Terence O’Hara and Kathleen Day
The Washington Post
January 17, 2005
In October 2002, the directors of Riggs Bank received an internal memorandum listing $1.9 million in suspicious cash withdrawals by former Chilean dictator Augusto Pinochet from 2000 to 2002 – the board’s first official notification of a relationship that bank regulators were investigating.
The directors did not question the nature of the bank’s relationship with Pinochet, who only a year before had eluded a Spanish criminal indictment on genocide and torture charges, according to sources who have seen minutes and transcripts of the meeting. No internal procedures were changed. The board took no action.
The directors of the bank, much like their counterparts at the bank’s holding company, deferred to the management team picked by the bank’s chief shareholder, Joe L. Allbritton. Within 18 months, Riggs would be embroiled in the most extensive money-laundering scandal in modern banking, fined $25 million and damaged so severely that it would be forced into a merger.
In a number of corporate scandals in recent years, boards of directors have been criticized for not aggressively monitoring the activities of management. Earlier this month in separate actions, directors of WorldCom Inc. and Enron Corp. agreed to pay millions of dollars of their own money to settle class-action lawsuits seeking redress for fraud that occurred on their watch, highlighting the issue of director responsibility.
At Riggs, the directors at the bank and its holding company did not confront the huge risks connected with Riggs international banking relationships. The boards followed the lead of Allbritton and his wife, Barbara – both directors who were often openly derisive of efforts by regulators to improve oversight of its international banking operations.
The information in this article was drawn from internal Riggs documents released by a congressional investigation, public records, transcripts of board meetings and sources familiar with the directors’ actions. The sources spoke only on the condition that they not be identified because the bank is the subject of ongoing investigations.
Joe Allbritton ran Riggs for 20 years, until 2001, and helped court Pinochet as a client. Riggs also provided banking for the dictator of Equatorial Guinea and with embassies from countries designated as “non-cooperative” with international anti-money-laundering efforts.
Despite such “high-risk” clients, efforts by independent directors to make sure the company was complying with anti-money-laundering rules were cursory at best, according to the account that emerged from sources and documents, and challenges by outside directors to Riggs management – headed by Joe until Robert L. Allbritton assumed control in 2001 – were almost nonexistent.
A director, speaking on the condition he not be identified, said he considered Riggs “Joe’s bank.” In his view, since Allbritton controlled 40 percent of it, Riggs was his to run as he pleased within the reasonable limits of federal regulation and shareholder interest. The director added that many Riggs bank and holding company directors did not recognize that there was a huge money-laundering risk involved in international and embassy banking. Those views were echoed by other board members and executives and advisers to Riggs directors.
That hands-off attitude toward the bank’s money-laundering compliance may have been reinforced by the company’s chief regulator. The Office of the Comptroller of the Currency (OCC), from 1996 until 2002, repeatedly told Riggs Bank directors that the company was making “progress” with its anti-money-laundering procedures.
Riggs’s two-tiered board structure is unusual. All chartered financial institutions, including banks, must have their own boards, but at most major bank holding companies the bank board and the holding company board are the same. At Riggs, only three people were on both boards – Joe and Barbara Allbritton and Riggs President Lawrence I. Hebert.
The bank board’s primary responsibility is to make sure the bank operates in a safe and sound manner, and it is answerable to the OCC. Broader corporate issues such as executive compensation, internal controls, audit oversight and fiduciary responsibility – and accountability – are shared by both Riggs boards.
Several Riggs executives and advisers said that may have been part of Riggs’s oversight problem. For example, the corporate board did not necessarily directly receive information about OCC examinations. According to minutes of board meetings, several directors of Riggs’s corporate board felt they had been left out of the loop when they learned of the OCC’s findings about Riggs’s money-laundering lapses in 2002. Several corporate board members expressed surprise upon learning, in July 2004, that Pinochet had been a client of the bank, despite the bank board having been briefed on an OCC examination of the Pinochet accounts in late 2002 and early 2003, according to sources.
Since Allbritton took over in 1981, and even after he stepped down as chairman and chief executive in 2001, he has dominated the company and its boards. Of the 19 combined directors of Riggs National Corp. and Riggs Bank, only a few have no personal or business ties to the company or Allbritton.
Several sources familiar with the workings of the board, including advisers to the board, said its members have worked “diligently” to do what’s best for the company during a trying period. Those sources said they have never seen a board member act in a way that benefited the Allbritton family at the expense of the company during the crisis of the past year.
Still, in the boardroom, a director who differed with Joe Allbritton rarely expressed it directly. A transcript of a tape of an April 11, 2000, meeting of Riggs Bank board of directors, chaired by Allbritton, includes an exchange in which he asks Riggs’s head of compliance at the time, Steve Marshall, about a management committee that had been asked to write policies for compliance with anti-money-laundering laws.
“Mr. Marshall, what does the laundry committee do?” Allbritton asked.
Laughter can then be heard on the tape as the compliance chief likened the committee to a popular brand of detergent.
“The appropriate acronym is the Tide committee,” Marshall answered. Marshall then said, “The money-laundering deterrence committee has the unique pleasure of ensuring we have appropriate controls are [sic] in place to make sure we are not dealing with inappropriate individuals using the bank inappropriately for money laundering.”
Allbritton replied, “Well, that’s interesting. We have all kinds of committees that have come into banking since I started this life.”
Marshall, who left Riggs in 2000 to become an independent consultant, said: “I was not trying to be lackadaisical toward the issues at hand. I was trying to drive the discussion towards a discussion of the policy and the roles and responsibilities of the committee.”
When Allbritton joked about regulators, no board members expressed disagreement, according to sources who have listened to the tapes. Sources who were present at the meetings said many directors were friends with Joe Allbritton, and several had known him for decades and were accustomed to his jokes.
Allbritton spokesman Paul Clark said Allbritton’s comments were often in jest, and shouldn’t be taken to imply Allbritton had a dismissive or mocking attitude toward bank regulators or compliance with anti-money-laundering laws. “Everybody says something regrettable at one time or another,” Clark said. “And taken out of context such comments can be misread.”
In December 2003, the OCC told Riggs Bank management and its board of its concerns about accounts held by Equatorial Guinea and its ruling family, accounts that held hundreds of millions of dollars of revenue obtained from oil companies doing business in the west African country.
The OCC warned the board and Riggs managers that the deposits exposed the bank to financial and reputational risks. Regulators also raised questions about the independence of Simon P. Kareri, Equatorial Guinea’s account manager at Riggs, who had close ties to the ruling family.
Allbritton, still smarting from the OCC action that led to the Pinochet accounts being closed the year before, told the OCC examiner that Riggs had no intention of closing the accounts, according to the Senate permanent subcommittee on investigations report. Although Robert Allbritton would later tell the subcommittee that the majority of the board felt otherwise, no one spoke up at the meeting with regulators, according to sources familiar with the meeting.
The voluminous record of the directors’ actions compiled by the Senate subcommittee, released recently, contains only one report of a board member openly challenging Riggs management. Christopher Meyer became a Riggs National Corp. director in late 2003 after leaving his post as British ambassador to the United States. He joined the board just at the time the OCC began to express concern about Riggs’s Equatorial Guinea accounts. At a Jan. 21, 2004, meeting, Meyer said Riggs should get rid of the country as a customer, citing well-known corruption of the country’s ruling family.
Minutes of the board meeting show that Hebert assured Meyer and the rest of the board that its dealings with Equatorial Guinea were not a problem. However, a month later, in February, Riggs’s security and compliance chief David B. Caruso uncovered a potential fraud by and a number of suspicious transactions in the accounts. Those discoveries ultimately would lead the OCC to notify Riggs on March 2 that it intended to fine the bank.
Many of Riggs independent directors, including Meyer, were unaware of that development until a March 22 board meeting. Meyer was angry, according to minutes of the meeting and people who were present. He felt that Robert Allbritton and Hebert had failed to keep the board fully informed. He quit several weeks later in frustration, according to sources familiar with the circumstances. Publicly, Riggs said Meyer didn’t have enough time to serve on Riggs board.
The boards of the bank and its holding companies have become more active over the past year, hiring a seasoned team of internal investigators and firing several employees. The directors solicited buyers for the bank, and announced a deal under which Riggs be acquired by PNC Financial Services Group. That deal could be derailed by further investigations of the bank, since the purchase agreement allows PNC to walk away if there are “material adverse changes” in circumstances. If the PNC deal goes through as originally agreed to, the Allbritton family’s collected holdings will be worth close to $300 million.
“The Riggs boards are focused on assuring that Riggs prudently and effectively addresses all issues facing the company and its businesses,” said Mark N. Hendrix, a company spokesman. “The boards recognize their responsibility and fiduciary duty with respect to the enterprise and are committed to continuing to act accordingly.”
The boards often meet once or more a week now to review efforts to remedy regulatory problems and to hear about what Riggs’s internal investigation is finding.
The directors want to avoid surprises like at the May 2004 meeting, when the OCC and the Financial Crimes Enforcement Network, a Treasury Department agency that collects information about possible crimes at financial institutions, presented the company’s two boards with the consent order fining the company for violations of the Bank Secrecy Act.
Although the boards knew the fine was coming, board members were caught completely off guard by its size and the tough language in the Financial Crimes Enforcement Network consent order. “Absolute shock,” was how one senior bank executive described a May 13 meeting at which H. Rodgin Cohen, the bank’s regulatory counsel, presented the boards with the consent order.
While some members raised concerns about the language of the proposed settlement, in the end, all board members agreed to sign the consent order unchanged.
“It was like a two-by-four right between the eyes,” one person present said.