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WSJ.com - How Top Dutch Bank Plunged Into World of Shadowy... http://online.wsj.com/article_print/SB113590226646934275.html December 30, 2005 PAGE ONE Risky Territory How Top Dutch Bank Plunged Into World of Shadowy Money • ABN Amro Conveyed Billions To U.S. Shell Companies, • Amid Slow Fed Response Trip to 'Last Chance Saloon' By GLENN R. SIMPSON Staff Reporter of THE WALL STREET JOURNAL December 30, 2005; Page A1 AMSTERDAM -- When two New York banks became ensnared in a Justice Department criminal probe over their ties to small Russian lenders in 1999, most big banks scrambled to dump their own Moscow clients. One bank saw opportunity. "Shall we not capitalize on the development?" an officer at ABN Amro Holding NV emailed colleagues. The Dutch bank, the world's 20th-largest by assets, proceeded to recruit the very Russian outfits doing business with Bank of New York Co. and Republic National Bank, even as one ABN Amro employee warned in an email, "We are all heading for trouble if we do it." Five years later, trouble came. ABN Amro is now the subject of a Justice Department criminal inquiry. The bank acknowledges it transferred billions of dollars into 1 of 10 12/30/2005 5:09 PM WSJ.com - How Top Dutch Bank Plunged Into World of Shadowy... http://online.wsj.com/article_print/SB113590226646934275.html the U.S. with little scrutiny of who was moving the money and why. It often failed to report these transactions to the U.S. government as required by financial-crime laws, regulators say. ABN Amro also admits that its officers falsified documents connected to billions of dollars in transactions with Iran and Libya, which are the target of U.S. sanctions. Last week, ABN Amro entered into a settlement with U.S. and Dutch regulators calling for $80 million in fines addressing both the failure to report suspicious transactions and the illegal business with Iran and Libya. All told, bank and government records show that the flagship bank of the Netherlands processed more than $70 billion in suspicious or illegal transfers through its New York office. The story of how ABN Amro ignored red flags and plunged into the world of shady finance illuminates the central role of the U.S. financial system in the global flow of black-market funds, even when foreign entities have no direct business in the U.S. It also shows the U.S. government's struggle to police dirty money. Although the Federal Reserve knew as early as 2000 that ABN Amro had attracted many suspicious customers, it waited four years to carry out a major crackdown. An initial agreement in July 2004, overseen by Fed money-laundering official Herbert Biern, didn't require ABN Amro to pay any fines. This year Mr. Biern went to work for the bank as head of U.S. regulatory affairs. The bank and the Fed say he followed all ethics rules in securing his new job. MORE COVERAGE This article is based on internal See a selection of investigative articles by ABN Amro correspondence whose Wall Street Journal staff reporter Glenn R. authenticity was acknowledged by Simpson. the bank; interviews with current • As Europe Cuts Corporate Tax, Pressure Rises on U.S.1 and former bank officials and 01/28/05 regulators; and public court • Arab Bank's Link to Terrorism Poses Dilemma2 documents and corporate filings. 04/20/05 • Government Probes Tax Shelters3 ABN Amro's troubles with 06/03/05 inadequate reporting stemmed 2 of 10 12/30/2005 5:09 PM WSJ.com - How Top Dutch Bank Plunged Into World of Shadowy... http://online.wsj.com/article_print/SB113590226646934275.html • In Bermuda, AIG Helped Shape Corporate from its business with two poorly Haven4 09/20/05 regulated entities: small banks in countries like Russia, and shell • Irish Subsidiary Lets Microsoft Slash Taxes5 11/07/05 companies that are easy to set up in some U.S. states. Regulators and prosecutors believe that foreign businesspeople used these two entities -- with ABN Amro's help -- to shuffle around black-market money and engage in financial scams such as claiming tax credits for fictitious exports. Court records and government reports show officials believe several U.S. states are now top destinations for tainted dollars because of their lax laws on shell companies. In 2002-03, for instance, ABN Amro shipped more than $1 billion in 11,000 transactions to a single company in Lexington, Ky., called Allprex LLC, ABN Amro now acknowledges. The now-defunct company, which had no known offices or products, was incorporated by gynecologist Emilios Hadjivangeli, who hails from the Mediterranean island of Cyprus. Dr. Hadjivangeli, who is identified as a member of the Cyprus-Russian Business Association on the association's Web site, has incorporated 181 other companies in Kentucky and hundreds more in other states. Regulators in Cyprus and Kentucky say they haven't heard of Dr. Hadjivangeli or Allprex. He couldn't be located for comment. No criminal charges have been brought against ABN Amro or its executives, and no evidence has emerged that senior executives ordered criminal activity or knew about it in advance. Virtually all of the bank's possible violations of U.S. law were first uncovered -- and reported to authorities -- by investigators working for the bank or by the bank itself. The violations often involved U.S. laws that require banks to know who their clients are and where they get their money, as well as to report suspicious activity. Many of the bank's problems developed or worsened under the watch of Chairman Rijkman Groenink, who took the top post in 2000, but he was also instrumental in the bank's aggressive effort to right itself. The bank has spent more than $250 million to overhaul its systems and monitor transactions more closely. It expects to continue spending that amount annually on compliance with laws and regulations, and is vetting anew every account holder 3 of 10 12/30/2005 5:09 PM WSJ.com - How Top Dutch Bank Plunged Into World of Shadowy... http://online.wsj.com/article_print/SB113590226646934275.html world-wide. The bank has reorganized itself to insulate the executive who supervises compliance from management pressure. Mr. Groenink was reprimanded by the bank's board over an October 2004 incident in which he ordered the destruction of an internal report into the Iran and Libya dealings. He quickly rescinded the order and no documents were destroyed. In a statement last week, Mr. Groenink said, "Nothing short of the highest standards of compliance is acceptable. We regrettably recognize that, in the past, our compliance in certain areas did not meet this standard." He said the bank has put in place an extensive remedial program and called improving compliance "the highest priority of the bank." Corporate Aristocrat ABN Amro is one of Europe's corporate aristocrats. The bank is descended from the Netherlands Trading Society, chartered in 1824 by King Willem I to build the Dutch economy and finance trade with its Indonesian colonies. In 1926 it opened the first bank in Saudi Arabia. It was privatized by the Dutch government in the 1960s and became the Algemene Bank Nederland, or ABN. Later it merged with Amsterdam-Rotterdam Bank (Amro). Like other top international banks, ABN Amro's New York office does business as a "correspondent" for smaller foreign banks that lack a U.S. presence. Suppose a shoemaking company in Russia with an account at a small Russian bank wants to send dollars to a leather supplier overseas. Without a U.S. branch, the small bank can't tap dollars provided by the U.S. Federal Reserve. Instead, it hooks up with a big bank like ABN Amro to get U.S. currency and help its client purchase the leather. In the early days of post-Communist 4 of 10 12/30/2005 5:09 PM WSJ.com - How Top Dutch Bank Plunged Into World of Shadowy... http://online.wsj.com/article_print/SB113590226646934275.html Russia, scores of new banks needed such a liaison bank in New York. The risks of these operations came to light in the 1999 case involving Bank of New York. According to the Department of Justice, a Russian emigre who worked at BONY and her husband funneled $7 billion to small U.S. companies from Russian banks in a scheme designed in part to help clients hide money from Russian authorities. The scheme took advantage of BONY's correspondent relationships with Russian banks, according to the department. As BONY and other banks retreated from Russia, ABN pounced. Within two years of the start of the BONY scandal, ABN's dollar-changing accounts for Russian and Eastern European banks leapt to about 150 from around two dozen. ABN's upper management, which was making a series of acquisitions, left the unglamorous business to junior executives, bank officials and lawyers say. It produced only a few million dollars in profits annually, even after expanding its clientele in the former Soviet bloc. In a 2000 examination, the Federal Reserve and New York state regulators noted a "significant number" of new East European client banks at ABN Amro's New York branch and said the branch "was unable to provide adequate documentation" about the banks. The New York branch told the regulators that the Moscow branch was doing that job, and the regulators didn't take action. Bank records show Mr. Groenink received the results of the examination and some other negative reports in this period but generally forwarded them to aides. On a few occasions he called for action, including a 2001 memo in which he wrote of regulators' criticisms: "This is intolerable and must be fixed immediately." Yet ABN Amro's top management also let several warning signals about the business they were engaging in pass by unheeded.

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