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Risk Management and Regulatory Failures at Riggs Bank and Ubs: Lessons Learned

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Risk Management and Regulatory Failures at Riggs Bank and Ubs: Lessons Learned RISK MANAGEMENT AND REGULATORY FAILURES AT RIGGS BANK AND UBS: LESSONS LEARNED HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS SECOND SESSION JUNE 2, 2004 Printed for the use of the Committee on Financial Services Serial No. 108–91 ( U.S. GOVERNMENT PRINTING OFFICE 95–062 PDF WASHINGTON : 2004 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 G:\DOCS\95062.TXT FIN1 PsN: MICAH HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania RICHARD H. BAKER, Louisiana MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELA´ ZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana RON PAUL, Texas BRAD SHERMAN, California PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California STEVEN C. LATOURETTE, Ohio JAY INSLEE, Washington DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, JR., North Carolina MICHAEL E. CAPUANO, Massachusetts DOUG OSE, California HAROLD E. FORD, JR., Tennessee JUDY BIGGERT, Illinois RUBE´ N HINOJOSA, Texas MARK GREEN, Wisconsin KEN LUCAS, Kentucky PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York VITO FOSSELLA, New York MIKE ROSS, Arkansas GARY G. MILLER, California CAROLYN MCCARTHY, New York MELISSA A. HART, Pennsylvania JOE BACA, California SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina TOM FEENEY, Florida RAHM EMANUEL, Illinois JEB HENSARLING, Texas DAVID SCOTT, Georgia SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama TIM MURPHY, Pennsylvania CHRIS BELL, Texas GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina BERNARD SANDERS, Vermont KATHERINE HARRIS, Florida RICK RENZI, Arizona Robert U. Foster, III, Staff Director (II) VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\DOCS\95062.TXT FIN1 PsN: MICAH SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS SUE W. KELLY, New York, Chair RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois STEVEN C. LATOURETTE, Ohio JAY INSLEE, Washington MARK GREEN, Wisconsin DENNIS MOORE, Kansas JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York VITO FOSSELLA, New York CAROLYN B. MALONEY, New York JEB HENSARLING, Texas JIM MATHESON, Utah SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama GINNY BROWN-WAITE, Florida CHRIS BELL, Texas J. GRESHAM BARRETT, South Carolina (III) VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\DOCS\95062.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\DOCS\95062.TXT FIN1 PsN: MICAH C O N T E N T S Page Hearing held on: June 2, 2004 ...................................................................................................... 1 Appendix: June 2, 2004 ...................................................................................................... 31 WITNESSES WEDNESDAY, JUNE 2, 2004 Baxter, Thomas Jr., General Counsel and Executive Vice President of the Federal Reserve Bank of New York, accompanied by Katherine Wheatley, Assistant General Counsel, Federal Reserve Board and Michael Lambert, Financial Services Cash Manager, Federal Reserve Board .............................. 6 Stipano, Daniel, Deputy Chief Counsel, Office of the Comptroller of the Cur- rency ...................................................................................................................... 5 APPENDIX Prepared statements: Kelly, Hon. Sue W. ........................................................................................... 32 Oxley, Hon. Michael G. .................................................................................... 34 Baxter, Thomas Jr. ........................................................................................... 36 Stipano, Daniel ................................................................................................. 54 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Kelly, Hon. Sue W.: Bank Secrecy Act: OCC Examination Coverage of Trust and Private Banking Services, U.S. Department of the Treasury ................................. 74 (V) VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 G:\DOCS\95062.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 G:\DOCS\95062.TXT FIN1 PsN: MICAH RISK MANAGEMENT AND REGULATORY FAILURES AT RIGGS BANK AND UBS: LESSONS LEARNED Wednesday, June 2, 2004 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to call, at 2:13 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue W. Kelly [chair- woman of the subcommittee] Presiding. Present: Representatives Kelly, Gutierrez, Moore, Maloney, and Matheson. Chairwoman KELLY. The subcommittee on Oversight and Inves- tigations will examine risk management and regulatory failures at Riggs Bank and UBS, lessons learned this afternoon. Two weeks ago, this subcommittee explored proposals to stream- line and federalize our current system to prevent money-laundering and terror financing. The recent cases involving Riggs Bank and UBS reveal regulatory and risk-management breakdowns that also must be examined in order to strengthen our Government’s ability to enforce our anti-money laundering laws. This afternoon, the subcommittee will investigate the noncompli- ant and inexcusable behavior of these two banks, along with the in- adequate response of our regulators. In the OCC’s oversight of the Riggs Bank’s case, we find no better illustration of the inherent weaknesses of a fragmented regulatory regime. We find a regulator that was reportedly aware of noncompliance by Riggs with high-risk foreign clientele as far back as 1997, per- haps even earlier, and does nothing about it. We find a regulator that was slow to act even after the September 11 terrorist attacks inside our borders made the threat posed by terror-funding net- works all too clear. We find a regulator with credibility so dimin- ished that Riggs shamelessly continued to violate the Bank Secrecy Act even after a full-time OCC examiner was placed on the bank’s premises following last summer’s consent order. I am very interested in hearing directly from the OCC about how this happened. I am also deeply concerned that we are combating illicit funding networks inside our country with the regulatory structure that was not designed to be part of our arsenal in a war on terror. Though a lot of great strides forward have been taken, particu- larly with the creation of the Office of Terrorism and Financial In- (1) VerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\95062.TXT FIN1 PsN: MICAH 2 telligence, the TFI, and with an elevated focus on improving FinCEN’s capability, it is evident that this is still a work in progress. The time has come to replace slow-footed regulatory sys- tems with one that is centralized, multi-dimensional and focused intentionally on preventing our financial institutions from being ex- ploited by criminals and terrorists. Therefore, this subcommittee will continue to pursue proposals that centralize our examination and compliance assets, that estab- lish a criminal enforcement authority, that will restore the credi- bility of our regulators. Such reforms should establish clear lines of oversight, improve our ability to quickly detect and respond to suspicious activity and will make clear to financial institutions that, from now on, brazen violators are going to be going to jail in- stead of just paying a civil fine. Our hearing today also focuses on UBS’s contract with the Fed- eral Reserve Bank of New York to serve as an extended custodial inventory which facilitates the international distribution of U.S. Currency. Beginning with its contract in 1996, UBS was in viola- tion of its agreement to repatriate old U.S. banknotes and dis- tribute—re-distribute new banknotes on behalf of the Federal Re- serve. The bank knowingly traded U.S. currency through the ECI with countries subject to restrictions from the Office of Foreign Asset Control, including Cuba, Iran, Libya, and Yugoslavia. The most serious and disturbing violation has been the discovery that officers and employees at UBS intentionally falsified documents to side-step detection by U.S. authorities. Though these actions and the company’s failure to implement in- ternal controls made it exponentially more difficult to detect sus- picious activity, it is also important to examine how and why rou- tine oversight by the Federal
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