By Lucy Komisar
April 10, 2007
The New York Times reports today that Charles Prince, CEO of Citigroup, is planning to cut the corporation‘s compliance staff. Reporter Eric Dash says it‘s “to keep the bank from getting bogged down” because “the compliance overhang has made it difficult to be competitive” and “unnecessarily slowed the company down.”
Translation: the other banks are laundering profits or running scams that help their clients cheat tax authorities and investors, and they make good money at it. Why shouldn‘t we do so without running the risk of internal whistleblowers?
Dash noted that Citigroup had been “beefing up its compliance staff after several scandals. Citigroup, like other banks, was tarred by its dealings with Enron and WorldCom and by investigations into analysts‘ conflicts during the Internet boom.”
The NY Times has apparently forgotten that “tarred by its dealings” really means that Citigroup set up offshore shell companies that helped Enron cook the books. Citing details is so messy.
The use of shell companies to disguise financial operations was –is — standard for Citigroup. In the Enron case, Citigroup’s lawyers, Milbank Tweed, worked with the Cayman Islands agent Maples and Calder to set up the shell company, Delta Corp, in 1993 to do commodity swap transactions that involved “prepays” that were fake loans. No commodities ever changed hands between Enron and Delta.
Delta was owned by another shell, a so-called charitable trust, Grand Cayman Commodities Corporation. Testifying at a hearing organized by Sen. Carl Levin (shown here), 
Citigroup official Richard Caplan, explained, Citibank forms special purpose entities to do lots of structure finance transactions, much as other institutions in the market form special purpose entities. He said, We do this all the time. This is standard operating procedure in the structured finance industry.
Levin asked, You’re forming an entity. The operations of that entity are hidden. There’s linkage between the transactions. Why are you forming this kind of entity in the Cayman Islands, a secrecy jurisdiction? Why do you hesitate to say that you’ll give us authority to try to pierce that secrecy to find out who owns that trust which holds the stock in Delta? That’s troubling, and I want to know your answers. Why do you do this in secrecy jurisdictions? Why not open, do it in daylight?
Caplan replied, I think if you would examine other special purpose entities used by Citibank and other banks and other corporations in receivables financings or mortgage financings, you will find that they have very similar characteristics to Delta.
Enron proposed to Citigroup to have its brokerage arm, Salomon Smith Barney, sell its debt to public investors. That was done through still another shell company called Yosemite, a Delaware business trust, which sold notes, for which the underlining structured financing was a phony prepay. Enron made it clear to Citigroup it did not wish any explanation of the assets of the trust to investors or rating agencies. And Citigroup complied. They laid off $2.4 billion, and Enron used the proceeds to repay Citigroup.
The deals by Citigroup enabled Enron to keep $4.8 billion of debt from 14 transactions with Citigroup off its balance sheet for six years.
And Citigroup made nice commissions. Can‘t you see why having too many compliance officers around to sniff out such scams is so unnecessary? And as Richard Caplan might confirm, so “uncompetitive.”