Private Banking Coming Under Public Scrutiny

Private banking is about to get a little less private.

For years, banks have been rushing into this lucrative niche, which specializes in highly personalized and often secretive financial services for the wealthy or famous.

But now, legislators worry that money launderers, corrupt foreign politicians and other crooks also are taking greater advantage of the veil of private banking. Federal officials are considering new laws to force banks and regulators to pay closer attention to the customers of these low-profile units.

At recent Senate hearings, Citigroup came under fire for failing to adequately monitor its private-banking arm, permitting controversial foreign figures to secretly funnel millions of dollars out of their countries. The bank admitted that there was a lapse in its monitoring systems but said it had corrected the problem.

Treasury Secretary Lawrence H. Summers has proposed the Money Laundering Act of 1999, which he hopes will make it more difficult to launder illegal proceeds through private-banking units in the U.S. Among other things, the law would increase the types of foreign crimes that banks must watch for among their customers.

Likewise, Sen. Carl Levin (D-Mich.) has introduced a bill that would require banks to collect more information about their richest customers’ sources of income--and make it a crime for banks to conceal their customers’ identities.

Levin’s bill comes in response to a Nov. 9 Senate subcommittee report that found that many banks allow their private-banking customers to use numbered accounts or code names to conduct business.

The report also found that banks were failing to adequately question unusual financial activity by private-banking clients, either out of loyalty or because they were intimidated by their rich and powerful customers.

In California, private-banking executives say they are watching the legislative debate with concern and are reviewing their anti-fraud policies to ensure compliance.

“The recent focus on this gives us pause,” said former state Treasurer Kathleen Brown, who heads Bank of America’s West Coast private-banking unit. “But we already have some pretty stringent and detailed procedures in place.”

Richard Hartnack, vice chairman of Union Bank of California, said he doubts that money laundering is as prevalent in private banking as some fear.

“Private banking is not a place where crooks would go because there is constant scrutiny from a bank employee,” he said.

Nevertheless, regulators want the banks to take extra precautions before conducting business for private clients, including collecting personal and financial references, creating profiles of customers and their sources of income, researching clients in newspapers and other public records, and visiting clients at home and at their places of business.

To help with the task, several large banks--including Citibank, Bank of America and Wells Fargo--are turning to software programs to continuously monitor transactions of their private-banking clients. Such systems alert the bank to transactions that are unusually large or out of the ordinary for the client.

Such scrutiny could put private banks in an uncomfortable position. On one hand, banks want to cooperate with law enforcement. On the other, they want to protect the privacy of their well-heeled clients.

“It’s a Catch-22,” said Gordon Greenberg, a banking attorney at McDermott, Will & Emery in Los Angeles. He said private-banking clients will soon be subjected to the kind of customer monitoring that was proposed by the government earlier this year under the so-called “know your customer” rule. That idea, which would have applied to virtually all customers, was shot down because complaints flooded in over the potential invasion of privacy.

“We’re getting the same legislation again through the back door,” Greenberg said.

But Brown said it is necessary for banks to identify and monitor customers to protect themselves from fraud. She said a B of A private-banking office recently turned away a Southland resident who was carrying a Louis Vuitton suitcase filled with cash because he would not reveal the source of the money.

In California, the well-to-do can receive private-banking services from dozens of institutions, from tiny PriVest Bank in Costa Mesa to the biggest banks. Beverly Hills-based City National Bank, which has carved a niche in the entertainment industry, is another leading player.

The spotlight on private banking comes as the niche is growing rapidly. Thanks largely to the thriving stock market, assets worth an estimated $15 trillion are being managed by private-banking units worldwide.

“It’s a growth business for Bank of America,” Brown said, adding that the company’s private-banking unit provides more than 7% of total revenue, up from less than 1% six years ago.

The niche caters to rich clients who typically must leave investable assets of at least $1 million with the bank. In return, they receive personalized planning services and investment advice from an employee who functions as the client’s personal banker.

Services can range from yacht loans and trust management to handling the client’s monthly household bills or even picking up the mail while he or she is out of town.

Discretion is key. Because clients tend to be political leaders, chief executives, movie stars and other very wealthy individuals, their financial transactions can make headlines--or even move the stock market.

“This is very confidential information,” said Gene Elerding, banking attorney at Manatt Phelps & Phillips in Los Angeles. “Many banks even put up a wall between their private-banking units and the rest of the bank.”

Clients pay dearly for the service. Clients typically must generate at least $25,000 in revenue for the bank each year. Fees of $1 million annually are not uncommon.

Such hefty charges have helped private banking become one of the industry’s most profitable business segments.

Profits at private-banking units are often twice as large as those of other bank departments, with annual returns of 20% or higher, according to the Senate subcommittee report.

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Times staff writer Edmund Sanders can be reached at edmund.sanders@latimes.com.