Undue Diligence How banks do business with corrupt regimes

[Magda Hassan]

Undue
Diligence
How banks do business with corrupt regimes
Summary 03
1 Introduction: 07
Breaking the links between banks, corruption and poverty
2 Who is your customer? 17
3 Riggs and Equatorial Guinea: 26
Doing business with heads of state
(Plus: Where did Equatorial Guinea’s oil
money go after the demise of Riggs?)
4 Barclays and Equatorial Guinea: 40
Doing business with the sons of heads of state, Part I
(Plus: Who banks for President Bongo of Gabon
since Citibank closed its doors to him?)
5 Bank of East Asia and Republic of Congo: 50
Doing business with the sons of heads of state, Part II
6 Citibank, Fortis and Liberia’s logs of war: 68
Doing business with natural resources that are fuelling conflict
7 Deutsche Bank and Turkmenistan: 82
Doing business with a human rights abuser
8 Oil-backed loans to Angola: 90
Doing business with an opaque national oil company
9 The problem with the Financial Action Task Force 105
10 Conclusions and recommendations 112
Glossary 124


Summary
What is the problem?
The world has learnt during 2008 and 2009
that failures by banks and the governments
that regulate them have been responsible
for pitching the global economy into its
worst crisis in decades. People in the world’s
richest countries are rightly angry at the
increasing job losses and house repossessions.
What is less understood is that for
much longer, failures by banks and the
governments that regulate them have caused
untold damage to the economies of some
of the poorest countries in the world.
By doing business with dubious customers in
corrupt, natural resource-rich states, banks
are facilitating corruption and state looting,
which deny these countries the chance to lift
themselves out of poverty and leave them
dependent on aid.
This is happening despite a raft of anti-money
laundering laws that require them to do due
diligence to identify their customer and turn
down illicitly-acquired funds. But the current
laws are ambiguous about how far banks
must go to identify the real person behind a
series of front companies and trusts. They fail
to be explicit about how banks should handle
natural resource revenues when they may be
fuelling corruption. And if a bank has filed a
report on a suspicious customer as required
by the law, but then the authorities permit
the transaction to go ahead, the bank can
legally take dirty money. So it may be
Economic crisis:
banks have damaged
the world’s richest
economies, but by
facilitating corruption
they help perpetuate
poverty in the world’s
poorest countries.
4 SUMMARY
possible for a bank to fulfil the letter of its
legal obligations, yet still do business with
these dubious customers.
By accepting these customers, banks are
– directly or indirectly – assisting those
who are using the assets of the state to
enrich themselves or brutalise their own
people. Corruption is not just done by the
dictator who has control of natural resource
revenues. He needs a bank willing to
take the money. It takes two to tango.
This report presents a series of case studies
about bank customers in Equatorial Guinea,
Republic of Congo, Gabon, Liberia, Angola and
Turkmenistan. In these countries, the national
resource wealth has or had been captured by
an unaccountable few, whether for personal
enrichment, to maintain an autocratic
personality cult that violated human rights,
or to fund devastating wars.
The banks doing business with these
customers include Barclays, Citibank, Deutsche
Bank, and HSBC. Nearly all of the banks that
feature in this report are major international
banks and all of them make broad claims about
their commitments to social responsibility.
Yet there is a grotesque mismatch between
rhetoric and reality. Their customers are
heads of state or their family members, stateowned
companies used as off-budget financing
mechanisms by their parent government,
central banks in states that have been
captured by one individual, and companies
trading natural resources out of conflict
zones. Banks should have been extremely
wary about doing business with any of them.
Why does it matter?
Natural resource revenues offer a potential way
out of poverty for many developing countries.
But too often, resource revenues that could be
spent on development are misappropriated or
looted by senior government officials, or are
used to prop up regimes that oppress their
own people. Banks have a crucial role to play
as the first line of defence against corrupt
funds, but they are not doing a good job of it.
The key step banks are already required to
perform to prevent corrupt funds entering
the international system is due diligence, to
find out who their customer is and where his
or her funds have come from. But the current
system is full of loopholes, whether in the
anti-money laundering laws themselves, or the
way that they are enforced. The result is that
the international banking system is complicit
in helping to perpetuate poverty, corruption,
conflict, human suffering and misery.
This is a serious matter of public interest,
both in the countries whose natural resources
ought to be paying for development but are
An Angolan mother
mourns the death
of her child. Angola
is Africa’s largest oil
producer, but has the
highest rate of child
mortality relative to
its national wealth
in the world.
Credit: J. B. Russell/
Panos
GLOBAL WITNESS MARCH 2009 UNDUE DILIGENCE 5
not, and in the countries whose taxpayers
are funding aid to the developing world to fill
the gap that is left by corruption and other
forms of illicit capital flight. Global Witness
is publishing this report in order to provide
a tool for productive debate and, hopefully,
to contribute to an improvement in banking
regulation and enforcement that will have a
positive impact on development outcomes for
the world’s poorest countries. In the current
climate of banking meltdown, the report’s focus
on transparency and the need for assurance
that the financial regulatory system is working
effectively is of particular public interest.
What can be done?
The changes in financial regulation that are on
the way as a result of the global financial crisis
also present a chance to tackle the financial
industry’s ongoing facilitation of corruption.
While the multiple causes of a complex
banking crisis are different to the relatively
straightforward factors which allow banks to
do business with corrupt regimes, there are
two identical underlying themes. The first is
that when it comes to sticking to the rules,
bankers are doing the minimum they can
get away with. They aggressively exploit the
loopholes and ambiguities in regulations
and arbitrage their responsibilities to the
lowest level. The second is that regulation
by individual national governments is too
fragmented to be effective, is hindered by
bank secrecy laws, and is not backed by
political will.
Global Witness is making the following
recommendations, which need to be adopted
globally, with effective information sharing
across borders. There would be no point in
tightening anti-money laundering rules only
in Europe and the US if that meant that dirty
money then flowed, for example, towards Asia.
1. Banks must change their culture of
know-your-customer due diligence,
and not treat it solely as a box-ticking
exercise of finding the minimum
information necessary to comply with the
law. Banks should adopt policies so that if they
cannot identify the ultimate beneficial owner
of the funds, or the settlor and beneficiary if
the customer is a trust, and if they cannot
identify a natural person (not a legal entity)
who does not pose a corruption risk, they
must not accept the customer as a client. They
should adopt this standard even if they are not
legally required by their jurisdiction to do so.
2. Banks must be properly regulated to
force them to do their know your customer
due diligence properly, so that if they
cannot identify the ultimate beneficial
owner of the funds, or the settlor and
beneficiary if the customer is a trust, and
if they cannot identify a natural person
(not a legal entity) who does not pose a
corruption risk, they must not accept the
customer as a client. Anti-money laundering
laws must be absolutely explicit, and consistent
across different jurisdictions, that banks must
identify the natural person behind the funds,
investigate the source of funds, and refuse
the customer if they present a corruption risk.
Regulators are in the front line of ensuring
that this is enforced, and should treat the
prevention of corrupt money flows as a priority.
This is the scandal at the heart of the system,
because customer identification has been the
crucial element of money laundering laws since
their inception in the 1980s. Yet inconsistencies
and a failure by many jurisdictions to be
sufficiently explicit about what is required
from banks in practice mean that there are
still too many loopholes that can be exploited.
While it is important that banks develop their
own effective know-your-customer policies,
as per the previous recommendation, leaving
banks to do it on their own without regulatory
oversight will not work, because the avoidance
of corrupt funds inevitably involves turning
down potential business, and not all banks
are willing to do this. The subprime crisis and
ensuing credit crunch have shown, among
other things, that allowing banks to selfregulate
does not work. They consistently claim
that they employ the cleverest people in the
world and can be allowed to manage their own
risk. But if, as they have shown, they cannot
safely manage the task that is of greatest
importance to them – making a profit – then
it seems clear that they cannot be expected to
self-regulate when it comes to ethical issues.
3. International cooperation has got
to improve. A necessary first step is to
overhaul and strengthen the workings of the
Financial Action Task Force (FATF), a little
known and opaque inter-governmental body
that sets the global standard for the antimoney
laundering rules that are supposed to
prevent flows of corrupt funds. FATF must
use its powers to name and shame more
effectively, open itself up to external scrutiny,
and cooperate with other organisations and
government agencies working on corruption.
6 SUMMARY
FATF’s members – which include the states
that are home to the world’s major economies
– also need to get their own houses in order
before they lecture the small island tax havens
who have frequently been FATF’s targets.
For example, of 24 FATF member states
evaluated in the last three years, none were
fully compliant with Recommendation 5,
which requires countries to have laws in place
obliging banks to identify their customer and
none had legislation in compliance with FATF’s
Recommendation 6 which says countries must
require their banks to perform enhanced
due diligence on politically-exposed persons
(PEPS: senior government officials or their
relatives and associates, who because of their
access to state resources are a heightened
money laundering risk). Only four countries
were ‘largely compliant,’ two were ‘partially
compliant,’ eighteen, including the UK, were
non-compliant.1 (See table on page 107)
4. New rules are needed to help
banks avoid corrupt funds.
Each country s • hould publish an online
registry of the beneficial ownership of
all companies and trusts, and an income
and asset declaration database for its
government officials.
• National regulators should be required
by FATF to assess the effectiveness of the
commercial databases of PEPs on which
banks rely to carry out their customer
due diligence.
• Banks should not be permitted to perform
transactions involving natural resource
revenues unless they have adequate
information to ensure that the funds
are not being diverted from government
purposes; should be required to publish
details of loans they make to sovereign
governments or state owned companies,
as well as central bank accounts that
they hold for other countries; and should
develop procedures to recognise and avoid
the proceeds of natural resources that are
fuelling conflict, regardless of whether
official sanctions have yet been applied.
(See page 116 for a full explanation of
these and other recommendations.)
The governments of the world’s major
economies must stand up to make these
things happen. If they do not, no other
jurisdictions will either. Governments that
have bailed out banks and whose taxpayers
now own a stake in them have even more
incentive to do so. Those governments that
have committed themselves to making poverty
history, and that claim to be pushing good
governance and accountability through their
aid interventions, are guilty of hypocrisy
if they fail to take responsibility for how
their financial institutions and the financial
system which they regulate are contributing
to corruption and therefore poverty.