Dictators' Savings & Loan

By Adam Zagorin/Washington

Citigroup's specialized private banking division, which has 40,000 clients, each holding more than $3 million in assets, has produced a wealth of headaches in recent years. And this week's migraine could be especially severe for John Reed, Citigroup's co-chairman. He's being hauled before the Senate's Permanent Subcommittee on Investigations to explain the bank's oversight of accounts controlled by a gallery of international reprobates and dictators. All kept tidy sums in Citi vaults; some of it was rightfully theirs.

A report prepared by subcommittee Democrats and obtained by TIME says the private bank repeatedly broke many of its own rules in handling the cash of these depositors, and was not too particular in determining whether funds coming in were legally obtained. Says Senator Carl Levin: "We cannot condemn corruption overseas and then tolerate U.S. banks' making fortunes managing that same money."

Yet Reed did not shake up the private bank, say investigators, until after being warned by a Citigroup board member. Says Reed in a statement prepared to deliver to Senators this week: "Changes did not occur overnight, and in retrospect, one could take issue with whether they happened fast enough."

They didn't happen fast enough to prevent Ali Asif Zardari from dumping millions of dollars into Citi accounts. The husband of Benazir Bhutto, a former Prime Minister of Pakistan, Zardari faced corruption allegations. In fact, the report says, Reed was advised by bank staff to "stay away from him." But a year later, Citi opened three accounts for him. According to the report, when Reed finally learned of the Zardari accounts, Reed "thought the account officer must have been 'an idiot.'"

Some of Citi's other private clients included two sons of Nigeria's recently deceased dictator, General Sani Abacha. Shortly after the general's demise last year, his wife was stopped as she tried to leave the country with 35 or so suitcases bulging with foreign currency. According to the report, with Abacha gone and Nigeria searching for money he allegedly stole, his sons urgently began to shift $39 million among various Citi accounts--with no opposition from the bank.

Then there was Omar Bongo, another former client, who has been the President of the oil-rich West African nation of Gabon since 1967. When Citi belatedly got around to working up his customer profile, officials were at a loss to explain the origin of more than $100 million held in Bongo's accounts. Then a helpful Bongo subordinate told the bank that the President regularly receives 8.5% of the country's budget as an allowance. Bank officials accepted this explanation, although no such provision existed in Gabon's budget.

Citi is now implementing what is probably one of the most aggressive anti-money-laundering programs in the U.S. banking industry. But its past missteps could lead to a tightening of money-laundering statutes on Capitol Hill. The company is taking no chances and has hired Boyden Gray, White House counsel in the Bush Administration, to keep legislators from getting too busy. Gray sent a letter to the Senate subcommittee arguing that it lacked jurisdiction to investigate. A second letter pleaded that Reed should not have to testify. Both requests were quickly denied.

--By Adam Zagorin/Washington