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Helping the money launderers, Banks find reasons to resist efforts to crack down on terrorist cash flow

BY MARIANNE LAVELLE

In the drive to strengthen the U.S. banking system against terrorists, Congress is finding it must first make it past another
formidable force: the lobbyists.

The banking industry and an array of libertarian groups have been working relentlessly, if quietly, to blunt new money-laundering legislation that would give U.S.  authorities enhanced oversight over the flow of money across the nation's borders. In principle, the business and interest groups say they support a strong U.S. effort to choke off the finances of
terrorists.

Nevertheless, with their own lucrative overseas dealings at stake, they are balking at proposed antiterrorism measures that will, in effect, curb all business in the secretive world of offshore finance. "There are outside parties in the banking industry who do not want heightened due diligence, and they have been trying to get this out of the bill," said Rep. John LaFalce of New York.

He voiced frustration as the House Financial Services Committee, on which he serves as ranking Democrat, last week tackled a succession of amendments that would have given the U.S. treasury secretary discretion to exempt banks from new
requirements. LaFalce said he didn't want to leave such decisions up to the Bush administration, which had shown little interest in tough money-laundering controls earlier this year: "It wasn't until September 11 and after that they saw the light on this issue."

The fine print. The American Bankers Association, the lead industry lobbying organization, released a letter praising the legislation that emerged from a House committee last week. But that was after it had managed to insert into the bill a requirement that government officials embark on a likely lengthy process of writing regulations to put the law into effect.

"We've asked for what I think are reasonable adjustments," says John Byrne, association senior counsel. He said that U.S. banks have rallied behind President Bush's move, expanded last week, to freeze the assets of Osama bin Laden and to reconstruct the money trail. But, says Byrne, "what we're not committed to is simply passing laws that have been sitting around for a while in the current environment simply because the time has come to put them into play."  Indeed, money-laundering legislation, stymied for years by bank lobbying, moved to the fast track after the devastating September 11 attacks.

The measure would crack down especially on dealings with banks in countries with high levels of bank secrecy. In effect, the legislation would reverse the Bush administration's pre-September 11 policy of backing off from the international
movement to pressure those countries to change their laws. "Money laundering is the transmission belt that gives terrorists the means to carry out their campaigns," said Senate Banking Committee Chairman Paul Sarbanes, a Maryland Democrat, as he pushed forward with the package. But the going hasn't been easy.

Case in point: The proposal currently moving forward on Capitol Hill would bar U.S. banks from doing business with foreign "shell banks," that is, financial institutions that have no physical offices but simply exist to move money from one place to another in secrecy. Many U.S. banks already shun relationships with shells, and the American Bankers Association agrees with a prohibition. But, according to congressional staffers, lobbyists for giant Citigroup had urged lawmakers to make an exception
for shell banks affiliated with financial services companies.

Because it is so easy to set up an unregulated financial service firm–Osama bin Laden allegedly had one, called Taba Investments–proponents feared such an exception would render the new legislation meaningless. Citigroup's proposal was
removed from both Senate and House bills just before committee votes. And Citigroup spokeswoman Christina Pretto, who would not comment specifically on the shell issue, said the  corporation "strongly supports" the current bill. "We have been working . . . to achieve the most effective means to ensure that the banking system worldwide is never used by terrorists and other criminals," she said. Citigroup has taken heat for its dealings with offshore institutions in the past.

An investigation spearheaded by Democratic Sen. Carl Levin of Michigan earlier this year took aim at Citigroup for opening a $7.7 million account for a Cayman Islands shell bank whose assets were eventually seized in an illegal-drug investigation. The new legislation would force U.S. banks and other financial institutions to step up efforts to determine the source of deposits from foreign countries. Banking industry officials have called the proposal impossible to enforce. Bert Ely, an Alexandria, Va., banking consultant, calls it an effort "to turn banks into spymasters" that won't succeed in nabbing terrorists. "The bad guys figure how to get around these things, or we would have won the war on drugs long ago," Ely says.

Perhaps the most important–and criticized–provision would give the treasury secretary power to sanction any country or financial institution he deems to be "a primary money laundering concern." He might limit or outright prohibit any dealings with U.S. banks. Former government officials say that's the kind of clout that the United States has been lacking in international money laundering probes such as the pursuit of bin Laden.

"This is a very, very deep problem," says William Wechsler, a special adviser at the Treasury Department in the Clinton administration. "A simple law enforcement investigation–following the money trail and going to the country, and saying, 'We need some legal assistance'–is not going to get the cooperation we need. You need to have leverage over these countries, to be able to show that there is a price that's going to be paid for not cooperating."

Libertarian groups, led by an organization called the Center for Freedom and Prosperity, are engaged in what they call a
"nonstop effort" against the measure. The center, which declines to reveal its supporters, fights for the right of small "tax haven" countries in the Caribbean and elsewhere to maintain bank secrecy laws in the face of mounting international pressure. Provisions ostensibly meant to curb money laundering are, in fact, the center contends, "designed to give an ideologically driven
treasury secretary unchecked powers to impose sanctions on economically successful low-tax jurisdictions."

The center's critics charge that it is lobbying on behalf of wealthy individuals or institutions that stow money in the secret offshore  banking system to avoid taxes. "You do everything the same way, if you're a crook, a terrorist, or a tax evader," says one Senate staffer. "If you start to open up bank secrecy for terrorism, these folks start to worry that the next stop will be tax
enforcement."

Opponents of the legislation say there's no evidence any of the proposed new controls over U.S. dealings with foreign institutions would have prevented last month's catastrophic terrorist attack. But bin Laden himself boasted in a newspaper interview last month that his followers have exploited "the cracks inside the Western financial system." And as lawmakers are finding out, some of those cracks won't be sealed without a fight.