Testimony of Walter B. Wriston
Wriston, Walter B.
Mr. Chairman, I am Walter Wriston, Chairman of Citibank and Citicorp, its holding company. I have occupied that position since 1970. I have been employed by Citibank in various capacities since 1946. we greatly appreciate having the opportunity to describe to your committee pertinent facts concerning the matters you have been reviewing.
Unfortunately, some testimony in your earlier hearings conveyed a misleading impression as to the real nature and character of those events--an impression that has been rejected by responsible authorities who have investigated the realities of the situation.
The facts show that Citicorp's own system of corporate governance detected a few questionable foreign exchange trading practices which took place during the mid-1970s. While they were neither pervasive nor massive, we addressed them. The system worked to make the appropriate internal corrections and appropriate disclosures to authorities and to shareholders. That is how a model system of corporate governance is supposed to work, and that is what really happened here.
On December 22, 1981, the Securities and Exchange Commission, on recommendation of the Director of the Division of Enforcement, Office of General Counsel and Division of Corporation Finance, declined to take any action against Citicorp. The Commission acted responsibly and properly, as will be demonstrated in some detail by our vice Chairman, Hans Angermueller; Mr. Darwin Smith, the Chairman of the Audit Committee of our Board of Directors; and Mr. John Hoffman, a partner in the law firm of Shearman & Sterling which conducted a study for the Audit Committee. One or more of these gentlemen is prepared to address himself to various details raised in previous hearings by this subcommittee. In particular, they will respond to what was put on the record at hearings of this subcommittee held on September 13th and 17th, 1982. At that time, certain witnesses charged Citicorp with practices at variance with foreign laws and regulations, and with failure to make adequate disclosure of such alleged violations to U.S. authorities. That testimony was materially misleading. It involved both substantial misstatements of evidence and major omissions of facts favorable to Citicorp. Mr. Chairman, we welcome this opportunity to correct the record.
What I propose to address is Citicorp's system of corporate governance, which is both extensive and longstanding, and how that system responded to the foreign exchange trading issue and certain other charges made by a former Citicorp employee. No system, either in government or private enterprise, can prevent all instances of misconduct. In any organization of 60,000 people, whether it be a corporation or a small city, there will always be a handful of people who do not follow the rules. As President Kennedy remarked, when an air force pilot flew a mission near Russian Siberia during the Cuban Missile Crisis, "There is always some guy who doesn't get the message."
The question is not whether human nature can be changed so we can abolish our justice system. Rather, it is what action is routinely taken to make as sure as humanly possible that mistakes by individuals, for whatever reason, are thoroughly investigated and appropriate action taken to prevent them in the future.
Citibank was founded in 1812. In good times and bad, it has built its business both here and abroad in almost 100 countries on the bedrock of institutional integrity.
There are both philosophical and business reasons for this corporate culture which is deeply ingrained in our organization. All banking is built on trust and honesty. Men and women who come to work with us know that. From a purely business point of view, we are always aware that we are a guest in each country in which we operate, and can be ejected by any sovereign with the stroke of a pen. Our corporate policy manual makes our management's intent very clear: "It is the intent of Citicorp management that the law of the countries where our business activities are conducted be known and obeyed. Above the minimum level required by law, it is Citicorp's policy to adhere to the highest standard of integrity, to be applied consistently throughout the world. The standard is defined by management's perception of the United States' experience and value systems. Through consistent and continuous compliance with this standard, Citicorp has earned a reputation for excellence and integrity while achieving outstanding business success. This reputation for integrity, retained by generations of Citibankers, has to be maintained and defended. No business plan or individual proposition can be accepted if there is a risk of impairing that reputation."
You will observe, Mr. Chairman, that any business plan would be rejected if it did not adhere to these rules.
Over the years, corporate policy manuals and other reminders have been disseminated to all officers, stressing the institution's policy to comply with all relevant laws and regulations. All officers are instructed never to lose sight of the fact we are guests in countries abroad. This policy is included in our desk book on ethical standards and conflict of interest policy. It is updated and distributed at approximately two-year intervals to all officers and supervisors in the Citicorp organization. Each officer is required to confirm in writing that he or she received the book and is familiar with its contents. These confirmations are forwarded to Citicorp's outside auditors. Follow-up occurs so as to assure the broadest possible compliance. In order to assure, as nearly as anyone can that these high standards are adhered to, we spend some $40 million a year on auditing. We have written our corporate bylaws in such a way that the Chief Auditor reports directly to the Board of Directors.
To handle day-to-day questions, the board created a committee on good corporate practices, which reports to the board each year. In addition to our outside auditors, regulators in dozens of countries pore over our books in a weekly, monthly, and quarterly basis. We file some 7,000 reports annually with various government authorities. This is as effective and complete a mechanism for good corporate oversight and governance as I know of anywhere.
The effectiveness of this system is evidenced by the fact that almost all criticism of our activities under discussion here came from material prepared by Citicorp's own internal audit staff. These individuals in our audit division are by and large bank auditors, not lawyers. Their function is to review and report on business operations of the corporation. Information they report results from a review of actual transactions, from interviews with officers in line businesses, and from their own observations. Auditors are encouraged to raise any and all questions as to conduct of Citicorp's business. In this way, supervising management is in a position to investigate and take appropriate action where warranted. This has been done in this case. The Securities and Exchange Commission's investigation, which ultimately became the subject of this subcommittee's hearings, focused primarily on Citibank's foreign exchange dealings in the 1973 to 1978 period.
To put these matters in perspective, it is necessary to understand that during this period, exchange regulations and exchange rates in Europe were more volatile than at any time since World War II. With the demise in 1971 of the Bretton Woods agreement, a new international monetary system had to be established. In the period from 1945 to 1971, the U.S. dollar was the world's reserve currency against which every other major currency was pegged. When the Bretton Woods system broke down, there was no other currency which could be substituted for the dollar. This led to central banks' experimentation with diverse forms of exchange control regulations. Few if any currency traders had experienced a comparable situation. In fact nobody had--not governments, not central bankers, not regulators, and certainly not the young men and women manning our trading desks...working to recycle petrodollars. Indeed, so massive was the transfer of financial assets to the OPEC countries that many in high places expressed doubts that the global financial system could handle it.
It is also necessary to understand that central bank regulation in Europe has traditionally been more informal than comparable regulation in the United States. Here, federal regulators publish thousands of regulations and interpretations; in Europe, many regulatory positions are provided orally to bankers at meetings which occur on a regular or occasional basis. This factor, together with the singular increase in exchange rate fluctuations after 1971, made it almost impossible at times for anyone to know what current local rules required. Central banks in Europe began to develop new techniques, approaches, and new rules and regulations for banks to operate in foreign exchange markets on almost a weekly basis. These rules and regulations changed many times on short notice and without prior consultation. It was a period of trial and error; a learning experience for everybody, including the regulators. The velocity of change during that period was greater than at any time since World War II.
In that environment, it would have been virtually impossible for any bank's foreign exchange practices not to deviate occasionally from the fluctuating wishes of some central bank. It was in this context, and after the failure of the Bank Herstatt and Franklin National Bank, that Citicorp conducted a special internal survey of the treasuries of its European branches. This review was undertaken as a matter of sound management on our part to determine the entire range of prudential controls and practices. It was not suggested or urged by any regulatory authority. Nor was it proposed or prompted by the allegations of any Citibank employee, it simply seemed to be a good management response.
The resulting report--the "Natvig-Pomeroy Report" was completed during the summer of 1975, and a copy forwarded to me by our Comptroller in August. Although I no longer have an independent recollection of the report or its contents, I reviewed it and instructed the Comptroller to be certain to follow up on the significant points in the report. This, I believe, was an appropriate and responsible action for top management. Again, when a former Citibank employee in Paris presented allegations about certain of our European branches in early 1978, I immediately urged that the charges be investigated by the Examining Committee of the bank and the Audit Committee of Citicorp, two bodies, all of whose members are outside directors. They did so with the assistance of outside legal counsel and outside auditors. The results of their study were promptly made available at the bank's initiative to relevant U.S. and foreign regulatory agencies and to anyone requesting a copy. This again, I believe, was appropriate and responsible action by top management. We certainly would not have taken such good faith internal review actions if we were not trying to get at the truth. After an extensive review by European central bank regulators of Citibank's activities during the five-year period, (1973-1978), only 26 out of millions of transactions were the basis for fines or penalties.
Citibank and appropriate government agencies resolved their differences over those cases by agreeing on payment of some additional taxes, creditable against our U.S. tax bill, and on a certain amount of fines and penalties. There were some additional transactions in Switzerland which were criticized by the Swiss authorities, however, in a letter to us dated January 3, 1980 from the President of the Swiss National Bank he stated the bank had "terminated its investigations...the conclusion is that we abstain from taking further steps although from the point of view of our currency protection regulations various transactions do not appear to be beyond all doubt. As far as we are concerned, the matter is thus settled...". We have also agreed to more general tax adjustments in two countries, the principal one of which was reported in our audit committee report of a year ago, plus a second minor one, which has occurred since then, given Citibank's enormous volume of foreign exchange trading activities during this petrodollar recycling period--which amounted to hundreds of billions of dollars--this is a remarkably low incidence of error.
Contrary to impressions previously given to this subcommittee, no pattern or scheme of improper transactions by Citicorp has ever been found by any of the numerous authorities which have examined the accusations.
The decision of the Securities and Exchange Commission to end its proceedings was an appropriate decision. Citibank continues to operate in all countries involved with no ascertainable harm to its continuing business. There has been no material loss to Citicorp stockholders as a result of these transactions. The financial impact has been to transfer to other countries tax payments which otherwise would have gone to the U.S. Treasury and the expense of fines totalling $1.2 million. Allegations as to deliberate foreign law violations by Citicorp employees have not been borne out after 3 1/2 years of investigation by the SEC. Even if such violations had been established, which they were not, the amounts in question were very small in relation to Citicorp's total operations.
It has been reported in news media and stated at the September hearing that Citicorp earned $46 million during the 1973-1978 period from foreign exchange parking transactions. This is not true. Whoever stated it confused earnings with total revenue before operating expense. This is like confusing sales with earnings. Such revenues would represent less than one half of 1% of total revenues for this period which is not significant. In addition, the Office of General Counsel, Division of Corporation Finance and Director of the Enforcement Division of the SEC all recommended that the investigation be discontinued. It was a fair, logical and proper decision, which we awaited and accepted. These hearings now are some years after the events, and, Mr. Chairman, Citicorp has implemented further internal safeguards designed to prevent, so far as humanly possible, even these few transactions from being repeated.
Citicorp has never, to my knowledge, knowingly conducted its business in violation of foreign laws or regulations. At the same time, we do not argue that none of our 60,000 employees operating in almost 100 countries has ever made a mistake in judgment. Some have.
We have no serious disagreement with the observation made by the office of the Comptroller of the Currency in his letter of December 8, 1980, to the Citibank Board of Directors that booking foreign exchange contracts at off-market rates is not a normal banking practice. It is in fact totally against our policy, and we could not agree with the Comptroller more. That these things did occur in a few instances some years ago is a fact we regret.
From the moment they came to the attention of senior management, steps were taken--some at our own initiative and others at the suggestion of the Comptroller of the Currency--to strengthen management and control systems by which we satisfy ourselves and those who regulate us that our business activities continue to be conducted in accordance with local laws and sound banking practices. That has been our policy since the bank's inception. It is the only policy which can assure our continued welcome in the many countries where we do business, and thus our corporate survival.
One final note: In some nine years there have been some twenty separate inquiries and an expenditure of millions of dollars. While some issues were raised by European government agencies, no authority has ever adjudicated that out of the millions of transactions a single one was unlawful; 26 specific transactions were the subjects of voluntary settlements. None of the adjustments in these transactions changed the earnings of Citicorp by as much as a penny a share. They did increase our tax payments to some foreign countries and reduce our tax payments to the United States by a like amount.
Reviews of our operations in many major markets revealed we operated properly, honorably and devoid of abuse. I am proud of our record in that regard. I appreciate, Mr. Chairman, the opportunity this subcommittee has provided to us to put our story on the record, and its fairness in its approach to this hearing. Thank you. I will now turn the floor over to my associate, Mr. Angermueller, who is prepared to discuss all of these matters in greater detail.