More than just a bank, Riggs was an American cultural institution. It sold itself to PNC Financial Services Group Inc. in 2005.Reuters Photographer/Reuters
Riggs Bank once marketed itself as “the most important bank in the most important city in the world.”
The Washington, D.C.-based lender – which traced its origins to a note-brokerage house founded in 1836 – proudly counted more than 20 U.S. presidents as customers, including Thomas Jefferson, Abraham Lincoln and Theodore Roosevelt. In addition to being “the bank of presidents,” Riggs served the U.S. government by financing the Mexican-American war and facilitating the Alaska Purchase.
More than just a bank, Riggs was an American cultural institution. But its downfall came after it transacted large sums of dirty money from former Chilean dictator Augusto Pinochet and the government of Equatorial Guinea. The leaders of this legendary lender thought they could get away with giving high-risk customers a wink and a nod – even in the post-9/11 era. After all, providing banking services for “politically exposed persons” (PEPs) – prominent people who could be susceptible to being involved in bribery or corruption – was lucrative and central to its business model.
U.S. financial regulators and the Department of Justice, though, brought down the hammer. Saddled with record fines and settlements totalling US$59-million and facing relentless regulatory remediation, Riggs sold itself to PNC Financial Services Group Inc. in 2005.
The tale of Riggs is a reminder of how money laundering – which is often dismissed as a “non-financial risk” – can quickly morph into an existential crisis for lenders when senior executives and corporate directors fail to grasp the gravity of financial crime.
Fast forward to the present day, and one of Canada’s most storied banks, Toronto-Dominion Bank TD-T, is facing scrutiny over its anti-money-laundering practices in the United States. This month, TD posted its first quarterly loss in 21 years after it set aside another large provision to pay anticipated U.S. regulatory fines over anti-money- laundering failures. TD has now reserved more than US$3-billion for fines and continues to brace for other non-financial penalties.
To be clear, no one is suggesting that TD is facing an existential crisis because of its current money-laundering woes. And TD is certainly not the only Canadian bank to run afoul of U.S. regulators. In January, Royal Bank of Canada’s U.S.-based subsidiary City National Bank was fined US$65-million and ordered to fix “systemic deficiencies” in its risk management and internal controls, including those that pertain to anti-money-laundering.
Nonetheless, Canadian banks – many of which are seeking growth and pursuing investments in the United States – must learn from history. U.S. regulators and law enforcement show no mercy on financial crime – not even to a financial institution that is steeped in American history.
David Caruso, former executive vice-president of compliance and security at Riggs Bank, has argued that Riggs paid a steep price because its anti-money-laundering compliance program lacked proper oversight by management and its board of directors.
“Keep in mind that the failures of Riggs to properly identify its risk and manage them is not unique,” Mr. Caruso wrote in the foreword of a 2006 case study published by risk-screening company World-Check. “Ask yourself how well your institution knows all of its risks and how well they are controlled.”
Such questions must be asked of Canadian banks, too, because C-suite executives and corporate directors still need to be pushed by regulators to directly engage themselves with anti-money-laundering and anti-terrorist-financing efforts.
“We have seen in the past that significant illicit activities related to money laundering can impact the reputation of financial institutions – and in turn negatively impact the integrity of our financial system,” said Kathy Thompson, an assistant superintendent at the Office of the Superintendent of Financial Institutions (OSFI), during a speech last June to financial executives.
It remains to be seen, however, if this prodding by regulators will create lasting change. For far too long, executives and board members have treated anti-money- laundering as a cost centre rather than an essential service.
Riggs made that same mistake when it doubled down on serving PEPs during the 1980s. By giving anti-money-laundering compliance short shrift, it failed to appreciate the risks.
It ultimately got in trouble because of its “repeated and systemic failure” to accurately report suspicious transactions, according to the U.S. Department of Justice. Some were associated with accounts owned and controlled by the now-deceased Mr. Pinochet, who ruled Chile from 1973 to 1990.
Between 1994 and 2002, Mr. Pinochet deposited more than US$10-million into his accounts at Riggs – even though various countries had warrants against him for human-rights crimes and a global asset-freeze order had been issued by a Spanish magistrate. Riggs bankers also transferred money to Mr. Pinochet in such a way as “to avoid scrutiny.”
Suspicious transactions involving accounts for the government of Equatorial Guinea also went unreported by Riggs. There were more than 30 accounts in all between 1996 and 2004. Riggs also opened multiple personal accounts and helped establish offshore shell corporations for President Teodoro Obiang Nguema, who has ruled the country since 1979, and his relatives. By 2003, the balances and outstanding loans on the various accounts totalled US$700-million.
Perhaps that’s why no one batted an eye when a Riggs employee made several large deposits, some worth US$3-million, by carrying suitcases full of shrink-wrapped bills into a branch, according to a U.S. Senate report.
“Bad decisions and their ramifications take years to be understood,” Mr. Caruso wrote. “In the case of Riggs it took almost 20 years for errors in judgement to come to fruition.”
That hindsight should serve as foresight for Canadian banks.