UPDATE 2-Citigroup boosting anti-money laundering efforts

Thu Apr 5, 2012 2:15pm EDT

* U.S. regulator accused Citi of lapses

* Citi agrees to improve compliance

* Citi will not pay penalty as part of agreement (Rewrites, adds background, additional byline)

By Dave Clarke and Carrick Mollenkamp

April 5 (Reuters) - Citigroup, one of the world's biggest banks, had major lapses in its anti-money laundering systems that are supposed to police the flow of shadowy money, a U.S. bank regulator said.

The Comptroller of the Currency, which regulates national banks, said on Thursday that Citigroup Inc's Citibank had fallen short in establishing and maintaining programs meant to identify money laundering and other improper flows of money.

Under an agreement with the OCC, the bank will have to improve its anti-money laundering operations but will not pay a monetary penalty. Citi did not admit or deny any wrongdoing.

There has been an increased effort by federal and state regulators to crack down on shadowy money moving entering the U.S. banking system. Citigroup is the fourth big global bank to be hit in the regulatory crackdown over the past two years.

The OCC specifically cited a weakness in Citigroup's so-called remote deposit capture business. That business typically enables banks to process deposits from foreign banks seeking access to the U.S. banking system.

Those deposits can be transferred into a bank via large volumes of traveler's checks.

Citi informed the OCC that it had found compliance problems in this line of business dating back to 2006, according to the consent order released on Thursday.

As part of the agreement with the OCC, Citi will have to hire an independent consultant to review bank records and determine whether "suspicious activity was timely identified by the bank."

"Many of the issues highlighted in the OCC's order have already been remediated or are in the process of being remediated," the bank said in a statement. "Furthermore, we are developing a plan to address the remaining OCC requirements."

The order also cites problems in Citigroup's correspondent banking business.

This function, where a bank acts as an agent of a foreign bank to provide services, h as long been seen as a weak spot in the U.S. banking system as smaller, foreign banks often seek access to the U.S. financial system through this business.

A Senate investigative panel, which has identified numerous ways in which illicit funds move globally, in 2001 issued a report specifically targeting gaps in correspondent banking.

That report found that "U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system."

In recent years regulators and law enforcement officials have focused on money laundering problems at other large banks.

For instance, the U.S. unit of HSBC Holdings Plc, ABN Amro Holding NV and Wachovia Corp all were fined or reprimanded in 2010 by federal law-enforcement and bank regulators for lapses in anti-money laundering systems.

In 2009 and 2010, Barclays Plc, Lloyds Banking Group and Credit Suisse Group agreed to settlements totaling more than $1 billion as part of a probe into aiding sanctioned countries, banks or other enterprises.

The issue has also caught the attention of Congress.

A U.S. Senate panel is investigating HSBC and a hearing by the Senate Permanent Subcommittee on Investigations could occur later this year.

That investigation could extend to other banks or gaps in the U.S. regulatory system, according to a person familiar with the Senate probe. It is not known if Citigroup is a part of that investigation. HSBC is cooperating with the probe. (Reporting By Dave Clarke in Washington and Carrick Mollenkamp in New York; Editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)

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