Bits Blog: Snowden Urges Tech Industry to Protect Customers

Michael Buckner/Getty Images for SXSW

AUSTIN, Tex. — Edward J. Snowden wants the technology industry to get serious about protecting the privacy of its users and customers.

"When we think about what is happening at the N.S.A. for the last decade, the result has been an adversarial Internet," Mr. Snowden told a crowd of developers and entrepreneurs at the South by Southwest conference here on Monday, speaking by videoconference.

"They are setting fire to the future of the Internet," he added. "You guys are all the firefighters. We need you to help us fix this."

Mr. Snowden, the former National Security Agency contractor who leaked classified documents that revealed a vast network of government surveillance, told the audience that they "can enforce our rights for technical standards."

Mr. Snowden said he chose the conference, known as SXSW, to speak directly to people with the skills to make mass surveillance significantly more expensive for government agencies — if not impossible. For the past decade, Mr. Snowden said, the N.S.A. had been given free rein to make the Internet less secure by engaging in large-scale sweeps of data.

Mr. Snowden fled the United States last summer and is living at an undisclosed location in Russia, where he has been granted temporary asylum. He faces charges in the United States of violating the Espionage Act.

Mr. Snowden appeared remotely at the conference with Christopher Soghoian, the principal technologist of the American Civil Liberties Union, and Ben Wizner, director of the A.C.L.U.'s Speech, Privacy and Technology Project and Mr. Snowden's legal adviser, both of whom were on site in Austin. The event was a rare live interview for Mr. Snowden, conducted by Mr. Wizner.

Using technology to mask his whereabouts, Mr. Snowden appeared through a Google Plus videoconference — the irony of which was not lost on Mr. Snowden or others, who joked about the fact that Google was involved in many of Mr. Snowden's revelations.

Appearing before a green screen that had been programmed to display the American Constitution, Mr. Snowden addressed a rapt audience that often broke into applause and cheers. Hundreds packed into an exhibition hall to hear him speak and those who could not find seats stood along the wall or sat on the floor.

At various points during the event, the Internet access in the convention center buckled under the burden of all the people trying to use their devices to tweet or go online. And at times, Mr. Snowden's connection dropped, in part because of the anonymity software he used to mask his location.

Mr. Snowden said he hoped to raise a call to arms to developers, cryptographers and privacy activists to build better tools to protect the privacy of technology users. The goal, he said, was that encryption would ultimately be considered as a necessary, basic protection, and not something easily dismissed as an "arcane black art."

Ultimately, Mr. Snowden said, that will "allow us to reclaim the open and trusted Internet."

He was referring to the many digital encryption protections that are cheap and widely available, but exceedingly difficult for people to use properly.

Mr. Snowden noted that encryption services like Pretty Good Privacy, or PGP software, and anonymity services, like Tor, are available, but are not as easy to use as Google's Gmail service or Chrome browser.

He also praised services like Open WhisperSystems, a suite of applications that aims to make secure communications tools usable, and commonly use.

Ultimately, the tech industry can help fix the problem of security, Mr. Soghoian said. "Most regular people are not going to download some obscure security app," he said. "They're going to use the tools they already have," like Google, Facebook and Skype.

Mr. Snowden repeatedly emphasized that he didn't want to block government agencies from doing their job to protect citizens, but was instead concerned about unwarranted surveillance. He said that if the American government and its technology industry are not held accountable for unwarranted oversight, foreign companies and agencies might feel free to adopt similar mass surveillance tactics and policies.

When companies collect data, he said, they should only "hold it for as long as necessary."

Mr. Snowden's comments Monday echoed his testimony to members of the European Parliament, released Friday, in which he said targeted surveillance was acceptable.

At one point here in Austin, Mr. Snowden answered a question sent via Twitter about whether any data was ever truly safe, from a malicious hacker or an agency like the N.S.A.

"Let's put it this way," he said with a bit of a laugh. "The United States government has assembled a massive investigation team into me personally, into my work with journalists and they still have no idea you know what documents were provided to the journalists, what they have, what they don't have, because encryption works."

Conference attendees applauded and cheered as Mr. Snowden spoke, but the event also drew criticism. Some questioned the format; half the time was devoted to Mr. Soghoian's comments.

Leading up to the event, Representative Mike Pompeo, Republican of Kansas, wrote a letter to SXSW organizers calling for them to cancel the event altogether.

SXSW's conference organizers have made privacy and surveillance a cornerstone of the technology portion of the event. Over the weekend, Julian Assange, founder of WikiLeaks, also gave a talk by videoconference.

Mr. Snowden, who was dressed sharply in a white dress shirt and gray blazer for his talk, said he had no regrets about his actions, even though he now faces prosecution and is thought by many to be a traitor, or worse.

"I took an oath to support and defend the Constitution and it was violated on a massive scale," he said.

Jenna Wortham reported from Austin, Tex., and Nicole Perlroth from San Francisco.

A version of this article appears in print on 03/11/2014, on page B1 of the NewYork edition with the headline: Snowden Tries to Rally Tech Conference to Buttress Privacy Shields.

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Weekend Kitchen

Robert Stolarik for The New York Times

At Alder in the East Village, Kevin Denton, the beverage director, makes three cocktails in two sizes, regular and "short."

Mini-cocktails, known by some as shorts, are offered at a few bars in the East Village.

12.07 | 0 komentar | Read More

 </span> The Men of Atalissa

Editors' Choice - Times Documentaries

By Kassie Bracken and John Woo March 8th, 2014

For decades, a group of men with intellectual disabilities seemed happy living in a small Iowa town. Then their neighbors found out the truth. This film is being shown in collaboration with POV.org.

12.07 | 0 komentar | Read More

DealBook: Former Leaders of Once-Mighty Law Firm Indicted

Updated, 9:07 p.m. | Several former leaders of the once-high-flying law firm Dewey & LeBoeuf apparently violated a cardinal rule that lawyers always tell their clients: Don't put anything incriminating into an email.

Yet four men, who were charged by New York prosecutors on Thursday with orchestrating a nearly four-year scheme to manipulate the firm's books to keep it afloat during the financial crisis, talked openly in emails about "fake income," "accounting tricks" and their ability to fool the firm's "clueless auditor," the prosecutors said.

The messages were included in a 106-count indictment against Steven Davis, Dewey's former chairman; Stephen DiCarmine, the firm's former executive director; Joel Sanders, the former chief financial officer; and Zachary Warren, a former client relations manager. They were charged with larceny and securities fraud. One of the men even used the phrase "cooking the books" to describe what they were doing to mislead the firm's lenders and creditors in setting the stage for a $150 million debt offering that was supposed to solve the firm's financial woes, according to the messages.

It is the kind of rogue language that one might expect to find in emails unearthed during a corporate fraud case from the Enron era, but not at a law firm that carried the name of Thomas Dewey, the former governor of New York, who began his legal career by prosecuting organized crime. The indictment is an unusual coda to the collapse of a firm that was created by the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, and that filed for bankruptcy in May 2012.

"Those at the top of the firm directed employees to hide the firm's true financial condition from creditors, investors, auditors and even partners of the firm," the Manhattan district attorney, Cyrus R. Vance Jr., said at a news conference announcing the indictment.

The case is also surprising in that it stems partly from a revolt within the firm itself. Lawyers at Dewey ousted Mr. Davis, an architect of the merger, as chairman just as the firm was preparing to file for bankruptcy. Soon afterward, several of them went to Mr. Vance, urging him to investigate Mr. Davis and his administrative team.

Through their lawyers, all of the men denied the charges.

The indictment paints a portrait of a law firm being run like a criminal enterprise. Mr. Vance said his office had already secured guilty pleas from seven other people who once worked for Dewey. A person briefed on the investigation said several were cooperating with the two-year-old investigation.

"I can't say whether this is the Enron" of the legal world, Mr. Vance said. "Clearly this is the largest law firm bankruptcy that we know of in history."

At its peak, the combined firm had 26 offices around the globe and employed more than 1,300 people. The $550 million in claims against the firm's estate made it the largest bankruptcy filing by a law firm on record.

The bankruptcy revealed that while Dewey was a brand-name operation, it failed to generate sufficient revenue to pay the big contracts of its star lawyers and meet its expensive overhead. The firm struggled to keep up with loan payments during the worst of the financial crisis.

But the indictment and a parallel civil complaint filed by the Securities and Exchange Commission surprised even some who had worked at Dewey.

"If the allegations are true, then once again we see a cover-up giving rise to a crime, when the same people had the option of speaking up and being heroes for helping to solve a sympathetic debt problem at the height of the Great Recession," said Martin Bienenstock, a former Dewey lawyer and now chairman of the bankruptcy and restructuring practice at Proskauer Rose.

Roy D. Simon, a professor at the Hofstra University School of Law, who specializes in legal ethics, said it was ironic that far too many lawyers at Dewey were "uncurious about the management of their firm," until it was too late.

Prosecutors contend that the accounting games at Dewey began in November 2008, not long after the merger was completed, and continued until March 7, 2012, a little before Dewey filed for bankruptcy two months later. The firm found it could not meet provisions in bank loans that required it to meet certain cash-flow projections. To make it appear as though Dewey was meeting those conditions, the top executives schemed to make a series of fraudulent accounting entries that either increased revenue, decreased expenses or appeared to rein in distribution payments to partners, prosecutors said.

The authorities said the accounting scheme was laid out in a document called the "Master Plan."

Mr. Davis and his team had hoped that the firm's revenue would eventually increase as the economy recovered. But by the end of 2009, Dewey owed its bank lenders about $206 million, needed to make payments totaling $240 million to its partners, yet had just $119 million in cash.

The S.E.C. case centers on a 2010 private debt offering in which Dewey raised $150 million from 13 insurers and an additional $100 million from a line of credit placed with several large banks. The firm used the offering to refinance its existing credit lines and buy itself more time.

But the S.E.C. and prosecutors contend the offering document for the debt deal misrepresented the firm's financial situation.

The S.E.C. complaint charged Mr. Davis, Mr. DiCarmine and Mr. Sanders with making material misrepresentations. The commission charged two other former top executives — Frank Canellas, the director of finance, and Thomas Mullikin, the controller. Mr. Warren was not named as a defendant in the S.E.C. suit.

If the case goes to trial, defense lawyers are expected to attack the prosecution's reliance on emails. Legal experts said that email evidence was strongest when coupled with testimony from a cooperating witness who can bolster what is in writing.

That said, the emails in the indictment and S.E.C. complaint appear powerful on their face.

In an exchange in December 2008 among Mr. Davis, Mr. Sanders and Mr. DiCarmine, the men discuss the need to come up with $50 million to meet a loan provision. Mr. Davis responds "ugh" in one message. The answer to problems, the indictment suggests, was to devise the "Master Plan" for fudging the firm's accounting entries.

In another exchange in June 2009, Mr. Sanders and Mr. Canellas joke about the law firm's outside auditor, who was fired by his company for reasons unrelated to his auditing assignments. Mr. Sanders remarks to Mr. Canellas, "Can you find another clueless auditor for next year?" Mr. Canellas responded: "That's the plan. Worked perfect this year."

Even agents with the Federal Bureau of Investigation, which worked with Mr. Vance's office, were surprised by the brazenness with which Mr. Davis and his team discussed their plan in emails, a person briefed on the investigation said.

Elkan Abramowitz, the lawyer for Mr. Davis, 60, said that his client acted in "good faith in an effort to make the firm a success" and that the charges were "simply wrong."

Edward Little, the lawyer for Mr. Sanders, 55, said that his client broke no laws and that "despite what the district attorney's office apparently believes, the public does not need a scapegoat every time a financial disaster is reported in the media."

Austin Campriello, the lawyer for Mr. DiCarmine, 57, said that his client "did not commit any crimes" and that the district attorney's office "spins some inartful emails into crimes."

Of the indictments, Mr. Warren's was most surprising, partly because he is just 29 and was a rather low-level employee. Steven Hyman, the lawyer for Mr. Warren, said that Dewey was his client's first job after college and that the charges were a "travesty" because "he did nothing wrong."

William Alden and Floyd Norris contributed reporting

New York v. Davis, et al

S.E.C. v. Davis, et al

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DealBook: Bank of England Suspends Worker as Currency Inquiry Expands

Updated, 8:00 p.m. | The Bank of England said on Wednesday that it had suspended an employee as it escalated a review into whether bank officials had known about or condoned potential manipulation of the currency markets.

The British central bank also released minutes of meetings between officials and industry representatives that indicated that there were concerns about possible manipulation for rates like the 4 p.m. fix for the pound to the United States dollar as early as July 2006.

As regulators in Britain, the United States and other countries investigate whether traders at the world's largest banks colluded to manipulate foreign exchange rates, questions are being raised about the Bank of England's role as a watchdog. Two years ago, the Bank of England and other regulators were criticized by British lawmakers for failing to recognize the manipulation of the London interbank offer rate, or Libor, and taking steps to stop it.

"Alarm bells should be ringing when a central bank suspends staff in connection with market rigging," said Simon Morris, a partner at the law firm CMS Cameron McKenna in London. "This is serious because the whole basis of regulation is based on trust and integrity."

On Wednesday, the bank said that its oversight committee had begun an investigation to determine whether bank officials were involved in or knew about attempted or actual manipulation of the currency markets or any other improper behavior in the foreign exchange markets.

The law firm Travers Smith has been appointed legal counsel to the committee and will prepare a report on the investigation. The report "will be published in due course," the central bank said.

"The Bank of England does not condone any form of market manipulation in any context whatsoever," the bank said in a statement. "The bank has today reiterated its guidance to staff regarding management of records and escalation of important information."

The central bank said an extensive internal review of documents, emails and other records that began in October had found no evidence that Bank of England employees colluded to manipulate the currency market or share confidential client information.

"The bank requires its staff to follow rigorous internal control processes and has today suspended a member of staff, pending investigation by the bank into compliance with those processes," the bank said.

The employee was not identified, and the Bank of England declined to provide more details about the employee's role.

The central bank said it had examined about 15,000 emails, 21,000 chat room records and more than 40 hours of recorded telephone calls as part of its internal review.

"No decision has been taken on disciplinary action against any member of bank staff," it said.

The Bank of England has faced questions in recent months about communications between its staff members and traders who were part of an industry subcommittee that discussed issues affecting the currency markets.

In the minutes of a July 2006 subcommittee meeting that were released on Wednesday, "It was noted that there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix."

The subcommittee, which was made up of bank officials, industry leaders and trade group members, met three or four times a year to discuss developments in the markets.

Several traders who served on the subcommittee are among more than a dozen currency traders who have been placed on leave or fired as a result of internal investigations at several large participants in the foreign exchange markets, including Citigroup and UBS.

The last time the subcommittee met was in February 2013.

The $5 trillion-a-day currency markets are lightly regulated and have been seen as difficult to manipulate.

Many of the world's largest banks, including JPMorgan Chase, Barclays and the Royal Bank of Scotland, have acknowledged that they are facing regulatory inquiries into potential manipulation of the currency markets. Deutsche Bank, the largest player in the foreign exchange market, with a share of about 15.2 percent, and Citigroup have both fired employees as a result of their own investigations into the matter.

None of the banks and none of the traders who have been suspended or fired have been accused of wrongdoing.

Before last year, the Bank of England had no formal oversight role for the currency trading markets. It only provided input into voluntary guidelines on conduct adopted by the industry.

Instead, the companies participating in the foreign exchange markets and those companies' conduct were regulated by Britain's Financial Services Authority, which was split in two last year.

One of its successors, the Prudential Regulation Authority, falls under the Bank of England and oversees the safety and security of banks, which participate in the currency markets.

The other successor, the Financial Conduct Authority, now regulates the industry's conduct and is undertaking a separate investigation into the potential manipulation.

Martin Wheatley, the chief executive of the Financial Conduct Authority, has said the currency manipulation accusations are "every bit as bad as they have been with Libor."

Mark J. Carney, governor of the Bank of England, is expected to appear before the Treasury Select Committee next week, and British lawmakers have vowed to ask him about the currency trading investigation.

 

12.08 | 0 komentar | Read More

DealBook: A Standoff of Lawyers Veils Madoff’s Ties to JPMorgan Chase

It remains one of Wall Street's most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff's Ponzi scheme?

A newly obtained government document explains why — five years after Mr. Madoff's arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded.

The document, obtained through a Freedom of Information Act request, reveals a behind-the-scenes dispute that tested the limits of JPMorgan's legal rights and raised alarming yet unsubstantiated accusations of perjury at the bank. More broadly, the document highlights the legal hurdles federal authorities can face when investigating a Wall Street giant.

That dispute, which positioned JPMorgan against the government and ultimately one government agency against another, traced to the point after Mr. Madoff's arrest in December 2008. Around that time, JPMorgan's lawyers interviewed dozens of bank employees who potentially crossed paths with Mr. Madoff's company.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers' interview notes, the government document and other records show, hoping they would open a window into the bank's actions. The issue gained urgency in 2012, according to the records, when the comptroller's office conducted its own interviews with JPMorgan employees and discovered a "pattern of forgetfulness."

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan's lawyers.

But JPMorgan, which produced other materials and made witnesses available to the comptroller's office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.

Even after the comptroller's office referred the issue to the Treasury Department's inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers' interviews were essentially "made for the purpose of getting advice for the commission of a fraud or crime."

In other words, if the accusations were true, JPMorgan employees either duped lawyers into covering up wrongdoing, or, worse, the lawyers themselves helped obstruct the investigation.

The accusation, the government document showed, led to a debate in Washington over how far to press JPMorgan when the bank was sure to fight and a judge would be free to set a harmful precedent for future cases.

Those concerns, and skepticism about the Treasury inspector general's accusations, drove the Justice Department to reject the move to revoke attorney-client privilege. In the government document — a letter to the Treasury inspector general, or O.I.G., dated Sept. 12, 2013 — the civil division ruled that "unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that" the interview notes were "made for the purpose of facilitating a crime or a fraud."

While the ruling applied to the Madoff case alone, it could have broader implications as regulators weigh the costs of future fights and the likelihood of passing muster with the Justice Department. And despite being an exceptional case — banks and their regulators typically settle disputes over attorney-client privilege without the Justice Department getting involved — the ruling illustrated a persistent tension over the privilege that continues to shape the government's pursuit of financial fraud.

Even though the Justice Department is loath to undermine the privilege between a bank and its lawyers, a move that could prompt a reprimand from Congress and the courts, it also wants to appear tough on crime after the financial crisis. In the letter to the Treasury Department's inspector general, the civil division's leader declared that "I share your commitment to using all available tools to combat financial fraud," noting that the division had sued Standard & Poor's and Bank of America over their roles in the crisis.

And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.

"Why hire a lawyer to do an internal investigation? It's because you get the privileges," said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. "Otherwise, you'd save a little money and hire a consultant or accountant."

In a statement, a spokesman for the Treasury Department's inspector general said the office was "still considering if additional steps are warranted."

The Justice Department's civil division, which last year helped reach a record $13 billion settlement over JPMorgan's sale of questionable mortgage securities, said in the Madoff letter that it stood "ready to work with you to develop an alternative that might better address the relevant regulatory concerns."

JPMorgan, which served as the primary bank for Mr. Madoff's company, declined to comment for this article.

In the past, a JPMorgan spokesman, Joe Evangelisti, has noted that the bank poured significant resources into bolstering its controls since Mr. Madoff's arrest. He also remarked that "we do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme," which was an "unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses."

The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan's potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank's assertion that attorney-client privilege protected certain emails.

Regulators also have pushed for access to handwritten interview notes and other findings that arose from an internal investigation conducted by a bank's lawyers. While that push raises concerns about undermining the work product doctrine — and some bank lawyers have already reported a growing reluctance to be candid in private correspondence with bank employees — regulators say they are often unsatisfied with only a summary of the lawyers' findings.

"We remind the banks that we're your supervisor, you're not our supervisor," Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York, said at a recent panel discussion on attorney-client privilege held by Fordham Law School and the Cardozo School of Law.

Mr. Baxter added, however, that "we're reasonable people."

There are limits on what regulators can do if a bank balks at a demand for documents. If a fight ensues, the decision to challenge the privilege rests with the Justice Department.

In organized crime and terrorism cases, legal experts say, the Justice Department often exercises the so-called crime-fraud exception to the privilege. To do so, the Justice Department must show facts at the outset "to support a good faith belief by a reasonable person" that a judge's review of the communications in question might establish that the crime-fraud exception would apply.

The JPMorgan case was not so clear cut. When the inspector general argued for the crime-fraud exception to invalidate the privilege, the Justice Department concluded that the evidence did "not suffice to justify" pursuing that claim.

In the letter outlining its decision, the Justice Department noted that memory lapses among JPMorgan employees "occurred in only a handful of the dozens of interviews conducted" by the comptroller's office. The interviews, according to the letter, were conducted three-plus years after the events in question occurred. It is unclear why it took the comptroller's office so long to interview bank employees.

The letter further says that the inspector general "has not identified any evidence affirmatively suggesting that the lapses in memory resulted from perjury," adding that the "accusation of criminal collaboration depends entirely on speculation." If the Justice Department were to pursue the subpoena, the letter said, the action would "risk developing negative precedent that could result in harm to the long-term institutional interests of the United States."

Although the decision limited the view inside JPMorgan, the comptroller's office and federal prosecutors in Manhattan still penalized the bank for its failure to sound the alarms about Mr. Madoff. The settlements, announced in January, amounted to roughly $2 billion.

Peter J. Henning contributed reporting.

A version of this article appears in print on 03/05/2014, on page B1 of the NewYork edition with the headline: A Standoff Of Lawyers Veils Madoff Ties to Bank .

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DealBook: Citi Affiliate’s Troubles Multiply as Money-Laundering Subpoenas Follow Fraud

Updated, 9:16 p.m. | A headache is growing for Citigroup as a banking affiliate involved in money transfers across the Mexican border has become ensnared in a criminal investigation.

The disclosure of the inquiry on Monday follows the bank's admission on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico.

A Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance, the bank said in a securities filing on Monday. The focus of the subpoenas is unclear. The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act.

The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members, industry experts say.

In public statements on Friday detailing the purported fraud at Banamex in Mexico, Citigroup's chief executive, Michael L. Corbat, did not mention the inquiries involving the Banamex affiliate in the United States.

People briefed on the matter say that the two issues — one involving fraud and the other involving money-laundering compliance — are unrelated. But together they show the perils of building a large banking business in and around a country that has wrestled with drug trafficking and corruption. Mexico accounts for some 13 percent of Citigroup's total revenue.

In recent years, federal regulators have been pressuring many United States banks to bolster their surveillance of suspicious transactions in an effort to thwart terrorists and other criminals from laundering money.

Regulators have previously said that Citigroup lacked effective governance and internal controls to oversee anti-money-laundering compliance at Banamex USA.

In 2012, Banamex USA entered into a consent order with the F.D.I.C. and California Department of Financial Institutions to improve its oversight and tracking systems. A year later, Citigroup entered into another consent order with another regulator, the Federal Reserve, and agreed to take companywide actions also intended to bolster its compliance efforts.

Citigroup's chief compliance officer at the time of last year's consent order has since stepped down from that role, but is still at the bank, according to two people briefed on the matter.

Long known for its sprawling operations, Citigroup has struggled for years to improve its controls, working to centralize its compliance and audit functions.

One of the bank's recent run-ins with regulators stemmed in part from improvements gone awry, several current and former executives with the bank said. In 2006, during an overhaul of the business units that process some of Citi's foreign transactions, an error in one of the bank's computer systems isolated the system from the anti-money-laundering operations that scrutinize the money flowing into the bank, the executives said. Once Citi discovered the problem in 2010, the bank immediately alerted regulators, but while the error was in effect, some payments were not completely vetted.

Regulators called for extensive change at Banamex USA, like more compliance training for senior executives and tellers and holding monthly meetings to review the company's progress in adhering to the 2012 consent order. The affiliate was also ordered to retroactively review a year's worth of wire transfers between $10,000 and $50,000.

The Federal Reserve noted in its consent order last year that the bank had made some progress toward improving its anti-money-laundering controls.

Separately, regulators in the United States are also looking into whether compliance and oversight problems may have contributed to the fraud at Banamex in Mexico. Bank officials suspect at least one Banamex employee may have enabled the fraud, which centered on the oil services company Oceanografía.

Banamex advanced $585 million to Oceanografía, which supplies marine services to the Mexican government oil monopoly. The bank also lent $33 million to the company directly. The fraud forced Citigroup to restate last year's earnings.

In an effort to strengthen oversight at the Mexican banking affiliate, Citigroup last month appointed Michael Helfer, the company's departing general counsel, to the Banamex board, a person briefed on the matter said.

But strengthening compliance can collide with another of Citigroup's major goals: cutting costs. Bank officials have been on a mission since the financial crisis to make the large bank more efficient and less expensive to run.

Banamex USA underwent a downsizing last year. The company had a sizable business in taking money from third-party agents in the United States and then remitting the money back to an extensive network of Banamex bank branches in Mexico, industry experts say.

But now Banamex USA will transfer money from the United States to Mexico only from its own customers, a spokeswoman said. Last year, Banamex USA also reduced the number of its branches in California, Arizona and Texas, three states with large Mexican immigrant communities, to three from 11.

Citigroup said the changes at Banamex USA are part of the bank's global restructuring of branches and businesses. But industry participants suspect that the moves may have more to do with avoiding the costs and risks of trying to meet anti-money-laundering regulations.

"It's very unfortunate," said Mario Trujillo, chief executive of DolEx Dollar Express, a large money transfer company operating between the United States and Latin America. "The majority of family remittances are sending money at low amounts. That has not been proven to be the major source of money laundering at the large banks."

12.07 | 0 komentar | Read More

DealBook: Citigroup Says Mexican Subsidiary Was Defrauded of as Much as $400 Million

Updated, 8:56 p.m. | At the helm of Citigroup for just a year and a half, Michael L. Corbat has been trying to transform into a boring bank a global giant that has been plagued in the past by blowups and bailouts.

Now a scandal at the bank's Mexican subsidiary shows that the chief executive still has work to do, as the development revives some familiar concerns about the sprawling bank's ability to manage risk.

Citigroup said on Friday that it had recently uncovered fraud in its Mexican banking unit, Banamex, forcing the bank to restate its 2013 earnings.

Citigroup said as much as $400 million was misappropriated in the fraud. In a harshly worded memo to employees, Mr. Corbat said it was unclear how many people were involved in the activity, which centered on the oil services company Oceanografía.

People briefed on the matter said that at least one Banamex employee was suspected of enabling the fraud. Citigroup said it was working with investigators in Mexico to "initiate criminal actions" that might yield "just penalties on the responsible parties" and could allow the bank to recover damages.

The Mexican government seized control of Oceanografía's assets Friday morning, a move that the attorney general, Jesús Murillo Karam, said at news conference in Mexico City was meant "to preserve jobs" and "the company's documents."

A big question is why Citigroup was doing business with Oceanografía in the first place.

The company is well known among Mexican investors as politically connected but financially shaky. It supplies marine engineering services and derives nearly all of its business from Pemex, Mexico's government-owned oil monopoly.

"This company has been toxic for a long time," said Luis Maizel, senior managing director of LM Capital Group, which invests in emerging market debt.

The United States ratings firm Fitch warned about Oceanografía's high leverage and poor cash flow generation in 2009. The next year, Fitch eventually withdrew its ratings because the company was not supplying enough information. In 2008, Standard & Poor's noted that Mexico's congress had investigated allegations of improper deals between Oceanografía and Pemex, though no wrongdoing was proved.

The latest scandal comes at an awkward time, as Mexico is getting ready to open its closed energy industry to outside private investors.

Citigroup, through Banamex, provided credit to Oceanografía in several ways. It extended $585 million of short-term credit through an accounts receivable financing program.

The program typically worked like this: Banamex would advance money to Oceanografía to provide services to Pemex. The oil giant would then pay back Banamex, verifying invoices provided by Oceanografía to confirm that the work was completed.

In theory, Banamex was relying on Pemex's rock-solid ability to pay back the bank, which made the transaction the equivalent of a government-guaranteed loan.

But Banamex also lent $33 million directly to Oceanografía in the form of loans and standby letters of credit.

"When you have a company getting contracts from the government, it looks like a very attractive credit to a bank," Mr. Maizel said. "But in Latin America, you are lending to the people running the companies, not just the companies."

Mr. Corbat's reputation rests, in part, on his ability to lead Citigroup into an era when it is free from damaging incidents. But Citigroup's far-flung operations could complicate his efforts to keep a tight lid on employee misconduct. And the Mexican market is an important one for the bank, accounting for about 13 percent of its revenue, according to a Credit Suisse analysis.

In the Mexico case, analysts and even some regulators privately praised Mr. Corbat's public response. He vowed to hold accountable the people behind the fraud.

"I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it," Mr. Corbat said in a memo to employees. "All will be held equally responsible, and we will make sure that the punishment sends a crystal-clear message about the consequences of such actions."

Federal authorities in the United States are also scrutinizing what happened in Mexico. According to one person briefed on the matter, the bank has provided briefings for federal regulators in New York and Washington, who are examining whether lax controls allowed the scheme to unfold.

The Securities and Exchange Commission and the F.B.I. in New York are also preliminarily reviewing the conduct, another person said.

Citigroup has been in Mexico since 1929, and it has been a favorite institution of the Mexican elite. When the country nationalized the banks in 1982, Citigroup was allowed to remain in Mexico even while most foreign banks had to leave. In 2001, it acquired Banamex in a $12.5 billion deal.

The situation in Mexico is an echo of past problems in Latin America that saddled Citigroup with huge losses. In the 1980s, the bank was crippled by bad loans in the region.

The recent scheme began to unravel, according to Citigroup and Mexican officials, when Pemex found irregularities in the bonds that Oceanografía was required to put up to guarantee the completion of its contracts.

In response, Mexico's federal comptroller suspended Oceanografía on Feb. 11 from entering into new government contracts for 20 months.

That move led Banamex to review its $585 million financing program to Oceanografía. During that review, the bank determined that a significant portion of the accounts receivable were fraudulent.

The bank said it appeared that invoices from Oceanografía were falsified to represent that Pemex had approved them. The Banamex employee who processed them is suspected of being involved in the fraud, people briefed on the matter said.

Citigroup is not the only major lender doing business with Oceanografía. The company has borrowed hundreds of millions of dollars from the capital markets in recent years.

A $335 million bond issue in 2008 helped finance the acquisition of new vessels, and the company now owns the largest offshore construction fleet in Mexico, with 69 ships.

The company does not have a track record of treating bondholders very well, said Mariela Anguiano, an analyst who follows the company for BCP Securities in Greenwich, Conn. They tended to pay coupon payments on the last possible day, she said, and did not provide much information.

In a prospectus issued late last year for the sale of $160 million in bonds, the company stated: "The group is from time to time subject to various accusations, including accusations of corrupt practices."

"When the underwriter came by my office trying to sell me on the bonds, I said, 'How dare you offer this to me?' " said Carlos Legaspy, president and chief executive of InSight Securities, which invests in corporate and distressed debt in Latin America.

For years, the rapid growth of Oceanografía and other well-connected local contractors has raised concerns about the cozy relationship between the government oil monopoly and its long-term suppliers.

Pemex's chief executive, Emilio Lozoya Austin, a close associate of President Enrique Peña Nieto's, has promised a widespread sweep of corruption in the company, ahead of forcing it to compete or ally with private investors.

Pemex said on Friday that Oceanografía's alleged irregularities were "an isolated case" and that it was continuing business as usual.

Ben Protess and Peter Eavis contributed reporting.

12.07 | 0 komentar | Read More

DealBook: Trading Site Failure Stirs Ire and Hope for Bitcoin

The apparent collapse of Bitcoin's best-known and once-dominant trading platform has provoked outrage among its users, but it has also stirred hopes that the way may now be clear for more established players to transform and rein in a largely unregulated market.

Hours after it stopped trading without warning Monday night, the secretive Bitcoin exchange Mt. Gox said that it would "close all transactions for the time being in order to protect the site and our users." The action and brief statement left users wondering where their money went, amid accusations that as much as 6 percent of the Bitcoins in circulation were now missing — worth more than $300 million at current exchange rates.

Outside the offices of Mt. Gox in central Tokyo, disgruntled Bitcoin traders and their supporters held up signs that read "Where Are My Bitcoins?"

"I'm filled with disbelief," said Kolin Burges, a trader from London who flew to Japan this month after the exchange stopped paying out funds. "I was prepared for the worst, but it's hard to believe they might have lost their coins."

Toru Hanai/Reuters Protesters outside of the building in Tokyo where Mt. Gox is housed.

Yet the unanswered questions about Mt Gox did not shake the faith of many in Bitcoin. With one of its earliest online marketplaces seemingly gone, the world of virtual currency may now be forced to become a more mature part of the financial system.

"I think it's a significant event, but I think there's a decent chance that it is part of what we would call this sort of shaking out of the industry as it matures and slowly becomes a little more regulated," said Benjamin M. Lawsky, New York state's top financial regulator.

Mr. Lawsky is not the only regulator trying to determine the next steps. Three commissioners from the Commodity Futures Trading Commission were at a meeting recently where Bitcoin was on the agenda, and the agency's lawyers are examining the regulators' options, according to a person briefed on the matter who spoke on the condition of anonymity. Federal prosecutors in New York also are investigating potential legal violations that arise from use of the virtual currency.

Financial regulators around the world have weighed in over the last few months on how to oversee Bitcoin, with some countries, like Russia, banning it altogether, and others, like Germany, generally favoring the new technology.

The interest in Bitcoin is that its underlying technology holds the promise of allowing users to move money around the world without using an intermediary, thus lowering the cost of financial transactions.

Troubles at Mt. Gox have rattled the Bitcoin world before. A year ago, the exchange suspended operations for several hours, and Bitcoin trading nearly ground to a halt.

But since then some prominent venture capitalists have invested millions in new Bitcoin companies that are intended to provide more sophisticated platforms for virtual currency transactions. Many of those investors went public on Tuesday to declare their continued confidence in the technology.

Cameron Winklevoss, an early Bitcoin proponent who, along with his brother, Tyler, owns about $64.1 million worth of the virtual currency, said that Mt Gox's closure "underscores just how far the Bitcoin ecosystem has come."

"Several exchanges have seamlessly picked up the slack and the market price has shown remarkable resilience," Mr. Winklevoss said in an email. "Mt. Gox is in the past, and the brightest minds in the room are hard at work building a responsible and secure future."

Such optimism was reflected in the oft-volatile price of Bitcoin, which rose on Tuesday after plummeting overnight. Tuesday evening, the price of a Bitcoin stood around $525, not far from where it was when the Mt. Gox news emerged Monday night.

"There's a little bit of a sense of relief that the whole thing didn't crumble," said Gil Luria, a managing director at Wedbush Securities, who has written research notes on Bitcoins. "Over the next few weeks and months, we're going to see new exchanges either gain prominence or emerge."

Many users of Mt. Gox had long ago given up on the company after numerous incidents in which it was forced to temporarily shut down.

At one point last year, Mt. Gox handled 80 percent of all Bitcoin transactions. But the exchange's market share began to significantly decline last year, when newer exchanges like Bitstamp in Slovenia, and BTC-e in Bulgaria, took its place, according to data from the Genesis Block, a virtual currency research firm.

A number of other early Bitcoin companies have also struggled recently. A few weeks before the problems at Mt. Gox, the founder of the popular early exchange BitInstant, Charles Shrem, was arrested and accused of helping to facilitate drug transactions on the now-defunct online marketplace Silk Road.

"There's definitely been a clear transition happening," said Greg Schvey, the Genesis Block's head of research.

Among the new, more experienced companies entering the space is SecondMarket, which runs an exchange for the buying and selling shares of private companies. On Monday, as Mt. Gox was preparing to go offline, SecondMarket announced its plans to start a new, regulated Bitcoin exchange for major banks. Until now, virtually all Bitcoin exchanges have allowed anyone to sign up and trade, which has made them harder to police.

Companies dedicated to being more regulator-friendly for consumers and merchants, like BitPay, Coinbase and Circle, have also grown in number and size. BitPay, for example, is currently working with 24,000 merchants to take payments in Bitcoin, up from 10,000 last September and 1,000 in 2012, according to a spokeswoman. Last year, BitPay processed $110 million to $120 million in transactions.

Some early Bitcoin adopters have been uncomfortable with the involvement of banks and regulators in a virtual currency whose early appeal was its apparent freedom from any central bank or government. But many of the new Bitcoin companies have said that virtual currencies will have to face more regulation if they want to be widely used.

"I think it's important always to know what the rules of the game are," said Steve Hanke, a professor of applied economics at Johns Hopkins University.

In Japan, financial regulators have so far declined to step in to help Mt. Gox customers, saying the virtual coins are a traded product, not a currency, and therefore remain outside of their purview.

Tibanne, the company that operates Mt. Gox out of Tokyo, according to the local registry office, has told other Bitcoin companies that it is planning to file for bankruptcy, according to John O'Brien, a spokesman for a coalition of Bitcoin companies that has been responding to the problems.

A bankruptcy administrator could distribute Mt. Gox's assets — any remaining Bitcoins plus any nonvirtual cash — to its creditors, a process that could take a year or more. But the company could also be acquired, given the value of its customer list and name recognition.

Even those who fear they have lost money they held with Mt. Gox remained enthusiastic on Tuesday about the potential of virtual currencies.

"My thoughts and my heart also go out to all of those others in the community who lost a lot more than me today," said Rick Falkvinge, the 42-year-old founder of the Pirate political party based in Sweden. Despite losing what he said was $80,000 in Mt. Gox, Mr. Falkvinge said that he remained "absolutely bullish on Bitcoin."

Hiroko Tabuchi and Ben Protess contributed reporting.

12.07 | 0 komentar | Read More

Sinosphere Blog: Hong Kong Editor Whose Ouster Stirred Protests Is Reported Stabbed

Updated, 11:40 a.m. E.D.T. | Kevin Lau, the former chief editor of the Hong Kong newspaper Ming Pao whose replacement in January stirred protests about press freedom in the semi-autonomous Chinese territory, was stabbed Wednesday morning, according to local media reports.

Mr. Lau was stabbed with a knife by an attacker on a motorbike, according to Ming Pao, and was listed in serious condition at a local hospital. The attack happened shortly after 10 a.m. as Mr. Lau was walking to his car in the Sai Wan Ho neighborhood, Apple Daily reported.

Mr. Lau's ouster led to noisy protests by journalists and others who feared that his departure reflected the Chinese Communist Party's efforts to subdue the territory's independent media. Ming Pao has been known for its hard-hitting journalism.

The police could not immediately be reached for comment on the reports.

Francis Moriarty, the head of the press freedom committee of the Hong Kong Correspondents Club, called the attack "shocking" and noted that it came after several less serious attacks on journalists in Hong Kong and just days after a protest over press freedom concerns in the territory.

"This is a serious escalation," he said.

On Sunday, at least 1,600 people turned out to a protest to support press freedom in Hong Kong, with organizers citing such concerns as the recent dismissal of a popular radio host and claims by local media outlets that they are losing advertising from mainland Chinese businesses because of their editorial positions.

Others called the attack disturbing no matter what the motive turns out to be.

"It doesn't matter what the motives are, it's just not acceptable,'' said Yuen Chan, a lecturer in journalism at Chinese University of Hong Kong, adding that she didn't have any information on why Mr. Lau was attacked. "There have been incidents where media people have been attacked, it's not the first one – it's very very disturbing.''

Michael Forsythe contributed reporting.

12.07 | 0 komentar | Read More