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Date: Wed, 28 Jul 2004 06:42:25 -0700
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Subject: USA/Africa: Oil and Transparency


USA/Africa: Oil and Transparency

AfricaFocus Bulletin
Jul 28, 2004 (040728)
(Reposted from sources cited below)

Editor's Note

Two recent U.S. Senate hearings have highlighted issues related to
oil and transparency in West and Central Africa. The Senate Foreign
Relations Committee has focused on the options for U.S. support for
transparency in strategic oil-rich countries in the Gulf of Guinea
region, including Nigeria, Angola, and Equatorial Guinea. The
Committee on Governmental Affairs, on the other hand, has focused
on the less often discussed role of American banks and companies in
fostering lack of transparency, with a detailed expose of a
prominent Washington bank's role in managing suspect accounts for
the leaders of Equatorial Guinea.

This AfricaFocus Bulletin contains brief excerpts from the latter
report, which also featured the bank's role in handling accounts
for former Chilean dictator Augusto Pinochet. The report is of
wider significance than the particular cases, since the
investigators stress that it is an indicator of the general failure
of regulatory authorities to adequately monitor such suspicious
money flows.

The Foreign Relations committee hearing features testimony from a
recent Center for Strategic & International Studies (CSIS) task
force on promoting accountability and transparency in Africa's Oil
Sector. For reports from that hearing, see
http://foreign.senate.gov/hearings/2004/hrg040715p.html
The report from the CSIS task force is available at
http://www.csis.org/africa

Although the CSIS report mentions wider transparency initiatives,
such as the multinational Publish What You Pay campaign calling for
transparency by oil companies and banks as well as oil-producing
countries (http://www.publishwhatyoupay.org), it is notable that
the CSIS recommendations for U.S. action focus only on U.S.
pressure on African governments. Nevertheless, taken together the
reports make it clear that transparency and corruption issues are
unlikely to be addressed unless greater demands are placed on all
parties involved in the oil and cash nexus

For previous AfricaFocus bulletins and links on oil and
transparency issues, see
http://www.africafocus.org/docs04/oil0401.php and
http://www.africafocus.org/docs04/ang0401.php

For a comprehensive report of human rights issues in Equatorial
Guinea, see the International Bar Association report from October
2003 [http://www.ibanet.org/news/NewsItem.asp?NewsID=121] For a
recent report on political opposition to the Obiang dictatorship,
see http://allafrica.com/stories/200407210688.html

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

United States Senate

Permanent Subcommittee on Investigations,
Committee on Governmental Affairs

Norm Coleman, Chairman; Carl Levin, Ranking Minority Member

Money Laundering and Foreign Corruption: Enforcement and
Effectiveness of the Patriot Act Case Study Involving Riggs Bank

Report Prepared by the Minority Staff of the Permanent Subcommittee
On Investigations

Released in Conjunction with the Permanent Subcommittee on
Investigations' Hearing on July 15, 2004

July 14, 2004

[Excerpts: full report available at http://govt-aff.senate.gov]


I. Introduction

From 1999 to 2001, the U.S. Senate Permanent Subcommittee on
Investigations of the Committee on Governmental Affairs, at the
request of Senator Carl Levin, Ranking Minority Member, conducted
a detailed investigation into money laundering activities in the
U.S. financial services sector, including in-depth examinations of
money laundering activities in private banking, correspondent
banking, and the securities industry. ...In 2003, again at Senator
Levin's request, the Subcommittee initiated a followup
investigation to evaluate the enforcement and effectiveness of key
anti-money laundering provisions in the Patriot Act, using Riggs
Bank as a case history ...

II. Executive Summary

The evidence reviewed by the Subcommittee staff establishes that,
since at least 1997, Riggs has disregarded its anti-money
laundering (AML) obligations, maintained a dysfunctional AML
program despite frequent warnings from OCC [Office of the
Comptroller of the Currency]  regulators, and allowed or, at times,
actively facilitated suspicious financial activity.

The evidence also shows that federal regulators did a poor job of
compelling Riggs Bank to comply with statutory and regulatory
anti-money laundering requirements. They were too tolerant of the
bank's weak AML program, too slow in reacting to repeat
deficiencies, and failed to make prompt use of available
enforcement tools.

Two sets of Riggs accounts, one involving Augusto Pinochet and the
other involving Equatorial Guinea, illustrate the bank's poor AML
compliance.2 They also illustrate the failure of federal bank
regulators to exercise meaningful oversight of a bank with numerous
high risk accounts and fundamental, long-standing AML deficiencies.

...

Equatorial Guinea Accounts. The Subcommittee investigation also
determined that, from1995 until 2004, Riggs Bank administered more
than 60 accounts and CDs for the government of Equatorial Guinea
(E.G.), E.G. government officials, or their family members. By
2003, the E.G. accounts represented the largest relationship at
Riggs Bank, with aggregate deposits ranging from $400 to $700
million at a time. The Subcommittee investigation has determined
that Riggs Bank serviced the E.G. accounts with little or no
attention to the bank's anti-money laundering obligations, turned
a blind eye to evidence suggesting the bank was handling the
proceeds of foreign corruption, and allowed numerous suspicious
transactions to take place without notifying law enforcement.

The Subcommittee investigation found, for example, that Riggs
opened multiple personal accounts for the President of Equatorial
Guinea, his wife, and other relatives; helped establish shell
offshore corporations for the E.G. President and his sons; and over
a three-year period, from 2000 to 2002, facilitated nearly $13
million in cash deposits into Riggs accounts controlled by the E.G.
President and his wife. On two of those occasions, Riggs accepted
without due diligence $3 million in cash deposits for an account
opened in the name of the E.G. President's offshore shell
corporation, Otong, S.A. In addition, Riggs opened an account for
the E.G. government to receive funds from oil companies doing
business in Equatorial Guinea, under terms allowing withdrawals
with two signatures, one from the E.G. President and the other from
either his son, the E.G. Minister of Mines, or his nephew, the E.G.
Secretary of State for Treasury and Budget. Riggs subsequently
allowed wire transfers withdrawing more than $35 million from the
E.G. government account, wiring the funds to two companies which
were unknown to the bank and had accounts in jurisdictions with
bank secrecy laws. The Subcommittee has reason to believe that at
least one of these recipient companies is controlled in whole or in
part by the E.G. President. When, in 2004, the bank requested more
information about the two companies from the E.G. President, he
declined to provide it, except to say the wire transfers to them
had been authorized.

The senior leadership at Riggs Bank were well aware of the E.G.
accounts and met on several occasions with the E.G. President and
other E.G. officials. The bank leadership permitted the account
manager handling the E.G. relationship to become closely involved
with E.G. officials and business activities, including advising the
E.G. government on financial matters and becoming the sole
signatory on an E.G. account holding substantial funds. ...

Riggs Bank failed to cooperate initially with Subcommittee requests
for information about the E.G. accounts, identifying only about
half the E.G. accounts at the bank and producing limited account
documentation and electronic mail. The Subcommittee later learned
that the bank had failed to designate the E.G. accounts as high
risk accounts until October 2003, and did not subject them to
additional scrutiny despite obvious warning signs, such as the
involvement of foreign political figures, a country with a culture
of corruption, and frequent high dollar transactions. The bank also
failed to monitor or report suspicious activity in the E.G.
accounts. The bank closed these accounts in recent weeks.

Regulatory Failure. Given the fundamental, long-standing
deficiencies in Riggs' AML program, it is difficult to understand
why federal regulators failed to act sooner to require the bank to
correct them. The OCC recently acknowledged: "there was a failure
of supervision" at Riggs, and "[w]e gave the bank too much time."
The evidence shows that, since 1997, OCC examiners repeatedly
identified major AML deficiencies at Riggs Bank, but more senior
OCC personnel allowed these AML deficiencies to continue year after
year without forceful action to stop them. ...

It was only in 2004, six years after the OCC began citing Riggs for
AML deficiencies, that federal regulators imposed their first civil
fine on the bank. ...

The Subcommittee's investigation indicates that the failure of
supervision in the Riggs matter is not an isolated case, but
symptomatic of a pattern of uneven and, at times, ineffective AML
enforcement by federal regulators. ...

An important ancillary issue raised by the Riggs case history
involves the ability of U.S. financial institutions with foreign
affiliates to get key due diligence information about accounts
opened and managed by their foreign affiliates. After questions
arose about the $35 million in wire transfers from the E.G. oil
account, for example, Riggs sent letters under section 314 of the
Patriot Act to at least two banks, Banco Santander and HSBC USA,
asking them voluntarily to share information about the beneficial
owners of certain accounts to which the funds had been directed.
... Both banks declined to provide the requested information,
because the accounts had been opened at their foreign affiliates in
Luxembourg or Spain. .... ...

Oil Company Payments. During its analysis of large bank
transactions involving E.G. accounts at Riggs Bank and other
financial institutions, the Subcommittee staff became aware of a
number of substantial payments that had been made by oil companies
doing business in Equatorial Guinea to individual E.G. officials,
their family members, or entities controlled by these officials or
family members. For example, these payments, which sometimes
exceeded $1 million, paid for E.G. land leases or purchases, E.G.
Embassy expenses, in-country security services, or expenses for
E.G. students studying abroad. In a few instances, the evidence
shows that oil companies entered into business ventures with
companies owned in whole or in part by the E.G. President, other
E.G. officials, or relatives.

For example, in 1998, ExxonMobil established an oil distribution
business in Equatorial Guinea of which 85 percent is owned by
ExxonMobil and 15 percent by Abayak S.A., a company controlled by
the E.G. President. These types of payments and business ventures,
which came to light as a result of the Subcommittee's detailed
review of bank transactions involving Equatorial Guinea, are often
unknown to the public and raise concerns related to corruption and
profiteering. To reduce opportunities for corruption, the oil
companies doing business in Equatorial Guinea should adhere to
disclosure practices advocated in such international transparency
initiatives as the Extractive Industries Transparency Initiative
led by U.K. Prime Minister Tony Blair, and the G-8 Anti-Corruption
and Transparency Initiative.These initiatives would require the oil
companies to make public disclosure of all payments made to E.G.
officials, their family members, or entities they control. To
further reduce opportunities for corruption, U.S. oil companies
should not participate in future business ventures in which
individual E.G. officials or their family members have a direct or
beneficial interest. Congress should also amend the Foreign Corrupt
Practices Act to require U.S. companies to disclose substantial
payments to and business ventures entered into with a country's
officials, their family members, or entities they control.

III. Findings

Based upon its investigation, the Subcommittee Minority staff makes
the following findings of fact.

(1) Assisting Pinochet. Riggs Bank assisted Augusto Pinochet,
former president of Chile, to evade legal proceedings related to
his Riggs bank accounts and resisted OCC oversight of these
accounts, despite red flags involving the source of Mr. Pinochet's
wealth, pending legal proceedings to freeze his assets, and public
allegations of serious wrongdoing by this client.

(2) Turning a Blind Eye. Riggs Bank managed more than 60 accounts
and certificates of deposit for Equatorial Guinea, its officials,
and their family members, with little or no attention to the bank's
anti-money laundering obligations, turned a blind eye to evidence
suggesting the bank was handling the proceeds of foreign
corruption, and allowed numerous suspicious transactions to take
place without notifying law enforcement.

(3) Dysfunctional AML Program. For many years, Riggs Bank ignored
repeated directives by federal bank regulators to improve its
anti-money laundering program, instead employing a dysfunctional
system that failed to safeguard the bank against money laundering
or foreign corruption.

(6) Uneven AML Enforcement. Current AML enforcement efforts by
federal agencies are uneven and, at times, ineffective, as
demonstrated by cases in which federal regulators have allowed AML
compliance problems to persist at some financial institutions for
years, failed after three years to issue final regulations
implementing the Patriot Act's due diligence requirements, and
failed to issue revised guidelines for bank examiners testing AML
compliance with the Patriot Act's due diligence requirements
combating money laundering and foreign corruption.

(7) Unseen Payments. Oil companies operating in Equatorial Guinea
may have contributed to corrupt practices in that country by making
substantial payments to, or entering into business ventures with,
individual E.G. officials, their family members, or entities they
control, with minimal public disclosure of their actions.

...

The Country of Equatorial Guinea.

Equatorial Guinea is a West African country, composed of a mainland
and five inhabited islands, with slightly less landmass than
Maryland and a population of about 510,000. Malabo, on the island
of Bioko, is the capital and largest city. Spanish and French are
the official languages, but Bantu languages are also spoken.

Equatorial Guinea was colonized by the Portugese in the late 1600s,
ceded to Spain in 1778, and gained independence in the 1960s. After
a referendum and constitutional convention, Francisco Macias Nguema
was elected President of Equatorial Guinea in 1968. Macias
subsequently abrogated the constitution, established a single-party
dictatorship, and declared himself President for life. His rule
occasioned the death or exile of about one-third of the country's
citizens. In 1979, Macias was overthrown and executed by his
nephew, Colonel Teodoro Obiang Nguema Mbasago.

Mr. Obiang declared himself President in his uncle's place.
Twenty-five years later, he still holds that position. While a new
E.G. constitution was enacted in 1982, and single-party rule was
officially ended in 1991, free and fair elections have not
followed. In the most recent election in December 2002, in which
President Obiang claimed victory with 97% of the vote, the U.S.
State Department described the proceedings as "marred by extensive
fraud and intimidation." President Obiang is also depicted as
dominating the E.G. government. In the words of the U.S. State
Department, he "names and dismisses cabinet members and judges,
ratifies treaties, leads the armed forces, and... appoints the
governors." A review of top E.G. officials over the past few years
shows that many are members of the President's extended family.

The State Department has also been highly critical of the country's
human rights abuses, use of torture, and culture of corruption. The
IMF has also issued reports critical of the country's lack of
transparency and accountability on fiscal matters. Corruption
allegations are also commonplace in articles about Equatorial
Guinea. For example, one recent U.S. publication wrote: "In 1998,
according to the IMF, [the E.G.] government received $130 million
in oil revenue, and Obiang simply pocketed $96 million of it.
Although three of every four Equatoguineans suffer malnutrition,
between 1997 and 2002, Obiang spent just over 1 percent of his
budget on health, by far the lowest of the nine African countries
the IMF surveyed. According to a 2002 State Department report,
there is 'little evidence that the country's oil wealth is being
devoted to the public good.'"

Despite its poor record on human rights, civil liberty, and
democracy, Equatorial Guinea has experienced rapid economic growth
during the last five years due to development of its oil resources.
Since 1997, U.S. oil companies, including Amerada Hess,
ChevronTexaco, ExxonMobil, and Marathon have made substantial
investments in oil fields off the E.G. coast as well as in E.G.
methanol and liquified natural gas plants. Equatorial Guinea has
also become an important source of oil for the United States.

Diplomatic relations between Equatorial Guinea and the United
States have varied over the years. In 1995, the United States
closed its embassy in Equatorial Guinea. Eight years later, in
2003, the United States agreed to re-establish this Embassy,
reportedly at the urging of U.S. oil companies doing business in
Equatorial Guinea. President Obiang professes to be a strong
supporter of the United States and frequently travels to this
country. His wife and children own real estate in Maryland,
California, New York, and elsewhere. ...

*************************************************************
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.

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