Loopholes Allow Tainted Money Into U.S., Report Says

Real estate agents, escrow agents, lawyers, attorneys and others are involved in scandal

Feb. 4 (Bloomberg) -- U.S. lawyers, real estate and escrow agents and other professionals are enabling the flow of tens of millions of tainted dollars into the country due to loopholes in anti-money laundering laws, a Senate report says.

In one case, the son of Equatorial Guinea’s president relied on lawyers, shell companies, bankers and real estate agents to help move more than $110 million in “suspect funds” into the U.S., the report said. The money was used to buy a $30 million home in Malibu, California, and a $38.5 million Gulfstream jet, the report said.

“With the help of U.S. lawyers, real estate and escrow agents, lobbyists and others, politically powerful foreign officials, and those close to them, have found ways to use the U.S. financial system to protect and enhance their ill-gotten gains,” Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, said at a hearing today.

“While U.S. financial institutions have become more vigilant and built stronger barriers to keep out suspect funds, their anti-money-laundering safeguards still have holes,” he said.

The first three witnesses at the hearing, two lawyers and a lobbyist, invoked their constitutional right against self- incrimination and declined to answer questions from Levin.

Circumventing Laws

The subcommittee’s investigation examined how some powerful foreign politicians, their family members and associates may be circumventing U.S. laws and safeguards to bring money into the U.S. financial system that may be the product of corruption.

The report said financial institutions generally have become more vigilant since the 2001 Patriot Act required more scrutiny of such private banking accounts.

Still, the 325-page report cited a series of lapses by banks. For example, an HSBC Holdings Plc bank in New York gave an Angolan bank, Banco Africano de Investimentos, “ready access to the U.S. financial system” despite the latter institution’s ties to corrupt oil and diamond industries, the report said.

HSBC Bank USA’s director of anti-money laundering compliance, Wiecher H. Mandemaker, testified today that the bank’s “broader practices today exceed even the more robust post-Sept. 11 federal regulations in a number of important respects.”

Source of Funds

Politically powerful people and their associates in other countries are able to bring into the U.S. millions of dollars without having to provide information on the source of the funds because of lax controls in other professions, the report said.

“Real estate agents, escrow agents, attorneys and others do not have the legal obligation the way banks do at the moment to take action to prevent their participation in suspect transactions,” Levin said at a briefing with reporters on Feb. 2.

Levin said today that as the U.S. leads efforts to stop the flow of illegal money into places such as Iraq and Afghanistan, it must do a better job of halting the movement of suspect funds into the U.S.

Among the report’s recommendations are that Congress enact a law and the U.S Treasury issue rules that would strengthen bank screening of politically powerful foreign clients.

The report called on the Treasury to repeal a 2002 exemption given to real estate and escrow agents for anti-money- laundering programs under the Patriot Act, which gave law enforcement greater latitude to investigate terrorism.

Names of Owners

Congress also should pass a law that requires people forming U.S. corporations to disclose the names of the beneficial owners, the report said. Professional groups such as the American Bar Association and National Association of Realtors should issue guidelines involving acceptance of funds from potentially suspect foreign sources, it said.

The report centered on examples from four oil-producing African nations that have been cited for corruption by organizations such as the U.S. State Department and Transparency International, a global group working against corruption.

Aside from Equatorial Guinea, they are Angola, Gabon and Nigeria.

In the case of Teodoro Nguema Obiang Mangue, the son of the president of Equatorial Guinea, the report said two lawyers helped him bypass anti-money-laundering laws by allowing him to use shell company accounts as conduits for his funds without telling U.S. bankers that Obiang was using the accounts.

‘Set Up Another’

“If a bank later uncovered Mr. Obiang’s use of an account and closed it, the lawyers helped him set up another,” it said.

Many of the professionals in the Obiang case were under no legal obligation to take anti-money-laundering precautions, the report said.

Attorneys Michael Jay Berger and George I. Nagler, both of Beverly Hills, California, invoked their constitutional right against self-incrimination and declined to testify today.

The report said Nagler worked with a colleague in the insurance industry to provide insurance coverage for Obiang’s 32 motorcycles and cars, which included seven Ferraris, five Bentleys, four Rolls-Royces and two Lamborghinis.

The report cited a 2007 U.S. Justice Department memorandum that said it was “investigating suspected criminal conduct” of Obiang, who is the minister of agriculture and forests.

Obiang hasn’t been criminally charged. The subcommittee investigators couldn’t confirm the investigation, the report said. A lawyer for Obiang didn’t return phone calls seeking comment.

Lobbyist Cites Rights

Another witness, Jeffrey C. Birrell, a lobbyist with the Grace Group in McLean, Virginia, also invoked his constitutional right against self-incrimination today.

The report said Birrell was hired by the late president of Gabon, Omar Bongo, to help buy six U.S.-built armored vehicles and get government permission to buy six C-130 military cargo aircraft from Saudi Arabia. The aircraft sale never occurred.

Birrell’s attorney, Ian Pitz of Madison, Wisconsin, said in an interview yesterday that the transactions were “undertaken with complete transparency and with required approval from the United States government.”

“We’re not aware of any wrongdoing by any party related to those transactions,” he said.

To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.