Global Policy Forum

Civil, Criminal Penalties Would Total $41 Million

By Terence O'Hara

Riggs Bank yesterday admitted it was criminally liable for failing to take adequate measures to prevent potential money laundering by former Chilean dictator Augusto Pinochet and officials of Equatorial Guinea. Riggs pleaded guilty to one felony count of failing to file suspicious activity reports and agreed to a fine of $16 million. The fine, if approved by U.S. District Judge Ricardo M. Urbina on March 29, will bring to $41 million the total civil and criminal penalties paid by the 160-year-old bank to resolve anti-money-laundering deficiencies in its former embassy and international operations.

Urbina yesterday questioned both Riggs and prosecutors about the size of the fine and whether it was truly punitive. "What I'm trying to get a feel for is, how much is $16 million?" he asked. "Is it just a business expense for the bank?" Lawyers for both sides said the fine was far more than any benefit Riggs derived from doing business with Pinochet and Equatorial Guinea. Department of Justice officials yesterday said that while the size of the criminal fine is small compared with other recent fines involving corporate wrongdoing -- Alabama's AmSouth Bancorp. was assessed a $40 million fine in a similar criminal proceeding last year -- it was large for a company as small as Riggs, which is one-tenth the size of AmSouth. The amount is more than the bank's combined earnings of $14 million for 2002 and 2003.

Sources familiar with plea negotiations between Riggs and the Department of Justice said a previous $25 million regulatory fine paid by Riggs, the cooperation of the bank in the investigation and a concern by bank regulators that a fine not be so large as to put Riggs into serious financial trouble all factored into the size of the criminal fine. The sources agreed to speak only on the condition that they not be named because of the continuing investigations. While the guilty plea clears a legal cloud over Riggs and its holding company and is expected to allow it to be sold this spring, prosecutions against individuals are expected. "This is an active and ongoing investigation," said Kenneth L. Wainstein, U.S. attorney for the District. The bank has agreed to cooperate with investigators.

"Riggs has accepted responsibility for certain past actions," said Mark N. Hendrix, a company spokesman. "Importantly, the agreement concludes all investigations of Riggs Bank and its affiliates into its embassy banking and international private banking business, both of which we discontinued last year." The fine will be paid by the company and its shareholders from the bank's cash reserves at no cost to depositors. Despite its criminal troubles, Riggs is considered a well-capitalized institution by regulatory standards.

Yesterday's filings included no new details of the bank's wrongdoing, much of which already has been laid out in a report by the Senate permanent subcommittee on investigations and an internal report by the bank. Those reports found that the bank had helped Pinochet hide millions of dollars from international investigators and bank regulators. They also detailed failures by the bank to adequately monitor millions of dollars in suspicious transactions involved the ruling family of Equatorial Guinea and that country's oil revenue. Not mentioned in yesterday's filing were millions of dollars in transactions by diplomats of Saudi Arabia, including Prince Bandar bin Sultan, the Saudi ambassador to the United States. In its May enforcement against Riggs, the Office of the Comptroller of the Currency specifically cited Riggs's failure to file suspicious activity reports for large-denomination withdrawals of cash by Bandar and others. However, said sources familiar with the criminal investigation, unlike the Pinochet and Equatorial Guinea transactions, prosecutors found no evidence that the Saudi withdrawals were criminal in nature, even if they should have been reported.

Court papers detailed a series of transactions going back to 1994 with Pinochet and Equatorial Guinea that should have triggered the filing of suspicious activity reports. Riggs, which pleaded guilty to one felony count of failing to file such reports, ultimately filed them, but in some cases only years after the conduct occurred. The filing described efforts by Riggs to disguise Pinochet's accounts from regulatory scrutiny and enable the former Chilean general to move his money through Riggs's internal accounts so that his funds could not be traced. The regime of Pinochet, who took power in a quick and bloody 1973 coup and was dictator until 1990, has been widely accused of murdering political dissidents in Chile and abroad. Pinochet is under house arrest on charges of murder, and his finances at Riggs are the subject of a separate criminal investigation in Chile.

Equatorial Guinea became a Riggs client in 1995, soon after billions of dollars in oil reserves were discovered off its coast. Its regime, headed by President Teodoro Obiang Nguema, is considered one of the most corrupt and repressive in West Africa. Ultimately, Equatorial Guinea became Riggs's biggest depositor, with accounts worth as much as $700 million at their peak. Court papers noted that Riggs and its former manager of African accounts, Simon P. Kareri, failed to file reports on numerous suspicious transactions involving Obiang, his family and other government officials. Kareri is the subject of a criminal investigation by Justice, according to court papers. Riggs closed its Equatorial Guinea accounts last year, shortly before getting out of the rest of its embassy and international businesses.

Mark J. Hulkower, an attorney with Steptoe & Johnson LLP who negotiated the plea agreement with the U.S. attorney, said Riggs "deeply regrets" its conduct. The plea agreement is a crucial hurdle in allowing Riggs to complete its $766 million merger agreement with PNC Financial Services Group Inc. of Pittsburgh. PNC and Riggs agreed to the merger, in which Riggs would become part of PNC, in July, when the criminal investigation was just getting underway. The fine, as well as millions of dollars in legal fees, will probably mean PNC will seek to renegotiate the price downward, analysts said yesterday. However, sources familiar with the merger said at least one other major bank remains interested in buying Riggs and could make its own offer. In addition, Riggs's board wouldn't be legally bound to agree to a lower price and might even be reluctant to, given that other potential acquirers are waiting, said sources familiar with the deal.

Both Riggs and PNC officials said they expect to make an announcement about the status of the merger late next week. "We're probably going to see a deal completed," said Gerard S. Cassidy, who follows banks for RBC Capital Markets. "I'd be very surprised if PNC walked away from the transaction. But there's also a very strong likelihood that the deal would be re-priced." PNC agreed in July to pay about $24 a share in stock and cash for Riggs. Riggs stock rose 32 cents yesterday to close at $22.44.

"We are reviewing and evaluating the Department of Justice agreement," said Brian E. Goerke, a PNC spokesman. "We anticipate making a statement in early February with respect to our merger agreement with Riggs. Beyond that, we have no comment at this time." There was no comment on the plea from senior executives at Riggs, including Robert L. Allbritton, chief executive of Riggs National Corp., whose family controls 40 percent of Riggs. Lawrence I. Hebert, chief executive of Riggs Bank since 2001, was the sole operating executive present at the hour-long hearing in Urbina's courtroom yesterday when the plea was entered. He said he was pleased with the outcome but declined to answer further questions and immediately left the courtroom when the hearing adjourned.