Playing the Money Game

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Questions about Citibank's profits from overseas branches

Has New York's Citicorp, the second largest bank holding company in the U.S., improperly diverted some $46 million in profits from foreign-currency transactions? Or was one of the biggest dealers in world money markets simply shifting funds between countries in generally accepted, legal ways in order to reduce the amount of taxes it paid? Bankers and federal officials were hotly debating such questions last week, after the Securities and Exchange Commission overruled its staff and decided not to bring any legal action against Citibank for questionable currency-trading transactions between 1973 and 1980.

In 1978, David Edwards, then 33, a former member of Citibank's international staff in Paris, walked into SEC headquarters in Washington with an extraordinary tale. He charged that Citibank had created an intricate system of special telex messages, false documents and secret sets of books to evade taxes on its European operations. The technique involved hiding profits from tradings in foreign currency by creating artificial transactions with Citibank's branch in Nassau, the Bahamas, where taxes are lower than in Europe. In one such deal, Edwards charged, a telex from the Paris branch of Citibank instructed the Nassau office to buy $6 million worth of French francs from the Paris branch at the rate of 4.7275 francs to the dollar. Then the telex instructed Nassau to sell the $6 million at the higher rate of 4.7375 francs per dollar. The transaction did not change Citibank's overall net financial position, but the Paris branch could record a lower profit on its books and thus pay lower taxes in France.

Edwards said that he became aware of the practice in 1975 and tried for three years to alert Citibank's management to the problem. One week after he brought his complaint to the bank's board of directors, in a letter in 1978, he was fired. Edwards subsequently filed a $14 million damage suit against Citibank, charging that he had been wrongfully dismissed, but he lost the case.

The Edwards claims put European bank regulators on the trail of Citibank, which had to pay $5.6 million in back taxes and $7.5 million in administrative fees to Switzerland and $550,000 in fines to France. But far from changing its procedures after Edwards made his allegations, the SEC investigators charge, Citibank merely altered its bookkeeping methods to make the practice harder to trace.