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Undue Diligence: How Banks Do Business with Corrupt Regimes

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Undue Diligence: How Banks Do Business with Corrupt Regimes UNDUE DILIGENCE How banks do business with corrupt regimes A report by Global Witness, March 2009 CONTENTS 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 Economic crisis: banks have damaged the world’s richest economies, but by facilitating corruption they help perpetuate poverty in the world’s poorest countries. What is the problem? which deny these countries the chance to lift The world has learnt during 2008 and 2009 themselves out of poverty and leave them that failures by banks and the governments dependent on aid. that regulate them have been responsible for pitching the global economy into its This is happening despite a raft of anti-money worst crisis in decades. People in the world’s laundering laws that require them to do due richest countries are rightly angry at the diligence to identify their customer and turn increasing job losses and house repossessions. down illicitly-acquired funds. But the current laws are ambiguous about how far banks What is less understood is that for must go to identify the real person behind a much longer, failures by banks and the series of front companies and trusts. They fail governments that regulate them have caused to be explicit about how banks should handle untold damage to the economies of some natural resource revenues when they may be of the poorest countries in the world. fuelling corruption. And if a bank has filed a report on a suspicious customer as required By doing business with dubious customers in by the law, but then the authorities permit corrupt, natural resource-rich states, banks the transaction to go ahead, the bank can are facilitating corruption and state looting, legally take dirty money. So it may be 4 SUMMARY possible for a bank to fulfil the letter of its mechanisms by their parent government, legal obligations, yet still do business with central banks in states that have been these dubious customers. captured by one individual, and companies trading natural resources out of conflict By accepting these customers, banks are zones. Banks should have been extremely – directly or indirectly – assisting those wary about doing business with any of them. who are using the assets of the state to enrich themselves or brutalise their own Why does it matter? people. Corruption is not just done by the Natural resource revenues offer a potential way dictator who has control of natural resource out of poverty for many developing countries. revenues. He needs a bank willing to But too often, resource revenues that could be take the money. It takes two to tango. spent on development are misappropriated or looted by senior government officials, or are This report presents a series of case studies used to prop up regimes that oppress their about bank customers in Equatorial Guinea, own people. Banks have a crucial role to play Republic of Congo, Gabon, Liberia, Angola and as the first line of defence against corrupt Turkmenistan. In these countries, the national funds, but they are not doing a good job of it. resource wealth has or had been captured by an unaccountable few, whether for personal The key step banks are already required to enrichment, to maintain an autocratic perform to prevent corrupt funds entering personality cult that violated human rights, the international system is due diligence, to or to fund devastating wars. find out who their customer is and where his or her funds have come from. But the current The banks doing business with these system is full of loopholes, whether in the customers include Barclays, Citibank, Deutsche anti-money laundering laws themselves, or the Bank, and HSBC. Nearly all of the banks that way that they are enforced. The result is that feature in this report are major international the international banking system is complicit banks and all of them make broad claims about in helping to perpetuate poverty, corruption, their commitments to social responsibility. conflict, human suffering and misery. Yet there is a grotesque mismatch between rhetoric and reality. Their customers are This is a serious matter of public interest, heads of state or their family members, state- both in the countries whose natural resources owned companies used as off-budget financing 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 2. Banks must be properly regulated to are funding aid to the developing world to fill force them to do their know your customer the gap that is left by corruption and other due diligence properly, so that if they forms of illicit capital flight. Global Witness cannot identify the ultimate beneficial is publishing this report in order to provide owner of the funds, or the settlor and a tool for productive debate and, hopefully, beneficiary if the customer is a trust, and to contribute to an improvement in banking if they cannot identify a natural person regulation and enforcement that will have a (not a legal entity) who does not pose a positive impact on development outcomes for corruption risk, they must not accept the the world’s poorest countries. In the current customer as a client. Anti-money laundering climate of banking meltdown, the report’s focus laws must be absolutely explicit, and consistent on transparency and the need for assurance across different jurisdictions, that banks must that the financial regulatory system is working identify the natural person behind the funds, effectively is of particular public interest. investigate the source of funds, and refuse the customer if they present a corruption risk. What can be done? Regulators are in the front line of ensuring The changes in financial regulation that are on that this is enforced, and should treat the the way as a result of the global financial crisis prevention of corrupt money flows as a priority. also present a chance to tackle the financial industry’s ongoing facilitation of corruption. This is the scandal at the heart of the system, because customer identification has been the While the multiple causes of a complex crucial element of money laundering laws since banking crisis are different to the relatively their inception in the 1980s. Yet inconsistencies straightforward factors which allow banks to and a failure by many jurisdictions to be do business with corrupt regimes, there are sufficiently explicit about what is required two identical underlying themes. The first is from banks in practice mean that there are that when it comes to sticking to the rules, still too many loopholes that can be exploited. bankers are doing the minimum they can get away with. They aggressively exploit the While it is important that banks develop their loopholes and ambiguities in regulations own effective know-your-customer policies, and arbitrage their responsibilities to the as per the previous recommendation, leaving lowest level. The second is that regulation banks to do it on their own without regulatory by individual national governments is too oversight will not work, because the avoidance fragmented to be effective, is hindered by of corrupt funds inevitably involves turning bank secrecy laws, and is not backed by down potential business, and not all banks political will. are willing to do this. The subprime crisis and ensuing credit crunch have shown, among Global Witness is making the following other things, that allowing banks to self- recommendations, which need to be adopted regulate does not work. They consistently claim globally, with effective information sharing that they employ the cleverest people in the across borders. There would be no point in world and can be allowed to manage their own tightening anti-money laundering rules only risk. But if, as they have shown, they cannot in Europe and the US if that meant that dirty safely manage the task that is of greatest money then flowed, for example, towards Asia. importance to them – making a profit – then it seems clear that they cannot be expected to 1. Banks must change their culture of self-regulate when it comes to ethical issues. know-your-customer due diligence, and not treat it solely as a box-ticking 3. International cooperation has got exercise of finding the minimum to improve. A necessary first step is to information necessary to comply with the overhaul and strengthen the workings of the law. Banks should adopt policies so that if they Financial Action Task Force (FATF), a little cannot identify the ultimate beneficial owner known and opaque inter-governmental body of the funds, or the settlor and beneficiary if that sets the global standard for the anti- the customer is a trust, and if they cannot money laundering rules that are supposed to identify a natural person (not a legal entity) prevent flows of corrupt funds.
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