Riggs Bank Scandal Shakes Up Diplomatic Community by Alan B. Nichols In July, PNC Financial Services Group Inc. of Pittsburgh announced that it was planning to buy Riggs Bank of Washington, D.C., which had been beset by problems ever since federal regulators discovered repeated violations of laws designed to prevent money laundering. This followed an April decision that Riggs made to shut down its embassy banking business by the end of September, all of which has had major repercussions for its embassy clientele in the city. Riggs had been the bank of choice for an estimated 85 percent of all the cityís embassies and consulates, some of which have been banking with Riggs for more than 30 years. No fewer than 100 foreign missions in Washington have been affected. Embassy banking is a business niche that, however small relative to other bank niches, nevertheless involves enormous sums of money. Not made lightly, Riggsís troubles were prompted by a U.S. Treasury Department penalty of $25 million on the bank for what federal regulators called its ìwillful, systemicî failure to report or look for suspicious transactions on certain accounts and customers deemed ìhigh riskî by the U.S. government under the Bank Secrecy Act (BSA). The decision sent shock waves through the diplomatic community in Washington and has severely inconvenienced Riggsís embassy customers, some of which have had difficulty finding alternative banking services (not all Riggs embassy accounts will be closed). One such mission, the Yemeni Embassy, said it has not yet found a new bank. However, based on a quick survey of the cityís embassies by The Washington Diplomat, the disruption has not been universal in the diplomatic community and, contrary to predictions that Riggsís competitors would shy away from stepping into the breach left by the bank, some large U.S. banks have been calling on embassies to solicit their business. When asked to comment on their business plans in light of the Riggs scandal, however, several large banks refused to comment for this article. Airing Dirty Money Banking activity, especially since 9/11, has been under close scrutiny by the U.S. government as well as the international finance community. Enhanced governmental investigatory powers to track fund transfers and deposits of suspicious or corrupt origins are part of the stepped-up U.S. and global campaign against terrorist and criminal activity. In this context, the Patriot Act added a provision to the Bank Secrecy Act that requires financial institutions to exercise enhanced due diligence when handling accounts of senior foreign political leaders, known as politically exposed persons (PEPs). Partial regulations have been issued by the Treasury Departmentís Financial Crimes Enforcement Network (FinCEN). In signing the Riggs penalty assessment, FinCEN Director William J. Fox cited the bank for failing to submit a written anti-money-laundering plan to the federal government and for failing to file complete, timely suspicious activity reports on the accounts of certain PEPS. In addition to the civil fines, a recent Senate report blasted the bank for its failure to monitor suspicious financial accounts, specifically those of Gen. Augusto Pinochet, the former Chilean dictator, and senior officials from Equatorial Guinea, including the countryís authoritarian president, Teodoro Obiang Nguema Mbasogo. The accounts for the West African country reportedly received enormous infusions of alleged payoff money from Exxon Mobil Corp., as well as Amerada Hess and Marathon Oil in return for oil drilling rights. Exxon has denied culpability, and all three companies have been questioned in an ongoing Senate investigation. According to a July article in the New York Times, ìThe [Senate] report said there had been an overly cozy relationship between Riggs and its federal regulators, and asserted that the bankís management was enamored of courting questionable clients and openly resistant to regulatory entreaties to close those clientsí accounts.î Also implicated in news reports have been accounts held by the Saudi Embassy, which has vigorously denied any wrongdoing. A Saudi source said his mission was the subject of ìselective news leaksî from certain members of Congress. The Senate is conducting a separate review of the Saudi accounts, which are also being examined by federal officials to see if they were used in connection with money laundering or the financing of terrorist activities. The fallout for Riggs, however, has been tremendous. In addition to agreeing to pay the $25 million penaltyóthe largest such fine ever levied on a U.S. bankóthe PNC buyout would effectively end the tenure of the oldest Washington-based banking institution. The Senate report also said that the venerable companyís largest shareholder, Joe L. Allbritton, who stepped down from his last official post with the company in May, was directly involved in courting Pinochetís business. And although no criminal charges have been filed against Riggs, a former executive is the subject of a federal grand jury hearing examining the possibility of criminal fraud. The bankís international business accounted for 23 percent of its $4.2 billion in deposits. Nevertheless, Riggs executives decided that in light of the high-risk nature of embassy banking and the enhanced vulnerability to legal risks, it was not worth perpetuating this traditional part of its business. Enhanced due diligence requirementsótracking data on certain customersí backgrounds and even in some cases the backgrounds of its customersí customersóis often labor intensive and carries additional administrative costs. PNC has said it was agreeing to buy a ìcleanî Riggs Bank, explaining that Riggsís decision to shed its embassy customer accounts would proceed as planned. In an official comment, the company said, ìIn order to address key regulatory issues, Riggs will be moving forward with their plans to divest the international banking and the majority of their embassy banking businesses. As part of this process, we will be working closely with Riggs to evaluate the remaining aspects of the embassy business to determine PNCís plans after closing." What This Means for Embassies Albanian Ambassador Fatos Tarifa said his embassy had to terminate its contract with Riggs but has already signed on with Wachovia. ìIt was very unfortunate we had to close our account with Riggs,î Tarifa said. ìRiggs diplomatic section was very reliable and provided timely and courteous service. ìThe Riggs decision came at an unfortunate time for us,î the ambassador added. ìMany of our employees went on vacation at the beginning of the summer, and Riggs only gave us a month to find a new bank.î Tarifa said the embassy decided on Wachovia based on the recommendation of others in the community. ìWachovia is a favored bank,î he said. ìAll embassies that must move seem to be going to Wachovia.î As far as the risks of embassy banking are concerned, Tarifa said, ìWe are a small embassy and the annual income from our consular services is around $80,000. We have a small number of transactions and the amounts are smallómonthly rental payments of our apartments and water, power and lighting bills.î However, Tarifa said he understands the need for the heightened awareness. ìItís the time we live inÖ. The risks are there, and banks are right to investigate suspicious activities. Transferring huge amounts of money can be a problem.î The Riggs scandal has also impacted the Egyptian Embassy. ìI was disappointed in Riggsís decision as a reaction to whatever financial handlings that occurred with XYZ embassies,î said Hesham Elnakib, embassy director of press and information. ìBy not following instructions [regarding BSA reporting requirements] and penalizing all embassies is non-courteous and a negative reaction.î According to Elnakib, the Riggs account with the Egyptian mission closed in late July. He said six other banks came courting the embassy, making the transition to a new bank as seamless as possible. Nevertheless, disappointment lingers at the embassy. ìSome executives at Riggs,î Elnakib said, ìquestioned the decision because our embassy business has always been very transparent. We have been a good account for more than 20 years. ìWe are here to conduct business,î he continued. ìOur banking transactions serve our business and affect our bilateral relations with the United States. Some embassies complained to [Secretary of State Colin] Powell. We are here under the supervision of the State Department and this affects our accreditation. Of course we must abide by U.S. laws, but this decision was unprecedented and involved a long chain of inconvenience.î That inconvenience impacted the entire embassy staff. ìOur business almost stopped. Riggs discontinued not only the accounts of our various ministries, but all our employee accounts. I am dismayed. Their reaction was too strong,î Elnakib said. ìEmbassy banking is very lucrative and very transparent. Itís government to government, and transactions are easy to track.î Asked if he objects to tighter controls and monitoring of embassy business, Elnakib replied, ìAs long as the security regulations donít pose a huge burden on our work, I have no problem with them.î Saudi spokesman Nail Al-Jubeir was quoted in news reports in early summer that the Saudi Embassy was having trouble finding a new bank. However, he told The Washington Diplomat in July, ìWe are not desperate to find a new bank. Banks are calling us.î Al-Jubeir said that a meeting in New York on June 8 among representatives of different embassies and government officials helped to clear the air and clarify the new BSA rules, an eventuality that was most welcome. ìWe first had to meet our employee payroll, which we did, but with respect to our other financial obligations, our vendors were very cooperative, and we appreciated that. We have a huge budget and not every bank can handle us,î Al-Jubeir said, declining to say which bank his embassy is using now, although he noted that it was essential that the embassy have a reliable bank with access to the local market. Mumís the Word The Saudisí success at finding a new bank notwithstanding, there are other countries in the Middle East and in Latin America, particularly, that are still having trouble finding a bank to replace Riggs, according to Moneylaundering.com, a Web site specializing in anti-money laundering-related information. Several large U.S. banks, including Citibank, Bank of America and Wachovia, were asked to contribute to this article and all declined. Similarly, the French, British and German embassies were asked to speak on this subject, and they too replied with a ìno comment.î Daniel Mitchell, a policy analyst at the Heritage Foundation, said he understands that embassy banking is not a subject some wish to talk about, given todayís anti-terrorism and anti-crime regulatory climate. ìAnti-money-laundering rules place an enormous burden on banks, and many, like Riggs, see the benefits of embassy banking as not worth the costs,î he said. ìThey are asking, ëDo we want the hassle of having these customers?íî Mitchell added that the stiffer rules are driven in part by the Financial Action Task Force on Money Laundering based in Paris, an international organization put together by developed nations to combat money laundering. Mitchell suggested that anti-money-laundering rules developed by such organizations often fail to balance costs and benefits. ìAre we killing a fly with a sledgehammer,î Mitchell asked. Despite the June meeting in New York among bank officials, embassy personnel and government regulators aimed at clarifying the rules, John Byrne, director of the American Bankers Associationís Center for Regulatory Compliance, contends that the government needs to be much more specific as to what constitutes due diligence. ìThere is no magic pill or safe harbor for elaborate due diligence,î he said. ìIf a bank presents an [anti-money-laundering] plan, there is no standard in place for what is acceptable. Without a clear directive from the regulators, a bank would have to think long and hard before it takes on potentially high-risk customers.î Given this climate of regulatory uncertainty, ìwe would consider some [embassy] accounts radioactive.î He noted, however, that not all embassy bank accounts are created equally, suggesting that problems arise with countries whose anti-terrorism or anti-money-laundering laws are weak. ìSome vetting of employees must be done by the embassy,î he said. Furthermore, ìan embassy must know its own laws thoroughly and what its obligations to its bank are, and these obligations should be in writing.î The value of the Riggs situation is that it is serving notice to all other banks that compliance with new BSA rules will entail additional employee training, a plan that includes how they look at risk assessment, and extensive documentation of its customers and their financial transactionsóall of which are highly labor intensive, said Byrne. Failure to do these things will leave banks like Riggs vulnerable to civil penalties or, worse, criminal allegations. Recognizing the urgency for clarification, Congress is holding hearings aimed at fleshing out the rules in more specificity. It is a task that needs to be done, according to Byrne. ìThere is a lot of confusion out there.î Alan B. Nichols is a contributing writer for The Washington Diplomat.