AlGosaibi v Maan AlSanea - New Venue The US Congress

If you've been following the continuing dispute between AHAB and Mr. Al Sanea, you know from reading Frank Kane over at The National that the latest "round" is scheduled for a new venue - the US Congress. As a side comment, if you're not reading The National already, you should.

As per the schedule, the hearing was held on September 28th at 4:00PM.  The prepared testimony of the four witnesses can be found here at the US House of Representatives' Financial Services Committee.  The listed topic is terrorism finance.

Among those giving testimony was Eric L. Lewis, Esquire, of the Washington DC office of Bachman Robinson & Lewis.  As you'll see from the attached biography, he has an extensive background in investigating financial crimes.

His prepared remarks are here.

Interestingly in his description of his experience and current assignments (page 1 paragraph 2), he does not mention his current assignment and that of his firm for AHAB - though it is clear later in the testimony that there is this link.  I'm confident this was an oversight and was corrected when he read his statement this afternoon.

His comments do not deal with terrorism per se, but with what he feels are serious defects in the provision of correspondent bank accounts which terrorists might exploit.  I am sure that just by perhaps a fortuitous coincidence his remarks might also help the case of his client, AHAB, in their legal battle with Mr. Al Sanea.

In that regard he focuses on what he alleges to be criminal activity by Mr. Al Sanea.  As always, let's stop to note that to this day Mr. Al Sanea continues to deny any improper or illegal behavior.

His argument is that there were repeated critical failures of know-your-customer due diligence ("KYC") by the American Bank that opened  the main US Dollar clearing account for AHAB's Money Exchange Division in NYC.   He notes that the Money Exchange advised the American Bank that it anticipated a volume of US$15 billion per year through its account.  As Mr. Lewis notes, this amount was out of proportion to the business conducted by the Money Exchange - which he places at US$60 million per year.  He also comments that the total of remittances from the Kingdom were about US$21 billion in 2008.  Therefore, it would be unrealistic for the bank to make the assumption that AHAB Money Exchange had the preponderant a share of the remittances business in the Kingdom as it operated from a single office in the Eastern Province.

Mr. Lewis identifies four red flags which he asserts were missed by the American Bank: (a) a high risk region and country (b) a money remittance business which accepts business from "walk in" customers where he asserts the Money Exchange's KYC would be non existent or weak, (c) massive transactional volume, and (d) a transactional volume vastly disproportionate to the customer's ostensible business.

As a side comment, I'd note that these requirements reflect the due diligence standards established by the FATF in its 40 Recommendations.  Recommendations 5, 7 and 11 are the relevant ones.

The Financial Action Task Force is an inter-governmental organization set up  by to combat money laundering and the financing terrorism.  It does not have any legal enforcement powers.  Rather it sets global standards, monitors individual countries' compliance therewith, including naming and shaming non compliant jurisdictions (which triggers additional AML procedures under the 40 Recommendations).  It also serves as a clearing house for the exchange of expertise and information on money laundering. The FATF has also issued Nine Special Recommendations on Terrorism Finance.

Summing up what he sees as a failure of due diligence, he states (page 3 paragraph 4):

"Yet, in this case, our investigation revealed no evidence of any significant due diligence or AML investigation by [American Bank] of the Money Exchange in connection with the opening of the [American Bank] account in 1998, or really at any time after the opening of the account - even after the imposition of much more strict anti-money laundering  and know-your-customer requirements after the tragedy of 9/11."

On page 4 paragraph 2 he levies another serious charge:

"Literally at the same time it was under investigation and was negotiating this settlement with the DA’s office, [American Bank] was in communication with the Money Exchange, which was running about a $20 billion  annual volume at that time. [American Bank] asked the company to change its name to something without the words “Money Exchange,” which might be a red flag to [American Bank's] auditors or compliance officials. [American Bank] also asked the Money Exchange to cease engaging in walk-in money remittance business. But this aspect appears to have been perfunctory and not to have been followed up. The Money Exchange simply proffered a new name not suggestive of money remittance services—it went from “Ahmad Hamad Algosaibi Brothers Money Exchange, Commission and Investment” to “Ahmad Hamad Algosaibi Brothers Finance, Development and Investment.” It went right on doing walk-in remittance business. Its enormous movement of funds through its account at [American Bank] remained unchanged. The truth is that if [American Bank] had done its due diligence, it would have been immediately obvious that the throughput in the account actually had nothing to do with any money remittance business. And even the $15 billion a year predicted transaction volume was substantially exceeded. So [American Bank] failed to ask why a money exchange would need to process $15 billion per year and went it started to process in excess of $20 billion or $30 billion per  year, it failed to ask why there was an additional $5 or $15 billion per year in transactions. On a per  transaction fee basis, this was all good, no-risk business for [American Bank].”

As we look at the issue of the American Bank's requirement that the Money Exchange change its name, the major pieces of public evidence in that regard - of which I am aware - are from the submission by AHAB's counsel  (by an attorney from Mr. Lewis' firm) in NY Supreme Court Case 601650/2009 - Mashreqbank v AlGosaibi.  These are exhibits #16 (Document #93) and #19 (Document #96).  You can read these for yourself by going to the NY Supreme Court's website at http://iapps.courts.state.ny.us/webcivil/FCASMain.  Perform an Index Search using the CRN 601650/2009 and follow through until you find a tab for e-filed documents (at the lower right hand of a screen).

Exhibit #19 (pages 7-8) contains a memo dated 12 June 2006 from Mr. Mark Hayley to Mr. Al Sanea relaying his account (I haven't seen any document which purports to relay the American Bank's account) of a meeting with the American Bank:

"The Money Exchange must not act or be perceived to act as a money service business.  Accordingly, no walk in business can be accepted, even if the customer is well known to us (e.g., Saad, AlGosaibi and Aramco staff).

Instead we must have a full account relationship with every customer requiring to transfer money and every account relationship requires full KYC documentation and compliance.

According to [American Bank], perception is also important and the words "Money Exchange" in our name could be seen by the regulators as an indication of money service activities.  Therefore we need to change our name."

This document can be read in two ways.

In the first - favorable to the American Bank - they are telling AHAB that the Money Exchange can no longer operate as a money exchange.  That it must terminate business of that nature.  And as a result should change its name so that there is no suggestion that it is engaged in that business.  Presuming that it did of course eliminate this business, then it would be highly appropriate for the entity to change its name.

In the second - unfavorable way - the document can be read to imply that the change in name is cosmetic designed to circumvent the bank's internal audit and controls.   That the entity would continue to perform money transfer services but for account holders.  Under this theory, since the ME was not licensed as a bank or investment company, it would remain a money exchange.

There are really two fundamental issues here:

1. What is the business this entity is engaged in"  Is it a money exchange firm?   Is it operating as an unlicensed and unregulated bank?  Is is something else?  
2. What is the legal status of the entity?  When I was a rookie banker (who dealt with the Money Exchange and other AHAB entities), I knew that it was a division of the AHAB Partnership.  That it did not have a separate legal identity.   That's a critical matter for a banker as it affects one's rights under the law.  Important as well in determining who had the right to sign to commit the entity to a legal document, to sign a payment order.  And important for issues like ultra vires defenses.

The memo is crystal clear.

"Since we call National Bottling a "company" it would not be inconsistent to call the Algosaibi Investment Division a "company".  By calling ourselves Algosaibi Investment Company we could explain that this is the first step towards eventual incorporation following the grant of a bank of investment company license.

This new name will not change our constitutional position as a division of Ahmad Hamad Algosaibi & Brothers Company -- Partnership.  Our letterhead should continue to disclose this -- see attached.”

The memo then notes that they should obtain a CR for the Investment Company.  Another key point:  one does not need to be a separate legal entity to obtain a CR in the Kingdom.  Caveat banker.

Exhibit #16 contains a memo from Mr. Hayley to Mr. Al Sanea dated 14 July 2006 which contains Mr. Hayley's account of a 3 July  meeting with the American Bank.  That memo notes that:

1. KYC Anti Money Laundering procedures must be revised to eliminate any "walk in" business and that a draft (apparently incorporating same) was sent to the American Bank. 
2. The account name must be changed to Ahmad Hamad Algosaibi & Brothers Company.  (Note that's the Partnership name - a legal entity unlike the Money Exchange.) 
3. The Money Exchange name must be changed.  "This is necessary even if our account with [American Bank] is maintained in the Partnership name."

Again it is possible to read this document in a manner favorable to the American Bank.  The client has told  it banker that it has ceased walk in business and has provided that banker a draft internal document. which reflects this.  Thus, meeting the American Bank's requirement.  The account is to be registered in the name of the Partnership - a legal entity.  References to "money exchange" are being removed to conform to the facts and thus to avoid raising false issues.

We don't have the full set of information that Mr. Lewis does so there may be other documents and evidence he has which enable him to draw his conclusion.  So at this point from what we have here the jury is out.  But the American Bank at this point does appear to have a reasonable case.

There are a couple of other points from his testimony.

1. The American Bank advised that the original account opening records were lost in the 9/11 tragedy.  Rather poor form in record retention and security.   Certainly not in compliance with FATF Recommendations, but then as is pretty well known the US was fairly relaxed about these matters prior to 9/11.
2. On page 5 Mr. Lewis asserts that "Awal Bank was a creature of Al Sanea's fraud and was, further, the bank of choice for the children of a foreign head of state who appeared to be using Awal Bank to launder funds."  The BD64,000 question here is whether his bank was an active conspirator.  Or whether it was being taken advantage of by these third parties.  I cannot think of a single major USA bank or UK bank that has not been fined by a regulator for lapses in implementing proper AML procedures.  If that's the case with Awal - a lapse in procedures, then they are in the company of many household name financial institutions from the "Developed" West.  If they were an active participant, the company they keep is a much much smaller circle of banks.

One last bit to cover and we're done:  the presumed profitability of the account that caused the American Bank to short circuit due diligence (taking Mr. Lewis allegations at face value).

How do correspondent banks (like our American Bank) make money on an account?

Generally, it's through a combination of per item charges (debits, credits, payments, account statements, etc) plus some fixed charge for maintaining the account (a required minimum balance or a yearly fee).

Let's look at the item which drives the overwhelming bulk of the per item charges:  payment charges.

The per item charge is independent of the amount of the payment.  A payment for $100,000 costs the same as one for $100,00,000 - all other things being equal.

So what drives the per item price for a payment?

1. The manner in which the instructions are delivered to the correspondent bank. Payments delivered in machine readable form (through SWIFT or the correspondent's proprietary payment system - often PC based) are preferred because they do not require as much effort to process as those which are not in machine readable or electronic form.  In the latter case, the correspondent has to employ staff to take the non machine readable instructions from the client, input them into the payment system with of course the obligatory checking of the payments by a second employee to make sure they've been entered properly.  So pricing for manual payments is much higher than electronic ones.  
2. There is a further distinction for electronic payments - whether they are straight through or need to be repaired.  To go "straight through" the payment system, payments need certain codes for the receiving bank, the beneficiary etc.  If the client (here Algosaibi) inputs all this information correctly, then the NY correspondent has little to no operational work.  If not, then a member of the correspondent bank's operations staff has to enter this information. Note that with a straight through payment if sufficient funds are in the client's account, the payment is released without any manual intervention by the correspondent.  If there are insufficient funds, a credit officer may have to make a decision whether to release the payment or not.  Generally, there is no charge for credit approval.  So as you'd expect, straight through payments not requiring any "repairs" are priced lower than electronic payments requiring repairs.

Let's make some assumptions and see what sort of revenue (note revenue not net profit) the American Bank may have been making on the Money Exchange account.

1. $20 billion in payments through the account per year.  Since Algosaibi did not start out with $20 billion in the account, they'll need to arrange cover for these payments by having credits of US$20 billion. 
2. Each payment and credit at US$25 million.  That's 800 of each.  We'll also look at the highly unlikely scenario where each is US$1 million.  That means 20,000 of each. 
3. US$5 per payment and per credit.   We'll also look at higher levels.  A not very likely US$10 per item.  And a totally unrealistic US$50 per item.   One further fussy note.  Generally, credits are not priced the same as payments.  They're priced lower because they come to the correspondent in  electronic form.  And if there's a problem with applying the payment, the correspondent charges fairly hefty "investigation" fees.  What's the point you ask?  There's a lot of excess in my pricing. Credits are probably much much less than the payment price.
4. Other charges of $1,000 per month.  This should more than cover the miscellaneous per credit, per debit, account statement mailing, etc. 
5. A fixed charge of US$100,000 per year.  This should be well above what the American Bank required. 
6. Since Mr. Lewis mentioned that the same bank had been fined US$7.5 million for running a Latin American account through which over US$3 billion was transferred during 4.5 years,  we'll use that as the minimum fine.

What are the results?

Scenario 1:  Payment and Credit Size US$25 million

Per Item Charges	$5 Per Item	$10 Per Item	$50 Per Item
800 Payments	$4,000	$8,000	$40,000
800 Credits	$4,000	$8,000	$40,000
Sub Total	$8,000	$16,000	$80,000
Fixed Charges
Account Fee	$100,000	$100,000	$100,000
Miscellaneous	$ 12,000	$ 12,000	$ 12,000
Sub Total	$112,000	$112,000	$112,000
GRAND TOTAL	$120,000	$128,000	$192,000

Comments:

1. Here we're using $25 million per item which is realistic for the sort of business the Money Exchange was conducting.  And this certainly fits with the data in the account statements disclosed as part of Mashreqbank case. 
2. With this assumption the accounts have fairly modest total revenues, even at the completely unrealistic price of US$50 per item.  
3. If you think my assumptions are too low, double the results.  It's still hard to see a rational businessman running the risk of a US$7.5 million fine - which might be much larger given the amounts transferred through the accounts.  And not only is there the fine but also the damage to one's business reputation.  The dangers to one's franchise can be very serious.  Riggs Bank is a cautionary tale.

But maybe I'm being too generous.  So let's look at another scenario.

Scenario 2:  Payment and Credit Size US$1 million

Per Item Charges	$5 Per Item	$10 Per Item	$50 Per Item
20,000 Payments	$100,000	$200,000	$1,000,000
20,000 Credits	$100,000	$200,000	$1,000.000
Sub Total	$200,000	$400,000	$2,000,000
Fixed Charges
Account Fee	$100,000	$100,000	$100,000
Miscellaneous	$ 12,000	$ 12,000	$ 12,000
Sub Total	$112,000	$112,000	$112,000
GRAND TOTAL	$312,000	$532,000	$2,112,000

Comments:

1. Frankly, this is a highly unrealistic scenario.   I've included it to show that even an outlier like this does not generate sufficient revenue to take risk. 
2. Only if one combines it with the even more improbable US$50 per item charge do we get anywhere near a risk taking point. 
3. But the simple fact is that when the account was being used banks were fighting to get a piece of business from AHAB - then one of the Kingdom's most prestigious groups as was Mr. Al Sanea's companies.  So US$5 per item is probably the high point for payments.  The pricing per item may even have been lower.  Hard to see this account being so lucrative that a bank would take a risk like this.

Conclusion: 

1. Correspondent accounts just aren't that lucrative .  
2. Many of the major correspondent banks are feeling the pressure of AML regulations  and are highly sensitive not just to regulatory fines but to the risks of lawsuits by third parties (as happened to the Arab Bank's New York Branch).  And so they are reducing exposure by throwing marginal customers out.
3. That being said, bankers often do very stupid things. And sometimes bankers don't work for the best interest of their firms.