Дело БОНИ - заявление Реньи
May. 26th, 2007 05:30 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
borislvinhttp://financialservices.house.gov/banking/92299ren.htm
Testimony of Thomas A. Renyi, Chairman of the Board and Chief Executive Officer, The Bank of New York Company, Inc., before the House Committee on Banking and Financial Services, September 22, 1999
Mr. Chairman, Congressman La Falce, members of the Committee: My name is Tom Renyi. I am Chairman of the Board and Chief Executive Officer of The Bank of New York Company.
I appreciate the opportunity to testify before the House Banking Committee on behalf of The Bank of New York. We are the nation’s oldest bank, founded in 1784 by the same man who established and first headed the United States Treasury, Alexander Hamilton. Our business today focuses on providing services to the global financial services sector. We are one of the leading correspondent banks for commercial banks around the world. We provide corporate and retail services in our home market, as well as a variety of other trust and investment services. The Bank of New York has consistently produced earnings that rank among the best in our industry, while maintaining a culture and reputation of prudence and responsibility over our 215 year history.
You can therefore imagine how dismayed I have been by the suggestions in the press that The Bank of New York has been involved in, or been used as a vehicle for, money laundering or other illicit activities. Let me set the record straight at the outset. No charges have been filed against The Bank of New York. No relevant authorities have asserted that The Bank of New York has engaged in money laundering or violated any other law. Neither the Bank nor any of its customers have lost any money as a result of the activities in question. We have cooperated fully with the ongoing investigations being conducted by numerous US and foreign law enforcement agencies and bank regulatory authorities. We have provided these authorities with tens of thousands of documents and millions of electronic bits of information. We continue to cooperate with these investigations, which are not yet complete and remain highly confidential. Our commitment is to continue to participate fully in these investigations until they are completed. But, as you can understand, there are limits to what we can disclose prior to the completion of the investigation.
In my testimony, I would like to address three broad questions relating to our inquiry into possible misuse of the international funds transfer system: First, what were the events that actually took place, and how did they take place? Second, what have we done as a result of these events and the subsequent inquiry? And third, what else might be done, by entities or groups with a scope and mandate broader than our own? In the course of this discussion, Mr. Chairman, I will address in some detail the six specific topics relating to procedures, actions and relationships of The Bank of New York that you raised in your letter inviting me to appear before you today.
What took place and how?
Press accounts have tended to ignore The Bank of New York’s cooperation with investigating agencies here and abroad. Although, Mr. Chairman, there are limits to what I can say about these investigations because of their ongoing nature, let me try to describe what I can. The Bank learned of these investigations a year ago, in September 1998. When we requested the U.S. Attorney’s permission to close the accounts they were monitoring, we were asked to keep the accounts open; to advise no one, other than our bank regulators, about the investigations; and to take no action that would compromise the confidentiality of the investigations. We did all these things. It was our commitment then, and remains our commitment now, to cooperate fully with all law enforcement efforts.
Issue (4) in your letter of invitation deals with the opening of these accounts. As I said before, the Bank’s internal investigation is still in its early stages, so I am not in a position to make final or definitive statements about every aspect of these accounts. What we have learned about these accounts is this: When opened, the accounts were quite normal. The principal accounts were opened at a New York City branch of the Bank by Peter Berlin, a New Jersey resident who became a US citizen in 1996, and who represented himself as operating small businesses in the New York City metropolitan area. The accounts were referred by an officer of the Bank, Lucy Edwards, Mr. Berlin’s wife. The initial history of the accounts was unremarkable, and account activity was consistent with a modest business.
However, the volume of funds moving through these accounts increased to levels well beyond what would have been expected for businesses of this kind. When Bank employees noticed the increased volume, questions were asked within the Bank about Mr. Berlin and his companies. But the questions were not pursued with sufficient vigor or follow-through, and the questioners relied too heavily on the fact that Mr. Berlin was married to a well-regarded Bank officer, Lucy Edwards, who had referred the accounts.
Allowing these accounts to remain open and active without sufficient questioning was a lapse on the part of the Bank. I have taken personal responsibility for implementing remedial actions. I will describe these later in my testimony.
From a broader perspective, the questions of how these accounts operated extend to our business presence in Russia and to the nature of the global funds transfer system. The Bank of New York has done business in Russia since 1922, when Irving Trust, which we later acquired, opened an account for Vnesheconomobank, the Bank for Foreign Economic Affairs of the USSR. With the collapse of the Soviet Union in 1991, a new banking system began to emerge in Russia. Responding to public and private initiatives and encouragement to "bring Russia west," we – and many of our nation’s other leading commercial and investment banks – were asked to aid the development of this system, in our case focusing on the development of the infrastructure for the Russian capital markets, where our expertise in funds transfer and American Depositary Receipts was pertinent. We committed Bank personnel and resources to planning committees, training sessions, technological discussions and the like with Russian banking executives and personnel.
The business role we chose for ourselves in Russia was similar to what we do in many other countries: Correspondent banking and securities processing activities, bank-to-bank business, that generates stable, predictable fees with relatively low risk and capital exposure. These businesses include funds transfer, cash-collateralized confirmations of letters of credit, handling of collections, acceptance of deposits and the extension of limited credit to the Russian banking system out of the New York office.
We have no branches or bank subsidiaries in Russia, just one office that employs five people who perform administrative functions. We take no deposits in Russia. We extend no credit in Russia. Here in the US, we are a leading depositary for American Depositary Receipts for Russian companies, as we are for many countries around the world. This is a record-keeping and processing function. The Bank of New York does not underwrite, invest in, or sell Russian securities.
Issue (2) in your letter of invitation deals with our practices and procedures when establishing correspondent bank relationships. The Bank of New York employs the following procedure for opening correspondent relationships with foreign banks. All new relationships must be sponsored by a Bank of New York relationship manager who works in the department that is responsible for the correspondent bank’s home country. Before an account is opened, the relationship manager must have a written request from the prospective correspondent bank, develop a list of other correspondent bank references around the world, and meet with the bank on its premises. The prospective correspondent must submit financial statements and other regulatory filings. The relationship manager must secure a reference from two existing Bank of New York correspondent banks.
A related issue, issue (5) in your letter of invitation, addresses The Bank of New York’s relationship to the American Depositary Receipts of Inkombank and Bank Menatep. As you may be aware, The Bank of New York is the world’s leading ADR bank, and our services for these two banks were basically the same as our services for approximately 1300 other companies around the world. As previously stated, The Bank of New York did not underwrite, invest in, sell or assist any other entity in selling shares or ADRs for these Russian companies. The Bank acts as the Depositary bank, fulfilling administrative functions dealing with the legal transfer and registry of ownership of these securities.
The ADRs sponsored by Inkombank and Bank Menatep were issued against shares already trading in their home market. Although our role was limited to an administrative function and therefore did not involve underwriter’s due diligence, we met with the banks’ principal executives and their U.S. counsel. Both banks sought and obtained regulatory approval to offer ADRs in the U.S. from Russia’s Central Bank. As required by U.S. law, registration statements relating to the ADRs were filed by both banks with the U.S. Securities and Exchange Commission and were declared effective by the Commission. And both banks were required to and provided information to Russia’s Central Bank and to the SEC under Rule 12g3-2(b), including Annual Reports and Financial Statements audited under international accounting principles by Big Six accounting firms.
A final business-relationship issue is issue (6) in your letter of invitation, the Bank’s relationship with Bruce Rappaport and Inter-Maritime Bank. Mr. Rappaport is a shareholder of The Bank of New York Company, Inc., which is the parent of The Bank of New York. According to filings with the Securities and Exchange Commission, the last time he owned more than 5% of our stock was 11 years ago in 1988. We believe that he currently owns substantially less than 5%.
The Bank and Mr. Rappaport are co-owners of Bank of New York – Inter-Maritime Bank (BNY-IMB) -- a Geneva-based, Swiss bank. The Bank of New York owns 27.9% of this entity. BNY-IMB focuses on private banking and investment management. It is a small institution, with a total staff of 90 people and total assets of CHF 266 million. The Bank has a traditional correspondent banking relationship with BNY-IMB, which includes credit, cash management, custody and clearing services. The Bank of New York has no other commercial relationship with Mr. Rappaport.
Again, our principal business in Russia is in correspondent banking. Satisfying ourselves as to the credit-worthiness and business-worthiness of any correspondent bank, however, does not give us any knowledge as to the identity or activities of their customers. Our correspondent banking businesses involve dollar clearing or the transfer of US dollars through the global payments system. The essential characteristics of this system are its size, its speed and its lack of transparency. I want to focus on these key features of that system, because they help to explain how funds moved into and out of the Berlin accounts, and because they are the source of considerable frustration to anyone who seeks explicit information about the use of these, or any other, accounts.
First, the US dollar payments system is huge – close to a million transactions, with a total value of four trillion dollars, flow between the US dollar accounts of world banks every single day. Some $1.4 trillion of that daily volume moves through the Federal Reserve System. Another $1.4 trillion moves through the Clearing House International Payments System (CHIPS). And $1.2 trillion moves through "book transfer," often using the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a cooperative system with 6500 members in 178 countries. The system is automated, so that transfers are virtually instantaneous and virtually flawless in their efficient execution. These massive amounts tend to obscure the complexity of individual international transactions. A seemingly routine transaction, a company in New Delhi paying $5 million for auto parts made by a company in Detroit, can involve as many as five or six banks in several different countries, using a variety of payment systems.
Because of the extraordinary dollar value of the average transaction (approximately $4 million), errors are costly. To provide the necessary level of efficiency and accuracy, the system is designed to provide the highest possible level of straight-through or automatic processing. Manual intervention is minimized. This offers greater security at certain levels, because people can be compromised more easily than machines.
However, this system is also opaque, even to the practiced eye. The funds transfers here involve not physical cash or checks, but computer-driven electronic messages. The messages consist of little more than sums, accounts numbers and bank identifiers in digital form and are not intended to and only rarely would provide any reliable indication of the originator or ultimate beneficiary or the intended use of the payment. This is the form that assures the smoothest functioning of the payment system, because it minimizes errors of misinterpretation of data and instructions.
We and other banks realize the danger that funds transferred through the international payment system could have been illegally obtained or are being illegally diverted. That is why there are safeguards designed to limit access to the system to legitimate financial institutions. These safeguards include membership criteria for such organizations as CHIPS and SWIFT, and the review that should take place before we, or any bank, grants another bank correspondent status and access to the global payment system. Additionally, there are features which we all use to identify transactions that have been blocked by Executive Order. Scanning systems are used to stop and review transactions containing such pre-set identifiers as Cuba and Havana, Baghdad and Iraq. But these scanning systems only work when we have a suspect and some indication of his access to the global system to guide us.
To sum up, the global payments system is excellent at tracking funds flows within its internal electronic pathways; but the system is not very good at all at identifying who controls the origination or destination accounts, how they came by the money, or what they plan to do with it.
So we share the frustration of the authorities in these ongoing investigations. In the five weeks that we have been conducting our own investigation, we have examined vast amounts of data – but it is simply not possible for this data to identify the source or legality of any individual transfer of funds. Once a bank grants a customer access to its payments system and, by extension, the US dollar payment system, it is extremely difficult to track the flow of funds or to stop a transaction before it happens.
What have we done about the events and their causes?
Issue (1) cited in your letter of September 2 is The Bank of New York’s internal procedures for identifying and reporting suspicious account activity. The Bank has reviewed and revised its program that identifies and reports suspicious funds transfer and money movement transactions. These elements are brought together by the new Anti-Money Laundering Committee, which reviews unusual customer activity, documents its investigations and recommends appropriate action for the reviewed accounts directly to the Chief Executive Officer of the Bank and to the Board of Directors. These actions include closing of accounts and filing Suspicious Activity Reports. One important aspect of the committee’s mission is to address the possibility of an individual within the bank deflecting future questions about unusual account activity.
The Anti-Money Laundering Committee relies upon six automated review systems to analyze accounts for unusual activity, such as excess balance growth, excess fund transfers, transfers to high-risk countries and activity inconsistent with the original stated purpose of the account. The Committee also oversees the Bank’s Anti-Money Laundering Training Program, which has provided awareness training for literally thousands of employees who deal with customers or who process customer transactions.
At the foundation of the Bank’s program are detailed Anti-Money Laundering Policies and Procedures, including comprehensive Know Your Customer procedures for individual banking units. This entire program has been independently reviewed by a Big Five accounting firm, who found it satisfactory. The firm has made recommendations for further improvement, which the Bank is implementing.
The Bank has in place a state-of-the-art computer-based system (the Atchley System) for monitoring the flow of funds transferred through the Bank. We have been working with outside consultants to take funds transfer monitoring to a higher level – one that examines behavioral patterns to detect abnormal activity. This approach is similar to the behavior-based systems that are used by many credit card issuers to monitor card activity. We have identified such a system, which we are testing for approval and final implementation.
Addressing issue (3) cited in your letter, the improved anti-money laundering program described above is a major element of the Bank’s response to the recent allegations. In addition, the Bank has commenced a comprehensive internal investigation into the Berlin-related accounts with the assistance of outside counsel and forensic accountants. Because that investigation is still in its early stages, it would not be fair or appropriate to report on the findings to date. I will say this, however: our review is a searching one, conducted with fairness to all Bank employees, and I have instructed those conducting the investigation to "let the chips fall where they may." All employees are required to cooperate in the investigation. In two instances where employees refused to meet with our investigators they were promptly terminated. Our investigation determined that the two employees of the Bank, including Ms. Edwards, had also violated our Code of Conduct. The Code of Conduct, which every officer must review and sign annually, is the ethical centerpiece of our Bank’s performance. Violations of the Code have never been, nor will they be, tolerated. If other violations or weaknesses are identified in the course of this investigation, or by the investigations being conducted by the authorities, appropriate action will be taken.
What can be done at the public policy level?
My testimony today deals mostly with the actions of a very few individuals and one bank. But the investigations involve many other institutions around the world, and the question of possible misuse of the international funds transfer system is a truly global question. If we are to improve our global system, we must do so through international cooperation. Heightened domestic surveillance in any one country may simply drive would-be wrongdoers to less stringent points of entry into the system.
To do so unilaterally would have the impact of moving trade flows into non-US dollar-denominated currencies and their respective payment systems. Thus, any policy action that would reduce the importance and attractiveness of the US dollar as the currency of choice for international trade – and as a reserve currency – would place the United States at a distinct competitive disadvantage in the world economy.
Another policy issue is what the role of US banks should be in establishing correspondent relationships in Russia and other emerging countries where there are concerns about corruption. In this case, if western banks redline Russian banks, the emergence of a modern capitalist economy in Russia will probably be impossible.
We should, as well, determine if and how US foreign policy should address illicit business activity that uses the US dollar payments system. Today, an agency of the US Treasury, the Office of Foreign Assets Control, provides enforcement against economically embargoed countries, including Cuba, Libya and Iraq. OFAC instructions prevent funds transfers through our banks to these nations. Should that approach be applied to money laundering? Should that approach be applied more broadly to include flight capital? Could it be done selectively, without restricting legitimate trade flows?
This leads us to the final policy issue, that of privacy. If we choose to step up surveillance activities, can we do so with appropriate respect for our fellow citizens’ right to privacy? We have seen considerable public debate just this year to new Know Your Customer regulations proposed by federal bank regulatory agencies, and also to bank practices that shared customer records with marketing companies. We will need to keep in mind the need for a careful balance between transparency of financial transactions and the right to personal financial privacy.
I believe these are legitimate and important issues that touch on the central themes of these hearings. Yet the broader considerations should not obscure the essential responsibility that we and all the participants in the global payments system have in ensuring its appropriate use. When any financial institution provides access to the system or facilitates its use, it must do everything it can to prevent illicit activity from taking place as a result. And if illicit activity does take place, it must detect it and bring it promptly to the attention of appropriate authorities.
This is our responsibility. On behalf of The Bank of New York, I reaffirm it today.
Testimony of Thomas A. Renyi, Chairman of the Board and Chief Executive Officer, The Bank of New York Company, Inc., before the House Committee on Banking and Financial Services, September 22, 1999
Mr. Chairman, Congressman La Falce, members of the Committee: My name is Tom Renyi. I am Chairman of the Board and Chief Executive Officer of The Bank of New York Company.
I appreciate the opportunity to testify before the House Banking Committee on behalf of The Bank of New York. We are the nation’s oldest bank, founded in 1784 by the same man who established and first headed the United States Treasury, Alexander Hamilton. Our business today focuses on providing services to the global financial services sector. We are one of the leading correspondent banks for commercial banks around the world. We provide corporate and retail services in our home market, as well as a variety of other trust and investment services. The Bank of New York has consistently produced earnings that rank among the best in our industry, while maintaining a culture and reputation of prudence and responsibility over our 215 year history.
You can therefore imagine how dismayed I have been by the suggestions in the press that The Bank of New York has been involved in, or been used as a vehicle for, money laundering or other illicit activities. Let me set the record straight at the outset. No charges have been filed against The Bank of New York. No relevant authorities have asserted that The Bank of New York has engaged in money laundering or violated any other law. Neither the Bank nor any of its customers have lost any money as a result of the activities in question. We have cooperated fully with the ongoing investigations being conducted by numerous US and foreign law enforcement agencies and bank regulatory authorities. We have provided these authorities with tens of thousands of documents and millions of electronic bits of information. We continue to cooperate with these investigations, which are not yet complete and remain highly confidential. Our commitment is to continue to participate fully in these investigations until they are completed. But, as you can understand, there are limits to what we can disclose prior to the completion of the investigation.
In my testimony, I would like to address three broad questions relating to our inquiry into possible misuse of the international funds transfer system: First, what were the events that actually took place, and how did they take place? Second, what have we done as a result of these events and the subsequent inquiry? And third, what else might be done, by entities or groups with a scope and mandate broader than our own? In the course of this discussion, Mr. Chairman, I will address in some detail the six specific topics relating to procedures, actions and relationships of The Bank of New York that you raised in your letter inviting me to appear before you today.
What took place and how?
Press accounts have tended to ignore The Bank of New York’s cooperation with investigating agencies here and abroad. Although, Mr. Chairman, there are limits to what I can say about these investigations because of their ongoing nature, let me try to describe what I can. The Bank learned of these investigations a year ago, in September 1998. When we requested the U.S. Attorney’s permission to close the accounts they were monitoring, we were asked to keep the accounts open; to advise no one, other than our bank regulators, about the investigations; and to take no action that would compromise the confidentiality of the investigations. We did all these things. It was our commitment then, and remains our commitment now, to cooperate fully with all law enforcement efforts.
Issue (4) in your letter of invitation deals with the opening of these accounts. As I said before, the Bank’s internal investigation is still in its early stages, so I am not in a position to make final or definitive statements about every aspect of these accounts. What we have learned about these accounts is this: When opened, the accounts were quite normal. The principal accounts were opened at a New York City branch of the Bank by Peter Berlin, a New Jersey resident who became a US citizen in 1996, and who represented himself as operating small businesses in the New York City metropolitan area. The accounts were referred by an officer of the Bank, Lucy Edwards, Mr. Berlin’s wife. The initial history of the accounts was unremarkable, and account activity was consistent with a modest business.
However, the volume of funds moving through these accounts increased to levels well beyond what would have been expected for businesses of this kind. When Bank employees noticed the increased volume, questions were asked within the Bank about Mr. Berlin and his companies. But the questions were not pursued with sufficient vigor or follow-through, and the questioners relied too heavily on the fact that Mr. Berlin was married to a well-regarded Bank officer, Lucy Edwards, who had referred the accounts.
Allowing these accounts to remain open and active without sufficient questioning was a lapse on the part of the Bank. I have taken personal responsibility for implementing remedial actions. I will describe these later in my testimony.
From a broader perspective, the questions of how these accounts operated extend to our business presence in Russia and to the nature of the global funds transfer system. The Bank of New York has done business in Russia since 1922, when Irving Trust, which we later acquired, opened an account for Vnesheconomobank, the Bank for Foreign Economic Affairs of the USSR. With the collapse of the Soviet Union in 1991, a new banking system began to emerge in Russia. Responding to public and private initiatives and encouragement to "bring Russia west," we – and many of our nation’s other leading commercial and investment banks – were asked to aid the development of this system, in our case focusing on the development of the infrastructure for the Russian capital markets, where our expertise in funds transfer and American Depositary Receipts was pertinent. We committed Bank personnel and resources to planning committees, training sessions, technological discussions and the like with Russian banking executives and personnel.
The business role we chose for ourselves in Russia was similar to what we do in many other countries: Correspondent banking and securities processing activities, bank-to-bank business, that generates stable, predictable fees with relatively low risk and capital exposure. These businesses include funds transfer, cash-collateralized confirmations of letters of credit, handling of collections, acceptance of deposits and the extension of limited credit to the Russian banking system out of the New York office.
We have no branches or bank subsidiaries in Russia, just one office that employs five people who perform administrative functions. We take no deposits in Russia. We extend no credit in Russia. Here in the US, we are a leading depositary for American Depositary Receipts for Russian companies, as we are for many countries around the world. This is a record-keeping and processing function. The Bank of New York does not underwrite, invest in, or sell Russian securities.
Issue (2) in your letter of invitation deals with our practices and procedures when establishing correspondent bank relationships. The Bank of New York employs the following procedure for opening correspondent relationships with foreign banks. All new relationships must be sponsored by a Bank of New York relationship manager who works in the department that is responsible for the correspondent bank’s home country. Before an account is opened, the relationship manager must have a written request from the prospective correspondent bank, develop a list of other correspondent bank references around the world, and meet with the bank on its premises. The prospective correspondent must submit financial statements and other regulatory filings. The relationship manager must secure a reference from two existing Bank of New York correspondent banks.
A related issue, issue (5) in your letter of invitation, addresses The Bank of New York’s relationship to the American Depositary Receipts of Inkombank and Bank Menatep. As you may be aware, The Bank of New York is the world’s leading ADR bank, and our services for these two banks were basically the same as our services for approximately 1300 other companies around the world. As previously stated, The Bank of New York did not underwrite, invest in, sell or assist any other entity in selling shares or ADRs for these Russian companies. The Bank acts as the Depositary bank, fulfilling administrative functions dealing with the legal transfer and registry of ownership of these securities.
The ADRs sponsored by Inkombank and Bank Menatep were issued against shares already trading in their home market. Although our role was limited to an administrative function and therefore did not involve underwriter’s due diligence, we met with the banks’ principal executives and their U.S. counsel. Both banks sought and obtained regulatory approval to offer ADRs in the U.S. from Russia’s Central Bank. As required by U.S. law, registration statements relating to the ADRs were filed by both banks with the U.S. Securities and Exchange Commission and were declared effective by the Commission. And both banks were required to and provided information to Russia’s Central Bank and to the SEC under Rule 12g3-2(b), including Annual Reports and Financial Statements audited under international accounting principles by Big Six accounting firms.
A final business-relationship issue is issue (6) in your letter of invitation, the Bank’s relationship with Bruce Rappaport and Inter-Maritime Bank. Mr. Rappaport is a shareholder of The Bank of New York Company, Inc., which is the parent of The Bank of New York. According to filings with the Securities and Exchange Commission, the last time he owned more than 5% of our stock was 11 years ago in 1988. We believe that he currently owns substantially less than 5%.
The Bank and Mr. Rappaport are co-owners of Bank of New York – Inter-Maritime Bank (BNY-IMB) -- a Geneva-based, Swiss bank. The Bank of New York owns 27.9% of this entity. BNY-IMB focuses on private banking and investment management. It is a small institution, with a total staff of 90 people and total assets of CHF 266 million. The Bank has a traditional correspondent banking relationship with BNY-IMB, which includes credit, cash management, custody and clearing services. The Bank of New York has no other commercial relationship with Mr. Rappaport.
Again, our principal business in Russia is in correspondent banking. Satisfying ourselves as to the credit-worthiness and business-worthiness of any correspondent bank, however, does not give us any knowledge as to the identity or activities of their customers. Our correspondent banking businesses involve dollar clearing or the transfer of US dollars through the global payments system. The essential characteristics of this system are its size, its speed and its lack of transparency. I want to focus on these key features of that system, because they help to explain how funds moved into and out of the Berlin accounts, and because they are the source of considerable frustration to anyone who seeks explicit information about the use of these, or any other, accounts.
First, the US dollar payments system is huge – close to a million transactions, with a total value of four trillion dollars, flow between the US dollar accounts of world banks every single day. Some $1.4 trillion of that daily volume moves through the Federal Reserve System. Another $1.4 trillion moves through the Clearing House International Payments System (CHIPS). And $1.2 trillion moves through "book transfer," often using the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a cooperative system with 6500 members in 178 countries. The system is automated, so that transfers are virtually instantaneous and virtually flawless in their efficient execution. These massive amounts tend to obscure the complexity of individual international transactions. A seemingly routine transaction, a company in New Delhi paying $5 million for auto parts made by a company in Detroit, can involve as many as five or six banks in several different countries, using a variety of payment systems.
Because of the extraordinary dollar value of the average transaction (approximately $4 million), errors are costly. To provide the necessary level of efficiency and accuracy, the system is designed to provide the highest possible level of straight-through or automatic processing. Manual intervention is minimized. This offers greater security at certain levels, because people can be compromised more easily than machines.
However, this system is also opaque, even to the practiced eye. The funds transfers here involve not physical cash or checks, but computer-driven electronic messages. The messages consist of little more than sums, accounts numbers and bank identifiers in digital form and are not intended to and only rarely would provide any reliable indication of the originator or ultimate beneficiary or the intended use of the payment. This is the form that assures the smoothest functioning of the payment system, because it minimizes errors of misinterpretation of data and instructions.
We and other banks realize the danger that funds transferred through the international payment system could have been illegally obtained or are being illegally diverted. That is why there are safeguards designed to limit access to the system to legitimate financial institutions. These safeguards include membership criteria for such organizations as CHIPS and SWIFT, and the review that should take place before we, or any bank, grants another bank correspondent status and access to the global payment system. Additionally, there are features which we all use to identify transactions that have been blocked by Executive Order. Scanning systems are used to stop and review transactions containing such pre-set identifiers as Cuba and Havana, Baghdad and Iraq. But these scanning systems only work when we have a suspect and some indication of his access to the global system to guide us.
To sum up, the global payments system is excellent at tracking funds flows within its internal electronic pathways; but the system is not very good at all at identifying who controls the origination or destination accounts, how they came by the money, or what they plan to do with it.
So we share the frustration of the authorities in these ongoing investigations. In the five weeks that we have been conducting our own investigation, we have examined vast amounts of data – but it is simply not possible for this data to identify the source or legality of any individual transfer of funds. Once a bank grants a customer access to its payments system and, by extension, the US dollar payment system, it is extremely difficult to track the flow of funds or to stop a transaction before it happens.
What have we done about the events and their causes?
Issue (1) cited in your letter of September 2 is The Bank of New York’s internal procedures for identifying and reporting suspicious account activity. The Bank has reviewed and revised its program that identifies and reports suspicious funds transfer and money movement transactions. These elements are brought together by the new Anti-Money Laundering Committee, which reviews unusual customer activity, documents its investigations and recommends appropriate action for the reviewed accounts directly to the Chief Executive Officer of the Bank and to the Board of Directors. These actions include closing of accounts and filing Suspicious Activity Reports. One important aspect of the committee’s mission is to address the possibility of an individual within the bank deflecting future questions about unusual account activity.
The Anti-Money Laundering Committee relies upon six automated review systems to analyze accounts for unusual activity, such as excess balance growth, excess fund transfers, transfers to high-risk countries and activity inconsistent with the original stated purpose of the account. The Committee also oversees the Bank’s Anti-Money Laundering Training Program, which has provided awareness training for literally thousands of employees who deal with customers or who process customer transactions.
At the foundation of the Bank’s program are detailed Anti-Money Laundering Policies and Procedures, including comprehensive Know Your Customer procedures for individual banking units. This entire program has been independently reviewed by a Big Five accounting firm, who found it satisfactory. The firm has made recommendations for further improvement, which the Bank is implementing.
The Bank has in place a state-of-the-art computer-based system (the Atchley System) for monitoring the flow of funds transferred through the Bank. We have been working with outside consultants to take funds transfer monitoring to a higher level – one that examines behavioral patterns to detect abnormal activity. This approach is similar to the behavior-based systems that are used by many credit card issuers to monitor card activity. We have identified such a system, which we are testing for approval and final implementation.
Addressing issue (3) cited in your letter, the improved anti-money laundering program described above is a major element of the Bank’s response to the recent allegations. In addition, the Bank has commenced a comprehensive internal investigation into the Berlin-related accounts with the assistance of outside counsel and forensic accountants. Because that investigation is still in its early stages, it would not be fair or appropriate to report on the findings to date. I will say this, however: our review is a searching one, conducted with fairness to all Bank employees, and I have instructed those conducting the investigation to "let the chips fall where they may." All employees are required to cooperate in the investigation. In two instances where employees refused to meet with our investigators they were promptly terminated. Our investigation determined that the two employees of the Bank, including Ms. Edwards, had also violated our Code of Conduct. The Code of Conduct, which every officer must review and sign annually, is the ethical centerpiece of our Bank’s performance. Violations of the Code have never been, nor will they be, tolerated. If other violations or weaknesses are identified in the course of this investigation, or by the investigations being conducted by the authorities, appropriate action will be taken.
What can be done at the public policy level?
My testimony today deals mostly with the actions of a very few individuals and one bank. But the investigations involve many other institutions around the world, and the question of possible misuse of the international funds transfer system is a truly global question. If we are to improve our global system, we must do so through international cooperation. Heightened domestic surveillance in any one country may simply drive would-be wrongdoers to less stringent points of entry into the system.
To do so unilaterally would have the impact of moving trade flows into non-US dollar-denominated currencies and their respective payment systems. Thus, any policy action that would reduce the importance and attractiveness of the US dollar as the currency of choice for international trade – and as a reserve currency – would place the United States at a distinct competitive disadvantage in the world economy.
Another policy issue is what the role of US banks should be in establishing correspondent relationships in Russia and other emerging countries where there are concerns about corruption. In this case, if western banks redline Russian banks, the emergence of a modern capitalist economy in Russia will probably be impossible.
We should, as well, determine if and how US foreign policy should address illicit business activity that uses the US dollar payments system. Today, an agency of the US Treasury, the Office of Foreign Assets Control, provides enforcement against economically embargoed countries, including Cuba, Libya and Iraq. OFAC instructions prevent funds transfers through our banks to these nations. Should that approach be applied to money laundering? Should that approach be applied more broadly to include flight capital? Could it be done selectively, without restricting legitimate trade flows?
This leads us to the final policy issue, that of privacy. If we choose to step up surveillance activities, can we do so with appropriate respect for our fellow citizens’ right to privacy? We have seen considerable public debate just this year to new Know Your Customer regulations proposed by federal bank regulatory agencies, and also to bank practices that shared customer records with marketing companies. We will need to keep in mind the need for a careful balance between transparency of financial transactions and the right to personal financial privacy.
I believe these are legitimate and important issues that touch on the central themes of these hearings. Yet the broader considerations should not obscure the essential responsibility that we and all the participants in the global payments system have in ensuring its appropriate use. When any financial institution provides access to the system or facilitates its use, it must do everything it can to prevent illicit activity from taking place as a result. And if illicit activity does take place, it must detect it and bring it promptly to the attention of appropriate authorities.
This is our responsibility. On behalf of The Bank of New York, I reaffirm it today.
