Dubious Money Transfers By Merrill Lynch Taiwan For Chen 's Family

Finance Asia: The news that Merrill Lynch may have been involved in possible money laundering by members of the family of Taiwan’s former president, Chen Shuibian, has raised questions about the bank’s internal risk controls. Merrill Lynch has declined to comment on any aspect of this article, apart from to say that “as is our standard policy, we are cooperating with the authorities”.

The facts of the case, as they have been reported by opposition party legislator Hung Hsiuchu and the press in Taiwan, can be summed up thus: former president Chen Shuibian's daughter-in-law Huang Jui-Ching reportedly opened two Merrill Lynch bank accounts in Switzerland (at Merrill Lynch Bank Suisse AG) in February 2007, and remitted millions of dollars from an anonymous Credit Suisse Singapore account in February and March that year into two separate accounts at Merrill Lynch in Switzerland. First there were transfers of US$21 million and US$140,000 respectively.

A Cayman Islands account was set up three months later, and Huang transferred all the funds held in her personal name to this company. Merrill Lynch set up the Cayman Islands company on behalf of Huang, which is owned by Huang with power of attorney granted to Chen's son, Chen Chihchung. It has also been reported that an additional US$10 million was wired from RBS Coutts to the Cayman company account at Merrill Lynch in Switzerland. Credit Suisse declined to comment.

A spokesperson for RBS Coutts, says: "At this point in time we are aware that there has been numerous media reports and speculation on this issue. However our policy is not to comment on matters related to any individual on the grounds of client confidentiality." The Swiss authorities earlier this year froze the assets in all the accounts and informed the Taiwan government of their investigation. The Taiwan authorities made this public earlier this month.

Conversations with private-banking professionals in compliance and money laundering as well as relationship managers lead to the conclusion that something must have been awry with Merrill’s risk control system for such a situation to occur. Systems at all leading investment banks are set up with triggers that aim to red flag transactions which are potentially unethical or illegal. These triggers cover the identifying of prospective clients as part of the KYC (know your customer) process; the ‘source of wealth’; and how the client will ‘fund the account’ as bankers say, and why any large sums of money are transferred. All these checks are meant to ensure investment banks are protected from the type of situation Merrill now finds itself in.

In particular, private bankers are trained to watch out for so-called ‘politically-exposed persons’ or PEPs. Any person in a prominent political role (or connected to such a person) normally triggers heightened due diligence.

“Typically, it’s very hard for an Asian PEP, especially (given the corruption in many parts of the region), to open an account. They have to go through a careful and detailed vetting process,” says one private banker, adding that the client profile for a PEP can be up to 40 pages long, twice the length of a normal private banking client application. “As soon as a PEP said he or she wanted to open an account, the bank checks whether he has enough funds to qualify as a client for their private banking arm. They would, or should, have then checked how that person got that money – whether it was inherited or whether they were corporate dividends or the proceeds of a sale or whatever.

The basic principle is to identify any risks at the outset and then monitor how that risk evolves,” says the head of anti-money laundering at a major bank. “If a bank allows large sums of money to enter their banking systems without checking on its origin, you have to ask: how good was the risk analysis at the outset?” he adds. In other words, if Huang said she had large amounts of money in a Credit Suisse account, Merrill Lynch would have checked how she obtained that money, especially given it was transferred from a third party account to Merrill Lynch and especially for an obviously politically exposed person.

Based on local newspaper reports, the sums are huge relative to the wealth of the Chen family (Chen himself has always been in public service, first as the mayor of Taipei and then as president) and especially large relative to Huang herself, who is unemployed, and whose husband (Chen’s son) is seeking to go to law school in the US. Private bankers say that the fact that the funds were being parked offshore should have raised red flags. “You have to ask why the money was being sent to Switzerland, which historically has been a haven for money laundering because of its banking secrecy laws. You then have to ask why that money was transferred to a Cayman Islands company account,” says one banker.

A significant red flag would have been the transfer to the corporate account from the personal account, even within the same bank. “Any transfer to a third party is treated very carefully partly because of the fear it could be funding terrorist activity, or fraud, or money laundering, or – when it comes to PEPs – embezzlement of state funds. Even though the owners of the company were the same as those who had a personal account with Merrill, the key thing is that it is a different legal entity. So that should also have signalled the need for increased due diligence,” says the head of anti-money laundering quoted above. In particular, the fact that the Cayman company in question, Bouchon, was set up as a nominee company by Merrill Lynch Bank and Trust Company (Cayman) is suspicious. Such a structure hides the shareholders’ names and should have triggered yet another red flag. (Fairfield Nominees and Fiduciary Services, companies owned by Merrill Lynch, are acting as nominee shareholder and nominee director respectively.)

A simple check with the Cayman registrar of companies shows that Merrill Lynch Bank and Trust are also the registered office for Bouchon – the entity which does the administration, record keeping and other corporate services for Bouchon, as well as providing a mailing address. According to one lawyer with 10 years experience in the Caymans, such a structure is unusual. “Nominee ownership of a Cayman company, intended to hide the actual beneficial owners is very rare. I never saw a single example of this in 10 years working as a Cayman lawyer. The anti-money laundering laws in the Cayman Islands are amongst the toughest in the world. It means that we wouldn't touch such a structure unless there were compelling business reasons to do so, and I can't think of a legitimate reason to hide this much.” This makes Merrill Lynch’s decision to go ahead with the structure surprising. The structure could have been an integral part of any money laundering operation. That’s because the names of the ultimate beneficial owners under a nominee structure are withheld. “Setting up a Cayman Islands entity means that in all public documents, it will list Merrill Lynch’s holding companies as the shareholder and director thereby protecting the identity of the true owners of the company. It also gives the true owners an air of legitimacy since Merrill is acting as registered shareholder and director,” says one private banker. “Given that the documents of a Cayman Islands company are not publicly disclosed, you have to ask why such a structure was required,” he says.

At Coutts RBS the account was in the name of Galahad Management. No clarity is available on who the registered shareholders of Galahad were. “It seems as if the plan was to consolidate all the funds held in different accounts under the Chen family and its associates, and to consolidate them in one, supposedly safe, place, namely Bouchon – a company on paper controlled by Merrill Lynch but indirectly under the control of the Chen family,” comments a banker.

The Cayman lawyer points out that finding out who really controls the company is very difficult since “shareholder registers of Cayman Islands’ companies are not publicly available – unless you are a director of the company, you have no right to see who is a shareholder. Even shareholders don't have the right to see who the other shareholders are,” he says. What is disclosed is the registered office, which in Bouchon’s case is Merrill Lynch Bank and Trust – a globally respected brand, likely to give comfort to anybody dealing with Bouchon.

Sources close to Merrill say that the bank tipped off the Swiss authorities after the bank got suspicious. A spokeswoman for the Swiss Federal Prosecutor’s office in Bern told FinanceAsia it is not commenting on the matter. So why the tip off now? We can only speculate, but perhaps they may have decided to come clean after seeing what was happening to UBS in the US, where the Swiss bank is embroiled in a massive tax evasion case. In any case, the system’s triggers are meant to be in place to prevent such situations from arising. Something clearly went awry. One possibility is that a senior person at Merrill Lynch overturned any concerns at the compliance department. “It’s the last thing compliance people want to see happen, but unfortunately, it does occur. Money talks,” says the money laundering expert.

p/s photos: Vivian Hsu