Arafat Had `Authority' at Company That Banked With Citigroup

Palestine Commercial Services ``was a company that was founded by Arafat,'' Ashrawi, 58, a former member of Arafat's cabinet, said in a telephone interview from the West Bank city of Ramallah. ``He had the authority.''

Disclosure of an account linked to Arafat is an embarrassment for Citigroup, the world's biggest financial- services company, with a market value of $236 billion, because to many clients ``he was considered a terrorist, and you won't want to be associated with terrorists,'' said Daniel Bandi, 40, chief investment officer at Integrity Asset Management in Independence, Ohio. He oversees $200 million, including Citigroup shares.

Citigroup Chief Executive Officer Charles Prince and Michael Schlein, a senior vice president who oversees public relations and ethics programs, called Bloomberg last week to demand a previous story about the account be retracted. They refused to be interviewed by a Bloomberg reporter.

No Accounts

``Citigroup does not have any accounts for Yasser Arafat -- and we never have,'' company spokeswoman Shannon Bell said in a statement issued Nov. 19. After Bloomberg submitted a list of written questions about the account, Bell said Friday the New York-based company would make no further comment.

Citigroup's global policies require it to know the identity of its clients and the source of their funds, according to anti- money laundering rules the bank submitted to the U.S. Senate Governmental Affairs Committee's subcommittee on investigations in 1999. The company, which also signed the Wolfsberg Principles on money laundering, in September shut its private banking business in Japan after regulators said it hadn't properly screened clients.

Palestinian and Israeli officials agree Arafat controlled PCSC, the company that held the Citigroup account.

``Absolutely,'' said Dore Gold, a Jerusalem-based adviser to Israeli Prime Minister Ariel Sharon and a former Israeli ambassador to the United Nations. ``PCSC was Arafat's.''

Arafat Control

Shuaibi, 55, chairman of the Palestinian legislature's economic committee, said Arafat held the power at Ramallah-based Palestine Commercial Services, which was owned by the Palestinian Authority and known by its initials, PCSC. ``Arafat was controlling it,'' he said.

Arafat never had his name on any of the accounts he controlled, Ashrawi said. Ashrawi, Gold and Shuaibi said they had no information about the Citigroup account.

Arafat, president of the Palestinian Authority and chairman of the Palestine Liberation Organization, died Nov. 11 in Paris at age 75. His death triggered a debate about the size of his fortune. In addition to the money he turned over to the Palestine Investment Fund, Arafat controlled $500 million as head of the PLO, Colonel Miri Eisin of Israeli army intelligence said in a 2002 interview.

In 1994, Arafat shared the Nobel Peace Prize with Israeli Prime Minister Yitzhak Rabin and Foreign Minister Shimon Peres after they negotiated the 1993 Oslo agreement, which created the framework for Palestinian autonomy in the West Bank and Gaza Strip, occupied by Israel after the Six-Day War in 1967. Israel blamed him for attacks on civilians, including a raid on the athletes' village at the 1972 Munich Olympics in which 11 Israelis died.

Mohamed Rachid

There is no indication the Citigroup account was used for anything other than investing. Arafat used other money under his control to pay fighters in his Fatah movement, according to documents the Israeli army seized at Arafat's Ramallah compound in April 2002. Palestinian negotiator Saeb Erekat at the time said the documents were forgeries.

Arafat and his financial adviser, Mohamed Rachid, controlled PCSC's holdings until those assets were wrapped into the Gaza City-based Palestine Investment Fund in 2002, said Karim Nashashibi, the International Monetary Fund representative in the West Bank and Gaza. Arafat appointed Rachid as chairman of the PCSC, a June 2004 World Bank report shows.

``It was basically controlled by the president and his chief economic financial adviser,'' Nashashibi said at a September 2003 briefing in Dubai, when the IMF released a report on the economy of the West Bank and Gaza.

`Siamese Twin'

Arafat's and Rachid's authority were interchangeable when it came to money, said Hasan Abu-Libdeh, president of the Palestinian Central Bureau of Statistics in Ramallah. Rachid was Arafat's ``Siamese twin,'' Abu-Libdeh said in a July 2002 interview.

He referred to Arafat by his pseudonym, Abu Amar.

``Rachid is a loyal, smart actor who is doing a job not approved by many, but by Abu Amar,'' said Abu-Libdeh, 50, a former board member of the Palestine Liberation Organization's investment vehicle, the Palestinian Martyrs Works Society. Abu- Libdeh, who lives in Ramallah, declined to comment when contacted this month.

Ashrawi, active in Palestinian politics since 1967 and a member of the legislature since 1996, said it was a struggle to get Arafat to hand over the assets. International aid donors in the late 1990s asked the Palestinian Authority to put the investments under finance ministry control and have an international accounting firm audit them, the IMF report said.

`He Had to Comply'

``The president wasn't ready to relinquish all sources of his powers, but he understood financially that he had to comply,'' said Ashrawi, who lives in Jerusalem. Of PCSC, she said, ``It was run by Mohamed Rachid and therefore Arafat.''

The Citigroup account is listed in the Palestine Investment Fund's 2003 annual report, released in May and audited by Ernst & Young's office in Amman, Jordan, a member of New York-based Ernst & Young International, which does business in 140 countries.

The report contains a list of the fund's holdings and their value as estimated by New York-based Standard & Poor's, a unit of McGraw-Hill Cos. that provides credit ratings and financial research. The table also designates the assets as PCSC or Palestinian Authority investments. Those are the entities that held the individual investments before they were transferred to the fund, S&P spokeswoman Rebecca Hill said in an e-mail.

Worth $6.8 Million

Line 13 of the list, on page 45 of the report, says: ``Citibank Account (Venture Capital Investments).'' The designation ``PCSC'' is listed under a column headed ``PCSC or PA Investment.'' Standard & Poor's valued the Palestine Investment Fund's assets at $799 million and estimated the Citibank account to be worth $6.8 million in 2003, according to the annual report.

A previous asset disclosure released in February 2003 didn't mention the Citibank account. Included in a list of assets still under evaluation by S&P was an entry for ``Venture Capital Investments'' valued at $7 million.

The PCSC account was held at Citigroup's private bank, Andreas Martin, a Standard & Poor's analyst who helped value the assets for the Palestine Investment Fund, said in an interview Nov. 16. He didn't comment on whether the account was connected to Arafat. Martin, who works in Los Angeles, declined to be interviewed for this story, said S&P spokeswoman Hill.

Citigroup Private Bank, based in New York, has 90 offices in 31 countries, according to the bank's Web site. The unit had net income of $551 million last year, accounting for 3 percent of Citigroup's profit, the company said in its annual report.

Palestine Investment Fund

The private bank's annual revenue per client averages about 1 percent of the assets under management, according to a Feb. 10 presentation to investors. Based on that percentage, the fees for a $6.8 million account would be about $68,000.

The Palestine Investment Fund was created under an Oct. 14, 2000 decree signed by Arafat that ordered all Palestinian Authority investments to be transferred to the fund, the annual report said. A second decree on Aug. 14, 2002 established the fund's by-laws, and it began operations on Jan. 1, 2003.

``All of the assets previously held by the PCSC, have been legally transferred to the PIF, except for eight (8) investments still in progress,'' the annual report says. The PCSC is now a wholly owned subsidiary of the Palestine Investment Fund, the report says.

Citigroup didn't respond to a list of questions submitted by Bloomberg News or a request to interview executives. To support the company's statement that it had no Arafat account, spokeswoman Bell on Nov. 22 cited an assessment that the Democracy Council conducted during the process of moving PCSC's holdings to the new fund. The Los Angeles-based council, a non- profit group that promotes democratic institutions in emerging nations, helped track the Palestine Investment Fund's assets.

`Nothing Illegitimate'

``Our investigation of this account found no direct connection to Mr. Arafat,'' Democracy Council President James Prince said in a Nov. 19 letter to Bloomberg. ``We discovered nothing illegitimate or unethical about the opening or use of this particular account.''

In an interview on Nov. 18, the council's Prince said that as part of the process of transferring assets to the Palestine Investment Fund from PCSC, the fund sent a letter to Citigroup requesting that the account be registered in the fund's name. He said he didn't know which name the account was held under at PCSC.

``Most of the PCSC ones weren't registered in PCSC's name. There were special purpose entities and offshore accounts,'' he said. ``Arafat had influence over these.''

Prince didn't return phone calls requesting further comment.

Anti-Corruption Group

Shuaibi, the chairman of the Palestinian legislature's economy committee, also said Arafat controlled PCSC through Rachid. A dentist who lives in Ramallah, Shuaibi has been a member of the legislature since 1996 and heads the Palestinian chapter of Transparency International, a Berlin-based anti- corruption group.

``Mohamed Rachid was legally working under the supervision of Arafat,'' he said. ``Practically, he was deciding where to invest, how to invest, but usually he did this with an approval of Arafat.''

Shuaibi worked to bring PCSC's assets under control of the Palestinian Authority's finance ministry, said Izzat Abdulhadi, 47, director of the Ramallah-based Bisam Center for Research and Development, which promotes democracy in refugee camps.

``He's a very active parliament member and interested in the reform issue,'' Abdulhadi said. ``He's very honest and he's following the issue from the beginning.''

`Arafat's Bag Man'

Arafat exercised control over PCSC through his adviser, Rachid, said Rex Brynen, 42, a political science professor at McGill University in Montreal. Brynen has done research in the Palestinian territories since 1993 and is author of ``A Very Political Economy: Peacebuilding and Foreign Aid in the West Bank and Gaza'' (U.S. Institute of Peace, 2000).

``Rachid was Arafat's bag man, responsible for the war chest and off-the-books resources,'' Brynen said. ``Arafat had overall strategic control through Rachid. PCSC was a place to park money and an opportunity to make money.''

``I don't think anyone at Citibank was smart enough to know who did or didn't control PCSC's accounts,'' Brynen said.

The Wolfsberg Principles require banks to know who controls accounts and where their money comes from. The voluntary guidelines, signed in 2000 and updated in 2002, apply to private banking units, which manage money for wealthy clients.

Chateau Wolfsberg

Citigroup should have identified Arafat's control of the account, said Jeremy Pope, who was executive director of Transparency International when it helped draft the Wolfsberg Principles in 2000.

``Arafat was working through a proxy,'' said Pope, 66, who is now co-director of London-based Tiri Network, which advocates anti-corruption standards for business and government. ``Just to take it on face value would not be in compliance with the standards required by Wolfsberg.''

Citigroup signed the Wolfsberg Principles at Chateau Wolfsberg in Switzerland on Oct. 30, 2000, along with 11 other banks, including Zurich-based Credit Suisse Group, New York-based Goldman Sachs Group Inc. and Frankfurt-based Deutsche Bank AG. The 12 banks control about 60 percent of the global private banking market, according to the Web site of the Wolfsberg Group, the collective name for the signers.

``The bank will take reasonable measures to establish the identity of its clients and beneficial owners and will only accept clients when this process has been completed,'' the principles state.

`A Clear Case'

Opening an account for PCSC, or Arafat, isn't necessarily a violation of the guidelines, said Mark Pieth, 51, a professor of criminal law and criminology at the University of Basel in Switzerland who helped draft the Wolfsberg Principles. A bank only needs to understand who controls an account and be convinced it has legitimate sources and uses for the funds.

``They'd have to be very cautious in dealing with this account and really check who is using it,'' said Pieth, a former member of the Paris-based Financial Action Task Force on Money Laundering. ``It's a clear case for due diligence.''

Government officials and other people who have held positions of public trust, known as ``politically exposed persons,'' must receive increased scrutiny when opening accounts, according to the Wolfsberg Principles.

The PCSC account falls into a gray area in the guidelines on handling funds from politically exposed persons, Pieth said. Accounts for such people require approval by a bank's senior management, according to the principles.

Head of State

A bank could argue that Arafat was acting as a head of state, in which case the rules wouldn't apply, Pieth said. Such a contention is complicated by the fact that the Palestinian Authority isn't a sovereign nation and that PCSC was held outside the finance ministry, he said.

``You're caught between the public and the private, and the explanation for that is the state is not formed yet,'' Pieth said.

Citigroup has more than 300 anti-money laundering compliance officers around the world, according to an April 2004 fact sheet on its Web site. It also uses independent auditors to assess the company's compliance with anti-money laundering rules.

The company places responsibility for gathering customer information with the employees who deal directly with clients.

``We rely on those closest to our customers -- local branch managers, relationship managers and customer service personnel -- to understand fully with whom we are doing business and to ensure that the business we conduct on behalf of our customers is proper,'' the fact sheet said.

Japan Apology

Japanese regulators on Sept. 17 ordered Citigroup to shut its four private banking branches there because of what they said was a failure to conduct proper checks of account-holders. Japan's Financial Services Agency said Citigroup handled transactions that could be associated with money laundering by allowing an account to be opened without following proper procedures.

On Oct. 19, Citigroup said Deryck Maughan, 56, the vice chairman who ran its international businesses, and two other executives would leave the company. Six days later at a press conference in Tokyo, CEO Prince, 54, bowed in apology for the bank's actions.

``I sincerely apologize to customers and the public for the company's failure to comply with legal and regulatory requirements in Japan,'' Prince said, according to a transcript of his remarks provided by the company.

Know Your Client

In November 1999, Citigroup's co-chairman at the time, John Reed, submitted copies of the company's ``know-your-client'' policies to the Senate Governmental Affairs subcommittee on investigations during a hearing on private banking and money laundering.

``Citigroup businesses shall have Know Your Customer policies, procedures, and internal controls reasonably designed to determine and document the true identity of customers who establish relationships, open accounts, or conduct significant transactions and obtain basic background information on customers,'' the company's global policy said.

``The source of wealth should be wholly legitimate,'' the policy for the private bank said.

Banks following the Wolfsberg Principles often ask potential customers questions and request copies of identification papers, references and financial documents to determine who they are and whether they should be given an account, said Elizabeth Joyce, money-laundering adviser to the United Nations Office on Drugs and Crime in Vienna. Sometimes people evade these checks, she said.

`Politically Exposed Person'

``The person or his associates have disguised themselves so that normal know-your-customer procedures don't uncover the true identity,'' Joyce said.

If a bank learned it had an account from a company controlled by Arafat, it should have contacted financial authorities, such as the U.S. Treasury's Financial Crimes Enforcement Network, to see if the account should be closed, Joyce said.

``It would definitely raise a flag because he's a prime example of what is called a politically exposed person,'' she said. ``Banks have to take special care with them and everybody associated with them to investigate where the source of the money is that's going into the account.''

There is no indication Citigroup was aware that Arafat controlled PCSC.

Peace Talks Scuttled

Arafat in 2000 rejected a proposed settlement with Israel that included shared sovereignty over Jerusalem, scuttling peace talks. President George W. Bush and Israeli Prime Minister Sharon refused to restart talks with Arafat, blaming him for four years of violence that has claimed at least 990 Israeli and 3,440 Palestinian lives.

``Peace will not be achieved by Palestinian rulers who intimidate opposition, who tolerate and profit from corruption and maintain their ties to terrorist groups,'' Bush said in a Nov. 19, 2003, speech in London.

Arafat used Palestinian Authority money to provide government services in the West Bank and Gaza and to invest both in the territories and abroad. He also paid militant members of his Fatah faction, according to the documents seized by the Israeli army.

In one letter from January 2002, Marwan Barghouti, the Fatah leader in the West Bank, sought $1,000 for each of a dozen fighters.

Paying Militants

``Please allocate $350 to each,'' Arafat scribbled at the bottom of the letter. Arafat then signed his name, and sent the request to the finance ministry for payment. An Israeli court in June sentenced Barghouti to five consecutive life terms in prison after he was convicted of planning terrorist attacks.

The al-Aqsa Martyrs Brigades, which says it's an offshoot of Fatah, has claimed responsibility for attacks on Israelis, including the bombing of a bat mitzvah in Hadera on Jan. 17, 2002, that killed six people, according to a report by New York- based Human Rights Watch, a non-governmental organization that investigates human rights abuses around the world.

Arafat and the Fatah leadership weren't criminally liable for the actions of al-Aqsa because they didn't control the brigades, the October 2002 report said.

``The greatest failure of President Arafat and the PA leadership -- a failure for which they must bear heavy responsibility -- is their unwillingness to deploy the criminal justice system decisively to stop the suicide bombings,'' the report said.

Tax Revenue

PCSC's biggest source of funds was tax revenue transferred to accounts outside the finance ministry, according to an International Monetary Fund report dated Sept. 15, 2003. Arafat and Rachid controlled the largest of these accounts, the report said. The IMF estimated that $898 million of fuel, tobacco and alcohol taxes, as well as investment profits, were ``diverted'' from the Palestinian Authority budget from 1995 through 2000.

``Most of it has been used to invest in Palestinian assets, both internally and abroad,'' the IMF's Nashashibi said at the press briefing releasing the report. ``In any system you can always have a possibility of some misuse of funds, but what we're trying to do is produce a level of disclosure and transparency so that future or present misuse does not happen.''

William Murray, an IMF spokesman in Washington, didn't make Nashashibi available for an interview.

Budgetary arrears reached as much as $531 million, or 10 percent of gross domestic product, by the end of 2002 as wages rose, violence erupted in the West Bank and Gaza, and Israel stopped tax payments to the authority, the report said. The finance ministry's credibility collapsed as it left bills unpaid and issued checks to suppliers without sufficient funds.

Finance Ministry Control

``A political crisis occurred in May 2002,'' the report said. ``Intense discussion within the cabinet, political factions and the Palestinian legislative branch, coupled with external pressures, prompted President Arafat to take immediate action toward a broad-based effort at institutional reform.''

One of those changes was finally acting on the request from international aid donors to bring the authority's investments under the control of the finance ministry, headed by Salam Fayyad, the former IMF representative in the Palestinian territories.

The Palestine Investment Fund has a seven-member board of directors and has hired six investment managers to monitor its assets, according to the annual report. Profits go to the Palestinian Authority budget, and access to the fund's two bank accounts requires the approval of two board members and the general manager.

`Much Greater Confidence'

PCSC's investments were less transparent before they were moved to the Palestine Investment Fund, said John Wetter, 49, the World Bank's senior economist for the West Bank and Gaza.

``I have much greater confidence in PIF operations -- their accounting, their reporting, the proper management of resources - - than I did under the structure previously,'' said Wetter, who is based in the West Bank.

Rachid is the new fund's chief executive officer and general manager, according to the annual report. Fayyad is chairman. Rachid didn't respond to phone messages left at his office in Cairo or e-mails sent to two different addresses. Fayyad didn't return phone messages left with his staff.

Suzanne Jarrar of Ellam Tam, a firm based in the West Bank town of Al-Bireh that handles publicity for the Palestine Investment Fund and Fayyad, said she passed on messages requesting comment to the fund's management.

The Palestine Investment Fund ``operates according to international best practices of transparency and public reporting,'' the Democracy Council's Prince wrote in his letter.

Cairo Amman Bank

Investment decisions for the Citigroup account were made by an adviser at Cairo Amman Bank, said Martin of Standard & Poor's. The account holds investments in three private equity funds, a European mutual fund and some cash, he said.

Sami Saidi, Cairo Amman's deputy regional manager for the Palestinian territories, declined to comment on specific accounts. The bank's branches in the territories stopped providing investment services after violence between Palestinians and Israelis erupted in 2001, said Saidi, who is based in Ramallah.

Jordan-based Cairo Amman is a correspondent bank of Citigroup's, Saidi said. Most of the world's biggest banks with international reach hold correspondent accounts for smaller, domestic banks that use the accounts to transfer money abroad.

``We take care of the principles of proper banking,'' Saidi said.

The Palestinian Authority was trying to establish its commitment to government control of public assets when it created the Palestine Investment Fund, Fayyad, the finance minister and fund chairman, said in the annual report.

``We will not rest until we have succeeded in our efforts to regain the people's trust,'' he said.

Below are Web links to documents cited in this story:

Annual report that lists Citibank account: http://www.palestineinvestmentfund.com Select annual report and go to page 45.

IMF report identifying the source of PCSC's funds: http://www.imf.org/external/pubs/ft/med/2003/eng/wbg/wbg.pdf

IMF briefing in which the use of diverted funds was discussed: http://www.imf.org/external/np/tr/2003/tr030920.htm

Wolfsberg Principles: http://www.wolfsberg-principles.com

To contact the reporter on this story:
Vernon Silver in Rome at vtsilver@bloomberg.net

To contact the editor responsible for this story:
Ronald Henkoff at rhenkoff@bloomberg.net