A Congressional inquiry has found that it is ”relatively easy” for foreigners to hide their identities and form shell companies here that can launder money through American banks.
In a a nine-month inquiry that subpoenaed bank records, the investigators found that an unknown number of Russians and other East Europeans moved more than $1.4 billion through accounts at Citibank of New York and the Commercial Bank of San Francisco.
The accounts had been opened by Irakly Kaveladze, who immigrated to the United States from Russia in 1991, according to Citibank and Mr. Kaveladze. He set up more than 2,000 corporations in Delaware for Russian brokers and then opened the bank accounts for them, without knowing who owned the corporations, according to the report by the General Accounting Office, which has not been made public.
The report said the banks had failed to conduct any ”due diligence” into identifying the owners of the accounts.
Late this afternoon, Citibank sent a 15-page letter to the G.A.O., saying that it had closed the accounts after being contacted by G.A.O. investigators earlier this year.
”It is clear in hindsight that our systems and tracking procedures were not sufficient to detect the nature and extent of his relationship with us,” the bank said, referring to Mr. Kaveladze. The letter, signed by the general counsel, Michael A. Ross, for the Global Consumer Business at Citigroup Inc., went on, ”Given enhancements to our systems and procedures, we are confident that we would detect questionable activity and take action more promptly should a similar situation arise today.”
The bank said outside counsel had been brought in to review the matter after being alerted by the G.A.O, and that ”no illegal activity in the Kaveladze-related accounts” had been found.
In an interview, Mr. Kaveladze said he had engaged in no wrongdoing. He described the G.A.O. investigation as a ”witch hunt.”
The G.A.O. report said nothing about the sources of the money. In view of past investigations into laundering, this wave was highly likely to have arisen from Russian executives who were seeking to avoid taxes, although some money could be from organized crime.
More than $800 million was wired from abroad to 136 accounts that Mr. Kaveladze opened at Citibank for Russian clients, and most of that was then sent to overseas accounts, said the report, which was provided to The New York Times by government officials who want to see its findings receive maximum exposure. The report is to be released on Thursday.
About $600 million moved through the Commercial Bank, the investigation found.
The inquiry was sought in February by Senator Carl M. Levin, a Michigan Democrat who is the ranking minority member on the Permanent Subcommittee on Investigations, as part of his inquiry into laundering by United States financial institutions. ”We routinely and legitimately criticize foreign countries that allow the creation of corporations with secret ownership for the purpose of hiding money,” Mr. Levin said. Yet, he continued, some American states including Delaware, let companies incorporate without disclosing owners and officers, and that allows ”the establishment of a private corporation that can be used for money laundering.”
The banks, he said, are supposed to conduct their ”due diligence” reviews as a safeguard against laundering. ”This is a serious failing by these two banks and a violation of their responsibility under the law,” he added.
Mr. Levin said he was referring the report to the Justice Department for a criminal investigation and to the Office of the Comptroller of the Currency and to the Federal Deposit Insurance Corporation, which regulates banks.
Mr. Kaveladze vigorously denied that he had done anything wrong. Delaware law does not require that company owners be identified, he said, a point of law that the G.A.O. investigators agreed with. But the investigators said Mr. Kaveladze had represented to the banks that he knew who his customers were. Mr. Kaveladze declined to discuss that or the other accusations in detail.
”What I see here is another Russian witch hunt in the United States,” he said in a telephone interview.
A senior vice president at Commercial Bank, Juanna Collin, said the bank was aware of the investigation and had cooperated. Ms. Collin said she could not comment until she had read the report.
The Commercial Bank shut its international banking department in June because of laundering investigations, and the bank has been sold to First Banks America.
At one time, Mr. Kaveladze helped some 50 Russian nonresident aliens obtain Citibank credit cards, and each of them used the address for one of Mr. Kaveladze’s companies, International Business Creations, Citibank told the G.A.O. in its letter today. The bank was concerned and monitored the credit card accounts, finally closing them in 1996. At the time, Citibank’s compliance department recommended that all of Mr. Kaveladze’s accounts be closed, but the branch that handled them ”resisted,” Citibank wrote today. It was not until four years later that the accounts were closed.
Citibank has taken no disciplinary action against any of the individuals involved in handling the Kaveladze accounts. ”Much time has elapsed since many of these events occurred and many employees involved have retired, died, or found employment at other companies,” Mr. Ross wrote.
Mr. Kaveladze, who was born in the Soviet Republic of Georgia in 1960 and graduated from the Moscow Finance Academy in 1989, moved here in 1991 and quickly set up International Business Creations. The company opened accounts at Citibank and Commercial Bank for corporations that had been formed in Delaware for Russian brokers.
In 1996, Mr. Kaveladze expanded and set up the Delaware corporations. He established Euro-American Corporate Services Inc., which charged $350 for each company it incorporated in Delaware for a Russian broker and an additional $450 for each bank account that it opened, according to the G.A.O. report and a Euro-American employee.
Euro-American dealt with up to 50 Russian brokers and sometimes set up 10 corporations at a time, the report said. Euro-American has been liquidated, Mr. Kaveladze said. International Business Creations now operates from New Jersey, he added.
Published: Jul 18, 2017