BCCI, which managed to penetrate every country it targeted, including the United States, was a bank which regulators always recognized as a risky institution. Having no lender of last resort and no consolidated auditor, BCCI presented a structure which to Western bank regulators was unsound, regardless of how BCCI happened to use the structure. From the beginning, regulators in the United Kingdom and the United States sought to discourage BCCI from entering their jurisdictions. Their hostility was not based on a cultural contempt for a Third World or Pakistani bank, as BCCI's chief, Agha Hasan Abedi, sometimes contended. Rather, it was based on the very structure of the bank, which was viewed, correctly, as having been deliberately created to avoid regulation.
As William Taylor, then staff director of the Federal Reserve's Division of Banking Supervision and Regulation testified in May, 1991:
I want to make it clear that BCCI, unlike virtually any other major international bank, was not subject to a comprehensive system of supervisory oversight by authorities in its home country. . . both the holding company for BCCI and one of its major banking subsidiaries are chartered in Luxembourg; but neither the holding company nor the subsidiary has conducted a banking business in that country. BCCI appears to manage most of its global business out of offices in London. The regulatory authorities in Luxembourg, therefore, did not provide consolidated supervision of the BCCI organization.(1)
Luxembourg was thus one of BCCI's homes, yet did not regulate it, because BCCI did not engage in banking business there. BCCI's other home, the Grand Caymans, did not regulate any bank licensed there. The Caymans lack of regulation was precisely the inducement for banks to charter themselves there.(2) BCCI's operational home, the United Kingdom, also did not regulate BCCI's activities: the UK regulator, the Bank of England, considered BCCI to be a foreign bank, based in Luxembourg and the Grand Caymans, and thus the responsibility of regulators in those countries.
This neat arrangement by BCCI, together with its division of its auditing functions between two auditors, one for "Luxembourg" and the other for "Grand Caymans," ensured that BCCI's activities could not be adequately monitored by anyone. As former Comptroller of the Currency John Heimann testified:
Early on in my government service, I learned one very important and fundamental lesson; namely, that those so inclined to manipulate banks for their own benefit find it easiest to do so if they operate between different supervisory regimes.
Many bank swindles have been built around this practice. For example, an individual owns a bank in New York State, another bank in Belgium, a third bank in Switzerland, and still another bank in Argentina. Each of these banks is regulated by a different Supervisor. . . For years, the same situation applied domestically. There were some who owned both state chartered and national chartered banks who moved assets between them to improve examination results. This practice was stopped during my term as Comptroller when all relevant agencies began to coordinate examinations.(3)
Despite being chartered elsewhere, BCCI chose London as its operational home and headquarters, creating oversight problems that gave regulators headaches for years. The Bank of England indeed considered BCCI "the most difficult bank we have to deal with," as far back as the 1970's.(4) It repeatedly limited BCCI's ability to expand there and to gain full bank powers, even as the U.S. halted BCCI's attempts to purchase U.S. banks openly, leaving it with the legal ability only to enter the U.S. through establishing foreign branches which could not accept deposits from Americans.
Yet in the face of this regulatory hostility, BCCI ultimately succeeded in developing large banking operations in both the United States and the United Kingdom anyway, through its secret ownerships of U.S. banks and its accretion of licensed deposit taking status in the UK. While BCCI did not need to bribe central officials in the United States and the United Kingdom, as it did in many other countries, its success in flourishing in both countries for so long demonstrates obvious flaws in the regulatory process.
In the U.S., BCCI was able first to deceive the Federal Reserve, despite making numerous errors in the course of its takeover of Financial General Bankshares that provided obvious warnings of its intentions. It then was permitted to merge that bank, renamed First American, with National Bank of Georgia, which the Federal Reserve also knew to be associated with BCCI. It then was permitted to expand further into Florida, despite further warning signs to the Federal Reserve about the identity between BCCI's shareholders and those of First American. Even after it was indicted on drug money laundering charges, the Federal Reserve undertook only limited investigative efforts. The Federal Reserve's extensive current investigation of BCCI began after the Federal Reserve was notified by the New York District Attorney that BCCI had massive loans securing First American's stock which had never been disclosed to the Federal Reserve. As late as the spring of 1991, after the Federal Reserve understood that BCCI and many of First American's shareholders had lied to the regulators, and that BCCI itself was involved in massive fraud, the Federal Reserve still took no position as to whether BCCI should be closed globally, so long as the bank was shut down in the United States.
In the UK, the Bank of England took minimal steps to investigate the bank until it was notified by BCCI's auditors in early 1990 that BCCI had engaged in fraud. Even then, the Bank of England's approach to the problems posed by BCCI was not to close BCCI, but to find ways to keep BCCI alive and thus avoid embarrassing financial losses. In order to prevent BCCI from collapse, the Bank of England arranged with BCCI's auditors, with the government of Abu Dhabi, and with BCCI itself to keep secret what it had learned about BCCI. The Bank of England simultaneously committed itself to an agreement with Abu Dhabi whereby if Abu Dhabi would guarantee BCCI's losses, the Bank of England would lend its hand to helping BCCI survive, and with BCCI auditors that they would certify BCCI's books and accounts for another year, in return for Abu Dhabi's guarantee. The Bank of England even agreed to permit BCCI to restructure in the form of three banks, headquartered in three different jurisdictions -- precisely the structure already identified as the key to BCCI's previous success in evading regulation. Finally, as part of its agreements with Abu Dhabi, the Bank of England encouraged BCCI to move its headquarters and officers out of British jurisdiction to Abu Dhabi, along with its records, a move which later deprived investigators in the US, as well as the UK, with essential information about what BCCI had done.
Together, these actions by the regulators highlight the lack of accountability that still exists internationally in dealing with financial institutions as they cross national borders. BCCI's homes in Luxembourg and the Grand Caymans were not responsible for keeping track of what BCCI was doing. Neither was the United Kingdom, where BCCI was actually headquartered. So far as the Federal Reserve was concerned, BCCI's activities in the U.S. were limited to small state-chartered branch offices over which it had no jurisdiction whatsoever. Yet even after each of these authorities knew that BCCI had losses amounting to billions of dollars, none of the regulators had a picture of BCCI's whole operations, none of the regulators considered BCCI to primarily their problem, and each of the regulators remained prepared to permit BCCI to continue to survive if its survival meant that the interests of their country were protected.
In the case of the Federal Reserve, this meant leaving it to the Bank of England to make judgments concerning whether BCCI would continue to exist or not, so long as BCCI withdrew entirely from the United States and the Abu Dhabi government continued to provide funds to help prop up the now shaky First American Bank.
In the case of the Bank of England, this meant planning to permit BCCI to reopen as three "independent" banks so long as Abu Dhabi was willing to put in the cash necessary to prevent the bank from collapsing. That judgment by the Bank of England only changed at the end of June, 1991 when two simultaneous factors converged -- the announcement by Price Waterhouse in its Section 41 report that it was impossible to tell how deep, or how far, BCCI's frauds might ultimately extend -- and the fact that BCCI might shortly be indicted by the New York District Attorney as an example of organized crime, an indictment that would cause the collapse of the bank in any case.
Thus, in the end, it was not the regulatory process itself that brought about the exposure and removal of BCCI from either the United States or the United Kingdom. In both cases, the ultimate regulatory action was prompted by the criminal investigation brought by a local district attorney, Manhattan prosecutor Robert Morgenthau. But for Morgenthau's investigation, the Federal Reserve may well never have learned from the Bank of England, Price Waterhouse, Abu Dhabi, or anyone else that reports prepared by BCCI's auditors showed massive loans against the shares of CCAH/First American, information that caused them to open the investigation that swiftly led to BCCI's closure in the United States. But for Morgenthau's investigation, the Bank of England might well have proceeded with BCCI's restructuring regardless of the new revelations about fraud, and simply hoped for the best.
** When the Federal Reserve approved the take over of Financial General Bankshares by CCAH in 1981, it had substantial circumstantial evidence before it to suggest that BCCI was behind the bank's purchase. The Federal Reserve chose not to act on that evidence because of the specific representations that were made to it by CCAH's shareholders and lawyers, that BCCI was neither financing nor directing the take over. These representations were untrue and the Federal Reserve would not have approved the CCAH application but for the false statements made to it.
** In approving the CCAH application, the Federal Reserve relied upon representations from the Central Intelligence Agency, State Department, and other U.S. agencies that they had no objections to or concerns about the Middle Eastern shareholders who were purporting to purchase shares in the bank. The Federal Reserve also relied upon the reputation for integrity of BCCI's lawyers, especially that of former Secretary of Defense Clark Clifford and former Federal Reserve counsel Baldwin Tuttle. Assurances provided the Federal Reserve by the CIA and State Department, and by both attorneys, had a material impact on the Federal Reserve's willingness to approve the CCAH application despite its concerns about BCCI's possible involvement.
** In 1981, the Office of the Comptroller of the Currency had additional information, from reports concerning BCCI's role in the Bank of America and the National Bank of Georgia, concerning BCCI's possible use of nominee arrangements and alter egos to purchase banks on its behalf in the United States, which it failed to pass on to the Federal Reserve. This failure was inadvertent, not intentional.
** In approving the CCAH application, the Federal Reserve permitted BCCI and its attorneys to carve out a seeming loophole in the commitment that BCCI not be involved in financing or controlling CCAH's activities. This loophole permitted BCCI to act as an investment advisor and information conduit to CCAH's shareholders. The Federal Reserve's decision to accept this arrangement allowed BCCI and its attorneys and agents to use these permitted activities as a cover for the true nature of BCCI's ownership of CCAH and the First American Banks.
** After approving the CCAH application in 1981, the Federal Reserve received few indicators about BCCI's possible improper involvement in CCAH/First American. However, at several critical junctures, especially the purchase by First American of the National Bank of Georgia from Ghaith Pharaon in 1986, there were obvious warnings signs that could have been investigated and which were not, until late 1990.
** As a foreign bank whose branches were chartered by state banking authorities, BCCI largely escaped the Federal Reserve's scrutiny regarding its criminal activities in the United States unrelated to its interest in CCAH/First American. This gap in regulatory oversight has since been closed by the passage of the Foreign Bank Supervision Enhancement Act of 1991.
** The U.S. Treasury Department failed to provide the Federal Reserve with information it received concerning BCCI's ownership of First American in 1985 and 1986 from the CIA. However, IRS agents did provide important information to the Federal Reserve on this issue in early 1989, which the Federal Reserve failed adequately to investigate at the time.
** The FDIC approved Ghaith Pharaon's purchase of the Independence Bank in 1985 knowing him to be a shareholder of BCCI and knowing that he was placing a senior BCCI officer in charge of the bank, and failed to confer with the Federal Reserve or the OCC regarding their previous experiences with Pharaon and BCCI.
** Once the Federal Reserve commenced a formal investigation of BCCI and First American on January 3, 1991, its investigation of BCCI and First American was aggressive and diligent. Its decisions to force BCCI out of the United States and to divest itself of First American were prompt. The charges it brought against the parties involved with BCCI in violating federal banking standards were fully justified by the record. Its investigations have over the past year contributed substantially to public understanding to date of what took place.
** Even after the Federal Reserve understood the nature and scope of BCCI's frauds, it did not seek to have BCCI closed globally. This position was in some measure the consequence of the Federal Reserve's need to secure the cooperation of BCCI's majority shareholders, the government and royal family of Abu Dhabi, in providing some $190 million to prop up First American Bank and prevent an embarrassing collapse. However, Federal Reserve investigators did actively work in the spring of 1991 to have BCCI's top management removed, including the then head of BCCI, Zafar Iqbal, who had close ties to the Abu Dhabi shareholders.
** In investigating BCCI, the Federal Reserve's efforts were hampered by examples of lack of cooperation by foreign governments, including most significantly the Serious Fraud Office in the United Kingdom and, since the closure of BCCI on July 5, 1991, the government of Abu Dhabi.
** The Federal Reserve has fully cooperated with the Subcommittee in its investigative efforts, providing essential information, documentation, and assistance in obtaining access to witnesses. This cooperation was unique among federal agencies, and materially assisted the Subcommittee's work.
** U.S. regulatory handling of the U.S. banks secretly owned by BCCI was hampered by lack of coordination among the regulators, which included the Federal Reserve, the FDIC, and the OCC, highlighting the need for further integration of these separate banking regulatory agencies on supervision and enforcement.
** The Bank of England had deep concerns about BCCI from the late 1970s on, and undertook several steps to slow BCCI's expansion in the United Kingdom.
** In 1988 and 1989, the Bank of England learned of BCCI's involvement in the financing of terrorism and in drug money laundering, and undertook additional, but limited supervision of BCCI in response to receiving this information.
** In the spring of 1990, Price Waterhouse advised the Bank of England that there were substantial loan losses at BCCI, numerous poor banking practices, and evidence of fraud, which together had created a massive hole in BCCI's books. The Bank of England's response to the information was not to close BCCI down, but to find ways to prop up BCCI and prevent its collapse. This meant, among other things, keeping secret the very serious nature of BCCI's problems from its creditors and one million depositors.
** In April, 1990, the Bank of England reached an agreement with BCCI, Abu Dhabi, and Price Waterhouse to keep BCCI from collapsing. Under the agreement, Abu Dhabi agreed to guarantee BCCI's losses and Price Waterhouse agreed to certify BCCI's books. As a consequence, innocent depositors and creditors who did business with BCCI following that date were deceived into believing that BCCI's financial problems were not as serious as each of these parties already knew them to be.
** From April, 1990, the Bank of England relied on British bank secrecy and confidentiality laws to reduce the risk of BCCI's collapse if word of its improprieties leaked out. As a consequence, innocent depositors and creditors who did business with BCCI following that date were denied vital information, in the possession of the regulators, auditors, officers, and shareholders of BCCI, that could have protected them against their losses.
** In order to prevent risk to its restructuring plan for BCCI and a possible run on BCCI, the Bank of England withheld important information from the Federal Reserve in the spring of 1990 about the size and scope of BCCI's lending on CCAH/First American shares, despite the Federal Reserve's requests for such information. This action by the Bank of England delayed the opening of a full investigation by the Federal Reserve for approximately eight months.
** Despite its knowledge of some of BCCI's past frauds, and its own understanding that consolidation into a single entity is essential for regulating a bank, in late 1990 and early 1991 the Bank of England tentatively agreed with BCCI and its Abu Dhabi owners to permit BCCI to restructure as three "separate" institutions, based in London, Abu Dhabi and Hong Kong. This tentative decision demonstrated extraordinarily poor judgment on the part of the Bank of England. This decision was reversed abruptly when the Bank of England suddenly decided to close BCCI instead in late June, 1991.
** The decision by the Bank of England in April 1990 to permit BCCI to move its headquarters, officers, and records out of British jurisdiction to Abu Dhabi has had profound negative consequences for investigations of BCCI around the world. As a result of this decision, essential records and witnesses regarding what took place were removed from the control of the British government, and placed under the control of the government of Abu Dhabi, which has to date withheld them from criminal investigators in the U.S. and U.K. This decision constituted a costly, and likely irretrievable, error on the part of the Bank of England.
The Federal Reserve, rather than the Office of the Comptroller of the Currency was the primary decision maker as to whether to permit the Middle Eastern group which fronted for BCCI to take over Financial General Bankshares. However, due to several accidents of history, the OCC did have more information concerning the threat posed by BCCI to the U.S. banking system, and BCCI's actual intentions. Moreover, the OCC was the primary decision maker in approving whether to permit Ghaith Pharaon, another BCCI front-man, to take over the National Bank of Georgia from Bert Lance in precisely the same period.
Despite having very serious reservations about BCCI, and fears that BCCI might secretly be trying to enter the U.S., the OCC ultimately decided in both cases to accept assurances that its fears were unjustified. The reasons for OCC's decisions in both cases are not entirely clear, but appear to have been related in the case of the National Bank of Georgia, to having no viable alternative to the Pharaon purchase, and in the case of Financial General Bankshares, to extract tough concessions from the shareholders as to the condition that BCCI was not involved, and then leave responsibility for the ultimate decision on the CCAH application to the Federal Reserve.
The main historical accident that placed OCC in this position was the coincidence of John Heimann, the Comptroller of the Currency, having previously been the chief banking regulator for the State of New York at a time when BCCI was trying to enter the New York market through nominees.
As detailed in the chapter on BCCI's early activities in the United States, Heimann had found that a young Pakistani with few personal financial resources had applied to take over a New York bank, with BCCI behind him. On investigating BCCI, Heimann determined that BCCI had no central regulator, divided its operations between two auditors, and had no consolidated financial report, and therefore that its true financial picture could not be determined. Heimann stopped the application from proceeding, BCCI tried to enter New York again through targeting a second bank through a second nominee, and ultimately, Agha Hasan Abedi himself had met with Heimann in an unsuccessful effort to convince him that BCCI was a good bank.
Soon thereafter, Jimmy Carter became President, and Heimann became Comptroller of the Currency, where he wound being the principal person in the Carter Administration who determined that Bert Lance's banking practices were serious enough to warrant criminal investigation, and to require that Lance not remain as director of the Office of Management and Budget.
In early 1978, when Lance sold his shares in the National Bank of Georgia to Ghaith Pharaon, Heimann was in a quandary. A man who in his judgment was among the least trustworthy bankers in the United States was selling his bank to a man who, if history was repeating itself, might be a nominee for the least trustworthy bank in the world.
Heimann began probing the situation to determine whether BCCI was behind Pharaon. As a memorandum he wrote to his files on January 4, 1978 stated::
Tomorrow, January 5th, the sale of Lance's stock to Pharaon will be completed at 2 pm. . . Guyton [President of NBG since Lance's departure for OMB] noted he was somewhat disturbed about the role played by the Pakistanis in this transaction. Not that he knew anything negative about them but their role at present or in the future, seemed to be ill defined and caused him some concern. He believes that Lance is presently on the BCCI payroll working with Addabi [sic] and Sami. As a matter of fact, Lance went to London last week and will be back today. The purpose of that trip, presumably, was to discuss further expansion of BCCI in the U.S.(5)
In the conclusion of the memo, Heimann noted that Pharaon and BCCI apparently had plans for acquiring additional U.S. banks. This fact gave Heimann additional cause for concern given his opposition to BCCI's entry into the U.S. in New York two years previously. Within two weeks, OCC learned that Lance was not merely on BCCI's payroll, but receiving "a tremendous salary," an airplane, office space, and secretarial assistance from BCCI. NBG president Guyton told the OCC that BCCI intended to invest for its own account as well as for other investors in the U.S., and Lance was to be its business agent.(6) Soon thereafter, Heimann learned of Lance's involvement in the FGB takeover, and ordered his staff to determine whether Pharaon was a front for BCCI. As detailed in the chapter on BCCI's activities in the U.S., OCC staff met with Pharaon, who assured them that BCCI was merely an advisor to the purchase. The staff were not sure whether to believe Pharaon, and feared that he might be merely an "alter ego" for BCCI in the U.S.(7)
But Heimann was faced with a difficult choice. Pharaon had agreed that Lance would have no further involvement with National Bank of Georgia if his application to buy it were approved. Shortly, the OCC would be filing suit against Lance, charging him with fraud, which Lance would settle through a consent decree. If the National Bank of Georgia were not severed from Lance, it could be taken down with him.
Given OCC's concerns about Lance, there was an obvious tension between trying to protect the National Bank of Georgia from Lance's practices by letting a sale to Pharaon go forward, and with trying to protect the National Bank of Georgia by stopping the sale because of concerns about BCCI. The likely consequence of the latter course of action, however, would be that no one would buy NBG at all and it would be left in Lance's hands. The OCC knew in private what was not known by the public, although it was whispered in banking circles -- that NBG was in financial trouble, and had inadequate capital. Pharaon's tender offer for the shares of the bank would expire on June 20, 1978. If the OCC took any action to delay or prevent that acquisition, NBG might never recover.(8) The OCC gave Pharaon permission to move forward and he concluded his tender offer to purchase a 60 percent interest in NBG on May 30, 1978. OCC thus took the conservative approach of accepting Pharaon's dubious account about his relationship to BCCI, and permitting Pharaon to "rescue" the bank, rather than challenging Pharaon's purchase and placing the bank at immediate risk.
OCC's decision about NBG was unfortunate. As later bank examination documents demonstrate, NBG remained what OCC termed a "problem" bank for years following its sale to Pharaon, with a substantial number of Lance-related substandard and non-performing loans remaining in its portfolio. A decade later, after its purchase by First American at the behest of BCCI, NBG -- renamed First American Georgia -- remained in "unsatisfactory" condition according to OCC examiners, with serious problems of asset quality, earnings, loan losses, and monitoring system.
Another unfortunate aspect of OCC's decision is that OCC never advised the Federal Reserve of the tentative judgement of its staff that BCCI might be using Pharaon as a nominee at NBG. The OCC had also encountered this practice of BCCI's in a completely different setting at precisely the time it was considering the Pharaon-NBG matter. An OCC auditor based in London, Joseph Vaez, had determined that BCCI, which was still partly owned by Bank of America, had been making use of nominees in purchases of other banks.(9) This information was developed by the OCC's foreign examination division, and did not apparently reach the OCC examiners dealing with NBG.
Thus, while the OCC did ultimately require that BCCI not be involved in owning, lending, controlling, or managing Financial General Bankshares as a condition of signing off on the CCAH application, as an institution, the OCC had been in a position to do much more, and to insist upon further investigations. Instead, it made its concerns known to the Federal Reserve, and left it to the Federal Reserve to reach the ultimate judgments about the wisdom of the CCAH acquisition, and to insure that CCAH and its shareholders lived up to the commitments obtained from them by the OCC.
In buying National Bank of Georgia through its nominee, Pharaon, BCCI had succeeded in overcoming the regulators to acquire its first bank in the United States. This lesson would have been especially powerful to Abedi. During this very time, he was in the very midst of high publicized actions in Washington involving many of the same players and where allegations were again being raised about BCCI's possible use of front-men. It was a lesson that with persistence, BCCI would also be able to succeed in deceiving the regulators in its attempt to take over FGB.
Like OCC, the Federal Reserve was not blind to the issues involved in the CCAH application to take over FGB. BCCI's role was the key question throughout the highly-contested litigation during the take over and application process for FGB, and the Federal Reserve sought assurances that BCCI was not an owner, lender, controller, or manager of CCAH, on many occasions, and from many sources.
For example, as early as April, 1978, the Federal Reserve was asking detailed questions of Clark Clifford and Robert Altman as attorneys for Lance and the "individuals" in the BCCI group, inquiring whether ICIC, BCCI's Grand Caymans affiliate, was acting as a vehicle for the acquisition of FGB, receiving in reply a statement from BCCI lawyer Robert Altman that BCCI was acting as the commercial banker and financial advisor for the Middle Eastern investors, and that while BCCI had been used to move funds for the investors into the U.S., it had not financed any of the FGB purchases.(10)
Thus, by mid-1978, BCCI had developed a theory of its involvement with the Middle Eastern investors in FGB designed to reconcile its central role in the original takeover with the various securities and banking laws which prohibited it having an actual direct interest in taking over FGB. The theory, a clever cover story for the truth, was that BCCI was a financial advisor to the actual parties at interest, and never a principal itself in their purchases of FGB stock. From May 9, 1978 onward, Clark Clifford and Robert Altman, as attorneys for Lance, BCCI, and the BCCI-related shareholders, would articulate the position that BCCI at no time acted inconsistently with this role. It was a theory that was easy to abuse, as it would be very difficult for anyone, including the Federal Reserve, to distinguish between BCCI's actions as a financial advisor for legitimate shareholders, and the truth, which was that BCCI owned FGB, and the shareholders were nominees.
Nevertheless, the Federal Reserve continued to question whether BCCI actually had a hidden interest in CCAH, receiving further assurances. On March 12, 1981, the OCC finally signed off on the CCAH takeover based on the understanding that BCCI would have no involvement with the management of the bank or the holding companies or with the financing of the acquisition. And on April 23, 1981, the Federal Reserve convened a hearing on the application, focusing again on the issue of BCCI's role in CCAH, receiving still further assurances. A detailed account of the regulators' concerns, and the assurances provided by the CCAH shareholders, Clifford, Altman and others, are specified in detail in the chapter on BCCI's early activities in the U.S.
Based on the assurances, the Federal Reserve, despite its obvious suspicions, approved the CCAH application on August 25, 1981, and the acquisition was completed the following April, following delays involving state authorities.
In approving the CCAH application, the Federal Reserve explicitly accepted "the entire record" of statements made to it by the Middle Eastern investors, BCCI, and their attorneys. These included certain statements made in the April 23, 1981 hearing and in the applications which constituted practical, if not necessarily legal, loop-holes regarding BCCI's ability to be involved with FGB in the future, and contrary to the understandings which the OCC had said were critical for its approval of BCCI's application.
These statements made by the CCAH shareholders, Clifford and Altman, suggested that if BCCI loaned funds to the shareholders after the original acquisition in connection with CCAH, such loans would not be precluded. Together with the Federal Reserve's acceptance of the concept that BCCI could act as a liaison between FGB and the shareholders in its capacity as "investment advisor," the ability of BCCI to "lend" to its shareholders following the initial acquisition created a mechanism by which BCCI could at any time "call" its interest in CCAH shares, in collusion with its nominees. It would do this by "lending" funds, secured by those shares, on which the nominees defaulted, leaving BCCI in possession of the shares. In the decade to come, this device was used by BCCI repeatedly to deceive the regulators, in some cases with the apparent knowledge of some of BCCI's attorneys and agents in the U.S.
A review of the entire record shows the Federal Reserve to have diligently sought to learn the truth about the nature and extent of BCCI's involvement in the CCAH acquisition of FGB. The Federal Reserve queried relevant federal agencies, such as the CIA and Statement, and learned nothing negative about the proposed shareholders. It asked detailed questions of the shareholders themselves and of its attorneys, and received repeated assurances. Its investigative efforts were persistent and significant, and it is hard even in retrospect to understand much else the Federal Reserve might have done to prove that BCCI in fact was using nominees to buy FGB without looking beyond the transaction to larger issues about BCCI. None of the documents that would show the nominee relationships were available to anyone not part of the conspiracy of deception; any loans made by BCCI in connection with the purchase were hidden abroad, or among its affiliates. Ultimate proof that these wealthy Middle Easterners were lying to the Federal Reserve would have been essentially impossible to obtain.
On the other hand, the Federal Reserve did have before it very substantial circumstantial evidence that the applicants, their attorneys, and BCCI were not telling it the full truth. There were some obvious leads available to the Federal Reserve which it did not follow up. And if the Federal Reserve had decided that BCCI might well be a secret party to the deal, and broadened its investigation to look at BCCI's overall goals and typical procedures, it might well have been able to discover enough about what was actually going on to justify rejecting the application.
To begin with, it was patently obvious that the original four Middle Eastern shareholders working with Lance and BCCI to take over FGB in early 1978 had been acting jointly, and the SEC had specifically made this finding, which was admitted by the shareholders, Lance and BCCI in a consent decree. Yet Kamal Adham, Faisal al Fulaij and the other shareholders had taken great pains to testify to the Federal Reserve that not only did they not act together in the original takeover, they did not even know one another. The implausible -- and wildly contradictory -- accounts given the Federal Reserve by these shareholders concerning how they came to invest in FGB should have been sufficient, in and of themselves, to have justified disapproval.
In addition, Lance's sale of the National Bank of Georgia at precisely the same time to another person associated with BCCI, Ghaith Pharaon, at an inflated price, was further evidence to any reasonable skeptical mind that BCCI might well be behind both transactions. This should have been especially obvious given the many public accounts of BCCI having bailed Lance out of his financial problems with millions of dollars in loans and payments. Moreover, Heimann at OCC had already seen BCCI use nominees, and an OCC bank examiner had made reference to BCCI's use of nominees in a 1978 memorandum on BCCI and the Bank of America. The possible relationship between the NBG purchase by Pharaon from Lance to the FGB purchase by the Middle Eastern investors with Lance, with BCCI involved as the "investment advisor" in both cases, was never explored by the Federal Reserve. Basic questions concerning that relationship would likely have raised very disturbing questions about what was actually taking place. However, in part because the National Bank of Georgia purchase was regulated by the OCC rather than the Federal Reserve, the Federal Reserve never put the two transactions together, and thus missed a very significant opportunity to find out the truth.
Finally, because BCCI was not an official party to the transaction, the Federal Reserve never considered the possibility of investigating BCCI itself. When it asked the CIA and State Department about the CCAH shareholders, it neglected to ask the agencies what they knew about BCCI. Because it did not view BCCI to be party to the transaction, it did not look at BCCI's other efforts to enter the United States, which would have alerted the Federal Reserve to BCCI's practice of using nominees. Instead, the Federal Reserve looked solely to the parties before it, unable to move past the formal statements in the application to understand what was actually taking place behind it.
Other factors were also at work. BCCI's use of Clark Clifford and Baldwin Tuttle clearly had an impact on the Federal Reserve's willingness to challenge the statements being made to it by the CCAH shareholders. Clifford's prestige was enormous, and his reputation for integrity impeccable. During the April 23, 1981 hearing before the Federal Reserve, he gave the Federal Reserve his word that BCCI was not involved in language that has since often been quoted:
None. There is no function of any kind on the part of BCCI. I think when the question was asked, having to do with what might occur in the future, I think somehow may have given the answer, "well, that would depend upon the judgment of Financial General in the future." I know of no present relationship. I know of no planned future relationship that exists, and other than, I don't know what else there is to say.(11)
Clifford's additional suggestion in the hearing that rejection of the application by the Federal Reserve would be a sign of bigotry and intolerance on the part of the regulators was also an effective means of discouraging regulators from being overly skeptical of the Middle Eastern investors, despite their inherently implausible stories about their investment in FGB.
The fact that Baldwin Tuttle, a former Federal Reserve counsel, was acting as the regulatory lawyer for the group would also have had a significant sobering effect on any Federal Reserve attorney who might otherwise advocate further investigation, or rejection of the application. To deny the application on the ground that one did not believe the assurances given by clients of a former colleague, with the high professional standards of the Federal Reserve itself, would have been a difficult, and painful, judgment.
For all of these reasons, the Federal Reserve in essence gave the CCAH shareholders the benefit of the doubt, and BCCI was given its first significant foothold in the United States.
A second error by the Federal Reserve, which would come back to haunt the regulators later, was its undefined acceptance of the concept that BCCI could be the investment advisor and conduit for the CCAH shareholders. These concepts were to become almost infinitely expandable by BCCI, and to complicate substantially later investigations and prosecutions, although it is now evident the concept was intended by BCCI, its front-men and attorneys as a cover story from the start.
Compounding this error was a third mistake by the Federal Reserve. While initial statements to regulators by the CCAH shareholders had made broad statements about BCCI's non-involvement, by the time of its approval, suggesting that BCCI was free to lend money to FGB shareholders, and to engage in other actions regarding FGB in the future, as implied by the Clifford statement, "what might occur in the future, I think. . . well, that would depend upon the judgment of Financial General."(12) The notion that whatever obligations everyone had been under at the time of the takeover would end the moment that the Federal Reserve approved the CCAH application threatened to undermine the assurances that the regulators had so patiently sought over the previous three years. Yet nowhere on the record is there a clear statement by the Federal Reserve prior to the approval of the CCAH application, that the transactions prohibited in the past would also be prohibited in the future -- as was clearly understood and required by the OCC.
In short, the Federal Reserve was neither sufficiently skeptical, tough, or imaginative to combat the cleverness of those who conspired to deceive it. Justifiably suspicious of the presentation that had been made to them by the Middle Eastern investors, the regulators ultimately lacked the bureaucratic will to refuse them permission to buy the bank they had targeted. The result was that BCCI was able to get away, for a decade, with secretly owning what became with BCCI's money the biggest bank in the nation's capital.
As far as the Federal Reserve was concerned, once it had approved CCAH's application to buy FGB, its role was, for the time being, finished. As Federal Reserve council Virgil Mattingly testified in May, 1991 it was the Federal Reserve's view that:
In the years immediately following the acquisition, there was no evidence to suggest that CCAH and First American were functioning other than in accordance with the statements made to the Board and the other regulators . . . Both federal and state examinations of First American and its subsidiary banks and of the U.S. offices of BCCI detected no irregularities in their dealings with each other, which were reported as limited.(13)
As Mattingly testified, nothing unusual was noticed by the Federal Reserve until BCCI was indicted for drug money laundering in Tampa in October, 1988.(14)
While completing its secret purchase of First American, BCCI itself had opened branch offices, licensed by and primarily regulated by the states in which they were located, in San Francisco, Los Angeles, Miami, Tampa, and Boca Raton, with additional representative offices in Washington DC and Houston. As none of these offices could accept domestic deposits, U.S. regulatory interest in them was slight, and they operated with almost no supervision prior to the Tampa indictment. During that time, these branches worked quietly to take in funds from foreigners who wished to place funds in the U.S., engaging in commercial banking transactions, service the needs of foreign embassies, commercial entities, and central banks, and becoming the home away from home for flight capital from the Third World, for tax evaders, and for those engaged in arms trafficking, commodities fraud, and money laundering.
Regulators were remarkably innocent of all of this activity, which was clearly rampant at BCCI's U.S. offices, and visible in its documents, as later reviewed by Subcommittee staff. Because of BCCI's status as a foreign branch, licensed by states, checks by federal regulators were infrequent and limited. It was not until 1987 that the Federal Reserve first identified money laundering at BCCI, in its Miami office, triggering a criminal referral to the IRS, the FBI, and the U.S. Attorney in Miami.
Even then, the Federal Reserve did not consider BCCI's wrongdoing sufficiently worrisome to require a broader look at what BCCI was doing in the United States, making no attempt to coordinate an examination for money laundering in all of BCCI's offices. Such a coordinated examination took place for the first time only in October and November, 1988 -- after the Tampa sting had shown BCCI to be laundering money from drug countries like Colombia and Panama through the United States to Europe and back on a systematic, institutional basis. When it was finally undertaken, it revealed that BCCI had also been laundering money out of its New York and Boca Raton branches, that the BCCI branches' internal controls and lending practices were poor, and that remedial action was required.(15)
Remarkably, even then, after BCCI had been indicted for having a corporate policy of soliciting the proceeds of cocaine trafficking, and multiple branches of BCCI had been found by regulators to have engaged in money laundering, the Federal Reserve took no action to force BCCI to leave the United States. Its attitude was that this would be a decision for the states which licensed BCCI's local branches. All that the Federal Reserve insisted upon was that the past violations be cleaned up, and that BCCI agree to a anti-money laundering compliance program as a condition of continuing to do business, a deal that BCCI was glad to accept.(16) Under the circumstances, this was a remarkably tolerant attitude on the part of the Federal Reserve. That attitude persisted even after BCCI pled guilty to the drug money laundering charges in January 1990. At that time, the Federal Reserve advised the chairman of the Subcommittee that it lacked the power to simply order the closure of a state-chartered foreign bank for laundering drug money, prompting Senator Kerry to propose legislation -- currently pending before the full Senate -- explicitly mandating the closure of any bank convicted of such a charge.
Even at First American, although the bank examiners had failed to detect irregularities, they had certainly already occurred, as later investigations were to show.
For example, almost immediately following the acquisition, BCCI directed First American to re-establish banks in New York City, after New York regulators had prevented the New York branches of FGB from being purchased by the CCAH group along with the rest of FGB. The space leased by First American, at BCCI's direction, was far in excess of its needs and imprudent. At the same time, BCCI directed the hiring of employees for First American, and placed on First American's payroll two key officers to staff international operations out of New York. Soon thereafter, BCCI officials began to engage in joint marketing operations with First American officials, and to steer flight capital from Latin American, including Colombia and Panama, to First American.(17)
Moreover, despite the Federal Reserve's contention that nothing unusual took place, in fact, First American's purchase of the National Bank of Georgia in 1986 from "Ghaith Pharaon" should have raised substantial concerns if the regulators had been paying any attention whatsoever. After all, the Federal Reserve knew National Bank of Georgia was officially owned by Ghaith Pharaon, whose "financial advisor" was BCCI, while at the same time, First American was officially owned by other Middle Eastern investors whose "financial advisor," once again, was BCCI. Moreover, Clifford and Altman, chairman and president of First American, and lawyers for BCCI, had previously been the lawyers for Bert Lance in the sale of National Bank of Georgia to Pharaon, at the very time they were also helping Lance, BCCI, and the Middle Eastern investors in their original take over attempt of FGB. These facts surely should have caused the Federal Reserve to undertake a serious investigation in 1986. Not only did this not happen, but in the Federal Reserve's public testimony in May 1991, there was no recognition by Mattingly that such an investigation should have happened.
Within weeks after the Tampa indictment, IRS agents working on the case against BCCI advised the Federal Reserve that it had information that BCCI owned First American. As Federal Reserve counsel Mattingly testified:
On December 27, 1988, an IRS agent working with the Justice Department authorities in Florida contacted by telephone one of the Federal Reserve staff personnel and asked for access to the transcripts to the hearing and so forth and so on. . . . . we were told the staff member was told that [the] BCCI employee indicated that BCCI owned First American Banks. That was basically when we were advised. And again, that kind of allegation we had heard before.(18)
Two days later, a reporter for a Florida newspaper contacted Federal Reserve official Lloyd Bostian in Richmond looking for information concerning the ownership of First American. The reporter advised Bostian that an affidavit filed by an undercover FBI agent stated that a BCCI official said BCCI had not bought U.S. banks directly, but BCCI did control the National Bank of Georgia and other banks through individuals.(19)
In response to this disturbing information, the Federal Reserve undertook the first significant review of the BCCI-First American relationship that had occurred since its approval of the CCAH application seven and a half years earlier. As Mattingly characterized the review:
We went into the bank [First American] and one of the things that the Reserve bank did was contact each of the First American banks and ask them, what are your dealings, what kind of relations do you have with BCCI. We got back responses from the presidents of each of these banks. Basically, most of them said there were no affiliations whatsoever. . . . We also went into the bank, the First American banks, and contacted and talked to the senior management of the company, including its lawyers, reviewed with them the commitments, and were assured that everything, that any relationships between BCCI and First American were as they had been portrayed in the application. There was no controlling influence. We were subsequently told there are no loans to fund the acquisition by the investors of the CCAH stock.(20)
However, the Federal Reserve did find a number of facts during the review which should have been sufficient to cause the Federal Reserve to open an investigation.
Its examiners found "multiple" First American Accounts at BCCI (there were in fact 40 in all), and a very significant correspondent bank relationship between BCCI and First American, and that the common ownership of CCAH and BCCI had increased.(21)
In addition, its officials had been directly provided with additional information concerning the nature of the BCCI-First American relationship from the IRS itself.
On February 1, 1989, the IRS agent who originally had contacted the Federal Reserve, David Burris, came to Washington with a supervisor and met with William Ryback, a senior Federal Reserve international bank supervisor. The two IRS agents provided Ryback with a briefing of the evidence they had obtained concerning the links between BCCI and First American. According to the IRS agents, they offered to provide Ryback with witnesses who would describe how BCCI owned First American. According to the IRS agents, Ryback declined their offer, and instead suggested that he need documents in order to take further action. However, by Ryback's account, no offer of witnesses was mentioned by the IRS agents in the course of their debriefing.(22)
Regardless of the contradictions between the IRS account and Ryback's concerning what was said in their February 1 meeting, by that date the Federal Reserve had ample information sufficient to justify the opening of an investigation. Yet instead it concluded on February 8, 1989 -- just one week after the Ryback-Burris meeting -- that there were no evidence of irregular contacts between First American and BCCI or of the failure by CCAH to adhere to its commitments.(23) The judgment, needless to say, was flawed. Eight days later, the Federal Reserve approved the acquisition by CCAH/First American of yet another bank -- the Bank of Escambia, of Pensacola, Florida.
Regardless of whether it was the fault of the Federal Reserve or that of federal law enforcement, nothing was done by the regulators with the information that federal law enforcement had developed concerning BCCI's secret ownership of First American. Nowhere is this more evident than in the treatment of a critical tape, made by federal agents on September 9, 1988, during which BCCI officer Amjad Awan had told undercover Customs agent Robert Mazur about BCCI's secret ownership of First American, and his perception of Clark Clifford and Robert Altman's role in a coverup. The tape contained a road map for regulators as to how the FGB transaction was structured, through nominees. But the Federal Reserve never obtained it until December, 1990 -- nearly two years after Burris had first contacted the Federal Reserve -- and some six months after it had already been introduced at trial and become a public document.
The Federal Reserve's lack of diligence in pressing for the information possessed by federal law enforcement was matched by the failure of federal law enforcement, apart from the IRS agents, to provide the Federal Reserve with the information it had. For example, at no time did the Tampa U.S. Attorney's office advise the Federal Reserve that in addition to the original information it had received, the Subcommittee had provided it with further sources concerning the alleged relationship. Similarly, in May, 1989, the information the CIA had previously developed concerning BCCI's secret ownership of First American was provided anew to selected federal agencies, including the State Department, Treasury Department, Commerce Department, National Security Council, Office of the Comptroller of the Currency, and Federal Bureau of Investigation, and yet no one had bothered to notify the Federal Reserve.(24)
On August 21, 1989, in the midst of the Federal Reserve's review of BCCI's compliance with its anti-money laundering consent decree with the Federal Reserve, the Federal Reserve did hear from a local law enforcement agency concerning information that BCCI owned First American. A representative of the New York District Attorney told a Federal Reserve investigator that an informant had reported that BCCI owns or controls First American through nominees. However, the Federal Reserve took no immediate action in response, except to not that it head heard this allegation before.(25)
Thus, from early February on, the Federal Reserve did little if anything further to investigate the BCCI-First American relationship until the end of 1989. At that time, it learned -- informally -- from a Bank of England official that some of First American's shareholders had outstanding loans from BCCI, possibly secured by their stock in CCAH/First American. In response to this new information, the Federal Reserve in December, 1989 wrote Robert Altman, as CCAH's counsel, to again ask whether there were any loans by BCCI or its affiliates to any of CCAH's past or present shareholders, regardless of the purpose of the loan.(26) The questions asked of Altman by Ryback showed that the Federal Reserve was, whatever the failings of its investigations to date, fully focused on the central issue:
In connection with the application of Credit and Commerce American Holdings N.V. [CCAH] . . . a question was raised . . . whether any of the financing of the equity investment would be provided directly or indirectly by Bank of Credit and Commerce International S.A. (BCCI). It was indicated at the time that the individual investors had substantial funds and only a modest portion of the total investments would be financed. Further, any personal borrowing by the investors would come from financial institutions unaffiliated with BCCI.
It has come to our attention that at least some of the investors may have borrowed from BCCI. It may be that these borrowings were unconnected with the Financial General Bankshares transaction, but nevertheless were granted close to the time the acquisition was made. Some, if not all, of the borrowings may be secured by the stock of Financial General Bankshares. In order to clarify the situation it would be helpful if you would provide information on any loans extended to the original or subsequent investors, either directly or indirectly, by BCCI or any other affiliated organizations. This information should include all loans extended to the investors regardless of purpose, whether any of these loans are secured and if so, in what manner, and the date any loans were originally granted. It would also be useful to provide information on the repayment history of any such loans.(27)
True and honest answers to the questions asked by Ryback would have, of course, brought to an immediate end BCCI's secret ownership of First American, and commenced the kind of investigations which in fact began only one year later. Instead, Altman advised Ryback by telephone that he did not know the answers to Ryback's questions and had therefore contacted BCCI and CCAH's shareholders to ask them what they knew. Altman enclosed a letter from Naqvi and BCCI -- which according to later Federal Reserve charges Altman himself had drafted -- contending that the information requested was confidential and could not be released without the permission of the shareholders, which to date had not been granted. The Naqvi letter once again gave assurances that BCCI had not financed the original FGB acquisition, and through artful wording, sought to leave the impression, without so stating, that CCAH shares had been pledged against BCCI lending.(28) The Altman letter concluded by recharacterizing Ryback's broad, and detailed, request, in terms that would if accepted by the Federal Reserve, relieve Altman from the obligation of disclosing his own and Clark Clifford's prior loans from BCCI:
I shall, of course, press ahead with my request for the detailed information you wish to review, with my understanding that you primary interest is the current state of borrowings from BCCI by any of the First American investors, including any stock that may have ben pledge as collateral for loans.(29)
These artful dodges did not relieve the Federal Reserve's mounting anxieties that it might have been duped by BCCI. The Federal Reserve accordingly reached out again to the Justice Department and federal law enforcement.
On February 7, 1990, the Federal Reserve sent investigators to Tampa to meet with federal prosecutors, who were at the time in the midst of the trial of five BCCI officers who had been indicted in the Tampa case. The prosecutors said that while rumors of the BCCI-CCAH relationship abounded, they had investigated them and found no evidence to substantiate them.(30) This position was then confirmed by IRS agents, including Burris. The agents told the Federal Reserve that they wrote a report to the grand jury setting out the facts, which they would be glad to provide to the Federal Reserve, and that they had an informant who could also provide further information on the issue. Following the meeting, the Federal Reserve investigator was told by a Tampa prosecutor that the report contained no relevant information, and therefore would not be provided. The Federal Reserve persisted in requesting the report, and the Tampa prosecutor, for reasons not explained, continued to refuse to cooperate by providing it. In the meantime, the investigator tried repeatedly to talk to the informant, and was told by the informant's wife that the informant was out of the country.(31)
Thus, when the Federal Reserve finally went to federal law enforcement in search of information, the information it was given was either of little help, or actually incorrect. Instead of cooperating with the Federal Reserve, the Tampa prosecutor actually refused to provide requested information.
The Federal Reserve also reached out, with equal lack of success, to the Bank of England. It asked the Bank of England to provide it with more information about the nature of BCCI's lending to CCAH shareholders. In return, the Bank of England advised the Federal Reserve "that it had encountered difficulties in obtaining the necessary information but would continue its investigation."(32)
The previous December, the Bank of England had provided the Federal Reserve with an important warning about BCCI's lending to First American. But since then, the Bank of England itself had been drawn into BCCI's troubles as a result of Price Waterhouse advising it of the massive losses at BCCI and Price Waterhouse's own unwillingness to sign off on further audits of the bank. Thus, the Bank of England was now struggling with the problem of how to prevent BCCI from collapsing entirely, how to work out agreements with Abu Dhabi to guarantee BCCI's losses, and how to keep knowledge of the depth of BCCI's troubles from becoming public. By the spring of 1990, its own perceived vital interests were at stake. Accordingly, the Bank of England chose to be less than completely candid with the Federal Reserve about what it knew. If it had told the Federal Reserve that BCCI had $850 million in lending secured by CCAH's shares, the result would have been the instantaneous action that the Federal Reserve ultimately took the following January, just weeks after it finally saw the Price Waterhouse audits that the Bank of England withheld from it earlier in the year.
Despite its investigatory efforts, from the spring of 1990 through November, 1990, the Federal Reserve made little progress on the BCCI-First American issue. The Justice Department had given it almost nothing. The Bank of England had given it almost nothing. Both were in fact, for differing reasons, withholding important information from the Federal Reserve. At last, in November, the New York District Attorney's office gave the Federal Reserve the information it needed to break the investigation open. As Mattingly testified:
In November 1990, the New York County District Attorney's Office informed Federal Reserve staff that a confidential source had stated that a report prepared in October 1990 by BCCI's outside auditors indicated that BCCI had made substantial loans to CCAH shareholders secured by CCAH shares. Board staff immediately requested access to this report from the United States General Manager of BCCI. After a delay occasioned by the initial refusal of the auditor [Price Waterhouse] to permit the report to be examined by the Federal Reserve, BCCI agreed to make the report available for review by a senior member of the Board's examination staff in BCCI's London office. The review was conducted on December 10, 1990. The auditor's report and a conversation on that date with the new chief executive officer of BCCI [Zafar Iqbal] indicated that BCCI had substantial loans outstanding secured by CCAH stock. This was the first substantive evidence received by the Board confirming a financial relationship between BCCI and CCAH.(33)
Eleven days after this event, the Federal Reserve was contacted by counsel for the Abu Dhabi shareholders of BCCI and First American, Patton, Boggs & Blow, who advised the regulators
that Abu Dhabi had the previous April become BCCI's new majority shareholders, and had invested "a very large sum in BCCI stock to correct certain capital deficiencies." The lawyers for Abu Dhabi confirmed that "a substantial amount of the stock of CCAH had been pledged to BCCI as collateral for hundreds of millions of dollars in loans to certain shareholders of CCAH," and suggested that Patton, Boggs, instead of Clifford and Altman, would now be coordinating the handling of issues pertaining to CCAH with the regulators.(34)
Two weeks later, the Federal Reserve initiated its formal investigation, including the authorization of full discovery power, into the circumstances of BCCI's acquisition of control of CCAH and whether false or misleading statements had been made to the Board during the application process in 1981 and afterwards. Two weeks later, Patton Boggs acknowledged that there was material in BCCI's files concerning nominee arrangements for some of the CCAH shareholders. One week later, on January 22, 1991, the Federal Reserve sent a proposed cease and desist order to BCCI's counsel and made criminal referrals to the Justice Department.(35)
Having decided at last to place all the resources at its disposal to investigating BCCI's activities in the United States, the Federal Reserve put together a team of attorneys, examiners and investigators to conduct a comprehensive investigation of BCCI.
In Washington, the Board of Governors of the Federal Reserve swiftly reached consent decrees with BCCI and CCAH on March 4, 1991, requiring BCCI to divest itself of any interest it had in CCAH, and prohibiting transactions between BCCI and CCAH except as specifically approved by the Federal Reserve, and requiring BCCI to submit a plan to the Federal Reserve under which it would cease all banking operations in the United States.
At the same time, the Federal Reserve devoted its primary attention to severing First American from BCCI, and trying to stave off its collapse. When the Federal Reserve and other U.S. regulators ultimately did undertake a systematic review of BCCI's relationship with its secretly-held U.S. subsidiaries, they found evidence that BCCI had directed First American's decisions at the holding company level, including in connection with First American's costly decision to open offices in New York City and its even more costly decision to purchase the National Bank of Georgia.(36) But the regulators found only limited evidence that BCCI, its shareholders, or customers had received preferential treatment from First American. Thus, in a sense, BCCI had made only limited use of the asset it had bought. With certain exceptions pertaining to First American's deposits of funds in BCCI's Grand Caymans affiliate, ICIC, First American had been collected as an asset to be held for a rainy day, rather than as an asset to be immediately raided. First American was BCCI's piggy-bank, not BCCI's dust-bin bank, its place to deposit resources created elsewhere.
Nevertheless, First American also had serious financial problems, due in large part to its over-reliance on real estate and agricultural lending, similar to that of other banks in the metropolitan Washington region, that had now turned sour. These problems were now being exacerbated by the bad publicity First American was receiving in connection with its ownership by BCCI. Normal forms of recapitalization were no longer available to First American. It could not call on its nominee shareholders to pump in more funds. Nor could BCCI itself add new funding to First American. Nor would any "white knight" be able to come in and purchase the bank at any price until many more of the legal problems pertaining to its ownership were resolved. Apart from the Federal Reserve's own discount window, the only possible place to turn was Abu Dhabi. Accordingly, the Federal Reserve began negotiations with Patton, Boggs and Blow to determine the degree to which the Abu Dhabi shareholders of CCAH/First American were willing to help the Federal Reserve preserve the value of their investment -- which would disappear entirely in the event of a First American collapse. Thus, both Abu Dhabi and the Federal Reserve during the first half of 1991 had substantial incentives to cooperate with one another. Abu Dhabi needed to find ways to avoid the closure of BCCI globally, a closure which the Federal Reserve had the potential of forcing. The Federal Reserve needed Abu Dhabi's money.
Squeezed out of this equation was the ability of the Federal Reserve to find out the full story -- including the issue of the precise role Abu Dhabi had played in the original FGB takeover, and subsequently. Obviously, it would not be possible for the Federal Reserve to insist on full and complete disclosure by Abu Dhabi with the same vigor that it was insisting on disclosure by other shareholders, and at the same ask Abu Dhabi to place its cash into First American. The result was that the Federal Reserve and Abu Dhabi entered into a period of cooperation for the purpose of saving First American that in its way, was no different from the same kind of cooperation the Bank of England was getting from Abu Dhabi in Abu Dhabi's attempt to save BCCI. In return for Abu Dhabi giving the regulators money, the regulators would accept Abu Dhabi's assurances of innocence, at least for the time being.
In mid-March, the Federal Reserve sent two experienced investigators, Richard Small in Washington and Thomas Baxter in New York, to Abu Dhabi, where they requested the Abu Dhabi authorities to provide them with all relevant documents pertaining to BCCI's activities in the United States. Abu Dhabi would not grant Small and Baxter direct access to BCCI's files. Instead, they agreed to arrange the transport of particular categories of files, as designated by Small and Baxter, to a suite in the hotel in which they were staying in Abu Dhabi. This arrangement successfully produced vital documents concerning nominee arrangements between BCCI and all of the non-Abu Dhabi shareholders of CCAH. It was never likely to, and did not in practice, result in the provision to the Federal Reserve of useful material concerning Abu Dhabi's relations with BCCI.
Despite its need for funds for First American, the Federal Reserve did take a strong position with British regulators concerning the need for BCCI to be totally reformed if it were to continue in any form. In the weeks prior to BCCI's closing, Federal Reserve investigators, including Small and Baxter, lobbied the Bank of England aggressively on the issue of BCCI being permitted to restructure with any of its former officers remaining in charge of the bank, including the new head, Zafar Iqbal, installed by Abu Dhabi. In part as a result of the Federal Reserve's lobbying, the Bank of England in turn advised Abu Dhabi of the need to remove Iqbal, which in turn lead to a temporary stalemate over the proposed restructuring of BCCI, until the Bank of England ended the issue, and the bank itself, with its order closing BCCI of July 5, 1991.
Following BCCI's closure, the Federal Reserve worked with outside members of the First American board of directors such as former Maryland Senator Charles Mac Mathias, to force Clifford and Altman out of their roles as chairman and president of First American, and working with other bank regulators, closely monitored First American for signs of a run on the bank, and proceeded to a series of enforcement actions, including an assessment on July 29, 1991 of a $200 million fine against BCCI, a $37 million fine against BCCI nominee Ghaith Pharaon, a $20 million fine against BCCI official Kemal Shoaib, and the commencement of civil enforcement proceedings against Clifford and Altman, and together with the Justice Department and New York District Attorney Morgenthau, a plea agreement on December 17, 1991 by BCCI's liquidators that forfeited some $500 million of BCCI assets in the U.S., together with a complex, asset sharing agreement designed to protect both U.S. interests and assist innocent BCCI depositors and creditors abroad.(37)
The Federal Reserve's summaries of charges accompanying the various enforcement actions have collectively amounted to several hundred pages of detailed, precise information on how, when, and by whom, the Federal Reserve was lied to in connection with BCCI's activities in the United States. These summaries leave little doubt as to what happened on the matters they cover. They demonstrate clearly the very substantial investigatory and legal capabilities placed by the Federal Reserve into the BCCI investigation since January 3, 1991, and collectively provide the most complete account to date of what took place concerning BCCI's activities in the United States.(38)
At the same time, the Federal Reserve has adroitly, if not always swiftly, handled the complexities of severing First American from BCCI. Untangling BCCI's ownership of CCAH was a lawyer's nightmare, and without resorting to the regulatory takeover of First American some believed inevitable, the Federal Reserve now appears to have taken First American from the brink of extinction to long-term survival. While First American did lose several billion dollars in deposits and was severely weakened by the bad publicity surrounding BCCI's closure, buffered by the $190 million obtained from Abu Dhabi, it has, to date, appeared to weather the storm. After extensive and protracted negotiations, the CCAH shareholders placed their shares of CCAH into a trust and an independent trustee was appointed, shortly before the Subcommittee's final hearing, on July 30, 1992. Various First American assets, including its Georgia, Florida and Tennessee operations, have been sold off, and the sale of the metropolitan Washington operations to another bank is anticipated to occur by the end of 1992.
Throughout this period, the Federal Reserve and Abu Dhabi have sought to retain a cordial relationship, deferring problem areas in order to permit the sale of First American to go forward, with Abu Dhabi continuing to provide some, albeit limited, assistance to the Federal Reserve concerning some formerly privileged BCCI documents held in Abu Dhabi, and with the Federal Reserve remaining unaccountably "hopeful" that it will in time gain access to the top BCCI officers still held under house arrest in Abu Dhabi.(39)
While the Federal Reserve made profound progress in investigating BCCI during 1991 and 1992, substantial obstacles have remained to the Federal Reserve's ability to complete its investigation. As noted above, eighteen key witnesses and many key BCCI documents have remained held in Abu Dhabi and unable to any U.S. investigator to date. Foreign bank secrecy laws have also continued to hinder the Federal Reserve's ability to get information it requires, especially in Luxembourg and France.(40) The Federal Reserve has yet to be able to interview key participants in BCCI's frauds in the United States, including former Saudi intelligence liaison and BCCI front-man Abdul Raouf Khalil, former head of Kuwaiti Airlines and BCCI front-man Faisal al Fulaij. And the Federal Reserve has been prevented from interviewing certain witnesses and reviewing certain documents in the United Kingdom by the British Serious Fraud Office.(41) While all of these issues remain a problem, the most serious of them remains Abu Dhabi's refusal to provide access to the documents and witnesses it controls. As Mattingly testified:
Senator, I think it is absolutely imperative that the Federal Reserve and Mr. Morgenthau and the Justice Department have access to BCCI employees in Abu Dhabi, and that we also have access to all of the documents of BCCI that are in Abu Dhabi.(42)
Until such access is provided, the Federal Reserve's investigations of BCCI cannot be said to be complete.
On January 30, 1992, the FDIC was forced to close the Independence bank of Encino California, held by Ghaith Pharaon as a nominee for BCCI, at a cost to the bank insurance fund of an estimated $130 million to $140 million.(43) The action took place just weeks after $5 million was injected into the bank by BCCI's liquidators one week after they had entered a guilty plea with the Justice Department and District Attorney Morgenthau on the bank's criminal indictments. The Independence Banks's closure, so soon after the final cash infusion, suggests just how far the bank had fallen by the time the regulators stepped in.
In fact, U.S. regulators were essentially oblivious to BCCI's ownership of the Independence Bank, and consistently underestimated the financial damage done to the Independence Bank by the management put into place there by BCCI, until the spring of 1991. The reasons for this are not entirely clear. The FDIC was aware of Pharaon's reported 15 percent ownership of BCCI and his borrowing relationship with BCCI, and aware that the person selected by Pharaon to chair Independence Bank, Kemal Shoaib, was a former officer of BCCI. There are two likely explanations for the FDIC's failures. First, the Independence Bank was a state chartered bank, and a non-member of the FDIC, whose principal regulator was the California State Superintendent of Banks, only secondarily backed up by the FDIC. Thus, the FDIC's monitoring of the Independence Bank was less rigorous than it would be if the FDIC were the primary regulator. Second, the FDIC had not been the decision maker in connection with the FGB take over, as was the Federal Reserve, or the decision maker in connection with Pharaon's take over of the National Bank of Georgia, as was the OCC. Accordingly, it had no reason to recognize the pattern that had emerged of BCCI's use of nominees to buy U.S. banks.(44)
Pharaon's purchase of the Independence Bank in 1985 had shown the usual pattern of BCCI. He filed documents showing that he would be financing 40 percent of the purchase himself, with the remaining 60 percent coming from a domestic bank, whose cooperation BCCI had secured through guarantees from BCCI which were not disclosed to the FDIC.(45) A routine background check of Pharaon was conducted, including requests for comment from the FBI, Customs Service, CIA, INTERPOL, and other regulatory agencies. No adverse information about Pharaon was uncovered by the background checks.(46)
Most interesting about the lack of information was the response by the CIA, which knew at the time of the FDIC's request that BCCI had engaged on a nationwide strategy of acquiring U.S. banks and had by the time of the FDIC request for comment already created a memorandum describing this strategy that it had provided to Treasury Secretary Donald Regan and to Robert Bench at the OCC. What appears to have happened is that the CIA was either unaware of Pharaon's connection to BCCI, or had failed to cross-reference its information about BCCI with Pharaon's name.(47)
After Pharaon purchased the Independence Bank, the condition of the bank was monitored regularly by state and FDIC examiners, and for the next three years, the State banking department conducted gave the bank a composite 2 rating on a scale of five, with 1 being the highest possible rating. This indicated the regulators' view that the Independence Bank was in strong, although not outstanding, financial condition. In mid-1988, this was downgraded to a 3 rating based on the bank's rapid growth and changing asset mix. An on-site examination by the state banking department and the FDIC a few months later downgraded this rating to a 4, indicating that the bank had, in the regulators' view, suddenly developed rather serious problems.(48)
As FDIC enforcement chief Stone testified:
This examination in 1988 marked a turning point for Independence Bank. From 1988, FDIC examiners became increasing concerned and alerted to problems at the bank. The examination report disclosed heavy asset classifications, low capital, weak earnings, thin liquidity, poor underwriting policies and inadequate record keeping and internal controls. Growth had been uncontrolled since mid-1987 and had been concentrated in joint venture real estate investments permitted under California law.
Mr. Shoaib had embarked on a program of investing in joint ventures involving acquisition, development and construction of real estate projects, primarily in southern California. In 1988, FDIC examiners discovered improper account of these projects which resulted in the understatement of total assets and liabilities, and the overstatement of the bank's capital.(49)
While the FDIC took the position that these problems had developed rather suddenly at the Independence Bank, in fact, as Senator Kerry suggested to the FDIC, "a bank does not accumulate" such problems overnight. Stone acknowledged that on detailed examination, the FDIC found that "file documentation was horrible," and that there had been "outright misrepresentation[s] by bank officials during [a] previous examination."(50)
Moreover, the Independence Bank had also begun to earn substantial fees -- $4 million in 1990 alone -- on transaction involving the swapping and restructuring of Third World debt. This was an area that Pharaon had used to his advantage in Argentina, as a result of personal relationships with high Argentine officials, including Argentine central bankers, to engage in transactions with BCCI in that country which were questionable at best.(51) Although the FDIC did not recognize this practice as pertaining to BCCI, it believed it completely inappropriate for a small, state-chartered bank and ordered the practice halted.(52)
Thus, once again, BCCI had successfully taken over a U.S. bank, and in this case actually brought BCCI's own typical practices to bear on the bank, under the nose of regulators who did not recognize what was happening. In the case of the Independence Bank, however, the FDIC did move to try to solve its problems from late 1988 on, through requiring further capital infusions from Ghaith Pharaon, and the resignation of Kemal Shoaib, the former BCCI officer, from his position as head of the bank in January, 1989.
At the same time, the FDIC sought to investigate whether the Independence Bank's ties to BCCI meant that it was engaged in money laundering. It found no systematic money laundering, but a few suspicions customer transaction which it then brought to the FBI. It did not, however, suspect that BCCI might have used Pharaon as a nominee and did not investigate that possibility.(53) It did, however, require Pharaon over the next two and a half years to inject some $46 million in new capital into the bank as the price for avoiding action by the regulators. In April, 1991, Pharaon, then under active investigation by District Attorney Morgenthau and the Federal Reserve, refused to inject any further capital into Independence, placing the bank's survival in doubt. Regulators installed examiners at the bank, looked to the royal family of Abu Dhabi as a source of capital, who refused to assist, considered a sale of the bank, and sought funds from BCCI and then its liquidators in an effort to prevent its collapse. However, it deteriorated rapidly, especially following the bad publicity due to revelations that it had been secretly owned by BCCI, and on January 30, 1991 was closed at the loss of $130 million to $140 million to the bank insurance fund.
In summary, BCCI's purchase of the Independence Bank demonstrated both the weaknesses and the strengths of the U.S. regulatory system. BCCI easily purchased a state bank in California through a nominee, attracting little notice, and using simple devices available to anyone with financial resources and willing to lie to regulators. While its ownership was never caught by examiners, the negative consequences of its ownership were, after about three years, and from there on, the examiners placed very significant pressure on the BCCI nominee, Pharaon, to force the bank to comply with U.S. standards and regulations.
The Federal Reserve acted swiftly in the wake of the development of the BCCI scandal in the spring of 1991 to write legislation, then introduced by the chairman and ranking member of the Senate Banking Committee, and the chairman of the Subcommittee, to enhance its supervision of foreign banks. That legislation swiftly passed the Congress in 1991, and is already being implemented by the Federal Reserve. The new law:
** Bars entry of any foreign bank into the U.S. unless it is subject to consolidated home country supervision and agrees to permit supervisory access to any information regarding it that the regulators want.
** Applies to foreign banks the same financial, managerial and operational standards governing U.S. banks.
** Grants specific authority to federal regulators to terminate the U.S. activities of any foreign bank that is engaging in illegal, unsafe, or unsound practices.
** Grants the Federal Reserve authority to examine any office of a foreign bank in the U.S.(54)
The new law filled many of the regulatory gaps specifically applicable to the BCCI case, but at least three broad problems remain:
WEAK FOREIGN REGULATORS. While the new foreign bank supervision law does prohibit banks without a central regulator from entering the U.S., it not does prohibit banks which are regulated in bank regulatory havens, such as Grand Caymans, Luxembourg, or, for that matter, any of the significant number of tiny nations who seek to attract business through offering lax regulatory standards and stringent bank secrecy laws. If BCCI had been based solely in the Grand Caymans, it might not have been able to maintain its deceptions as long once they were uncovered, but penetrating those deceptions in the first place would have just as difficult. The Federal Reserve needs to consider whether it is appropriate to deny access for a foreign bank to engage in activities in the U.S. if it is based in a country that does not certain essential standards for banking regulation.
FOREIGN BANK SECRECY LAWS. Criminals use bank secrecy laws to commit crimes. As the BCCI case demonstrates, even after those crimes have been discovered, foreign bank secrecy laws substantially interfere with legitimate U.S. law enforcement and bank regulatory interests in determining what went and who committed the illicit activity. The Foreign Bank Supervision Enhancement act substantially improved the Federal Reserve's ability to secure information directly from foreign banks doing business in the U.S., as a condition for their participation in the U.S. market. However, vital information pertaining to the activities of those banks may be in the possession of individuals or institutions other than banks not directly subject to the Federal Reserve's jurisdiction. For example, if BCCI had wired funds to a foreign bank, based in a bank secrecy haven, that did not do business in the U.S., the provisions in the Foreign Bank Supervision Enhancement Act would be of no help in obtaining the needed information. The Federal Reserve needs to consider whether it is appropriate to press for broader changes in bank confidentiality laws by foreign countries, beginning with the United Kingdom.
COORDINATION AMONG BANK REGULATORS. Regulation of U.S. banks has become a remarkably complex web, with bank examiners working for the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, and the Office of Thrift Supervision, at the Federal level, and approximately 52 additional regulators at the state level. It is inevitable under the circumstances that there are failures to communication, cooperation, and coordination among these differing agencies. At numerous, critical times in the BCCI case, information available to one regulator was not passed on to another regulator. The Federal Reserve needs to consider whether it is an appropriate use of regulatory resources to create some form of central federal banking data base regarding every financial institution regulated in any form by the federal government. Such a data base could compile application forms, bank examination reports, audits, correspondence, and other data for the use of all federal regulators which otherwise would remain segregated and scattered at each individual agency.
Although BCCI was chartered in Luxembourg and the Grand Caymans, its real home through most of its existence was the United Kingdom, where Abedi established BCCI's headquarters, and the senior BCCI officers made key decisions for BCCI's operations world-wide.
Abedi's choice for a world headquarters in London's financial district, "The City," made sense in the early days of the petrodollar boom. At the time, London was a favored vacation and shopping destination for oil-rich Middle Easterners, and BCCI needed to serve them. London was in any case one of the world's great banking centers. And yet, the location of BCCI's in the United Kingdom also created difficulties for the bank. For one thing, the British banking system viewed BCCI with suspicion and hostility from the beginning, because BCCI was not regulated in the United Kingdom, was managed by Pakistanis, and was therefore, as Abedi's put it, "outside the club."(55)
Despite the hostility shown towards BCCI by the British banking system, the actual jurisdiction over BCCI by the Bank of England was distinctly limited. Because BCCI was chartered in Luxembourg and the Grand Caymans, the Bank of England considered them to be the "lead regulators," and itself to have only a secondary role under British banking laws. This reduced the level of scrutiny imposed on BCCI by the Bank of England, even as British bank secrecy and confidentiality laws combined to impede the ability of any other regulator to penetrate BCCI's activities in the United Kingdom, where it was headquartered, and did all of its essential business.
Thus, in making the UK its actual headquarters, while keeping its charters in Luxembourg and the Grand Caymans, BCCI effectively fractured oversight by each of the regulators to a mere part of its operations, and frustrated consolidated oversight by anyone. At the same time, concern over this arrangement in the UK prompted repeated attempts by the British to curtail BCCI's activities, which proved to have relatively little effect.
BCCI's problems in the United Kingdom were notorious and public by mid-1978, as contemporaneous press accounts, describing the frigid response of British authorities to BCCI's expansion, demonstrate.(56) As the House of Commons Treasury and Civil Service Committee concluded following its investigation of BCCI:
The evidence we have received makes it quite clear that the Bank of England was well aware that there were problems at BCCI even as far back as the 1970s. The Governor told us: "I cannot say I was happy or, indeed, any of us have been particularly happy about having these branches in the UK. It has been the most difficult bank we have had to deal with." [As another bank regulator testified] "We had no shortage, if I may use that term, of allegations and accusations . . . about BCCI."(57)
BCCI's inherent problems in the UK were exacerbated by BCCI's over-rapid expansion, from four offices in the United Kingdom in 1973, to 45 offices four years later. The depth of the problems had already become clear by 1976, when BCCI still had not received the authority from the Bank of England to engage in full banking services in the UK. By 1978, the UK regulators were taking still more aggressive action against BCCI -- blocking the bank from being permitted to engage in any further expansion through branching, in order to "bring greater transparency to the operations of BCCI in the UK," and thus enable regulators to analyze just what BCCI was doing.(58) In 1980, the Bank of England turned down BCCI's request for recognized status under the Banking Act of 1979, limited it only to be a licensed deposit taker in the UK.(59)
Having taken these steps to limit BCCI's activities in the UK, the Bank of England did not seek to investigate BCCI further, or encourage others to do so. Instead, it sought to limit its own involvement in bearing responsibility over BCCI.
For example, in 1985, Luxembourg regulators, increasingly uncomfortable with their inability to oversee BCCI's activities, suggested that BCCI be required by the Bank of England to establish a separately incorporated entity in the UK that would enable the Bank of England to become the lead regulator. The Bank of England's response to the Luxembourg overture was to discourage it.(60) As Brian Quinn, executive director of the Bank of England, testified before the House of Commons, the Bank of England rejected Luxembourg's offer because:
You become lead regulator of an organisation you believe you can regulate.(61)
Prodded by the continuing rumors and allegations about BCCI, on December 4, 1985, the Bank of England decided that it would be appropriate for it to visit BCCI's Central Treasury offices in London, in what was apparently the first time the Bank of England had sought such an examination. Its examiners met with BCCI directors and officers, and after spending a week in the bank reached some startling conclusions. As one Bank of England official wrote in an internal memorandum:
1. After spending one week in BCCI, I am absolutely certain that the real head office is located on six floors of 100 Leadenhall Street. It is here that Abedi, Naqvi, Twitchin, Farqui et al work 12 hours a day managing assets of $15bn. . . . .
2. It is clear that Luxembourg is an historic chapter in the BCCI story and that Grand Cayman is a tax haven used as a booking centre. The Bank of England are effectively the prime supervisors of BCCI, not the IML [the Luxembourg Monetary Institute]. UK incorporation of the UK branch network followed by recognition must be traded with Abedi in exchange for the movement out of Leadenhall Street of the Central Support Organisation.(62)
From this memorandum, it appears that not until the end of 1985 did the Bank of England even understand that BCCI's headquarters was located in London. When it did, its first reaction was not to decide to upgrade its regulation of BCCI, but to consider trading upgraded status for BCCI's deposit taking in the UK in exchange for BCCI's agreement to move its headquarters out of the UK to the Bank of England would not have to regulate it.
In this same period, the Bank of England learned of BCCI's huge Treasury losses, which had nearly wiped out BCCI's capital, and did not object when BCCI moved its Treasury operations out of London to Abu Dhabi.
But a larger solution to the BCCI problem was still required, and the problem was considered sufficiently severed to require a structural response. After the Luxembourg Monetary Institute found itself unable to convince anyone else to take over the responsibility of monitoring BCCI's activities that were beyond its capabilities -- especially with BCCI's most important records now held in London and Abu Dhabi -- Luxembourg began to press for the formation of a College of Regulators to regulate BCCI. As Luxembourg had explained it, the Basle Concordat signed in May 1983 by many of the European banking regulators established a provision to permit a "college of regulators" to be set up to regulate banks that otherwise would escape regulation. While it was recognized that such a college was a second best approach after supervision on a consolidated basis," it was a lot better than the existing situation, in which Luxembourg did not even have the right to obtain BCCI's records in the UK. As Luxembourg described it, the college was the only solution available to Luxembourg to exercise supervision "over a group 98 per cent of whose activities feel outside its jurisdiction and for which none of the other banking supervisory authorities involved was prepared to take responsibility as parent authority."(63)
The British authorities, as well as Luxembourg, recognized that the college was not an ideal solution, because it perpetuated a problem that had been recurrent in the handling BCCI internationally: each nation focused on its own domestic concerns, and refused to accept full responsibility for BCCI's overall activities.(64)
The College was also, as might be expected of a newly created bureaucratic entity, slow to develop. Its was not formed until 1987. Its first meeting did not take place under April of 1988. At that meeting, which took place in Luxembourg, the regulators met with four BCCI officials and three partners of Price Waterhouse and discussed BCCI's large loan exposures. These consisted of the massive lending to CCAH shareholders for shares of First American; massive lending to BCCI shareholders such as Ghaith Pharaon and Kamal Adham; massive lending to the Gokal brothers; and other large loans which later were shown to be to nominees. As Lord Justice Bingham found:
Reference was made to the large loan exposures, but these were not examined in detail. . . The management were not taxed as to when and how these loans were to be reduced and no plan or timetable was sought. . . There was a brief and inconclusive discussion of CCAH which, according to the IML note of the meeting, had "to be seen as BCCI's steeping stone to set up in the US." . . . The meeting ended with a consideration of the College's enlargement to include Hong Kong, the Caymans and perhaps the United States and some Middle Eastern authorities. Naqvi was opposed to this. A College of that size, he argued, would be unmanageable. He wanted the group to be supervised on a consolidated basis by one supervisor and wanted the group to be restructured with that end in mind.(65)
The last thing that BCCI's top officials wanted was for the U.S. to participate with foreign regulators in overseeing its activities. As Naqvi knew, the moment the Federal Reserve knew of its massive loans for shares of CCAH, BCCI would be on a swift road to being forced out of the United States, and perhaps out of existence entirely.
What is remarkable about the summary of the meeting is the casual manner in which the regulators were approaching BCCI's problems. They saw massive outstanding lending that was not being serviced, and yet failed to recommend, let alone insist upon, any serious effort to correct the situation. Instead, they considered further additions in membership to the college, in what was in retrospect a further attempt to avoid having to take on the responsibility for overseeing BCCI themselves.
In later meetings of the college, discussions continued among BCCI, its auditors, and its regulators, concerning the need for BCCI to put aside additional funds as provisions against country risk, due to BCCI's very large lending to Nigeria -- some $260 million in all -- and its smaller, but still substantial exposure in countries like the Philippines, Zambia, and Sudan.(66)
In the spring of 1989, the college regulators listened to Price Waterhouse express its concerns about BCCI's continued high concentration of lending. Price Waterhouse also told the regulators that some of the largest borrowers were not paying interest on loans, let alone principal when due, and there was evidence that funds had been "drawn down" by BCCI without its central credit committee having provided prior approval. Yet in response, neither the Luxembourg regulators nor the Bank of England suggested that anything in particular be done, and accordingly, Price Waterhouse once again signed off on its audits, again certifying them to be a true and fair representation of BCCI's financial condition.(67)
By the end of 1989, the college regulators were placing increasing pressure on BCCI to reform, in concert with Price Waterhouse. In early 1990, Price Waterhouse informed the Bank of England that it now was confident that top BCCI officials had provided false information to it, and that there was fraud at BCCI, in an amount that was yet to be determined. The problem that the college regulators and the auditors had been slowly trying to come to grips with over the previous three years had accelerated, and action had to be taken.
On April 18, 1990, Price Waterhouse provided a report to the Bank of England which stated that a number of financial transactions at BCCI booked in its Grand Caymans affiliates and other offshore banks were "false and deceitful," and that it was impossible at the present time to determine just how far the fraud reached. Thus, a critical decision had to be made. Either BCCI had to be closed down now, or the Bank of England itself had to give its assent to keeping it open in some new form as a means of avoiding losses to BCCI's million or more depositors. New management needed to be installed. New financing had to be found, and the holes in BCCI's books had to be plugged.
The obvious solution was to ask Sheikh Zayed and the government of Abu Dhabi to take over the bank. As Zayed and the Al Nayhan family who ruled Abu Dhabi had been major depositors of BCCI, and had long had billions in family finances handled by BCCI, they stood to lose as much as anyone if the bank collapsed. Accordingly, Abu Dhabi would have to be told the truth about BCCI's perilous condition, and asked to commit funds to keeping the bank solvent.
A series of urgent meetings were held in Abu Dhabi and Luxembourg, beginning in March, 1990, in which Naqvi confessed his errors and resigned from his position as CEO at BCCI. Abu Dhabi agreed to provide a $1.2 billion cash infusion to BCCI, and to guarantee its losses. Naqvi was removed to Abu Dhabi, and a new management team was brought in. Best of all, from the point of view of the Bank of England, Abu Dhabi and BCCI had agreed to remove BCCI from its headquarters in London, a goal that the Bank of England had been seeking for years.
Rather than increase its jurisdiction over BCCI at this critical time, the Bank of England was increasingly anxious to make it someone else's problem. Abu Dhabi seemed only too glad to comply, and accordingly, the Bank of England gave its blessing to the removal not only of BCCI's headquarters, but its officers, and most importantly, all of its records, from British jurisdiction to that of Abu Dhabi.
At the same time, the Bank of England met with Price Waterhouse, which wanted to know the Bank of England's position concerning whether or not it should once again sign off on BCCI's books, despite the fraud which now the Bank of England, the Luxembourg regulators, and Abu Dhabi knew about in addition to Price Waterhouse and BCCI. The Bank of England and the Institut Monetaire Luxembourgeois, informed of what the auditors termed "all the uncertainties known to Price Waterhouse and of the financial support commitment by the Government of Abu Dhabi," agreed that BCCI could continue to operate, and Price Waterhouse duly signed off on BCCI's books.(68)
By agreement, the Bank of England had in effect entered into a plan with BCCI, Abu Dhabi and Price Waterhouse in which they would each keep the true state of affairs at BCCI secret in return for cooperation with one another in trying to restructure the bank to avoid a catastrophic multi-billion dollar collapse. From April 1990 forward, the Bank of England had now inadvertently become partner to a cover-up of BCCI's criminality. The goal was not to ignore BCCI's wrongdoing, but to prevent its disclosure, for that in turn could cause a massive run on the bank, BCCI's collapse, and potential billions in losses.
As the Governor of the Bank of England, Robin Leigh-Pemberton, testified before the House of Commons Treasury and Civil Service Committee:
On receipt of both the [Price Waterhouse] report of April 1990 and October 1990 we were alerted to [fraud and deceit], but those phrases described what I call the state of evidence, namely there was an indication that certainly things were not well. Some transactions had been either false or deceitful . . . but our view was that even if this added up to individual acts of fraudulent conduct it did not give evidence of a system of fraud throughout the Bank which was wide enough to justify closure. I hope it does not shock you too much, it is only a matter of realism that we do have occasions of fraud in banks. . . if we close down a bank every time we find an individual act or two of fraud we would have rather fewer banks than we do at the moment.(69)
Moreover, according to the Governor of the Bank of England, the moment the decision was made by the Bank that it would try to keep BCCI open rather than close it, it became essential to do everything possible to avoid contributing to its demise:
It is impossible for us to give what one might call an advance warning or a health warning. A hint from the Bank of England that somebody on our list may not be quite pukka would be the kiss of death to the future of a bank. We are in the difficult position that our banks are either on the list or they are struck off. I am sorry to say we have to leave it people to make their best judgment as to whether any one of those institutions is or is not fit to be a depository for the purpose they want.(70)
In short, depositors in the United Kingdom should regard their choice of banking institutions, according to the Governor of the Bank of England, by the ancient Latin maxim, "caveat emptor," let the buyer beware, and should not rely on the regulators to provide them with the facts. BCCI had become a bank too big to fail. In the effort to avoid that failure, the Bank of England was in no position to tell anyone the truth about its difficulties until it was too late for them to protect themselves.
Thus, unfortunately, rather than permitting ordinary depositors to find out for themselves the true state of BCCI's finances, the Bank of England, Price Waterhouse, Abu Dhabi and BCCI found themselves in collusion to deprive the public of the information necessary for them to reach any reasonable judgment on the matter, because the alternative would have been an immediate collapse of the bank.
Throughout the remainder of 1990, and the spring of 1991, BCCI, Abu Dhabi, and the Bank of England continued to work on a restructuring of BCCI as a means of saving the bank, with the intention of collapsing its dozens of entities into three banks, to be based in London, Abu Dhabi, and Hong Kong. At the same time, Price Waterhouse continued to provide each of them with the information that the fraud at BCCI was massive, and that the losses associated with the fraud were mounting into the billions. All the while, BCCI, Abu Dhabi, the Bank of England, and Price Waterhouse worked together to keep what they knew about BCCI secret. The secrecy had become critical now that they all knew about the ongoing criminal investigation into BCCI taking place in New York City by the District Attorney. Each made a strenuous effort to prevent the District Attorney from obtaining the Price Waterhouse audit reports which contained the information that if known would destroy BCCI. But by late 1990, the District Attorney, after months of effort, had obtained some of the audit reports, and appeared to be narrowing in on an indictment of BCCI. At the same time, the Bank of England was also finally having to deal with inquiries from the Federal Reserve, which had been fully alerted to the state of affairs at BCCI for the first time not by the Bank of England, but by the Manhattan District Attorney.
As news continued to filter into the Bank of England from Price Waterhouse and from former BCCI officials, such as Masihur Rahman, who were now working to expose what had happened at the bank, the Bank of England began to conclude that the restructuring proposal advocated by Abu Dhabi might not be possible after all. In March, the Bank of England commissioned it formally to investigate BCCI under Section 41 of the UK's Banking Act. Finally, on June 22, 1991, Price Waterhouse delivered a draft report to the Bank of England, known under British law as a Section 41 report, demonstrating that "fraud on a significant scale had been committed and that it had involved a significant number of people both inside and outside the bank."(71)
One week later, the Bank of England alerted the UK's Serious Fraud Office to begin an investigation of BCCI. Four days later, on July 5, 1991, BCCI was closed internationally in an action initiated by the Bank of England. Apart from the information contained in the Price Waterhouse report, the Bank of England would have had reason to act in any case. The Bank of England had reason to know that the New York District Attorney was only a few weeks away from indicting BCCI for massive fraud in an indictment that would outline in some detail most of the practices described privately to the Bank of England by Price Waterhouse. If the Bank of England had not finally acted, the indictments would have triggered a massive run on BCCI that would have resulted in the bank's immediate global closure in any case.
1. S. Hrg. 102-379 pp. 99-100.
2. See S. Hrg. 102-350 Pt. 4 p. 80, on the popularity of the Cayman Islands for banks because of lax licensing requirements, absence of reserve requirements, income taxes, or lending limitations.
3. Heimann, id, pp. 73-74.
4. House of Commons Treasury and Civil Service Committee Fourth Report, Banking Supervision and BCCI: International and National Regulation, March 4, 1992, hereafter "House of Commons Report," p. xiii.
5. Memorandum, Office of the Comptroller of the Currency, January 4, 1978, Comptroller John Heimann.
6. Memorandum, OCC, to File from John G. Hensel, January 17, 1978.
7. Memorandum, OCC, Serino to Heimann, April 3, 1978, "Notes On Meeting with Pharaon."
8. Various documents, OCC files on NBG, March-July, 1978.
9. Office of Comptroller of the Currency Report of Joseph Vaez, February 15, 1978, memo to Robert R. Bench from J.E. Vaez, National Bank Examiner London regarding BCCI Holdings (Luxembourg).
10. Letter, Robert Altman to Mannion of Federal Reserve, May 9, 1978.
11. Id. p. 144.
12. Clifford, April 23, 1981 hearing, id.
13. Prepared testimony of Virgil Mattingly, S. Hrg. 102-379 p. 118.
15. Prepared testimony of Virgil Mattingly and William Taylor, S. Hrg. 102-350 Pt. 1 pp. 86-87.
16. Id at 87.
17. The details of these interactions between BCCI and First American are set forth in some detail in the chapter on BCCI's later activities in the United States and in the chapter concerning Clifford and Altman.
18. S. Hrg. 102-379 p. 138.
19. House Committee on Banking, Finance and Urban Affairs, September 11, 1991, Pt. 1, "Bank of Credit and Commerce International Investigation, Serial No. 102-69 p. 685.
20. S. Hrg. 102-379 p. 139.
21. Testimony of Virgil Mattingly, S. Hrg. 103-479 p. 139.
22. Chronology, Committee on Banking, Finance and Urban Affairs, House of Representatives, September 11, 1991, Bank of Credit and Commerce International, Pt 1, Serial No. 102-69 p. 686.
23. S. Hrg. 102-379 p. 118.
24. The details of this information, and of how and when it was communicated within the U.S. government, are set forth in the chapter concerning BCCI's relations with the CIA and foreign intelligence.
25. Chronology, House Committee on Banking, Finance, and Urban Affairs, BCCI Pt 1, September 11, 1991, Serial No, 102-89 p. 688.
26. S. Hrg. 102-379 p. 119.
27. Ryback of Federal Reserve to Robert Altman, Clifford & Warnke, S. Hrg. 102-350 Pt. 3 pp. 440-441.
28. Naqvi to Altman, January 31, 1990, S. Hrg. 102-350 Pt. 3 pp. 442-443.
29. Altman to Ryback, February 5, 1990, S. Hrg. 102-350 Pt. 3 pp. 444-445.
30. Chronology, House Banking Committee, BCCI Pt 1, id., p. 689.
31. Chronology, House Banking Committee, BCCI Pt. 1, id. pp. 689-690.
32. S. Hrg. 102-379 p. 119.
33. S. Hrg. 102-379 p. 120.
34. S. Hrg. 102-379 p. 120.
36. The Federal Reserve's findings on these issues are set forth in the Summary of Charges issued by the Board of Governors of the Federal Reserve, In the Matter of BCCI, issued July 29, 1991, and In the Matter of Clark Clifford, issued July 29, 1992. These findings are set forth in some detail in the chapters on BCCI in the United States and the chapter on Clifford and Altman.
37. An account of those enforcement actions as of May 18, 1992, provided by the Federal Reserve to the Subcommittee, is contained at S. Hrg. 102-350 Pt. 4 pp. 144-145.
38. Numerous Federal Reserve investigators and attorneys participated in the investigation and drafting of the summary of charges, including Richard Small, Thomas Baxter, and Kit Wheatley. While their personal roles, and the roles of their colleagues, in exposing the full extent of wrongdoing in connection with BCCI have remained necessarily behind the scenes, the value of their work has been incalculable, both to the Subcommittee specifically and to the public at large.
39. Prepared testimony of Virgil Mattingly, S. Hrg. 102-350 Pt. 4 pp. 147-148.
40. S. Hrg. 102-350 Pt. 5 p. 153.
41. S. Hrg. 102-350 Pt 5 p. 169.
42. S. Hrg. 102-350 p. 171.
43. Prepared testimony of John W. Stone, FDIC, S. Hrg. 102-350 Pt. 5 p. 163.
44. See testimony of John Stone, FDIC, S. Hrg. 102-350 Pt. 5 p. 160.
45. A detailed account of this transaction is set forth in the chapter on BCCI's later activities in the United States.
46. S. Hrg. 102-350 Pt. 5 p. 158.
47. A detailed account of what the CIA knew at the time, and what it told the Treasury and OCC is contained in the chapter concerning BCCI, the CIA and foreign intelligence.
48. S. Hrg. 102-350 Pt. 5 p. 158.
49. S. Hrg. 102-350 Pt 5 p. 159.
50. S. Hrg. 102-350 Pt. 5 pp. 156-157.
51. See section on Argentina in chapter on BCCI's activities in foreign countries.
52. S. Hrg. 102-350 Pt. 5 p. 162.
53. S. Hrg. 102-350 Pt. 5 p. 160.
54. The full hearing on this legislation is set forth in S. Hrg. 102-379, May 23, 1991, which includes its text at p. 9, and a Federal Reserve analysis at p. 122.
55. See Euromoney, S. Hrg. 1-2-350, Pt. 3 p. 308.
56. Euromoney, id., Financial Times, The Many Who Adds a Touch of Mysticism to Banking, May 17, 1978, S. Hrg. 102-350, Pt. 3 pp. 303-304.
57. Bank of England chronology, Annex, Fourth Report, House of Commons Treasury and Civil Service Committee, March 4, 1992, "Banking Supervision and BCCI" p xiii.
58. House of Commons report, id, p. xiii.
60. House of Commons Report, id p. xxxi.
61. House of Commons Report, id, p. 54.
62. Extract, Paragraph 144, Report, Inquiry into the Supervision of the Bank of Credit and Commerce International, The Right Honorable Lord Justice Bingham, July 27, 1992, hereafter, "Bingham Report."
63. House of Commons Report, id, Memorandum submitted by the Institut Monetaire Luxembourgeois (IML) p. 95.
64. See Price Waterhouse comment, reprinted in House of Commons report, id, p. ix.
65. Paragraph 268, Bingham Report, id.
66. Price Waterhouse Report BCCI Holdings to the Audit Committee, Unaudited Results to 30 September 1989 and Outlook for the Year; Subcommittee document.
67. Bingham Report, id, Paragraphs 3l3-320.
68. Memorandum submitted by Price Waterhouse in reply to Questions from the House of Commons Committee on Treasury and Civil Service, February 5, 1992.
69. Minutes of Evidence Taken Before The House of Commons Committee on Treasury and Civil Service, July 23, 1991, Fourth Report, Banking Supervision and BCCI, printed March 4, 1992, p. 104.
70. Id, p. 108.
71. Id. Price Waterhouse's findings of the Section 41 report are reviewed in some detail in the chapter concerning BCCI's criminality.
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