Complaint Review: Primerica Citigroup - Nationwide

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Cleaning Up

St. Petersburg Times; St. Petersburg, Fla.; Jan 7, 2001; JEFF HARRINGTON;

Abstract:

Today's money launderers trade cash for chips at casinos, wait a few minutes and then cash out. They wire funds through a U.S. financial institution from a foreign country and then withdraw the cash in a third country using ATMs. They move money around through check-cashing outlets and other so-called money remitters that are less tightly regulated than banks. They pump money through brokerage firms, insurance companies and unsuspecting legitimate businesses. They pay millions to export outdated computer chips or equipment as a way to get U.S. dollars into the system.

Rogue U.S. financier Martin Frankel allegedly used a sophisticated money-laundering scheme to bilk insurance companies of $200-million. The founder of the International Boxing Federation was convicted on money-laundering charges in August, the same month onetime football star Art Schlichter was indicted on similar charges. Democrats have even accused Rep. Tom DeLay, the House majority whip, of money laundering in raising funds for Republican candidates and causes.

Many U.S. banks have been fined from $20,000 to several million dollars but none has been indicted in the past 12 years on money- laundering charges; over the same period, the United States has sanctioned almost two dozen foreign banks from Yugoslavia, Israel Pakistan, Mexico and other countries.

Full Text:

Copyright Times Publishing Co. Jan 7, 2001

A proliferation of money-laundering methods is making it more difficult for U.S. regulators to clamp down on crooks in the trillion- dollar-a-year business. But the government is cutting into criminals' bottom line.

Adedeji Okubanjo, a 24-year-old Nigerian citizen, was already under scrutiny by Secret Service agents here when a local SouthTrust Bank branch questioned his plans to wire $175,000 to New York.

The bank reported its suspicions to regulators and blocked the wire transfer. Instead of catching a plane to New York to collect more than a half-million dollars in cash from a counterfeit check scheme, Okubanjo wound up in prison on a two-year sentence for bank fraud.

Chalk up one successful battle against money laundering. The problem for regulators: Sentencing Okubanjo in 1998 was like picking off a single enemy soldier as thousands more continue to pour over the hill.

"I don't think we can win the war," said David Vogt, a Treasury Department official who helps spearhead anti-money laundering efforts. "In all honesty, the best we can do is make the cost of (laundering money) higher . . . to cause them some pain."

Despite new federal regulations, deepening international cooperation and unprecedented voluntary cooperation by banks to spot and report suspicious behavior, money laundering is flourishing.

The International Monetary Fund estimates that laundering accounts for 3 percent to 5 percent of the world's annual gross domestic product, or about $1.5-trillion.

The Financial Crimes Network has hired a contractor to develop a model for measuring the magnitude of laundering. But to some experts, putting a price tag on the problem is a futile exercise.

"You sit in these rooms and government people will just laugh at some of the numbers tossed around," said John Byrne, senior counsel and compliance manager for the American Bankers Association. "I don't know how you can estimate it."

The practice of filtering ill-gotten money through the financial system to make it "clean," or legitimate, owes its moniker to the days of Al Capone. The Chicago mobster reputedly used coin-operated laundries to hide his gambling revenue.

Crooks have come a long way from the self-service laundries of the Windy City.

Today's money launderers trade cash for chips at casinos, wait a few minutes and then cash out. They wire funds through a U.S. financial institution from a foreign country and then withdraw the cash in a third country using ATMs. They move money around through check-cashing outlets and other so-called money remitters that are less tightly regulated than banks. They pump money through brokerage firms, insurance companies and unsuspecting legitimate businesses. They pay millions to export outdated computer chips or equipment as a way to get U.S. dollars into the system.

The Internet has helped, too.

Electronic cash and online clubs that let people use debit credit cards for transactions have great potential for misuse. So do stored- value or "smart" cards that can be used to tap into bank accounts and other sources to download funds. Internet gaming has burgeoned into a $10-billion industry, with many of its more than 600 sites linked to countries known to be lax on money laundering, such as Antigua.

Of course, there are always wire transfers, off-shore accounts, shell companies and the old-fashioned smuggling of dollars out of the country.

"You're only limited by your imagination," said Ken Rijok, a former Miami lawyer who knows the money-laundering process from the inside.

In the 1980s, Rijok briefly specialized in helping set up ways to launder money. After a prison sentence and disbarment, he joined the lecture circuit, offering tips on how to stop his former livelihood.

"Frankly, I think it's infinitely worse than it was before," Rijok said. "It looks like we have twice the amount of tax havens than we had before, not just in the Caribbean. And now we have to deal with Russian organized crime."

Indeed, the growing presence of Russian crime bosses was one of the trends highlighted by the Bank Secrecy Act Advisory Group this fall in the industry/government group's first-ever comprehensive report looking at the effectiveness of money-laundering laws.

One of the report's co-authors was Vogt, the Treasury Department official who acts as assistant director of the Financial Crimes Enforcement Network, better known as FinCEN.

Among Vogt's biggest concerns is that entrenched criminal organizations have begun cooperating in complicated wire transfers, making it tougher to follow dirty money.

Russian organized crime will have one piece of the laundered funds, the classic Italian Mafia has another, Asian Mafia will have a third, and a drug cartel yet another.

"We're not talking about Aunt Emma in her garage," Vogt said. "We're talking about large-scale criminal activity, the globalization of organized crime and what it means to us."

Bankers and regulators have heard the wake-up call.

The Treasury Department went on the offensive last year with a warning list of 15 foreign countries that have "serious deficiencies" in money laundering controls, including the Bahamas, Cayman Islands, Panama, Israel, Russia and the Philippines.

The Feds identified New York, Los Angeles, the Texas border and San Juan as high financial crime areas that are prone to money laundering. (South Florida recently submitted an application to join the list and is expected to be added this year along with Chicago and the San Francisco Bay area.)

Two years ago, FinCEN briefly floated the idea of making banks compile detailed financial portraits of their customers in search of suspicious behavior. But supportive bankers and legislators quickly abandoned the so-called Know Your Customer proposal after a public outcry that it would make banks spy on their customers for the government.

Nevertheless, a growing number of big banks now are embracing Know Your Customer principles internally, whether or not they become formal regulations.

The regulatory enthusiasm has rolled into 2001.

Republicans on the House Banking Committee have pledged to make anti-money laundering one of their top agenda items with the new Congress.

Gradually, over the next several years, FinCEN wants to make check- cashing companies, brokers and insurance companies follow similar requirements as banks in filing reports of suspicious activity.

Aggressiveness of crooks and prosecutors and the wide definition of "money laundering" has resulted in some big headlines over the past couple of years.

Rogue U.S. financier Martin Frankel allegedly used a sophisticated money-laundering scheme to bilk insurance companies of $200-million. The founder of the International Boxing Federation was convicted on money-laundering charges in August, the same month onetime football star Art Schlichter was indicted on similar charges. Democrats have even accused Rep. Tom DeLay, the House majority whip, of money laundering in raising funds for Republican candidates and causes.

Closer to the Tampa Bay area, the eclectic roster of people accused of money laundering ranges from the former longtime mayor of Belleair Beach to the former executive director of the Tampa Housing Authority to leaders of the Tampa-based church Greater Ministries International.

The tales that have garnered the most attention, though, center on major banks burned by laundering scandals.

The Bank of New York had to explain how a corrupt employee helped funnel more than $7-billion of supposed Russian Mafia money through the bank in more than 160,000 electronic transactions over four years.

And Citigroup chief executive John Reed had to explain to Congress why his company's private banking roster is filled with such dubious international clients as Asif Ali Zardari, husband of a former prime minister of Pakistan who is in jail for corruption; Omar Bongo, president of the African nation of Gabon and the subject of a French corruption inquiry; the sons of a former military leader of Nigeria, Gen. Sani Abacha, one of whom has been charged with murder; and Jaime Lusinchi, a former president of Venezuela.

One such Citibank customer, Raul Salinas, the brother of former Mexican President Carlos Salinas de Gortari, allegedly moved up to $100-million around in secret accounts in the mid-1990s.

Defenders of the banks say the high-profile cases were anomalies traced to rogue employees who didn't follow the rules.

"It's much more difficult now to launder money tried-and-true through an American bank unless you have someone in the inside," insists Byrne of the American Bankers Association.

As Byrne points out, banks are more likely than ever to file a report with regulators whenever they suspect criminal activity.

They also have more safeguards at their disposal.

John Daly, owner of Americas Software in Miami, has signed deals with more than 50 financial institutions to buy his anti-money laundering software during the past four years. The latest version of his software can be customized to flag suspicious patterns in how transactions move in and out of an institution.

The intensified scrutiny has had an impact, said Michael Matossian, director of regulatory risk management at First Union Corp.

"There have been some visible failures, but banks . . . day in and day out, are remarkably adept at identifying potential instances of criminal activity," he said.

Charles Intriago, publisher of Money Laundering Alert, a Miami- based newsletter, isn't about to let banks off the hook that easy.

Intriago, a former federal prosecutor, contends there are egregious holes in the American line of defense against launderers, from the banks on down.

He accuses government regulators of picking on easy targets, such as small check-cashing companies in Miami and out-of-country banks, while giving large U.S. financial institutions a free ride.

Many U.S. banks have been fined from $20,000 to several million dollars but none has been indicted in the past 12 years on money- laundering charges; over the same period, the United States has sanctioned almost two dozen foreign banks from Yugoslavia, Israel Pakistan, Mexico and other countries.

"There seems to be a double standard in this country," Intriago said. "The ugly American beats up on everyone and is not swallowing its own medicine."

Intriago also challenges the Treasury Department to back up tough talk of enforcement.

Regulators in 1996 said that by year-end, check-cashing companies would have to abide by the same filing requirements as banks when they suspect suspicious activity.

The latest timetable for check-cashing companies to comply is January 2002, according to Vogt. It's unclear when and how other financial institutions, such as brokerage firms, will follow suit.

Vogt acknowledges there are gaps in enforcement. But he is encouraged that the anti-money laundering campaign is hurting felonious financiers where they notice it most: the bottom line.

Ten years ago, he said, criminals had to spend about 10 percent of their ill-gotten money just to launder the funds. Today, as launderers have been forced to become more sophisticated, the cost is closer to 20 percent of the total.

"You're taking a bite out of the proceeds. You're making it more difficult," Vogt said. "But to eliminate money laundering, you'd have to eliminate crime, which isn't likely."

- Information from Times files was used in this report.

Text for charts not provided for electronic library. Please see microfilm.

&

For Release: March 6, 2001

FTC Charges One of Nation's Largest Subprime Lenders with Abusive Lending Practices

Associates First Capital Corporation And Its Successors Citigroup Inc. And CitiFinancial Credit Company Named in Complaint

The Federal Trade Commission today filed a complaint in federal court charging Associates First Capital Corporation and Associates Corporation of North America (collectively, The Associates) with systematic and widespread abusive lending practices, commonly known as "predatory lending." The FTC alleges that The Associates violated the Federal Trade Commission Act through deceptive marketing practices that induced consumers to refinance existing debts into home loans with high interest rates, costs, and fees, and to purchase high-cost credit insurance. The FTC also charged The Associates with violating several other federal laws, including the Truth in Lending Act, Fair Credit Reporting Act, and Equal Credit Opportunity Act, and with using unfair tactics in collecting consumers' payments on its loans. In addition to seeking other relief, the FTC has asked the court to award redress to all borrowers who were injured as a result of the defendants' practices.

"The Associates engaged in widespread deceptive practices," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "They hid essential information from consumers, misrepresented loan terms, flipped loans, and packed optional fees to raise the costs of the loans. What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable - hard working homeowners who had to borrow to meet emergency needs and often had no other access to capital."

Associates First Capital is a Delaware corporation that was headquartered in Irving, Texas, and was the parent company of Associates Corporation of North America. In September 2000, Citigroup Inc., based in New York City, announced it would acquire The Associates for $31 billion and merge The Associates' operations into its own. At the time the merger was completed on November 30, 2000, The Associates was one of the nation's largest "subprime" lenders. In 1999, according to public corporate records, the total dollar amount of all outstanding loans in The Associates' U.S. consumer finance portfolio was $29.7 billion. In that year, The Associates serviced 480,000 home equity loans; in 1997 (the last year for which figures were available) the company also had nearly 3 million personal loans.

In addition to The Associates, the complaint also names as defendants Citigroup Inc. and CitiFinancial Credit Company, Citigroup's consumer finance arm, as successors to The Associates.

Subprime lending refers to the extension of loans to persons who are considered to be higher risk borrowers. The Associates, like other subprime lenders, charged its customers prices that were substantially higher than those available to borrowers in the prime market. This was reflected primarily in the higher interest rates and points charged to such customers. For example, The Associates charged as many as eight points on mortgage loans. (Each point equals 1 percent of the amount financed.)

THE ALLEGED LAW VIOLATIONS

Deceptive Savings Claims

According to the FTC's complaint, The Associates obtained its customers through a variety of means, including through direct mail offers that in some cases included "live checks," and the purchase of retail installment contracts from sellers of consumer goods. Once in The Associates' loan portfolio, customers were aggressively solicited to take out new loans and refinance their existing debts into a single debt consolidation loan, typically a home equity loan, a practice known as "flipping." The complaint alleges that The Associates' promotional materials and sales pitches stressed - in many cases, falsely - that debt consolidation loans would lower customers' monthly payments and save them money. The Associates trained its employees to tell consumers that there would be "no out-of-pocket fees" or "no up front out-of-pocket costs" with its loans, the complaint charges, when in fact its mortgage loans came with high points and closing costs.

Specifically, the complaint alleges that The Associates violated the Federal Trade Commission Act by falsely representing that:

Consumers would save money when consolidating existing debts into a home equity loan with The Associates, and the examples shown in The Associates' solicitations accurately illustrated the potential savings. In fact, according to the complaint, these comparisons did not take into account the loan fees and closing costs The Associates typically added to the consumer's loan principal. Further, the companies' comparisons did not reveal that for certain Associates loans, consumers would still owe the entire principal amount in a "balloon payment" at the end of the loan term.

Consumers could pay off their current debts (e.g., credit card and other debts) with a home equity loan for the same amount. In fact, The Associates' loans also came with substantial fees and costs and, in some cases, credit insurance premiums.

Credit Insurance "Packing"

The FTC complaint also charges that The Associates engaged in practices designed to induce borrowers to purchase, unknowingly, optional credit insurance products, a practice known as "packing." The Associates' employees, according to the complaint, would quote prospective borrowers a monthly payment amount that would include a package of optional credit insurance products. These insurance products were intended to cover the borrower's loan payments in various circumstances, such as death, accident, illness or loss of employment, and the premiums were added to the principal amount of the loan ("single-premium credit insurance"). The employees referred to these products as "total payment protection," if they mentioned them at all, and were trained (until at least mid-1998) to quote the monthly payment with the cost of the insurance automatically included. At the loan closings, according to the complaint, The Associates' employees rushed consumers through the process. If the consumer noticed that the credit insurance products were being added to the loan, The Associates' employees used various tactics to discourage them from removing the insurance, the complaint alleges.

Specifically, the complaint charges that The Associates engaged in the following deceptive practices in violation of the FTC Act with respect to credit insurance:

Misrepresenting that consumers could obtain "total payment protection," or insurance, on their loan without any additional cost. In fact, the insurance added hundreds or thousands of dollars to consumers' loan costs; Misrepresenting that credit insurance would provide full coverage on consumers' loans. In fact, in many instances, the insurance was issued for a term shorter than the loan term and would not provide full coverage on the loan; Failing to disclose (or disclose adequately), when quoting monthly payment amounts, other material terms of the offer, such as (a) that the monthly payment amount included credit insurance which was an additional cost added to the loan; (b) that the entire premium for the credit insurance was financed up front and the consumer paid additional points and interest on the loan as a result; (c) that the purchase of credit insurance was optional and not required to obtain the loan; and (d) the extent to which the insurance would not cover the full loan term or loan balance; and Misrepresenting that consumers could cancel credit insurance within a stated number of days (e.g., 30 days) of the loan closing without cost. In fact, according to the complaint, when consumers canceled credit insurance within the stated number of days, The Associates credited their accounts only for the insurance premium amount and failed to refund any portion of the financed points on the premium or the excess interest attributable to the insurance.

Unfair Debt Collection Practices

The FTC also charges that The Associates employed abusive and unfair tactics in collecting on their loans, including:

disclosing consumers' debts to third parties without the consumer's consent; calling consumers at their place of employment after being advised by the consumer that such calls were inconvenient or not permitted; and making repeated and continuous telephone calls to consumers with intent to annoy, abuse, or harass. Credit Statute Violations

In addition, the FTC charges the defendants with violating the Truth in Lending Act ("TILA"). The Associates provided certain borrowers with "Homeowner's Express Loans," which were offered pending the closing of a home equity loan. According to the complaint, the Homeowner's Express Loan and the subsequent home equity loan were, in reality, one transaction that The Associates "split" into two so as to provide consumers with immediate cash. (Immediate cash is not possible on home equity loans in most circumstances, in part because TILA provides consumers with a three-day right of rescission). The complaint alleges that The Associates violated TILA by failing to give Homeowner's Express Loan borrowers proper disclosures and disbursing loan funds to those consumers before the expiration of the rescission period. The complaint also alleges that the defendants violated TILA by failing in their advertisements to disclose clearly and conspicuously loan fees, balloon payments, and other information, and by failing to retain certain records of compliance.

Further, the complaint charges that The Associates violated the record keeping requirements of the Equal Credit Opportunity Act by failing to retain written records relating to consumers' loan applications, including the application for consumer credit and other written and recorded information used in evaluating the application.

Finally, the complaint charges that The Associates violated the Fair Credit Reporting Act by using or obtaining consumers' credit reports for impermissible purposes, i.e., to solicit consumers for new or additional loans beyond the loan for which the report was originally obtained.

The FTC has asked the court to prohibit the defendants from violating the FTC Act and other laws in the future in connection with offering and extending credit, and to award redress to all borrowers who were injured as a result of the defendants' practices.

The FTC has increased its enforcement activities to halt illegal lending practices engaged in by subprime lenders, and the matter announced today is the FTC's 15th case involving the subprime industry since 1998. Many of these cases have involved deceptive practices by small and large subprime lenders, or violations of the Home Ownership and Equity Protection Act (HOEPA). HOEPA provides special protections for consumers in certain non-purchase, high-cost loans secured by their homes. The Commission has also testified before Congress and federal and state agencies regarding predatory lending problems, and made recommendations regarding legislative and regulatory changes to strengthen consumer protections.

In addition, the Commission has implemented an aggressive consumer education program and has published a series of free publications specifically for homeowners and potential home buyers. "High-Rate, High-Fee Loans (Section 32 Mortgages)" alerts homeowners about their rights under HOEPA. Last January, the Commission published a new consumer alert about home-equity lending, "Shopping for a Home Equity Loan?" In January 1999, the Commission, along with ten other federal agencies, including the Federal Reserve Board, produced "Looking for the BEST Mortgage - Shop, Compare, Negotiate" to help consumers shop for home loans. In July 1999, the Commission partnered with AARP to produce "Need a Loan? Think Twice About Using Your Home as Collateral." Other available publications include: Home Equity Loans: The Three-Day Cancellation Rule, Home Equity Scams: Borrowers Beware! and Mortgage Discrimination.

The FTC filed its complaint in the U.S. District Court for the Northern District of Georgia, Atlanta Division, on March 6, 2001. The Commission vote authorizing staff to file the complaint was 5-0.

NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The case will be decided by the court.

Copies of the complaint are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form. The FTC enters Internet, telemarketing and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies worldwide.

MEDIA CONTACT:

Howard Shapiro

Office of Public Affairs

202-326-2176

STAFF CONTACT:

Joel Winston or Peggy Twohig

Bureau of Consumer Protection

202-326-3224

(Civil Action No.: 010CV-0606)

(FTC File No.: 972 3152)

(assoc3601.wpd)

Toll-Free Number

1-877-862-0886

Related Documents:

FTC v. Citigroup Inc., et al. (Northern District of Georgia, Atlanta Division).

Complaint [PDF 47K]

Exhibit A [PDF 609K]

Exhibit B [PDF 251K]

High-Rate, High-fee Loans (Section 32 Mortgages)

Home Equity Loans: The Three-Day Cancellation Rule

Home Equity Scams: Borrowers Beware

Looking for the Best Mortgage?

Mortgage Discrimination

Need a Loan? Think Twice About Using Your Home as Collateral

Shopping for a Home Equity Loan?

Previous Statement:

Prepared Statement of the Federal Trade Commission before the California State Assembly Committee on Banking and Finance on Predatory Lending Practices in the Home-Equity Lending Market

Text of the Statement

News Release

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