Uncle Sam swoops on Mexican banks

Senior executives of Bancomer in Mexico City are unlikely to forget the morning of May 18 when the call came through from the US justice department. Along with two other prominent Mexican financial institutions, and scores of bankers, Bancomer was being indicted on US conspiracy and money-laundering charges. Within a few hours, US treasury secretary Robert Rubin would announce the biggest ever federal money-laundering investigation - and the first US money-laundering indictments against legitimate foreign financial institutions.

Known as Operation Casablanca, the investigation took almost three years and was so circumspect it was done without the knowledge of Mexican public servants. Three big Mexican banks were indicted - Bancomer, Banca SerfIn, and Banca Confía. Bancomer and Serfín are the country's second- and third-largest banks. All three have significant foreign ownership stakes - held by the Bank of Montreal, HSBC and Citibank, respectively.

Ordered to desist

Twenty-six Mexican and five Venezuelan bankers, among others, were also indicted on money-laundering charges. On June 11, treasury undersecretary of enforcement Raymond Kelly told a house banking committee hearing that $100 million of the dirty money had been seized, and 167 individuals arrested. He also said the investigation is continuing. Although only three institutions were indicted, 12 of Mexico's largest banks and four Venezuelan banks were allegedly involved. In the indictment's wake, the US Federal Reserve Board ordered six banks - Banamex, Bital, Banco Santander, Banco Industrial de Venezuela as well as Bancomer and Serfín - to "cease and desist" from such practices. Civil penalties could be levied against them.

The US attorney's office in Los Angeles, which is prosecuting, declined to explain why certain banks involved were not indicted. All three that were have pleaded not guilty.

But Bancomer's deputy director general of finance, Javier Fernández, believes the amount of money allegedly laundered by the three institutions is the key to the US case. Bancomer allegedly laundered more than $20 million, Serfín $7.7 million and Confía $11 million - the largest of the amounts claimed to have been laundered by the 12 instititutions. "It makes it seem it's prevalent at the institution," says Fernández, who acknowledges that Bancomer officials should have noticed something was amiss. "When you analyze these transactions in retrospect, they should have raised suspicions from supervisory officers at the branch level," he says.

That type of admission could be critical to the US case. "If you should have known but didn't or are wilfully blind or purposely sought not to know, then you can be held liable," says Michael Zeldin, who headed the money-laundering unit of the US justice department until 1992 and now heads Price Waterhouse's money-laundering investigation unit.

A bank's specific legal obligations under the money-laundering statutes are murky. Although banks are required by the Fed to "know your customer", there is no clear definition precisely what that means. However, banks can still be prosecuted on federal charges of conspiracy and aiding and abetting a crime, as occurred in this case.

The indictment against the banks offers some insight into other issues besides the total amounts that may be part of the US case. Such factors as the size of single deposits - one was more than $1.6 million at Serfín - could indicate that supervision was inadequate. The duration of alleged laundering is also significant. At Bancomer, for example, it is said to have gone undetected for more than a year and a Serfín banker was alleged to have been engaged in laundering for several years.

Although the indicted banks have noted that the individuals indicted were lower-level executives, some of them were in management positions at branch level. The prosecution is also likely to point to the indicted bankers' alleged statements to undercover agents suggesting such activities would pose few problems. The market environment that made money laundering desirable may also undercut the banks' defence. Comments from the bankers about pressures to increase the level of deposits, or statements that big balances could keep the bank from looking too closely at an account, all bolster the government's case.

"It could be that the government has a theory that the environment in these institutions was so lax as to allow this to happen," speculates David Gilles, a money-laundering investigator at Price Waterhouse who previously worked with the Financial Crimes Enforcement Network, another US government agency that tracks money laundering.

Not just warning shots

The sweeping scope of the investigation is a testament to its political importance. "These are real mainstream, legitimate banks with solid reputations," says Zeldin. "The organized effort to target these banks is not a shot across the bows. It's a live round telling the international banking community that we [the authorities] view this problem as serious, and international, and you have an obligation to participate in eliminating it."

Mexican banks have long been suspected of tolerating, if not openly supporting, money laundering. At least a year before the Mexican peso crisis hit world markets early in 1995, tales of official corruption and the rising prominence of Mexico's drug kingpins began to filter through to US law enforcement agencies. Alarmingly, the authorities began to hear that the newly privatized Mexican banking system had become one of the biggest money-laundering centres in the world. One Mexican bank, the fraud-ridden Banca Cremi-Union, in which the government intervened in the summer of 1994, was believed to be connected to Mexico's increasingly powerful drug cartels. Others, including the then-troubled Banpaís, were also suspected of such relationships. And there were whispers that even the most respected of Mexico's banks were not immune to the lure of narco money.

Whether or not the three Mexican banks indicted in May are found guilty, they know their reputations are at stake. Bancomer's first action, says Fernández, was to undertake its own internal investigation. Bancomer, which is considered one of Mexico's better-managed financial institutions, quickly hired William Isaac, the former US Federal Deposit Insurance Corporation chairman who now runs Washington-based consulting firm Secura Group, to find out what went wrong. Isaac's mission, says Fernández, is threefold: first, find out what happened, second, determine how it could have happened, and third, figure out what the bank should do to ensure it doesn't happen again.