AML/CFT: Indonesia investigates Citibank

Citibank is one of a handful of globally active full service banks.

By definition, as a global bank, it has branches in places were both genuine business opportunities and criminal activities are present.

And like any global bank, it has it share of dodgy customers ranging from high-ranking politicians, through bigwigs in organised crime to two-bit shysters who want to use its reputation as a shield for their own activities.

But, unlike Santander, HSBC and Standard Chartered (who are, pretty much, Citibank's only real competitors in this approach of broad-spectrum banking), Citibank has a special attraction to money launderers: the fluidity of its approach to local currency / foreign currency transactions - especially the US dollar. Indeed, as a US bank, Citibank is often - rightly - viewed as the easiest channel into US dollars and, ultimately, the USA.

That is no surprise to the US Government which makes frequent domestic attacks on Santander and HSBC (and, in niche areas where Citibank is threatened such as private banking, other foreign banks, too).

But foreign governments tend to be wary of attacking the mighty Citi for the simple reason that it operates under the protection of the US Government, as evidenced by the comments in 2008 by District Attorney Robert Morghenthau that he would not prosecute a US head-quartered bank for money laundering because to do so would undermine the credibility of Wall Street.

And that has proved so although this week the rival office of the New York District Attorney of the Department of Justice has announced the prosecution of the owner of a tiny US private bank - but while that is close, it's not the same as prosecuting the bank itself. And it's a long way from prosecuting one of the major institutions.

Indonesia's PPATK (the initials are for the Malay version of its name: Financial Transaction Reports and Analysis Centre), its FIU, has announced an investigation into Citibank's operations in the country. Given that the corruption industry in Indonesia is a parallel economy run in US dollars - or in goods such as cars - the most obvious question is how come it's taken until now for an investigation into accounts held at Citibank.

The answer is simple: PPATK has only recently secured the powers to conduct its own investigations and is now more closely modelled on Thailand's AMLO than on the pure intelligence gathering and analysis model that is more common. AMLO has had some spectacular successes - including investigations of politicians. In doing so, it has come under considerable and sustained fire from all sides, leading Nigel Morris-Cotterill, Head, The Anti Money Laundering Network (ultimate owner of chiefofficers.net) to quip in an AMLO sponsored conference "You can tell AMLO is doing good work and being impartial because it is hated equally by everyone."

PPATK is heading the same way: its links with the newly enlarged and re-energised anti-corruption agency has led to an immediate and hostile response from all hues of the political spectrum with many pre-emptive strikes by politicians at both national and local levels.

But PPATK has been quietly gathering the evidence it needed for several years, patiently waiting for the new powers it was lobbying for.

And its powers are considerable: it not only has the power to conduct investigations into criminal conduct but also to undertake a qualitative review of the counter-money laundering systems of financial institutions.

This will not be the headline story - but it is the most important part of the story. All financial institutions in jurisdictions that have well-drafted counter-money laundering laws and regulations must put in place the most stringent of "home or host" requirements. Without passing comment directly on Citibank or any other identifiable institution, it has to be said that many financial institutions - especially those from the USA, Germany and Japan - simply export their domestic, "home," policies. There are a number of instances where local compliance / risk management officers have reported to their head offices that those policies do not meet the standards of the host country. The almost invariable response to those reports that have come to the attention of The Anti Money Laundering Network has been that the officer in the host country should shut up and do as he is told, that "home" policies are the bank's global policies and they are to be applied.

Indonesia's investigation of Citibank's counter-money laundering policies and procedures, particularly with regard to politicians and other "politically exposed persons" will blow that argument apart for once and for all.

Morris-Cotterill says "the USA forced through the FATF a policy that differentiated between foreign PEPs and domestic PEPs. There is an argument that domestic PEPs are already subject to local law and therefore no extra attention should be required. But that argument has no merit: anyone who is in a position of influence should be regarded as an elevated risk in a financial institution's Risk Matrix, whether they are foreign or local. In effect, that's what Indonesia is doing: it is saying that the FATF's position is weak and that US banks rely on that weak position in their activities around the world. It is saying that any effective risk management system in a financial institution should raise the risk score of domestic politicians, judges and civil servants. From being a victim of FATF attacks, Indonesia is now on the offensive, albeit in very polite terms."

Depending on how it turns out, it is this aspect of the Indonesian investigation that is likely to have the most far-reaching repercussions across the AML/CFT risk management/compliance industry.

YUNUS Husein is quietly spoken yet he exudes authority. His staff - and the foreign technical experts who have been drafted in over the past few years, often paid for by foreign governments - regard him with considerable affection and respect. They are right to do so: since taking over the reigns at PPATK, he has transformed it, forcing through the new powers, developing in-house expertise in investigations - and providing security for his teams.

Indeed, almost everyone at PPATK has no public face except Yunus. This is not ego: it's focussing attention away from the people who work at the coal-face. He may be chairman, but he is not averse to (figuratively) rolling up his sleeves and getting involved in a brawl to protect his organisation and to secure the powers and budget it needs. And he is no figurehead: he has a deep understanding of the issues involved on a practical, legal and political level, perhaps more so than the heads of most "western" FIUs who are, all too often, bureaucrats first and investigators second. And, most importantly, perhaps, he is not - as evidence by the success in reshaping the FIU and its functions, easily intimidated.

When Yunus says that PPATK is looking at "the exercise of due diligence on politically exposed persons," the risk management / compliance sector can be sure he knows exactly what he is saying, exactly what the effect is and exactly why he is doing it. And because PPATK has, under his direction, been building the evidence against the whole banking sector, it is also certain that he is asking questions to which he already knows - as far as possible - the answer.

The investigation into Citibank has been triggered by a case in which Inong MALINDA, then a manager at Citibank Jakarta dealing with high-net worth individuals, is alleged to have embezzled substantial sums of money. While investigating that, the PPATK discovered accounts in the names of or linked to a number of public figures. Those accounts held sums that were impossibly large relative to their salaries and known assets, PPATK alleges.

Malinda is alleged to have stolen at least USD2 million from the accounts of customers at Citi in Jakarta and to have laundered that money through what appeared to be an investment company or simply in buying stuff and supporting an extravagant lifestyle.

What PPATK found was a sufficient number of public officials with accounts in the Citigold scheme for which customers must hold a minimum balance of IR500 million. Initial enquiries by PPATK are reported to have found multiple accounts belonging to PEPs with several times that amount. Given that the minimum figure amounts to approximately 14 months' nett pay for ministers and around three and a half years' worth of nett pay for senior police and military officers, the accumulation of such funds is no easy matter.

Like the other major banks mentioned in this article, Citibank is a major target for money launderers. The huge global footprint of those banks is a significant attraction for two reasons: first, all of them have comprehensive counter-money laundering policies in place and they do enforce them internally. Therefore they are considered "apex targets" from a money launderer's perspective: a remittance from one of those banks is less likely to arouse suspicion than one from, say, Fred's Bank and Laundrette, Dayton, Ohio.

The second reason is that transfers within a global institution are often subject to less scrutiny than transfers from outside. And so, it is true that the easiest way to get money into the USA from any foreign base is to bank it into a US institution overseas and then transfer to an account in the USA. The same is true for the Euro and Sterling.

Citi is only the first bank to be facing such a probe. It will not be the last - there are many representative offices and branches of foreign private and retail banks in Jakarta and in nearby Singapore and Malaysia.

The case might seem like a good way of filling up a slow news Tuesday. In fact, it has all the signs of an impending shift in the tectonic plates that the international financial industry has for too long considered not worth worrying about.