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. Last Updated: 07/27/2016

U.S. Banks Ignored Dubious Accounts

WASHINGTON — A U.S. congressional inquiry has found that it is "relatively easy" for foreigners to hide their identities and form shell companies in the United States that can launder money through U.S. 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 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 Tuesday afternoon, Citibank sent a 15-page letter to the GAO, saying that it had closed the accounts after being contacted by GAO 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 Kaveladze. The letter, signed by the general counsel, Michael Ross, for the Global Consumer Business at Citigroup Inc., Citibank's parent, 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 GAO, and that "no illegal activity in the Kaveladze related accounts" had been found.

In an interview, Kaveladze said he had engaged in no wrongdoing. He described the GAO investigation as "another Russian witch hunt."

The GAO 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 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 Thursday.

About $600 million moved through the Commercial Bank, the investigation found.

At one time, Kaveladze helped some 50 Russian nonresident aliens obtain Citibank credit cards, and each of them used the address for one of Kaveladze's companies, International Business Creations, Citibank told the GAO in its letter Tuesday.

The inquiry was sought in February by Democratic Senator Carl Levin as part of his inquiry into laundering by U.S. financial institutions. "We routinely and legitimately criticize foreign countries that allow the creation of corporations with secret ownership for the purpose of hiding money," Levin said. Yet, he added, some U.S. 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.

Levin said he was referring the report to the Justice Department for a criminal investigation.

A senior vice president at Commercial Bank, Juanna Collin, said the bank was aware of the investigation and had cooperated. 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.