Lax Oversight of Banks Aids Money Laundering

The failure of U.S. banks and regulators to track transactions with foreign banks enables criminals to route billions of dollars from drug sales, Internet gambling, tax evasion or other illegal activities into the United States each year, a new Senate subcommittee report concludes.

Although regulators have prodded U.S. banks in recent years to bolster their efforts to control money laundering through individual accounts, the Senate permanent subcommittee on investigations found banks and regulators have been lax in applying similar standards to correspondent banking, in which foreign banks use U.S. banks to perform wire transfers and other transactions.

The subcommittee’s report, which concludes a yearlong investigation, will be made public today. Regulators and bankers familiar with the inquiry say it’s the first comprehensive look at this aspect of banking and how it facilitates money laundering.

“Inattention and disinterest by U.S. banks in screening the foreign banks they take in as clients have allowed rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the United States and to benefit from the protections afforded by the safety and soundness of the U.S. banking industry,” said Sen. Carl Levin of Michigan, the senior Democrat on the subcommittee.

The subcommittee launched its investigation after a Russian money-laundering scandal erupted 18 months ago at Bank of New York.

In all, the subcommittee staff questioned 20 institutions and pursued, in detail, cases at more than a dozen U.S. banks involving “dirty money” flowing through U.S. accounts from suspicious foreign banks, especially offshore banks in jurisdictions with weak money-laundering laws, the report says.

J.P. Morgan Chase & Co., Bank of America, Citigroup and First Union said they terminated the accounts studied by the subcommittee as soon as they became aware of suspicious activity. They said they are constantly monitoring and improving oversight of money laundering, correspondent accounts in particular.

“We’re constantly trying to balance a customer’s right to privacy with the monitoring of bank activity,” said Shirley Norton at Bank of America. “It’s not easy.”