Playing the Money Game

By Alexander L. Taylor III

Questions about Citibank's profits from overseas branches

Has New York's Citicorp, the second largest bank holding company in the U.S., improperly diverted some $46 million in profits from foreign-currency transactions? Or was one of the biggest dealers in world money markets simply shifting funds between countries in generally accepted, legal ways in order to reduce the amount of taxes it paid? Bankers and federal officials were hotly debating such questions last week, after the Securities and Exchange Commission overruled its staff and decided not to bring any legal action against Citibank for questionable currency-trading transactions between 1973 and 1980.

In 1978, David Edwards, then 33, a former member of Citibank's international staff in Paris, walked into SEC headquarters in Washington with an extraordinary tale. He charged that Citibank had created an intricate system of special telex messages, false documents and secret sets of books to evade taxes on its European operations. The technique involved hiding profits from tradings in foreign currency by creating artificial transactions with Citibank's branch in Nassau, the Bahamas, where taxes are lower than in Europe. In one such deal, Edwards charged, a telex from the Paris branch of Citibank instructed the Nassau office to buy $6 million worth of French francs from the Paris branch at the rate of 4.7275 francs to the dollar. Then the telex instructed Nassau to sell the $6 million at the higher rate of 4.7375 francs per dollar. The transaction did not change Citibank's overall net financial position, but the Paris branch could record a lower profit on its books and thus pay lower taxes in France.

Edwards said that he became aware of the practice in 1975 and tried for three years to alert Citibank's management to the problem. One week after he brought his complaint to the bank's board of directors, in a letter in 1978, he was fired. Edwards subsequently filed a $14 million damage suit against Citibank, charging that he had been wrongfully dismissed, but he lost the case.

The Edwards claims put European bank regulators on the trail of Citibank, which had to pay $5.6 million in back taxes and $7.5 million in administrative fees to Switzerland and $550,000 in fines to France. But far from changing its procedures after Edwards made his allegations, the SEC investigators charge, Citibank merely altered its bookkeeping methods to make the practice harder to trace.

Despite the findings of its staff, however, the SEC decided in January not to take steps against Citibank. John M. Fedders, who eight months ago became the head of the SEC's enforcement division, concluded that the investigation had found "to a limited extent" that "the conduct in question was illegal." Nonetheless, the SEC put forth the somewhat extraordinary contention that since Citicorp had never told its stockholders that its senior management possessed "honesty and integrity," the corporation had no legal duty to inform the public of the questionable transactions. As Fedders reportedly reasoned in a staff report: "I do not subscribe to the theory that a company that violates tax and exchange control regulations is a bad corporation, and that disclosure of illegal conduct should be forced as a prophylactic measure." Angry SEC staff members apparently leaked their report to the New York Times.

Citibank denied that it had done anything illegal and accused the newspaper of ignoring information that had already cleared it of any wrongdoing. Citibank Chairman Walter Wriston, who was identified in the report as having approved the procedures, accused the Times of using McCarthyist methods against him. In December 1980, according to the bank's lawyers, the Comptroller of the Currency completely exonerated Citibank from charges of any illegal foreign-exchange transactions. The bank added that it made changes in its procedures nearly four years ago to clear up matters of misunderstanding or dispute. Concluded Hans Angermueller, chief legal officer at the bank: "We believe our practices and procedures were basically proper."

Major international banks and multinational corporations have set up branches in Nassau, Bermuda, the Cayman Islands and other low-tax banking centers as a way of lessening taxes. In corporate and financial circles these areas are known as "offshore profit centers." Money today can be switched around the world with the speed of a computer message, and financiers naturally want to declare their profits where they are taxed at a low rate. Said one New York City banking expert: "Surely it is not in the U.S. shareholders' interest that American companies pay the maximum amount of taxes on their overseas operations."

Citibank, which last year had revenues of $265 million from foreign-exchange transactions, has aggressively sought ways around national tax laws. Said a bank analyst: "Citibank was playing its cards a little too close to the chest, and it got caught." The leaked SEC staff report could spur further investigations by several foreign governments. Two congressional subcommittees have announced that they will be investigating the commission's handling of the Citicorp case.

The SEC decision to go against its staff was a clear indication of the agency's shift in policy enforcement under the Reagan Administration. The commission long cultivated an image as the "cop on the corner of Broad and Wall Streets." Under Stanley Sporkin, Fedders' aggressive predecessor as director of enforcement, the commission required companies to make public statements whenever they violated the law.

John S.R. Shad, the new Reagan-appointed SEC chairman and a former vice chairman of a Wall Street investment firm, has adopted a more limited role for the agency. Shad and Fedders see their primary job as policing the securities markets. Said Shad: "The SEC was using its power of disclosure to influence corporate decisions. There was concern after Watergate at what appeared to be the unbridled power of corporate management." But Shad wants to back away from enforcement that he believes is "clearly beyond the basic mandate of the commission." Although few will quarrel with his avowed goal of cutting back Government regulations, decisions like that in the Citicorp case can give the impression that the SEC has greatly relaxed the standards for corporate ethics. --By Alexander L. Taylor III. Reported by Jonathan Beaty/Washington and Frederick Ungeheuer/New York

With reporting by Jonathan Beaty, Frederick Ungeheuer

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