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“How Top Dutch Bank Plunged Into World of Shadowy Money”

The Top Managment and the Board Became Fully Involved - This Story Highlights the Importance of Internal Controls

Is the Wall Street Journal’s headline on the top of  Page 1 on December 30, 2005. The article by reporter Glenn R. Simpson provides a detailed account of alleged massive money laundering through branches of ABN Amro Holding NV, the world’s 20th largest bank. 

The case that is described goes to the heart of the “know your customer” issue that has been the central feature of action in striving to curb money laundering in recent years. At its core, the requirement is that banks take forceful actions to ensure that they know who owns the accounts in which money is deposited and that they are pro-actively engaged in investigating suspicious transactions. The ability of banks to put in place “know your customer” systems is a key aspect of corporate governance in banking and the dangers of inappropriate action are illustrated in the Wall Street Journal article.

Money laundering is vital for criminals of all kinds engaged in corruption – they need to find ways to wash their ill-gotten gains and convert often vast amounts of local currency into dollars and euros that can be easily deposited across the world. “Know your customer” is at the core of the Wolfsberg Principles – a voluntary code of anti-money laundering principles stimulated by Transparency International in partnership with leading banks, including ABN Amro.

“Know your customer” became a critical focal point for U.S. and international financial regulators after the 9/11 terrorist attack in New York. The key concern is that criminals, transferring corrupt gains across the world can  “launder” their money by creating shell companies and by opening bank accounts in phony names – the “know your customer” rules require that banks know who their customers are, that they investigate suspicious accounts and transactions and so curb money laundering. But, as the Wall Street Journal article highlights, vast sums of cash flowed through ABN Amro without the bank knowing details about who sent the money and who received it.

The article noted: “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..”

The article also illuminates the failure of the Bank to act prudently in this area, to mensure that it had adequate internal controls in place and, in one incident, that there were even temptations by top managers to hide key information from regulators. The article does underscore that the bank conducted extensive internal investigations when it started to realize that massive problems were developing and that it has fully cooperated with U.S. regulatory authorities. Moreover, the bank has also put in place new control systems, involving costs running to more than $250 million on an annual basis, to guard against further similar critical problems.  Nevertheless, the newspaper reported that the U.S. authorities are pursuing a criminal investigation.

Illustrative of the “know your customer” issue is a case highlighted in the article where in 2002-03 “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.”

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Capitalism's Achilles Heel: Dirty Money and How to Renew the Free Market System

Exclusive EthicsWorld article by author Raymond Baker
Senior fellow at the Center for International Policy

Enron.  Tyco.  WorldCom.  This list of tainted companies could go on for pages.  More than ever, our economic system is struggling to balance what is legal, what is ethical and what serves the common good.  The many disgraced corporations in the last five years have met with scandal in their own unique ways.  But there is a common thread that links many of them and countless other companies that operate “cleanly.”

That thread is the dirty money structure, which consists of tax havens, secrecy jurisdictions, abusive transfer pricing, dummy companies, anonymous trusts, hidden accounts, solicitation of ill-gotten gains, kickbacks and loopholes left in the laws of western countries that encourage incoming criminal and tax-evading funds.  Many global companies and banks use this structure to skirt customs, tax, financial and money laundering laws.  Roughly $11 trillion is stashed away in tax havens and secrecy jurisdictions.  About half of cross-border commerce involves some part of the dirty money structure, often to hide illicit proceeds.

The result is nothing less than the legitimization of illegality.  It is virtually impossible to do business using tax havens, secrecy jurisdictions, abusive transfer pricing, and secret accounts without breaking laws in many countries.

Why has so much bad behavior become business as usual?  One explanation is greed, but this does not adequately explain the phenomenon.  A better explanation is that we value “maximizing” our business operations over ensuring that they are fair and just.  The capitalist system is enormously productive, yet it could accomplish so much more.  We need to make a top priority of justice and fairness in business operations if capitalism is to achieve its fullest potential and spread prosperity to all.  Curtailing the dirty money structure is an essential first step.

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