BCCI AND LAW ENFORCEMENT:
District Attorney of New York
While the Justice Department's handling of BCCI has received substantial criticism, the office of Robert Morgenthau, District Attorney of New York, has generally received credit for breaking open the BCCI investigation.
It did so not on the basis of having any witnesses or information available to it which were not available to other investigators, including the Justice Department, and the Federal Reserve. Rather, District Attorney Morgenthau broke the case because he recognized BCCI's importance and significance as a case of global international organized crime, and devoted sufficient attention and resources to force out the truth.
As District Attorney Morgenthau testified, he made the decision to target BCCI once the bank's activities came to its attention because of his recognition that prosecuting a financial institution handling many millions in drug money could, in the long run, have as much impact on fighting crime as the hundreds of prosecutions his office was making every week against traffickers themselves in New York.
[J]ust as illegal drugs are smuggled into this country, illegal profits must be smuggled out. The sums involved are truly staggering . . . the simple truth is that the wire transfer and the bank book are as much the tools of the drug trade as the scale and the gun. . . the nexus between drugs and money means that if we are to succeed in the war against drugs, we must be as vigorous in our prosecution of corrupt bankers as we are of street dealers.(1)
In going after BCCI, Morgenthau's office quickly found that in addition to fighting off the bank, it would receive resistance from almost every other institution or entity connected to BCCI, including at various times, BCCI's multitude of prominent and politically well-connected lawyers, BCCI's accountants, BCCI's shareholders, the Bank of England, the British Serious Fraud Office, and the U.S. Department of Justice. Each, while professing to cooperate with the District Attorney, in fact withheld information from the District Attorney and in some cases, impede, delay, or obstruct his inquiry for months. Ultimately, Morgenthau proved BCCI's criminality, not because of information or cooperation provided by other government agencies -- with the key exception of the Federal Reserve, there was almost none -- but because BCCI had left a trail of evidence of wrongdoing there for anyone with the tenacity to pursue it.
In the late spring of 1989, Jack Blum, who had been the chief counsel to the Subcommittee investigation concerning "Drugs, Law Enforcement, and Foreign Policy," during 1987 and 1988, went to New York to meet with prosecutors working for District Attorney Robert Morgenthau concerning information he had about criminal activity involving BCCI.
Blum knew Morgenthau's reputation as an aggressive prosecutor, and had worked with Morgenthau in the course of the 1987-1988 Subcommittee investigation. Morgenthau had testified as the lead witness before the Subcommittee in February, 1988 concerning the importance of money laundering in attacking crime. In that testimony, he had stated that some $5 billion to $10 billion a year was being laundered through New York banks and other financial institutions, suggesting that laws combatting money laundering were inadequate, and that the New York banks had a role in preventing the laws from being tougher.(2) In that testimony, Morgenthau made a commitment to the Subcommittee concerning his approach to money-laundering:
We are going to spend more resources now in trying to trace [illegal] funds. I think we are going to be successful, although, again, that is a labor-intensive kind of activity.(3)
Based on the statements made to the Subcommittee by Morgenthau, Blum believed he might be in a position to follow up on the information Blum had developed about BCCI in connection with his work for the Senate. As Blum testified, he believed he had critical information and witnesses about BCCI's criminality, and had taken that information in March, 1989 to the U.S. Attorney for the Middle District of Florida in Tampa who had prosecuted BCCI on money laundering charges as a result of the Operation C-Chase sting. Blum had brought in two witnesses with information concerning, and arranged for a lengthy conversation to take place between him and the witnesses under circumstances where they could be secretly taped by the government. Moreover, Blum had convinced both of the witnesses to cooperate with the Justice Department. Yet in Blum's view, after all of his efforts,
the Justice Department had done nothing with the information:
The strange thing is that after that effort to put this all in the hands of the Justice Department -- and I might add that at the time I went to Miami, at the instruction of the chairman [Senator Kerry], I shared with the agents working the case materials we had gathered, memos I had written, and other materials we had gathered, so that they would have a complete picture of what we knew.
I waited for something to happen, and what happened was, I started getting calls from the two guys I took to Tampa who said, they're not following up. Then I talked to the agents, and the agents said well we're very busy. We're working on preparations for the trial.
No follow up, and I began to worry that something was very wrong with this case. In . . . late May, I decided that I would bring this matter to another jurisdiction, and that was New York. Our Federal system mercifully allows for parallel activities. If the State government fails, the Federal Government is there, and vice versa. . .
So I went up to New York and I talked to Bob Morgenthau and essentially told him what I knew. On the basis of the same evidence, essentially, and he ultimately communicated with the same witnesses, he produced the indictment that you read about the other day.(4)
After Blum met with Morgenthau, he was introduced to other prosecutors in the New York DA's office, and debriefed them. He told them he believed BCCI had engaged in money-laundering in New York, and described the evidence that BCCI owned First American. Morgenthau's prosecutors found his information to be startling, and viewed it with skepticism. As Michael Cherkasky, Morgenthau's chief of investigations later stated:
Blum's story was ridiculous. [He said] the entire Third World was involved and that they had bought and sold entire governments and maybe some United States officials. It was a fascinating tale -- this guy was telling us the world was corrupt!(5)
Morgenthau decided to move forward, and assigned the investigation of the case to John Moscow, an experienced fraud prosecutor. Moscow in turn interviewed Blum's witnesses, looked at documents, investigated the case Blum brought to them, and, in Cherkasky's words, Blum's "'story' was proven to be true."(6) While the Justice Department prosecutors who had the most information about BCCI regarded Blum as a "wacko," and his information as worth little, the New York District Attorney's office took it seriously, investigated it, and proved it out.
During the July 4th weekend of 1989, several members of District Attorney Morgenthau's staff attended an international conference on money laundering in Cambridge, England. At the conference, they learned that BCCI had an international reputation for capital flight, tax fraud, and money laundering that far exceeded the conduct charged in the Florida indictment.(7)
In addition, Morgenthau's staff learned that BCCI did not have a single regulator and did not operate on a consolidated basis anywhere and that its two major operating subsidiaries were chartered in separate bank secrecy havens -- Luxembourg and the Cayman Islands -- where customer privacy was paramount. They concluded that this structure multiplied BCCI's opportunities to conceal fraud. Following the trip, they conferred with the District Attorney and decided to pursue an investigation against BCCI in earnest. At the time they made this decision, all of the information they had was also available to the Justice Department.(8)
From the start, given the allegations presented to them by Blum, the New York District Attorney's office recognized that an important part of the investigation would be uncovering the exact relationship between BCCI and First American. After Blum left Morgenthau's office, Morgenthau looked at First American in Moody's stock guide, and noted that First American was owned by a series of holding companies starting in Delaware that then moved offshore to various bank secrecy havens, and that First American itself was headed by Clark Clifford. Morgenthau later said that looking at the series of holding companies and seeing Clifford's name at the top, he concluded that "somebody was trying to hide something.(9)
Because First American had a New York operation, First American Bank of New York, any misrepresentations made in connection with that bank by BCCI or anyone else would confer a primary basis for jurisdiction for Morgenthau's office.
Thus, while BCCI's possible ownership of First American was never more than a peripheral issue for the Tampa prosecutors, one which prosecutor Jackowski termed "dessert," with money laundering being the main course, the issue was always at the center of attention at the District Attorney's office. As Moscow stated later:
We kept asking one basic question: 'Who owns B.C.C.I. and where did the money come from?' We never got to the advanced questions. We got stock on the simple questions and on 'Who owns First American?'"(10)
While the New York District Attorney was able to subpoena those documents held at BCCI New York, and at the offices of First American in New York, subpoenas outside the immediate jurisdiction of New York posed greater problems for a local district attorney. These problems, while in some cases substantial, were dwarfed further by the District Attorney's difficulties in obtaining information pertinent and material to BCCI's activities in New York, but held at such locations as the United Kingdom, Luxembourg, the Grand Caymans, Panama, and Abu Dhabi. Moreover, on even simple issues, New York was finding tremendous obstacles in getting answers.
When New York sought documents from the Serious Fraud Office in London -- the British version of the financial crimes unit within the Justice Department -- the SFO was unwilling to provide it with any assistance in obtaining BCCI documents. When New York met with BCCI's lawyers, former federal prosecutors Lawrence Wechsler and Lawrence Barcella, they told the New York prosecutors that the documents concerning the issues of BCCI's capitalization and stock were held abroad and protected by bank secrecy, and the prosecutors could not obtain them.(11) As Morgenthau later testified, BCCI had been careful to keep its critical records in countries that would protect its right to keep them secret, making investigation of BCCI extraordinarily difficult:
When you try to get the records, they invoke the secrecy laws of all those jurisdictions. The main audit of BCCI was done by Price Waterhouse U.K. They are not permitted, under English law, to disclose, at least they say that, to disclose the results of that audit, without authorization from the Bank of England. The Bank of England, so far -- and we've met with them here and over there -- have not given that permission.
The audit of BCCI, the financial statement, profit and loss balance sheet that was filed in the State of New York was certified by Price Waterhouse Luxembourg. When we asked Price Waterhouse U.S. for the records to support that, they said, oh, we don't have those, that's Price Waterhouse U.K.
We said, can you get them for us? They said, oh, no, that's a separate entity owned by Price Waterhouse Worldwide, based in Bermuda.
So, here you have financial statements, profit and loss, filed in Washington, filed in Virginia, filed in Tennessee, filed in New York, and audited by auditors who are beyond the reach of law enforcement.
So that creates some very, very serious problems.(12)
Thus, accounting firms in the United States affiliated with those elsewhere that had certified BCCI responded to subpoenas with the claim that they could not provide the documents that could prove BCCI's criminality; the Bank of England, which could have made those documents available also refused to provide them; and the British Serious Fraud Office refused to provide them. Moregenthau's attempts to obtain documents concerning BCCI's money laundering and other crimes from Panama met similar resistance. Finally, when the District Attorney of New York turned to the Justice Department for assistance, it too refused to cooperate. As Morgenthau testified on May 23, 1991:
We've had a number of meetings with senior people in the fraud section of the Justice Department, and I think their position has been that they'd rather go it alone.(13)
In fact, at the time the Justice Department had, as detailed in the chapter on the Justice Department, refused to provide the New York District Attorney with access to its documents and certain witnesses under its control in connection with BCCI, and in one case, a prosecutor in Tampa actually lied to the Morgenthau office and claimed that the Blum tapes pertaining to his debriefings of the BCCI witnesses did not exist and had never existed.(14)
Documents subpoenaed by the Foreign Relations Committee from BCCI and provided by BCCI's liquidators to the Committee after the closure of the bank on July 5, 1991 provide a base-line mechanism for assessing how the District Attorney of New York put together his case. The documents initially provided by the liquidators to the Committee consisted almost entirely of materials that had previously been subpoenaed in 1990 by the District Attorney of New York.
What the documents show is that the District Attorney had several insiders who either still worked at BCCI, or had formerly done so, who had provided guidance to the relationships between BCCI and First American.
Subpoenas to BCCI in New York had revealed hundreds of documents pertaining to BCCI's involvement in various aspects of decision making concerning the First American Bank in New York. They also revealed financial benefits to First American and National Bank of Georgia employees being paid them by BCCI while they ostensibly were employed by the U.S. banks, numerous and differing kinds of financial transactions involving BCCI and First American, and participation by First American employees who formerly worked for BCCI in BCCI's annual conferences.
A number of the witnesses who testified before the Subcommittee were first interviewed by investigators from Morgenthau's office. These BCCI insider, such as Abdur Sakhia, who testified in detail about the ties between BCCI and First American, Clifford and Altman's alleged knowledge of these ties, and Clifford and Altman's alleged actions at First American at the direction of BCCI, provided critical information linking together the documents and leading to subpoenas to other, less cooperative, BCCI insiders.
Thus, based on the information that existed within the United States, it was possible to develop a theory of what had taken place, as well as a substantial amount of direct and circumstantial evidence to confirm it. However, it was clear from the first additional critical information was outside the United States, and had to be obtained to further document some of the essential matters to bring an indictment.
Morgenthau's office had learned in the autumn of 1990 that audits of BCCI by Price Waterhouse UK would detail massive fraud at BCCI, and describe in detail BCCI's interest in First American. But subpoenas to Price Waterhouse in the United States produced no information, as the accounting firm's attorneys took the position that the U.S. firm had no power to obtain such information from its foreign affiliates. Accordingly, Morgenthau, as described in a journalistic account, used personal contacts he had in the United Kingdom to cut the knot of secrecy the UK had imposed on the audit reports:
[Morgenthau] contacted Eddie George, the deputy governor of the Bank of England. Morgenthau reminisced about his time in England during the war. . . "Morgenthau told George, 'We are going to charge this bank.' . . . And when we charge them you are going to be looked at publicly. We would like to be able to say that the Bank of England helped us."(15)
It is not by any means clear that the Bank of England responded to Morgenthau's plea. However, ultimately, through a mechanism that has never been made public, Morgenthau was able to obtain the Price Waterhouse audit reports, detailing BCCI's frauds, its massive lending on First American, its use of nominees, and related matters. As his investigation intensified, he found that the Federal Reserve had by late 1990 became engaged in its own investigation of BCCI and First American, and the two offices began working closely to assist one another.
The Federal Reserve was able to conclude by February, 1991 that there had been violations of the Federal Bank Holding Company Act in connection with failures by BCCI to keep it apprised of changes in share holdings at First American/CCAH. The situation threatened the restructuring of BCCI that was going on in the United Kingdom, and the Federal Reserve was able to convince the Abu Dhabi government that cooperation with it was essential if Abu Dhabi and BCCI were to have any hope of keeping the bank alive. Federal Reserve investigators Richard Small and Thomas Baxter went to Abu Dhabi and there found the key documents showing BCCI's secret ownership of First American through nominees, which were in turn provided to the District Attorney's office. Thus, as of the spring of 1991, Morgenthau had assembled more than enough information to indict BCCI as a classic Ponzi scheme from its beginning. Yet even as he prepared to indict BCCI, he continued to face massive obstacles in obtaining information from any government agency besides the Federal Reserve, let alone from the vigorous defense being pursued by his targets. As Morgenthau testified on May 23, 1991:
We are finding problems at every step of the way. We are finding problems with the Justice Department in getting records. We have had subpoenas out to various banks for records which have not been honored. We have been trying to get the cooperation of the Bank of England. We are trying to get the cooperation of Price Waterhouse U.K., and we have not been successful.
The one organization that has been very helpful to us is the Federal Reserve Bank of New York and the Federal Reserve Board in Washington.(16)
On July 29, 1991, the New York District Attorney indicted BCCI. In contrast to the narrow money laundering charges brought against BCCI by the Justice Department in Tampa, the indictment alleged a broad, international criminal organization which stole funds from poor countries and small depositors and used them to keep BCCI afloat despite massive mismanagement and the fact that the bank had no real assets of its own.
As the indictment described it:
[BCCI's] scheme was premised on the fact that banks rely on credit. The essence of the scheme was to convince depositors and other banking and financial institutions, by means of false pretenses, representations, and promises that the BCC Group was a safe financial repository and institution for funds, and thereby defendants acted to persuade depositors and banking and other financial institutions to provide the BCC Group banks with deposits and credit.(17)
Thus under Morgenthau's theory of the case, BCCI had from the beginning never had the assets it purported to have, but relied on the reputations of prominent people to provide it with the aura of wealth and respectability it needed. He saw BCCI to a massive, multi-billion dollar confidence scheme, whose collapse was inevitable if the facade BCCI had so carefully constructed were ever ripped away. During the months prior to his July 29, 1991 indictment of BCCI, the New York grand jury had heard witness after witness detail the mechanisms by which the facade had been maintained, and having hearing those details, they indicted.
The New York District Attorney found that among the major actions taken by BCCI to carry out its fraud were:
** Employing the ruling families of a number of Middle Eastern states as nominees for BCCI, who pretended to be at risk in BCCI but who were in fact guaranteed to be held harmless by BCCI for any actual losses.
** Using bank secrecy havens including Luxembourg and the Cayman Islands to avoid regulation on a consolidated basis by any single regulator of BCCI, and thereby to permit BCCI to transfer assets and liabilities from bank to bank as needed to conceal BCCI's true economic status.
** Paying bribes and kickbacks to agents of other banking and financial institutions, thereby avoiding the scrutiny of regulators. (18)
By December, 1991, BCCI's liquidators had pled guilty to the first six counts of the New York indictment as part of an agreement concerning BCCI's assets in the United States. Essentially every one of the matters which Blum had put in front of the District Attorney two and a half years earlier had proven to be true, and had now been acknowledged by BCCI's representatives in formal court proceedings.
The persistence of the District Attorney in 1989 and 1990 led to a series of events which brought BCCI down. First, the questions being asked by the District Attorney intensified the review of BCCI's activities by its auditors, Price Waterhouse, in England. Second, the District Attorney's questions led to the Federal Reserve again seeking information about BCCI's possible ownership of First American beginning in late 1989. Third, the District Attorney's efforts were critical to stopping an intended reorganization of BCCI worked out through an agreement among the Bank of England, the government of Abu Dhabi, BCCI's auditors, Price Waterhouse, and BCCI itself, in which the nature and extent of BCCI's criminality would be suppressed, while Abu Dhabi would commit its financial resources to keep the bank going during a restructuring.
By the late spring of 1991, the key obstacle to a successful restructuring of BCCI bankrolled up Abu Dhabi was the possibility that the District Attorney of New York would indict. If such an indictment came, the restructuring could prove exceedingly embarassing for the Bank of England, depending on what Morgenthau charged and whether it had the consequence of causing a global run on BCCI.
The Federal Reserve, the only other government agency then engaged in an active investigation of BCCI, was focused on a relatively narrow set of issues. It had already reached a consent decree with BCCI under which BCCI would agree to give up its secret interest in First American and cease to do business in the United States. These were serious steps, but related to issues that BCCI could characterize as technical violations of U.S. banking laws, rather than matters that went to the fundamental integrity of BCCI's record keeping and bookkeeping and finances.
By contrast, a criminal indictment in New York might be far broader. The questions asked to date by the District Attorney's office indicated it might well charge that since BCCI's inception, it had been an insolvent pyramid scheme to obtain credit by pretending to have the deep pockets of its Middle Eastern shareholders, when in fact at least a majority of these shareholders were not at risk. Such an indictment would have inevitably caused a swift and thoroughly justified international run on BCCI by depositors all over the world. In threatening such an indictment, the New York District Attorney was making the restructuring proposal intended by the Bank of England, Abu Dhabi, Price Waterhouse, and BCCI, impossible.
The result was that in late June, 1991, confronted both with mounting evidence of BCCI's frauds and with the probability of an indictment within weeks by the New York District Attorney, the Bank of England was forced to begin setting into motion the process of BCCI's international closure.
Thus, the pressure from a single, local prosecutor's office that would not relent when it found evidence of global criminality, proved sufficient to shut down a $23 billion criminal bank operating in some 73 countries. The result is testament to the power of a single local district attorney unwilling to abandon his search for the truth, and the trail of evidence left by BCCI of its crimes around the world.
1. S. Hrg. 102-379, pp. 152-153.
2. S. Hrg. 100-773, Pt. 2 pp. 20-21.
4. S. Hrg. 102-350 p. 33.
5. Vanity Fair, April, 1992, "How They Broke the Bank," p. 261.
6. Letter, Michael Cherkasky to Senator Kerry, November 21, 1991, S. Hrg. 102-350 Pt. 3 p. 771.
7. S. Hrg. 102-379 p. 148.
8. Id p. 149.
9. Vanity Fair, April 1992, "How They Broke the Bank," p. 261.
11. Id p. 262.
12. Morgenthau, S. Hrg. 102-379 p. 158.
13. Id. p. 162.
14. See Vanity Fair, April 1992, "How They Broke the Bank," p. 266.
15. Vanity Fair, April, 1992, "How They Broke the Bank," p. 266.
16. S. Hrg. 102-379 p. 167.
17. People v. BCCI, Supreme Court of the State of New York, County of New York, July 29, 1991.
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