Bank Ignored Red Flags on African Despot

In early 2001, the State Department issued a report on the tiny West African nation of Equatorial Guinea, warning that the country was mishandling its growing oil wealth and decrying its record on human rights. But officials at the nation’s longtime U.S. lender, Riggs Bank in Washington, saw things differently. Not long after the report was issued, they invited the country’s leader to lunch.

“The Riggs Bank relationship with you and your government is based on respect for you and our ability to anticipate and fulfill your requirements,” top officials said in a May 17, 2001, letter to Equatorial Guinea’s president, Brig. Gen. Teodoro Obiang Nguema Mbasogo.

The letter thanked Obiang for “the opportunity you granted to us in hosting a luncheon in your honor” and said that a committee of senior executives had been set up to discuss “how best we can serve you.”

The institution’s relationship with Equatorial Guinea has since led to a huge fine, a grand jury investigation and a hearing Thursday on Capitol Hill that explored how Riggs became the banker of choice for a dirt-poor African nation dealing with sudden oil riches -- and funneled millions to a despotic ruler and members of his family.

The Riggs debacle is raising questions about whether federal bank regulators are doing their job at a time of growing concern that terrorists may be using U.S. financial institutions to bankroll their operations.

While federal money-laundering laws were strengthened by the USA Patriot Act, which was enacted in the weeks after the Sept. 11, 2001, attacks, regulations fully implementing the provisions have yet to be finalized. And while many of the problems at Riggs predated the attacks, the pattern of abuse continued unabated after enactment of the law, which expanded the reach of law enforcement in the hunt for terrorists. Indeed, federal bank regulators said they were unaware of the problems with Equatorial Guinea at Riggs until reading about them in an article in the Los Angeles Times.

“The Bush administration is almost two years behind where the Congress told them they should be” in issuing final money-laundering regulations, said Jonathan M. Winer, a Washington lawyer who was deputy assistant secretary of State for international law enforcement in the late 1990s.

Among other rules still in flux are those that set standards for the amount of due diligence that institutions have to conduct on high-risk accounts, such as those linked to foreign political leaders -- just the sort of issue raised in the Riggs case.

The hearing was based on a report issued late Wednesday by Senate investigators, laying out a portrait of financial greed and regulatory ineptitude.

The report showed how the bank channeled millions of dollars into accounts for Obiang and his relatives, sometimes wiring the money into overseas shell companies that Riggs helped to create.Until the bank finally severed relations with the country earlier this year, Equatorial Guinea was Riggs’ largest client, with deposits reaching as much as $700 million, or more than 10% of the bank’s assets.

The report also found that Riggs assiduously courted former Chilean dictator Augusto Pinochet and hid the relationship from regulators for two years.

At Thursday’s hearing, members of Congress accused bank officials of turning a blind eye to the history of problems and of asking too few questions about clients. They also blasted regulators for being too slow to act.

“How do you write that stuff to a guy who’s as abominable as this guy?” said Sen. Carl Levin (D-Mich.), the ranking member of the Senate Permanent Subcommittee on Investigations, referring to the bank’s letter to Obiang.

Lawrence I. Hebert, Riggs’ president and chief executive, said he was unaware of the 2001 State Department report and described the lunch with Obiang as a way to gather information.

“It was my attempt to know the customer,” said Hebert, who at the time had only recently joined the bank.

In their testimony, Hebert and other bank officials blamed lax financial controls and regulatory compliance systems and said they had invested millions to remedy the problems.

They have also attempted to direct blame for much of the bank’s problems on the former account manager for Equatorial Guinea. According to the subcommittee report, that manager directed more than $1 million from an Equatorial Guinea account at the bank to an overseasaccount controlled by his wife.

The manager, Simon Kareri, appeared at the hearing with his lawyer. He declined to answer questions, citing the right against self-incrimination, and was excused.

The hearing also featured testimony from Riggs’ former chief federal examiner, whom it hired in 2002, and shed new light on the advisors Riggs used in sorting out its relations with the African nation and other clients. They included a prominent Texas law firm and a nonprofit group in Virginia that monitored elections in Equatorial Guinea and was itself involved in a business deal with Obiang.

Before being hired by the bank, federal examiner R. Ashley Lee was conducting a review of Pinochet’s accounts with Riggs. Levin said he was troubled that the regulator had not moved more aggressively to expose problems with the portfolio.

Levin also said some of Lee’s answers concerning his handling of those accounts did not square with sworn testimony from other regulators. He said he would ask the Justice Department to investigate.

Lee, Riggs’ executive vice president and chief risk officer, denied any impropriety.

The committee also heard from representatives of three oil companies that have helped fuel an economic boom in Equatorial Guinea since oil was discovered there in the mid-1990s. The subcommittee report said the oil companies -- ExxonMobil, Amerada Hess and Marathon Oil -- also might have contributed to a culture of corruption in the country. The report cited millions of dollars of payments that the companies made to Obiang and his cronies over the years to lease property and fund the education of the children of the ruling elite.

The companies said they had acted ethically, disclosed the payments on their books and made sure that payments were made based on market rates.