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Citibank's Tricks

Part I: "Rinky-Dink" Lending

by Matthew Rothschild

As concerns mount about the possible collapse of the world financial system, new evidence has emerged that Citibank - through dubious banking practices - may be courting the very disaster everyone but Walter Wriston seems to fear.

Recent press accounts on Citibank have focused on its questionable foreign exchange dealings. Little attention, however, has been paid to an even greater - and more alarming - abuse by Citibank: its borrowing and lending transactions among it affiliates and subsidiaries.

Citibank, the second largest commercial bank in the United States, has engaged in highly questionable money market activities in at least 16 countries in Europe and Asia over the past decade, according to internal Citibank memos and a recent House subcommittee staff report.

Through "evasion of local regulations and falsification of documents," Citibank has "contravened" the laws of foreign governments, claims the staff report of the House subcommittee on oversight and investigations which is holding hearings on Citibank.

The 23-page staff study, blandly entitled "Description of Citibank's Transactions," provides a rare glimpse of Citibank's profit making techniques in the money markets. The report is based on "extensive and detailed internal documents" of Citibank. The subcommittee submitted both the report and the documents for the public record on September 13. These extraordinary in-house memos show Citibank officials themselves expressing doubt as to the legality of the company's practices.

"Rinky-dink deals," one Citibank vice-president in the comptroller's division said in 1977, referring to the company's evasions of local reserve requirements. "A pure tax gimmick," said another vice president in 1975 about a different Citibank device.

The new evidence concerning Citibank's internal borrowing and lending activities - when added to the evidence about the company's foreign exchange transactions (see p. 13) - reveals a number of disquieting features:

  • Shady practices have pervaded Citibank
  • Such practices have accounted for a major portion of Citibank profits, running into the "hundreds of millions of dollars," according to recent Congressional testimony
  • Senior Citibank officials, up to and including chairman Walter Wriston, knew about the activities and did not stop them. "I don't have any doubt that Walter Wriston knew what was going on and approved it," says Congressman Albert Gore, member of the subcommittee investigating Citibank.
  • Monetary regulations of national governments are ill-equipped to deal with evasions such as Citibank's
  • Citibank's questionable transactions have carried great risks, not only for Citibank itself, but for the global financial system.

"The extent to which Citicorp was able to circumvent and subvert local regulations," says Congressman John Dingell, chairman of the subcommittee on oversight and investigations, "raises the spectre of large multinational banks becoming a law unto themselves beyond the control of national governments. The present international financial crisis may simply be the most serious manifestation of this loss of control."

"The Jersey Pool"

Citibank resorted to numerous devices to evade the banking laws of foreign countries where it operated, according to the Citibank documents and the House staff report. These "tricks," as one Citibank vice president term them, upped Citibank profits in three ways: by increasing the amount of money the bank could lend, by decreasing the amount of taxes it had to pay, and by giving the bank an unfair advantage over its competitors.

To avoid taxes and lending requirements in Germany, Citibank made use of what its officials called "the Jersey Pool."

The Jersey Pool consisted in 1978 of $619 million of loans which Citibank Channel Islands Ltd (located in the Jersey Islands off the coast of England) would make to Citibank Germany. But Citibank Germany would control the lending and set phony terms on the loan, thus enabling Citibank Germany to avoid having to pay reserve requirements on the funds.

Citibank officials frankly discussed this procedure in a March 1978 memo entitled "Treasury Guidelines - Germany."

"To avoid maintaining reserves with the Central Bank, (Citibank's German Subsidiary) has formal contracts with Jersey that show maturities greater than four years," the document explains. "The Central Bank does not require reserves against deposits of this tenor."

In actuality, however, the maturities on Jersey loans to Citibank Germany were nowhere near the required four years, the Citibank memo notes. Loans from Jersey to Citibank Germany are "presently done at maturities of 1-3 months... But for the reports to the Central Bank, borrowing from Jersey and Luxembourg is shown in the `over four years' category."

The Jersey Pool paid off for Citibank. "By using this strategy," says the House staff report, "Citibank avoided paying in reserves of many millions of dollars. Had these Euromark borrowings from Jersey matured in less than four years, they would have been subject to a 20% reserve requirement" - or $124 million, without interest. The report says that Citibank saved some $66 million in additional reserve requirements by using variations of the Jersey Pool maneuver.

Booking in Nassau and Monaco

While the Jersey Pool allowed Citibank Germany to borrow funds off-book, another ploy enabled it to loan funds off-book.

According to the documents, Citibank Germany routinely booked its loans to local German residents in Citibank Nassau or Citibank Monaco, but would control the funds from Frankfurt.

"Citibank maintained the fiction that deposits were booked outside Germany and the accounts for these units were never submitted to German authorities," the House staff report states. "In reality," the Nassau and Monaco units "were departments managed by the German treasurer" of Citibank. As such, the money should have come under German regulations.

Citibank's tax auditors, Peat, Marwick, Mitchell, advised the company in September, 1971 1 that this trick may be illegal. "We feel that the German tax authorities would have good arguments to attribute the entire Nassau operations to the German branches for this period," Peat, Marwick, Mitchell wrote to senior Citibank management.

Peat, Marwick, Mitchell warned Citibank that it might get caught. "It appears that the German tax authorities do not fully understand, yet" what Citibank was up to. "It is impossible to evaluate the progress of the education process of the German tax authorities, but it is conceivable" they would raise the issue of the transaction's legality.

This evasion netted Citibank a fortune. In 1977, the total assets and liabilities for Citibank Nassau and Monaco amounted to $2.674 billion, according to Citibank's "Treasury Guidelines - Germany." The House subcommittee report concludes that "the profitability of Citicorp's German operations appears to depend disproportionately on its ability to evade domestic reserve requirements."

The English Round Trip

Citibank's questionable dealings were by no means confined to Germany. In England, for instance, "for almost three years (1975 through 1977), Citibank's London branch funded 6-month interbank deposits with other banks in the U.K. by borrowing short-term funds (overnight to 30 days) in the London interbank market," the subcommittee staff report says. This "mismatching of maturities on deposits was contrary to guidelines established by the Bank of England."

Here, as well, this apparent violation boosted profits for Citibank. "The spread on the mismatched deposits and placements earned $1 million per month, cumulative for a total of $33.6 million over the entire period." These earnings, the report adds, "constituted a substantial portion of the London branch's profits."

As in Germany, Citibank disguised the London device, the staff report claims. "To give the appearance of conforming to" English banking guidelines, Citibank London made "short-term placements with Nassau in exchange for six month placements by Nassau in the London branch ... On London's books the six-month placements with other banks appeared to be from six-month placements from Nassau."

French "Liquidity Transactions"

In France, Citibank used a simpler maneuver to avoid reserve requirements. The French government required banks to keep 600'0 of their short-term deposits (maturing in less than three months) in low-yielding liquid assets. By making a couple of transactions, Citibank would turn short-term deposits into long-term ones, thus freeing up large sums which could reap high yields, the documents show.

The French strategy comes through loud and clear in a 1975 memo from a Citibank vice president to Citibank's comptroller, Stephen Eyre. "Until fairly recently Paris placed large amounts (e.g., $50 million) with Brussels at 7-day call, and Brussels placed same back with Paris at 93-day call, both at the same rate of interest. The purpose was to alleviate Paris' liquidity problem... The transaction was recently discontinued because it was noticed by the Belgian Banking Commission who suggested it might be better if we didn't have this on t he books."

In place of the Brussels deal. Citibank achieved "the same result" by going through London and Amsterdam, the Citibank vice president said, adding that the operation carried $250 million.

Practices Widespread: 16 Countries

In 1975, Citibank vice president Arthur Natvig, who worked in the Comptroller's division, went on a tour of Citibank's foreign operations in Europe, Asia, and elsewhere. According to Natvig's memos of his trip, Citibank's questionable transactions occurred in 16 countries. In Europe, he cited: Belgium, Britain, France, Germany, Italy, Luxembourg, and Switzerland. In Asia, he found similar activities going on in Brunei, Hong Kong, Indonesia, Japan, Malaysia, the Philippines and Singapore. Natvig's memos indicate that Citibank may have also carried out such transactions in Saudi Arabia.

Many of Citibank's evasions do not appear to have stopped, the House staff report says. "It is likely that the bank continues to engage in activities" such as avoiding reserve requirements and "tax evasion."

Walter Wriston's Role

Citibank's chairman Walter Wriston knew about these activities as far back as 1975, according to the Citibank documents and to Thomson Von Stein, an attorney for the Securities and Exchange Commission, who investigated Citibank for the SEC from 1979-1981.

In the fall of 1975, two Citibank vice presidents in the comptroller's division - on the suggestion of Wriston - prepared a report on Citibank's foreign exchange and money market activities in Europe. Their study was "a factual description of numerous and varied devices, methods, and practices Citibank branches in Western Europe used to circumvent, evade and nullify banking and tax regulation," Von Stein wrote in an SEC draft enforcement proposal.

When the SEC questioned Wriston about the study his officers made, Wriston denied receiving it.

But a copy of the study, on record with the House subcommittee, bears Wriston's initials, and a note to Stephen Eyre, the comptroller, which states: "Be certain to follow up on these points, WW 9/4."

Congressman Albert Gore (D-Tenn.) questioned Von Stein about this matter at the subcommittee hearings on September 13:

Gore: "Mr. Wriston evidently made a note in his copy of the report telling the comptroller to follow up on the suggestions to disguise the transactions, is that correct?"
Von Stein: "Correct."
Gore: "Yet he later disavowed knowledge of the report. "
Von Stein: "He didn't recall receiving it."
Gore: "Is there any doubt in your mind that Mr. Wriston knew about the transactions?"
"It was a significant document ... Mr. Wriston is a competent executive."

One of the Citibank internal memos contains more evidence that Wriston was aware of Citibank's questionable activities. Natvig, the Citibank officer who conducted a study on foreign exchange and money market dealings for the bank, met Wriston in Montego Bay in 1975 and in 1976 at a Citibank comptroller's meeting: both times, according to Natvig's notes, Natvig informed Wriston of the bank's practices. Natvig's notes show that Wriston wasn't worried about the problem. "He doesn't see how we can be criticized for taking SF (Swiss Franc) positions in Nassau, even if our Swiss dealer does it," Natvig wrote in his notes to one of the meetings.

Citibank strongly denies that Wriston, or any high-ranking officer of the bank, was involved in illegal activities. "Citibank today categorically asserted that no member of its senior management had condoned or directed any illegal banking transactions," the bank stated on September 13.

The Risks to Citibank

Citibank's evasions of local regulations was a high-risk operation for the company.

"The potential cost to Citicorp of being caught in regulatory evasion were enormous," the House staff report states, in reference to Citibank's Germany dealings. "This possibility was acknowledged by senior officials" of the bank and "could have resulted in lower profits and other adverse impacts on German operations and for the institution as a whole."

If detected, Citibank could have faced demands from European governments for payment of taxes and fines, as well as the curtailment of operations, one Citibank official warned.

"Strictly confidential treatment is necessary," wrote Citibank vice president Natvig in his 1975 memo to senior management outlining the bank's evasion strategy. "In general, European management does not foresee serious reprisals if discovered; but disclosures could mean instructions to discontinue and might involve tax claims and penalties."

The risk of detection however was not the only - nor the most serious - one that Citibank ran when it engaged in "regulatory evasion," the report of the House subcommittee staff argues.

By "the nature of the activity itself," Citibank's evasions entailed profound financial risks for the bank, the report says. Citibank's numerous kinds of evasions had one thing in common, notes the report: "they resulted in a mismatching of maturities of loans and deposits." In other words, Citibank held more money in deposits maturing early (liquid liabilities) that it had in short-term loans (liquid assets).

"The cumulative mismatching of deposits and loans placed the bank in an illiquid position," the staff report says, where "the bank's exposure relative to its capital was high."

In addition, by underreporting the size of its local lendings, Citibank deprived itself of an external safeguard: central bank discounts. Central banks "provide liquidity in the event of unstable market conditions," the subcommittee staff report explains, but "access to the discount window is generally restricted to the scale of local operations. Thus by "falsification" and underreporting of its operations, Citibank closed the discount window on itself.

Once faced with liquidity problems, Citibank may suffer a "loss of confidence" from the financial markets, which could spark "a cumulative chain reaction eroding the bank's and holding company's profits," the report notes.

Compounding the financial risk, Citibank itself did not know the extent tent of its own vulnerability. "Liquidity is not quantified to keep the numbers before management on an ongoing basis," Citibank vice president Natvig wrote in his 1975 memo that Wriston initialled.

Risks to the World

Uncertain as to the extent of its own financial risks, Citibank appeared oblivious to the damage it might inflict beyond its own balance sheets.

The House staff report says that in Germany, Citibank's evasions "undermined" the "monetary prudential regulation" established by the German government to ensure stable financial markets and safeguard local depositors. Similarly, Citibank's practice of evasion "undermines U. S. prudential regulation," the report charges.

Most threatening of all, Citibank's "tricks" posed a threat to international financial stability, the report says.

Banks rely on each other for 70% of their loans, so "the problems of one bank can be transmitted to other banks through the interbank market," the report explains. And Citibank is no ordinary bank. When it gambles, the entire financial system is in on the bet.

"Since Citicorp is one of the largest banks world-wide and the largest player in the Eurodollar interbank market, it has the potential for creating a very systemic disturbance," the report says.

The risks Citibank's activities represent for world financial stability raise questions as to the suitability of current banking regulations. The House staff report argues that the national scope of banking law is inadequate. "Regulation and disclosure in all countries tends to focus exclusively on activities in the national market," the report says. "Given the capacity for evasion inherent in offshore operations as revealed in the Citicorp records, the narrowness of this focus and the differences in regulatory procedures that result enhance the motivations and opportunities for evasive strategies."

To date, no government has penalized Citibank for its evasion of lending regulations. The two U.S. agencies that were investigating Citibank - the Securities and Exchange Commission and the Comptroller of the Currency - have closed their books on the case.

Only the House subcommittee seems to be taking any interest in Citibank's transactions and their implications. Subcommittee hearings will continue after the Congressional recess, and senior Citibank officials - including Walter Wriston - may testify.

But what will come of the hearings remains in doubt. The House staff report recommends "reconstituting a regulatory environment" worldwide that would require "more and better - not less and more lax - regulation and disclosure." Such a proposal runs counter to the Reagan Administration philosophy, and would no doubt face the staunch opposition of U.S. banks - Citibank and Walter Wriston at the forefront of the bank deregulation lobby.

Part II: "Sham" Foreign Exchange Deals

Citibank's questionable activities do not end with its shady borrowing and lending transactions among its subsidiaries. Indeed, the company's foreign exchange transactions have been the subject of controversy for over four years.

The U.S. Securities and Exchange Commission (SEC) began investigating Citibank's foreign exchange transactions in May, 1978. Citibank had engaged in "sham transactions" and had "violated local laws in several European countries," wrote the SEC staff attorney, Thomson Von Stein, who was investigating Citibank.

But the commissioners of the SEC, led by a Reagan appointee, decided to overrule its staff, declining in February, 1982, to bring enforcement proceedings against Citibank.

Although the SEC has closed its case, allegations about Citibank's foreign exchange dealings - and questions about the SEC's handling of the case - continue to fly.

As the world's largest trader in foreign currencies, Citibank makes money speculating on the daily changes in the rates of country currencies. But foreign countries, concerned that speculative activities may adversely affect their currencies, often limit the amount of money a bank can keep for such purposes. For instance, European governments "prohibited outright a bank from maintaining overnight long or short positions in that country's currency or prohibited such positions over a certain limit," noted the SEC's Von Stein, in his draft report on Citibank.

Citibank used an uncomplicated technique "to evade such laws," Von Stein alleged. The company would "simply `transfer,' by a purported `sale' contract, its long or short position to the books of a Citibank accomodation branch outside the country, usually Nassau, Bahamas." The European branch that "sold" its position to Nassau, however "retained control of such long or short positions off its own books," Von Stein wrote in his 138-page draft report. This was a "clearly and readily provable violation of local regulations," according to Von Stein.

Citibank benefited in two ways from such transactions - which went by the name of "parking." First, Citibank could carry on greater speculative transactions, increasing its opportunity for profits. Second, Citibank could pay less taxes, since it would record the transactions in the tax haven of the Bahamas, not in Europe, Von Stein explained in his report.

Just as it may have helped Citibank, these "parking" deals could have hurt the foreign countries on whose currency Citibank was speculating. "There is a possibility of adversely affecting the national policies of some of the nations in which these currencies originate," said Representative John Dingell (D-Mich.), at hearings he held on Citibank on September 13.

To get an idea of the scale of Citibank's "sham transactions," Von Stein examined the company's foreign exchange trading in several European countries. In Switzerland, for instance, Von Stein found that Citibank earned $83 million in foreign exchange trading from 1974-1978, while only reporting $51.5 million to the Swiss government. In Switzerland, Italy, Germany and England combined for those four years, Von Stein found that Citibank earned $58 million off-book, by using parking transactions in Nassau.

With all these transactions being recorded in Nassau, Bahamas, you might get the idea that Nassau was a busy place. Not true. The action took place in New York.

Nassau "actually means the `Nassau Desk,' sometimes known as the `Eurocurrency Department of Citibank located in New York City," Von Stein explained in his report. "This `Nassau Desk,' (and a `Nassau Germany Unit' located in Citibank Frankfurt) handled and managed the foreign exchange and money market activities which were recorded for legal purposes on the Bahamas branch's books."

Nassau was "just a device that recorded the transaction, just an electric bagman," said Representative Albert Gore (D-Tenn.), at the September 13 hearing.

Involvement of Senior Citibank Officials

As was the case with Citibank's borrowing and lending between subsidiaries (see page 12), the company's foreign exchange transactions occurred with the knowledge of the company's highest-ranking officers, including chairman Walter Wriston, Von Stein's report says.

"The senior management of Citibank, up to and including the chairman, approved the practice of a branch holding overnight currency positions on a booking branch's books larger than the host government permitted, and were put on notice that such practices were circumventing the law," Von Stein alleged.

As evidence, Von Stein cited a 1973 meeting of Citibank's European treasury heads in New York, which was attended by Wriston, G.A. Costanzo (vice chairman), Freeman Huntington (then senior vice president in charge of foreign exchange), and Thomas Theobald (then executive vice president). Von Stein obtained a copy of the minutes to the meeting, which stated in part: "Wriston told the traders that management knows the risks in foreign exchange ... positions should be parked in Nassau... finance swaps procedure (provides)... greater flexibility in maintaining FX (foreign exchange) profits... hide them from being published."

Another internal Citibank document obtained by Von Stein shows that the vice chairman of Citibank, Costanzo, and the executive vice president for foreign exchange, Huntington, personally discussed the "parking" of foreign exchange. This document, a letter dated June 11, 1973, from Huntington to Costanzo reads: "It was common practice in most European countries for trading branches to park their positions overnight or otherwise... when in the interest of the institution. We continue to feel that this is of pivotal necessity to give us the worldwide flexibility which we require to capitalize on the existing volatile exchange markets."

Wriston and the other senior officials also received a 16-page memo in 1975 from two Citibank vice presidents, entitled "Survey of European Treasuries." This memo, Von Stein wrote in his report, "pointed out clearly to the top management of Citibank how Citibank parking practices violated the law."

Citibank on September 13 of this year issued a statement denying Von Stein's allegations: "Citibank today categorically asserted that no member of its senior management had condoned or directed any illegal banking transactions."

In spite of Citibank's denial, Von Stein's report quotes Citibank officials acknowledging the risks the company faced by engaging in such transactions. For instance, a letter dated March 24, 1975 from Citibank vice president Arthur Natvig to Stephen Eyre, Citibank's comptroller, states that foreign governments may view parking "as a means of circumventing local regulations and as such it would doubtless be specifically forbidden to the detriment of profits." Natvig added in the letter that "although management thinks it most unlikely, detection could conceivably also involve restrictions on the Bank's overall Swiss activities, and possibly also some sanctions or reprisals against its senior officers." According to Von Stein, Eyre responded to Natvig's fears a month later, telling Natvig that parking "is something we can live with as it stands."

Citibank hasn't escaped scott-free on its foreign exchange dealings. Over the past three years, Citibank has agreed to pay over $11 million in back taxes to European governments on profits it made on its foreign-exchange transactions.

But as far as U.S. disciplinary action, Citibank has gotten away completely unscathed.

The U.S. Comptroller of the Currency investigated Citibank from 1978-1980. It did not recommend enforcement actions against the bank, even though the comptroller stated in a letter to Citibank on December 1980 that "a number of the foreign exchange transactions received were inconsistent with sound banking principles and exposed the bank to penalties and assessments levied by foreign supervisors."

The U.S. Securities and Exchange Commission, also declined to bring enforcement proceeding against Citibank, announcing in February, 1982 that it was closing its four-year investigation.

The SEC decision to drop the case upset the enforcement staff, which had recommended on December 9, 1981 that the Commission bring proceedings against Citibank. Stanley Sporkin, who was head of the enforcement division during most of the investigation and who is now general counsel for the CIA, registered his dissatisfaction with the decision when he testified before the Congressional subcommittee on September 13. "I think that was just shoddy work, quite frankly,' said Sporkin, when asked about the agency's decision to drop the case.

"The SEC abdicated its responsibility under the law." says Congressman Albert Gore (D-Tenn.), who sits on the subcommittee that is holding hearings on Citibank. "The SEC's decision to overrule its staff and drop the case told me that the new policy over there is to look the other way so long as the perpetrator is wearing a three-piece suit."

Portrait of a whistle-blower

Citibank's questionable foreign exchange activities first came to light in 1978 when a Citibank employee, David Edwards, blew the whistle.

Edwards, who was an assistant vice president in Citibank's Paris foreign exchange department, witnessed Citibank's Paris trader transferring profits from Citibank Paris to Citibank Nassau. On March 23, 1977, Edwards met with two officials from Citibank's comptroller's division and told them of his findings. He was to repeat his misgivings numerous times over the next 11 months before Citibank fired him.

Each time Edwards raised his concerns with senior management, he was assured either that his allegations were being looked into, or that they had no substance. For instance on July 27, 1977, Edwards met with George Vojta, executive vice president for Citibank's international banking group. Vojta told Edwards: "We have reviewed on several occasions the allegations you have made about the Treasury operations in France and the specific conduct of the trader there... We haven't been able to substantiate these allegations."

Citibank fired Edwards on February 9, 1978. "We have already informed you of our conclusion that you have acted in a manner that is detrimental to the best interests of Citibank," Edwards was told by Thomas Theobeld, who replaced Vojta as executive vice president. "Under these circumstance," Theobeld wrote to Edwards "we now advise you that your employrnent with Citibank is terminated effective immediately."

One month later, Edwards brought his allegations against Citibank to the U.S. Securities and Exchange Commission, which began its investigation in May, 1978.

In July of that year, Edwards took Citibank to court for wrongful dismissal. In February, 1980, he lost his appeal of a lower court ruling dismissing the suit.

As of February 1981, Edwards had been "unable to find employ ment as a banker," Thomson Von Stein, SEC staff attorney, wrote in his draft enforcement document.

"Citibank's treatment of Edwards has been characterized by deception and cupidity," wrote the SEC's Von Stein.

According to Von Stein, Citibank first "sought to hush up Edwards" and then decided to dump him. Von Stein quotes one Citibank vice president, Ed Pomeroy, as telling another official that Citibank should find "the best way of unloading the guy" and should "ease Edwards out ... gently to save complications."

Walter Wriston, Citibank's chairman, was asked about Edwards in a 1979 issue of Executive magazine. Wriston said that Edwards' "famous accusations didn't arrive until after he was dismissed" and that Edwards was fired because he was incompetent. "The record, of course, shows this is wrong," Von Stein wrote. "This effort to portray Edwards simply as a disgruntled and incompetent employee is patently incorrect and unfair."

Even Citibank's general counsel and senior vice president, Hans Angermueller, acknowledged that Citibank acted unjustly in getting rid of Edwards. "In retrospect, it wasn't fair," Angermueller said in a 1980 meeting with the SEC enforcement staff, according to Von Stein's report.

Von Stein holds nothing but respect for Edwards. "David Edwards was the individual in Citibank who made this case possible. He tried within Citibank to get his suspicions investigated and the questionable practices changed and was fired for doing so," Von Stein wrote in his report. "This agency and the U.S. government owe him a debt."

Edwards, reached by phone in his Dallas home, was reluctant to talk about his experience with Citibank. "It's simple. I just did my job. My job was to say it was wrong. Period."

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