The BCCI Affair
A
Report to the Committee on Foreign Relations
United States Senate
by
Senator John Kerry and Senator Hank Brown
December 1992
102d Congress 2d Session Senate Print 102-140
Contents
INTRODUCTION
AND SUMMARY OF INVESTIGATION
THE
ORIGIN AND EARLY YEARS OF BCCI
BCCI'S
RELATIONSHIP WITH FOREIGN GOVERNMENTS
CENTRAL BANKS, AND INTERNATIONAL ORGANIZATIONS
BCCI
IN THE UNITED STATES: PART I
BCCI
IN THE UNITED STATES: PART II
BCCI
AND LAW ENFORCEMENT: PART I
BCCI
AND LAW ENFORCEMENT: PART II
BCCI,
THE CIA AND FOREIGN INTELLIGENCE
CLARK
CLIFFORD AND ROBERT ALTMAN
ABU
DHABI: BCCI'S FOUNDING AND MAJORITY SHAREHOLDERS
MOHAMMED
HAMMOUD: BCCI'S FLEXIBLE FRONT-MAN
HILL
AND KNOWLTON AND BCCI'S PR CAMPAIGN
1.
BCCI CONSTITUTED INTERNATIONAL FINANCIAL CRIME ON A MASSIVE AND GLOBAL SCALE.
BCCI's unique criminal structure -- an elaborate
corporate spider-web with BCCI's founder, Agha Hasan Abedi and his assistant,
Swaleh Naqvi, in the middle -- was an essential component of its spectacular
growth, and a guarantee of its eventual collapse. The structure was conceived
by Abedi and managed by Naqvi for the specific purpose of evading regulation or
control by governments. It functioned to frustrate the full understanding of
BCCI's operations by anyone.
Unlike any ordinary bank, BCCI was from its earliest
days made up of multiplying layers of entities, related to one another through
an impenetrable series of holding companies, affiliates, subsidiaries,
banks-within-banks, insider dealings and nominee relationships. By fracturing
corporate structure, record keeping, regulatory review, and audits, the complex
BCCI family of entities created by Abedi was able to evade ordinary legal
restrictions on the movement of capital and goods as a matter of daily practice
and routine. In creating BCCI as a vehicle fundamentally free of government
control, Abedi developed in BCCI an ideal mechanism for facilitating illicit
activity by others, including such activity by officials of many of the
governments whose laws BCCI was breaking.
BCCI's criminality included fraud by BCCI and BCCI
customers involving billions of dollars; money laundering in Europe, Africa, Asia,
and the Americas; BCCI's bribery of officials in most of those locations;
support of terrorism, arms trafficking, and the sale of nuclear technologies;
management of prostitution; the commission and facilitation of income tax
evasion, smuggling, and illegal immigration; illicit purchases of banks and
real estate; and a panoply of financial crimes limited only by the imagination
of its officers and customers.
Among BCCI's principal mechanisms for committing
crimes were its use of shell corporations and bank confidentiality and secrecy
havens; layering of its corporate structure; its use of front-men and nominees,
guarantees and buy-back arrangements; back-to-back financial documentation
among BCCI controlled entities, kick-backs and bribes, the intimidation of
witnesses, and the retention of well-placed insiders to discourage governmental
action.
2.
BCCI SYSTEMATICALLY BRIBED WORLD LEADERS AND POLITICAL FIGURES THROUGHOUT THE
WORLD.
BCCI's systematically relied on relationships with,
and as necessary, payments to, prominent political figures in most of the 73
countries in which BCCI operated. BCCI records and testimony from former BCCI
officials together document BCCI's systematic securing of Central Bank deposits
of Third World countries; its provision of favors to political figures; and its
reliance on those figures to provide BCCI itself with favors in times of need.
These relationships were systematically turned to
BCCI's use to generate cash needed to prop up its books. BCCI would obtain an
important figure's agreement to give BCCI deposits from a country's Central
Bank, exclusive handling of a country's use of U.S. commodity credits,
preferential treatment on the processing of money coming in and out of the
country where monetary controls were in place, the right to own a bank,
secretly if necessary, in countries where foreign banks were not legal, or
other questionable means of securing assets or profits. In return, BCCI would
pay bribes to the figure, or otherwise give him other things he wanted in a
simple quid-pro-quo.
The result was that BCCI had relationships that
ranged from the questionable, to the improper, to the fully corrupt with
officials from countries all over the world, including Argentina, Bangladesh,
Botswana, Brazil, Cameroon, China, Colombia, the Congo, Ghana, Guatemala, the
Ivory Coast, India, Jamaica, Kuwait, Lebanon, Mauritius, Morocco, Nigeria,
Pakistan, Panama, Peru, Saudi Arabia, Senegal, Sri Lanka, Sudan, Suriname,
Tunisia, the United Arab Emirates, the United States, Zambia, and Zimbabwe.
3.
BCCI DEVELOPED A STRATEGY TO INFILTRATE THE U.S. BANKING SYSTEM, WHICH IT
SUCCESSFULLY IMPLEMENTED, DESPITE REGULATORY BARRIERS THAT WERE DESIGNED TO
KEEP IT OUT.
In 1977, BCCI developed a plan to infiltrate the
U.S. market through secretly purchasing U.S. banks while opening branch offices
of BCCI throughout the U.S., and eventually merging the institutions. BCCI had
significant difficulties implementing this strategy due to regulatory barriers
in the United States designed to insure accountability. Despite these barriers,
which delayed BCCI's entry, BCCI was ultimately successful in acquiring four
banks, operating in seven states and the District of Colombia, with no
jurisdiction successfully preventing BCCI from infiltrating it.
The techniques used by BCCI in the United States had
been previously perfected by BCCI, and were used in BCCI's acquisitions of
banks in a number of Third World countries and in Europe. These included
purchasing banks through nominees, and arranging to have its activities
shielded by prestigious lawyers, accountants, and public relations firms on the
one hand, and politically-well connected agents on the other. These techniques
were essential to BCCI's success in the United States, because without them,
BCCI would have been stopped by regulators from gaining an interest in any U.S.
bank. As it was, regulatory suspicion towards BCCI required the bank to deceive
regulators in collusion with nominees including the heads of state of several
foreign emirates, key political and intelligence figures from the Middle East,
and entities controlled by the most important bank and banker in the Middle
East.
Equally important to BCCI's successful secret
acquisitions of U.S. banks in the face of regulatory suspicion was its aggressive
use of a series of prominent Americans, beginning with Bert Lance, and
continuing with former Defense Secretary Clark Clifford, former U.S. Senator
Stuart Symington, well-connected former federal bank regulators, and former and
current local, state and federal legislators. Wittingly or not, these
individuals provided essential assistance to BCCI through lending their names
and their reputations to BCCI at critical moments. Thus, it was not merely
BCCI's deceptions that permitted it to infiltrate the United States and its
banking system. Also essential were BCCI's use of political influence peddling
and the revolving door in Washington.
4.
THE JUSTICE DEPARTMENT MISHANDLED ITS INVESTIGATION AND PROSECUTION OF BCCI,
AND ITS RELATIONSHIPS WITH OTHER GOVERNMENT AGENCIES CONCERNING BCCI.
Federal prosecutors in Tampa handling the 1988 drug
money laundering indictment of BCCI failed to recognize the importance of
information they received concerning BCCI's other crimes, including its
apparent secret ownership of First American. As a result, they failed
adequately to investigate these allegations themselves, or to refer this
portion of the case to the FBI and other agencies at the Justice Department who
could have properly investigated the additional information.
The Justice Department, along with the U.S. Customs
Service and Treasury Departments, failed to provide adequate support and
assistance to investigators and prosecutors working on the case against BCCI in
1988 and 1989, contributing to conditions that ultimately caused the chief
undercover agent who handled the sting against BCCI to quit Customs entirely.
The January 1990 plea agreement between BCCI and the
U.S. Attorney in Tampa kept BCCI alive, and had the effect of discouraging
BCCI's officials from telling the U.S. what they knew about BCCI's larger
criminality, including its ownership of First American and other U.S. banks.
The Justice Department essentially stopped
investigating BCCI following the plea agreement, until press accounts, Federal
Reserve action, and the New York District Attorney's investigation in New York
forced them into action in mid-1991.
Justice Department personnel in Washington lobbied
state regulators to keep BCCI open after the January 1990 plea agreement,
following lobbying of them by former Justice Department personnel now
representing BCCI.
Relations between main Justice in Washington and the
U.S. Attorney for Miami, Dexter Lehtinen, broke down on BCCI-related
prosecutions, and key actions on BCCI-related cases in Miami were, as a result,
delayed for months during 1991.
Justice Department personnel in Washington, Miami,
and Tampa actively obstructed and impeded Congressional attempts to investigate
BCCI in 1990, and this practice continued to some extent until William P. Barr
became Attorney General in late October, 1991.
Justice Department personnel in Washington, Miami
and Tampa obstructed and impeded attempts by New York District Attorney Robert
Morgenthau to obtain critical information concerning BCCI in 1989, 1990, and
1991, and in one case, a federal prosecutor lied to Morgenthau's office
concerning the existence of such material. Important failures of cooperation
continued to take place until William P. Barr became Attorney General in late
October, 1991.
Cooperation by the Justice Department with the
Federal Reserve was very limited until after BCCI's global closure on July 5,
1991.
Some public statements by the Justice Department
concerning its handling of matters pertaining to BCCI were more cleverly
crafted than true.
5.
NEW YORK DISTRICT ATTORNEY MORGENTHAU NOT ONLY BROKE THE CASE ON BCCI, BUT
INDIRECTLY BROUGHT ABOUT BCCI'S GLOBAL CLOSURE.
Acting on information provided him by the
Subcommittee, New York District Attorney Robert Morgenthau began an investigation
in 1989 of BCCI which materially contributed to the chain of events that
resulted in BCCI's closure.
Questions asked by the District Attorney intensified
the review of BCCI's activities by its auditors, Price Waterhouse, in England,
and gave life to a moribund Federal Reserve investigation of BCCI's secret
ownership of First American.
The District Attorney's criminal investigation was
critical to stopping an intended reorganization of BCCI worked out through an
agreement among the Bank of England, the government of Abu Dhabi, BCCI's
auditors, Price Waterhouse, and BCCI itself, in which the nature and extent of
BCCI's criminality would be suppressed, while Abu Dhabi would commit its
financial resources to keep the bank going during a restructuring. By the late
spring of 1991, the key obstacle to a successful restructuring of BCCI
bankrolled up Abu Dhabi was the possibility that the District Attorney of New
York would indict. Such an indictment would have inevitably caused a swift and
thoroughly justified an international run on BCCI by depositors all over the
world. Instead, it was a substantial factor in the decision of the Bank of
England to take the information it had received from Price Waterhouse and rely
on it to close BCCI.
6.
BCCI'S ACCOUNTANTS FAILED TO PROTECT BCCI'S INNOCENT DEPOSITORS AND CREDITORS
FROM THE CONSEQUENCES OF POOR PRACTICES AT THE BANK OF WHICH THE AUDITORS WERE
AWARE FOR YEARS.
BCCI's decision to divide its operations between two
auditors, neither of whom had the right to audit all BCCI operations, was a
significant mechanism by which BCCI was able to hide its frauds during its
early years. For more than a decade, neither of BCCI's auditors objected to
this practice.
BCCI provided loans and financial benefits to some
of its auditors, whose acceptance of these benefits creates an appearance of
impropriety, based on the possibility that such benefits could in theory affect
the independent judgment of the auditors involved. These benefits included
loans to two Price Waterhouse partnerships in the Caribbean. In addition, there
are serious questions concerning the acceptance of payments and possibly
housing from BCCI or its affiliates by Price Waterhouse partners in the Grand
Caymans, and possible acceptance of sexual favors provided by BCCI officials to
certain persons affiliated with the firm.
Regardless of BCCI's attempts to hide its frauds
from its outside auditors, there were numerous warning bells visible to the
auditors from the early years of the bank's activities, and BCCI's auditors
could have and should have done more to respond to them.
By the end of 1987, given Price Waterhouse (UK)'s
knowledge about the inadequacies of BCCI's records, it had ample reason to
recognize that there could be no adequate basis for certifying that it had
examined BCCI's books and records and that its picture of those records were
indeed a "true and fair view" of BCCI's financial state of affairs.
The certifications by BCCI's auditors that its
picture of BCCI's books were "true and fair" from December 31, 1987
forward, had the consequence of assisting BCCI in misleading depositors,
regulators, investigators, and other financial institutions as to BCCI's true
financial condition.
Prior to 1990, Price Waterhouse (UK) knew of gross
irregularities in BCCI's handling of loans to CCAH/First American and was told
of violations of U.S. banking laws by BCCI and its borrowers in connection with
CCAH/First American, and failed to advise the partners of its U.S. affiliate or
any U.S. regulator.
There is no evidence that Price Waterhouse (UK) has
to this day notified Price Waterhouse (US) of the extent of the problems it
found at BCCI, or of BCCI's secret ownership of CCAH/First American. Given the
lack of information provided Price Waterhouse (US) by its United Kingdom
affiliate, the U.S. firm performed its auditing of BCCI's U.S. branches in a
manner that was professional and diligent, albeit unilluminating concerning
BCCI's true activities in the United States.
Price Waterhouse's certification of BCCI's books and
records in April, 1990 was explicitly conditioned by Price Waterhouse (UK) on
the proposition that Abu Dhabi would bail BCCI out of its financial losses, and
that the Bank of England, Abu Dhabi and BCCI would work with the auditors to
restructure the bank and avoid its collapse. Price Waterhouse would not have
made the certification but for the assurances it received from the Bank of
England that its continued certification of BCCI's books was appropriate, and
indeed, necessary for the bank's survival.
The April 1990 agreement among Price Waterhouse
(UK), Abu Dhabi, BCCI, and the Bank of England described above, resulted in
Price Waterhouse (UK) certifying the financial picture presented in its audit
of BCCI as "true and fair," with a single footnote material to the
huge losses still to be dealt with, failed adequately to describe their serious
nature. As a consequence, the certification was materially misleading to anyone
who relied on it ignorant of the facts then mutually known to BCCI, Abu Dhabi,
Price Waterhouse and the Bank of England.
The decision by Abu Dhabi, Price Waterhouse (UK),
BCCI and the Bank of England to reorganize BCCI over the duration of 1990 and
1991, rather than to advise the public of what they knew, caused substantial
injury to innocent depositors and customers of BCCI who continued to do
business with an institution which each of the above parties knew had engaged
in fraud.
From at least April, 1990 through November, 1990,
the Government of Abu Dhabi had knowledge of BCCI's criminality and frauds
which it apparently withheld from BCCI's outside auditors, contributing to the
delay in the ultimate closure of the bank, and causing further injury to the
bank's innocent depositors and customers.
7.
THE CIA DEVELOPED IMPORTANT INFORMATION ON BCCI, AND INADVERTENTLY FAILED TO
PROVIDE IT TO THOSE WHO COULD USE IT.
THE
CIA AND FORMER CIA OFFICIALS HAD A FAR WIDER RANGE OF CONTACTS AND LINKS TO
BCCI AND BCCI SHAREHOLDERS, OFFICERS, AND CUSTOMERS, THAN HAS BEEN ACKNOWLEDGED
BY THE CIA.
By early 1985, the CIA knew more about BCCI's goals
and intentions concerning the U.S. banking system than anyone else in
government, and provided that information to the U.S. Treasury and the Office
of the Comptroller of the Currency, neither of whom had the responsibility for
regulating the First American Bank that BCCI had taken over. The CIA failed to
provide the critical information it had gathered to the correct users of the
information -- the Federal Reserve and the Justice Department.
After the CIA knew that BCCI was as an institution a
fundamentally corrupt criminal enterprise, it continued to use both BCCI and
First American, BCCI's secretly held U.S. subsidiary, for CIA operations.
While the reporting concerning BCCI by the CIA was
in some respects impressive -- especially in its assembling of the essentials
of BCCI's criminality, its secret purchase of First American by 1985, and its
extensive involvement in money laundering -- there were also remarkable gaps in
the CIA's reported knowledge about BCCI.
Former CIA officials, including former CIA director
Richard Helms and the late William Casey; former and current foreign
intelligence officials, including Kamal Adham and Abdul Raouf Khalil; and
principal foreign agents of the U.S., such as Adnan Khashoggi and Manucher
Ghorbanifar, float in and out of BCCI at critical times in its history, and
participate simultaneously in the making of key episodes in U.S. foreign
policy, ranging from the Camp David peace talks to the arming of Iran as part of
the Iran/Contra affair. Yet the CIA has continued to maintain that it has no
information regarding any involvement of these people, raising questions about
the quality of intelligence the CIA is receiving generally, or its candor with
the Subcommittee. The CIA's professions of total ignorance about their
respective roles in BCCI are out of character with the Agency's early knowledge
of many critical aspects of the bank's operations, structure, personnel, and
history.
The errors made by the CIA in connection with its
handling of BCCI were complicated by its handling of this Congressional
investigation. Initial information that was provided by the CIA was untrue;
later information that was provided was incomplete; and the Agency resisted
providing a "full" account about its knowledge of BCCI until almost a
year after the initial requests for the information. These experiences suggest
caution in concluding that the information provided to date is full and
complete. The relationships among former CIA personnel and BCCI front men and
nominees, including Kamal Adham, Abdul Khalil, and Mohammed Irvani, requires
further investigation.
8.
THE FLAWED DECISIONS MADE BY REGULATORS IN THE US WHICH ALLOWED BCCI TO
SECRETLY ACQUIRE US BANKS WERE CAUSED IN PART BY GAPS IN THE REGULATORY PROCESS
AND IN PART BY BCCI'S USE OF WELL-CONNECTED LAWYERS TO HELP THEM THROUGH THE
PROCESS.
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.
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.
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.
9.
THE BANK OF ENGLAND'S REGULATION OF BCCI WAS WHOLLY INADEQUATE TO PROTECT
BCCI'S DEPOSITORS AND CREDITORS, AND THE BANK OF ENGLAND WITHHELD INFORMATION
ABOUT BCCI'S FRAUDS FROM PUBLIC KNOWLEDGE FOR FIFTEEN MONTHS BEFORE CLOSING THE
BANK.
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.
10.
CLARK CLIFFORD AND ROBERT ALTMAN PARTICIPATED IN IMPROPRIETIES WITH BCCI IN THE
UNITED STATES.
Regardless of whether Clifford and Altman were
deceived by BCCI in some respects, both men participated in some BCCI's
deceptions in the United States.
Beginning in late 1977, Clifford and Altman assisted
BCCI in purchasing a U.S. bank, Financial General Bankshares, with the
participation of nominees, and understood BCCI's central involvement in
directing and controlling the transaction.
In the years that followed, they made business
decisions regarding acquisitions for First American that were motivated by
BCCI's goals, rather than by the business needs of First American itself; and
represented as their own to regulators decisions that had been made by Abedi
and BCCI on fundamental matters concerning First American, including the
purchase by First American of the National Bank of Georgia and First American's
decision to purchase branches in New York City.
Clifford and Altman concealed their own financing of
shares of First American by BCCI from First American's other directors and from
U.S. regulators, withheld critical information that they possessed from
regulators in an effort to keep the truth about BCCI's ownership of First
American secret, and deceived regulators and the Congress concerning their own
knowledge of and personal involvement in BCCI's illegalities in the United
States.
11.
ABU DHABI'S INVOLVEMENT IN BCCI'S AFFAIRS WAS FAR MORE CENTRAL THAN IT HAS
ACKNOWLEDGED, INVOLVING IN SOME CASES NOMINEE RELATIONS AND NO-RISK
TRANSACTIONS THAT ABU DHABI IS TODAY COVERING-UP THROUGH HIDING WITNESSES AND
DOCUMENTS FROM U.S. INVESTIGATORS.
Members of Abu Dhabi's ruling family appear to have
contributed no more than $500,000 to BCCI's capitalization prior to April 1990,
despite being the record owner of almost one-quarter of the bank's total
shares. An unknown but substantial percentage of the shares acquired by Abu
Dhabi overall in BCCI appear to have been acquired on a risk-free basis --
either with guaranteed rates of return, buy-back arrangements, or both.
The interest held in BCCI by the Abu Dhabi ruling
family, like the interests held by the rulers of the three other gulf sheikdoms
in the United Arab Emirates who owned shares of BCCI, materially aided and
abetted Abedi and BCCI in projecting the illusion that BCCI was backed by, and
capitalized by, Abu Dhabi's wealth. Investments made in BCCI by the Abu Dhabi
Investment Authority appear to have been genuine, although possibly guaranteed
by BCCI with buy-back or other no-risk arrangements.
Shares in Financial General Bankshares held by
members of the Abu Dhabi royal family in late 1977 and early 1978 appear to
have been nominee arrangements, adopted by Abu Dhabi as a convenience to BCCI
and Abedi, under arrangements in which Abu Dhabi was to be without risk, and
BCCI was to guarantee the purchase through a commitment to buy-back the stock
at an agreed upon price.
Abu Dhabi's representative to BCCI's board of
directors, Ghanim al Mazrui, received unorthodox financial benefits from BCCI
in no-risk stock deals which may have compromised his ability to exercise
independent judgment concerning BCCI's actions; confirmed at least one
fraudulent transaction involving Abu Dhabi; and engaged in other improprieties
pertaining to BCCI; but remains today in place at the apex of Abu Dhabi's
committee designated to respond to BCCI's collapse.
In April, 1990, Abu Dhabi was told in detail about
BCCI's fraud by top BCCI officials, and failed to advise BCCI's external
auditors of what it had learned. Between April, 1990 and November, 1990, Abu
Dhabi and BCCI together kept some information concerning BCCI's frauds hidden
from the auditors.
From April, 1990 through July 5, 1991, Abu Dhabi
tried to save BCCI through a massive restructuring. As part of the
restructuring process, Abu Dhabi agreed to take responsibility for BCCI's
losses, Price Waterhouse agreed to certify BCCI's books for another year, and
Abu Dhabi, Price Waterhouse, the Bank of England, and BCCI agreed to keep all
information concerning BCCI's frauds and other problems secret from BCCI's one
million depositors, as well as from U.S. regulators and law enforcement, to
prevent a run on the bank.
After the Federal Reserve was advised by the New
York District Attorney of possible nominee arrangements involving BCCI and
First American, Abu Dhabi, in an apparent effort to gain the Federal Reserve's
acquiescence in BCCI's proposed restructuring, provided limited cooperation to
the Federal Reserve, including access to selected documents. The cooperation
did not extend to permitting the Federal Reserve open access to all BCCI
documents, or substantive communication with key BCCI officials held in Abu
Dhabi, such as BCCI's former president, Swaleh Naqvi. That access ended with
the closure of BCCI July 5, 1991.
From November, 1990 through the present, Abu Dhabi
has failed to provide documents and witnesses to U.S. law enforcement
authorities and to the Congress, despite repeated commitments to do so.
Instead, it has actively prevented U.S. investigators from having access to
vital information necessary to investigate BCCI's global wrongdoing.
The proposed agreement between Abu Dhabi and BCCI's
liquidators to settle their claims against one another contains provisions
which could have the consequence of permitting Abu Dhabi to cover up any
wrongdoing it may have had in connection with BCCI.
There is some evidence that the Sheikh Zayed may
have had a political agenda in agreeing to the involvement of members of the
Abu Dhabi royal family and its investment authority in purchasing shares of
Financial General Bankshares, then of CCAH/First American. This evidence is
offset, in part, by testimony that Abu Dhabi share purchases in the U.S. bank
were done at Abedi's request and did not represent an actual investment by Abu
Dhabi until much later.
12.
BCCI MADE EXTENSIVE USE OF THE REVOLVING DOOR AND POLITICAL INFLUENCE PEDDLING
IN THE UNITED STATES TO ACCOMPLISH ITS GOALS.
BCCI's political connections in Washington had a
material impact on its ability to accomplish its goals in the United States. In
hiring lawyers, lobbyists and public relations firms in the United States to
help it deal with its problems vis a vis the government, BCCI pursued a
strategy that it had practiced successfully around the world: the hiring of
former government officials.
BCCI's and its shareholders' cadre of professional
help in Washington D.C. included, at various times, a former Secretary of
Defense (Clark Clifford), former Senators and Congressmen (John Culver, Mike
Barnes), former federal prosecutors (Larry Wechsler, Raymond Banoun, and Larry
Barcella, a former State Department Official (William Rogers), a former White
House aide (Ed Rogers), a current Presidential campaign deputy director (James
Lake), and former Federal Reserve Attorneys (Baldwin Tuttle, Jerry Hawke, and
Michael Bradfield). In addition, BCCI solicited the help of Henry Kissinger,
who chose not to do business with BCCI but made a referral of BCCI to his own
lawyers.
At several key points in BCCI's activities in the
U.S., the political influence and personal contacts of those it hired had an
impact in helping BCCI accomplish its goals, including in connection with the
1981 CCAH acquisition of FGB and the handling and aftermath of BCCI's plea
agreement in Tampa in 1990.
The political connections of BCCI's U.S. lawyers and
lobbyists were critical to impeding Congressional and law enforcement
investigations from 1988 through 1991, through a variety of techniques that
included impugning the motives and integrity of investigators and journalists,
withholding subpoenaed documents, and lobbying on capital hill to protect
BCCI's reputation and discourage efforts to close the bank down in the United
States.
13.
BCCI'S PUBLIC RELATIONS FIRM SMEARED PEOPLE WHO WERE TELLING THE TRUTH AS PART
OF ITS WORK FOR BCCI.
When Hill and Knowlton accepted BCCI's account in
October, 1988, its partners knew of BCCI's reputation as a "sleazy"
bank, but took the account anyway. In 1988 and 1989, Hill and Knowlton assisted
BCCI with an aggressive public relations campaign designed to demonstrate that
BCCI was not a criminal enterprise, and to put the best face possible on the
Tampa drug money laundering indictments. In so doing, it disseminated materials
unjustifiably and unfairly discrediting persons and publications who were
telling the truth about BCCI's criminality.
Important information provided by Hill and Knowlton
to Capitol Hill and provided by First American to regulators concerning the
relationship between BCCI and First American in April, 1990 was false. The
misleading material represented the position of BCCI, First American, Clifford
and Altman concerning the relationship, and was contrary to the truth known by
BCCI, Clifford and Altman.
Hill and Knowlton's representation of BCCI was
within the norms and standards of the public relations industry, but raises
larger questions as to the relationship of those norms and standards to the
public interest.
14.
BCCI ACTIVELY SOLICITED THE FRIENDSHIPS OF MAJOR U.S. POLITICAL FIGURES, AND
MADE PAYMENTS TO THESE POLITICAL FIGURES, WHICH IN SOME CASES MAY HAVE BEEN
IMPROPER.
Beginning with Bert Lance in 1977, whose debts BCCI
paid off with a $3.5 million loan, BCCI, BCCI nominees, and top officials of
BCCI systematically developed friendships and relationships with important U.S
political figures. While those which are publicly known include former
president Jimmy Carter, Jesse Jackson, and Andrew Young, the Subcommittee has
received information suggesting that BCCI's network extended to other U.S.
political figures. The payments made by BCCI to Andrew Young while he was a
public official were at best unusual, and by all appearances, improper.
15.
BCCI'S COMMODITIES AFFILIATE, CAPCOM, ENGAGED IN BILLIONS OF DOLLARS OF LARGELY
ANONYMOUS TRADING IN THE US WHICH INCLUDED A VERY SUBSTANTIAL LEVEL OF MONEY
LAUNDERING, WHILE CAPCOM SIMULTANEOUSLY DEVELOPED SIGNIFICANT TIES TO IMPORTANT
U.S. TELECOMMUNICATIONS INDUSTRY EXECUTIVES AND FOREIGN INTELLIGENCE FIGURES.
BCCI's commodities affiliate, Capcom, based in
Chicago, London and Cairo, was principally staffed by former BCCI bankers,
capitalized by BCCI and BCCI customers, and owned by BCCI, BCCI shareholders,
and front-men. Capcom employed many of the same practices as BCCI, especially
the use of nominees and front companies to disguise ownership and the movement
of money. Four U.S. citizens -- none of whom had any experience or expertise in
the commodities markets -- played important and varied roles as Capcom front
men in the United States.
While investigation information concerning Capcom is
incomplete, its activities appear to have included misappropriation of BCCI
assets; the laundering of billions of dollars from the Middle East to the US
and other parts of the world; and the siphoning of assets from BCCI to create a
safe haven for them outside of the official BCCI empire.
Capcom's majority shareholders, Kamal Adham and A.R.
Khalil, were both former senior Saudi government officials and successively
acted as Saudi Arabia's principal liaisons to the Central Intelligence Agency
during the 1970's and 1980's.
Its U.S. front men included Robert Magness, the CEO
of the largest U.S. cable telecommunications company, TCI; a vice-President of
TCI, Larry Romrell; and two other Americans, Kerry Fox and Robert Powell, with
long-standing business interests in the Middle East. Magness, Romrell and Fox
received loans from BCCI for real estate ventures in the U.S., and Magness and
Romrell discussed numerous business ventures between BCCI and TCI, some of
which involved the possible purchase of U.S. telecommunications stock and
substantial lending by BCCI.
Commodities regulators with the responsibility for
investigating Capcom showed little interest in conducting a thorough
investigation of its activities, and in 1989 allowed Capcom to avoid such an
investigation through agreeing to cease doing business in the United States.
The Subcommittee could not determine whether BCCI,
Capcom, or their shareholders or agents actually acquired equity interests in
the U.S. cable industry and believes further investigation of matters
pertaining to Capcom is essential.
16.
INVESTIGATIONS OF BCCI TO DATE REMAIN INCOMPLETE, AND MANY LEADS CANNOT BE
FOLLOWED UP, AS THE RESULT OF DOCUMENTS BEING WITHHELD FROM US INVESTIGATORS BY
THE BRITISH GOVERNMENT, AND DOCUMENTS AND WITNESSES BEING WITHHELD FROM US
INVESTIGATORS BY THE GOVERNMENT OF ABU DHABI.
Many of the specific criminal transactions engaged
in by BCCI's customers remain hidden from investigation as the result of bank
secrecy laws in many jurisdictions, British national security laws, and the
holding of key witnesses and documents by the Government of Abu Dhabi.
Documents pertaining to BCCI's use to finance terrorism, to assist the builders
of a Pakistani nuclear bomb, to finance Iranian arms deals, and related matters
have been sealed in the United Kingdom by British intelligence and remain
unavailable to U.S. investigators. Many other basic matters pertaining to
BCCI's criminality, including any list that may exist of BCCI's political
payoffs and bribes, remain sequestered in Abu Dhabi and unavailable to U.S.
investigators.
Many investigative leads remain to be explored, but
cannot be answered with devoting substantial additional sources that to date no
agency of government has been in a position to provide.
Unanswered questions include, but are not limited
to, the relationship between BCCI and the Banco Nazionale del Lavoro; the
alleged relationship between the late CIA director William Casey and BCCI; the
extent of BCCI's involvement in Pakistan's nuclear program; BCCI's manipulation
of commodities and securities markets in Europe and Canada; BCCI's activities
in India, including its relationship with the business empire of the Hinduja
family; BCCI's relationships with convicted Iraqi arms dealer Sarkis
Sarkenalian, Syrian drug trafficker, terrorist, and arms trafficker Monzer
Al-Kassar, and other major arms dealers; the use of BCCI by central figures in
the alleged "October Surprise," BCCI's activities with the Central
Bank of Syria and with the Foreign Trade Mission of the Soviet Union in London;
its involvement with foreign intelligence agencies; the financial dealingst of
BCCI directors with Charles Keating and several Keating affiliates and
front-companies, including the possibility that BCCI related entities may have
laundered funds for Keating to move them outside the United States; BCCI's
financing of commodities and other business dealings of international criminal
financier Marc Rich; the nature, extent and meaning of the ownership of other
major U.S. financial institutions by Middle Eastern political figures; the
nature, extent, and meaning of real estate and financial investments in the
United States by major shareholders of BCCI; the sale of BCCI affiliate Banque
de Commerce et Placement in Geneva, to the Cukorova Group of Turkey, which
owned an entity involved in the BNL Iraqi arms sales, among others.
The withholding of documents and witnesses from U.S.
investigators by the Government of Abu Dhabi threatens vital U.S. foreign policy,
anti-narcotics and money laundering, and law enforcement interests, and should
not be tolerated.
SUMMARY
OF LEGISLATIVE RECOMMENDATIONS
1.
THE SUBCOMMITTEE RECOMMENDS THAT THE UNITED STATES DEVELOP A MORE AGGRESSIVE
AND COORDINATED APPROACH TO INTERNATIONAL FINANCIAL CRIME, AND TO MOVE FURTHER
AGAINST FOREIGN PRIVACY AND CONFIDENTIAL LAWS THAT PROTECT CRIMINALS.
2.
THE SUBCOMMITTEE RECOMMENDS THAT THE JUSTICE DEPARTMENT RECONSIDER THE POLICIES
AND PRACTICES THAT LED TO ITS INEFFECTIVENESS IN INVESTIGATING AND PROSECUTING
BCCI, AND IMPAIRED ITS ABILITY TO COOPERATE WITH OTHER INVESTIGATIONS OF BCCI
BEING CONDUCTED BY THE FEDERAL RESERVE, NEW YORK DISTRICT ATTORNEY, AND THE
SENATE.
3.
THE SUBCOMMITTEE RECOMMENDS THAT THE CENTRAL INTELLIGENCE AGENCY AND STATE
DEPARTMENT UPGRADE THE TRACKING OF FOREIGN FINANCIAL INSTITUTIONS AND
ACTIVITIES, AND THE DISSEMINATION OF INFORMATION CONCERNING SUCH INSTITUTIONS.
4.
THE SUBCOMMITTEE RECOMMENDS THAT THE CONGRESS CONSIDER WHETHER ADDITIONAL
OVERSIGHT MECHANISMS ARE NECESSARY TO ENSURE THE CIA'S ACCOUNTABILITY ON THE
PROVISION OF INFORMATION.
5.
THE SUBCOMMITTEE RECOMMENDS THAT FEDERAL AGENCIES IMPOSE NEW REQUIREMENTS ON
FOREIGN AUDITORS TO PROTECT U.S. INTERESTS IN ANY CASE IN WHICH ANY SUCH AGENCY
IS RELYING ON AN AUDIT CERTIFIED BY A FOREIGN AUDITOR. AT MINIMUM, THIS SHOULD
REQUIRE FOREIGN AUDITORS WHOSE CERTIFICATIONS ARE USED BY INSTITUTIONS DOING
BUSINESS IN THE U.S. AGREE TO SUBMIT THEMSELVES TO U.S. LAWS.
6.
THE SUBCOMMITTEE RECOMMENDS THAT THE PRESIDENT AND THE SECRETARY OF STATE
ADVISE THE GOVERNMENT OF ABU DHABI THAT ITS WITHHOLDING OF DOCUMENTS AND
WITNESSES PERTAINING TO BCCI FROM U.S. FEDERAL LAW ENFORCEMENT INVESTIGATORS,
THE FEDERAL RESERVE, THE NEW YORK DISTRICT ATTORNEY AND THE CONGRESS THREATENS VITAL
U.S. INTERESTS AND WILL NOT BE TOLERATED.
7.
FURTHER ATTENTION NEEDS TO BE GIVEN TO THE PROBLEM OF THE REVOLVING DOOR IN
WASHINGTON, AND THE IMPACT ON THE REGULATORY PROCESS AND ON LAW ENFORCEMENT OF
POLITICAL INFLUENCE IN WASHINGTON. THE SUBCOMMITTEE RECOMMENDS THE
CONSIDERATION OF LEGISLATING A FEDERAL STATUTORY CODE OF CONDUCT FOR ATTORNEYS
WHO PRACTICE BEFORE FEDERAL AGENCIES.
8.
THE SELF-REGULATION OF THE U.S COMMODITIES MARKETS BY THE COMMODITIES FUTURES
TRADING COMMISSION, THE CHICAGO BOARD OF TRADE, AND THE CHICAGO MERCANTILE
EXCHANGE IS INADEQUATE TO PROTECT THOSE MARKETS AGAINST MONEY LAUNDERING
INVOLVING TRADES
FROM
ABROAD. THE SUBCOMMITTEE RECOMMENDS THAT THE EXCHANGES MAKE MONEY LAUNDERING
ILLEGAL, AND DEMAND THAT THIS REQUIREMENT BE ACCEPTED BY FOREIGN COMMODITIES
EXCHANGES WITH WHOM THEY DO BUSINESS, AS A CONDITION OF ACCESS TO US EXCHANGES.
9.
THE SUBCOMMITTEE RECOMMENDS THAT FURTHER STEPS BE TAKEN TO INSURE ADEQUATE
ACCOUNTABILITY OF FOREIGN FINANCIAL INSTITUTIONS DOING BUSINESS IN THE UNITED
STATES, INCLUDING REQUIRING FOREIGN BANKS FORM SEPARATELY CAPITALIZED HOLDING
COMPANIES IN THE UNITED STATES AS A CONDITION OF LICENSE AND THE CONSIDERATION
BY THE FEDERAL RESERVE OF ESTABLISHMENT A MINIMUM STANDARD FOR CONSOLIDATED
REGULATION THAT EXCLUDES BANK REGULATORY HAVENS.
10.
THE SUBCOMMITTEE RECOMMENDS THAT FOREIGN INVESTORS WHO PURCHASE SUBSTANTIAL
SHARES OF U.S. BUSINESSES BE REQUIRED TO APPEAR PERSONALLY IN THE UNITED STATES
AS INSURANCE THAT THE FOREIGN INVESTOR IS NOT ACTING AS A NOMINEE FOR SOMEONE
ELSE.
11.
TURF WARS CONTINUE TO SEVERELY DAMAGE THE ABILITY OF LAW-ENFORCEMENT AGENCIES
IN THE UNITED STATES TO DO THEIR JOB. THE SUBCOMMITTEE RECOMMENDS THE
ESTABLISHMENT OF A COMMITTEE OF LAW ENFORCEMENT OFFICIALS WHOSE JOB IT IS TO CONDUCT
OVERSIGHT OF, PREVENT, AND RESPOND TO FAILURES OF COOPERATION IN LAW
ENFORCEMENT.
12.
THE SUBCOMMITTEE RECOMMENDS THAT A STATUTORY MECHANISM FOR THE RECEIPT BY
CONGRESS OF FOREIGN FINANCIAL INFORMATION BE ESTABLISHED.
BCCI cannot be taken as an isolated example of a
rogue bank, but a case study of the vulnerability of the world to international
crime on a global scope that is beyond the current ability of governments to
control. Its multi-billion dollar collapse is merely the latest in a series of
international financial scandals that have bedeviled international banking this
century. Its techniques and its associations with government officials,
intelligence agencies, and arms traffickers, were neither new nor unique.
For example, as far back as the 1920's, the
International Match Corp bilked shareholders and lenders out of some $500
million through switching company assets and liabilities among a series of
shell entities, creating fictional assets when existing ones were adequate, and
through transferring funds from the United States offshore. All the while, its
chairman, Ivan Kreuger, maintained friendships with numerous world leaders
including then U.S. President Herbert Hoover, in a manner reminiscent of BCCI's
founder Agha Hasan Abedi's relationships wit President Carter a half a century
later.
During the 1960's, the Channel Islands off the coast
of England became the host to a series of post-off box banks, including the
infamous Bank of Sark, whose facilities including a room over a pub, a desk and
a telephone. That headquarters proved adequate to enable the swindlers who
established the bank to use it to sell some $100 million in fraudulent checks
and letters of credit on the phantom bank before their criminality was
discovered.
In the same period, Bernie Cornfeld, chairman of the
Investors Overseas Service (IOS), which sold "The Fund of Funds," and
fugitive financier Robert Vesco, siphoned off hundreds of millions of dollars
from investors in the mutual fund that at its height had $3 billion in assets
under its management. In doing so, it moved funds held at Credit Suisse to a
small bank which IOS itself owned based in Luxembourg, from which the funds
disappeared. Again, this technique anticipated the methods used by BCCI to
shift assets from legitimate institutions to its own, and then to engage in
wire transfers sufficient to make them impossible to track.
Similar techniques were used by Italian financier
Michele Sindona in connection with his management of Banco Ambrosiano in Italy;
and by former CIA agent Michael Hand in the drug money laundering Nugan Hand
Bank in Australia during the late 1970's and early 1980's. The latter
institution had numerous ties to U.S. intelligence and military personnel which
have never been explained.
Thus, the rise and fall of BCCI is not an isolated
phenomenon, but a recurrent problem that has grown along with the growth in the
international financial community itself. Given the extraordinary magnitude of
international financial transactions -- which amount to some $4 trillion per
day moving through the New York clearance system alone -- the opportunities for
fraud are huge, the rewards great, and the systems put in place to protect
against them, far from adequate, as this report demonstrates in some detail.
The scope and variety of BCCI's criminality, and the
issues raised by that criminality, are immense, and beyond the scope of any
single investigation or report. This report, the product of some four years of
investigation by the Subcommittee, while extensive, can merely provide a basic
guideline to the fundamental facts and issued raised by the BCCI affair.
The Subcommittee investigation of BCCI began in
February, 1988, early in the second year of a two-year investigation of the
relationship between drug trafficking to U.S. foreign policy and law
enforcement that had been authorized by the full Committee. During a hearing on
General Noriega's drug trafficking and money laundering, BCCI was identified as
facilitating Noriega's criminal activity. In March, 1988, the Foreign Relations
Committee authorized the issuance of subpoenas to BCCI and those at the bank
involved in handling Noriega's assets, and the accounts of others in Panama and
Colombia. Service of those subpoenas was delayed, at the request of the Justice
Department and U.S. Customs Service, due to concern that its service could
interfere with an ongoing sting operation of BCCI in Tampa, Operation C-Chase.
By the time the Subcommittee secured the permission of federal authorities to
move forward with service of the subpoena, in late July 1988, the Subcommittee
had completed the public hearings in connection with its investigative mandate,
and was proceeding to complete its final report, with no further investigative
efforts planned.
However, service of the subpoena set into motion a
series of contacts during the late summer and early fall involving the
Subcommittee, BCCI officials, and BCCI's attorneys, including Clark Clifford
and Robert Altman. During those contacts, BCCI officials advised Subcommittee
counsel Jack Blum that in their view, BCCI and its attorneys were obstructing
the Subcommittee's efforts to investigate the bank. The Subcommittee conducted
a deposition of one key BCCI official, Amjad Awan, shortly before his arrest in
the Customs' sting, and deposed a second, former BCCI officer following the
sting, during the final days of the authorization given the Subcommittee by the
Foreign Relations Committee. Thus, as the two-year investigation of the
Subcommittee authorized by the Foreign Relations Committee ended, investigating
BCCI remained a major piece of unfinished Subcommittee business.
In the spring of 1989, Senator Kerry, chairman of
the Subcommittee, authorized Blum as he was leaving the Subcommittee, to
provide the information he had developed to the Justice Department. After the
Justice Department, in Blum's view, had failed to follow up on the information
provided, he took the same information to New York District Attorney Robert
Morgenthau, who shortly commenced his investigation of BCCI, based in
substantial part on the leads provided him by Blum and the Subcommittee.
In the meantime, Senator Kerry asked two members of
his personal staff to continue the investigation from within his personal
office until such time as further authorization might be granted from the
Foreign Relations Committee, or another Committee of formal jurisdiction for a
committee investigation.
During 1989 and 1990, staff in Senator Kerry's
office had numerous contacts with BCCI's attorneys, certain BCCI customers,
and, in a truncated fashion, with BCCI officials, in an attempt to determine
whether allegations concerning BCCI's secret ownership of First American
Bankshares were correct, and as part of an effort to identify the extent and
nature of BCCI's support of drug money laundering.
In January, 1990, when the Justice Department
entered into a plea agreement with BCCI, Senator Kerry criticized the plea
agreement for permitting BCCI to avoid trial, and the $14 million fine as
insufficient punishment for an institution which had a corporate policy of
laundering drug money. At the same time, the Subcommittee published a report on
drug money laundering which focused in part on further questions concerning
BCCI, including BCCI's alleged secret ownership of First American.
During the spring and summer of 1990, the Senator
Kerry's staff conducted further investigative efforts concerning BCCI, met with
BCCI's and First American's attorneys on several occasions attempting to obtain
BCCI documents. In July, 1990, Senator Kerry, in his capacity as chairman of
the Subcommittee, scheduled hearings on BCCI which were postponed after BCCI's
attorneys and the Justice Department advised staff that each of the requested
witnesses, including BCCI attorney and First American President Robert Altman,
would decline the Subcommittee's request to testify.
After efforts to obtain authorization for the
investigation within the Banking Committee failed, Senator Kerry decided in
early 1991 to formalize the personal staff investigation within the
Subcommittee and to seek formal authorization for an investigation from the
Foreign Relations Committee, which was granted on May 23, 1991, without
dissent. Together with this authorization, the Foreign Relations Committee
authorized the issuance of a subpoena to BCCI for records pertaining to its
dealings with foreign officials of a number of countries, arms dealers, and
focusing on its secret ownership of U.S. financial institutions. At this time,
Senator Kerry was joined in further investigative efforts by his ranking
member, Senator Brown.
While the Foreign Relations Committee provided
consistent support for the Subcommittee's efforts through 1991 and 1992,
staffing resources for the investigation remained limited, amounting to two
attorneys, with no budget for travel. The lack of resources particularly
hampered efforts to investigate matters pertaining to BCCI's activities outside
the United States.
Authority for subpoenas and writs were granted by
the Committee to the Subcommittee on May 23, 1991, November 27, 1991, February
29, 1992, June 4, 1992. In all, the Subcommittee conducted thirteen days of
public hearings, on August 1, 2, 8, October 18, 22, 23, 24, 25, and November
21, 1991; February 19, March 18, May 14, and July 30, 1992; one day of closed
hearings, on October 31, 1991 and staffed an additional day of hearings in the
Senate Banking Subcommittee on Consumer and Regulatory Affairs on May 23, 1991.
Both by subpoena and by request, documents were
received from many institutions, agencies and individuals, including BCCI
itself; many of BCCI's attorneys and law firms; many former BCCI officials;
representatives of BCCI's creditors and depositors; Price Waterhouse, BCCI's
accountants; Clark Clifford and Robert Altman; the First American Bank; the
Federal Reserve, Office of Thrift Supervision, Resolution Trust Corporation,
Office of the Comptroller of the Currency, Federal Deposit Insurance
Corporation, Majority Shareholders of BCCI (Abu Dhabi), the Central
Intelligence Agency, the U.S. Customs Service, the State Department; the
Department of Agriculture; former federal prosecutors and investigators; and
many others.
In addition, the Subcommittee has been vitally
assisted by certain BCCI insiders who, while still working at BCCI during the
period of its operation, became sufficiently angered and disgusted by what they
had observed that they contacted the Subcommittee and agreed to provide the
Subcommittee with information on an ongoing basis. These insiders helped the
Subcommittee to document improprieties involving BCCI's attorneys, senior
officers, and shareholders, as well as, certain failures to act on information
by federal law enforcement.
Many matters remain to be investigated, and these are
outlined in the Executive Summary and in the final chapter on conclusions and
legislative recommendations.
What is absolutely clear is that the United States
needs to exercise far more leadership in helping develop a system for
monitoring and regulating the movement of funds across international borders to
replace the current, inadequate, patchwork system that BCCI, with all of its
faults, so aptly took advantage of to defraud over one million depositors and
thousands of creditors from countries all over the world.
Equally important is for the United States to give
renewed attention to the difficulty of monitoring the actual circumstances and
intentions, of foreign investors seeking to acquire U.S. institutions. As the
BCCI case demonstrates, such investments pose special difficulties for both
investigation and prosecution should something go wrong.
Finally, influence peddling, the revolving door, and the willingness of well-placed and prominent people in Washington to provide services to whoever wants in the door and is willing to pay ones fees is a phenomenon that poses very substantial dangers for our system of government. As the BCCI case suggests, higher standards of conduct by the private sector in Washington that lives alongside of government is an essential part of making it possible for government to work. The lack of those standards was a significant factor in BCCI's success in committing crimes, and the government's failures in doing anything them.
BCCI's conception, growth, collapse, and criminality
are inextricably linked with the personality of its founder, Agha Hasan Abedi,
who in turn was a product of the unique conditions of Muslim India in the final
period of British rule prior to partition, and the first years after partition.
These were years of fundamental change in the
region, involving the creation of an entire new ruling class in both Hindu and
Moslem India to replace the departing British foreign service. While the period
created special opportunities for a newly-emerging professional class in both
countries, Abedi and many of the others who later became prominent in Pakistani
banking made up a special class. In India, they had grown up as members of a
minority, of ineradicably lower status than similarly educated Hindus, despite
their university educations. Following partition, these Indian Moslems migrated
northward to the new Muslim state of Pakistan, but remained forever regarded as
outsiders by the natives. Accordingly, as they settled in the newly-developing
cities, such as Karachi and Lahore, they formed a clannish class of Muslim
professionals who kept themselves apart from other Pakistanis.
Abedi himself was especially suited to succeed in
the post-colonial environment, given his family's experience in northern Indian
in Mahmudabad, where his father had served the Rajah. At the Rajah's court,
Abedi was exposed to great wealth, and to the concept that access to it could
be had for anyone who managed to make himself indispensable to the person who
controlled such wealth. Abedi also learned that the previously immutable laws
of the British colonial power could be changed, at whim, by the new Indian and
Pakistani rulers that followed, and that as often as not, legal obstacles to
any goal could be eliminated if they interfered with the plans of a
sufficiently important political figure. These were lessons which Abedi applied
throughout his career as a banker, and at the core of BCCI's unique history.
A history of BCCI, prepared in 1982 by Khusro
Karamat Elley, a key figure in BCCI's secret management of First American,
provides a rosy, public-relations view of Abedi's career to the founding of
BCCI a decade earlier.
The story begins in the early forties, when the
Habib family of India set up a Bank in Bombay, India. They started hiring young
graduates as trainee officers and among the first was a young and warm hearted
individual named Agha Hasan Abedi. In 1947, when Pakistan was formed, the
Habibs [as Moslems] moved their bank to Pakistan.
The Habibs ran the bank like a family business. All
decisions were centralized with family members and working hours were long and
hard. Agha Hasan Abedi rose very rapidly but soon found the atmosphere to be
too restrictive for the great number of ideas welling up inside him. In 1958 he
left Habib Bank and was able to get together Investors to form a new bank to be
known as United Bank. The Central Bank in Pakistan gave the license and was
quite happy with Mr. Abedi's statements that he wanted to make this the largest
bank in Pakistan. They however did find it disturbing when he described to them
in great detail how high the salaries of the employees of this bank would be,
what would be the quality of the offices and the extent of the mechanization
that he would go into. Within ten years, United Bank became the second largest
bank in Pakistan and all that Mr. Abedi envisioned, relating to the facilities,
the staff, and relating to the high quality of appearance of the offices, and
to the modern outlook of the Bank, had been achieved. Additionally, the Bank
had opened branches overseas in quite a few countries including the Middle
East. The Bank was already poised to become the largest bank in Pakistan but
political conditions were making it apparent to Mr. Abedi that Pakistan could
probably not form the basis for an operation of the size which he and his team
were capable of.(1)
This internal BCCI history focuses on key elements
of BCCI's operation already present in the Habib and United Banks: a close knit
family structure for management, high salaries and benefits to motivate
employees, unusually luxurious offices for the purpose of impressing customers,
aggressive expansion, beginning with the Middle East, and Abedi's refusal to
live within the constraints of governments.
Press accounts of Abedi's life from the 1970's and
1980's typically note Abedi's wish for his success to be seen as a Pakistani
version of a Horatio Alger story: success in the material world as being merely
the logical reward for piety, hard work, sobriety, discipline, and loyalty.
Internal BCCI documents make clear Abedi's ability to motivate his employees to
work exceptionally hard. Yet in this, Abedi approach was little different from
other successful super-salesmen. What distinguished Abedi's method as a banker
was his focused attention on cultivating individuals of wealth, deemed
"high net worths," at BCCI, and those who controlled wealth, such as
Pakistani government officials.(2)
Abedi's Charisma
By all accounts -- ranging from statements made by
Bert Lance to Jimmy Carter to the Pakistani bankers who went to work for him at
BCCI -- Agha Hasan Abedi was a man of extraordinary personal charisma. That
charisma was the glue which held BCCI together. Its absence following Abedi's
stroke in early 1989, which led to Carter arranging an emergency heart
transplant for him, had a substantial impact on BCCI's ability to survive the
drug money laundering indictments in Tampa and the banks subsequent
misfortunes.
According to former BCCI chief financial officer
Massihur Rahman, who worked alongside Abedi for nearly two decades, Abedi was a
man whose personality dominated all those around him, who could simultaneously
turn great personal powers to good and to evil.
I remember looking into his eyes and seeing God and
the Devil balanced equally in them. He was already an older man when he began
BCCI, and he was determined to not to waste time in taking his vision and
turning it into something very big.(3)
Abedi asked the total devotion of everyone around
him. Should one of his employees decide to abandon an Abedi project, he took it
personally, as if it reflected badly on Abedi himself, and would focus every
attention in an effort to persuade the employee to change his mind.
For example, when BCCI officer Abdur Sakhia received
two offers from other banks and decided to leave BCCI, Abedi refused to accept
the situation:
I said I have to leave. They said you can do what
you want, but please stay we wont let you go. I said, Mr. Abedi you are making
things very difficult. I have two offers, one from Citicorp and one from BOP
Canada. He started crying. It was absolutely heartbreaking. We used to sit in
15,000 square feet of open space. Mr. Abedi is at the head of the room and he
started crying. We are people from the East, we are not trained to handle
things like that. I said Mr. Abedi, my fate is in your hands, you can do with
me what you like.(4)
Abedi As Pakistani Political Paymaster
Abedi's earliest successes were largely the result
of his having recognized the importance in Pakistan of providing payoffs or
other under-the-table services to Pakistani officials, especially the
leadership of any current governing party. For example, when the United Bank
was formed in 1959, Abedi appointed as chairman of its board I. I. Chundrigar,
the former Prime Minister of Pakistan, who was a close confidante of
Pakistani's then current prime minister, Ayub Khan. Abedi maintained close ties
to Khan's government, later hiring General Khan's minister of information to
become the "publisher" of a BCCI promotional magazine,
"South."(5) When the Pakistani military government
was replaced following the debacle that resulted in the severance of East
Pakistan into Bangladesh, Abedi became just as cozy with Pakistani
"socialist" Ali Bhutto, Khan's ideological opposite. When Bhutto was
overthrown in 1978 in a military coup, Abedi swiftly changed allegiances again
to Bhutto's successor, Islamic "puritan" General Zia.(6)
Zia later executed Bhutto for financial crimes, in which Abedi, among others,
was clearly involved, while forming close ties to Abedi, on whose financial
skills he increasingly relied.
Abedi's personal involvement in Bhutto's
"crimes" was described officially in a White Paper issued by the
Government of Pakistan in July, 1978 on "The Conduct of the General
Elections in March 1977." In a section analyzing the illegal funding of
campaign activities for the PPP, the party of Bhutto, the White Paper describes
how "the other large source of funds was the money brought in by Agha
Hasan Abdi [sic]" amounting to "two or three crores of rupees."
A later reference to Abedi in the White Paper describes his "travels . . .
loaded as he used to be with bagfuls of money."(7)
Abedi also sought out key pillars of the Pakistani
private sector, securing the Saigol family as a key client of Abedi's in three
successive banks -- Habib, United, and then BCCI. The Saigol group was one of
the major industrial and trade groups in Pakistan by the mid-1950's, with its
initial fortune made in textiles, and as close to "old wealth" as
existed at the time within Pakistan's commercial class. Abedi first secured the
Saigol account while at Habib, and took the account with him when he left to
form United Bank, making the Saigol's United's principal shareholders. At the
time, some in Pakistani's commercial community wondered how Abedi had managed
to take the important Saigol relationship from the Habib Bank. Thirty years
later, Price Waterhouse was to detail the reason -- Abedi's willingness to
reschedule millions in loans to the Saigols whenever they found it inconvenient
to repay them.(8)
Through these and similar relationships, Abedi built
the United Bank into the second largest bank in Pakistan, complete with a
protocol department responsible for taking care of the personal needs of VIPs.
As founder, president and Chairman of United, Abedi was already a great success
in Pakistani terms. But Abedi himself felt this was insufficient to meet his
ambitions. And so Abedi increasingly began to focus on "high net worth
individuals" outside Pakistan to liberate him from the inherent
limitations of being nothing more than a very big fish in a Pakistan which
Abedi viewed as too small to accommodate his vision.
Impact of Nationalization
By the early 1970's, there was an ongoing tension
between Abedi's ambition to move beyond Pakistan, and that of the Pakistani
government to keep Pakistani institutions generally and Abedi's bank
specifically under its control. From the time he took power, Pakistani Prime
Minister Ali Bhutto, typifying the socialist cast of much of the former
colonial world in this period, was threatening to nationalize the banks, as he
already had nationalized other sectors. Accordingly, Abedi began moving forward
with the initial steps to form BCCI as a Pakistani-managed bank outside of
Pakistan. When Bhutto in turn learned about Abedi's attempt to circumvent his
new socialist order, he not only went ahead with plans for nationalizing the
United Bank, but promptly placed Abedi under house arrest.(9)
While under house arrest, Abedi further developed
his scheme for his new institution. Unlike United Bank, it would operate in a
manner to defy the ability of the Pakistani government, or any other, to impede
any objective it might seek. It would be the first global, international, and
indeed, trans-national bank, and something more: a charity, a foundation, a
shipping empire, an insurer, a brokerage firm, a commodities exchange, a
publishing house, a world-class hospital for the rich, a real estate empire, an
employee cooperative, an Islamic investment bank, and a Third World powerhouse.(10)
As a politicized, post-colonial Pakistani, Abedi
frequently articulated the goal of achieving equality of status with the
financial institutions of the former colonial powers. During the colonial
period, millions of Indian and Pakistani expatriates had fanned out across
British possessions to become the commercial class in many of them. But they
had not yet developed their own financial institutions, and had still to rely
on European financial institutions to do business, institutions whose attitude
towards them ranged from ignorance to neglect to contempt. A bank of their own
would treat them better, be able to do far more to help them, and make itself
great at the same time.
As Abedi explained while under house arrest to
Massihur Rahman, who later became his chief financial officer at BCCI:
Up to that stage in the early 1970's there were
mostly national banks and savings banks. The few banks which are international
are indeed the colonial banks from Britain, France, Germany, and lately from
America. So they were normally not international, they were really national
banks, big national banks of countries which were international in network
only. So he felt that if a genuinely global bank would be started bridging all
the Third World countries and also bridging the first world, there would be a
unique banking structure which could be very, very useful socially and also
very profitable.(11)
The nationalization of Pakistani banking which
provided the impetus for BCCI also insured that BCCI would retain the Saigol
relationship, as a substantial portion of their businesses were also
nationalized by Bhutto in 1972. Nationalization also provided other Pakistani
businessmen with powerful motivation to find a bank that could not be
controlled by the Pakistani government. The most important of these proved to
be the Gokal brothers, Pakistanis who became in the 1970's, through BCCI
lending, owners of the largest shipping empire in the world, with a business
that ultimately included commodity trading, general trading, manufacturing,
financial services, and real estate.(12) In addition to
freeing them from the threat of Pakistani appropriation, BCCI provided both the
Saigols and the Gokals one key service from BCCI that no other bank could
provide -- the freedom to defer repayment of past loans and to borrow new money
at will. Moreover, both clients received a special privilege similar to that
afforded BCCI's own officers: when something went wrong and they lost money,
BCCI would help them cover it up. This was a matter not just of loyalty to ones
intimate business associates -- it was also a matter of sound business
practice, as recognizing losses on the loans would have hurt BCCI's balance
sheets.(13)
Critical Elements of BCCI's Creation
Abedi needed five things to create BCCI. First, a
bank secrecy and confidentiality haven, which he found first in Luxembourg, and
then in Grand Caymans. Second, a source of capital, $2.5 million, which Abedi
ultimately obtained from Bank of America, supplemented by another $500,000 from
Sheikh Zayed of Abu Dhabi. Third, a source of initial assets, $100 million, of
which at least half were provided as deposits by Sheikh Zayed. Fourth, a group
of like-minded Pakistanis to operate the bank. These were now widely available
as a result of Bhutto's nationalization of their banks. Lastly, credibility in
the international community, through a relationship with an established Western
financial institution which would provide prestige to BCCI, but not interfere
with its unique approach to banking. This too was provided by Bank of America
during BCCI's formative years.(14)
The most critical of these five elements was the
relationship between BCCI and Abu Dhabi.
Abedi and Sheikh Zayed of Abu Dhabi
Abu Dhabi is the largest and wealthiest member of
the United Arab Emirates, an oil-rich federation of sheikhdoms with a combined
population of under 1.5 million, bordering on Saudi Arabia and Oman, with one
of the world's highest standards of living as a result of oil wealth. Like all
of the Gulf sheikdoms, Abu Dhabi is unusual among modern states in that its
ruler, and the ruling family, owns all the land and natural resources of the
country in fee simple absolute, with no distinctions being made among the
wealth of the ruler, his family, and the nation itself. As lawyers for Abu
Dhabi have described it:
By tradition and historical background of the
Trucial States, the ruler of an Emirate owns all of the land of his State. However,
he allots land to his subjects individually for their use. Similarly, all the
natural resources of the States are also regarded as the personal property of
the ruler and his heirs who enjoy complete authority to utilize them as they
consdier fit.(15)
As early as 1967 Abedi's high net worth customers
included the ruler of Abu Dhabi, Sheikh Zayed bin Sultan Al Nahayan, and his
family. The illiterate Sheikh, a formerly impoverished desert Bedouin, was the
recently installed head of a newly wealthy oil state who owed his power to a
British coup against his brother in 1966. The brother had been deposed for
having been unwilling to spend Abu Dhabi oil revenues for any purpose,
including easing conditions for members of the British foreign service posted there.
After installing Sheikh Zayed, British officialdom
had failed to pay attention to his desire to be taken seriously as an important
world political leader. By contrast, Abedi viewed Sheikh Zayed to be a
potentially important resource. By one account, the relationship began when
Abedi made the decision to fly to Abu Dhabi in 1966 to solicit the right of the
United Bank to take deposits from the thousands of Pakistani workers assisting
in its modernization. Travelling with one assistant and bringing an oriental
rug as a gesture of goodwill, Abedi secured Sheikh Zayed's permission for the
United Bank to open a branch in Abu Dhabi.(16) By a second
account, Abedi beat out the Habib Bank for taking care of arrangements for
Sheikh Zayed's first bustard hunting and falconry vacation in Pakistan,
personally waiting patiently outside the Pakistani government guest house while
the Sheikh napped, and securing the right to handle the Sheikh's logistics when
he awoke.(17)
By 1967, what had begun with Abedi handling the
Sheikh's falconry and bustard-hunting trips in Pakistan, and the finances of
Pakistani workers in Abu Dhabi, wound up with Abedi running the Sheikh's
financial life. As far as Pakistani bankers observing the relationship were
concerned, Abedi coordinated everything for Sheikh Zayed, from the building of
the Sheikh's palaces in Pakistan, the furnishing of his villas in Morocco and
Spain, his medical appointments, to the digging of wells for his homes in the
desert.(18) As BCCI officer Abdur Sakhia put it,
Digging a well or two was a minor cost of doing
business. Abedi's philosophy was to appeal to every sector. If you were
religious people he would help you pray.(19)
From the point of view of BCCI, Sheikh Zayed and his
family were ill-equipped to handle the demands of the modern world, and in the
early days, dependent on Abedi and Abedi's bank for their every need. Even in
the late 1970's, Sheikh Zayed, whose personal tastes were quite simple, would
on trips abroad routinely write checks for $100,000 or $200,000 at a time for
members of his retinue to spend as they liked, written on the back of a
matchbook or a piece of toilet paper. This practice continued until BCCI
officers provided the Sheikh with a gold checkbook and insisted that drafts be
written on it.(20) As Akbar Bilgrami described his
experiences with Zayed:
He would pray or listen to the news. He had a court
jester-type person who made him laugh and told him poetry. He was a simple man,
simple but shrewd. On a trip to spain which lasted two weeks, his retinue spent
$20 million, but he only spend $400 on himself the entire trip for two dogs
whose price he negotiated down from $1,000.
He was a simple man who did not spend a lot of money
on himself. It is part of Arab culture. The Sheikh is a sort of farther figure.
It is hard for him to say no to people, especially because he knows that
everybody knows that he has the money. He would carry about a briefcase filled
with expensive watches, Cartiers, Rolexes.(21)
Among BCCI officers it was believed that the United
Arab Emirates itself owed its creation to Abedi, who came up with the idea as a
means of reducing instability among the gulf emirates and increasing the
stature of Sheikh Zayed.(22) As Sakhia recalled:
Abedi created the UAE. He planted the idea of the
UAE as a federation to Sheikh Zayed. These people had no standing anywhere in
the world. They were smugglers and tribesmen. When Sheik Zayed would come for
months in Pakistan, not even a policeman would give him any attention. Yet two
months after meeting Abedi, Sheikh Zayed finally gets a state visit to
Islamabad and meets the President of Pakistan which then became the first
country to give him any status. The first embassy of UAE was opened in Pakistan
and the second in London, and both were staffed by Abedi's appointments.(23)
In time, Sheikh Zayed would unburden himself to
Abedi, and tell Abedi that he felt ignored by westerners, a sentiment he later
repeated to Bert Lance, as Lance recalled to Senate investigators, and in
testimony on October 24, 1991.
I remember a long conversation I had with Sheikh
Zayed at his palace outside of Islamabad. There were three of us there: Bert
Lance, Abedi, and Sheikh Zayed. The Sheikh was unhappy that the US hadn't paid
any attention to him. The US Ambassador hadn't focused on him. . . He was being
reated in a manner that really wasn't befitting the strategic importance or the
fiscal importance of the UAE. [Zayed was] concerned about the discrimination as
it related to the UAE vis-a-vis other Arab countries . . . receiving more
attention and more concern than the UAE was.(24)
It is absolutely clear from BCCI documents that
Abedi's relationship with the Sheikh of Abu Dhabi and the Al Nahayan family was
the foundation of the establishment of the bank without which BCCI never could
have come into existence. Throughout the first critical decade of BCCI's
eighteen year existence, as much as 50% of BCCI's overall assets were from Abu
Dhabi and the Al Nayhan family, who were earning about $750 million a year in oil
revenues in the early 1970's, an amount that rose to nearly $10 billion a year
by the end of the decade. Until the formation of a separate affiliate, the Bank
of Credit and Commerce Emirates (BCCE), BCCI functioned as the official bank
for the Gulf emirates, and handled a substantial portion of Abu Dhabi's oil
revenues. And yet from the beginning, there was an oddity about this central
relationship: at no time while Abedi was in charge of BCCI did Abu Dhabi hold
more than a small share of BCCI's recorded shares. Abu Dhabi appears not to
have capitalized BCCI, but instead to have insisted on guaranteed rates of
return for the use of its money.
As Akbar Bilgrami, who handled Sheikh Zayed's
personal finances in the late 1970's at BCCI, has described it, BCCI provided
Zayed with great benefits for what appeared at the time to be very little risk.
Zayed deposited substantial funds, amounting to billions of dollars, in BCCI,
receiving a guaranteed rate of return on these deposits -- sometimes as high as
1.5 percent over LIBOR, a standard European funds rate. In return for a
relationship that was costing him little and indeed, making him profits, Sheikh
Zayed received the prestige and benefits of having people all over the world
believe it was his bank, without his own funds being at risk.(25)
Thus, rather than being a major investor in fact in BCCI, in the early years,
Abu Dhabi only agreed to place extremely large sums of money as deposits at the
bank, which BCCI used in lieu of capital.
An eyewitness to BCCI's creation described Abedi's
elation after Sheikh Zayed agreed to back his new bank in a scene that took
place in late 1972, in the late evening, in the living room of a Pakistani
banker in Abu Dhabi. Abedi addressed the Pakistanis present in the following
terms:
It is truly the grace of God that the prayers of all
the U.B.L. [United Bank of Pakistan] employees who had to flee Bangladesh and
who had been kept on the U.B.L. payroll by us, have been provided a source of
livelihood by God. The Sheikhs have been kind enough to give me their trust and
support the new bank that we are creating for these employees.(26)
Abedi used the expression "rizq," or
"providence" to describe the deal he had consummated with Sheikh
Zayed. But there would have been a number of compelling reasons for Sheikh
Zayed to respond to Abedi's offer. Sheikh Zayed was financially unsophisticated
and in need of assistance from someone he could trust to handle his finances in
a manner that would meet his personal, cultural and political needs. These
included the need for secrecy as to the location and size of his wealth, given
the political instability within the region; the need to adhere to Islamic law,
through structuring transactions so that they could be profitable and safe
without the payment of interest in violation of that law. There was, moreover,
no one within Abu Dhabi who the Sheikh could trust to provide the adequate
secrecy. Indeed, apart from Abedi, Sheikh Zayed may well have known no one
inside or outside Abu Dhabi with the apparent sophistication to handle finances
of the magnitude that were being generated by the petrodollars. In any case,
Abedi had already been attending to all of the Sheikh's personal needs in
Pakistan for five years, thereby demonstrating his ability to make the
relationship worry-free for the Sheikh.
Abol Helmy, an Iranian BCCI officer, described the
relationship as a logical outgrowth of the post-colonial period in the Third
World:
The British ruled India, Pakistan, and the Arab
countries. Traditionally, the Indians and then the Pakistanis because of the
Moslem thread that linked them became the civil servants for the British
working in the Gulf. It was a continuation of the policies of the Empire.(27)
As a result of the Abedi-Zayed agreement, Abedi now
had essentially unlimited resources to create BCCI. He could now act
simultaneously as manager of billions of Sheikh Zayed's personal wealth, as
banker to the United Arab Emirates of which Sheikh Zayed was chief of state,
and as chairman of a new bank that had guaranteed assets of hundreds of
millions of dollars from its inception.(28) Moreover, Sheikh
Zayed was accustomed to the use of nominees, as nominee purchases were
frequently employed whenever he wished to buy anything to avoid the price
increasing if the Sheikh's name had been mentioned as part of the negotiations.(29)
One consequence of this arrangement, however, was
that Abedi's success was overly dependent on his relationship with Abu Dhabi
and its assets. He was managing the Sheikh's resources, he had use of them, and
if he did not meet the Sheikh's needs, he could lose everything. Recognizing
this dependence, Abedi made it a practice to insure that BCCI would provide
whatever the Sheikh required, whenever the Sheikh or his family wanted it. As BCCI
records demonstrate, payments, often characterized as loans, were made to
members of the Abu Dhabi royal family on an as-needed basis by BCCI, without
any regard as to whether these same resources were also being committed
elsewhere. With Abedi relying on the Sheikh's resources to finance his rapid
expansion, BCCI's finances quickly became so intermingled with the finances of
Abu Dhabi that it was difficult even for BCCI insiders to determine where one
left off and the other began.
BCCI's Protocol Department
By all accounts, Abedi flattered Zayed, and to
ensure that no detail of his needs would be neglected, established a large
protocol department, first at the United Bank and later at BCCI.
The most detailed account of the protocol
department's activities provided publicly to date has been that of Nazir
Chinoy, who as a branch manager of BCCI in Pakistan had substantial direct
contact with the head of BCCI's protocol department, Sani Ahmad, and had
first-hand knowledge of the protocol department's finances.
According to Chinoy, upon his arrival at
BCCI-Pakistan in 1978, the protocol department employed about 120 people, whose
job was "to establish and further the rapport with the sheiks of and
ruling families of Dubai and Abu Dhabi." The protocol department was
financed by BCCI, and had nothing to do directly with the bank. Instead, it was
handled as an adjunct to special activities of Abedi, managed by Ahmad under
Abedi's direction, and housed in Karachi in a separate building opposite Mr.
Abedi's house.(30) From 1978 through 1982, the period Chinoy
was at BCCI-Pakistan, the protocol department principally functioned as the
administrative wing of the Abu Dhabi royal family for their foreign travel.
The rulers and their families would come very
frequently. Ninety-percent of the time, the guests were from Abu Dhabi and
Dubai; occasionally, Oman, and the other emirates. They would come for shooting
at the Game Reserves. There was one particular cashier called Ibrahim. Sani
would call me and tell me to make Ibrahim available. He would take 5 million in
huge notes of rupees. At that time about $400,000. In Pakistan that is a hell
of a lot of cash money. It would be carried out in steel trunks. We would be
given money from the rulers account in Abu Dhabi in US Dollars.(31)
As of 1978, the expenses of the protocol department
were about 300,000 rupees a month -- about $600,000 a year, rising to $2.5
million a year by the early 1980's, and as much as $10 million a year at the
height of BCCI's success. The protocol department was not responsible for
financing its own operations. Its expenses were instead paid by the Pakistani
branch of BCCI each month after it received a statement from BCCI protocol
chief Sani Ahmad describing his expenditures. These expenditures were always
paid by the BCCI branch, even though often, the bankers were unable to
determine the nature of the expenses or the reasons for the expenditures.
According to Chinoy:
Sani would tell me that I need one million rupees
today and we would give him the moneys and the branch would pay the money. What
it was paid for we would have no idea I did not want to get involved in this
either and he would report to Mr. Abedi and I would tell Abedi what money had
been given to Sani Ahmed. Abedi would never initial or sign [any of the
documents], but he looked at and approved everything.(32)
Each hunting trip's expenses would amount to several
million dollars, requiring a special exemption from the State Bank of Pakistan
to permit the funds to be debited from BCCI's protocol department. This
exemption was granted by the State Bank after arguments by Abedi that Pakistan
needed to maintain BCCI's relationship with Abu Dhabi as a means of improving
its overall balance of payments.(33)
By the late 1970s, BCCI's protocol department
handled all affairs for the 18-20 palaces BCCI maintained for the ruler of Abu
Dhabi in Pakistan, all under the direct control of Sani Ahmed. In return, money
was sent each month from BCCI Abu Dhabi to Pakistan to pay for the gardeners, telephones,
and maintenance of houses.
The protocol department also established a special
relationship with Pakistani Customs airport authorities so that members of Arab
royal families would receive VIP treatment that avoided the usual delays
associated with entering Pakistan.
Along with the construction of palaces and vacation
homes, BCCI handled private matters for the visiting Al-Nahayans, including the
procurement of Pakistani prostitutes for the male members of the family. These
were typically teenage girls, known as "singing and dancing girls,"
and selected, outfitted and trained by a woman named Begim Hashari Rahim, who
later was promoted to the official position of Interior Decorator to the Royal
Family of Abu Dhabi.(34)
As head of the protocol department before becoming
head of BCCI's Washington, D.C. representative office, Sani Ahmad had a unique
role at BCCI and special relationship with Abedi. He was treated with deference
by other BCCI officers, who did not consider him to be a banker, but a fixer.
As Chinoy recalled:
Sani was the trusted man for things no one else was
supposed to know. We were the technocrats. Sani Ahmed would handle the things
we wouldn't, like get girls. If anyone paid anyone any money [as a bribe], Sani
would have been the one to do it.(35)
Bank of America
Ironically, although Abedi now had a large source of
assets for BCCI, the Sheikh of Abu Dhabi could not provide him with credibility
in the west. Abedi's first choice for a prestigious western partner, American
Express, insisted on having a major say in BCCI's management, which Abedi would
not tolerate.(36) Abedi's search for a more compliant partner
brought him to Bank of America, which in 1972 was one of the most aggressive of
U.S. international banks, with a presence in Iran already and in Pakistan. For
BCCI, a relationship with Bank of America would provide recognition in the west
and access to the Bank of America's global network for correspondent banking.
For the Bank of America, BCCI provided a potentially lucrative entry to Arab
oil wealth, at a tiny capitalization cost of just $2.5 million.(37)
Following what Abedi referred to as "an historic lunch" in San
Francisco, Bank of America agreed to provide the money and to be a passive
partner in BCCI, permitting Abedi to run the operation as he pleased.(38)
As Abedi told a British magazine, Euromoney, in the summer of 1978:
Bank of America agreed to become a shareholder, but
we made it a condition that we would establish the management style.(39)
With only $3 million in total capital, Abedi kept
BCCI's initial overhead down through promising the central Pakistani recruits
to his team that they were members of a family, employed for life, whose future
prosperity was being built collectively. He made the founder group shareholders
of BCCI and put them to work in a tiny office in Abu Dhabi sharing what
Massihur Rahman later described as "mess-type flats."(40)
Working conditions in Abu Dhabi, and at BCCI in the early days, were extremely
primitive, but more easily accepted by the Pakistani bankers than they would be
by western ones.(41)
Simultaneously, Abedi relied upon senior Bank of
America officials to sit on BCCI's board of directors, to recruit additional
bankers for BCCI, and to approve all major loans by the bank. Among the key
figures retained by Abedi as directors from Bank of America were Yves Lamarche,
who had previously managed Bank of America operations in the Middle East, J.D.
Van Oenen, a European Bank of America official, and P.C. Twitchen, formerly,
Vice President of Bank of America. Another prominent Bank of America figure,
Roy Carlson, who was based in Iran, later became President of National Bank of
Georgia at a time when it became secretly owned by BCCI.
Ownership of BCCI
Although Abu Dhabi had a key interest in BCCI from
its creation, in accord with Abu Dhabi's failure to provide the initial funds
for capitalization, BCCI's early stock recordations did not show Abu Dhabi as
the actual owner of the bank. A snapshot of BCCI shares from Bank of America
files as of September 30, 1977 described BCCI's majority owner as ICIC, at 50.1
percent; its most important minority owner as Bank of America, at 30 percent;
and its largest Arab owner as Majid Al-Futaim of Dubai in the United Arab
Emirates at just 4 percent, with the members of the family of Abu Dhabi owning
just 3.4 percent all told.(42)
This list indicated that the Pakistanis actually
owned BCCI at a time when to the outside world, the bank was ostensibly owned
by oil-rich Middle Eastern Arabs, including the ruling families of Bahrain,
Sharjah, Dubai, Saudi Arabia, and Iran, as well as that of Abu Dhabi.(43)
That picture was complicated still further, however,
by the fact that ICIC was not the owner of record of any of its shares of BCCI
on the share register of BCCI in Luxembourg. Instead, several of the
shareholders on the register were acting as nominees for BCCI, according to the
Bank of America records. Moreover, some of the subsidiaries owned by BCCI also
relied on nominees, and by the late 1970's, ICIC was the record controller of
as much of 70 percent of BCCI all told.(44) Yet even at the
time, BCCI officers were told by Abedi that ICIC really owned only about 30
percent of BCCI.(45)
A further difficulty in interpreting the issue of
ownership was that ICIC continuously was borrowing very substantial amounts
from BCCI with inadequate documentation, with the result that for all practical
purposes, BCCI was repeatedly buying itself, and using various nominees along
the way to hide this fact.
Looking to BCCI's capitalization was of little help
in determining its ownership, either. Apart from the tiny, real capital of $2.5
million placed in BCCI by the Bank of America, and an additional $500,000
acknowledged by Abu Dhabi, there remains no evidence of other substantial cash
infusions in the bank in the early years, suggesting that from the beginning,
Abedi and Sheikh Zayed had agreed to provide BCCI only the assets of Sheikh
Zayed as a depositor, rather than his capital as an investor. This pattern, in
which Abedi asked for little in the way of cash on the line from potential
"investors," would be repeated in other cases, except that often, a
shareholder would contribute merely the prestige of his name and aura of
wealth, rather than deposits or any actual financial contribution.
The Early Use of Front-Men
As a privately held company, BCCI was obliged to no
one to provide detailed information about shareholders. BCCI made it a practice
never to reveal exactly who owned how much of the bank. However, in direct contradiction
to BCCI's obsessive secrecy about the actual facts of its ownership, Abedi
heavily publicized the fact that most of the most important royal families of
the oil-rich states of the Middle East were "shareholders" from the
first in BCCI, and therefore were ostensibly backing the bank with their
fabulous petrowealth.
What the outside world did not know is that in every
case -- with the possible exception of Zayed's and Abu Dhabi's acknowledged
holdings in BCCI -- these backers had been provided hold harmless agreements by
BCCI, providing them guarantees against loss, and that the interest in BCCI
held by these royal families had been essentially provided to them by Abedi as
a "gift," accompanied by generous terms on lending and other BCCI
services.
Just as BCCI's board of directors would later
contemptuously be referred to as "RAF," for "rent-a-face,"
by BCCI insiders, Abedi had essentially rented the names of many of the Arab
world's most prominent oil-rich monarchs. Instead of the public image of their
backing BCCI with their money, BCCI was paying them for the illusion that they
were behind the bank.
BCCI's glossy promotional materials were
characteristically
misleading on the issue of its initial
capitalization. In describing its history in a mid-1980's Group Profile made
available to the public, BCCI wrote:
The BCC Group was originally conceived as an
international banking organization backed by Middle Eastern investors to
provide commercial banking services world-wide . . . Its initial paid up
capital of $2.5 million wa subscribed by Bank of America (25% later increased
to 30%) and the balance by investors from the Middle East (emphasis
added).(46)
The deliberate vagueness of the phrase "the
balance" underscores the lack of any substantial additional initial
capital in BCCI beyond that provided by Bank of America. The $500,000
investment acknowledged by Abu Dhabi to the Subcommittee for the first time on
May 14, 1992 would have been considered surprisingly tiny had it been revealed
in 1972.
Some hint of how Abedi approached the capitalization
problem is found in Abedi's motivational rhetoric, in which he constantly
talked of BCCI as something that could be created out of pure willpower.
"Western Banks concentrate on the visible, whereas we stress the
invisible," Abedi told a British journalist in 1978.(47)
Such a statement could be taken as many did take it, as mystical gobbledygook.
But it well described Abedi's technique for building a banking empire --
building something out of nothing by relying on something invisible but
powerful: images of wealth. These images, from BCCI's fancy buildings to the
photographs of Abedi posing with its fabulously wealthy Middle Eastern
"shareholders," provided as much power for Abedi as the real money
would have done, so long as everyone believed it was there. It was far easier
to ask a Middle Eastern potentate for his name than for his money, and as far
as Abedi was concerned, the results were the same.
Although ICIC "owned" 70 percent of BCCI
in 1980 upon Bank of America's withdrawal, ICIC mysteriously became a minority
owner of BCCI by the end of the decade. As of December 31, 1989, ICIC held less
than 11 percent of BCCI, with Abu Dhabi becoming the principal shareholder,
holding over 35 percent, including shares owned by various members of the
Al-Nahyan family and the Abu Dhabi investment authority.(48)
Yet the actual picture as to BCCI's ownership even
then remains clouded. Several of the larger shareholders registered at that
date, including Wabel Pharaon with 11.55 percent, Mohammed Hammoud, with 3.44
percent, Abdul Raouf Khalil, the Saudi government's intelligence liaison to the
United States and other foreign governments, with 3.08 percent, and Kamal
Adham, Khalil's predecessor as Saudi intelligence chief, with 2.94 percent,
were acting as BCCI's nominees for ownership of its own shares, through
guarantees that prevented them from being at risk. Moreover, Price Waterhouse
could at the time find no evidence of the bank's actual contact with Khalil,
its supposed "shareholder," for a number of years, although there
were numerous transactions in his name undertaken in that period.(49)
A year later, following the disclosure of massive
losses at BCCI as a result of Price Waterhouse reports to the Board of Directors,
the Abu Dhabi royal family had took full legal title of BCCI, increasing its
share to over 78 percent of all BCCI shares, with the new shares obtained
entirely from those formerly held by the nominees.(50)
Given the many mysteries about BCCI's shareholding
from its creation and the fact that critical records remain missing, it remains
difficult to determine retrospectively whether or not Abu Dhabi had the ability
at all times to do what it ultimately did in 1990 -- obtain direct and complete
formal control of the majority of BCCI shares.
BCCI's Rapid Expansion
Throughout the 1970's, BCCI expanded rapidly, with
Abedi adding new corporate members to the BCCI family by the month. Initially,
BCCI was incorporated in one location only, Luxembourg. Two years later, a
holding company was created, BCCI Holdings, with the bank underneath it BCC
S.A., split into two parts, BCCI S.A., with head offices in Luxembourg, and
BCCI Overseas, with head offices in Grand Cayman. Luxembourg was used mostly
for BCCI's European and Middle East locations, and the Grand Caymans mostly for
Third World Countries.(51)
This structure was intentionally further complicated
by the establishment of a series of additional entities, used as "parallel
banks" by BCCI as needed for financial manipulations. These parallel
entities included the Kuwait International Finance Company (KIFCO), in which
BCCI ostensibly had only a minority interest; a Swiss bank, Bank de Commerce et
Placements SA (BCP), in which BCCI also ostensibly had only a minority
interest; the National Bank of Oman, again with BCCI formally holding only a
minority interest; a 100% owned finance subsidiary, Credit & Finance
Corporation Ltd,; and the series of entities based in the Grand Caymans and
collectively known as "ICIC," which became the principal "bank
within a bank" at BCCI. In the cases in which BCCI's official interest was
minority, its apparent lack of control was the consequence of local regulations
prohibiting a foreign bank from owning a majority share. Each time, BCCI found
ways to evade the regulations through the use of front-men or nominees, and
wound up being able to direct the operations of these institutions as if they
were wholly-owned subsidiaries.
BCCI's aggressive drive for expansion was
necessitated by a financial strategy that pursued asset growth, rather than
profitability, as the key to success. This approach was a necessity because of
the underlying lack of working capital and BCCI's high-start up costs. The idea
was that through rapid growth, BCCI would eventually fill the holes in its
capital through commissions on its frenzy of activity. In the meantime, growth
could disguise temporary operating losses through creative bookkeeping. In
fact, the growth did not end the losses, but exacerbated the underlying capital
problem, because BCCI needed to increase its retained capital in order to show
an adequate cushion for its billions in new assets. The solution to this
problem, like all others, for Abedi, was relentless growth.
To implement this approach, BCCI officers were
directed to focus their attention on individuals and entities who controlled
large sums of cash: people like central bank officials, heads of state,
"high net worth individuals," and black marketeers, and offer them
terms significantly better than the terms offered by competing banks, or
services, such as kick-backs and freedom from documentation, that the
competition was unwilling to provide. As a marketing document from BCCI in the
United States, prepared during the mid-1980's, advises BCCI officers, they
should vigilantly look for "client relationships which are considered
special for . . . reasons such as confidentiality, high sensitivity,
requirement of special attention and service, large size deposit, business or
profit, complexity of business, etc.," which would receive specialized
attention from BCCI higher-ups.(52)
BCCI's trans-national character continued to be a
critical ingredient of its marketing. As BCCI historian K.K. Elley noted in
1982, BCCI because "serves no country of individual. . . No customer need
fear that their assets will be frozen because their country is having a
difference with the country of BCCI's origin."(53)
Fueled in part by infusions of petrodollar deposits
from Gulf State rulers during the hey-day of the OPEC years, BCCI's early
growth was exponential, especially in the United Arab Emirates, the Sultanate
of Oman, Yemen, and Bahrain, as the following profile of the first five-years
of BCCI's performance demonstrates.
Year # Branches # Countries Assets Growth
1973 19 5 $200 m --
1974 27 7 610 m 204%
1975 64 13 1.2 b 98%
1976 108 21 1.6 b 37%
1977 146 43 2.2 b 33%
After consolidating its position in the Middle East,
BCCI identified Africa as the next area for growth. A number of African
countries possessed many of the traits that BCCI had learned to exploit in the
Middle East -- autocratic rulers who controlled much of the wealth of their
nations, primitive working conditions for bankers which discouraged westerners,
and non-western attitudes towards the payment of gratuities as a cost of doing
business.
African expansion began in Egypt, Sudan, Mauritius
and Seychelles, and extended by 1979 into Kenya, Swaziland, Liberia, Nigeria
and Sierra Leone. Typically, BCCI operated in these countries in a corrupt
environment marked by cash bribes, kickbacks to senior central bank officials
of the nation involved, and special arrangements with the heads of state.(54)
As a consequence of its willingness to do things that most westerns banks were
not, BCCI soon became the largest foreign bank operating in Africa.
The third phase of BCCI's growth targeted Asia, and
included the acquisition of the Hong Kong Metropolitan bank from the Swiss Bank
Corporation. This branch of BCCI later became the vehicle for handling very
large transactions by the Chinese government, whose business Abedi secured
through a mixture of public charitable activities and private kick-backs.(55)
Simultaneously, BCCI decided to expand into the Americas, opening offices in
Canada, branches in the United States, and in Venezuela, Columbia, Panama, and
Jamaica. By the mid-1980s, BCCI's empire extended to banks or branches in 73
countries, and assets totalling about $22 billion.
BCCI's amazing rate of growth continued in good
years and bad, without regard to macro-economic conditions. For example, in
Hong Kong during the 1983-1984 period, BCCI prospered while other foreign banks
were forced to retrench because of economic downturn. This phenomenon was
repeated in the United Arab Emirates during a slump that began around 1983
because of the fall in oil prices; and in Nigeria in the late 1980's -- a time
when other foreign banks withdrew from operations there. As BCCI officer Nazir
Chinoy later explained, in the case of Nigeria, at least, this result was
because BCCI was willing to bribe officials and assist them in handling their
payments in a manner that the competition, hemmed in by auditors and lawyers,
could not meet.(56)
Abedi's Mysticism As Component of BCCI
Strategy
While engaging in corporate legerdemain as a means
for hiding what he was doing, Abedi developed a peculiar mystic philosophy for
BCCI, which was shared with BCCI's recruits in annual means as part of
motivating them to give their "all" to BCCI's expansion. Many of BCCI's
more senior officials viewed Abedi's philosophical musings as boring and
unintelligible material which had to be endured.(57) At
annual meetings of BCCI officials, Abedi would often speak about his philosophy
for hours at a time. However, Abedi's stature at BCCI was such that no one ever
challenged him, and instead, younger officers seeking to rise in the ranks
would parrot Abedi's philosophy and describe how it had changed their lives.(58)
Abedi's philosophy was an often obscure mix of
Islamic mysticism focusing on the links between the individual, the family, and
the universe; and self-help sales motivational pitches. For example, in
describing BCCI's decentralized and obscurantist structure in philosophical
terms, Abedi wrote:
Our restructuring and reorganization has its own
meaning that emerges out of our own needs, our own purpose and our quality and
quantity of human resource that we from time to time become. We accept the
truth that each one of us is different and like every human being each one of
us is inadequate, but unlike others we genuinely accept each other and we have
a tremendous urge and desire to constantly move towards adequacy. . . [T]he
quality of relationships . . . is the essence of an organization. It is the
shining truth. It is the truth that every individual member of the family must
unveil in his feelings -- in his psyche. It must spark like a brilliant star in
his heart.(59)
Abedi described the key functions of BCCI's support
centers to BCCI officers under their jurisdiction as "keep their energy
flow," and "becoming an agent of change," including
"extricating the Managers and the staff from the malady of containment and
psychological lethargy and inertia wherever it has set in."(60)
In an earlier management meeting in New York in
1983, on memo paper featuring a sepia-toned highlight of the hand of God
touching the hand of Adam in Michelangelo's Creation from the Sistine Chapel,
Abedi explained that BCCI's spiritual aspect was much more important to its
success than its material aspects.
We must learn to "feel" that BCCI is this Power
and not merely a group of branches, a set of facts and figures. Since, BCC is a
power, a spirit, a Desire - it is all encompassing and enfolding - it relates
itself to cosmic power and wisdom, which is the will of God. . . . OUR MAJOR
FUNCTION: To have a desire, Improve its volume and quality, Make others
have such a Desire, Merge this in the pool of corporate Desire, Make the
purpose of this Desire our major purpose, Make it BCC identity.(61)
Abedi then asked the key pertinent question:
"IS BCC A DESIRE, OR IS BCC A BANK?"(62)
While on one level these philosophic discussions
appear far removed from the practical elements of banking, in fact there was an
important link between the philosophy and BCCI's strategy of asset growth. The
philosophy, obscure as it was, described the importance of relentless,
ceaseless activity as a means of growth, and of the need to remove
"obstacles" to the growth, regardless of the source. Junior officers
were encouraged to keep things moving and not to worry much about rules. Senior
managers were advised to encourage junior officers to experiment, and to help
them circumvent even the rather relaxed procedures that applied to doing
business at BCCI. As Abedi told forty-five of his managers in 1985:
If our colleagues who represent young energy and
young hope do not live up to our standards in the task they perform, how do we
deal with them? Our response could either encourage them to flow and in time
enable them to come closer to the desired standards or may stifle and
discourage them early on in their careers, thereby diminishing any chance of
them improving and performance towards excellence. Do not nip the flower in the
bud. . . give them room to breathe. (63)
Under Abedi's guidance, BCCI officers learned that
they would be rewarded for any technique that allowed them to acquire customers
and assets, and would not be punished by the bank even for engaging in
unorthodox or illegal banking practices. In the words of BCCI official Akbar
Bilgrami:
Abedi had a saying to younger employees, that if a
banker cannot make money for himself, he cannot make money for the bank. It was
an invitation to enrich yourself, that I never felt comfortable with.(64)
When a BCCI banker was caught by local regulations,
he would not be punished, but simply transferred from the location or from BCCI
to another entity controlled by the bank, often with a bonus payment.(65)
By contrast, if an officer refused to facilitate an obviously illegal
transaction, BCCI's senior officials would simply go around him, and his career
would suffer accordingly.(66)
Abedi made use of mysticism as a motivational
technique even on the most mundane of banking matters. When BCCI developed
Travellers Cheques in 1986 as a new product, Abedi convened a conference of
BCCI employees to announce that these cheques were "a profitful instrument
of relationship." Abedi announced that "travellers cheques add a new
dimension to my personality. They are a means of making a profit and at the
same time a means of fulfilling my aspirations. There is great happiness in
selling the largest possible volume of travellers cheques."(67)
Compartmentalization
As a technique for insuring security and control,
Abedi adopted a strategy taken from intelligence operations. He
compartmentalized information about BCCI. Compartmentalization insured that
even within the bank, officers in one operation would have little to no
information about the nature of the activities of an officer in another area.
Not only was information about BCCI's activities closely held, but even senior
officials were discouraged by Abedi from asking questions. As Massihur Rahman
testified:
I was very uncomfortable because in [previous bank
jobs], I could go across the board and go to any division and see any of the
operation. But here I could see these Chinese walls were getting very, very
watertight and we were always taught about humility and ego and anything that
was slightly out of context was considered just an ego trip.(68)
Instead of having vice presidencies, the bank had 50
senior executives and 198 managers, with only two people considered to be
higher up than all others: Abedi and his chief assistant, Swaleh Naqvi. As
Rahman described it:
There was Mr. Abedi at the very top, there was Mr.
Naqvi who was like a chief operating officer, who converted . . . Mr. Abedi's
ideas and things into practical shapes. And then there was a big gap between
these two and the other executives who were all called general managers. All of
us were called general managers. . . You couldn't be senior to anybody else,
you're all the same pay, the same benefits.(69)
Consequence of BCCI Structure and
Philosophy on Audits
Abedi's unique approach to banking had the effect of
removing most checks and balances on BCCI. Other senior officers did not have a
complete picture of BCCI's operations. The board of directors learned little
beyond what Abedi and Naqvi told them. And outsiders, including BCCI's
auditors, could be easily manipulated.
This manipulation was facilitated by Abedi's
decision to divide its annual audits between two of the then "Big
Eight" accounting firms -- Ernst & Whinney and Price Waterhouse, with
Ernst & Whinney taking responsibility over only the holding company and
BCCI Luxembourg, and Price Waterhouse taking responsibility over only BCCI
Overseas in the Grand Cayman, a state of affairs which ended with Ernst &
Whinney's withdrawal in 1986, and Price Waterhouse gaining responsibility for a
consolidated audit of all BCCI activities in 1987. Even then, however, Price
Waterhouse was not in the position to review BCCI's overall picture due to the
exclusion from its audit work of a number of BCCI affiliates, some secretly
owned, including ICIC, KIFCO, and BCP. Moreover, as late as 1990, key documents
involving guarantees against loss by BCCI to principal shareholders, held in
the Grand Caymans and in Abu Dhabi, do not appear to have been made available
to auditors.
Obstacles In the United Kingdom
Some of the same factors that made BCCI's growth
possible also inhibited it from further expansion. Its rapid expansion had
prompted intense speculation in the United Kingdom, which was interfering with
BCCI's ability to obtain a full banking license from the Bank of England, as
Abedi implicitly acknowledged in a 1978 interview.
The Bank of England probably hasn't given permission
because of the atmosphere surrounding the BCCI and the propaganda that has been
spread about us. . . It is not only the Bank of England that is against us, but
the Club.(70)
The hostility to BCCI in the United Kingdom, which
was the headquarters for BCCI's operations, was all too reminiscent to Abedi of
the conditions that had lead to the demise of the United Bank in Pakistan.
Abedi needed to move outside the reach of the United Kingdom. An obvious
solution was to find a new home for BCCI in the United States.
Unfortunately, the relationship with Bank of America
had become an obstacle to such a move for BCCI. Rather than see BCCI expand
into its home base, Bank of America was increasingly uncomfortable with its
partner. Despite its initial agreement to let BCCI be BCCI, Abedi's original
U.S. partner, Bank of America, had found itself bewildered by many BCCI
practices from the beginning. An internal "family history" of BCCI,
written as a case study by one of BCCI's key officers in the United States,
Khusro Karamat Elley on October 27, 1982, provides a sanitized version, from
BCCI's point of view, of what went wrong between BCCI and Bank of America:
The Bank of America found on their hands an
affiliate which had already become one of their largest and in which they had
no management control. They were also being required to contribute every year
to the increase of capital in order to maintain their portion of the
shareholding. Perhaps most importantly they had also arrived at the conclusion
that the Middle East had become far too important not to have a direct
presence.(71)
In fact, by 1976, Bank of America had already
stopped contributing to new infusions of capital for BCCI, reducing its share
from 30 percent to 24 percent. By the spring of 1976, extensive discussions
within Bank of America about BCCI's unusual practices had resulted in a series
of memos being created and circulated among senior officials at the bank. Two of
these memoranda, introduced as exhibits in the 1978 litigation over the FGB
takeover, make explicit the profound disquiet at Bank of America over BCCI's
handling of its Arab clients and its management style.
The first memo, written May 10, 1976 from Bank of
America Executive Vice President Alvin C. Rice to Scudden Hersman, Jr., a
senior vice president, noted the concerns that some in Bank of America had
expressed about BCCI's unusual attention to meeting the personal needs of
leading political figures, especially in the Middle East, but stated that no
bookkeeping entries demonstrating abuses had been found. Rice warned, however,
that the overall relationship between Bank of America and BCCI was a difficult
one:
We are just not operating on the basis of mutual
trust and cooperation that make the whole effort and exercise worthwhile.
Substantial profits usually have a way of curing problems but this case is an
exception. If we can't make some major breakthroughs in the near future, we
will have to consider alternatives such as divestiture.(72)
In the second memo, written following a meeting
between Rice and Abedi, Rice described how he and Abedi had discussed the
problem of BCCI officials withholding information from Bank of America
officials. Abedi attributed this to cultural differences:
According to Abedi, frank criticism "American
style" is something Pakistanis are not accustomed to. Criticism is taken
as a personal affront and for this reason, sometimes BCCI officers have not
wanted to disclose fully operating procedures that they knew would not meet
BofA's quality standards.(73)
Later, Rice would tell journalists that the
fundamental problem he encountered with BCCI was that BCCI thought nothing of
bribery, and believed that even obstacles with regulators could be fixed
through "baksheesh."(74)
These concerns simmered for another year at Bank of
America. But by the fall of 1977, disapproving questions from an auditor from
the U.S. Comptroller of the Currency in London responsible for reviewing Bank
of America's overseas holdings, intensified Bank of America's concerns. These
concerns had already been acknowledged privately in other Bank of America
internal memoranda about BCCI: its overly-cozy relationship with its
shareholders, its practice of providing shareholders with unusual banking
services, Bank of America's inability to penetrate BCCI's banking practices,
and BCCI's hostility to Bank of America inquiries about those practices.
By February, 1978 the OCC auditor had concluded that
Bank of America was substantially at risk from BCCI.(75) But
by then, divestiture of BCCI by Bank of America was in the interests of both
banks. BCCI needed to sever its relationship with Bank of America to provide
itself with additional options in connection with its ongoing attempt to buy
Financial General Bankshares. Bank of America needed to reduce what might soon
become an actual liability on its books. Accordingly, Bank of America had begun
to implement a rapid divestment agreement with BCCI through the purchase of the
Bank of America shares by BCCI's bank-within-a-bank, ICIC, described by the
Bank of America in a January 30, 1978 press release merely as "one of the
other major BCCI shareholders." In announcing the sale of its stake in
BCCI, Bank of America emphasized that "the close co-operation that has
developed between the two banks will be maintained."(76)
Over the following decade, Bank of America would in fact maintain correspondent
banking relationships with BCCI, continually seek additional business from
BCCI, collude in at least one of BCCI's purchases of foreign banks through
nominees in South America, and earn a great deal of money from the relationship
until BCCI's closure.(77)
1.
"Growth of
International Banking: Case Study of Bank of Credit and Commerce Intl, Khruso
Karamat Elley, October 27, 1982, Senate Document 385.
2.
See e.g.
"The Mysteries Behind Abedi's Bank," Euromoney July 1978; S. Hrg.
102-350 Pt. 3, pp. 305-310; "The man who adds a touch of mysticism to
banking," Financial Times, May 17, 1978; S. Hrg. 102-350 Pt. 3, pp.
303-304.
3.
Staff interview,
Rahman, August 7, 1991.
4.
Staff interview,
Sakhia, October 7, 1991.
5.
Testimony of
Rahman, S. Hrg. 102-350 Pt. 1, p. 540.
6.
Former BCCI
Pakistan branch chief Nazir Chinoy provided detailed information about the
Zia-Abedi relationship in a series of interviews with Senate staff from March
9-16, 1992; see also check to General Zia from BCCI-UAE, May 25, 1985, S. Hrg.
102-350, Pt. 2 p. 511.
7.
White Paper on
the General Elections, Government of Pakistan, July 1978, S. Hrg. 102-350, Pt.
3, pp. 314-317.
8.
See Price
Waterhouse reports to BCCI on "Problem Loans," February 14, 1990, in
S. Hrg. 103-350, Pt. 1, pp. 359-360 and BCCI Task Force Report on Saigols, id,
pp. 437-438.
9.
Massihur Rahman,
S. Hrg. 102-350, Part One, p. 489.
10.
Id.
11.
Id. at 490-491.
12.
BCCI Task Force
Report on Selected International Loans, S. Hrg. 102-350, Pt. 1 p. 417,
testimony of Rahman, Id. pp. 532-533.
13.
Id at 455-456.
14.
See testimony of
Rahman, S. Hrg. 102-350, Pt. 1, pp. 489-491; Financial Times, May 17, 1978,
"The man who adds mysticism to banking," S. Hrg. 102-350, Pt. 3, pp.
303-304; "The mysteries behind Abedi's bank, Euromoney, July 1978.
15.
Letter from
Baldwin Tuttle to Lloyd W. Nostian, Jr., Federal Reserve Richmond, November 5,
1980.
16.
"BCCI
Founder: These Things Happen," Najam Sethi, Wall Street Journal, July 29,
1991.
17.
See e.g.
Bankrupt, The BCCI Fraud, Kochan & Whittington, p. 23.
18.
Staff interviews
with Massihur Rahman, August 7, 1991; Abdur Sakhia, October 9, 1991; Nazir
Chinoy, March 9-16, 1991.
19.
Id.
20.
Akbar Bilgrami,
Staff interview, July 13, 1992.
21.
Staff interview,
Bilgrami, July 13, 1992.
22.
Id.
23.
Staff interview,
Abdur Sakhia, October 7, 1991.
24.
Staff interview,
Lance, October, 1991; testimony of Lance, S. Hrg. 102-350 pp 20-21.
25.
Bilgrami, staff
interviews, July 13-14, 1992.
26.
Transcribed
verbatim statement of BCCI insider, April 8, 1991.
27.
Staff interview,
Abol Helmy, January 13, 1991.
28.
Id.
29.
Staff interview,
Akbar Bilgrami, July 13, 1992.
30.
Staff
interviews, Chinoy, March 9-16, 1992.
31.
Id.
32.
Staff
interviews, Chinoy, March 9-16, 1992.
33.
Id.
34.
Testimony, Nazir
Chinoy, Subcommittee on Terrorism, Narcotics and International Operations,
March 18, 1992, p. 26.
35.
Id.
36.
Euromoney July
1978, S. Hrg. 102-350 Pt. 3, pp. 305-310.
37.
Growth of
International Banking, Case Study of Bank of Credit and Commerce Intl, Khruso
Karamat Elley, October 27, 1982; BCCI internal document, Senate investigation.
38.
Id.
39.
The Mysteries
Behind Abedi's Bank, Euromoney, July 1978; S. Hrg. 103-350, Pt. 3, pp. 305-310.
40.
Testimony of
Rahman, S. Hrg. 102-350, Pt. 1, p. 491.
41.
Growth of
International Banking, Case Study of Bank of Credit and Commerce Intl, Khruso
Karamat Elley, October 27, 1982; BCCI internal document, Senate investigation.
42.
Exhibit I, OCC
Report of Joseph Vaez to Robert Bench, February 15, 1978.
43.
See e.g.
Euromoney July 1978 chart, S. Hrg. 102-350, Pt. 3, p. 306.
44.
Exhibit II, OCC
Report of Joseph Vaez to Robert Bench, February 15, 1978.
45.
Staff interview,
Sakhia, October 7, 1991.
46.
BCC Group
Profile, undated, 1985.
47.
Financial Times,
May 17, 1978, S. Hrg. 102-350, Pt. 3, p. 303.
48.
BCC Holdings
(Luxembourg) S.A., List of Shareholders as On 15.10.1990, Senate Document 300.
49.
BCCI documents
from Abu Dhabi, Grand Caymans, Panama, showing Khalil transactions; Price
Waterhouse, Report to Board of Directors of BCCI, February 18, 1989, S. Hrg.
102-350, Pt. 1, pp. ___.
50.
BCCI Holdings
(Luxembourg) S.A>, List of Shareholders as on 31.12.89, Senate Document 298.
51.
Testimony of
Rahman, S. Hrg. 102-350, Pt. 1 p. 491.
52.
"Client
Contact and Relationship Programme," BCCI internal document from Agha
Hasan Abedi to U.S. employees, October 9, 1985, Senate document.
53.
"Growth of
International Banking: Case Study of Bank of Credit and Commerce Intl, Khruso
Karamat Elley, October 27, 1982, Senate Document 385.
54.
Staff
interviews, Nazir Chinoy, March 9-16, 1992.
55.
Confidential
source, Senate investigation, March, 1991.
56.
Staff interview,
Chinoy, March 9-16, 1992.
57.
Interview, Nazir
Chinoy, March 9-16, 1992.
58.
Staff
interviews, various BCCI officers; various Senate BCCI documents.
59.
"Context
and Rationale," Statement of Agha Hasan Abedi to BCCI officials, undated,
Senate BCCI Document 1269.
60.
Id.
61.
BCCI document,
Summary of the Management Meeting, New York, 12.2.83 p. 7.
62.
Id.
63.
Note of Meeting
with the President on 17.1.85 at 5pm, Senate BCCI document.
64.
Bilgrami, staff
interview, July 13, 1992.
65.
Testimony of
Rahman, S. Hrg. 102-350, Pt. 1, p. 513.
66.
Staff interview,
Chinoy, March 9-16, 1992; staff interview. Sakhia, October 7, 1991.
67.
Abedi, BCCI
International, internal publication of BCCI, May 1986, Number 35, p. 12.
68.
Id. at 495.
69.
Id. at 497.
70.
Abedi, quoted in
Euromoney, July 1978, in S. Hrg. 1
03-350
Pt. 3, p. 308.
71.
Growth of
International Banking, Case Study of Bank of Credit and Commerce Intl, Khruso
Karamat Elley, October 27, 1982; BCCI internal document, Senate investigation.
72.
Bank of America
Memo, Rice to Mersman, May 10, 1976, Lamarche Dep Exhibit No 6, August 11,
1978, FGB litigation.
73.
Bank of America
Memorandum for the Files, May 26, 1976, Lamarche Deposition Exhibit 7, August
14, 1978, FGB Litigation.
74.
London Telegraph
Magazine, November 10, 1991, No Questions Asked, p. 12.
75.
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).
76.
Id.
77.
Staff
interviews, Sakhia, October 7, 1991; Chinoy, March 9-16, 1992.
BCCI's unique criminal structure -- an elaborate
corporate spider-web with BCCI's founder, Agha Hasan Abedi and his assistant,
Swaleh Naqvi, in the middle -- was an essential component of its spectacular
growth, and a guarantee of its eventual collapse. The structure was conceived
by Abedi and managed by Naqvi for the specific purpose of evading regulation or
control by governments. It functioned to frustrate the full understanding of
BCCI's operations by anyone.
Unlike any ordinary bank, BCCI was from its earliest
days made up of multiplying layers of entities, related to one another through
an impenetrable series of holding companies, affiliates, subsidiaries,
banks-within-banks, insider dealings and nominee relationships. By fracturing
corporate structure, record keeping, regulatory review, and audits, the complex
BCCI family of entities created by Abedi was able to evade ordinary legal
restrictions on the movement of capital and goods as a matter of daily practice
and routine. In creating BCCI as a vehicle fundamentally free of government
control, Abedi developed in BCCI an ideal mechanism for facilitating illicit
activity by others, including such activity by officials of many of the
governments whose laws BCCI was breaking.
As one BCCI officer later recalled, Abedi had a
saying that expressed his view about law:
The only laws that are permanent are the laws of
nature. Everything else is flexible. We can always work in and around the laws.
The laws change.(1)
BCCI would not change to accommodate human laws. On
the occasions that such laws actually interfered with BCCI's business, BCCI
would, as necessary, change the laws to accommodate BCCI -- or ignore them
entirely.
Significantly, at the same time that BCCI created
its elaborate corporate structure for the purpose of deceiving and defrauding
those outside BCCI, within BCCI, BCCI's various entities were largely
disregarded, and treated interchangably. As BCCI's liquidators concluded one
year after the bank's closure in a report to the bank's creditors committee,
"in a number of respects, the BCCI Group appears to have conducted its
affairs as a single entity, witout clearly identifying which company or entity
within the BCCI Group was responsible for any particular transaction."(2)
As a result, the records of BCCI's criminal activity
constitute an accounting and legal nightmare, and a full record of what
actually took place is unlikely to be reconstructed. BCCI's multiplicity of
locations, layered corporate structure, front-companies, front-men, its
willingness from the top down to falsify information, and its pervasive
disregard for the national laws of each country it operated in, combined to
create a culture of criminality within the bank so massive as to defy
investigation.
BCCI records in the United States are fragmentary
and incomplete. To the extent that they are organized at all, that organization
is in chronological order document by document, rather than according to any
subject matter, customer account, or transaction. Though fragmentary, these
records are also voluminous, amounting to at least 9,000 boxes in New York and
Miami alone, and several million pages. Foreign BCCI document repositories of
BCCI, especially in the United Kingdom, the Grand Caymans, and Abu Dhabi, are
even larger, with access for U.S. investigators limited by foreign bank confidentiality,
privacy laws, and the willingness of the foreign jurisdictions to cooperate.
One year following the closure of BCCI, federal
investigators in the U.S. were still in the process of microfilming BCCI
documents from Miami, and liquidators for BCCI in the United Kingdon had
indexed 1600 boxes containing approximately 2.4 million separate BCCI documents
-- approximately 2.5 percent of the total of BCCI's documents in the United
Kingdom.(3)
Adding to the inherent problem of investigating the
largest case of organized crime in history, spanning over some 72 nations, has
been the destruction of documents at BCCI and its affiliates by shredding and
arson; document backdating and falsification; the removal of most key documents
from London to Abu Dhabi in 1990; the refusal of authorities in the United
Kingdom and in the Grand Caymans to share information with Congress and other
U.S. investigators as a consequence of their interpretation of local bank
confidentiality and privacy laws; the inability to question Abedi due to his
stroke, the inability to question BCCI's other key officials due to their
incarceration and segregation in Abu Dhabi by Abu Dhabi officialdom since July
5, 1991, and BCCI's haphazard method of record-keeping.
Regardless of what might be shown in the missing
material, the remainder is more than adequate to document BCCI's criminality,
including fraud by BCCI and BCCI customers involving billions of dollars; money
laundering in Europe, Africa, Asia, and the America; BCCI's bribery of officials
in most of those locations; its support of terrorism, arms trafficking, and the
sale of nuclear technologies; its management of prostitution; its commission
and facilitation of income tax evasion, smuggling, and illegal immigration; its
illicit purchases of banks and real estate; and a panoply of financial crimes
limited only by the imagination of its officers and customers.
Among BCCI's principal mechanisms for committing
crimes were shell corporations, bank confidentiality and secrecy havens, layering
of corporate structure, front-men and nominees, back-to-back financial
documentation among BCCI controlled entities, kick-backs and bribes,
intimidation of witnesses, and retention of well-placed insiders to discourage
governmental action.
As Robert Mueller III, the Assistant Attorney
General at the Justice Department now in charge of the BCCI investigation,
testified in October, 1991:
BCCI was not an ordinary bank. It was set up
deliberately to avoid centralized regulatory review, and operated extensively
in bank secrecy jurisdictions. Its affairs are extraordinarily complex. Its
offers were sophisticated international bankers whose apparent objective was to
keep their affairs secret, to commit fraud on a massive scale, and to avoid
detection.(4)
In the words of former Senate investigator Jack
Blum:
The problem that we are all having in dealing with
this bank is that . . . it had 3,000 criminal customers and every one of those
3,000 criminal customers is a page 1 story. So if you pick up an one of [BCCI's]
accounts you could find financing from nuclear weapons, gun running, narcotics
dealing, and you will find all manner and means of crime around the world in
the records of this bank.(5)
However daunting the task of explicating the full
extent of BCCI's criminality, it is essential to recognize that at core, BCCI
was not a bank which made an adequate return on investment through lending out
depositors funds like other banks, but a "Ponzi scheme," which used
new depositors funds to pay current expenses and to repay earlier depositors,
creating a pyramid of mounting obligations that ultimately and inevitably would
bring about BCCI's collapse.
As Blum testified:
"The people I talked to at the bank would say,
this was a bank that was very strange, because it needed deposits all the time,
and if you're running a Ponzi scheme you need more and more cash in to support
the whole system of fraud that you've generated. What it meant was that BCCI
people would go out and bribe central bank officials and high government
officials to get them to deposit their country's foreign exchange at BCCI, and
in exchange for whatever amount of money, suddenly the foreign exchange
reserves of a country would be put there and put to use."(6)
From the beginning, BCCI President Abedi conceived
of BCCI as a machine with two driving mechanisms -- asset growth and faith. The
latter was essential to prevent a day of reckoning when depositors and
creditors alike would cause a run on the bank. The former was necessary to
sustain the latter through bad times. Together, they worked to sustain the
illusion that BCCI was solvent, when in fact, it is unlikely BCCI was ever
solvent.
On December 18, 1991, in an agreement with the
Justice Department and New York District Attorney, BCCI's liquidators pled
guilty to having engaged in a criminal conspiracy through financial fraud, and
thereby constituting a Racketeering Influenced and Corrupt Organization (RICO),
whose entire assets, legitimate and illegitimate, were subject to confiscation
by the government. Specific crimes admitted to by BCCI's liquidators in the
agreement included:
** Seeking deposits of drug proceeds and laundering
drug money
** Seeking deposits from persons attempt to evade
U.S. income taxes
** Using "straws" and nominees to acquire
control of U.S. financial institutions
** Lying to regulators and falsifying regulatory
documents
** Creating false bank records and engaging in sham
transactions to deceive regulators.(7)
Thus, the criminality at BCCI was not, as has
sometimes been suggested, a side-effect of the bank's enormous growth during
the 1970's, an unintended consequence of overly rapid expansion, but inherent
in the bank's philosophy of asset expansion from the beginning, and pervasive
to its closure.
While U.S. law enforcement was not able to legally
establish BCCI as organized crime until December, 1991, the scope of BCCI's
criminality had been clear to both prosecutors and BCCI's defense team at least
a year earlier. As BCCI's own private investigators, hired by the bank after
its indictment in Tampa for money laundering in October, 1988, told BCCI
officials in 1990:
It is [the government's] view that BCC is a full
service bank in the worse sense of the phrase. [Prosecutors] believe that it is
official bank policy to actively seek out and market high net-worth
individuals, and to gain from them large and frequent deposits, preferably in
cash. They see such marketing efforts as being done at best without regard for
the source of the customer's cash, ant at worst with tacit acceptance or even
actual knowledge that in many cases the customer's money is derived from
illegal enterprises, most notably narcotics. . . In the eyes of some
prosecutors and investigators, the Bank's "services" are not limited
merely to accepting the proceeds of illegal activities. They believe that
BCC[I] officers and employees, with express upper management approval, also
actively assist and even advise their customers on the most effective methods
of hiding their money and evading taxes. Money, for example, is seen to be
hidden or "laundered" by the constant, carefully controlled transfer
of funds from one account to another within BCC and its world-wide branches or
between BCC and other banks related to BCC, thus making the money almost impossible
for U.S. law enforcement to trace. (8)
As an officer of BCCI Canada wrote to law
enforcement just three days after the closure of BCCI worldwide, even those
inside BCCI were often appalled by its practices.
We have read with a sense of relief that finally
somebody had the guts to investigate into the affairs in the Bank . . . BCCI
s.a., BCCI Overseas and BCC Canada have been for years conducting false
accounting practices, concealment of losses (more so to avoid displeasing the
Arab Owners) and making irregular loans.(9)
The letter went on to describe the knowledge of
principal officers of BCCI, including its chief executive officer in the
Americas, knowledge of money laundering, drug trafficking, loans created in
"bogus" names, and advances of funds to non-existent companies in
London, Luxembourg, Cyprus, Malta, the Channel Islands, and other locations.
The writer begged investigators prosecute "the big crooks in London and
Abu Dhabi."(10)
BCCI Paris branch manager Nazir Chinoy would later
admit to investigators that essentially all of BCCI's activity in France was
the result of the customer or the bank or both violating somebody's laws.
All the money we got [at BCCI-France] in some way we
were breaking the law. If you taking it with a kickback, you are breaking
foreign exchange, all Africans who brought their money got commissions which
meant kick-backs. Back to back LCs to misrepresent financial deals, taking out
less money in a third world country and keeping a share, kickbacks, exchanges,
laundering, in some way you are breaking the law in each case. The law breaking
was pretty systematic.(11)
Scope, Types and Techniques of Fraud
BCCI's financial empire was built on the fiction
that it was heavily capitalized by oil-rich Arab leaders, when the reality was
that most of them -- and according to some credible information, all of them --
were acting as nominees, providing either their names to BCCI, or their names
plus their funds in the form of deposits to BCCI to get a guaranteed no-risk
return, rather than as actual investors at risk.
As a result, BCCI never had a substantial capital
base, and was forced from the beginning to use deposits to meet operating
expenses rather than to properly invest them in legitimate loans or other
financing. Not having the actual capital base, BCCI simply pretended it was
there, and enlisted the reputations of its shareholders to assist it in so
pretending, in order to lure others to deposit their funds with BCCI. As BCCI
officers have told the Subcommittee, BCCI in effect had to create retained
capital out of operating profits through juggling its books because of the lack
of real capitalization. Because of the lack of real profits as well, the
supposed profits had to in turn be manufactured through juggling the books
pertaining to deposits. These deposits, in turn, could only receive a good
return on investment through taking the funds from new deposits, requiring BCCI
to grow at a frenzied pace in order to avoid collapse.
As Manhattan prosecutor Robert Morgenthau described
in his indictment against BCCI of July 29, 1991, to whose first six counts
BCCI's liquidators plead guilty as part of the December, 1991 plea agreement,
[BCCI's] scheme was premised on the fact that banks
rely on credit. The essence of the scheme was to convince depositors and other
banking and financial institutions, by means of false pretenses,
representations, and promises that the BCC Group was a safe financial
repository and institution for funds, and thereby defendants acted to persuade
depositors and banking and other financial institutions to provide the BCC
Group banks with deposits and credit.(12)
The New York District Attorney found that among the
major actions taken by BCCI to carry out its fraud were:
** Employing the ruling families of a number of
Middle Eastern states as nominees for BCCI, who pretended to be at risk in BCCI
but who were in fact guaranteed to be held harmless by BCCI for any actual
losses.
** Using bank secrecy havens including Luxembourg
and the Cayman Islands to avoid regulation on a consolidated basis by any
single regulator of BCCI, and thereby to permit BCCI to transfer assets and
liabilities from bank to bank as needed to conceal BCCI's true economic status.
** Paying bribes and kickbacks to agents of other banking
and financial institutions, thereby avoiding the scrutiny of regulators. (13)
The Sandstorm Report
An insider's account of BCCI's fraud created by
BCCI's own auditors, Price Waterhouse, and provided to the Bank of England
dated June 22, 1991, the "Sandstorm Report," was the final evidence
that lead to the shutdown of BCCI globally on July 5, 1991. That draft report,
based on a review of banking records from several countries and interviews
carried out through the spring of 1991, found evidence of "widespread
fraud and manipulation," at BCCI, reflecting "the general scale and
complexity of the deceptions which have undoubtedly taken place over many
years."(14) This information was developed when Price
Waterhouse investigated some $600 million of BCCI deposits not recorded in
BCCI's books. Other major losses related to BCCI accounts in related entities,
including ICIC in the Grand Caymans, sometimes know as BCCI's
"bank-within-a-bank," the Bank de Commerce et Placements, a BCCI
subsidiary in Switzerland, the Kuwaiti Investment Finance Company (KIFCO), a
secret BCCI subsidiary ostensibly owned by a BCCI nominee.
The Sandstorm report has been provided to the
Subcommittee solely in a heavily censured form by the Federal Reserve at the
insistence of the Bank of England, which forbid the Federal Reserve from
providing a clean copy of the report to the Congress on the ostensible ground
that to do so would violate British bank secrecy and confidentiality laws.
However, even with the hundreds of items and almost every identifiable name in
the report censured, it is clear that the Sandstorm report outlines criminality
on a vast scale.
Among the specific types of BCCI fraud described by
Price Waterhouse in Sandstorm were account manipulation of non-performing loans,
fictitious profits and concealed losses, fictitious loans set up in connection
with repurchases of shares, misappropriation of deposits, fictitious
transactions and charges, unrecorded deposit liabilities, nominee arrangements
to create false capitalization, unorthodox and apparently illegal repurchasing
arrangements for shareholders, the "parking" of loans to avoid
recognition of losses, shoddy lending, bad investments, off-book transactions,
false confirmations of transactions, misrepresentations with respect to
beneficial ownership of shares, fictitious customer loans, falsified audit
confirmations, and the drafting of fraudulent agreements.(15)
The Sandstorm report -- prepared by Price Waterhouse
for the benefit of BCCI's final group of managers, brought in for the purpose
of finding a way to help BCCI survive as a wholly-owned subsidiary of Abu Dhabi
-- describes BCCI's fraud, rather kindly, as originating in BCCI's sense of
vulnerability in case of any losses because of its lack of any lender of last
resort and the hostile attitude of the international banking community.
According to Price Waterhouse, to compensate for this weakness, BCCI's
management, including Abedi and Naqvi, believed it was essential to declare
profitability every year regardless of the true financial condition of BCCI.
Accordingly, Abedi and Naqvi provided guaranteed rates of return to principal
Middle Eastern shareholders of BCCI, and then falsified and manipulated
accounts and records as necessary in order to pay those returns, while still
showing profits. (16)
When BCCI actually lost money due to poor lending
practices, rather than accept provisions for the losses, it simply disguised
them, through what Price Waterhouse described as "a very complicated
series of manipulations of loan and deposit accounts, treasury activities and
purchases of its own shares." (17)
Price Waterhouse found significant account
manipulation at BCCI beginning as early as 1976.(18) These
account manipulations were, according to BCCI officials interviewed by the
Subcommittee, carried out in order to make BCCI appear to be a far more
profitable institution than it really was, and thus provide a sufficient
capital base to justify its level of lending and provide "security"
for its deposits.
As BCCI's losses grew, so did its manipulation of
accounts and its frauds, as well as its use of affiliated and related entities
such as ICIC in the Grand Caymans, the Banque de Commerce et Placements in
Geneva, the National Bank of Oman, and the Kuwaiti Investment Finance
Corporation (KIFCO).
The bank has a history of poor lending where it now
appears that a significant amount of account manipulation has gone on. This has
included the utilization of funds routed through Fork [ICIC], including funds
managed by Fork Investments [ICIC Investments]; the use of fictitious lionize
drawn down in the names of third parties; and the use of unrecorded deposits,
in an attempt to avoid the need to make provisions. This routing of funds has
been carried out on a very significant scale, involving a number of related
companies, including the Fork Holdings Group [ICIC Holdings Group], LOANS, NBO,
and KIFCO, and third party banks such that it is now difficult for anyone to
ascertain the true nature of external exposures recorded in the names of
certain major customers.
It now appears that over the period from 1977 to
1985, the Treasury operations of Sandstorm made significant losses. These
losses were concealed and at the same time significant profits were
manufactured. The precise amount of such loans/fictitious profits cannot now be
established but may well have been of the order of $600-$700 million before
funding costs, or approaching $1 billion if funding costs are added.
These losses were originally funded through
unorthodox means at the behest of Abedi. . .(19)
The underlying situation at BCCI, already bad,
worsened dramatically in 1985 as a result of $500 million in losses
"incurred" by BCCI in commodity trading undertaken through Capcom,
BCCI's commodity trading affiliate, managed for BCCI by S.M. Akbar. According
to Massihur Rahman, who was BCCI's chief financial officer at the time, this
was equivalent to BCCI's entire capital, and threatened to wipe out the bank.(20)
Price Waterhouse concluded:
In 1986 . . . it was discovered that significant
losses had been incurred in option trading. When Akbar resigned, he left a
record of his activities with [redacted by Bank of England] who brought under
his own control the amounts which had been financed by unorthodox means.
[Redacted by Bank of England] set up a small central team under [redacted by
Bank of England] to review the record left by [redacted by Bank of England] to
verify the representations made by Akbar and maintain contact with the
customers. We understand that whilst [redacted by Bank of England] attempted to
establish some control by [illegible] customers deposits, largely by using
funds from Fork [ICIC], he could not bring himself to make full disclosure,
which would almost certainly have brought the bank down.
Instead as a result of continued pressure for
profits and loan servicing he continued to use unrecorded deposits, certain
external funds (with Fork Holdings [ICIC Holdings] and companies controlled but
not legally owned, by it) and funds were drawndown on bogus loan accounts in
the name of prominent Middle East investors. These funds were applied to adjust
other balances in order to avoid making provision for bad loans and to conceal
the past Treasury losses, in an enormous and complex web of fictitious transactions
in what is probably one of the most complex deceptions in banking history.
These losses now form a major part of the current
deficit in the bank which has been rectified by the financial support
arrangements providing by the Government of Abu Dhabi.(21)
Manager's Ledgers and Numbered Accounts
Among BCCI's unusual practices was the use of
"managers ledgers" in addition to numbered accounts to manipulate
accounts through back-to-back transactions that were essentially untraceable.
BCCI insiders advised the Subcommittee in early 1991
that these accounts often were designated solely as "ML" with a
number following it, and often no one other than the BCCI officer responsible
for the account would have any idea who, if anyone, owned it. In some cases,
even the BCCI officer in charge of the account would be unable to identify its
owner.
Price Waterhouse described this practice in BCCI
Grand Caymans as early as April 1986, stating that "we have no particular
objection to [using numbered accounts]," but "we found that in most
instances none of the officers of the Grand Cayman office were able to
correctly identify either the name of the borrower or the credit officer
responsible for monitoring the account at other locations."(22)
At the time, Price Waterhouse suggested that BCCI should improve its management
of such accounts to prevent such occurrences, but when the bank failed to do
so, Price Waterhouse took no additional action other than adding an asterisk
(*) to this notation in later audit reports, indicating that the recommendation
had been made to BCCI more than once.
Later, Price Waterhouse noted how financial
transactions from BCCI to its secretly held Swiss subsidiary, LOANS, were
marked "PAY WITHOUT MENTIONING OUR NAME," with the result that the
recipients of the funds from LOANS were unable to determine from whom or where
the money had come.(23)
Price Waterhouse's findings were later affirmed by
its successor accountants, Touche Ross, who handled the liquidation of BCCI. A
year after becoming liquidator, Touche Ross noted that the true picture of
BCCI's activities was distorted by such practices as "loan parking,"
"artificial fund transfers," the provision of multiple loans to a
customer, each secured by the same property, and many similar improper practices.(24)
BCCI Concealment of Treasury Losses
In 1985, after rumors of BCCI's losses in options
trading reached bank regulators, Luxembourg bank regulators asked BCCI to
provide an audited review of its central treasury activities. BCCI selected
Price Waterhouse Cayman to perform the work, which determined in early 1986
that significant losses had been incurred and not recorded. According to Price
Waterhouse, it concluded then that the losses and lack of record keeping were
due to "incompetence."(25) However, in the 1991
Sandstorm Report, Price Waterhouse found that "with the benefit of
hindsight, it appears more sinister in that it now seems to have been a
deliberate way to fictitiously inflate income."(26)
BCCI officials have confirmed that the account
provided Price Waterhouse in 1986 was designed to conceal the long-term nature
of BCCI's inflation of its books.(27)
Ziauddin Akbar, the Treasury official held
responsible for the massive losses in 1986 and fired by BCCI at the time
following their discovery, told two BCCI officials in the U.S. in 1988 that
Akbar had been a "scapegoat," used by BCCI's management to deceive
the auditors when the auditors had accidently caught on to long-term
manipulations by BCCI of its financial condition.
Ziauddin Akbarr told these officials that BCCI had
been inflating its assets from the mid-1970's in order to make the make look
profitable when it was not. When Price Waterhouse discovered this activity in
1986, BCCI's top officials worked out a scheme with Akbar under which he would
accept responsibility, and pretend that the losses had just happened in the
previous year due to unwise commodity speculations by BCCI. In that way, the
losses would be viewed by outsiders as an unforunate one-time occurence, and
with the sacrifice of Akbar, BCCI could continue.(28)
In its 1991 review, Price Waterhouse found that
among the specific techniques used by BCCI to hide its losses were:
** misappropriation of deposits without depositors
knowledge to provide funds to adjust non-performing and bogus loan accounts,
and Treasury losses.
** misappropriation of external funds deposited
under trust with Sandstorm [BCCI] and Fork [ICIC] to be managed on behalf of a
few prominent people who are also shareholders of [BCCI] Holdings.
** the creation of loans with no commercial
substance in the names of people without their knowledge.
** selling certificates of deposit placed with the
Central Treasury without informing the depositors, and using the proceeds to
fund adjustments.
** routing funds through [ICIC], LOANS, KIFCO, SDCC
and other affiliates and third parties to make adjustments prior to accounting
reference dates and audit confirmation dates, which were often reversed at a
later date.(29)
ICIC -- The Bank Within A Bank
From the early days of BCCI, the various legal
entities known collectively as ICIC, functioned officially as a BCCI pension
fund for BCCI officers, and unofficially as BCCI's principal "bank within
a bank."
The flexibility of ICIC to carry out many different
schemes for Abedi is indicated by the number of different entities Abedi
created using the identical ICIC abbreviation, including International Credit
and Investment Company Overseas, Ltd.; International Credit and Investment Co.,
Ltd.; International Credit and Commerce (Overseas) Ltd.; ICIC Holdings of Grand
Cayman; ICIC Apex Holdings; ICIC Overseas, Cayman; ICIC Foundation; the ICIC
Staff Benefit Fund; the ICIC Staff Benefit Trust; ICIC Business Promotions;
ICIC Business and Promotions; and others.
As BCCI liquidators in the Grand Caymans found, ICIC
was not really a bank at all, but a post-office box location to
"book" transactions that were initiated, organized, and approved in
other parts of BCCI. In essence, ICIC was a "conduit" or mechanism
for BCCI's fraud.(30)
Some of the bewildering number of purposes and uses
of the different ICICs included:
ICIC Apex Holding Limited. Incorporated on October
2, 1987 as the ultimate holding company for the ICIC Group, equivalent to a
charitable trust, with the beneficiaries designated as "mankind at
large."
ICIC Holdings. Incorporated on April 6, 1976 as the
holding company for the ICIC Group, created as the holding company for ICIC
Overseas. ICIC Holdings "invested" in ICIC (Overseas) and loaned
money to ICIC Foundation and the ICIC Staff Benefit Fund.
ICIC (Overseas) Limited. Incorporated on April 6,
1976 as an offshore bank to facilitate the purchase and sale of BCCI shares and
to provide private banking services for BCCI shareholders and customers. (ICIC
Overseas also advanced funds to nominees to allow them to purchase interests in
the three other BCCI affiliates -- Attock Oil, Credit and Commerce Insurance,
and the Saudi Development Company.)
ICIC Foundation Cayman. A charitable foundation
wholly owned by the ICIC Foundation in the United Kingdom, established by a
gift of BCCI shares owned by ICIC Holdings. The assets of the Foundation were
shares in BCCI, and the assets of the UK Foundation were one-third of the
shares of LOANS, the secretly-owned Swiss affiliate of BCCI.
ICIC Staff Benefit Fund. A Cayman entity wholly
owned by the ICIC Staff Benefit Trust for the benefit of BCCI Employees,
established by a gift of BCCI shares from ICIC Holdings. This entity held
another one-third of the shares of LOANS.(31)
Usually, correspondence and transactions involving
any of these ICIC entities would refer merely to ICIC, leaving it to top BCCI
management to determine which of the entities, if any, would get
"credit" or be "debited" for the particular transaction.
No one within BCCI other than Abedi, Naqvi, and
small circle of younger assistants, had an overall picture of ICIC. To early
Pakistani recruits to BCCI, such as Massihur Rahman, ICIC was described as a
"parallel organization" to BCCI which would "hold shares of the
bank for the founder group," in essence, a holding company controlling the
stock of the BCCI holding companies.(32) ICIC was also, from
the beginning, a mechanism to disguise and misrepresent the ownership of BCCI.
As needed, ICIC took on additional characteristics: bank, foundation, and
finance company. But its most usual purpose was to act as a vehicle for BCCI's
inflation of assets and concealment of losses, acting as a mechanism for at
least $1 billion of circular transactions to inflate BCCI's books.
The first detailed audit of ICIC conducted by Price
Waterhouse took place in 1991, with its draft conclusions provided to BCCI's
board of directors on June 17, 1991, in a report classified by Price Waterhouse
as "strictly private and confidential." The Price Waterhouse report
provides cautions that its findings were based on records which were missing,
falsified, or incomplete. But the picture drawn in the report again details
fraud on a massive scale.
The Price Waterhouse audit found that BCCI
effectively controlled ICIC, and that most ICIC transactions were initiated at
the instructions of senior BCCI management: Swaleh Naqvi, the number two man at
BCCI, and two of his assistants, Mr. Hafeez and Mr. Imam. ICIC's uses included:
** Financing BCCI shares and capitalization, through
the use of nominees, buy-back arrangements, and guaranteed minimum returns on
investments.
** Routing funds in a manner to disguise their true
nature and effect on BCCI.
** Providing guarantees, through commitments signed
by BCCI management on ICIC letterhead, for various nominee arrangements for
shareholders of companies secretly controlled by BCCI, such as First American
through its holding company, CCAH.
** Lending to BCCI shareholders and customers.
** Paying BCCI expenses.
** Handling the management of customer funds
controlled by BCCI chairman Abedi through powers of attorney.
** BCCI buying its own shares through nominees
through ICIC.
** Processing financial transactions that were
"unrecorded" at BCCI and which therefore remain untraceable.(33)
In all, ICIC made $290 million in loans, of which
all but perhaps $25 million is apparently lost. About $93.5 million of those
loans were used to purchase shares of BCCI itself; another $100 million in
loans went to nominees for BCCI, or for "routing" transactions aimed
at disguising BCCI's financial status; another $20 million went to an ICIC
subsidiary, ICAC, and effectively disappeared in ICAC's insolvency. Another $62
million in lending went to "secure" interests in other entities by
BCCI "shareholders," including people who were clearly serving as
nominees.
ICIC lending included millions to major front-men
for BCCI including Ghaith and Wabel Pharoan, Faisal al Fulaij, Prince Turki,
and Mohammed Hammoud. The role at BCCI of Hammoud, who purchased the shares of
Clark Clifford and Robert Altman in First American in 1988 with funds lent him
by BCCI, is illustrated by the fact than when his BCCI loans become delinquent,
they were simply transferred from BCCI to ICIC.(34)
Examples of ICIC being used by BCCI to handle
nominee relations include:
** Wabel Pharoan writing ICIC on December 4, 1984 to
confirm that all transactions in BCCI shares in his name were undertaken as a
nominee.
** Faisal al Fulaij writing ICIC on February 16,
1985 to confirm that ICIC was entitled to all profits, and was required to bear
all losses, on the CCAH (First American Bank) shares in his name which were
being managed by ICIC.
** BCCI officer H.M. Kazmi writing Saudi Sheikh
Kamal Adham on August 2, 1987 to confirm that Adham was not liable for any
loans recorded in his name on the books of ICIC, including Adham's loans
secured by his shares of CCAH for the First American Bank and Attock Oil.(35)
ICIC also offered unorthodox services, including
guarantees against loss, to prominent Middle Eastern political figures,
including the rulers of several Gulf states. For example, BCCI #2, Swaleh
Naqvi, sent confirmation letters in February 1990 from ICIC Holdings to the
Rulers of Ajman and Fujairah advising them that loans to them from BCCI would
be paid off through proceeds from the disposal of their shares in CCAH, owner
of the First American bank. In the event that their shares did not cover
losses, Naqvi confirmed that these Rulers would not be required by ICIC or BCCI
to pay them. It is notable that at the time Naqvi made this commitment, CCAH
and the First American Banks had not been offered for sale to anyone.(36)
Money Laundering
From the time of BCCI's indictment on drug money
laundering charges in Tampa, Florida in October, 1988, there was little doubt
to anyone looking at the facts that BCCI had been used to launder drug money.
The Customs agents working on the
"C-Chase" case against BCCI, moved millions of dollars in U.S.
currency, representing the proceeds of cocaine sales through BCCI Panama, BCCI
Luxembourg, and LOANS Switzerland as a result of the knowing participation of
several BCCI officials.(37)
As Robert Mazur, the Customs agent in Tampa who
selected BCCI as the target of the Customs money laundering sting testified,
BCCI bank executives volunteered methods to enhance and improve his techniques
for money laundering, and shortly before the sting ended the operation, offered
to introduce Mazur to other potential "cash" customers for money laundering
services from Bogota, Colombia.(38)
Attorneys for BCCI and the bank itself contended
that the Tampa case represented an accident involving a small number of bank
officers. Indeed, when BCCI itself pled guilty to money laundering in January,
1990, the bank continued to take the position that this guilty plea only
constituted an admission that a few of its employees had engaged in the
activity, and that its guilty plea was based solely on a theory of corporate
responsibility, "respondeat superior." As BCCI's attorneys argued to
federal prosecutors and Senate staff prior to the bank's January 1990 plea
agreement, it was inevitable that a bank operating in so many countries would
be used by drug traffickers. This was partially true, as the Deputy Assistant
Secretary of State for International Narcotics Matters acknowledged:
Setting aside those instances where BCCI managers
knowingly promoted money laundering, BCCI seemed attracted to traffickers for
the same reasons that other banks have been found attractive. First,
traffickers seek international banks that are sophisticated in wire transfers,
that have branches in those parts of the world where they operate, and which
permit quick retrieval of funds. Second, traffickers seek banks in those
countries where national banking laws afford maximum secrecy to depositors,
permit nominee accounts, and do not provide for close monitoring of cross
border transactions of currency movements.(39)
Given BCCI's size and dispersion, money laundering
at BCCI would have been inevitable under any circumstances. Given BCCI's never
ending quest for assets and its management's attitude towards laws, it was
ubiquitous. As Akbar Bilgrami explained, Abedi was constantly telling BCCI
employees that the only thing that mattered was the generation of assets. When
Bilgrami was in Colombia in the mid-1980's, a period when Colombia had already
developed the reputation as the center for cocaine smuggling and drug money,
Abedi told him that he needed to increase BCCI's activity in Colombia to $1
billion in local currency in deposits, and $1 billion in U.S. denominated
deposits -- funds which obviously could only be generated, directly or
indirectly, from the drug trade.(40)
BCCI's December, 1991 plea agreement with U.S. law
enforcement outlines the systematic nature of the money laundering as follows:
40. The BCCI Defendants and their affiliates . . .
would and did formulate and implement a corporate strategy for increasing
BCCI's deposits by encouraging placements of funds from the proceeds of drug
sales, in conscious disregard of the currency regulations, tax laws, and
anti-drug laws of the United States, and of other nations;
41. In furtherance of the BCCI Group's corporate
strategy to pursue deposits in disregard of United States and foreign law, the
BCCI Defendants . . . would knowingly offer a full range of services to drug
importers, suppliers and money launderers;
42. Co-conspirators would and did conduct . . .
financial transactions with narcotics drug proceeds including the wire transfer
of said proceeds from places in the United States to and through other places
outside the United States, with the intent to conceal and disguise the nature,
location, source and ownership of these drug proceeds.(41)
The criminal information entered into by the
liquidators outlined how BCCI laundered money, detailing its use of
certificates of deposits held at foreign branches to offset cash deposits made
in the U.S.; its technique of crediting "counter-balancing loan
proceeds" to foreign corporate bank accounts designated by drug
traffickers; and BCCI's use of false names, codes, and counter-surveillance
techniques against law enforcement, among other money-laundering techniques.
Knowledge of the bank's money laundering activity
was not limited to a few high-level officials at the bank, as former BCCI chief
financial officer Massihur Rahman contended.(42) As Abdur
Sakhia, formerly BCCI's chief officer in the United States testified, it been
obvious within BCCI as of 1983 that the bank had adopted a conscious policy of
soliciting drug funds when it decided to purchase a bank in Colombia. It was
obvious to Sakhia and other BCCI officers then that BCCI's motivation for
obtaining the Colombia bank was its recognition that enormous amounts of U.S.
currency were being generated as a result of narcotics trafficking, and that
Colombia could become an extremely profitable operation for BCCI.
According to Sakhia,
We knew that the money that we would be getting in
Colombia would be drug money. We knew that all the dollar deposits we would be
getting would be drug money.(43)
Sakhia contended that his own attempts to discourage
BCCI's entry into the Colombian market resulted in his being denied the
position of becoming regional manager for BCCI throughout the Americas, in
retaliation for his unwillingness to go along with BCCI's plan:
If I had agreed to the purchase of the Colombia bank
I would have been head of the Latin American region total but I opposed the
purchase of the Colombian bank. I opposed it for two reasons. I didn't want
that size of acquisition. We wouldn't know who the 500 people of staff we were
taking over well enough. We were getting branches in lawless areas like
Cartegena, Cali and Medellin. There were armed guards every time I went from Bogota
to the hotel in Colombia. I made an effort to get controls on our accounts in
Miami because of concerns about drug money. I was opposed by London and by Amir
and Saleem Saddiqi, who was also head of audit and compliance and
simultaneously head of growth and profit.(44)
While Sakhia provided key information to U.S.
investigators about wrong-doing at BCCI, other BCCI officers remaining at the
institution scoffed at his professions of innocence in the banks criminality.(45)
Similarly, Massihur Rahman, who likewise provided vital information to this and
other investigations, professed to have been excluded from all wrongdoing at
the bank. But other BCCI insiders contended that Rahman assisted BCCI's inner
circle in deception, if inadvertently, through noting deficiencies in BCCI's
books and warning other officials of the risks if they were not corrected. As
one BCCI official told investigators in the spring of 1992:
Massihur Rahman was head of finance and he was a
member of the Central Management Committee. He was never part of the inner
clique of the top four or five and yet he had a very significant position
because all of the balance sheets were reviewed by him. He packaged the balance
sheets. He is a very intelligent man. If there were any shortcomings here or
there, he came up with the ideas of how to make it look good. As a
professional, he dressed them up when he saw deficiencies. He was a technocrat,
he understood what the international world wants, whereas a lot of the others
did not meet outsiders at all. From their point of view what was good enough
for Pakistan or India was good enough. Massihur Rahman had a higher standard.
He told them what they had to come up with and Naqvi produced the proper
figures in response.(46)
The degree of BCCI-U.S.'s reliance on money
laundering as a principal business was demonstrated by what happened when BCCI
put into place a "compliance program" as part of its January 1990
plea agreement resolving the Tampa money laundering case: business dropped noticeably,
especially referrals from other BCCI locations, because neither BCCI nor its
customers wanted to provide details about the customers' businesses.(47)
BCCI's clients for money laundering included
Panamanian General Manuel Noriega, for whom it managed some $23 million of
criminal proceeds out of its London branches; Pablo Escobar, of the Medellin
cartel; Rodriguez Gacha, of the Medellin cartel; and several members of the
Ochoa family.(48)
Bribery
Bribery was a key component of BCCI's strategy for
asset growth worldwide, from the earliest days of the bank. In some case, the
recipients of funding from BCCI may not have considered the payments to be
"bribes," but simply a mechanism by which BCCI obtained what it
wanted from an official, and in return the official helped BCCI, such as BCCI's
payments to two of the Gulf emirs in return for the use of their names as
nominees for the purchase of First American. In other cases, the bribes were
naked and direct quid pro quos, such as BCCI's payments to Central Bank officials
in return for Central Bank deposits in countries like Peru. In other cases,
BCCI made campaign contributions to politicians, such as it did with General
Zia in Pakistan and Carlos Andres Perez in Venezuela. In still other cases,
BCCI's payments came in the guise of charitable contributions, and provided
BCCI with an entree to generate deposits from others, as in the case of
President Jimmy Carter. Among the Americans who BCCI provided with financial
assistance in addition to Carter, were U.S. Ambassador to the United Nations
Andrew Young, Bert Lance, and Jesse Jackson. Abroad, important figures with
extensive contact with BCCI included former British Prime Minister James
Callahan, then United Nations Secretary General Javier Perez de Cueller,
Jamaican prime minister Edward Seaga, Antiguan prime minister Lester Byrd; a
large number of African heads of state; and many Third World central bank
officials.
The courting of important governmental and political
figures was a task ordinarily undertaken directly by Abedi, usually with
considerable secrecy. Typically, a local BCCI official would make contact with
a key national political figure, who would then be passed on to Abedi. Abedi
would then assess that official's needs and try to put together a transaction suitable
to the official's status and needs. (49)
In some cases, Abedi would not make a
"bribe" per say, but would instead use BCCI's resources to build
goodwill, which he in turn would then make use of to generate assets elsewhere.
This was Abedi's approach, for example, with President Jimmy Carter, who
received millions of dollars in BCCI funding for charitable activities, and
then travelled with Abedi to developing nations, providing Abedi with entry to
their leaders and, often, the assets of their central banks.(50)
Abedi used a similar approach with Jesse Jackson and
Andrew Young, both of whom had business expenses paid for by BCCI, and either
solicited business for BCCI in return, or offered to do so. (51)
When it came to General Noriega, bribes were
unnecessary, as BCCI provided the far more important service of laundering $23
million of his money and keeping it safe from other governments and his
eventual successors in Panama by insuring its disappearance following his
indictments. But to demonstrate BCCI's hospitality, the bank still made sure
that it provided Noriega with an expensive gift -- a $25,000 persian carpet,
hand delivered with Abedi's regards to Noriega by Alauddin Sheikh.(52)
In other cases, however, BCCI would make direct
payments to key officials, sometimes in suitcases filled with cash. As BCCI
officer Abdur Sakhia stated in interviews with Subcommittee staff:
Abedi's philosophy was to appeal to every sector.
President Carter's main thing was charity, so he gave Carter charity. [Pakistani
President] Zia's brother in law needed a job, he got a job. [Bangldeshi
President] Ashraf's mistress needed a job, she got a job. Admission of your son
to a top college, he would arrange it somehow.(53)
According to Sakhia,
There was a world wide list of people who were in
the payoff of BCCI. It was my understanding this included the family of Indira
Ghandi, Ashad of Bangladesh, and General Zia. In Africa, most of the leaders of
Africa in Zambia, Zimbabwe, Mugabe, and others, were all understood to have
received money.(54)
According to both Sakhia and BCCI's Paris manager,
Nazir Chinoy, BCCI official Alauddin Sheikh would sometimes take cash to people
at Abedi's request.(55) Both officials stated that they
understood that Nigerian central bankers were paid off in cash by Mr. Sheikh at
a World Bank meeting in Seoul, Korea.(56)
Chinoy said that such payments were typically made
in great secrecy, but that it was obvious to him and others at BCCI what was
going on. He described one such apparent payment by Abedi to President Mugabe
in Zimbabwe.
I accompanied Mr. Abedi and Mr. Sheikh to the
opening of a joint venture with Zimbabwe. I believe that to get permission to
open that venture, money was paid to President Mugabe and to Nkomo. The basis I
am making this statement was that when I went there with Mr. Sheikh, I was
acting as Mr. Abedi's personal assistant or secretary. Mr. Sheikh went off on
his own to see Nkomo who was the chief opposition at that time, and then he
went off to see President Mugabe, and when they talked they wanted me out of
the room. A number of us were there for the opening. But only Sheikh and Abedi
left in the room with these two political figures. Otherwise I was accompanying
him and acting with him. Sheikh carried a bag with him. At the time I had a
suspicion that you don't get permission as a foreign bank so easily without a
payment. Without favors, it wouldn't be so easy to get a bank that fast,
especially given the opposition of the British banks who were already
established there. And I can think of no other reason for the exclusion of
everyone but Sheikh and Abedi.(57)
The New York District Attorney's indictment of BCCI
alleged that in 1986 and 1987, BCCI president Abedi and number two official,
Swaleh Naqvi, opened a bank account in a Swiss bank in Panama to "transmit
bribes and kickbacks in the amount of a percentage of the deposits maintained
by the Central Reserve Bank of Peru to the two senior officers of that
bank," in a total amount of $3 million, in return for Peru maintaining
large central bank deposits in BCCI.(58) These bribes were
paid following a meeting involving BCCI officials and Peruvian president Alan
Garcia. According to BCCI official Akbar Bilgrami, the purpose of the meeting
was to make sure that President Garcia would not undercut the decision by the
Central Bank and that if the payments were made to the Central Bankers, BCCI
would indeed receive the Peruvian deposits in return. Upon returning from Peru,
Shafi told Bilgrami that Garcia had given his blessing to the transaction.(59)
Chinoy contended that BCCI was simply efficiently
exploiting the prevailing business practices in many of the countries in which
it operated, suggesting that in Nigeria and many other African countries it was
not possible to do business without buying presents, giving kickbacks, or
making bribes to officials.
Commission means kick-back. The government approves
a $300 million contract. A multinational corporation agrees with the government
which has helped him, 10 percent gets kicked back. A company is established
abroad or they nominate a cousin or someone who is paid 3 percent. It is known
as a commission but it is actually a kickback. It is the only way to do
business.(60)
Support of Terrorism and Arms
Trafficking
BCCI's support of terrorism and arms trafficking
developed out of several factors. First, as a principal financial institution
for a number of Gulf sheikhdoms, with branches all over the world, it was a
logical choice for terrorist organizations, who received payment at BCCI-London
and other branches directly from Gulf-state patrons, and then transferred those
funds wherever they wished without apparent scrutiny. Secondly, BCCI's
flexibility regarding the falsification of documentation was helpful for such
activities. Finally, to the extent that pragmatic considerations were not
sufficient of themselves to recommend BCCI, the bank's pan-third world and
pro-Islam ideology would have recommended it to Arab terrorist groups.
Arms trafficking involving BCCI included the financing
of Pakistan's procurement of nuclear weapons through BCCI Canada, as documented
in the Parvez case, involving a Pakistani who attempted to procure nuclear
related materials financed by BCCI through the United States. (61)
In a November 22, 1991 letter to the Subcommittee,
the CIA stated that "the Agency did have some reporting [as of 1987] on
BCCI being used by third world regimes to acquire weapons and transfer
technology," but was unwilling to elaborate on the nature of this activity
in public.(62)
In early August, 1991, the Committee was provided
with documents from the Latin American and Caribbean Region Office (LACRO) of
BCCI, describing the offer for sale by the Argentine air force of 22 Mirage
aircraft for $110 million. (63) The planned sale was to have
been made to Iraq, as part of Saddam Hussein's massive military buildup prior
to the Gulf war. BCCI was acting as the broker for the transaction, which was
to take place in August or September of 1989, but not completed as a result of
a dispute within the Argentine military itself.(64) Arms
sales involving BCCI from Latin America to the Middle East remain, as of April
1992, under active investigation by U.S. law enforcement.(65)
Abu Nidal
In the United Kingdom, a key window on BCCI's
support of terrorism was an informant named Ghassan Qassem, the former manager
of the Sloan Street branch of BCCI in London. Qassem had been given the
accounts of Palestinian terrorist Abu Nidal at BCCI, and then proceeded, while
at BCCI, to provide detailed information on the accounts to British and
American intelligence, apparently as a paid informant, according to press
accounts based on interviews with Qassem.(66)
As of 1986, the information obtained about Abu
Nidal's use of BCCI was sufficiently detailed as to justify dissemination
within the U.S. intelligence community.(67)
In July, 1987, as a result of the information
provided by Qassem, a State Department report concerning Abu Nidal and Qassem,
declassified in 1991 at the request of the Subcommittee, describes Abu Nidal's
use of BCCI.
The ANO commercial network comprises several
businesses created over the past seven years with the long-term goal of
establishing legitimate trading enterprises in various countries, gaining
experience in commercial trade, and making a profit for the group. . . The
general manager of the commercial network and the principal agent in gray-arms
transactions is Samir Hasan Najm al-Din (Samir Najmeddin). He has directed many
of ANO's commercial activities, both licit and illicit, from his offices in the
INTRACO building in Warsaw, Poland.. . . He has maintained a general account at
a major West European Bank [BCCI in London] from which he transfers money to
individual company accounts at local banks. He maintains joint control of each
company's ban accounts, along with the company manager, and he is responsible
for forwarding all major contracts to Sabri al-Banna for final approval.(68)
Following dissemination of this material by the
U.S., the U.S. coordinated efforts to shut down the financing of the activities
exposed in its targeting of Abu Nidal through BCCI-London, with some success.(69)
Other terrorist groups continued to make use of
BCCI, including one "state sponsor of terrorism," and the Qassar
brothers, Manzur and Ghassan, who have been associated with terrorism, arms
trafficking, and narcotics trafficking in connection with the Government of
Syria, and with the provision of East Bloc arms to the Nicaraguan contras in a
transaction with the North/Secord enterprise paid for with funds from the
secret U.S. arms sales to Iran.(70)
Training of Cartel Death Squads
In April 1989, a network of Israeli arms
traffickers, operating out of Miami, made a shipment of 500 Israeli
manufactured machine guns through the Caribbean island of Antigua for the use
of members of the Medellin cartel. Later, one of these weapons was used in the
assassination of Colombian presidential candidate Luis Carlos Galan, and
several other of the weapons were found in the possession of cartel kingpin
Jose Gonzalo Rodriguez Gacha after his death in a gunfight with Colombian drug
agents.
The principals in the arms trafficking included Yair
Klein, who had previously been identified in Colombian drug enforcement
documents as involved in training paramilitary squads for the cocaine cartel in
Medellin; Pinchas Shahar, an Israeli intelligence operative, and Maurice
Sarfati, an Israeli "businessman" operating out of Miami and Paris.
The scandal broke after a broadcast by NBC News on
August 21, 1989 about Klein's activities, and a Colombian judge charged Klein
with having engaged in criminal conspiracy in training the private armies for
the cartel. In the months that followed, the scandal extended to Antigua as
well, an island with no substantial military force and no need for the 500
machine guns its foreign minister ordered from Israeli military industries.
Subsequent investigations of the affair, including
one by the Government of Antigua conducted by a Washington attorney, Lawrence
Barcella, left many questions unanswered. However, it became clear that the
Antigua project had been outgrowth of the establishment of a "melon
farm" by Sarfati in Antigua in 1983,
financed by the United States government through a
$2 million loan from the Overseas Private Investment Corporation (OPIC), in
part on the basis of financial references for the principals provided OPIC by
BCCI.
Before providing the $2 million to Mr. Sarfati for
his melon farm, OPIC requested financial references. Sarfati provided
references from his principal bank, BCCI Miami. In a letter from its Miami
office, BCCI advised OPIC on June 14, 1983 that Sarfati, "who is one of
our valued customers" had a number of major accounts with BCCI.(71)
Ultimately, OPIC lost its entire investment in the
melon farm and concluded that it had been defrauded by Sarfati. After filing
suit against Sarfati, OPIC sold its remaining interest in the melon farm, at a
loss of 50 cent on the dollar, to an Israeli businessman, Bruce Rappaport, and
an entity owned by him called the Swiss American Bank. Rappaport, a confidante
of former CIA director William Casey, was in this period also in frequent
contact with BCCI's original U.S. contact, Bert Lance. Coincidentally, one of
BCCI's principal board members, Alfred Hartmann, who was also chairman of
BCCI's secretly-owned Swiss affiliate BCP, also sat on the board of another of
Rappaport's banks.(72)
In 1990, when the Subcommittee sought records
pertaining to Mr. Sarfati from BCCI, it was advised by lawyers for BCCI that
the Sarfati accounts at BCCI were "missing." Additional investigative
work later located most of the accounts pertaining to one of Sarfati's partners
in the Antigua venture, Haim Polani, but the accounts of Sarfati and his
businesses remained lost. BCCI Latin American and Caribbean Region (LACRO)
documents now maintained at the Federal Reserve in Miami document millions in
BCCI loans to various Sarfati businesses.
BCCI and BNL
BCCI was also involved with the Banco Nationale del
Lavoro (BNL), Italy's biggest bank, whose Atlanta office was involved in a
scheme to provide as much as $4 billion in fraudulent loans to facilitate
illegal arms sales for the government of Iraq. In March 1991, three officials
from BNL were indicted.
Although much about the relationship between the two
banks remains unclear, BCCI documents in the United States show that BCCI
loaned short-term -- often overnight -- its substantial U.S. surpluses to BNL
in Atlanta, with transactions amounting to billions a year. While such lending
from a bank with a surplus to another bank that could use the assets would be
normal, what was not normal about the transaction was BCCI taking funds from
its overseas branches for overnight use by BNL.
BCCI and BNL shared a key figure in common, Alfred
Hartmann, who was on the board of directors of both banks and the head of
BCCI's secretly controlled Swiss affiliate, Banque de Commerce et Placements
(BCP).
Ironically, when BCCI was closed, its Swiss
affiliate was almost immediately sold to a Turkish banking group, Cukorova, whose
subsidiary, EndTrade, was BNL's partner in the illegal arms sales from the U.S.
to Iraq, and part of the federal investigation into BNL.
Prostitution
BCCI's involvement in prostitution arose out of its
creation of its special protocol department in Pakistan to service the personal
requirements of the Al-Nahyan family of Abu Dhabi, and on an as-needed basis,
other BCCI VIPs, including the families of other Middle Eastern rulers.
Several BCCI officers described the protocol
department's handling of prostitution to Senate investigators in private, and
two -- Abdur Sakhia and Nazir Chinoy -- confirmed their general knowledge of
the practice in testimony.
The prostitution handled by BCCI was carried over
from practices originally instituted by Abedi at the United Bank, when working
with a woman, Begum Asghari Rahim, he cemented his relationship with the
Al-Nahyan family through providing them with Pakistani prostitutes.
Among BCCI bank officials in Pakistan, Begum Rahim
was reputed to have in United Bank first won the favors or attention of the
royal family by arranging to get virgin women from the villages from the ages
of 16 to 20. Rahim would make payments to their families, take the teenaged
girls into the cities, and there taught them how to dress and how to act,
including the correct mannerisms. The women would be then brought to the Abu
Dhabi princes. For years, Rahim would take 50-60 of these girls at a time to
large department stores in Lahore and Karachi to get them outfitted for
clothes. Given the size of Rahim's retinue and her spending habits -- $100,000
at a time was not unusual when she was engaged in outfitting her charges -- her
activities became notorious in the Pakistani community generally, and there was
substantial competition among clothiers and jewelers for her business.(73)
According to one U.S. investigator with substantial
knowledge of BCCI's activities, some BCCI officials have acknowledged that some
of the females provided some members of the Al-Nahyan family were young girls
who had not yet reached puberty, and in certain cases, were physically injured
by the experience. The official said that former BCCI officials had told him
that BCCI also provided males to homosexual VIPs.(74)
Intimidation of Witnesses
After his experience with the nationalization of the
United Bank in Pakistan, Abedi never forgot the ability of governments to
destroy his creations. Bribery and prostitution were two techniques to
discourage government inquiry. Intimidation of potential witnesses and whistle blowers
was another.
Throughout investigations of BCCI, would-be BCCI
whistle blowers have expressed fears for their lives, including Noriega's BCCI
banker, Amjad Awan, who told Senate investigator Jack Blum that he would be
killed if the details of the limited information he gave the Senate about BCCI
were revealed; a second former BCCI official who was a source of Blum; and the
two BCCI officials who ultimately testified before the Senate in 1991: Massihur
Rahman and Abdur Sakhia.
Both Rahman and Sakhia left BCCI in 1990, together
with a few others from the bank in the period when Abu Dhabi was taking active
control of BCCI and forcing out those of the original Pakistani group who
lacked close ties to the Al-Nahyan family.
These departures came at an especially vulnerable
time for BCCI, and the threats to them should they break the code of silence
left nothing to the imagination.
In the testimony of Abdur Sakhia, formerly the BCCI
official in charge of Latin America and the Caribbean,
When I left the bank in April 1990, we left as a
group, about 12 of us, Each one was told you go quietly, if you make any noise,
they are going to fix you. I got the word from Naqvi's secretary that if I made
any noise, Altman's firm will get me involved in a drug case.(75)
In the account of Massihur Rahman,
I left. Since then, my family and I have been
hounded. All sorts of direct and indirect threats have been used, to the extent
that Scotland Yard got to know about it and the Guildford police got to know
about it . . . and they had special security put around our house and special
equipment put in the house for direct access to the police station, and my wife
and children were suffering greatly . . . they were being terrorized by these
situations and my wife was having to put the children under the bed every night
for fear of some physical violence or some gunshots.(76)
It had long been part of BCCI internal lore that
erring Pakistani officers in Pakistan could wind up having an accident if they
talked about BCCI when they left. In the United Kingdom, another senior BCCI
executive, John Hilbery, had told Rahman that there had been a gunshot through
his window shortly after he left the bank. As a result, Hilbery decided he
would not go to court against BCCI to assert any claims against his former
employer, but would simply quietly withdraw.(77)
During the Tampa money laundering case against BCCI,
information was received through government sources about potential plans to
try to affect the government's case by kidnapping witnesses.(78)
Moreover, in that same case, BCCI retained private
investigators to investigate the Customs agents who had brought the case
against BCCI, with the investigators ultimately destroying the business of a
key informant who assisted in the prosecution of the case. As chief undercover
Customs agent Robert Mazur testified:
BCCI, had in fact, retained another investigative
firm for the sole purpose of investigating me, and the IRS agent who is the
affined to the BCCI searches. That was something that not only happened to me,
but also happened to many other people who tried to work on behalf of the
Government, and in particular, a citizen who showed tremendous courage to allow
the Government to use his business in part as their cover, who later became a
victim of malicious statements that were made by the investigators that led
later to his financial ruin, and its a shame that that type of thing occurred,
but it did.(79)
Black Network?
None of the BCCI officers interviewed by the Senate
claimed to have knowledge of a "black network" of intelligence
operatives, arms dealers, drug traffickers, burglars, or assassins employed by
BCCI, as described in a Time magazine cover-story on BCCI on August 15, 1991.
They declared, to a person, that they did not believe such a network existed at
the bank. However, several suggested that if the black network were
recharacterized as a team of officials carrying out Abedi's most secret
missions, then it could exist on a somewhat smaller scale then that
characterized by Time, operating out of either BCCI's Pakistani protocol
department or its Pakistani BCCI Foundation.
1.
Staff interview, Abdur Sakhia, October 7, 1991.
2.
Touche Ross, Bank of Credit and Commerce International (SA) in Liquidation,
Report on the Activities Undertaken in Luxembourg and the UK Covering the
Liquidation Period Up to April 15, 1992.
3.
Touche Ross, Report on the Activities Undertaken in Luxembourg and the UK
Covering the Liquidation Period Up to April 15, 1992.
4. S.
Hrg. 102-350, Pt. 3 pp. 790-791.
5.
Blum, S. Hrg. 102-350, Pt. 1, p. 61.
6.
Blum, S. Hrg. 102-350, Pt. 1, p. 37
7.
Superseding Information, U.S. v. BCCI, Crim. No. 91-0655, U.S. District Court
for the District of Colombia, December 19, 1991.
8.
Report of Internal Investigation to BCCI, Philip Manuel Resources Group,
November 1990, S. Hrg. 102-350, Pt. 2, pp. 387-388.
9.
Letter to Whom It May Concern, July 8, 1991 on BCC Canada letterhead.
10.
Id.
11.
Staff interview, Chinoy, March 9-16, 1992.
12.
People v. BCCI, Supreme Court of the State of New York, County of New York,
July 29, 1991.
13.
Id.
14.
Price Waterhouse, Draft Report on Sandstorm SA Under S. 41 of the Savings Act
of 1987.
15.
Price Waterhouse, Draft Report on Sandstorm SA Under S. 41 of the Savings Act
of 1987.
16.
Id at 1.
17.
Id at 1.
18.
Id at 1.
19.
Id at 2
20.
Testimony of Rahman, S. Hrg. 102-350, Pt. 1, p. 502.
21.
Id at 2.
22.
Price Waterhouse report to BCCI, Internal Control Report, April 28, 1986, p. 3.
23.
Price Waterhouse, Draft Report on Sandstorm SA Under S. 41 of the Savings Act
of 1987, p. l3.
24.
Touche Ross, Report on the Activities Undertaken in Luxembourg and the UK
Covering the Liquidation Period Up to 15 April 1992.
25.
Id at 17.
26.
Id.
27.
Staff interviews, Akbar Bilgrami and Amjad Awan, July, 1992.
28.
Staff interviews, Akbar Bilgrami, July 13-14, 1992; Amjad Awan, July 20-21,
1992.
29.
Id.
30.
Report of Grand Caymans Liquidators to Grand Caymans Court, August 30, 1991,
Deloitte Ross Tohmatsu, International Credit and I nvestment Company (Overseas)
Ltd.
31.
Price Waterhouse, Report to the Director on ICIC Group, June 17, 1991, Sec. 1.
32.
Testimony of Rahman, S. Hr. 102-350, Pt. 1, p. 517.
33.
Price Waterhouse, Report to the Director on ICIC Group, June 17, 1991, Sec. 1.
34.
Id.
35.
Id.
36.
Id.
37.
S. Hrg. 102-350, Pt. 3, p. 737.
38.
Testimony of Robert Mazur, S. Hrg. 102-350, Pt. 3, p. 682.
39.
Testimony of Grant Smith, Deputy Assistant Secretary of State, S. Hrg. 102-350,
Pt. 3, p. 579.
40.
Staff interviews, Akbar Bilgrami, July 13-14, 1992.
41.
Superseding Information, U.S. v. BCCI, Crim. No. 91-0655, U.S. District Court
for the District of Colombia, December 19, 1991.
42.
Testimony of Rahman, S.Hrg. 102-350, Pt. 1, p. __.
43.
Interview, Abdur Sakhia, October 7, 1991
44.
Sakhia, id.
45.
Staff interviews with various BCCI officers, October 1991 and July 1992,
including Akbar Bilgrami, who worked with Sakhia in Miami in the mid-1980's.
46.
Staff interview, BCCI officer, March, 1992. In defense of Sakhia and Rahman, it
is notable that neither is the subject of investigation by law enforcement in
connection with BCCI's activities, and neither have sought immunity from
prosecution, demonstrating substantial limits on their culpability. Both
voluntarily provided critically important information about BCCI to U.S.
investigators, including the Senate.
47.
Price Waterhouse, Interim Report on Results and Operations to BCCI Holdings,
September 30, 1989, S. Hrg. 102-350, Pt. 1, p. 279.
48.
BCCI Records and customer lists, LACRO, Federal Reserve, Miami.
49.
Staff interviews with Abdur Sakhia, October 7, 1991; Nazir Chinoy, March 9-16,
1991; Confidential BCCI informant, March, 1990.
50.
See e.g. AP, July 15, 1991.
51.
Staff interview, Nazir Chinoy, March 9-16, 1991; BCCI documents, Andrew Young
trip to Nicaragua.
52.
Chinoy, id.
53.
Staff interview, Abdur Sakhia, October 7, 1991.
54.
Staff interview, Abdur Sakhia, October 7, 1991.
55.
Staff interviews with Sakhia, id., and with Chinoy, March 9-16, 1991.
56.
Id.
57.
Staff interview, Chinoy, March 9-16, 1992.
58.
People v. BCCI, Supreme Court of the State of New York, County of New York,
July 29, 1991.
59.
Staff interview, Akbar Bilgrami, July 13-14, 1992.
60.
Staff interview, Chinoy, id.
61.
Testimony of Alan Kreczo, Deputy Legal Adviser, Department of State, S. Hrg.
102-350, Pt. 3, p. 599.
62.
S. Hrg. 102-350 Pt. 3 p. 601.
63.
BCCI LACRO documents in S. Hrg. 102-350 Pt. 1 pp. 126-162.
64.
Interview with Argentine, Mick Anderson, staff, Senator Alan Cranston, August
6, 1991, S. Hrg. 102-350, p. 253.
65.
Internal Customs source, April, 1992.
66.
See e.g. Financial Times, November 13, 1991, p. 6.
.
67.
Testimony of Laurence Pope, Associate Coordinator for Counter-Terrorism,
Department of State, S. Hrg. 102-350, Pt. 3, p 580.
68.
Abu Nidal's Terror Network, U.S. Department of State, S. Hrg. 102-350, Pt. 3,
pp. 640-641.
69.
Testimony of Pope, id, at 581.
70.
See Testimony of Pope, id., at 581; staff interviews.
71.
Loan Application to the Overseas Private Investment Corporation, submitted by
Roydan (Antigua) Limited.
72.
OPIC Documents provided to Subcommittee, July, 1990; Testimony of Bert Lance,
S.Hrg. 102-350, Pt.3 pp. 44-46.
73.
Staff interview, Nazir Chinoy, March 9-16, 1991; see also account of Sakhia,
October 7, 1991; practice described by other anonymous BCCI officers to Senate
staff.
74.
Staff interviews, U.S. investigator, February, 1992.
75.
Sakhia interview, October 13, 1991
76.
Testimony of Rahman, S. Hrg. 102-350 Pt. 1 p. 256.
77.
Id.
78.
Testimony of
Robert Mazur, S. Hrg. 102-350, Pt. 3, p 692.
79.
Id at 692.
Introduction
On July 5, 1991, when BCCI was closed, some one
million small depositors in BCCI around the world lost their deposits.
In addition to these small depositors, there were
other, larger depositors. Among those depositors were central banks,
governmental organizations, government investment funds, and government officials,
involving most of the countries in the world.
There is no way of knowing even now precisely who
were among all those who lost money. BCCI made frequent use of "managers'
ledgers" or numbered accounts for its most sensitive depositors, whose
identities were typically kept secret from everyone other than their personal
banker at BCCI. Given the anonymity, the secrecy, and the source of the income
behind many of these deposits, some depositors, including governmental
officials or agencies, have not necessarily been in a position to assert claims
to the money they have lost.
However, some sense of the impact on governmental
entities and global officialdom is provided by an account appearing in the
French wire service Agence France Presse a few days after BCCI's global
shut-down, concerning BCCI losses at its tiny branch in Korea, entitled
"Angry Diplomats Urge Government To Release Their BCCI Assets":
A major row is erupting between the South Korean
government and foreign diplomats whose deposits have been frozen by the
suspension of the Seoul branch of the scandal-hit Bank of Credit and Commerce
International (BCCI). Incensed diplomats from 33 countries met last Thursday at
a European embassy here to coordinate strategy after a protest they filed with the
central bank of Korea went unheeded, diplomats said. The diplomats said that
120 of their colleagues from 33 embassies have had part or all of their
deposits frozen. In addition, the accounts of several embassies have been
frozen, forcing some to cut back operations. . . The local branch of BCCI had
strongly lobbied diplomats here to use the bank, offering interest rates
slightly above average and putting a wide international network at their
disposal, officials said. . . . The envoys said that among those countries [in
Korea alone] whose embassies were in partial or deep trouble were [a number of]
Latin American countries, Bangladesh, Belgium, Iran, Italy, Hungary, Liberia,
Libya, Pakistan, the Philippines, Saudi Arabia, Spain, Switzerland, Thailand, Turkey,
the United Arab Emirates and Yugoslavia . . . Peru and Argentina have suspended
consular operations [entirely] because of lack of funds.(1)
BCCI's offices in Korea were among the bank's
smallest, containing just $92 million out of BCCI's total of $23 billion in
assets. Yet small as the branch was, the impact of its closure on the foreign
diplomatic corps in Seoul was devastating. This tiny branch of BCCI had,
somehow, developed relationships with these embassies that neither domestic
banks in Korea, nor any of the other foreign banks doing business in Korea had
obtained.
The fact so many officials from so many countries
banked at a single, obscure BCCI office provides an insight into the success of
BCCI's overall strategy of targeting government officials everywhere to use its
array of banking services.
In his July 29, 1992 indictment of BCCI's former
heads, Agha Hasan Abedi and Swaleh Naqvi, and two of BCCI's front-men, Ghaith
Pharaon and Faisal Saud Al Fulaij, New York District Attorney Robert Morgenthau
alleged, in some detail, how BCCI systematically engaged in criminal activity
with officials and prominent political figures from many countries to generate
assets for BCCI's Ponzi scheme, both from the governments involved, and from
innocent, legitimate depositors.
As the indictment alleges:
. . . members of the BCC Group, acting to further
the conduct and affairs of the criminal enterprise, assisted various nations,
including Pakistan, Senegal, Zambia and Nigeria, to evade fiscal restraints
placed on them by such world institutions as the World Bank and the
International Monetary Fund. . . . The BCC Group agreed to bribe employees,
agents and fiduciaries entrusted with Third World money to place it at risk in
the BCC Group, which was insolvent.
Members of the enterprise sought to secure a
preferential position for the BCC Group in various countries through the use of
corrupt payments of monies and other benefits to powerful individuals and to
make and cause to be made deposits of money with the BCC Group. Specifically,
defendants Abedi and Naqvi plotted to deliver cash and other benefits to
countries' finance ministers, head of countries' central banks and senior
executives of international and regional organizations to obtain deposits. . .
Among the countries in which members of the BCC
group made such corrupt payments for deposits and favorable treatment were the
Congo, Nigeria, Morocco, Senegal, Tunisia, the Ivory Coast, Argentina and Peru.
Among the institutions defrauded were the World Bank, the International
Monetary Fund, the African Development Bank and the Economic Cooperation of
West African States.(2)
Similarly, over the past four years, the
Subcommittee has developed extensive documentary and testimonial evidence of
BCCI's systematic reliance on relationships with, and as necessary, payments
to, prominent political figures in most of the 73 countries in which BCCI
operated. BCCI records and testimony from former BCCI officials together
document BCCI's systematic securing of Central Bank deposits of Third World
countries; its provision of favors to political figures; and its reliance on
those figures to provide BCCI itself with favors in times of need.
As BCCI's former senior official for the Caribbean,
Abdur Sakhia, testified:
BCCI's strategy globally had been to be very
well-known, to make an impact in the marketplace, to have contacts or
relationships . . . with all the people who matter. . . You name it, we would
develop relationships with everyone of consequence . . . In the Caribbean,
every major country I knew the heads of state, I knew the finance ministers, I
knew the governors of the central bank. I knew heads of all the major banks in
the area, the heads of foreign banks. I knew the people in various official
agencies, like the Caribbean Development Bank, Inter-American Development Bank,
Organization of American States. Everyone of consequence in this region I knew.
. . .(3)
These relationships were systematically turned to
BCCI's use to generate cash needed to prop up its books. BCCI would obtain an
important figure's agreement to give BCCI deposits from a country's Central
Bank, exclusive handling of a country's use of U.S. commodity credits,
preferential treatment on the processing of money coming in and out of the
country where monetary controls were in place, the right to own a bank,
secretly if necessary, in countries where foreign banks were not legal, or
other questionable means of securing assets or profits. In return, BCCI would
pay bribes to the figure, or otherwise give him other things he wanted in a
simple quid-pro-quo. For example, BCCI would help an official move flight
capital out of his country to a safe haven elsewhere, to launder funds skimmed
by the official from an official bank account or official commercial transaction,
create a foundation for a head of state to provide charitable services for his
home village or province, take him on a shopping spree at a fancy London
department store, or secure him sexual favors.
The result was that BCCI had relationships that
ranged from the questionable, to the improper, to the fully corrupt with
officials from countries all over the world, including but certainly not
limited to Argentina, Bangladesh, Botswana, Brazil, Cameroon, China, Colombia,
the Congo, Ghana, Guatemala, the Ivory Coast, India, Jamaica, Kuwait, Lebanon,
Mauritius, Morocco, Nigeria, Pakistan, Panama, Peru, Saudi Arabia, Senegal, Sri
Lanka, Sudan, Suriname, Tunisia, the United Arab Emirates, the United Kingdom,
the United States, Zambia, and Zimbabwe.
Typically, these relationships were handled
personally and in secrecy by BCCI's top two officials -- Abedi and Naqvi --
with the occasional assistance of trusted lieutenants. Accordingly, a full
accounting of these relationships may not be possible. Sakhia told the
Subcommittee that he believed there was a list of BCCI's payments to political
figures somewhere at BCCI's headquarters in London, held closely by Abedi and
Naqvi, that contained all the names. When BCCI's headquarters were moved to Abu
Dhabi in the spring of 1990, the list, if it still existed, was likely moved
there with BCCI's other records:
There was a world wide list of people who were in
the payoff of BCCI. The family of Indira Gandhi. President [Ershad] of
Bangladesh. General Zia of Pakistan. Many of the leaders of Africa. I went to a
World Bank meeting in Seoul, Korea and [BCCI official] Alauddin Shaikh was
handing out cash in the hall to the staff of the Central Bank of Nigeria . . .
Abedi's philosophy was to appeal to every sector. If you were religious people
he would help you pray. President Carter's main thing was charity, so he gave
Carter charity. [Pakistani] President Zia's brother-in-law needed a job, he got
a job. [Bangladeshi] President [Ershad]'s mistress needed a job, she got a job.
You needed the admission of your son to a top college? Abedi would arrange it
somehow.(4)
According to Sakhia, the form of the payoff varied
with the needs of the customers, but the purpose was always the same --
"to buy influence."(5)
In addition to cash payments, which were kept
secret, BCCI routinely gave presents to government officials around the world,
a fact disclosed to auditors. As BCCI officer Nazir Chinoy explained:
The auditors will not object if the manager
certifies that $50,000 was spent on entertainment on a particular day. They
will accept it without bills. It is understood that Christmas presents, giving
and taking are common. We tell them we are looking after our people, I have 50
people I want 50 shirts from Harrads for Christmas for my staff, or a Senator
from some country telling you I want my people to be looked after. Then he
says, when I come to power you take a favor from me. It is an accepted form of
operation.(6)
According to Chinoy, these presents would routinely
involve gifts worth $5,000 or more if the official was sufficiently important.
In the case of Manuel Noriega, for example, the antique oriental rug selected
by BCCI and provided to him one year in his honor was worth substantially more.
In other cases, BCCI would make a form of payments
to high ranking officials through one of its Foundations, which would create an
annual "prize," and bestow it upon a person either whom BCCI wished
to influence, or whose receipt the prize would provide BCCI needed legitimacy.
For example, from 1980 to 1988, a BCCI foundation called The Third World
Foundation bestowed an annial Third World Prize of $100,000 as follows:
1980. Dr. Paul Prebish, international development
economist from Argentina. At the time, BCCI was seeking to enter Argentina
through nominees.
1981. Dr. Julius Nyerere, President of Tanzania. The
Prime Minister of India, Indira Gandhi, presented the prize. At the time, BCCI
had alleged financial relationships with various persons associated with Gandhi
and was seeking to expand in Tanzania.
1982. Zhao Ziyang, the Chinese premier. Again, BCCI
was looking to, and soon thereafter was able to, become one of the first
foreign banks to open offices in China.
1983. Professor Arvid Pardo, a UN diplomatic from
Malta, whose prize was presented by Belisario Betancur, President of Colombia.
In 1983, BCCI purchased a bank in Colombia through nominees.
1984. Willy Brandt, former German chancellor, with
UN Secretary General Javier Perez de Cuellar giving his approval.
1985. Nelson and Winnie Mandela.
1986. Musician Bob Geldorf, for his work in raising
funds for the hungry in Ethiopia.
1987. The International Planned Parenthood
Federation of India, presented by Jose Sarney, President of Brazil. In this
very period, BCCI was seeking to strengthen its ties to President Sarney, and
had just purchased a bank in Brazil through nominees which included close
associates of Sarney.
1988. Gro Harlem Brundtland, the Norweigian Prime
Minister, presented by Robert Mugabe, Prime Minister of Zimbabwe. Mugabe had
according to many BCCI officials received cash payments from BCCI in previous
years.(7)
The Subcommittee has not obtained internal BCCI
documents describing its global strategy for bribery, or any list of payments
made to officials. However, the Subcommittee does have a collection of
documents and testimony which outline individual cases of bribery, payoffs, or
financial benefits provided by BCCI to officials in particular countries. Thus,
the case histories set forth below are illustrative, rather than comprehensive,
and do not necessarily represent the worst examples of the practice, but merely
the ones the Subcommittee has been best able to document.
Deposits
From Foreign Governments
A baseline for assessing BCCI's principal
relationships with foreign governments is to review the deposits it received
from Central Banks. At one level, the choice of BCCI as a depository for a
Central Bank of a Third World country might seem logical. BCCI had marketed
itself as the Third World bank, devoted to providing the best possible services
to the Third World. However, every central banker also knew that BCCI, as a
bank not based in any one country, had no lender of last resort, and no
consolidated audit.
Thus, deposits in BCCI were potentially a very substantial
risk for any Central Bank. If BCCI failed, the Central Bank funds would not be
protected, but would be treated like the funds of any other depositor. Despite
these obvious risks to placing funds with BCCI, dozens of countries placed
their reserves with the bank, in some cases, at very substantial, and
imprudent, levels.
BCCI document repositories in the United States,
unfortunately only contain records pertaining to such deposits in BCCI-Miami,
and thus, these represent only a fraction of the total. For example, a number
the countries that had deposits at BCCI in the United States would also
maintain deposits -- usually larger ones -- at BCCI in Panama, where they would
be more protected from creditors.
Typical deposits at BCCI-Miami by central banks and
governmental organizations, usually in certificates of deposit, are listed
below:
Organization Amount Date
Andean Reserve Fund $15,884,000 July
31, 1988
Central Bank of Aruba 6,000,000 July
31, 1988
Central Bank of
Barbados 5,000,000 May
31, 1985
Central Bank of Belize 12,000,000 July
31, 1988
Central Bank of Bolivia 14,414,000 July
31, 1988
Banco de la Rep de
Colombia 3,050,346 Aug
4, 1986
Central Bank of Curacao 25,000,000 July
31, 1988
Eastern Caribbean Bank 2,000,000 March 28, 1985
Caribbean Development
Bank 3,025,786 June
28, 1985
Bank of China 15,000,000 Dec
31, 1985
Fed. Cafeterios Colombia 10,000,000 July
31, 1985
Banco de Guatemala 3,000,000 July
31, 1988
Bank of Jamaica 13,700,000 July
31, 1986
Jamaica
Petroleum/PETROJAM 7,137,437 Jan
31, 1986
Banco Nacional de
Panama UNKNOWN Dec
31, 1984
Central Bank of
Paraguay 5,000,000 Oct
10, 1989
Central Bank of
Suriname UNKNOWN Nov
3, 1986
Central Bank St. Kitt 8,500,000 July
31, 1988
Central Bank Trinidad 5,000,000 Oct
31, 1984
Venezuela Investment
Fund 24,000,000 July
31, 1988
Additional central banks had developed relationships
with BCCI, but had their accounts shifted by BCCI from its offices in Miami to
the National Bank of Georgia in Atlanta. These included Costa Rica, El
Salvador, and Honduras, whose "territory" was given by BCCI to its
secretly-held subsidiary in Georgia.(8)
It is not possible from BCCI's records in the U.S.
to determine even the neighborhood of the degree to which the other Central
Banks were depositing funds in BCCI as a whole. For example, the Central Bank
of Peru, which did not deposit any funds in BCCI-Miami and therefore is absent
from the above extensive list, placed Central Bank deposits at BCCI-Panama that
rose to a level of $270 million dollars in June, 1987 -- nearly 30 percent of
the total cash reserves of the Government of Peru.
Thus, what is significant, simply, is the large
number of central banks and government organizations -- twenty in all -- who
were willing to place what was substantial uninsured deposits with BCCI's Miami
branch alone, at a time when BCCI was known to have no lender of last resort
behind it, and no one to insure a country's repayment should BCCI default.
An appendix to a September 30, 1988 Price Waterhouse
Report to BCCI's Audit Committee shows a substantial number of additional
governmental entities from other countries making deposits at BCCI as of that
date, as follows:
Organization Location Amount
China Civil Eng &
Construction Corporation UAE $11,414,000
Hong Kong 34,400,000
International Fund for
Agricultural Development
Luxembourg 17,200,000
OPEC United Kingdom 60,000,000
Central Bank of Sri
Lanka United Kingdom 15,070,000
Bangladesh Bank United Kingdom 25,340,000
Bank Foreign Trade
USSR United
Kingdom 10,135,000
State Bank Pakistan United Kingdom 48,960,000
National Bank Hungary United Kingdom 15,000,000
Arab Bank for Natl
Development in Africa United
Kingdom 42,569,000
Central Bank Syria United Kingdom 21,855,000
Bank of Zambia France 10,920,000
Bank Milli Afghan United Kingdom 20,000,000
Perhaps especially worthy of note from the above
list are the Soviet Union's foreign trade account at BCCI, the account for the
State Bank of Hungary, and the account for the Central Bank of Syria. In each
case, the Subcommittee knows essentially nothing about the underlying nature of
the relationship between BCCI and these governments, other than the fact that
British sources have contended that BCCI in the United Kingdom was used by
numerous intelligence agencies, including most of the major intelligence
agencies of the world.(9)
Loans
to Foreign Governments and Government Banks
As a consequence of BCCI's collapse, determining what governments were credited by BCCI as receiving loans is a far easier matter than determining who, in the past, placed funds with BCCI. A consolidated loan report for BCCI dating from March 31, 1991, shows numerous governmental organizations credited as receiving very substantial lending from BCCI as follows:
Abu Dhabi Finance Department $35,704,000
Abu Dhabi National Food Stuff Co 21,749,000
Banca Nazional del Lavaro 13,737,000
Botswana Railways 9,400,000
Botswana Telecommunications 2,600,000
Cameroon Ministry of Finance 29,172,000
China International Water & Elec 42,268,000
China National Complete Plant Exp 32,606,000
China Road & Bridge Eng. Co. 20,641,000
China State Construction Group 32,450,000
State of Gabon 7,771,000
Bank of Jamaica 33,895,000
Central Bank of Nigeria 226,060,000
Sultanate of Oman 14,444,000
Petrojam (Jamaica Petroleum) 45,420,000
Government of Seychelles 22,957,000
Bank of Sudan 53,987,000
Republic of Zimbabwe 17,063,000(10)
Price Waterhouse reports 18 months earlier had
listed BCCI's exposure on lending to governments and Central Banks as follows:
Country Nature
of Loans Exposure 9/30/89
(in millions)
Nigeria
Government 216.9
Philippines Central
Bank 30
Zambia Central
Bank 24.6
Sudan Central
Bank 19.9
Iraq
Unspecified 11.8
Mexico
Unspecified 7.3
Cuba
Unspecified 2.3
Sierra Leone
Unspecified 3.3
Ivory Coast
Unspecified .8
Panama Unspecified .6(11)
Many normal banks have such exposures, and apart
from the situation involving Nigeria and to some extent Sudan, the exposure
faced by BCCI on its lending to governments was within reasonable commercial
norms. However, beneath the veneer of normal practice, the underlying manner by
which BCCI developed these relationships was anything but normal. As the case
histories below demonstrate, in country after country, BCCI's relationships
with officials were fundamentally corrupt.
Use
of Nominees and Fronts Generally
In the early 1980's, as part of BCCI's program of
expansion in Latin America, BCCI decided that it was essential to expand
banking operations in the Americas. Accordingly, a team of BCCI's acquisition
experts, including Amir Lodhi and Abol Helmy, began meeting with Central
Bankers and government officials in such places as Argentina, Brazil, Colombia,
Peru and Venezuela to find suitable banks to purchase. In most of these
countries, there were at the time restrictions on the ability of foreign banks
to purchase local banks. Accordingly, Lodhi and Helmy were directed to identify
prominent figures in each country who would agree to act as BCCI nominees in
purchasing local institutions, under agreements where the nominees would not be
at risk, while BCCI would secretly finance their purchases -- precisely as it
had done in its purchase of First American Bankshares and the National Bank of
Georgia in the United States.
While the financial details of each proposed transaction
differed, the model for the transactions had been drawn up by BCCI years
previously, and had been relied upon by BCCI in its secret purchase of First
American. Helmy was provided with draft structures of these previous
transactions, which he used as a guide in preparing fresh proposals for these
Latin American countries. Ultimately, using this mechanism, BCCI was able to
purchase banks in Argentina, Brazil, and Colombia; however, Helmy contended
that in the case of Argentina, the laws changed prior to the purchase of the
bank, and so the nominee arrangements that had been agreed upon were not
needed.(12)
As BCCI's former head of its Latin American and
Caribbean operations, Akbar Bilgrami explained:
Using a nominee was a typical way of going about things.
Argentina, Brazil, Ghana, Colombia, Venezuela, Nigeria. All these places
started out as nominee relationships. Some were cleaned up. But it was always
preferable that there not be a nominee relationship. When we bought a
bank or set up a subsidiary, we would often use the nominee relationship
because the laws of the country wouldn't allow BCC to have majority control.
For example, we used it briefly in Colombia until we received permission to
have majority control for BCCI from the government.(13)
In each case, various forms of payments for the
individuals who facilitated the purchases of the banks were made by BCCI,
including bribes to officials in many of the countries.
Money
Laundering, Commodities Frauds and Skimming
According to BCCI officers interviewed by the
Subcommittee, there were consistent themes in BCCI's activities in the Third
World, in terms of the kinds of services that government officials would be
looking for from BCCI. First, to the extent the official controlled a source of
government funds, the official typically wanted to be compensated in connection
with his decision on where to place the funds. The solution to this problem was
simple enough -- BCCI would pay a "commission" to the official
involved. Second, to the extent the official controlled transactions involving
government funds, the official might well want to be compensated on a fee
basis, transaction by transaction. BCCI developed a number of techniques in
response to this requirement, which typically involved one form or another of
skimming the government funds that moved through the transaction, again with
the revenues deposited in a safe place outside the official's country. Third,
to the extent the official was in a position to generate substantial resources
of his own through non-BCCI corruption, he often would want a safe and
confidential place to hide his money. Again, BCCI would comply.
In each of these cases, BCCI would make use of
applicable techniques for hiding and laundering cash: manager's ledgers or
numbered accounts; phony loans to hide (and legitimize) real, but unclean
deposits; circuitous routing of funds through bank secrecy havens like the
Grand Caymans and Panama, and so on.
Pay-Offs
to Avoid Prosecution
Inevitably, BCCI's criminal practices as a bank
would set off alarm bells in one or another of the nations in which it was
operating. Because of BCCI's underlying financial fragility, any such problem
could potentially mushroom. Accordingly, the bank made it a high priority to
fix such cases through payoffs. Usually, this could be accomplished with
existing relationships.
For example, in Nigeria, on the several occasions
when BCCI's activities had been discovered by officials who had not been
compromised, investigations were quelled by a top Nigerian religious and
governmental official, Al Haji Ibrahim Dasuki, who was also president of BCCI's
Nigerian bank.(14) This pattern was repeated all over the world. As
Sakhia testified:
BCCI officers were indicted and jailed in other
countries, like Sudan, Kenya, India, and in each case there was a terror in the
bank that, you know, this has happened, that has happened. And somehow then
some deal would be struck. People would be freed, BCCI would start doing
business all over again.(15)
This practice did not only take place in Third World
countries. Notes taken by BCCI's lawyers in the United States at Patton, Boggs
& Blow in Washington, D.C. refer to possible payments to French officials
by BCCI in 1989 to solve a criminal legal matter that had developed for BCCI
there. According to the U.S. lawyers involved, each of them was disturbed about
the proposed bribe, and were trying to prevent it from happening.(16)
Thus, BCCI's system of payoffs was not by any means
an occasional practice, but one that pervaded the institution from its
creation, and continued through to its collapse.
CASE
STUDIES
ARGENTINA
In Argentina, BCCI targeted and ultimately
successfully purchased, the Finamerica Bank, a small Argentina financial
institution that was at the time owned by FIAT and by the Banco de Italia. In
December, 1984, through a local middle-man, Ricardo Gotelli, Fiat authorized
the sale to BCCI.(17) Internal BCCI memoranda show that in the
original structuring of the transaction, BCCI was intending to lend money to
the current shareholders of the bank and have them pledge their shares back to
BCCI in order to avoid having to notify the Central Bank, and receive its
authorization for the purchase. Ultimately, however, this plan was found not to
be necessary as a result of BCCI securing the Central Bank's permission for the
transaction.(18)
The New York indictment of Abedi, Naqvi, Faisal al
Fulaij and Ghaith Pharaon on July 29, 1992 succinctly sets forth why BCCI was
able to abandon the nominee structure and directly, publicly purchase the
Argentine bank:
The BCCI Group made corrupt payments to the
President of the Central Bank of Argentina and a member of its Board of
Directors. In or about 1983 and 1984, the BCC Group made and caused to be made
a five hundred thousand dollar "political" contribution to the
President and a member of the Board of Directors of the Central Bank of
Argentina upon an agreement and understanding that it would influence the
conduct of said President and Director in relation to the establishment of a bank
of the BCC group in Argentina and in relation to the business of the BCC Group.(19)
At the same time BCCI decided to move into
Argentina, so did its front-man, Ghaith Pharaon. According to published
reports, Pharaon came to Argentina by way of Paraguay, where he had established
a personal friendship with military strongman Alfredo Stroessner. Argentine
press accounts quote Pharaon as stating he had visited Paraguay to assist in
developing BCCI's relationships there, which culminated in the Central Bank of
Paraguay placing some of its central bank deposits with BCCI.
The new BCCI bank quickly made one enormous set of
loans to Pharaon -- for the construction of a luxury five-star hotel in
downtown Buenos Aires -- the first such hotel in the city, including an
18-story tower, convention center, and shopping gallery, built on the grounds
of a historic mansion.
According to a letter submitted to Argentine
economic authorities by the Hotel Corporation of Argentina, most of the
financing for Pharaon's hotel project -- $26.3 million in all -- was to come
through selling Argentina Debt under the government's debt equity conversion
program. In the letter, Pharaon was described as "a prominent
international businessman who has investments in banks, insurance companies,
real state [sic] development projects, and numerous other businesses
worldwide."(20) During an application for Argentinean
citizenship Pharaon made on June 16, 1988, he listed BCCI, CenTrust Bank in
Florida, and Independence Bank in California as among his principal
investments, and declared he had helped arrange BCCI's acquisition of
FinAmerica -- renamed BCCI Argentina.(21)
BCCI's direct involvement in the debt-for-equity
project was suspected by some Argentinean press at the time, given the lavishness
of the project and questions about whether a hotel could possibly be
profitable. However, BCCI's actual involvement was not proven until after
BCCI's global closure on July 5, 1991. A week later, investigators in Buenos
Aires reported that BCCI Argentina had been heavily involved in the
construction of the Pharaon hotel, but that all accounts at the bank had been
"cleared out a week before the central bank's move to revoke the
license," leaving no depositors in the bank and no deposits. BCCI had
financed the Buenos Aires hotel through buying Argentinean foreign debt at a
huge discount and cashing it with the central bank, with the result that the
Argentine central bank, in essence, financed the bulk of the hotel.(22)
In addition, the hotel project required legislative
and regulatory action by various Argentine political figures. In mid-1989,
Pharaon reached out to new-elected Argentine President Carlos Menem himself,
through ties Pharaon had developed to Menem's former chief of staff, Alberto
Kohan. A few months later, Pharaon was introduced to President Menem, and
following a meeting with Pharaon, President Menem personally telephoned local
officials in Buenos Aires to eliminate the red tape that had been delaying the
construction of the BCCI-Pharaon hotel. The delays ended the following day.(23)
The intimate nature of the relationship between top
Argentine officials, BCCI, and Pharaon was further demonstrated when Pharaon
hired Argentine economist Gonzalez Fraga. On Pharoan's behalf, Fraga arranged
the debt-equity swap to help finance the hotel, and then became the new
president of the Central Bank under Menem. Fraga told journalists, "it's a
pretty story that President Menem made me head of the Central Bank as a favor
to Pharaon. But it wasn't that way."(24)
In practice, BCCI's Buenos Aires bank never
developed much of the business anticipated for it. Ultimately, its principal
activities were mainly to manage the financing of Pharaon's hotel venture and a
jojoba planation also financed through an Argentine debt-equity swap involving
BCCI.
In the meantime, Pharaon had unwittingly brought
about official action against BCCI Argentina in April, 1991 as a result of
testifying in a court case, unrelated to BCCI, that:
As much as BCCI, the First National Bank of Boston,
the Credit Suisse and the National Bank of Greece -- all are equally
lawbreakers.(25)
In response to this suggestion that all banks were
laundering money, Argentina ordered BCCI to begin winding up its affairs in
Argentina as of the end of 1991, and began a formal investigation of BCCI in
Argentina. Little further happened until BCCI's global closure on July 5, 1991,
which soon resulted in BCCI Argentina's closure as well. Argentine Federal
Judge Maria Servini then combined the investigation into BCCI with another
ongoing case implicating the former appointment's secretary of Argentine
President Carlos Menem, and his sister-in-law, Amira Yoma, in an alleged
international drug and money laundering network. However, little has been made
public about the investigation since that time, and many of the key questions
about BCCI's and Pharaon's relationships in Argentina remain unanswered.
BCCI
and Argentine Arms Deals
In response to the Foreign Relations Committee
subpoena to BCCI, BCCI's liquidators produced documents concerning two proposed
arms sales involving Argentina that had been maintained at BCCI's offices in
Miami.
The first set of documents held at BCCI-Miami
referred to the sale by the Argentine Air Force of what handwritten notes
described as "22 units of Aircraft plus adequate space parts, including 6
spare engines at a price of $110,000,000.00," consisting of Mirage IIIC/B
jets manufactured in France and "modified to Argentine Air Force
requirements following years of combat experience."(26)
The prospectus included technical drawings of the
Mirage jets and basic military specifications, with a commitment that the
"AAF," or Argentine Air Force, would provide all technical
documentation in support of the planes, ground support equipment, and, if the
"customer country" wished, a full program of flight training in
Argentina for customer country pilots. (27)
This proposal had never gone through the legal
processes in Argentina required for such sales, and was a secret in Argentina
until the Subcommittee released these documents. As former Argentine Defense
Secretary Raul Alconada Sempe testified before the Subcommittee, the sales had
never been authorized, and that if such a proposal had been made legally, it
would have required notification to the Argentine parliament:
Sales without the Defense Minister knowing, from
1983 on, it was impossible, because it was only the Defense Ministry that
authorized such sales. What does exist, and I think this is a general problem
throughout all countries, is that there are countries that have arms, countries
that need arms, and the famous middleman crop up. The brokers, the sales
agents, and these are the people that try to match the buyer and the seller. .
. . They just try to look for such a deal. This is what may have happened.(28)
Following the conclusion of the hearing,
investigators in Argentina determined that the sale appeared to be a proposal
made unofficially by a general in the Argentine air force to various countries
in the Middle East, including Iraq. BCCI had offered to act as a broker and
possible financier for the proposed sale of the Mirage jets, which represented
a substantial percentage of the total possessed by Argentina. However, the
general involved had never been able to convince Argentine governmental figures
that the transaction was in the interest of Argentina, and the proposal died.
Other BCCI documents describe BCCI's involvement in
a possible sale of night vision equipment by Litton Electron Devices in Arizona
to the Government of Argentina, guaranteed by an Argentine government bank,
through a company owned by the Argentine government. It is not clear from the
documents whether BCCI ultimately financed the night-vision equipment sales or
not.
BANGLADESH
When BCCI was closed globally on July 5, 1991, one
of the nations that was worst hit was Bangladesh, which had deposits of $171
million at the time of its closure. Following the collapse, some 40,000
depositors threatened a hunger strike after losing their life savings, 500 depositors
actually conducted a sit-down strike in the capitol's financial district, and
another thirty depositors threatened to engage in self-immolation if the
government did not find a way to restore some of their losses. One month later
the Bangladeshi government promised to provide up to $1400 to each of the banks
depositors, as a means of ending the highly-publicized strikes.
Thus, the impoverished government of one of the
poorest countries in the world was forced, in essence, to raid its own treasury
to alleviate the suffering of the small depositors to make up for millions
stolen from Bangladesh by BCCI and former Bangladeshi government officials,
including the man who had been president and dictator of Bangladesh throughout
the 1980's, Mohammed Ershad. These schemes included massive tax evasion and an
equally massive and illegal currency trafficking ring involving then-president
Ershad, top aides, and President Ershad's mistress, which continued until
Ershad was deposed in December, 1990.
According to various press accounts, supplemented by
information from BCCI insiders provided the Subcommittee, President Ershad
worked with his brother-in-law, former Bangladeshi diplomat A.G.M. Mohiuddin,
to smuggle millions of dollars out of Bangladesh through BCCI into the United
States. BCCI also hired various relatives of Ershad to work at BCCI branches in
Hong Kong, Britain and Canada, and in return, Bangladesh hired one of BCCI's
top officers to serve as Bangladesh's first ambassador to Brunei -- whose
embassy functioned primarily as a sales office in Brunei for BCCI.(29)
The BCCI-Ershad connection was essential to the
Bangladesh president because given his country's impoverishment, he had
relatively limited opportunities outside of what BCCI could bring him to get
rich. His salary was only $13,000 a year as president, but through making use
of BCCI he was able to move millions of dollars of fund siphoned out of
Bangladesh governmental accounts.
As BCCI officer Abdur Sakhia testified in response
to a question about payments by BCCI to the leading political families of
India, Pakistan and Bangladesh, including President Ershad:
The payoff [came] either in the form of cash, or
hiring of their relatives, contribution to their favorite charities, payment of
their medical bills. It took various shapes. So in some cases cash may have
been given, in some cases their relatives were hired, in other cases their
charities were funded, their projects were financed at favorable rates, loans
at favorable rates. So it took different shapes and forms.(30)
In the case of Bangladesh, the payoffs in fact came
in almost every shape and form. By far the most detailed account of these
payoffs was provided by the Los Angeles Times, which sent a reporter to
Bangladesh to interview government officials, BCCI officers, and private
business there about the relationship between BCCI and Bangladesh after BCCI's
collapse. Its account has been generally corroborated by testimony to the
Subcommittee from statements by BCCI officials, including Sakhia and Chinoy. As
the Times found:
Here, in a land that perpetually ranks among the
poorest of the world's poor, BCCI stretched the law to its limits to avoid
paying desperately needed government taxes, to skirt national banking
regulations and to remit as much profit as possible out of Bangladesh and into
the bank's international web of corporations and subsidiaries.(31)
The practices described in the Los Angeles Times
article were typical of BCCI's practices in other countries. After the Central
Bank of Bangladesh forbid BCCI from exporting profits in Bangladesh abroad --
the "flight capital" BCCI specialized in -- BCCI created the BCCI
Foundation, a charitable trust based in Bangladesh, whose official purpose was
to fund scholarships, rural health care centers and school libraries. Funding
for the BCCI Foundation came from BCCI's banking operations in Bangladesh.
Those profits became tax-free because they were given to the Foundation. And
the foundation in turn gave funds not principally to the needy, but to a joint
venture investment bank, called the Bank of Small Industries & Commerce or
BASIC, staffed by BCCI officials, in which President Ershad and his top aides
had a financial stake.(32)
Towards the end of Ershad's rule in Bangladesh, the
scheme had become sufficiently transparent that it created outrage within the
country. For example, the Foundation's most important scholarship program, to
provide interest-free loans to talented college students, received about
$10,500 in donations from the Foundation in 1990, in a year when the Foundation
earned over $21,000 in interest alone.(33)
In the meantime, BCCI hired three of Ershad's close
relatives, along twelve other sons and daughters of prime ministers, finance
ministers, police chiefs, central bank governors and deputy governors.(34)
In late 1990, Ershad resigned under fire, and was
tried for a variety of arms trafficking offenses in Bangladesh, and sentenced
to a ten year prison term, while awaiting trial on additional corruption
charges, including some pertaining to his relationship with BCCI. Following
BCCI's collapse, the new government retained an investigative firm in New York
in an attempt to trace what the new government contended as much as $520
million in funds misappropriated from the Bangladesh treasury by BCCI, Ershad,
and his relatives. The investigators have alleged that Ershad moved millions of
dollars through BCCI accounts in London and Hong Kong.(35)
Even disaster relief aid provided by foreign
governments to Bangladesh to help victims of a devastating cyclone in 1990
wound up being deposited in BCCI and lost with the closure of the bank.(36)
Thus, BCCI, which promoted itself as a Third World
Bank devoted to assisting the Third World in development, stole millions from
Bangladesh, in concert with Bangladesh's ruling political family, in what one
BCCI official was later to describe as "a perverse, reverse Robin
Hood."(37)
BRAZIL
By early 1986, BCCI had identified Brazil as a prime
target for BCCI expansion. Latin American banker Brian Jensen, then an
Alternate Executive Director of the International Monetary Fund, had been
working closely with BCCI, on an unofficial basis in this period, to help BCCI
obtain its relationship with Peru through payments to Peruvian central bankers.
In addition to his work on BCCI's Peruvian activities, Jensen studied the
Brazilian economy and Brazilian banking system for BCCI, and wrote Abedi a
memorandum which Jensen faxed to BCCI from offices at the IMF in early 1986
describing his approach to Brazil:
The establishment of a banking concern in Brazil can
become a priority. I feel I can be useful in identifying and putting together a
concrete and well-balanced possibility for BCCI while at the same time
protecting for a positive attitude from the local authorities to such
initiative. . .
A US $230 billion economy with an external trade
component that exceeds 25 percent of GNP, Brazil offers the advantages of a
large internal market of 135 million people and a rapidly growing export sector
. . . Brazilian legislation . . . and long standing traditions or practices . .
. exclude foreign banks from establishing branches or investing in domestic
commercial banks at present. However, foreign equity participations of up to
one-third of the common stock or half of non-voting shares are allowed in
investment banks. These are specialized financial intermediaries authorized to
issue certificates of deposits and other savings investments, as well as to
extend loans to the private sector. . .(38)
Abedi told Jensen to talk with Brazilian bank
officials to find a way to get around the regulations. The following month,
Jensen sent a second memorandum from his IMF offices in Washington to BCCI:
Conscious of BCCI's interest in Brasil and according
to our recent conversations in London. . . I have held discrete conversations
(on a no-name basis) with central Bank authorities and existing banking groups
(well know to me) as to the better possibilities and strategies. . .
The route followed by most new investors in
Brasilian banking in recent years has been to buy equity into existing groups,
assuring in his manner an important presence in the market. All foreign
investment has been in this fashion. The rationale has been to find a solid and
reputable local group (ongoing concern) and acquire up to 30 percent. . .(39)
BCCI well-understood the concept. It did not mind
holding a public minority interest in a Brazilian bank, so long as it had
sufficient additional secret interests through nominees to insure that in
reality the local bank was BCCI anyway. BCCI directed its acquisitions officer,
Abol Helmy, who was already handling the Argentine FinAmerica purchase, to
locate possible nominees for BCCI in Brazil.(40) Eventually, two
were found -- Sergio da Costa and Carlos Leoni Siqueira, to be BCCI's nominees,
each to hold on BCCI's behalf one-third of the bank, with the remaining
investor, Jacque Eluf, to hold an additional one-third, which he himself would
pay for, but which BCCI would guarantee against loss.
The nominees chosen by BCCI were extremely prominent
members of BCCI's elite. Jacque Eluf, who it was guaranteeing against loss, was
one of the wealthiest men in Brazil, owner of IAT Co., Brazil's largest
exporter of industrial alcohol, with a net worth in 1986 of about $100 million.
BCCI nominee Carlos Leoni Siqueria was one of Brazil's leading attorneys, on
the board of directors of companies such as IBM Brazil and Grupo Gerda,
Brazil's largest privately owned steel manufacturing company. BCCI Nominee
Sergio da Costa was at the time the most senior member of the Brazilian
diplomatic corps and a close associate of then Brazilian president Jose Sarney.(41)
Da Costa was available to BCCI because at the age of
67 after four decades of serving Brazil as its Ambassador to such significant
postings as England, Canada, the United Nations, and the United States, he was
retiring and anxious to make money. Da Costa had been brought to BCCI by BCCI
shareholder and front-man Ghaith Pharaon, who in late April, 1986 had met with
Da Costa in Miami to seek Da Costa's help in responding to the problems posed
for BCCI in circumventing the Brazilian bank laws. A telex from Miami branch
manager Abdur Sakhia to BCCI-London on May 6, 1986 described the meeting having
ended positively for BCCI:
Ambassador Da Costa has promised Dr. Pharaon to
assist the Bank in any way he can and he also had asked Mr. Ferreira [a
prominent Brazilian businessman close to President Sarney] to use his
association with the President of the Republic to assist BCC.(42)
By September of 1986, da Costa had agreed to himself
become a front-man for BCCI in Brazil. In return, BCCI agreed to pay him
$150,000 a year, with no further responsibilities beyond being a front-man and
using his influence to help BCCI with Brazilian authorities in Brasilia, the
capital city.
Under the terms of the arrangement, da Costa agreed
to be a director and shareholder, secretly acting as BCCI's nominee, of the
bank BCCI was purchasing in Brazil, in a transaction structured by BCCI officer
Abol Helmy.
Helmy drafted a memorandum, "Strictly Private
and Confidential," regarding "Brazil," on September 2, 1986,
under which da Costa and a second prominent Brazilian would each own 50 percent
of a Brazilian company that would buy 12,622,500 voting ordinary shares in BCCI
Brazil, pledge those shares to BCCI, give BCCI the right to vote its shares,
and give BCCI the right to buy those shares. Da Costa would agree to serve on
the three man board of directors as BCCI's front-man, to guarantee BCCI control
of the bank. He would 'pay' $1,233,580 for his 'share' of BCCI Brazil's stock,
and BCCI would reimburse him that amount in New York. The internal BCCI
memorandum drafted by Helmy makes explicit the fact that these arrangements
were designed to deceive Brazilian authorities:
It must be emphasized that the Brazilian
economy and bureaucracy are highly sophisticated. As such any payments
made by Brazilians must have the appropriate ORIGINATION OF FUNDS. That
is, the Brazilian 'investors' must have the necessary net worth for
Brazilian taxation authorities' purposes to support any investments made. . .
Messrs. Da Costa and Leoni to ensure that the
transaction is fully acceptable to the Central Bank and to ensure that there
are no adverse public consequences will be purchasing their shares in cash. . .
Both Ambassador Da Costa and Mr. Leoni are reluctant
to take loans from any bank to finance the transaction for Central Bank and
public image purposes . . . I have negotiated, subject to BCC management
approval, an interest free loan to the individuals concerned . . . to enable
them to complete the transaction.(43) (emphasis in original)
The memorandum demonstrated that BCCI would provide
da Costa and Leoni with $2,467,160 for the purchase of his stock in BCCI
Brazil, every penny the stock would cost. In a staff interview, Helmy
acknowledged that da Costa and Leoni were not at risk and that the transaction
was a standard nominee arrangement by which BCCI circumvented local laws and
that this approach had been used a numerous of times previously by BCCI. Helmy
also said it was BCCI's understanding that da Costa and Leoni would take care
of arrangements with Brazil's central bank and other Brazilian officials to
make sure that they acquiesced in the transaction as structured.(44)
Thus, in essence, Helmy at BCCI and da Costa, while still Brazil's Ambassador
to the United States, had with other BCCI officials and other prominent
Brazilians, created a plan by which they would together make possible BCCI's
purchase of a bank in Brazil to circumvent Brazilian law.
BCCI officials were ecstatic at da Costa's
participation in their plan for Brazil, and his agreement to be a Senior
Advisor to BCCI. On October 28, 1986, while da Costa was still Brazil's
Ambassador to the United States, the head of BCCI's Miami office, S. M. Shafi,
sent him a congratulatory telex at the Embassy:
congratulations from myself and my colleagues on
your joing [sic] our Brazilian project. We welcome you to the fold BCC family.
I am very certain your experience, qualifications and contacts not only in
Brazil but also internationally will go a long way in turning our subsidiary in
Brazil into one of the most successful units of BCCI.(45)
Da Costa signed a three-year consultancy agreement
with BCCI on November 3, 1986, under which he committed to acting as
"Director of [BCCI's] investment bank in Brazil," and a front-man for
BCCI there.(46) Da Costa then followed through in participating in
the plan developed by Helmy under which BCCI would secretly purchase a majority
interest in BCCI Brazil through nominees. He received his 'loans,' from BCCI,
and purchased his 'stock' in the Brazilian bank. BCCI duly reported its loans
to him on its books in Panama, characterized as "International
Loans," as if they were normal loans that BCCI anticipated would be
repaid. By April 30, 1988, da Costa's 'loans,' from BCCI amounted to
$1,563,723.85. In fact, da Costa did not pay interest or principal on the
loans, which were shams to mask BCCI's ownership of the 'da Costa' shares of
the bank.
Among themselves, BCCI officials were also pleased
about another aspect of being connected to da Costa. As he entered his
agreement with BCCI to circumvent Brazilian banking laws, he had told them that
he was also joining Kissinger Associates. A full account of da Costa's and
BCCI's relationship with Kissinger Associates is set forth separately.(47)
To penetrate the Brazilian market, BCCI had once
again made pay-offs to some of the most prominent people in Brazil -- this time
among others to the country's most senior and prestigious diplomats -- in order
for them to participate with BCCI in circumventing the laws of their country.
CAMEROON
BCCI developed a number of relationships with
governmental entities in the impoverished Central African country of Cameroon,
including the United Nation's account there and the U.S. embassy's account
there. But the most critical relationship for BCCI in Cameroon was with the
country's ministry of finance, which, after BCCI began making payments to its
officials, agreed to borrow funds from BCCI on which BCCI charged Cameroon
interest, and then to redeposit them in non-interest bearing accounts,
benefiting no one other than BCCI and the bribed officials.(48)
At the same time, BCCI went into a joint venture
with the government of Cameroon to finance BCCI's bank in Cameroon. The joint
venture was successful for both BCCI, which held 60 percent of the banks
shares, and for Kanga Zamb Jean, who was previously Cameroon's finance
secretary and governor of a province of Cameroon before he became chairman and
managing director of the bank. In that capacity, Jean was officially
representing the interests of the Republic of Cameroon, which held a minority
interest in the bank. In fact, Jean was also lining his own pockets.(49)
BCCI's relationships with Cameroon were flourishing
by the time of BCCI's indictment in Tampa on drug money laundering. In 1988,
Cameroon started directing oil export financing through BCCI, as a result of
payments being made by BCCI to people in the finance department of the Cameroon
national oil company. The payments were small, amounting to no more than $3,000
to $4,000 per person, but enough to secure BCCI what it needed in such a
low-income country. In return for this small investment, BCCI benefitted a
number of ways. As Nazir Chinoy, Paris regional manager in this period,
explained:
The deposits from the purchasers of the oil are kept
from 7-10 days in Paris. You can use that money to make a small profit there.
But more important than the deposit was the exchange. The money is kept in
Paris then is converted into French francs. There is an exchange profit to be
made for BCC Paris as well as for BCC Cameroon.(50)
BCCI Cameroon became a cash cow for BCCI, with
deposits amounting to between 90 and 100 million pounds sterling. When BCCI was
closed globally, Cameroon was caught with most of that money still deposited --
including a substantial amount of government funds -- amounting to about $90
million, which for Cameroon constituted a substantial loss.(51) Of
those funds, approximately $63 million amounted to real deposits by Cameroon
that had been discovered by BCCI's auditors, but never recorded by BCCI on the
books. BCCI had kept the deposits off-the-books in order to use the cash to
finance other BCCI operations elsewhere.(52) Later, BCCI's chief
financial officer, Massihur Rahman, was to refer to the treatment of Cameroon's
as unrecorded deposits at BCCI as "major fraud."(53)
COLOMBIA
As Colombia was transformed during the 1980's from a
country whose biggest cash crop was coffee, to one whose biggest cash crop was
cocaine, BCCI decided to enter the Colombian market through buying Banco
Mercantile, a troubled bank there.
It did so fully aware of the nature of most of the
dollars that were being generated in Colombia. According to Abdur Sakhia, who
was then on BCCI's top officials in the United States, BCCI's decision to
acquire a Colombian bank was exceptionally controversial even within BCCI:
In December, around Christmas 1982, we had a meeting
in Panama, and Mr. Akbar Bilgrami, who was indicted and convicted, and Mr.
Amjad Awan, brought in a proposal of this bank in Colombia. We wanted to expand
in Colombia in terms of a branch in Bogota which would do international
business, but according to them the only way we could get an entry into
Colombia would be to buy this bank.
I was vehemently opposed to the acquisition, one,
because the bank was doing very poorly . . . I said: What are we going to do
with all of this? We do not know what people they are, what type of clients
they are, what are they doing in Cartagena, Cali, Medellin? How are we going to
control this.
I had been to Colombia twice before this meeting to
our office. We used to have a representative office in Bogota. And every time
they would take me from the airport escorted by an armed guard to my hotel. . .
I said: How are we going to manage offices in remote arts of Colombia when you
cannot walk in Bogota unescorted? I said: We don't know what types of clients
they are, what type of business they have, what type of money they have; we
shouldn't go into this acquisition.
Later on I learned that we would now divide the
operation into Caribbean and U.S. on one side and Latin America on the other
side. So Colombia, Panama, Peru were taken out of my jurisdiction.(54)
We knew that the money that we would be getting in
Colombia would be drug money. We knew that all the dollar deposits we would be
getting would be drug money.(55)
Thus, when Sakhia complained about the concept of
expansion into Colombia at a time when Colombia had already become lawless as a
result of the drug trade, BCCI's response was to take away his jurisdiction
over BCCI operations pertaining to Colombia, as well as its drug-producing
neighbor Peru, and its drug-money laundering neighbor, Panama.
Akbar Bilgrami, convicted of money laundering in the
Tampa case, told the Subcommittee that he could not, for legal reasons, discuss
in any detail his activities in Colombia. He was willing, however, to make some
general statements about the flow of funds from BCCI Colombia to the United
States.
First, it was true that BCCI, like other foreign
banks based in Colombia, was moving dollars out of Colombia into FDIC-secured
banks in the United States. According to Bilgrami, one of the key goals of many
of his Colombian clients was to obtain federal insurance for their cash
deposits. Accordingly, BCCI would take their funds, and immediately transfer
the funds to accounts set up in their names in First American, which BCCI
secretly controlled, and in National Bank of Georgia, which BCCI then
separately secretly controlled. According to Bilgrami, most of this was typical
flight capital:
You know, all flight capital is questionable money:
Tax evasion, drugs money, arms transactions, pure political corruption. But we
were small, only able to take in $100 million yearly. Other banks were taking
in a billion each. So we were losing out on that business. Credit Suisse was
repatriating $1 billion per year in flight capital from Colombia. Union Bank of
Switzerland, another $1 billion. We only handled $100 million. But that amount
did go from BCCI Colombia into the United States.(56)
In Colombia, as in so many other nations, BCCI found
that to stay in business, it had to pay bribes. Because the bank it had
acquired was in such poor shape, and so near to collapse, the Colombian
government had made no objections to BCCI's acquisition of it, and no payments
by BCCI to officials were necessary. That changed, however, after BCCI bought
the bank. According to Bilgrami:
Colombia was a unique situation. We never paid any
illegal money to purchase the bank. But when we inherited the bank, we learned
that it was a tradition to pay the treasurer of the bank commissions on the
largest accounts. I asked Mr. Naqvi for clarification, you know, should we pay
it? And he said to pay it in dollars so that it couldn't be traced to us. So we
paid it, around $20,000 to $30,000 monthly.(57)
CONGO
BCCI's situation in the Congo was different from its
situation in many other countries, in that the best known example of its
criminality emanated from government cheating, rather than BCCI's.
Originally, BCCI had purchased government
securities, at a discount, under an agreement by which the government promised
to repay BCCI, and then the government had, after making some of the
repayments, failed to follow through on the deal. Thus, BCCI's original
wrongdoing was merely its creation of a mechanism for repayment through
skimming off commodities transactions. However, BCCI then wound up paying
bribes only after Congo officials failed to honor the deal worked out
originally. In essence, BCCI made the payoffs to protect itself after it had
been the victim of fraud by the Congo.
As Nazir Chinoy advised the Subcommittee, in August
1985, BCCI had worked out what looked like a profitable arrangement with the
Government of the Congo by purchasing notes issued by the Congo in the range of
$65 million to $67 million. These notes had been originally purchased by Mohsen
Hujaj, a Lebanese contractor, with extensive contacts in the Congo. Hujaj
accepted the notes from the Congo in payment for services he had performed
after the government proved unable to pay under the terms of its contract with
Hujaj. In a three-way deal, Hujaj got the government to acknowledge this
indebtedness to BCCI and agree to certain repayments starting every three
months.
A complex scheme was devised to insure that BCCI
would be repaid on the notes without the government of the Congo having to
acknowledge the payments or set aside funding for them. The Congo government
placed 17 million in deposits in dollar terms in BCCI Paris, while BCCI was
given the right to handle funds generated through the sale of oil and to take a
charge off the proceeds of these sales. Under the terms of the deal, the oil
sales were made from the Government of the Congo to a French company called
ELF. ELF paid the money to an offshore account in a Swiss bank which had lent
Congo $60 million. When the oil proceeds came in, the balance after paying for the
oil would be sent to BCCI Paris, which got about $20 million of the proceeds
and would use this for repayment on the notes. The arrangements worked well
until January 1986, when suddenly the money stopped coming in from the Swiss
bank.(58)
With some difficulty, BCCI learned from the Swiss
bank that the government of the Congo had repaid the Swiss bank directly for
its lending, and in the future they took payment directly for the oil from ELF,
bypassing BCCI entirely. In response, BCCI turned once again to a tried and
tested technique -- bribery. As Chinoy explained:
We had to make expensive presents to the finance
minister to get much of our money out. We were still owed $40 million by 1987
and having difficulty with the Lebanese, Hujaj, who threatened to get me killed
because we were holding $11 million of his deposits at BCCI which were pledged.
We released $6 million and had to find other means of securing repayment on the
rest.(59)
In the meantime, French authorities, under the
leadership of Jacques Chirac, had recognized the Congo's parlous financial
condition, and convened a meeting of bankers in an attempt to restructure
Congo's debt. Under the terms of the restructuring, BCCI, which was the second
largest of all lenders to the Congo, would be forced to accept losses on its
lending, which it did not wish to do. Accordingly, BCCI officials discussed
what kind of payments could be made to the ministry of finance in the Congo to
solve the problem:
Dildar Rizve [a senior BCCI official] said, if I can
get to him, if he releases our funds, I'll set up a scholarship for him. I have
a feeling it was $100,000 for his children. But in 1987 the finance minister
was replaced and a new finance minister came in who was a younger and more
honest man. The new chap wanted $5 million as a temporary overdraft to assist
the President for his tribe. If we could get him that, they would pay us back
within 5-10 days. I spoke to Naqvi [then BCCI's second highest ranking
official] who said, go and do it. It was repaid and he was honest. He said, if
you want money, lend me another $20 million. Congo had changed from socialism
to joining the World Bank and becoming capitalist. He said I will see that your
outstanding [loan]s are paid before we join the World Bank. The money was given.
On June 29 1988, the new finance minister was in Paris and Security Pacific
[which was lending the Congo new funds] paid us the full amount outstanding.(60)
BCCI was one of only two out of 32 banks that was
fully repaid on its lending. While the new finance minister was, in Chinoy's
view, honest, to keep him that way, BCCI did make sure that he and the Governor
of the Central Bank received presents from BCCI. According to Chinoy, "we
gave him the expensive presents and that made the difference."(61)
JAMAICA
Shortly after establishing offices in the United
States, BCCI cornered the market for government funds and programs in Jamaica
as the result of establishing a personal relationship with then-Prime Minister
Edward Seaga. Ultimately, this relationship involved BCCI being involved in
financing all of Jamaica's commodity imports from the United States under the
U.S. Commodity Credit Corporation (CCC) program and handling essentially every
foreign current account of Jamaican government agencies.
According to Abdur Sakhia, who brought in the
Jamaican account, unlike BCCI's practice in so many other countries, its
relationship with Jamaica was based on nothing more than reaping more benefits
for having taken some additional risk.
Sakhia told the Subcommittee that the relationship
began, in part, because he had known Mr. Seaga's family as a result of his
children and Sakhia's children attending the same school in Toronto, Canada.
Soon thereafter, Seaga invited Sakhia to Jamaica to find out if BCCI would lend
Jamaica any money. Jamaica began to borrow from BCCI, and the borrowing
continued until BCCI executives began to become concerned about whether or not
BCCI would be repaid. Seaga began personally telephoning BCCI, and Sakhia
personally, to beg for additional money for Jamaica.
They owed a lot of money to BCCI. Seaga told me, we
need oil, we need seeds for planting, can we make an exception here? Finally he
called me in desperation at home. He told me, there is an oil ship which is
here in Kingston already, it is ready to unload the oil. If we don't unload it
we will have a dark Christmas in Jamaica. Just give us and extra $4 million or
$5 million and we will make it up to BCCI. I promise you personally.(62)
Sakhia decided to take the risk. When the crisis was
over, Seaga insured that BCCI received essentially all Jamaica's foreign
business. BCCI soon wound up with "practically every foreign currency
account of Jamaican government agencies at BCCI," including lucrative
concessions in which Jamaica selected BCCI as the bank to handle all of the
U.S. government or international organization sponsored guarantee programs. As
Sakhia told the Subcommittee:
By the mid-1980's, we handled every penny that came
into or out of Jamaica in terms of foreign currency.(63)
We were bankers to the central bank, we were bankers
to all official governmental organizations in Jamaica.(64)
Typically, BCCI would provide financing, usually for
the import or export of products, which in turn would be guaranteed by the
foreign or international organization. Jamaica provided BCCI a no-risk means of
generating profits through international organizations and foreign governments,
and BCCI in return loaned funds to Jamaica which other banks refused to
provide, on the basis of the personal relationships involved, and BCCI's
expectation that these relationships would in the long run guarantee its
repayment.(65)
At the time of BCCI's collapse, Jamaica owed about
$34 million to BCCI. Thus, Jamaica may well be one of the few nations to have actually
benefitted from the unusual deal worked out between BCCI and its political
leaders.(66)
NIGERIA
BCCI's activities in Nigeria were so profoundly,
overwhelmingly corrupt as to suggest a very significant level of corruption in
Nigerian officialdom generally. Whereas BCCI's activities in most countries
merely involved corrupting a few, key people, in Nigeria the corruption was
systemic and endemic, and touched nearly every operation of the bank in
Nigeria.
According to BCCI officers, this was not the
consequence of BCCI applying its practices to Nigeria, but rather, BCCI
adapting itself to the conditions already present in Nigeria. According to BCCI
officers interviewed by the Subcommittee, few European or American businesses
active in Nigeria would have been able to do business without making one or
another form of pay-off to Nigerian officials during the 1980's, and, to the
knowledge of some BCCI officials, several such corporations, including some
well-known European and U.S. banks, did.
During the Subcommittee's original investigation of
BCCI in 1988, corruption involving Nigerian officials was one of the earliest
allegations of BCCI criminality made to staff. As former Subcommittee
investigator Jack Blum testified:
There are extraordinarily close relationships at all
levels of the Nigerian Government with BCCI. [During my intial investigation] I
had been called . . . by the Nigerian Ambassador who had been asked to call by
the President [of Nigeria] to say, what's happening here? What are you guys
doing with respect to BCCI?(67)
Several BCCI officials described BCCI having made
cash payments to officials of the Nigerian central bank. As Abdur Sakhia
testified:
During a meeting of the World Bank in Seoul, Korea
-- I think it was in 1985 -- I saw one of the BCC officers with a lot of cash,
handing it out to the staff of the central bank of Nigeria. This is what I saw
personally being given to them.(68)
The most detailed account of BCCI's activities in
Nigeria came from Nazir Chinoy, convicted in the Tampa case of money laundering
during the time he was BCCI's Francophone regional manager. Prior to moving to
BCCI-Paris, Chinoy had been stationed by BCCI in Nigeria for the first half of
the 1980's, where he saw first hand the pervasive corruption of the Nigerian
banking system, and BCCI's solutions for dealing with it profitably.
At the time Chinoy arrived in Nigeria in December,
1980, he found that BCCI already had purchased a minority interest in a
commercial bank in Nigeria -- owning just 40 percent of the Nigerian bank, with
corrupt Nigerian officials insisting on controlling the remaining 60 percent.
But even with only 40 percent, the Nigerian offices of BCCI were earning BCCI
very significant profits. In fact, the profits were so large that BCCI feared
the Nigerians might try to take remaining interest in the bank away from BCCI.
Chinoy's job was to establish a second bank for BCCI in Nigeria to protect BCCI
against the possible expropriation by the government of the first bank.(69)
BCCI was already being used for short-term
commercial financing through letters of credit for the purchase and sale of
goods by various Nigerian governmental entities. Moreover, some Nigerian
officials were using BCCI in London and elsewhere to store cash they had earned
through off-the-books deals while in the government. As Chinoy explained:
Nigerians were keeping large laundered funds
generated by influential people who got contracts from international companies
and commissions paid abroad. The money was kept abroad and not repatriated to
Nigeria. BCCI was a good place to keep it.(70)
The simplest means of generating funds for Nigerian
officials was requiring a "commission" on each transaction. As Chinoy
stated:
Commission means kick-back. The government approves
a $300 million contract. A multinational corporation agrees with the government
which has helped him, 10 percent gets kicked back. A company is established
abroad or they nominate a cousin or someone who is paid 3 percent. It is known
as a commission but it is actually a kickback.(71)
Other mechanisms by which these funds were generated
for Nigerian officials were through over invoicing of imports and under
invoicing of exports. When over invoicing would take place, the government
would pay more for goods than the actual market price. BCCI would disguise this
through shell entities which would appear to any outsider as arms-length
brokers, but which in fact were mere mechanisms by which money would be skimmed
off from the government and deposited in BCCI, to be shared by BCCI and by the
official responsible for handling the purchase. When under invoicing would take
place, the reverse would happen. The government would ship greater commodities
than were reflected on the government invoices; the additional commodity would
be sold at the same time as that invoiced, and the additional funds generated
would again be split by BCCI and the Nigerian official, who of course would
have keep his profits outside his home country. As Chinoy explained it:
Essentially, BCCI was handling the financing of
commodities through bribery. For example, BCCI loaned $250 million to Nigeria
to be repaid within the next six months for oil exports. Nigeria would charge
OPIC prices but would load ten percent more than the invoice. That way you are
giving a 10 percent discount.(72)
Business was so good that Chinoy's predecessor and
superior at BCCI, Alauddin Shaikh, who was a senior official at the bank,
decided to leave BCCI to form a partnership with a Nigerian, Razar Sareef, who
had gained control of Nigerian oil exports. Shaikh has been implicated by
numerous BCCI officials in making pay-offs not only in Nigeria, but in several
other countries. His new venture was in any case a success. It wound up
controlling the National Petroleum Corporation of Nigeria account for the
United States, an account it continued to control at least as of 1991.(73)
Other techniques used by Nigerian officials with the
connivance of BCCI were currency swaps involving government funds. Government
funds were placed in an account at BCCI in London. BCCI would place the funds
with Lloyds or another bank and swap it into different currencies or make stock
investments with it. If there was a loss, Nigeria bore it. If there was a
profit, the first 8 percent went to Nigeria, on anything additional, the money
was split between Nigeria and the traders at BCCI.(74)
In addition to the skimming that was taking place of
government funds, BCCI found itself in the position of being able to earn
enormous fees from ordinary commercial transactions in Nigeria, because
Nigerian officials insured that financial transactions undertaken by BCCI for
its customers would be handled much more efficiently than similar transactions
undertaken by any other foreign bank doing business in Nigeria. While other
banks would have to wait days or weeks for their transactions to be processed
by the relevant government ministries, BCCI, would have their transactions
handled promptly. As Chinoy explained:
BCCI got big profits because early release of foreign
exchange was the crux of any deal. BCCI was two to three times faster than
Chase Manhattan or the Bank of America or any other joint venture. BCCI was
faster than any Nigerian bank in getting foreign exchange out of the Central
Bank. It had very good relations with Central Bank of Nigeria. Unless you were
friendly with receptionist, it would lie in the tray and wouldn't go anywhere
for days. BCCI used to look after the girl at the foreign exchange desk. When
the BCCI clerk would hand in the foreign exchange she would do that first for
processing its release. Release of foreign exchange was important. Clerks at
every level were looked after by presents. We had an officer, Mr. Saddiqui, who
used to go and spend at least 10 days a month in Nigeria. His specific job was
to look after people at all levels. In addition, he had appointed one to two
expatriates who did nothing but spend their time at Central Bank. I do not
think that cash was actually paid, but presents were bought in large amounts,
as much as 20-40 dresses, shirts, ties at a time brought in from London and
given. Everybody was kept happy. so that there is no objection raised by a
clerk that a document isn't filled in exactly correctly. Because BCCI was so
good and there was a BCCI application where someone had forgot to cross a
"t" or dot an "i" and they would get it rectified quickly.
This is Nigeria.(75)
The result was that BCCI began to develop almost a
monopoly on handling import-export financing in Nigeria. As Chinoy explained:
For banks other than BCCI, sometimes it could take
90 days for your letter of credit to take. If some clerk is unhappy he says
your documents are not in order and he throws it back and doesn't give a
reason. In Nigeria it is very important to have contacts because it takes 14
days for a letter to reach you. BCCI would get its letters of credit three
times faster than anyone else. They will get it through the Central Bank faster
than other banks. Business increases due to this reputation.(76)
According to Chinoy, the price-tag on some of the
presents provided Nigerian bureaucrats was not small -- typically, they
included such items as silver canteens, cutlery sets, tea sets, coffee sets,
and $5,000 luxury watches and similar goods valued at a few thousand pounds,
and given to Central Bank and other Nigerian officials.
Chinoy knew about the corruption of top Nigerian
officials personally. During his residence in Nigeria, three Nigerians
controlled the release of foreign exchange in Nigeria. One of the three, the
country's comptroller of foreign exchange, was named Al Haji Balu:
Once when I was in marketing in 1985-1986, I saw a
deposit from Balu of 280,000 Deutschmarks in a certificate of deposit in
Frankfort. I knew what his salary in Nigeria was. This was at the time worth
about $150,000 US, for deposit at BCCI Frankfort. He didn't have that kind of
money from his government salary. It was obvious what was going on.(77)
Another extremely prominent Nigerian political
figure who was being paid bribes by BCCI was Al Haji Ibrahim Dasuki, chairman
of BCC Nigeria up until 1990-1991, when he became the Sultan of Sokoto. BCCI
audit records show a $1 million loan from BCCI to Dasuki which BCCI provided
him to pay for his shares of BCCI-Nigeria. Dasuki repaid this favor -- although
not this loan -- to BCCI in many ways. According to Chinoy:
Dasuki had fantastic contacts with the government.
He was a politician and religious leader of great eminence, and in line then to
be Sultan of Sokoto. He could help the bank and used to be paid. He was paid
from Caymans as well as from Nigeria. He was paid in London by one of Mr.
Naqvi's special assistants, Asad Matualah, now in custody in Abu Dhabi.(78)
Chinoy explained that Dasuki was the one who would
fix problems with other government officials for BCCI if anyone noticed that
exchange laws were being broken or other problems arose. Dasuki was able to
perform this role because of his position as a religious leader, making his
support indispensable to other key Nigerian officials:
Dasuki came from the North where all presidents in
Nigeria come from, and even the President has to go and pay homage to the
Sultan of Sokoto. When he became Sultan all of the leaders would owe him a
measure of deference. He took full advantage of that. Two to three times BCCI
got into trouble and Dasuki would sort it out.(79)
Dasuki also acted as a local representative for
BCCI, obtaining the right to import goods for Nigeria, and providing that right
to a business associate affiliated with BCCI. The BCCI associate would then
arrange for import of the commodity involved, such as rice. According to
Chinoy:
It was like a license to make money. Rice was gold.
Dummy companies were created on a per transaction basis and had no other life
beyond that.(80)
Dasuki had so much business activity, he was able to
establish his nephew, Ibrahim Katuni, to a level where by the mid-1980's, every
foreign country did business with him because he had access to every ministry
and had cut deals with each of them.
Katuni would tell a foreign businessman, this is how
you'll make $100,000, and I'll take 20 percent. He kept Dasuki happy and was
hoping to become President of BCCI.(81)
BCCI found other ways of circumventing practices in
Nigeria which frustrated other banks and prevented them functioning normally.
As the indictment of BCCI officials in New York described it, BCCI's success in
this area involved defrauding the Central Bank of Nigeria. Foreign exchange
shortfalls in Nigeria had caused the government in about 1981 to impose restrictions
on imports, requiring letters of credit used in connection with imports to be
secured by 100 percent cash deposits in Nigerian banks. In turn, the banks were
required to certify that the payment had been made to the Central Bank. As the
transactions involved might take months to be completed, this would tie up the
company's funds for substantial amounts of time, discouraging the import
activity altogether. BCCI's way around the problem was to create phony loans
for the importers and deposit the "proceeds" from the phony loans on
BCCI's books in Nigeria, and then inform the Central Bank that the deposits had
been made. Once the import transaction was over, the paperwork would be
reversed. Through this technique, BCCI generated letter-of-credit business from
importers who would not otherwise have been able to do business; earned
commissions on opening the letters of credit; earned interest on the fictitious
loans it granted; and realized exchange profits from converting currencies.(82)
BCCI also handled black market foreign exchange
transactions for Nigerian officials for use in Nigerian elections. Because
Nigeria has never developed credit cards, and Nigerians rarely use checks,
essentially all transactions in Nigeria are in cash, with few record-keeping requirements
adequate to monitor graft, which is endemic.(83) Most of the time,
officials sell their cash in Nigerian currency and buy foreign exchange with it
for purchasing goods abroad, or for maintaining deposits and homes abroad,
typically in the United Kingdom. But sometimes the Nigerians found they needed
Nigerian currency, especially during election time. According to Chinoy:
At elections, the officials need the money and sell
the foreign exchange at black market price and that money is paid in Nigerian
currency to them and they return the foreign exchange abroad. This method is
employed by Nigerian politicians to obtain political money. It is commonplace
throughout Africa.(84)
As noted above, BCCI's Nigerian operations were
among the bank's most profitable. This is understandable. In the case of BCCI
and the Nigerian government, crime paid.
PAKISTAN
Pakistan was the home of almost all of BCCI's top
officials, including founder Agha Hasan Abedi. Long before BCCI itself was
started by Abedi, he began the practice of making pay-offs to politicians as a
mechanism for securing business and strengthening his banks.
For example, when Abedi formed the United Bank in
1959, he appointed as chairman of its board I. I. Chundrigar, the former Prime
Minister of Pakistan, who was a close confidante of Pakistani's then current
prime minister, Ayub Khan. Abedi maintained close ties to Khan's government,
later hiring General Khan's minister of information to become the
"publisher" of a BCCI promotional magazine, "South."(85)
When the Pakistani military government was replaced
following the civil war that resulted in the severance of East Pakistan into
Bangladesh, Abedi became just as cozy with Pakistani "socialist" Ali
Bhutto, Khan's ideological opposite, making political payoffs on behalf of
Bhutto during elections.(86) When Bhutto was overthrown in 1978 in a
military coup, Abedi swiftly changed allegiances again to Bhutto's successor,
Islamic "puritan" General Zia.(87) Zia later executed
Bhutto for financial crimes, in which Abedi, among others, was clearly
involved, while forming close ties to Abedi, on whose financial skills he
increasingly relied.
The relationship was personal as well as
professional. A sample BCCI payment to General Zia was obtained by the Subcommittee,
showing BCCI's branch in the United Arab Emirates making a payment to Zia of 40
million Pakistani rupees -- several hundred thousand dollars -- on May 26,
1985.(88)
The BCCI-Pakistan relationship was important to both
the bank and a succession of Pakistani governments. Although Abedi had been
close to Bhutto, and formed a close relationship with the current President of
Pakistan as well, it was General Zia was who in charge of Pakistan during most
of BCCI's existence, and General Zia who did the most for BCCI. As Nazir
Chinoy, who was based in Pakistan in the late 1970's and early 1980's,
recalled:
Every time Mr. Abedi came, he always called on
President Zia. President Zia did not meet Abedi during office hours, but in the
night when Mr. Abedi would fly in, they would finish official dinners first and
I would be sitting with Abedi and Abedi would leave for two to three hours and
meet with Zia. It was the President Zia that he spoke to first before speaking
to the finance minister. I think that Abedi used Zia and Zia used Abedi also
for the gulf countries, when he wanted some assistance. It was a two way
street.(89)
The Pakistani government guaranteed BCCI's ability
to push aside immigration and customs requirements for its distinguished Arab
visitors on their holidays in Pakistan, and BCCI's ability to engage in
profitable banking. In return, BCCI assisting Pakistan in violating monetary
controls imposed on its government by international organizations. As Chinoy
explained:
In 1979, Pakistan was very short of foreign
exchange, and under pressure from the World Bank to devalue the rupee. The
World Bank had placed credit ceilings. The total lendings by commercial banks
were limited to a figure by the World Bank. For BCCI's lending, the figure
given was $750,000 US. This was just not viable to maintain. We had large
deposits and had large surplus funds. Mr. Abedi was very keen that these limits
go up. The World Bank would increase the limits each quarter based on how much
foreign exchange Pakistan was able to generate based on central bank records.
If the dollar reserves of the country went up, the World Bank would allow
larger lendings in rupees. I am not sure who was the brains behind it, Mr.
Abedi or Naqvi but between the two of them they came up with the idea. $50
million would be placed with BCCI Pakistan through BCCI's Kuwaiti affiliate,
KIFCO. BCCI transferred money to KIFCO. I have a feeling that KIFCO got the
money from Caymans. In any case, Kifco placed the money with BCCI Karachi.(90)
Thus, according to Chinoy, BCCI used an affiliate
which was officially separate from BCCI, but secretly controlled by it and
owned by it, to launder BCCI funds from one BCCI location to BCCI Pakistan, in
order to make it seem as if BCCI Pakistan had generated an extra $50 million in
legitimate deposits through this paper transaction. BCCI reported the extra $50
million to the Pakistan central bank, which in turn reported it to the World
Bank to show the a $50 million increase in Pakistan's dollar reserves from abroad.(91)
A similar account of these transactions is described
in the indictment of BCCI's top officials by the New York District Attorney on
July 29, 1992. According to that indictment, the amount involved in all
totalled $100 million.(92)
Zia died in a plane crash in mid-August, 1988,
leaving a vacuum in relationships that BCCI very much regretted. Among BCCI
officials, it was generally believed that if Zia had still been alive in
October, 1988, he would have used his influence with the U.S. government to soften
the handling of the case against BCCI in Tampa.(93)
With Zia gone, BCCI was not left without resources
in Pakistan, however. The man who became President, Ishaq Khan, had served as
chairman of the BCCI Foundation throughout the 1980's, and had close ties to
Abedi.
The relationship between BCCI, the Pakistani
government, and the BCCI Foundation had been deeply entangled from the start.
As in the Bangladesh version of the BCCI Foundation, the Pakistani BCCI
Foundation was created as a means of sheltering BCCI profits from taxation. In
1981, it received tax-free status while Ishaq Khan was Pakistan's minister of
finance. In turn, the foundation received BCCI's profits from Pakistani
operations, and then used some of those profits to finance projects the
Pakistani government wanted and could not pay for itself. For example, BCCI
provided $10 million in grants in the late 1980's to finance an officially
"private" science and technology institute named for Pakistani
President Ishaq Khan, whose director, A. Qadir Khan, has been closely
associated with Pakistan's efforts to build a nuclear bomb. The institute is
believed by some experts to be the headquarters for Pakistan's efforts to build
an Islamic bomb. In the same period, other BCCI officials were assisting
Pakistanis in purchasing nuclear technologies paid for by Pakistani-front
companies through BCCI-Canada.(94)
The Foundation also made payments to somewhat less
political entities, such as $3 million dollars for an "investment" in
Attock Cement, a private cement company in Pakistan ostensibly owned by BCCI
front-man Ghaith Pharaon, but in fact a front for BCCI itself. As BCCI officer
Nazir Chinoy testified:
this foundation was set up . . . with the government
of Pakistan nominating as the chairman, one or two trustees from the public and
two or three from BCCI management . . . 90 percent of [BCCI Pakistan's] pre-tax
profits being generated in rupees [were] given to the Foundation. It is a lot
of money. . . .A charitable foundation is not subject to the same audit strict
audit procedures or scrutiny by the central bank or the state bank of Pakistan.
. . it becomes an opportunity to get employment. If you want to do somebody a
favor, you could put him on the staff of the foundation and find a job for him.(95)
Among other officials whose activities were financed
by BCCI in Pakistan were Jam Sadiq Ali, the highest ranking official in the
province of Sind -- where Karachi is located -- whose personal expenses were
financed by BCCI for years of self-exile in London, and who defended BCCI and
Abedi after its collapse.(96)
Yet another high-ranking Pakistani official placed
on BCCI's payroll after his government service was Pakistan's former Ambassador
to China, Sultan Khan, who was provided a job at BCCI at its representative
office in Washington, D.C. There, according to BCCI records, Khan solicited
business for BCCI and its secretly-held subsidiary, First American, from the
Chinese Embassy and Chinese officials in the mid-1980's, sponsored occasional
events on behalf of the Chinese to which he invited prominent Americans, and
had lunch with foreign diplomats who controlled accounts whose business BCCI
was interested in acquiring. By the late 1980's, Khan continued to go to BCCI's
Washington representative office, but according to him had little to do there
beyond reading the newspapers and picked up his paycheck until the office
closed after BCCI's indictment in Tampa.(97)
According to BCCI's former head of Latin American
and Caribbean operations, Akbar Bilgrami, such appointments of retired
Pakistani officials were typical.
PANAMA
Repatriating U.S. dollars from Latin America to the
United States was an essential function of BCCI Panama from its inception. This
was apparent to anyone who had contact with BCCI's Panama offices. As a
Colombian marijuana trafficker and cooperating Justice Department witness told
the Subcommittee:
Everyone who did business in the drug trade knew
about BCCI. We all used it. It was very conveniently located at the airport
when you came into Panama. Its officers were very attentive. And even if
something went wrong, and your money was frozen at the request of the United
States, BCCI would make sure you could get your money back.(98)
As this trafficker explained, his accounts at BCCI
had been frozen at the request of the United States as a result of an anti-drug
operation it had mounted called Operation Pisces. After the funds were frozen,
he went to Panama, where he was told by his lawyer that if he was willing to
give up 10 percent of the full amount, BCCI would find a way to release his
funds to him, while telling the U.S. government they were frozen. He agreed,
and soon the lawyer produced a letter from the Attorney General of Panama --
who at the time was supposedly working closely with the United States on
anti-drug efforts -- ordering the release of the funds.(99)
Cartel money-launderer Ramon Milian Rodriguez, who
testified before the Subcommittee in February, 1988 concerning his knowledge of
Noriega's involvement with drug trafficking and money laundering, wrote the
Committee after BCCI's global closure to inform the Committee that he too
banked at BCCI, and that a substantial portion of his remaining funds following
his arrest and conviction in Tampa had remained at BCCI and was lost in its
closure.(100)
Following BCCI's plea agreement with the U.S.
Attorney in Tampa in January 1990 which required BCCI to cooperate with law
enforcement in anti-money laundering activities, BCCI's own employees in Miami
began to recommend that BCCI's attorneys refer to the Justice Department BCCI's
overall operations in Panama, as well as Colombia, for possible further
criminal investigation. When BCCI's attorneys refused to undertake this action,
apparently out of concern that such a referral would wind up destroying the
bank, these lower-level BCCI employees again asked the lawyers to criminally
refer BCCI's Panama and Colombian operations to Justice. The lawyers again
refused to do so.(101)
BCCI officials argued that in handling flight
capital and dirty funds out of Panama, BCCI was little different from most
other foreign banks which had decided to locate there.(102)
However, it was no accident that BCCI was the
foreign bank that obtained the bank account of Panama dictator Manuel Antonio
Noriega. Once again, BCCI systematically solicited relationships in Panama with
top officials as the key to long-term profitability. While Noriega was in
charge of Panamanian intelligence, G-2, under the government of General
Torillos, Noriega had come to know Alauddin Shaikh, a BCCI official who
frequently handled payoffs to government officials in a number of countries.
As Nazir Chinoy explained:
Originally Panama was set up by Alauddin Shaikh,
Amjad Awan was his understudy only. Awan reported to Shaikh, not anyone else.
Up until I was in London in 1985, Shaikh used to fly to Panama two to three
trips a year to meet with General Noriega. The relationship was very close.
General Noriega gave a copy of old hand-written Koran to Alauddin Shaikh.(103)
When Noriega visited London, Shaikh provided him
with dinners and entertainment, and soon thereafter, Noriega assisted BCCI in
obtaining a license to open a bank in Panama. Shortly thereafter, Shaikh's
assistant, Awan, who had met Noriega in London, was transferred by BCCI from
London to Panama, where he made the acquisition of Noriega's account a
priority.(104)
Awan pressed Noriega on numerous occasions to open
an account at BCCI, and in early 1982, Noriega agreed, opening an account in
the name of the Panamanian defense forces. Under his agreement with Awan,
Noriega would have sole control over the funds, which would be maintained by
BCCI in the United Kingdom in numbered accounts.(105)
During the first two years he held the account with
BCCI, Noriega used his accounts at BCCI to make political payoffs in the course
of elections, and for intelligence operations. For example, Noriega directed
BCCI to payoff the mortgage of his hand-picked candidate for president of
Panama, Nicholas Barletta. Later, this changed, and he used his accounts with
BCCI as a personal account for himself and his family, who received credit
cards from BCCI and began making extensive charges for shopping trips in Miami,
New York, London, Paris, and at popular European resorts on the BCCI "Panamanian
Defense Forces" account. At its height, Noriega maintained about $25
million in the account, mostly from cash deposits. The largest single deposit
of currency into the accounts was approximately $4 million.(106)
Noriega introduced members of his business clique to
BCCI, and encouraged BCCI to make loans to them, including businessman Enrique
Pretelt and arms dealer and drug trafficker Cesar Rodriguez. BCCI provided them
with lines of credit that were secured by Noriega's promise to Awan that he
would make sure that the loans were made good. However, these loans were
defaulted on. In the case of Rodriguez, when BCCI raised the issue with
Noriega, Noriega advised the bank to look his estate and that he would have no
further responsibility. Against Awan's wishes, BCCI chose to swallow the losses
-- which amounted to $10 million in all -- rather than irritate Noriega by
pushing forward with attempts at recovery.(107)
The closeness of the relationship between BCCI and
Noriega extended to Noriega's wife and children as well, each of whom made use
of BCCI accounts. Noriega handled the purchase of Noriega residences in the
United Kingdom. And Noriega's daughter was even hired as an employee at
BCCI-Miami, where the bank trained her in its own techniques for banking.(108)
Later, when Noriega was indicted in Miami in
February 1988, he told BCCI to move his bank accounts at BCCI-London to another
location, in an effort to hide them from U.S. authorities. Awan and other BCCI
officials, including Swaleh Naqvi, then BCCI's Acting CEO, discussed Noriega's
request and decided to move the funds to BCCI-Luxembourg as a means of keeping
the funds concealed from detection by law enforcement in the United States and
United Kingdom. The funds stayed in Luxembourg for the next four months.
In July, 1988, when BCCI learned that the
Subcommittee had subpoenaed it for Noriega's records, Awan met with BCCI
officials Naqvi, Dildar Rizvi, and S.M. Shafi to discuss whether Noriega's
funds needed to be hidden still further. Noriega then called Awan and asked
Awan to transfer the money out of BCCI entirely, to Panama's government bank,
Banco Nacional de Panama, and immediately from there to a small European bank.
Awan then met Ziauddin Akbar, BCCI's former head of Treasury operations, who in
1986 had left BCCI to become the head of Capcom, its commodities trading
affiliate. Awan discussed Noriega's problems with Akbar, who offered to hold
the $23 million in Noriega funds for BCCI in one of the trading accounts Capcom
maintained for laundering money, a company sometimes referred to as Finley and
sometimes as Findley. At BCCI's direction, Awan then travelled to Panama
through a circuitous route designed to ensure that there would be no record of
Awan's travel to Panama through the United States, and while in Panama, met
with General and Mrs. Noriega. The Noriegas authorized BCCI to transfer their
money to the Findley account at the Middle East Bank in London, and Akbar then
moved the Noriega funds through Capcom to different entities, breaking up the
trail by which Noriega's money could easily be traced by anyone.(109)
Thus, BCCI officials in the United States, Panama,
the United Kingdom and Luxembourg colluded with one another to hide funds which
they knew were the subject of a pending criminal action in the United States
from law enforcement. They hid the funds through using the rather traditional
mechanism in money laundering of layering -- moving the funds from entity to
entity and from location to location until they could no longer be traced.
PERU
Overview
BCCI's method and scope of operations in Peru
parallelled its functions in most, if not all, other countries. First, officers
of the bank cultivated favorable relationships with powerful members of
government and the private sector. Second, BCCI sought to do business in Peru
with the hope of securing the high net worth depositors upon which its
operations depended regardless of the source of the deposits. Finally, the bank
conducted the full range of highly suspect or outright illegal activities that
it conducted in other countries, including allegedly giving bribes and
kickbacks, hiding money in numbered accounts, evading regulatory inspection,
and laundering stolen government funds and drug profits.
Background
Near the end of 1984, the government of Peru ceased
making any payments on its national debt. The breach of its debt repayment
obligations subjected Peru to two direct results over the next year. First,
Peru became a bad risk to which very few, if any, banks or countries outside of
Peru would extend loans and lines of credit. These loans and lines of credit
were essential to financing trade between Peru and other nations because the
external sources were Peru's only source of foreign currency. Second, those
banks and countries to which Peru had already become indebted sought to collect
the money that Peru owed them. The directors and managers of Peru's central
bank -- the Banco Central de Reservas del Peru ("BCRP"), which
managed all the funds of the government -- particularly feared attachment and
seizure of Peruvian assets located in other countries.(110) In
short, Peru was faced with a dilemma: On the one hand, its need to finance
foreign trade compelled it to form a relationship with a bank outside the
state. Yet Peru faced attachment and seizure of any funds placed outside of the
protection of its own borders.
Thus, entering 1986, Peru was faced with two
immediate needs as a result of its refusal to pay its debt obligations. First,
it needed to form a relationship with a bank which would extend lines of credit
in foreign currency in exchange for deposits of Peruvian currency. Second,
insofar as Peru faced attachment and seizure of its assets by countries and
banks to which it was indebted, it needed to form a relationship with a bank
which could "hide"(111) Peruvian deposits from creditors.
These two criteria -- "reciprocity" and "safety" -- formed
the express agenda of the BCRP as it began to approach BCCI and other banks in
mid-1986.(112)
Formation
of the Relationship
Just as in the United States, one of BCCI's very
first actions lay in hiring a prestigious law firm. Jorge del Castillo, a
member of the Peruvian House of Delegates, testified that, upon entering the
country in 1984,
BCCI . . . asked for and got the legal advice of a
very important law firm in Peru, . . . Arias & Davis & Associates,
which is a very well known law firm.(113)
Moreover, just as in the United States, the law firm
hired was well-connected to the Peruvian government. Del Castillo testified
that the partner at Arias & Davis's representing BCCI was:
. . . Dr. Sterling, . . . a person whom all of us
respect and could not possibly be suspected of anything illegal, he is a member
of Dr. Lunes Flores' party, and is the President of the Peruvian Senate. He is
beyond reproach.(114)
Thus, from its entry into Peru, BCCI sought to
cultivate the patina of respectability that it had sought to cultivate since
its creation.
In the meantime, BCCI began to promise Peru terms
that it, alone among international banks, could meet. Peru would deposit its
funds at BCCI-Panama, BCCI-Panama would hide those funds under Panama's strict
bank confidentiality laws, and BCCI would then lend money to Peru at a rate of
about 50 cents on the dollar, which Peru could use to purchase foreign goods.
This attractive offer was offset, in part, from the
beginning, by Peru's legitimate concerns about BCCI as a bank. The central
bankers of Peru understood that BCCI had no lender of last resort, and that
their funds could disappear if something went wrong. These concerns were met,
in part, through bribes by BCCI to at least two of the decision-makers at the
central bank, who from there on would become staunch supporters of the BCCI
relationship.(115)
Following the bribe payments, the BCRP entered into
a formal banking relationship with BCCI on April 28, 1986. The BCRP and BCCI
signed two documents, "General Business Agreement for the Handling of
Numbered Account" and "Operative Covenant for Numbered Account."
These two documents described the accounts to be provided to the BCRP. The
deposits were to be in a numbered account, with BCCI to "keep absolute
secrecy about [the BCRP's] identity." The accounts were to be kept in
Panama, which maintained strict bank secrecy laws. In a letter dated the same
day, a $60 million line of credit was extended to the BCRP. In exchange for the
credit line, the BCRP promised to keep at least $200 million in its accounts.(116)
These agreements were advantageous to BCCI for three
reasons. First, BCCI required that the BCRP deposit four times the amount that
it was obligated to lend. Thus, as long as the relationship between the two
lasted, BCCI would have $140 million to use for purposes other than its loan
obligations to the BCRP. Loans are traditionally considered assets to a bank,
and deposits, because they are due upon a customer's demand, are considered
liabilities. Thus, the $140 million wouldn't be considered a traditional asset
increasing the book value of the branch.(117) However, within the
context of the transaction itself, the $200 million minimum requirement limited
the BCRP's ability to withdraw the money at will and thus provided a
near-certain $140 million for BCCI's use.
Second, the account agreements were advantageous to
BCCI because they did not obligate BCCI to pay any interest on the BCRP
deposits. This savings in interest would amount to millions in itself.(118)
However, the letter of credit did obligate the BCRP to pay an interest rate on
any amounts borrowed, as well as "[o]ther charges like Confirmation,
Commitment, Negotiation, etc. . . . as per BCCI schedule of charges."(119)
The agreement between BCCI and the BCRP was
advantageous to the BCRP in at least one way. Peruvian Central Bank official
Ricardo Llaque testified that no other bank with which the BCRP had a
relationship would provide a letter of credit as high as BCCI:
Senator Kerry[:] Did not other banks in Panama offer
numbered accounts?
Mr. Llaque[:] Yes, but not levels of credit which
were very high . . . . It [the size of the line of credit] was one of the most
important points in the decision of the board to accept the corresponding
relationship . . . and since it was a revolving line of credit it meant that
this was a benefit . . . at an amount much higher than what the nominal amount
of the line of credit really was.(120)
Llaque was contending that the line of credit BCCI
was advancing Peru was greater than that offered by any other bank. However, it
was still substantially below the level of the amounts deposited by Peru. More
importantly, since BCCI needed Peru's assets, and as an institution tended not
to be concerned about the repayment schedule of loans, BCCI's needs and Peru's
needs fit one another perfectly.
Relationship
Between BCCI And Peruvian Elite
As described above, in the course of obtaining the
Central Bank account, BCCI officials paid bribes to the Central Bank officials
handling the accounts.(121) The purpose of these bribes was to
ensure that once the relationship was established and BCCI had agreed to lend
funds against Peru's central bank assets, the Peruvians would have a personal
stake in keeping Peru's assets at BCCI.
As the District Attorney of New York has alleged in
his July 29, 1991 indictment of BCCI, and his indictment on July 29, 1992 of
BCCI's top officials and front-men:
The BCC Group made corrupt payments to the President
and the General Manager of the Central Bank of Peru. In or about 1985, the BCC
Group made payments of money to the President and General Manager of the
Central Bank of Peru upon an agreement and understanding that said President
and General Manager would take deposits of hundreds of millions of dollars of
Peruvian government reserves with banks of the BCC Group. Hundreds of millions
of dollars of the Central Bank of Peru's funds were placed on deposit with
banks of the BCC Group, and said payments to the President and General Manager
of the Central Bank of Peru were calculated as a percentage of the amount on
deposit.(122)
Or, as BCCI's head of Latin American and Caribbean
operations, Akbar Bilgrami put it:
We had to make payments into a Special Project
Accounts. I was told that BCC's relationship with Peru arose because Mr. Brian
Jensen joined the bank in 1986; he was an ex-Central Bank official. BCC's push
in 1987-1988 was to get big chunks of deposits from Peru. You see, Peru was
being cheap, not paying its foreign debt. BCC offered to keep Peru's money
hidden: $320 million in Panama.(123)
Or, in the more laconic conclusion of Abdur Sakhia,
the head of BCCI's Miami office:
the relationship between Peru and BCCI was not
kosher.(124)
However, even with the payment of bribes, BCCI
officials worried that the $250 million in assets could disappear from BCCI if
the officials they had paid-off were to lose favor. Given the significant size
of the lending BCCI had agreed to in return, they wanted assurances that in the
view of BCCI, could only be had from Peru's president, Alan Garcia.
Accordingly, after the relationship had been established, S. M. Shafi, head of
BCCI's Latin American operations, went to Lima, Peru to meet with Garcia and
receive such assurances. The meeting took place in mid-February, 1987, and
Garcia promised BCCI that the funds would remain at BCCI. Following the meeting
with Garcia, the Peruvian central bank raised its limit for deposits with BCCI
by another $50 million.(125) Moreover, the BCRP agreed to
"irrevocably and unconditionally" guarantee any loan provided by
BCCI. That is, if a local bank or institution defaulted on a loan from the BCCI
letter of credit, the BCRP promised to repay the loan. Moreover, the guarantee
covered the entire $110 million dollars. In August, 1987, the BCRP received
another $50 million increase, but it appears that no corresponding deposit was
required.(126)
BCCI sought and had been granted permission from the
government (as required by law) to open branches in Peru as early as 1984.
Although BCCI never in fact opened branch offices in Peru, its actions in 1984
established a presence in the country which laid the groundwork for the deal eventually
struck between BCCI and the BCRP in 1986. Llaque said, "It [BCCI] had sent
its people to Peru, and when we began to look for new corresponding banks the
bank was already there."(127)
However, it has been alleged that, when the BCRP
began searching for corresponding banks in 1986, the relationship between BCCI
and the government was already so strong that the BCRP did not even seek
proposals from banks other than BCCI. Fernando Olivera, presiding officer of an
committee formed by the Peruvian Parliament to investigate Peru's financial
operations, testified before the Subcommittee on August 2, 1991. Olivera
suggested but did not clearly state that his investigation had revealed that
the BCCI proposal was the only proposal sought and entertained by the BCRP.(128)
He also testified that the BCRP based its decision to invest in BCCI based
solely on a three-page report regarding BCCI Holdings, S.A., in Luxembourg.
The documents do not provide a clear answer as to
whether Llaque's explanation or Olivera's explanation was correct. For example,
it is unclear how BCCI's mere presence in Peru would in itself be helpful in
convincing the BCRP to make deposits with it. Even the placement of deposits in
numbered accounts in Panama was not a service unique to BCCI; the BCRP held
similar numbered accounts in Panama branches of four European banks other than
BCCI as early as December, 1985, six months before its accounts with BCCI were
opened.(129)
In opening the BCCI accounts, four BCCI executives
held meetings with members of the BCRP.(130)
Over the next year and a half, while the BCRP's
relationship with BCCI continued, several more meetings were held between
members of the Peruvian government, BCCI executives, and foreign VIPs. On
12/18/86, Akbar Bilgrami came to Peru accompanied by Panamanian General Manuel
Noriega. On 07/21/87, Alberto Calvo, an agent of BCCI, met with Daniel
Carbonetto, Economic Advisor to Alan Garcia Perez, the President of Peru, who
Calvo described to his superior at BCCI, S. M. Shafi, as the person "who
the public opinion considers the most influential person in the decision-making
process regarding economic policies." Carbonetto and Calvo discussed how
the Peruvian government could obtain additional lines of credit through BCCI. They
also described the risk of BCCI continuing to hold Peru's central bank reserves
at BCCI-Panama, given "Panama's political situation."(131)
Calvo concluded:
Mr. Carbonetto asked me to go with him to visit the
President Mr. Alan Garcia, and to brief him about our conversation. I politely
refused with the excuse that I was leaving for Chile.
In reality I prefer to meet with the President after
knowing what will be the policy of the Central Bank regarding the placement of
it's reserves and after having a chance of receiving your instructions on this
matter.
We agree to meet with the President of the Central
Bank one week after he takes office and after that we will visit the President
of the Republic.(132)
This meeting between Shafi and Alan Garcia appears
to have occurred finally in October of 1987. A separate meeting involving
Garcia, Manuel Noriega, and BCCI official Akbar Bilgrami, apparently took place
December 18, 1986, according to Fernando Olivera, a Peruvian legislator who
headed a commission reviewing the relationship in 1991, discussed below.
Illegal
Activities
There is a characteristic of BCCI's activities in
Peru not present in other countries which should be emphasized at the outset.
The BCRP's purpose in entering into a relationship with BCCI, if not illegal,
was at least highly suspect. The BCRP -- a branch of the Peruvian government
acting in this matter as government -- expressly intended to conceal its
country's funds from legitimate creditors, because of its desire to avoid
paying off its debts. Just as Manuel Noriega used BCCI with the intention of
hiding funds which rightfully belonged to the Panamanian government, the BCRP
used BCCI to conceal funds with were rightfully owed to private banks and other
countries. The formal difference between Noriega's use of BCCI and the BCRP's
lies in the fact that Noriega was acting as an individual using the bank to
deceive his government, while the BCRP was acting as an arm of government using
BCCI to deceive banks and other countries. In his testimony before the
Subcommittee, deputy central banker Llaque used the euphemism of
"safety" to describe the BCRP's purpose:
Senator Kerry[:] . . . [O]ne of the services that
you were looking for was an ability to be able to hide the money from seizure,
was it not? . . .
Mr. Llaque[:] Yes. Perhaps "hide" is not
the word . . . . We had at least two cases of embargoes of funds from the
Central Bank in U.S. banks, and also an embargo of funds from commercial banks
in the United States as well.(133)
It is apparent from the Subcommittee's review of
testimony and documents that "hide" was exactly the word to describe
the BCRP's intent in using BCCI. No witness or document disputed that the funds
were due to legitimate creditors; not did any witness or document question the
propriety of an outside nation seeking to attach funds.
The need for safety manifested itself in two
requirements. First, the funds had to be kept in an account shielded from
creditors. Thus, BCCI provided Peru with a numbered account which bore no
connection with the Peruvian government on its face. Second, the account needed
to be kept in a country with strict regulatory laws protecting disclosure of
account owners. Thus, the account was opened not in Peru, but in Panama.(134)
End
of BCCI Relationship With Peruvian Central Bank
By mid-1987, despite the bribes paid by BCCI and its
efforts to secure the support of President Garcia, officials at the Peruvian
central bank were becoming increasingly uneasy about the bank's relationship
with BCCI. The officials had learned about BCCI's massive commodities trading
losses in London, which had in effect wiped out BCCI's capital. They also
feared that the Noriega regime in Panama was potentially unstable, and that the
United States might ultimately take action against it -- as it did just six
months later in shutting down Panama's banks through refusing to accept
dollars.
Accordingly, they asked the senior analyst of
foreign banks at the Central Bank to provide the Central Bank with an analysis
as to the safety and security of Peru's funds at BCCI. The analyst, Gonzalo
Aramburu, was only too glad to provide the facts about BCCI -- it had no lender
of last resort in case of a default in any of its operational units; over the
previous two years BCCI had showed significant losses in operations in the
options market; and BCCI "uses an unusual accounting system in that it
does not make it possible to clearly identify the level of losses of the fiscal
year, or the activity that led to them."(135) Accordingly,
Aramburu recommended the Central Bank to take immediate action to protect
itself by cutting back on the $270 million in was then maintaining in BCCI.(136)
Over the following month, Peru removed $70 million
in deposits from BCCI. By the end of the year, it had removed over $150
million. The remaining funds were pulled at the end of January, 1988, as Panama
fell into a crisis over accusations concerning Noriega's drug trafficking.
Peruvian
Legislative Commission
Following BCCI's indictment on drug money laundering
charges in Tampa in October 1988, and growing international concern about BCCI
during 1989 and 1990, a legislative commission was created in Peru to review a
number of charges of Peruvian corruption, including issues pertaining to the
Central Bank's decision to place the government funds at BCCI. The head of that
commission, Fernando Olivera, a member of the Peruvian House of Deputies from
an opposing political party to former President Alan Garcia, testified before
the Subcommittee on August 2, 1991 about the meaning of BCCI's activities in
Peru:
We think that the cause of this behavior and the
decision to place Peru's international reserves in BCCI was corruption. And
here we have a document of the Swiss Bank Corp. in Panama providing that BCCI
oversees George Town Bank Corp Grand Cayman. From there, transfers were made to
the Security Bank to the Swiss Bank in New York and transferred from there to
an account in Panama of the Swiss Bank. These were the bribes for these
officers [Lionel Figueroa and Hector Neyra of Peru's Central Bank]. . . . There
are some other people under the Selva Negra and Terra Firma codes, and . . . we
are convinced that there are other authorities higher up who intervened.(137)
As another member of the Commission, Pedro
Cateriano, testified before the Subcommittee:
In Peru the members of the [Central Bank] board of
directors are political. They are named by the President and members of the
board . . . That is why the function they carry out is not really technical. It
is basically political.(138)
The clear message of the legislative commission was
that the Central Bank officials could not have been acting alone, and that
other important Peruvian political figures, including former President Alan
Garcia, were involved.
Another Peruvian legislator, Jorge Del Castillo, who
requested to testify before the Subcommittee to defend President Garcia, stated
that the Central Bank was independent of the President and autonomous in all
respects with no relationship to the Peruvian executive branch. Del Castillo
also provided documents to the Subcommittee consisting of an investigation on
behalf of Garcia of alleged BCCI accounts maintained by Garcia that did not, in
fact, exist. Del Castillo testified that this investigation disproved that
allegations concerning Garcia's involvement in any bribes that may have been
failed.(139)
BCCI officer Akbar Bilgrami, who, unlike the other
witnesses is neither Peruvian nor affiliated with any Peruvian political party,
told the Subcommittee that it was his understanding that Garcia had indeed
provided assistance BCCI, but that he had not heard of specific payments being
made to Garcia.
My main sources for information on payments in Peru
were two BCCI officials, Amir Lodhi and S.M. Shafi. According to them,
President Garcia approved that funds be placed in BCCI. Mr. Shafi told me that
the BCC had to pay for the deposit, but we didn't know how much, or to whom the
money went. This was handled by Mr. Saddiqui [one of BCCI's top officers in
London]. Two Central Bank officials and Mr. Jensen were handling it in Peru.
Mr. Shafi went to President Garcia as an insurance policy of getting the
amounts. I heard that the money went into the hands of the Central Bank
officials and Mr. Jensen. Mr. Shafi did not tell me that Mr. Garcia received
money. He said that he went there to guarantee that the money would be placed
in the account, as an insurance policy. Mr. Tariq Jan [another BCCI officer]
also went with Mr. Shafi to the meeting with Garcia. I believe that Mr. Shafi
went to see him to make sure that the relationship would occur. You know, it
wouldn't be good for BCC to start down this road without the support of the
country's president. I also think that Mr. Lodhi also met with Mr. Garcia, but
that meeting was more general. The meeting with Shafi was just with regard to
this relationship -- the money for the letters of credit. Lodhi's meeting with
Garcia was about Latin America and third world causes, and so on.(140)
On September 22, 1992, the Attorney General of Peru
announced that she would seek Garcia's extradition from Colombia after charging
him with alleged irregularities for his role in depoisiting Peruvian resesrves
in BCCI. The official, Blanca Nelida Colan, had "drawn up charges against
Garcia for the possible existence of foreign bank accounts for his alleged
participation in depositing $287 million in reserves" in BCCI.(141)
Conclusion
There were more than enough reasons for BCCI and
Peru's Central Bank for the two to development a relationship in 1986. Peru was
seeking to hide its money from foreign creditors, as it began refusing to pay
its foreign debt. BCCI was engaged, as always, in a quest for deposits to prop
up finances which were in an especially rickety and fragile state in this
period. BCCI, as usual, met with top officials in the country to secure and
strengthen its relationship with the Central Bank, including President Garcia.
Bribes allegedly were paid to two Peruvian central bankers. When BCCI finally
collapsed, Peru escaped harm principally because its exposure had previously
been so large and so imprudent, especially given both Panama and BCCI's shaky
state by the beginning of 1988, that responsible officials in Peru had acted to
end the relationship.
SENEGAL
In Senegal, BCCI paid bribes to employees of the
Foreign Exchange Department of the Central Bank, and provided them with gifts,
to assure that BCCI received preferential treatment in the release of foreign
exchange funds. This preferential treatment again placed BCCI in a favorable
position in relationship to other banks for handling imports to Senegal,
similar to that described in some detail above concerning BCCI's activities in
Nigeria.
Additionally, BCCI helped the Central Bank of
Senegal in defrauding the International Monetary Fund through falsifying
deposits in Senegal to the IMF. At the time, Senegal was required by the IMF to
maintain cash deposits of a certain level on reserve, and was unable to do so.
On the critical reporting dates for the Central Bank, BCCI discounted a $5
million to $6 million promissory note to a Senegal corporation for two to three
weeks, the corporation then placed the funds on deposit with the Central Bank
of Senegal for that period, showing the IMF that Senegal was meeting its
banking obligations, and when the IMF review was concluded, the transaction was
reversed.(142)
SUDAN
BCCI's situation in Sudan was similar to its
situation in a number of African countries -- it assured its access to central
bank funds through making payoffs to officials. As Akbar Bilgrami described it,
this was a general practice which he personally participated in only once, by
his superiors at BCCI London when he was a very junior officer of the bank:
In 1977, I was asked to go with the Senior Official
of the Central Bank and given 100,000 pounds. I was told to buy him anything he
wanted. I kept the receipts as we were buying items. This made the central bank
official very nervous, the keeping of receipts. He said, 'Barclays doesn't keep
receipts.' I brought the receipts back to my boss, who said 'What did you do
that for?' and threw them away. We spent about 70,000 pounds that day.(143)
ZAMBIA
In Zambia, BCCI once again worked with government
officials to defraud an international lending institution, in this case, the
World Bank. In 1987, the World Bank required Zambia to reduce its borrowings by
making a $35 million payment by December 31, 1987 from internal sources or
savings. When Zambia could not come up with the funds, BCCI loaned $45 millon
to Zambia, hiding the source of the funds so that they appeared to be from
Zambia's own sources.(144) As a result, the World Bank granted a new
$60 million loan to Zambia. As Nazir Chinoy explained the transaction:
The funds were given to Zambia by BCCI. The routing
was that they were sent from BCC Paris to a Zambian commercial bank to London
and from there, the World Bank was repaid. Two days later, Zambia was able to
draw on the $60 million tranche from the World Bank. BCCI Paris was repaid from
Copper exports. The terms for BCCI Paris were one percent front-end fees; one
and a half percent over LIBOR [a standard European international banking rate].(145)
According to Chinoy, BCCI was able to make money in
several additional ways off the Zambian transaction. In addition to the
transaction fees specified above, BCCI made money converting the payments it
received in French francs on the copper exports to dollars. Moreover, BCCI was
able to use the transaction to assist with internal bookkeeping problems, by
sending 50 percent of the front end fee to BCCI-Grand Cayman in compensation
for BCCI-Grand Cayman having issued a letter to BCCI Paris underwriting the
risk in case Zambia defaulted. In this way, BCCI-Paris reduced its taxable
income.
ZIMBABWE
Several BCCI officials interviewed by the
Subcommittee referred to bribes paid to Zimbabwe's prime minister, and the
political chief opposition figure in Zimbabwe, by BCCI at the time it opened a
joint venture with Zimbabwe. By the account of Nazir Chinoy:
I accompanied Mr. Abedi and Mr. Sheikh to the opening
of a joint venture with Zimbabwe. I think to get permission for establishing a
bank in Zimbabwe that money was paid to President Mugabe and to Nkomo. The
basis I am making this statement was that when I went there with Mr. Sheikh I
was acting as Mr. Abedi's personal assistant or secretary. Mr. Sheikh went off
on his own to see Nkomo who was the chief opposition at that time, and then he
went off to see President Mugabe, and when they talked they wanted me out of
the room. Many of us were there for the opening. But only Alauddin Sheikh and
[BCCI CEO] Abedi were left in the room with these two political figures.
Otherwise I was accompanying him and acting with him.
Mr. Sheikh carried a bag with him. At the time I had
a suspicion that you don't get permission as a foreign bank so easily without a
payment. Without favors, it wouldn't be so easy to get a bank that fast,
especially given the opposition of the British banks who were already
established there.(146)
By the account of Akbar Bilgrami:
We paid Mugabe and Nkomo. I was at the Parklane
Branch. BCC was approached to look after the expenses of the delegates, which
were paid. In addition, we paid 500,000 pounds from the Parklane Branch.
Someone from Mr. Naqvi's office came to Parklane and picked up the money. I
don't think than Ian Smith was getting paid by us. I think that the Rhodesian
government was taking care of him. That was in 1980-1981.(147)
By the account of Abdur Sakhia:
I drove one of my colleagues in London to a hotel,
and he went with a briefcase and he came back without a briefcase, and I asked
him: What happened to your briefcase? And he smiled at me and he said: This was
for those people. I said: What, did you carry gold bars? He said: No, some
cash. . . So this was prior to independence of Zimbabwe, when they were
negotiating for independence. Some officials, some politicians from Zimbabwe
were staying at a hotel in London.(148)
AFRICAN
DEVELOPMENT BANK
BCCI official Nazir Chinoy provided a detailed
account of corruption in the African Development Bank to the Subcommittee,
which he referred to in a much more limited way in public testimony.
According to Chinoy, BCCI had a long relationship
with African Development Bank, maintaining about $32 million in deposits in
BCCI's Paris branch in the mid-1980's. When Chinoy arrived, he found the hard
way that the African Development Bank was placing those funds on the basis of
bribes being paid to the officials at the African Development Bank who
controlled the placements.
Fifteen days after my appointment, we lost a deposit
of $14.3 million. When this deposit was lost I was concerned. [Another BCCI
official] rushed to me and asked me whether I had made the payment? I said,
what are you talking about? She said, haven't you been briefed by London? I said,
no. She said, have you failed to look after the Treasurer? We were giving them
top of the market rates. So I said, no I haven't been briefed. I learned from
[BCCI official] Zafir Iqbal that when my predecessor was here, he drew up his
expense account and he took cash dollars in travellers checks to give to the
man controlling the African Development Bank's accounts, his name was Ismael
Emay. I asked how much? Either 1/32nd or 1/16th. $8,000 to $10,000 a year in
all. I said, fine, will I be getting the money from Cayman? He said I don't
know, you'll have to manage.(149)
Chinoy made a round of courtesy calls at the African
Development Bank, meeting the president of the bank and the Treasurer. Chinoy
stated that he told the Treasurer that he should look Chinoy up in Paris, that
Chinoy did not know what his predecessor had failed to do, but if it hadn't
been paid to the Treasurer, Chinoy would pay it. According to Chinoy:
We debited the account and started to pay him. $5000
back due. We opened an account for him and his wife in Monte Carlo. He would
draw maybe a couple of thousand dollars as he wanted in expenses. The balance
he would send to Monte Carlo. The account he opened later in 1986. The money
came from BCCI Paris. We started building up a relationship. By the way, BCCI
London had 10m in investment funds of African development bank, this was kept
by Investment and finance section for investments in stocks and bonds and this
was controlled by Iqbal Rizvi directly with African Development Bank. At this stage,
there was rivalry between me and general manager. He wanted ADB under his wing
and I wanted to push for Paris. I started building up a relationship but he
wouldn't allow me to attend the ADB conference and he didn't take anyone from
France in 1986 for meeting in Zimbabwe. Gradually, we started acting in
parallel rather than in coordination. Deposits went up to $35 million, $45
million in dollar terms.(150)
Chinoy and BCCI intensified their marketing campaign
to the African Development Bank and became friendly with its president,
eventually obtaining the bank's entire French franc account, amounting to 200
million or more francs -- some $35 million dollars. According to Chinoy:
We continued the payment to the Treasurer. But I
told him no more than $50,000 a year. Which he made in 1987-88.(151)
Conclusion
The above account of corruption involving officials
of fifteen countries outlines typical methods by which BCCI acquired and
maintained accounts and relationships with governments and government officials
around the world. While lengthy, it is by no means complete and the size of the
iceberg below remains difficult to measure. The above account should be enough,
however, to demonstrate the fundamentally corrupt nature of BCCI's
relationships with the politically prominent, and its strategy of corrupting
those in or with access to government, for its own purposes.
The pervasiveness of BCCI's corruption of officials
in so many countries also raises larger questions about the persistence of
corruption as a way of doing business generally, around the world. BCCI
officials contend that its practices were typical of those engaged in by other
banks, including U.S. banks, doing business in developing countries. For
example, if true, this would suggest that international lending institutions
financed by the U.S. taxpayers, such as the IMF and World Bank, are routinely
being defrauded by collusion between the governments of those countries and
unethical banks that see the opportunity to make profits through helping such
governments defraud those institutions.
BCCI officials further suggested that U.S. and
European businesses that are successful in many of the countries in which BCCI
was doing business, especially in Africa, can be so only to the extent that
they themselves meet local standards and participate in the endemic corruption.
Such participation by U.S. entities is, of course, prohibited by the Foreign
Corrupt Practices Act. The testimony in staff interviews by BCCI officials
raises the question of whether violations of that act may be substantially
greater in number has been recognized.
Finally, the information concerning BCCI's
corruption of officials around the world illustrates the public policy interest
to lift the veil of secrecy regarding financial information that still obtains
in too many jurisdictions. Strong bank secrecy and confidential laws were
essential to BCCI preventing the detection of its criminality and its
corruption of public officials. In case after case, BCCI shifted funds to bank
secrecy havens in order to protect its payoffs from exposure. Moreover, secrecy
laws have to this day impeded the ability of the Subcommittee to detail
numerous further cases of such corruption that clearly exist. For example,
documents subpoenaed in the United States by the Senate, and in the possession
and control of BCCI's liquidators in the United Kingdom, have been withheld
from the Subcommittee by the British courts on the basis of British secrecy
laws. Little progress can be made in combatting corruption so long as many
jurisdictions continue to promote numbered accounts and secrecy to flight
capital and dirty money. The United States needs to take a fundamentally more
active and aggressive role in changing the attitudes of many foreign
governments on this issue.
1.
Agence France Presse, July 12, 1991.
2.
Indictment, People v. Abedi, et. al, Supreme Court of the State of New
York County of New York, July 29, 1992.
3. S.
Hrg. 102-350 Pt. 2 pp. 507-508.
4.
Staff interview, Sakhia, October 7, 1991.
5. S.
Hrg. 102-350 Pt. 2 p. 515.
6.
Staff interview, Chinoy, March 9, 1992.
7.
See Bankrupt: The BCCI Fraud, Kochan and Whittingon, Gollancz, London 1991, pp.
61-62.
8.
Sakhia, S. Hrg. 102-350 Pt. 2 p. 508.
9.
See reference to November 5, 1986 letter in minutes of Evidence Taken Before
House of Commons Treasury and Civil Service Committee, Banking Supervision and
BCCI, February 5, 1992, Sec. 252.
10.
BCCI -- Consolidated Report, EWP, Loans Over $7.5 million, March 31, 1991.
11.
s. Hrg. 102-350 Pt. 1 p. 288.
12.
Staff interview, Helmy, January 12, 1992.
13.
Staff interview, Akbar Bilgrami, July 20-28, 1992.
14.
Staff interview, Chinoy, March 9, 1992.
15.
S. Hrg. 102-350 t. 2 p. 528.
16.
See documents published in S. Hrg. 102-350 Pt. 6.
17.
BCCI-FinAmerica-Gotelli documents, provided to Senate by BCCI liquidators,
July, 1992.
18.
Id.
19. People
v. Abedi, Supreme Court of the State of New York, County of New York, July
29, 1992, p. 23.
20.
Letter, to Dr. Juan Sommer, February 4, 1988.
21.
See Los Angeles Times, May 8, 1991, "Encino Bank Ordered Sold."
22.
UPI, July 30,1 991, "Argentine Central Bank revokes BCCI license."
23.
Reuters, August 1, 1991, "Argentina Had No Funds in BCCI; Minister Angry
at Media," Washington Post, August 24, 1991, "BCCI Trail in Argentina
Remains Untraced."
24.
Associated Press, August 1, 1991, "BCCI in Argentina -- Political
Headaches, But Little Economic Impact."
25.
Associated Press, July 31, 1991, "Court Probes Alleged Money Laundering by
Foreign Banks."
26.
S. Hrg. 102-350 Pt. 1 p. 127.
27.
S. Hrg. 102-350 Pt. 1 p. 159.
28.
S. Hrg. 102-350 Pt. 1 p. 243.
29.
See e.g. Los Angeles Times, November 2, 1991, id.; Newsday, August 13, 1991,
"Ex-Bangladesh Ruler Linked to BCCI;" Daily Telegraph, August 13,
1991, "Bank Linked to Missing Bangladesh Disaster Aid."
30.
S. Hrg. 102-350 Pt. 2 p. 515.
31.
Mark Fineman, Los Angeles Times, "BCCI Left its Mark on Bangladesh,
November 2, 1991.
32.
Id.
33.
Los Angeles Times, id.
34.
Id.
35.
See Daily Telegraph, "BCCI Scandal: Bank Linked To Missing Bangladesh
Disaster Aid," August 13, 1991.
36.
See Agence France Presse, "Bangladesh Appeals to Canada to Unfreeze Some
BCCI Accounts," July 26, 1991.
37.
Mark Fineman, Los Angeles Times, "BCCI Left its Mark on Bangladesh,
November 2, 1991.
38.
Memorandum from Brian Jensen to Agha Hasan Abedi, January 30, 1986, Senate
document 001546.
39.
Banking Venture in Brasil - Aide Memoire, Jensen to Saddiki at BCCI-London,
February 24, 1986, Senate document 001545.
40.
Staff interview, Abol Helmy, January 12, 1992 and BCCI documents pertaining to
Brazil, produced by BCCI liquidators and from BCCI document repository in
Miami.
41.
Id.
42.
Memorandum/telex, Sakhia to Siddiki, May 6, 1986, Senate document.
43.
BCCI internal memorandum, Helmy to Ameer Saddiki, September 2, 1986, Senate
document 000653.
44.
Staff interview, Abol Helmy, January 12, 1992.
45.
Telex, Shafi to da Costa, October 28, 1986, BCCI Senate Document 000645.
46.
BCCI Luxembourg Letter of Appointment, Ameer H. Siddiki to Ambassador Correa da
Costa, October 28, 1986, Senate document.
47.
Staff interview, Abdur Sakhia, October, 1991; see also BCCI telex concerning Da
Costa, October 28, 1986, id..
48.
Staff interview, Nazir Chinoy, March 9, 1992; see indictment, People v.
Abedi, New York Supreme Court, July 29, 1992, p. 24.
49.
Staff interviews, Chinoy, id. See also People v. Abedi, New York County,
indictment, July 29, 1991, id. p. 23.
50.
Staff interview, Chinoy, March 9, 1992.
51.
See testimony of Alan Kreczko, Deputy Legal Advisor, Department of State, S.
Hrg. 102-350 Pt. 3 pp. 575-578.
52.
See Price Waterhouse Section 41 Report to the Bank of England, June 1991.
53.
Commentary, Massihur Rahman, to Price Waterhouse Section 41 Report to the Bank
of England, June 1991.
54.
Sakhia testimony, S. Hrg. 102-350 Pt. 2 p. 526.
55.
Staff interview, Sakhia, October 7, 1991.
56.
Staff interviews, Bilgrami, July 20-28, 1992.
57.
Staff interview, Bilgrami, July 20-28, 1992.
58.
Staff interview, Chinoy, March 9, 1992.
59.
Staff interview, Chinoy, March 9, 1992.
60.
Staff interview, Chinoy, March 9, 1992.
61.
Id.
62.
Staff interview, Sakhia, October 7, 1991.
63.
Staff interview, Sakhia, October 7, 1991.
64.
Sakhia, S. Hrg. 102-350 Pt. 2 . 508.
65.
Id.
66.
Price Waterhouse audit report, December 31, 1990.
67.
S. Hrg. 102-350 Pt. 1 p. 63.
68.
S. Hrg. 102-350 Pt. 2 p. 515.
69.
Staff interview, Nazir Chinoy, March 9, 1991, see also Chinoy testimony S. Hrg.
102-350 Pt. 4 p. 829.
70.
Staff interview, March 9, 1991.
71.
Staff interview, March 9, 1992.
72.
Staff interview, Chinoy, March 9, 1992.
73.
Id.
74.
Id.
75.
Staff interview, March 9, 1992.
76.
Staff interview, Chinoy, March 9, 1992.
77.
Staff interview, Chinoy, March 9, 1992.
78.
Staff interview, Chinoy, March 9, 1992.
79.
Staff interview, Chinoy, March 9, 1992.
80.
Staff interview,
Chinoy, id.
81.
Staff interview,
Chinoy, id.
82.
People v.
Abedi, July 29,
1992, New York County Supreme Court, p. 20-21.
83.
Staff interview,
Chinoy, id.
84.
Chinoy staff
interview, id.
85.
Testimony of
Rahman, S. Hrg. 102-350 Pt. 1, p. 540.
86.
White Paper on
the General Elections, Government of Pakistan, July 1978, S. Hrg. 102-350, Pt.
3, pp. 314-317.
87.
Former BCCI
Pakistan branch chief Nazir Chinoy provided detailed information about the
Zia-Abedi relationship in a series of interviews with Senate staff from March
9-16, 1992; see also check to General Zia from BCCI-UAE, May 25, 1985, S. Hrg.
102-350, Pt. 2 p. 511.
88.
S. Hrg. 102-350
Pt. 2 p. 510.
89.
Staff interview,
Chinoy, March 9, 1992.
90.
Staff interview,
Chinoy, March 9, 1992.
91.
Chinoy testimony
S. Hrg. 102-350 Pt. 4 pp. 368-369.
92.
See People v.
Abedi, New York Supreme Court, County of New York, July 29, 1992.
93.
Staff interview,
Sakhia, October 7, 1991.
94.
S. Hrg. 102-350
Pt. 3 p. 599.
95.
S. Hrg. 102-350
Pt. 4 pp. 392-393.
96.
Los Angeles
Times, August 9, 1991.
97.
Staff interview,
Sultan Khan, March, 1991.
98.
Staff interview,
Colombian marijuana trafficker and federal cooperating witness, September, 1989.
99.
Id; the
trafficker provided copies of the original letters to the Subcommittee in 1989,
signed by the Attorney General of Panama.
100.
Milian-Rodriguez
letter to Senator Kerry, August, 1991.
101.
Letters, Lino
Linares, Miami branch, BCCI to Holland and Knight and to Raymond Banoun, July
and August, 1990, and January 1991. Details on this interaction are set forth
in the chapter on BCCI's lawyers.
102.
Staff
interviews, Akbar Bilgrami and Amjad Awan, July, 1992.
103.
Staff interview,
Chinoy, March 9, 1992.
104.
Awan testimony,
S. Hrg. 102-350 Pt. 6; see also Blum memorandum of Awan interview, Pt 1 pp.
17-22.
105.
Id.
106.
Id., see also
Affidavit of Amjad Awan, Government Exhibit O, U.S. v. Noriega, Southern
District of Florida.
107.
Id.
108.
Staff
interviews, BCCI attorney Raymond Banoun, May-July 1990; see also Banoun notes
produced to Subcommittee September 3, 1992.
109.
Id.
110.
An understanding
of the nature and composition of the BCRP is important to the discussion which
follows. Del Castillo testified that the Peruvian constitution designates the
BCRP as "an autonomous body . . . not depend[ent] upon the executive
branch." S. Hrg. 102-350 Pt. 1 p. 233. However, Cateriano testified that
its directors are partisan politicians "named by the President and . . .
by the Senate." at 199. Thus, the BCRP should not be considered an
autonomous body free from political pressure or private influence.
111.
S. Hrg. 102-350
Pt 1 p. 167.
112.
S. Hrg. 102-350
Pt. 1 p. 166.
113.
at 232.
114.
S. Hrg. 102-350
Pt. 1 p. 232.
115.
See People v.
BCCI, New York Supreme Court, July 29, 1991.
116.
Letter from A.M.
Bilgrami and Ishtiaq Nasim to the BCRP, dated 28 April 1986 ("[T]his is to
advise you that in consideration of your placing U.S. $200 [million] [sic]
deposits with our Panama Office, we are placing at your disposal a line of
[sic] credit for $ U.S. 60 [million]. It is our mutual understanding that you
will continue to maintain equivalent sufficient balances in your Placement
Account.").
117.
Staff interview,
Akbar Bilgrami, July 1992.
118.
At an interest
rate of 5% per year, for example, BCCI would save $7,200,000 per year in fees.
119.
"Agreement
on operational procedure between BCR and BCCI regarding utilization of credit
line for US $60 millions by Peruvian local banks (PLBs)," dated May 30,
1986.
120.
S. Hrg. 102-350
Pt. 1 p. 167.
121.
Staff
interviews, Akbar Bilgrami, July 20-28, 1992; see also indictments People
vs. BCCI, July 29, 1991 and People vs. Abedi, July 29, 1992, brought
by New York District Attorney.
122.
People v.
Abedi, et. al,
New York County Supreme Court, July 29, 1992.
123.
Staff
interviews, Bilgrami, July 20-28, 1992.
124.
Staff interview,
Abdur Sakhia, October 9, 1991.
125.
Staff
interviews, Akbar Bilgrami, July 20-28, 1992; documents reprinted in S. Hrg.
102-350 pp. 202, 206-207.
126.
S. Hrg. 102-350
Pt. 1 p. 165.
127.
S. Hrg. 102-350
Pt. 1 p. 166.
128.
196-197. Compare
the 8 July 1987 memorandum from Carlos Saito to Ana Ma. de Reategui (both of
the BCRP) entitled "Evolution of BCRP deposits abroad" ("At the
end of June 1986 work was already underway with seven banks" . . . .
"The last bank with which correspondent relations were established was . .
. BCCI.").
129.
See the
Evolution of BCRP deposits abroad, hearing book at 176.
130.
S. Hrg. 102-350
PT. 1 p. 170.
131.
S. Hrg. 102-350
Pt. 1 p. 206.
132.
Id.
133.
S. Hrg. 102-350
Pt. 1 p. 167.
134.
See the
Evolution of BCRP deposits abroad, at 175 ("[I]t was decided to open
special accounts in the market in Panama, which have maximum security.").
135.
S. Hrg. 102-350
Pt. 1 p. 173, "Central Reserve Bank of Peru, Memorandum to Juan Villanueva
from Gonzalo Aramburu, August 7, 1987.
136.
Id.
137.
S. Hrg. 102-350
Pt. 1 p. 199.
138.
Id.
139.
S. Hrg. 102-350
Pt. 1 p. 233.
140.
Staff
interviews, Akbar Bilgrami, July 20-28, 1992.
141.
Reuters,
September 22, 1992, "Attorney General To Seek Extradition of Ex-President
Garcia."
142.
People v.
Abedi, Supreme
Court of the State of New York, County of New York, July 29, 1992.
143.
Staff interview,
Bilgrami, July 20-28, 1992; Bilgrami testimony, S. Hrg. 102-350 Pt. 6.
144.
People v.
Abedi, Supreme
Court of the State of New York, County of New York, July 29, 1992, p. 18.
145.
Staff interview,
Chinoy, March 9, 1992.
146.
Staff interview,
Chinoy, March 9, 1992.
147.
Staff interview,
Bilgrami, July 20-28, 1992.
148.
S. Hrg. 102-350
Pt. 2 p. 515.
149.
Staff interview,
Chinoy, March 9, 1992.
150.
Chinoy, id.
151.
Id.
INITIAL
ENTRY AND FGB AND NBG TAKEOVERS
Introduction
BCCI's entry into the United States was inevitable,
given Abedi's desire to make BCCI into a global bank, and the size and
importance of the United States financial and banking markets. Since BCCI was
undercapitalized from its inception, its success required constant growth as a
means of filling the ever-increasing hole created by its lack of capital and
its operational losses. Securing a base in the United States was intended by
Abedi from the beginning as a means of obtaining new opportunities for growth.
The United States was one of the largest money havens for flight capital. It
was also unique among banking systems in insuring deposits at a very
substantial level for FDIC member banks. FDIC insurance made deposits in U.S.
banks more secure than deposits anywhere else in the world. As a foreign bank,
BCCI could not legally accept deposits from U.S. citizens, or itself become an
FDIC member bank. But if BCCI could find a way to enter the FDIC system, it
would be able to offer a whole new, and highly valued, service to its customers
-- U.S. government guaranteed deposit insurance. Abedi decided that he would
first acquire legitimate banks in the United States for BCCI, and then
determine later how to merge BCCI into them.
BCCI's initial strategy for the United States was to
infiltrate the U.S. banking system through purchasing beachhead banks in major
banking centers, and then to expand the beachhead operations until BCCI had
U.S. banking operations of sufficient size that they could ultimately merge
with BCCI itself. Later, after state regulators in New York had proven
resistent to BCCI, and BCCI had successfully acquired National Bank of Georgia
and FGB/First American, this strategy was modified. BCCI expanded in the United
States by opening BCCI branch offices in regions with significant populations
from the Third World engaged in trans-national commercial activity, such as
Miami, Houston, Los Angeles, San Francisco, New York, and Chicago. BCCI's
intention was to use these branch offices to feed depositors and banking
activity to NBG and First American, expanding BCCI's activities through pushing
deposits into the federal deposit insurance system. BCCI then formed an
additional beachhead institution in California in 1985 through a nominee. By
then, Abedi had decided that he would work systematically to integrate the
various U.S. banks BCCI now secretly owned, until the survivor was strong
enough and large enough to in turn purchase BCCI.(1)
BCCI had significant difficulties implementing this
strategy due to regulatory barriers in the United States designed to insure
accountability. These barriers included:
** a strong bias against any bank, such as BCCI,
which did not have a primary regulator with the responsibility for conducting
oversight on a consolidated basis of the foreign bank.
** requirement for certified financial statements
from would-be foreign shareholders seeking to acquire a U.S. target.
** reporting requirements in take-over attempts of
federally chartered banks, subjecting any shareholders seeking to acquire a
bank to the diverse disclosure rules of the Securities and Exchange Commission
(SEC).
** prohibitions on the ability of a bank holding
company, such as Bank of America of California, which still had a 28 percent
interest in BCCI, from purchasing banks in other states, directly or
indirectly.
** limitations against interstate banking and
branching, which slowed the ability of BCCI's flag-ship U.S. bank, First
American, to purchase the National Bank of Georgia, and prevented First
American from integrating with any bank in California, such as the Independence
Bank, as desired by BCCI.
However, while these barriers did delay BCCI's
purchases of banks in the United States, and the integration of its U.S. empire,
they failed to stop the purchases. In the end, BCCI was successful in acquiring
four banks, operating in seven states and the District of Colombia, with no
jurisdiction successfully preventing BCCI from infiltrating it. The techniques
used by BCCI in the United States had been previously perfected by BCCI, and
were used in BCCI's acquisitions of banks in a number of Third World countries
and in Europe. These included purchasing banks through nominees, and arranging
to have its activities shielded by prestigious lawyers, accountants, and public
relations firms on the one hand, and politically-well connected agents on the
other. These techniques were essential to BCCI's success in the United States,
because without them, BCCI would have been stopped by regulators from gaining
an interest in any U.S. bank. As it was, regulatory suspicion towards BCCI
required the bank to deceive regulators in collusion with nominees including
the heads of state of several foreign emirates, key political and intelligence
figures from the Middle East, and entities controlled by the most important
bank and banker in the Middle East.
Equally important to BCCI's successful secret
acquisitions of U.S. banks in the face of regulatory suspicion was its
aggressive use of a series of prominent Americans, beginning with Bert Lance,
and continuing with former Defense Secretary Clark Clifford, former U.S.
Senator Stuart Symington, well-connected former federal bank regulators, and
former and current local, state and federal legislators. Wittingly or not,
these individuals provided essential assistance to BCCI through lending their
names and their reputations to BCCI at critical moments. Thus, it was not
merely BCCI's deceptions that permitted it to infiltrate the United States and
its banking system. Also essential were BCCI's use of political influence
peddling and the revolving door in Washington.
Decision
to Enter U.S.
By 1976, it had become clear to both BCCI and its
U.S. partner, Bank of America, that their relationship was causing problems for
both parties and might not long survive. Moreover, BCCI's top officials,
especially Abedi, had come to believe that entry into the U.S. market in a
manner that BCCI could control was critical. Since its creation, BCCI had been
a bank whose deposits and activities were denominated in dollars. Its
settlements with other banks were carried out in dollars. There were numerous
inconveniences associated with BCCI's inability to conduct business in the U.S.
itself, and its forced reliance on western banks like Bank of America to act as
its correspondent banks for all dealings with the U.S. Moreover, given the
hostile attitude of regulators in the United Kingdom, BCCI had to make sure it
was not fenced out of expansion in the industrialized countries. If the Bank of
England ever acted against it, and BCCI had no alternative site in a major
western financial center, it might be destroyed.(2) Additionally,
the U.S. was home to numerous "high net worth" individuals from Third
World countries, who could be induced to bank at BCCI. Unlike many countries,
the U.S. had no restrictions on the movement of capital in and out of its
borders, making it an attractive place to park BCCI's real financial assets.
Finally, both Abedi and his key financial backer, Sheikh Zayed of Abu Dhabi,
may have had political motives to strengthen their position in the U.S.
According to T. Bertram Lance, BCCI's initial
partner in its most important acquisitions in the United States, both Sheikh
Zayed and Abedi felt that BCCI could become a critical element in strengthening
ties between the United States and their constituencies. As Lance described a
meeting between him, Sheikh Zayed and Abedi in Islamabad, Pakistan in late
1977:
Abedi was concerned about the shifting tides towards
the Soviets in Afghanistan, Iran, India and the Mideast. Both Abedi and Zayed
each expressed their concerns about the Arab worlds lack of ties to the US.
They wanted to do something about it.(3)
Friends of Lance told journalists at the time
gaining access to President Carter and the White House was one of the explicit
goals of doing business with Lance and one of the reasons the "Arabs"
were interested in having Lance represent them and in buying his interest in
the National Bank of Georgia.
An Atlanta source close to the negotiations says the
Arabs see Lance as giving them access to the administration. Though a private
citizen, Lance is a regular visitor at the White House and is the chairman of a
$500-to-$1000-a-plate fund-raiser for President Carter scheduled for January in
Atlanta.
"Under normal circumstances," says this
source, "NBG would be the last bank anyone would be interested in. But the
investors see this as an opportunity to do a favor for someone close to the
President."(4)
Initial
Attempts to Enter U.S.
BCCI's initial attempt to obtain a bank in the
United States was notably unsuccessful. Initially, BCCI decided it would begin
with a small acquisition, that of the Chelsea Bank, a national bank with a
state-chartered holding company in New York. In order to keep the transaction
low-key, BCCI decided to proceed through a nominee, a member of the Gokal
family, whose shipping empire could be characterized as much BCCI affiliate as
BCCI customer. Unfortunately, the nominee chosen had few resources of his own,
and was a transparent alter ego for BCCI, prompting the very regulatory
scrutiny in New York that BCCI had sought to avoid. As recounted by former
Comptroller of the Currency John Heimann:
My first supervisory contact with BCCI occurred when
I was New York Banking Superintendent. New York law requires the Superintended
to approve the change of control of a New York chartered bank. . . A young
Pakistani national was the proposed purchaser. His uncertified financial
statement showed total assets of $4.5 million, of which $3 million was in the
form of a loan from his sister. His reported annual income for the prior year
was, as I recall, approximately $34,000. Since he was not an experienced banker
. . . and since BCCI was his primary banking relationship, he indicated that he
would be relying upon that institution for advice and counsel.
Since he was relying upon BCCI to meet his
qualifications of experience, we sought to determine what we could about that
organization.(5)
Heimann determined that BCCI had no central
regulator, which meant that there was no banking authority anywhere with the
right to review and the responsibility to oversee all of BCCI's activities.
BCCI also had divided its operations between two auditors, and thus had no
consolidated financial report, so it was impossible for Heimann to be certain
he could identify and understand BCCI's actual financial condition. According,
Heimann put a hold on the application. BCCI identified a second bank in New
York, and a second nominee, and made a second application, with the same
result. Finally, Abedi decided to approach Heimann directly.
On each occasion, the subject of the meeting . . .
concerned itself with BCCI's apparent desire to enter the United States. In
each instance, Mr. Abedi attempted to convince us of the secure nature and
correct operations of BCCI, its financial strength, etc. On each of these
occasions, I expressed my concern that BCCI did not have a primary regulator,
and that, until it did, my office was reluctant to permit entry into the US.(6)
Abedi had by now tried the back door into the United
States twice and been rejected, and the front door once, with the same result.
New York, the most important U.S. banking market for BCCI, would be closed to
BCCI so long as Heimann was its chief regulator.
Soon thereafter, however, Jimmy Carter was elected
President, and Heimann was appointed to become Comptroller of the Currency,
responsible for supervising national banks, and in a position to opine on
nearly any attempted purchase by BCCI in the United States. At the same time,
Carter appointed as his new director of the Office of Management and Budget, T.
Bertram Lance, head of the National Bank of Georgia (NBG), which Lance had
purchased in 1975 from the Financial General Bankshares (FGB) group, a bank
holding company headquartered in metropolitan Washington. BCCI alone might not
be able to circumvent Heimann. Abedi knew that in such circumstances, the only
way to proceed was through going over a bureaucrat's head through making use of
one's political ties. In 1975, Abedi had few such ties in the United States. In
1977, however, Abedi was introduced to Bert Lance, and BCCI's previous failures
in trying to penetrate the U.S. banking system were replaced with success.
History
of Financial General Bankshares
In 1910, a socialist visionary named Arthur J.
Morris decided to find a means of providing credit to small wage earners and
consumers through creating a kind of cooperative banking system later to be
known as the "Morris Plan."
Under the Morris Plan, wage earners depositing their
paychecks in a cooperative fashion into Morris' institutions became entitled to
receive small loans back in return. The concept was successful, and lead to
Morris building consumer banks that by the 1940's extended to Florida, Georgia,
Maryland, New York Tennessee, Virginia, and the District of Colombia. All of
these lending institutions were under the control of another entity,
incorporated in 1925, called Financial General Bankshares ("FGB").
Eventually, these banks converted to and merged with conventional banks, and
expanded their services to cover insurance, venture capital, mortgage banking
and industrial operations.(7)
In 1955, FGB came under the control of retired Army
General George Olmstead. By then, the FGB franchise was one of a small number
of banks that had been grandfathered to permit interstate banking, generally
prohibited by the McFadden Act. The Federal Reserve grandfathering also
permitted Financial General's ownership by another corporate entity of
Olmstead's, International Bank ("IB"), despite the fact that IB also
had several non-banking subsidiaries.(8)
FGB's unique market position attracted criticism
from other banks and by 1966, the Federal Reserve decided that FGB was a
holding company subject to its regulation, and that International Bank could
not retain FGB. General Olmstead was forced by the Federal Reserve to sell out
his interests in FGB on or before 1978.(9)
General Olmstead decided to retire as soon as he
could sell FGB, and began looking for buyers. Bank stocks were not in favor
with investors at the time. Olmstead was initially unable to find anyone who
would buy the entire franchise. But in June 1975, he was able to sell FGB's
Georgia operation, the National Bank of Georgia, to Georgia banker Bert Lance.
Bert
Lance
By September 21, 1977, when Bert Lance tendered his
resignation from the position of director of the Office of Management and
Budget (OMB) to President Jimmy Carter, Lance had become the most notorious
banker in the United States.
Prior to coming to Washington, Lance's entire career
had been in banking in Georgia, starting in 1951 with his work as a teller at
the Calhoun National Bank, a bank owned by the grandfather of his wife,
Labelle. Lance had stayed with the Calhoun Bank and eventually become its
president. He began to support Jimmy Carter in his political activities in
1966, when Carter first ran for governor and lost, and again in 1970, when
Carter ran for governor and won. In 1974, at the end of Carter's term, Lance
himself ran for governor and lost, before emerging as Carter's most important
fund-raiser and political advisor in his successful race for President in 1976.
Lance had become president of National Bank of
Georgia in January 1975, and quickly come into conflict with Financial
General's headquarters in Washington for making loans which both exceeded his
lending limit and were not secured by collateral. FGB's chairman, William J.
Schuiling, was sufficiently disturbed by Lance's practices that he intended to
force a show-down with Lance. But by June, 1975, Lance instead offered to buy
FGB's controlling interest in National Bank of Georgia for $7.8 million.(10)
When Olmstead needed to sell the rest of FGB in
1976, he turned first to Lance. At the time, Lance was working to elect Jimmy
Carter president. Anxious to join the Administration, rather than to remain in
banking, he turned Olmstead down.(11)
Lance was formally precluded from engaging in
financial transactions while director of OMB. However, according to later SEC
charges, Lance continued to meet with General Olmstead regarding the sale of
FGB, and put Olmstead in touch with William G. Middendorf, a former secretary
of the Navy who ultimately decided to take over FGB. Lance met with both
Olmstead and Middendorf at the Washington Metropolitan Club about the proposed
sale while director of OMB.(12). As of April 1977, Middendorf and a
group of twenty investors purchased Olmstead's interests in FGB, and Middendorf
was installed as the chairman of the bank. But the takeover group, including
former ambassador to Iran Joseph Farland, Arkansas banker Jackson Stephens, and
Occidental Petroleum chairman Armand Hammer, swiftly began to disintegrate. By
November, 1977 the shareholders had split, with Stephens heading a group
opposed to Middendorf -- even as the Federal Reserve ordered Olmstead and his
group to end their dual relationship to both International Bank and FGB by
January 31, 1978.(13)
It was precisely at this point that FGB, Bert Lance,
and BCCI came together to bring about BCCI's secret purchase of a $2 billion
bank in the nation's capitol.
Lance's problems had begun on July 11, 1977, when
President Carter asked the Congress to suspend ethics rules that would have
forced Lance to sell 190,000 shares of stock he owned in National Bank of
Georgia. He based his request on the ground that Lance would lose $1.6 million
if he was forced to sell, because the bank's stock was depressed. Weeks of bad
publicity followed, as well as an investigation by the Office of the
Comptroller of Lance's Georgia banks which found "unsafe and unsound"
banking practices at NBG and the other banks, but no criminal behavior by
Lance.
Following Congressional hearings in which he was
represented by Clark Clifford and Robert Altman on September 8-14, 1977, Lance
resigned from OMB and found himself in terribly difficult circumstances. Not
only was he exiled from President Carter's Administration, but his greatest
asset -- his network and experiences as a banker in Georgia -- had been turned
into an apparent liability. Also, Lance was still deeply in debt as a result of
his borrowing $3.4 million to purchase NBG just two years earlier, and had no
ready buyer for his interest in the National Bank of Georgia, his principal asset,
given the fall in the price of its stock. Moreover, as Lance's practices at NBG
had received a vast amount of negative national publicity, the value of the
franchise itself was potentially permanently impaired.
Lance's and NBG's perilous position, coinciding with
FGB's perilous position, provided a unique opportunity for Agha Hasan Abedi and
BCCI to exploit.
The marriage between Lance and BCCI in 1977 was one
not merely of convenience, but necessity. At the time, BCCI had already
attempted to enter the United States market and failed; and Lance was facing
indictment, deeply in debt, and had literally no other place to turn. Moreover,
Abedi and Lance shared some characteristics in common. Both Abedi and Lance
were entrepreneurial financiers who liked to operate at the border of legal
restrictions, in disregard of customary and usual banking practices. Both had
reached high positions in their home countries through providing financial and
other backing to political figures in their home countries -- Abedi to a
succession of Pakistani prime ministers, Lance to Jimmy Carter. And both had
come to a point in their respective careers where their entrepreneurial spirit
had been stymied by their respective establishments. They both needed to create
new opportunities to escape their difficulties. Without Abedi, Lance was only a
few steps away from bankruptcy. Without Lance, Abedi lacked any clear means of
entering the United States. Together, they were able to make Lance wealthy, and
to gain for BCCI secret entry to several of the most important financial and
banking markets in the United States.
During the process, both BCCI and Lance -- each
notorious within banking circles -- drew the persistent scrutiny of bank
regulators, federal investigators, and journalists alike. Both experienced the
most bitterly contested bank take-over in U.S. history in connection with the
Financial General Bankshares' takeover litigation. In the face of this unusual
regulatory scrutiny and public attention, BCCI was still ultimately able not
merely to enter the U.S. market, but to acquire the most important bank in
metropolitan Washington. This advantageous market entry would ultimately result
in BCCI owning a network of U.S. banks extending coast to coast through seven
states and the District of Colombia.
BCCI's
Targeting of National Bank of Georgia
And
Financial General Bankshares
As in most areas concerning BCCI, there is more than
one, mutually inconsistent, account of how BCCI and Bert Lance came together,
and of how BCCI came to target Financial General Bankshares (FGB) for takeover.
The first account, as testified to by Lance himself,
suggests that a former Georgia state Senator named Eugene Holly had developed a
relationship with Abedi and BCCI and wanted Lance to meet Abedi to see if they
could help one another. By this account, Lance went to New York in October
1977, met Senator Holly there, was joined by Abedi and his number two at BCCI,
Swaleh Naqvi. Lance was told that BCCI had developed a unique approach of
economic development for the Third World which it wanted to expand in the
United States. As Lance testified:
Basically, Mr. Abedi said to me: I am building a
bank headquartered in London that has a deep and abiding interest in the
problems of health, hunger, economic development. . . I shared that concern,
especially about economic development, because I had come from a poor section
of Georgia.(14)
After discussing economic development issues, Lance
and Abedi got down to basics: BCCI was looking to expand into the United
States, and wanted Lance's help. As Lance testified, Abedi understood that
Lance might need to know more about BCCI -- the last thing either Abedi or
Lance would wish to do was further embarrass the President of the United
States. Accordingly, Abedi would leave Lance with BCCI's annual reports, and
Lance could get back to him as to whether Lance could help. According to Lance,
he then turned to Clark Clifford, who had represented him in Congressional
hearings into Lance's activities in Georgia, and asked Clifford to do due
diligence on BCCI. When Clifford called Lance back to tell Lance that Abedi was
"a man of integrity and character," Lance agreed to meet with Abedi
and Naqvi in London, and there became BCCI's agent for its forays into the U.S.(15)
Thus, by Lance's account, Clifford first had contact with BCCI on behalf of
Lance in October, 1977.
According to Lance, while in London on October 15,
1977, he learned that Abedi had already targeted the Bank of Commerce in New
York for possible purchase by BCCI. Lance told Abedi that FGB was a much better
prospective purchase for BCCI, because it "enjoyed a very unique position
in American banking at that point in time in the sense that it was one of the
two or three, maybe four, multistate holding companies that were in existence
in the United States."(16)
Lance testified that while he had read other
accounts of how BCCI became interested in FGB, it was his belief that he
brought FGB to Abedi's attention, not anyone else.(17)
Lance also testified that in London, he also piqued
Abedi's interest in purchasing National Bank of Georgia from Lance -- on behalf
of Abedi's investor clients, not BCCI, and that Abedi soon advised him that
Ghaith Pharaon might be interested. As a result, Abedi arranged to have the Pharaon
purchase of National Bank of Georgia proceed on one track, while Abedi arranged
for the other Middle Eastern "investors" to work on the FGB takeover
on a second track.(18)
Jackson
Stephens: BCCI's Principal U.S. Broker?
A second, and inconsistent, account of BCCI's
initial entry into the U.S. was provided to the Washington Post in 1978 by
participants in the FGB takeover battle, and later reiterated in filings with
the Federal Reserve by Lance and BCCI attorney Robert Altman. By this account,
the initial contact between BCCI and FGB came from Arkansas multi-millionaire
and FGB shareholder Jackson Stephens.
At the time, Stephens was both a close friend of
Lance's, and a longtime activist in Democratic political circles. Stephens had
been instrumental in fundraising efforts for President Jimmy Carter, who had
been his classmate at the U.S. Naval Academy in Annapolis. Moreover, Stephens
retained a financial interest in National Bank of Georgia after Lance purchased
it from FGB.(19)
According to the Post account, by the time of
Lance's resignation, Stephens had already begun to broker the sale of National
Bank of Georgia to "a client of BCCI" -- BCCI front-man Ghaith
Pharaon -- as a means of assisting Lance. Stephens then went to BCCI and Abedi
to see if BCCI might be interested in acquiring the metropolitan Washington FGB
franchise directly. As the Post wrote:
A BCCI executive said the Arabs weren't interested
in FGB, but the subject came up again on Nov. 26 when Stephens and Lance met
Abedi in Atlanta for more talks about National Bank of Georgia. Abedi began to
sound interested, and Stephens reportedly offered to sell a block of 4.9
percent of FGB and recommended Abedi meet [Eugene Metzger, a dissident
shareholder with a significant number of FGB shares] to pursue the matter.(20)
Altman's account to the Federal Reserve removed
Lance from the picture even further, contending that Jackson Stephens, not
Lance, handled all the negotiations regarding National Bank of Georgia, and
first proposed to BCCI the possibility of buying FGB.
As set forth in a May 9, 1978 letter from Altman to
the Federal Reserve, Jackson Stephens told a BCCI representative during
negotiations over the sale of National Bank of Georgia to Pharaon in November,
1977 that FGB might be available and could be a good investment for other BCCI
customers. In late November, Stephens told Abedi that Abedi should meet with
FGB investor Eugene Metzger, and designate Metzger and Stephens as agents for
these Middle Eastern investors. Neither BCCI nor any of its affiliates provided
financing for the purchase of the stocks, although BCCI advanced the funds
through the accounts the Middle East investors maintained at BCCI. Some funds
were borrowed by one "investor," Fulaij, from the Kuwait International
Finance Company ("KIFCO"), which BCCI purportedly had a 49 percent
interest in, but actually owned and controlled through its nominee, Faisal
al-Fulaij.
Adham's
Account of Origin of FGB Takeover
A fourth account of the genesis of the BCCI's
interest in FGB, completely inconsistent with the Lance, Post, and Altman
accounts, came from BCCI shareholder and front-man Kamal Adham, who advised the
Federal Reserve on April 10, 1991 by letter that an Middle Eastern friend of
his, Hasan Yassin, told him that FGB would be a good investment, and Adham as a
result brought the prospective investment to BCCI for review as his business
agent. Adham did not explain to the Federal Reserve how Yassin had known of
FGB's availability, or why Yassin believed Adham might be interested, nor had
Lance ever heard of Yassin. Two weeks later, Adham reiterated these statements
in formal testimony before the Federal Reserve.(21)
Oddly, given Altman's representation to the Federal
Reserve that the Middle Eastern investors became involved as a result of a
meeting between Stephens and Abedi, Clifford himself told the Federal Reserve
in 1981 that Adham's involvement came "from a friend who was associated
with the Saudi Arabian embassy" with "contacts" to Mr. Middendorf.
Clifford's reiterated this statement to the Senate on October 24, 1991,
testifying that "the man in the Saudi Arabian Embassy looked into [FGB] in
more detail and concluded that it might be an attractive acquisition.
Apparently, that was one of his functions in the Saudi Arabian Embassy, to pass
information of that kind back to Saudi Arabia."(22)
Later, Adham, Clifford, and Altman would seek to
resolve the contractions in these accounts in testimony before the Federal
Reserve, discussed below.
The
Federal Reserve's Findings
On July 29, 1991, the Federal Reserve issued
findings concerning the genesis of the 1977-78 takeover suggesting that in
fact, Lance, Stephens and BCCI, working together, had initiated the discussions
regarding the BCCI group's purchase of FGB in a meeting on November 7, 1977.
According to the Federal Reserve:
At the suggestion of T. Bertram Lance
("Lance"), Abdus Sami ("Sami"), a senior BCCI officer from
its inception and a close associate of Abedi, met with Jackson Stephens
("Stephens") to discuss the purchase by a BCCI client of the interest
of Lance and others in NBG. . . During the meeting, Stephens, who was
dissatisfied with his investment in Financial General, told Sami that Financial
General might be a good investment for BCCI clients.(23)
The Federal Reserve findings are indeed the only
account that is consistent with the contemporaneous documentary records
concerning what took place. These Federal Reserve findings show Lance's
testimony to have incorrectly omitted Stephens' key role; Altman's account to
have incorrectly omitted the key roles of Lance and of BCCI; and Adham's
account, bolstered by Clifford at the Federal Reserve hearing, to be at best,
immaterial to the FGB purchase, and at worst, an outright fabrication.
Ghaith
Pharaon and the NBG Takeover
In both the National Bank of Georgia and Financial
General Bankshares takeovers, although BCCI was the real party at interest, it
disguised that interest for a number of reasons, including the fact that at the
time, Bank of America's 24 percent ownership of BCCI would have made BCCI's
purchase of a U.S. bank outside California illegal under any circumstance.
Both purchases began moving on a fast track in
November and December, 1977. Although Lance and the others involved took pains
to suggest that the two purchases were unrelated, as Lance acknowledged, Lance,
Abedi, Clark Clifford, and Robert Altman were central to both of them, and the
two transactions took place simultaneously.(24)
For example, while Clifford and Altman have
testified that they did not become involved with Lance and the FGB transaction
until February, an article in the Washington Post on December, 18, 1977, quotes
Altman, as Lance's representative, confirming negotiations among "Middle
Eastern financial interests" and Lance concerning Lance's establishment of
"a holding company to direct their capital into banks and other U.S.
investments."(25)
The article describes Abedi's role as the
"matchmaker" for the proposed transactions, and specified that
"Lance's attorney, Altman" had announced earlier in December that
Lance was negotiating to sell shares of NBG stock for $20 each -- precisely the
price paid in early 1978 to Lance by BCCI nominee Ghaith Pharaon.(26)
Of the two transactions, the National Bank of
Georgia transaction was far simpler, and consummated with far greater ease. The
principal reason for the difference was that the National Bank of Georgia was
not a bank holding company, and as a result, was regulated only by the Office
of the Comptroller of the Currency, which was more worried about the wretched
condition of the bank and its possible failure than about the possibility that
its purchaser, Saudi "billionaire" Ghaith Pharaon, might be a
front-man for BCCI.
BCCI's relationship with Pharaon went back to the
foundation of Pharaon's fortune. Pharaon inherited funds and opportunities,
from his father Rashid, who had been a physician for the founder of Saudi
Arabia, Abdul Aziz. His father became close to the King, and was posted abroad
as a Saudi Arabian Ambassador to all Europe from 1948 to 1954, during which the
younger Pharaon was educated in Paris. Later, Pharaon studied in Lebanon,
Syria, and Switzerland. He completed his education in the U.S. at the Colorado
School of Mines and Stanford University, where he studied petroleum
engineering, and completing it with a Harvard MBA, after which he began
referring to himself as "Dr. Pharaon."(27)
While in his twenties in the mid-1960's, Pharaon
became friendly with then-Saudi intelligence chief Kamal Adham, who introduced
him to Abedi and BCCI. Pharaon and Adham went into business together, building
a Hyatt Hotel in Jeddah, Saudi Arabia, financed by BCCI, which in turn
generated enough money for Pharaon to found a construction firm, REDEC, whose
success formed the basis for Pharaon's reputation as a billionaire. Ultimately,
numerous banks financed Pharaon's activities as well as BCCI, and by 1977,
Pharaon had already taken short-term passive interests in banks in Texas and
Michigan.
Chronology
of the Sale of NBG to Pharaon
The National Bank of Georgia sale to Pharaon and
BCCI began, according to testimony by Bert Lance, through discussions and
negotiations between Lance, Abedi and other BCCI officials in Atlanta over
Thanksgiving weekend in 1977.(28) It was precisely the same time
that Lance, Abedi and BCCI reached agreement on beginning the takeover of
Financial General Bankshares as well.(29)
Abedi handled all the negotiations with Lance
concerning the purchase of National Bank of Georgia. Although Pharaon was the
apparent buyer, Lance never even met him until January 1978, after the
negotiations had been completed, the day before the sale of National Bank of
Georgia from the Lance group to Pharaon was announced. Ultimately, Lance
received $2.4 million for his interest in the bank, twice the previous market
value of the shares.(30) In addition, Lance received another $3.5
million from BCCI's Grand Caymans affiliate, ICIC, for acting as BCCI's
business agent. Lance used these funds to repay debts to the National Bank of
Chicago, and to purchase shares of FGB.(31) The funds provided Lance
were originally described as "loans," but BCCI never asked Lance to
sign a note or to arrange terms for repayment, and in time, the payment came to
be understood as a consulting fee, or retainer.(32)
Unlike the bitterly contested FGB takeover, the sale
of National Bank of Georgia from Lance and its other investors proceeded
quickly, and reasonably smoothly. The $20 per share tender offer, with a total
cost of $21 million for Pharaon at twice the recent market value of the shares,
assured little opposition from the shareholders. Moreover, Pharaon's purchase
of his stake of NBG shares from Lance was completed by the beginning of
January, 1978 -- before the regulators knew of the BCCI group's attempt to take
over FGB, and before a federal grand jury in Atlanta began a criminal probe of
Lance's banking affairs.
Nevertheless, federal regulators were uneasy about
the Pharaon transaction from the beginning because of the involvement of BCCI
officials in it. A memorandum to the files from then-Comptroller of the
Currency John Heimann on January 4, 1978 articulated the nature of the
concerns:
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.(33)
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.
Pharaon had told [Guyton, the NBG president] that
Pharaon was negotiating for another bank in the United States and would have an
announcement to make within 30 days. Guyton also understands that BCCI is
looking for another bank in the United States.(34)
There is no evidence that Pharaon was looking at any
other U.S. bank at this time, apart from BCCI's still secret interest in FGB.
Thus, while Pharaon was ultimately not involved in the 1978 FGB takeover, in
retrospect, this reference suggests that Pharaon may have been considering
participating with BCCI in its FGB takeover as a nominee for the bank.
Within two weeks, OCC received additional disturbing
information. A small aviation company was requesting an unsecured loan for
$890,000 from NBG to purchase a Grumman airplane, backed up by a irrevocable
letter of credit issued by BCCI, all at Lance's request. The president of the
company was Lance's personal pilot, and the loan was being made to purchase a
plane to facilitate Lance's business activities for BCCI. The loan was not one
that NBG, or any well-run bank would ordinarily make, because the credit was
unsecured. However, NBG officers felt they were under pressure from Lance to
approve the loan, who was now on BCCI's payroll, 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.(35)
OCC officials told Guyton it would be
"foolish" to make the loan, and NBG accordingly agreed not to make
it. The incident represented precisely the kind of self-dealing that Heimann
had already seen in reviewing Lance's finances at part of the inquiry that
arose while Lance was director of OMB. When the FGB takeover attempt became
public month later, Heimann directed OCC officials in enforcement to determine
whether Pharaon, like Gokal before him, was a front for BCCI.
On March 30, 1978, Robert B. Serino, director of
Enforcement and Compliance of OCC, met with Pharaon, to find out just what role
BCCI and Lance were going to play in Pharaon's NBG. Pharaon assured the OCC
that Lance would not be involved further in his bank, and that BCCI would act
merely as an advisor, but Serino, in a memorandum to Heimann, was uncertain as
to whether to believe him.
Pharaon . . . indicated that there never was an
understanding or desire on his part to have Lance participate in the management
of NBG and this was not to be a term of his purchase. This is contrary to the
representations given to us and the SEC by Lance's counsel during the original
meetings . . . at that time, they indicated that one of Pharaon's conditions of
the purchase would be that Lance would be acting as chief executive officer.
Pharaon indicated that Abedi, in fact, was the one
who suggested to him that this would be a good investment and essentially put
the deal together for him. He indicated that BCCI was, in fact, one of his financial
advisors and that he had hoped to use employees of BCCI (paid by him
personally) to review the transactions at NBG periodically to advise him as a
controlling shareholder of the condition of the bank in the future. . .
My conclusions from meeting with Pharaon are that he
tells a convincing story; however, it appears that he is "beholden"
to or at least influenced by Abedi. I believe he could, in fact, be Abedi's alter
ego in the United States.(36)
There is no evidence in OCC files to suggest that OCC
sought to investigate further its suspicions about Pharaon acting as a front
man for BCCI in the purchase of National Bank of Georgia. Instead, the OCC,
accompanied by the SEC, filed a joint civil suit against Lance, National Bank
of Georgia, and Lance's other bank, the Calhoun bank, charging them with
"fraud and deceit" in violating banking and securities laws, and
including among the charges allegations that Lance used the banks to personal
enrich himself by providing himself with excessive and unsecured loans. All
three signed consent decrees, neither admitting nor denying the allegations --
but agreeing not to engage in unsafe and unsound banking practices in the
future.
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.(37) 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.
The truth was that Pharaon and BCCI had purchased
NBG in a partnership, with BCCI lending Pharaon some of the funds to buy the
bank, and agreeing to share the expenses, profits, and losses with Pharaon
50-50. This arrangement was convenient for both Pharaon and BCCI because it
permitted them to rearrange the ownership of NBG as needed depending on their
respective financial situations.(38) It went undetected until 1991,
when the Federal Reserve for the first time investigated the NBG takeover of
1978 and concluded that Pharaon had borrowed at least part of the funds he used
for the acquisition, with BCCI as his partner in the transaction from the
beginning.(39)
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. Moreover, 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.
Clifford
and Altman and FGB Takeover
By all accounts, Clifford and Altman's introduction
to BCCI and FGB came as a consequence of their representation of Lance before
Congress beginning on Labor Day weekend in 1977. But the parties involved
provide differing accounts of how and when Lance brought Clifford and Altman
into his bank deals in the ensuing months.
According to Lance, he first discussed the
possibility of Clifford becoming counsel for Abedi and BCCI as early as
October, 1977, because Lance "thought that Mr. Clifford ought to be Mr.
Abedi's counsel in regard to what he was doing." Lance said that Clifford
was already familiar with BCCI at this time, because Clifford had on Lance's
behalf "done the due diligence that he reported back to me on from the
standpoint of BCCI and Mr. Abedi" before Lance became involved with them
in October.(40)
By contrast, Clifford testified that his and
Altman's involvement with BCCI began in December 1977 when Lance, as a
"former client," brought Abedi in to talk with Clifford for "a
social visit." Although the FGB takeover attempt had in fact already begun
in November, according to Clifford, there was no discussion at the meeting involving
Lance, Clifford, and Abedi, of any prospective takeover. Rather, according to
Clifford, Abedi confined himself to telling Clifford of his philosophy of
banking -- to provide the Third World with banking services which they had
never had before, as a means of bringing progress to developing lands.(41)
According to Clifford, in the weeks that followed,
he would "hear from time to time [from] little reports [that] would sift
in that Mr. Abedi and BCCI were in the process of acquiring stock in a company
called Financial General Bank Shares . . . I had not heard of them
before."(42) According to Clifford, only after BCCI and the
Middle Eastern investors had made their acquisitions of FGB stock, and only
after the SEC had been alerted by the Middendorf group of the action by the
BCCI group, did Abedi and the others involved retain Clifford and his firm,
Clifford & Warnke to assist them in the litigation regarding the attempted
takeover. Clifford testified that his representation of the bank and its
investors began in February, 1978.(43)
As Clifford affirmed in his written testimony to the
Senate:
Without our involvement or advice, four of these
investors had purchased stock in an American bank holding company called
Financial General Bankshares ("FGB"), the predecessor to First
American, without filing certain disclosures with the Securities and Exchange
Commission ("SEC"). The SEC investigated these transactions, and the
management of FGB, concerned that these purchased foreshadowed a possible
corporate takeover effort, filed suit against the Arab investors, BCCI, Mr.
Abedi and others. We were retained to represent Bert Lance, Agha Hasan Abedi,
BCCI, Sheikh Mohammed bin Zaied al Nahyan, Sheikh Sultan bin Zaied al Nahyan,
Faisal al Fulaij, and Abdullah Darwaish, certain of these defendants.(44)
Thus, by Clifford's account, the entire structure of
the FGB transaction and the assembling of the shareholders had been conceived
and implemented by BCCI and the "investors" before Clifford had ever
become involved. The representation began in connection with SEC action that
took place in mid-February, 1978. This account would buttress Clifford and
Altman's contentions that they were "grossly deceived" from the first
by BCCI.(45)
However, the chronology described by Clifford is
inconsistent with both the details and the sense of Lance's testimony, and with
a contemporaneous telex sent to Abedi and BCCI by BCCI official Abdus Sami, who
was working closely with Lance in late 1977 and early 1978 on the FGB takeover.
The
Sami Memo:
Documentary
Evidence of BCCI's Actual Intentions
The Sami memo to BCCI chairman Agha Hasan Abedi,
written January 30, 1978, provides the best documentary summary of the actual
structuring of the FGB takeover by Lance and BCCI. It reveals the clear
involvement of Clark Clifford in the month of January, 1978, a time when
Clifford contends he was uninvolved in BCCI's attempt to take over FGB, and
prior to what Clifford described as the triggering event for his involvement,
the commencement of litigation involving the SEC in mid-February, 1978.
The Sami memo, written in Washington and sent to
Abedi in Karachi, Pakistan, first describes the "situation of acquisition
of FGB," noting the purchase to date by the BCCI group of 17.5 percent of
the FGB stock, with commitments or control over 23 to 24 percent of the stock,
and that a meeting needed to take place between "our friend," Bert
Lance, and the Middendorf group, to determine whether the BCCI takeover would
proceed by with the consent of the Middendorf group, or through a contest. In
the telex, Sami advised Abedi that they needed to prepare for litigation in
which the Middendorf group would argue that it was undesirable for FGB to be
taken over by foreigners. He added that BCCI needed to retain Clark Clifford as
counsel in the event of a contest for control. Sami then described further
steps BCCI needed to take in preparation for such a struggle:
To keep individual ownership to below 5 percent we
have to distribute the ownership to 4 persons of substance. We have already given
the names of Sheikh Kamal Adham and Mr. Fulaig [sic]. We want two other names
immediately. Under Securities and Exchange Regulations we are also obligated to
report to Commission as well as Financial General details of purchases. We
require their biodata and powers of attorney for them. We must have this early
this week to avoid possible liability on Mr. Metzger and purchases. We have to
be careful that our name does not appear as financier to most of them for this
acquisition. The necessity of filing this return has arisen on account of
concentration of over 5 percent in the hands of Metzger, his knowledge and our
intention to acquire control.(46)
The Sami memo described an intentional strategy by
BCCI, Lance, Adham, Fulaij, and other members of the BCCI group to disguise
BCCI's underlying interest in the transaction, and the fact that the
individuals were acting as a group, in order to circumvent SEC disclosure
rules. Under American securities law, anyone who buys five percent of a
publicly traded company must file a disclosure form with the Securities and
Exchange Commission. In the memo, Sami also advised Abedi that he has "met
Clark Clifford and explained to him our strategy and our goal. He was happy to
know the details and has blessed the acquisition," suggesting that
Clifford was a knowing participant in BCCI's takeover scheme on or before
January 30, 1978, and had already been retained as lawyer for the group prior
to that date.(47)
Sami's dating of Clifford's involvement is
buttressed by the legal bill sent by Clifford to BCCI for this period. The
bill, dated May 24, 1978, describes the legal services rendered them by
Clifford as dating not from mid-February, but from January 1978.
Significantly, the federal district court judge who
heard the case brought by the Middendorf group against BCCI and the Lance group
made a specific finding regarding BCCI's apparent use of nominees in connection
with the initial takeover, as suggested by the Sami memorandum. On April 27,
1978, the court found that in early December 1977, BCCI's agents sought to
purchase a percentage of Financial General shares substantially in excess of
any amount for which Abedi then had purchasers.(48) Thus, rather
than responding to investment requests from clients, BCCI was in effect acting
not only as agent but as principal in the takeover.
Within a matter of days following the writing of the
Sami memorandum, BCCI added the crown prince of the Abu Dhabi royal family,
Sheik Sultan bin Zayed al Nahyan, and Abdulah Darwaish, financial adviser to
the Abu Dhabi royal family, as the two additional shareholders for the purpose
of the takeover referred to by Sami. Significantly, during this period, Abedi
also solicited Iranian millionaire Mohammed Rahim Motaghi Irvani, a business
partner of former CIA director Richard Helms, to be a nominee shareholder.
Irvani, was listed in the original SEC filing in the early, 1978 takeover
attempt, as a 5 percent shareholder of CCAH, and BCCI's lead front-man in the
original takeover. Several documents, introduced in civil litigation involving
Irvani in Georgia, describe Irvani's recruitment by Abedi in early 1978 to act
as a front-man for BCCI.(49)
The
FGB Litigation, Consent Decree and Takeover
On February 7, 1978, a meeting of FGB shareholders
was convened at which Lance announced that the BCCI group controlled 20 percent
of the FGB stock and wanted eventual control -- despite having never previously
disclosed its takeover intentions, as required by federal securities laws, to
the SEC.
The Middendorf group, recognizing that Lance's
statements amounted to a confession of violating SEC disclosure laws,
immediately complained to the SEC and the Federal Reserve, which launched
investigations.
Lance had made a significant mistake in advising the
Middendorf group of the coordinated takeover effort by the BCCI group. Within
days, both Lance and BCCI began publicly announcing that FGB investors had
purchased the stock individually, not as a group. He also announced that BCCI
was uninvolved in the purchases and honoring the legal prohibitions against its
involvement that existed due to its partial ownership by Bank of America.(50)
The revised version of events by Lance and BCCI had come too late: the
Middendorf group, which still controlled FGB, filed suit on February 17, 1978
alleging violations of securities laws.
A month later, the SEC filed its own suit to block
the Lance-BCCI FGB takeover attempt. Eleven defendants were named in the
action, including Lance, Abedi, BCCI, and four BCCI clients. However, an agreement
had already been struck between the SEC and the Lance-BCCI group, which suited
both the SEC and the would-be investors.
Given Lance's admissions, and the careless
assemblage of the Middle Eastern shareholders by BCCI, the SEC case against the
Lance-BCCI group was formidable, and hard to contest. For example, each
"individual" Middle Eastern investor sought to acquire, at precisely
the same time, an identical interest in the bank of 4.9 percent, which placed
each one, supposedly acting independently, at just under the level that would
otherwise have required them to disclose their purchase to the SEC. It was all
too obvious that they were acting jointly, as a group. But the SEC was not
looking for punitive action, merely corrective action. So long as Lance-BCCI
group agreed to live by SEC rules in the future, and compensate the injured
parties by paying more for the shares of the bank, the SEC would let them go
forward. The Lance-BCCI group agreed to pay the highest price to date for stock
in FGB to any shareholders who wanted to sell -- and promised to keep BCCI out
of any continued takeover efforts of FGB, other than as an investment
"advisor."
The SEC's surprisingly mild position, given the
baldness of the group action, was a further demonstration of Abedi's principal
of not being overly concerned about laws. Here, BCCI had broken SEC laws and
while hampered by SEC action, would be permitted to move forward with its
arrangements to take over FGB so long as it paid the current FGB shareholders
enough for the privilege.
On April 27, a federal judge permanently enjoined
Lance and ten other defendants form violating securities laws, and the SEC
consent decree was issued. In its injunction, the federal district court made
specific findings that there was evidence BCCI was at the center of the
takeover, and might well have controlled the takeover. The court said that the
BCCI clients relied "heavily, if not exclusively" on Abedi and BCCI
in deciding to purchase the FGB shares and, tellingly, that BCCI's agents had
to sought to purchase a percentage of FGB shares substantially in excess of any
amount for which Abedi then had purchasers. These findings should have been
warning lights to regulators. In fact, because of these warnings, the Federal
Reserve later sought and received assurances from BCCI, the Middle Eastern
investors, and the attorneys, that BCCI was not behind the purchase.
In the meantime, BCCI executives began making false
statements to the press in an apparent attempt to rewrite history and discourage
further litigation. For example, two top BCCI officials, Allaudin Shaikh and
Dildar H. Rizvi, told the Washington Post in mid-March, 1978 that Lance was
merely "an informal adviser who pointed out investment opportunities in
the U.S." for BCCI," suggesting that he was "not employed by the
bank . . . was paid nothing by the bank. . . and had received absolutely no
loans from BCCI or loans arranged by BCCI." The executives also told the
Post that the Middle Eastern investors advised by BCCI were "four
individuals from different countries, absolutely unknown to each other."(51)
On March 28, 1978, a memorandum to the Federal
Reserve Board of Governors discussed the Fed's investigation into the
Lance-BCCI activities, stating that the SEC had found "no evidence"
that the Middle Eastern investors had actually acted in concert, despite
Abedi's and BCCI's serving as their joint financial advisor. However, within
days, the U.S. District Court judge hearing the SEC complaint found that BCCI,
Abedi and the four investors had indeed acted as a group.
By April, 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. On May
9, 1978, Altman told the Federal Reserve that Abedi and BCCI were 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.(52)
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 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.
Although the takeover was now able to move forward,
Lance's poor judgment would soon result in his being severed from both National
Bank of Georgia and FGB. In February, his statements had set off the SEC action
and FGB civil litigation. Moreover, his own legal problems pertaining to his
sloppy banking practices in Georgia were mounting. Over the remainder of 1978,
Lance was eased out by Clifford, and replaced at the apex of the BCCI group by
retired Senator Stuart Symington. Symington would later become chairman of the
Board of Directors of the acquisition vehicle BCCI created for the takeover,
and would remain so until his death.
In the months that followed, the Middendorf group
and the BCCI group continued to litigate the takeover. Dozens of depositions
were taken, and all the parties to the takeover were placed on the record.
During those depositions, the BCCI investors repeatedly stated under oath that
they were purchasing FGB shares for their own interest; that BCCI did not
control, vote, or have the power to dispose of their shares; that BCCI would
not finance the purchase of their shares; and that BCCI's role was limited to
that of commercial banker and investment advisor for the Middle Eastern
investors.(53)
In 1991, Clifford testified that "nothing in
the course of this litigation . . . indicated in any way that they [the Middle
Eastern investors] were nominees for BCCI, as is now alleged."(54)
However, throughout the litigation and takeover, there were in fact recurrent
allegations that BCCI was behind the takeover, and regulators, including the
Federal Reserve, the Office of the Comptroller of the Currency, and various
state banking authorities, continued to insist on receiving affirmations from
everyone involved that BCCI was not a principal.
The ambiguous nature of BCCI's role was demonstrated
again during the summer of 1978, when BCCI, ostensibly on behalf of the Middle
Eastern investors, formed Credit and Commerce American Holdings
("CCAH"), N.V., as a Netherlands Antilles holding company, which in
turn held a subsidiary, Credit and Commerce American Investment, B.V., of the
Netherlands, as vehicles for acquiring shares of FGB. In statements filed with
the SEC, BCCI, Abedi, and the four Middle Eastern investors stated that BCCI
would have no interest in CCAH. They advised the SEC that ICIC Overseas would
own up to 5 percent of CCAH's shares. At the time, ICIC Overseas was ostensibly
a staff benefit fund for BCCI, but in fact was then and remained a slush fund
for and alter ego of BCCI itself.
The
1978 CCAH Application
By October, no agreement had yet been reached
between the Middendorf group and the BCCI group. However, the BCCI group in the
form of CCAH pressed forward with making a formal application to the Federal
Reserve for the acquisition of all the voting shares of FGB. Under the terms of
the application, CCAH, CCAI, and FGB would become bank holding companies and
acquire all of the shares of Financial General Bankshares. The four Middle
Eastern "investors" would contribute all of their shares of the bank
to CCAI, in return for shares of CCAH. CCAI would then make a tender offer for
the remaining shares of Financial General Bankshares. As stated to the Federal
Reserve by Robert Altman in his capacity as counsel to CCAH, "neither BCCI
nor any other organization related to BCCI contemplates owning any equity
interests in CCAH."(55)
At the time, Clifford and Altman were dealing
simultaneously with BCCI on the acquisition and with BCCI's various front-men
and nominees.
For example, in this precise period, Clifford and
Altman received a power of attorney from one acknowledged BCCI front-man or
nominee, Iranian businessman Mohammed Irvani, for Irvani's proposed involvement
as a participant as a shareholder of CCAH, in a transaction handled on Irvani's
behalf by former CIA director Richard Helms. Helms drafted an agreement
indemnifying Irvani from any loss in connection with Irvani giving Clifford's
law firm a power of attorney to act in Irvani's name in purchasing CCAH shares.(56)
The fact that Irvani was acting as a front-man for BCCI at the time was
confirmed recently by his son, Bahman Irvani, who told the Atlanta Constitution
that his father "lent his name to the 1978 takeover bid at the request of
BCCI founder Agha Hasan Abedi."(57)
Through the remainder of 1978 and early 1979, the
critical issue focused on by regulators was whether BCCI actually had a hidden
interest in CCAH. For example, on November 7, 1978, Federal Reserve Lloyd
Bostian of the Richmond Fed wrote Altman to ask for more information on the
relationship between CCAH, CCAI, and BCCI. Two weeks later, Altman replied that
although ICIC would have an ownership interest of 4.5 percent in CCAH, and one
or two persons associated with BCCI or ICIC might serve as directors of FGB,
neither BCCI nor ICIC would have contracts with the bank or their holding
companies relating to management or investments. Soon thereafter, the
Comptroller of the Currency raised concerns about who would be providing
financing for the proposed FGB purchase. On January 12, 1979, Altman wrote the
Federal Reserve to specify that no more than $20 million would be borrowed by
the shareholders for the acquisition, and that all such borrowing would be made
by institutions having no affiliation with either CCAH or CCAI.
In the meantime, the Middendorf group had continued
to object to the takeover, and on January 26, 1979, the Attorney General of
Maryland issued an opinion stating that Maryland law precluded a hostile
takeover of a bank. On February 16, 1979, the Federal Reserve dismissed the
1978 CCAH application on the ground that it violated Maryland law, and in
response, CCAH and CCAI sued to overturn the Maryland decision.
The
1980 CCAH Application
Those involved in the original takeover believed
that the Federal Reserve's objections would end if they were able to resolve
the continuing fight with the Middendorf group and end the take-over battle.
They therefore sought to sweeten the financial reward to the non-CCAH
shareholders of FGB, and find ways to shield the CCAH purchase from the shadow
of BCCI. Tentative agreement was reached with the non-CCAH shareholders for the
sale of the bank in March 1980, while Senator Symington was pressed into a
leading role as chairman of CCAH and a would-be director of Financial General
Bankshares. Thus BCCI had arranged to replace its shady reputation with the
very distinguished and respectable reputation of retired United States Senator
and former Democratic Presidential nominee. In May, the non-BCCI faction sent a
letter of understanding to Symington setting out the guiding principles of the
FGB acquisition, which included the requirement that Symington himself hold and
vote 60 percent of the stock of CCAH for the first five years, with Clifford
succeeding Symington in the event of his death or inability to complete his
term. The provision was suggested by Clifford as a means of assuring regulators
that BCCI would not secretly control the bank.(58)
Even at this point, lawyers for the Middle Eastern
investors knew that the actual shareholders they were representing were
potentially a fluid group. As former Federal Reserve lawyer Baldwin Tuttle
explained in a May 27, 1980 memorandum to Robert Altman and two other BCCI
attorneys, entitled "The Application (At Long Last!)":
It will be necessary to determine who the
new investors will be (we should try to keep as closely as
possible to the original cast of characters to help with our moratorium
problem.) (emphasis added)(59)
The memorandum from Tuttle implies that even in
1980, the attorneys for the acquiring group believed that the identities of the
"investors" were not in control of the proposed takeover, but names
to be manipulated at will to deal with legal, regulatory, and financial issues
as they arose.
On November 25, 1980 -- three years after the
original takeover of the bank began with Bert Lance -- CCAH and CCAI filed a
second application with the Federal Reserve to become bank holding companies.
The application made a number of key representations, required by the
regulators, regarding the nature and source of the financing of the venture, in
part to demonstrate that BCCI had no direct or indirect interest in the
transaction. These representations included:
** None of those purchasing the CCAH stock would
retain any personal indebtedness in connection with the transaction.
** All of the funds used in the transaction would be
provided from the personal funds of the investors.
** None of the funds would be from financial
institutions affiliated with BCCI.
The application, filed on CCAH's behalf by Clifford
and Altman, also made an iron-clad statement that BCCI had no interest, direct
or indirect, in the bank:
BCCI owns no shares of [Financial General], CCAH, or
CCAI, either directly or indirectly, nor will it if the application is
approved. Neither is it a lender, nor will it be, with respect to the
acquisition by any of the investors of either [Financial General], CCAI or CCAH
shares."
In a written response to questions concerning the
relationship between BCCI and CCAH, Altman further stated that the shareholders
of CCAH had all made personal investments, and none of them were acting
"as an unidentified agent for another individual or organization."
As part of the application process, the investors
provided the Federal Reserve with financial information, typically consisting
of extremely general statements about the net worth of the applicants. For
example, the certificate provided for Kamal Adham consisted of a declaration by
a Middle East accountant based in Saudi Arabia on June 19, 1978, addressed "To
whom it may concern," that states:
Without any responsibility, we here certify that the
estimation of the net worth properties [sic] and investments of H.E. Kamal
Adham, as at June 15th 1978, is U.S. dollars 134.000.000 ($134 million).
According to the accountants, this conclusion was
based on an estimated value of his investments in land and buildings at $100
million, buildings outside Saudi Arabia at $8 million, and
"investments" not otherwise specified at $26 million.
The Federal Reserve made additional efforts to
secure more precise information on the finances of the would-be purchasers, and
were eventually told that the financial resources of many of the shareholders
could not be calculated, because they were rulers of nations who owned all of
the land of the countries they ruled, and their financial resources were
essentially the net national wealth of their countries.
In a letter from BCCI lawyer Baldwin Tuttle to the
Federal Reserve, dated November 5, 1990, Tuttle advised the Federal Reserve:
By tradition and historical background of the
Trucial Sates, the ruler of an Emirate owns all of the land of his State . . .
Similarly, all the natural resources of the State are also regarded as the
personal property of the ruler and his heirs who enjoy complete authority to
utilize them as they consider fit.(60)
Tuttle told the Federal Reserve that it was
"impossible to estimate or segregate" the assets of the Al Nayhan
family from those of the Sheikh himself or of the emirate of Abu Dhabi because
they are "not regarded as separate entities." According to Tuttle,
the legal situation of all property in these emirates was identical -- the
proposed investors in FGB owned everything of value in the emirates they ruled.(61)
Assured of the solvency of these apparent investors
in FGB, by early 1981 the Federal Reserve was moving to lift the remaining
barriers to the purchase, if it could be certain that BCCI was not secretly
behind the transaction. This issue was of deep concern not only to the Federal
Reserve, but to the Office of the Comptroller of the Currency, which knew the
most about BCCI. OCC had learned of BCCI's use of nominees in connection with
its review of Bank of America's interest in BCCI; it had concerns about Ghaith
Pharaon being BCCI's alter ego in his purchase of National Bank of Georgia.
Given its knowledge, the FGB transaction made OCC officials uneasy. But the
Federal Reserve was the primary regulator, and the OCC was not willing to stop
the FGB transaction from moving forward, so long as they received assurances
from everyone involved that BCCI was not a party to the transaction.
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.
As Charles Muckenfuss III, the senior deputy
comptroller of the currency, explained in the letter to the Federal Reserve:
We note that in the October, 1978 application a
relationship between the investors group and the Bank of Credit and Commerce
International (BCCI) was outlined. Members of the proposed investors group or
Credit and Commerce American holdings, N.V. and Credit and Commerce American
Investment, B.V., also hold an interest in BCCI. It has now been represented to
us that BCCI will have no involvement with the management and other affairs of
Financial General nor will BCCI be involved in the financing arrangements, if
any are required, regarding this proposal. This commitment is critical, both
now and in the future, since such a relationship with another financial
institution would be a significant factor in appraising this application. This
is especially important in light of the overlapping ownership which will exist
between Credit and Commerce American Holdings N.V., Credit and Commerce
American Investment, B.V., and BCCI. Moreover, any enhanced direct or indirect
affiliation or relationship would take on even greater significance in light of
the fact that BCCI is not subject to regulation and supervision on a
consolidated basis by a single bank supervisory authority.(62)
Thus, by early 1981, the technical securities and
banking regulatory issues had been solved by the CCAH group. The only remaining
obstacle to approval of the CCAH group takeover was continued suspicion by
regulators that BCCI -- investment advisor to most of the shareholders and
owned by a number of the shareholders -- might still somehow be a direct or
indirect shareholder. The regulators therefore repeatedly asked Clifford,
Altman, and the CCAH shareholders for assurances on this point, and repeatedly
received them. The Federal Reserve and the OCC were now ready to accept these
assurances. State regulators, especially Sidney A. Bailey, the chief bank
regulator for Virginia, responsible for overseeing FGB banks in Virginia, were
not.
Virginia's
Objection to the CCAH Takeover
Bailey had served at OCC for twenty years as a bank
examiner before becoming the number one bank regulator for Virginia in 1978.
Bailey had previously been visited at the state banking offices in Richmond by
Clifford and Altman, and had felt that Clifford's representations to him were
theatrical and rehearsed. Clifford had argued that America was strengthened by
foreigners recycling petrodollars to the U.S., while Bailey believed in local
control, so that regulators would have access to the people in charge if there
were trouble.(63)
As far as Bailey was concerned, there was no way of
knowing who this Middle Eastern group really represented, what they intended to
do with the bank after they took it over, or why they had selected this bank in
the first place. Bailey believed that banks were like churches, not just basic
local institutions in which citizens placed their money, but the repositories for
that which is good and sound in a community, the embodiments of a community's
past, present and future. The representations that were being made to him by
Clifford and Altman were designed to provide comfort to him concerning the
intentions of the Middle Eastern investors, but to Bailey, they were inherently
unverifiable. For that reason, Bailey had told the Federal Reserve that as far
as the State of Virginia was concerned, "the proposed acquisition will be
inimical to the convenience and needs of the community."(64)
As Bailey later testified:
Representations were made that the operation of the
subsidiary banks of Financial General Bankshares . . . would be improved, that
their quality and quantity of service to the communities they served would be
raised . . . However, how that was to be done was not made clear and it seemed,
with control to pass outside the country, it seemed, well, a little hard to
believe that the real intent of this group of individuals was to improve the
quality of banking service in the Shenandoah Valley or Virginia or in McLean
and Washington, D.C. or anywhere else. There wasn't any real incentive for them
to do that . . . Take me at my word. Believe me. Have I ever lied to you? That
sort of thing. . . I had the word of the people speaking to me that none of
these negative detrimental things would occur, and nothing more.(65)
Bailey was also concerned about the corporate walls
created by the holding company structure of CCAH, CCAI, and FGB. With neither
CCAH nor CCAI being located in the U.S., Bailey felt the offshore holding
company structure provided an invitation to abuse. He was sufficiently
concerned about the problem that he had contacted both the State Department and
CIA in an effort to learn more about the shareholders, but had received no
information from either about any of those involved in the transaction.(66)
In all of these objections, Bailey was joined by state regulators from
Tennessee, who, in concert with the local bankers at FGB's Tennessee branches,
opposed the takeover as against the interests of the community.
The
April 23, 1981 Federal Reserve Hearing
In response to Bailey's concerns, and in an effort
to put the allegations concerning BCCI's involvement to rest, the Federal
Reserve scheduled an unusual hearing on the CCAH application for April 23,
1981, convened by associate counsel Robert Mannion. Prior to the hearing the
Federal Reserve advised Baldwin Tuttle, as lawyer for the CCAH group, that the
first issue the Federal Reserve wanted answered was how the various
shareholders became involved in investing in U.S. banks and decided to acquire
FGB. In the letter, the Federal Reserve also asked the applicants to
"clarify the historical, current and expected future relationships between
the Bank of Credit and Commerce International, S.A., London, England, and its
affiliated companies, on the one hand, and Applicants and their principals, on
the other."
The hearing opening with Bailey reiterating his
opposition to the takeover, and reiterating the concerns he had previously
expressed to the Federal Reserve by letter. First, the U.S. might not be able
to insure that these foreign owners would abide by its laws. Second, it would
be difficult to tell who really controlled the bank. Third, it was possible the
bank's new Middle Eastern owners might strip the bank of its assets and move
them elsewhere before anyone found out. Bailey listed another half dozen
related reasons, mostly related to the difficulties of verifying financial
information of foreign shareholders. Finally, Bailey suggested that the key
issue the Federal Reserve should consider was why the Middle Eastern investors
were willing to pay so much for the bank.
What is the motive giving rise to these protracted,
expensive campaign to buy Financial General? Allegedly, Financial General is
viewed by these applicants simply as an investment, but it is obvious that the
price which the applicants are prepared to offer for control of Financial
General bears little logical relationship to either the actual book value of
those shares or their price in the market prior to the initial stimulation of
the market by the applications or their agents. There can be little doubt that
some incentives other than orthodox investment motives must have prompted this
effort. . . One obvious plausible answer to this riddle lies in the unique
position of Financial General in the market. No other single financial
institution is situated in both the financial and government hubs of the United
States.(67)
Bailey warned the other regulators that he believed
the purchasers had some secret agenda. Bailey did not know for sure what it
was, and neither did any of the other regulators. Until they could determine
what it was, the Federal Reserve should turn the application down.
In response to this impassioned presentation by
Bailey, Clark Clifford opened the presentation of the case on behalf of the
Middle Eastern investors. He began by expressing his regret at Bailey's
concerns, and promised to answer them, noting that if the Fed permitted the acquisition,
Clifford looked forward "to many years of an agreeable relationship
between us, Mr. Bailey."
Clifford described the genesis of the FGB takeover
as arising from Adham -- not BCCI and Abedi, not Jackson Stephens or Lance --
and that as a result of Adham becoming interested in the bank, Adham had
interested his associates and friends, and brought BCCI into the picture to
analyze FGB as an investment.(68)
Clifford said that the Middle Eastern group put
together by Adham was interested in bringing substantial new capital to the
bank as passive investors, and that in addition to Senator Symington and
Clifford, other prominent Americans such as retired General Elwood Quesada and
General James Gavin would serve on FGB's boards, demonstrating the honorable
intentions of the bank's shareholders and their commitment to quality.
He also suggested that it was critical for the
national interests of the Untied States itself that the Federal Reserve permit
the application to go forward.
It is in the interest of our country that an effort
is made to bring back to the United States as many of the dollars as we can
that through the years we send over to the OPEC countries.(69)
Clifford explained that some $90 billion in payments
had left the U.S. for crude oil to the Persian Gulf countries the previous
year. If those funds were taken and invested in West Germany, Great Britain,
Switzerland, they would bring no benefit to the United States, whereas if the
application was approved, it would be the U.S. that would benefit.
Clifford then introduced the investors, beginning
with Sheikh Kamal Adham, whom Clifford described not as the brother-in-law to
the late King, nor as the former head of Saudi intelligence, but merely as a
prominent Saudi businessman. Clifford said that he had the "deepest
respect for his [Adham's] character, for his reputation, for his honor and for
his integrity." Clifford suggested that Bailey's concerns were founded on
some naive form of anti-foreign bias. He warned that such anti-Arab bigotry was
unfair and implied that such a factor could not justify a refusal to grant the
CCAH application:
I believe deeply in this country. I believe deeply
in its attitude of fairness. I believe deeply in its attitude that it is a
country of laws and not of men. I do not believe in prejudice. I do not believe
in bias. Our government does not, and with all of these factors, it seems to me
that these men bring into this operation those qualities that our country can
well receive.(70)
Adham then addressed the Federal Reserve,
reiterating the account that his interest in FGB began not with Abedi and BCCI,
but with Hassan Yassin of the Saudi Arabian embassy, that BCCI was brought in
by Adham to evaluate the bank, and that Adham then learned that BCCI was
already independently and coincidentally involved in evaluating the bank for
other Middle Eastern investors.
Adham told the Federal Reserve that BCCI was a
banker for him and some of the other investors, but that there were no
understandings or agreements involving him or any of the investors and BCCI
concerning FGB. Parroting language used by Clifford and Altman in formal
statements to the Federal Reserve, Adham testified that "whatever
relationships are developed between Financial General and BCCI in the future, if
any, are matters to be decided by the new management of Financial General based
upon that institution's best interests."(71)
Similar statements followed from Faisal al Fulaij,
Abdul Raouf Khalil, and El Sayed El Gohary.
At this point in the hearing, Mannion, the Federal
Reserve lawyer conducting the hearing, focused on the contradiction between
Adham's explanation of how he became interested in FGB, and the apparent
earlier involvement of BCCI and Abedi with the Lance group.
MR. MANNION: As I read the statements . . . Sheikh
Adham and Mr. Fulaij were originally interested in this investment by the Bank
of Credit and Commerce, BCCI.
MR. ALTMAN: That is not correct. . . I believe that
Sheikh Adham's testimony was that he was advised of this by a friend who worked
in the Saudi Arabian Embassy, Mr Yassin . . . Mr. Fulaij has said that he was
seeking to make investments abroad, particularly in the United States, and
asked for his representatives to locate some of them and advise him of their
availability. They had contacted BCCI in that effort, and BCCI brought to their
attention the fact that there was stock available in Financial General.(72)
Thus, according to Adham, Fulaij and Altman, it was
sheer coincidence that BCCI was the investment advisor for everyone involved.
This testimony, provided to the regulators for the purpose of attempting to
reconcile the otherwise inconsistent accounts provided by Lance, Altman and
others of how BCCI came to be involved in the takeover, strained the credulity
of regulators even in 1981. Mannion again asked Altman whether Adham was the
leader of the investor group, the person who had brought together all of the
other investors. Adham responded by explaining, again, that there were two
independent groups of Middle Eastern investors -- one Saudi, the other Kuwaiti
-- who had become interested in FGB as a matter of utter coincidence. Oddly, at
this point, Adham had chosen to ignore the third group involved, the Abu Dhabi
investors, entirely. Given the fact that Abu Dhabi was even then the largest
shareholder in BCCI apart from BCCI itself, the omission may not have been
inadvertent.
SHEIKH ADHAM: I invited some of my friends from my
part of the world and I guess some friends from Kuwait invited some friends
from Kuwait and some of their friends. But I am called the lead because perhaps
I now own more shares than the others.(73)
After a lunch break, Mannion returned to the issue
that was troubling him.
MR. MANNION: We are still a little bit uncertain as
to how the group came about. In Sheikh Adham's written and oral presentation
this morning, he indicated how he became interested in Financial General, and
then went to BCCI and had them do an analysis of the organization. Then we
understand that Mr. Fulaij, on his own, was looking for investments in the
United States, and he was advised by BCCI to get involved in or suggested that
he might want to get involved in Financial General. Was Sheikh Adham aware that
Mr. Fulaij was getting involved in Financial General or when Mr. Fulaij made
his investment, was he aware that Sheikh Adham was involved in it?(74)
This question had apparently not been anticipated by
Adham, Fulaij, or their lawyers, and hence Adham and Fulaij replied as follows:
SHEIKH ADHAM: I don't know what -- I certainly don't
know.
MR. FULAIJ: The same.(75)
Mannion, troubled by the unbelievable nature of the
coincidence, persisted.
MR. MANNION: So you were told that Financial General
was a good investment by BCCI, and on that basis, is it just a coincidence that
BCCI is first asked by Sheikh Adham to do an investigation or analysis of
Financial General, and . . . they then gave advice to several of their
investment clients to be involved in Financial General?
MR. FULAIJ: (Nods in the affirmative.)
SHEIKH ADHAM: That is very possible. Such things
happen in our parts of the world.(76)
Adham then advised the Federal Reserve -- falsely --
that he had not met Fulaij for ten years, had no immediate contacts with him
and that their mutual involvement was mere coincidence. In fact, both had been
involved with other transactions involving BCCI, including acting as nominees
for BCCI in connection with recent stock transactions involving BCCI's oil
company, Attock Oil.
Concerned by the nature of Mannion's questions,
Adham sought to put his concerns to rest directly.
SHEIKH ADHAM: I think that from the line of
questions, it appears there is doubt that somebody or BCCI is behind all of
this deal. I would like to assure you that each one on his own rights will not
accept in any way to be a cover for somebody else.(77)
In an effort to enlighten the Federal Reserve,
Clifford and Altman then compared BCCI's role as an investment advisor to
Merrill Lynch in the United States -- independently looking at investment
opportunities for its clients. Another lawyer for the BCCI group, Baldwin
Tuttle, a former Federal Reserve attorney who previously had been Mannion's
superior at the Fed, then took his turn to explain his understanding of what
had happened:
MR. TUTTLE: Both [Adham] and Mr. Fulaij have stated
that originally they were buying shares as an investment like anyone else buys
a small minority interest as an investment. It is only after Financial General
commenced the litigation that they considered the possibility of increasing their
shareholding.(78)
Mannion then returned to the issue of BCCI directly,
noting the similarity of the names "Bank of Credit and Commerce" on
the one hand, and "Credit and Commerce Holdings" on the other. Why
were the names so similar? Clifford responded:
The terms "Credit" and the term
"Commerce" are terms that are used extensively in the Persian Gulf in
financial affairs. His Excellency [referring to Adham] has said that he deals
with banks that used the terms "credit," and used the terms
"commerce." Of course a number of banks used the term
"Commerce." . . . I know of no additional reasoning behind it.(79)
Clifford then reiterated the key representation
pertaining to the application before the Federal Reserve. In response to a
question from Mannion as to precisely the function of BCCI in the application,
Clifford testified:
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.(80)
Based on the representations made by Clifford,
Altman, Tuttle, Adham, Fulaij, and the other Middle Eastern investors, the
Federal Reserve, despite its obvious suspicions, approved the application on
August 25, 1981. The Federal Reserve also granted a request, made by Altman on
behalf of the Middle Eastern investors and CCAH on June 2, 1981, to seal
portions of the transcript of the hearing, preventing anyone outside the
Federal Reserve from learning the identities of several of the shareholders.(81)
A year later, perhaps as a way of breaking with the past and moving beyond the
ugly publicity pertaining to the litigation over the takeover, and the bank's
new Middle Eastern ownership, FGB formally changed its name of its banks to
First American, and its holding company to First American Corporation.
In approving the 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 loop-holes regarding BCCI's ability to be involved with FGB in the
future, and which were contrary to the understandings which the OCC had said
were critical for its approval of BCCI's application. These statements
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, 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.
The
True Account of the 1978 Takeover
While there had been numerous warning signs in front
of the Federal Reserve prior to its approval of the CCAH application to
take over CCAH, and again, recurrently, through the 1980's, the Federal Reserve
did not conclude that it had been lied to about BCCI's role until December,
1990, when attorneys for Sheikh Zayed and BCCI at the firm of Patton, Boggs
& Blow, prompted by investigative activity by the District Attorney of New
York and other factors, advised the Federal Reserve of the apparent control of
First American by BCCI. Seven months later, after BCCI had been closed
globally, the Board of Governors of the Federal Reserve voted to issue an order
banning the four Middle Eastern investors from banking activities in the United
States forever, on the basis of the false statements they made to the Federal
Reserve in the course of the 1978 and 1980 applications to take over FGB, and
in the course of the April 23, 1981 hearing. In that order, the Federal Reserve
also made findings as to the true state of affairs pertaining to the FGB
takeover a decade earlier.
On July 29, 1991, the Federal Reserve found:
** BCCI owned CCAH in violation of the Bank Holding
Company Act.
** BCCI concealed its intended ownership and control
of CCAH at the time of CCAH's 1980 application to acquire First American.
** At least four of the Middle Eastern investors
involved in the 1980 application were nominees for BCCI, including all of the
Middle Easterners who had appeared in person before the Federal Reserve during
its April 23, 1978 hearing, Adham, Fulaij, Khalil, and Jawhary. In addition,
other BCCI nominees included the head of one emirate within the United Arab Emirates
-- Sheikh Naomi, ruler of the Emirate of Ajman and a corporation wholly owned
by the head of a second emirate, Sheikh Hamad bin Mohammed al-Sharqi, ruler of
the Emirate of Fujeriah. Other nominees included Sheikh Shorafa, a government
official of the United Arab Emirates.
** The head of BCCI, Agha Hasan Abedi, and his chief
assistance, Swaleh Naqvi, had coordinated the nominee scheme for BCCI.
The Federal Reserve found that beginning in late
1977, BCCI began using these nominees to purchase stock in Financial General
through an arrangement under BCCI loaned the money to the nominees to purchase
the CCAH shares, subject to side agreements under which the nominees were not
liable for serving or repaying the loans. Under the terms of the scheme, the
nominees signed deeds to transfer their stock in blank, leaving it to BCCI to
fill in the name of the transferee at BCCI's convenience. BCCI was also
authorized by the nominees to sell the shares at whatever price it chose and to
keep any profits it might earn, and BCCI promised to indemnify the nominees
against any losses they might sustain for acting as nominees. BCCI was also
given the power to vote the shares held by its nominees, had powers of attorney
to sell the shares, and agreed to make fixed payments in fees to the nominees
in compensation for their agreement to act as nominees.(82) The
Federal Reserve found that BCCI also financed the start-up costs of CCAH and a
$50 million loan to First American supposedly from an outside bank, BAII, which
had interlocking directors with BCCI.(83)
In short, BCCI, Kamal Adham, Faisal al Fulaij,
A.R.K. Khalil, and the other Middle Eastern nominees had secretly done
precisely what the Federal Reserve had sought to assure they would not do, and
had done precisely what they had promised not to do, in writing and in
testimony to the Federal Reserve prior to its approval of the 1980 CCAH
application. From late 1977 through December 1990, BCCI and its nominees lied
to the Federal Reserve, repeatedly filling out false reports to the Federal
Reserve, and providing the Federal Reserve false statements and information.
1.
See e.g. Price Waterhouse Note of Audit Committee Meeting on 4 April 1989,
BCCI, "SN [Swaleh Naqvi] said that it was unlikely there could be a merger
between BCCI and CCAH in the immediate future, although it is possible that
there could be a reverse merger in the future. In the view of BCCI's problems
in the USA, he did not consider it advisable that this possibility was
discussed [publicly] for a couple of years."
2.
London Daily Telegraph Magazine November 19, 1991, "No Questions
Asked."
3.
Staff interview, Lance, October, 1991.
4.
Harris and Berry, "Arab Investors Want Lance to Manage Funds,"
Washington Post, December 18, 1977, A1.
5.
Testimony of Heimann, S. Hrg. 102-379, p. 76.
6. Id
at 77.
7.
Washington Post, April 2, 1978, John F. Berry and Jerry Knight.
8.
Id.
9.
See Washington Post, April 2, 1978.
10.
Washington Post, April 2, 1978.
11.
Id.
12.
SEC civil complaint, US District Court Washington DC, March 17, 1078; see also
Washington Post, March 18, 1978.
13.
Id.
14.
Lance, S. Hrg. 102-350, Pt. 3, p. 5.
15.
Id. p. 6.
16.
Id at 8.
17.
Id.
18.
Id. p. 11.
19.
Forbes, December 15, 1976, p. 95, "A Couple of Country Slickers."
20.
Washington Post, April 2, 1978.
21.
S. Hrg. 102-350, Pt. 3 pp. 8-9; see also Federal Reserve Hearing April 23, 1981
transcript p. 54.
22.
Federal Reserve Hearing transcript, April 23, 1981, p. 25; Clifford, S. Hrg.
102-350 Pt 3., p. 59.
23.
Summary of Charges, U.S. Board of Governors of the Federal Reserve System, In
the Matter of BCCI, No. 91-043, Paragraph 22, July 29, 1991.
24.
Id. at 12.
25.
Harris and Berry, Washington Post, December 18,1 977, A1.
26.
Id.
27.
Resume, Ghaith Pharaon, in BCCI Senate documents; see Atlanta Business
Chronicle, April 27, 1987. While "Dr." Pharaon's doctorate was
self-conferred, his decision to adopt the honorific had lasting impact. Even
after Pharaon had been indicted by the Justice Department and New York District
Attorney and cited for numerous violations of banking law, federal banking
regulators continued to refer to him in prepared and oral testimony before the
Subcommittee as "Dr. Pharaon." See, e.g. prepared testimony of John
Stone, head of enforcement, FDIC, May 14, 1992, which refers to Pharaon as
"Dr Pharaon" some 33 times, S. Hrg. 102-350 Pt. 5 pp. 158-163.
28.
Id.
29.
In its suit in the FGB case, the SEC found the FGB takeover battle formally
began just a few days later, on November 29, 1977, when Lance, Stephens, Metzger
and BCCI, through Abedi, set in motion a plan for taking over FGB. Lance began
buying up the bank's stock, telling none of the sellers that the secret
purchaser was BCCI.
30.
The Economist, April 1, 1978; Lance, id., p. 14.
31.
See e.g. The Economist, April 1, 1978, "The Nine Lives of Bert
Lance."
32.
Facts on File, March 24, 1978; The Economist, September 9, 1978.
33.
Memorandum, Office of the Comptroller of the Currency, January 4, 1978,
Comptroller John Heimann.
34.
Id.
35.
Memorandum, OCC, to File from John G. Hensel, January 17, 1978.
36.
Memorandum, OCC, Serino to Heimann, April 3, 1978, "Notes On Meeting with
Pharaon."
37.
Various documents, OCC files on NBG, March-July, 1978.
38.
See e.g. memorandum, Patton, Boggs & Blow re: National Bank of Georgia,
March 14, 1991.
39.
Summary of Charges, U.S. Board of Governors of the Federal Reserve, In the
Matter of BCCI, #91-043 Paragraph 181, July 29, 1991.
40.
Lance, S. Hrg. 102-350 Pt. 3 p. 32.
41.
Clifford, Id., p. 70.
42.
Id. at 59.
43.
Id. at 60.
44.
Clifford, id., p. 70.
45.
S. Hrg. 102-350 Pt. 3 p. 63.
46.
S. Hrg. 102-350 Pt. 3 pp. 25-27.
47.
Id.
48.
See e.g. Summary of charges, Federal Reserve, In re Clifford, 92-080, July 29,
1992, Paragraph 23.
49.
Confidential and Privileged Attendance Note, November 19, 1990, BCCI Attorney
memcom of meeting with Roy Carlson, Exhibit D in G&H Montage case, id.; S
Hrg. 102-350 Pt. 4 pp. 286-298.
50.
Wall Street Journal, February 14, 1978.
51.
Washington Post, March 22, 1978.
52.
Letter, Robert Altman to Mannion of Federal Reserve, May 9, 1978.
53.
See e.g. Clifford written testimony, id., at 71.
54.
Clifford, id., at 72.
55.
Federal Reserve Application, October 19, 1978.
56.
Plaintiff's exhibit, Helms 9, G&H Montage, id., reprinted S. Hrg. 102-350
Pt. 4 p. 237. Helms' involvement with various BCCI figures is discussed in
detail in the chapter concerning BCCI's links to U.S. and foreign intelligence.
57.
Peter Mantias, "BCCI: Case reveals former CIA chief's ties to bank,"
Atlanta Constitution, February 15, 1992, A1.
58.
S. Hrg. 102-350 Pt. 3 pp. 75-77.
59.
Letter, Tuttle to Altman, May 27, 1980, on file at Federal Reserve.
60.
Tuttle to Bostian, Federal Reserve Bank Richmond, November 5, 1980.
61.
Id.
62.
S. Hrg. 102-350, Pt. 3 pp. 328-330.
63.
Staff interview, Bailey, April, 1991. See also testimony of Bailey, S. Hrg.
102-379, pp. 60-63.
64.
S. Hrg. 102-379, p. 61.
65.
S. Hrg. 102-379 pp. 61-63.
66.
Staff interview with Bailey, April, 1991; at the time, the CIA knew precisely
who Adham was, having had extensive contact with him in his role as the liaison
between Saudi and U.S. intelligence, but did not advise Bailey of this
relationship. A detailed treatment of Adham and of the CIA are contained in
separate chapters of this report.
67.
Bailey, Federal Reserve Hearing, April 23, 1981, pp. 15-17.
68.
Federal Reserve Hearing Transcript, April 23, 1978 p. 26.
69.
Transcript, Federal Reserve Hearing, April 23, 1981.
70.
Clifford, Federal Reserve Hearing April 23, 1981, transcript p. 46.
71.
Adham, Federal Reserve Hearing transcript April 23, 1981 p. 56.
72.
Federal Reserve Hearing transcript April 23, 1981 p. 75.
73.
Id p. 76.
74.
Id. p. 78.
75.
Id p. 78.
76.
Id. p. 79.
77.
Id. p. 80.
78.
Id p. 90.
79.
Id. p. 143.
80.
Id. p. 144.
81.
The Federal Reserve only unsealed this material in 1990, after providing it in
a heavily redacted form to journalist Larry Gurwin following repeated requests
from Gurwin in the preparation of his ground-breaking story on the BCCI-First
American connection for Regardies' magazine.
82.
Summary of Charges, US Board of Governors of the Federal Reserve, No. 91-043,
July 29, 1992, pp. 1-11.
83.
Id. Paragraphs 152-154; see also staff interview, Akbar Bilgrami, July 13,
1992.
ACQUISITION,
CONSOLIDATION, AND CONSEQUENCES
Initial
Plan For BCCI in the U.S. After the Takeover
Following the exhausting process of the FGB
takeover, BCCI began undertaking a number of steps to carry out Abedi's plan
for penetrating the U.S. banking and capital markets, with the intention of
making BCCI's U.S. holdings its largest and of controlling a substantial market
share of U.S. banking overall by building First American into one of the twenty
largest banks in the United States.(1)
Abedi set into motion a dual approach, in which he
would establish branch offices of BCCI in the U.S. which would be permitted to
accept deposits from foreigners but not take deposits from Americans, and use
those offices to feed business to the U.S. banks BCCI owned. An undated BCCI
memorandum, titled, "A Strategy for the USA," gives the flavor of the
bank's thinking.
The memorandum states that BCCI's purpose in the
U.S. is "to make it the most successful country in the BCC network in the
next 5 years," through building upon BCCI's existing base of correspondent
banking for Third World Central Banks, trade finance, and private banking, and
adding to that base the financing of the "export of technology and
services from USA." In addition, BCCI would use its U.S. network to branch
out into the U.S.'s then profitable real estate development industry, growing
through direct investments in U.S. real estate.(2)
According to the memorandum, "penetration of
the market" would require BCCI's presence in at least twelve
jurisdictions: California, Washington state, Arizona, New York, New Jersey,
Connecticut, Florida, Texas, Chicago, DC, Virginia and Maryland.
Accordingly, Abedi assembled a team of BCCI people
for North America, placing them, variously, at the BCCI representative offices
and branches, at First American, and at National Bank of Georgia. Within BCCI,
management discussions on operations in the United States viewed the operations
of FGB/First American, National Bank of Georgia and BCCI's branch offices as an
organic whole, to be thought of together.
As described by BCCI regional general manager Abdur
Sakhia:
In any management discussions, in any discussions on
our future in the United States, we would think of three entities -- BCCI,
National Bank of Georgia, First American, then Financial General -- in the same
breath. Who would be going where, who would work in which entity, what area of
business would be handled by which entity, allocation of businesses, markets,
geographical territories, all took place as if this was one entity.(3)
To ensure a discreet BCCI role in its new U.S.
empire, Abedi placed key employees at each of the institutions BCCI had
purchased. At National Bank of Georgia, four officials with ties to Abedi or
BCCI were installed. At First American, BCCI limited its direct employment of
officers to First American New York, where long-time BCCI officials K. K. Elley
and Aijaz Afridi were put into place, where they continued to draw benefits
from BCCI while officially employed by First American. Elley obtained his job
at First American in 1983 as a consequence of Swaleh Naqvi, the number two
official at BCCI, telling Altman to hire him. Afridi, who had previously worked
for another secretly-controlled BCCI entity in Switzerland, Banque de Commerce
et de Placement of Geneva, was placed at the First American through Abedi's
intervention.(4)
From the point of view of BCCI, it was the senior
partner in this arrangement, despite the official title given to Clark Clifford
as chairman of the board following the death of Stuart Symington. As an article
written for Worldpaper on August 24, 1982 following interviews with BCCI
officials, including Abedi, described it, BCCI's intention was to
"manage" First American and all of its branches in the U.S., just as
it was already managing the National Bank of Oman. However, in the years that
followed, mid-level BCCI officials in the United States would feel that they
were engaged in a struggle for control of First American with Clifford and
Altman. Whenever BCCI officials would push too hard to more directly involved
in controlling First American's affairs, Clifford and Altman would appeal to
Abedi, and Abedi would usually -- but not always -- take steps limiting the
BCCI intrusion into First American.
To preserve deniability for the regulators, Abedi
and top BCCI management sought to segregate and compartmentalize their
activities, making certain that Clifford and Altman would meet separately with
Abedi outside the presence of other BCCI officials. As BCCI regional manager
Abdur Sakhia described it, typically, when Clifford and Altman visited BCCI
offices in New York and Miami from 1982 onwards, Mr. Abedi would meet with them
first, they would leave, and Abedi would then separately brief the BCCI staff as
to what happened.(5)
In pursuit of a unified U.S. strategy, within one
year of the FGB takeover, BCCI moved to establish its U.S. presence directly,
opening offices in New York, Miami, and San Francisco, with later branches and
representative offices targeted for Chicago, Houston, Los Angeles, Tampa, Boca
Raton, and Washington, D.C. These offices primarily engaged in marketing
commercial banking services to import-export businesses, and in providing
personal banking to "high net worth" individuals who were non-U.S.
citizens, and therefore permitted to make deposits at a branch office of a
foreign bank in the U.S.
BCCI worked make these branch offices high-profile
from the beginning. In Miami, for example, the bank deliberately sought out
well-known public officials and invited them to visit the bank. Both past and
present Florida governors accepted the invitation, as did a U.S. Senator, and
the then-son of the Vice President of the United States, Jeb Bush, who was at
the time Florida's Secretary of State. Miami branch chief Abdur Sakhia said
although BCCI had only been in south Florida a short time before its opening,
it was already growing rapidly and becoming profitable, and political figures
were glad to help the bank celebrate its growth.
We started in April 1982, but our formal opening in
August 1982. Governor Graham came to that opening. Jeb Bush came to that
opening too, along with Atlanta Mayor Andrew Young. Oil ministers from
Venezuela, Abu Dhabi, the minister of economy and finance from Jamaica, Barbados,
officials from Central Banks from all over the region. We had eight to ten
ministers and central bank governors and leading businessmen from Venezuela and
Peru and Trinidad, everywhere. It was a very successful opening. . .I have a
videotape of portions of those in which Graham is being introduced to all BCCI
people. Jeb Bush is also in those videotapes. Dante Fascell came to my house.
We had met socially a couple of times. Reuben Askew came to the bank several
times and had been to my house. Paula Hawkins came to the bank several times
separately.(6)
BCCI's
Involvement in First American Management
Shortly after purchasing First American, BCCI
recognized that expansion of First American's operations to include offices in
New York would be expensive. Accordingly, Abedi and BCCI decided to add $30
million in capitalization to First American/CCAH, with some of these funds
coming from the Crown Prince of Abu Dhabi's deposits with BCCI, and the
remainder from BCCI itself, as loans to its nominees, Fulaij, Khalil, and
Shorafa.(7)
Initially, First American had intended to retain the
Bank of Commerce in New York, which had been one of the banks owned by FGB in
New York. However, the Bank of Commerce board opposed the acquisition, and
purchased the New York branch themselves, leaving First American without
offices in New York City. As Robert Altman testified:
In the spring of 1982 we were then in a very
awkward, and to some extent, unhappy posture. We were under an obligation to
sell the New York City bank. And we were under a need to set up a new bank and
really start it from scratch. We had nothing in the city. We had no staff. We
had no location. We had no resources. It put us, as I say, in a difficult
position. . . We essentially had two contacts in New York. One was the law firm
of Wachtell, Lipton, Rosen & Katz that was cocounsel with us . . . the
other was BCCI which had a representative office and was acting as an
investment advisor. And we used those resources to try to get set up in New
York.(8)
Thus, according to Altman, BCCI, acting as an
investment advisor to the shareholders, helped First American set up its New
York offices as a convenience to Clifford, Altman and First American. This
account raises the question of why, under the circumstances of having no
resources in New York City, First American would have wanted to establish
officers there at all. New York City was already among the most competitive of
all banking environments in the United States with giants as Citibank, Chase
Manhattan, Chemical Bank, as well as dozens of other already well-established
domestic and foreign banks.
The key business reason for opening a New York bank
of First American was BCCI's desire to have it become the correspondent bank
for BCCI's commercial bank relationships in the United States, and to act as
BCCI's U.S. alter ego, free from interference by the DC-Maryland-Virginia banks
of First American, which were being managed by Clifford and Altman.
A memorandum dated July 25, 1983, from BCCI employee
Aijaz Afridi to BCCI Number 2 Swaleh Naqvi, with copies to BCCI officials Kemal
Shoaib and K.K. Elley, described BCCI's plan for First American New York in
terms that suggest it would operate independently from the other First American
banks, apart from using them as sources of funds and sources for "their
entire international business," in which First American New York would
"become their Central Treasury."(9)
The memorandum discusses such issues as how to
achieve growth and profitability for First American New York, how to project
its image domestically and internationally, how to introduce the bank to Third
World countries, new products and services, and related issues. Under
"basic assumptions," Afridi noted:
Management style and Philosophy will be on the
pattern of BCC -- No interference from the Holding Co. and free hand to the
Management.(10)
The record also shows that BCCI's involvement in
directing the establishment of this office was pervasive. For example, as both
BCCI officials and BCCI documents show, it was BCCI, not First American, that
determined how much office space First American would lease in New York. As
Sakhia testified:
The decision of hiring, decision for acquisition of
space . . . the New York office of First American was identified by BCC officers
and approved by Mr. Abedi. He made the decision to rent that space.(11)
Over the ensuing decade, the space would prove
grossly excessive for the actual needs of First American, and its costs would
become a significant drain on First American's resources. A letter dated
December 13, 1982 from Elley to Swaleh Naqvi, Abedi's number two at BCCI, on
BCC New York stationery, documents the nature of the relationship between BCCI
and First American in New York. In the letter, Elley brings Naqvi up to date with
a meeting he has had with Altman concerning the First American Bank in New
York, and covering the subletting of space at 350 Park Avenue, renovation of
the space, selection of board directors, recruitment of key staff, selection of
auditors and attorneys, and coordination with the holding company and the
shareholders -- all matters being handled for First American by Elley as a BCCI
employee and reported to Naqvi, the BCCI senior executive at a time when
Clifford and Altman were ostensibly in control of First American.(12)
BCCI also handled the purchase of new branch offices
in New York for First American. In March 1983, while Elley was still employed
by BCCI as head of its New York representative office, he began discussions
with Bankers Trust officials regarding the purchase of branches of their bank
for First American. Six weeks later, when First American submitted bids for the
branches, BCCI officials -- not First American officials -- handled the
negotiations.(13)
From the outset, officials at National Bank of
Georgia and First American frequently travelled to meet with top management at
BCCI. Soon after Pharaon's purchase of the National Bank of Georgia was
approved by the OCC, NBG hired as its president former Bank of America officer
Roy Carlson, who had worked closely with Abedi in the Middle East. Carlson soon
began making trips to London to visit BCCI and in return, entertaining Abedi
and his wife in Atlanta. In 1983, Carlson made two BCCI-related trips abroad,
to London and Athens. In 1984, he made three such trips. In 1985, he made three
such trips again, together with trips to Miami and Chicago to meet with BCCI
officials there. Tariq Jamil, a former BCCI employee who went to National Bank
of Georgia until its sale to First American in 1986, when he returned to BCCI,
had a similar pattern of BCCI-related trips, as did two other Pakistani NBG
employees with ties to BCCI. And National Bank of Georgia in turn financed the
travel of top BCCI officials like Abedi and Naqvi to the United States, beginning
as early as August, 1982.(14)
U.S.
Marketing Meetings
Apart from the situation in New York, where BCCI's
branch office managed the start up of First American before its two principal
officers there, Elley and Afridi, transferred to the new start up office of
First American, BCCI was sufficiently busy during the first two years of its
start-up in the U.S. that little effort was made to coordinate the activities
of First American and BCCI overall. For example, the first branch in Manhattan
of First American Bank opened its doors for the first time on March 1, 1984. By
late 1984, BCCI had established a network of branches, representative offices
and agencies in the U.S., Canada, and Latin America, including Miami, San
Francisco, Los Angeles, New York, and Washington, D.C. Abedi believed that both
First American and BCCI were sufficiently well-established that it was time to
begin coordinating the different parts of BCCI's empire. In early 1984, Abedi
asked the BCCI officials in the Americas to form a committee, which first met
in April, 1985 in New York, "to coordinate the efforts of different
locations of BCC and other institutions so that the President's desire
to have a totality in approach is achieved." (emphasis added)(15)
In attendance at this first meeting were
representatives of all of BCCI's offices in the United States and Canada, along
with Elley and Afridi from First American New York and Tariq Jamil from the
National Bank of Georgia. Its purpose was described by BCCI officers as
coordinating the efforts of the entire group of BCCI-controlled institutions,
including National Bank of Georgia and First American, to increase their
overall market share in the United States. During the meeting, Jamil presented
a report on the operations of NBG and Elley presented a report on the
operations of First American Bank of New York. The memorandum summarizing the
meeting ended with the following conclusion:
Mr. Elley concluded that in America we are sitting
on 7 Billion dollar assets and this is just the beginning. There is much to do
and inspite [sic] of diversity of operations as different agencies and banks we
have to find a common denominator.(16)
The reference to seven billion dollars accurately
described BCCI's assets in the U.S. only if one included both National Bank of
Georgia and First American.
According to Abdur Sakhia, who was the U.S.
coordinator for the meetings, the key mission of the meetings was to find ways
to better cross-market between BCCI, First American, and National Bank of
Georgia:
There was a plan within BCCI to market for First
American. The international division, based in London, marketed for
correspondent relationships for BCC group, including First American. So not
only the branches of BCCI worldwide sent business to First American, but BCCI
correspondents also were sending business to First American. Similarly, the
deposits of U.S. residents or U.S. corporations that we could not take in BCCI
branches because of the agency status we would market to First American. . . we
were parking -- we were giving profits to First American. . . because the
overhead, the marketing overhead, was absorbed by BCCI, the profit that was
made was made in First American. But it was coming back to us because it was
one and the same thing. . . because First American was owned by BCCI.(17)
Later memoranda of the America's Coordinating
Committee of BCCI described the sharing of information between First American's
officers handling Latin America and BCCI's; the possibility of BCCI procuring
mortgages and selling them to First American; and similar coordination among
BCCI, National Bank of Georgia, and First American New York.
The absence of First American's Virginia, Maryland
and DC banks from these memoranda, despite the inclusion of First American New
York, is notable. Clifford and Altman, in their Senate testimony, suggested
that the lack of involvement of their branches was evidence that they were
deceived by BCCI and BCCI officers at First American New York, Afridi and
Elley. An alternate explanation, consistent with the testimony of a number of
BCCI officials interviewed, suggests that there was an ongoing battle between
BCCI's officials in the United States on the one hand, and between Clifford and
Altman on the other, for control of BCCI's empire in the United States; that
Abedi insisted on the purchase of First American New York to meet BCCI's needs,
despite the lack of market justification for the purchase on the part of First
American itself; and that Clifford and Altman temporarily ceded control of
aspects of First American New York while jealously guarding First American's
metropolitan Washington franchises against encroachment by BCCI's Pakistani
second-level managers. Later, Altman would try to regain that control.
Nazir Chinoy, head of BCCI's Paris branch, learned
of the struggle over First American New York at a BCCI annual conference in
Luxembourg in 1985, from Afridi himself, who confessed over a glass of wine
that he was increasingly unhappy at First American New York.
Afridi felt that Altman was not permitting him to
run First American on BCCI lines and yet he was answerable to Mr. Abedi for
profits. He said Altman was interfering in the management and that he had
reported to Naqvi on many an occasion about Altman interfering with his management,
or trying to change the management structure or style.(18)
As Chinoy described it, from his point of view as a
BCCI official operating outside the U.S., there was not so much a separation
between First American and BCCI as two different types of management, one
Pakistani and one American.
I saw rivals competing for power -- Afridi wanting
to be the top man, and Altman wanting to be the top man.(19)
Abdur Sakhia, who was directly involved in U.S.
expansion plans for BCCI, saw the problem in similar terms.
I was insistent that BCCI should have a direct
presence of BCCI in the United States because we had a lot of opportunity, we
were marketing with out hands tied behind our back because we were agencies.
And he would say: Well, why don't you do marketing for our other banks, First
American Bank, for National Bank of Georgia? Here are two banks; what do you
want? I'd say: Sir, it makes a difference because we do not control the
transactions, we do not provide the services directly . . . We were frustrated
at the response time, turnaround time, service of First American. In BCC we in
terms of business used to give a very good turnaround time, very good service.
First American was in that sense very bureaucratic.(20)
Joint
Marketing
Numerous BCCI and First American documents
demonstrate that the offices of the two banks were working together in the
early 1980's in an effort to expand First American's and National Bank of
Georgia's business, especially in the international realm. For example, BCCI officers
helped First American develop relationships with the Government of Sri Lanka
for handling it imports of U.S. agricultural products under the Department of
Agriculture's PL 480 program; BCCI officials set up meetings with the World
Bank and International Monetary Fund to which officials of First American and
National Bank of Georgia would be invited; and sponsored meetings with officers
of various Latin American central banks.
Documents retrieved by Subcommittee staff from
BCCI's files at its former offices in New York after liquidation provide
detailed information about some of the joint marketing efforts. One such
document, a discussion paper concerning "Relationship With First American
Bank," describes the relationship between BCCI and First American for
joint marketing as follows:
We are liasing [sic] closely with First American
Bank in their marketing efforts in the Washington area. Already a number of
accounts of individuals/corporations have been subpoenaed and a good beginning
has been made on Embassy accounts (Brunei, Bangladesh, Guatemala, Pakistan,
Panama). We hope to gear up this activity and make substantial progress in the
coming months. In addition next week we are jointly calling on thirteen
embassies in Washington to get PL 480 business. . . . All efforts are being
made to mobilize deposits for other BCC offices and in some cases for First
American Bank.(21)
Another document from BCCI's Washington
representative office, written by BCCI protocol chief Sani Ahmad, and dated
July 5, 1985, suggests that First American would takeover any business in the
United States that BCCI could not lawfully engage in, such as taking deposits,
or participating in U.S. government programs like agricultural credits.
All business that our own agencies in the United
States are precluded from handling is being passed on to First American Bank,
and also those contacts who desire local bank accounts. The accounts worth
mentioning in this respect are the [deleted] Account with balances of around
$100,000, [deleted] restaurant with a turnover of about $35,000 per month and
the Bangladesh Embassy who have placed a Term Deposit of over $1 million with
First American. . . Bangladesh business is already being routed through [First
American] because of this office.(22)
A later BCCI memorandum states that "a number
of personal accounts have been opened at different branches of First American
bank" through BCCI's efforts . . . we are now working with their [First
American's] Asset Management Group who have provided us with a number of top
multinational contacts such as Westinghouse and Northrop Corporation."(23)
In early 1986, BCCI officials at the Washington
representative office began conducting meetings with prospective clients at
First American's Washington offices. Later that year, BCCI introduced First
American officers to officials at the Chinese Embassy. According to a BCCI
"Business Call Memorandum," dated April 18, 1986:
The purpose of the meeting was to introduce First
American to the Chinese Embassy to try and obtain their account. Mr. Barry
Blank and Ms. Maureen Mcdonald from First American attended the meeting. . .
This meeting was with officers of the political section [which] maintains both
current and fixed deposit accounts.(24)
First American documents maintained by BCCI describe
the same transactions from the point of view of First American. These documents
typically underplay the involvement of BCCI officials in the marketing, simply
noting their presence at meetings. However, BCCI officers were provided copies
of at least some of the letters produced by First American concerning the joint
marketing operations, and were even copied on First American's internal
memoranda.
The fullest documentary record of the joint
marketing program pertains to BCCI's successful solicitation of UPI to use BCCI
as its international bank and First American as its U.S. bank.
In May 27, 1986, Barry Blank of First American wrote
to Mario Vazsquez Rana, whose Mexican company was about to purchase UPI, as a
follow up to a meeting in Mexico City attended by representatives of both First
American and BCCI, and referring to BCCI's involvement in the meetings. In
July, additional follow up letters were written by First American officials to
UPI, referring to BCCI as First American's "affiliate." In this
letters, written by First American personnel, First American officials describe
the interrelationship of First American and BCCI and the benefits of banking
with them together:
First American Bank, N.A., in cooperation with its
affiliate Bank of Credit and Commerce International (BCCI) and its extensive
international correspondent bank network, is prepared to establish an
international cash management program to meet your company's needs. . . The
first step we recommend is that UPI establish banking relationships with BCCI
in the locations where they have full service branches corresponding with your
bureau locations, and that UPI establish the remaining banking relationships
with our [First American's] correspondent banks . . .(25)
Ultimately, UPI agreed to open accounts at both BCCI
and First American.(26) From the First American correspondence, it
would appear that First American itself successfully solicited the business. A
fuller account of the solicitation, contained in the BCCI memoranda, makes it
clear that the UPI relationship was initiated by and developed by BCCI
officials, and that UPI selected First American for its U.S. banking at BCCI's
request. Ironically, UPI was unhappy with the handling of its accounts by First
American and quickly ended the relationship.(27)
Correspondent
Banking
BCCI sought to strengthen First American through
providing it with profitable activity from BCCI. As of February, 1991, some 46
branches of BCCI world-wide still maintained accounts at First American, with
First American holding an average of $35 million in BCCI demand deposits,
overnight placements and term placements. As part of its relationship with
BCCI, First American made credit lines available to numerous BCCI branches and
affiliates, for which First American received compensation in the form of
demand deposits and cash fees. (28)
Expansion:
Purchase of Independence Bank
Abedi had from the beginning intended to expand
BCCI's operations into California, as a means of linking BCCI's U.S. operations
with its rapidly growing operations on the Pacific rim. Accordingly, BCCI
officials in the U.S. were directed in 1983 and 1984 to investigate California
banks for secret acquisition by BCCI. In November, 1984, they selected
Independence Bank of Encino and began negotiating its sale. Soon thereafter,
Abedi and Pharaon agreed to make Pharaon BCCI's nominee for the purchase in
order to avoid the regulatory scrutiny that would follow if BCCI sought to
purchase Independence directly. Abedi arranged for BCCI's alter ego, ICIC, to
enter into an agreement with Pharaon in which Pharaon agreed to act as nominee
and agent for ICIC in acquiring Independence. Under the terms of the
arrangement, Pharaon would hold 15 percent of Independence Bank on his own behalf,
and the 85 percent would be held by ICIC for BCCI.(29)
Regulators were told that Pharaon would pay for
Independence through a mixture of his own funds and from a loan from a major
domestic bank. However, in fact, BCCI loaned or guaranteed the funds for the
purchase, laundering the funds through other banks.
As BCCI Number Two Swaleh Naqvi admitted to BCCI's
London attorneys in early 1991, BCCI in fact provided all the financing for the
acquisition and later increases in capital. The financing was provided from
accounts in Pharaon's name with BCCI holding all the shares as security,
although BCCI's security interest was never registered with the company in
order to evade detection by regulators.(30)
First, BCCI loaned $8.5 million to Pharaon and transferred
the proceeds to Pharaon's account at Banque Arabe et Internationale
d'Investissement, Paris (BAII), a bank which shared directors in common with
BCCI, and which had also been used to shield BCCI's funding of the First
American purchase four years earlier. BCCI instructed BAII to send a telegram
to California banking authorities stating that Pharaon had deposits of that
amount with BAII that were being held for the purchase of Independence, and
thereby disguising the fact that the funds came from BCCI. The remainder of the
funding for the transaction came from First National Bank of Boston -- with a
letter of credit, guaranteeing First National Bank of Boston against loss
coming from BAII, which in turn received a counter-guarantee from BCCI holding
BAII harmless against any claim that might arise. Thus, BCCI in effect was
responsible for the entire financing of the Pharaon purchase, and disguising
this role through both of the banks involved.(31)
After acquiring Independence through Pharaon, BCCI
undertook its typical follow-up. Abedi appointed a high-level BCCI official,
Kemal Shoaib, to become chief operating officer of Independence, while
abandoning its original plan of also placing Roy Carlson, president of National
Bank of Georgia, on the bank's board of directors. Shoaib then continued to
report to BCCI while heading Independence, and to receive benefits from BCCI
such as a subsidized home mortgage loan and accrual of his BCCI pension
benefits. Independence's budget, strategy and planning, its directors and
senior employees, all were run by BCCI's number two, Swaleh Naqvi, for
approval. As Independence required additional capital infusions, BCCI loaned
the money to Pharaon.(32) Just as envisioned in BCCI planning
memoranda, Independence Bank began to make direct investments in real estate,
as permitted by California law, and incurring losses as a result of BCCI's
management which ultimately would bring about Independence Bank's collapse.
By 1991, when federal regulators finally conducted a
serious review of Independence Bank's condition, they found atrocious
conditions at the bank, unusual in a U.S. financial institution, but typical of
BCCI's practices:
Loans subject to adverse classification total $194
million, representing nearly 44% of total loans, a phenomenal ratio for a
commercial bank. . . The bank has an especially unenviable record of selecting
or attracting borrowers of questionable character and creditworthiness. Many
files include derogatory credit information, such as delinquencies, tax liens,
litigation, and judgments, which were often not addressed in internal memoranda
or excused as normal in the real estate business . . . Financial statements
were often not complete . . . lacking supporting specifics, sometimes not even
signed by the borrower, often not of the legal entity borrowing the funds, and
frequently not on the bank's forms, which included a number of pertinent
questions which therefore went unanswered. Requesting tax returns was almost
unheard of. Rarely were the existence of assets verified, and less frequently
were values independently confirmed. In many cases even the most basic
financial analysis was not attempted, and when it was, it was often badly
flawed.(33)
In all, BCCI spent $90 million on Independence,
whose collapse in 1992 later cost the bank insurance fund, and indirectly, the
U.S. taxpayers, some $140 million.(34)
Consolidation:
First
American Purchases National Bank of Georgia
On
BCCI's Behalf
As the Office of the Comptroller of the Currency had
suspected in early 1978, BCCI in fact owned 50 percent of National Bank of
Georgia (NBG) from the moment of its ostensible sale to Ghaith Pharaon in May
of that year, with Pharaon acting as BCCI's nominee for those shares to avoid
the hostility regulators had already demonstrated towards any direct
acquisition by BCCI. As the Federal Reserve ultimately found following BCCI's
closure, when Pharaon acquired his shares of NBG from Lance, he borrowed at
least part of the funds used for the acquisition from BCCI.
In November 1981, Pharaon established a holding
company, GRP, Inc., of which he owned 100 percent, to hold his shares of NBG,
and established a cost-sharing arrangement with BCCI concerning NBG under which
BCCI and Pharaon would divide expenses equally and consider NBG to be equally
owned by both. The following year, this holding company changed its name to NBG
Financial Corporation. A year later, in August, 1983, Pharaon formed two more
holding companies, Interedec (Georgia) N.V. or Curacao in the Netherlands Antilles,
and a second Interedec (Georgia), incorporated in Nassau, Bahamas. Under this
arrangement, shares in the National Bank of Georgia were held by NBG Financial,
shares in NBG Financial were held by Interedec of the Netherlands Antilles, and
shares in Interedec of the Netherlands Antilles were held by Interedec of
Nassau Bahamas, which in turn were held by Pharaon. The obvious purpose and
intent of this series of holding companies -- so similar to the holding
companies and locations set up to hide BCCI's ownership of First American --
was to permit Pharaon and BCCI to sell or mortgage Pharaon's interest in NBG
without regulators or creditors finding out.(35)
Soon after setting up these holding companies,
Pharaon formed another company, Pharaon Holdings Limited of Nassau, which
immediately acquired Pharaon's 50% interest in NBG, making Pharaon Holdings a
bank holding company under U.S. law and requiring Pharaon under U.S. law to
notify the Federal Reserve of the change in ownership, which Pharaon ignored.(36)
The other 50% of the stock, held by Pharaon as a nominee for BCCI from the
beginning, remained in NBG Financial.
During the years NBG was "owned" by
Pharaon, it adopted a number of BCCI's practices and employed a number of
former BCCI employees. NBG personnel regularly attended BCCI conferences, at
BCCI's expense. NBG adopted BCCI's management style and hexagonal logo, and
reoriented its orientation as a bank from focusing on local business at the
retail level to international transactions.(37)
On January 1, 1985, Pharaon, who was experiencing
significant financial difficulties, executed a secret "Memorandum of
Deposit" with BCCI which provided that all of the outstanding shares of
NBG Financial would be deposited with BCCI as collateral for loans to Pharaon
and his companies, and giving BCCI "or its nominees" the right to
vote the shares. As a result, as of that date, BCCI had effective control over
the 50% of the shares of NBG which had been BCCI's from the beginning.(38)
By November 1985, with Pharaon's financial
difficulties intensifying, BCCI's auditors, Price Waterhouse, began to express
concern to BCCI about its exposure to Pharaon and calling on the bank to reduce
this exposure. In fact, a portion of this exposure was related to Pharaon's
holding of NBG on BCCI's behalf.
Accordingly, BCCI and Pharaon agreed to liquidate
Pharaon's 50% interest in NBG, and sell his holdings of NBG stock held by
Pharaon Holdings Limited back to NBG Financial, now controlled by BCCI. At this
point, BCCI had direct and total secret control of all of the outstanding
shares of National Bank of Georgia, and had demonstrated to Price Waterhouse
its ability to force "loans" to major borrowers like Pharaon to be
"repaid." But these financial manipulations did not solve the other
serious problem created by Pharaon's deteriorating financial condition -- the
possibility that creditors might seek to attach the shares of NBG Financial --
still officially "owned" by Pharaon. The result would not merely put
BCCI's ownership of NBG at risk, but could set in motion the destruction of
BCCI's entire empire in the United States and possibly globally.(39)
In London, Abedi looked at the NBG situation and
determined that the simplest solution to the Pharaon problem was to merge
National Bank of Georgia into First American, and thereby take Pharaon out of
the picture. In the terms of the Federal Reserve charges, "in December
1986, BCCI caused CCAH to agree to purchase the shares of NBG [Financial] from
Pharaon for $220 million."(40)
Significantly, while the transaction did not close
until August 19, 1987, First American provided $80 million at the end of
December, 1986 as an option on the purchase, securing those $80 million worth
of shares and leaving Pharaon "holding" only a remainder of $140
million worth of the bank -- shares already held by BCCI as security for
defaulted loans. Thus, any outsider who tried to attach Pharaon's shares in NBG
would find that as creditors, they were now in back of First American and BCCI,
making such an attachment of little legal value and thereby protecting the
shares.
Within BCCI at the time, it was generally understood
that the sale of NBG from "Pharaon" to "First American" was
principally a consolidation of BCCI entities within the United States. As Abdur
Sakhia testified, First American had been planning to expand its operations to
Florida in the mid-1980's, and had never discussed a move into Georgia, until
1985. In late 1985, he became aware that Pharaon's financial situation had
become shaky, and at Abedi's request arranged for a meeting to take place in
Miami in November of 1985 involving Abedi, Naqvi, Clifford, Altman, and two
officials from National Bank of Georgia -- Carlson and Jamil. No one else was
permitted to attend the meeting. After it ended, Abedi came out and told Sakhia
and other BCCI officials that National Bank of Georgia would be merged with
First American.(41) Later, in preparation for BCCI's possible
purchase of a bank in Florida, Sakhia was provided with a model file of the
Independence Bank transaction, which had the details of the National Bank
Transaction showing Pharaon's role as a nominee.(42)
After the Miami meeting, Sakhia wrote Abedi in
London in February 1986 regarding BCCI's "Future Plans in the United
States." In the memorandum, Sakhia referenced his discussions with Altman
concerning the planned purchases by BCCI of banks in Florida. In a paragraph
concerning the National Bank of Georgia, Sakhia suggested that in view of
"the forthcoming restructuring of the bank in Georgia, it may be useful to
merge their Miami operation with BCC Overseas, Miami, as this will offer
additional dollar deposit and correspondent banking relationship to BCCI
Overseas."(43)
In their written testimony before the Senate,
Clifford and Altman denied that the acquisition of NBG by First American was
directed by BCCI, stating instead that the acquisition "was as reflection
of First American's consistent corporate strategy of expansion since 1982 . . .
in December 1986, based solely on its judgment of First American's best
interests, the CCAH Board approved the proposed acquisition of NBG. BCCI did
not influence these deliberations, nor did it control the Company's decision to
acquire NBG. First American, not BCCI, initiated the NBG transaction."(44)
Pharaon himself took a similar position, which he
has maintained to this date, that he was never a BCCI nominee and acted
independently in connection with his sale of NBG to First American, as in all
other matters. As Pharaon told reporters in 1987, the transaction took place
for sound reasons of banking business on both sides:
[NBG] really needed to be part of a larger
organization. We let First American take a very deep look at the bank because
we knew that we were not selling them anything they wouldn't be totally
satisfied in purchasing. It was not a situation where I was simply telling them
no look, no see, no touch, just pay. I'm dealing with people with whom I have
other dealings and I can't afford to pass on to them something they wouldn't be
totally happy with."(45)
As Altman said at the same time:
It was clearly an arms-length business deal, that is
to suggest we didn't get any special consideration in terms of price. . . It's
a logical move for us in terms of our market expansion.(46)
The statements made by Clifford and Altman to the
Committee and to journalists, and by Pharaon to regulators and journalists,
cannot be reconciled with the documentary and testimonial accounts of all the
other parties involved, as well as the findings of the Federal Reserve
concerning the NBG sale to First American, and fails to account for the manner
in which BCCI and Pharaon handled the transaction.
At BCCI, the transaction was viewed to be a matter
of utmost secrecy, because of the risk to the bank if the regulators should
understand that BCCI was directing the National Bank of Georgia sale. Paris
branch manager Nazir Chinoy, who had no direct involvement with the sale of NBG
to First American, only happened to learn of BCCI's involvement in the deal --
and the secrecy involved concerning BCCI's real role in it -- when Abedi came
to Paris and lost a briefcase containing key documents regarding the sale:
Either in December 86 or January 87 Naqvi and Abedi
came to meet with Pharaon and through a communications error I was not there to
receive them at the airport. They wound up having to take a taxi to BCCI's
offices at the Champs Elysee. Abedi gave the taxi driver $30 for a $5 drive.
When Abedi got into the bank he said, where's my briefcase. All of us looked
surprised. It had been left in the luggage compartment of the taxi. I talked to
the girl at the airport and offered a $100 (1000 franc) reward. The next
morning at 9 am I got a call. The taxi driver came up and said, the briefcase
is there. Naqvi said, you collect it and bring it to London. I said I am
leaving for Ivory Coast. They said never mind then you go back and catch your
flight. It was a trip I didn't want to make. It's tiring. I saw written
National Bank of Georgia written on the briefcase. Naqvi told me to open it and
see if the papers are right to the top. I did and they were. The following week
they came again and Naqvi and Abedi arranged for it. Abedi told Naqvi in Urdu,
thank god the National Bank of Georgia deal is done. Then Naqvi signalled to
Abedi to keep quiet because I was in the front seat.(47)
Internal documents produced by British lawyers for
BCCI in 1990 and 1991 describe admissions by Naqvi to the bank's lawyers about
the true state of affairs between Pharaon and BCCI, at a time when Pharaon was
threatening to "trade information for protection from prosecution"
with the Manhattan District Attorney if BCCI did not cooperate with Pharaon.(48)
According to Naqvi, BCCI and Pharaon had undertaken a complex series of
financial maneuvers in 1985, months before Clifford and Altman supposedly
initiated the transaction over NBG, to sell Pharaon's interests in NBG to BCCI
in response to Pharaon's shortages of funds, even setting an expected price for
NBG's sale:
The bank agreed to settle [Pharaon's] 50% interest
in advanced based on expected proceeds of $205 million, giving him $102.5
million [as BCCI already secretly owned the other half of National Bank of
Georgia]. This payment date was taken as 17 May 1986. In fact Pharaon received
some funds before this in 1985 and the remainder through 1986 and 1987, with a
small balance carried forward. The payments were structured [not as payment for
the stock but] as loans to Pharaon. These payments also covered $95 million due
to Pharaon on the sale of his own BCC shares. . . the bank and Pharaon entered
a formal agreement signed by Pharaon dated 17 October 1986 for the bank to
receive a 10% commission for finding a buyer for the NBG shares. The agreement
warrants that Pharaon/Interdec [sic] own all the NBG shares.(49)
When First American purchased National Bank of
Georgia a year after Pharaon started receiving his "loans," the funds
-- which came from BCCI itself into First American and from First American to
NBG -- were used to pay off the "loans." Ironically, since the
"loans" were used by BCCI to wipe out Pharaon's shares of BCCI itself
and Pharaon's interests as a nominee in other BCCI-related institutions such as
Attock Oil, the entire transaction was largely a wash, with the consequence of
eliminating Pharaon's nominee interests in National Bank of Georgia, BCCI
itself, and BCCI-related entities and consolidating (50)
CenTrust:
BCCI Schemes With A Dirty S&L
Throughout the 1980's, BCCI had wanted to establish
a foot-hold in Florida through owning a bank in that state with the ability to
take deposits from Americans, a power precluded BCCI's branch operation there
under federal bank laws applying to foreign banks, which are outside the U.S.
federal deposit insurance system. Internal memoranda at BCCI begin referring to
a variety of possible acquisitions of banks in South Florida, and a number of
different BCCI officials, including Abdur Sakhia, who testified before the
Subcommittee, began investigating possible target banks in Florida for BCCI's
acquisition. A memorandum from Sakhia to Abedi in early 1986, entitled,
"Future Plans in the United States," describes BCCI's intentions:
With reference to our brief meeting in London, we
are pursuing bank acquisition with Mr. Altman the two institutions I mentioned
to you in London. As you are aware, the statewide banking in the state of
Florida is achieved either through acquisition in different counties and
subsequent merger or by incorporation of Denovo Banks in each county, and
merging them subsequently . . . As I suggested to your good self, we may apply
for state chartered agencies of BCC Overseas in Ft. Lauderdale, Orlando and
Jacksonville counties. Because of our relationship with state authorities we
can get approval ourselves within two to three months without involving any
legal cost whatsoever. When we complete the acquisition of a bank we may then
transfer existing agencies with the exception of the Miami Agency to the
acquired bank with considerable savings of cost and time.(51)
In point of fact, BCCI had expanded its branch
offices to three in Florida -- Miami, Tampa and Boca Raton -- but was unable to
find a suitable target bank in Florida over the remainder of 1986. Moreover,
BCCI had decided by early 1986 that whatever it did in Florida would have to be
secret, because the Treasury losses discovered by BCCI's auditors in 1985 and
announced publicly in December 1985 had made BCCI even more notorious in
international banking circles, and would subject any proposed purpose of a U.S.
bank by BCCI to even more scrutiny.(52) Sakhia, as well as others
affiliated with BCCI, had already begun meeting with CenTrust chief David Paul
beginning in early 1985 and continuing through 1986, socializing with Paul.
According to Sakhia, nothing came of these meetings. (53)
By early 1987, however, Pharaon, who had developed a
personal relationship with CenTrust Savings & Loan high-flyer David Paul,
had advised BCCI that Paul was looking for financing for CenTrust, and might
ultimately be willing to give up control of BCCI. Paul was at the time an
active political fundraiser for the Democratic party, the Democratic Senate
Campaign Committee, which the Subcommittee chairman then chaired, a number of
Democratic politicians, and some Republican politicians and entities as well.
At the time, BCCI was not sufficiently satisfied it
knew the full extent of CenTrust's problems to be willing to simply purchase
the bank. But BCCI and CenTrust's top officials saw a second opportunity. BCCI
did not have to make a final decision regarding its ownership of CenTrust. It
was sufficient that it could help CenTrust strengthen its eroding capital base
through a scheme that would help both CenTrust and BCCI. Working in collusion,
Pharaon, BCCI and CenTrust could create a profitable market in CenTrust
subordinated debentures by artificially propping up the price through BCCI
buying debentures from CenTrust, demonstrating their marketability, and then
CenTrust i turn agreeing to repurchase the debentures under a buy-back
agreement.
As the Justice Department described the scheme in
its late 1991 indictment of BCCI, Abedi, Naqvi, and Pharaon, Pharaon would seek
to sell CenTrust subordinated debentures to investors; arrange for a branch of
BCCI to purchase $25 million of the debentures to deceive other investors as to
their market value; and CenTrust would in turn agree to repurchase any of the
debentures that had been purchased by BCCI.(54) As a result,
CenTrust -- whose ultimate collapse is likely to cause the taxpayers $1 billion
to $2 billion -- was kept afloat and its true condition withheld from
regulators. As the Justice Department has charged:
Paul and Pharaon on or about May 16, 1988 would and
did cause Pharaon to use his position and relationship with BCCI to arrange
BCCI's assistance in purchasing approximately $25,000,000 (par value) of the
$150,000,000 offering, with the condition that the debentures would be
purchased within a short period of time at full par value. Under this
arrangement, the apparent purchaser of the debentures would hold the bonds
briefly, creating the appearance that the $150 million offering had been fully
sold, and then return the bonds and receive a full refund of the purchase
price, assuming no risk of a drop in the market price while earning interest on
the bonds for the period they were held.(55)
At first, Pharaon himself was intending to purchase
the CenTrust debentures, but as was typical of Pharaon's ventures with BCCI,
there was a great deal of flexibility between Pharaon and BCCI as to who
between them would actually undertake a particular transaction.
Paris branch manager Nazir Chinoy, who testified
before the Subcommittee, developed detailed knowledge of the arrangements
involving Pharaon and BCCI as a result of his having had a surplus of dollar
funds available for investment out of BCCI's Paris office. Chinoy had in 1988
advised Naqvi that Paris would be happy to loan funds for BCCI investments
elsewhere, on a "parked loan" basis, under which the Paris office
would not take the credit risk, which would be taken on by BCCI's Central
Office in London, but would earn interest and commissions. Soon after, Chinoy
received a call from BCCI London that Ghaith Pharaon wish to borrow $25 million
to purchase the bonds of a U.S. bank. According to Chinoy:
They asked me, would I be interested in lending it?
My initial response was, why is Mr. Naqvi giving this to Paris and not to New
York or Miami region? Why not to the States? The answer I got back was that Dr.
Pharaon -- I don't know why he was referred to as Dr. Pharoan -- that he had
dealings with Paris and his staff knew our people in Paris and he was happy
with the service in Paris and he would like it there. The rates were 1 percent
front end fee and that was juicy -- $250,000 straight -- and 1 and a half over
LIBOR. The loan would be for a period of six months. Collateral American bank
bonds. Mr. Naqvi felt they were good bonds and there would be no problem in
getting credit committee approval. He may have said the name but it didn't mean
anything to me.(56)
Chinoy was told that Pharoan expected the price of
the debentures to improve and would ultimately sell the bonds, and that he
should make payment for the bonds to Drexel, Lambert, which was handling the
transaction for the U.S. bank, CenTrust. According to Chinoy, in making the
decision to go ahead with the financing, he was relying not on financial
information for CenTrust or for Pharaon, but on the reputation of Drexel,
Lambert as an investment banker which created markets, and on Naqvi in London.
If Mr. Naqvi as president of the bank says the
collateral is good, he knows better than you. I said fine, and set in progress
the loan formalities. The paper work was set into operation and we got
instructions to pay Drexel in NY. Payment was made through traditional BCCI
bankers in New York Security Pacific. The bonds were held by Drexel in NY to
order of BCCI-Paris. Almost $25 million were disbursed. Later negotiations with
Imran Iman indicated that Pharoan was not willing to let BCCI buy the bonds
after all, instead he wanted to buy them and have BCCI loan him the funds. In
April or May of 1988, we had booked a front-end fee of $200,000. $25 million
was one of the biggest loans of Paris to an individual. If you did any loan
over $5 million you prepared a credit report based on the Bank of Americas loan
reporting procedure adopted years ago -- profitability, shareholders
profitability etc. 15 pages. In this case, we did not prepare this. We did a
CYA letter instead to cover ourselves -- shot off a memo, signed by me, to London.(57)
As branch manager of BCCI Paris, Chinoy was told by
BCCI London that he had to go ahead with the transaction however it was
structured, and regardless of how the terms changed over the course of the
transaction. Ultimately, the debentures arrived at BCCI-Paris as security, and
Pharaon later sold the bonds and BCCI Paris was repaid, earning almost
$700,000, with another $300,000 being provided to Pharaon as commission or
interest. The funds for the repayment of BCCI-Paris in turn came from BCCI London.(58)
Later, Chinoy saw a fabricated document, ostensibly
from the Paris branch of BCCI, addressed to BCCI's credit committee and
requesting the loans for the CenTrust transaction, which he believed was
created by Naqvi after the fact to cover the unusual transaction and to make it
appear to auditors that authority for it had been requested and granted by the
committee. According to Chinoy, Pharaon's "profits" on CenTrust were
transferred to BCCI's offices in Bahrain as a means of reducing Pharaon's defaults
to BCCI there, and demonstrating to auditors that Pharaon's loans from BCCI
were being serviced.(59)
In the meantime, BCCI also agreed to finance
Pharaon's purchase of an interest in CenTrust, with the possibility of assuming
actual control of the bank.
On August 12, 1987, Pharaon filed disclosure
statements with the SEC stating that he had purchased 16.9 percent of CenTrust
common stock and 24.4 percent of its Series One participating stock, a
preferred stock, from two insurance companies which had purchased the shares
the preceding year. Reminiscent of the FGB takeover purchases of just under the
5 percent holdings required for reporting in 1977, this represented just under
the 25 percent ownership that would constitute the legal definition of "control"
of CenTrust by Pharaon. The next day, Paul advised inquiring journalists that
Pharaon was "one of my very close personal friends. He is probably one of
the three of four closest personal friends Mrs. Paul and I have." By
January 7, 1988, Pharaon acquired 748,901 shares of voting common stock of
CenTrust, and on April 14, 1989, he purchased an additional 812-681 shares of
Centrust, bringing his total holdings of CenTrust voting shares to 1,561,582
shares. At no time did Pharaon or BCCI disclose the fact that all of these
purchases had been financed by BCCI, and that the CenTrust shares purchased by
Pharaon would be held by BCCI as security for those borrowings, placing BCCI in
the position of being able to control CenTrust. As a Memorandum of Deposit
signed by Pharaon and BCCI stated, "BCC or its nominees may exercise . . .
in respect of the [CenTrust] Securities or any of them any voting rights as if
BCC or its nominees were a sole beneficial owner thereof." At the very
time that BCCI was under indictment in Tampa, Florida for money laundering, it
had secretly acquired and controlled the largest S&L in Florida, CenTrust.(60)
Ironically, consistent with its pattern of expanding
into areas of operation that BCCI had been interested in exploiting, First
American also purchased a bank in Florida, the Bank of Escambia, at almost the
same time as BCCI acquired its interest in CenTrust. The purchase of the bank,
renamed First American Florida, caused federal regulators to ask for further
information concerning First American's dealings with BCCI. On receiving
assurances that First American's shareholders still were not nominees for BCCI,
and that BCCI was not in back of the transaction, the Federal Reserve permitted
the purchase to go forward.(61)
BCCI's
Attempts to Sell its US Empire
BCCI's secret purchase of U.S. banks had been
extraordinarily expensive for BCCI. Because it had used nominee arrangements to
pay for the banks, its ownership of the banks was carried on its books as loans
which were not being serviced. As a result, each year, BCCI was forced to add
the interest to the amount secured by its shares of First American to its
books. Additionally, First American's series of acquisitions, including
operations in Tennessee and Florida, had stripped BCCI of further capital. By
1989, Price Waterhouse, as BCCI's auditors, were becoming increasingly unhappy
and vocal about the size of BCCI's exposure on First American, and demanding
that BCCI contact the shareholders and have them at least been servicing the
loans they supposedly had. Since both the shareholders and BCCI knew the loans
were bogus, BCCI was left in the position of having to consider the forced sale
of First American.
Indeed, that strategy was first considered, and
attempted, by BCCI, in 1986 in connection with the purchases of BCCI and CCAH
stock by the Khalid bin Mahfouz, head of the National Commercial Bank of Saudi
Arabia and the most powerful banker in the Middle East. Bin Mahfouz had
purchased shares of both BCCI and CCAH under a complex agreement that would
permit him to purchase both banks, or to hold his interests temporarily with
BCCI guaranteeing to buy them back at no risk to bin Mahfouz. After auditors
for National Commercial Bank raised questions about bin Mahfouz's actions regarding
BCCI, the transactions were fully unwound by 1989, leaving the First American
problem for BCCI unsolved.
In 1989, after meetings with auditors, BCCI
concluded that it should place First American on the market, and asked Clifford
to retain an investment banker to seek purchasers for First American. As an
internal task force headed by BCCI chief financial officer Massihur Rahman
noted in April, 1990:
Since 1989 the bank has advised the major borrowers
to dispose of their shares in CCAH to repay their loans in BCCI . . . the legal
representatives of the shareholders of CCAH have retained the services of a
major U.S. investment bank to advise, evaluate and assist either in the
outright sale or in the merger of the CCAH group of First American banks with a
larger banking entity.(62)
Goldman Sachs was retained by Clifford, on behalf of
"CCAH" in July 1989. On October 10, 1989, Clifford wrote First
American's shareholders to inform them that they had been approached by Barnett
Banks "to discuss their interest in a possible merger or acquisition
arrangement with First American," and had retained Goldman Sachs to
evaluate the "express interest of Barnett Banks as well as other possible
candidates."(63)
By April, 1990, Price Waterhouse concluded that
BCCI's financial situation was perilous, and demanded that action be taken
immediately. BCCI's $702 million exposure had not been reduced, as bank
officials had promised, but had gone up, with interest, to a staggering amount
-- $870 million. Price Waterhouse concluded that based on its estimate, if a
buyer were found, BCCI would still lose $200 million or more on a sale of First
American at 2.1 times net tangible assets.(64) Price Waterhouse also
warned that if a buyer were not found, the auditors might well classify a
portion of this debt, wiping out BCCI capital in the process and drawing public
attention to the loans in BCCI's annual report. Given the ignorance of U.S.
regulators about the nature of BCCI's lending for First American, this would be
a catastrophe.
The only way out of this problem was a sale of First
American, and the initial interest from Barnett Banks had disappeared. However,
at Clifford's recommendation, Goldman Sachs had also contacted NCNB, now known
as Nation's Bank, to determine whether NCNB might be interested in purchasing
First American. NCNB was indeed interested, and prepared to offer $1 billion
for First American based on the financial information provided to them by
Goldman Sachs. The offer, which represented 1.5 book value, was subject to a
number of conditions, including "satisfactory completion of normal
business and legal due diligence by both you and us."(65) Oddly
enough, NCNB and BCCI never moved ahead with the due diligence. Little further
paperwork was done, and within two months, BCCI executives were told that
negotiations had stopped entirely.(66)
By the end of July, BCCI's board of directors had
become involved in seeking other ways to dispose of BCCI's holdings in First
American. In a letter from BCCI director J.D. Van Oenen to BCCI's then senior
executive, Swaleh Naqvi, Van Oenen noted that there were "many problems of
which we were not fully aware" in selling the franchise, because of limits
on interstate banking, foreign ownership, and because of unspecified problems
with the New York operation of First American. Van Oenen noted that if BCCI
could not sell First American, it would lose another $60 to $70 million by the
end of 1990 on holding the bank. Further, Price Waterhouse had developed an
"attitude" regarding the First American shares that might well result
in the auditors classifying a portion of the loans, which could damage BCCI's
balance sheets further. An attachment to the Van Oenen letter showed annual
losses for BCCI connected with First American as amounting to $106 million, and
that BCCI would have to sell First American at three times book value to break
even, at a time when it had been unable to move ahead with an offer for half
that amount.(67)
According to the memorandum the preferred option
BCCI was considering was the "internal solution" -- a sale of First
American to Abu Dhabi. Unfortunately, the questions that regulators would raise
appeared to make this approach impossible. Alternatively, Abu Dhabi might be
convinced to lend funds to BCCI and "call the loans, at a time of their
choosing, take possession of the security and thus gain two years breathing
space to dispose of it." Under this scheme, Abu Dhabi would in effect
replace BCCI as the lender to the nominees, and then remove them at its convenience,
at which time it could hold or sell First American as it pleased. Van Oenen
acknowledged that there was a fundamental flaw with this plan -- if Abu Dhabi
called all of its loans simultaneously, regulators would again ask questions,
and might charge that Abu Dhabi had secretly gained control of the bank without
due notification.(68)
A third approach recommended in the BCCI/Van Oenen
memorandum would involve BCCI "garaging" loans with other
institutions to "slim down" its balance sheets, either on a
"re-purchase basis," or "as an outright sale." The former
approach amounted to juggling BCCI's books to take its loans for First American
off the balance sheets. The approach had already been effectively used by BCCI
in connection with purchases and sales of CCAH stock by Khalid bin Mahfouz and
the National Commercial Bank of Saudi Arabia in 1986. But it would do nothing
to resolve the underlying losses other than buy time, and it would face severe
criticism from regulators, if they found out, and from BCCI's own auditors.
Outright sale of First American stock was simpler, but faced an equally
daunting objection -- no institution would buy the stock without some form of
guarantee from BCCI's shareholders, and favorable terms, costing BCCI further
funds it could not afford.(69)
The BCCI directors also wished further to explore
selling First American to a domestic U.S. bank, but recognized that the only
bank that expressed interest, NCNB, had for unknown reasons done nothing
further to move ahead with negotiations. Finally, they considered the
possibility of the sale of First American to a foreign bank, noting that the
only identifiable institution that might be interested would be the National
Bank of Abu Dhabi, a very small institution, with assets of $150 million, that
could "theoretically qualify for a 'reverse' procedure by merging into
CCAH." Van Oenen acknowledged that "the chances [for approval of such
a transaction] do not rate very high."(70)
In fact, by the summer of 1990, the Morgenthau
investigation of BCCI's activities in the United States had already moved into
high gear, and BCCI's lawyers in the United States, including Clifford and
Altman, were in the position of resisting the attempts of the New York District
Attorney to obtain documents concerning the relationship between First American
and BCCI. Subcommittee staff were also questioning the relationship, and had
scheduled hearings for July or August, 1990 on the topic of BCCI's possible
ownership of First American. In such an environment, any orderly sale of First
American to any potential buyer would be fraught with difficulty, and there is
no documentation following the Van Oenen letter indicating that an actual sale
of First American was anticipated by anyone.
Consequences
for First American
Of
BCCI-Related Expansion
Up and until the indictment of BCCI in October, 1988
in Tampa on money-laundering charges, BCCI continued its expansion and
consolidation in the United States, with First American expanding operations in
Tennessee and Florida, and considering the development of operations in Utah
and elsewhere. While the metropolitan branches of First American were kept
largely free of BCCI's direct involvement, its New York and Georgia operations
were never completely free of BCCI's influence, and even in the metropolitan
branches of First American, BCCI had provided a variety of services up to the
Tampa indictment. As Abdur Sakhia concluded:
You have enumerated the whole list of interlocking
relationship, joint business, joint marketing, joint . . . staff transfers,
hiring of staff, merger of First American and National Bank of Georgia, renting
of space, appointment of chief executives . . . how the raising of capital and
purchase prices were circulated. It is nothing but one institution.(71)
In the face of Clifford and Altman's position that
First American bank was never controlled by BCCI, and that the two operations
were separate, officials at First American New York took pains to reiterate to
BCCI officials at far-away locations elsewhere that the two banks were
operating jointly. One such letter, to a BCCI official in Nairobi, Kenya,
written on First American stationery, and signed by two First American
officials specifically sought to rebut assertions to the contrary:
Recently an article appears in the Financial Times
of February 13, 1990 ascribing certain comments to an unnamed senior First
American officer. We have taken exception to the report where it states that,
in the future, our two institutions shall not be dealing together.
To set the record straight, we wish to reiterate
that First American values the relationship between our two institutions, and
we are continually desirous of enhancing it. As you are aware, we are
maintaining about forty accounts of the BCC Group's various locations. Additionally,
sizable credit facilities are also available in all categories.(72)
Unfortunately, a number of BCCI's purchases in the
U.S. were proving unprofitable. Independence Bank grew ever weaker as the value
of its real estate plummeted. First American New York's operations never
justified the costs of the space in Manhattan which BCCI insisted that it
lease, and which was still costing First American substantial sums as of May,
1992. And National Bank of Georgia remained a weak institution, with very significant
problems, including, as bank regulators late found, "inadequate
supervision by board and management, an eroding capital base, an ineffective
corporate liquidity function, and deteriorating asset quality and earnings
performance."(73)
Even First American's core banks had become severely
stressed by the end of the 1980's, in part due to the softening real estate and
office building markets on the East Coast generally and in metropolitan
Washington in particular. Thus, by the time BCCI was closed internationally on
July 5, 1991, federal regulators had sought and received an additional $200
million in new financing and capitalization for First American to keep the bank
from being at risk of failure even before the avalanche of negative publicity hit
the bank during the second and third quarters of 1991.
By the time BCCI closed, federal bank organizations
would find that overall, the First American banks owned by BCCI were "run
in a very disorganized manner [with] very little direction being given to the
banks" by central management, and Georgia and New York operating
"virtually autonomously" from the central management associated with
the metropolitan banks of First American.(74)
Similarly, First American's current management,
including president George L. Davis, told the Subcommittee in May that despite
the opportunities for First American to have used its unique multi-state status
to provide enhanced banking services, in actual fact they found the various
franchises of First American to have never been centrally coordinated or
managed. Instead, each entity had maintained a largely separate existence from
others, with the result that there were few benefits to First American from
extending its geographic reach. Accordingly, Clifford and Altman's successors
at First American were choosing to sell off the various branches of First
American other than the metropolitan banks, because they could find no adequate
business purpose to keep them.(75)
Conclusions
By the time of the October 1988 indictment of BCCI
in Tampa as a result of a Customs money-laundering sting operation, BCCI had
secretly acquired a coast-to-coast network of United States banks operating in
New York, Maryland, Virginia, the District of Colombia, Georgia, Florida,
Tennessee, and California without U.S. or state regulators ever catching on to
BCCI's ownership and control of the institutions. Accomplishing this goal had
been expensive for BCCI, which had consistently paid more for each bank than
the market would dictate for any normal banking institution. Moreover, in some
cases, such as the lease for First American New York, BCCI made poor business
judgments which cost First American money. In other cases, such as the purchase
of National Bank of Georgia, BCCI financed First American's costs, so that
First American itself was not stripped of its resources by the purchase, but
found itself buying a bank that it did not need, failed to make use of, and
which had severe ongoing operational problems that were clearly not taken into
account in its pricing.
Thus, even apart from the events that took place as
a consequence of the Tampa money-laundering sting and the concurrent
Subcommittee investigation of BCCI in 1988, and the resulting investigation
conducted by New York District Attorney Morgenthau in 1989, BCCI's U.S. empire
was in serious difficulties by the end of the 1980's. Maintaining that empire
was already proving increasingly costly to BCCI, which was already being
pressured to liquidate its loans to First American shareholders by its auditors
and the Bank of England. Yet through financial manipulations which had become
routine at BCCI, these banks were kept afloat regardless, because the
consequences for BCCI of not maintaining them would have been catastrophic.
1.
See e.g. Clifford statement to First American Board re First American growth,
October 4, 1984.
2.
Senate BCCI document 391-393, produced by BCCI liquidators July, 1991.
3.
Sakhia, S. Hrg. 102-350 Pt 2. p. 505.
4.
Findings, U.S. Board of Governors of the Federal Reserve System, In the Matter
of BCCI, 91-043, July 29, 1991, Paragraphs 165-167.
5.
Sakhia, staff interviews, October 7, 1991.
6.
Abdur Sakhia, staff interviews, October, 1991.
7.
U.S. Board of Governors of the Federal Reserve, In the Matter of BCCI Holdings,
91-043, Paragraph 61, July 29, 1991.
8.
Altman testimony, S. Hrg. 102-350 Pt. 3 pp. 234-235.
9.
Board of Governors Federal Reserve System Exhibit AD 134, Afridi to Naqvi, July
25, 1983.
10.
Id.
11.
Sakhia testimony, S Hrg. 102-350 Pt. 2 p. 513.
12.
S. Hrg. 102-350 Pt. 3 p. 332.
13.
Charges, Board of Governors of the Federal Reserve System, In the Matter of
BCCI Holdings, 91-043, July 29, 1991, Paragraphs 176-178.
14.
Travel reimbursement records of Tariq Jamil, 1981-1987, First American Georgia.
15.
Minutes of U.S. Marketing Meeting, April 24, 1985, S. Hrg. 102-350, Pt. 3 p.
336.
16.
Minutes of U.S. Marketing Meeting, S. Hrg. 102-350 Pt 3 p. 342.
17.
Testimony of Sakhia, S. Hrg. 102-350 Pt. 2 p. 547.
18.
Staff interview, Chinoy, March 9, 1992.
19. Id.
20.
Sakhia testimony, S. Hrg. 102-350 Pt. 2 pp. 598-599.
21.
BCCI Discussion Paper, dated "London, 1985," retrieved from documents
at BCCI offices at 350 Park Avenue, New York, March, 1992.
22.
Sani Ahmed, BCCI internal memo, July 5, 1985.
23.
BCCI Washington Rep Office Marketing Report, September 30, 1985.
24.
BCCI Business Call Memorandum, April 18, 1986.
25.
First American Bank/BCCI joint presentation, United Press International, July
1986, retrieved from BCCI files, BCCI-New York.
26.
See Office Call Report Form, S.P. Schmidt, November 20, 1986.
27.
First American documents, Barry Blank to Mario Vasquez Rana, UPI, May 27, 1986;
Susan Schmidt to Miguel A. Bursat, General Manager, UPI, July 23, 1986; BCCI
memoranda, Akbar Bilgrami, to S.M. Shafi, August 8, 1986; letter, Susan
[Schmidt] to Amjad [Awan], BCCI, regarding UPI account, September 26, 1986.
28.
Memo, First American New York, "Correspondent Banking Relationship Between
First American Bank of New York and BCCI," February 7, 1991.
29.
Charges, Board of Governors of the Federal Reserve System, In the Matter of
Ghaith R. Pharaon, 91-037, September 17, 1991, Paragraphs 10-15.
30.
Strictly Privileged & Confidential Produced For Legal Advice Memorandum,
Pharaon, Background Paper, For Discussion with Messrs Blair and Siddiqui,
Considerations Before Pharaon Meeting 5/6 March 1991.
31.
Id, paragraphs 20-23.
32.
Id, paragraph 28.
33.
FDIC, Report of Examination, November 25, 1991.
34.
Prepared testimony of Comptroller of the Currency, May 14, 1992.
35.
Charges, Board of Governors of the Federal Reserve, In the Matter of BCCI,
91-043, July 29, 1991, Paragraphs 179-195.
36.
Id.
37.
See summary of charges, Federal Reserve, In re Clifford, id., Paragraph 129.
38.
Id. Paragraph 184.
39.
Id,. Paragraphs 184-187.
40.
Charges, Board of Governors of the Federal Reserve, In the Matter of BCCI,
91-043, July 29, 1991, Paragraph 188.
41.
Sakhia testimony, S. Hrg. 102-350 Pt. 2 p. 604.
42.
S. Hrg. 102-350 Pt. 2, p. 606.
43.
Sakhia letter to Abedi, Future Plans in the United States, February 10, 1986,
S. Hrg. 102-350, Pt. 2 p. 595.
44.
Written statement, Clifford and Altman, S. Hrg. 102-350 Pt. 3 p. 78.
45.
Atlanta Business Journal, April 27, 1987, "Pharaonic reflections: Thoughts
on an empire."
46.
Id.
47.
Staff interview, Chinoy, March 9, 1992.
48.
Privileged and Confidential Pharaon Background Paper, unattributed, "For
Discussion With Messrs. Blair and Siddiqi, Considerations Before Pharaon
Meeting 5/6 March 1991.
49.
Id.
50.
See February 25, 1990 draft "Strictly Privileged & Confidential,
Produced for Legal Advice, re: Dr. GR Pharaon," BCCI Attorneys, London.
51.
Sakhia letter to Abedi, Future Plans in the United States, February 10, 1986,
S. Hrg. 102-350, Pt. 2 p. 595.
52.
Sakhia, S. Hrg. 102-350, Pt. 2 p. 606.
53.
S. Hrg. 102-350, Pt. 2 pp. 643-650.
54.
Indictment, U.S. v. BCCI, US District Court for DC, Grand Jury January 16,
1991.
55. U.S.
v. Paul, Indictment, US District Court for the Southern District of
Florida, February 23, 1992.
56.
Staff interviews, Chinoy, March 9, 1992.
57.
Chinoy id.
58.
Chinoy, id.
59.
Chinoy, id.
60.
Charges, Board of Governors of the Federal Reserve, In the Matter of BCCI, July
29, 1991, Paragraphs 201-206.
61.
S. Hrg. 102-350 Pt. 3 p. 83.
62.
S. Hrg. 102-350 Pt. 1 p. 408.
63.
S. Hrg. 102-350 Pt. 3 p. 453.
64.
Price Waterhouse letter to shareholder, S. Hrg. 102-350 Pt. 1 p. 483.
65.
S. Hrg. 102-350 Pt. 3 pp. 457-458.
66.
BCCI Memo from J.D. van Oenen to S. Naqvi, July 30, 1990, S. Hrg. 102-350 Pt. 3
pp. 463-479.
67.
Id.
68.
Id.
69.
See e.g. Charges, Board of Governors of the Federal Reserve System, In the
matter of Khalid bin Mahfouz, 92-074, July 2, 1992.
70.
Id.
71.
S. Hrg. 102-350 Pt. 2 p. 640.
72.
Letter from Maurice Acoca and Mansoor Shafi to S. S. Dinamani, February 21,
1990, First American New York to BCCI Kenya.
73.
OCC letter to the Board of Directors, First American Bank Georgia, as of August
30, 1990.
74.
OCC, FAB Exam Status Report, June 13, 1991.
75.
Staff interview, George Davis, May, 1992.
The
Justice Department
Introduction
Over the past two years, the Justice Department's
handling of BCCI has been criticized in numerous editorials in major
newspapers, including the Wall Street Journal, the Washington Post, and the New
York Times, reflecting similar criticism on the part of several Congressmen,
including the chairman of the Subcommittee, Senator Kerry; the chief Customs
undercover officer who handled the BCCI drug-money laundering sting, Robert Mazur;
his superior at Customs, Commissioner William von Raab; New York District
Attorney Robert Morgenthau; former Senate investigator Jack Blum, and, within
the Justice Department itself, the former U.S. Attorney for the Southern
District of Florida, Dexter Lehtinen.
Typical editorials criticized Justice's prosecution
of BCCI as "sluggish," "conspicuously slow,"
"inattentive," and "lethargic." Several editorials noted
that there had been "poor cooperation" by Justice with other
agencies. One stated that "the Justice Department seems to have been
holding up information that should have been passed on" to regulators and
others. Another that "the Justice Department's secretive conduct in
dealing with BCCI requires a better explanation than any so far offered."(1)
In response to all these critics, the Justice
Department has suggested that their comments are ill-informed, their motives
suspect, and that in time, the wisdom and probity of the Justice Department's
approach would emerge. As Assistant Attorney General Robert S. Mueller III
stated to the Subcommittee in prepared testimony on November 21, 1991:
We are responsible, ethical prosecutors. We will not
indict simply to get favorable press coverage or to quiet our critics. We
require evidence sufficient to prove a crime beyond a reasonable doubt, and we
will not indict if that evidence does not exist . . . It is premature to assess
our performance. We cannot even respond fully to criticism, because we cannot
reveal grand jury proceedings or the details of our investigations. Our record
when the investigations and prosecutions have concluded will speak for itself.
. . a fair review of the available facts will show that the Department of
Justice has done an excellent job on the BCCI investigations, and that the criticisms
of the Department are fundamentally unfair.(2)
Unfortunately, as time has passed it has become
increasingly clear that the Justice Department did indeed make critical errors
in its handling of BCCI prior to the appointment of Attorney General Barr in
October, 1991, and moreover masked inactivity in prosecuting and investigating
the bank by advising critics tat matters pertaining to BCCI were "under
investigation," when in fact they were not.
These critical strategic errors, which arose in the
earliest stages of the Justice Department's handling of the Customs sting,
Operation C-Chase, in 1988, were compounded by the Justice Department's
attempts to hinder other legitimate investigative efforts, and by the Justice
Department's inability to admit that it had made any of these mistakes.
While mid-level officials in the US Attorney's
office in Tampa worked long hours under atrocious conditions to bring the money
laundering case against BCCI which arose out of Operation C-Chase, it is clear
now, and should have been clear as of the date of the C-Chase indictment
against BCCI in October 1988, that BCCI represented much more than a drug money
laundering case.
Nevertheless, the US Attorney's office chose to
bring, and not to supersede, a limited, money-laundering case against the bank
in Florida and indicted several mid-level BCCI officials, throwing out a
possible Racketeering Influenced and Corrupt Organizations (RICO) case that
would have enabled it to have gone after all of BCCI's assets in the United States
-- possibly including any interest it had in the First American bank.
The US Attorney in Tampa then made its second
strategic mistake as it allowed the bank to plead out while prosecuting the
individual bankers. BCCI mounted a $20 million defense in Florida and provided
for the legal costs and living expenses of its former employees throughout
their trials. The bank's strategy was obviously to blunt to the extent possible
any attempt by the US Attorney's office to "flip" individual defendants,
causing them to plead out of the case and to agree to provide damaging
testimony against the institution itself. BCCI's strategy largely succeeded
when in January, 1990, the U.S. Attorney and Justice Department agreed to
permit the bank to avoid trial, and pled guilty to the narrow set of offenses
contained in the indictment, and thereby end investigation and prosecution of
BCCI in the only judicial district where any such activity existed. The
October, 1988 indictment had charged BCCI as institution with having a
corporate policy of soliciting drug money. Following the plea, prosecutors
changed their underlying theory of the case to suggest that the real guilt lay
not with the bank, but with the individual bankers at BCCI who happened to fall
into the net of the Customs' sting.
The result was that the Justice Department permitted
BCCI to sever its Florida operations and sacrifice a handful of bank employees
and thereby to continue its worldwide criminal activity.
Soon after the January 1990 plea agreement, the Justice
Department stopped investigating BCCI entirely. Despite the fact that hundreds
of leads had not been followed up on in the C-Chase investigation, and that law
enforcement officials in the filed recognized the importance of those leads,
the Justice Department took which government agents later characterized as a
"time-out".
There does not appear to have been anything sinister
that prompted this decision. Rather, the decision to stop investigating BCCI
appears to be an example of poor communication, overwork, understaffing,
inadequate understanding of the meaning of information in the possession of
Justice, and a flawed prosecutorial and investigative strategy. It was also the
unintended consequence of the BCCI case arising as a Treasury Department investigation
brought by Customs and IRS agents only, without the involvement of the FBI.
Given the focus of Treasury agents on crimes pertaining to issues such as money
laundering and customs violations, the failure to bring the FBI into the case
may have contributed to the lack of follow through on the broader criminality
pertaining to BCCI.
During the remainder of 1990 and the first half of
1991, it became increasingly clear from the Subcommittee's investigation, New
York District Attorney Morgenthau's investigation and media investigations that
BCCI was an international criminal organization. Throughout that period, the
Justice Department found itself in the apparently uncomfortable position of
having to give the public impression that it was aggressively moving against
BCCI, at a time when it was doing very little concerning the bank, and
investigators and prosecutors involved in the Tampa case were no longer working
on matters pertaining to BCCI. Instead of immediately renewing their
investigation, the Department sought to impede the investigations of others
through a variety of mechanisms, ranging from not making witnesses available,
to not returning telephone calls, to claiming that every aspect of the case was
under investigation in a period when little, if anything, was being done.
Only after regulatory agencies around the world
seized the bank on July 5, 1991, did the Justice Department begin to give the
BCCI investigation an unprecedented urgency and importance. Under Assistant
Attorney General Mueller, the Department assigned nearly three dozen attorneys
to the case. During 1992, the Department brought several indictments, which
remained narrower, less detailed and, at times, seemingly in response to the
efforts of District Attorney Robert Morgenthau of New York, the Federal
Reserve, or both.
Findings
** Federal prosecutors in Tampa handling the 1988
drug money laundering indictment of BCCI failed to recognize the importance of
information they received concerning BCCI's other crimes, including its apparent
secret ownership of First American. As a result, they failed adequately to
investigate these allegations themselves, or to refer this portion of the case
to the FBI and other agencies at the Justice Department who could have properly
investigated the additional information.
** The Justice Department, along with the U.S.
Customs Service and Treasury Departments, failed to provide adequate support
and assistance to investigators and prosecutors working on the case against
BCCI in 1988 and 1989, contributing to conditions that ultimately caused the
chief undercover agent who handled the sting against BCCI to quit Customs
entirely.
** The January 1990 plea agreement between BCCI and
the U.S. Attorney in Tampa kept BCCI alive, and had the effect of discouraging
BCCI's officials from telling the U.S. what they knew about BCCI's larger
criminality, including its ownership of First American and other U.S. banks.
** The Justice Department essentially stopped
investigating BCCI following the plea agreement, until press accounts, Federal
Reserve action, and the New York District Attorney's investigation in New York
forced them into action in mid-1991.
** Justice Department personnel in Washington
lobbied state regulators to keep BCCI open after the January 1990 plea
agreement, following lobbying of them by former Justice Department personnel
now representing BCCI.
** Relations between main Justice in Washington and
the U.S. Attorney for Miami, Dexter Lehtinen, broke down on BCCI-related
prosecutions, and key actions on BCCI-related cases in Miami were, as a result,
delayed for months during 1991.
** Justice Department personnel in Washington,
Miami, and Tampa actively obstructed and impeded Congressional attempts to
investigate BCCI in 1990, and this practice continued to some extent until
William P. Barr became Attorney General in late October, 1991.
** Justice Department personnel in Washington, Miami
and Tampa obstructed and impeded attempts by New York District Attorney Robert
Morgenthau to obtain critical information concerning BCCI in 1989, 1990, and
1991, and in one case, a federal prosecutor lied to Morgenthau's office
concerning the existence of such material. Important failures of cooperation
continued to take place until William P. Barr became Attorney General in late
October, 1991.
** Cooperation by the Justice Department with the
Federal Reserve was very limited until after BCCI's global closure on July 5,
1991.
** Some public statements by the Justice Department
concerning its handling of matters pertaining to BCCI were more cleverly
crafted than true.
Early
Warnings About BCCI
Although the Justice Department did not indict BCCI
until 1988, there were rumors about the bank virtually since its inception.
BCCI officially first came to the United States as a branch in New York during
the 1970's. New York state banking officials subsequently denied BCCI's
takeover of a small bank. Furthermore, bank regulators and law enforcement
agencies in other countries, such as the United Kingdom, had reservations about
the bank. The British, in fact, refused to grant BCCI full banking status.
According to U.S. banking regulators, they routinely make inquiries to the
Justice Department about BCCI.
In September 1991, the House Subcommittee on Crime
and Criminal Justice, issued a report detailing federal law enforcement's
handling of allegations involving BCCI. According to the report,
"[F]ederal authorities had scores of contacts concerning BCCI as far back
as 1983," and "the government had enough information on BCCI by the
mid-1980's to have put BCCI on the most wanted list."(3)
Among the findings of the House Subcommittee:
a.) The DEA had a plethora of case information
which, taken in totality, led to the inevitable conclusion that "BCCI is
the place to launder money."(4) The report stated that:
[A] review of the files has, so far, revealed 125
cases that have been identified "as having something to do with
BCCI." Most of the cases are undercover storefront operations which lead
to warrants to seize BCCI bank accounts containing suspected drug proceeds.(5)
b.) Senior IRS officials refused to begin an
undercover investigation of BCCI despite the fact that the criminal division
had developed important information about the bank. The report states:
Former BCCI employee Aziz Rehman was interviewed by
IRS special agents in IRS's Miami office in April 1984 shortly after he was
fired by BCCI for refusing to transport large volumes of currency which he
believed to be in violation of existing Federal laws. He provided them with
documentation of deposits to a nonexistent BCCI branch in Nassau, Bahamas, and
described his role as a former courier for large cash deposits to BCCI accounts
of "customers" and other banks.(6)
c.) The Customs Service had information as far back
as 1983 concerning the illegal smuggling operations of one of BCCI biggest
customers, a Jordanian arms merchant named Munter Bilbeisi. According to the
House Subcommittee report, "Any reasonable investigation into Bilbeisi's
operations would have uncovered that Bilbeisi's coffee business had established
a financial relationship with BCCI in 1983, and that BCCI had issued phony
letters of credit from 1983 to 1986 to finance smuggling."(7)
d.) Representatives of the Government of India
provided the IRS with evidence of a money laundering scheme involving BCCI.
However, according to the report, because India did not have a tax treaty with
the United States, the allegations were not followed-up on.(8)
Abdur Sakhia, the former regional manager for BCCI
in the United States, testified before the Subcommittee on Narcotics, Terrorism
and International Operations that he met with Justice Department officials in
the autumn of 1984 in the office of former then-Senator Paula Hawkins to
discuss allegations of BCCI's involvement in drug money laundering. Sakhia
testified that he was told by the President of BCCI, Agha Hasan Abedi, to meet
with Senator Hawkins after the Senator, on a trip to Pakistan, told President
Zia that she was concerned about drug money laundering by a Pakistani bank in
the Cayman Islands, which she subsequently identified as BCCI. According to
Sakhia, he was told by the Justice Department that BCCI was not under
investigation and that he subsequently learned that the US Department of State
had communicated the same message to the Pakistani government.(9)
The Subcommittee has been unable to determine the
source for Senator Hawkin's information, although notes that she was at the
time the Chairman of the Subcommittee on Narcotics, Terrorism and International
Operations and would have had access to classified material from both the DEA
and the CIA.
There is also evidence that the regulators had
passed on information about BCCI to the Justice Department in 1987. Robert
Forrestal, President of the Federal Reserve of Atlanta, testified before the
House Banking Committee on Sept. 1992, and stated that "while
participating in an April, 1987 examination of BCCI Miami, our examiners
discovered possible money laundering transactions that appeared to be structured
to evade reporting requirements, The transactions were detected in a review of
checks and money orders sent from BCCI Panama to BCCI Miami for payment. A
criminal referral concerning the activities discovered at the Miami agency was
filed with the U.S. Attorney's office in Miami and with the Federal Bureau of
Investigation in North Miami Beach on May 18, 1987.
Operation
C-Chase
In 1986 undercover Customs agent Robert Mazur wrote
a memorandum to his superiors proposing an undercover money laundering operation
called Operation C-Chase. According to Mazur, the proposal sprung from almost
two and one half years of undercover work in Florida on international money
laundering. Mazur's proposal was accepted and the Customs Agency notified the
Justice Department which provided strategic and tactical assistance.(10)
Mazur, who coordinated the undercover operation,
posed as a businessman coordinating a number of investment and mortgage
businesses which were used as a cover for the laundering of drug proceeds.
According to Mazur, after the front was established, an informant approached
members of a Colombian drug ring based in Medellin. Cartel members slowly
gained confidence in Mazur and his team and over a period of time began to
provide him with substantial amounts to drug money to be laundered. Mazur
testified that in an "effort to ultimately obtain a Panamanian
account" he opened an account at BCCI because it was the only bank with
which he was familiar that had international branches.(11) Mazur
testified that he had not been "armed with any particular information that
BCCI was involved in that type of activity."(12)
Operation C-Chase ultimately proved an extremely
successful undercover operation and helped to shed light on the massive drug
money laundering taking place in the United States. Mazur testified that one of
the money launderers ensnared in Operation C-Chase had gross receipts in the
United States "of roughly $200 million per month in currency that needed
to be removed from the United States on his behalf."(13) While
the early stages of the investigation focused on the cartel and drug money
laundering, as Mazur learned more about BCCI, he began to focus his efforts on
the bank's complicity in money laundering.
From his very first meeting with officials at BCCI,
Mazur was struck by the bank's "polished marketing approach . . .
everything fit to have an institution that might have an ulterior motive for
its locations."(14) After Mazur checked with local prosecutors
in Tampa and discovered that the bank showed up in another drug-related
investigation, his suspicions were heightened.(15) Directing the
activities of his undercover team, Mazur set about to investigate BCCI and he
quickly discovered that the bank was all too willing to assist him in the
laundering of funds.
Mazur testified that after he opened his account in
Panama:
"the bank came back to have a broader
relationship ... an operations officer .. recognized the nature of the
transactions and called me, unsolicited, to inform me that he would be in the
United States and that he felt the bank, being a full service bank, had the
types of abilities to keep my transactions conducted in a very confidential way
that would enhance the businesses I was involved in."(16)
According to Mazur, the bank provided him with a
sophisticated means for laundering money which entailed receiving the cash at
"either their Panama branch or their Luxembourg branch and several
locations in the Middle East." Mazur described in Subcommittee testimony
how an officer at BCCI, Sayed Hussain, advised him not to repeat the mistakes
that other drug money launderers had made in Operation Pisces, a previous U.S.
government undercover money laundering sting which had traced the proceeds of
drug money laundering to BCCI accounts in Panama. BCCI clients had been
implicated in that government undercover operation and apparently Hussain
believed that there were better ways to conceal client's funds.
Mazur told the Subcommittee that his undercover
operation handled "roughly $14 million through BCCI on behalf of
clients." BCCI earned banking fees on these transactions totaling in
excess of $250,000, but according to Mazur the bank was much more interested in
getting large deposits so as cause "their balance sheets to look very strong."(17)
During the winter of 1988, a tentative date was
established for the takedown of BCCI. That date was altered slightly during the
ensuing months but remained within a two week time frame at the beginning of
October. In July, an implementing plan was put into effect with the October
time frame in mind.(18)
However, it became increasingly evident to agent
Mazur that there were significant leads and evidence that could not be followed
up on by October. Moreover, Mazur testified that he was on the verge of meeting
with the "inner circle" at BCCI which could have potentially unlocked
many of the criminal secrets about the bank. Senator Kerry asked agent Mazur if
the predetermined date in October, which seemed increasingly arbitrary to the
agents, was politically motivated:
Senator Kerry: Did you have any discussion with
anybody about whether or not October was the date? Because October 1988 was a
Presidential election year. And by having an October takedown it would make
Customs be able to present the administration with a sort of present on a
platter.
Mr. Mazur: There certainly was mere speculation that
that played a part by people at low levels like mine. But beyond that I cannot
say more.
Senator Kerry: But it went through your head that
might have been a reason that there was such a compulsion to terminate this
thing in October.
Mr. Mazur: I was at a loss for understanding why
October. I would say that for sure.(19)
Mark Jackowski, the Assistant US Attorney overseeing
the case testified to the Subcommittee, however, that the decision was
predicated on other considerations. He testified that his office had made a
decision that "if there came a point in the investigation where we
continued to launder funds on behalf of old clients without developing evidence
against additional defendants, we would attempt to terminate the
operation." Jackowski added that the date had been originally set -- in
February -- with the expectation that they would be able to make a case by the
fall against BCCI officers and that, in fact, they had accumulated the
requisite evidence.(20)
By the summer of 1988 Mazur had compiled enough
evidence to indict the bank and several of its officers. But Mazur believed
that the corruption went much higher than the mid-level officers with whom he had
been dealing. As he explained to the Subcommittee, "It appeared to me that
the knowledge of the source of the funds and the method of seeking out drug
proceeds as a source of deposits for the bank was something that was promoted
at every level of senior management within the bank."(21)
On September 9, 1988, one month before the sting
operation against BCCI was scheduled to be taken down, Mazur, in his undercover
role as drug-money launderer Robert Musella, had met with Amjad Awan, BCCI's
personal banker to Panamanian General Manuel Noriega, at the Grand Bay Hotel in
Miami, Florida, where he engaged in a conversation with Awan that was wired and
recorded by Federal agents. In that conversation, Awan told Mazur that he had
been subpoenaed by the Foreign Relations Committee of the U.S. Senate in
connection with his handling of Noriega's accounts, and the accounts of others
in Panama. He also told Mazur about his understanding of BCCI's secret
ownership of First American, about the political implications of Clark
Clifford's chairmanship of First American, and about alleged obstruction of the
Subcommittee's investigation into Noriega and BCCI by BCCI lawyer Robert
Altman. As the transcript of the wiretap showed, Awan told Mazur:
What's happened is that we were served a subpoena
last month. The bank was and Mr. Shafi our general manager was. I was supposed
to have been served also . . . This is why I've been going up and down to
London with our attorneys in Washington . . . On a personal level, last Friday,
I was told that, ah, our lawyers, Mr. Altman was there, and he suggested to the
bank that I should be immediately transferred from the U.S. to Paris. . . . So,
they duly transferred me Friday to Paris. . . I'm not too, too happy on, on
what our attorneys are telling us to do. I think that's they're doing a very
stupid thing. As long as I am an employee of the bank, I can be anywhere, I
can, I can be in Timbuctu, if they throw a subpoena on me, they can demand that
the bank produce him. . . So I think that's a very stupid policy to take. . . .
I went to, ah, I met with the counsel to the Foreign
Relations Committee . . . I've got a good rapport going with them. And ah,
without really damaging the bank or without, without ah, disclosing anything
about, uh, business, I think I can, with a bit of luck, I can extricate myself
from the whole situation quite cleanly. . . I think they're going to go through
BCCI's records with a tooth comb . . . if anything gets released there that
BCCI is being investigated, BCCI is dead . . . no customer is going to keep an
account with BCCI. . . I don't think the bank could stand up to any sort of
publicity. It's gonna, it's going to, it's gonna hit them bad. . .
Our attorneys are, are, they're heavyweights, I mean
Clark Clifford is, is sort of the Godfather of the Democratic party. I mean,
when he calls Jesse Jackson for dinner, that means Jesse Jackson can receive us
for dinner. . . .
I have, I have totally different, uh, uh, assessment
of the situation. And it might be far-fetched, it might sound stupid, but my
assessment is, that we own a bank in washington . . . We own a bank, uh based
in Washington, it's called the First American Bank. The holding company is in
Washington, and there are 5 banks actually. First American of New York, First
American of Washington, D.C., First American of Virginia, Maryland, Tennessee
and Georgia. There's six banks. Six large banks, they are $10 billion banks.
Bought out by BCCI about 8 years ago . . . And BCCI was acting as advisor to
them, but truth of the matter it is that the bank belongs to BCCI. Those guys
are just nominee shareholders. . . Clark Clifford and his, uh, law partner Bob
Altman are the chairman and capital holders. I personally feel it would suit
them if BCCI withdrew . . . and they just take over that entire part of the
bank. . . . I wouldn't at all be surprised if, you know, if they're totally
screwing BCCI to take over this bank. I, I don't know, but this is the way I
see it. Because the advice he's giving, in my opinion, I, I just don't respect
it. . . . He, he knows a lot, and uh, that's why I don't want him to represent
me. That's why I've gone on to another lawyer.(22)
Awan had provided Mazur with sufficient background
information regarding violations of federal law to enable another agent
assigned to the case, IRS Special Agent David Burris, to conclude that seven
separate federal criminal statutes had been apparently violated. In addition to
the money laundering charges already being contemplated, Awan had now alerted
the C-Chase agents to an apparent conspiracy to obstruct a Senate investigation
by BCCI and its lawyers, and to BCCI's possible illegal ownership of First
American. Accordingly, Burris set down the relevant facts from the Awan
wiretap, and drafted an affidavit stating that he believed there was sufficient
evidence to make out a case that these statutes, including obstruction of the
Senate, had been violated.(23) Burris understood the meaning of
Awan's statements, describing them in Paragraph 4 of his affidavit in the
following terms:
Awan said that BCCI has bought and controls First
American Bank and National Bank of Georgia through private individuals. The
banks were bought through individual names rather than BCCI because BCCI could
not buy the banks and run them due to U.S. law.(24)
Nevertheless, in the weeks that followed, the
prosecutors directing Operation C-Chase made no effort to broaden the case
against BCCI, or to investigate any of the new allegations raised by the Awan
wiretap. There was no attempt to interview Clifford or Altman, no attempt to
seek further information from the Subcommittee to determine whether its
investigation had been interfered with, no subpoenas prepared to be issued
against First American, and, even after the take-down of the sting, no
investigation of any links between BCCI and First American.
Against the desires of Mazur, who wanted to keep the
C-Chase operation going longer, the takedown was set in motion on October 8,
1988. A phony wedding had been arranged between Mr. Mazur and another
undercover agent posing as his fiancee. The ruse of the wedding successfully
lured BCCI officers and narcotics traffickers into the United States who
believed they were attending the marriage of an important customer. At a phony
bachelor's party for Mr. Mazur, federal agents swooped in and made numerous
arrests. The operation had been coordinated with law enforcement authorities in
the UK and France who also conducted searches and made arrests.(25)
With the arrests, the effort to make the money-laundering
case against BCCI and the BCCI officials indicted in Tampa took precedence over
any further investigative efforts concerning broader issues of criminality
regarding BCCI. The small team of agents and attorneys, who soon became grossly
outnumbered by the defense team retained by BCCI, and selected and coordinated
by Clark Clifford and Robert Altman, soon had all they could do to prepare for
trial on the specific money-laundering counts brought in the October, 1988
indictments.
Justice
Handling of Operation C-Chase:
Failure
to Charge RICO
Months before the takedown of Operation C-Chase,
many of those most involved in investigating and prosecuting BCCI had concluded
that BCCI was a quintessential example of corporate organized crime, and
suitable for being prosecuted under the Racketeering Influenced and Corrupt
Organizations Act (RICO), whose provisions contained powerful tools for
prosecutors, including broad forfeiture possibilities.
Under RICO, any business that is convicted of
investing the proceeds of two or more criminal acts, constituting a pattern of
racketeering activity, in a legitimate business, is subject to having all of
the proceeds of its criminal activity, including the legitimate businesses,
forfeited to the government.
RICO would have an especially powerful tool against
BCCI, because once the government proved that BCCI committed two or more acts
of money laundering, the government might be able to take the entire bank.
Given BCCI's actual secret ownership of First American, a RICO case against
BCCI would have had a devastating impact on BCCI, and might well have blown
open BCCI's core secrets.
A series of memoranda from early 1988 detail the
discussions within the Justice Department and among the agents about the basis
for a RICO prosecution of BCCI. By March, 1988, high level Customs officials
were reporting to Commissioner Von Raab that several BCCI officials were
indictable under RICO. On April 6, 1988, another Customs memorandum stated that
it was the opinion of the U.S. Attorney's Office in Tampa that "probative
evidence exists to establish corporate criminality against BCCI as an
institution," and that "current plans for prosecution are to indict
BCCI as an institution under the provisions of the RICO statutes." This
recommendation was reiterated in a second memorandum, May 10, 1988.(26)
Mazur and the other undercover agents involved in
Operation C-Chase strongly supported the bringing of a RICO case against BCCI,
because if the bank were convicted of racketeering, they could "seek
forfeiture of a lot of the bank's assets that would be located in the United
States."(27)
Yet, for reasons that were never explained to the
Customs agents, the Justice Department in the fall of 1988 did not give
approval to a RICO prosecution, and the RICO case against BCCI was abandoned.(28)
Robert Genzman, the US Attorney for Tampa, told the
Subcommittee that it was his view that "RICO charges would have
complicated an already complicated case."(29) According to
Genzman:
Put simply, we believed that RICO charges would have
added nothing, and would have greatly complicated the case. It is absolutely,
untrue, as has been suggested, that the entire bank could have somehow been
forfeited out the U.S. government had RICO charges been brought in Tampa. There
was simply insufficient evidence to support such a sweeping international
forfeiture.(30)
Thus, according to Genzman, RICO charges would not
have placed additional pressure on BCCI and would not have created the risk of
significant additional assets at the bank being forfeited to the government,
beyond the $14 million at stake in the narrower case ultimately brought.
Genzman's statements again suggest the blindness at
the U.S. Attorney's office to the broader evidence already developed by Mazur
and the other Customs agents. This material included, but was not limited to,
the Awan allegations contained in the Burris memorandum. Genzman's position
also fails to take into account the obvious potential, if Justice had indeed
decided to make a RICO case, of seeking plea agreements with the individual
officers as a means of securing a broader RICO case against the bank itself in
a superseding indictment. Such a strategy, unlike the strategy actually pursued
by the U.S. Attorney in Tampa, could well have resulted in a forfeiture of
BCCI's assets in the U.S., and led to the uncovering of its ownership of First
American as well.
In addition, a RICO case could have permitted the
United States to achieve the critical objective for Operation C-Chase defined
by Customs agents in March, 1988 -- establishing the corporate culpability of
BCCI's involvement in the laundering of "literally hundreds of millions of
dollars in drug proceeds," rather than the mere $14 million handled in
connection with the sting.(31) In a RICO case against the bank, one
or another of BCCI's officers could have been turned to help make the larger
case against BCCI that was so important.
Justice
Handling of Operation C-Chase:
Failure
to Provide Adequate Resources
During the entire post indictment investigation,
Mazur and the entire investigative team were strapped for resources. According
to Mazur, "I was confronted with some 1,200 tapes that needed to be
perfected for the benefit of the defendants.... I and a small number of other
agents, two or three, spent at times literally twenty-four hours in a given day
transcribing and trying to meet deadlines." When asked by Senator Wofford
if he felt "outgunned" by the BCCI defense team, Mazur replied
"tremendously," noting that BCCI had investigated him personally, and
that there were threats to the lives of agents and witnesses.(32)
As Mazur advised his superiors:
The problems created by defense tactics have
resulted in the need for resources to be expended to document improper conduct
(ie, misleading business associates of government witnesses, improperly issuing
subpoenas, intimidating government witnesses.(33)
Mazur recalled a pretrial hearing at which AUSA Mark
Jackowski appeared alone on behalf of the government and 23 lawyers appeared on
behalf of BCCI.(34) In recalling the incident to the Subcommittee,
Jackowski offered that "it was a fair fight."
Subpoenas and searches related to the takedown had
also produced some 16,600 documents from individual defendants, and another
100,000 documents from BCCI itself. These documents, some of which have since
been reviewed by Subcommittee staff, contained significant information
concerning BCCI's broader criminality. But more than six months after the
takedown, the government had yet to review a single page.(35)
In an effort to keep the investigation and
prosecution of BCCI on track, Mazur and his colleagues in Tampa made numerous
requests to their superiors for help, requests which were largely ignored. As
Mazur testified:
After the undercover operation was concluded, the
Government was confronted with a massive task. Records had been seized from
BCCI in Miami, from the homes of several officers in Miami, from the BCCI
offices in London and Paris, from the homes of traffickers. And a tremendous
task with a tremendous potential benefit faced the Government in using those
records . . .And very little resources of those that were available could be
used to deal with those matters because of the tremendous resources that were
needed just to attend to pretrial motions and the upcoming trial in Tampa . . .
For one reason or another it was impossible for the
Government to locate people who could fill that void or it was in the opinions
of those who had the authority to make that decision an unnecessary use of resources,
one or the other.
And I think a lot of follow up in contacting
witnesses and reviewing records that was lost . . . would have been a great
advantage to us all to see the things that are happening in the BCCI case
happen more quickly and smarter . . . I think that that was, that time out, was
a costly time out.(36)
On April 11, 1989, Mazur wrote superiors to remind
them that Operation C-Chase was being severely damaged by the inability to add
resources to the case, noting that the problem had been discussed repeatedly
since November, 1988 without improvements, and that a much biggest case could
yet be made against BCCI if additional resources were provided:
The network of the bank is awesome. Since the have
over 14,000 employees and operate in 74 countries, the viable leads are
endless. Attempts to superceed [sic] the indictment to include a nucleus of
evidence that would reveal BCCI's criminal enterprise is a monumental task, in
view of the bank's magnitude. There are inadequate resources to follow up
professionally relative to: [next half page of text redacted by Justice
Department](37)
Mazur summarized the conditions under which he
worked as being a soldier on a forward mission in a war zone, backed up by a
government that refused to send in reinforcements when they were needed:
We were somewhat of a reconnaissance squad that had
been out in the middle of the desert and encountering the enemy, and sent word
back to the fort that we needed some help. And waited and fought and fought and
fought but no help came.(38)
Mazur continued to work for the U.S. Customs Service
on the BCCI prosecution through to the conviction of the BCCI officers indicted
in the case in August, 1990. But the experience had left him frustrated and
angry. In April, 1991, Mazur resigned from the U.S. Customs Service in a letter
to Customs Commissioner Carol Hallett, to whom he wrote the following:
I know that my formally advising you of the
deplorable conditions in Tampa could cause some individuals in a professional
circle to question my loyalty. But it is simply out of my love for this country
and our critical need for ethical government that I think its appropriate to
respond to a request for my candor. . . If it had not been for the nearly two
years of achievement prior to March 1988, the ultimate outcome would also have
been lost. The outcome of the case, while notable, was considerably less than
it could have been. The indictment of additional defendants and the seizure of
substantially more drug proceeds was lost, directly as a result of the
application of inadequate resources . . . to the investigation. This opinion is
shared by individuals meaningfully involved int he successes preserved within
Operation C-Chase, including the lead prosecutor.(39)
Mark Jackowski, the assistant U.S. Attorney in Tampa
who worked most closely with Mazur on Operation C-Chase, expressed his own
unhappiness with the handling of the C-Chase investigation in a memorandum,
attached to the Mazur letter, which the Justice Department withheld from the
Subcommittee. Jackowski testified about the memorandum, however, in response to
questions from Senator Kerry, as follows:
My unhappiness with the C-Chase investigation . . .
was that there were a number of documents that were seized as a result of searches
conducted in Miami and other places. It was my view that included within those
records were leads to other narcotics traffickers and money launderers.l It was
my further view, as of the time I wrote my memorandum, which was at the end of
January 1991, that those documents had not been adequately reviewed to pursue
all those leads. That was the nature of my unhappiness.(40)
In direct contradiction to Customs Special Agent
Mazur and Jackowski, an assistant U.S. attorney from his own office, Robert Genzman,
the U.S. Attorney in Tampa, testified that the BCCI investigation and
prosecution were not substantially impeded by the lack
of resources, arguing that the case was extremely successful, because BCCI pled
guilty and its officers were convicted, and BCCI paid what was then the largest
fine ever imposed on a financial institution in a money-laundering case -- $14
million.
But while characterizing the results of the Tampa
prosecution as superb, Genzman acknowledged that the investigative and
prosecutorial resources in Tampa had indeed been stretched to the breaking
point by the case, due to the complexity of the money-laundering sting; the
"scorched earth" strategy of BCCI's lawyers, who "filed hundreds
of motions and briefs on every imaginable subject," and the need to
transcribe some 2,000 taped conversations between the undercover agents and
their targets.(41)
This situation was typical of the kind of conditions
faced by government prosecutors, Genzman testified, and nothing unique to the
BCCI case:
More resources could always be added to a case of
this magnitude and complexity. While agents and prosecutors had to put in very
long hours and work under severe time constraints along the way to bring the
case to a successful conclusion, that is a regular, albeit unfortunate, fact of
law enforcement.(42)
Justice
Handling of Operation C-Chase:
Failure
To Follow-Up
Robert Genzman, the US Attorney in Tampa, told the
Subcommittee that "[I]t was never our intention to simply stop
investigating BCCI after the first indictment."(43)
But Genzman's own assistant, Mark Jackowski, told
the Subcommittee that the grand jury investigation of BCCI had to be suspended
"due to a lack of available leads and the press of the upcoming
trial."(44)
A dearth of leads, however, was clearly never a
problem in the case. As Mazur told the Subcommittee, the "time-out"
consisted of leads that were not followed up, bank officers who were not
interviewed and superseding indictments which were not issued. When Senator
Kerry suggested that "there was not a follow up and there was not really a
continuation of investigation into the leads that existed at the time,"
Mazur responded, "To a limited extent there was, but not in effect,
no."(45) In fact, the "time out" lasted for a full
thirteen months, by the calculation of Tampa prosecutor Jackowski.(46)
Mazur testified that among the things not followed
up because of the resource crunch were criminal activity involving other BCCI
officers and the subpoena of records which could have lead to additional
indictments of others or broader, superseding indictments of BCCI.(47)
In all, there were hundreds of leads not followed up, including BCCI's
involvement in illegal arms transactions, what Mazur described as "the
association between BCCI, First American, and National Bank of Georgia,"
and possibly on payoffs to government officials.(48)
In fact, by mid-1989, the US Attorney's office in
Tampa had information on BCCI's alleged ownership of First American in four
instances from two separate sources. Initially, a few steps were taken by the
Tampa office to follow-up on this information. AUSA Jackowski moved to subpoena
the Federal Reserve for First American documents. But following this action,
the pressure of preparing for trial against BCCI and the inability to get
additional resources allowed the effort to peter out without further efforts
being made.(49)
Various officials at the Justice Department provided
different explanations as to why the information was not followed-up on.
Assistant Attorney General Mueller "passed the buck" to the Federal
Reserve, noting that "the essence of the information. . . regarding the
allegations of secret ownership was passed on to the Federal Reserve after the
October 1988 takedown of the undercover case." Quoting from the Federal
Reserve General Counsel Virgil Mattingly's testimony before the Subcommittee,
Mueller claimed the Federal Reserve disregarded the information as "the
kind of allegation [that] they had heard before."(50)
Kehoe explained to the Subcommittee that once the US
Attorney in Tampa had indicted Awan, one of the sources of the allegations
regarding First American, it became difficult for him "to point to the
documents to corroborate that piece of information." But even on this
narrow point Kehoe's testimony is at odds with his colleague, AUSA Jackowski,
who told the Subcommittee, "we obtained information from Mr. Awan
throughout the course of the case concerning that [First American]."(51)
In the view of the Subcommittee, none of the
officials provided an adequate explanation as to why the Justice Department did
not follow-up on the evidence it received relating to the secret ownership of
First American.
Jackowski perhaps best summed up the myopic strategy
of the US Attorney's office in Tampa when he told Senator Kerry, "this,
our case, was a money laundering case.(52) As Jackowski testified:
We were at dinner, and the first course was to eat
the money laundering plate. And when you look at the evil behind this bank . .
. the alleged evil is that they facilitated the cartel. That was what was on
our plate. We ate that meal. We did not ignore the dessert, which was First
American Bank; we simple put it aside.(53)
However, as Senator Kerry pointed out, "That is
the problem. It was not a money laundering case. It was a case that was much
bigger than that."(54)
What appears to have happened is that some members
of the Operation C-Chase team were never able to move conceptually beyond the
original goal of Operation C-Chase, namely, to target drug money laundering.
The team of agents working on Operation C-Chase did not include anyone from the
FBI with a broader perspective on criminal investigation or a background in
major financial fraud. The Tampa prosecutors responsible for trying Operation
C-Chase viewed any of the broader panoply of issues pertaining to BCCI as
being, as Jackowski testified, "dessert," to be digested following
the main course, money laundering. There was little recognition even as late as
November 1991 by Jackowski or the other Tampa prosecutors that focusing
attention on BCCI as a case study of global organized financial crime could
have been more rewarding and more important than the narrower approach they
adopted. Given the difficulties facing the Operation C-Chase team, the real solution
would have been a referral of the First American and other broader allegations
concerning BCCI from the Tampa office to a financial crimes unit at main
Justice, and to the FBI, or to another appropriate office within the Justice
Department. Unfortunately, rather than make such a referral, the Tampa
prosecutors held onto all the BCCI-related matters, while failing to follow up
on many of the key ones.
Justice
Handling of Operation C-Chase:
The
Plea Agreement
The plea agreement reached between BCCI and the U.S.
Attorney for the Middle District of Florida (Tampa) in January, 1990, came as a
surprise to many. On November 17, 1989, Price Waterhouse informed BCCI's
directors that the lawyers for BCCI "will attempt to come to a pre-trial
settlement with the prosecution, but the lawyers do not expect the prosecution
to be amenable. As such there is now a real prospect of a trial."(55)
Similarly, BCCI officers indicted in the Tampa case were told by BCCI
higher-ups up to the day of the agreement that they should expect no agreement,
but if there was one, the settlement would include bank and officers alike.(56)
During mid-December, a series of meetings took place
among BCCI's lawyers and representatives of the US Attorney's office in Tampa,
together with representatives of the Customs Service, Internal Revenue Service,
and Drug Enforcement Administration. Representing BCCI were two prominent
former federal prosecutors from Washington, D.C., Lawrence H. Wechsler and E.
Lawrence Barcella, Jr. The lawyers for BCCI were anxious to avoid a trial, and
offered a guilty plea by BCCI to money laundering and the complete cooperation
of the bank in helping convict other drug money launderers, if they could in
return obtain a commitment by the U.S. Attorney that this would end BCCI's
criminal problems for all offenses then known to the government.
The offer was intriguing to the prosecutors, but
they wanted to make sure that BCCI would not be seen as getting off lightly.
The trial judge had indicated during a pre-trial conference that he was of the
opinion that BCCI's participation in laundering drug money would be
insufficient to prove to him that BCCI and its officers were also guilty of
drug trafficking. As a result, given the state of the government's evidence,
BCCI could not be convicted on any drug offense itself, but only for laundering
drug money. As a result, the most the government might gain if it convicted
BCCI was a $28 million fine, twice the amount which the government had moved
through BCCI. In practice however, the judge would be unlike to impose much
more than the $2.5 million fine imposed against another bank in Puerto Rico the
previous year. Accordingly, if BCCI was willing to pay a substantially larger
fine -- such as the $14 million fine it ultimately agreed to pay, to be
characterized as forfeiture so that it would go to law enforcement instead of
back to the U.S. Treasury -- the prosecutors were willing to deal. BCCI's
lawyers, after consulting with the bank, agreed, and the plea agreement was
struck. According to everyone involved, those making the decision on behalf of
the government were in Tampa, not Washington.(57)
As Robert Genzman, the Tampa US Attorney, testified:
We made that determination in the district ...[a]s a
courtesy, we advised the Department of Justice of what we were about to do, and
received no opposition.(58)
Genzman explained that the plea agreement was
entered into for several reasons:
First, the Government secured the conviction of the
bank, one of its principle objectives. Second, eliminating the corporation from
the trial prevented a recurrence of a problem confronted in the 1986 case
against the Bank of New England, where the corporation was convicted, but all
the individual defendants were acquitted. Third, BCCI agreed to a number of
substantial terms beyond the plea of guilty, including cooperation with the
government and a probation condition which incorporated the terms of its
consent decree with the Federal Reserve. Most importantly, the Government had
been threatened with an adverse legal ruling, which would have substantially
reduced the amount of any financial penalty that could be imposed against the
bank, had it gone to trial. The $14 million was forfeitable only if the bank
was convicted of drug conspiracy.(59)
This rationale was correct, to the extent that one
viewed the case against BCCI to be no bigger than the amount of drug funds it
demonstrably moved. But the indictment had alleged something larger -- that
BCCI itself had a corporate policy of drug money laundering -- and as a result
of the plea, there would be testimony about this practice, and no further
exposure of what BCCI was doing.
As Mazur testified, the Justice Department and
Jackowski "went out of their way" to solicit the opinions of those
involved in the case, including him, before agreeing to the plea. Unlike
Genzman, Mazur saw advantages to keeping BCCI in the case. Mazur testified that
"I was, in the long run, of the opinion that we may as well go to trial
[against BCC itself], in view of the terms."(60)
There was one obvious and foreseeable consequence of
permitting BCCI itself to plead out, while prosecuting the nine individual
officers of BCCI and its commodities trading affiliate, Capcom, involved in the
indictment. With BCCI having taken a plea, there was no incentive for the
individual officers to negotiate a plea based on their offering up information
about BCCI's other criminality. The basic notion of using lower-level employees
of a company to go after higher-ups was effectively lost, as the lower-level
officers felt betrayed and abandoned, while the prosecutors in Tampa had given
up any right to go after BCCI for other crimes.
Thus, Genzman's rationale, while understandable from
a technical point of view, missed the underlying point. Long before the trial,
the Tampa prosecutors had before them information that BCCI secretly owned
First American, that BCCI's lawyers, Clark Clifford and Robert Altman, might
well have committed crimes, and that BCCI itself might well be a host for
criminality activity on a global basis. Amjad Awan, Akbar Bilgrami, Nazir
Chinoy, and likely several other of the Tampa defendants could have provided
the information to have led to the swift indictment of BCCI on an array of
offenses far more serious than those on which the bank was indicted in Tampa.
According to Bilgrami and Awan, they and perhaps several of the other
defendants would have been receptive to providing information about BCCI's
larger criminality if they had ever been informed by the government that there
was a possibility that BCCI itself would plea and leave them in the lurch, and
that if they talked, the government would agree to reduce their sentences.(61)
The decision to permit BCCI to plead out of the case, while continuing to
prosecute its individual officers, effectively put an end on that rather
obvious and important, prosecutorial strategy.
While it is always easier to be critical in
hindsight, Senator Kerry, among other members of Congress, was harshly critical
of the plea bargain at the time and went so far as to write a letter to the
Judge. First, while the $14 million fine represented three times the largest
money forfeiture ever, was, as Senator Kerry said at the time, a drop in the
ocean of the proceeds BCCI had derived from criminal activity. Ultimately, that
fine was dwarfed by the $200 million assessment later made against BCCI on
these larger issues by the Federal Reserve.
Anticipating this criticism in his testimony,
Genzman told the Subcommittee that:
"[T]hose who used the $200 million fine figure
imposed by the Federal Reserve in July as an example of that the Justice
Department should have obtained are confusing apples with oranges. These are
simply two cases for which BCCI has been punished separately according to the
law that applied in each offense."(62)
What Genzman appears to be saying is that the
Justice Department brought a narrow case and received an appropriate fine. The
issue, of course, is whether a broader indictment should have been brought, and
whether anything was lost by the plea agreement, which ended the ability of the
Tampa prosecutors to take further action against BCCI.
US Attorney Genzman testified that "BCCI did,
in fact, cooperate, and its cooperation during the seven-month trial against
individual defendants in 1990 was utilized in obtaining the convictions and the
resulting jail sentences against those individuals."(63)
Genzman may not have been aware that while the bank
was allegedly cooperating, it was also paying the astronomical lawyer's fees --
reaching upwards of $20 million -- for the defendants, providing for their
housing, and working to insure that they could continue to stay silent about
what they knew concerning the bank.(64) Nor is there evidence that
BCCI has provided meaningful assistance in helping Justice make any significant
criminal case. Indeed, other information obtained by the Subcommittee suggests
that BCCI may have used information it obtained from the government in the
course of "cooperation" to alert foreign money-launderers of U.S. law
enforcement interests, goals, and strategies, providing the criminals important
information used to evade the U.S.(65)
Genzman's argument that it was more important to
convict the individuals than prosecute the bank was incorrect. The strategy was
wrong, not only in hindsight, but clearly flawed at the outset given that the
investigators understood that the corruption in the bank reached the highest
levels, and that sworn affidavits by one of them, David Burris, articulated
other important crimes involving BCCI's lawyers that cried out for
investigation and prosecution.
Double
Jeopardy
Perhaps the most controversial aspect of the plea
bargain relates to the question of double jeopardy or possible future
prosecution of the bank. Justice Department officials repeatedly denied that
the plea agreement between the U.S. Attorney in Tampa and BCCI did anything
more than preclude that federal prosecutor's office from undertaking further
action against BCCI. In no case, according to the Justice Department, did the
entering of the plea by BCCI result in any limitation being placed on any other
office of the Justice Department in investigating or prosecuting BCCI. As US
Attorney Genzman testified:
The plea agreement contained relatively standard
language, committing the US Attorney's office for our district not to prosecute
BCCI for any other Federal criminal offense then known to the government. . .
It does not prevent the US Attorney in Tampa, or any other prosecutor, state or
federal, from prosecuting any individual from the President of BCCI on down. ..
[Nor does it] bar any other prosecutors, state or federal, from prosecuting
BCCI for offense. (66)
Genzman's first assistant, Greg Kehoe, added, the
issue "had been discussed at length within the Department," and had
concluded that it would not be an impediment.(67)
Notwithstanding the testimony of Genzman and Kehoe,
the plea bargain apparently did cause double jeopardy problems for the only
other federal prosecutor then looking into BCCI, the US Attorney in Miami,
Dexter Lehtinen.
In testimony before the Subcommittee, Lehtinen, who
in 1991 was set to indict BCCI on tax fraud charges, stated:
"By the middle of September (1991). . . I
couldn't indict and we set the grand jury each Friday. . . [T]he statement made
to use each Friday, was the statement made to us from the Department of Justice
that you are blocked from bringing the indictment because of the Tampa plea and
the Tampa double jeopardy. You can't do it, period. Nothing like lack of
evidence."(68)
While the plea agreement did not technically bar any
office of the Justice Department outside Tampa from prosecuting BCCI, the
entrance of the plea by BCCI protected it on double jeopardy grounds from being
prosecuted for any of the actions it took which arguably were included within
the substance of the Tampa indictment. The exact extent of this coverage would
in any subsequent indictment of BCCI have been a matter for substantial legal
argument. What is significant about Lehtinen's testimony is that contrary to
the statements of other Justice Department personnel, the Tampa plea did in
fact interfere with further prosecution of BCCI. Justice Department statements
to the contrary to the Congress were thus to that extent misleading.
Justice
Provides Assistance to BCCI
Following the plea agreement, some Justice
Department officials adopted an inexplicably benign attitude towards the bank,
taking at least two separate actions to help BCCI. First, Justice Department
officials asked another U.S. Attorney's office not involved in the negotiations
to join in the plea agreement, and thereby be utterly barred from taking any
further action against BCCI. Second, another Justice Department official asked
state regulators in Florida, New York and California to keep BCCI open when
they were considering closing it, and a few days later, on being asked to
explain this request, denied having made it.
Each of these requests were made by the Justice
Department officials involved at the explicit behest of BCCI's lawyers, who themselves
were former prominent federal prosecutors. They raise the question of whether
the revolving door, and personal relationships among prosecutors, may have
influenced certain Justice Department officials to assist BCCI in contravention
of sound public policies.
The
Request to Broaden the Plea to Include Miami
In January, 1990, after negotiating the plea
agreement, at BCCI's request, the Tampa prosecutors entreated the US Attorney's
office in Miami to join them.
This was an odd request. At the time, the US
Attorney for the Southern District of Florida had its own investigation of
BCCI. It had not participated in the negotiations over the plea agreement and
if it joined the Tampa plea it would be completely precluded from prosecuting
BCCI further. Arguably, there could be some benefit to the Miami office for
entering such a plea, in that it would facilitate that office's receipt of
BCCI's cooperation in making cases against other criminals. On the other hand,
BCCI was already legally required under its plea agreement with Tampa to
provide such cooperation to the government on every matter. Obviously, the real
beneficiary of Miami joining Tampa in the plea would be BCCI, whose attorneys
were aggressively pushing the concept. As the then US Attorney for the southern
district, Dexter Lehtinen, told the Subcommittee:
[In] the normal course of events, the defendant . .
. in order to gain a benefit form a plea agreement, would want as much of the
government estopped or barred from prosecuting again.(69)
According to Lehtinen, "In this particular
case, we saw no benefit to the Government by our participation."(70)
The Miami's office refused to join the plea agreement, which went forward
without the Southern District of Florid's participation.
The
Request to Keep BCCI Open
At the time of the plea agreement, BCCI's attorneys
became aware of the possibility that BCCI's guilty plea on drug money
laundering charges might well result in BCCI's closure by the various state
banking regulatory agencies that had licensed it to do business in Florida, New
York, and California. The BCCI lawyers pointed out to prosecutors that if BCCI
were closed, it would be more difficult for BCCI to cooperate in making cases
against other criminals. Accordingly, the attorneys asked the Tampa prosecutors
to send a letter to the state regulators asking the regulators to keep the bank
open.
Within the U.S. Attorney's offices, there was some
sentiment that Justice should recommend BCCI should be closed down entirely.
Dexter Lehtinen told the Subcommittee that "Tampa [the US Attorney for the
Middle District of Florida] wanted to know our position with respect to BCCI's
license, and that BCCI's lawyer's wanted to know . . . my position."
According to Lehtinen, he told "both groups that we were of the opinion
that a license should be in jeopardy if we made a successful prosecution."(71)
Despite US Attorney's Lehtinen's recommendation, US
Attorney Genzman decided to adopt a neutral position regarding the revocation
of the license. The Tampa prosecutors accordingly on January 31, 1990, wrote
state regulators to advise them that the Tampa U.S. Attorney's office had no
position whatsoever as to whether BCCI should be closed down, or stay open.
BCCI's lawyers, principally former federal
prosecutors Lawrence Wechsler, Lawrence Barcella, and Raymond Banoun,
dissatisfied with this result, decided to talk to others in the Justice
Department to bring about a different result. Two weeks later, they achieved
their goal. Chuck Saphos, head of the narcotics section of the Criminal
Division of Justice in Washington, D.C., agreed to write a letter to the state
regulators urging them to keep BCCI open. In return, BCCI would be able to
cooperate with Justice.
BCCI's lawyers contacted the state regulators'
office in Florida, and told the regulators that a letter would be coming from
Washington, asking them to keep BCCI open. Soon afterwards, the letter did, in
fact, arrive, signed by Saphos, stating that BCCI's cooperation was important
to the Justice Department and that keeping it open would allow the Department
to monitor BCCI's customer accounts:
"We are, therefore, requesting that BCCI be
permitted to operate in your jurisdiction, with the understanding that certain
accounts may be maintained by the bank, at the request of the Department of
Justice, which otherwise would be closed to avoid legal and regulatory
violations."(72)
In addition to the regulators, Saphos sent copies of
his letters to the Federal Reserve, and to BCCI lawyers Banoun and Wechsler.
The rationale for keeping the bank open was in fact,
very weak. First, there were like to be few significant drug money launderers
still using BCCI following its highly publicized indictment in October, 1988.
Second, to the extent such accounts existed at the time of the indictment,
BCCI's lawyers had systematically sought to shut down them or refer them over
to law enforcement as part of its consent decree entered into with the Federal
Reserve in early 1989 as a result of the indictment. Finally, the plea agreement,
and promise to cooperate with the government, would be as public as the
indictments had been. It would be hard to imagine that any drug money
launderers could still be enticed to use BCCI under such conditions. Saphos'
letter had adopted BCCI's position about the case, rather than recognizing the
true facts at the time.
In Florida, state regulators were baffled by the
Saphos letter. They felt there was no logical reason to allow BCCI to continue
to operate in Florida. The day after receiving the Saphos letter, Florida
Comptroller Gerald Lewis wrote Saphos back in the following terms:
Thank you for your letter of February 13, 1990,
requesting that the Bank of Credit and Commerce International (Overseas)
Limited ("BCCI") be permitted to continue operating in Florida as a
state licensed foreign bank agency despite BCCI's guilty plea to money
laundering charges . . . Because BCCI has pled guilty to felony charges, the
ultimate decision of renewal becomes a difficult one. Your letter indicates
that you may have information I should consider in resolving this matter. To
this end, I invite you and any other appropriate Department of Justice
officials to meet with me in Tallahassee on February 19, 1990.(73)
Saphos, although chief of the narcotics section, had
little previous involvement with any aspect of the BCCI investigation or
prosecution. His position that BCCI should be kept open had evidently not been
approved by the Attorney General, or by anyone else at Justice. Accordingly,
Saphos was in no position to travel to Tallahassee to explain why BCCI should
be kept open. He immediately wrote Lewis back to change his position:
I must apologize if there was ambiguity in my letter
of February 13, 1990, which led to a belief on your part that the Department of
Justice wished to influence your decision on whether to permit BCCI to retain
its license. The Department of Justice takes no position in that regard. The
sole purpose of my letter was to indicate that, if you allow BCCI to continue
in business, there may be occasions where the Department of Justice may request
BCCI, pursuant to its obligations under the plea agreement, to make or continue
a banking relationship with customers who are the subjects of criminal
investigations. . . . I merely wanted to make certain that you and I were
communicating concerning criminal investigations.(74)
Thus Saphos who had only three days earlier stated
"we are therefore requesting that BCCI be permitted to operate in your
jurisdiction," was now forced to state on the record that this was not
the position of the Department of Justice, and to mischaracterize the position
he had clearly taken to help BCCI in his earlier letter.
In testimony before the Subcommittee, Assistant
Attorney General Mueller struggled to explain the circumstances surrounding the
Saphos letters, admitting, "that first letter is ambiguous at best,"
and "I do not know what initiated it ..."(75)
Greg Kehoe, US Attorney Genzman's First Assistant
testified that when he first learned about Saphos' letter to the state
regulators, he was upset.(76) As Kehoe testified, "[O]bviously
the attorneys for BCCI were talking to Mr. Saphos" and "[they] tried
to go behind my back." Yet Kehoe, who negotiated the plea agreement,
seemed indifferent to the incident, testifying that in his view, "Saphos'
efforts were with the best intentions of law enforcement involved," while
acknowledging that, "nothing surprises me in the murky world of criminal
law enforcement."(77)
In testimony before the Subcommittee, US Attorney
Genzman did little to clarify this bizarre chain of events. The US Attorney
told the Subcommittee that "... in this case we told the Comptroller's
office that we were taking no position" relative to the reissuing of
BCCI's license to operate in Florida.
The obvious explanation for what happened is that
Saphos was personally lobbied by people he knew who had formerly been with the
Justice Department and now represented BCCI on the outside, and agreed to do
them a favor. There is no record of any other person within the Justice
Department signing off on Saphos' letter, and it appears likely that he sent it
without the letter having gone through any formal approval process. When his
recommendation to keep BCCI open became an issue, he retreated from it.
The
Miami Investigation
By the latter part of 1989 another investigation of
BCCI had been launched, in the Southern District of Florida under the direction
of US Attorney Dexter Lehtinen.(78) The Miami investigation centered
on the theory that BCCI could be indicted for various tax frauds. It was
Lehtinen's belief that this case would not be barred by double jeopardy,
because it involved different facts from the Tampa case, and because the Miami
office had refused to participate in the plea agreement with BCCI. Lehtinen testified
that the investigation was "an important matter . . . a priority
matter."(79)
At the time Lehtinen was also investigating David
Paul's dealings in Miami's largest Savings & Loan, CenTrust, which had a
variety of ties to BCCI and in which BCCI held a secret interest of 25 percent
through its nominee, Ghaith Pharaon. Lehtinen described to the Subcommittee the
strategy behind his two-track investigation and the aggressiveness with which
his assistants moved to make the case against the bank:
"CenTrust was alleged to have had some
relationships to BCCI, and so we had two teams which would issue what would you
call BCCI subpoenas. One team would issue BCCI subpoenas on behalf of its
CenTrust investigation, one would issue BCCI subpoenas on behalf of its BCCI
investigation."(80)
Lehtinen explained that the case was "records
intensive," which made the subpoenas vitally important.(81)
In late 1990 and early 1991, Lehtinen's office
issued a series of subpoenas pursuant to the CenTrust and BCCI investigations.
Many of the subpoenas were to BCCI in other countries for records and documents
that had been moved from the Miami branch.(82) As Lehtinen described
the subpoenas, "[they] never mentioned foreign countries."(83)
The investigators in Miami, however, were frustrated when BCCI asserted the
bank secrecy laws of foreign jurisdictions. Lehtinen's assistants then proposed
to seek compulsion through the courts to have the records located abroad
produced. Lehtinen told Senator Brown, "[O]ur circuit, the Eleventh circuit
is very clear, those subpoenas will be enforced. Some other circuits are a
little bit different, but our circuit is very aggressive."(84)
Before proceeding, however, Lehtinen's office was
first required to have authorization from the Justice Department's Office of
International Affairs. However, according to Lehtinen, the response from the
Justice Department was that they would not authorize enforcement of the
subpoenas.(85) Lehtinen told the Subcommittee that he didn't
"recall a specific reason for the refusal."
Ultimately, with the assistance of Deputy Assistant
Attorney General Mark Richard, the US Attorney's office in Miami did seek
compulsion for enforcement to two of the subpoenas, one in the United Arab
Emirates and one in Panama. When BCCI continued to refuse to comply with the
two subpoenas, the bank was fined $50,000 a day, until seven days later, when
it capitulated and supplied the records.(86)
Lehtinen and his assistants continued to urge the
Department of Justice to assist in the enforcement of the other subpoenas. By
August, 1991, following the Morgenthau indictment, the Justice Department began
a series of meetings in an effort to move more swiftly against BCCI. In one
such meeting at Justice in Washington, Lehtinen again raised the issue of the
failure to enforce his subpoenas in response to Assistant Attorney General
Mueller's offer to provide assistance to any US Attorney office pursuing a case
against BCCI. Despite Mueller's offer, no assistance was forthcoming and the
subpoenas continued to languish, leaving Lehtinen perplexed:
[E]xactly why the Department of Justice handles
matters as they do is -- whatever factors they take into account are not
particularly known to us in Miami in all circumstances. We in Miami wanted all
of those steps taken that we proposed. They were not taken and we are just not
able to say why.(87)
Despite the problems with not having the subpoenas
enforced, Lehtinen's office continued to pursue the investigation of BCCI for
tax fraud. Lehtinen testified that in his meeting with Assistant Attorney
General Mueller in early August, Mueller encouraged him to "work
aggressively on it as much as possible."(88) By the third week
in August, Lehtinen was ready to move forward with an indictment after having
been notified by his assistants that "there was no problem with the
on-site review by the Justice department's tax division. Then, suddenly, on
August 22, Dennis Saylor, chief assistant to Assistant Attorney General
Mueller, called Lehtinen and, according to the US Attorney, "indicated to
me that I was directed not to return the indictment."(89) As
Lehtinen testified:
[I] asked who was requesting me not to return it,
and he said [Acting] Attorney General William Barr. I asked why we weren't
returning the indictment, if it was tax, tax was on-site and tax would talk to
us. . . I asked, why we are being told this way not to indict, and he said he
didn't know. . . (90)
Lehtinen thought that it was strange that he would
be receiving a telephone call from "non-tax" people telling not to
proceed.(91)
The next day Lehtinen received a letter from the
Assistant Attorney General for the Tax Division Bruton, informing him that he
should not move forward because his investigation of BCCI was not "an
authorized" tax investigation. Lehtinen told the Subcommittee, "I
don't know what they are talking about there...That is very odd."(92)
Later in his testimony, Lehtinen added:
Well, the statement that you are not doing an
authorized Tax Division case is foolish. If it is not an authorized tax case
that is because the Tax division -- I don't know what that means. I mean, you
are doing a grand jury. The Tax Division knows it. You are urged for more than
a month by DOJ to indict it. You coordinate with tax. You ask for a special review
and then a day after you get a phone call saying the Attorney General says
don't do it. The tax division tells you, oh, by the way, your grand jury isn't
an authorized grand jury. In late July or early August, the head of the
criminal division, Mr. Mueller, told us he -- he told Andreas Rivera directly
that he would specifically make sure the Tax Division handled this case
effectively and efficiently. So to say tax didn't know until August 19th
doesn't make a lot of sense."(93)
Moreover, Lehtinen had sent a letter to the Justice
Department on May 13, 1991 in which he concluded that "the BCCI tax case
is a case of the greatest national urgency."(94)
Lehtinen was particularly concerned because the
statute of limitations was set to run on one his counts. When he conveyed his
concern, the reply from the tax division, according to Lehtinen was "Why
don't you just claim that BCCI was out of the country," because the
statute does not run if the target is out the country. Lehtinen testified that
he dismissed this advice as "disingenuous and a real legal problem."(95)
When pressed by Senator Brown on the ramifications of the Department's actions,
Lehtinen testified "We believed that a decision to not go to the grand
jury would mean a decision to drop the charge."(96)
Lehtinen testified that he would have understood had
the tax division criticized his case on evidentiary grounds, but, at the time,
that did not appear to be the case. Instead the Miami US Attorney was given the
somewhat ambiguous instructions that more work needed to be done on the case.
According to Lehtinen, "[T]here was functionally speaking no additional
work that could be done," pointing out that "if you [the Justice
Department] want me to do additional work, you should have approved my grand
jury subpoena."(97)
Lehtinen became even more confused when one month
later he was told by the Justice Department that he could not indict because of
problems of double jeopardy arising out of the Tampa case. Senator Brown spoke
for the Subcommittee when he characterized the unwillingness of the Justice
Department to allow the Grand Jury to return indictments in the southern
district as "very strange."(98)
By early November, the concerns over evidence and
double jeopardy previously expressed by the Justice Department had all but
vanished. On November 6, 1991, Deputy Attorney General, George J. Terwilliger,
wrote Lehtinen that he was "prepared to defer to your prosecutorial
judgment on this matter..." When asked by Senator Kerry if the state of
his evidence had changed from August, Lehtinen responded, "No, it was the
same evidence."(99) Lehtinen implied to the that the reversal
by the Department of Justice was the result of Congressional and media
pressure:
There had been significant, Time Magazine and New
York Times articles, very critical of the Department.
I know Congressman Schumer sent staffers to Miami
and to various districts on behalf of the House Judiciary Subcommittee on
Crime.(100)
While it is difficult to sort out precisely what
went wrong between the U.S. Attorney for Miami and main Justice in Washington,
it is obvious from the above account that two important cases involving BCCI in
Miami were frustrated, if not paralyzed, by inaction at main Justice in
Washington during much of 1991. In part, that outcome may have been the result
of continuing attempts by the Justice Department to defend the plea agreement
in Tampa, and to steer any further activities pertaining to BCCI to the Tampa
office. Additionally, the Justice Department may have been uncomfortable
dealing with the possible preclusion of investigation or prosecution in Miami
arising out of the double-jeopardy problems created by BCCI's plea in Tampa,
problems that had to date not surfaced even in interviews with Congressional
investigators.
Jack
Blum and the Justice Department
In March of 1988, months before the takedown of
Operation C-Chase in Tampa, the chief investigator for the Foreign Relations
Committee, Jack Blum, contacted the Justice Department with startling
information about BCCI. In the course of his investigation into narcotics
trafficking in Panama, Blum had come into contact with "a very senior BCCI
officer who was in the process of disengaging from the bank."(101)
According to Blum, the BCCI banker provided him with a substantial amount of
information about the bank's criminality. Blum proceeded to seek authorization
from the Foreign Relations Committee to issue subpoenas to the bank, which were
granted. Before issuing the subpoenas, however, Blum contacted the US
attorney's office in Miami and Tampa, which asked him not to proceed. Blum told
the Subcommittee:
I talked to Joe Maigre, who was then the deputy in
Tampa, who told me there was an undercover operation underway. . . the
well-advanced Operation C-Chase. . . I was not told the nature of the
operation. What I was told was that agent's lives were in danger, and that he
-- and that he was followed-up by the Department of Justice in a formal way --
requested that we defer the issuance of a subpoena until we get a go-ahead.(102)
Blum did defer issuance of the subpoenas until late
July, 1988. At that time, he contacted Tampa, and asked if he had clearance for
now issuing the subpoenas. He was told there was no objection. The four
Committee on Foreign Relations subpoenas were then served on BCCI and its
officers.
Blum's next contact with the Department of Justice
occurred in March 1989. The contact was precipitated after Blum received a
telephone call from a former client who knew a highly placed BCCI officer who
claimed that the Senate investigation "almost brought the house down and
there was a full court press to make sure that it didn't get anywhere."(103)
Blum had his friend convince the BCCI officer to talk to Blum. Blum then
arranged to have Customs and IRS secretly "wire" a hotel room in
Miami to secretly record their conversation.
Blum debriefed the BCCI official over the course of
the next three days. He testified that the BCCI official "laid out in
exquisite detail the false capitalization of the bank, the question of straw
men holding stock, the use of the bank to purchase First American, National
Bank of Georgia, Independence Federal in Encino, CA..."(104)
According to Blum, he then:
"flew up to Tampa and met with a team that
consisted of other Customs and IRS agents and two representatives of the U.S.
attorney's office. The agents were quite excited. They seemed ready and eager
to go forward. I had lengthy conversations with at least one of the assistants,
Mark Jackowski. He was eager to go forward."(105)
Two weeks later, after Blum had left the
Subcommittee, he made arrangements with law enforcement to secretly tape the
BCCI official who had originally provided him a great deal of information about
the bank. Again, Blum secretly met the individual in a hotel room in Miami and
debriefed him for several hours. And, again, Blum believed that the Justice
Department would use the information in its investigation of the bank.(106)
Following the taping, Blum had further contact with
the Tampa investigators and prosecutors, providing further information over the
course of a lengthy conference call.
However, according to Blum, the Justice Department
did not follow-up on the information:
"I waited for something to happen and, and what
happened was, I started getting calls from the two guys I took to Tampa who
said they're [the Justice Department] is not following up. Then, I talked to
the agents, and the agents said, well, we're very busy. . . No follow-up. And I
began to worry that something was very wrong with this case. In -- I now
believe it was late May, I decided that I would bring this matter to another
jurisdiction, and that was New York... [I] talked to Bob Morgenthau and
essentially told him what I knew. On the basis of the same evidence
essentially, and he ultimately communicated with the same witnesses, he
produced the indictment. . ."(107)
Mark Jackowski, the principal assistant United
States attorney in Tampa handling the prosecution of BCCI from 1988 through
1990, presents a very different version of events:
The ex-BCCI official who had been portrayed by Blum
as having direct, firsthand knowledge concerning various matters, either did
not have such information, or was unwilling to admit it. The ex-official's
information appeared to be primarily hearsay, gossip, rumor and innuendo. He
was also unwilling to testify at any public proceeding. . . We were
disappointed because Mr. Blum had led us to believe that the witness could
provide firsthand information relative to the bank's involvement in money
laundering and other matters.(108)
Rather than tell Blum that the interviews had been
failures, and that the U.S. Attorney's office would not make use of the
witnesses he had proffered, Jackowski and the Tampa prosecutorial team issued a
subpoena to the Federal Reserve for documents pertaining to the First American
relationship, and then permitted the broader inquiry suggested by Blum to
lapse.
In justification of this failure to act, Jackowski,
in sworn testimony, raised questions about Blum's credibility and even his honesty.
Jackowski testified that he discounted what Blum told him about BCCI because
Blum had made several wild accusations about the Subcommittee and asked for
money for the information he was providing the Justice Department.(109)
In staff interviews prior to his testimony, Jackowski claimed Blum had made
even more outrageous statements -- that Senator Kerry had been paid one million
dollars by BCCI, and that as a result Blum was fired from his job.(110)
Jackowski contended that he did not believe these claims, any more than he
believed the other information Blum had provided him, characterizing Blum as a
"wacko." (111) Jackowski acknowledged that he failed to
make any contemporaneous memorandum of the alleged conversations during which
Blum supposedly made the statements cited by Jackowski, failed to investigate
Blum's alleged wrongdoing, failed to investigate Kerry's alleged wrongdoing.
failed to inform the Subcommittee of Blum's alleged remarks, and first raised
the allegations 30 months later, in interviews with Congressional staff and at
the public hearing, some five months after Blum had made his public criticisms
of Justice.
Blum took the same information that he had presented
to Jackowski to the Manhattan District Attorney's office some weeks later after
he had been told by his BCCI informants that Justice Department officials in
Florida were not following up on the information. According to the Manhattan
District Attorney's office, which provided the Subcommittee with a letter dated
November 21, 1991:
At no time did Mr. Blum ever seek or request money
form this office for his assistance to us in the investigation of BCCI, nor did
he receive any money from this office for his out-of-pocket expenses.
At no time did Mr. Blum ever ask for or suggest that
he wanted, employment with this office.
At no time, during this office's dealings with Mr.
Blum, did he ever accuse you, Senator Kerry, of misconduct.(112)
It seems highly illogical and unlikely that Blum
would make the kind of representations to Jackowski which Jackowski has
asserted, and then, only weeks later, adopt an entirely different demeanor with
the Manhattan District Attorney's Office. What is more likely is that Blum did
complain about not being able to complete the investigation of BCCI that had
begun to develop in his final months with the Subcommittee, and may have
offered to assist the U.S. Attorney's office on the case if they wanted his
help.
It is notable that both of the witnesses who were
taped with Blum by Justice, and who Jackowski viewed to have no useful
information, were in fact placed before a grand jury by the New York District
Attorney, to provide the testimony they had originally offered the Justice
Department. That testimony became part of the record on which the grand jury
then voted to indict BCCI on July 29, 1991.
The Subcommittee finds Jackowski's testimony not
merely unconvincing, but given the severity of the charges, malicious. The
Subcommittee believes Jackowski's testimony may stem from a personal dislike of
Blum, who has not only been critical of the Justice Department, but who
garnered significant media attention for having broken open the case when
Jackowski had labored long and hard for months as the principal Justice
Department official dedicated to Operation C-Chase. Jackowski deserves
significant credit for his work, but not for his testimony.
Notably, in response to questions from Senator
Brown, Jackowski acknowledged that the tape recordings made by the U.S.
Attorney's office, involving Blum and his BCCI informant, focused on the issue
of BCCI's use of nominees in the course of its secret take-over of U.S. banks.
As Jackowski acknowledged:
The tapes, sir, contained information with respect
to First American, that is correct. They contained information relative to NBG,
that is correct. They contained information relative to Independence. With
respect to Independence, the first witness said that he had in fact gone to a
law firm because he suspected that Independence Bank might be owned by BCCI
through Ghaith Pharaon.(113)
Because the witness did not have what Jackowski
regarded as sufficient first hand information concerning these issues,
Jackowski and the other Tampa prosecutors considered the information offered to
be of little value, and shrugged off the witnesses Blum had believed to be so
important.
Cooperation
with the District Attorney
and
the Federal Reserve
Inexplicably, at times in the investigation the
Justice Department has provided halting or reluctant cooperation with other law
enforcement and regulatory bodies. In some instances the cooperation was
non-existent, and in others, the Subcommittee has concluded that the Justice
Department actually tried to frustrate or delay the provision of witnesses and
documents to other law enforcement.
In testimony before the Senate Banking Committee,
the General Counsel of the Federal Reserve, Virgil Mattingly, described to
Senator Kerry the cooperation that his office was receiving from law
enforcement:
Senator Kerry. What kind of cooperation is the Fed
receiving from the New York District Attorney who is investigating both CCAI
and CCAH?
Mr. Mattingly. Superb.
Senator Kerry. What kind of cooperation have you
received from the Justice Department?
Mr. Mattingly. We have cooperated fully with the
Justice department. We have given them everything we have on this matter.
Senator Kerry. What kind of cooperation are you
receiving from them?
Mr. Mattingly. We are actively working with them.(114)
What Mattingly did not state in his public testimony
is that over the past year, the Justice Department had actually been refusing
to provide assistance to the Federal Reserve, and to some extent, had actually
mislead the Federal Reserve about the existence of important information.
On February 7, 1990, the Federal Reserve had 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.(115) This position was then confirmed by IRS
agents working with the Tampa prosecutors. 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.(116)
Instead of cooperating with the Federal Reserve, the Tampa prosecutor had
actually refused to provide requested information. At the time of Mattingly's
testimony, the Federal Reserve had yet to be obtain the report it had been
requesting from the Justice Department for 18 months.
During that same hearing District Attorney
Morgenthau spoke directly to some of the problems that his office was having in
working with the Justice Department. The District Attorney stated, "We've
had a number of meetings with senior people in the fraud section of the Justice
Department, and I think that their position is that they would rather go it
alone." (117)
District Attorney Morgenthau also testified that he
had sought documents from the US Attorney's office in Tampa and that those
documents had not been provided. According to Morgenthau,
"I wrote him a letter on March 8. I've never had
a response to that letter. We were told that it had to be cleared by main
Justice and a name was given to us. We called that lawyer three or four times
on the phone, and he didn't answer his phone. I'm sure they are all very busy
down there."(118)
As the New York District Attorney's case continued
to develop, the tapes that had been created by Blum became of significant
concern to the office. Given their assessment of the importance of the
information they had been provided by Blum's witnesses, the New York
prosecutors wanted to be sure they had told Justice the same thing, and that
the stories had not changed. Accordingly, District Attorney Morgenthau
requested that the tapes made in March, 1989 of the Blum-BCCI official
conversations be made available to his office. Initially, his assistants were
advised by the U.S. Attorney for Tampa's office that no such tapes existed.
Later, the U.S. Attorney acknowledged their existence, but refused to provide
them to the Manhattan District Attorney on the ground that to do so would
threaten to reveal a source -- the BCCI official who Blum had been taped with,
with whom the Justice Department had had no contact since March 1989, and whose
identity was already known to the Manhattan District Attorney.
In another case, District Attorney Morgenthau
requested that the Justice Department provide a witness to New York who had
important information that New York needed.
Senator Kerry. I have heard through the grapevine as
we have been investigating this of an instance or instances in which the
Justice Department has access to or custody of a witness with material
information regarding this case, which your office would like to interview but
they have refused to provide your office with access to such a witness. Is that
accurate?
Mr. Morgenthau. With this correction. They have said
that he may be available in a year.
Senator Kerry. In a year?
Mr. Morgenthau. Yes. Not at this time. . . in a
year. I don't want you to think that they have refused to let us see him.(119)
Morgenthau went on to say that his office had
offered to exchange information with the Justice Department, but that they had
rejected the offer. The District Attorney told the Subcommittee that he had run
many collaborative investigations in the past and that the actions of the
Justice Department in the BCCI case represented the "exception, not the
rule."(120)
In response to Morgenthau's criticisms, US Attorney
Genzman argued that "all sorts of problems crop up" in cooperative
efforts and he specifically noted that "because of the differing systems
of immunity, giving up information [to a county DA] might taint the Federal
investigation."(121) There was a certain irony to Genzman's
remarks given that at this point in time, the investigation of the Manhattan
District Attorney's office was far in advance of his own. Indeed, the US
Attorney's September 1991 indictment closely mirrored that of District Attorney
Morgenthau, although it trailed the local prosecutor by nearly six weeks.
The
Investigation Begins Again
In late 1990, upon receiving information from
several sources, including lawyers for Abu Dhabi and BCCI, that BCCI might well
own First American, the Federal Reserve made a criminal referral to the Justice
Department. As a result, for the first time, a grand jury was sworn in to hear
evidence concerning BCCI's secret ownership of First American on January 16,
1991.
At that point, the New York District Attorney had
been investigation these issues for about 18 months, and the Federal Reserve
was in the initial stages of what would soon became a very significant
investigatory effort to sort out who had participated in violating the Bank
Holding Company Act and other banking statutes.
After the collapse of the bank on July 6, 1991, and
the impending indictments by the District Attorney in Manhattan, the Justice
Department in Washington moved swiftly to broaden its investigation. According
to Dexter Lehtinen:
"[S]omewhat prior to the indictment, briefly,
believing that he [Morgenthau] would indict, and thereafter, the Department's
criminal division surveyed all of the United States Attorney's offices. Of
course, they knew all about us because of our efforts to enforce the subpoenas,
but [they] surveyed everyone with respect to what they were doing on any of these
issues that Morgenthau had dealt with and what did they need?"(122)
As Lehtinen put it, "There was substantially
more interest after [Morgenthau's] indictment."(123)
On September 5, 1991, the US Attorney in Tampa
returned an indictment alleging racketeering and additional money laundering
charges. And on November 15, 1991 the Department of Justice in Washington
issued BCCI related indictments alleging racketeering and other offenses based
on the secret acquisition and control of Independence Bank and the parking of
securities in Centrust.(124)
According to Assistant Attorney General Mueller,
"It was only in May of this year [1991] that we received a referral from
the Federal Reserve on this bank.....the Department has moved with remarkable
speed given the complexity of the matters involved."(125)
In testimony before the Subcommittee, Mueller
described the importance which the Justice attached to the BCCI case after the
worldwide collapse of the bank. He stated that:
The Department is pursuing allegations of wrongdoing
of BCCI and its employees. It is conducting investigations through a Washington
based task force, and in a number of US Attorneys' offices. At present 37
Federal prosecutors, supported by dozens of agents and supervisory and support
personnel, are conducting or supporting investigations nationwide....The
Washington task force alone has interviewed dozens of witnesses and reviewed
tens of thousands of pages of records. It is interviewing witnesses and
securing evidence in locations such as Britain, France, Abu Dhabi, Pakistan,
Egypt, the Cayman Islands, the Channel Islands, Argentina, Peru and other
countries.(126)
On July 29, 1992, the Justice Department, the
District Attorney of New York, and the Federal Reserve each moved against
BCCI's top officials, some of BCCI's nominees, and Clark Clifford and Robert
Altman in a coordinated effort. Clearly, at least as of the time that Attorney
General Barr was confirmed at Justice, many of the problems that had surfaced
between the Justice Department and other law enforcement agencies had been
worked through by the end of 1991, and a clear effort was being made to
collaborate effectively on investigating and prosecuting BCCI.
Justice
and the CIA
From early 1985 on, the CIA possessed and
disseminate to other governmental agencies detailed and important information
about BCCI's plans in the United States, and its secret ownership of First
American. That information was made available initially to the Treasury and to
the Comptroller of the Currency, neither of which passed the information on to
anyone else. In 1986, a broader group of agencies received the same
information. In neither case did the CIA's memoranda trickle down to the agents
or prosecutors responsible for investigating and prosecuting BCCI, until after
the takedown of Operation C-Chase, when information in a third memorandum from
the CIA did reach Tampa Customs agents.
Undercover Customs agent Mazur testified that during
Operation C-Chase he never received any information from his superiors "about
information the CIA might have."(127) According to Mazur,
information from the CIA was brought to his attention "after the
conclusion of the undercover operation."
Assistant Attorney General Mueller told the
Subcommittee that while the CIA may have known about BCCI's criminality and
illegal ownership of First American dating as far back as 1985,
"regrettably, the Justice Department was not on the CIA's dissemination
list until 1990 and therefore the Department never received this 1986 report at
the time it was disseminated." Mueller is correct that no component of DOJ
ever received the 1986 report, but the May 1989 report, which contained many of
the same facts, including BCCI's ownership of First American -- in some cases
with more detail provided -- was provided to both the DEA and the FBI.
As Assistant Attorney General Mueller testified:
At no time, to my knowledge, has anyone from the
CIA, or any agency, attempted to obstruct or interfere with the Department of
Justice's investigation and prosecution of BCCI.(128)
For the record, assistant US Attorney Mark
Jackowski, who oversaw the undercover operation and prosecuted the case, has
provided a variety of answers on this subject. When asked by a journalist
whether he had uncovered any CIA involvement in BCCI or whether the agency had
ever interfered with Operation C-Chase or the ensuing prosecution, Jackowski
responded "no comment." When asked the same question by Subcommittee
staff, Jackowski replied that "I read a lot of spy novels. Let's leave it
at that." When asked by Senator Kerry in a public hearing, Jackowski,
under oath, stated that he did not come into contact with the CIA.
The
Justice Department and the Senate Investigation
Through much of the Subcommittee's four year
investigation into BCCI, the Justice Department treated the Subcommittee's
investigation with visible disdain, at times bordering on contempt. As
Jackowski testified, the Tampa prosecutors viewed the principal Subcommittee
investigator of BCCI in 1988 and 1989, Jack Blum, to be unreliable at best,
someone who wished to trade his information for money, and who had produced
little of real value for them. In interviews with Senate staff in the fall of
1991, Jackowski characterized Blum as a "wacko," who had done little
more than provide him with "bullshit."(129) Accordingly,
after initial interviews of his witnesses, Jackowski and his colleagues did
nothing further with the information and leads he had provided.
Following Blum's departure, other Senate staff
efforts were treated equally cavalierly.
In the fall of 1989, the Subcommittee sought to
depose a Colombian money-launderer who was also cooperating with the Tampa
prosecutors, and who had used BCCI in Panama. The Tampa prosector's office and
the Justice Department, without prior notification to Subcommittee staff, began
making telephone calls to other Senate offices, not involved in the
investigation, in an effort to prevent the deposition. The Justice Department
told these offices, and Subcommittee staff that even staff interviews with the
witness would inevitably prejudice the federal prosecution of BCCI and of
Manuel Noriega, and that the government could be forced to provide to the
defendants any material the Colombian provided to the Subcommittee. Staff
advised the Justice Department that the deposition would be held Committee
confidential, and was in any case constitutionally protected against
disclosure. However, because of the level of concern the Justice Department
expressed, and the implicit threat by Justice that the Subcommittee would be
blamed if something did go wrong with the Noriega prosecution in connection
with the Colombian, the deposition was halted. As a result, the important
information possessed by the witness concerning BCCI's criminal activity in Panama
was never provided to the Subcommittee on the record. To make matters worse,
the communications by Justice seeking to stop the deposition with other Senate
offices not involved in the investigation resulted in a leak that the Colombian
was cooperating with the government, imperiling his family and property in
Colombia. As a result of this leak, generated through incautious actions by
Justice, the Colombian refused to cooperate further with the Subcommittee.
Ironically, the Colombian, far from being essential to the government's
criminal cases against BCCI and Noriega, was never used by the government in
either trial.
During the spring of 1990, when the Subcommittee was
seeking to obtain documents from BCCI directly, lawyers for BCCI took the
position that they would gladly provide documents they were making available to
the Justice Department from overseas if the Justice Department would in turn
provide copies to BCCI's lawyers in the United States. In response, Justice
attorneys advised the BCCI lawyers on May 25, 1990, that the Subcommittee staff
should contact Justice directly for the documents involved, which came from
Panama. Subcommittee staff contacted federal prosecutors in Tampa and Miami
about the documents, who did not return telephone calls or reply to letters for
many weeks. In early July, a prosecutor from Tampa advised the Subcommittee
staff to ask main Justice in Washington for its position regarding the
documents. Following repeated telephone calls, the Justice Department finally
advised the Subcommittee in mid-July, 1990, that it could not provide the
Subcommittee any documents whatsoever from any location whatsoever, other than
the materials entered into the record in the BCCI trial in Tampa. The decision
was made by Justice following a meeting between Subcommittee staff and Chuck
Saphos, the head of Justice's narcotics section who had six months earlier
written the state regulators to recommend that BCCI be kept open.
In the meeting with the Subcommittee, Saphos took
the position that any question the Subcommittee might ask about BCCI would
inevitably prejudice ongoing matters at the Justice Department. Saphos told
staff that there was no matter pertaining to BCCI that could be discussed
without prejudicing the Noriega trial. Accordingly, the Justice Department
could not consent to testify concerning any aspect of the BCCI case, nor would
it provide any information concerning any aspect of the BCCI case apart from
what was on the public record in the Tampa trial.
Following the meeting between Subcommittee staff and
Saphos, Deputy Assistant Attorney General Bruce Navarro advised Senator Kerry
in a letter dated July 24, 1990:
Your questions about the nature of BCCI's
cooperation under the plea, BCCI's potential involvement in the handling of assets
of Antonio Noriega and the possibility of further investigative efforts by the
United States concern matters upon which the Department can not comment without
jeopardizing any future prosecutions that might be undertaken. . .
Many of the specific questions you have raised may
be addressed by BCCI itself. The Department simply can not testify on matters
which are under investigation or subject to pending litigation.(130)
As is now made clear by the record, this was during
a period in which law enforcement had taken an acknowledged
"time-out" from its investigation.
Even after the global closure of BCCI, the Justice
Department continued to impede attempts by the Subcommittee to gather
information concerning BCCI, and its own handling of the BCCI case. The
Subcommittee had requested copies of Customs Service memoranda related to
Operation C-Chase. As the Customs Service is an agency of the US Treasury --
not the Justice Department -- it would have been the Treasury's decision as to
whether to release them. Treasury had no objection to their release. However,
after conferring with Justice, Treasury explained to the Subcommittee that it
would not release them without Justice's permission, and that permission had
not been granted by Justice.
The Subcommittee then asked Justice to explain its
refusal to release the documents. The reason provided by the Department was
that the memoranda contained information that would jeopardize ongoing
investigations. After considerable wrangling, and after the Justice Department
was advised that any additional delays in providing the documents could result
in equal delays in a Senate vote on confirmation Acting Attorney General Barr
in a permanent position, Subcommittee staff were allowed to review the
memoranda in an unredacted form.
When the documents had been produced, few revealed
anything about ongoing investigations. Many referred to embarrassing criticisms
by Customs agents of the handling of the BCCI investigation, including the lack
of resources that had been devoted to Operation C-Chase, internal discussions
concerning the advisability of bringing a RICO case and the advisability of
pursuing a plea agreement with the bank.
Prior to the warning concerning a delay in the Barr
nomination, the Justice Department also refused to allow Senator Kerry to meet
one-on-one with DEA agent Mazur, formerly the lead Customs agent in Operation
C-Chase. The Department insisted that a member of the Justice Department be
present in the interview, contending that any private interview between a
Senator and a Department of Justice employee was precluded by "Attorney
General Order 504-73," which charges the Assistant Attorney General for
Legislative Affairs "with the responsibility of coordinating all
Department of Justice activities relating to the Congress." The Assistant
Attorney General for Legislative Affairs stated that a private meeting between
a United States Senator investigating BCCI and the undercover agent who exposed
the bank, without the presence of officials from Justice's legislative
relations office, would prevent him with "fulfilling the responsibilities
charged to him by the Attorney General."(131) As a result,
despite numerous requests from Senator Kerry to meet with Mazur personally, the
meeting did not place. Senator Kerry therefore decided to simply request Mazur
to testify publicly, without any prior debriefing of what he might to say to
either the Senator or the Senator's staff. Senator Kerry also decided to seek
testimony from Mark Jackowski as the chief prosecutor in the Tampa case.
On September 16, 1991, September 18, 1991, and
October 16, 1991, in response to a series of requests from the Subcommittee,
the Justice Department expressed its refusal to accede to Subcommittee requests
for the testimony of Jackowski and Mazur before the Subcommittee concerning
BCCI. At the time, neither of them were involved in further activities
concerning BCCI. In the September 16, 1991, the Justice Department suggested
that the Subcommittee's requests would not only compromise ongoing cases, but
put Mazur's personal safety at risk:
Department's policy on provision of Departmental
representatives for Congressional hearings is that line attorneys and
investigative personnel do not represent the Department in Congressional
hearings . . . One effect of having Mr. Mazur testify in an open Congressional
hearing on his role in the undercover operation which led to the successful
prosecutions in the BCCI matter, even with safeguards such as attempting to
disguise his identity, would increase the possibility of drug traffickers
attempting to seek revenge by harming Mr. Mazur or his family.(132)
Mazur's personal attorney advised staff that Mazur
believed his identity could be protected through the mechanism of having him
testify behind a screen with his voice altered, an approach that was ultimately
adopted by the Subcommittee. Later, Mazur personally advised staff of the
Subcommittee that he had no reason to believe his testimony before the
Subcommittee, with those precautions, would create any risk to him or his
family.
The Justice Department also advised the Subcommittee
that if Mazur testified, he could never be used again in an undercover
assignment.(133) Later, after Mazur testified before the
Subcommittee, he in fact returned to an undercover role, without incident.
Finally, the Justice Department, reiterating a line that it had previously
taken on several occasions with the Subcommittee, said that the Subcommittee's
requests threatened to prejudice ongoing matters.(134)
After attempting to resolve any legitimate problems
the Justice Department might have, without success, the Subcommittee chairman
advised the Justice Department on October 31, 1991, that if it continued in its
refusal to provide these witnesses, the Subcommittee would seek the
authorization of subpoenas to compel the Justice Department to produce them as
witnesses.
At this point, having delayed hearings concerning
the Justice Department's handling of BCCI for months in 1991, and for more than
a year since the Subcommittee's original request for its testimony in July,
1990, the Justice Department agreed to produce the witnesses in order to
prevent the confrontation between the Senate and the Justice Department that
would ensue should a subpoena be issued.(135)
In summary, between March 1988 and October 1991, the
Justice Department repeatedly requested delays or halts to action by the
Subcommittee concerning BCCI, criticized Subcommittee staff and information
concerning BCCI, refused to provide assistance to the Subcommittee concerning
BCCI, and, on occasion, made misleading or false statements to the Subcommittee
concerning the status of investigative efforts concerning BCCI. This pattern
shifted substantially after Senator Kerry advised the Justice Department that
its handling of the Subcommittee could impede the Barr nomination. While some
differences of opinion concerning Congressional access to documents have taken
place, following Attorney General Barr's confirmation, the Justice Department
has generally demonstrated a dramatically improved responsiveness to
Subcommittee inquiries and requests concerning matters relating to BCCI.
Post-Script
On August 26, 1992, some weeks after the date of the
drafting of this chapter of the report, the Justice Department delivered to the
Subcommittee chairman and ranking member a response to a request made to
Justice by the Subcommittee one year earlier, on August 1, 1991, and reiterated
on November 21, 1991, for a rebuttal by the Justice Department to any of the
statements made by former Subcommittee investigator Jack Blum before the
Subcommittee which the Justice Department considered incorrect.(136)
The rebuttal provided on August 26, 1992 consisted
of a thirteen page statement challenging the August 1, 1991 sworn testimony of
former Customs Commissioner William von Raab, an eleven page statement
challenging the August 1, 1991 sworn testimony of former Subcommittee
investigator Blum, and a cover letter apologizing "for any inconvenience
our delay in responding may have caused you."
Nearly all of the statements contained in the
rebuttals were previously made by Justice Department officials either in
prepared statements or in sworn testimony before the Subcommittee on November
21, 1991 and May 18, 1992, and have been previously analyzed, incorporated, and
referred to within the body of this chapter.
As noted at the start of this section, editorial
writers commenting on the Justice Department's handling of BCCI frequently
described its response as "sluggish," an assessment which the Justice
Department has termed unfair. The delay of over nine months by the Justice
Department before providing the Subcommittee the requested response
unfortunately provides some ironic further demonstration of the underlying
problem.
Given the lack of celerity of this response, and the
repetitious character of its rebuttals, the Subcommittee, rather than attempt
to incorporate these further statements at the last minute in the body of the
section, includes them, without comment or further analysis, as appendices
below.
1.
See e.g. editorials, "Why So Slow on BCCI?", Washington Post, May 29,
1991, "What the U.S. Knew About BCCI," Washington Post September 9,
1991, "Greed, Influence and BCCI," The Washington Post, November 1,
1991; "Questions For Mr. Barr," Washington Post, November 12, 1991;
"What Took So Long?," New York Times, August 3, 1991.
2. S.
Hrg. 102-350 Pt. 3 p. 789.
3.
Federal Law Enforcement's handling of Allegations Involving the Bank of Credit
and Commerce International. Staff Report Issued On September 5, 1991 by the
Committee on the Judiciary. September 1991., p.2.
4.
Id. p.3.
5.
Id.
6.
Id.
7.
Id.
8.
Id. p.4.
9. S.
Hrg. 102-350 Pt. 2. p. 524.
10.
S. Hrg. 102-350, Pt. 3, p. 716.
11.
Id. p. 671.
12.
Id. p.672.
13.
S. Hrg. 102-350, Pt. 3, p. 669.
14.
Id. p. 672.
15.
Id. p. 672
16.
Id. p. 678.
17.
Id. p. 681.
18.
Id. p. 688.
19.
Id. p. 689.
20.
Id. p. 732.
21.
Id. p. 683.
22.
Transcript, federal wiretap of conversation between Robert Musella, undercover
agent and Amjad Awan, September 9, 1988, 5:05 pm, Grand Bay Hotel, Miami,
Florida.
23.
S. Hrg. 102-350 Pt. 1 p. 52.
24. S
Hrg. 102-379, Subcommittee on Consumer and Regulatory Affairs, Senate Committee
on Banking, Housing and Urban Affairs, May 23, 1991, p. 231.
25.
S. Hrg. 102-350 Pt. 3, p.731.
26.
S. Hrg. 102-350 Pt. 3 p. 686.
27.
Id. p. 687.
28.
Id.
29.
Id. p.721
30.
S. Hrg. 102-350 Pt. 3 p. 721.
31.
Customs Memorandum from Mazur to Group Supervisor, March 15, 1988.
32.
Id. p.691.
33.
Memorandum from Mazur to [redacted by Justice Department], April 11, 1989,
Subject: Current Resource Needs of Operation C-Chase.
34.
Id. p.691
35.
S. Hrg. 102-350 Pt. 3 p. 753.
36.
S. Hrg. 102-350 Pt. 3 p. 696.
37.
Mazur Memorandum to [redacted by Justice Department] April 11, 1989, Subject:
Current Resource Needs of Operation C-Chase.
38.
Id. p. 701.
39.
Id. p. 695.
40.
S. Hrg. 102-350 p. 746.
41.
S. Hrg. 102-350 Pt. 3 p. 723.
42.
Id. p.717
43.
Id. p.719.
44.
Id. p. 736.
45.
Id. p.697.
46.
S. Hrg. 102-350 p. 773.
47.
Id p. 697.
48.
Id p. 698.
49.
Id. p. 749.
50.
Id. p. 792.
51.
Id. p.750.
52.
Id. p. 754.
53.
S. Hrg. 102-350 Pt. 3 p. 752.
54.
Id. p. 754.
55.
S. Hrg. 102-350 Pt. 1 p. 279.
56.
Staff interviews, Amjad Awan and Akbar Bilgrami, July 20-29, 1992.
57.
Testimony of Deputy Assistant Attorney General Paul Maloney, S. Hrg. 102-379
pp. 222-223.
58. S
Hrg 102-379. p. 233.
59.
S. Hrg. 102-350. Pt. 3. pp. 718-719.
60.
Id. p.694.
61.
Staff interviews, Bilgrami and Awan, July 20-29, 1992.
62.
Id. p.719.
63.
Id. p. 718.
64.
Staff interviews, Amjad Awan and Akbar Bilgrami, July 20-29, 1992.
65.
Oral communication, June, 1992, U.S. government official.
66.
Id. p. 720.
67.
Id. p.782.
68.
Lehtinen testimony, p.64.
69.
Id. p. 13.
70.
Id.
71.
Id. p.16.
72.
Id. p. 768.
73.
Gerald Lewis to Charles S. Saphos, February 14, 1990.
74.
Saphos letter to Lewis, February 16, 1990.
75.
Id. p.799.
76.
S. Hrg. 102-350 Pt. 3 p. 768.
77.
Id. p.768.
78.
S. Hrg. 102-350 Pt. 5, Lehtinen testimony, p. 11.
79.
Id. p.19
80. Id.
p. 15.
81.
Id.
82.
Lehtinen recalled in testimony that the countries included the United Kingdom,
France, Holland, Luxembourg, Switzerland, panama, United Arab Emirates, and the
Bahamas and Grand Cayman. Id. p. 23.
83.
Id. p.23.
84.
Id. p.39.
85. d.
p.26.
86.
Id. p. 28.
87.
Id. p. 34.
88.
Id. p.50.
89.
Id. p.51.
90.
Id. p.52.
91.
Id. p.54.
92.
Id. p.58.
93.
Id. p. 63.
94.
Id. p.70.
95.
Id. p. 76.
96.
Id. p. 82.
97.
Id. p.80.
98.
Id. p.77.
99.
Id. p. 60.
100.
Id. p. 61.
101.
S. Hrg. 102-350, Pt. 1. p.27.
102.
Id. p.27.
103.
Id. p. 32.
104.
Id. p.32.
105.
Id. p.33.
106.
Id. p.33.
107.
Id. p. 33. Greg Kehoe, First Assistant US Attorney in Tampa testified that
District Attorney Morgenthau's indictment was based on Price Waterhouse audit
reports. However, District Attorney Morgenthau credits Blum with providing him
the evidentiary foundation for beginning his investigation that led, months
later, to New York's securing the audit reports.
108.
Id. p.735.
109.
Id. p. 735.
110.
Winer memo to files, Jackowski interview, September 23, 1991.
111.
Id.
112.
Letter to Senator John Kerry, signed Michael Cherkasky, District Attorney of
the County of New York, November 21, 1992, Id. p. 770.
113.
S. Hrg. 102-350 Pt. 3 p. 759.
114.
Id. p.137. In testimony later in the day, Robert Genzman explained that
"With regard to cooperation with the Federal reserve, let me mention one
problem... If we gave certain information to the federal Reserve, that
information could become subject to the regulatory scheme under which the
federal Reserve works." p. 235.
115.
Chronology, House Banking Committee, BCCI Pt 1, id., p. 689.
116.
Chronology, House Banking Committee, BCCI Pt. 1, id. pp. 689-690.
117.
Id. p. 163.
118.
Id.
119.
S. Hrg. 102-379, pp. 166-167.
120.
Id.
121.
Id. p.235.
122.
Lehtinen testimony, p. 29.
123.
Id. p.30.
124.
S. Hrg 102-350, Pt. 3, p. 787.
125.
Id. p. 788.
126.
Id. p, 788.
127.
Id. p. 673.
128.
S. Hrg. 102-350 Pt. 3, p. 789.
129.
Memo to files, Winer, Re: Jackowski interview, September 23, 1991.
130.
Letter, Navarro to Senator Kerry, July 24, 1990.
131.
Letter to US Senators Hank Brown and John Kerry from Assistant Attorney General
W. Lee Rawls, September 18, 1991.
132.
Letter from Assistant Attorney General W. Lee Rawls to Senator Kerry and
Senator Brown, September 16, 1991.
133.
Id.
134.
Id.
135.
Letter, W. Lee Rawls, Assistant Attorney General, to Senators Kerry and Brown,
November 4, 1991.
136.
S. Hrg. 102-350 Pt. 4 p. 778.
District
Attorney of New York
Introduction
While the Justice Department's handling of BCCI has
received substantial criticism, the office of Robert Morgenthau, District
Attorney of New York, has generally received credit for breaking open the BCCI
investigation.
It did so not on the basis of having any witnesses
or information available to it which were not available to other investigators,
including the Justice Department, and the Federal Reserve. Rather, District
Attorney Morgenthau broke the case because he recognized BCCI's importance and
significance as a case of global international organized crime, and devoted
sufficient attention and resources to force out the truth.
As District Attorney Morgenthau testified, he made
the decision to target BCCI once the bank's activities came to its attention
because of his recognition that prosecuting a financial institution handling
many millions in drug money could, in the long run, have as much impact on
fighting crime as the hundreds of prosecutions his office was making every week
against traffickers themselves in New York.
[J]ust as illegal drugs are smuggled into this
country, illegal profits must be smuggled out. The sums involved are truly
staggering . . . the simple truth is that the wire transfer and the bank book
are as much the tools of the drug trade as the scale and the gun. . . the nexus
between drugs and money means that if we are to succeed in the war against
drugs, we must be as vigorous in our prosecution of corrupt bankers as we are
of street dealers.(1)
In going after BCCI, Morgenthau's office quickly
found that in addition to fighting off the bank, it would receive resistance
from almost every other institution or entity connected to BCCI, including at
various times, BCCI's multitude of prominent and politically well-connected
lawyers, BCCI's accountants, BCCI's shareholders, the Bank of England, the
British Serious Fraud Office, and the U.S. Department of Justice. Each, while
professing to cooperate with the District Attorney, in fact withheld information
from the District Attorney and in some cases, impede, delay, or obstruct his
inquiry for months. Ultimately, Morgenthau proved BCCI's criminality, not
because of information or cooperation provided by other government agencies --
with the key exception of the Federal Reserve, there was almost none -- but
because BCCI had left a trail of evidence of wrongdoing there for anyone with
the tenacity to pursue it.
Information
From Senate Aide Initiates Investigation
In the late spring of 1989, Jack Blum, who had been
the chief counsel to the Subcommittee investigation concerning "Drugs, Law
Enforcement, and Foreign Policy," during 1987 and 1988, went to New York
to meet with prosecutors working for District Attorney Robert Morgenthau
concerning information he had about criminal activity involving BCCI.
Blum knew Morgenthau's reputation as an aggressive
prosecutor, and had worked with Morgenthau in the course of the 1987-1988
Subcommittee investigation. Morgenthau had testified as the lead witness before
the Subcommittee in February, 1988 concerning the importance of money
laundering in attacking crime. In that testimony, he had stated that some $5
billion to $10 billion a year was being laundered through New York banks and
other financial institutions, suggesting that laws combatting money laundering
were inadequate, and that the New York banks had a role in preventing the laws
from being tougher.(2) In that testimony, Morgenthau made a
commitment to the Subcommittee concerning his approach to money-laundering:
We are going to spend more resources now in trying
to trace [illegal] funds. I think we are going to be successful, although,
again, that is a labor-intensive kind of activity.(3)
Based on the statements made to the Subcommittee by
Morgenthau, Blum believed he might be in a position to follow up on the
information Blum had developed about BCCI in connection with his work for the
Senate. As Blum testified, he believed he had critical information and
witnesses about BCCI's criminality, and had taken that information in March,
1989 to the U.S. Attorney for the Middle District of Florida in Tampa who had
prosecuted BCCI on money laundering charges as a result of the Operation
C-Chase sting. Blum had brought in two witnesses with information concerning,
and arranged for a lengthy conversation to take place between him and the
witnesses under circumstances where they could be secretly taped by the
government. Moreover, Blum had convinced both of the witnesses to cooperate
with the Justice Department. Yet in Blum's view, after all of his efforts,
the Justice Department had done nothing with the
information:
The strange thing is that after that effort to put
this all in the hands of the Justice Department -- and I might add that at the
time I went to Miami, at the instruction of the chairman [Senator Kerry], I
shared with the agents working the case materials we had gathered, memos I had
written, and other materials we had gathered, so that they would have a
complete picture of what we knew.
I waited for something to happen, and what happened
was, I started getting calls from the two guys I took to Tampa who said,
they're not following up. Then I talked to the agents, and the agents said well
we're very busy. We're working on preparations for the trial.
No follow up, and I began to worry that something
was very wrong with this case. In . . . late May, I decided that I would bring
this matter to another jurisdiction, and that was New York. Our Federal system
mercifully allows for parallel activities. If the State government fails, the
Federal Government is there, and vice versa. . .
So I went up to New York and I talked to Bob
Morgenthau and essentially told him what I knew. On the basis of the same
evidence, essentially, and he ultimately communicated with the same witnesses,
he produced the indictment that you read about the other day.(4)
After Blum met with Morgenthau, he was introduced to
other prosecutors in the New York DA's office, and debriefed them. He told them
he believed BCCI had engaged in money-laundering in New York, and described the
evidence that BCCI owned First American. Morgenthau's prosecutors found his
information to be startling, and viewed it with skepticism. As Michael
Cherkasky, Morgenthau's chief of investigations later stated:
Blum's story was ridiculous. [He said] the entire
Third World was involved and that they had bought and sold entire governments
and maybe some United States officials. It was a fascinating tale -- this guy
was telling us the world was corrupt!(5)
Morgenthau decided to move forward, and assigned the
investigation of the case to John Moscow, an experienced fraud prosecutor.
Moscow in turn interviewed Blum's witnesses, looked at documents, investigated
the case Blum brought to them, and, in Cherkasky's words, Blum's "'story'
was proven to be true."(6) While the Justice Department
prosecutors who had the most information about BCCI regarded Blum as a
"wacko," and his information as worth little, the New York District
Attorney's office took it seriously, investigated it, and proved it out.
BCCI's
Reputation
Contributing
to Initiation of Investigation
During the July 4th weekend of 1989, several members
of District Attorney Morgenthau's staff attended an international conference on
money laundering in Cambridge, England. At the conference, they learned that
BCCI had an international reputation for capital flight, tax fraud, and money
laundering that far exceeded the conduct charged in the Florida indictment.(7)
In addition, Morgenthau's staff learned that BCCI
did not have a single regulator and did not operate on a consolidated basis
anywhere and that its two major operating subsidiaries were chartered in
separate bank secrecy havens -- Luxembourg and the Cayman Islands -- where
customer privacy was paramount. They concluded that this structure multiplied
BCCI's opportunities to conceal fraud. Following the trip, they conferred with
the District Attorney and decided to pursue an investigation against BCCI in
earnest. At the time they made this decision, all of the information they had
was also available to the Justice Department.(8)
From the start, given the allegations presented to
them by Blum, the New York District Attorney's office recognized that an
important part of the investigation would be uncovering the exact relationship
between BCCI and First American. After Blum left Morgenthau's office,
Morgenthau looked at First American in Moody's stock guide, and noted that
First American was owned by a series of holding companies starting in Delaware
that then moved offshore to various bank secrecy havens, and that First
American itself was headed by Clark Clifford. Morgenthau later said that
looking at the series of holding companies and seeing Clifford's name at the
top, he concluded that "somebody was trying to hide something.(9)
Because First American had a New York operation,
First American Bank of New York, any misrepresentations made in connection with
that bank by BCCI or anyone else would confer a primary basis for jurisdiction
for Morgenthau's office.
Thus, while BCCI's possible ownership of First
American was never more than a peripheral issue for the Tampa prosecutors, one
which prosecutor Jackowski termed "dessert," with money laundering
being the main course, the issue was always at the center of attention at the
District Attorney's office. As Moscow stated later:
We kept asking one basic question: 'Who owns
B.C.C.I. and where did the money come from?' We never got to the advanced
questions. We got stock on the simple questions and on 'Who owns First
American?'"(10)
Problems
Obtaining Information
While the New York District Attorney was able to
subpoena those documents held at BCCI New York, and at the offices of First
American in New York, subpoenas outside the immediate jurisdiction of New York
posed greater problems for a local district attorney. These problems, while in
some cases substantial, were dwarfed further by the District Attorney's
difficulties in obtaining information pertinent and material to BCCI's
activities in New York, but held at such locations as the United Kingdom,
Luxembourg, the Grand Caymans, Panama, and Abu Dhabi. Moreover, on even simple
issues, New York was finding tremendous obstacles in getting answers.
When New York sought documents from the Serious
Fraud Office in London -- the British version of the financial crimes unit
within the Justice Department -- the SFO was unwilling to provide it with any
assistance in obtaining BCCI documents. When New York met with BCCI's lawyers,
former federal prosecutors Lawrence Wechsler and Lawrence Barcella, they told
the New York prosecutors that the documents concerning the issues of BCCI's
capitalization and stock were held abroad and protected by bank secrecy, and
the prosecutors could not obtain them.(11) As Morgenthau later
testified, BCCI had been careful to keep its critical records in countries that
would protect its right to keep them secret, making investigation of BCCI
extraordinarily difficult:
When you try to get the records, they invoke the
secrecy laws of all those jurisdictions. The main audit of BCCI was done by
Price Waterhouse U.K. They are not permitted, under English law, to disclose,
at least they say that, to disclose the results of that audit, without
authorization from the Bank of England. The Bank of England, so far -- and
we've met with them here and over there -- have not given that permission.
The audit of BCCI, the financial statement, profit
and loss balance sheet that was filed in the State of New York was certified by
Price Waterhouse Luxembourg. When we asked Price Waterhouse U.S. for the
records to support that, they said, oh, we don't have those, that's Price
Waterhouse U.K.
We said, can you get them for us? They said, oh, no,
that's a separate entity owned by Price Waterhouse Worldwide, based in Bermuda.
So, here you have financial statements, profit and
loss, filed in Washington, filed in Virginia, filed in Tennessee, filed in New
York, and audited by auditors who are beyond the reach of law enforcement.
So that creates some very, very serious problems.(12)
Thus, accounting firms in the United States
affiliated with those elsewhere that had certified BCCI responded to subpoenas
with the claim that they could not provide the documents that could prove
BCCI's criminality; the Bank of England, which could have made those documents
available also refused to provide them; and the British Serious Fraud Office
refused to provide them. Moregenthau's attempts to obtain documents concerning
BCCI's money laundering and other crimes from Panama met similar resistance. Finally,
when the District Attorney of New York turned to the Justice Department for
assistance, it too refused to cooperate. As Morgenthau testified on May 23,
1991:
We've had a number of meetings with senior people in
the fraud section of the Justice Department, and I think their position has
been that they'd rather go it alone.(13)
In fact, at the time the Justice Department had, as
detailed in the chapter on the Justice Department, refused to provide the New
York District Attorney with access to its documents and certain witnesses under
its control in connection with BCCI, and in one case, a prosecutor in Tampa
actually lied to the Morgenthau office and claimed that the Blum tapes
pertaining to his debriefings of the BCCI witnesses did not exist and had never
existed.(14)
Techniques
to Obtain Information
Documents subpoenaed by the Foreign Relations
Committee from BCCI and provided by BCCI's liquidators to the Committee after
the closure of the bank on July 5, 1991 provide a base-line mechanism for
assessing how the District Attorney of New York put together his case. The
documents initially provided by the liquidators to the Committee consisted
almost entirely of materials that had previously been subpoenaed in 1990 by the
District Attorney of New York.
What the documents show is that the District
Attorney had several insiders who either still worked at BCCI, or had formerly
done so, who had provided guidance to the relationships between BCCI and First
American.
Subpoenas to BCCI in New York had revealed hundreds
of documents pertaining to BCCI's involvement in various aspects of decision
making concerning the First American Bank in New York. They also revealed
financial benefits to First American and National Bank of Georgia employees
being paid them by BCCI while they ostensibly were employed by the U.S. banks,
numerous and differing kinds of financial transactions involving BCCI and First
American, and participation by First American employees who formerly worked for
BCCI in BCCI's annual conferences.
A number of the witnesses who testified before the
Subcommittee were first interviewed by investigators from Morgenthau's office.
These BCCI insider, such as Abdur Sakhia, who testified in detail about the
ties between BCCI and First American, Clifford and Altman's alleged knowledge
of these ties, and Clifford and Altman's alleged actions at First American at
the direction of BCCI, provided critical information linking together the
documents and leading to subpoenas to other, less cooperative, BCCI insiders.
Thus, based on the information that existed within
the United States, it was possible to develop a theory of what had taken place,
as well as a substantial amount of direct and circumstantial evidence to
confirm it. However, it was clear from the first additional critical
information was outside the United States, and had to be obtained to further
document some of the essential matters to bring an indictment.
Morgenthau's office had learned in the autumn of
1990 that audits of BCCI by Price Waterhouse UK would detail massive fraud at
BCCI, and describe in detail BCCI's interest in First American. But subpoenas
to Price Waterhouse in the United States produced no information, as the
accounting firm's attorneys took the position that the U.S. firm had no power
to obtain such information from its foreign affiliates. Accordingly,
Morgenthau, as described in a journalistic account, used personal contacts he
had in the United Kingdom to cut the knot of secrecy the UK had imposed on the
audit reports:
[Morgenthau] contacted Eddie George, the deputy
governor of the Bank of England. Morgenthau reminisced about his time in
England during the war. . . "Morgenthau told George, 'We are going to
charge this bank.' . . . And when we charge them you are going to be looked at
publicly. We would like to be able to say that the Bank of England helped
us."(15)
It is not by any means clear that the Bank of
England responded to Morgenthau's plea. However, ultimately, through a
mechanism that has never been made public, Morgenthau was able to obtain the
Price Waterhouse audit reports, detailing BCCI's frauds, its massive lending on
First American, its use of nominees, and related matters. As his investigation
intensified, he found that the Federal Reserve had by late 1990 became engaged
in its own investigation of BCCI and First American, and the two offices began
working closely to assist one another.
The Federal Reserve was able to conclude by
February, 1991 that there had been violations of the Federal Bank Holding
Company Act in connection with failures by BCCI to keep it apprised of changes
in share holdings at First American/CCAH. The situation threatened the
restructuring of BCCI that was going on in the United Kingdom, and the Federal
Reserve was able to convince the Abu Dhabi government that cooperation with it
was essential if Abu Dhabi and BCCI were to have any hope of keeping the bank
alive. Federal Reserve investigators Richard Small and Thomas Baxter went to
Abu Dhabi and there found the key documents showing BCCI's secret ownership of
First American through nominees, which were in turn provided to the District
Attorney's office. Thus, as of the spring of 1991, Morgenthau had assembled
more than enough information to indict BCCI as a classic Ponzi scheme from its
beginning. Yet even as he prepared to indict BCCI, he continued to face massive
obstacles in obtaining information from any government agency besides the
Federal Reserve, let alone from the vigorous defense being pursued by his
targets. As Morgenthau testified on May 23, 1991:
We are finding problems at every step of the way. We
are finding problems with the Justice Department in getting records. We have
had subpoenas out to various banks for records which have not been honored. We
have been trying to get the cooperation of the Bank of England. We are trying
to get the cooperation of Price Waterhouse U.K., and we have not been
successful.
The one organization that has been very helpful to
us is the Federal Reserve Bank of New York and the Federal Reserve Board in
Washington.(16)
The
New York Indictment
On July 29, 1991, the New York District Attorney
indicted BCCI. In contrast to the narrow money laundering charges brought
against BCCI by the Justice Department in Tampa, the indictment alleged a
broad, international criminal organization which stole funds from poor
countries and small depositors and used them to keep BCCI afloat despite
massive mismanagement and the fact that the bank had no real assets of its own.
As the indictment described it:
[BCCI's] scheme was premised on the fact that banks
rely on credit. The essence of the scheme was to convince depositors and other
banking and financial institutions, by means of false pretenses,
representations, and promises that the BCC Group was a safe financial repository
and institution for funds, and thereby defendants acted to persuade depositors
and banking and other financial institutions to provide the BCC Group banks
with deposits and credit.(17)
Thus under Morgenthau's theory of the case, BCCI had
from the beginning never had the assets it purported to have, but relied on the
reputations of prominent people to provide it with the aura of wealth and
respectability it needed. He saw BCCI to a massive, multi-billion dollar
confidence scheme, whose collapse was inevitable if the facade BCCI had so
carefully constructed were ever ripped away. During the months prior to his
July 29, 1991 indictment of BCCI, the New York grand jury had heard witness
after witness detail the mechanisms by which the facade had been maintained,
and having hearing those details, they indicted.
The New York District Attorney found that among the
major actions taken by BCCI to carry out its fraud were:
** Employing the ruling families of a number of
Middle Eastern states as nominees for BCCI, who pretended to be at risk in BCCI
but who were in fact guaranteed to be held harmless by BCCI for any actual
losses.
** Using bank secrecy havens including Luxembourg
and the Cayman Islands to avoid regulation on a consolidated basis by any
single regulator of BCCI, and thereby to permit BCCI to transfer assets and
liabilities from bank to bank as needed to conceal BCCI's true economic status.
** Paying bribes and kickbacks to agents of other
banking and financial institutions, thereby avoiding the scrutiny of
regulators. (18)
By December, 1991, BCCI's liquidators had pled
guilty to the first six counts of the New York indictment as part of an
agreement concerning BCCI's assets in the United States. Essentially every one
of the matters which Blum had put in front of the District Attorney two and a
half years earlier had proven to be true, and had now been acknowledged by
BCCI's representatives in formal court proceedings.
Consequences
of New York's Investigation
The persistence of the District Attorney in 1989 and
1990 led to a series of events which brought BCCI down. First, the questions
being asked by the District Attorney intensified the review of BCCI's
activities by its auditors, Price Waterhouse, in England. Second, the District
Attorney's questions led to the Federal Reserve again seeking information about
BCCI's possible ownership of First American beginning in late 1989. Third, the
District Attorney's efforts were critical to stopping an intended
reorganization of BCCI worked out through an agreement among the Bank of
England, the government of Abu Dhabi, BCCI's auditors, Price Waterhouse, and
BCCI itself, in which the nature and extent of BCCI's criminality would be
suppressed, while Abu Dhabi would commit its financial resources to keep the
bank going during a restructuring.
By the late spring of 1991, the key obstacle to a
successful restructuring of BCCI bankrolled up Abu Dhabi was the possibility
that the District Attorney of New York would indict. If such an indictment
came, the restructuring could prove exceedingly embarassing for the Bank of
England, depending on what Morgenthau charged and whether it had the
consequence of causing a global run on BCCI.
The Federal Reserve, the only other government
agency then engaged in an active investigation of BCCI, was focused on a
relatively narrow set of issues. It had already reached a consent decree with
BCCI under which BCCI would agree to give up its secret interest in First
American and cease to do business in the United States. These were serious
steps, but related to issues that BCCI could characterize as technical
violations of U.S. banking laws, rather than matters that went to the
fundamental integrity of BCCI's record keeping and bookkeeping and finances.
By contrast, a criminal indictment in New York might
be far broader. The questions asked to date by the District Attorney's office
indicated it might well charge that since BCCI's inception, it had been an
insolvent pyramid scheme to obtain credit by pretending to have the deep pockets
of its Middle Eastern shareholders, when in fact at least a majority of these
shareholders were not at risk. Such an indictment would have inevitably caused
a swift and thoroughly justified international run on BCCI by depositors all
over the world. In threatening such an indictment, the New York District
Attorney was making the restructuring proposal intended by the Bank of England,
Abu Dhabi, Price Waterhouse, and BCCI, impossible.
The result was that in late June, 1991, confronted
both with mounting evidence of BCCI's frauds and with the probability of an
indictment within weeks by the New York District Attorney, the Bank of England
was forced to begin setting into motion the process of BCCI's international
closure.
Thus, the pressure from a single, local prosecutor's
office that would not relent when it found evidence of global criminality,
proved sufficient to shut down a $23 billion criminal bank operating in some 73
countries. The result is testament to the power of a single local district attorney
unwilling to abandon his search for the truth, and the trail of evidence left
by BCCI of its crimes around the world.
1. S.
Hrg. 102-379, pp. 152-153.
2. S.
Hrg. 100-773, Pt. 2 pp. 20-21.
3.
Id.
4. S.
Hrg. 102-350 p. 33.
5.
Vanity Fair, April, 1992, "How They Broke the Bank," p. 261.
6.
Letter, Michael Cherkasky to Senator Kerry, November 21, 1991, S. Hrg. 102-350
Pt. 3 p. 771.
7. S.
Hrg. 102-379 p. 148.
8. Id
p. 149.
9.
Vanity Fair, April 1992, "How They Broke the Bank," p. 261.
10.
Id.
11. Id
p. 262.
12.
Morgenthau, S. Hrg. 102-379 p. 158.
13.
Id. p. 162.
14.
See Vanity Fair, April 1992, "How They Broke the Bank," p. 266.
15.
Vanity Fair, April, 1992, "How They Broke the Bank," p. 266.
16.
S. Hrg. 102-379 p. 167.
17.
People v. BCCI, Supreme Court of the State of New York, County of New York,
July 29, 1991.
18.
Id.
Introduction
External auditors of banks everywhere play a
critical role in the self-regulatory process by which both ordinary depositors
as well as players in the financial marketplace evaluate their own business
performance, and that of those with whom they may place their savings or do
business. In addition, in many foreign jurisdictions, external auditors of
banks are relied upon by regulators to provide them with important internal
information about bank practices, performing the kind of function in those
countries that federal bank examiners do in the United States.
In the case of BCCI, there can be no question that
the auditing process failed to work. As the Bank of England stated in
determining that BCCI be closed:
It appears from the Price Waterhouse Report [of June
1991] that the accounting records [of BCCI] have completely failed and continue
to fail to meet the standard required of institutions authorised under the
Banking Act. It further appears that there is not [a] proper or adequate system
of controls for managing the business of BCCI.(1)
Given the demonstrable failure of the auditing
process, serious questions have been raised about how and why BCCI's outside
auditors permitted BCCI to flourish as long as it did, despite fraud and other
bad practices which went back many years. The record offers both support for
assessing blame on BCCI's auditors, and the suggestion that their work in the
spring of 1991 was an essential component of the investigative process that
ultimately forced BCCI's closure.
One view of the culpability of BCCI's accountants
was expressed by BCCI's own chief financial officer, Masihur Rahman. Rahman
testified that as BCCI's top financial official, he did not know of BCCI's
frauds prior to the spring of 1990. He testified that has the bank's chief
financial officer in London, he did not have access to any of the underlying
loan information and related files at BCCI's various field offices. Rahman
testified that he therefore relied on the work of the outside auditors,
operating around the world at the local level, to review BCCI's records at its
various offices and branches, and thereby ensure their truth and accuracy.
At the other extreme was the position taken by
BCCI's principal auditor, Price Waterhouse (UK), that it was completely
deceived by BCCI until the spring of 1990, and handled its responsibilities
concerning BCCI without any fault whatsoever.
As Masihur Rahman expressed his position, regarding
the auditors' handling of BCCI's first set of major losses in 1985:
I used to tell the Price Waterhouse and Ernst &
Whinney to please review these reports and also please keep me informed, because
you are more my eyes and ears than my own inspection division . . .[if] Price
Waterhouse had been doing its job, there's no way that this $1 billion exposure
[in BCCI's Central Treasury] which was taken to $11 billion exposure in the
course of 3 or 4 months [in 1985] could have happened.(2)
According to Rahman, Price Waterhouse (UK) had
signed off on BCCI practices year after year without issuing any red flags,
until suddenly, in April, 1990, it found massive deficiencies at the bank, in
which, as Senator Kerry put it, "every red flag in the world was
flying," raising the question of how Price Waterhouse could have missed
all of BCCI's bad practices previously.(3) From Rahman's point of
view, local auditors at each of BCCI's locations had the opportunity to review
the underlying loan documentation from the beginning. Rahman believed that
process of review was precisely what they had been hired to do and failed at.
From his point of view, as chief financial officer, his job was to accept the
numbers provided him and audited locally the accountants, and from there to put
together the overall financial accounts of BCCI. Thus, the deceptions that took
place were made possible through the auditors' failure to have looked
sufficiently closely at BCCI's customer-by-customer financial records around
the world, and especially in the Grand Caymans. As Rahman explained in an
annotation to the report prepared by Price Waterhouse to the Bank of England in
June, 1991 which helped bring about the closure of BCCI globally:
Price Waterhouse should have known from their audit
of Grand Cayman over many years that deposits of BCCI were being misused. The
'fictitious' loan accounts were in most cases so obviously fictitious that the
year after year audit of PW should have detected most, if not all. PW not only
knew about ICIC Overseas accounts [where some $600 million of the fraud had at
BCCI had taken place] but irregularly "certified these accounts. . . It
all happened in, or were initiated by Grand Cayman. . . done by a few people in
an amateurish way, right under the nose of PW (Grand Cayman) and PW (UK), who
had done audit of these units from their inception (1975.)(4)
Rahman further stated to the British inquiry into
BCCI undertaken by Lord Justice Bingham that essentially all of BCCI's serious
treasury problems were related to the activities at Grand Cayman, which had
taken place in a blatant and repetitive form over many years. According to
Rahman, BCCI was paying its auditors $5 million per year to conduct audits which
each year took nearly five months. According to Rahman, if properly done, these
audits should have uncovered the problems and forced action long before April,
1990.
In contrast, as Price Waterhouse expressed their
position, BCCI had deceived them through colluding with shareholders and
borrowers to create false documentation that mislead them:
The auditor's responsibility is to design and
execute an audit so as to have reasonable expectation of detecting material
misstatement in the financial statements whether due to fraud, irregularity, or
error. However, common sense dictates, and it is accepted internationally, that
even the best planned and executed audit will not necessarily discover a
sophisticated fraud, especially one where there is collusion at the highest
level of management and with third parties. Under such circumstances, it is
reasonable to expect that it may take a number of annual audits before
accumulating concerns change to suspicions and ultimately lead to the
identification of fraud; in fact, this is what happened in our audit of BCCI.(5)
Price Waterhouse found that BCCI Treasury losses had
been concealed and its profits manufactured through BCCI's failure to record
deposits and other liabilities; the creation of fictitious loan accounts; the
use of funds from ICIC which were controlled by BCCI; use of third party funds
which BCCI was managing; circular routing of funds using various BCCI
affiliates; the purchase and repurchase of BCCI's own shares through nominees
with buy-back arrangements; and the collusion between BCCI and major customers
in supplying false confirmations to the external auditors, among other
techniques.(6)
In fact, many aspects of BCCI's relationship to its
auditors, especially Price Waterhouse's partnerships outside the United States,
were sufficiently unusual to provide evidence for both the positions expressed
by Rahman and by Price Waterhouse.
Over BCCI's nineteen year existence, BCCI lent at
least two Price Waterhouse partnership's funds for business projects, while
those partnerships were auditing BCCI; had an affiliate make substantial
payments to at least one key former Price Waterhouse official after he had had
handled audits of BCCI; allegedly "took care" of Price Waterhouse
partners through providing benefits to them such as the use in the Grand
Caymans of a villa; according to federal regulators, made use of BCCI-Hong Kong
to handle its routine banking needs in the Far East; and according to one BCCI
official, may even have been compromised by mid-level BCCI employees who
allegedly provided them with sexual favors for that purpose.
Moreover, when Price Waterhouse (UK) discovered
massive losses at BCCI in 1985 which the bank falsely characterized as
commodities trading losses, Price Waterhouse (UK) accepted BCCI's explanation
and did not undertake the kind of comprehensive review of BCCI's Treasury
operations in the Grand Caymans which should, even then, according to
statements by various BCCI officials, have demonstrated BCCI's fraud.
After 1985, Price Waterhouse (UK) made note of and
reported to BCCI's directors and officers exceptionally poor practices by many
BCCI entities year after year, including BCCI's failure to keep adequate
records. Nevertheless, Price Waterhouse (UK) did not inform regulators of this
or other problems at BCCI until April, 1990, and continued through 1990 to sign
off on BCCI's annual statements that its consolidated audits "give a true
and fair view of the financial position of the group."
Moreover, Price Waterhouse (UK) according to its own
audit reports was told by BCCI officials in years prior to 1990 that they had
violated U.S. law in failing to inform the Federal Reserve of changes in
ownership by shareholders of CCAH/First American, and in various practices
relating to CCAH/First American. Yet the firm took no action to advise any
regulator, let alone the Federal Reserve, of what they had knew -- or,
alternatively, to resign their position as BCCI's auditors.
In defense of the auditors, it should be noted that
BCCI's top officials, key major shareholders and some principal borrowers did
seek to deceive them through creating false records and documents. The full
nature and extent of the fraud would indeed have been difficult to penetrate,
given BCCI's far-flung empire and structural complexity, and the bank's
decision for its first 15 years of operation to divide responsibility for its
audits between Price Waterhouse and Ernst & Whinney, thus ensuring that no
one auditor had an overall view of its activities. It is also true that once
Price Waterhouse recognized that the hole in BCCI's books had grown so
significant that it threatened the solvency of the institution in early 1990,
they brought the matter to the attention of the Bank of England. As a result,
from that date forward, the Bank of England shared in whatever blame might be
attached to Price Waterhouse's decisions following that date, and prior to its
final certification of BCCI's books in April, 1990.
Difficulties
of Investigating BCCI's Auditors
A full understanding of what took place between BCCI
and its auditors has been severely impeded by the inability to obtain documents
and testimony from BCCI's principal auditors, especially Price Waterhouse.
While Price Waterhouse's US partnership provided full cooperation regarding its
audits of BCCI activities in the United States, it took the position that it
had neither any knowledge of, or responsibility for, BCCI's overall auditing,
which was handled solely by their affiliated partnership in the United Kingdom,
Price Waterhouse (UK).
Price Waterhouse (UK), which handled the
consolidated audit of BCCI world-wide from 1987 on, and which previously was
responsible for over 15 years for the audits of one of BCCI's two flag banks,
BCCI Overseas (Grand Cayman), where a substantial portion of the frauds took
place, refused to provide the Subcommittee with any of
its voluminous audit reports pertaining to BCCI in response to the subpoena of
the Committee on Foreign Relations. Price Waterhouse (UK) argued that provision
of such material was precluded by British law, and that the British partnership
of Price Waterhouse did not do business in the United States and could not be
reached by any subpoena.
Price Waterhouse (US), which said it did not possess
any documents pertaining to BCCI operations outside the United States,
explained its relationship with other Price Waterhouse partnerships in other
countries as one of a loose affiliation of independent partnerships linked
together by a set of agreed-upon standards for audit work, but entirely
separate from one another in legal responsibilities. As set forth in a Price
Waterhouse (US) letter to Subcommittee staff on October 17, 1991:
[T]he 26 Price Waterhouse firms practice, directly
or through affiliated Price Waterhouse firms, in more than 90 countries
throughout the world. Price Waterhouse firms are separate and independent legal
entities whose activities are subject to the laws and professional obligations
of the country in which they practice. . .
PW-US, like other Price Waterhouse firms throughout
the world, is a separate and distinct partnership. For your immediate purposes,
it is appropriate to note that no partner of PW-US is a partner of the Price
Waterhouse firm in the United Kingdom; each firm elects its own senior partner;
neither firm controls the other; each firm separately determines to hire and
terminate its own professional and administrative staff. . . each firm has its
own clients; the firms do not share in each other's revenues or assets; and
each separately maintains possession, custody and control over its own books
and records, including work papers. The same independent and autonomous
relationship exists between PW-US and the Price Waterhouse firms which practice
in Luxembourg and Grand Cayman.(7)
As Price Waterhouse (US) partners explained to the
Subcommittee, when Price Waterhouse, or any auditing firm, signs off on an
audit and certifies that its audit represents a true and accurate picture of a
company's books, the certification is not made by Price Waterhouse as a single
entity, as would be true in a corporate structure. Rather, the certification is
made by, and binds only the members of the partnership of the accounting firm
in the country in which they themselves are certified as accountants.
In the case of BCCI, Price Waterhouse (UK), relying
on work performed by its affiliates in a number of locations around the world,
conducted the consolidated audit of BCCI from 1987 through 1992. During that
time, many other Price Waterhouse partnerships, including Price Waterhouse
(US), provided Price Waterhouse (UK) with written summaries of BCCI's financial
condition locally, in accordance with their audit instructions from Price
Waterhouse (UK), which were then incorporated into the consolidated accounts of
the group. Questions about BCCI's activities in the Grand Caymans or Panama or
Colombia could be answered only by Price Waterhouse (UK), in connection with
its consolidated audits, or by the local partnerships of Price Waterhouse in
those countries.
Thus, under the partnership system that all the
international accounting firms use, Price Waterhouse (US) has maintained that
it has no knowledge of, or responsibility for, a consolidated audit certified
by any of its partnerships in other countries, including those done pertaining
to BCCI. Accordingly, in response to the Committee subpoena to Price
Waterhouse, Price Waterhouse (US), provided complete documentation of its work
on behalf of BCCI in the United States, but no documents regarding Price
Waterhouse's work on behalf of BCCI elsewhere, including its reports to BCCI's
board of directors, and the background to its annual certifications of BCCI's
books and records. On these critical issues, Price Waterhouse (US) referred all
questions to Price Waterhouse (UK), which in turn took the position that it was
legally precluded by British bank confidentiality and privacy laws from
providing any of the documents subpoenaed by the Committee. In lieu of
testimony or documents, Price Waterhouse (UK)'s attorney provided the Subcommittee
a copy of the firm's written answers to questions from a Committee of the
British House of Commons.(8)
It is worth noting, for the record, Masihur Rahman's
view that for years, Price Waterhouse has held themselves out to be a global
firm with uniform standards and one single responsibility. According to Rahman,
Price Waterhouse brochures were submitted to BCCI repeatedly emphasizing Price
Waterhouse's global integration as a critical strength of the firm.
Due to Price Waterhouse (UK)'s refusal to respond to
the subpoena, the Committee has been unable to obtain a complete set of Price
Waterhouse's audit reports concerning BCCI, and has had to rely on fragments of
such reports obtained from the Federal Reserve and other sources amounting to a
small percentage of the total work. As a result, for some years, no audit
reports of any kind have been obtained. For other years, the audit reports
obtained are limited to fragments of the whole. These fragments do provide some
important information about Price Waterhouse's concerns about BCCI from the
early 1980's on; unfortunately, the fragments exclude other critical
information necessary to evaluate the history of Price Waterhouse's handling of
these audits.
In reaching its conclusions, the Subcommittee has
sought to make use of all available information, including the answers provided
by the auditors to questions from the British House of Commons. However, given
the incomplete state of the information the Subcommittee has been able to
obtain, it is possible that additional documents from the auditors concerning
BCCI could have changed the conclusions reached by the Subcommittee on some of
these matters. It is therefore especially unfortunate that the foreign auditors
refused to honor the Committee's subpoena.
Findings
As noted above, reaching conclusions concerning the
responsibility of the auditors in connection with BCCI's maintenance of its
deceptions until July, 1991 have been hampered by the inability to obtain full
documentation and any interviews from any of BCCI's foreign auditors.
Nevertheless, the information and testimony gathered by the Subcommittee is
adequate to find:
** BCCI's decision to divide its operations between
two auditors, neither of whom had the right to audit all BCCI operations, was a
significant mechanism by which BCCI was able to hide its frauds during its
early years. For more than a decade, neither of BCCI's auditors objected to
this practice.
** BCCI provided loans and financial benefits to
some of its auditors, whose acceptance of these benefits creates an appearance
of impropriety, based on the possibility that such benefits could in theory
affect the independent judgment of the auditors involved. These benefits
included loans to two Price Waterhouse partnerships in the Caribbean. In
addition, there are serious questions concerning the acceptance of payments and
possibly housing from BCCI or its affiliates by Price Waterhouse partners in
the Grand Caymans, and possible acceptance of sexual favors provided by BCCI
officials to certain persons affiliated with the firm.
** Regardless of BCCI's attempts to hide its frauds
from its outside auditors, there were numerous warning bells visible to the
auditors from the early years of the bank's activities, and BCCI's auditors
could have and should have done more to respond to them.
** By the end of 1987, given Price Waterhouse (UK)'s
knowledge about the inadequacies of BCCI's records, it had ample reason to
recognize that there could be no adequate basis for certifying that it had examined
BCCI's books and records and that its picture of those records were indeed a
"true and fair view" of BCCI's financial state of affairs.
** The certifications by BCCI's auditors that its
picture of BCCI's books were "true and fair" from December 31, 1987
forward, had the consequence of assisting BCCI in misleading depositors,
regulators, investigators, and other financial institutions as to BCCI's true
financial condition.
** Prior to 1990, Price Waterhouse (UK) knew of
gross irregularities in BCCI's handling of loans to CCAH/First American and was
told of violations of U.S. banking laws by BCCI and its borrowers in connection
with CCAH/First American, and failed to advise the partners of its U.S.
affiliate or any U.S. regulator.
** There is no evidence that Price Waterhouse (UK)
has to this day notified Price Waterhouse (US) of the extent of the problems it
found at BCCI, or of BCCI's secret ownership of CCAH/First American. Given the
lack of information provided Price Waterhouse (US) by its United Kingdom
affiliate, the U.S. firm performed its auditing of BCCI's U.S. branches in a
manner that was professional and diligent, albeit unilluminating, concerning
BCCI's true activities in the United States.
** Price Waterhouse's certification of BCCI's books
and records in April, 1990 was explicitly conditioned by Price Waterhouse (UK)
on the proposition that Abu Dhabi would bail BCCI out of its financial losses,
and that the Bank of England, Abu Dhabi and BCCI would work with the auditors
to restructure the bank and avoid its collapse. Price Waterhouse would not have
made the certification but for the assurances it received from the Bank of
England that its continued certification of BCCI's books was appropriate, and
indeed, necessary for the bank's survival.
** The April 1990 agreement among Price Waterhouse
(UK), Abu Dhabi, BCCI, and the Bank of England described above, resulted in
Price Waterhouse (UK) certifying the financial picture presented in its audit
of BCCI as "true and fair," with a single footnote material to the
huge losses still to be dealt with, failed adequately to describe their serious
nature. As a consequence, the certification was materially misleading to anyone
who relied on it ignorant of the facts then mutually known to BCCI, Abu Dhabi,
Price Waterhouse and the Bank of England.
** The decision by Abu Dhabi, Price Waterhouse (UK),
BCCI and the Bank of England to reorganize BCCI over the duration of 1990 and
1991, rather than to advise the public of what they knew, caused substantial
injury to innocent depositors and customers of BCCI who continued to do
business with an institution which each of the above parties knew had engaged
in fraud.
** From at least April, 1990 through November, 1990,
the Government of Abu Dhabi had knowledge of BCCI's criminality and frauds
which it apparently withheld from BCCI's outside auditors, contributing to the
delay in the ultimate closure of the bank, and causing further injury to the
bank's innocent depositors and customers.
BCCI's
Early Audit Relationships
As specified in the chapter of BCCI's criminal
activity, BCCI was from its earliest days made up of multiplying layers of
entities, related to one another through an impenetrable series of holding
companies, affiliates, subsidiaries, banks-within-banks, insider dealings and
nominee relationships. By fracturing corporate structure, record keeping,
regulatory review, and audits, the complex BCCI family of entities created by
Abedi was able to evade ordinary legal restrictions on the movement of capital
and goods as a matter of daily practice and routine. As a result, the records
of BCCI's criminal activity were buried beneath a layering that substantially
impeded anyone's ability to make sense of them.
Yet, this problem was not something which developed
slowly, near the end of BCCI's existence in 1991, but rather, a structure which
BCCI's head, Abedi, created from the earliest days of the bank, and which was
accepted for over a decade by both of BCCI's principal auditors, Price
Waterhouse and Ernst & Whinney.
According to Masihur Rahman, he recognized the
potential for abuse in the system developed by Abedi from the beginning, and
insisted on retaining top accounting firms for BCCI as a mechanism to counter
Abedi's complexities. As Rahman explained it:
Soon after formation of the bank, it started as BCCI
S.A. which was the Luxembourg Bank, but within a couple of years, Mr. Abedi
decided to restructure it, and the holding company was produced. It was called
BCCI Holdings. And the bank underneath it, BCC S.A. was split into two parts,
one bank was left with its head office in Luxembourg called BCCI S.A., and
another bank was created with its head office in Grand Cayman. The BCC S.A.
bank was mostly with European and Middle East locations, and BCC Overseas Bank
was mostly Third World countries. . . .
Well, the more number of entities there are in any
organization, obviously the more isolation you can put each section to. And if
you do an intercompany position, then unless you know both companies' position,
you could get half a picture. So there was that situation also . . .
Because I realized the danger of this evolving
structure and the management style, I insisted that we had the best and biggest
auditors. And so we from the early days had two of the biggest audit firms,
Ernst & Whinney which became Ernst & Young, and Price Waterhouse.(9)
Initially, both the holding company and all BCCI's
other banks other than its Grand Cayman's banking unit, BCCI Overseas, was
handled by Ernst & Whinney, with BCCI Overseas in Grand Caymans as a
"flag-ship" bank, handled by Price Waterhouse from its formation in
1975. According to Rahman, in an effort to deal with BCCI's "free-wheeling
structure," both firms were instructed by him to notify him, as BCCI's
chief financial officer, of any abnormalities they encountered at the local
level in the course of their audits, as they found them, and not to wait until
the end-of-the-year audit to report them. Moreover, controls were placed on
BCCI's Treasury operations requiring the Treasury department of BCCI to
maintain 90 percent of its deposits in a liquid form -- such as placements with
prime banks and U.S. and European government securities -- and permitting the
Treasury to engage in trading on no more than a maximum of 10 percent of BCCI's
dollar surpluses, which would limit the exposure to about $100 million in all.
Price
Waterhouse Audits -- Mid-1980's
The earliest audit for which the Subcommittee has
been able to obtain any records consists of a few sample pages of audit
findings and recommendations from Price Waterhouse Grand Caymans to BCCI dated
December 31, 1983, prepared by Price Waterhouse Grand Cayman personnel Richard
W. Harris and Richard D. Fear. As of the end of 1983, the auditors found that
BCCI's loan portfolio contained:
a relatively high concentration of risk to a number
of prominent clients. The inherent risk associated with these major exposures
is significant in the context of the capital base of the Bank particularly in
cases were advances have been made on an unsecured basis.(10)
Accordingly, the auditors recommended that BCCI
consider limiting the maximum loan exposure to individual clients or groups,
and increasing its loan loss provisions. The pages provided the Subcommittee do
include references to other problems with the bank, but the full explanation of
those problems was apparently set forth on pages not obtained by the
Subcommittee.
Excerpts from a report prepared in 1984 by Price
Waterhouse provides a fuller account of the nature of the problems Price
Waterhouse had previously found. While again the documents provided are
fragmentary, they contain the following:
Although there have been marked improvements in the
quality of the credit files maintained at Head Office [Grand Cayman's] we have again
noted instances where the files contain inadequate financial information such
that the credit worthiness of the borrow cannot be readily established.(11)
Portions of an internal control report prepared by
Price Waterhouse dated April 26, 1986 concerning BCCI's Grand Caymans office
described numerous additional problems pertaining to BCCI's lending practices
and documentation:
We noted instances where funds had been disbursed .
. . prior to the perfection of the security arrangements required . . .
Instances were noted in which items of security were
not supported by independent valuations . ..
We have noted some instances where the documentation
received by the Bank to create a charge or pledge over security had been
accepted without any evidence of consideration having been given to its legal
enforceability in the jurisdiction in which the enforcement would be made . . .
We noted instances where exposure exceeded
authorized limits, occasionally by significant amounts, and also that in many
such cases such excesses were caused by the accrual of interest. .
During the course of our audit we had several
requests from local auditors to review loans for which documentation was not
available locally . . .
No regular reporting procedures exist at Head Office
whereby senior management, the Central Credit Committee or the Board of
Directors are notified of non-compliance with the terms and conditions of
borrowing, particularly in relation to the non-payment of principal and
interest . . .
We noted instances whereby the interest rate being
applied to an account differed from that quoted . . .
We noted instances, where for general reasons of
confidentiality, certain borrowers were designated with a numbered account
reference rather than the account being entitled with the full name of the
borrower. Whilst we have no particular objection to this practice, we
found that in most instances none of the officers of the Grand Caymans office
were able to correctly identify either the name of the borrower or the credit
officer responsible for monitoring the account at other locations.
. .(emphasis added)
We noted instances of errors occurring in the
accounting records at Head Office accounting to ensure their completeness and
accuracy. . .
We have noted during the past few years that the
level and number of staff loans booked at Head Office has steadily increased
but that regular monitoring is not carried out to ensure that the terms and
conditions of such loan are being followed.(12)
Asterisks adjacent to a number of these concerns
were placed by the auditors to indicate issues which they had previously raised
with BCCI, in some cases for several years. Many of the concerns taken
independently might not be cause for unusual concern. But taken together, they
demonstrate at minimum that as early 1986, BCCI's auditors knew of a
significant number of exceptionally poor practices at BCCI concerning its
record keeping, treatment of interest to borrowers, handling of numbered
accounts, and handling of accounts where customers were failing to pay interest
or principal or both.
While Price Waterhouse may have considered BCCI's
poor banking practices to be a demonstration of a lack of sophistication or
professionalism on the part of BCCI, in fact, these practices, taken together,
were essential mechanisms by which BCCI maintained its global frauds.
For example, BCCI's practice of simply tacking on
interest to principal in cases in which loans were non-performing was
necessitated by its practice of using nominees to disguise transactions in
which BCCI was the real party at interest, such as BCCI's secret ownership of
First American. The nominees understood from the beginning that they were not
responsible for paying interest, and that BCCI would take care of it. The
simplest means for BCCI to take care of it, was, so long as the auditors
permitted it, to just add the interest to the principal. Then, when BCCI was
ready, it would proceed against the borrower, its nominee, and
"acquire" the property secured by these loans. Accordingly, BCCI
often would not want any independent valuation of the secured property, because
its intention from the beginning was to own or control the secured property --
such as First American -- rather than to sell the property if its
"borrower" did not pay BCCI back its "loan."
Similarly, the practice of BCCI officials not being
able to identify the borrower behind a numbered account, or the BCCI officer
responsible for monitoring the account at other locations, would have been a
logical means of compartmentalizing knowledge about accounts in order to limit
the possible criminal exposure of the officials and the bank for irregular
loans or drug money laundering. To the extent that an official monitoring a
numbered account cannot identify a customer, he cannot very well know the
quality of his credit or the source of the customer's funds. To the extent that
the official cannot identify the other bank officials involved in monitoring
the account, they can each claim that they are not responsible for the recovery
of this loan, or in a drug-related case, did not possess adequate knowledge to
recognize that the funds they were moving were laundered funds.
Without speculating on the possible reasons for
these deficiencies, or expressing any concerns that these deficiencies might
not be inadvertent on the part of BCCI, the auditors made a number of
recommendations to BCCI in 1986 on how to correct them:
We recommend that efforts be made to obtain current
financial and other supporting information in respect to all borrowers. . .
We recommend that, except in the most exceptional
circumstances, funds should not be disbursed prior to the perfection of any
required security arrangements. . .
We recommend that independent valuations be obtained
on a regular periodic basis to enable the adequacy of security to be properly
monitored. . .
We recommend that all charge or pledge documentation
be approved by the legal department before funds are disbursed . . .
We recommend that loans should not be allowed to be
drawn down in excess of approved limits prior to increased facilities being
sanctioned in writing. . .
We again recommend that, in accordance with the
group policy, interest on loans against which there is a specific loan loss
provision is always created to reserve and not to income . . .
We again recommend that the Central Credit Division
take positive steps to ensure that branch managers throughout the Bank are
fully aware that they are responsible locally for maintaining complete credit
files for all loans. . .
We recommend that procedures be introduced to enable
management to readily identify non-performing loans. . .
We recommend that all credit files contain written
authorization to support the interest rate being applied to an account. . .
We recommend that the Head Office manager maintain a
private register of borrowers using numbered accounts. . .
We again recommend that procedures be introduced to
monitor and control staff loans and advances.(13)
These recommendations, if followed by BCCI, and if
insisted upon by Price Waterhouse, backed up by the threat of qualifying the
accounts, or by the threat of resignation, would have limited BCCI's ability to
continue to engage in many of the deceptions that were essential for its
continued survival -- including the use of nominees to own BCCI's secretly-held
subsidiaries, such as First American and the Independence Bank. In practice,
BCCI continued over its remaining five years of life to abide by few of these
recommendations, with the result that the auditors repeated them year after
year, with ever greater specificity, while continuing to sign off year after
year on BCCI's accounts, concluding that their audit reports represented a
"fair and true" picture of BCCI's actual financial status when in fact
they did not.
BCCI's
1985 Treasury Losses
In 1985, BCCI and its auditors faced the first major
crisis of the bank. The crisis came in one of BCCI's flag-ship operations --
BCCI Overseas (Grand Caymans), which had been audited from its inception by
Price Waterhouse. The crisis was acute and involved BCCI's Central Treasury. It
required the recognition of a loss of approximately $500 million, the
equivalent of the bank's entire capitalization. BCCI characterized the loss as
due to as trading losses in the securities and commodities markets, ostensibly
brought about through unauthorized trades by a junior BCCI officer, Ziauddin
Akbar, who had been placed to run the Treasury Department by BCCI CEO Abedi.
By the account of BCCI chief financial officer
Rahman, Abedi and Naqvi had permitted Akbar to take "very, very large
exposures," in securities and commodities trading, in what was actually a
Ponzi scheme, in which front-end commissions received, representing offsets
against liabilities under open futures contracts, were treated as profits
rather than as offsets, and actual losses were hidden through BCCI taking
ever-larger futures positions in securities and commodities trades to create
offsets against the past losses; plus additional "profit" as and when
required; until by the autumn of 1985 the forward exposures had become $11
billion against a board approved limit of $1 billion. According to Rahman:
This was done by not more than two or three of the
executives in the treasury division directly under Mr. Naqvi.(14)
These huge losses imperiled BCCI on several
accounts. First, they had nearly wiped out the capital of the bank, and BCCI
would have to find ways to recapitalize. Second, they suggested recklessness on
the part of BCCI's top officials, and made many wonder what had prompted the
recklessness. But most dangerous of all, these losses could have prompted a
thorough review of all BCCI's books and records from the beginning by BCCI's
auditors, a review which would have brought down the bank if the auditors had
discovered the frauds involved.
As Ziauddin Akbar later told associates, the truth
was that the losses had taken place over a number of years and were in fact not
really losses at all, but falsified bookkeeping instituted by Abedi and Naqvi
to inflate BCCI's books and show phony profits. According to Akbar, he agreed
to be the scapegoat for the losses in an effort to avoid a situation in which
the auditors would conclude that there been systematic fraud at BCCI, conducted
at the top. In fact, the auditors wrongly concluded that the losses had taken
place over a short period, and that did not force the further review of BCCI
documents which would likely have revealed the years of systematic and massive
fraud in the bank's books.(15)
Instead, Price Waterhouse, working closely with
Abedi and Naqvi, agreed to the shift of $150 million from the ICIC Staff
Foundation/Trust to meet part of this loss, and then splitting the balance of
the loss into three years on technical grounds. Akbar was fired, and BCCI was
saved.
Nevertheless, recognition of the losses was costly
for BCCI. The losses became a significant factor in the decision soon
thereafter of BCCI's regulators in Luxembourg, the Institut Monetaire
Luxembourgeois (IML) to notify BCCI's other regulators that the Luxembourg
authority was unhappy with its responsibility for monitoring BCCI while BCCI
actually was headquartered in London. Moreover, it brought about a crisis among
the auditors themselves.
According to Ernst & Whinney, the Treasury
losses had caused it to doubt whether the auditors could trust BCCI and Naqvi,
although Price Waterhouse's confidence in Naqvi remained unshaken. As Ernst
& Whinney told the British House of Commons:
PW say that "Until Price Waterhouse exposed him
[in 1990], Naqvi enjoyed the respect and engendered the confidence of all those
who met him". E&W's confidence in Mr Naqvi was shaken when it was told
for the first time on 13 February 1986 of the problems in the Treasury Division
of BCCI Overseas and of his involvement therein.(16)
In May 1986, Ernst & Whinney advised BCCI that
unless they were permitted to assume responsibility for the whole audit and
BCCI's management style were changed and its record keeping systems were
improved, they would resign from their commission as auditors for BCCI. In
addition to the Treasury losses, Ernst & Whinney were concerned about
"a marked reluctance by both Mr. Abedi and the board of BCCI Holdings to
take prompt action to disclose these [Treasury losses] to the regulators, to
disclose them in the group accounts in a manner satisfactory to E&W and to
discipline those responsible." Finally, Ernst & Whinney had advised
BCCI that if it were to continue to act as the bank's auditors, BCCI needed to
achieve "a marked improvement in the financial and managerial controls
exercised throughout the group."(17)
Over the following several months, BCCI, Ernst &
Whinney and Price Waterhouse had extensive discussions about the changes which
needed to be implemented, and had mutually agreed about the nature of the
changes to be put into effect.(18) Nevertheless, for reasons which
Ernst & Whinney has declined to specify, it resigned from further work
auditing for BCCI, leaving Price Waterhouse for the first time in the position
of being BCCI's sole global, consolidated auditor. At the time of Ernst &
Whinney's withdrawal, it was auditor to 12 of BCCI's various subsidiaries and
affiliates, and Price Waterhouse was auditor for the remaining 19.(19)
1987
Audits
Year after year, BCCI's auditors continued to find
evidence of poor banking practices and imprudent lending on issues unrelated to
the massive Treasury losses. In its end of year report for 1987, Price
Waterhouse noted numerous concerns on accounts involving close to $1 billion of
exposure to BCCI involving many of the accounts which regulators would later
conclude involved front-men. Yet no action was taken by Price Waterhouse, by
BCCI's directors, or by regulators who later received these reports, to require
any concrete action by BCCI, backed up by sanctions for any failure to comply,
to correct the obvious banking irregularities.
For example, in its 1987 audit of accounts
pertaining to the Gokal brothers and their shipping empire, the Gulf Group,
Price Waterhouse found that exposure to the group amounted to $318 million --
or 23 percent of BCCI's capital base, with exposure rising every year,
repayment performance "below expectations," security held against the
lending likely unenforceable, and financial information regarding the loans
"inadequate." Three years later, Price Waterhouse would conclude that
on many of the Gokal related loans, the financial information was not merely
"inadequate" but non-existent. Price Waterhouse also found that
"cash allocations to [some Gokal] accounts appear to be arbitrary and, as
a result of this and the lack of formal repayment schedules, it is difficult to
assess the underlying performance of each account."(20)
In the same set of audits, Price Waterhouse found
that BCCI faced exposure on loans to former Saudi intelligence chief Kamal
Adham of over $200 million, involving large, unsecured exposures, "poor
interest repayment performance," "no evidence of long term repayment
schedule," "other related exposures with BCCI/ICIC," and that
bank documents showed little evidence of regular contact between BCCI and
Adham.(21) Worse, Price Waterhouse found that many of the shares
Adham had in the First American Bank, CCAH, were pledge as security for loans
BCCI had made to other BCCI borrowers. Nevertheless, Price Waterhouse did not
require that the loans to Adham -- or to the Gokal brothers -- be classified or
that BCCI make "provision" against them, so long as BCCI promised to
correct the problems in the account in the future, which BCCI of course did not
do.
The audit of the Adham accounts mirrored that of the
audit of the accounts of his successor at Saudi intelligence, Abdul Raouf
Khalil. In its end of the year audit for 1987, Price Waterhouse described the
situation in the following terms:
AR Khalil is a Saudi Arabian national who has had
facilities with the bank for a number of years. In the past the bank operated a
large investment trading portfolio on his behalf, however this ceased in 1985
and he now channels his trading activities into Capcom Financial Services
Limited, an independently managed investment house with a paid up capital of
f25m of which he owns 20%.
Little is known publicly about Khalil, however he is
the owner of a substantial museum of Arabian artifacts in Jeddah reputed to be
worth some $350m. This value is inherently subjective, but it is understood
that he is attempting to arrange the sale of the museum to the Saudi Arabian
authorities.
MAJOR CONCERNS.
- Lack of documented evidence of contact with
borrower for 1987
- Balance confirmation outstanding
-Interest unpaid
-Lack of evidence of long term repayment schedule
-Lack of formal documentation to secure CCAH shares
. . .(22)
Price Waterhouse expressed its anxieties about the
Khalil account, but once again, decided that it would not force BCCI to classify
any of the loans to Khalil as doubtful or bad, or require BCCI to make
provision in a manner that would be reflected in its public audit, again so
long as BCCI promised to clean up the problems in the future:
We remain concerned about his account however no
provision will be required for 1987 providing:
- the account balance is confirmed to us by the
borrower
- interest for 1987 is fully repaid
For the future we require:
- full loan files to be maintained to include all
details of correspondence, meetings and other pertinent evidence of the
monitoring the account
- adherence to an agreed repayment schedule
- formalization of security arrangements.(23)
In the months that followed, BCCI did not undertake
any of the promised reforms, but Price Waterhouse took no action to force
BCCI's hand for another two years.
1989
Audit
The Subcommittee was not able to obtain any of Price
Waterhouse (UK)'s reports to BCCI covering the period between December, 1987
through December, 1988, which includes the date of the indictment of BCCI and
seven of its officers on drug money laundering charges by the U.S. Attorney in
Tampa in October 1988, following a "sting" by the Customs Service.
Audit reports to BCCI from Price Waterhouse dated
November 17, 1989, demonstrate that BCCI had made very little progress in
responding to any of Price Waterhouse's expressed concerns, but that relations
between Price Waterhouse and BCCI had remained cordial and cooperative, and
that Price Waterhouse felt at the time that BCCI was actually "performing
reasonably."
The audit report begins with the following sanguine
assessment:
Overall the bank has performed reasonably over the
past year considering the significant repercussions that could have resulted
from the US indictment. The Group has continued to remain relatively liquid and
also attract some new business.(24)
While over the course of the report, Price
Waterhouse reiterated several of the concerns it had previously expressed in
various other audit reports taking place over the previous six years, its
overall tone was of an auditor reporting that outstanding issues were in the
process of being resolved. While not free of all warnings and caveats, this
1989 interim report did indeed, consistent with Masihur Rahman's testimony, imply
that no obvious major problems existed.
1990
Audit: Price Waterhouse Puts Out Red Flags
The Subcommittee does not have any coherent account
of why, suddenly, Price Waterhouse began in the spring of 1990 to shift from
its previous position of politely making recommendations to BCCI to change its
behavior, to aggressive criticism of practices at the bank that for the most
part it had already been aware of for years. However, the consequences for both
Price Waterhouse and BCCI were obvious. Under British law, Price Waterhouse in
finding gross irregularities at BCCI, would now be able to report these
findings to the Bank of England, and thereby share any responsibility for
BCCI's future.
In the April 1990 audit report, Price Waterhouse
found that all the previous practices it had condemned and recommended be
corrected, had instead persisted and worsened. Among Price Waterhouse's
findings was the recognition that BCCI's lending in connection was among
serious problems facing BCCI. As Price Waterhouse noted:
** BCCI faced more than $850 billion of exposure in
connection with lending for First American (CCAH). BCCI's practices regarding
these loans were atrocious. The number of shares pledged by some borrowers had
been changing from year to year. BCCI held blank transfer deeds and powers of
attorney on the shares that allowed it to transfer them at will, against
lending that had been for First American itself, or any other lending to First
American's shareholders. Worse, BCCI's were giving conflicting stories about
whether BCCI itself owned First American or not. In past years, Price
Waterhouse stated, they had been told that BCCI held all the shares of First
American, and not simply those pledged as security on lending. This year, they
were saying the reverse.(25)
** Many of the loans for First American had never
been reduced to writing with loan agreements involving the shareholders, so
there was no real way to determine what the terms of the lending were supposed
to be, or whether the shareholders had actually authorized them.
** The files maintained by the bank concerning the
$850 billion in lending against First American were sparse, with little
evidence of customers acknowledging decisions concerning their
"investments," let alone directing them.
** Interest was not being serviced on loans for
First American. And the interest charges BCCI was crediting on the First
American loans were substantial, without evidence that the shareholders had
agreed to the interest charges.
** Audits of two companies, Midgulf and Rubstone,
who had secured loans from BCCI against their ownership of stock in First
American, had been certified by representatives of BCCI shareholder Mohammed
Hammoud, yet now BCCI was stating that Hammoud did not own those companies, and
it was not clear who, if anyone, did.
** In the past, management had told the auditors
that they had not reported all the changes in share holdings in First American
to federal regulators as required by law.
Price Waterhouse thus acknowledged for the first
time that there were serious questions as to who owned First American, and that
it had known from past representations by BCCI management that the bank was
violating U.S. laws in failing to tell regulators about changes in ownership
when they occurred.
Other findings of the new audit reports by Price
Waterhouse were equally damning. Price Waterhouse found that there had been
little or no direct contact with Saudi intelligence figure A. R. Khalil since
1985. Yet Khalil had still somehow purchased an additional 57,748 shares of
BCCI in April 1989 in a rights offering, with money loaned by BCCI. Price
Waterhouse found this disturbing, given "an apparent breakdown in the
relationship between the borrower and the bank," and the fact that Khalil
had not made any interest payments in five years on previous borrowing from
BCCI. Price Waterhouse also found that documentation to support Khalil's
borrowings from BCCI was absent, and representations by various BCCI officers
about his relationship with the bank were "inconsistent." Price
Waterhouse found it impossible to determine whether Khalil still owned the
13,250 shares of First American/CCAH attributed to him, which BCCI held as
security against $120 million it had ostensibly lent Khalil.(26)
The new Price Waterhouse reports on BCCI's
relationship with the Gokal brothers and their Gulf shipping group, who
together owed BCCI over $400 million, were similarly dismal. Price Waterhouse
noted in addition to the kind of problems described above, violations of Indian
and Pakistani exchange control violations in connection with loans to the
Gokals, and statements by BCCI management that the auditors should look to the
relationship of trust between the Gokals and BCCI's top officials rather than
to any documents in determining BCCI's ability to recover its lending to the
Gokals.(27)
Concerning BCCI's banking arm in Kuwait, the Kuwait
International Finance Company (KIFCO), Price Waterhouse found that placements
recorded by BCCI with KIFCO were inconsistent with Kifco's financial statements
regarding the same transactions. Price Waterhouse noted that the principal
mechanism for repaying Kifco's loans from BCCI was a mysterious Kuwaiti entity
called "the IZ company for Exchange," and that "we now have
suspicions as to the propriety of the transactions." Price Waterhouse
noted that it had requested access to KIFCO's records which had been denied.(28)
Concerning BCCI's relationship with its Swiss
banking representative (and secretly held subsidiary) Banque de Commerce et de
Placements SA (BCP), Price Waterhouse stated "Swiss secrecy laws have
prevented us from being provided with information relating to customer accounts
by the incumbent auditors," and described a number of transactions
involving BCCI, its affiliates, and BCP, which Price Waterhouse could not
penetrate.(29)
Concerning BCCI front-man Mohammed Hammoud, Price
Waterhouse noted that it had no evidence that Hammoud owned any of the
companies to which BCCI and its Grand Caymans affiliate ICIC had lent some $110
million. Worse, various companies which had BCCI officials had previously said
were owned by Hammoud were now being claimed by BCCI officials not be owned by
Hammoud, but by others, who in turn reiterated that Hammoud did own the
companies. Finally, Hammoud supposedly now owned 2.6 million shares of BCCI
itself, but there were no records backing up this purported ownership.(30)
Concerning the Saigol family, who now owed BCCI $44
million, Price Waterhouse found that there was no evidence that loans or
interest on loans were being repaid. Worse, BCCI had lied about the Saigol
accounts to the auditors in the past:
Representations previously given about the
beneficial ownership of companies to which new loans were extended in Bahrain
in 1989 have been false. The loans have been given, in part, to repay
delinquent loans in other locations.(31)
The reporting on lending to other prominent BCCI
shareholders such as Ghaith Pharaon, the bin Mahfouz family, and members of the
Abu Dhabi royal family raised similarly serious problems.
In total, the new audit reports by Price Waterhouse
-- the first of which reached BCCI acting head Swaleh Naqvi in February, 1990
-- were devastating, and raised fundamental questions as to whether the bank
could -- or should -- survive. And yet the information in the audits was
different from previous audit reports largely in tone and detail rather than in
substance. All but one or two of the issues identified had been raised by the
auditors before, and reasons for the sudden shift in attitude remain obscure.
Price Waterhouse's own account of the sudden change
is unilluminating. As it told a committee of the British House of Commons in
February, 1992:
Our 1987 and 1988 audits revealed imprudent lending:
during the 1989 audit we identified that, contrary to management's previous
assurances, further lending had been permitted on the major customer accounts
where the credit risk was already heavily concentrated. Additionally, around
this time, Price Waterhouse identified certain loan transactions in a number of
locations for which senior management were unable to provide adequate
explanation. Price Waterhouse communicated concerns about these matters and
their implications on the credibility of management to the Bank of England
early in 1990.(32)
What appears to have happened is that the auditors
had spent many years detailing record keeping, documentation, and other
problems with BCCI's lending practices, without having had any appreciable
impact on change those practices, while each year receiving approximately $5
million for their audit work. By early 1990, it was becoming increasingly clear
that the lending problems were so severe that the auditors themselves might be
held at risk if they did not alert authorities. What is striking is Price
Waterhouse's decision to notify the Bank of England "early in 1990,"
before it notified BCCI's own board of directors of the problems, and without
telling BCCI it had reached out to the regulators. As the visible financial
hole at the heart of BCCI grew ever larger, the relationship between BCCI and
Price Waterhouse had finally snapped.
Response
to 1990 Audit Report
BCCI chief financial officer Rahman testified that
he was shocked by the sudden change in attitude by Price Waterhouse, as well as
by some of the information provided to him by them in their new reports, which
he received on March 14, 1990:
In the usual process, the whole world audit was
completed in the month of February, 1990. . .my wife and family were planning
to go on holiday the later part of March, April. And when I received a call on
a weekend from Price Waterhouse saying that they wanted to meet me, the
partners, and -- I was a bit hesitant because I had been seeing all the
partners throughout the last few months and I did not know what it was that they
wanted to bring up. Anyway, I went to their office and they produced for me a
whole list of what they thought was irregularities, illegalities, and misuse of
funds.(33)
According to Rahman, the problem cases identified
were exactly those Price Waterhouse had identified for years, but this time the
attitude of the auditors was completely different.
Senator Kerry: Now, the irregularities and problems
that they put forward to you had been in existence for several prior years, had
they not?
Mr. Rahman: Yes. All the names that they listed were
names which had appeared in prior years. . .
Senator Kerry: Some were fronts?
Mr. Rahman: Some were fronts, obviously. . . . They
presented this list of huge problems whose potential loss could be $1 billion,
plus. . . . They said the only thing before we go to the regulator . . . is
that we can allow you to have an inquiry of your own from all our findings, and
come up with your interpretation and facts.(34)
Price Waterhouse was now taking the hard line with
BCCI that it had no choice but to notify the regulators, when in fact, they had
already been notified. All that BCCI could do was supplement Price Waterhouse's
reporting with its own analysis, which Price Waterhouse urged Rahman to
undertake as head of a BCCI interim task force.
Rahman testified that as chief financial officer of
a $22 billion concern, he had previously been relying year after year on the
auditors reports in preparing BCCI's overall books, and had never been
permitted to look at the underlying documentation himself. Now, as he began for
the first time reviewing the underlying documentation on the loans, he was
shocked at what he found. On the one hand, Price Waterhouse's criticisms of
BCCI's operations were valid. On the other hand, from Rahman's point of view,
these obvious frauds and illegal acts should have been brought to his attention
years previously, and the auditors should not have permitted the practices to
go on so long.
The Task Force report prepared by Rahman and three
other BCCI officers during March 1990, began by acknowledging BCCI's failures,
but criticized Price Waterhouse for taking so long in alerting management to
how bad the problem was:
The Task Force after many hours of interviews with
the concerned Accounts Executives . . . and reviewing many files and documents
made available to it (most of which were of very poor quality) . . . confirms
the 'concern' of PW in many of the referred cases . . . The Task Force
simultaneously expresses considerable surprise and disappointment at such
obvious flaws in basic banking procedures and documentation. The Task Force
feels that the annual audit thereof should have easily detected and corrected
such haphazard transaction several years ago.
The Task Force concludes that there is little doubt
from the sparse records available and inadequate explanations given by the
Accounts Executives/Officers that there must be some 'interlocking'
arrangements between the shareholders of both BCCI Holdings (Lux) SA and CCAH
whereby in several cases 'nominee' routes may have been taken to front each
others investment in these two banking groups with corresponding loans being
drawn from BCCI (& ICIC) to fund such 'interim' holdings. . .
It took the Task Force only a few days to note that
nearly each of these cases had common patterns of initiation, activity, fund
flow, weak documentation and vague explanations from the concerned account
officers which any reasonable audit process should have tracked down,
identified and stopped forthwith. That is extended over so many years is a
great disappointment to the Task Force -- particularly since their initiations
was all rom the same source in Grand Caymans (and London).(35)
Thus, as of April, 1990, both Price Waterhouse and
BCCI's senior financial official, Rahman, had explicitly recognized, in
writing, BCCI's dire financial condition, its poor lending practices, and its
frauds in connection with First American and other matters. Ironically, in the
weeks to come, it would be Rahman who would voluntarily resign his commission
and leave BCCI, and the auditors who would stay and try to find a way to save
the bank.
Price
Waterhouse's Sign Off on 1990 Audit in May, 1990
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. A new management team was
brought in. Unfortunately, rather than constituting a strong group of banking
professionals, the new team was headed by a long-time Abu Dhabi insider from
BCCI itself, Zafar Iqbal, the former head of BCCI's branch in the United Arab
Emirates, the Bank of Credit and Commerce Emirates, or BCCE, who had long had a
close personal relationship with important members of the royal family of Abu
Dhabi arising out of his provision of intimate personal services for them in
Pakistan and elsewhere. Within the bank, Iqbal was not considered to be an
expert on much besides pleasing the Abu Dhabi royal family. BCCI junior
officers knew him as the man who had for years provided "singing and
dancing girls" to the royal family, and related personal services.(36)
BCCI operations were moved, with the apparent approval of the Bank of England,
to Abu Dhabi, along with all of BCCI's most important records. And assurances
were given to Price Waterhouse that Abu Dhabi would back BCCI all the way.
These assurances were needed because Price
Waterhouse was threatening to refuse to sign-off once again on BCCI's books
with an unqualified audit report, and relations between the auditors and BCCI
had deteriorated substantially after BCCI's directors had criticized the
auditors for providing their audit reports to the Bank of England. On April 20,
a meeting was held in Luxembourg with the shareholders in which Price
Waterhouse made a dire presentation, and during which Abu Dhabi representatives
advised Price Waterhouse that Abu Dhabi would make an open-ended financial
commitment to bail out BCCI. As Price Waterhouse stated to the chairman of the
Abu Dhabi Finance Department on April 25, 1990:
Your representative, HE G Al Mazrui, has confirmed
to use that you are fully aware of the nature and magnitude of the
uncertainties and prepared to provide the necessary financial support in the
event that losses arise from realisation of these loans.(37)
In return for Abu Dhabi bankrolling BCCI's
restructuring, Price Waterhouse would agree to certify BCCI's books, subject to
a single caveat -- that the basis of the preparation of the certification was
Abu Dhabi's intention to maintain BCCI's capital base while it reorganized and
restructured. Instead of telling the world the truth -- that the consolidated
accounts reported by Price Waterhouse in April 1990 did not in fact give a
"true and fair view of the financial position of the group at December 31,
1989," Price Waterhouse contends that it did, using the Abu Dhabi
commitment as its justification for so doing.
In justification of this decision, Price Waterhouse
stated the following:
The circumstances existing in the last week of April
1990, when Price Waterhouse had to decide on the form of report on the accounts
of BCCI for the year ended 31 December 1989, were extremely complex as there
was material uncertainty about the recoverability of significant loans and
advances shown in the balance sheet. Significant matters taken into account
including the following:
-- The Abu Dhabi Government had given a commitment
to indemnify BCCI against loss either by taking over balances at no loss to
BCCI or by contributing equivalent funds to make good any losses incurred on
the loans and advances in question;
-- the Government of Abu Dhabi and related
institutions had taken a controlling (over 77 per cent) interest in BCCI and
stated their intention to make further share acquisitions and to reorganize and
restructure BCCI;
-- the Bank of England the Institut Monetaire
Luxembourgeois had been informed of all the uncertainties known to Price
Waterhouse and of the financial support commitment by the Government of Abu
Dhabi and had decided to allow BCCI to continue to operate;
-- whilst evidence of certain false and deceitful
transactions had been discovered we believed the extent of these transactions
to be limited to a small number of specific situations;
-- the individuals in management who were thought to
have been responsible were to be removed.(38)
Accordingly, after receiving these sign-offs from
everyone else involved, including most importantly the Bank of England, Price
Waterhouse signed off once again on BCCI's books stating:
In our opinion, the consolidated accounts give a
true and fair view of the financial position of the group at December 31, 1989
and the results of its operations and changes in financial position for the
year ended in accordance with International Accounting Standards.(39)
The certification was subject to a small footnote,
listed as Note 1 in BCCI's annual report, which cited that the "Basis of
Preparation" for the Price Waterhouse report was the fact that "the
Government of Abu Dhabi has subscribed US$400 million for new shares and
acquiring a major holding from an existing shareholder such that together with
related institutions they now hold over 77 per cent of the share capital of the
holding company. They have advised the directors of their intention to maintain
the group's capital base whilst the reorganization and restructuring necessary
for its continued development is undertaken." Price Waterhouse also
charged off a loan loss for BCCI of $600 million, a loss for the year of nearly
$500 million, and a reduction in shareholders equity of approximately 50 per
cent, from $886 million to $424 million. In so doing, Price Waterhouse for the
first time recognized losses that had in actuality, taken place over many
preceding years.
By agreement, Price Waterhouse, Abu Dhabi, BCCI, and
the Bank of England had in effect agreed upon a plan 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. Thus to some extent, from April 1990 forward,
BCCI's British auditors, Abu Dhabi owners, and British regulators, had now
become BCCI's partners, not in crime, but in cover-up. The goal was not to
ignore BCCI's wrongdoing, but to prevent disclosure of the wrongdoing from
closing the bank. 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 had together colluded to deprive the public of
the information necessary for them to reach any reasonable judgment on the
matter, because the alternative would have been BCCI's collapse.
For its part, in June, 1990, Price Waterhouse was
actually to file another report with the Bank of England, known as a Section 39
report, finding that BCCI's systems and controls were satisfactory -- findings
that Price Waterhouse would have to entirely abandon just five months later.
Abu
Dhabi Deceives the Auditors
In April, 1990, Naqvi and the other chief officers
who resigned with him from their positions in BCCI were placed under house
arrest in Abu Dhabi, as Abu Dhabi took formal control of BCCI. Unfortunately,
as it did so, it did not disclose to Price Waterhouse certain information that
it now had about the extent of the fraud at BCCI, and it took positions that
had the clear intention of seeking to sweep the true nature of BCCI's problems
under the rug, and to avoid the disclosure to BCCI's regulators of what had
really taken place. Essentially, Abu Dhabi was now seeking to make certain that
the money it was spending on BCCI would suffice to keep secret the relationship
between Abu Dhabi and other Arab shareholders in BCCI, even, as necessary, from
Price Waterhouse, the outside auditors for the bank it now owned.
In September, 1990, Price Waterhouse learned that
BCCI had concealed further lending of over $500 million to its major customs by
"parking" that lending with a Middle Eastern bank, namely, the
National Commercial Bank of Saudi Arabia controlled by Khalid bin Mahfouz, the
most powerful banker in the Middle East, who was later indicted in the United
States in connection with his activities pertaining to BCCI and First American.
This was bad enough, but was worse was the fact that since Naqvi's removal, the
practice had continued, "with the knowledge and approval of the Board
representative of the controlling shareholders" -- the government of Abu
Dhabi. The auditors had begun to realize that Abu Dhabi was now colluding with
BCCI in continuing fraudulent practices, and in hiding them from Price
Waterhouse.
According to Price Waterhouse, worse was to come.
Since March or April, 1990, Naqvi, who had personally handled many of BCCI's
frauds, had been living under house arrest in Abu Dhabi. Incredibly, Abu Dhabi
had decided to retain Naqvi as a consultant to advise them on BCCI, and were
giving him access to BCCI's documents. Even more incredibly, Naqvi was said to
be maintaining some 6,000 files personally in Abu Dhabi, whose very existence
had still never been disclosed to the auditors. For months, as Price Waterhouse
continued its efforts to review BCCI's books, it had been lied to by BCCI and
it was finding, by Abu Dhabi, kept in ignorance of some of the bank's most
vital records, and only stumbling onto the fact of their existence in November,
1990.
As Price Waterhouse described it, when they
confronted Abu Dhabi with their concerns about Naqvi, and a request to review
the files he controlled, they were told by Abu Dhabi authorities that the
auditors could not have access to them, and that they would remain under the
control of the discredited Naqvi:
Price Waterhouse's report to the directors of 3
October 1990 revealed that management may have colluded with some of BCCI's
major customers to misstate or disguise the underlying purpose of significant
transactions. Following this, the controlling shareholders of BCCI [Abu Dhabi],
under pressure from Price Waterhouse, agreed to a full investigation of the
problem accounts and to enforce the resignations of Abedi and Naqvi as
directors.
An Investigative Committee comprising
representatives from Price Waterhouse, E&W Middle East Firm (who were
auditors of the Abu Dhabi Government interests), two firms of lawyers and the
Abu Dhabi Government was established in November 1990 to supervisor the
investigation into the problem accounts. Price Waterhouse were advised by
senior BCCI management that Naqvi had been retained as an "advisor"
to provide explanations to the Abu Dhabi Government and that they could not
have access to files being used by him. Price Waterhouse made clear to the
controlling shareholders that without access to Naqvi and the files he was
using there could be no investigation.
Ultimately access was granted and we were shocked to
find that Naqvi was holding around 6,000 files. After initial steps to secure
the files, a preliminary review revealed that amongst them were details of
transactions and agreements not previously disclosed to us despite management's
prior assurances that they had provided all relevant information to Price
Waterhouse.(40)
For reasons the auditors could not fathom, Abu Dhabi
had placed Naqvi, a principal architect of BCCI's frauds, in charge of BCCI's
most important and secret records without telling them. For the past eight
months, Naqvi and Abu Dhabi had maintained exclusive control of those records,
with essentially unlimited opportunities to destroy them or falsify them
throughout that time. By the time Price Waterhouse finally obtained access to
these records in November and December, 1990, it found massive fraud in the
materials that still existed. But the auditors had no way of determining the
extent to which those documents were already cleansed of any material damaging
to the new owners of BCCI, along with any other material which Abu Dhabi or
Naqvi wanted hidden forever.
Section
41 Report and BCCI's Closure
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.
Oddly enough, Price Waterhouse continued to resist
finding that fraud had taken place for many months after the information
available to it provided ample basis for such a conclusion. As late as its
October, 1990 report to the Bank of England, the auditors avoided concluding
that BCCI was involved in fraud, and suggested that they believed that the
restructuring and remedial efforts being taken would be adequate to solve the
bank's problems.
During December, 1990, at the very time that the New
York District Attorney had obtained some of the most critical of its earlier
audit reports, Price Waterhouse completed its initial review of the formally
hidden Naqvi files. In that review, Price Waterhouse found evidence of phony
loans and hidden deposits amounting to hundreds of millions of dollars, nominee
arrangements, hold harmless agreements relieving borrowers of any obligation to
repay loans, and other, similarly criminal practices at the bank. Again, to
Price Waterhouse's shock, Abu Dhabi had known of these practices since at least
April, 1990, and never disclosed them to the auditors.(41)
The implications of these findings for BCCI's future
were devastating. If there were in fact deposits that had been made to BCCI amounting
to hundreds of millions that had never been recorded at the bank, how was
anyone to ever determine what claims by BCCI depositors might be real, and what
claims might be phony? Price Waterhouse decided that it dare not put this
information in writing, and would confine itself to reporting it orally to the
Bank of England, which it did in January 1991. In response, Abu Dhabi again
agreed to make good any losses in connection with these unrecorded deposits.
In the months that followed, Price Waterhouse began
tracing the circuitous routing of funds between BCCI and its Grand Caymans
affiliate, ICIC, and found additional fraudulent activity amounting to as much
as $1 billion through this mechanism alone. 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."(42) Nine days later, at the direction of the Bank of
England, BCCI's offices around the world were closed down and BCCI ceased to
exist.
BCCI's
U.S. Auditors
Given the limited extent of BCCI's official
activities in the United States, which were limited to state-licensed local
branches and representative offices, and not licensed to accept deposits in the
United States, the audit activities of BCCI's United States outside auditors,
Price Waterhouse (US), were extremely narrow in scope. As noted above, Price
Waterhouse (US) responded to a subpoena by the Committee by providing all
requested documents and full cooperation regarding any materials it possessed
regarding BCCI in the United States.
These documents demonstrate that over the course of
that audit relationship, Price Waterhouse (US) did find that BCCI's U.S.
offices maintained inadequate documentation on many of their loans, and engaged
in other sloppy banking practices. But the documents provided by Price
Waterhouse (US) to the Subcommittee also confirmed that Price Waterhouse (US)
handled its auditing of BCCI's U.S. activities professionally and diligently,
albeit within the narrow confines of its commission from its UK partnership.
Such a finding might be odd, given BCCI's extensive
involvement in this period in laundering funds from Latin America and the
Caribbean. But until the spring of 1989, the Price Waterhouse (US) audits were
designed to look only at lending practices and overall bookkeeping issues,
rather than the issue of whether BCCI might be laundering funds from abroad.
Moreover, given Price Waterhouse (US)'s ignorance of BCCI's true relationships
with First American, the Independence Bank, and other entities, there would
have been any number of improper activities by BCCI in the United States in the
aggregate that would fall outside the ordinary purview of auditors.
In early 1989, after BCCI had been indicted on money
laundering charges in Tampa, Price Waterhouse (US) was selected by BCCI to
create a compliance program under which BCCI would submit to extremely rigorous
standards for the handling of transactions from abroad which were designed to
trace and stop money laundering. The compliance program was put into place
under a June 1989 Memoranda of Understanding with the Federal Reserve, which
permitted BCCI to stay open in the United States only if it developed policies
to insure its compliance with Bank Security Act and anti-money laundering
regulations.
The Price Waterhouse compliance program, designed to
be state-of-the-art, for the first time established a comprehensive anti-money
laundering regime at BCCI, and forced BCCI's U.S. offices to become ever more
careful in handling funds from foreigners. Its implementation was effective,
and its results positive in terms of compliance with U.S. law for BCCI's U.S.
branches, but very negative in terms of BCCI's U.S. cash-flow. As Price
Waterhouse (UK) noted in November, 1989:
We understand there has been a noticeable drop in
the funds transferred from other BCCI locations to the US agencies because of
this onerous requirement to obtain the necessary details from their customers.
Most of their US dollar transactions formerly with the US agencies are being
routed to third party banks. Management are investigating this matter to
satisfy themselves that there is nothing untoward in such transactions.(43)
By insisting the BCCI's offices in the US document
where their funds were coming from, Price Waterhouse had ended the ability of
the U.S. offices to engage in profitable activity. BCCI's business dried up,
demonstrating the degree to which the US operations had been functioning
largely to launder dirty money from other countries in the first place.
However, there were substantial limitations the
effectiveness of the compliance effort undertaken by Price Waterhouse, which
were built into its design by BCCI. Originally, Price Waterhouse (US) had
proposed to BCCI the establishment of a very broad global review of the bank's
procedures to insure that the bank was able to stop laundering money
world-wide, and turn BCCI into bank that rigorously honored the laws of every
country in which it did business. On February 1, 1989, Price Waterhouse (US)
wrote Robert Altman to propose to:
Work with BCCI officials on an immediate to medium
term plan to regularize the bank's regulatory and supervisory status on a
global consolidated basis. This would necessitate visiting key supervisors
around the world and learn of their concerns and expectations and provide the
framework to enable BCCI to meet these expectations.(44)
The naive approach by Price Waterhouse (US) was of
course, incompatible with BCCI's survival. BCCI could tolerate such a program
in any case. But by 1989, the UK auditors already knew of dozens of problems
that BCCI was supposed to have cleaned up and had failed to rectify. That
failure was because the practices were ones which BCCI relied upon for its
continued survival. If BCCI had agreed to permit Price Waterhouse (US) to
undertake this court, Price Waterhouse (US) would have swiftly learned of these
practices, and possibly have been forced to tell U.S. regulators about them.
But there was an even more direct problem. The information already contained in
Price Waterhouse (UK)'s audits, that there had been massive lending by BCCI on
CCAH shares and securing those shares, contained the great secret that BCCI
effectively owned controlled First in violation of U.S. laws. Such a confrontation
with reality was obviously not in BCCI's interests, or in the interest of
Altman himself. The terms of engagement were swiftly narrowed to include only
an anti-money laundering compliance program focused on the particular BCCI
entities that had been implicated in the C-Chase sting in Tampa. The narrower
engagement was signed by Price Waterhouse and sent to Altman, as BCCI's
attorney, on March 9, 1989.(45) For this engagement, together with
its regular audits of BCCI branches, Price Waterhouse (US) received
approximately $4.5 million per year.(46)
Thus, before hiring the Price Waterhouse (US), BCCI
and Altman narrowed the framework for their efforts, with the result that they
were sufficiently narrow to preclude Price Waterhouse (US) from learning of problems
at BCCI in the United States already known to Price Waterhouse (UK), but
apparently never communicated to their US affiliated partnership.
Loans,
Payments and Favors from BCCI to Accountants
One especially troubling aspect of BCCI's
relationship to its accountants was its practice of providing them with loans.
While the Subcommittee has not been able to determine the complete extent of
this practice, the Subcommittee has received documentation of at least two such
instances -- the first involving a 1987 loan of BDS $587,000 to Price
Waterhouse's partners in Barbados, the second involving a loan of $17,000 to
Price Waterhouse's partners in Panama in 1984, increased to $50,000 a year
later.(47)
Even within BCCI, this practice was controversial.
When Price Waterhouse applied for the Panama loan, BCCI official A. M. Akbar
wrote Amjad Awan, then head of BCCI's Panama branch, to express his concern
about the propriety of lending money to one's auditors:
The firm is our auditors and we do not consider it
proper to sanction or enhance the limit of USDLR 50,000.00 to our own auditor.
However, we shall re-exam the matter on receipt of your justification as well
as your confirmation that local laws does not prohibit loans & advances to
the company's auditors.(48)
In response, Awan advised Akbar that "there are
no restrictions about advances to company auditors [which] may be allowed"
and the lending was approved.
Separately, regulatory reviews of the books and
records of Capcom Financial Services Ltd., BCCI's commodities trading
affiliate, showed payments of $100,000 by Capcom to former Price Waterhouse
Grand Caymans partner Richard Fear in the three years since he left Price
Waterhouse in 1986. Fear had previously handled audits of the books of BCCI in
the Grand Caymans, the location of many of the worst frauds at BCCI.
Both Capcom's head, Ziauddin Akbar, and former Price
Waterhouse partner Fear, had been held at fault in connection with BCCI's
massive trading losses in 1985, described above, which were discovered in 1986.
At the time, Akbar was the head of BCCI's Treasury, and therefore held
responsible for the losses, and Fear was the principal person responsible for
insuring the propriety of BCCI Grand Cayman's books and records.
In late June, 1992, at the behest of the Serious
Fraud Office of the United Kingdom, Royal Cayman Islands police conducted dawn
raids of Price Waterhouse officers in the Grand Caymans, as well as the home of
Fear and a second Price Waterhouse partner there, as well as the office of Price
Waterhouse's local Grand Caymans attorney, conducting searches for records.
In late February, the Subcommittee requested copies
of any reports or memoranda created by Price Waterhouse concerning Fear and
BCCI, and related documents. Price Waterhouse refused to provide the documents
requested, stating that in its view it was "inappropriate to produce the
work product of its lawyers for examination by any governmental or private
third-party," and that in any case, "Mr. Fear's participation [in
PW's investigation] was predicated upon implicit understandings of
confidentiality." However, despite the "implicit understandings of
confidentiality" Price Waterhouse reached with Fear, Price Waterhouse did
advise the Subcommittee that it had concluded Fear was innocent of wrongdoing
in accepting funds from BCCI's affiliate, Capcom. According to Price Waterhouse
(UK):
Richard Fear left the employment of PW-UK in July,
1986. . . PW-UK first became aware of the payments to Mr. Fear mentioned in the
Wall Street Journal article, in September, 1991.
Upon learning of the payments, PW-UK obtained
Richard Fear's agreement to cooperate in an inquiry by lawyers acting for
PW-UK. Counsel for PW-UK had discussions on the subject with Richard Fear and
ascertained from looking at various records which he showed to them that the
payments were indeed made in two installments in July and August 1988 by Capcom
Financial Services Limited ("Capcom"). The payments, which totalled
$100,000, were stated to be for referral to Capcom of potential clients
requiring brokerage or investment services.
We understand that the United Kingdom Serious Fraud
Office ("SFO") has investigated the circumstances in which the
payments were made and has interviewed Mr. Fear. We further understand that the
SFO has concluded its investigation with respect to Mr. Fear and the matter is
not being pursued.
Based on all the above, PW-UK concluded that these
payments by Capcom to Richard Fear, which were made two years after he had
ceased to be employed by PW-UK, were unconnected with any work that he did on
the audit of BCCI or while at PW-UK.(49)
According to press accounts, Fear's alleged receipt
of funds from Capcom remains under investigation by the British Serious Fraud
Office.
In sworn testimony before the Subcommittee on July
30, 1992, Akbar Bilgrami, formerly head of BCCI's Latin American and Caribbean
region and convicted in the Tampa money laundering case, stated that he had
been informed by other BCCI officials that Price Waterhouse in the Grand Caymans
had been "taken care of." Bilgrami said he did not have details as to
how the auditors had been taken care of, other than that it was his
understanding that BCCI had provided one or more of them with the use of a
villa.(50)
Robert
Bench
Robert Bench, a partner in Price Waterhouse (US),
had minimal involvement in any BCCI affair while at Price Waterhouse, becoming
responsible for some assistance to BCCI in early 1989 in connection with the
compliance program instituted by Price Waterhouse for BCCI as part of BCCI's
first consent decree with the Federal Reserve following its indictment on money
laundering charges in October, 1988.
However, in his previous positions as a senior
official of the U.S. Comptroller of the Currency during the late 1970's to the
mid 1980's, Bench was exposed on two occasions to important information
regarding BCCI which, taken together, raise questions as to Bench's handling of
BCCI affairs as a partner at Price Waterhouse.
First, in 1978, as Associate Deputy Comptroller for
International Banking, Bench was provided with information about a variety of
shoddy banking practices at BCCI, including BCCI's use of nominees, by an OCC
bank examiner working under him, Joseph Vaez. The memorandum prepared by Vaez
and provided to Bench was a clear warning signal to OCC, as well as the Bank of
America, which still had an ownership interest in BCCI, that BCCI was a danger
to anyone involved with it. As the Vaez memorandum noted, if the Bank of
America did not sever its relationship with BCCI, the OCC might well classify
its entire investment in BCCI.(51)
Second, in 1985, Bench was provided a report by the
CIA concerning BCCI that detailed BCCI's plans for the United States. This
memorandum, described in detail in the chapter on BCCI's ties to the
intelligence community, contained striking information, including the fact that
BCCI secretly owned First American.
Bench testified that he had only a very limited
memory of the 1985 report:
I do recall reviewing a classified piece of
information that dealt with BCCI. . . it was somewhere in the middle of the '82
to '87 period. I feel comfortable about that. . . I recall receiving a document
from the CIA that dealt with BCCI. To the best of my recollection it didn't
deal with First American and it didn't deal with anything in the United States.
There is an action step that I took within the office on that information . . .
which was to look at this information in terms of LCD [Lesser Developed
Country] debt.(52)
In staff interviews prior to this testimony, Bench
emphasized that he had no memory whatsoever of having ever been advised that
BCCI held interests in any financial institution in the United States, let
alone First American.(53)
In fact, the memorandum provided Bench by the CIA
focused significantly on BCCI's plans in the United States, including its
ownership of a Washington, D.C., based, multistate bank holding company that
Bench would have surely known was First American.
Obviously, this was information that the Federal
Reserve should have had and did not have at the time that Bench was
participating in BCCI's compliance program in connection with its consent
decree with the Federal Reserve following its money-laundering indictment.
Bench testified that he had no memory of the 1978
memorandum prepared by Joseph Vaez for him at OCC, and that his memory of the
1985 memorandum was almost equally dim.(54) According to Bench,
based on his lack of memory of either memorandum, there was no reason for him
to have connected any of the information in them to his ongoing work on BCCI
compliance years later at Price Waterhouse.
During that compliance work, Bench travelled to
London twice to meet with BCCI officials in London, including Abedi and Naqvi,
and provided technical assistance to BCCI in the United Kingdom and the U.S. in
anti-money laundering matters, "under the direction of Robert
Altman."(55) At the time, Altman was not only BCCI's attorney,
but the President of First American. Yet according to Bench, it never occurred
to him that there might be a relationship between the two institutions that
needed to be understood to determine whether BCCI was truly complying with the
Federal Reserve's requirements.
According to Bench, the reason for this was that the
focus of the compliance effort solely focused on money laundering. As he
testified:
Senator, to the best of my recollection, there was
no linkage whatsoever, in any of the work we did or any of the discussions we
had, with First American . . . I don't recall any First American issues . . . it
was very clear that in this exercise Mr. Altman and Mr. Clifford were lawyer
for BCCI.(56)
At the time Bench met with BCCI officials and Price
Waterhouse (UK) partners in London, both the BCCI officials and the British
accountants knew that BCCI has massive loans on First American secured by First
American's shares. Bench himself had been told by the CIA that BCCI owned First
American back in 1985. Thus, Bench's personal obliviousness to this issue as a
partner of Price Waterhouse (US) raises obvious questions. If Bench had
remembered, recognized, or understood the information that was available to him
from his days at the OCC, or reviewed any of the recent audit reports at Price
Waterhouse (UK) to BCCI's directors, Bench would have had the truth in front of
him concerning BCCI's secret ownership of First American. Price Waterhouse (US)
and BCCI would have been ethically required to tell the Federal Reserve the
truth. And the Federal Reserve would have learned about BCCI's ownership of
First American as of the spring of 1989 -- almost two years earlier than the
time it actually learned of the relationship.
Instead, according to Bench's testimony, he never
focused his attention on the BCCI-First American relationship in any respect,
and so confined himself to advising BCCI on how to improve its practices to
avoid being used to launder drug money. Bench's approach was narrow and
incurious at best.
Conclusions
Regarding The Auditors' Role
From the beginning, BCCI's fractured system of
banking, involving a multiplicity of entities spanning the globe, posed an
obvious challenge to auditors responsible for providing a base-line of
protection to those relying on its annual certifications of BCCI, which the
auditors failed to meet.
The auditors' options in responding to this problem
were quite clear. First, they could respond by highlighting problems, and
working with BCCI to solve them, an approach applied through the first 15 years
of BCCI's existence. Second, when BCCI failed to respond to their
recommendations, the auditors could respond by resigning, an option adopted by
Ernst & Whinney in 1986. Price Waterhouse, for reasons that are not clear,
but which may relate to the $5 million a year being generated by BCCI-related
work, remained with BCCI, and signed off on BCCI's books year after year until
early 1990. At that time, recognizing that the financial hole inside the bank
required emergency action, Price Waterhouse sought to avoid the risk of being
destroyed together with BCCI by taking the information it had developed to the
British regulators, and seeking further guidance from them.
The auditors' role also created special problems for
those investigating BCCI. BCCI's consolidated audits were based on the work
product from auditors around the world. Yet those investigating BCCI in the
U.S. found that the local partnership of the auditing firm involved possessed
none of the information it requires, and contended it had no power to obtain
any of the information it requires.
This problem raises squarely the question of whether
remedial legislation is necessary to require international accounting firms to
include as a condition of their relationship with foreign affiliated
partnerships, that these foreign partnerships agree to provide information in
response to valid subpoenas in the United States on cases affecting the United
States.
Additional institutional issues arose regarding the
auditors' role in BCCI's failure in the UK. In the UK, the issue is whether
external auditors have responsibilities to depositors, customers, and the
general public independent of their duty to a bank's shareholders.
When an external auditor certifies the financial
statement of a business, it is simultaneously providing different services to
different audiences.
For the shareholders of the institution it is
certifying, it is providing what is supposed to be a clear, full, and fair
description of the actual performance of the business to assist the shareholder
in determining the value of his investment, the performance of the company, and
the strength of the company's management, as well as assurances that the
company has no untoward risks from violations of law or regulatory compliance.
To anyone else, an annual certification represents
what may be the principal means by which an outsider can evaluate the safety of
entering into a transaction with a business. An annual report tells a would-be
depositor in a bank about the health of the bank and its business, its level of
capital, its past returns on investment, its areas of difficulty. In reviewing
such a report's audit certification, an outsider is assuming the reputation for
expertise of the auditor, and focusing not on the quality of the audit, but on
the information the ostensible neutral and complete audit is providing.
Thus, true and accurate financial statements,
certified by reputable accounting firms, are at the heart of the
self-regulatory process of financial markets throughout the world. In the
United States, this seldom has significant implications because first, depositors
are insured by the federal government and therefore need not worry about a
bank's solvency, so long as they maintain less than $100,000 per account; and
second, the United States conducts independent bank examinations by seasoned
examiners employed by bank regulators. Outside the United States, however, bank
deposits remain largely uninsured, and outside auditors, rather than bank
examiners, are relied upon to insure that reliable financial information is
provided to the markets.
Unfortunately, the accounting profession generally
has regarded its primary responsibilities as being to shareholders of a
company, rather than to potential customers, creditors, or others who might
have an interest in obtaining accurate information concerning a company. In the
case of a bank, this approach is potentially quite dangerous for uninsured
depositors, as it leaves them in the position of having to rely on the work of
auditors whose principal duties are not to them, but to those who have placed
capital in the bank. This result is especially unfortunate as depositors
provide the preponderance of funds used by banks -- typically 90 to 95 percent
-- while working capital tends to be limited to 10 percent of a bank's assets
or less.
In the case of BCCI, the duty Price Waterhouse
viewed itself to owe was to BCCI's shareholders -- a small number of Middle
Eastern sheikhs most of whom were in fact not real shareholders at all, but
nominees, who were not even paying interest to BCCI on its lending to them in
their capacity as nominees. Thus, Price Waterhouse in fact wound up owing a
duty principally to the people who were deceiving it.
Moreover, even apart from the nominee issue, because
BCCI was a bank, the vast preponderance of its funds came not from capital
contributions for stock, but from its one million or more depositors, to whom
it surely also had a duty. As Professor Richard Dale of the University of
Southampton has noted, this problem was inherent in the system of regulation in
the United Kingdom:
BCCI's 1989 accounts were not qualified, even though
the auditors were aware of serious problems the nature of which had been
reported to the bank's majority shareholders. In explaining the decision not to
qualify, the auditors have argued that in general terms a bank's accounts
cannot be qualified without risking a collapse in confidence and a potentially
calamitous withdrawal of deposits. While this approach may be consistent with
an auditor's established legal obligation to shareholders, it is not
necessarily in the interests of existing depositors, cannot be in the interests
of prospective depositors and is difficult to justify on public policy grounds.
. . For the banking system as a whole the absence of credible financial
information is likely to mean an increased incidence of destablising bank runs.(57)
Thus, under the system as it stood in 1990 and 1991,
Price Waterhouse (UK) was in the unenviable position of having to try to keep
BCCI open, even as it uncovered ever more information demonstrating that the
only fit conclusion to BCCI's existence was its swift termination. Only a few
choices presented themselves. Once again, Price Waterhouse could have resigned
its commission as BCCI's auditors, a choice available to it from the beginning.
Or it could do as it belatedly did, and make use of a provision of British law
that enabled it to advise the regulators of its findings of improper banking
practices in early 1990, and seek the regulators' advice on how to proceed
further. When it chose the latter course, it obtained the comfort of knowing
that its every action was being reviewed contemporaneously by regulators at the
Bank of England who would share ultimate responsibility for whatever happened.
Possible
Changes in International Accounting Practice
The BCCI case raises the issue of whether the
current structure for accounting firms as independent partnerships, with
authority and liability limited to the nation in which they are licensed, is
appropriate and adequate to meet the challenges posed by an international financial
marketplace.
One of the great difficulties in uncovering BCCI's
fraud for regulators and investigators was the fact that its frauds were
carried out through diverse and widespread jurisdictions spanning the globe,
while its activities were audited by local accounting partnerships.
Arguably, the current system by which one
partnership of an accounting firm sets out audit instructions to all of its
global affiliated partnerships in other countries, for them to carry out its
instructions, should be adequate to maintain the standards of an audit that
would be carried out within the borders of one country. But in cases where
something goes wrong, as in BCCI, the structure leaves those injured in
countries other than that in which the accounting firm is licensed, in a
difficult situation. The firm responsible for the consolidated audit may be
located in a jurisdiction with strong financial confidentiality and privacy
laws that preclude disclosure of essential information. It may, as Price
Waterhouse (UK) did, contend that it does not do business in a jurisdiction in
which people have been injured by its handling of audits, and may even refuse,
as Price Waterhouse (UK) did, to honor subpoenas issued to it. Such a result is
against public policy, and new structures for international accounting firms
need to be considered to avoid a recurrence.
One efficient approach that could be adopted
unilaterally by the United States, would be to require accounting partnerships,
as a condition of being licensed in the United States, or as a condition of
being permitted to have their certifications relied upon by any government
agency, to reach agreements with its foreign affiliated entities insuring that
they will respond to authorized subpoenas in the United States, and provide
information as required by U.S. law.
A second approach would rely on the major accounting
firms to modify their partnership agreements without being explicitly required
by government to do so, as a matter of self-regulation, to insure the
availability of documents from their affiliates in accord with the domestic law
of the countries in which they are licensed. Thus, a firm such as Price
Waterhouse (US) would seek to amend the Memorandum of Association and Bye-Laws
of Price Waterhouse World Firm Limited (PWWF) to reach a new binding
understanding among it and its affiliates. Under that new binding
understanding, if Price Waterhouse (US) received a legal subpoena in the United
States concerning documents possessed by any of its affiliates, the affiliates
would have to provide that information to U.S. authorities, subject to the
requirements of the laws of their jurisdictions. While such a change would not
solve all problems in countries which retain strict financial secrecy laws, it
would provide a mechanism by which lawful U.S. subpoenas could be cooperatively
enforced in many cases.
A third approach would be legislation prohibiting
the use or reliance by any federal agency on an audit prepared by any
accounting firm not licensed in the United States. This approach would
dramatically reduce the risk to the United States from certifications by
foreign accounting firms who do not view themselves to be subject to U.S.
subpoenas, such as Price Waterhouse (UK). On the other hand, it could well
impose some substantial additional costs on firms, especially foreign firms,
whose consolidated audits are prepared by non-U.S. auditors, and further
hearings and comments on the proposal would be appropriate.
1.
Affidavit of John Bartlett, Bank of England, July 5, 1991.
2.
S. Hrg. 102-350 Pt. 1 p. 498 and 500.
3.
S. Hrg. 102-350 Pt. 1 p. 516.
4.
Commentary, Massihur Rahman, Price Waterhouse Section 41 Report to the Bank of
England, June, 1991.
5.
Memorandum submitted by Price Waterhouse in response to questions from the
British Treasury and Civil Service Committee of the House of Commons; provided
to the Subcommittee by counsel to Price Waterhouse (UK), February 5, 1992,
Answer 1.
6.
Section 41 Report, Price Waterhouse, Bank of England, June 1991.
7.
Letter, Gilbert Simonetti, Jr., Price Waterhouse, to Jonathan Winer,
Subcommittee staff, October 17, 1991.
8.
For the record, Price Waterhouse (UK) did offer to provide the Subcommittee
with the opportunity to interview Price Waterhouse (UK) partners in London
without the provision of the subpoenaed documents, an offer precluded by
Subcommittee rules regarding staff travel, and which, in the absence of the
provision of the subpoenaed documents would have been of marginal utility in
any case.
9.
S. Hrg. 102-350 Pt. 1 p. 496.
10.
Price Waterhouse Grand Caymans papers dated December 31, 1983.
11.
"Commentary on the Independent Examination of the Accounts of Bank of
Credit and Commerce International (Overseas) Ltd. for the year ended 31
December 1984," Price Waterhouse Grand Caymans.
12.
"Internal Control Report," 28 April 1986, Bank of Credit and Commerce
International (Overseas) Ltd., S. Hrg. 102-350 Pt. 4. pp. 152-155.
13.
Price Waterhouse report to BCCI, id, S. Hrg. 102-350 Pt. 4 pp. 152-155.
14.
S. Hrg. 102-350 Pt. 1 p. 500.
15.
Staff interviews, Akbar Bilgrami and Amjad Awan, July 20-30, 1992.
16.
Memorandum submitted by Ernst & Young in reply to Questions from the
Treasury and Civil Service Committee, February 21, 1992, p. 102.
17.
Memorandum submitted by Ernst & Young in reply to Questions of House of
Commons Committee on Treasury and Civil Service, February 21, 1991, p. 101,
Fourth Report, Banking Supervision and BCCI.
18.
Id.
19.
Memorandum submitted by Ernst & Young in reply to Questions from the
Treasury and Civil Service Committee of the House of Commons, February 21,
1992.
20.
Price Waterhouse Audit Report, "Our Large Exposures," December, 1987,
BCCI, Subcommittee document.
21.
Id.
22.
Id, re "AR Khalil."
23.
Id.
24.
S. Hrg. 102-350 Pt 1 p. 264.
25.
S. Hrg. 102-350 Pt. 1 p. 307.
26.
S. Hrg. 102-350 Pt. 1 pp. 314-316.
27.
S. Hrg. 102-350 Pt. 1 pp. 317-324, 332-343.
28.
S. Hrg. 102-350 Pt. 1 p. 352.
29.
S. Hrg. 102-350 Pt. 1 p. 353.
30.
S. Hrg. 102-350 Pt. 1 pp. 356-358.
31.
S. Hrg. 102-350 Pt. 1 p. 360.
32.
Memorandum submitted by Price Waterhouse in reply to Questions from the
Committee on Treasury and Civil Service, February 5, 1992.
33.
S. Hrg. 102-350 Pt. 1 p. 518.
34.
S. Hrg. 102-350 Pt. 1 pp. 518-520.
35.
S. Hrg. 102-350 Pt. 1 pp. 450-458.
36.
Staff interviews, Nazir Chinoy, Abdur Sakhia, Akbar Bilgrami.
37.
S. Hrg. 102-350 Pt. 1 p. 481.
38.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1992.
39.
BCCI Annual Report For the Year 1989, dated April 1990.
40.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1991.
41.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1991.
42.
Id. Price Waterhouse's findings of the Section 41 report are reviewed in some
detail in the chapter concerning BCCI's criminality.
43.
S. Hrg. 102-350 Pt. 1 p. 279.
44.
S. Hrg. 102-350 Pt. 4 p. 50.
45.
S. Hrg. 102-350 Pt. 4 p. 53.
46.
S. Hrg. 102-350 Pt. 4 p. 92.
47.
BCCI Loan documents obtained by Subcommittee; some reprinted in S. Hrg. 102-350
Pt. 2 pp. 624-629.
48.
BCCI Documents, Federal Reserve, Miami, obtained pursuant to Committee
subpoena.
49.
Letter, James E. Tolan to Jonathan Winer, March 4, 1992.
50.
Bilgrami testimony, S. Hrg. 102-350 Pt. 6, July 30, 1992, and staff interviews,
July 20-29, 1992.
51.
S. Hrg. 102-350 Pt. 4 pp. 15-23.
52.
Testimony Bench, S. Hrg. 102-350 Pt. 4 pp. 36-37.
53.
Staff interview, Bench, February 14, 1992.
54.
S. Hrg. 102-350 Pt. 4 pp. 36, 85.
55.
S. Hrg. 102- 350 Pt. 4 p. 86.
56.
S. Hrg. 102-350 Pt. 4 p. 89-91.
57.
Professor Richard Dale, Minutes of Evidence Taken Before the Treasury and Civil
Service Committee, id, January 15, 1992, p. 4.
Introduction
The relationships involving BCCI, the CIA, and
members of the United States and foreign intelligence communities have been
among the most perplexing aspects of understanding the rise and fall of BCCI.
The CIA's and BCCI's mutual environments of secrecy have been one obvious
obstacle. For many months, the CIA resisted providing information to the Subcommittee
about its involvement with and knowledge of BCCI. Moreover, key players who
might explain these relationships are unavailable. Some, including former CIA
director William Casey, and BCCI customers and Iranian arms dealers Ben
Banerjee and Cyrus Hashemi, are dead. Others, including most of BCCI's key
insiders, remain held incommunicado in Abu Dhabi. While promising in public
hearings to provide full cooperation to the Subcommittee, to date the Abu Dhabi
government has refused to make any BCCI officers available for interview by the
Subcommittee. Former BCCI chairman Agha Hasan Abedi remains severely
incapacitated due to a heart attack. Finally, some persons in a position to
know portions of the truth have denied having any memory of events in which
they participated and of documents which they reviewed.
A baseline for assessing the BCCI-CIA story is the
CIA's official record of its use of BCCI and its targeting of the bank, as set
forth in several hundred CIA records created from 1982 through 1992. That
record was, by and large, accurately represented by CIA acting director Richard
Kerr in public testimony on October 25, 1991, supplemented by more detailed,
classified testimony on October 31, 1991. Unfortunately, that record also
contains ostensible gaps in knowledge on the part of the CIA about the
activities of key contacts in the Middle East for U.S. intelligence --
including BCCI shareholders Kamal Adham and Abdul Raouf Khalil, and BCCI
customer and Iran/Contra arms merchant Adnan Khashoggi -- which strain belief.
Outside the documentary record provided to the
Subcommittee by the CIA, there is additional material, consisting of BCCI
documents, testimony from BCCI officials and insiders, and extrinsic,
circumstantial and historic information describing other substantial contacts
between BCCI and the intelligence community. These include contacts between
BCCI and:
** former U.S. intelligence officials, including a
former head of the CIA;
** former and current foreign intelligence
officials; and
** individuals engaged in covert operations on
behalf of the United States government, including in the Iran/Contra affair.
In addition, the Subcommittee has received
allegations of meetings between former CIA director William Casey and BCCI's
head, Agha Hasan Abedi.
CIA officials have told the Subcommittee that the
CIA as an institution has rules requiring the creation of written records on
every activity engaged in by the Agency, and on all significant information
reported to the Agency. In the summer of 1991, the CIA engaged in what its
officials described as a "dumb" or "brute force" review of
its documents, essentially reviewing all possible files for information on
BCCI, rather than relying on knowledgeable individuals to select such
information. The review located a substantial amount of material generated by
the CIA throughout the 1980's, which was produced in July and August, 1991 for
CIA internal reviews, in September and October for the Congressional
intelligence oversight committees, and beginning in March, 1992, to the
Subcommittee.
Unfortunately, there remains a wide disparity
between the CIA's official account of critical relationships between BCCI and
persons associated with the CIA, and the information available from other
sources, including BCCI's own records. One is left with the choice of accepting
the official record, which requires an assessment that the other contacts
between BCCI and U.S. intelligence figures and operations are coincidental, or
of assuming that the full story of BCCI's relationship to the United States has
been intentionally veiled by critical players on both sides of that
relationship.
The
Subcommittee Investigation and the CIA
The Subcommittee's contact with the CIA regarding
BCCI began in March, 1991, when staff learned from a Subcommittee source that
the CIA had prepared a report concerning BCCI's criminality which was made
available to Customs in late 1988. Cleared staff contacted the CIA's
congressional liaison office to request a copy of the document. The staff was
told that no such document had ever existed. Perplexed, staff contacted its
source to determine whether he was certain that the material had been provided.
The source referred staff to former Customs Commissioner William Von Raab, who
confirmed the existence of the document. Staff contacted the CIA a second time,
and informed the agency that a senior Reagan administration official had viewed
the document. Again, the Subcommittee was told that no documents concerning
BCCI had ever been created by the CIA.(1)
Staff then met with Von Raab, who revealed that not
only had the CIA provided him with a briefing paper regarding BCCI, but that he
obtained it through the offices of then-CIA assistant director Robert Gates,
who referred to BCCI as "the Bank of Crooks and Criminals." Von Raab
also advised the Subcommittee that Customs agents handling the C-Chase
investigation of BCCI had discovered in the course of their work several BCCI
accounts that were actually accounts held by the CIA. Von Raab told Subcommittee
staff that his agents were told to cease their investigation of those
particular accounts.(2) However, in an interview with Subcommittee
staff, AUSA Mark Jackowski denied that he had ever uncovered any CIA
involvement with the bank and Assistant Attorney General Robert Mueller
testified that "at no time ...has anyone from the CIA ... attempted to
obstruct or interfere with the Department of Justice's investigation and
prosecution of BCCI."(3)
On May 14, 1991, Senator Kerry wrote CIA Director
Webster to again request the briefing paper on BCCI prepared by the CIA, as
well as information on the CIA's own use of the bank. No reply was received in
response to this letter from the CIA for over two months, during which BCCI was
closed globally following its seizure in the United Kingdom by the Bank of
England on July 5, 1991.
In the meantime, cleared staff requested a formal
briefing from CIA staff concerning the CIA's knowledge of BCCI's activities.
The CIA provided an oral briefing at its offices in June, 1991 at the
"secret" level, consisting of very general information concerning
BCCI's use by drug traffickers, material which was by then already largely a
matter of public record. The briefer provided by the CIA to Congressional staff
was unfamiliar with other basic information about BCCI, such as the names of
BCCI's shareholders, including former Saudi intelligence chief Kamal Adham, the
key figure in BCCI's secret takeover of First American, and the CIA's former
principal contact in the Arab Middle East. Further, the briefer also appeared
to be ignorant of the principal analytic documents concerning BCCI previously
prepared by the CIA and disseminated to Executive Branch agencies, which
contained this and other more important information about BCCI.(4)
On July 23, 1991, CIA director Webster replied to
Senator Kerry's May 14 request by letter, admitting to the existence of two
documents concerning BCCI, which were described as "extremely
sensitive" and therefore restricted to being held by the Senate intelligence
committee.(5) On reviewing these memoranda, Senator Kerry recognized
that the earlier of the two documents, created in early 1986, contained
startling information -- that the First American Bank in Washington was
secretly owned by BCCI. The distribution list attached to the memorandum
indicated that the CIA had communicated this information at the time to the
Treasury Department. These was no indication that either Treasury or the CIA
had ever advised the Federal Reserve, the primary regulator of First American,
of this critical information.
Senator Kerry asked Judge Webster to declassify
immediately the fact that the CIA had known as of 1986 that BCCI owned First
American, and to begin the process of declassifying the entirety of both
memoranda. On July 31, 1991, the CIA advised Senator Kerry that he could reveal
the information concerning BCCI's secret ownership of First American, but no
other information from the memos. The CIA had not yet acknowledged its own use
of BCCI to the Subcommittee, or provided access to any other materials prepared
by the CIA concerning BCCI.
When the single sentence from the 1986 memorandum
was declassified, Senator Kerry supplied it immediately to the Federal Reserve,
whose counsel expressed shock that the CIA, Treasury, State Department, and
Office of the Comptroller of the Currency had possessed this information in
1986 and never provided it to the Federal Reserve.(6)
On August 2, 1991, with Congress in recess, acting
CIA director Richard Kerr chose to provide the first public account of the
CIA's involvement with BCCI at the National Press Club, to a group of high
school students, who were not permitted to ask questions.
During the August recess, the Senate Select
Committee on Intelligence began its audit of the CIA's relationship with BCCI,
and requested that the CIA provide its auditors with all documents prepared by
the CIA concerning BCCI. In the same period, the CIA began its own internal
reviews of its handling of BCCI, including a management review, an intelligence
review, and an "independent investigation" by the CIA's statutory
Inspector General.(7) By the end of August, 1991, the CIA had
determined that there were several hundred reports on BCCI by the CIA, of which
perhaps four dozen contained substantial information regarding the bank.
Through early October, 1991, in response to further
requests from Senator Kerry, the CIA continued to refuse to declassify any of
the remainder of the information concerning BCCI on the ground that to do so
might imperil sources and methods. The CIA also remained unwilling to permit
staff outside the Intelligence Committees to review this material. As CIA legal
staff later explained it, the CIA was unaccustomed to providing information
pertaining to oversight issues to staff outside the Intelligence Committees,
and felt uncomfortable with the questions being posed by the Subcommittee.(8)
Ultimately, Acting Director Richard Kerr agreed to
testify before the Subcommittee concerning BCCI in public, after Senator Kerry
advised the CIA that the nomination of CIA director Robert Gates would be
delayed until the CIA provided such testimony.
On October 25, 1991, Acting Director Kerr testified
in open session before the Subcommittee regarding the CIA-BCCI relationship,
expressing from his opening statement his personal discomfort about providing
information concerning intelligence matters in public:
As an intelligence officer for 30 years, I find
myself a little reluctant in an open hearing to talk about intelligence,
intelligence sources, and intelligence methods, and the information that we
acquire through that process (emphasis added).
Despite Kerr's reluctance, the information contained
in his testimony, summarized below, substantially advanced the Subcommittee's
knowledge of the official record regarding the CIA's contacts with BCCI. For
example, the Subcommittee learned for the first time that there were not two
memoranda regarding BCCI prepared by the CIA, but hundreds which had been
disseminated to other agencies. Kerr also disclosed that he had provided the
Treasury Department with information about BCCI's secret ownership of First
American in 1985, a year earlier than previously known, and implying the
existence of a separate memorandum to Treasury not previously acknowledged.
Kerr refused to answer a number of questions in open
session. In closed session the following week, Kerr acknowledged that several
of the questions he refused to answer did not refer to classified information
or concern national security. Instead, he had refused to discuss the
information in open session because he felt uncomfortable discussing
information in public that might embarrass the United States, or any U.S.
agency or official.(9)
Initially, Kerr resisted providing the Senators
serving on the Subcommittee the opportunity to review the documentary material
pertaining to BCCI created by the CIA, suggesting instead that the CIA provide
the Senators only general information characterizing the number of reports and
the general substance, to "protect sources and methods." Following
the closed session, during which Senator Kerry pressed again for the documents,
it was agreed between the Subcommittee and the CIA that all the memoranda
prepared by the CIA concerning BCCI would be sent to the Senate Intelligence
Committee storage facility to permit review. Months later, that material had
still not been provided.
Finally, on February 18, 1992, some eleven months
after the Subcommittee had first sought information concerning BCCI from the
CIA, Director Gates, after meeting with Senator Kerry, directed the CIA to
permit staff to review additional records at the CIA pertaining to BCCI.
Following this directive from Gates, the CIA for the first time made
substantial information regarding its knowledge of BCCI available to the
Subcommittee, although information on CIA operations using the bank remained
unavailable, channeled solely to the Congressional intelligence committees.
The Subcommittee review culminated in the CIA
agreeing to declassify certain material from the 1985 memorandum about BCCI,
discussed below.
The
Official Record
The CIA's first user request in connection with BCCI
was from the Federal Reserve in 1981, which asked the CIA whether the CIA had
any derogatory information concerning the Middle Eastern shareholders who were
about to buy Financial General Bankshares (FGB), which later became First
American Bankshares, through the holding company CCAH. The CIA, after reviewing
its records, told the Federal Reserve that it had no derogatory information on the
shareholders, who included Kamal Adham and Abdul Raouf Khalil, the past and
then-current Saudi intelligence liaisons to the United States.(10)
The CIA did not tell the Federal Reserve that Adham
and Khalil were foreign intelligence liaisons of the United States, nor did it
advise the Federal Reserve that both Adham and a third FGB shareholder, Faisal
al-Fulaij, had been the subject of a Securities and Exchange Commission probe
in connection with violations of the Foreign Corrupt Practices Act by Boeing
and Lockheed for arms sales to Saudi Arabia.(11)
There is conflicting evidence as to whether the
Governors of the Federal Reserve were aware of the intelligence background of
any of the CCAH shareholders. However, at the staff level at least the Federal Reserve
did learn in 1981 of both the intelligence contacts of Adham and the SEC probe
into his and Fulaij's alleged receipt of bribes.(12) Former Federal
Reserve Chairman Paul Volcker, who signed the order approving the application
of CCAH shareholders to take over Financial Bankshares, testified before the
Senate Banking Committee in early 1991 that he "wasn't aware" of Mr.
Adham's intelligence background, and that "he was sure that it might send
an eyebrow or two up," and that "it might provoke further investigation."(13)
Because BCCI was not officially purchasing FGB, and
a condition of the purchase was that BCCI not be involved in the transaction
except as an investment advisor, the Federal Reserve did not ask the CIA about
BCCI itself. If it had done so, it would likely have learned about BCCI's
involvement in money laundering.
According to the contemporaneous CIA records
retrieved during the search of Agency files during the summer of 1991, the CIA
first developed information concerning BCCI, which it provided users in the
U.S. government, in 1979. After learning in the early 1980's that BCCI was, as
an institution, involved in money laundering activities, the CIA began by the
mid-1980's to target BCCI as an institution for foreign intelligence collection.
Initially, this collection operation was small. The CIA began a larger and more
comprehensive operation as of 1986, which continued through 1990. This
operation focused on the "people, the mechanisms, and the way that BCCI
laundered narcotics money."(14)
In the course of targeting BCCI for laundering drug
money, the CIA learned of BCCI's involvement in manipulating certain financial
markets, in arms trafficking, and in supporting international terrorism,
including handling the finances of Sabri Al-Bannah or Abu Nidal, and his
terrorist organization.(15)
Between 1979 and 1991, the Directorate of Operations
of the CIA produced several hundred reports containing intelligence concerning
BCCI. BCCI was also discussed in a number of finished Directorate of
Intelligence analytic studies, as part of larger discussions of terrorism and
counter narcotics.(16) Among these reports was detailed reporting on
the use of BCCI Panama by major narcotics traffickers. The Operations
Directorate also prepared three special analytic reports, incorrectly
characterized by Kerr as having been prepared by the CIA's Intelligence
Directorate, one each in 1985, 1986, and 1989, discussed below in some detail.(17)
Kerr acknowledged that the CIA had also used BCCI
for certain intelligence-gathering operations, and characterized the use as
limited and routine, and undertaken without the knowledge of any person at
BCCI. A Senate Intelligence Committee audit, conducted in the summer and fall
of 1991, confirmed Kerr's testimony on that point, according to a briefing
provided by the auditor to Subcommittee staff. The Subcommittee was not
permitted by the CIA to read the actual report generated by Senate Intelligence
Committee staff, and thus detailed review by the Subcommittee of that audit has
not been possible.(18)
Kerr also acknowledged what the Subcommittee had
learned in testimony just one day previously from former First American
president Robert Altman, that the CIA had made extensive use of First American
for a variety of purposes, including as a repository for "normal
banking" and for savings accounts.(19)
The agency later informed Subcommittee staff that
neither Clifford nor Altman had been made aware of the existence of the
accounts prior to the summer of 1991.
According to Kerr, critical to understanding the
contacts between the CIA and BCCI were a number of things the CIA did not do.
Kerr testified that contrary to press reports, the CIA had not been involved
with any BCCI black network of thugs and assassins, had not been involved with
or had knowledge of any use of BCCI for the same of arms to Iran or the
diversion of funds for the Nicaraguan Contras, had not violated any laws, had
no relationship with BCCI's head, Agha Hasan Abedi, and had never placed Abedi
on a watch list.(20)
The
1985, 1986 and 1989 Reports
The Operations directorate produced two finished
analytic reports regarding BCCI, the first in early 1986, and the second in
early 1989, as well as a special intelligence report in early 1985, which was
the basis of the material provided to the Treasury and to OCC. Kerr testified
that as of early 1985, the CIA had learned that BCCI had succeeded in gaining
control of Financial General Bankshares in late 1981, which then was renamed
First American, and told the Treasury and Office of the Comptroller of the
Currency ("OCC"), about BCCI's secret purchase.(21) Kerr
did not inform the Subcommittee that the original report containing this
information was then lost, and has never since been located by the CIA.(22)
Congressional Relations at the Agency did inform Subcommittee staff that the
author of the 1985 could not be identified. However, in a subsequent meeting,
the Associate Director of Operations informed Subcommittee staff that, indeed,
the author had been identified and that he had been asked to reconstruct the
memo to the extent possible.
The
1985 Report
There are a number of oddities pertaining to the
early 1985 report by the CIA on BCCI.
The first oddity is the fact that original report is
missing and has not been located by the CIA, which has instead, at the request
of the Subcommittee, reconstructed the contents of the report by looking to the
source information it was based upon, and relying on its normal procedures for
analyzing and disseminating similar material.
The second unusual aspect of the report is that the
CIA has records showing it to have been commissioned by the then-head of the
International Division of the OCC, Robert Bench, who has denied under oath
having ever sought the information.
A third oddity is that CIA records also show Douglas
P. Mulholland, then the intelligence chief of the Treasury Department, as
having also solicited the information. Yet like Bench, Mulholland denies having
any recollection of having done so.
Fourth, the information contained in the report --
that BCCI owned First American -- was important and startling, and would have
been so recognized by anyone in the position of Mulholland or Bench -- yet
neither of them recollect that the report discussed this issue. First American
was by then the largest bank holding company in the metropolitan Washington
area, and BCCI's prohibition from ownership had received widespread attention
in the Washington Post and the financial press.
Firth, no action was taken by Mulholland or Bench in
response to this critical information to alert federal law enforcement or the
Federal Reserve, the primary regulator. The CIA, having provided the
information to Treasury and the OCC, believed it had no further obligation to
disseminate the information, either.
In an effort to sort through these anomalies, the
Subcommittee in the spring of 1992 reviewed the material provided by the CIA to
Mulholland and Bench in 1985. During the course of that review, the CIA
provided a complete record to the Subcommittee of all the raw information upon
which the 1985 memo was based. The Subcommittee requested the declassification
of material from the 1985 material concerning First American and the bribery of
officials. The declassification was completed on April 9, 1991, and consisted
of the following account, which excerpts the substance, and on critical factual
issues, the actual language, of the original 1985 material:
The CIA's Summary
Background:
In the early 1980s, as part of the overall U.S.
Government effort to stop international narcotics trafficking, the Agency began
collecting strategic foreign intelligence on narco-dollar money laundering. A
successful intelligence collection operation in the Caribbean developed
operational leads to several major foreign banks, including BCCI, suspected of
narcotics money laundering. Pursuing these leads, CIA initiated a mutually
productive dialogue with international banking experts at the Office of the
Comptroller of the Currency to determine how CIA could meet OCC's intelligence
needs. In late 1984, Agency officers met with a senior official from OCC, who
expressed interest in a broad range of international financial intelligence CIA
could provide. One of several issues in which the OCC official expressed
interest was the takeover efforts and suspicious activities of institutions
such as BCCI, which he specifically cited for its spectacular growth and the
mystery surrounding its activities. In a later meeting, a Treasury intelligence
liaison official expressed the interest of that organization in BCCI because of
a possible concern about the less than wholesome reputation of the bank.
Foreign Intelligence Collection:
In late 1984 and early 1985, the Agency collected
some intelligence on BCCI and disseminated the information to the Treasury
Department. The foreign intelligence provided to the Treasury dealt with
several activities, including the following information.
The primary goal of BCCI senior management was
growth in deposits at all branches internationally. The strategy being employed
by BCCI to achieve rapid growth in assets and profits included manipulation of
international financial markets and bribery, which was an approved policy
encouraged by senior executives, including the general managers and President
Abedi. The objectives of BCCI included developing both profits and
political/economic leverage in the Near East, Africa, and Asia through the use
of a tremendous volume of financial assets. BCCI expansion in the United States
included the secret ownership of the Washington, D.C.-based bank holding
company with which BCCI was affiliated. All of the shareholders in the
Washington D.C.-based bank holding company were fronts for BCCI. BCCI loaned
them the capital to make the purchase in return for their shares as collateral,
which was regarded as a sensitive secret within BCCI management circles. If all
of BCCI's assets in the U.S. were included in their balance sheet, the bank
would be much higher in the worldwide ranking of the top one hundred financial
institutions.
The Agency-Treasury Dialogue:
CIA provided this foreign intelligence to the
Treasury intelligence community liaison representative in January 1985 [Douglas
P. Mulholland], who reported to CIA that he carried it directly to the
Secretary [Donald Regan] for his further disposition. The Treasury intelligence
liaison officer also recommended only two persons in the Comptroller hierarchy
see this material, which he described as "dynamite." The liaison
officer praised this information, promised to keep the Agency fully informed of
Treasury's reaction to it, and provided follow-up collection requirements to
the Agency. These included a request for examples of BCCI management
encouraging the use of bribery. The Treasury liaison officer also requested the
name of the Washington, D.C.-based bank holding company owned by BCCI and the
names of any other U.S.-based companies controlled by BCCI.
In April 1985, Agency officers had a curiously
unsatisfactory discussion with the Treasury intelligence liaison representative
concerning BCCI activities reported earlier by the Agency. The Treasury
official explained that the position of the Treasury enforcement offices was
that the BCCI activities reported by the Agency were not surprising and
complemented the general picture Treasury had of BCCI. The Treasury officer
stated that although his organization was interested in BCCI's activities to
manipulate an international financial market and in the bank's buying into the
U.S. along the lines of its acquisition of Financial General Bankshares [First
American], Treasury was not concerned enough to levy further collection
requirements on the Agency. The Treasury intelligence liaison officer said that
money laundering remained the major focus of Treasury's enforcement side.(23)
What is notable about the information contained in
the memorandum is that it was emphatic on BCCI's ownership of a Washington,
D.C. based holding company, identified by Treasury as First American. The
Treasury's senior intelligence official, Mulholland, initially considered the
information to be "dynamite," but by April, after conferring with
then Secretary of the Treasury Donald Regan, had concluded that Treasury saw no
need for receiving further information about BCCI's ownership of First American,
or its plans in the United States generally.
Mulholland's
Testimony
On February 19, 1992, Douglas P. Mulholland,
currently the Assistant Secretary of State for Intelligence and Research,
testified about his contacts with the CIA concerning BCCI as the special assistant
for national security to the Secretary of the Treasury from 1982 through 1987,
when he was the CIA's chief liaison in the Treasury.
Mulholland, a career officer of the CIA, had been
placed in Treasury by CIA chief William Casey, and left his job at Treasury on
retirement from the CIA in 1987 to become a researcher for the Bush election
campaign, before being appointed to his current position as head of
intelligence at the State Department.
Mulholland described his contacts with the CIA
concerning BCCI as follows:
I have a very limited memory of any specific
documents, discussions, or events relating to BCCI, including any information
that may have been introduced by the intelligence community during the
mid-1980's.
Although I may well have discussed sensitive
information on BCCI with senior department officials, including then-Secretary
Donald Regan, that was not such an unusual experience as to ingrain such a
discussion in my mind. . . With regard to BCCI, I recall only receiving one
report during my time at the Treasury . . . The report was hand carried to me
by a CIA officer who emphasized the sensitivity of the report.
I also recall this report because of its unusual
format. The report lacked any heading or identifying numbers, and was typed on a
plain piece of paper. One substantive aspect of the report struck me as
particularly surprising, but because this information was produced and remains
controlled by CIA, I am unable to discuss with you today any of the substance.(24)
In public testimony, Mulholland therefore declined
to discuss the substance of the single aspect of the report which he found
surprising. However, in interviews with Subcommittee staff prior to his
testimony, Mulholland advised the Subcommittee that his memory concerned a matter
in the CIA report which had nothing to do with BCCI's possible ownership of
U.S. institutions, and that he had no personal memory that the issue was raised
in the report.(25)
Mulholland emphasized throughout his testimony that
his own memory regarding the BCCI report was very limited. He acknowledged that
the CIA's documents reported him having provided the report Secretary Regan,
but he stated he had no personal memory of having done so.(26) He
estimated the frequency of his meetings with Secretary Regan regarding CIA
reports as being anywhere from "zero to one hundred percent" of the
time, and said he had not the "vaguest idea" of how often he had
discussed such matters with the Secretary. He testified that the secondary
source chronology the CIA concerning his activities was plausible, but that he
could not say for certain whether it was correct, as he had no memory of having
asked for any information, or having briefed anyone else on the information.(27)
Mulholland stated that even if he had recognized
that the information contained in the report important, he would not have the
right at the Treasury Department, let alone the responsibility, to take any
action to disseminate the information further, since the CIA was the agency
which created the information and controlled it.(28)
Mulholland acknowledged that he had never received a
comparable report from the CIA about any other bank besides BCCI, and that the
BCCI report was not "normal." He testified that there was no record
maintained at the Treasury Department of the report having been logged in, and
he could not give any reason for this omission.(29)
Mulholland said he had no memory of having
commissioned such a report, despite the CIA's documentary record that he had
done so, and hence, he was unable to provide the Subcommittee with any reason
why any person at Treasury might have asked the CIA to develop information
concerning BCCI in late 1984 and early 1985.
Bench's
Testimony
Bench, like Mulholland, had only a very limited
memory of the 1985 report. As he testified:
I do recall reviewing a classified piece of
information that dealt with BCCI. . . it was somewhere in the middle of the '82
to '87 period. I feel comfortable about that. . . I recall receiving a document
from the CIA that dealt with BCCI. To the best of my recollection it didn't
deal with First American and it didn't deal with anything in the United States.
There is an action step that I took within the office on that information . . .
which was to look at this information in terms of LCD [Lesser Developed
Country] debt.(30)
In staff interviews prior to this testimony, Bench
emphasized that he had no memory whatsoever of having ever been advised that
BCCI held interests in any financial institution in the United States, let
alone First American.(31)
Bench also told staff that not only had he no memory
of having commissioned a report on BCCI, but he would have been unlikely to
have done so in any case, because of the OCC's need to work abroad without
officials from other countries being concerned that it was doing so in
conjunction with U.S. intelligence. Bench was therefore perplexed that the CIA
had identified him as the requester, noting that to the extent he had an
interaction concerning BCCI, it was the CIA asking him if he wanted
information.(32)
Regan's
Recollection
Following the declassification of the 1985
memorandum by the CIA, the Subcommittee contacted former Secretary of the
Treasury Donald Regan to determine what memory he had regarding Mulholland
having provided him with the 1985 memorandum. According to an aide to Regan, he
initially believed he had not been shown the memorandum by Mulholland because
he had left Treasury to take the position of chief of staff at the White House,
and so advised a Wall Street Journal reporter who contacted him at home in
August, 1991. Regan was then contacted by Mulholland in August or September,
1991, who advised Regan that Mulholland had reviewed records at the CIA showing
that he did provide the memorandum to Regan, and that Mulholland had no
personal recollection regarding the matter, either. According to Regan's aide,
Regan still has no recollection of Mulholland ever providing information
regarding BCCI to him.(33)
In reviewing the CIA documents and the testimony of
Kerr, Mulholland and Bench, it appears that the CIA has accurately set forth
the information regarding First American provided Mulholland, Regan and Bench
in 1985, and that Mulholland, Bench and Reagan's memories that the CIA did not
tell them about BCCI's secret control of First American are, at best,
incorrect.
The
1986 and 1989 Reports
While the 1985 report received oddly limited
distribution, the 1986 report, containing most of the key elements of the
earlier report, including the fact that BCCI was owned by First American, was
distributed more widely, to the Department of State, Defense Intelligence
Agency, National Security Agency, National Security Council, Commerce
Department, and to Treasury. Thus, every major CIA user that might be
interested in the information received it, except for the two agencies which
would have had a statutory responsibility to begin investigations in response
-- the Federal Reserve and the Justice Department. However, Treasury logs again
showed no actual receipt of the document, and there is no record of Treasury
having passed the information to its agents in U.S. Customs, including those in
Tampa whose investigation of BCCI lead to its indictment on money laundering
charges in October, 1988.(34) The 1989 report, which provided
detailed information concerning BCCI's criminality, was provided both Customs
and the FBI, and reiterated the information, reported in the 1985 and 1986
memos, that First American was owned by BCCI. Even at this late date, the
Federal Reserve was notified by no one of the existence of the report, or of
any of the material in it.
Unofficial
BCCI-CIA Links
The unofficial story of BCCI's links to U.S.
intelligence is complicated by the inability of investigators to determine
whether private persons affiliated with U.S. intelligence were undertaking
actions such as selling U.S. arms to a foreign government outside ordinary
channels on their own behalf, or ostensibly under sanction of a U.S. government
agency, policy, or operation.
In the 1970's and 1980's, there have been cases of
people with ties to U.S. intelligence engaging in operations on their own
behalf which in fact had no ties to any approved U.S. government interest, such
as former CIA officer Edwin Wilson's illegal arms sales to Idi Amin of Uganda
and to Colonel Qaddafi of Libya. There have been other cases, such as retired
General Richard Secord's arms sales to Iran and to the contras in the
Iran/Contra affair, which are hard to distinguish from Wilson's case, except
for the fact that the sales had actual secret approval and support from
officials within the government, although they were not authorized by law under
the Arms Export Control Act, and although Congress did not receive
notifications required by law from the President.
In the case of BCCI, former CIA officials, including
former CIA director Richard Helms and the late William Casey; former and
current foreign intelligence officials, including Kamal Adham and Abdul Raouf
Khalil; and principal foreign agents of the U.S., such as Adnan Khashoggi and Manucher
Ghorbanifar, float in and out of BCCI at critical times in its history, and
participate simultaneously in the making of key episodes in U.S. foreign
policy, ranging from the Camp David peace talks to the arming of Iran as part
of the Iran/Contra affair.
As early as the mid-1980's, sources in the United
Kingdom were alleging that BCCI was providing services not only to the CIA, but
to intelligence agencies of a number of countries, including the Soviet Union.
For example, a November 5, 1986 letter to the Governor of the Bank of England,
written anonymously, stated the following:
The BCCI is involved in helping people avoid Tax,
illegal transfers of money, Hawala transfers, off the record deposits, conduit
for drug and crime money and also as banker to intelligence agencies for most
major agencies of the world.(35)
Did BCCI, its shareholders, or its officers, perform
services for the United States government during any part of its existence?
Were such services linked in any respect to BCCI's activities, such as its
acquisition of First American? The unofficial record, explored below, raises
these questions but cannot answer them definitively.
Kamal
Adham: BCCI's Godfather of Middle East Intelligence
Kamal Adham, who was the CIA's principal liaison for
the entire Middle East from the mid-1960's through 1979, was the lead front-man
for BCCI in its takeover of First American, was an important nominee
shareholder in BCCI, and remains one of the key players in the entire BCCI
affair. On July 29, 1992, he reached a plea agreement with the District
Attorney of New York, acknowledging that he had been a BCCI front-man in the
United States, and agreeing to provide full cooperation with U.S. law
enforcement in BCCI-related investigations and prosecutions.
Adham was at the time of BCCI's creation in 1972,
the brother-in-law of King Faisal of Saudi Arabia, and the head of Saudi
Intelligence, responsible for internal security and relations with external
intelligence agencies. Press accounts concerning Adham from the late 1970's
refer to him as the "godfather of Middle East intelligence,"
emphasize the closeness of his ties to the Central Intelligence Agency, and
describe his having had responsibility for making payments, on behalf of the
CIA, to Egyptian President Anwar Sadat when Sadat was merely Nasser's Vice
President and having financial troubles.(36) As Bob Woodward
described it:
Relations between the CIA and the Saudi intelligence
service were generally good, going back to the days when the legendary and
enormously wealthy Kamal Adham had been its head. In 1970, the Saudis had
provided then Egyptian Vice President Sadat with a regular income. It was
impossible to determine where Saudi interests in these arrangements ended and
American CIA interests began.(37)
Adham's historic relationship with U.S. intelligence
was indeed unusually close. While Adham was still in place as the CIA's liaison
in 1977, the CIA's station chief for Saudi Arabia, Raymond H. Close, chose to
go to work for Adham upon leaving the CIA, according to press reports at the
time which Close has only denied since the BCCI scandal broke.(38)
As Jeff Gerth of the New York Times reported in 1981:
In the case of Mr. Close, the one time station chief
in Saudi Arabia, former Government officials say his actions, while in the CIA
and since retirement, are often clouded in mystery. In the first place, some
think Mr. Close may still be working for the CIA in some capacity, although he
officially retired in 1977. They add that a further complicating factor is that
some Saudis privately share the same perception.(39)
The Times account describes how Close had actually
given approval to weapons sales from Saudi Arabia to Pakistan in the early
1970's, in contravention of the "official policy" enunciated by the American
ambassador, and states that Close went into business with Kamal Adham upon
leaving the CIA.(40)
Within months of going into business with Close,
Kamal Adham became the "lead investor" for the CCAH group taking over
First American, officially on his own behalf, but in fact, acting as a nominee
for BCCI. On April 23, 1981, Adham personally appeared at the Federal Reserve's
hearing on the First American takeover, to inform the Federal Reserve of his
personal wealth and background, and his desire to be a passive investor. In
that appearance, Adham neglected to tell the Federal Reserve of his background
in Saudi Arabian intelligence, historic ties to the CIA, or that Adham had
acted as the most important liaison between the United States and his long-time
friend, Anwar Sadat, in helping negotiate the Camp David accords.(41)
As President Carter's former Director of the Office
of Management and Budget, Bert Lance, testified,
There was an opportunity there for Kamal Adham to
have done the kind of work he did with regard to Sadat's visit to Jerusalem and
that sort of thing, and subsequently playing a role in regards to satisfying
some of the Arab countries with regard to the action that Sadat had taken, both
in going to Jerusalem and also in Camp David.(42)
The key role played by Adham in Camp David was
apparently to encourage other Arab political figures not to repudiate Sadat for
agreeing to peace with Israel. Although such attempts may have appeared
unsuccessful in terms of public statements by Gulf rulers, it is clear that
many of the Gulf rulers in private provided some support for Sadat, including
then-Crown Prince and now King Faud of Saudi Arabia, who sought to strengthen
ties with the United States as a means of defending the Saud family from a variety
of possible instabilities.
The actual intent of BCCI and its Arab shareholders
in participating with BCCI in the takeover of First American remains a matter
of speculation. One article, appearing in the Washington Post on December 18,
1977, at the very beginning of the takeover efforts regarding First American
and the National Bank of Georgia, described the intent of BCCI and the Arabs as
gaining "access to the administration" through Lance.(43)
The involvement of Gulf leaders in the takeover in Washington at the same time
as the Camp David accords were put into place, would have been recognized
within the Middle East at the time as an important symbolic gesture by each of
them to strengthen ties with Israel's superpower sponsor, the United States. Their
ownership of First American also would have providing a direct means to gain
influence in the U.S. through the ownership of the bank.
To recapitulate: Adham was at the same time in
business with a retired CIA station chief whose activities caused people in the
U.S. and Saudi governments to question whether he was truly
"retired," acting as an intermediary for the U.S. in negotiations
regarding Camp David, and acting as a phony "lead shareholder" in a
take-over of the largest bank in the nation's capital on behalf of BCCI. The
simultaneity was thus either part of a larger political plan of Adham, BCCI,
and people within the Carter Administration and the CIA, or merely a
coincidence.
Questioned about the concurrence of these events,
Adham has told U.S. investigators that they were unrelated, and thus, BCCI's
purchase of First American was not a quid pro quo for Camp David. Instead,
Adham has suggested that his involvement in these events, and BCCI's later
involvement in financing the Presidential library, charities, and travel of
President Jimmy Carter, for whom Camp David was the major achievement of his
presidency, were in fact coincidence.(44)
Clark Clifford, in sworn interrogatories, stated
that he, too, believed Adham's roles in Camp David and in the simultaneous
takeover of Financial General were coincidence. Clifford stated that while
Adham had told him of his friendship with Sadat, he had not advised Clifford of
having any role in Camp David.(45)
A fuller account of Adham's role as a front-man for
BCCI from its creation and in connection with the CCAH takeover is contained in
the chapter on BCCI's nominees.
Abdul
Raouf Khalil
Abdul Raouf Khalil, like Kamal Adham, was a BCCI
shareholder and front man from its creation, and a key nominee in BCCI's secret
takeover of First American. Like Adham, Khalil appeared at the Federal Reserve
on April 23, 1981 to tell the Federal Reserve he intended to be a passive
investor. Like Adham, Khalil failed to advise the Federal Reserve that he was,
at the time of the Federal Reserve's hearing, a key figure in Saudi Arabian
intelligence, and its liaison to the United States. Indeed, Khalil's
description of his activities at the hearing were fundamentally misleading on
this point, as they presented Khalil to be nothing more than a private Arab
businessman, who as a friend of Adham, joined Adham to be passive investor of
Middle Eastern money in the stable U.S. banking system. As Khalil told the
Federal Reserve:
My career has been devoted to business and I
presently hold interests in real estate, mechanical and electrical maintenance
projects, and commodities. In addition, I have been involved in some business
ventures with American and British manufacturers for the installation of
electronic and computer equipment in Saudi Arabia.(46)
Khalil did not characterize the kind of electronics
and computers he was installing in Saudi Arabia, or advise the Federal Reserve
of the telling name of one of his businesses: the Saudi Security and Technical
Services Company. In fact, the electronic and computer equipment which Khalil
referred to included the electronic and computer equipment for the Government
of Saudi Arabia, and for its intelligence operations.
Price Waterhouse audit reports suggest that Khalil
had no written contact with BCCI from 1985 on. By the late 1980's, senior
officials of BCCI knew of no way to contact Khalil, and in some cases, such as
that of chief financial officer Massihur Rahman, even doubted his existence.(47)
Yet throughout this period, BCCI used Khalil -- or his name -- extensively as a
nominee in transactions in Latin American and the Caribbean, as well as in
Europe, while Khalil continued to have ongoing contact with the CIA, which
continued, according to law enforcement officials, until well after BCCI's
closure on July 5, 1991. Moreover, Khalil simultaneously was a principal
shareholder and director of Capcom, BCCI's commodities trading affiliate,
throughout this period.
Khalil's continuing ties to the CIA are exemplified
by the experience of U.S. regulators, who asked the State Department in 1991 to
locate Khalil for service of legal documents, and were told that Khalil could
not be located. After some months, the regulators determined that Khalil was
frequently found in the offices of the CIA station chief in Saudi Arabia. Upon
making this suggestion to the State Department, the regulators found that
service of the legal documents on Khalil was quickly arranged.(48)
Former
CIA Director Richard Helms
and
BCCI Front Man Mohammed Irvani
Adham and Khalil were not the only BCCI and CCAH
shareholders with intelligence ties. Before Adham acted as the lead shareholder
in the takeover of First American, another person acted as BCCI's chief
front-man in an earlier, unsuccessful takeover attempt. That man, Mohammed
Rahim Motaghi Irvani, was listed in the original SEC filing in the early, 1978
takeover attempt, as a 5 percent shareholder of CCAH. Irvani was at the time
the principal partner of former CIA director Richard Helms in Helms'
international consulting firm, Safeer, and the chief financier of that firm.
During the time Irvani acted as BCCI's lead front-man in the original takeover,
he received advice on how to be protected from any liability in that role by
Helms. Thus, there were personal, legal, and financial links between Helms and
Irvani at a critical time in the history of BCCI's acquisition of First
American.
Irvani founded the Melli Industrial Group in Iran in
1949 to manufacture footwear and leather goods, and developed close ties to the
government of the Shah of Iran. By the time of the first Financial General
Bankshare's takeover in 1978, the Melli Industrial Group owned 23 operating
companies, as well as joint ventures with foreign firms such as Goodyear and
United Chemical. Irvani also owned the Alwand Industrial Co., which held
interests in the Iran Arab Bank, and had a net worth estimated in financial
documents of over $50 million personally and a financial empire whose corporate
value was as much as $800 million.(49)
Irvani's friendship and financial support were
critical to Helms in this period. Helms, a thirty-year veteran of the CIA and
its predecessor, the OSS, was dismissed in February, 1973 from his position as
CIA director by President Nixon and appointed Ambassador to Iran until 1977, where
he met Irvani. When he returned to the U.S., Helms was indicted for lying
before a Congressional committee concerning CIA activities in Chile. On October
31, 1977, Helms plead no contest to two charges, in return for a recommendation
by the government that he not be sentenced to prison.
In arranging this plea agreement, Helms was
represented by Washington defense attorney Edward Bennett Williams. But in
addition to Williams' negotiations, Helms also called upon Clark Clifford for
help. In the fall of 1977, Clifford visited a top Justice Department official
to argue against an indictment of Helms, saying such charges could damage the
U.S. intelligence community.(50)
Despite Clifford's successful intervention with
Justice, as a result of the guilty plea, Helms was, in the words of the federal
judge who presided over the case, "in disgrace and shame."(51)
It was precisely at this time that Irvani provided a critical lifetime to Helms
through financing the Safeer Company, named for the Iranian word for "Ambassador,"
as an international consulting firm whose initial business was mostly supplied
by Irvani and Irvani's contacts.
According to Safeer Company corporate records and
other documents on file in civil litigation in Atlanta in the case of G&H
Montage, Gmbh v. Irvani, Superior Court of Gwinnett County, Georgia,
88-A-03571-6, 80 percent of Safeer was capitalized and owned by Irvani.
Moreover, much of Safeer's early business activity was handled by Irvani's
former chief U.S. assistant, Roy Carlson, who became Vice President of Safeer
and had close ties to BCCI.
Carlson, who served as a Naval officer in the
Pacific during World War II, joined the U.S. foreign service and was detailed
to South Africa, before moving to the Bank of America, where he spent twenty
years. While working for BOA, Carlson was stationed in Teheran in the 1960's
and in Beirut in the early 1970's. Carlson ultimately became head of the bank's
operations throughout the Middle East and East Africa. During that time, he
came into close contact with Abedi, advising Abedi on the formation of BCCI in
1972, prior to BCCI's incorporation in Luxembourg. In turn, Abedi had
introduced Carlson to Irvani, one of the most successful industrialists in
Iran, who hired him to be manager of the Melli group.
During this period Carlson started his own company,
the "North West Investment Company", which was created in order
"to help expedite shipments through Europe to companies in Iran." (52)
North West invested $120,000 into Safeer Company during its first year, and one
year later, liquidated this investment in Safeer, selling its shares to an
entity, "Brockton Leather Company," which in turn sold them to
Richard Helms for one dollar.(53)
Corporate records obtained from Switzerland in May,
1992 show that North West is still listed as in operation, and that Carlson is
listed as Vice-President of the Company and as a resident of Teheran, although
Carlson lives in Snellville, Georgia. Northwest corporate records also show
that Dr. Marco Jagmetti, the lawyer for Northwest, is a director of Rothschild
Continuation Holdings, a holding company run by BCCI director Dr. Alfred
Hartmann.(54) Although it has not been able to determine if they are
related companies, the Subcommittee has uncovered documents indicating that
BCCI shareholder Kamal Adham was President of a Panamanian holding company
called "North West International".(55)
After the Iranian revolution, Carlson fled Iran and
went to work for Richard Helms in Safeer, on transactions financed by Irvani.
Then, after Ghaith Pharoan purchased National Bank of Georgia from Bert Lance
on behalf of BCCI, Agha Hasan Abedi personally selected Carlson as the new head
of National Bank of Georgia.(56)
A memorandum prepared by BCCI lawyers following a
meeting with Carlson in November, 1990 describes how Irvani by early 1978
became a front-man for BCCI in its takeover of First American, at the very time
Irvani was financing Helms' international consulting firm. The memorandum
described Carlson as telling BCCI the following:
In the mid-1970's, and arising out of the
relationship which had grown from Agha Hasan Abedi's involvement with Irvani
over Iran Arab Bank, Agha Hasan Abedi had invited Rahim Irvani to take a 5%
stake in [First American]. Carlson said that Agha Hasan Abedi wished the
consortium holding the shares to have a broad background including those from
Iran. Carlson said the material produced at trial purported to indicate that
Rahim Irvani had applied to Credit & Commerce Americas for a loan in order
to purchase the share stake... The investment had not proceeded because
firstly, Rahim Irvani had never been keen to make the investment at all, but
had been persuaded that he could do so on the basis of the loan to be made to
him [by Abedi and BCCI.](57)
When Irvani agreed to act as a front-man, Richard
Helms drafted legal language to protect Irvani against possible liability for
the use of his name as a shareholder by Abedi, BCCI, and the Clifford law firm.
A telex from Helms to Irvani, dated October 20, 1978, describes Helms'
assistance to Irvani as follows:
Roy Carlson asked on October 19 that I have an
independent attorney review the seven documents he sent me by telex. . . you
are not running undue risks.
Carlson also told me that you wanted a draft of a
simple agreement which would hold you harmless in these arrangements. The text
of this agreement is as follows:
LETTER AGREEMENT. For value received, the
undersigned jointly and severally agree to indemnify you from any liability,
loss, or damage, including reasonable attorneys' fees, arising out of or caused
by your granting, as shareholder or a director, a power of attorney to any
partner of Clifford, Glass, McIlwain and Finney, a Washington D.C. law firm, to
act in your name with respect to the transaction involving Financial General
Bankshares of Washington, D.C.(58)
The telex ended with the sign-off, "With
Warmest Regards, HELMS."
With this suggestion, Helms was assisting Irvani in
acting as a front-man for BCCI, who would not be at risk for the use of his name
by the BCCI group represented by Clark Clifford and Robert Altman. Helms was
assisting Irvani in his acting as a BCCI front-man in the takeover being
handled by Clifford just
one year after Clifford had assisted Helms in his
negotiations with the Justice Department on his perjury indictment.
Irvani's role in the takeover was acknowledged
recently by his son, Bahman Irvani, who told the Atlanta Constitution that his
father "lent his name to the 1978 takeover bid at the request of BCCI
founder Agha Hasan Abedi."(59)
Despite the existence of the October, 1978 telex
from him to Irvani regarding how to structure the hold-harmless agreement for
Irvani to the Clifford firm in the original FGB takeover, Helms has recently
denied that he was involved in the transaction, terming the allegation
"totally untrue . . . absolute nonsense."(60)
Irvani's role in BCCI's initial attempt to acquire
Financial General ended with the Iranian revolution in January 1979, as he
became an unnecessary nominee.
Over the following decade, Irvani, Carlson, and
Helms continued to interact with one another and with BCCI.
Helms provided introductions for Irvani to then U.S.
Ambassador to Germany Walter J. Stoessel, Jr in January, 1979, and through
former Senator Albert Gore Senior, contacted Senator Bumpers' office for
assisting on locating rice dealers for Irvani. Helms and Irvani also continued
to refer business to one another.(61)
During the 1980's, Helms continued to introduce
Irvani to prominent Americans, writing Vice President Bush on Irvani's behalf
in October 29, 1987, forwarding an October 16, 1991 letter from Irvani to Bush,
and forwarding letters of congratulations from Irvani to President-elect Bush
and Secretary of State James Baker on November 28, 1988. None of the actual
letters from Irvani to George Bush discussed in the Helms-Irvani correspondence
have been located. But the cover letter from Irvani to Helms on the October 16,
1987 letter, refers to Irvani's desire to provide Vice President Bush with
advice on his presidential campaign.(62)
Helms took other steps on Irvani's behalf, including
introducing Irvani's son Ali to Ambassador Paul Nitze, arms control advisor to
President Reagan, and writing to U.S. Ambassador to Egypt Frank Wisner on
Irvani's behalf on May 22, 1989. Helms introduced Irvani's son, Ali, to former
CIA station chief for Saudi Arabia Raymond Close -- who had previously worked
for Irvani's successor as BCCI's lead front-man in the First American takeover,
Kamal Adham -- on July 11, 1989.(63)
Throughout this period, BCCI financed Irvani
investments in the United Kingdom and in the United States, which in 1989
amounted to $38 million in a single transaction to buy a New York office
building, 140 East 58th Street. Other BCCI documents show numerous loans,
typically of millions of dollars at a time, to the Irvani family, as well as
indications that the Irvanis also received substantial loans from the National
Bank of Georgia, both while that bank was owned by BCCI through Ghaith Pharoan,
and after Pharoan was replaced as a nominal owner by First American.
BCCI
and William Casey and His Network
On February 23, 1992, NBC News broadcast the
allegation that former Director of Central Intelligence William Casey met
secretly for three years with Abedi, that such meetings took place every few
months at the Madison Hotel in Washington, D.C., and that they discussed
matters relating to U.S. arms deals to Iran and the arming of Afghani rebels.
Prior to the broadcast, NBC contacted the CIA and
was advised of the following by the CIA:
"An extensive search of CIA files and cable
traffic revealed no evidence that CIA was involved in or had any knowledge of
any use of BCCI for the sale of arms to Iran or the diversion of funds for the
Nicaraguan contras, in connection with the Iran-contra affair."(64)
Previously, Kerr had testified before the
Subcommittee on October 25, 1991 that:
allegations that the Agency had any direct or
indirect relationship with Abedi or recruited him for CIA activities are
absolutely baseless.(65)
According to the CIA in February, 1992, the CIA
found "no records or evidence whatsoever to indicate that former Director
Casey or the Agency had any sort of relationship with Abedi."(66)
Balanced against these flat denials are statements
to the contrary by one BCCI official in a position to know to U.S. officials.
The BCCI official explicitly described meetings between Casey and Abedi at the
Madison Hotel in the mid-1980's, identified one other person who had personal
knowledge of the meetings, and provided an account which one U.S. official
deemed credible.(67) In addition, there are statements by BCCI
officer Abdur Sakhia and Bert Lance that each had noticed in 1985 a change in
Abedi's attitudes towards the United States, which they attributed to his
developing a relationship with the CIA.
Sakhia testified that in 1984, he was told by Abedi,
or one of his associates in London that Abedi was uncomfortable about
travelling in the United States because he feared he was on a CIA watch list,
but that as of a year later, Abedi's attitude had changed completely, giving
Sakhia an impressions that "a deal had been struck somewhere."(68)
Lance provided a more detailed account, describing a
meeting with Abedi at a symposium on conflict resolution at Emory University
sponsored by President Carter in October 1983:
What [Abedi] said was . . . from the precise moment
that Ronald Reagan was sworn in as President of the United States, I have been
on the CIA Watch List. And my every movement, my every act, whatever I do,
personally as well as through BCCI, is noted, watched, observed, under
surveillance of the Central Intelligence Agency. . . I said: Well, why, Mr.
Abedi? . . . And he said something that was very interesting, Mr. Chairman. He
said: You have to understand that I fall into the category of being a Third
World liberal . . .(69)
According to Lance, Abedi's attitude and concern
about the CIA suddenly changed significantly in 1984. Where he had been
concerned about making visits to the United States, and about expanding his
operations in the United States, he now felt confident, leading Lance to
conclude that Abedi had received "an assurance" that the U.S.
government would no longer impede his activities. Lance, acknowledging he had
no hard evidence for his assertion, nevertheless concluded that the CIA had
made an effort "to coopt Mr. Abedi and BCCI, and in effect, turn them into
the bank of the CIA."(70)
Neither Lance nor Sakhia had been exposed to the
other's testimony at the time of making these statements, or had ever met one
another.
One possible explanation of the contradictory
accounts is that Casey undertook actions in the foreign policy or intelligence
sphere while director of the CIA outside its record keeping and operations. The
CIA's legal department has described such activity by Casey, including any role
he had in the Iran/Contra affair, as being undertaken in his position as an
advisor to the President, rather than in his position as Director of Central
Intelligence.(71) In such cases, Casey would have taken actions
which were outside the record keeping of the CIA, undocumented, fully deniable,
and effectively irretrievable.
Iranian
Arms Deals and Dealers
Regardless of whether Abedi and CIA director Casey
concluded a deal under which BCCI would provide off-the-books assistant to any
unofficial or "off-the-books" operation of Casey, BCCI was
incontestably used by key Iran/Contra figures to finance arms shipments to Iran
in connection with the secret Reagan Administration initiative. CIA records, as
well as Kerr's testimony, state the CIA did not know this. However, the record
is clear that a number of BCCI officials knew of the U.S. government arms sales
to Iran at the time. Ironically, BCCI knew of this Reagan Administration
initiative at a time when the Iranian arms sales remained secret not only from
the U.S. public but the Congress, and at a time when the CIA knew that BCCI was
a criminal enterprise.
BCCI was also involved in a number of other Iranian
arms sales after the fall of the Shah, some of which appear not to have been
completed, and others of which appear not to have involved the United States.
In still other cases involving BCCI's use for arms sales to Iran, it is simply
not possible to determine the extent of involvement by U.S. officials.
BCCI was used from the late 1970's in London by
Iranian arms brokers who became the central figures in the "October
Surprise" allegations of secret negotiations with Iran involving Casey and
Iranians over the fate of U.S. hostages. It was also used by Iranian arms
dealers in Britain who never completed arms sales with Iran. Most important, it
was extensively used by Adnan Khashoggi and Manucher Ghorbanifar in arms deals
that were directly on behalf of the United States.
1984-1986:
Adnan Khashoggi and Manucher Ghorbanifar
Both Saudi businessman Adnan Khashoggi and Iranian
arms merchant Manucher Ghorbanifar were central agents of the United States in
selling arms to Iran in the Iran/Contra affair. According to the official
chronologies of the Iran/Contra committees, Khashoggi acted as the middleman
for five Iranian arms deals for the United States, financing a number of them
through BCCI; and Ghorbanifar was the individual who conceptualized the
arms-for-hostage negotiations, and provided the initial channel to the
"Iranian moderates" with whom the Reagan Administration negotiated
prior to delivering shipments of U.S. TOW missiles and HAWKs to Iran in 1985
and 1986.
Khashoggi was served as the "banker" for
arms
shipments as the undercover scheme developed in 1985
and 1986. Khashoggi himself said he advanced $1 million in August 1985 to
"get the deal going." According to his own and other published
accounts, he provided some $30 million in loans altogether, depositing money in
a Swiss bank account controlled by Lake Resources, the company run by former
White House aide Oliver North, who played the pivotal role in the operation
involving the arms sales and diversion of funds to Nicaraguan Contra rebels.
Both Khashoggi and Ghorbanifar banked at BCCI's offices
in Monte Carlo, and for both, BCCI's services were essential as a means of
providing short-term credit for sales of arms from the U.S. through Israel to
Iran. Khashoggi's use of BCCI for the Iranian arms sales was first described,
in passing, in an Iran/Contra committee deposition on June 8, 1987, describing
the movement of $10 million from Credit Swisse which would to through BCCI four
times to produce $40 million of sales "and therefore, additional
profit." In the same deposition, the witness, Khashoggi business manager
Emanuel Floor, described Ghorbanifar as stating, "these are my
associates," and writing down the name, "BCCI." Floor described
BCCI as acting not merely as Ghorbanifar and Khashoggi's bank for the purpose
of these transactions, but as an actual partner in the Iranian arms deals.(72)
As described in detailed Subcommittee testimony by
BCCI Paris manager Nazir Chinoy on March 18, 1992, Khashoggi came to Paris to
meet with Chinoy in early 1986 to discuss continuing transactions he had until
then been conducting through BCCI's Monte Carlo branch. According to Chinoy,
the meeting was set up when Chinoy wished to learn more about the reasons for
the sudden increase in assets and activity of the Monte Carlo branch of BCCI,
which was under his jurisdiction as chief manager for the French region of the
bank. He learned from Manir Karim, the branch manager for Monte Carlo that most
of the new assets and activity were the result of a very successful
relationship that had been developed with Saudi arms dealer Adnan Khashoggi.
Khashoggi had two to three "very active" deposit accounts at Monte
Carlo, according to Chinoy, and kept very large balances there, paying
"his crew" through travellers checks at the rate of $100,000 to
$150,000 each month. Chinoy decided to learn more, and met with Khashoggi and
Karim in BCCI's office in Paris:
I met Khashoggi in a small room at the bank. He told
me he had a deal, he was to be a supplier, buy American arms through Israel and
supply them to the Iranians. What he wanted was a four-day credit.(73)
Khashoggi told Chinoy he was working directly for
the U.S. government and the CIA, and needed BCCI because none of the parties
involved in the Iran/Contra affair trusted one another:
The Israelis wanted their money for the arms whereas
the Iranians would only pay when the arms physically would reach them. The
Americans wanted their money as soon as they gave their arms to the Israelis
and Khashoggi did not have the money himself at the time. Khashoggi wanted a
revolving $5 million credit, and the charges he was prepared to pay were
generous -- 2% front end fees per transaction. For $2 million you would get
$40,000 per transaction. Then you would get interest at 1 1/2 % over LIBOR for
the actual number of days the overdraft loan or line of credit was operating.
This was juicy.(74)
In meeting Khashoggi, Chinoy learned for the first
time that BCCI had been providing these services for Khashoggi for a number of
months through the Monte Carlo office of BCCI, without the knowledge of the
Paris office, which was responsible for the Monte Carlo office. Karim explained
that there had been at least five transactions as of early 1986, that had never
been detected by other BCCI offices and which had never received formal
approval in writing by BCCI's headquarters in London. This was done by
exploiting BCCI's "float," through BCCI's officer taking a check on a
Thursday or Friday from Khashoggi and holding it over the weekend, while giving
Khashoggi credit for the check immediately. Khashoggi in return would use the
money and make the payments to the Israelis. The arms would be delivered over
the weekend and by Monday or Tuesday Khashoggi would have the check from a
Swiss bank, normally Credit Suisse, where the North/Secord "Enterprise"
maintained its accounts. Credit Suisse would give Khashoggi a "Demand
draft," which BCCI would then cash for its credit on the transaction on a
Tuesday or Wednesday after Khashoggi had his funds from the Iranians.(75)
According to Chinoy, the five or more transactions
had involved eight to ten million dollars in all. Chinoy recognized that the
activity was profitable, but he was uncomfortable about BCCI being involved in
a transaction that secretly involved the U.S., Israel and Iran in arms deals,
and that had not been and would not be approved in writing by BCCI's London
office. Chinoy said that he told Khashoggi he could not continue the deals,
that they would have to stop them. In the weeks that followed, Chinoy noticed
that profits at the Monte Carlo branch fell, indicating to him that his
subordinate had obeyed Chinoy's order. But he then learned that the arms deals
started up again anyway, and that Khashoggi and Karim completed two to three
more transactions out of Monte Carlo totalling $15 million to $17 million
dollars.(76)
In the same period, Chinoy learned from Karim that
Iranian arms sales Manucher Ghorbanifar also maintained a regular deposit
account at BCCI Monte Carlo, in amounts ranging from $2 million to $2.5
million, typically kept in short-term certificates of deposit. Chinoy suggested
to Karim that BCCI sever its relation with Ghorbanifar and was told:
We should let the account be. He is in very good
books with French intelligence, with the American government, he is helping
everybody and he has good accounts in Switzerland and I hope we will get more
money from him.(77)
According to Chinoy, BCCI officers understood that
Ghorbanifar had helped the French government obtain the release of hostages
held in Beirut, and that accordingly, BCCI would strengthen its status in
France by handling Ghorbanifar's business.
Further confirmation for Chinoy's account came from
BCCI's senior office in the United States, Abdur Sakhia, who testified that in
the mid-1987, he was contacted by FBI agents investigating the Iran/Contra
affair who needed to obtain records from BCCI Monte Carlo, which was the
"missing link" in their documentary chain involving the U.S. and
Credit Suisse. According to Sakhia, the FBI told him that a BCCI branch manager
in Monte Carlo had been paid $100,000, "presumably by the U.S.
government," and deposited that check in Switzerland in his own account.
They asked Sakhia to obtain BCCI's records concerning the transaction from
Europe. Sakhia contacted his superiors in London and they discussed whether or
not BCCI should provide the information to the FBI despite the fact that to do
so would violate French secrecy laws. The official at BCCI-London, Ameer
Siddiki, agreed with Sakhia that if BCCI's involvement in Iran/Contra became
known, it would focus dangerous attention on the bank's other activities. BCCI
London informed Sakhia that if the United States government agreed to prevent
BCCI's involvement from becoming public, BCCI would violate French law and
provide the records to the United States. The FBI agreed to this arrangement,
and the records regarding the Iranian transactions were provided by BCCI to the
FBI.(78)
Following this agreement, Sakhia remained concerned
about the fact that the BCCI official involved, Manir Karim, had accepted a
$100,000 bribe to handle the transactions, and deposited them in a non-BCCI
institution, and yet had not been disciplined by BCCI. Based on this and
related information, Sakhia concluded that the handling of the arms sales by
BCCI "was all being orchestrated from London and London was aware of what
was happening."(79)
According to the Iran/Contra deposition of Albert
Hakim, banker for the North/Secord Enterprise, Khashoggi made deposits in the
North/Secord accounts from BCCI in the amount of $2.5 million on February 7,
1986; $2.5 million on February 10, 1986; and two checks of $5 million each on
February 18, 1986. Still additional deposits were made from BCCI by Khashoggi
for $5 million on May 18, 1986. Provocatively, Hakim referred to additional transactions
amounting to millions more involving an entity referred to simply as
"IC" of the Grand Caymans, reminiscent of BCCI's own Grand Caymans
affiliate "ICIC." (80)
Three payments to BCCI from the North/Secord
accounts, including Lake Resources, the account used to finance arms to the
contras, are shown in the ledger books maintained by Hakim on behalf of the
enterprise, amounting to $10 million only.(81) In addition, the
Hakim ledgers show five wire transfers amounting to $346,000 to First American
Bank, which may merely indicate that Secord, North, or the fourth partner of
the enterprise, former CIA agent Thomas Clines, may have had an account there.
Evidence for the involvement of BCCI headquarters in
London and Abedi in the Iran/Contra arms transactions is contained in documents
between BCCI Grand Caymans and BCCI London in March 1986 involving a $10
million arms transaction -- the exact amount referred to by Emanuel Floor as
having been intended for movement through BCCI by Khashoggi and Ghorbanifar,
and tracking the February 18, 1986 payments referred to by Hakim.
The documents, which refer to the use of a front
company "in formation" to handle the transaction, are in the nature
of preliminary discussions regarding whether BCCI would handle the transaction.
But they contain a critical fact: they demonstrate the involvement of
BCCI-London in transactions involving BCCI Monte Carlo and BCCI Grand Caymans.
From Chinoy's point of view, the meaning of the documents is that when he
expressed concern about the Khashoggi transaction, London simply went around
him. From Sakhia's, the documents showed that Abedi had approved the BCCI
project from the beginning. (82)
Ironically, Clark Clifford had his own long-standing
ties to Khashoggi. In 1981, Khashoggi took $250,000 from Northrop intended for
Saudi Arabian Air Force General Hashim M. Hashim. Four years later, Northrop
released documents accusing Khashoggi of demanding the bribe for the general,
and then converting it to his own use, Khashoggi retained Clifford to represent
him in the subsequent federal grand jury investigation of the matter.
Significantly, both Kamal Adham and Faisal al Fulaij, BCCI's front-men for the
1981 takeover, were investigated as well as Khashoggi for taking money from
Northrop and Lockheed in connection with U.S. arms sales to Saudi Arabia.(83)
Perhaps as a matter of coincidence, the business
formed by Secord in May, 1983 immediately upon his retirement from the U.S.
government in partnership with Hakim, Stanford Technology Trading Group
International of Vienna, Virginia, used a BCCI shareholder as its local agent
in Saudi Arabia for contracts to provide security services in the Middle East.
The person who Secord hired to help him acquire Saudi government contracts was
Abdullah Said Bugshan and his brothers. Together, the Bugshan brothers owned
about one half of one percent of BCCI during the period they reprsented Secord
and Hakim in Saudi Arabia. While representing Secord, they had also deposits in
BCCI ranging from $13 million to $21 milllion in BCCI and had outstanding loans
of about $6 million from BCCI.(84)
Other
Iranian Arms Dealers and BCCI
Ben
Banerjee
A recurring question about the Iran/Contra scandal
is the issue of whether there may have been earlier arms sales to Iran, prior
to the period covered by the Iran/Contra Congressional committees. On September
29, 1987, Die Welt, a German newspaper, reported that in 1984, Iran's
ambassador authorized the purchase of 20,000 U.S.-made TOW missiles after talks
between U.S. Lt. Col. Oliver North and Iranian officials in Hamburg. According
to Die Welt, the deal fell through and the weapons were never delivered after
an Iranian contact disappeared with the letter of credit.
According to Die Welt, Iran's ambassador to West
Germany, Mohammad Djavad Salari, signed a letter authorizing the purchase of
the anti-tank weapons worth $264 million, and North, then a member of the U.S.
National Security Council, took part in one
negotiating session on Nov. 20, 1984. The newspaper
said the purchase authorization came after talks in a Hamburg hotel between
Iranians and two British-based arms dealers, Michael J. Aspin, owner of the
weapons dealership Delta Investments and Indian-born millionaire weapons dealer
Ben Banerjee, chief of the British company BR and W. Industries.(85)
Both Banerjee and North denied the allegation.
Documents obtained by the Subcommittee, filed in a
British criminal case later brought against Aspin for fraud in connection with
the attempted sale of the American TOW missiles to Iran in 1984, and a second
attempted sale in 1985, include a "pro-forma invoice," dated November
21, 1985, for the supply and delivery of 1250 units of BCM 71A TOW MISSILES,
manufactured in the USA, "all brand new in manufacturers original
packing," from B.R. & W. Industries, Ltd., signed by Ben Banerjee,
U.S., denominated "lift trucks" for the purpose of bank and customs
documentation, and handled by BCCI in London. The invoice was accompanied by
telexes and letters on BCCI stationary of a nature and type ordinarily used by
BCCI, showing BCCI providing counter guarantees and letters of credit for a
transaction involving the "lift trucks" in November and December,
1985, involving the Iranian government and its bank, Bank Melli, and channeled
through the Arabian Gate General Trading Co. of Dubai, United Arab Emirates.(86)
In staff interviews, BCCI Paris manager Chinoy confirmed that Banerjee banked
with BCCI in London and was involved in "large dealings with Iran."(87)
During the Aspin trial, Leslie Aspin, Michael
Aspin's brother, testified that the TOW missile sale was a legitimate sale
authorized by the United States government as part of a 1984 -1985 effort to
ransom CIA agent William Buckley, with the weapons to be transferred from
Portugal to Iran. In a sworn statement of May 1, 1987, Aspin attested that he
and Oliver North opened three joint accounts in BCCI Paris into which North
deposited $5 million on November 15, 1984, and listed the account numbers and
signature cards of the three accounts, one of which was maintained for an
entity called "Devon Island," allegedly, under the signature of North
and Bannerjee, and the other two accounts, which were numbered accounts,
maintained under the signatures of Aspin, Bannerjee and Ghorbanifar.(88)
The Subcommittee has confirmed the existence of
accounts in London involving Banerjee and in Monte Carlo involving Ghorbanifar,
but has not received access to BCCI's accounts in Paris to determine whether or
not the accounts referred to by Aspin existed. North has denied having
maintained such an account. However, BCCI Paris manager Chinoy did learn of an
account in the name "Devon Island" when he received a telephone call
in 1988 from a London office of BCCI asking about it, and was advised by his
assistant that the account existed but had not been used.(89)
Both Banerjee and Aspin are dead. The Subcommittee
is continuing to seek Banerjee and Aspin's records from BCCI's liquidators in
hopes of determining whether the arms sales to Iran in which they were
participated had the backing of or involvement of any U.S. official.
1980:
BCCI and October Surprise: Cyrus Hashemi
The late Cyrus Hashemi, an Iranian expatriate living
in London, is a key figure in the "October Surprise" allegations
charging that William Casey and other members of President Reagan's election
team in 1980 engaged in negotiations with Iran, whereby Iran would delay the
return of U.S. hostages held in Iran until after the November, 1980 election,
in return for the U.S. providing Iran with needed arms for its war against
Iraq. According to these allegations, which are substantially based on states
made by Hashemi's brother Jamshid, who was based in Paris in this period, Cyrus
Hashemi was to have acted as the middle-man in these secret negotiations between
Casey and Iran. Later, Hashemi was indicted by the U.S. Attorney for the
Southern District of New York for weapons dealings with Iran in a case that was
ultimately thrown out of court as a result of complications arising out of the
Iran/Contra affair.(90)
Without reaching any judgments concerning these
allegations, records obtained by the Subcommittee demonstrate that BCCI was one
of the principal banks used by Cyrus Hashemi in the United Kingdom.(91)
Bruce
Rappaport, Alfred Hartmann, and BCCI
Bruce Rappaport, an Israeli-born Swiss businessman
who was investigated in 1987 by Independent Counsel Robert McKay for certain
activities he engaged in on behalf of former CIA director Casey, had several
connections to important participants in the BCCI affair. For example, he
placed one of BCCI's key "rent-a-faces," Alfred Hartmann, who headed
BCCI's secretly-held Swiss affiliate, Banque de Commerce et Placements, on the
board of directors of his Intermaritime Bank of Geneva and New York; developed
a relationship with BCCI's original contact in the U.S., Bert Lance, in the
mid-1980's, and purchased an Antiguan melon-farm from Israeli arms dealers who
were significant customers of BCCI in Miami.(92)
Rappaport's links to BCCI are significant chiefly
because of his relationship to Casey, a frequent golfing partner. For example,
Rappaport threw a party in Washington in the summer of 1985 for Casey to
demonstrate high-level support for a project to build a pipeline to ship oil
from Iraq through Jordan. Rappaport was also the person who allegedly
controlled accounts which received $10 million for the contras provided the
North-Secord operation by the Sultan of Brunei, at the request of Elliot
Abrams. The Iran/Contra Committees were told by Swiss authorities that the $10
million had disappeared, and was found to have "mistakenly" gone to
an unwitting Swiss businessman, who then returned the money after the
Iran/Contra affair was discovered. Press accounts, which Rappaport has denied,
contend that the businessman was Rappaport. If Rappaport did indeed receive the
funds, the placement of the $10 million with him would not likely have been in
error, given his close relationship with Casey.(93)
Oman
While reviewing the complex relationships between
BCCI and the Bank of Oman, which was affiliated with BCCI, the Subcommittee
came across several linkages suggesting ties between the Sultanate of Oman, key
figures in Saudi intelligence and U.S. persons with connections to the
intelligence community.
As a 1985 article in the New York Times noted,
Western intelligence has been a major influence in this tiny, but strategically
placed, Gulf State, adjacent to the United Arab Emirates headed by Sheik Zayed.
Although BCCI is not mentioned in the article, there is a substantial amount of
evidence which demonstrates that both BCCI and the CIA has played a major role
in the foreign policy and economic affairs of that country. The article
discusses a Pasadena corporation, Tetra Tech, operated by a former CIA agent,
which "helps manage several key Omani government agencies."(94)
It is clear that several companies and government
agencies in Oman had multimillion dollar loans from BCCI. BCCI's loan book,
dated March 3, 1991, for example, shows: Oman Aviation Service had an $8
million loan; Oman Building and Contracting Co. had over $11 million; Oman
Flour Mills Co. had a $13 million loan; Oman Development Bank had $13 million;
Oman Investment and Finance Company had a $10 million loan; Oman Building and
contracting Services had a $16 million loan; and Sultanate of Oman had $14
million in loans. These are, of course, only the companies or government
agencies which are clearly identifiable as having an Oman connection: there are
undoubtedly other companies which the Subcommittee has been unable to identify.(95)
Besides the entities listed above, BCCI may have
been moving money through the National Bank of Oman to fund the war in
Afghanistan. British journalists have written:
"BCCI's role in assisting the U.S. to fund the
Mujaheddin guerrillas fighting the Soviet occupation is drawing increasing
attention. The bank's role began to surface in the mid-1980's when stories
appeared in the New York Times showing how American security operatives used
Oman as a staging post for Arab funds. This was confirmed in the Wall Street
Journal of 23 October 1991 which quotes a member of the late General Zia's
cabinet as saying 'It was Arab money that was pouring through BCCI.' The Bank
which carried the money on from Oman to Pakistan and into Afghanistan was
National Bank of Oman, where BCCI owned 29%."(96)
The National Bank of Oman and its CEO, Case Zawawi,
also did business with Bruce Rappaport. Jerry Townsend, the President of
Colonial Shipping in Atlanta, told the Subcommittee that his former employer,
Bruce Rappaport, had business relations in Oman with Case Zawawi at the
National Bank of Oman. Townsend, who claims to have worked as a soviet analyst
with the CIA, was employed by Rappaport between 1981 and 1990. Townsend
recalled that Rappaport flew Zubin Mehta and the London Philharmonic to Oman on
one occasion to entertain the Sultan and other members of the royal family.
More importantly, according to Townsend, Rappaport and Zawawi had numerous
"contracts with the Saudis." The consolidated loan report for BCCI of
March 3, 1991 shows a loan authorization of almost $11 million to the Zawawi
group with an outstanding balance of nearly $8 million.(97)
Conclusions
Key questions about the relationship between U.S.
intelligence and BCCI cannot be answered at this time, and may never be
answered, without the ability for investigators to review BCCI records and
interview BCCI witnesses held by the government of Abu Dhabi. Other questions
could be answered from documents available in the United Kingdom, and
subpoenaed by the Committee, but for the decision by the British judge on an
application of BCCI's liquidators not to permit the Committee to receive them
without the written "permission" of the depositors involved, such as
Abu Nidal, and the deceased Ben Banerjee and Cyrus Hashemi. Still other BCCI
documents in the United Kingdom have been segregated and sealed by British
intelligence (MI-5), and withheld from dissemination to anyone.(98)
Finally, other relevant information in the
possession of the CIA concerning certain important figures in BCCI's history
remains classified, and hence outside the scope of this report. Summaries of
some of this classified material have been provided to staff in a classified
form that cannot be referred to. However, even there, the underlying material
upon which these summaries were based, has been withheld, and therefore any
additional relevant information the underlying material may contain can only be
a matter of speculation.
However, even by its own account of its activities,
the CIA made two significant mistakes in its handling of BCCI.
First, the CIA failed to provide the critical
information it had gathered to the correct users of the information -- the
Federal Reserve and the Justice Department. Kerr testified that he was
"not sure it was a bad decision," a judgment challenged immediately
during the hearing by Senator Hank Brown, who noted:
My training was that somebody's supposed to take
responsibility. . . . And when a decision is made that is a bad decision, you
identify who made it. . . You may feel a failure to get information about a
criminal activity to the Federal Reserve is not [a bad judgment], I have a
different view of it.(99)
Second, even when the CIA knew that BCCI was as an
institution a fundamentally corrupt criminal enterprise, it used both BCCI and
First American, BCCI's secretly held U.S. subsidiary, for CIA operations. In
the latter case, some First American officials actually knew of this use.(100)
While the reporting concerning BCCI by the CIA was
in some respects impressive -- especially in its assembling of the essentials
of BCCI's criminality, its secret purchase of First American by 1985, and its
extensive involvement in money laundering -- there were also remarkable gaps in
the CIA's reported knowledge about BCCI.
According to Kerr, the CIA did not have any
information regarding the involvement of Kamal Adham -- its chief intelligence
liaison in the Arab Middle East during the 1960's and 1970's -- in BCCI, or
that of his successor, Abdul Raouf Khalil, or of Iran/Contra arms dealer Adnan
Khashoggi.(101) Those statements have since been reiterated to the
Subcommittee by the CIA in April 1992, following a further review of CIA
records, with the caveat by the CIA that CIA record keeping is not
consolidated, and that it remains possible that information which exists has
not been retrievable.
The professed lack of knowledge by the CIA about the
activities of its foreign intelligence liaisons and operatives who were BCCI's
major shareholders and customers is perplexing and disturbing. The
relationships between the CIA and Adham and Khalil were, according to public
accounts, among the most important intelligence relationships the United States
has had in Saudi Arabia over a quarter of a century. Similarly, Khashoggi and
Ghorbanifar performed a central role for the U.S. government in connection with
the Iran/Contra affair in operations that involved the direct participation of
CIA personnel.
The CIA's professions of total ignorance about their
respective roles in BCCI are out of character with the Agency's detailed
knowledge of many critical aspects of the bank's operations, structure,
personnel, and history.
If one accepts these statements at face value, it is
hard not to conclude that the CIA's ignorance on these matters constituted a
significant intelligence failure on the part of the CIA. Given the CIA's
responsibilities to protect the U.S. against covert action by foreign powers,
it would be especially disturbing if the United States does not, as a general
matter, know anything whatsoever -- as the CIA has testified here -- of very
substantial financial activities within the United States of chief foreign
intelligence liaisons such as Adham and Khalil.
The errors made by the CIA in connection with its
handling of BCCI were complicated by its handling of this Congressional
investigation. Initial information that was provided by the CIA was untrue;
later information that was provided was incomplete; and the Agency resisted
providing a "full" account about its knowledge of BCCI until almost a
year after the initial requests for the information. These experiences suggest
caution in concluding that the information provided to date is full and
complete. Caution is especially warranted given the CIA's recurrent statements that
its record keeping has not been consolidated, and that it is possible that
records pertaining to BCCI, or its shareholders, could have been missed in its
search.
The lack of recollection by the chief intelligence
officer of the Treasury, Douglas Mulholland, and by a then-senior official of
the Office of the Comptroller of the Currency, Robert Bench, of the CIA having
told them about BCCI's secret ownership of First American, is troubling.
According to the CIA's records, Mulholland
recognized at the time that the information was important, and sought more
information. The original memoranda are written in a fashion that makes it
unlikely that any recipient would have not have noted BCCI's secret ownership
of Washington's largest bank holding company, and have remembered it later.
Accordingly, the testimony of both Bench and Mulholland raises questions about
their candor.
1. S.
Hrg. 102-350 Pt. 3, pp. 569-570.
2.
Id.
3. S.
Hrg. 102-350, p. 794.
4. .
Hrg. 102-350 pt.3, pp.569-570
5.
Letter, Webster to Kerry, S. Hrg. 102-350, Pt. 3, p. 607.
6.
Communication between Subcommittee staff and Virgil Mattingly, Federal Reserve,
July 31, 1991.
7.
Testimony of Richard Kerr, Acting Director of Central Intelligence, S. Hrg.
1012-350 Pt. 3 p. 573.
8.
Briefings, Subcommittee staff, by CIA office of general counsel and deputy
director of operations, March-April, 1991.
9.
Kerr testimony, closed session, Subcommittee, October 31, 1991.
10.
Testimony of Virgil Mattingly, Senate Banking Subcommittee on Consumer and Regulatory
Affairs, S. Hrg. 102-379 p. 141.
11.
Staff interview, Virgil Mattingly, Federal Reserve, June, 1991, and review of
Federal Reserve documents.
12.
Testimony of Virgil Mattingly and William Taylor, Senate Banking Subcommittee
on Consumer and Regulatory Affairs, S. Hrg. 102-379 pp. 141-143.
13.
Senate Banking Committee Testimony, March, 1991.
14.
Testimony of Kerr, S. Hrg. 102-350, Pt. 3 p. 573.
15.
Id.
16.
Id.
17.
Id.
18.
Id. at 590-591.
19.
Id., testimony of Altman, S. Hrg. 102-350, Pt. 3, p. 259. 268.
20.
Testimony of Kerr, id. at 374.
21.
Testimony of Kerr, S. Hrg. 102-350, Pt. 3, p. 573.
22.
See February 18, 1992 testimony of Douglas P. Mulholland before Subcommittee.
23.
CIA summary, declassified on April 9, 1992, based on Subcommittee review of
internal Agency cable traffic on BCCI and CIA's interaction with Treasury, S
Hrg. 102-350 Pt. 4, pp. 360-363.
24.
24Mulholland Testimony, S. Hrg.
102-350 Pt. 4, pp. 6-7.
25.
Staff interviews with Mulholland, February 14, 1991.
26.
Mulholland Testimony, id. at 8.
27.
Id at 32-33.
28.
Mulholland Testimony, S. Hrg. 102-350, Pt. 4 p. 9.
29.
Id. p. 28.
30.
Testimony Bench, S. Hrg. 102-350 Pt. 4 pp. 36-37.
31.
Staff interview, Bench, February 14, 1992.
32.
Interview, Bench, March 13, 1991.
33.
Staff interview with secretary to Donald Regan, May 5, 1992.
34.
Kerr, id, at 573; Mazur, S Hrg. 102-350, Pt. 3, p. 673.
35.
Minutes of Evidence Taken Before House of Commons Treasury and Civil Service
Committee, Banking Supervision and BCCI, February 5, 1992, Sec. 252.
36.
BBC, excerpts, Radio Peace and Progress in Arabic, July 1, 1981, S. Hrg.
102-350, Pt. 3 p. 291.
37.
Woodward, Veil, Simon & Schuster, New York, 1987 p. 352.
38.
See Jeff Gerth, New York Times December 6, 1981, "Former Intelligence
Aides Profiting From Old Ties," S. Hrg. 102-350 Pt. 3 pp. 293-299.
39.
Id.
40.
Id.
41.
Statements of Adham to U.S. law enforcement officials, March, 1992.
42.
Testimony of Lance, S. hrg. 102-350 p. 22.
43.
Harris and Berry, "Arab Investors to Manage Funds; Arabs Want Lance to
Direct Investments," Washington Post, December 18, 1977, A1.
44.
Statements of Adham, id.
45.
Affidavit of Clark M. Clifford, February 7, 1992, S. Hrg. 102-350 Pt. 4 p.710.
46.
Transcript, Federal Reserve Board hearing, April 23, 1981, p. 65.
47.
Testimony of Rahman, S. Hrg. 102-350, Pt. 1, p. 501.
48.
Staff interview, U.S. investigator, April, 1992.
49.
S. Hrg. 102-350 Pt. 4 pp. 310-316.
50.
National Law Journal, December 22, 1980; UPI, December 13, 1980.
51.
Washington Post, March 1, 1981, G1.
52.
staff interview by telephone with Roy Carlson, July 16, 1991.
53.
Safeer Company, Second Annual Meeting, minutes, November 23, 1979, S. Hrg.
102-350, Pt. 4, p. 255.
54.
Swiss corporate register, Zurich, p.155.
55.
documents filed by Kamal Adham with the Federal Reserve, 1989 FRY-6: Principal
Shareholder data, p.3.
56.
BCCI documents, including telex to Frank Van Court from Swaleh Naqvi, 11/12/79,
"seen by Agha Saheb," curriculum vitae of Irvani, Alwand Investment
Company.
57.
Confidential and Privileged Attendance Note, November 19, 1990, BCCI Attorney
memcom of meeting with Roy Carlson, Exhibit D in G&H Montage case, id.; S
Hrg. 102-350 Pt. 4 pp. 286-298.
58.
Plaintiff's exhibit, Helms 9, G&H Montage, id., reprinted S. Hrg. 102-350
Pt. 4 p. 237.
59.
Peter Mantias, "BCCI: Case reveals former CIA chief's ties to bank,"
Atlanta Constitution, February 15, 1992, A1.
60.
Atlanta Constitution, "Ex-CIA chief Helms denies helping BCCI,"
February 18, 1992, S Hrg. 102-350 Pt. 4 p. 236.
61.
Letter, Stoessel to Helms, January 26, 1979; Letter, Rahim Irvani to Helms,
March 21, 1984, S. Hrg. 102-350 Pt. 4 pp. 270-277.
62.
Letters on file in G.M.H. Montage case, id.; S. Hrg. 102-350 Pt. 4, pp.
259-260, 265, 272-273, 275.
63.
Id.. S Hrg. 102-350 Pt. 4 p. 266.
64.
NBC Memo, February 21, 1992.
65.
Testimony of Kerr, S. Hrg. 102-350, Pt. 3 p. 573.
66.
NBC Memo, id; communications of CIA DDO to Subcommittee staff, April 9, 1992.
67.
Staff interview, federal investigator.
68.
Testimony of Sakhia, S. Hrg. 102-350, Pt. 2, p. 527.
69.
Testimony of Lance, S. Hrg. 102-350, p. 39.
70.
Id at 40-41.
71.
Staff briefing, CIA legal department staff, February, 1992.
72.
Deposition of Emanuel Floor, Congressional Iran/Contra Committees, June 8,
1987, pp. 31-34, reprinted S. Hrg. 102-350 PT 2. pp. 539-540.
73.
Chinoy, Staff interview, March 9-16, 1992.
74.
Id.
75.
Id.
76.
Testimony of Chinoy, March 18, 1992, staff interviews, March 9-16, 1992.
77.
Chinoy staff interview, March 9-16, 1992.
78.
Testimony of Sakhia, S. Hrg. 102-350, Pt. 2, pp. 529-531.
79.
Id.
80.
Hakim Deposition, April 20, 1987, Vol 13, Iran/Contra Depositions, pp. 16-17.
81.
Iran-Contra Affair, Appendix A: Volume 2, Source Documents S. Rept. No.
100-216, pp. 255-256.
82.
Chinoy, staff interviews, March 9-16, 1992; Sakhia testimony, S. Hrg. 102-350,
Pt. 2, pp. 530-531.
83.
The New York Times, p. 56, September 3, 1975.
84.
BCCI Holdings (Luxembourg), Statement of Shareholders, Giving Percentage of
Shareholders, Deposits and Liabilities Including Contingent Liabilities of Each
Shareholder, 1985-1987, Subcommittee document, Iran/Contra Appendix A, Volume
2, Source Documents, S. Rept. No. 100-216, p. 200.
85.
See Associated Press, September 27, 1987.
86.
S. Hrg. 102-350 Pt. 3 p. 618-628.
87.
Staff interview, Chinoy, March 9-16, 1992.
88.
Affidavit of John J. Loftus, Esq., September 12, 1991.
89.
Staff interviews, Chinoy, March 9-16, 1992.
90.
See generally October Surprise, Gary Sick, ________________, New York (1991).
91.
FBI teletype, October 8, 1980, New York to Director, Attn Criminal
Investigative Division, Terrorism Section, re Cyrus Hashemi.
92.
See e.g. testimony of Lance, S. Hrg. 102-350, Pt. 3, p. 43-44.
93.
See e.g. Legal Times, July 31, 1989, "I'm Not Rappaport."
94.
New York Times, Jeff Gerth, 3/28/85 p. 5
95.
BCCI Consolidated loan book, March 3, 1991.
96.
Bankrupt, the BCCI Fraud, Kohan and Whittington p. 220
97.
BCCI consolidated loan report. March 3, 1991
98.
Communications, firm of Nussbaum and Wald, legal representatives to BCCI
liquidators, Touche Ross, June, 1992.
99.
S. Hrg. 102-350 Pt. 3 pp. 592-593.
100.
Testimony of Altman, S. Hrg. 102-350 Pt. 3 p. 259.
101.
Id. at 574.
Introduction
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.
Findings:
The U.S. Regulators
** 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.
Findings:
The Bank of England
** 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
U.S. Regulators
The
OCC and John Heimann
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.
The
Federal Reserve
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.
Assessment
of Federal Reserve Decisions On FGB/CCAH
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.
1982-1989:
Sleeping Regulators
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)
Non-Regulation
of BCCI Branches
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.
Irregularities
At First American
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.
Federal
Reserve Actions After Tampa Indictment
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)
Federal
Reserve Actions, 1991-1992
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)
Obstacles
to Completing Federal Reserve Investigations
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.
Federal
Deposit Insurance Corporation (FDIC)
And
Independence Bank
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.
Lessons
Learned And Analysis of
Foreign
Bank Supervision Enhancement Act of 1991
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.
THE
BANK OF ENGLAND
Background:
BCCI in the United Kingdom
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.
Early Warning Signals
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.
Formation
of the BCCI College of Regulators
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.
The
April 1990 Price Waterhouse Report
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.
Section
41 Report and BCCI's Closure
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.
14.
Id.
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.
35.
Id.
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.
59.
Id.
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.
Introduction
For twelve years, from BCCI's initial attempts to
acquire FGB/First American in January, 1978, until their forced resignation in
August, 1991 from their positions as the top officials of First American,
former Secretary of Defense Clark Clifford and his law partner, Robert Altman,
were the central figures in BCCI's acquisitions and management of U.S. banks.
During that time, they met with and represented
BCCI's top management, major shareholders, major borrowers, and every figure of
consequence who participated in BCCI's frauds in the United States. Their roles
included:
** Representing Bert Lance in his sale of National
Bank of Georgia (NBG) to BCCI nominee Ghaith Pharaon in 1977 and 1978.
** Representing Lance, BCCI, and all of the Arab
shareholders in the Financial General Bankshares (FGB) takeover and all related
litigation from late 1977 through late 1990.
** Representing Commerce and Credit American
Holdings (CCAH), the new entity created to buy FGB, and several levels of
holding companies below CCAH, from 1978 through late 1990.
** Acting as chairman and president, respectively,
and directors of First American, from 1981 through August 1991.
** Negotiating First American's purchase of National
Bank of Georgia from Pharaon and BCCI in 1985 and 1986.
** Handling legal matters for First American, and
selecting First American's other counsel from 1978 through late 1990.
** Representing BCCI before state and federal
regulators from 1978 through late 1990.
** Representing BCCI before Congress from 1988
through 1990.
** Purchasing shares of First American and borrowing
funds from BCCI for their shares of First American from 1986 through 1989.
** Coordinating the legal defense of BCCI and of all
of its officers charged in the Tampa case, including handling the selection of
attorneys for all of the individual BCCI officers, following BCCI's October,
1988 indictment.
Clifford and Altman have testified that they were
throughout this period deceived as to BCCI's ownership of and control of First
American and other BCCI entities in the United States, and ignorant of the
bank's wrongdoing in any material respect. In Clifford's words:
In all these years, we didn't encounter a single
suspicious circumstance. . . Were we deceived? Apparently, we were
deceived.(1) (emphasis added)
We have not violated any law. We have not been
guilty of any impropriety. . . if all that we read about, this poisonous,
constant stream of misconduct, if that is a true statement of what this bank did,
then we have been grossly deceived.(2)
As Altman testified:
The allegations that relate to misconduct on our
part, I want the record to be clear, that we deny them totally and completely.(3)
In contrast, numerous BCCI officers who appeared
before the Subcommittee testified that Mr. Clifford and Mr. Altman must have
known that BCCI owned First American. Abdur Sakhia, for instance, testified:
[I]n any management discussions . . . on our future
in the United States, we would think of three entities -- BCCI, National Bank
of Georgia and First American -- in the same breath. Who would be going where,
who would work in which entity, what area of entity will be handled by which
entity, allocation of businesses, markets, geographic territories, all took place
as if this was one entity. . . [I]t is very hard to believe, very, very hard to
believe, almost impossible to believe. . . that Clifford and Altman did not
know [about BCCI's ownership of First American].(4)
Similar statements were made in public testimony and
in staff interviews by BCCI officials Amjad Awan, Akbar Bilgrami, and Nazir
Chinoy concerning Clifford and Altman's role in BCCI and First American.
While it is clear that no one, with the possible
exception of BCCI's top two officials, Abedi and Naqvi, knew of all the
criminal conduct at the highest levels of the bank's operations, numerous
people at BCCI and associated with it did know of BCCI's ownership of First
American, its use of nominees for acquisitions generally, its lending to First
American's purported shareholders, and its strategy for expansion in the United
States.
Findings
The Subcommittee received with care the detailed
proffer of information and testimony provided by Clifford and Altman, and
struggled to reconcile their statements with the other information provided to
the investigation. Reaching judgments regarding the nature and extent of
Clifford and Altman's intentions is impeded by the lack of witnesses to a
number of key meetings over the course of a decade regarding BCCI and First
American in which only Clifford, Altman, and BCCI's top two officials, Abedi
and Naqvi, were permitted to participate. Few memoranda exist as to the
substance of any of these meetings, and it was the practice of Abedi, Naqvi,
Clifford and Altman to exclude all others from these meetings who might
otherwise give witness as to what was discussed and decided.
Nevertheless, based on a review of all of the
documents and testimony before the Subcommittee, the account provided by
Clifford and Altman to the Subcommittee is not consistent with the facts.
Regrettably, as the chapter below details, in case after case, explanations
provided by Clifford and Altman concerning their conduct are contradicted not
merely by sworn testimony of other witnesses, but by contemporaneous documents
which set forth facts that are at odds with their testimony. The totality of
the information concerning Clifford and Altman leads to the conclusion that
regardless of whether they too were deceived by BCCI in some respects, both men
participated in some of BCCI's deceptions in the United States. Testimony of
mid-level BCCI officials, contemporaneous documents created by others, and the
legal documents and correspondence involving Clifford and Altman directly,
together lead to the conclusion that Clifford and Altman:
** Assisted BCCI in purchasing a U.S. bank,
Financial General Bankshares, with the participation of nominees, and
understood BCCI's central involvement in directing and controlling the
transaction.
** Made business decisions regarding acquisitions
for First American that were motivated by BCCI's goals, rather than by the
business needs of First American itself.
** Represented as their own to regulators decisions
that had been made by Abedi and BCCI on fundamental matters concerning First
American, including the purchase by First American of the National Bank of
Georgia and First American's decision to purchase branches in New York City.
While these decisions were ratified by First American's board of directors,
they were decisions made initially by BCCI and communicated to Clifford and
Altman, who in turn secured ratification of them, as necessary, by First
American's boards.
** Concealed their own financing of shares of First
American by BCCI from First American's other directors and from U.S.
regulators.
** Withheld from regulators critical information
that they possessed to secret BCCI's ownership of First American.
** Deceived regulators and the Congress concerning
their own knowledge of and personal involvement in BCCI's illegalities in the
United States.(5)
Early
Involvement
Clifford, Altman and Bert Lance each testified that
their mutual involvement with BCCI began in the fall of 1977, in connection
with Lance's decision to participate in a hostile takeover of Financial General
Bankshares (FGB) in Washington, and the participation of a group of Middle
Eastern investors, advised by BCCI.
But their accounts diverge as to how Clifford and
Altman came to know BCCI and Abedi, and when Clifford and Altman began to participate
with Lance and Abedi in planning BCCI's strategy for acquiring U.S. banks.
By Clifford and Altman's account, they knew nothing
of BCCI and were introduced to the bank by Lance in December, 1977 and did not
represent BCCI until mid-February, 1978 in connection with litigation with SEC
and FGB's management. By Lance's account, Clifford's involvement with the case
began two months earlier, soon after Lance met with Abedi in New York and
discussed with Abedi BCCI's need to enter the U.S. market.
In Lance's account:
I went to see Mr. Clifford, who had represented me
since Labor Day weekend of 1977, and I said: Mr. Clifford, I have made the
acquaintance of Mr. Abedi. His bank is BCCI. He has some interest in talking to
me about future relationships, whether that is in regard to being merely a
consultant or being actively involved in one of his operations somewhere
. . . it is absolutely imperative and incumbent upon
me to make sure that we know what kind of people that I am getting involved
with . . . I asked Mr. Clifford, because of his knowledge and expertise . . .
to do his due diligence on my behalf, as my attorney . . . Every instance o[r]
report that I either got or from what Mr. Clifford told me came back that Mr.
Abedi was a man of integrity and character.(6)
Based on the assurances he had received from
Clifford, Lance went to London, met with Abedi again in late October, and began
discussing the possibility of a takeover of FGB with Abedi and BCCI.(7)
In contrast, Clifford testified that the first he
learned of BCCI was when Lance, as a "former client," brought Abedi
to meet them in December, 1977 on "merely a social visit."(8)
By Clifford's account:
One of the main subjects we discussed in that brief
social meeting was the aid that he had for his bank, of providing the Third
World with banking services which they had not ever had before . . . I found
him to be pleasant and a man of importance. Thereafter, I'd hear from time to
time that the little reports would sift in that Mr. Abedi and BCCI were in the
process of acquiring stock in a company called Financial General Bank Shares.
That's a bank holding company, centered in Washington. I had not heard of them
before.(9)
In fact, in the period that Clifford testified he
was merely hearing "little reports" sifting in "from time to
time," Clifford and Altman were already representing Lance in connection
with his attempt to sell the National Bank of Georgia to Ghaith Pharaon in a
transaction fully negotiated by and handled by Abedi, ostensibly on Pharaon's
behalf. This representation had begun no later than early December, 1977. As
Lance testified, the negotiations concerning National Bank of Georgia with
Abedi had taken place between Thanksgiving and Christmas, and were in that
period turned over by Lance to his attorneys:
They [Mr. Clifford and Mr. Altman] were very aware
of what I was trying to do and were very helpful to me in trying to do that. .
. After discussions with Mr. Abedi about the National Bank of Georgia, I turned
over these negotiations to Bob Altman to deal with Pharaon's attorney, a
gentleman by the name of Frank Van Court, who is a member of the Vincent and
Elkins law firm in Houston.(10)
Thus, Lance refers to an ongoing representation of
him by Clifford and Altman, stemming out of Congressional testimony a month
earlier, while Clifford describes Lance as a "former client." Lance
places Clifford's involvement with him with BCCI in October, prior to
discussions about the structuring of the FGB takeover, while Clifford places
his first contact in late December. Lance places Clifford's representation of
him on the BCCI-related acquisitions by December, while Clifford places the
representation in mid-February. In each case, the difference between the
testimony is that Lance places Clifford as a participant in the critical
decisions that BCCI made in late 1977, while Clifford places himself at a
distance from these decisions. Clifford's desire not to have been involved is
understandable, because the manner in which Lance and the Middle Eastern
investors chose to conduct their takeover bid for Financial General Bankshares
would prove, within three months, to have been illegal by a federal judge.
A mid-December, 1977 article in The Washington Post
provides irrefutable evidence of Clifford and Altman's involvement in
negotiations by Lance at that time regarding investments by "Middle
Eastern financial interests . . . into banks and other U.S. investments"
in a deal in which the "matchmaker" was described as Abedi, head of
BCCI. The article states that the Middle Eastern investors represented by Abedi
want Lance "to set up a holding company to direct their capital into banks
and other U.S. investments," and quotes Altman as confirming that
negotiations between Lance and Abedi had taken place concerning the bank
transactions:
"There are a lot of people who are trying to
guess what's going on," said the attorney, Robert A. Altman, but he added
that few are privy to the details. "The terms are still being negotiated.
We hope to have a statement shortly."(11)
In the same article, Altman is described as
announcing Lance's intention to sell his shares in the National Bank of Georgia
as of early December, 1977 to an unnamed purchaser for $20 a share -- the exact
amount paid in early January, 1978 to Lance by Ghaith Pharaon on behalf of
himself and BCCI.(12) Thus, Altman and Clifford were already
representing Lance in his negotiations over sales of his bank to Pharaon at the
beginning of December, 1977; and in connection with the establishment of a bank
holding company, obviously referring to the structure to be used by BCCI to
acquire Financial General Bankshares, by mid-December, 1977; the period in
which Clifford testified he had been privy only to "a social visit"
from Abedi concerning other matters, and during which Clifford by his account
did not represent Lance, described by Clifford as "a former client,"
at all.
Takeover
of Financial General
As of January, 1978, Clifford and Altman were
simultaneously representing Lance in his discussions with BCCI about the
possible takeover of Financial General Bankshares; meeting with Abedi and other
BCCI officials concerning that takeover; representing Lance in negotiations
with Abedi and BCCI officials concerning the purchase of National Bank of
Georgia by Ghaith Pharaon; and preparing to handle representation of the Arab
shareholders who were ostensibly using BCCI as an "investment
advisor" for the Financial General Bankshares transaction.
These roles were not being undertaken casually, or
in a routine fashion, but in the context of what was about to become a
high-stakes, highly-publicized hostile takeover of a major metropolitan
Washington bank. The takeover bid was agreed to by Lance and BCCI in late
November, 1977 and begun in December with purchases of Financial General
Bankshares shares on the open market. It was structured so that each
shareholder participating in the bid with BCCI would purchase an amount of
shares just below the 5% that would trigger the requirement of SEC disclosure
-- a strategy demonstrating some sophistication about and knowledge of U.S.
regulations. The strategy, an obvious violation of SEC law if discovered, was
dictated by the group's need to acquire an adequate block of shares in the FGB
stock to challenge the controlling management of FGB, the Middendorf group,
which already owned about 20 percent of the target bank.
This initial strategy created an underlying problem
for Lance, BCCI, the Arab group, and its attorneys which was never corrected.
If Lance, BCCI, the Arab investors, or their attorneys admitted the truth --
that they had been acting as a group from the beginning, purchasing blocks of
FGB shares just under disclosure requirements to avoid premature disclosure and
a more aggressive defense against the takeover by FGB's current management --
they would be admitting to possibly criminal violation of U.S. securities laws.
Yet in denying this truth, they committed themselves to what was at the time a
significant distortion of the truth, and a distortion which grew ever complicated
over time.
Thus, an original, untrue proposition -- that the
BCCI group was not a group at all, but a collection of Arab individuals who
happened to use BCCI as a joint investment advisor, and who happened
individually to independently become interested on the same week in the same
U.S. bank -- was one which Clifford and Altman wound up maintaining from
February, 1978 onwards, from the time the SEC filed suit against the Arab
investors, Lance, and BCCI, charging that they had acted as a group, and had
intentionally violated U.S. security disclosure laws by failing to disclose
their intent to gain control over FGB. The representations made by Clifford and
Altman concerning BCCI's role regarding First American in the years that
followed were consistent with this original lie, and therefore inconsistent
with the truth.
In their prepared testimony before the Senate,
Clifford and Altman described the thrust of the SEC suit and their state of
knowledge upon entering the case:
BCCI served as the banker and investment adviser to
a number of wealthy Middle Eastern rulers and businessmen. Without our
involvement or advice, four of these investors had purchased stock in an
American holding company called Financial General Bankshares ("FGB"),
the predecessor to First American, without filing certain disclosures with the
Securities and Exchange Commission ("SEC").(13)
In their joint written statement to the
Subcommittee, Clifford and Altman testified explicitly that they were not
involved in the structuring of the original takeover attempt, the selection of
the investors, or any other aspect of the transaction:
Without our involvement or advice, four of these
[Middle Eastern] investors had purchased stock in an American bank holding
company called Financial General Bankshares . . . without filing disclosures
with the Securities and Exchange Commission ("SEC"). The SEC
investigated these transactions, and the management of FGB, concerned that
these purchases foreshadowed a possible corporate takeover effort, filed suit
against the Arab investors, BCCI, Mr. Abedi, and others. We were retained to
represent Bert Lance, Agha Hasan Abedi, BCCI, Sheikh Mohammed bin Zaied al
Nayhan, Sheikh Sultan bin Zaied al Nahyan, Faisal al Fulaij, and Abudullah
Darwaish.(14)
This account is contradicted by a January 30, 1978
memorandum found in BCCI files in Abu Dhabi by the Federal Reserve, and
previously held in BCCI files in Karachi, Pakistan, from Abdus Sami, a BCCI
official, to BCCI chairman Abedi. In this memorandum, Sami advises Abedi that
Clifford personally approved the details of the plans for the takeover, and
describes BCCI's intention to circumvent SEC disclosure by keeping purchases of
the shares to just under 5 percent for each shareholder.
In the memorandum, Sami advised Abedi that in order
"to keep ownership to below 5 percent we have to distribute the ownership
to 4 persons of substance." Sami noted that "we have already given
the names of Sheik Kamal Adham and Mr. Fulaij. We want two other names immediately."
In the memorandum Sami also told Abedi that Lance had suggested the retention
of Clifford as chief counsel "in view of the possibility of this
[takeover] contest and also for presentation of the holding company application
to Fed[eral Reserve]." According to Sami, "[I] met Clark Clifford and
explained to him our strategy and goal. He was happy to know the details
and has blessed the acquisition."(15) [emphasis added]
The memorandum clearly states that Clifford was
involved in the FGB takeover from the beginning -- before two of the original
four shareholders had even been chosen, before a takeover contest had actually
begun, before an application was made to any regulator, before the SEC knew of
any activity that might prompt its interest. The memorandum, found by the
Federal Reserve in BCCI's files, is a contemporaneous representation of the
understanding of the BCCI official most directly involved at the time in
meetings with Lance and Clifford concerning the purchase of FGB. Accordingly,
its clear import has to be given considerable weight.
The chronology in the memorandum is supported by the
legal bills sent by Clifford and Altman to BCCI, and provided to the
Subcommittee in the spring of 1992 by BCCI's liquidators. In their written
statement to the Subcommittee, Clifford and Altman testified that they did not
provide advice to BCCI, or its Arab investors, until the litigation involving
the SEC and the Middendorf group, which began in mid-February 1978. But the
bills from Clifford's law firm to BCCI, provided to the Subcommittee in May,
1992, demonstrate that they actually represented BCCI and the Arabs in January,
1978, just as Sami had specified, and contrary to Clifford and Altman's
testimony.
Clifford,
Altman and the Regulators
Neither Clifford or Altman were experienced in
either banking law, or in takeover litigation. Accordingly, Baldwin Tuttle, a
former Federal Reserve attorney, was retained to handle banking regulatory
issues, and the law firm of Wachtell, Lipton, Rosen & Katz in New York was
retained to advise on the takeover itself.
In the months that followed, numerous filings were
made with banking regulators by Tuttle, the Wachtell firm, and Clifford and
Altman on the behalf of the Arab investors, BCCI, and Lance concerning the
nature and extent of BCCI's involvement in the transaction.
For example, the original application to the Federal
Reserve of October 19, 1978, made by CCAH and the original Middle Eastern
shareholders and signed by Altman, stated:
The proposed individual investors in CCAH have
substantial funds and it is contemplated that the funds to be used by each of
them to purchase the equity interest in CCAH will be provided from their
personal funds and possibly from personal borrowings from one or more financial
institutions (which would be unaffiliated with BCCI or any of its affiliates),
except that at least an aggregate of $50 million will be provided from personal
funds and not more than an aggregate of $20 million will be borrowed. Such
investors intend that if personal borrowings are made, Financial
General Shares purchased pursuant to the Offer will not serve as collateral for
such borrowings. (emphasis added)(16)
A November 24, 1978 letter from Altman to the
Federal Reserve Bank of Richmond reiterated the commitment that:
neither BCCI nor any other organization related to
BCCI contemplates owning any equity interest in CCAH.(17)
On January 12, 1979, Altman again told the Federal
Reserve by letter that the shareholders would not borrow from BCCI or its
affiliates. In October, 1980, when CCAH resubmitted an application to the
Federal Reserve signed by Altman, Altman reiterated that BCCI had no role in
the transaction:
BCCI owns no shares of FGB, CCAH, or CCAI, either
directly or indirectly, nor will it if the application is approved. Neither is
it a lender, nor will it be, with respect to the acquisition by any of the
Investors of either FGB, CCAI, or CCAH shares . . . All of the Investors in
CCAH have substantial funds and the funds to be used by each of them to
purchase their equity interest in CCAH will be provided from their personal
funds . . . . No principal of Applicant will retain any personal indebtedness
in connection with this transaction.(18)
As described in the chapter on BCCI's activities in
the United States, ultimately the decision came down to a public hearing at the
Federal Reserve on April 23, 1981 in which Clifford and Altman, along with Mr.
Adham and Mr. Fulaij, made an appeal to regulators to allow the acquisition to
move forward. As Clifford told regulators at the hearing when he was asked
about BCCI's involvement in the acquisition, BCCI's role would be:
None. There is no function of any kind on the part
of BCCI . . . I know of no present relationship. I know of no planned future
relationship that exists.(19)
In their prepared testimony before the Senate,
Clifford and Altman testified that they made full disclosure to the regulators
at that meeting concerning the contemplated relationship between BCCI and the
Middle Eastern investors who bought shares in CCAH. Clifford and Altman
testified that the regulators "were advised that certain of First American
investors were also shareholders in BCCI; that the investors used BCCI as their
commercial and investment bank; that BCCI had provided and would continue to
provide "advisory and other services to the shareholders with respect to
their CCAH investments; and that BCCI served as a communications link with the
investors."(20)
As discussed earlier, Robert Mannion, the Associate
General Counsel for the Federal Reserve, who conducted the public hearing on
the FGB takeover, broached the issue of the relationship between the Middle
Eastern investors and BCCI on numerous occasions, but ultimately accepted the
assurances of Clifford, Altman and the Middle East investors themselves that
BCCI would neither own nor control Financial General Bankshares.
Part of the problem is that the permissible
relationship between BCCI and First American was never explicitly set out by
anyone at the Federal Reserve, beyond the original requirement that BCCI could
not act as a lender to the shareholders for the original purchase of FGB, and
was limited to acting as an "investment advisor," and conduit for
information. The principal official regulatory discussion of the degree to
which BCCI and FGB could interact was set forth in a letter to the Federal
Reserve from the Deputy Comptroller General, Mr. William Muckenfuss, in a
letter to the Chairman of the Federal Reserve Board, which became part of the
record upon which the Federal Reserve's approval of the CCAH application was
granted. The Comptroller's office signed off on the takeover of Financial
General Bankshares, stipulating certain conditions:
It has now been represented to us that BCCI will
have no involvement with the management, and other affairs of Financial
General, nor will BCCI be involved in the financing arrangements, if any are
required, regarding this proposal. This commitment is critical, both now, and
in the future, since a relationship with another financial institution would be
a significant factor in appraising this application. This is especially
important in light of overlapping ownership, which will exist between Credit
and Commerce Holdings, Credit and Commerce Investment, and BCCI. Moreover, any
enhanced, direct or indirect affiliation or relationship between BCCI and
Financial General, would take on even greater significance in light of the fact
that BCCI is not subject to regulation and supervision on a consolidated basis,
by a single bank supervisory authority."(21)
Testifying before the Subcommittee, Clifford
acknowledged that he interpreted the Muckenfuss letter to have signified a
definite agreement in three areas: "one, BCCI would not acquire any stock
in First American at the time of the tender offer; two, that they would not, in
any way, finance the purchase of the stock in First American; and three that
they would have no control over the operation of First American."(22)
Clifford's interpretation of the obligation differs
from the plain text of the Muckenfuss letter and OCC's requirements. OCC stated
that its approval was condition on BCCI not being involved with management. For
that concept, Clifford unilaterally substituted the word "control," a
substantially less stringent standard than that which the OCC actually
required.
Concerning the first point, no documents have been
found by the Subcommittee which definitively prove Clifford and Altman knew
BCCI had acquired stock in First American prior to the conclusion of the FGB
acquisition. But the Sami memorandum contains material suggesting that
precisely such an arrangement had been approved by Clifford in the early days
of the FGB takeover, and other documents provide circumstantial documentation
of Clifford's knowledge about the proposed Middle Eastern shareholders in FGB
not being at risk.
An October, 1978 telex from former CIA Director
Richard Helms to Mohammed Rahim Irvani, one of the original investors, shows
Helms advising another BCCI front-man on language designed to hold him harmless
for acting as a front-man for BCCI. The language of the telex states that by
agreement, Irvani would be not be liable for any liability caused by granting a
power of attorney to Clifford and his firm in connection with the FGB takeover,
and suggests that this language be sent to the Clifford firm.(23)
Irvani was then listed, within days of the telex, in an application filed with
the Federal Reserve by Altman on behalf of CCAH, listed as one of its intended
principal shareholders, along with representatives of the Abu Dhabi royal
family, and Faisal al Fulaij -- another nominee for BCCI.(24)
What was unusual about this agreement provided to
Irvani by Helms at the time of Irvani's application to the Federal Reserve as a
shareholder of CCAH is not the power of attorney given to Clifford and Altman
-- they would hold a power of attorney for all of the Middle Eastern investors
-- but rather the indemnification, which essentially states that Clifford and
Altman have the power to act in Irvani's name without liability attaching to
Irvani -- meaning that someone else, presumably BCCI, would be indemnifying
Irvani against any possible liability as a result of the use of his name. As a
result, Irvani would not be at risk for any actions he participated in during
the takeover, and therefore would be understood to be a nominee by anyone
knowing of the indemnification.
On point two, William Taylor, the head of Banking
Supervision for the Federal Reserve, and Gerald Corrigan of the New York
Federal Reserve, gave credence to Clifford's interpretation in testimony before
the House Banking Committee. Corrigan stated that "there was no
prohibition of borrowing from First American even when the stock of First
American was placed as collateral." According to Altman, the only prohibition
on pledge of stock was for the initial takeover. Nevertheless, Taylor's and
Corrigan's testimony is at odds with the specific language of the Muckenfuss
letter relating to "financial arrangements .... both now and in the
future." Moreover, whenever Clifford and Altman clearly knew of such
borrowing by First American shareholders from BCCI against collateral, such as
in connection with their own such borrowings, various rights offerings, and
First American's purchase of National Bank of Georgia, they took steps to hide
this information from the regulators.
On point three, Clifford and Altman have remained
adamant that BCCI never exercised any control over First American. On
this point, however, there is substantial evidence to the contrary.
Management
of First American
In testimony to the House Banking Committee,
Clifford stated that "Before accepting the offer to serve [as Chairman of
First American] however, a fundamental agreement was made with the shareholders
on the issue of authority," that he [Clifford] would run the bank. (25)
Counsel for Clifford acknowledged, however, that "the specific
agreement... was an oral agreement" and that there was nothing in writing
to support their client's assertion.(26) Clifford characterized his
involvement in the operations of the bank as "no ivory tower experience
for us." He explained that "This was a hands-on occupation. I took it
as my first obligation."(27)
However, BCCI in fact participated in the selection
of First American's top management from the outset of Clifford and Altman's
tenure. As detailed in the Federal Reserve's summary of charges, Abedi, BCCI's
CEO, interviewed a series of candidates for the new chief executive officer of
First American, including former Citibank president William I. Spencer, Daniel
J. Callahan, James Drumwright, and Robert Stevens, the last of whom ultimately
became First American's CEO and president. While Spencer turned down the job
offer after meeting with Abedi following an introductory meeting with Clifford,
Callahan was informed by Clifford that he would not be offered the position of
CEO of First American because Callahan had requested "exclusive
administrative, operational and executive control" of the bank.(28)
Clifford's involvement with Abedi in this process --
which begin within days of the April 23, 1981 hearing before the Federal
Reserve -- is evidence of his understanding at the time that BCCI would have a
substantial say in the most important decisions affecting First American's
future, beginning with the selection of a CEO. Contrary to the assurances
provided the Federal Reserve by Clifford and Altman, no CEO would be chosen who
would require full autonomy in decisions regarding the bank.
In prepared testimony before the Senate Foreign
Relations Committee, Clifford and Altman stated that "The evidence is
conclusive that the two companies [BCCI and First American] had different --
and incompatible--operating policies and procedures, strategic concepts, bank
support functions, staffing and administrative programs, customer bases and
controls and systems." Clifford cited as proof that BCCI did not control
First American the testimony before the House Banking Committee of Robert P.
Black, the Chairman of the Richmond Federal Reserve.
who said, that in a review of First American's
activities in 1991, "we have found no evidence of influence or
control."(29)
In practice, BCCI's involvement in day-to-day
affairs of some of First American's members banks was either very limited, or
non-existent, and in others, such as First American Virginia, the institution
under the jurisdiction of the Richmond Federal Reserve, limited to a few
transactions. But in other parts of First American, including First American
Georgia and First American D.C., BCCI clearly influenced both important banking
investment decisions and other transactions. In connection with First American
New York, BCCI controlled most of the critical decisions by First American,
including the hiring of management, the size, location and choice of office
space, and the business strategy. More importantly, when it came to fundamental
issues of First American's acquisition and sales strategy, BCCI's needs over
the course of a decade repeatedly dictated First American's decision making,
rather than independent business judgments by the U.S. officials of First
American.
First
American New York
In their written testimony to the Subcommittee,
Clifford and Altman made the following presentation concerning the issues
related to BCCI's involvement with decisions concerning First American New
York:
BCCI has not in any way controlled First American
Bank of New York ("FABNY"), much less the First American
organization. These events now being questioned cannot be viewed in isolation,
and are related to unique circumstances in New York during the 1982-1983 time
period. . . In connection with the 1981-1982 regulatory proceedings to acquire
two New York banks owned by FGB, an application was submitted to the New York
State Banking Board. Due to strong opposition, the investors agreed to divest
the New York City bank following the tender offer. The Middle Eastern
investors, in effect, were forced to create a new bank in New York City -- an
unforeseen development.
As a result, an entire management group to operate
the New York bank had to be identified and hired. Mr. Abedi, as investment
advisor to the shareholders, was consulted about bankers whom he might know or
recommend for employment by the new First American Bank of New York. This
assistance was particularly welcome as FABNY was to have an international
banking capability, and Mr. Abedi's background was devoted to international
banking. At no time, however, did Mr. Abedi make decisions concerning the
selection, hiring, or dismissal of officers. Final authority -- as made clear
by Board minutes -- rested with Mr. Clifford and the FABNY board.(30)
However, in testimony before the Subcommittee,
Altman acknowledged that the circumstances pertaining to BCCI's involvement in
the establishment of a New York office for First American had lead to BCCI
being unusually involved in some of the start-up functions of First American
there.
When the acquisition was completed in the spring of
1982 we were then in a very awkward and, to some extent, unhappy posture. We
were under an obligation to sell the New York City bank. And we were under a
need to set up a new bank and really set it up from scratch. We had nothing in
the city. We had no staff. We had no location. We had no resources. It put us,
as I say, in a difficult position.
Now throughout the takeover litigation and during
the regulatory proceedings, we essentially had two contacts in New York. One
was the law firm of Wachtell, Lipton, Rosen & Katz that was co-counsel with
us and represented the shareholders during these proceedings. And the other was
BCCI, which had a representative office and was acting as the investment
advisor. . . And so we went to the people we knew at Wachtell, Lipton and we
asked the attorneys did they know of space in the city. And they did. And they
recommended space. And we went to BCCI's representative office in New York,
which was then headed by this man, Elley. And he also attempted to assist us by
telling us of brokers or space that he was aware of. And, indeed, this was
something that I worked on personally.
But I was not in New York City and when I would go
up there and I was to get back messages or information, I would usually ask
people to send it either to BCCI in New York or to the New York lawyers. They
acted, in effect, as a local contact for us.
And so BCCI was trying to be helpful to us. Now this
did not seem particularly out of the ordinary.(31)
Thus by Altman's account, BCCI, like Wachtell,
Lipton, was acting a local contact and assistant to help First American
establish its presence. Unfortunately, the account does not square with other
information obtained by the Subcommittee concerning the circumstances which
lead to the opening of the New York office of First American, nor does it
provide any business justification for First American having made the decision
to open a New York office in the first place.
To begin with, there was no obvious business
justification for First American to purchase two branches in New York City from
Banker's Trust, where banks like Citibank, Chase Manhattan, and Chemical Bank
collectively had many hundreds of branches. Indeed, a decade later, George
Davis, Clifford's successor as CEO of First American, would conclude that the
New York operation of First American had lost money for years and remained in
1992 a drain on the resources of First American overall.(32) By
contrast, Abedi and BCCI had made acquisition of a bank in New York his
priority since 1975, while First American had not done any preparation in
insure its ability to do business there. Again, in Altman's words:
We had nothing in the city. We had no staff. We had
no location. We had no resources.(33)
The obvious question was why First American, under
the circumstances, would as among the earliest actions of Clifford and Altman
at the head of First American, go ahead with expanding First American's
operations through purchasing New York branches under such difficult
conditions. The answer, as numerous BCCI memoranda suggest, was that Abedi and
BCCI needed the branch to act as an outpost in the U.S. for BCCI's international
operations, and that Clifford and Altman were essentially acting as covers for
BCCI's acquisition there, that had been previously blocked by New York bank
regulators when BCCI sought to go in directly.
For example, a memorandum dated July 25, 1983, from
BCCI employee Aijaz Afridi to BCCI Number 2 Swaleh Naqvi, with copies to BCCI
officials Kemal Shoaib and K.K. Elley, described BCCI's plan for First American
New York in terms that suggest it would operate independently from the other
First American banks. According to this BCCI official, while operating
independently, First American New York would be subsidized by the other First
American banks, using their assets as sources of funds and their clients as
sources for "their entire international business," with First
American New York becoming "their Central Treasury."(34)
The BCCI memorandum discusses such issues as how to
achieve growth and profitability for First American New York, how to project
its image domestically and internationally, how to introduce the bank to Third
World countries, new products and services, and related issues. Under
"basic assumptions," Afridi noted:
Management style and Philosophy will be on the
pattern of BCC -- No interference from the Holding Co. and free hand to the Management.(35)
The record also shows that BCCI's involvement in
directing the establishment of this office was pervasive. For example, as both
BCCI officials and BCCI documents show, it was BCCI, not First American, that
determined how much office space First American would lease in New York. As
Sakhia testified:
The decision of hiring, decision for acquisition of
space . . . the New York office of First American was identified by BCC
officers and approved by Mr. Abedi. He made the decision to rent that space.(36)
The space that was rented by First American was 350
Park Avenue, close to the offices already established by BCCI in New York at
320 Park Avenue. According to the Federal Reserve, and contrary to Altman's
sworn testimony, it was BCCI, not Wachtell, Lipton, that directed the choice of
a location, and when Clifford and Altman objected to the cost of the location,
they were overruled by Abedi.(37)
Over the ensuing decade, the space would prove
grossly excessive for the actual needs of First American, and its costs would
become a significant drain on First American's resources. A letter dated
December 13, 1982 from Elley to Swaleh Naqvi, Abedi's number two at BCCI, on
BCC New York stationery, documents the nature of the relationship between BCCI
and First American in New York. In the letter, Elley brings Naqvi up to date
with a meeting he has had with Altman concerning the First American Bank in New
York, and covering the subletting of space at 350 Park Avenue, renovation of
the space, selection of board directors, recruitment of key staff, selection of
auditors and attorneys, and coordination with the holding company and the
shareholders -- all matters being handled for First American by Elley as a BCCI
employee and reported to Naqvi, the BCCI senior executive at a time when
Clifford and Altman were ostensibly in control of First American.(38)
BCCI also handled the purchase of new branch offices
in New York for First American. In March 1983, while Elley was still employed
by BCCI as head of its New York representative office, he began discussions
with Bankers Trust officials regarding the purchase of branches of their bank
for First American. Six weeks later, when First American submitted bids for the
branches, BCCI officials -- not First American officials -- handled the
negotiations.(39)
For instance, in an October 14, 1982 letter to
Swaleh Naqvi, Khusro Karamat Elley, an employee of BCCI in New York, wrote
concerning "the subletting of space, ... selection of board of directors,
recruitment of key staff, selection of auditors, selection of lawyers,
compensation package, including fringe benefits, projections for first year's
operations, coordination with holding company and shareholders." (40)
Another letter written by Mr. Elley to Mr. Naqvi
concerns the Board of Directors of First American Bank in New York and Mr.
Elley's recommendation of Mr. Richard Paget to the board. In response to a
question regarding the Paget recommendation, Altman testified only that:
We had a very unusual situation that developed in
New York. And you were focusing on a period nearly 10 years ago, very limited
in time.(41)
Clifford and Altman's written testimony referred to
a single candidate for First American New York recommended to them by Abedi.(42)
In fact, as specified below, BCCI had direct involvement in, and apparent
control over, numerous key personnel decisions in First American New York
beginning in early 1982 and continuing through at least early 1986.
For example, in October, 1982, Abedi had contacted
Joseph Feghali, the president of another bank with whom BCCI had a
correspondent banking relationship, interviewed him in Los Angeles, and offered
Feghali the position of president and CEO of First American New York. In
subsequent meetings, Abedi and his number two at BCCI, Naqvi, offered Feghali a
seven-year contract with First American, including benefits and salary for
Feghali, before Feghali had communicated with either Clifford or Altman. Only
after these decisions had been made did Feghali meet with Altman. At that
point, Altman and Feghali met to discuss First American New York operations
with Elley, and continued further negotiations over the terms of a draft
employment contract Altman provided Feghali, who ultimately turned down the
offer from BCCI and from Altman for medical reasons.(43) Later, this
scenario was repeated in 1983 in connection with BCCI first interviewing and
then recommending to Clifford and Altman the hiring of Bruno Richter as CEO and
president of First American New York, a position he accepted in July 1983.(44)
Following Richter's hiring by Clifford and Altman,
he in turn sought to hire other bank officials for First American New York who
were required to interview not only with Altman, but with Abedi and Naqvi in
London. Later, when Clifford and Altman became unhappy with Richter, his firing
was discussed at length with Abedi by Clifford and Altman. His replacement,
William Duncan, was selected as First American New York's new president and CEO
only after interviewing with Abedi in London.(45)
Ultimately, two BCCI officers, Elley and Afridi,
were transferred by BCCI's New York agency to First American New York. Naqvi
discussed the issue with Altman and then offered Elley a position at First
American New York as senior Vice President. After leaving BCCI for First
American, both officers continued to receive BCCI benefits including
reimbursements from BCCI for gas, electric and telephone bills, as well as
concessionary mortgage rates from BCCI.(46)
The minutes of a BCCI U.S. marketing meeting held in
1985 describe the participation of these two former BCCI officials during their
tenure at First American in meetings aimed at strengthening BCCI's control of
the U.S. bank. As the memorandum stated:
"Mr. Afridi opened the meeting and emphasized
that the purpose of the meeting was to coordinate the efforts of different
locations of BCCI and other institutions [emphasis added] so that the
President's desire to have a totality of approach is achieved. It is a great
challenge that the group faces in the present and future U.S. operations."(47)
Afridi was a former employee of BCCI who at the time
was working for First American of New York and, according to the memorandum,
"requested the members to work together to overwhelm the U.S. market.
Historically, we have not made a calculated approach to the U.S. market."
When Senator Kerry asked Mr. Altman to comment on the memorandum, Mr. Altman,
who did not attend the meeting, said, "I can't explain what this does
mean.....I can't comment on the propriety of what the participants were doing,
but I think it is troubling."(48)
When asked by Senator Kerry if Mr. Elley and Mr.
Afridi, whom Mr. Altman had hired from BCCI, were working behind his back on
the joint marketing plan, Altman replied. "That is correct."(49)
However, Abdur Sakhia, the head General manager for U.S. operations, testified
that Altman talked to him personally "about [joint BCCI-First American]
marketing."(50)
First
American Bankshares' Capitalization
The handling of First American's capitalization by
BCCI and by Clifford and Altman raise further substantial questions about their
independence of BCCI's control in handling First American's most important
financial transactions -- its capitalization. BCCI's direct involvement with
Clifford and Altman in connection with financing for First American began
almost immediately after the Federal Reserve approved the CCAH application, and
continued throughout the 1980's.
As the Federal Reserve found in its summary of
charges, on about May 13, 1982, BCCI or ICIC Overseas made a payment to one of
First American's holding companies, CCAI, of $2.5 million to permit it to pay
interest on a loan from BAII, followed by a second payment of $2.3 million on
about July 13, 1982 from BCCI or ICIC Overseas for the same purpose. According
to the Federal Reserve, these payments violated the commitment made by Clifford
and Altman and CCAH that no more than $50 million in debt would be incurred by
CCAH and its subsidiaries for the acquisition of FGB, because they represented
an addition $4.8 million in debt to BCCI or ICIC Overseas by CCAH. The Federal
Reserve additionally found that they violated the commitment made that BCCI
would not fund the CCAH acquisition of FGB, a commitment violated through the
payment of the interest.(51)
Two weeks after the second payment, CCAH's outside
auditors, Ernst & Whinney, who at the time were also auditing BCCI's
Luxembourg holding company, wrote to BCCI and to Altman concerning the $4.8
million in new funds, and describing the new funds as a capital contribution by
a new investor. In effect, the auditors were viewing the payment by BCCI to be
a capital contribution by BCCI entitling it to own shares in First American. In
response, BCCI told the CCAH manager in the Netherland Antilles and the
auditors on September 20, 1982 that the funds should be treated as a short-term
subordinated loan from the shareholders of CCAH, making it a loan from BCCI to
all of CCAH's shareholders. Six months later, Altman wrote the CCAH manager in
the Netherlands Antilles that only one CCAH shareholder had lent the money --
Kamal Adham -- despite knowing that BCCI itself had lent the money and was now
using Adham as a pass through or nominee. Later, after BCCI officials in London
complained about how much the loan was costing BCCI, Altman directed CCAH to
prepay the loan 19 months prior to its maturity, replacing it with a new loan
at a higher interest rate, costing CCAH $152,0000 over the remaining term of
the loan.(52)
In August, 1982, BCCI provided $30 million to First
American through its holding company, CCAH, to purchase the remaining common
and Class A shares of Financial General, making FGB a wholly-owned subsidiary
of CCAH by eliminating any shareholders from Financial General who were not
controlled by BCCI. As the Federal Reserve found:
At the time CCAH received and used the funds, no
decision had been made as to the method by which they would be reflected on the
books of the company. The board of directors had not authorized the issuance or
sale of additional shares of the company, and no decision had been made as to
whom, if anyone, new shares would be issued.(53)
In effect, the $30 million capital contribution gave
BCCI a direct stake in First American less than one year after the Federal
Reserve had approved its application on the understanding that BCCI would not
be involved. Alternatively, the $30 million could be characterized as a BCCI
loan to First American, also prohibited by the Federal Reserve. It took BCCI
over four months to decide how to structure the contribution. Its conclusion
was to direct its resident agent in the Netherlands to direct Altman to treat
the $30 million as capital contributions from three existing Middle Eastern
shareholders and from a fourth new shareholder, Sheikh Khalifa Bin Zayed al
Nahyan. The resident agent provided Altman with back-dated resolutions
authorizing this handling of the funds, which Altman duly had signed by CCAH's
directors.(54)
In 1983, when CCAH raised $75 million in additional
capital through a "rights offering," BCCI again paid the funds to
First American, advancing the purchase price for the shares, despite the fact
that responsibility for payment of the funds had not yet been allocated among
the various shareholders in accordance with their acceptances, or waivers, of
the shares due them in the rights offering. According to the Federal Reserve's
summary of charges:
Altman was aware of BCCI's payment, and was
concerned that the funds had not yet been allocated among the various
shareholders . . .(55)
Later in 1983, when BCCI failed to provide an
additional $25 million requested by CCAH, BCCI provided CCAH with a $20 million
credit line, stating that CCAH had requested the loan. These funds were paid by
BCCI to First American, with documentation created later attributing the
lending to Kamal Adham, a key front-man for BCCI in the CCAH stock purchases.
Tellingly, although BCCI treated Adham as the lender of the funds, Altman and
another partner at Clifford & Warnke dealt exclusively with BCCI concerning
the terms and repayment of the loan, despite Altman's frequent contacts with
Adham on other matters pertaining to First American. Later, another Clifford
& Warnke attorney drafted loan documents memorializing Adham's involvement
in the matter, back dated two and a half months, and signed by Altman, which
were provided to BCCI for Adham's signature.(56)
In future years, Clifford & Warnke lawyers
communicated with BCCI a number of times concerning the "Adham" loan,
and described the loan in two instances as one "arranged by you [BCCI] in
our favor."(57) Despite BCCI's handling of every aspect of the
loan, including the original disbursement to First American, Altman in filings
with the Federal Reserve described it as a "loan from Investor." In
1991, when Altman gave sworn testimony to the Federal Reserve, he represented
that the loan was made to CCAH by Adham.(58)
First
American's Purchase of NBG
Perhaps the clearest example of Clifford and Altman
undertaking an action, ostensibly on behalf of First American, but directed by
BCCI, was First American's decision to purchase the National Bank of Georgia in
1986 from Ghaith Pharaon. Clifford and Altman have testified that they
"learned that the owner of NBG, Ghaith Pharaon, was in financial difficulty
and might be willing to sell his bank."(59) Clifford and Altman
describe the acquisition of the National Bank of Georgia by First American in
1986 as a "reflection of First American's consistent corporate strategy of
expansion since 1982," suggesting that it was mere coincidence that First
American purchased a bank already owned by another member of the BCCI family,
Pharaon, and which they understood to have adopted BCCI's hexagonal logo and
banking practices.(60)
As the Office of the Comptroller of the Currency had
suspected in early 1978, BCCI in fact owned 50 percent of National Bank of
Georgia (NBG) from the moment of its ostensible sale to Ghaith Pharaon in May
of that year, with Pharaon acting as BCCI's nominee for those shares to avoid
the hostility regulators had already demonstrated towards any direct
acquisition by BCCI. If any of Pharaon's creditors attached NBG's assets, the
ensuing civil litigation could threaten to reveal this secret interest, with
the result that BCCI be destroyed. Accordingly, BCCI decided to consolidate its
U.S. holdings through the sale of NBG to First American, as specified in some
detail in the chapter on BCCI's later activities in the U.S. Thus, while BCCI's
business need to bring about this purchase is clear, First American's was not,
especially given the actual underlying problems at NBG, which had begun when
the bank had been under the control of Bert Lance and accelerated as a
consequence of BCCI's management of NBG while Pharaon held the bank.
BCCI's
Business Need for First American/NBG Purchase
On January 1, 1985, Pharaon executed a secret
"Memorandum of Deposit" with BCCI which provided that all of the
outstanding shares of NBG Financial would be deposited with BCCI as collateral
for loans to Pharaon and his companies, and giving BCCI "or its
nominees" the right to vote the shares. As a result, as of that date, BCCI
had effective control over the 50% of the shares of NBG which had been BCCI's
from the beginning.(61)
By November 1985, with Pharaon's financial difficulties
intensifying, BCCI's auditors, Price Waterhouse, began to express concern to
BCCI about its exposure to Pharaon and calling on the bank to reduce this
exposure. In fact, a portion of this exposure was related to Pharaon's holding
of NBG on BCCI's behalf.
Accordingly, BCCI and Pharaon agreed to liquidate
Pharaon's 50% interest in NBG, and sell his holdings of NBG stock held by
Pharaon Holdings Limited back to NBG Financial, now controlled by BCCI. At this
point, BCCI had direct and total secret control of all of the outstanding
shares of National Bank of Georgia, and had demonstrated to Price Waterhouse
its ability to force "loans" to major borrowers like Pharaon to be
"repaid." But these financial manipulations did not solve the other
serious problem created by Pharaon's deteriorating financial condition -- the
possibility that creditors might seek to attach the shares of NBG Financial --
still officially "owned" by Pharaon. The result would not merely put
BCCI's ownership of NBG at risk, but could set in motion the destruction of
BCCI's entire empire in the United States and possibly globally.(62)
In London, Abedi looked at the NBG situation and
determined that the simplest solution to the Pharaon problem was to merge
National Bank of Georgia into First American, and thereby take Pharaon out of
the picture. In the terms of the Federal Reserve charges, "in December
1986, BCCI caused CCAH to agree to purchase the shares of NBG [Financial] from
Pharaon for $220 million."(63)
Significantly, while the transaction did not close
until August 19, 1987, First American provided $80 million at the end of
December, 1986 as an option on the purchase, securing those $80 million worth
of shares and leaving Pharaon "holding" only a remainder of $140
million worth of the bank -- shares already held by BCCI as security for
defaulted loans. Thus, any outsider who tried to attach Pharaon's shares in NBG
would find that as creditors, they were now in back of First American and BCCI,
making such an attachment of little legal value and thereby protecting the
shares. From the point of view of First American, however, this secret
arrangement had a significant problem. BCCI's security interest in NBG preceded
that of First American. If something went wrong, First American might not be
able to recover its $80 million.
BCCI's
Understanding of First American Purchase of NBG
Within BCCI at the time, it was generally understood
that the sale of NBG from "Pharaon" to "First American" was
principally a consolidation of BCCI entities within the United States. As Abdur
Sakhia testified, First American had been planning to expand its operations to
Florida in the mid-1980's, and had never discussed a move into Georgia, until
1985. In late 1985, he became aware that Pharaon's financial situation had
become shaky, and at Abedi's request arranged for a meeting to take place in
Miami in November of 1985 involving Abedi, Naqvi, Clifford, Altman, and two
officials from National Bank of Georgia -- Carlson and Jamil. No one else was
permitted to attend the meeting. After it ended, Abedi came out and told Sakhia
and other BCCI officials that National Bank of Georgia would be merged with
First American.(64) Abdur Sakhia remembers organizing the meeting.
According to Sakhia, it was at this meeting that the decision was made to merge
National bank of Georgia and First American. According to Sakhia, afterwards he
met with Abedi, who talked of "merger and not buy and sell."(65)
Later, in preparation for BCCI's possible purchase
of a bank in Florida, Sakhia was provided with a model file of the Independence
Bank transaction, which showed Pharaon's role as a nominee, which was to be the
model for the purchase of the Eagle Bank by BCCI. Sakhia then met with Naqvi in
Luxembourg, and discussed BCCI's planned purchase of Eagle, with Faisal al
Fulaij to act as the nominee instead of Pharaon. Altman was present during the
conversation, and thus participated in a meeting in which the use of nominees
by BCCI to purchase banks in the U.S. was discussed.(66) Altman's
knowledge of this practice by BCCI and by Pharaon in connection with
Independence would obviously have been important in the NBG transaction,
causing him as a lawyer to have asked many questions concerning the
relationship between BCCI and Pharaon. No document provided the Subcommittee
shows Altman having ever expressed concern about the possibility that Pharaon
was a nominee. The obvious explanation is that he did not do so because it was
a fact Altman already knew, and because Altman himself had become a party to
the arrangements involving BCCI and Pharaon.
After the Miami meeting, Sakhia wrote Abedi in
London in February 1986 regarding BCCI's "Future Plans in the United
States." In the memorandum, Sakhia referenced his discussions with Altman
concerning the planned purchases by BCCI of banks in Florida. In a paragraph
concerning the National Bank of Georgia, Sakhia suggested that in view of
"the forthcoming restructuring of the bank in Georgia, it may be useful to
merge their Miami operation with BCC Overseas, Miami, as this will offer
additional dollar deposit and correspondent banking relationship to BCCI
Overseas."(67)
Clifford
and Altman's Explanation of NBG Transaction
In their written testimony before the Senate,
Clifford and Altman denied that the acquisition of NBG by First American was
directed by BCCI, stating instead that the acquisition:
was a reflection of First American's consistent
corporate strategy of expansion since 1982 . . . in December 1986, based solely
on its judgment of First American's best interests, the CCAH Board approved the
proposed acquisition of NBG. BCCI did not influence these deliberations, nor
did it control the Company's decision to acquire NBG. First American, not BCCI,
initiated the NBG acquisition.
The price paid by First American was reasonable and
determined free of control by BCCI.(68)
As Altman told journalists in 1986 who wondered at
the coincidence of Clifford and Altman buying the bank once held by Lance and
whose sale by Lance to Pharaon they had participated in:
It was clearly an arms-length business deal, that is
to suggest we didn't get any special consideration in terms of price. . . It's
a logical move for us in terms of our market expansion.(69)
In answers to written questions from the
Subcommittee, Altman denied attending any meetings regarding the NBG purchase
by First American in Miami, as described by Sakhia. However, Roy P.M. Carlson,
the former President of NBG, has told Subcommittee staff that he, Mr. Clifford
and Altman all met together at the Grand Bay Hotel in Miami in February 1986 to
discuss the price for NBG.
Unfortunately, the statements made by Clifford and
Altman to the Committee regarding the National Bank of Georgia transaction
cannot be reconciled with the documentary and testimonial accounts of the other
parties involved.
Federal
Reserve Findings on NBG Purchase
On July 29, 1992, the Federal Reserve issued a
lengthy summary of charges against Clifford and Altman in connection with their
roles in BCCI and First American, including 350 paragraphs setting forth their
roles in connection with alleged violations of various federal regulatory
provisions. Of those 350 paragraphs, 78 paragraphs were devoted to Clifford and
Altman's handling of the purchase of NBG by First American, and they define in
detail the factual basis for concluding that the purchase was occasioned not by
the independent needs of First American, or an independent business judgment by
Clifford and Altman, but by BCCI. The following account summarizes the Federal
Reserve evidence and findings.
The Federal Reserve found that in 1977, Pharaon
became the nominal owner of National Bank of Georgia in a transaction
negotiated and bankrolled by BCCI, and in which BCCI had a secret 50 percent
interest from the beginning. While nominally owned by Pharaon, NBG employed
several BCCI officials, NBG personnel regularly attended BCCI conferences at
BCCI's expense, NBG adopted BCCI's management style and hexagonal logo, and
revised its business orientation from a retail bank to an international bank.(70)
In February 1983, Altman joined National Bank of
Georgia officials at a BCCI-sponsored conference in New York, whose purpose was
to integrate NBG into BCCI's corporate culture. Following a presentation by
BCCI officials, an executive vice president of NBG, William Batastini,
"gave public remarks at which he expressed his happiness at being part of
the BCCI family," in Altman's presence. Batastini then repeated these
remarks at a later annual conference of BCCI in Athens in March 1983, again in
Altman's presence.(71)
By January 1, 1985, BCCI, in the course of
restructuring Pharaon's loan portfolio with BCCI, acquired control of all NBG
shares. In November, Pharaon's financial problems -- including a possible
default on a $200 million loan that had been syndicated to a number of banks --
became public -- with the result that the prospect of liens on Pharaon's
property by creditors became a significant threat. Moreover, the news caused
Price Waterhouse, BCCI's auditor, to express concerns about BCCI's exposure to
Pharaon, and to urge that BCCI call in loans to reduce its exposure. As the
Federal Reserve found:
Because BCCI secretly owned and controlled NBG and
its shares, an attachment of those assets by Pharaon's creditors threatened
BCCI with a substantial financial loss. . . BCCI thus had an incentive to cause
NBG to be sold to another BCCI nominee, one that would not be subject to
levying creditors.(72)
Accordingly, BCCI began to plan the sale of NBG to
CCAH and First American. In September 1985, Altman met with NBG's president,
Roy Carlson, who had been placed at NBG by Abedi, who had known Carlson through
Carlson's work at the Bank of America when Bank of America owned a stake in
BCCI, and two other NBG officials. At the time, Georgia law prohibited the
acquisition of a Georgia bank of a bank holding company, such as CCAH, which
had substantial assets outside the south. The following month, Altman asked
First American's Treasurer, A. Vincent Scoffone, to conduct a preliminary
evaluation of NBG to determine a purchase price for NBG. Scoffone estimated
that NBG's book value was approximately $80 million, and that based on recent
bank sales prices of Georgia banks, a realistic price for NBG would range from
$120 million to $180 million. At the time, Scoffone warned that "no review
has been performed on the quality of the asset base. Such a review is mandatory
before any real meaningful analysis can be made regarding the tangible net
worth of NBG."(73)
According to testimony from Sakhia, and the summary
of charges of the Federal Reserve, in November, 1985, Clifford and Altman
attended a conference of BCCI managers in Miami, including Abedi, Naqvi,
Sakhia, and two NBG officers, Carlson and former BCCI official Tariq Jamil.
Following a conference with the managers, Clifford and Altman met separately
with Abedi, Naqvi, Elley, Jamil and Carlson, during which Abedi decided and
announced that NBG would be sold to CCAH, that Jamil would be transferred from
NBG back to BCCI's headquarters in London, and that Elley would be transferred
from First American New York to NBG to replace Jamil. Some time later, Altman
told Sakhia he was not pleased with Abedi's decision to purchase NBG and that
he would not have purchased the bank of his own free will.(74)
In February 1986, in connection with an evaluation
of Pharaon's holdings, an independent valuation of NBG was conducted by the
firm of Keefe, Bruyette & Woods, which determined that NBG was worth
between $130 million and $144 million, and a copy of this report was provided
to the firm of Clifford & Warnke. In May, 1986, First American's Treasurer,
Scoffone, conducted a second analysis of NBG's value, without having been told
by Clifford of Altman of the Keefe, Bruyette & Woods valuation. In a
memorandum to Altman dated May 7, 1986, Scoffone concluded that based on the
median purchase price for banks within the past year, its value was $152
million. Arguing that "NBG may be a unique situation because of its
location in Atlanta, Georgia," Scoffone said that "a premium over the
median purchase price may be appropriate," and on that basis concluded
that a fair price for NBG would be $211 million if one assigned a higher
multiple times book price for the shares than banks in the Georgia region had
been sold for during the past year. He also acknowledged that at such a price:
this transaction would be highly beneficial to the
present owner of NBG. The bank would be sold at a significant premium over both
the national and local median sales prices.(75)
Contrary to normal banking practice on a purchase of
this magnitude, Clifford and Altman did not retain an independent investment
banker to assist in valuing the shares, as they had previously done in the
purchase of branches for First American in New York from Banker's Trust in
1983, and would do again in 1990 when they were considering the sale of First
American overall. Instead, First American relied on Scoffone's evaluation, and
Altman became the sole representative of First American in negotiations over
the acquisition and the structuring of the transaction. Significantly, in doing
so, Altman did not deal with Pharaon, but with Abedi, Naqvi, and other BCCI
officials.(76)
On May 8, 1986, Altman wrote Naqvi, enclosing
Scoffone's evaluation, and expressing his hope that the purchase price would be
in the range of $160 million to $175 million, as "we are nearing the point
at which this purchase is too expensive."(77) A week later,
meeting in London with Batastini at BCCI's London headquarters, Altman and
Batastini agreed to a purchase price of $205 million, of which $80 million
would be paid up front for an option to purchase, and $125 million upon
consummation of the transaction. Under the agreement, First American (CCAH)
would pay Pharaon the $80 million immediately, and against the $80 million
would receive a security interest in NBG's shares -- thus protecting them from
other Pharaon creditors. At the same time, BCCI and Altman discussed the fact
that BCCI would simultaneously have lending to Pharaon for the remainder of the
$205 million, leaving NBG's shares entirely pledged and protected from
creditors. Altman then discussed this situation further with other attorneys
for First American, who noted the following:
The proposed structure may focus unwelcome attention
on the relationship between CCAH [First American's holding company] and BCCI
and raise questions as to whether BCCI has acquired control of NBG. . . . A
bigger problem [then certain other regulatory issues raised by the structure],
however, arising from BCCI's involvement in the transaction is that it might
focus closer attention on the relationship between CCAH and BCCI. An argument
could be made perhaps that CCAH and BCCI are acting together and/or as
principal and agent.(78)
Altman then sent a copy of this memorandum to Naqvi,
and Clifford sent a second copy to Abedi in London, with a note from Clifford
dated June 17, 1986 warning Abedi that the memorandum would "give you some
idea of the difficulties and complexities facing us." Later in June, when
CCAH and First American filed drafts of the option agreement with the Federal
Reserve under which CCAH would acquire the National Bank of Georgia, the
documents did not refer to the pledge of NBG shares to BCCI that was
simultaneous with the pledge of NBG shares to First American, or to the fact
that BCCI would acting as an "escrow agent" and would hold the funds
paid to Pharaon by First American until the completion of the transaction.(79)
By August, Baldwin Tuttle at Milbank, Tweed, the
regulatory attorney involved in handling the First American-NBG transaction,
became sufficiently concerned about the structuring of it that he wrote to warn
him that there five separate legal problems for First American arising out of
it. First, the payment of the $80 million option placed CCAH/First American at
risk; second, under the structure of the deal, First American did not have the
right until the acquisition was completed to exercise any control of management
of NBG, leaving it vulnerable should the current management not do their job;
third, there was no provision in the agreement for negotiation of the price if
the value of NBG declined prior to the option's exercise; fourth, legal
opinions were necessary to determine "the validity of Pharaon's ownership
of NBG;" and finally, there was no guarantee CCAH/First American would
recover its $80 million if it chose not to exercise its option.(80)
These issues arose in part because Tuttle had
previously been advised that BCCI would also have a security interest in NBG
shares, raising the question of whether BCCI's interest in the shares, or First
American's interest in the shares, would be satisfied first in the event
something went wrong.
In response to this letter, Altman demanded that
Tuttle appear at Altman's office, and during a "brief and hostile
meeting," handed Tuttle both the original and the only other copy of his
letter and warned Tuttle that if he ever wrote such a letter again, Tuttle
would no longer represent CCAH/First American.(81)
While there are many conclusions one might draw on
the basis of this incident, one notable element is Tuttle's recognition that
there reasons to doubt "the validity of Pharaon's ownership of NBG."
The only possible reason to doubt his ownership under the circumstances was the
issue of whether BCCI was the actual owner already. Altman's response to Tuttle
offers a convincing example of Altman's determination that no inquiries be made
regarding this issue. It is evidence that Altman's failure to advise the
Federal Reserve of BCCI's involvement in the transaction was wilful and
intentional, rather than accidental, as reflected in the charges brought
against Altman by the Federal Reserve in connection with this incident.
On September 4, 1986, Altman provided Naqvi at BCCI
with draft documents relating to the option and loan transaction for his
review, and identifying BCCI as pledge agent for First American's option
payment and BCCI's loan. In a cover letter to Naqvi, Altman wrote that the
agreements assumed that there was no debt secured by the NBG shares
"except as may be later authorized with respect to the BCCI loan to Dr.
Pharaon." As the Federal Reserve found, Altman was already aware of the
Pharaon debt to BCCI secured by the NBG shares.(82)
The significance of the September 4, 1986 letter
from Altman is that it identifies how Altman chose to respond to the problems
posed by revealing the fact that BCCI already had a security interest in
National Bank of Georgia shares that might impair the value of First American's
security interest in them and raise questions about the $80 million option.
Altman's response was, in effect, to join BCCI in a subterfuge -- that BCCI
would not lend the money to Pharaon or gain security from Pharaon until First
American's debt was secured -- when in fact, both Altman and Naqvi knew this
was untrue.
On October 23, 1986, Pharaon and BCCI executed
various agreements to effectuate the planned acquisition of National Bank of
Georgia, which included a loan agreement between Pharaon and BCCI whereby BCCI
would lend Pharaon $140 million at the time that CCAH/First American acquired
its option to purchase NBG, secured by another pledge of NBG shares to BCCI.
Altman did not sign these documents on behalf of CCAH, however, because, as the
Federal Reserve found, he "became concerned that the documents as then
drafted in connection with the NBG option would reveal to the Board BCCI's
extensive participation in the transaction."(83) According to
the Federal Reserve, Altman then went to London, where he met with a BCCI
officer, Imran Iman, and a BCCI lawyer, to discuss the transaction. A
memorandum written by the BCCI lawyer memorializing the meeting stated the
following:
Mr. Altman stated that because the Federal Remere
will see the Pledge Agreement they will see the references to the Loan
Agreement and BCCI SA and will therefore want to see the Loan Agreement. By
seeing all the documents, they would most likely arrive at an adverse
conclusion.
Altman suggested that a better way to have
structured the agreements would have been for the Option and Pledge Agreements
to have been executed and then perhaps 60 days later, a Loan Agreement signed
an addendum [sic] made to the Pledge Agreement to make BCCI a party to the
Pledge Agreement. . .
[The BCCI attorney] would contact [C&W Partner]
of Mr. Altman's office and appraise [sic] him of the above. [C&W Partner]
would prepare the fresh Pledge Agreement on the above facts. . . Mr. Altman
would discuss the above with Mr. Naqvi and if he is agreeable, Dr. Pharaon
would be approached.(84)
Following the meetings with Altman, the documents
were redrawn to separate the integrated transaction into two transactions in
order to mislead the Federal Reserve. As a British lawyer for BCCI wrote in a
memorandum:
[t]he reason for having two Pledge Agreements is
that Mr. R. Altman feels that in the previous Pledge Agreement, the references
to "Loan Agreement" would have given the Federal Reserve cause to see
the "Loan Agreement" and possibly decide that an "integrated
transaction" was being entered into. Whereas now, with the two Pledge
agreements, the Federal Reserve will only see the Option Pledge, which contains
no reference to the "Loan Agreement."(85)
A later memorandum by the BCCI lawyer to Naqvi,
conveying the substance of meetings between him and Altman in Washington D.C.
between December 18 and December 20, describes Altman advising that the
documents pertaining to BCCI be signed after "a reasonable period will
have elapsed" in order to prevent the Federal Reserve from concluding that
the transactions involving BCCI were integrated with the First American
purchase of NBG.(86)
The result of the signing of these documents is that
NBG stock was simultaneously pledged to BCCI and to CCAH/First American,
without it being clear which claim was subordinated. On December 18, 1986,
Altman wrote BCCI to advise BCCI that CCAH consented to BCCI holding a security
interest in Pharaon's stock in NBG up to a level of $140 million, in a letter
that did not specify whose claim to Pharaon's pledged shares would come first.(87)
In order to protect First American's interest, a subordination agreement was
created on behalf of CCAH, which was executed by Altman the same day, December
18, 1986. BCCI did not, however, execute the agreement, leaving it of no
effect. When First American lawyer Tuttle brought this to Altman's attention,
Altman ordered the $80 million to be disbursed to Pharaon regardless, placing
CCAH/First American at risk. Later, Altman lied about the situation to the
Federal Reserve, denying that he was responsible for seeing to it that BCCI
executed the subordination agreement.(88)
In the spring of 1987, months after paying the $80
million option to Pharaon, First American began its due diligence review of NBG
to determine what First American had acquired. In the course of the due
diligence, First American found numerous problems at NBG, including NBG having
paid the expenses of its officials to meet with BCCI officials in London; NBG
paying for hotel expenses for the crew of Abedi's private plane; NBG paying to
fly Abedi to the opening of President Carter's Presidential library; NBG paying
the salary of a former NBG employee for 15 months after he went back to work
for BCCI; and paying a fee of $475,000 to BCCI in connection with the CCAH
purchase. The due diligence also showed extraordinary expenses over NBG's
assumption of a lease from Pharaon's business, Interedec, which would cost NBG
another $25 million to $30 million over the 15 years life of the lease.
Finally, it showed that NBG was at or near the bottom of its peer group on a
wide variety of measures of financial performance, including its return on
assets, return on equity, margin on earning assets, and percentage of
non-performing loans. Any of these items would have justified First American demanding
a reduction of the price paid for NBG, or its right to withdraw from the
transaction. First American did neither.(89)
On April 22, 1987, CCAH/First American filed an
application with the Federal Reserve to acquire NBG, which made no mention of
BCCI's involvement in the transaction or of Clifford & Warnke's
simultaneous representation of both CCAH and BCCI in the transaction. The
application stated that Pharaon had control of 100 percent of NBG's shares, and
did not disclose the existence of Pharaon's pledge of the NBG shares, and other
documents giving BCCI the power to vote NBG's shares. When the Federal Reserve
asked the source of funds for the purchase, at Altman's direction, CCAH's
regulatory counsel, Tuttle, advised the Federal Reserve that the funds had been
raised through a rights offering paid for in cash, with less than 5 percent of
the equity capital involving borrowings by shareholders secured by a pledge of
shares. In fact, at that very time, Altman and Clifford had themselves borrowed
from BCCI about 10 percent of the equity capital in the rights offering,
against shares in First American which they pledged to BCCI, in direct
contravention of the representation they were making to the Federal Reserve.(90)
Finally, on July 24, 1987, Clifford and Altman sent
all shareholders of First American an offering memorandum relating to a
proposed share issuance to raise $115 million in new capital for CCAH to
complete the purchase of NBG. This memorandum represented the first time that
Clifford and Altman had asked the shareholders for their approval of the
transaction they had commenced in September 1985 at BCCI's direction. It was,
as the Federal Reserve found, materially incomplete about BCCI's involvement in
the transaction. Moreover, its omission of any notice to the shareholder's of
Clifford and Altman's own financial interest in the transaction, breached
Clifford and Altman's fiduciary duties to the CCAH/First American shareholders.(91)
Final evidence of the fact that the NBG transaction
was not in the interest of First American, is contained in the Federal
Reserve's last finding concerning the transaction:
The acquisition of [NBG] created a serious drain on
the financial health of First American . . . In 1992, First American
transferred NBG to one of its subsidiaries at a fair market value of only $90
million -- $130 million less than it had paid for the bank only five years
earlier. In addition, First American paid approximately $12 million to get out
of the obligations of the master lease [on the Interedec property it assumed
from Pharaon].(92)
The decision by BCCI, Clifford and Altman, to have
First American buy National Bank of Georgia had ultimately cost First American
over $140 million.
Other
Conflicts of Interest
Part of the difficulty in unravelling the
decision-making process relating to BCCI, First American, and the National Bank
of Georgia, and Clifford and Altman's role in this process, is that Clifford
and Altman simultaneously represented all parties in the transactions over a period
of 12 years spanning each permutation of purchase and sale of each of the
organizations involved.
The ambiguity about their multiple roles may have
been convenient for Clifford and Altman in some circumstances, such as during
attendance at BCCI's international conferences. But the ambiguity also created
an overwhelming, ongoing conflict of interest between their obligations to
First American's board of directors, officers and employees on the one hand,
and BCCI on the other. This was especially true because in the United States,
within both BCCI and First American, it was often perceived that there was an
ongoing struggle for control of First American's destiny, between two competing
organizations, one Pakistani, pertaining to BCCI, and the other American, and
controlled by Clifford and Altman.
Nazir Chinoy, head of BCCI's Paris branch, learned
of the struggle over First American New York at a BCCI annual conference in
Luxembourg in 1985, from Afridi himself, who confessed over a glass of wine
that he was increasingly unhappy at First American New York.
Afridi felt that Altman was not permitting him to
run First American on BCCI lines and yet he was answerable to Mr. Abedi for
profits. He said Altman was interfering in the management and that he had reported
to Naqvi on many an occasion about Altman interfering with his management, or
trying to change the management structure or style.(93)
As Chinoy described it, from his point of view as a
BCCI official operating outside the U.S., there was not so much a separation
between First American and BCCI as two different types of management, one
Pakistani and one American.
I saw rivals competing for power -- Afridi wanting
to be the top man, and Altman wanting to be the top man.(94)
The conflict of interest between First American's
needs and BCCI's needs was made explicit to Clifford and Altman in a memorandum
from an official of First American New York to them written in early 1987,
concerning the termination of a First American employee in New York. Enclosed
with the memorandum provided to Clifford and Altman was a letter from a First
American employee that stated that the association between BCCI and First
American was threatening to destroy First American as a bank:
Your basic error has been BCCI. This association is
"on the street" and as soon as this becomes known (with BCCI
reputation) decent accounts fly. . . . Either FAB must take over and become
First American Bank and buy out BCCI shares, or let them have it. But have two
factions running FAB, Eastern and Western, and until you decide just whom and
what you are, FAB is doomed to extinction.(95)
There is no record that Clifford or Altman undertook
any response to this letter, which contradicts Clifford's testimony that there
was never a "suspicion" about BCCI's involvement in First American
during the period he ran First American.
Another area of difficulty in assessing Clifford and
Altman's knowledge of the relationship between First American and BCCI is that
Clifford and Altman have maintained that BCCI acted as an investment advisor to
the shareholders. In testimony before the Senate, Clifford testified, "we
treat Mr. Abedi, we treat Mr. Naqvi, as the representatives of our
investors."(96) In other words, not only did Clifford and
Altman wear many hats, but they have maintained that Abedi and BCCI also played
various roles, ranging from client to investment advisor to
"communications link" for the middle eastern investors.
Sakhia, however, challenged Clifford and Altman's
characterization of Abedi as a communications link for the Middle Eastern
investors. Sakhia testified:
I fail to understand . . . that it was difficult to
communicate with the Middle Eastern investors. . . . They were not Bedouins in
the desert. . . . These were intelligent people who owned banks and businesses.
The Abu Dhabi investment Authority has several billion dollars invested in this
country, and if they can manage those businesses they did not need a channel
via Mr. Abedi to First American. They could have done it directly.(97)
Clifford and Altman did begin to communicate
directly with First American's shareholders in 1989, after the New York grand
jury had begun and both BCCI and Clifford and Altman understood that the key
issue would be whether the shareholders were nominees for BCCI. Thus, in
October 1989, Altman, instead of his past practice in routing communications
with shareholders through BCCI, wrote Adham and other shareholders directly to
seek their position regarding the possible sale of the bank.
Clifford
and Altman Loans From BCCI
And
Share Purchases of CCAH/First American
Perhaps the most controversial aspect of Clifford
and Altman's relationship with BCCI was their purchase of CCAH shares with
loans provided by BCCI, a transaction that not discovered by First American
officials until the summer of 1990 and not disclosed to the Federal Reserve
until the spring of 1991.
The transaction was controversial for a number of
reasons. First, from the beginning, regulators had stated their understanding
that BCCI would not be lending funds to BCCI shareholders which would be
secured by CCAH shares. Second, when regulators asked Clifford and Altman
whether they had been such lending now in the past, Altman's responses did not
acknowledge the existence of the loans. Third, the loans had never been
disclosed to First American's board of director or other offices. Fourth, the
terms of the loans were very unusual in that they were non-recourse, and BCCI
could not proceed against Clifford and Altman if they failed to repay them.
Moreover, as specified below, there were secret side agreements between
Clifford and Altman and BCCI which is essence guaranteed that BCCI would handle
the sales of the stock for Clifford and Altman at a price agreed to among the
three of them.
In their written testimony to the Subcommittee,
Clifford and Altman provided a detailed explanation of how they came to
purchase the stock, and how BCCI came to finance the purchase:
The amount paid us by the Company was relatively
modest. Mr Clifford, as Chairman, requested, and was paid, $50,000 a year -- a
modest amount compared to the substantial annual compensation paid to the top
officials of major banks. Mr. Altman . . . received no payments other than the
usual director's fees. . . Nor were we given the valuable perquisites that are
normally provided senior officers of large corporations. We received no
financial bonuses, incentive compensation, or profit sharing. . .
If First American prospered under our leadership, we
hoped to have the opportunity to invest in stock and thereby participate with
the shareholders in the economic benefits we were creating. In effect, we chose
to take our financial rewards as managers by making an investment in stock. . .
In 1985, in the light of 4 years of sustained economic growth experienced by
First American under our control, we discussed with Sheikh Adham the
possibility of acquiring stock in the Company. We also discussed it with Mr.
Abedi, as the advisor to the shareholders. We learned the shareholders favored
our investment in the company . . .
We had learned that certain of the shares [to be
offered in a rights offering] might remain unsubscribed, and that we could
purchase such shares at the same price -- book value -- as was paid by the
other shareholders.
We determined to acquire shares on this basis, and,
after considering alternatives, sought to finance this investment through bank
loans, if possible. . .
The first institution we approached for financing
was Banque Arabe et Internatinale d'Investissement ("BAII") in Paris,
the consortium bank that acted as the lead lender in the syndicate that had
lent $50 million in connection with the acquisition of FGB in 1982. . . When
problems arose in the negotiation of terms by our counsel, efforts commenced to
explore with BCCI financing for the contemplated stock purchase. BCCI, too, was
familiar with the [First American/CCAH] stock being offered as collateral and
the market for the shares. . .(98)
Thus, by this account, both the share purchase and
the lending were intended as compensation by CCAH's grateful shareholders to
Clifford and Altman for the superior job they had done in strengthening First
American over the first five years of their management. As Clifford testified,
"we got to a point where we knew we were over the hump. And I thought the
time had come for Mr. Altman and me to participate in the results of this very
determined effort that we had made, that was proving to be so successful."(99)
Clifford testified that "I wanted to own some stock in my own company."(100)
With the loans that they secured from BCCI, Clifford
and Altman purchased stock in CCAH in 1986. In testimony to the Senate, Altman
said that he and Clifford participated in a "rights" offering which
was confined to the 14 shareholders of CCAH, paying "book price" for
the stock, which was $2,216.000.(101)
The account suggests that both the share purchases
by Clifford and Altman, and the lending from BCCI were normal arms-length
business transaction, such as other banks might contemplate to reward officers
and directors. Moreover, it explicitly separates the decision by CCAH
shareholders to compensate Clifford and Altman through permitting them to
purchase shares in the bank from the decision by BCCI to lend them funds for
the purchases. In fact, the two activities were integrated from the beginning,
with BCCI committing from the start to arrange no-risk financing for Clifford
and Altman as part of the transaction.
Evidence for the integration of the lending by BCCI
to Clifford and Altman with the decision by Clifford and Altman to purchase
shares, and the intention that the purchase be risk free, is set forth in some
detail by the Federal Reserve in its findings against Clifford and Altman.
As the Federal Reserve detailed, prior to coming up
with the "rights offering" approach, with lending done against the
shares by BCCI, BCCI and Clifford and Altman considered a number of different
alternatives by which they would acquire a risk-free interest in First
American.
For example, in early drafts of the arrangement,
CCAH itself agreed to issue shares to Clifford and Altman, with one draft
including a commitment requiring Kamal Adham, with BCCI as a back-up, to
repurchase Clifford and Altman's shares at any time at their discretion.
Significantly, the requirement that Adham repurchase their shares was never
discussed with him, demonstrating the degree to which Clifford and Altman, as
well as BCCI, regarding him as no more than a nominee for BCCI.(102)
Ultimately, Clifford, Altman, and BCCI instead decided
to provide them shares through a rights offering in which another BCCI nominee,
Masriq, would "waive" its rights to shares in order to make them
available to Clifford and Altman, at book value or $2216, one day after Masriq
had purchased other CCAH shares at the price of $4044.20 a share -- a
transaction that would be economically inconceivable if Masriq were a real
party at interest rather than a nominee.(103)
In their written and oral testimony, Clifford and
Altman never specified exactly what had gone wrong to prevent BAII [the French
bank which they had originally contacted for the loans] from agreeing to lend
funds to them for their stock, instead suggesting merely that unspecified
difficulties with BAII had lead them to open negotiations over loans with BCCI.
In fact, BAII was considering the possibility of
issuing such a loan solely on the basis that BCCI would simultaneously provide
BAII with a guarantee of the loan -- making BAII effectively acting as a pass
through to cover BCCI's involvement, just as it had done in connection in
lending money at the outset of the FGB purchase. But Clifford and Altman
insisted on the lending being on a non-recourse basis.
Clifford testified that the non-recourse aspect of
the loan -- which prevented BCCI from suing him personally if he failed to
repay the loan, or interest on the loan -- had been recommended to him by New
York counsel who felt his advanced age required such an arrangement.(104)
Despite Altman's relative youth -- he was under 40 years old at the time --
Altman's loan was on the same terms. Altman testified that the concern in his
case stemmed from "the [lack of] liquidity of the investment."(105)
Regardless of Clifford and Altman's actual reason for insisting that they not
be at risk for the borrowing necessary to finance their purchases of CCAH
shares, BAII refused to provide the lending, even with a backup guarantee from
BCCI, on a non-recourse basis, viewing such lending in this circumstance to be
inadequately secured. Thus, even with protection from BCCI, and with a BCCI
director on its board, BAII viewed the transaction as sufficiently unusual to
pull out.(106)
As Clifford testified, ultimately BCCI provided a
$15 million loan on a 100% non-recourse basis for 18 months at the London
Interbank Rate, which ordinarily runs below the Prime rate. When pressed by
Senator Brown as to whether or not First American had ever loaned money to any
individual on such favorable terms, Clifford replied, "I do not
know."(107) In staff interviews, Virgil Mattingly, General
Counsel for the Federal Reserve, has confirmed that First American has never
made loans on such favorable terms.
The loans were due on January 1, 1988. The loans,
however, were not paid off at that time. Altman explained that
"they [the loans] were not actually in default
because we had gone to the lender [BCCI] . . . and asked if they would
refinance the loan or roll it over. The lender [BCCI] indicated a willingness
to do that, but before the documents were prepared for a second loan, we started
the process of disposition of the shares."(108)
Once BCCI lent the money to Clifford and Altman for
the loans, it immediately agreed to providing further protection to them to
make certain they would never be at risk from their stock purchases, and in
fact, committing to help them sell their shares "at such prices as BCCI
and [Clifford or Altman] shall mutually determine."(109)
These unusual terms were set forth not in the loan
agreements between BCCI and Clifford and Altman, but in a side agreement they
executed, which recited the following terms on the loans:
notwithstanding any provision of the Note or Pledge
Agreement (or any other document relating to the loan by the undersigned to
BCCI) to the contrary, it is understood and agreed that the undersigned shall
not be obligated personally to repay to BCCI the loan principal or any interest
accrued thereon[, and that] BCCI shall be limited solely to the undersigned's
interest in the CCAH shares and any proceeds thereof to repay the loan and
interest thereon . . . BCCI shall arrange for the sale of said CCAH shares to .
. . interested buyers in such manner, amount, and at such prices as BCCI and
[Clifford or Altman] shall mutually determine.(110)
Failure
to Disclose Terms of BCCI Loans
Clifford and Altman did not disclose the unique
terms of its arrangements with BCCI to anyone, but actively sought to conceal
it. In their written testimony to the Subcommittee, they suggest they provided
full disclosure in the following terms:
As noted earlier, our investment in CCAH stock was
known to and encouraged by the shareholders. In addition, our intended purchase
of stock was duly disclosed to and authorized by the Board of CCAH, the parent
company of First American. In advance of the 1986 rights offering, Mr. Clifford
personally informed Managing Directors Symington and Quesada that we intended
to acquire stock in the corporation . . . We also disclosed the acquisition of
this stock to the Federal Reserve Board.(111)
In fact, First American itself was never told by
Clifford or Altman of their borrowings from BCCI in connection with their
purchase of CCAH shares, until the issue arose as First American began to
respond to questions arising out of an audit of BCCI-First American wire
transactions in the summer of 1990.
As the Federal Reserve found, Clifford and Altman
failed to disclose a number of material facts to Symington and Quesada about
their stock purchases, including that they were financing their purchases by
means of non-recourse, preferential-rate loans from BCCI and that BCCI had
agreed to arrange for the subsequent repurchase of their shares at a price to
be agreed upon by Clifford, Altman and BCCI later.(112)
First American only learned of the existence of the
Clifford and Altman loans, although not all of their unusual terms, when First
American officials were conducting a review of BCCI wire transfers to First
American accounts in response to matters arising out of the New York criminal
investigation into the BCCI-First American relationship. In that review, they
discovered millions of dollars in wire transfers from BCCI to Clifford and
Altman's accounts, and asked them what these transfers pertained to.
A letter from Clifford and Altman to First American
senior vice president James E. Lewis, dated August 1, 1990, details their
handling of this inquiry from their own officers at First American. Clifford
and Altman replied as follows:
This memorandum is written to provide you with
background concerning certain wire transfers in 1988 you have identified
between the Bank of Credit and Commerce International (Overseas) lt., and or
personal accounts at First American Bank, N.A. . . .
You are informed that in connection with the 1986
Rights Offering to the shareholders of Credit and Commerce American Holdings,
N.V., the parent holding company of First American, to raise additional capital
for the Company, all of the new rights shares were not subscribed by the
shareholders. We determined to acquire a small amount of CCAH shares which were
thus available. In this regard, we explored financing of the purchase with
possible lenders, including BCCI.
Satisfactory loans with BCCI (Overseas) Ltd. were
negotiated by each of us and the purchase of the CCAH shares at the offering
price was effected. (Mr. Clifford invested approximately twice as much as Mr.
Altman.) . . .
In early 1988 we were interested in selling some of
our CCAH stock and upon making inquiries in this regard, learned that a Middle
East businessman wished to acquire shares of CCAH. As a result, we each sold
him, for cash, a portion of or shares. BCCI serviced that transaction and wired
to our respective accounts at First American the sale proceeds. From those
proceeds we decided to pay off all outstanding indebtedness to BCCI (including
interest) and, accordingly, we arranged to wire monies from or First American
accounts to BCCI for that purpose.
We understand this information will be maintained on
a confidential and privileged basis.(113)
Notable in this account is what Clifford and Altman
did not tell First American on August 1, 1990: that BCCI had held a security
interest in their First American shares, in contravention of the understanding
of regulators that BCCI would not lend for the purpose of purchases of such
shares; that BCCI's lending was made on a non-recourse basis, in which BCCI
could recover only Clifford and Altman's interest in First American, rather
than against them directly; that BCCI, not Clifford and Altman, had located the
"Middle East businessman" who purchased their shares; or that from
the beginning, Clifford and Altman had arranged with BCCI for guaranteed
buy-backs of their stock to insure them against any possible loss.
Significantly, Clifford and Altman also failed to
disclose the existence of these arrangements to their partners at Clifford
& Warnke, who under normal partnership rules would have been entitled to a
share of Clifford and Altman's profits from the compensation being provided
them for their work at First American.
In June 1987, Clifford and Altman met with Abedi and
Naqvi in London, and insisted on paying interest on their respective loans from
BCCI, despite the fact that the side letters they agreed executed relieved them
of any obligation to do so. Two months later, they participated in a second rights
offering for CCAH stock. They again paid for the shares with non-recourse loans
from BCCI, against which they pledged their shares of CCAH. They again executed
side-letters relieving them of any risk on the transaction and insuring that
they would be permitted to sell the stock at a price to be determined by BCCI,
Clifford and Altman. At this point, Clifford held 5446 shares of CCAH, Altman
2722 shares. All were pledged to BCCI. Nowhere was BCCI's security interest in
these shares recorded, including in the Netherland Antilles, where CCAH was
incorporated, and where it was legally required.(114)
In early 1988, several events took place which could
have given rise to Clifford and Altman's decision to sell enough of their
shares in CCAH to eliminate the BCCI lending to them. First, on February 9,
1988, Abedi suffered a heart attack and stroke. The same day, in hearings
before the Subcommittee, former Panamanian consul Jose Blandon disclosed that
BCCI was handling drug money for General Noriega. In turn, Blandon's testimony
prompted the issuance in March of a subpoena by the Foreign Relations Committee
to BCCI for Noriega records.
In this very period, Clifford wrote a letter, dated
February 8, 1988, to Naqvi, to ask Naqvi to arrange a sale of some or all of Clifford
and Altman's stock. Significantly, the Federal Reserve concluded that the
letter was not written on February 8, 1988 by Clifford, as dated, but
"some time thereafter" and was backdated to make it look as if it
were written prior to February 9, the date of the Abedi heart attack and the
Blandon testimony.(115)
In March, 1988 the shares of CCAH stock owned by
Clifford and Altman were sold for $6,800 per share. Although the stock had been
purchased at book value, it was sold at market-value, which essentially meant
whatever someone was willing to pay for it. Altman testified to the
Subcommittee that "the distinction between a purchase at book value and a
subsequent sale of the shares... was not a practice that was unique to Mr.
Clifford and me and this transaction."(116) Mr. Mohammed
Hammoud, a CCAH shareholder and the purchaser of the shares, was apparently
willing to pay $6,800.00 per share -- the highest price ever paid for CCAH
stock - which afforded Clifford and Altman a combined gross profit of $9.5
million. Clifford explained the high price by noting that "there were no
rights offerings in 1988," the year Mr. Hammoud purchased the stock of
Altman and Clifford. (117)
In fact, the price of the stock was set not by
Hammoud, and not even by BCCI, but by Clifford and Altman, who told Naqvi the
amount of net profit they wanted on the sale, after all taxes had been paid. As
the Federal Reserve found:
In late February or early March 1988, Altman met in
London with Naqvi. Naqvi called Imam and directed him to speak with Altman
concerning the sale of Clifford's and Altman's shares. Altman stated that he
wanted a net profit on his shares of $1.5 million, and that Clifford wanted a
net profit on his shares of $3 million. These profits were to be after payment
of all taxes and repayment of all loans from BCCI. Altman also stated that he
and Clifford each wanted to retain a portion of their CCAH shares. Naqvi agreed
to this and instructed Imam to work out the details with Altman.
In consultation with Altman, Imam calculated the
sale price that would be necessary to achieve Clifford's and Altman's goals of
paying off their loan balances including all interest paid, covering all
capital gains taxes to be imposed in the transaction, and retaining a profit of
$3 million and $l.5 million respectively. . . . Imam, in consultation with
Altman, calculated that a purchase price of 2.69 times book, or $6,800 per
share, would be needed to achieve Altman's objectives. In concluding their
conversation, Altman instructed Imam not to disclose their conversation to
anyone other than Naqvi.(118)
Following the working out of the details of this
arrangement, BCCI "found" Mohammed Hammoud, described by BCCI chief
financial officer Masihur Rahman as a "front man" for BCCI, to
"purchase" Clifford and Altman's shares in First American, for the
highest price ever paid for CCAH stock -- $6800 per share -- and with loans
from BCCI, secured by the CCAH stock.(119)
Altman has testified that he had never met Mr.
Hammoud.(120) However, a power of attorney maintained in BCCI
records shows that Hammoud granted Altman a power of attorney allowing Altman
to undertake any transaction on behalf of Hammoud he wished in connection with
the purchase or sale of CCAH shares. Thus, the power of attorney granted to
Altman by Hammoud would have permitted Altman to have effectuated the sale of
his shares to Hammoud whenever he chose, any whatever price he chose.
Altman, however, testified that he did not know that
he had a power of attorney from Hammoud, stating "to the best of my
recollection, I have never seen that document before."(121)
The Federal Reserve concluded that Altman lied to
them in his sworn testimony to them concerning the sale of the CCAH stock to
Hammoud. According to the Federal Reserve:
On February 12, 1991, in sworn testimony to the
Board of Governors, Altman falsely stated that he did not know how the purchase
price of $6800 per share was fixed, and that he did not discuss the matter with
Imam.(122)
Senator Brown accurately summed up the transaction
when he stated, "the substance . . . was that [Clifford and Altman] got
title to the stock without putting up a single penny of [their] own money, and
suffered no loss if the stock dropped in price . . ."(123)
Remarkably, when Clifford and Altman decided in 1989
to finance purchases of shares in CCAH from their own funds, BCCI automatically
advanced loans for those funds regardless, reversing the charges only after
BCCI was informed that Clifford and Altman had decided to pay for the additional
First American shares themselves.(124)
Concealment
of Loans from Regulators
The Federal Reserve showed renewed interest in the
issue of whether BCCI might secretly control First American after the
indictment of BCCI in Tampa for drug money laundering in October, 1988 renewed
simmering allegations that BCCI was in fact a rogue bank. At the time, CCAH had
an application before the Federal Reserve to retain control of a Florida bank,
the Bank of Escambia, N.A., of Pensacola, which it purchased as part of its
purchase of the National Bank of Georgia.
On January 23, 1989, Altman met with a Federal
Reserve examiner who questioned him concerning the nature and extent of the
First American-BCCI relationship. Altman told the examiner he did not know
about any understandings or financial arrangements that might exist between any
CCAH shareholder and BCCI, failing to mention his own and Clifford's past such
understandings and arrangements, as well as pledges of other shareholders'
shares to BCCI of which he had learned.(125)
Following the meeting with Altman, the Federal
Reserve decided to approve the application to retain Bank of Escambia, advising
Altman in its transmittal letter that it was specifically relying on the
representations made by CCAH regarding its relationship with BCCI and its
commitment that "BCCI is not involved in the operations" of CCAH or
First American.(126)
On December 13, 1989, William Rybeck, the Senior
Deputy for Banking Supervision at the Federal Reserve wrote to Altman
requesting "information on any loans, original or subsequent to the
investors." Altman replied that he had no "access to information
regarding any financial arrangements that might exist" between any CCAH
shareholder and BCCI. "Based on our consultations with the resident
management director for [CCAH] in the Netherlands Antilles, we can only confirm
that no pledge or security interest has ever been recorded on the Company's
share register by any lender."(127)
This response by Altman to the Federal Reserve was
exceptionally misleading. First, Altman knew not only of his own and Clifford's
loans from BCCI, but had arranged specifically that the loans not be recorded
in the Netherlands Antilles, and had made similar arrangements for other CCAH
shares pledged to BCCI. Thus, his confirmation that no pledge or security
interest has been recorded was knowingly misleading, and provided to the
Federal Reserve for the obvious purpose of convincing the Federal Reserve that
no such loans had ever been made, when Altman knew this to be a lie.
On February 5, 1990, Altman followed up this initial
misleading answer with a second letter to the Federal Reserve, this one
characterized as one he had "just received" from Naqvi at BCCI
concerning BCCI's loans to CCAH shareholders. The letter stated that the
acquisition of Financial General "was not financed in any respect by
BCCI," and was drafted to create the false impression that none of the
loans that BCCI may have made to CCAH shareholders were made for the purpose of
purchasing shares in CCAH/First American. This misleading letter, which Altman
presented to the Federal Reserve as if it originated from BCCI, had actually
been drafted by either Altman, or one of his partners at Clifford & Warnke,
and transmitted to BCCI and Naqvi for Naqvi's signature.(128)
Altman explained his actions regarding these letters
as a consequence of the Federal Reserve's supposed lack of interest in the
issue of BCCI lending for CCAH shares that had not been part of the original
FGB takeover in 1981:
Mr. Ryback, in December, had submitted to me a
letter that is broadly worded . . . When I received the letter I spoke to Mr.
Ryback and indeed, I spoke to him more than once. . . Mr. Ryback explained to
me what it is that he was seeking by way of information. I might note that the
first paragraph of Mr. Ryback's letter I believe is the matter relating to the
tender offer. Then he goes on his second paragraph and deals with the subject
of any loans made then or subsequently. . .
I pursued it, other attorneys pursued and we pursued
it aggressively. We received information back that we thought at the time was
credible. In this time period, the issue of lending arrangements arose, and the
matter came up about what BCCI's practices were . . . We did not necessarily
think that the lending was impermissible . . . It was not impermissible to
borrow, even borrowing secured by the stock. But we gave the Federal Reserve
the information we had obtained.(129)
Altman said that he understood that what the Federal
Reserve wanted to know was first, whether BCCI had lent money for the original
FGB takeover, and second, whether BCCI currently had lending which secured BCCI
shares. Altman testified that the one kind of information that Ryback did not
want was information about past BCCI lending which no longer existed -- such as
the lending made to Clifford and Altman, and it was on that basis that Altman
failed to provide him with this information:
Mr. Ryback was not interested in certain kinds of
information, even though his original letter would seem to call for it. . . I
had also indicated to him that to comply literally with this letter, I am told,
would be burdensome, to get every loan ever made to any investor by BCCI. And
that is why he focused his inquiry as the specific information that he needed
for his purposes.(130)
Mr. Rybeck, however, told Senator Kerry that he had
no memory of ever altering his original request.(131)
Ultimately, the Federal Reserve learned of the BCCI
loans to Clifford and Altman only from its own investigation, when it
discovered the relevant documents in BCCI files held in Abu Dhabi, and
interviewed Imam, who participated in meetings, telephone calls, and written
communications with Altman in connection with the loans.
What is evident from this history is that Altman
systematically took steps to hide the truth about his and Clifford's loans from
BCCI from the Federal Reserve, artfully answering questions in such a manner as
to mislead the Federal Reserve and prevent the Federal Reserve from discovering
their own secret loans. In the latter stages of this cover-up, Altman actually
created letters purporting to be from BCCI that were created at Clifford &
Warnke for the purpose of hiding Clifford and Altman's borrowings.
Altman's
Assessment of His Conflict of Interest
Pertaining
To First American and BCCI
On July 6, 1990, Robert Altman wrote a memorandum to
the file describing a meeting between him, Swaleh Naqvi, and another of BCCI's
lawyers from another U.S. firm named Kim Gagne, on that day in London. Both in
what it did say, and even more importantly in what it did not say, the
memorandum demonstrated Altman's personal recognition of the potential problems
for him relating to BCCI having lent him money for the purchase of his First
American stock.
The memorandum, written at a time when the Abu Dhabi
interests had just begun to assert their control of BCCI's business and legal
strategy, focused on conflict of interest issues involving BCCI, Clifford and
Altman, and provided a detailed review by Altman of the supposed nature of the
First American/BCCI relationship in the following terms:
I said that I had wanted to inform him [Naqvi]
personally why Clifford & Warnke could not provide legal advice to BCCI in
connection with the investigation being conducted by the District Attorney in
New York State. As he knew, our firm did not do criminal work, and the primary
representation of BCCI would be by other lawyers in any event. However, we were
general counsel to First American and an issue had arisen about BCCI's
relationship with First American. While we did not now know of any actual
conflict of interest between BCCI and First American, we were concerned about
the appearance of a conflict as well as any potential conflict. . . . Mr. Iqbal
[the new head of BCCI, replacing Naqvi at the request of Abu Dhabi] said he did
not know much about the First American issue in New York as his focus was
solely on BCCI's operations. Mr. Iqbal mentioned that BCCI had loans to some of
First American shareholders, but that alone constituted his understanding of
BCCI's relationship with First American. He accepted, however, my comments
regarding any appearance of conflict.
Mr. Naqvi also accepted the views I presented.
However, he seemed frustrated and stated that these allegations about the
BCCI/First American relationship were "pure rubbish." Mr. Naqvi said
that BCCI had "no interest whatsoever" in First American, except for
a financial interest in some loans made to some of the First American
shareholders (through general lines of credit). CCAH stock had, at some point,
apparently been given as security. Mr. Naqvi said that some years ago BCCI had
briefly considered a merger with Fist American, among its various corporate
restructuring strategies, but that this had never been pursued, and was merely
one of the historical planning models. Mr. Naqvi said he believed the false
allegations about BCCI/First American were being spread by disaffected former
BCCI employees who felt bitter toward the Bank.(132)
The subject matter of this memorandum is the BCCI
relationship to First American, whether BCCI had any interest in First
American, and the possible implications of loans BCCI might have made to First
American shareholders. At the time Altman wrote this memorandum, both Altman
and Naqvi knew well that Clifford and Altman had themselves had previously had
such loans, and that loans from BCCI to First American shareholders was a key
issue on which the New York District Attorney was seeking information. BCCI's
secret loans to Clifford and Altman, secured by First American/CCAH stock,
would obviously be material to such an inquiry, and of themselves raise
substantial "conflict-of-interest" questions concerning Clifford and
Altman. Any competent attorney would recognize this, and be compelled to
explore the issue with a client in any genuine conversation about the issue of
conflict. Yet nowhere in the memorandum does Altman discuss this issue with
Naqvi, as certainly would have happened if such a discussion were authentically
exploring the conflict issue.
The omission of any mention of Altman's own loans
from BCCI for First American stock during the lengthy discussions of the
conflict issues is striking, and extremely unlikely if the conversation and
memorandum were intended to reflect an honest analysis and appraisal of the
situation.
Legal
Fees
Clifford told the Subcommittee that "most of
the services were rendered to the operating holding company, First American
Bankshares," which "started out at a lower figure when the bank was
not so large, and as the bank expanded then the cost of legal services
expanded." Clifford indicated that his law firm received "maybe $1
million a year" in legal fees from First American.(133)
Clifford testified that the fees charged BCCI
"were nothing like those charged First American, because there wasn't
nearly that much work to do."
In fact, Clifford & Warnke billed First American
and its related entities a total of about $11 million over about an eight year
period, averaging about $1.35 million per year; and BCCI a total of about $6
million over twelve years, or about $500,000 per year, for a total of $17
million in all.
In addition, the law firm of Clifford & Warnke
was the lead firm for the defense of the BCCI officers indicted in Tampa in
1988. According to the House Banking Committee, BCCI paid some $45 million in
legal fees which were disbursed by Altman. In testimony before the Senate,
however, Mr. Altman disputed that figure and indicated that "the amount of
money ... paid in this general effort was half that -- approximately $20
million," which Altman testified was used for a variety of purposes
including international audits and the implementation of new procedures to
guard against money laundering. (134) Clifford testified that
"not one penny of that effort came to us."(135) A summary
of these disbursements, provided to the Subcommittee on March 2, 1992 by
Clifford and Altman's attorneys, specifies a total of $18,975,224.47 paid by
BCCI in attorney fees for the Tampa criminal defense, and another $2,817,011.66
for miscellaneous expenses, ranging from computer services and court reporters
to private investigators and expert witnesses in connection with the case.
Cooperation
with the Subcommittee
In testimony before the Senate, Clifford and Altman
explicitly denied having done anything to delay, impede, or frustrate the
efforts of the Senate to obtain the full story about BCCI, and BCCI's
relationship to First American. As Altman testified:
There have been suggestions made by certain
witnesses that we were engaged [in] influence peddling and the like, in order
to protect BCCI. Those are totally untrue. There are suggestions that we
condoned obstructions of this committee's efforts or investigations of BCCI.
Those are totally untrue, and the record should reflect that that is our view,
and as I said, we can detail it.(136)
Unfortunately, while repeatedly advising the
Subcommittee of their intention to cooperate fully with its inquiries, Clifford
and Altman, like BCCI itself, in fact failed to provide documents that had been
subpoenaed by the Committee. In addition, according to allegations from a
variety of sources, including other attorneys for BCCI and BCCI officials, they
undertook a variety of efforts to delay or impede the Subcommittee investigation.
These efforts included:
** Altman allegedly instructing BCCI officer Amjad
Awan to mark bank documents "attorney work product" in August 1988 in
an attempt to exempt them from subpoena, despite the fact that the documents
were bank records maintained in the ordinary course of business that had not
been created by attorneys.
** Failing to insure that all BCCI documents
specified in the Foreign Relations Committee subpoena in July 1988 were
provided to the Subcommittee, and failing to instruct BCCI or First American
employees to review BCCI records maintained at First American in response to
the subpoena.
** Failing to insure that BCCI officials in Florida
did not destroy or alter documents subpoenaed by the Committee in August and
September, 1988.
** Altman telling Subcommittee staff on May 14, 1990
that BCCI had no outstanding loans to shareholders of CCAH, when one week
earlier, he had told the Federal Reserve that he had heard reports of such
lending in amounts ranging from $400 million to over $1 billion.(137)
** Allegedly attempting to use "political
chits" to delay hearings of the Subcommittee in the summer of 1990.
Indeed, according to BCCI banker Amjad Awan, at the
very time in the summer of 1988 that Clifford and Altman had advised the
Subcommittee that they and BCCI would cooperate fully with the Subcommittee,
they were simultaneously advising their clients that they intended to play
"hardball" with the Subcommittee.(138)
Clifford and Altman have denied intentionally
undertaking any of these activities, for example, explaining the failure to
provide documents as inadvertent, and based on inadequate document review done
by BCCI officials; and denying the "political chit" charge outright.
Moreover, the Subcommittee investigation cannot fully answer all the questions
raised about Clifford and Altman's response to the inquiries by the
Subcommittee. For example, regarding the case in which BCCI officials destroyed
and altered documents in response to the Committee subpoena in 1988, it is not
clear from the record before the Subcommittee whether Clifford or Altman knew
of these activities.
However, there is no question that documents
subpoenaed by the Foreign Relations Committee concerning General Noriega, and
existing in the United States, were never reviewed by Clifford and Altman as
BCCI's attorneys, let alone provided to the Committee in response to a lawful
subpoena. And, after Clifford and Altman were no longer representing BCCI,
responses by them to document requests were delayed repeatedly, and some of the
answers that were ultimately provided proved to be incompatible with the
documentary evidence.
Handling
Of Subcommittee Witnesses and Documents
In March, 1988, following testimony before the
Subcommittee by Jose Blandon and other witnesses in February concerning the use
of BCCI by General Noriega and members of Noriega's business groups, the
Foreign Relations Committee authorized subpoenas to BCCI for Noriega's records.
At the time the Committee acted, Clifford and Altman had already begun their
own internal investigation at BCCI of the relationship between BCCI and
Noriega.
Documents provided to the Subcommittee on May 20,
1992 by Clifford and Altman, following BCCI's waiver of the attorney-client
privilege, describe a witness interview with Amjad Awan, Noriega's personal
banker at BCCI, conducted by an unspecified lawyer at Clifford & Warnke on
February 23, 1988 -- two weeks following Blandon's disclosures. At the time,
Awan was based in Miami, having been BCCI country manager in Panama from 1981
through 1984, and an officer at BCCI's Washington, D.C. representative office
in 1984 and 1985. As the Clifford & Warnke attorney described the
situation:
BCCI's New York office believes that BCCI may
receive a subpoena, perhaps from Congress, to testify about BCCI's role
vis-a-vis General Noriega . . . there was always an undercurrent that alot
[sic] of the money in Panama may be drug money, but BCCI felt it was dealing
with lawful activity in dealing with the foreign exchange dealers . . . Mr. Awan
knows of no specific instances of drug money passing through BCCI. It is
possible some was laundered drug money . . . General Noriega's business with
BCCI was limited to the $200,000 to $300,000 he deposited for VISA cards, etc.
But Mr. Awan became a personal friend of General Noriega. They became very
close after Mr. Awan left Panama in 1984. General Noriega asked Mr. Awan to
make hotel reservations, and to book limousine and airline tickets. Mr. Awan
would often use his own credit cards to perform these services because the BCCI
office in Washington in [sic] only a representative office. . . Mr. Awan meet
[sic] General Noriega in New York on one occasion and asked Mr. Awan to give
him $100,000 in cash.(139)
Thus, months before the service of a subpoena to
BCCI regarding Noriega and Awan, Clifford and Altman had interviewed Awan
regarding his relationship with Noriega, been informed of at least one cash
payment by BCCI to Noriega in the U.S., and learned of Awan's handling of
Noriega finances while at the Washington representative branch office of BCCI.
In the meantime, on June 1, 1988, Clifford wrote a
memorandum to Altman concerning information he had received from BCCI's number
two official, Swaleh Naqvi, in London, concerning an article in the New York
Times that referred to BCCI's alleged involved in money laundering operations
in Panama, in a leak arising out of the Customs "C-Chase" sting
operation. According to the Clifford memorandum to Altman:
On Wednesday, June 1, at 11:00 am I had a phone call
from Mr. Naqvi in London. He had placed the call to you, but in your absence
then spoke to me. I explained to Mr. Naqvi that the reason you were away was
that you were in California following up on information regarding the possible
purchase of a bank.
His call had to do with the BCCI bank in Panama.
There had been brought to his attention an article in the New York Times of
Wednesday, May 25, that referred to the Panamanian office of BCCI. The report
involved missing documents from the bank's records and stated that the
authorities have linked BCCI in Panama to money-laundering operations.
Mr. Naqvi says that there are two individuals who
operate the bank in Panama and he has told them to come to Washington to see
us. . . . He stated that the men would remain here as long as we required their
presence. After we have talked to the men we are to report to Mr. Naqvi. The
matter is of such importance to him that he may, after our conversation, decide
to come to the United States.(140)
Thus, by the time of the issuance of the Committee
subpoena on July 27, 1988 and subsequent service August 1, 1988, Clifford and
Altman were aware in some detail of both Noriega's involvement with BCCI and
serious allegations concerning BCCI's involvement with drug money laundering
generally.
After the Committee subpoena was served, in his
initial contact with the Subcommittee on behalf of BCCI, Clark Clifford wrote
Senator Kerry to advise him of BCCI's intention to cooperate fully with the
investigation. Soon thereafter, Clifford contacted Senator Claiborne Pell,
chairman of the full Committee, to request a one-month delay in producing
documents pursuant to the subpoena. Senator Pell referred that request to Kerry
staffer Dick McCall, extending production to September 11, 1988.
In the meantime, Clifford and Altman met with Jack
Blum and Kathleen Smith of the Subcommittee staff to discuss the subpoenas. A
memorandum to the file from Altman dated August 10, 1988, describes the meeting
in the following terms:
During the course of our discussions which lasted
about an hour and 20 minutes, Jack Blum described in detail the information
collected during the investigation and public hearings by the Subcommittee . .
. From its sources, the Subcommittee has been led to believe that BCCI, through
its banking locations in Panama, Colombia and in Miami, Florida, has had a
major involvement in the management of assets for General Manuel Antonio
Noriega, the current head of the Panamanian government; Michael Harari, reputed
to be a close aide of Noriega's, an arms dealer, and formerly an Israeli secret
service agent; and various other individuals from Panama and Colombia with
major involvements in international drug trafficking. The Subcommittee staff
has also been led to believe that BCCI, through its banking locations in
Colombia and Panama, has been significantly involved in the laundering of large
amounts of cash obtained from the sale of illicit drugs in the United States. .
.
(1) The staff has amassed extensive information on
BCCI. It is their understanding that General Noriega was instrumental in
helping BCCI secure a banking charter in Panama. Information on BCCI has been
provided by third parties, including government officials and other banks, as
well as current and former employees of BCCI.
(2) We advised the Committee that we would soon be
going to Miami to begin to assemble facts and related documents and, if need be
thereafter, to Colombia and Panama. We expressed concern over the breadth of
the subpoena. . .
(3) Altman told them that it was the intention of
BCCI's senior management to be cooperative and helpful. He stated that
management was unaware of any impropriety of the bank or its employees.
(4) In response to the staff's inquiry, Altman
described BCCI's relationship with First American and explained Clifford's and
Altman's long-standing representation of the Bank. Altman also expressed our
complete confidence in BCCI's management. He stated that criticism that had
been levelled at the Bank over the years had proved, upon careful
investigation, to be groundless and without merit. . .
Mr. Clifford, in particular, and the firm generally
have enjoyed an excellent relationship with the Committee over the years.(141)
Awan was in London at the time the subpoena was
served for a regularly scheduled marketing meeting, and was told about the
subpoena by Naqvi, who told him the lawyers would work things out.(142)
Following Awan's return to the United States, Awan participated in a series of
interviews with Altman and two other lawyers from Clifford & Warnke in
Miami in mid-August, 1988. Six other BCCI officials were also interviewed by
Altman in the same period. In the memoranda prepared by Clifford & Warnke
attorneys concerning these interviews, the BCCI officials made numerous untrue
statements to the lawyers conducting the interviews, ranging form claims that
they did not knowingly launder drug money, to a contention that "BCCI has
no professional relationship with General Noriega," but merely had
previously "maintain[ed] depository accounts for General Noriega in London
and issued credit cards."(143)
On August 17, 1988, Altman and other Clifford &
Warnke lawyers met again with BCCI officers in Miami and discussed the Senate
subpoenas follows:
Mr. Altman commented on the existence of the Noriega
account in London, but stated that the subpoenas requested documents in the
possession of [BCCI] Overseas. . . . They were all transactions of S.A. The
wire transfers of Panama to London had no names or account numbers. . . there
could be unfortunate implications for the bank if we were to produce documents
with respect to General Noriega's London account. Those records may be
protected by English or other foreign law, an issue we will check. If those
documents are produced, BCCI personnel in Panama could be at risk . . .
Mr. Altman suggested that we seek to produce
documents in the first week of September. By then, we would have to formulate a
position with respect to Mr. Awan.(144)
During the interviews, Awan stated that General
Noriega had in fact banked with BCCI, that Awan had handled various
transactions on behalf of Noriega while based in Washington, and that Noriega
had a maximum deposit relationship with BCCI of $22 million. This final
statement was, of course, entirely inconsistent with Awan's representation to
Clifford & Warnke the previous February that Noriega's business with BCCI
was limited to $200,000 to $300,000.(145) Moreover, Awan told Altman
that he "did not think that General Noriega would be above taking bribes
from those involved in the drug industry. (146)
It is clear from the documents provided to the
Subcommittee that Mr. Altman was concerned about providing too much information
to the Subcommittee. As Sanders notes in his memorandum:
Mr. Altman stated that the bank had a potential
political exposure as a result of the receipt of substantial dollar deposits
from General Noriega. Additionally, there is the concern with respect to money
laundering, although the bank does not believe any laundering occurred
knowingly. . . As to money laundering, we could explain it may have occurred.
We could explain that we took some few millions dollars from unknown sources
and that, in addition, we dealt with money changers. We could state, however,
that it was the policy of the bank not to deal with drug money and, in any
case, the amount of cash we received was insignificant compared to other banks.(147)
Following his meetings with Altman in Miami, Awan
returned to London, to review the Noriega financial records and meet with
Naqvi. While in London, he again met with Altman, who questioned Awan
concerning the nature and extent of BCCI's relationship with Noriega. According
to Awan's sworn testimony before the Committee, and staff interviews in
connection with that testimony, while in London in late August, Altman told
Awan to retrieve documents pertaining to Noriega in response to the Subpoena.
Awan retrieved the documents, which included a number of originals and some
copies, and showed them to Altman. All of the documents were BCCI financial
records, and none of them contained any material prepared by attorneys.
Nevertheless, when Altman returned the documents to Awan, he told Awan to mark
them as "attorney work product." Awan, who did not understand what
the phrase meant, marked the documents, "attorney word product," with
the markings appearing on each folder in which they were contained.(148)
Awan later recollected that Altman had also told him that regardless of what he
might tell the Senate, he intended to play "hardball" in response to
the subpoena.(149)
By contrast, Altman testified that there was
"no intention to mislead this committee," and "there has been no
effort to derail this process."(150)
Altman then met with Naqvi to discuss the Senate
subpoena further. Following that meeting, Awan was told by Naqvi not to return
to the United States, and that he would be transferred immediately to Paris as
a means of avoiding the subpoena.(151) Awan protested, noting that
his family and possessions were in Miami and that prior to the subpoena he had
no plans to leave the United States. Naqvi agreed that Awan could return
briefly to the U.S. to make arrangements to move, but urged him to leave as
rapidly as possible. Awan returned to the United States and, believing after
his meeting with Naqvi that he could not trust Altman to represent his
interests, began communicating directly with Blum without the knowledge of
Altman, and decided to resign from BCCI and retain a separate attorney.(152)
Significantly, chronologies of meetings, originally
created as privileged and confidential attorney work product pertaining to the
Congressional subpoena, and ultimately provided to the Subcommittee on May 20,
1992 by Altman's attorneys, do not show any meeting involving Altman and Awan
in London in August, 1988, despite Awan's detailed testimony concerning his
meeting with Altman in late August.
These chronologies show Altman's meetings with Awan
only in February 23, 1988 in Washington and in mid-August with Awan in Miami,
and omit any reference to Altman having Awan in London, or even to Altman
having met with Naqvi in London in this period. Given Awan's detailed and
explicit statement about meeting Altman in London at the time the subpoena was
issued, and Altman having told him in London to mark Noriega documents
"attorney work product," the omission of any reference to the London
meetings in the Clifford & Warnke internal chronologies and documents is
suggestive of Altman's intent.
Following his meeting with Altman and his meeting
with Naqvi in August, Awan told Blum that BCCI had sought to transfer him out
of the country and to prevent the service of the subpoena, and that this took
place immediately following a meeting between his superiors and Altman. Blum
arranged to serve Awan without providing further notice to BCCI, or Clifford or
Altman, and service was made in early September, 1988.
Soon after the service of the subpoena on Awan, on
September 9, 1988, Awan told an undercover Customs agent, Robert Musella, in a
conversation secretly recorded by the government, that the Foreign Relations
Committee "had a vendetta" against BCCI, and that lawyers for BCCI in
Washington advised the bank to immediately transfer Awan out of Miami to Paris
to avoid being served with the subpoena:
Last Friday, I was told that, ah, our lawyers, Mr.
Altman was there, and he suggested to the bank that I should be immediately
transferred from the U.S. to Paris. . . So they duly transferred me Friday to
Paris.(153)
Later, Awan would explain to investigators that he
was not personally present at any meetings with Altman regarding his transfer,
but that the circumstances had lead him to believe that the BCCI decision had
been made on the advise of Altman.(154)
On the very day Awan was telling Musella about
BCCI's decision to move him to Paris in an effort to circumvent the Senate
subpoena, September 9, 1988, Altman and his colleague at Clifford & Warnke,
Robert Sanders, met with Blum to discuss the subpoenas issued by the Committee
to BCCI. Altman told Blum that BCCI "does not do business" with drug
dealers, did not have large depository relationships in Colombia and Panama,
and that BCCI "had been approached for several occasions and offered
lucrative commissions to accept large cash deposits, but the bank always
refused." As detailed in the Clifford & Warnke memorandum of the
meeting, Blum then asked Altman concerning the relationship between BCCI and
Noriega:
Altman stated that BCCI previously maintained a
deposit account for the Panamanian government which General Noriega, as head of
the government, could control. BCCI may not disclose information about this
account for two reasons. First, such disclosure would be unlawful under
Panamanian bank secrecy law. Second, if this information were produced, the
employees and business operations of BCCI would be vulnerable.
Mr. Blum wanted to know how much money was in this
account and in what country the account was maintained. Mr. Altman stated that
this information was not available. Mr. Altman advised that the only one way
the bank might be able to disclose information was with the permission of the
Panamanian government.
Mr. Blum inquired when the money in this account was
withdrawn. Mr. Altman said the account was closed sometime this past summer.
Mr. Blum asked about Mr. Awan's present location.
Mr. Altman stated that he was traveling in the United States for a few days,
but may be transferred soon to BCCI's office in Paris. . . .
Mr. Blum asked whether BCCI ever made any loans to
General Noriega. Mr. Altman stated that if there were any loans, they were
minor in nature. Again bank secrecy laws foreclosed disclosure. . . .
Mr. Altman then stated in closing that he wanted to
convey to Mr. Blum a serious concern. Mr. Altman noted that the banking
business is built on trust and confidence. Accordingly, Mr. Clifford and he
were concerned that BCCI's reputation would be unfairly damaged as a result of
publicity about the investigation, even though all allegations would be
disproved. In this regard we were concerned about any rumors or leaks that
could flow from the investigation and might, incorrectly and inequitably,
tarnish BCCI's investigation.(155)
On September 14, 1988, Clifford and Altman met with
Foreign Relations Committee special counsel Blum to discuss document request
and production, and reiterated previous commitments to cooperate with the
Senate. Shortly thereafter, in Miami, BCCI officials, under instruction from
BCCI management, began altering and destroying documents specified in the
subpoena.(156) On September 19, 1988, Clifford and Altman made
BCCI's first production of the subpoenaed documents, with a second production
on September 21, 1988, accompanied by representations from BCCI, through
Clifford and Altman, that no other documents pertaining to the subpoena existed.
After retaining separate counsel from BCCI and
ceasing being represented by Clifford and Altman, Awan began to take the
position that he would be at less risk if he did not object to the production
of documents, and cooperated with the Subcommittee, a position that
contradicted Clifford & Warnke's position that if Awan provided
information, his life would be risk. Awan's tentative decision to cooperate
with the Subcommittee, communicated on September 22, 1988 to lawyers at
Clifford & Warnke, caused "distress" to the Clifford & Warnke
lawyers handling the matter, as set forth in a September 22, 1988 memorandum
from John Kovin, a partner at Clifford & Warnke, to Altman and another
partner:
A literal reading of John Grabow's telephone message
is somewhat distressing. If it means that no objections of any nature will be
interposed to the production of documents in response to Amjad Awan's subpoena
-- including any concerns that Mr. Awan may have about his personal safety --
it may cause us to alter the stance that we have adopted with the Committee
staff up to this point.(157)
A second memorandum to the file from Kovin describes
a meeting five days later in which the Clifford & Warnke attorneys are
clearly trying to convince Awan's lawyers to maintain a collective strategy of
keeping documents from the Committee. The September 27, 1988 memorandum, marked
"privileged and confidential," from Kovin states:
In response to specific questions by Mr. Grabow
[Awan's attorney], I responded that we had not provided any copies of Mr.
Awan's expense or compensation records for retention by the Committee, nor had
we provided any copies of "Noriega documents". With respect to the
latter category, we do not intend at the present time supplying any such documents."(158)
In a memorandum three days later, Kovin wrote that
"Awan turned over the so-called Noriega documents", and "Awan
noted to Grabow but not to Blum that certain of his travel records --supplied
to this firm -- from the period when he was stationed in Miami had not been
produced."(159) Thus, Clifford & Warnke knew as of
September 30, 1988 that documents responsive to the subpoena existed and had
not been provided to the Senate. Kovin's recommendation as to how to proceed
regarding those documents was not to conduct a search for them in order that
they be provided the Senate, as was legally and ethically required of BCCI's
attorneys, given the service of the Senate subpoena, but instead to "check
on this [the missing documents] in the event it later became the subject of
additional questions."(emphasis added)(160)
During September and October, Blum deposed Awan and
a second BCCI witness, as the Subcommittee completed its two year investigation
of drug trafficking in Central America and prepared its final report. When
Blum's appointment at the Foreign Relations Committee lapsed in March, 1989,
BCCI officials were told that Clifford and Altman had taken care the Foreign
Relations Committee, and that the investigation was over.(161)
On July 7, 1989, after a June 15, 1989 broadcast by
NBC on BCCI's involvement with General Noriega, describing BCCI documents
concerning Noriega, Senator Kerry wrote Clifford noting that NBC apparently had
obtained documents which had been subpoenaed by the Foreign Relations Committee
and never provided.
Four days later, Clifford wrote Senator Kerry to
state: "I am in receipt of your letter dated July 7, 1989," and noted
that "we shall continue to try to be responsive to the needs of the
Subcommittee."(162)
A meeting was set up for July 17, 1989, between
Kerry staff and lawyers for BCCI to discuss the Subcommittee on Narcotics and
Terrorism request for documents relating to bank accounts which General Noriega
and the government of Panama held at BCCI branches in London, England. At the
meeting, Altman and Raymond Banoun, a criminal defense attorney representing
BCCI, advised the Subcommittee that no documents responsive to Subpoena were in
the United States and that all documents were in London, had been reviewed, and
did not refer to documents in the United States. The next day, Subcommittee
staff wrote BCCI's attorneys to request the immediate provision of the
documents to the Subcommittee to the extent that any such document had ever
been in the United States, prompting a reply letter from BCCI's attorneys
reaffirming BCCI's offer to assist the Subcommittee in obtaining the documents.
The documents from London were ultimately provided to the Subcommittee in late
November, 1989, and were found to refer to dozens of transactions involving
BCCI records maintained at First American, which passed through First American,
or which involved BCCI's representative office in Washington.
After reviewing these documents, Kerry staff noted
that they referred to numerous documents at First American and BCCI Washington
which should have been produced by BCCI to the Senate in the fall of 1988. On
May 14, 1989, staff met with Altman, Banoun and Larry Wechsler, another BCCI
lawyer, and the lawyers produced 775 pages of new documents concerning Noriega.
At this meeting, the attorneys stated that they
relied on Awan's statements and conducted no independent searches for documents
in 1988 in response to the Committee subpoena. Altman, who had previously told
staff that he had reviewed all of Noriega's documents in London and that none
of them referred to transaction in the United States, now suggested that his
initial review had been casual at best, and that he had simply not noticed any
such transactions.(163)
In the meeting, BCCI's lawyers agreed to produce all
Noriega and Awan records held at First American by BCCI. Thus, a substantial
number of documents which should have been provided to the Committee by
Clifford and Altman in response to the subpoena to BCCI by the Foreign
Relations Committee were in fact not provided. Indeed, no search at BCCI's
accounts at First American had ever been conducted by First American in
response to the subpoena to BCCI. The documents ultimately provided showed
that, regarding Noriega's banking at least, BCCI and First American had a close
working relationship, and that Noriega's funds had passed through First
American, focusing further staff attention on the relationship between the two
institutions.
During the meeting, in response to a request from
the Subcommittee to provide information on loans from BCCI to its shareholders
and the shareholders of related entities, including ICIC and CCAH, Altman
advised Jonathan Winer of Kerry's staff that none of the shareholders of CCAH
currently had loans from BCCI.(164) One week earlier, Altman had
told the Federal Reserve precisely the opposite -- that Altman had "heard
reports of loans by BCCI to certain shareholders [of CCAH] in amounts ranging
from $400 million to over $1 billion."(165) Altman thus made a
misleading statement to Senate staff regarding BCCI's outstanding lending to
CCAH. Altman of course made no reference to his own past borrowings from BCCI.
By the summer of 1990, as the Subcommittee persisted
in its efforts to learn more about BCCI's relationship to First American, the
Subcommittee scheduled hearings intended to focus attention on the relationship
between the two institutions. In response, according to two confidential
memoranda prepared by a BCCI lawyer at the firm of Holland & Knight in
Florida, based on conversations with Philip Manuel, a private investigator
hired by BCCI in connection with its criminal defense, Altman and Banoun sought
to call in "political markers" in an effort to stop the Subcommittee
inquiry. As specified in the second of the two memoranda:
The Source [Manuel] stated that Altman and Banoun
are opposing the subpoenas and doing everything within their power to call in
"political markers." Consequently, it may be that Altman and Banoun
will succeed in quashing their subpoenas or having them withdrawn; and not end
up testifying before the Kerry Committee.(166)
Altman testified that he had "no idea what the
author is talking about when he talks about calling in political markers,"
noting that he had never even asked for a delay of the hearing in writing.(167)
In fact, staff was informed by Banoun, on behalf of BCCI, that attempts by the
Subcommittee to question him or Altman would interfere with BCCI's
attorney-client privilege, an assertion reiterated by former Senator John
Culver, who as part of BCCI's team of lobbyists, contacted the Kerry office to
urge a postponement of the planned hearing. After Altman, Banoun, and BCCI
refused to appear at any hearing, and the Justice Department alleged that any
hearing by the Subcommittee could interfere with its interests, the hearing was
postponed, due to the refusal of each of the requested witnesses to agree to
testify.
Thus, in contrast to the full cooperation promised
by Clifford and Altman to the Subcommittee in the course of its investigation,
BCCI's lawyer team, including Clifford and Altman, collectively failed to meet
basic obligations to the Senate to insure that subpoenaed documents be
produced; sought to convince BCCI officer Awan to tell the Senate that
production of documents would threaten his life, at a time when Awan no longer
wished to make this assertion; failed to search for documents known to be
required by the subpoena and not produced; failed to search other categories of
BCCI documents held at the First American Bank; asserted legal obstacles to
cooperation on numerous occasions; and declined to provide witnesses at
scheduled hearings. These findings represent the bare minimum of their failure
to provide the promised cooperation.
Federal
Reserve Charges
On July 29, 1992, in coordination with criminal
cases brought by the Justice Department and the New York District Attorney, the
Federal Reserve issued its summary of charges against Clifford and Altman,
specifying its findings of violations of law and regulations, and proposing to
bar them from banking for life.
In its summary of charges, the Federal Reserve
charged Clifford with four counts of violations of law and regulation, and
Altman with seven counts of such violations.
The first count charges Clifford and Altman with
having violated the Bank Holding Company Act by participating in BCCI's
acquisition of control of CCAH/First American in violation of that law.
Included in that count are numerous factual allegations concerning false
statements and concealment of information by Altman.
The second count charges Clifford and Altman with
having violated the Federal Reserve's order regarding the FGB takeover through
violating the commitments made that BCCI would have no role in the management
of or lending to First American, and related issues.
The third count charges Altman with having violated
the Bank Holding Company Act by participating in BCCI's acquisition and
retention of control of the National Bank of Georgia in violation of that act.
The fourth count charges Clifford and Altman with
having breached their fiduciary duties to CCAH, First American, and CCAH
shareholders by failing to disclose their personal financial arrangements with
BCCI regarding their own shares of CCAH.
The fifth count charges Clifford and Altman with
having engaged in unsafe and unsound banking practices and breaches of
fiduciary duty in connection with premature paying off BCCI loans to CCAH which
cost CCAH money.
The sixth count charges Altman with having violated
the law by making a number of false statements to the Federal Reserve.
The seventh count charges Altman with having
violated the bank Control Act in connection with the purchase of CCAH shares by
Masriq, an entity controlled by Saudi banker Khalid bin Mahfouz, against whom
the Federal Reserve has issued separate charges, treated elsewhere in this
report.
The findings of the Federal Reserve remain subject
at this time to a hearing to give Clifford and Altman the opportunity to rebut
the Federal Reserve's case prior to the Federal Reserve reaching a final
determination on these findings.
1.
House Committee on Banking, Finance, and Urban Affairs, September 11, 1991,
Serial No. 102-69, p. 36.
2. S.
Hrg. 102-350 Pt 3, p. 63.
3. S.
Hrg. 102-350 Pt. 3, p. 286.
4. S.
Hrg. 102-350 Pt 2 p. 505, 518.
5.
These findings should not be viewed to correspond to any conclusions that might
be reached in connection with the matters at issue in criminal and civil
litigation concerning Clifford and Altman in the U.S. District Court for the
District of Colombia, and in New York County in the case brought by District
Attorney Morgenthau. These findings have been reached on the basis of a record
which may include material not admissible in any of those proceedings, and
reflects judgments made in the course of Congressional fact-finding, whose
rules and procedures do not correspond to those rules and procedures applicable
to other proceedings.
6.
Lance, S. Hrg. 102-350 Pt. 3 p. 6.
7. Id
pp. 7-8.
8.
Clifford, S. Hrg. 102-350 Pt. 2 pp. 58-59.
9. Id
p. 59.
10.
S. Hrg. 102-350 Pt. 3, pp. 11-12.
11.
Art Harris and John F. Berry, Washington Post, December 18, 1977, A1.
12.
Id.
13.
S. Hrg. 102 Pt. 3 p. 70.
14.
Id.
15.
Sami memo to Abedi 1/30/78, S. Hrg. 102-350 Pt 3, pp. 26-27.
16.
October 19, 1978 Application, CCAH to Federal Reserve; see Summary of Charges,
Board of Governors of the Federal Reserve, No, 92-080-E-I1, In the matter of
Clark M. Clifford and Robert A. Altman, July 29, 1992, Paragraph 33.
17.
Summary of Charges, Federal Reserve, Id.
18.
Id, paragraph 33(e).
19.
Id, p. 33(i).
20.
S. Hrg. 102-350, Pt. 3, p.75.
21.
S. Hrg. 102-350 Pt. 3 p. 328-330.
22.
Clifford, S. Hrg. 102-350 Pt. 3 p. 93.
23.
Confidential and Privileged Attendance Note, November 19, 1990, BCCI Attorney
memcom of meeting with Roy Carlson, Exhibit D in G and H Montage case.
24.
See e.g. Summary of Charges, Board of Governors of the Federal Reserve System,
In the matter of Clark M. Clifford, No. 92-080-E-11, July 29, 1992, paragraph
26.
25.
Clifford and Altman written testimony before the House Committee on Banking,
Finance and Urban Affairs, September 11, 1991, Serial No. 102-69, Pt. 1, p. 21.
26.
Letter from Rauh and Bennett to Kerry, October 11, 1991.
27.
S. Hrg. 102-350 Pt 3, p. 63.
28.
Summary of charges, Federal Reserve, id, paragraphs 51-53.
29.
Id p. 64.
30.
S. Hrg. 102-350 Pt. 3 p. 77.
31.
Altman, S. Hrg. 102-350 Pt. 3 p. 235.
32.
Staff interview, Davis, May, 1992.
33.
Altman testimony, S. Hrg. 102-350 Pt. 3 pp. 234-235.
34.
Board of Governors Federal Reserve System Exhibit AD 134, Afridi to Naqvi, July
25, 1983.
35.
Id.
36.
Sakhia testimony, S Hrg. 102-350 Pt. 2 p. 513.
37.
Summary of charges, Federal Reserve, In Re Clifford, 92-080-E-I1, July 29, 1991
Paragraph 75.
38.
S. Hrg. 102-350 Pt. 3 p. 332.
39.
Summary of charges, Federal Reserve, In the Matter of BCCI Holdings, 91-043,
July 29, 1991, Paragraphs 176-178.
40.
p.236. letter from Elley to Naqvi, October 14, 1982
41.
S. Hrg. 102-350 Pt. 3 p. 238.
42.
S. Hrg. 102-350 Pt. 3 p. 77.
43.
Summary of charges, Federal Reserve, In the matter of Clifford, id, Paragraphs
80-86.
44.
Id, Paragraph 92.
45.
Id, paragraphs 92-103.
46.
Summary of charges, Federal Reserve, Clifford, id, Paragraphs 87-91, see also
personnel files, BCCI New York, Elley and Afridi, records reviewed by
Subcommittee staff.
47.
p. 241
48.
p.241
49.
p. 242
50.
S. Hrg. 102-350 Pt. 2, Sakhia testimony, October 22, 1991, p. 518.
51.
Summary of charges, Federal Reserve, Clifford, id. Paragraph 59.
52.
Summary of charges, Federal Reserve, Clifford, id., Paragraphs 60-65.
53.
Id, paragraph 68.
54.
Id, paragraphs 69-72.
55.
Summary of charges, Federal Reserve, Clifford, id, paragraph 110.
56.
Summary of charges, Federal Reserve, Clifford, id, Paragraphs 111-115.
57.
Id paragraphs 116-117.
58.
Id, paragraph 123.
59.
Id.
60.
S. Hrg. 102-350 Pt 3, p. 78.
61.
Id. Paragraph 184.
62.
Id, paragraphs 184-187.
63.
Summary of charges, Federal Reserve, In the Matter of BCCI, 91-043, July 29,
1991, Paragraph 188.
64.
Sakhia testimony, S. Hrg. 102-350 Pt. 2 p. 604.
65.
S. Hrg. 102-350, Pt. 2, testimony of Abdur Sakhia, October 22, 1992, p. 605.
66.
1019S. Hrg. 102-350 Pt. 2, pp. 521,
606.
67.
Sakhia letter to Abedi, Future Plans in the United States, February 10, 1986,
S. Hrg. 102-350, Pt. 2 p. 595.
68.
Written statement, Clifford and Altman, S. Hrg. 102-350 Pt. 3 p. 78.
69.
Id.
70.
Summary of Charges, Federal Reserve, Clifford, 92-080-E-I1, July 29, 1992,
Paragraphs 128-129.
71.
Id, Paragraph 130.
72.
Id, paragraph 134.
73.
Id, paragraphs 135-136.
74.
Id, Paragraphs 137-138.
75.
1028Summary of charges, Federal
Reserve, Clifford, id, paragraphs 141-152; see also S. Hrg. 102-350 Pt 3. pp
394-400.
76.
Id, Paragraphs 153-154.
77.
See document reprinted S. Hrg. 102-350 Pt. 3 pp. 402-403.
78.
Id, paragraph 162; see also memorandum "Option to Acquire National Bank of
Georgia reprinted in House Committee on Banking, Finance, and Urban Affairs,
September 11, 1991, Serial No. 102-69, Pt. 1, pp. 309-311.
79.
Summary of charges, Federal Reserve, Clifford, id, paragraphs 163-166.
80.
Id, paragraph 170.
81.
Id.
82.
Id, paragraph 171.
83.
Id, paragraph 177.
84.
Summary of charges, Federal Reserve, Clifford, id, paragraphs 177-178.
85.
Id, paragraph 180.
86.
Id, paragraph 183.
87.
S. Hrg. 102-350 Pt 4 p. 494.
88.
Id, paragraphs 187-188.
89.
Id, paragraphs 195-202.
90.
Id, paragraphs 205-206.
91.
Id, paragraphs 207-212.
92.
Id, paragraphs 215.
93.
Staff interview, Chinoy, March 9, 1992.
94.
Id.
95.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 104.
96.
S. Hrg. 102-350 Pt 3, p. 245.
97.
Sakhia, S. Hrg. 102-350 Pt. 2 p. 597.
98.
S. Hrg. 102-350 Pt. 3 pp. 80-81.
99.
S. Hrg. 102-350, Pt. 3, p. 62.
100.
S. Hrg. 102-350 Pt. 3, p. 97.
101.
S. Hrg. 102-350 Pt. 3, p. 103. Clifford explained that "book...is based
...upon the excess of assets over liabilities of that particular company, as of
a particular time."
102.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 249.
103.
Id, paragraph 251.
104.
S. Hrg. 102-350, Pt. 3, p. 98.
105.
S. Hrg. 102-350 Pt. 3, p.101.
106.
Summary of charges, Federal Reserve, Clifford, id, paragraphs 253-254.
107.
p. 100
108.
S. Hrg. 102-350 Pt. 3, p. 103.
109.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 257.
110.
Id, paragraph 257.
111.
S. Hrg. 102-350 Pt. 3 pp. 80-81.
112.
Summary of charges, Federal Reserve, Clifford, Id, Paragraph 258.
113.
Clifford & Warnke Memorandum to James E. Lewis from Clifford and Altman,
reprinted House Serial No. 102-69, Pt. 1, pp. 760-761.
114.
Summary of charges, Federal Reserve, Clifford, id, Paragraphs 264-267.
115.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 268.
116.
p.191
117.
p.193
118.
Summary of charges, Federal Reserve, Clifford, id, Paragraphs 269-270.
119.
Id, paragraph 271-272.
120.
p.197
121.
p.194
122.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 275.
123.
S. Hrg. 102-350 Pt. 3, p. 202.
124.
Federal Reserve summary of charges, In re Clifford, id, Paragraph 290.
125.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 299.
126.
Id, paragraph 300.
127.
Id, paragraph 303.
128.
Summary of charges, Federal Reserve, Clifford, id, Paragraph 305.
129.
S. Hrg. 102-350 Pt. 3 pp. 206-207.
130.
S. Hrg. 102-350 Pt 3 p. 207.
131.
Kerry-Rybeck communication, October 22, 1991.
132.
Altman Memorandum to the File, Clifford and Warnke, July 6, 1990, reprinted in
S. Hrg. 102-350 Pt. 5.
133.
S. Hrg. 102-350 Pt. 3, p. 266.
134.
S. Hrg. 102-350 Pt. 3, p. 269.
135.
S. Hrg. 102-350 Pt. 3, p. 270.
136.
S. Hrg. 102-350 Pt. 3 p. 286.
137.
Compare S. Hrg. 102-350 Pt. 3 p. 449 Memorandum to the File Re: Meeting with
Federal Reserve Staff, May 8, 1992; and Memorandum to BCCI Noriega/Senate File
From Raymond Banoun, regarding Altman meeting with Kerry Subcommittee staff,
May 18, 1990.
138.
Staff interview, Amjad Awan, July 20, 1992.
139.
Interview with Amjad Awan at Clifford & Warnke on February 23, 1988,
reprinted in S. Hrg. 102-350 Pt. 5.
140.
Clifford memorandum to Altman, June 1, 1988, reprinted in S. Hrg. 102-350 Pt.
5.
141.
Id, Memorandum to the File, Robert A. Altman, August 11, 1988.
142.
Awan statements, Staff interview, July 20, 1992.
143.
Memorandum to File, Robert C. Sanders, BCCI/Panama, August 29, 1988.
144.
Sanders Memorandum to File, August 29, 1988, Re: BCCI/Panama.
145.
Id.
146.
Id. p. 12
147.
Id. p. 22
148.
Staff interviews, Awan, July, 1992, and Awan Subcommittee testimony, July 29,
1992, S. Hrg. 102-350 Pt. 6.
149.
Id.
150.
S. Hrg. 102-350 Pt. 3 pp. 279-280.
151.
Id.
152.
Id.
153.
Awan, Staff
Interview, July 20, 1992.
154.
Staff interview,
Awan, July 27, 1992.
155.
Notes of Meeting
With Jack A. Blum, Clifford and Warnke, September 9, 1988, reprinted S. Hrg.
102-350 Pt. 5.
156.
Staff interview,
Akbar Bilgrami, July 13-14, 1992.
157.
Privileged and
confidential Memorandum to Mssrs. Altman and Sanders Re: BCCI Congressional
Matter, September 22, 1988, reprinted in S. Hrg. 102-350 Pt. 5.
158.
Kovin,
Memorandum to the File, September 27, 1988, p. 1.
159.
Kovin,
Memorandum to the file, September 30, 1988, p. 2, reprinted in S. Hrg. 102-350
Pt. 5.
160.
Id.
161.
Staff interview,
Sakhia, October, 1991.
162.
Clifford-Kerry
correspondence.
163.
Winer memcom,
May, 1989.
164.
See e.g. Memo to
BCCI Noriega/Senate File, Raymond Banoun, Re: Meeting with Kerry Subcommittee
Staff, May 18, 1990.
165.
S. Hrg. 102-350
Pt. 3 p. 449.
166.
S. Hrg. 102-350
Pt. 3 p. 538.
167.
S. Hrg. 102-350
Pt. 3 p. 278.
Introduction
There was no relationship more central to BCCI's
existence from its inception than that between BCCI and Sheikh Zayed and the
ruling family of Abu Dhabi.
Abu Dhabi was present at BCCI's creation as one of
two providers of BCCI's capital. It was BCCI's largest depositor, and its
largest borrower, and for most of BCCI's existence, its largest shareholder.
The relationship between the two entities was, as Price Waterhouse told the
Bank of England days before BCCI's closure, "very close," with BCCI
providing services to the ruling family of Abu Dhabi far beyond the ordinary
relationship of a bank to either its shareholders or depositors.(1)
There are numerous examples of the centrality of the
Abu Dhabi relationship to BCCI, and its unusual nature.
In 1972, when BCCI was created, Abu Dhabi
shareholders purchased 20 percent of its stock with an investment of $500,000,
and then generously agreed to have that interest drop to just over one percent
of BCCI just three years later.
In January, 1978, when BCCI decided to enter the
United States and purchase shares in Financial General Bankshares, and needed
two additional names, the ruling family of Abu Dhabi supplied them.
In 1980 and 1981, when BCCI needed a purchaser for
Bank of America's shares in BCCI, and had no one other than its bogus Grand
Caymans bank-within-a-bank, ICIC, to buy them, Abu Dhabi stepped in once again
to increase its interest in BCCI.
Throughout the 1970's and 1980's, the Abu Dhabi
ruling family and the Abu Dhabi government placed billions of dollars in
deposits at BCCI and its affiliates, such as ICIC, giving BCCI and its head,
Agha Hasan Abedi, the right to manage those assets, and a power of attorney to
act in the name of Sheikh Zayed.
In 1990, when accountants and regulators in the United
Kingdom found fraud at BCCI, the Abu Dhabi ruling family and government stepped
in again, agreeing to formally buy the bank, assert control, guarantee its
losses, replace BCCI's head with the head of its own BCCI affiliate, the Bank
of Credit and Commerce Emirates (BCCE), move BCCI's operations and records from
London to Abu Dhabi, and work on a plan to find a way to save the bank despite
its having acknowledged "mishandling" at least $2.2 billion of Abu
Dhabi's money.
By July 5, 1991, when BCCI was closed globally, the
Government of Abu Dhabi, its ruling family, and an investment company holding
the assets of the ruling family, were the controlling, and official
"majority" shareholders of BCCI -- owning 77 percent of the bank. But
since the remaining 23 percent was actually held by nominees and by BCCI's
alter-ego ICIC, Abu Dhabi was in fact BCCI's sole owner.
After July 5, 1991, it was in Abu Dhabi that most of
BCCI's top officials remained, where they remain under the control of the Abu
Dhabi government, under conditions said to be luxurious, which the Abu Dhabi
government refuses to discuss. While there, they have remained incommunicado,
and out of the reach of foreign investigators, unwilling, or unable, to tell
the world what happened.
In short, there is no question that the relationship
between Abu Dhabi and BCCI was central to both, and that no adequate
understanding of BCCI is possible without an understanding of the Abu Dhabi
relationship. Yet according to the testimony presented to the Subcommittee by
Abu Dhabi, that relationship was one that boiled down to little more than
victim (Abu Dhabi) and criminal (Abedi and BCCI). In essence, according to Abu
Dhabi, BCCI abused Abu Dhabi's trust by stealing deposits and mismanaging a
bank it owned, making Abu Dhabi by its own account BCCI's largest victim,
losing what it describes as some $6 billion in all.
Thus, by Abu Dhabi's account, it never knew that
most or all of BCCI's shareholders were front-men or nominees for BCCI,
including the heads of state of several of the smaller sheikhdoms of the United
Arab Emirates of which Sheikh Zayed is president, sheikhs who are generally
understood to treat Sheikh Zayed with great deference. It never knew that such
prominent shareholders as Kamal Adham and A.R. Khalil, two successive heads of
Saudi intelligence, were also nominees for the bank, along with such well-known
Middle Eastern financial figures as Faisal Fulaij of Kuwait and Ghaith Pharaon
of Saudi Arabia. Unlike these other figures, who were part of BCCI's
deceptions, and who by Abu Dhabi's account participated in BCCI's schemes to
deceive Abu Dhabi, Abu Dhabi contends it was innocent of wrongdoing, and
utterly duped.(2) To quote the testimony of Abu Dhabi's witness
before the Subcommittee, Ahmed Al Sayegh:
We didn't know anything about the bank [BCCI]
because of our passive role in the past [prior to taking control in April
1990].(3)
However, unlike any other shareholder, officer,
attorney, agent or depositor of BCCI, Abu Dhabi has been in the position, since
April, 1990, of having total control over BCCI's records. At least eighteen of
its key officers, who have remained held incommunicado and under house arrest
in Abu Dhabi since BCCI's collapse. During that period, Abu Dhabi has chosen
not to make any of these witnesses available to U.S. law enforcement. While it
did, temporarily, make some key documents available to the Federal Reserve
concerning the involvement of non-Abu Dhabi figures in BCCI's wrongdoing prior
to BCCI's closure, it has at all times prevented federal investigators from
having free access to BCCI's records, and all access to those records has been
ended since July 5, 1991.
Thus, Abu Dhabi has remained throughout the past
fourteen months in the position of being able either to prove its assertions,
or risk disproving them, through the simple act of granting access to the
critical BCCI information it alone controls, in witnesses and documents. Yet it
has chosen not to do so. In the process, Abu Dhabi has made, and broken,
repeated commitments to provide both witnesses and documents to the Justice
Department, the New York District Attorney, and the Senate, going as far back
as November, 1990, and continuing to the present.
Given Abu Dhabi's suppression of critical
information about its role in BCCI, its contention that it is innocent of all
wrongdoing in connection with BCCI, would, on this basis alone, inevitably be
viewed with some skepticism.
But despite Abu Dhabi's withholding of essential
witnesses and documents, BCCI financial records obtained to date by
investigators, together with testimony and statements from BCCI insiders,
outline a picture of the relationship which suggests that Abu Dhabi officials
were indeed knowing participants in substantial wrongdoing pertaining to BCCI's
activities in the United States and elsewhere, that members of the Abu Dhabi
ruling family participated in risk-free investments in BCCI banks, and that Abu
Dhabi officials engaged, as of April, 1990 on some issues and on others much
earlier, in a cover-up of fraudulent activity involving BCCI, which continues,
in substantial part, to this day.
Findings
** Members of Abu Dhabi's ruling family appear to
have contributed no more than $500,000 to BCCI's capitalization prior to April
1990, despite being the record owner of almost one-quarter of the bank's total
shares, with a book value of over $750 million as of December 31, 1989.
However, the Abu Dhabi Investment Authority, holder of a 10 percent interest in
BCCI beginning in 1980, appears to have made some cash payments for its
interest in BCCI, which had a book value of approximately $250 million as of
December 31, 1989. An unknown but substantial percentage of the shares acquired
by Abu Dhabi overall in BCCI appear to have been acquired on a risk-free basis
-- either with guaranteed rates of return, buy-back arrangements, or both.
** The apparent interest held in BCCI by the Abu
Dhabi ruling family, like the apparent interests held by the rulers of the
three other gulf sheikdoms in the United Arab Emirates who owned shares of
BCCI, materially aided and abetted Abedi and BCCI in projecting the illusion
that BCCI was backed by, and capitalized by, Abu Dhabi's wealth. However, Abu
Dhabi provided BCCI only the use of its name rather than substantial capital,
until at least 1980-1981. At that time, "investments" made in BCCI by
the Abu Dhabi Investment Authority to purchase shares of BCCI sold by the Bank
of America to ICIC, appear to have involved actual payments from Abu Dhabi,
according to some documents, on a no-risk, guaranteed return basis.
** Shares in Financial General Bankshares held by
members of the Abu Dhabi ruling family in late 1977 and early 1978 appear to
have been nominee arrangements, adopted by Abu Dhabi as a convenience to BCCI
and Abedi, under arrangements in which Abu Dhabi was to be without risk, and
BCCI was to guarantee the purchase through a commitment to buy-back the stock
at an agreed upon price. Later, one of the two original members of the Abu
Dhabi ruling family in fact sold back his shares to another BCCI front-man,
Kamal Adham.
** Abu Dhabi's representative to BCCI's board of
directors, Ghanim al Mazrui, received unorthodox financial benefits from BCCI
in no-risk stock deals which may have compromised his ability to exercise independent
judgment concerning BCCI's actions; confirmed at least one fraudulent
transaction involving Abu Dhabi; and engaged in other improprieties pertaining
to BCCI; but remains today in place at the apex of Abu Dhabi's committee
designated to respond to BCCI's collapse.
** In April, 1990, Abu Dhabi was told in detail
about BCCI's fraud by top BCCI officials, and failed to advise BCCI's external
auditors of what it had learned. Between April, 1990 and November, 1990, Abu
Dhabi and BCCI together kept some information concerning BCCI's frauds hidden
from the auditors.
** From April, 1990 through July 5, 1991, Abu Dhabi
tried to save BCCI through a massive restructuring. As part of the
restructuring process, Abu Dhabi agreed to take responsibility for BCCI's
losses, Price Waterhouse agreed to certify BCCI's books for another year, and
Abu Dhabi, Price Waterhouse, the Bank of England, and BCCI agreed to keep all
information concerning BCCI's frauds and other problems secret from BCCI's one
million depositors, as well as from U.S. regulators and law enforcement, to
prevent a run on the bank.
** After the Federal Reserve was advised by the New
York District Attorney of possible nominee arrangements involving BCCI and
First American, Abu Dhabi, in an apparent effort to gain the Federal Reserve's
acquiescence in BCCI's proposed restructuring, provided limited cooperation to
the Federal Reserve, including access to selected documents. The cooperation
did not extend to permitting the Federal Reserve open access to all BCCI
documents, or substantive communication with key BCCI officials held in Abu
Dhabi, such as BCCI's former president, Swaleh Naqvi. Access was sufficient,
however, to permit the Federal Reserve to identify critical documents regarding
frauds involving non-Abu Dhabi shareholders and borrowers of BCCI and BCCI
itself pertaining to CCAH/First American, the National Bank of Georgia and the
Independence Bank. That access ended with the closure of BCCI July 5, 1991.
** From November, 1990 until September 21, 1992, Abu
Dhabi failed to provide documents and witnesses to U.S. law enforcement
authorities and to the Congress, despite repeated commitments to do so.
Instead, it actively prevented U.S. investigators from having access to vital
information necessary to investigate BCCI's global wrongdoing. As of September
21, 1992, Abu Dhabi began making certain documents available for review by U.S.
law enforcement, in a move apparently timed to coincide with the publication of
this report. No representation has been made by Abu Dhabi, or by U.S. law
enforcement, as to the significance or completeness of the documents Abu Dhabi
selected for law enforcement review at its Washington, D.C. Embassy. Moreover,
none of the BCCI officials held in Abu Dhabi have yet to be made available for
interview by U.S. law enforcement. At the time of writing of this report, none
of the newly available documents had been made offered by Abu Dhabi for review
by the Subcommittee.(4)
** The proposed agreement between Abu Dhabi and
BCCI's liquidators to settle their claims against one another contains
provisions which could have the consequence of permitting Abu Dhabi to cover up
wrongdoing it may have had in connection with BCCI.
** Answers by Abu Dhabi's representative to key
questions from the Subcommittee about Abu Dhabi's role in BCCI, were
non-responsive, evasive, and misleading, although for the most part artfully
crafted to avoid being literally untrue.
** There is some evidence that the Sheikh Zayed may
have had a political agenda in agreeing to the involvement of members of the
Abu Dhabi ruling family and its investment authority in purchasing shares of
Financial General Bankshares, then of CCAH/First American. This evidence is
offset, in part, by testimony that Abu Dhabi share purchases in the U.S. bank
were done at Abedi's request and did not represent an actual investment by Abu
Dhabi until much later.
Origin
and Nature of BCCI-Abu Dhabi Relationship
The chapter on BCCI's early history describes in
detail the early history of Abu Dhabi and BCCI, which is recapitulated in
summary form here.
Abu Dhabi is the largest and wealthiest member of
the United Arab Emirates, an oil-rich federation of sheikhdoms, formed in 1971,
whose rulers own all the land and natural resources of their nations in fee
simple absolute, with no distinctions being made among the wealth of the ruler,
his family, and the nation itself. Sheikh Zayed of Abu Dhabi, installed in 1966
as head of the newly wealthy oil state through a British-led coup against his
brother in 1966, soon after developed a relationship with Agha Hasan Abedi,
head of the United Bank of Pakistan. Six years later, when Abedi decided to
form BCCI, he did so after receiving the blessing of Sheikh Zayed, and a
commitment of support. That support involved a tiny capital contribution to the
bank by Abu Dhabi -- $500,000 -- and a huge placement of petrodollars.
As set forth in the chapter on BCCI's early history
in some detail, the relationship between BCCI and Sheikh Zayed exceeded normal
standards of bank/client relationships in a number of respects. BCCI was not
merely a bank owned in part by Sheikh Zayed. Sheikh Zayed was not merely BCCI's
largest depositor. BCCI for many years handled almost every financial matter of
consequence for the Sheikh and his family, as well planning, managing, and
carrying out trips abroad, and a wide range of services limited only by the
desires of the Al Nayhan family itself.(5)
In his testimony of May 18, 1992, Abu Dhabi's
representative Ahmed Al Sayegh suggested that Abedi's role in Abu Dhabi has
been much overstated:
When Mr. Abedi was a respected banker and founder of
BCCI, his role, therefore, was limited to his bank. . . . His role in the case,
I guess, was limited to inducing potential investors in making commitments to
his bank, whether buying shares or placing deposits. . . He was not a financial
advisor [to Abu Dhabi or Sheikh Zayed].(6)
Other information obtained by the Subcommittee from
many sources demonstrates that Al Sayegh's testimony on this point was untrue.
In fact, for over twenty years, Abedi created and managed a network of
foundations, corporations, and investment entities for Abu Dhabi's ruling
family, of a complexity similar to the network he had created at BCCI itself.
BCCI handled the financing arrangements for many of these entities, and managed
a variety of Abu Dhabi's portfolio accounts in U.S. dollars.(7) As
far back as 1969 and 1970, when Abedi was still head of the United Bank in
Pakistan, Abedi established a cargo shipping company, the Hilal Group, operated
by Associated Shipping Services, Limited, London, as an operational company for
Abu Dhabi's Department of Private Affairs. Though primarily used to own cargo
ships, the entity was also used for trading in equities, holding property investments,
and other direct investments. One of the entities owned by Hilal Group,
Progressive Investment, had Abedi on its board. Later, when BCCI established
the Cromwell Hospital in London to provide a medical facility for the Abu Dhabi
ruling family and other prominent Middle Easterners, Abedi arranged for the
financing of the purchase for Abu Dhabi through a complex series of
transactions involving BCCI and a shell corporation holding Sheikh Zayed's
interests by which BCCI lent the funds for the hospital in pounds against
dollar accounts of the Department of Private Affairs, with the result that the
hospital investment did not appear on the books of the Department.(8)
Moreover, BCCI and Abu Dhabi also engaged in a
series of joint ventures, managed by BCCI, throughout the 1980's. Typical of
such ventures was the China-Arab bank, a joint venture of BCCI and the Abu
Dhabi Investment Authority, established in China in 1985 coincident with BCCI's
opening of offices in China, to use funds from Abu Dhabi to invest in China.
BCCI accounting records show a number of other ventures involving BCCI and Abu
Dhabi in China, as well as numerous financial relationships involving BCCI and
Abu Dhabi interests throughout the 1980's.(9)
Contrary to Al Sayegh's testimony, Abedi had broad
authority over the investments and finances of the ruling family until his
stroke in 1989. As the present chairman of the Department of Private Affairs of
Sheikh Zayed, Ghanim Al Mazrui testified in civil litigation in 1982, Abedi
could even be viewed as an official of the Abu Dhabi government, because of his
position on the Abu Dhabi committee responsible for overseeing Abu Dhabi's
wealth.(10)
As Bert Lance observed, the relationship was
exceedingly intimate:
Mr. Abedi . . . had, in effect, for lack of a better
term, been kind and attentive to Sheikh Zayed when he was still wandering
around in the desert and he had all his assets in his tent somewhere . . . I
think this is important to you as you search for the truth, to understand that that
relationship went back a long way -- and it went back before Sheikh Zayed
became "the richest man in the world" at that point in time, with an
income of some $4 billion or $5 billion, as the press reported; that there had
been a relationship that had developed that Mr. Abedi had helped Sheikh Zayed
when he had no real power or influence . . . Sheikh Zayed had absolute and
total trust and coincidence in Mr. Abedi, that whatever Mr. Abedi said or
suggested was something that Sheikh Zayed would look on with favor; that Mr.
Abedi had, in effect, built the house where we were [meeting with Sheikh Zayed
in his palace] outside of Lahore without any guidance or direction from Sheikh
Zayed, and it was that sort of relationship. It was very, very unique.(11)
BCCI also provided members of the Abu Dhabi ruling
family with personal services, ranging from Sheikh Zayed's own modest needs to
the more elaborate requirements of his sons and members of his retinue. A
history of BCCI's protocol department, and its relationship to Abu Dhabi, is
set forth in the chapter on BCCI's early history.
Throughout the first critical decade of BCCI's
eighteen year existence, as much as 50% of BCCI's overall assets were from Abu
Dhabi and the Al Nayhan family, who were earning about $750 million a year in
oil revenues in the early 1970's, an amount that rose to nearly $10 billion a
year by the end of the decade. Until the formation of a separate affiliate, the
Bank of Credit and Commerce Emirates (BCCE), BCCI functioned as the official bank
for the Gulf emirates, and handled a substantial portion of Abu Dhabi's oil
revenues. And yet from the beginning, there was an oddity about this central
relationship: at no time while Abedi was in charge of BCCI did Abu Dhabi hold
more than a small share of BCCI's recorded shares. Abu Dhabi appears not to
have invested substantial funds in BCCI, but instead to have insisted on
guaranteed rates of return for the use of its money. Thus, rather than being a
major investor in BCCI, in the early years, Abu Dhabi only agreed to place
extremely large sums of money as deposits at the bank, which BCCI used in lieu
of capital.
As a result of the Abedi-Zayed agreement, Abedi now
had essentially unlimited resources to create BCCI. He could now act
simultaneously as manager of billions of Sheikh Zayed's personal wealth, as
banker to the United Arab Emirates of which Sheikh Zayed was chief of state,
and as chairman of a new bank that had guaranteed assets of hundreds of
millions of dollars from its inception.(12)
Abedi thus relied on the Sheikh's resources to
finance his rapid expansion, not through capital investment, but as a huge
depositor. The result was BCCI's finances quickly became so intermingled with
the finances of Abu Dhabi that it was difficult even for BCCI insiders to
determine where one left off and the other began. Whether Abu Dhabi insiders,
including Abu Dhabi's representative on BCCI's board of directors, Ghanim Al
Mazrui, knew of this intermingling, remains an open question.
Abu
Dhabi's Ownership Interest In BCCI
Although Abu Dhabi had a key interest in BCCI from
its creation, in accord with Abu Dhabi's failure to provide the initial funds
for capitalization, BCCI's early stock recordations did not show Abu Dhabi as
the actual owner of the bank. A snapshot of BCCI shares from Bank of America
files as of September 30, 1977 described BCCI's majority owner as ICIC, at 50.1
percent; its most important minority owner as Bank of America, at 30 percent;
and its largest Arab owner as Majid Al-Futaim of Dubai in the United Arab
Emirates at just 4 percent, with the members of the family of Abu Dhabi owning
just 3.4 percent all told.(13)
According to Abu Dhabi itself, it actually had a 20
percent interest in BCCI in 1972, which then dropped to less than five percent
some two years later, with Abu Dhabi remaining a "passive investor,"
without formal representation on BCCI's board until 1981.(14)
In response to the Subcommittee's request for
information on the history of Abu Dhabi's ownership interest in BCCI, Abu Dhabi
provided on May 13, 1992, a list of Abu Dhabi shareholding in BCCI Holdings
(Luxembourg) S.A., one of BCCI's two flag-ship holding companies, which it
described as "based on preliminary review of documents."
The shareholding list provided by Abu Dhabi does not
begin until 1975, three years following BCCI's founding in 1972, and after, for
reasons not fully explained, Abu Dhabi's declared ownership in BCCI shares had
dramatically dropped. It shows an unusual pattern of ownership of BCCI shares
by the Al Nayhan family and the Abu Dhabi Investment Authority (ADIA).
Overall, after beginning at 20 percent in 1972, the
Al-Nayhan family's ownership of BCCI dropped to less than three percent in
1975, and then to just over one percent of BCCI in 1976, where its interest
remained, with small increases until 1980. In 1980, the Al Nayhan family's
holdings of BCCI sharply increased to over 8 percent, in 1981 increased sharply
again to over 18 percent, and by 1984 had reached 27 percent, and by 1986, 33
percent, where it remained until 1990, when Abu Dhabi became -- officially -- a
77 percent owner of BCCI.(15)
What is unusual about this pattern is the drop from
Abu Dhabi's holdings of 20 percent to less than 2 percent in three years,
followed by an increase from 2 percent to 18 percent five years later. It is
difficult to understand why any shareholder of a rapidly growing bank would be
willing to sell off or dilute so much of its interest in the years in which the
bank's value was rapidly increasing, and then buy back that interest at far
greater cost following five years of growth.
Sheikh Zayed's own holdings of BCCI displayed a
still stranger pattern. After owning 20 percent of BCCI in 1972, his personal
ownership had dropped to 2.26 percent in 1975, dropped still further to less
than one percent -- just .59 percent -- in 1976, and lower yet in 1977 to .47
percent of BCCI, before suddenly climbing in 1980 to 4.11 percent, when Sheikh
Zayed purchased 80,000 shares in the bank. Sheikh Zayed then resold these same 80,000
shares the following year, reducing his ownership interest from the 4.11
percent back to .47 percent. In 1984, he purchased BCCI shares anew and his
interest again climbed to over four percent, the vicinity in which his personal
interest in BCCI remained to BCCI's closing.
Despite explicit requests to do so, Abu Dhabi failed
to provide to the Subcommittee any explanation of the peregrinations of Abu
Dhabi's ownership of BCCI stock, the price paid for the shares purchased, or
the price received for the shares sold. Prior to the May 14 hearing, staff
advised lawyers for Abu Dhabi that the purchase and sales prices of the stock
and any funds provided by Abu Dhabi to BCCI as capital were critical issues
requiring answers. Apart from the statement that Abu Dhabi paid $500,000 for
its original interest in BCCI in 1972, Abu Dhabi provided no answer to these
questions. To the extent that Abu Dhabi did not pay for such shares, there
would be substantial questions as to whether it, like BCCI's other shareholders,
was also a nominee for BCCI.
The patterns shown above, for the period up to
April, 1990 are in some respects more consistent with a nominee relationship as
with an ownership relationship, except for the 10 percent ownership of BCCI
held from 1980 on the Abu Dhabi Investment Authority, which appears to be
genuine. However, even that ownership interest in BCCI by Abu Dhabi cannot be
viewed as conclusive in the absence of access to any buy-back arrangements from
BCCI that might have existed.
For example, evidence for concluding that Sheikh
Zayed's interests in BCCI could have been as a nominee for BCCI, or
interchangeable with BCCI, is the purchase by him for an unknown price and sale
for another unknown price, of 80,000 shares in BCCI, over one year. This is not
a normal practice for share trades in a privately held bank by a party with a
long-standing ownership interest in the bank. Similar transactions involving
BCCI's manipulation of shares in CCAH/First American were definitively found by
the Federal Reserve to have been either shams or nominee transactions.
On the other hand, Abu Dhabi did, from 1981 onwards,
own ever increasing percentages of BCCI, principally through Sheikh Zayed's
son, Sheikh Khalifa, and the Abu Dhabi Investment Authority, becoming the
largest shareholders of the bank at some point in the 1980's. This suggests the
possibility that Abu Dhabi actually owned the stock, regardless of guaranteed
returns or buy-back arrangements to "eliminate" risk to Abu Dhabi.
Following the May 14, 1992 hearing in which Abu
Dhabi's representative, Ahmed Al Sayegh, testified, the Subcommittee tried
again to elucidate the truth about this issue.
It reiterated in questions to Al Sayegh the request
that Abu Dhabi specify the capital actually paid in by the Abu Dhabi
shareholders at the time of each stock purchase, including the date of each
infusion of capital, and the amount paid in. Al Sayegh did not provide the
answer to the question of how much Abu Dhabi paid each time for its shares of
BCCI stock. Instead, he stated:
Many of the Majority Shareholders' share purchases
were from third parties, rather than purchases of newly-issued stock, and other
stock acquisitions came in the form of dividends. . . In any event, I am
unaware of the details of amounts paid for shares in particular transactions.(16)
The Subcommittee has asked Abu Dhabi to provide a
knowledgeable witness regarding such questions for over two years, beginning in
July, 1990. In the spring of 1992, it requested that Abu Dhabi's representative
on BCCI's board of directors, Ghanim Al Mazrui, appear to testify. Instead, Al
Sayegh was selected. His written answers were provided to the Subcommittee five
weeks after his testimony, through Abu Dhabi's Washington, D.C. lawyers at
Patton, Boggs & Blow. Hence, Al Sayegh's statement that he is "unaware
of the details" amounts to nothing less than a refusal by the government
of Abu Dhabi to answer the questions asked: what the Abu Dhabi shareholders of
BCCI actually paid for the fifteen separate purchases of BCCI stock listed by
Abu Dhabi as having been made and what other shareholders paid for the shares
of BCCI stock sold in that period by Sheikh Zayed, his son, Sheikh Khalifa bin
Zayed, and the Abu Dhabi Investment Authority. Answers to those questions would
be vital in demonstrating that Abu Dhabi was a legitimate, non-nominee
shareholder for all of its shares. The fact that Abu Dhabi has refused to
answer these questions suggests that the facts if revealed would not be helpful
to Abu Dhabi's position that it was never a nominee for BCCI, and was always at
risk.
Information contained in the Section 41 report of
Price Waterhouse of June, 1991, provided to the Bank of England and obtained by
the Subcommittee in an uncensored form only in late August, 1992, further
suggests that the shares in BCCI held by the ruling family of Abu Dhabi were
purchased according to BCCI's typical practices for nominees -- paid for by
loans from BCCI itself, with buy-back agreements and guarantees to insure the
purchaser against loss.
The Section 41 report states that the initial
capitalization of BCCI was just $2.5 million, and that subsequent increases of
capitalization, to $845 million as of December 31, 1990, had been carried out
through the extensive use of nominee arrangements, financed directly by loans
from BCCI and its bank-within-a-bank, ICIC Grand Caymans.
In the report, Price Waterhouse specifically found
that members of the Ruling Family of Abu Dhabi acquired their shares on the
basis of guaranteed rates of return and buy-back arrangements, with the result
that they were not at risk for their ostensible "shareholdings" of
BCCI.(17)
While the evidence is not conclusive, there is a
significant possibility that BCCI simply loaned the ruling family the funds for
its stock, or provided them gratis
A list of major loans to shareholders of BCCI
prepared in connection with a BCCI audit for the year ending September 30,
1987, shows lending to the Ruler of Abu Dhabi as standing at $620,800,000 --
some $74 million more than the authorized "limit" for lending to
Sheikh Zayed establish by BCCI's credit committee, and more than twice the
amount lent to the next highest borrower, Ghaith Pharaon at $283,900,000. A
second such list, dated July 31, 1991, shows loans to the Abu Dhabi group from
BCCI totalling $371.8 million, with an additional $17.5 million in loans to Abu
Dhabi from BCCI's affiliate, ICIC, for a total lending to Abu Dhabi of just
under $390 million. After the Abu Dhabi group, BCCI's next highest level of
lending to a shareholder was to its front-man, Kamal Adham, at $323.5 million.
In either period, the size of the lending to Abu Dhabi was sufficiently
substantial that it could have been applied to any number of purposes by either
BCCI or Abu Dhabi, including the financing of a significant proportion of the
holdings of members of the Abu Dhabi ruling family in BCCI itself and in
CCAH/First American.(18)
Abu
Dhabi's Involvement in the FGB Purchase
A lengthy account of how Abu Dhabi became involved
as shareholders in the purchase of Financial General Bankshares (FGB) is set
forth in the chapter on BCCI's entry into the United States.
The key questions that have arisen regarding those
facts are whether Sheikh Zayed had a political agenda in participating in
BCCI's secret purchase of FGB; whether the Abu Dhabi shareholders were BCCI's
nominees in connection with those purchases; whether the Abu Dhabi shareholders
knew that BCCI was the real owner of FGB; and whether Abu Dhabi shareholders or
representatives knowingly participated in false statements made to the Federal
Reserve in connection with the purchase.
Political
Agenda?
From the first public awareness of the FGB takeover,
reported in early 1978, the issue of whether the Middle Eastern investors in
FGB had a political agenda was of substantial concern to regulators. As
Virginia's chief banking regulator, Sidney Bailey stated in the public hearing
at the Federal Reserve concerning the takeover in the spring of 1981:
There can be little doubt that some incentives other
than orthodox investment motives must have prompted this effort. . . One
obvious plausible answer to this riddle lies in the unique position of
Financial General in the market. No other single financial institution is
situated in both the financial and government hubs of the United States.(19)
Bailey wondered whether that secret agenda was
somehow related to political goals of the Middle Eastern group involved.
According to Bert Lance, BCCI's initial partner in
its most important acquisitions in the United States, both Sheikh Zayed and
Abedi indeed felt that BCCI could become a critical element in strengthening
ties between the United States and their constituencies. As Lance described a
meeting between him, Sheikh Zayed and Abedi in Islamabad, Pakistan in late
1977:
Abedi was concerned about the shifting tides towards
the Soviets in Afghanistan, Iran, India and the Mideast. Both Abedi and Zayed
each expressed their concerns about the Arab worlds lack of ties to the US.
They wanted to do something about it.(20)
This point of view was reflected in a
contemporaneous press account in the Washington Post on December 18, 1977. As
the article stated:
An Atlanta source close to the negotiations says the
Arabs see Lance as giving them access to the administration. Though a private
citizen, Lance is a regular visitor at the White House and is the chairman of a
$500-to-$1,000-a-plate fund-raiser for President Carter scheduled for January
in Atlanta. "Under normal circumstances," says this source, "NBG
would be the last bank anyone would be interested in. But the investors see
this as an opportunity to do a favor for someone close to the President."(21)
In response to a written question from the
Subcommittee chairman, Al Sayegh denied that any of the Abu Dhabi investments
in CCAH/First American were related to a larger political agenda:
The suggestion that Sheikh Zayed purchased shares in
Financial General Bankshares to acquire influence in the United States suggests
improper motives on his part. Not only . . . did he never purchase FGB shares,
but the suggestion of improper motive is vehemently denied. The shares that
were purchased for Sheikh Sultan and Sheikh Mohammed were solely intended as a
passive commercial investment, not to acquire influence in the United States.(22)
Lance, who was present during the period of the
original FGB purchases, had no motive to lie on this particular matter. It is
not clear who the Washington Post's source was. Al Sayegh, who was not present
during any of the events material to this issue, might well not wish to admit
any political agenda that existed on the part of the Sheikh. However, the
overall evidence accumulated by the Subcommittee on this point is insufficient
to be conclusive either way.
Were
Abu Dhabi Investors Nominees in CCAH/First American?
The Federal Reserve's judgments about the nominee
role of the four Middle East investors in the FGB takeover were reached in
large part on the basis of documents provided Federal Reserve investigators in
the spring of 1991 by Abu Dhabi in Abu Dhabi.
These BCCI documents were in Abu Dhabi, because Abu
Dhabi had insisted on moving them from London to Abu Dhabi in the spring of
1990 after being told of fraud at BCCI by BCCI's external auditors, Price
Waterhouse, and agreeing to take over BCCI and to provide new funding for the
bank to keep it from collapsing.
During their trip to Abu Dhabi in March, 1991, to
review the BCCI documents that been moved there one year earlier by Abu Dhabi,
the Federal Reserve investigators were not permitted open access to documents.
Instead, they advised the Abu Dhabi government of the documents they wanted,
and in return, were provided with access to certain files, which were brought
by Abu Dhabi representatives to the Federal Reserve investigators' hotel rooms.
As a consequence, the investigators recognized at the time that there was a
very significant possibility that they were not being provided access to other
important files, and that files pertaining to Abu Dhabi could have been hidden
or destroyed.(23) The materials provided by Abu Dhabi to the Federal
Reserve documented in detail the mechanisms by which Adham, Fulaij, Khalil, El
Gohary, and others were used by BCCI as nominees. The materials provided did
not include any documents concerning similar arrangements involving Abu Dhabi.
Accordingly, the Federal Reserve's judgments about nominees did not reach the
question of whether the Abu Dhabi shareholders had arrangements similar to that
of the remaining Arabs involved in the 1978 and 1980 FGB takeover.
The Subcommittee has, however, interviewed and
received additional statements in some detail, supplemented in more general
terms by his sworn testimony, from a key BCCI official who handled the finances
of the Sheikh of Abu Dhabi for BCCI in the relevant period, and who had
frequent contact in the period 1977 through 1980 with Abdullah Darweish, the
Abu Dhabi official handling the shares on behalf of one of Sheikh Zayed's sons
during the takeover. This witness, Akbar Bilgrami, convicted of money laundering
the Tampa case in 1989, handled personal finances for Sheikh Zayed's Private
Department held at BCCI in the late 1970's, working closely with Abedi, Sheikh
Zayed, and Darweish, and having numerous direct contacts with each of them in
this period.
Bilgrami told the Subcommittee that while he and
Darweish were in Marbella, Spain in late 1977 or early 1978, Darweish received
a stack of legal papers from BCCI concerning the proposed FGB takeover and the
role of the Abu Dhabi investors. Darweish asked Bilgrami to read and review
these documents before he would sign them. Bilgrami read them carefully, and
told Darweish that while many of the provisions were left in blank, the terms
of the documents were for BCCI to provide loans, with buy-back agreements, to
several members of the Abu Dhabi ruling family, in nominee arrangements.
Bilgrami said the arrangements were complex and involved several interim
entities between BCCI and the ruling family shareholders, but that the
documents very clearly set forth a nominee relationship involving loans from
BCCI for the purchase of shares in the U.S. bank. According to Bilgrami,
Darweish told him this was "Abedi's operation," and that it was
Darweish's understanding that Abu Dhabi participation in "Abedi's
operation" had been cleared and that Darweish would sign the documents. At
the time, Darweish advised Bilgrami that he was not happy about signing
documents with blanks in them, but that he had little choice since the
arrangements had already been made.(24)
Bilgrami concluded at the time that none of Abu
Dhabi's funds were being invested in the U.S. and that Abu Dhabi's investors in
FGB were all nominees, for several reasons. First, the documents described
loans from BCCI to pay the Abu Dhabi investors for the share purchases. Second,
the documents referred to "buy back" arrangements, which would give
BCCI control over the shares, including the right to buy or sell them, and to
set the price of any sale. Third, Bilgrami had had sufficient experience with
the Abu Dhabi government to know that Darweish would not sign any document with
blanks in it if Abu Dhabi itself was making an investment. Documentation for
such investments were closely scrutinized by several levels of Abu Dhabi
officials, and blanks would not have been permitted. Finally, Darweish made it
clear to Bilgrami that the purchase of the U.S. bank was an "Abedi
operation from beginning to end."(25)
According to Bilgrami, he made a copy of these
documents for himself, in order to understand them better, and looked at them
carefully at the time and at least one additional occasion to make sure he
understood them. He said that he carried the documents with him whenever he was
transferred to a new country by BCCI, and believed they remained among his
papers at the time of his arrest in October 1988 in Tampa. However, it was his
understanding from federal investigators that they had not been found among his
seized papers.(26)
Bilgrami's account concerning Abu Dhabi having been
nominees has been corroborated generally by another Pakistani who was also
close to Darweish and involved in the circumstances pertaining to the FGB
takeover in 1977 and 1978.(27) In addition, it is corroborated by
the circumstances of Abu Dhabi's shareholders being selected by BCCI to participate
in the FGB within days of the preparation of a memorandum by a BCCI employee,
Abdus Sami. In the memorandum, dated January 30, 1978, Sami advised Abedi that
the details of the FGB takeover had been agreed upon, but that BCCI needed to
select two additional shareholders to supplement the two who had already agreed
to participate. The memorandum implies that the two are to be nothing more than
nominees:
We have already given the names of Sheikh Kamal
Adham and Mr. Fulaig [sic]. We want two other names immediately.(28)
Within days, BCCI had the additional two names --
Darweish and Sheikh Zayed's son, Sheikh Sultan bin Zayed Al Nahyan.
According to Abu Dhabi, their participation was
solicited by Abedi, and they understood them to be passive investments in a
bank with high growth potential.(29) But if they were in fact
investments, little if any investigation could have been done by the Abu Dhabi
investors into the proposed investment between the time of the Sami memorandum
and the time of their share purchases. And the language of the Sami memo --
which refers to names being given, rather than investments being sought --
suggest a nominee relationship instead, especially given the fact that the two
names BCCI already had were indeed nominees for BCCI.
As Price Waterhouse told the Bank of England in its
June 1991 Section 41 report:
We have . . . seen evidence to suggest . . . that
the four investors [Kamal Adham, Faisal al Fulaij, Sheikh Sultan Bin Zayed and
Abdullah Darweish on behalf of Sheikh Mohammed Bin Zayed] were used to keep
individual ownership below 5% and to ensure that BCCI's name did not appear.(30)
Thus, documents reviewed by Price Waterhouse
suggested that the two Abu Dhabi shareholders in the original FGB takeover were
as much nominees as Adham and Fulaij.
According to information obtained from a Pakistani
national familiar with the transaction, Sheikh Sultan's shares, and the shares
held by Darweish on behalf of Sheikh Mohammed, were "allocated" by
BCCI for the purpose of avoiding the SEC filing requirement that would have had
to have been undertaken if the Abu Dhabi interests were combined together.
It is also significant that Bilgrami's description
in staff interviews of the papers allegedly involving Abu Dhabi acting as a
nominee for BCCI in 1977 and 1978 closely resembles the actual nominee
arrangements BCCI reached with all of the other Arab shareholders -- documents
that Bilgrami has never seen.
Abu Dhabi has vigorously denied that it was involved
in any nominee arrangements with BCCI. However, given the fact that BCCI had
nominee arrangements with the leaders of three other emirates in the United
Arab Emirates, as well as with all of the other principal Arab
"investors" involved with BCCI, the lack of involvement of Abu Dhabi
in nominee arrangements would have been contrary to BCCI's practice. It is
difficult to imagine that they would have chosen to be, alone among the Middle
Eastern shareholders, including several others from the UAE, principals, rather
than nominees, for Abedi and BCCI in the takeover of Financial General
Bankshares. There is an additional plausible alternative: that the Abu Dhabi
ruling family viewed BCCI already as an institution they owned and controlled,
and therefore they did not distinguish between investments made by them
personally and guaranteed by BCCI, or nominee arrangements under which they
merely held stock for BCCI.
Accordingly, while the direct documentary evidence
that would back up Bilgrami's assertions has not been made available by Abu
Dhabi authorities, Bilgrami's account, supported by the other facts available
to the Subcommittee, is credible. Either the Abu Dhabi shareholders were
nominees for BCCI in the early days of the FGB takeover, or alternatively, they
did not distinguish between their holdings of FGB and BCCI's.
Darweish's
Arrest and BCCI's Role in Abu Dhabi in 1980
From 1977 to December, 1981, Abdullah Darweish was
chairman of the private department of Sheikh Zayed and the ruling family of Abu
Dhabi, responsible for handling their investments and functioning as a liaison
to Abedi and BCCI. According to the Abu Dhabi Attorney General, Darweish's
responsibilities were "holding the administration and investment of all
monies and assets of this department."(31) Darweish had
essentially sole authority for these funds, and worked closely with BCCI on
many of the investments. On December 8, 1981, Darweish was arrested in Abu
Dhabi and charged with defrauding the ruling family, with his role as chief
financial advisor replaced by Ghanim Al Mazrui as head of a committee.
At the time of his arrest, Darweish was still a
shareholder in Financial General Bankshares in Washington, having purchased
shares in FGB on behalf of Sheikh Mohammed, one of Sheikh Zayed's sons, in the
capacity as his guardian. According to various BCCI officials who knew
Darweish, there had been a power struggle in Abu Dhabi between Crown Prince
Sheikh Khalifa, Sheikh Zayed's son, and Sheikh Zayed, in which Darweish had
been caught, with the result that when a compromise was reached between father
and son, Darweish was the sacrifice. But his arrest also set into a motion
litigation involving others who had been financially injured as a consequence
of the power shifts which took place over the incident involving a Panama
corporation, registered in the name of Sheikh Zayed, Financiera Avenida.
Financiera had been established to invest Sheikh Zayed's wealth, without BCCI's
involvement. After Darweish's removal, everyone associated with Financiera lost
out, with the investment funds moving to the control of Sheikh Khalifa's
long-time aide, Al Mazrui, who replaced Darweish, and to BCCI. The ensuring
litigation opened a window into the operations and investments of Sheikh Zayed,
and BCCI.
Depositions and documents produced during the litigation
in New York, Chicago, London, Switzerland and Abu Dhabi showed that Abedi had
come, as of 1980, to supervise essentially all of the handling of Sheikh Zayed
and Abu Dhabi's wealth -- through his service on the investment committee of
the Department of Private Affairs that supervised the placement of the Sheikhs'
wealth outside of BCCI; through his handling, for a period, of essentially all
of the oil revenues dedicated by Sheikh Zayed to his private investments; and
in his capacity as chairman of BCCI, through his control over Abu Dhabi's funds
on deposit at BCCI.
As Abu Dhabi's representative, Ahmed Al Sayegh,
testified, "in excess of $2 billion was entrusted to Abedi and Naqvi for
investment by Their Highnesses Sheikh Zayed and Sheikh Khalifa under a power of
attorney between 1980 and 1990."(32) Al Sayegh did not identify
how much in excess of $2 billion was entrusted to BCCI, but given Abu Dhabi's
testimony that it lost $6 billion in all in BCCI's collapse, the amount must
have been considerable.
In the context of Darweish's fall in 1980, several
things happened to intensify the relationship between BCCI and Abu Dhabi.
Sheikh Zayed directed that all of his personal oil revenues be placed in BCCI.
He directed his investment authority, ADIA, to acquire a 10 percent state in
BCCI from ICIC, after ICIC as BCCI's alter ego agreed to buy-back those shares
from its departing U.S. partner, Bank of America. And he placed the chairman of
his private department, Al Mazrui, on BCCI's board of directors, where Al
Mazrui ultimately became chairman of the board. To a remarkable degree, the
fallout from the Darweish arrest was the merger of Abu Dhabi's interest, and
that of BCCI. This coincidentally took place at the exact time of the Financial
General Bankshares takeover in Washington.
Ghanim
Al Mazrui
As suggested above, for more than fifteen years,
Ghanim Faris Al Mazrui has served Sheikh Zayed as a financial advisor and
manager, having been secretary general of the Abu Dhabi Investment Authority
(ADIA) from 1976 to the present, which handles the principal government
investments of Abu Dhabi; chairman or acting chairman of the Private Department
of Sheikh Zayed, which handles the principal personal investments of the ruler
of Abu Dhabi, from 1982 to the present; and chairman of a "Shareholders
Working Group," which Abu Dhabi describes as "an informal committee
appointed to oversee and coordinate the Majority Shareholders' response to the
closure of BCCI," since July, 1991, and continuing to the present.(33)
From 1981 on, Al Mazrui also served on the Board of
Directors of BCCI itself, in his capacity as secretary general of ADIA, which
held 10 percent of BCCI's shares.
Simultaneous with Al Mazrui's appointment to the
Board of Directors of BCCI, was his appointment to the Board of Directors of
two other banks in Hong Kong, ostensibly unrelated to BCCI, called the Hong
Kong Deposit and Guaranty Bank and Tetra Finance, Inc. Both entities, on which
he served with several other important Middle Eastern officials, including
Yassin Hassan, Kamal Adham's original contact for the FGB takeover, collapsed
just two years later, with a total loss of capital and depositor losses
amounting to several hundred million dollars.(34) The collapse,
however, did not appear have an impact on Al Mazrui's career, and he remained
in place handling the ruling family's finances and entrusted with investing
billions of Abu Dhabi's oil revenues as well, up to the time of BCCI's collapse
a decade later.
Given his long service to both Abu Dhabi and his
decade of hands-on experience with BCCI, substantial questions have arisen as
to what Al Mazrui knew concerning BCCI's frauds, and when he knew about the
frauds. In response to a question to Abu Dhabi from Senator Kerry concerning
this issue, Abu Dhabi's designated witness, Ahmed Al Sayegh, stated that Al
Mazrui first learned of BCCI's problems, and its involvement in false or
deceitful accounting practices, in April, 1990, from Price Waterhouse, along
with other members of BCCI's board of directors. According to Al Sayegh, in the
same period, BCCI officers, whose names he failed to specify, met with Abu
Dhabi officials, with names again not specified but which apparently included
Al Mazrui:
in an effort to persuade the Government to make a
substantial capital injection into the bank. BCCI's officers confirmed that the
Bank was experiencing severe financial difficulties and disclosed the misuse of
$2.2 billion of managed funds on behalf of the Ruling Family.(35)
Thus, Abu Dhabi's chief representative on BCCI's
board, and Sheikh Zayed's trusted financial manager, Al Mazrui, had for the
previous decade somehow failed to detect BCCI having misused, and apparently
defrauded Abu Dhabi of, up to $2.2 billion, in addition to having presided over
the failures of the two Hong Kong banks in 1983. Moreover, Al Mazrui himself
had participated in improprieties and received no-risk financial pay-offs from
BCCI.
As Price Waterhouse told the Bank of England, in
June, 1991, neither Al Mazrui nor any other representative of Abu Dhabi had
advised them that substantial funds of Abu Dhabi had been
"mismanaged" by BCCI. The auditors could not determine what else Al
Mazrui knew and when he knew it. But the auditors had determined that Al Mazrui
himself had been involved in unusual financial practices with BCCI from 1986
on:
The extent to which the major shareholders and in
particular their board representative H.E.G.F. Mazrui was aware of the matters
discussed in this report [that is, BCCI's frauds] cannot be established. We
are, however, informed that H.E.G.F. Mazrui and the government were briefed
fully on all the problems in April, 1990, notwithstanding that they allowed the
1989 accounts to be finalised in discussions with ourselves and the Regulators
without disclosing this information. In addition, up until discussion of our
Report to the Directors and Regulators of 3 October 1990, H.E.G.F. Mazrui
contended that the loans for collection by the shareholders which have now been
proven to be totally fictitious, were recoverable.(36)
Price Waterhouse further advised the Bank of England
that Al Mazrui had his own accounts at BCCI's bank-within-a-bank, ICIC, which
showed that he received funds in 1986 and earlier from no-risk transactions
involving BCCI shares in which he was guaranteed against possible loss. Price
Waterhouse told the Bank of England that Al Mazrui confirmed that he benefitted
from these transactions and informed the Abu Dhabi government of his
involvement in them, ostensibly for the first time, in April 1990. Price
Waterhouse told the Bank of England that Al Mazrui also confirmed a fictitious
loan made to the Crown Prince of Abu Dhabi by BCCI, but claimed that he did not
remember signing the false confirmation. Al Mazrui told Price Waterhouse that
his signature must have been forged, a contention Price Waterhouse rejected.(37)
In summary, the Section 41 report by Price
Waterhouse shows that Al Mazrui received substantial personal financial
benefits from BCCI through no-risk stock trading; argued that BCCI loans which
were really fictitious were recoverable; and personally confirmed a bogus BCCI
loan to the Crown Prince of Abu Dhabi and then lied about it, before confessing
all to Abu Dhabi authorities in April, 1990. Yet more than two years later, Al
Mazrui remains in place as the head of Abu Dhabi's working group to deal with
BCCI-related problems. Al Mazrui has neither been fired, nor resigned, from the
positions of trust he has clearly violated.
Given these facts, Al Mazrui's continued role in
handling Abu Dhabi's response to the collapse of BCCI, raises additional
questions. One possible explanation is that Sheikh Zayed and the ruling family
are remarkably tolerant of incompetence, deception, fraud, and the personal
enrichment of top advisors. Alternative explanations are that Al Mazrui's
improprieties had previously been sanctioned by higher-ups, or were consistent
with ordinary practices in the Emirate.
Abu
Dhabi's Commitments in April-May, 1990
On April 18, 1990, Price Waterhouse provided a
devastating report on BCCI to the Bank of England which was simultaneously
provided to BCCI's board of directors, including Abu Dhabi representative Al
Mazrui. The report 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.
Price Waterhouse's report was prompted by its own
critical need to solve a problem. It was no longer in a position to certify
BCCI's books, unless someone provided financial guarantees to protect against
loss. 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. A new management team was
brought in. Unfortunately, rather than constituting a strong group of banking
professionals, the new team was headed by a long-time Abu Dhabi insider from
BCCI itself, Zafar Iqbal, the former head of BCCI's branch in the United Arab
Emirates, the Bank of Credit and Commerce Emirates, or BCCE, who had long had a
close personal relationship with important members of the ruling family of Abu
Dhabi arising out of his provision of intimate personal services for them in
Pakistan and elsewhere. Within the bank, Iqbal was not considered to be an
expert on much besides pleasing the Abu Dhabi ruling family. BCCI junior
officers knew him as the man who had for years provided "singing and
dancing girls" to the ruling family, and related personal services.(38)
BCCI operations were moved, without objection from the Bank of England, to Abu
Dhabi, along with all of BCCI's most important records. And assurances were
given to Price Waterhouse that Abu Dhabi would make an open-ended financial
commitment to bail out BCCI, enabling Price Waterhouse to sign off on its
books. As Price Waterhouse stated to the chairman of the Abu Dhabi Finance
Department on April 25, 1990:
Your representative, HE G Al Mazrui, has confirmed
to use that you are fully aware of the nature and magnitude of the
uncertainties and prepared to provide the necessary financial support in the
event that losses arise from realisation of these loans.(39)
Price Waterhouse then duly certified BCCI's books,
subject to a single caveat -- that the basis of the preparation of the
certification was Abu Dhabi's intention to maintain BCCI's capital base while
it reorganized and restructured.
By agreement, Price Waterhouse, Abu Dhabi, BCCI, and
the Bank of England had in effect agreed upon a plan 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. Thus to some extent, from April 1990 forward,
BCCI's British auditors, Abu Dhabi owners, and British regulators, had now
become BCCI's partners, not in crime, but in cover-up. The goal was not to
ignore BCCI's wrongdoing, but to correct it in order to keep the bank in
operation, and therefore, to hide the truth from the public because the truth
would force the bank to be closed.
If Abu Dhabi had honored the commitment made to
Price Waterhouse and the Bank of England, when BCCI was closed globally, BCCI's
innocent creditors and depositors would not have suffered a penny in losses,
since Abu Dhabi had agreed to guarantee them as the price for the Price
Waterhouse certification.
Coverup
and Obstruction of Investigations
In April, 1990, Naqvi and the other chief officers
who resigned with him from their positions in BCCI were placed under house
arrest in Abu Dhabi, as Abu Dhabi took formal control of BCCI. Unfortunately,
as it did so, it did not disclose to Price Waterhouse certain information that
it now had about the extent of the fraud at BCCI, and it took positions that
had the clear intention of seeking to sweep the true nature of BCCI's problems
under the rug, and to avoid the disclosure to BCCI's regulators of what had
really taken place. Essentially, Abu Dhabi was now seeking to make certain that
the money it was spending on BCCI would suffice to keep secret many of the
facts about the relationship between Abu Dhabi and BCCI, even, as necessary,
from Price Waterhouse, the outside auditors for the bank it now owned.
In September, 1990, Price Waterhouse learned that
BCCI had concealed further lending of over $500 million to its major customs by
"parking" that lending with a Middle Eastern bank, namely, the
National Commercial Bank of Saudi Arabia controlled by Khalid bin Mahfouz, the
most powerful banker in the Middle East, who was later indicted in the United
States in connection with his activities pertaining to BCCI and First American.
Price Waterhouse also learned that since Naqvi's removal, the practice had
continued, "with the knowledge and approval of the Board representative of
the controlling shareholders" -- the government of Abu Dhabi. The auditors
had begun to realize that Abu Dhabi officials were now colluding with BCCI in
continuing fraudulent practices, and in hiding them from Price Waterhouse.(40)
Since March or April, 1990, Naqvi, who had
personally handled in excess of $2 billion of Abu Dhabi's funds and was
personally responsible for many of BCCI's frauds, had been living under house
arrest in Abu Dhabi. Abu Dhabi had decided to retain Naqvi as a consultant to
advise them on BCCI, and were giving him access to BCCI's documents. According
to Price Waterhouse, Naqvi was maintaining some 6,000 files personally in Abu
Dhabi, whose very existence had still never been disclosed to the auditors. For
months, as Price Waterhouse continued its efforts to review BCCI's books, it
had been lied to by BCCI and it was finding, by Abu Dhabi, kept in ignorance of
the bank's most vital records, and only stumbled onto the fact of their existence
in November, 1990.(41)
As Price Waterhouse described it, when they
confronted Abu Dhabi with their concerns about Naqvi, and a request to review
the files he controlled, they were told by Abu Dhabi authorities that the
auditors could not have access to them, and that they would remain under the
control of the discredited Naqvi:
Price Waterhouse's report to the directors of 3
October 1990 revealed that management may have colluded with some of BCCI's
major customers to misstate or disguise the underlying purpose of significant
transactions. Following this, the controlling shareholders of BCCI [Abu Dhabi],
under pressure from Price Waterhouse, agreed to a full investigation of the
problem accounts and to enforce the resignations of Abedi and Naqvi as directors.
An Investigative Committee comprising
representatives from Price Waterhouse, E&W Middle East Firm (who were
auditors of the Abu Dhabi Government interests), two firms of lawyers and the
Abu Dhabi Government was established in November 1990 to supervisor the
investigation into the problem accounts. Price Waterhouse were advised by
senior BCCI management that Naqvi had been retained as an "advisor"
to provide explanations to the Abu Dhabi Government and that they could not
have access to files being used by him. Price Waterhouse made clear to the
controlling shareholders that without access to Naqvi and the files he was
using there could be no investigation.
Ultimately access was granted and we were shocked to
find that Naqvi was holding around 6,000 files. After initial steps to secure
the files, a preliminary review revealed that amongst them were details of
transactions and agreements not previously disclosed to us despite management's
prior assurances that they had provided all relevant information to Price
Waterhouse.(42)
Abu Dhabi had placed Naqvi, a principal architect of
BCCI's frauds, in charge of BCCI's most important and secret records without
telling them. For the past eight months, Naqvi and Abu Dhabi had maintained
exclusive control of those records, with essentially unlimited opportunities to
destroy them or falsify them throughout that time. By the time Price Waterhouse
finally obtained access to these records in November and December, 1990, it
found massive fraud in the materials that still existed. But the auditors had
no way of determining the extent to which those documents were already cleansed
of any material damaging to the new owners of BCCI, along with any other
material which Abu Dhabi or Naqvi wanted hidden forever.
During December, 1990, at the very time that the New
York District Attorney had obtained some of the most critical of its earlier
audit reports, Price Waterhouse completed its initial review of the formally
hidden Naqvi files. In that review, Price Waterhouse found evidence of phony
loans and hidden deposits amounting to hundreds of millions of dollars, nominee
arrangements, hold harmless agreements relieving borrowers of any obligation to
repay loans, and other, similarly criminal practices at the bank. Again, to Price
Waterhouse's shock, Abu Dhabi had known of these practices since at least
April, 1990, and never disclosed them to the auditors.(43)
The implications of these findings for BCCI's future
were devastating. If there were in fact deposits that had been made to BCCI
amounting to hundreds of millions that had never been recorded at the bank, how
was anyone to ever determine what claims by BCCI depositors might be real, and
what claims might be phony? Price Waterhouse decided that it dare not put this
information in writing, and would confine itself to reporting it orally to the
Bank of England, which it did in January 1991. In response, Abu Dhabi again
agreed to make good any losses in connection with these unrecorded deposits.(44)
Attempt
At Restructuring 1990 and 1991
The key goal of Abu Dhabi from the time it took
control of BCCI in April, 1990 was to find a way to save its interest in the
bank. By the account of Al Sayegh and Abu Dhabi:
In April, 1990, senior management revealed that BCCI
had suffered significant losses and Price Waterhouse for the first time
identified certain transactions that had been "either false or
deceitful." The Price Waterhouse report was sent to the Bank of England
and was discussed at a meeting between the Bank of England, the Luxembourg
Monetary Institute, Price Waterhouse, and BCCI management in April, 1990. With
the full support of the Bank of England, the Ruling Family purchased some 15
million outstanding BCCI shares, and the Abu Dhabi Department of Finance (which
previously had owned no BCCI shares) purchased another 15 million outstanding
shares and subscribed for 10 million additional shares issued by BCCI. The
share issuance was intended to cover the losses which had been identified and
to restore the liquidity of the BCCI subsidiary banks. As a result of these
steps, and the outlay of $1.2 billion, the Abu Dhabi investors now owned 77
percent of the stock of BCCI.(45)
Abu Dhabi immediately removed Naqvi from control of
BCCI and replaced him with Zafar Iqbal, then head of the Abu Dhabi operation of
BCCI, the Bank of Credit and Commerce Emirates, whose qualifications for the
position have been discussed above. They decided to shrink the bank, and:
with the encouragement of the College of Regulators,
a decision was made to move the headquarters of BCCI to Abu Dhabi form London,
so that the Majority Shareholders could begin to monitor some of the activities
of BCCI management.(46)
Planning began to find a way to restructure BCCI
into a three-headed entity, with separate "independent" banks based
in three locations, Abu Dhabi, Hong Kong and London, in a proposal that
evidently had some support if not final approval from the Bank of England and
the College of Regulators through the spring of 1991. As described in a legal
analysis provided to the BCCI Creditors' Committee after BCCI's collapse by the
firm of Norton Rose in London, this transaction would have involved the
Government of Abu Dhabi committing "some US$4 billion . . . under
financial support arrangements." These arrangements were signed between
BCCI and Abu Dhabi on May 22, 1991. Under their terms, most of BCCI's problem
loans were transferred at book value -- far in excess of their real value -- to
new companies owned directly by the Government of Abu Dhabi. In return, Abu
Dhabi gave BCCI SA promissory notes denominated in US dollars and UAE dirhams,
equivalent in face value to $3.061 US, with additional guarantees totalling
another $750 million for a group of remaining loans with some value.(47)
The three separate and independent banks to arise
out of BCCI's ashes were to have control and management of the operations of
the former BCCI banks divided into Europe and Canada, for the United Kingdom
bank; the Middle East and Asian subcontinent, for the Abu Dhabi bank; and the
Far East, for the Hong Kong bank. Under the plan, a substantial portion of the
BCCI global network would have been wound up or sold off. The banking
operations of BCCI would have been transferred from Luxembourg to Abu Dhabi by
the end of 1991 and from Grand Caymans to Abu Dhabi by the end of 1992.(48)
Snags developed, however, as the restructuring
proposal proceeded. The first was the New York District Attorney obtaining
information in the late autumn of 1990 concerning the previous Price Waterhouse
audit reports, including the April, 1990 reports, that triggered Abu Dhabi's
takeover of BCCI.
In November, 1990, the New York District Attorney
advised the Federal Reserve that a source stated that the reports showed that
there had been massive lending -- amounting to $850 million or more -- by BCCI
to First American's shareholders, none of which had ever been disclosed to the
Federal Reserve.
The Federal Reserve, after some significant
obstacles, was permitted by BCCI in December, 1990 to view those reports in
London.
On December 21, 1990, Federal Reserve attorneys met
with attorneys for Abu Dhabi and BCCI from the Washington law firm of Patton,
Boggs and Blow. The Federal Reserve learned from Patton Boggs for the first
time about the massive restructuring of BCCI planned by Abu Dhabi to respond to
unspecified capital "deficiencies" at BCCI. Patton Boggs confirmed
that what the Federal Reserve already knew from the Price Waterhouse audit
reports -- that BCCI had lent large sums to CCAH's shareholders which were
secured by CCAH's shares. Two weeks later, the Federal Reserve opened a formal
investigation. Less than three weeks later, it concluded that criminal activity
had been involved in the First American purchase, referred the matter to the
Justice Department, sent a proposed cease and desist order to BCCI, and widened
its investigation.(49)
Thus, during the spring of 1991, Abu Dhabi faced a
new problem. At any time, the Federal Reserve could, if it so desired, make it
impossible for the Bank of England to proceed with the restructuring.
Accordingly, Abu Dhabi found itself in the position of having to cooperate with
the Federal Reserve's investigation of BCCI and First American, and provide
information which could simultaneously confirm some of BCCI's frauds, and thus
increase the risk that bank which it was trying to save would not survive.
The compromise reached by Abu Dhabi was to permit
Federal Reserve investigators to travel to Abu Dhabi and review BCCI documents,
but only those documents pertaining to transactions involving U.S. banks, and
only as selected by Abu Dhabi. The Federal Reserve investigators went to Abu
Dhabi, told them what categories of documents they wanted, and Abu Dhabi
officials then "located them" from its BCCI document files. When
investigators sought to meet with Swaleh Naqvi, access to Naqvi was granted,
but only after Naqvi was provided an attorney who protested that he could not
allow the investigators to speak with Naqvi until the lawyer was more familiar
with the case.(50) The result was that the Federal Reserve obtained
substantial, but incomplete, information concerning BCCI's activities in the
United States, and very little information of any kind concerning Abu Dhabi's
role, or what took place at BCCI apart from its role in purchasing U.S. banks.
After the Federal Reserve, First American, and BCCI
entered into consent decrees on March 4, 1991, Subcommittee staff contacted Abu
Dhabi's U.S. attorneys at Patton, Boggs and Blow in an effort to understand the
ramifications of the decrees and the proposed restructuring of BCCI. In the
meeting, staff expressed their concerns about the fact that BCCI's former head,
Swaleh Naqvi was still in place providing advice and assistance to BCCI; that
BCCI's current head, Zafar Iqbal, was to remain in control of the banks
throughout the restructuring and presumably afterwards; and that a structure
was to emerge out of BCCI which failed to respond to what was even the one an
obvious lesson of the BCCI affair -- dividing BCCI into more than one part was
dangerous to the health of the international banking system. The attorneys at
Patton, Boggs and Blow, who were at the time representing both Abu Dhabi and
BCCI, acknowledged that they shared the concerns about Iqbal and Naqvi, and
would pass the Subcommittee's concerns on to their clients. Staff questioned
the attorneys as to whether the three independent banks could do business with
one another, and what protection would be in place to prevent further fraud
from taking place. In response, Middleton Martin, Abu Dhabi's principal lawyer
at Patton, Boggs and Blow in Washington, suggested that Abu Dhabi was a
"white hat" among whomever might be the "black hats," and
was doing its best to solve BCCI's many problems.(51)
At the direction of the chairman of the
Subcommittee, staff met with staff of the Federal Reserve to express Senator
Kerry's concerns about the proposed restructuring, and the wisdom of permitting
BCCI to be restructured in three parts. The Federal Reserve took the position
with staff that the decision was the Bank of England's. The Federal Reserve's
principal goals were to sever BCCI's relationship with First American and to
find out the nature and decree to which U.S. banking laws had been violated by
BCCI, its shareholders, and officers. However, Federal Reserve investigators
were also disturbed by the continued participation of BCCI directors and
officers in the future of the proposed three banks, and objected especially to
the continued involved of Iqbal. By the late spring of 1991, both U.S. and U.K.
regulators began to insist on the removal of Iqbal as the head of BCCI. Al
Mazrui, who had worked closely with Iqbal for many years, resisted, temporarily
paralyzing the restructuring plan that had previously been agreed to among the various
regulators, Abu Dhabi and BCCI.(52)
While tentatively assenting to Abu Dhabi's proposal
for restructuring BCCI, the Bank of England, in about March, 1991, also
authorized a Section 41 report by the auditors, named for the provision in
British banking laws by which regulators can commission an audit report of a
bank by its outside auditors for the regulators. That report was initiated at
least in part in response to new information developed by Price Waterhouse in
December, 1990 or January 1991 about the broad extent of BCCI's frauds. The
Section 41 report was completed in late June. The fraud outlined in that report
resulted in the Bank of England deciding, within days, to abandon its previous
support for a restructuring and to close the bank. Just two days before BCCI
was closed, Abu Dhabi had provided the British and Luxembourg regulators with
the latest -- and what proved to be the final -- draft restructuring plan for
BCCI.(53)
Abu
Dhabi and BCCI's Closure
Abu Dhabi representatives were outraged by the
sudden closure of BCCI. They had not been expecting the action, had committed
nearly $4 billion to keep BCCI open, and had been working closely with
regulators in an effort to make the restructuring succeed. Moreover, in an
effort to appease the Federal Reserve and prevent a collapse of First American,
while also protecting against the loss of the value of its investment in First
American, Abu Dhabi had also made a series of payments totalling about $190
million to keep First American from possible failure. The last of these
payments was made only days before the final closure of BCCI, a closure which
Abu Dhabi could reasonably conclude might well have been timed not to take
place until the moment they had put up the final installment of cash to help prop
up First American.(54)
In the wake of BCCI's collapse, any cooperation from
Abu Dhabi to the Federal Reserve ceased.
Abu Dhabi's first step in response to the closure of
BCCI was to set into motion legal proceedings in Abu Dhabi entitling it to
seize the promissory notes it had issued to BCCI as part of the restructuring
plan. As Norton Rose described it:
On Tuesday, July 16, 1991 the Government of Abu
Dhabi filed Plaint No. 1560 with the Abu Dhabi Civil Court of First Insurance.
. . The Court ordered such seizure and consequently that afternoon four court
officers attended the head of BCCI Group . . . where they located the
outstanding promissory notes and two guarantees, sealed them in yellow
enveloped, and deposited them in a safe (which was marked red) at the Bank. The
keys to the safe are apparently being kept in the Treasury of the Abu Dhabi
Civil Court.(55)
Thus, Abu Dhabi insured that actual documents
representing the additional financial obligations it entered into with BCCI --
ranging from $1.2 billion to $2.8 billion depending on how one valued the notes
-- would be locked under seal and kept from BCCI's liquidators, who otherwise
might be able to recover additional funds from Abu Dhabi on the basis of the
notes, but now would be stymied through the notes' impoundment.(56)
Abu Dhabi spent the remainder of July, 1991 trying
to avoid the liquidation of BCCI and to restart the restructuring plan. It
applied to the courts in the UK and Luxembourg to adjourn the petition for
liquidation to permit the consideration of the restructuring. But the effort
was fruitless. Even if the courts did not ultimately reject it, within a few
hours of its closure on July 5, 1991, BCCI had effectively been obliterated,
leaving some 14,000 employees out of work, and some one million depositors out
of luck. BCCI had lost billions of their money long ago. But it was BCCI's
closure that forced the world to recognize the losses.
Abu
Dhabi and the Liquidators
Shortly after BCCI's closure, liquidators were
appointed by the District Court of Luxembourg, where BCCI was incorporated, to
handle the winding up of BCCI and the recovery of the maximum possible amount
of assets for distribution to innocent depositors and creditors of BCCI
worldwide. The mandate of BCCI's liquidators was to recover funds, not
necessarily to aid in investigations of BCCI. As chief liquidator Brian Smouha
testified:
[O]ur responsibility is to use the resources in the
liquidation estates to maximize recoveries to be made available to creditors
and depositors. [A]s far as we are able consistent with that responsibility,
we endeavor to cooperate with numerous investigative authorities in a number of
countries.(57) [emphasis added]
Thus, to whatever extent investigative efforts might
threaten to reduce the recovery of funds for BCCI's depositors, BCCI's
liquidators have a responsibility under the terms of their appointment to
sacrifice the investigation and uncovering the truth about what happened to the
goal of maximizing funds to return to the creditors.
Following their appointment, the liquidators found
two key situations they had to deal with in order to recover substantial assets
for BCCI. The first was in the United States, which had more than $330 million
in BCCI assets frozen unless an agreement could be reached with the Justice
Department, New York District Attorney, and Federal Reserve. The second was
with Abu Dhabi. Abu Dhabi had previously guaranteed BCCI's debts as of April,
1990. At the time of the liquidation of BCCI, it was BCCI's sole owner. Abu
Dhabi has one of the world's deepest pockets as a result of its huge oil
reservoirs, and its revenues from oil of $10 billion or more annually. There
would be numerous possible theories for recovering funds from Abu Dhabi if its
role were litigated by the liquidator. On the other hand, Abu Dhabi also held a
number of cards were any such litigation to take place. First, it controlled
BCCI's records. Second, it controlled key BCCI witnesses. Third, its wealth
could easily be turned to time-consuming litigation, delaying any pay-out to
innocents for a decade or more. As a result, the liquidator either had the
choice of reaching an agreement with Abu Dhabi which met it interests, or of
entering in a difficult, contentious, and drawn-out battle with Abu Dhabi with
uncertain results.
The U.S. situation was, needless to say, far easier
to resolve. The liquidators were to a remarkable degree able to integrate the
goals of assisting investigators and helping depositors in the context of the
plea agreements they reached in the United States on January 24, 1992. In those
agreements, BCCI's liquidators entered pleas of guilty on behalf of BCCI to
federal racketeering and similar New York state charges. The pleas promised
full cooperation by the liquidators with U.S. law enforcement authorities and
worked out a fair distribution of BCCI's assets in the United States that
protected U.S. interests while facilitating the return of excess funds to
BCCI's worldwide creditors. BCCI's liquidators also provided substantial assistance
to the Subcommittee investigation, providing thousands of BCCI documents in the
United States, waivers of the attorney-client and work-product privilege of
BCCI's attorneys and investigators, and other important help.
But on the issue of BCCI and Abu Dhabi, the goals of
investigating what happened, and the liquidators need to insure the maximum
recovery, were not so easily aligned.
Abu Dhabi took a number of positions with the
liquidators which together amounted to Abu Dhabi maintaining its ability to
cover-up any information it wished the world not to know.
First, Abu Dhabi made it clear to the liquidators
that they could not press for the return of BCCI's documents held in Abu Dhabi,
despite the fact that under any ordinary standard of bankruptcy law outside the
jurisdiction of Abu Dhabi, the liquidators have the right to control those
documents, and the obligation to make them available to parties at interest in
the liquidation.
Second, Abu Dhabi made it clear that the liquidators
themselves would have only limited access to BCCI's documents in Abu Dhabi for
the limited purpose of using them to try to litigate claims against non-Abu
Dhabi borrowers from BCCI. As Smouha acknowledged:
[W]e have, after initially being denied access to
those documents, since late summer [1991] had access to the Central Credit
Division and other Central Office documents in Abu Dhabi for loan recovery
purposes. Many of the critical documents in Abu Dhabi were put under the
control of a court appointed receiver in Abu Dhabi. The receiver has not
permitted us to remove documents from Abu Dhabi.
With respect to witnesses, as you know, certain key
ex-employees of BCCI are under arrest in Abu Dhabi. We have asked for access to
certain of those persons. We have been advised that these persons are under
control of [t]he public prosecutor in Abu Dhabi and that access must be
obtained through that official.(58)
As of the writing of this report, that access had
yet to be obtained by anyone outside the Abu Dhabi government.
Third, Abu Dhabi insisted that it alone would have
the right to reach judgments about whom to sue on BCCI's behalf from among
BCCI's lawyers, accountants, and top officers, and how to proceed against them,
while permitting the liquidators to share in 50 percent of any returns on such
claims, with the other 50 percent to be given to Abu Dhabi itself.(59)
As Michael Crystal, an attorney for the liquidators, testified:
Under the proposed arrangements . . . these claims
will be managed . . . by the Government of Abu Dhabi's lawyers under a
cooperation arrangement under which we have a say in the case management.(60)
In fact, the literal language of the Contribution
Agreement proposed leaves this decision entirely to Abu Dhabi's discretion,
regardless of whom they may consult on "case management":
[T]he claims of Principal BCCI Companies against
certain specified third parties are to be assigned to the Government of Abu
Dhabi [and] will be pursued by them. [This applies to] the former auditors and
certain former solicitors of the Principal BCCI Companies; certain named
individuals who were formerly responsible for the management of the principal
BCCI Companies.(61)
The right to make decisions about how and against
whom to pursue claims is a basic right of any liquidator, and one of the most
important responsibilities, as the issue of who is sued, how a case is managed,
and whether or not to settle such claims goes to the heart of a liquidators' ability
to maximize a recovery.
Here, the interest of Abu Dhabi and the liquidators
could dramatically diverge. For example, Abu Dhabi might well be more
interested in insuring the silence of BCCI's professional advisors, lawyers and
accountants, than in the maximum recovery of assets from them. Accordingly, if
the liquidators acquiesced in Abu Dhabi's insistence on having the sole right
to make this decision, Abu Dhabi could choose to settle claims against those
who know the most about Abu Dhabi's participation in BCCI's improprieties, in
return for their silence. Contrary to the import of Crystal's testimony, if Abu
Dhabi decided to settle its claims against BCCI officers like Swaleh Naqvi,
against its auditors like Price Waterhouse, and against its attorneys, in
return for their agreement to say nothing further about what they had learned
concerning BCCI to anyone, including government investigators, the liquidators
would be bound to accept the decision.
Finally, as would be normal in any such agreement,
the liquidators would release Abu Dhabi from any claims that the liquidators,
on behalf of BCCI, its depositors and creditors, would have against Abu Dhabi.
In return for these key concessions by the
liquidators, Abu Dhabi agreed to provide $1.7 billion to the pool to be used to
repay creditors and depositors. Given Abu Dhabi's contention that it was
defrauded of $6 billion, and its professions of innocence, its claims would be
treated equally with those of innocent creditors and depositors, with the
result that half or more of the $1.7 billion contributed by Abu Dhabi would
likely be returned to Abu Dhabi itself, going from one Abu Dhabi pocket to
another, leaving depositors receiving no more than 30 cents on the dollar for
their losses and according to some creditors' contentions, far less.
Given the difficult choice between accepting these
unusual demands from Abu Dhabi in return for Abu Dhabi's $1,7 billion
contribution or of litigating Abu Dhabi's liability, the liquidators accepted
to Abu Dhabi's demands and initialed agreements with Abu Dhabi on February 20,
1992, incorporating the concessions described above, subject to approval by
BCCI's creditors and depositors. These agreements, which also included detailed
and reasonable provisions for the pooling of BCCI assets and other important
technical issues pertaining to the liquidation, were then provided to the
courts for ratification, ratified by the British court, and remain pending
before the Luxembourg court.
The practical consequences of the agreements reached
by the liquidators with Abu Dhabi have meant that the liquidators have
essentially chosen not to contest Abu Dhabi's positions concerning its
innocence in the affair; have decided not to investigate any wrongdoing by Abu
Dhabi in connection with BCCI; have acquiesced in Abu Dhabi's sequestration of
documents that legally belong to the liquidators and witnesses to whom the
liquidators legally should have access; and have even placed Abu Dhabi in the
position of being able to purchase the silence of the auditors and lawyers who
handled BCCI's affairs.
The secrecy, if not necessarily the real reason for
the secrecy, concerning the actual nature of Abu Dhabi's possibility
liabilities to the creditors, has been acknowledged by the liquidators
themselves. For example, the presentation made to BCCI's creditors and depositors
by the liquidators in their March 16, 1992 report describing the proposed
agreement with Abu Dhabi explicitly states under the title "Disadvantages"
of the agreement, that:
The Liquidators are advised by their legal advisors
that it would be inappropriate to provide a detailed assessment of claims
against the Majority Shareholders, because to do so might be highly prejudicial
to the interests of creditors were the Majority Shareholder Agreements not to
become unconditional.(62)
This remarkable sentence contains the essence of the
dilemma in the liquidator-Abu Dhabi deal. If the liquidators were to tell those
whom BCCI injured what Abu Dhabi might have done and what its potential
liability might be, either the creditors, Abu Dhabi, or both might withdraw
from the agreement, with ten years of more of difficult litigation ensuing.
Those being asked to sign off on the agreement, were being required to do with
full warning by the liquidators that the liquidators were already
suppressing information on Abu Dhabi's liability in order to obtain the
agreement.
Equally important, the practical consequences of the
agreements reached by the liquidators with Abu Dhabi have been that the
liquidators are as a practical matter acquiescing in Abu Dhabi's frustration of
U.S. law enforcement, regulatory, and Congressional investigations concerning
its activities pertaining to BCCI. This is disputed by the liquidators. As
Michael Crystal testified:
The commercial situation is not intended by the
court appointed fiduciaries, nor does it, touch and concern the ongoing
obligations of regulators to inquire into the past, to look into history, and
to consider whether there has been criminal misconduct which needs to be
prosecuted. There's nothing in the plea agreement which we think cuts across
those two separate interests.
The plea agreement requires us to cooperate with
regulators to ensure that crime is prosecuted and we have taken assiduously our
duties to provide full cooperation to the relevant regulatory authorities under
the plea agreement.
So far as the commercial arrangements are concerned
. . . they will not prevent regulators in jurisdictions who have access to
international treaties . . . from continuing to pursue criminals and bring them
to justice in a variety of jurisdictions.
The arrangements with Abu Dhabi don't prevent that.
They don't prohibit it.(63)
Crystal's testimony on this point was technically
correct, but as a practical matter, misleading. In giving the power of the
liquidators to reach independent judgments about how to pursue those most
knowledgeable about BCCI's wrongdoing -- and the extent of wrongdoing by Abu
Dhabi -- the agreements with Abu Dhabi initialed by the liquidators have
already had, and will continue to have, a profound negative impact on ongoing
criminal investigations in the United States pertaining to BCCI.
Moreover, there is, to say the least, a very large
tension between the legal commitment the liquidators made to the Justice
Department and the New York District Attorney to provide BCCI's full
cooperation to the United States, and the legal commitment the liquidators have
now made to Abu Dhabi. In time, that tension could imperil the ability of the
liquidators to recover any assets from the United States. U.S. law enforcement
would be fully entitled to declare that the commitments made to Abu Dhabi have
precluded the cooperation with the United States required under the plea
agreement entered into by the liquidators on BCCI's behalf. With the
liquidators thus declared in breach of their commitments to the Justice
Department, New York District Attorney, and Federal Reserve under the plea
agreements, the latter institutions and the U.S. courts could be free to take
the position that BCCI's U.S. assets had been forfeited by the liquidators in
the process.
Al
Sayegh's Testimony And Answers to Questions
Beginning in the spring of 1991, the Subcommittee
asked Abu Dhabi's and BCCI's lawyers at Patton Boggs and Blow that Abu Dhabi or
BCCI provide knowledgeable witnesses to testify in public concerning the key
issues pertaining to BCCI. These requests were ignored, or rejected, until the
spring of 1992, when the Subcommittee advised Abu Dhabi's attorneys that they
themselves could be subpoenaed to testify before the Subcommittee in their
capacity as business agents for Abu Dhabi in the event that a knowledgeable Abu
Dhabi witness was not produced. Recognizing that Abu Dhabi was continuing to
refuse to produce the key BCCI officials, such as Swaleh Naqvi, the
Subcommittee requested that Ghanim Al Mazrui be produced, or an equally
knowledgeable associate.
A hearing date was set for May 14, 1992. Until a few
days before the hearing, Abu Dhabi did not inform the Subcommittee of the
identify of the witness who testify. Shortly before the hearing, he was
identified as Ahmed Al Sayegh, a member of the steering committee, headed by Al
Mazrui, responsible for handling Abu Dhabi's response to BCCI's closure, and a
person with no knowledge of, or involvement in, Abu Dhabi's activities with
BCCI over the previous two decades. That lack of knowledge was, unfortunately,
reflected in a number of answers by Al Sayegh to important questions from the
Subcommittee.
Al Sayegh was, for example, unaware that from at
January 1978 through November 1990, Clark Clifford and Robert Altman
represented Abu Dhabi, testifying that "I don't think they were ever our
lawyers, Senator." In fact, Clifford and Altman made numerous filings with
regulators on the behalf of various members of the Abu Dhabi ruling family, had
extensive correspondence with representatives of Abu Dhabi, met with Abu
Dhabi's representatives during the Financial General Bankshares takeover, and
had signed powers of attorney, spanning more than a decade, for Sheikh Zayed
personally, for the Abu Dhabi Investment Authority, for at least one of Sheikh
Zayed's sons, and for Abdullah Darweish, guardian of another of Sheikh Zayed's
sons.(64)
Al Sayegh was similarly unaware of who made the
decision to install Zafar Iqbal as head of BCCI in April, 1990; of communications
involving Bert Lance and Sheikh Zayed concerning the FGB takeover in 1978; of
the structuring of the participation of Abu Dhabi ruling family members in the
FGB takeover from 1978 through 1981; of the affairs of Sheikh Zayed's private
department at any time; of whether or not Sheikh Zayed in any period placed all
of Abu Dhabi's oil revenues in BCCI; of how much Abu Dhabi had invested in
CCAH/First American. Al Sayegh further contended that Agha Hasan Abedi was
never a financial advisor for Sheikh Zayed or the Abu Dhabi government.(65)
This lack of knowledge, coming in testimony ten
months after BCCI's closure, reflected an obvious decision by Abu Dhabi not to
send someone to testify before the Subcommittee who knew what had actually
taken place between BCCI and Abu Dhabi over the previous twenty years.
Al Sayegh did, however, present Abu Dhabi's formal
positions concerning its role in the BCCI affair, and its intentions of fully
cooperating with the United States in investigating what happened. As he declared
in his opening statement:
First, the majority shareholders had no involvement
in the frauds perpetuated by BCCI which went on for some 18 years while they
were passive minority shareholders.
The investment decisions they made during that time
were based upon unqualified auditor's reports supplied by respected accounting
firms and the knowledge that the bank was regulated in many countries. They
were investors in a bank, not managers of a bank and relied on auditors and
regulators to do their jobs.
Second, the majority shareholders are the single
biggest victim of the fraud and probably its only intended victim . . .
[I]t must be understood that the majority
shareholders do not control the prosecutions in the UAE, though they are doing
everything in their power to assist in the ongoing investigation. . . We too
enjoy a separation of powers which include an independent judicial system
responsible for criminal proceedings. The separation of powers is respected and
upheld at the highest levels of UAE government.
Third, and most importantly for our purposes here
today, the Majority Shareholders have every intention of fully cooperating with
competent United States authorities in pursuing their own investigations,
subject only to any restrictions placed on the under UAE law and the needs of
our domestic investigations. . .
[M]y appearance today renews the Majority
Shareholders' commitment to cooperate with the investigative efforts of your
subcommittee and other competent U.S. authorities to the extent that we are
able to do so in a manner consistent with our own vital interests and the law
of the United Arab Emirates.(66)
The key points made by Al Sayegh were that Abu Dhabi
was innocent, victimized, and would fully cooperate with the United States on
investigating and prosecuting BCCI -- to the extent permitted by the law of its
country and to the extent permitted by its "vital interests."
By Al Sayegh's account, Abu Dhabi's decisions to
invest in BCCI was based not on the personal relationship between Sheikh Zayed
and Abedi described by everyone else familiar with what actually happened, but
on Abu Dhabi's reliance on BCCI's regulators in Luxembourg, the UK and the
Grand Caymans, and on Price Waterhouse and Ernst & Whinney, BCCI's
accountants.
By Al Sayegh's account, the chief difficulties in
making documents and witnesses available to the investigators of other
countries is that the Abu Dhabi legal system does not permit it, as its legal
system is based on a separation of powers that prevents the Executive Branch
from exercising any influence over the judicial process. In support of this
account, Abu Dhabi's attorneys provided the Subcommittee with extracts of
various laws of the United Arab Emirates, most of which have no applicability
whatsoever to matters in dispute, but which do contain several relevant
passages:
WE ZAYED BIN SULTAN AL NAHYAN, the President of the
United Arab Emirates, having examined the Provisional Constitution and in view
of the proposal made by [various Abu Dhabi cabinets and councils] HAVE ISSUED
THE FOLLOWING LAW: . . .
[J]udges shall be independent having no dominant
control over them in the performance of their duties other than the provisions
of the Islamic Doctrine, the laws in force and their conscience. No individual
or authority may violate the independency of the judicial authorities or interfere
in matters of justice. . .
The function of the public prosecution shall be
exercised before the Federal Courts by an attorney general . . .
The appointment of the attorney general and the
other members of the Public Prosecution to the grade of prosecutor shall be
effected by a decree issued by the President of the State [Sheikh Zayed]
following approval of the Cabinet upon the nomination of the Minister of
Justice. . .
The Minister of Interior may detain an alien against
whom a deportation order has been issued, for a period not exceeding two weeks.
. .
Following his arrest, an accused may not be detained
for more than forty-eight hours [unless there is an order by the prosecutor] to
detain him provisionally pending interrogation for a period of seven days
subject to renewal for further periods not exceeding fourteen days. [A judge
may] extend the detention for a period not to exceed thirty days, subject to
renewal . . .(67)
As Al Sayegh's prepared testimony, these final
provisions were the basis for the ordering of the summary arrest of the BCCI
officials suspected of being involved in the irregularities and fraudulent
activities, and their detention since, as under the interpretation given the
law, the phrase "subject to renewal" allows the judge to continue to
hold the accused from month to month so long as the prosecution wishes, without
any limit whatsoever, for years, decades, or life, if matters remain under investigation.(68)
Indeed, Subcommittee staff have interviewed one knowledgeable Pakistani insider
about BCCI and Abu Dhabi who spent years in prison in Abu Dhabi without trial,
after being involved in a dispute with a member of the ruling family.
Similarly, Al Sayegh's prepared testimony described
BCCI's bank records as under the "protective custody of the U.A.E. federal
civil court," which has provided "access
to the Majority Shareholders," Abu Dhabi, to
"gather evidence upon which the prosecution can proceed," while the
U.A.E. prosecutor, appointed by Sheikh Zayed, "has ordered that the
documents . . . remain confidential" for reasons not explained.(69)
Given the fact that Sheikh Zayed, according to his
own attorneys in submissions with the Federal Reserve, owns all of Abu Dhabi's
resources and land, and that the laws themselves are styled as decrees by
Sheikh Zayed, in consultation with other bodies and officials who are appointed
by Sheikh Zayed, not by popular vote at elections, the notion that the United
Arab Emirates's justice system is somehow completely independent from the
interests of the ruling family of Abu Dhabi stretches credulity.
Following the conclusion of Al Sayegh's opening
statement, Senator Kerry asked him whether Abu Dhabi was now prepared to
cooperate with the United States on investigating BCCI. Al Sayegh gave, in
essence, a commitment to complete the process of negotiating cooperation
agreements with the U.S. within weeks:
Senator Kerry. Can we understand now that Mr. Naqvi
and Mr. Iqbal and others will be made available to both members of the
committee staff and Justice Department personnel
Mr. Al Sayegh. Yes, Senator. We are in discussions
now, ongoing discussions, with the Department of Justice on terms for an
agreement to provide access to both individuals and documents . . . They
started a few weeks ago, Senator. I am certain we could wrap them up quickly.(70)
These statements were widely reported in the press
the following day. Contrary to Al Sayegh's assurances, as of the date of the
writing of this report four months later, no access to documents or witnesses
has been provided to either the Subcommittee or to federal law enforcement by
Abu Dhabi.(71)
As noted above, Al Sayegh did not have the personal
background and knowledge of the facts concerning Abu Dhabi's involvement with
BCCI to answer a number of basic questions asked by the Subcommittee in his
oral testimony. Moreover, the testimony came following some seven hours of
testimony from other witnesses. Accordingly, Senator Kerry requested, and Al
Sayegh agreed to provide, answers to a number of remaining questions in
writing, which were sent to Abu Dhabi's lawyers on May 20, 1992, with answers
received July 8, 1992.
In replying to the 65 additional questions from
Senator Kerry, Al Sayegh expressed his unhappiness at the number, nature, and
tone of the questions, contending that some "inquired into my own personal
affairs and the personal affairs of the Majority Shareholders or their
representatives that had no relation whatsoever to matters involving BCCI and
CCAH" and that others "contained factual allegations that are
baseless and seem designed to embarrass the Majority Shareholders and their
representatives." Accordingly, Al Sayegh requested a meeting with Senator
Kerry to take place before he answered the questions. Senator Kerry declined.
Senator Kerry's questions sought to clarify points
left unclear during the hearing. Unfortunately, in a number of cases, Al
Sayegh's answers did not provide the clarification sought.
For example, Question 6 asked whether the Abu Dhabi
Investment Authority was claiming sovereign immunity from suit in the United
States. In response Al Sayegh gave the uninformative answer that it
"depends upon the context in which the issue arises and the relevant facts
and circumstances."(72)
Question 7 asked whether the other majority
shareholders of BCCI, including Sheikh Zayed and his sons, would be claiming
sovereign immunity. The uninformative answer was "it depends on the
context in which the issue arises."(73)
In answer to Question 11, which asked about the
circumstances of a loan by the Abu Dhabi Investment Authority to finance the
buy-back of BCCI shares by Sheik Khalid bin Mahfouz, who engaged in fraudulent
transactions with BCCI, Al Sayegh answered, "I am not aware of the details
of the loan. . . I know of no reason why ADIA would be required to disclose its
loans to U.S. regulators."(74)
In answer to Question 13, which asked whether any of
the Abu Dhabi shareholders placed or deposited assets in ICIC, and if so, for
the dates, amounts and purchase of each such placement, Al Sayegh replied that
"in excess of $2 billion" was entrusted by Sheikh Zayed and his son,
Sheikh Khalifa between 1980 and 1990 which were temporarily deposited in ICIC
before being invested. No details were provided, nor any suggestion of how much
"in excess of $2 billion" might have been involved.
In answer to Question 14, which asked Al Sayegh to
provide detailed information concerning an account maintained by Sheikh Zayed
and the ruling family in ICIC, known as Account No. 20071, Al Sayegh replied
that "I do not think it is appropriate to provide details of the personal,
private affairs of His Highness Sheikh Zayed to the Subcommittee, nor am I
privy to them. However, to assist the Subcommittee, I am able to say that funds
deposited in Account No. 20071 at ICIC Overseas were Ruling Family funds, to be
invested by Abedi and Naqvi pursuant to powers of attorney."(75)
In answer to Question 16, which asked whether any of
the majority shareholders had ever taken loans from ICIC, Al Sayegh relied that
"I am not aware of any loans by ICIC to the Majority Shareholders."(76)
In fact, Price Waterhouse audits of ICIC available to the Majority
Shareholders, and obtained by the Subcommittee for the first time in August
1992, demonstrate quite clearly that as of December 31, 1989, ICIC had lent
$17.5 million to the Abu Dhabi group.(77)
In answer to Question 18, which asked Al Sayegh to
describe the nature and extent of claims by Abu Dhabi against ICIC, Al Sayegh
replied that the Ruling Family has "very substantial claims" against
ICIC, but "the details of the Majority Shareholders' intentions regarding
the claims are subject to legal privilege and cannot be disclosed."(78)
In answer to Question 28, which asked Al Sayegh to
provide the Subcommittee with a break-down of the capital paid-in by Abu Dhabi
shareholders to BCCI, Al Sayegh replied "I am unaware of the details of
amounts paid for shares in particular transactions, except that I am aware that
$1.2 billion was injected into BCCI in April 1990 in an effort to save the
bank."(79)
In answer to Question 29, which asked Al Sayegh to
provide a detailed breakdown of its losses as the biggest victim of BCCI's
fraud, including the date, type, location and amount, Al Sayegh replied that
the losses included misappropriated funds, equity investments in BCCI, amounts
on deposit, and interest, ignoring the Subcommittee's request for any dates on
the losses, where and how they occurred, and what amounts were involved in each
case.(80)
In answer to Question 34, which asked Al Sayegh
whether Al Mazrui, who remains chairman of the Shareholders Group in charge of
handling Abu Dhabi's interests pertaining to BCCI, received financial benefits
in connection with the purchase of BCCI shares, Al Sayegh replied, "I am
not privy to the details of Mr. Mazrui's own private affairs."(81)
In fact, Al Mazrui had confessed to receiving these benefits, according to
Price Waterhouse's Section 41 report, to members of the Abu Dhabi ruling family
in April, 1990.
In answer to Question 42, which asked Al Sayegh who
had custody of the $1.2 to $2.8 billion in promissory notes to BCCI from Abu
Dhabi, seized by Abu Dhabi authorities through court action after BCCI's closure,
Al Sayegh replied, "The Majority Shareholders are not in a position to
provide details or court papers on this matter because the matter is sub judice
and because of the in camera nature of the proceedings."(82)
In answer to question 44, which asked Al Sayegh to
specify the terms it requires to conclude a cooperation agreement with the
Justice Department and the New York District Attorney, Al Sayegh replied,
"I do not believe it to be appropriate to discuss the details of the
cooperation program, other than to say that we believe that the U.S.
authorities will be fully satisfied."(83)
In answer to question 48, which asked Al Sayegh to
specify the conditions of confinement of BCCI's officers in Abu Dhabi (who are
reportedly being held in an Officer's Club under comfortable conditions), Al
Sayegh replied, "I do not believe the conditions under which these
individuals are held in confinement is an appropriate issue for the
Subcommittee to be concerned with."(84)
In answer to questions 58-61, concerning the
function of the James Lake and his firm, Robinson Lake, retained by Sheikh
Zayed and Abu Dhabi to handle public relations for Abu Dhabi pertaining to
BCCI, Al Sayegh replied that questions about what they were doing for Abu
Dhabi, how much they were being paid, and who they were communicating with,
were not legitimate areas for the Subcommittee's inquiry. Al Sayegh said that
he believed these basic questions about its purpose in hiring Lake were
"intentionally calculated to embarrass Mr. Lake," and refused to tell
the Subcommittee what he had been paid.(85)
A number of the answers to other questions were also
less than illuminating.
In summary, these answers, taken together,
themselves demonstrate how limited the level of scrutiny Abu Dhabi is willing
to tolerate as a result of its involvement with BCCI. Basic questions
concerning how much money it put into BCCI, how much money it deposited, loans
it may have made in connection with BCCI share purchases and sales,
improprieties involving its chief financial officer responsible for BCCI, the
status of the BCCI officials held in Abu Dhabi, and even what Abu Dhabi wanted
out of its negotiations on cooperation with the Justice Department and New York
District Attorney, are central to understanding Abu Dhabi's role in BCCI.
Instead, Al Sayegh, representing Abu Dhabi, has taken the position that these
matters are, essentially, none of the Subcommittee's business. The answers
provided by Al Sayegh highlight how much Abu Dhabi may have to hide.
Al
Sayegh's Credibility
The day after Al Sayegh testified before the
Subcommittee, Senator Kerry's office received a sworn, unsolicited letter from
a constituent, who described himself as a U.S. citizen with personal knowledge
of Al Sayegh.
The constituent, a Massachusetts management
consultant who had worked in Abu Dhabi, advised the Subcommittee "against
uncritical acceptance of Mr. Al Sayegh's statements [because] he made false
statements to me in my business dealings with him and I suffered substantial
damage by accepting his word as truth."
The constituent, Dr. George B. Bricker, stated that
his management consultant company, had entered into contracts with the Abu
Dhabi National Oil Company (ADNOC) from 1982 to 1986, during which time Bricker
and his staff performed various services for ADNOC.
In mid-1986, Bricker's company, Redirection, was
assigned to diagnose organizational problems relating to the ADNOC Finance
Directorate, whose newly appointed manager was Al Sayegh. Bricker stated that
he worked closely with Al Sayegh's staff and met twice with Al Sayegh on the
project, during which Al Sayegh told him that he was satisfied with the
Redirection's and Bricker's performance. However, over a period of several
weeks, Redirection stopped being paid by Abu Dhabi, causing Bricker to ask Al Sayegh
if there was a problem.
According to Bricker, Al Sayegh said there was
merely "an insignificant hiccup in the accounts payable procedure"
and that Redirection's invoices would soon be paid in full. Bricker kept his
staff on the job for months more, without anyone being paid by Abu Dhabi.
Eventually, Bricker told the staff to leave Abu Dhabi, at which time Al Sayegh
admitted to Bricker that payments to Redirection had been withheld at Al
Sayegh's direction since the beginning of the project more than six months
earlier, and would not be paid until Redirection performed additional services
for new work which had never before been discussed or included in the contract.
Bricker eventually learned that his situation was
related to an attempt by Al Sayegh, which was successful, to replace the
previous management of ADNOC entirely, with younger managers of Al Sayegh's
generation and background. As Bricker had been in place under the earlier
management, Al Sayegh was using the technique of not paying Bricker and his
company as a way of forcing Bricker out without firing him. As Bricker
summarized, "Redirection performed no further projects for ADNOC.
Redirection lost an estimated US$100,0000 because of Mr. Al Sayegh's
all-too-plausible false statements. Clearly, Redirection had no legal recourse;
the U.S. Embassy was no help."(86)
While it is not possible to resolve the merits of
the business dispute involving Al Sayegh and the Massachusetts constituent who
wrote Senator Kerry, the unsolicited sworn statements made by a U.S. citizen,
Dr. Bricker, concerning Al Sayegh's alleged dishonesty in doing business with
him, do raise questions about the credibility of Al Sayegh.
BCCI audit reports obtained since Al Sayegh's
testimony show the company he was managing, ADNOC, as itself having very
substantial deposits at BCCI. These deposits were not held, as one would expect
of the Abu Dhabi National Oil Company, in Abu Dhabi, or even in the Middle
East, but at the BCCI bank responsible for the greatest portion of BCCI's
losses and fraud, BCCI-Grand Cayman, where they amounted to some $229,277,000
as of September 30, 1988.(87)
Finally, the Peat Marwick audit investigation of
BCCI's commodities affiliate and partner in money-laundering, Capcom, make reference
to apparently improper transactions involving Capcom in the United Arab
Emirates and individuals referred to as the Al Sayegh brothers. The
Subcommittee has not been able to determine whether the reference applies to
the witness.(88)
Abu
Dhabi' Lawyers and PR Firms
Like BCCI itself, Abu Dhabi has made a practice of
hiring in the United States as its attorneys and public relations assistants
firms which are among the most politically well-connected in Washington, D.C.
From 1978 through 1990, Abu Dhabi's interests in
Financial General Bankshares and in CCAH/First American were represented by
former Defense Secretary Clark Clifford, Robert Altman, and the firm of
Clifford & Warnke.
Through much of that period and continuing to the
present, Abu Dhabi's other interests in the United States were represented by
the Washington firm of Patton, Boggs & Blow. During that period, Patton
Boggs has also "served as headquarters for a billion-dollar enterprise
called Real Estate Operations, Inc., owned by Sheikh Zayed's Abu Dhabi
government," as was described in a lengthy article on Patton Boggs'
handling of Abu Dhabi's real estate investments that appeared in the Wall
Street Journal May 20, 1992.
According to the Journal, Abu Dhabi's investments in
the United States, much of which have been handled by Patton Boggs, total
nearly $1 billion. The Journal article then described how these assets were
held by Real Estate Operations, Inc., which in turn controlled 22 real estate
investment companies, 10 partnerships, three shell corporations, and other
entities, which in turn own millions of square feet of commercial and retail
property across the United States.(89)
As a result of handling Abu Dhabi's business, Patton
Boggs in addition to being attorneys for Abu Dhabi, became, in effect, their
business agents, or investment managers in the United States, thus linking the
firm to Abu Dhabi in a manner more intimate than a narrower, attorney-client
relationship.
Ironically, at BCCI's request, Patton Boggs also
handled legal work for a front-man of BCCI, Mohammed Hammoud, pertaining to a
real estate investment he made in Virginia that was financed by BCCI, with a
back-up letter of credit issued from BCCI's then secretly-held U.S. bank, First
American.
Thus, especially for the period from November, 1990,
when they became BCCI's principal lawyers in the United States, to July 5,
1991, when BCCI was closed, Patton Boggs inherited, to some extent, the problem
of multiple hats previously applicable to Clifford and Altman. While Patton,
Boggs partners had no role at the First American bank, apart from the interests
of their clients, there was a potential conflict of interest present between
the interests of Abu Dhabi as shareholders of BCCI, and the interests of BCCI's
creditors and depositors. This conflict always existed, but was only
highlighted after BCCI's closure, once the creditor and depositor interest
became represented not by Patton Boggs, but by BCCI's liquidators.
At the same time, Abu Dhabi has since BCCI's closure
retained a politically-connected public relations consultant, James Lake, and
his firm of Robinson-Lake, to carry out public relations efforts on behalf of
Abu Dhabi. Lake, who received $200,000 in payments from Abu Dhabi last fall in
connection with this work, has simultaneously been performing -- as a
volunteer, in an unpaid position -- the job of deputy manager to President
Bush's re-election campaign, causing the chairman of the Subcommittee to state
on March 18, 1992 that:
I do not believe that Mr. Lake should be sitting in
on White House campaign strategy meetings while he is also providing strategy
to Sheikh Zayed on how to deal with problems arising out of his ownership of
BCCI.(90)
Senator Kerry suggested that Lake resign from
representing Abu Dhabi, or from the President's campaign. In response, Lake
said that there was no conflict, and he would continue to handle both matters.
He also explicitly stated he would have no contact with anyone in the Executive
Branch concerning Abu Dhabi matters.
SENATOR KERRY'S VIEW:
Senator Kerry continues to believe that
Lake's dual representation represents a disturbing conflict of interest. In the
view of the chairman of the Subcommittee, at a time when Abu Dhabi continues to
refuse to prevent the Justice Department from obtaining access to documents and
witnesses held in Abu Dhabi, Lake's dual role sends the wrong message to Abu
Dhabi about how serious U.S. authorities are in investigating and prosecuting
anyone who has committed crimes pertaining to BCCI in the United States.
1.
Price Waterhouse Report Sec 41 to the Bank of England, June, 1991, Sec. 1.33.
2.
See testimony of Al Sayegh, S. Hrg. 102-350 Pt. 5 p. 759.
3. S.
Hrg. 102-350 Pt. 5 p. 762.
4. A
key issue raised by the September 21, 1992 decision to provide access to some
documents is whether the action represents real cooperation, or merely the
appearance of cooperation as part of a public relations effort. On September
21, 1992, Robert M. Moregenthau, District Attorney of New York, wrote the
Subcommittee stating the following: "I write at the request of Ronald S.
Liebman, Esq. of Patton Boggs & Blow, counsel for certain individuals and
entities in Abu Dhabi, including members of the Ruling Family. Mr. Liebman has
advised me that photocopies of certain documents have been delivered to the
Embassy of the United Arab Emirates in Washington, D.C. for inspection by
members of the District Attorney's Office. Later today we will begin the
process of reviewing these records, and will continue doing so until they have
been fully reviewed. Mr. Liebman has further advised me that an Abu Dhabi court
order authorizing this review was obtained yesterday. This review will not be
deemed an admission or authorized representation by the Abu Dhabi parties. We
will be free to use whatever leads are obtained to further our
investigation." Abu Dhabi has provided no explanation of why these
documents had been withheld from U.S. law enforcement prior to September 21,
1992. Abu Dhabi has also provided no explanation of why it has refused to
permit law enforcement to copy these documents, or to review them outside the
confines of the Embassy of the United Arab Emirates. Abu Dhabi has not provided
the documents to the Subcommittee. Thus, it is impossible to determine which
documents have been provided by Abu Dhabi, and which documents have continued
to be withheld. It is also not possible to determine what information the BCCI
officials held in Abu Dhabi could provide U.S. law enforcement if Abu Dhabi
permitted U.S. officials access to them.
5.
See generally detailed testimony regarding this issue of Nazir Chinoy, March
18, 1992; Akbar Bilgrami, July 30, 1992; and testimony of Abdur Sakhia October
22, 1991 and Masihur Rahman, August 8, 1991.
6. S.
Hrg. 102-350 Pt. 5 p. 757.
7.
Deposition of Abdullah Darweish, September 23, 1982, Financiera Avenida S.A.
v. Refco, US District Court Northern District of Illinois No. 82-C-1272.
8.
Staff interview, August, 1992, Pakistani national familiar with BCCI-Abu Dhabi
relationship.
9.
Price Waterhouse audit reports to BCCI board of directors, 1987-1989;
miscellaneous BCCI loan and financial documents.
10.
Deposition, Lasidi v. Financiera Avenida, New York Supreme Court County
of New York, 1982.
11.
S. Hrg. 102-350 Pt. 3 p. 22.
12.
Id.
13.
Exhibit I, OCC Report of Joseph Vaez to Robert Bench, February 15, 1978; an
accounting of Abu Dhabi's interest in BCCI at this time provided to the
Subcommittee on May 13, 1992 contradicts this figure, describing the Abu Dhabi
holdings in 1977 as 1.28 percent of BCCI.
14.
Prepared Statement of BCCI Majority Shareholders, S. Hrg. 102-350 Pt. 5 p. 747.
15.
Shareholding in BCCI Holdings (Luxembourg) S.A., prepared by Abu Dhabi to
Subcommittee, reprinted S. Hrg. 102-350 Pt. 5.
16.
Answer of Al Sayegh to Question 28 posed by Subcommittee, reprinted in S. Hrg.
102-350 Pt. 5.
17.
Price Waterhouse Section 41 Report to the Bank of England, June, 1991.
18.
Price Waterhouse audit report documents, BCCI, Loans to Shareholders, Valuation
of Shares BCCI Holdings & CCAH at November 30, 1987, and at December 31,
1989, obtained by Subcommittee.
19.
Bailey, Federal Reserve Hearing, April 23, 1981, pp. 15-17.
20.
Staff interview, Lance, October, 1991.
21.
Washington Post, December 18, 1977, "Arab Investors Want Lance to Manage
Funds."
22.
Al Sayegh, answer to question 25 from Senator Kerry, July 8, 1992, reprinted in
S. Hrg. 102-350 Pt. 5.
23.
Interviews, Richard Small and Thomas Baxter, Federal Reserve, April-May, 1991;
testimony of Virgil Mattingly, May 14, 1992, S. Hrg. 102-350 Pt. 5.
24.
Staff interviews, Akbar Bilgrami, July 13-14, 1992; Bilgrami testimony, July
30, 1992, S. Hrg. 102-350, Pt. 6.
25.
Id.
26.
Id.
27.
Staff interviews, former BCCI employee and Pakistani national, July, 1992.
28.
Sami memorandum, January 30, 1978, id.
29.
Al Sayegh, answers to question #19 from Senator Kerry, July 8, 1992, reprinted
in S. Hrg. 102-350 Pt. 5.
30.
Price Waterhouse Report Sec 41 to the Bank of England, June 1991.
31.
Indictment, December 8, 1991, Attorney General of Abu Dhabi Sheikh Zayed v.
Darweish.
32.
Al Sayegh, sworn answer to Question 13 of Senator Kerry, July 8, 1992,
reprinted in S. Hrg. 102-350 Pt. 5.
33.
Al Sayegh, Answers to Question #33 of Senator Kerry, July 8, 1992, reprinted in
S. Hrg. 102-350 Pt. 5.
34.
Price Waterhouse Audit Reports, 1983, Hong Kong Deposit and Guaranty and Tetra
Finance (HK).
35.
Al Sayegh, Answer to Questions #31 and #35 from Senator Kerry, July 8, 1992,
reprinted in S. Hrg. 102-350 Pt. 5.
36.
Price Waterhouse Report Section 41 to the Bank of England, June 1991.
37.
Id.
38.
Staff interviews, Nazir Chinoy, Abdur Sakhia, Akbar Bilgrami, Massihur Rahman.
In private, BCCI officials referred to Iqbal's chief role and principal skills
to be as a procurer.
39.
S. Hrg. 102-350 Pt. 1 p. 481.
40.
Section 41 Report to the Bank of England, Price Waterhouse, June, 1991.
41.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1991.
42.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1991.
43.
Memorandum submitted by Price Waterhouse in reply to Questions from the House
of Commons Committee on Treasury and Civil Service, February 5, 1991.
44.
Id. Price Waterhouse's findings of the Section 41 report are reviewed in some
detail in the chapter concerning BCCI's criminality.
45.
S. Hrg. 102-350 Pt 4 pp. 747-748.
46.
Id.
47.
Norton Rose Report to the members of the BCCI SA Creditors' Committee, May 1,
1992, pp. 3-5; reprinted in S. Hrg. 102-350 Pt. 5.
48.
Norton Rose report, id p. 5.
49.
S. Hrg. 102-379, testimony of Virgil Mattingly, May 23, 1991, pp. 114-121.
50.
S. Hrg. 102-350 Pt. 5 p. 750, and staff interviews with Federal Reserve
investigator Richard Small.
51.
Winer memcom, March meeting with Patton, Boggs, and Blow.
52.
Staff interview, August 26, 1992, Masihur Rahman, who was in daily contact with
BCCI officials and U.S. and British regulators during the relevant period.
53.
Norton Rose Report, id p. 6.
54.
See testimony of Al-Sayegh, S. Hrg. 102-350 Pt. 5 pp. 760-763.
55.
Norton Rose, id p. 54.
56.
Norton Rose, id, pp 54-55.
57.
S. Hrg. 102-350 Pt. 5 p. 325.
58.
Smouha prepared testimony, S. Hrg. 102-350 Pt. 5 p. 330.
59.
See Smouha's testimony, S. Hrg. 102-350 Pt 5 pp. 331-333.
60.
S. Hrg. 102-350 Pt. 5 p. 335.
61.
Appendix 3, Summary of the Proposed Agreements, Joint Liquidators Report, Bank
of Credit and Commerce International, SA March 16, 1992, p. 16.
62.
Joint Liquidators Report, March 17, 1992, id., reprinted in S. Hrg. 102-350 Pt.
5.
63.
S. Hrg. 102-350 Pt. 5 p. 338.
64.
S. Hrg. 102-350 Pt. 5 p. 766; documents regarding Clifford and Altman's
representation of Abu Dhabi from 1978 through 1990, S. Hrg. 102-350 Pt. 4 pp.
424, 432, 437-439, 456-459.
65.
Al-Sayegh testimony, S. Hrg. 102-350 Pt. 5 pp. 759-770.
66.
S. Hrg. 102-350 Pt. 5 pp. 743-746.
67.
Extracts, United Arab Emirates Federal No. 6 of 1973, Federal Law No. 10 of
1973, Federal Law No. 3 of 1983, reprinted in S. Hrg. 102-350 Pt. 5.
68.
S. Hrg. 102-350 Pt. 5 p. 754.
69.
S. Hrg. 102-350 Pt. 5 p. 754.
70.
S. Hrg. 102-350 Pt. 5 pp. 756-757.
71.
On September 21, 1992, Abu Dhabi began making selected documents available at
its Washington embassy for viewing by the Federal Reserve and U.S. law
enforcement, on the condition that no copies be made and that none of the
information could be used as admissions in court. None of these documents have
been made available to the Subcommittee and the value of this information, if
any, cannot be evaluated.
72.
Sworn statement, Ahmed Al-Sayegh, in response to question 6 of Senator Kerry,
July 8, 1992, reprinted in S. Hrg. 102-350 Pt. 5.
73.
Id, question 7.
74.
Id., answer to Question 11.
75.
Id, answer to Question 14.
76.
Id, answer to question 16.
77.
Valuation of Shares BCCI Holdings & CCAH at December 31, 1989 and Loans to
Shareholders, Subcommittee document.
78.
Sworn statement, Ahmed Al-Sayegh, in response to question 18 of Senator Kerry,
July 8, 1992, reprinted in S. Hrg. 102-350 Pt. 5.
79.
Id, answer to Question 28.
80.
Id, response to question 29.
81.
Id, answer to question 35.
82.
Id, answer to question 42.
83.
Id, answer to question 44.
84.
Id, answer to question 48.
85.
Id., answer to question 58-61.
86.
Statement, Dr. George B. Bricker, to Office of Senator John Kerry, May 18,
1992, by Fax.
87.
Price Waterhouse Report to the Audit Committee, BCCI Holdings (Luxembourg) SA,
10 November, 1988, Subcommittee document.
88.
See S. Hrg. 102-350 Pt. 6, Peat Marwick Report.
89.
"Abu Dhabi's Links With A Powerful Law Firm Present Problem For Democrats
on BCCI Issue," Wall Street Journal, May 20, 1992, p. A-18.
90.
S. Hrg. 102-350 t. 4 . 356.
Introduction
As the BCCI scandal has unfolded, Mohammed Hammoud
has emerged as a shadowy figure with close ties to a number of powerful
American political and government figures.
During the 1980's, Hammoud acted as a front-man or
nominee for BCCI, became an owner of BCCI and of CCAH, the holding company for
First American, borrowed over $110 million from BCCI, much of which he failed
to make interest payments on, and made numerous investments in the United
States with funds provided him by BCCI, and in one case, backed up by
guarantees from First American.
During the same period, Hammoud, a little known
Lebanese merchant, also purchased the shares in First American held by Clark
Clifford and Robert Altman; had his U.S. real estate investments managed by the
current U.S. Ambassador to Bahrain, Charles W. Hostler; had contact with
officials from the State Department concerning the release of U.S. hostages
from Beirut and other issues pertaining to Lebanon, and developed a personal
and business relationship with Michael Pillsbury, a former assistant
Undersecretary of Defense and Senate staff assistant.
After BCCI's indictment in October, 1988 by the U.S.
Attorney in Tampa, Hammoud also worked closely with BCCI's
criminal defense team in Washington to determine
whether it would be possible to "reverse Tampa" by meeting with
higher-level federal officials in Washington. In the fall of 1989, Hammoud
actually met with high-ranking officials at Treasury and Justice concerning the
BCCI case, and had ongoing contact with Senate staffer Pillsbury seeking to
assist BCCI in defending itself against its criminal case.(1)
Hammoud's multiple roles in connection with BCCI
continued until his sudden death on May 3, 1990, at the very time that
investigations of BCCI were intensifying. After his death, press accounts
raised questions as to whether his death was real or staged, and law
enforcement indictments have described Hammoud's current status as
"reportedly dead."(2)
Who
is Mohammed Hammoud?
Little is known of Hammoud's background, although
Abdur Sakhia, the former general manager for BCCI N.Y., described Hammoud as a
merchant who at one time operated a stall in one of Beirut's open-air markets:
My memory goes back about 27 or 28 years when I went
first to Beirut. He was a small time money changer.(3)
In interviews with Subcommittee staff, Nazir Chinoy,
the BCCI general manager in Paris, remembered Hammoud as:
A short man, not a very impressive personality. . .
My impression of Hammoud, to me Hammoud was not rich. Pharoan had physical
power from his bearing his confidence. Hammoud was a slimey sort of a chap, not
a forceful personality. Would Hammoud understand foreign policy? I do not think
so. He was not a worldly man. Pharoan yes. Hammoud no.(4)
In testimony before the Subcommittee in 1991,
Massihur Rahman, BCCI's former chief financial officer, described Hammoud as
"a medium sized businessman." BCCI's files indicate that Hammoud's
wealth grew exponentially, and inexplicably, during the 1980's, at a clip of
almost $5 million a year. By 1989 he is listed as owning assets in excess of
$35 million.(5) Nevertheless, according to Chinoy, Hammoud did not
give "the impression of being an extremely rich man from his clothes and
general behavior."(6)
At some point during the 1970's Hammoud became very
close to the top management at BCCI. Naqvi had worked in Lebanon and BCCI had
branches there, but the Subcommittee has been unable to determine who
originally introduced Hammoud to BCCI. Hammoud is described in a 1983 BCCI
memorandum as "a very good customer of the BCC Group," who
"possesses large means."(7) By the time of his death in
1990, Hammoud was a major shareholder in the bank, owning 2,646,184 shares,
according to a February, 1990 report by BCCI's outside auditors, Price
Waterhouse.
According to Rahman, "[h]e seemed to be very
close to some of our executives. And he has been used obviously for taking
loans and doing things."(8) Later in his testimony Rahman
characterized Hammoud as the most flexible of BCCI's nominees.
Chinoy echoed the testimony of Rahman, stating that
Hammoud had "a very special relationship" with the bank. Chinoy
recalled how Hammoud had borrowed about $100,000 from the Paris branch and was
not servicing the loan. When Chinoy wrote Hammoud asking that the loan be
repaid, Chinoy was rebuked by his superiors in London and told he "should
not write abusive letters to good clients who had helped the bank." Chinoy
explained that he later wrote the loan off in three separate installments.(9)
The loan to Hammoud by BCCI's Paris branch pales in
comparison to the massive loans Hammoud received from BCCI elsewhere. As of
April 1990, Hammoud owed over $110 million dollars to BCCI and its affiliate,
ICIC, Grand Caymans, As Price Waterhouse concluded in the report, "there
remain too many unanswered questions about Mr. Hammoud [including] his
connection with delinquent accounts of BCCI." At the time, Price
Waterhouse expressed its concern about the lack of evidence at BCCI that
Hammoud owned "any of the companies" he claimed to own in connection
with BCCI lending. (10)
Hammoud's
Real Estate Investments
Hammoud made real estate investments in the United
States through a series of companies: Linden Investments, Copperwood, N.V.,
Marmaris investments, N.V., Eastward, N.V. and Carlson Farms, Ltd. Ambassador
Charles Hostler, who advised Hammoud on his US investments, referred to these
companies as "holding companies" for the properties.
Documents obtained by the Subcommittee indicate that
all of the companies were probably front companies which Hammoud established on
behalf of BCCI. For instance in November, 1978, Hammoud wrote to ICIC, BCCI's
"bank within a bank":
I have to request you to arrange on my behalf for
the incorporation of a company in Cayman Islands with an authorized capital of
US$900,000.00 and Issued and Paid-up capital of $US100,000.00. This company to
be incorporated with the name and style of "Linden Investments Company
Limited" is to have as its principle objects investments in immovable
properties in the U.S.A. and other places, either directly or through any of
its subsidiaries to be incorporated in such countries where maximum tax
benefits would be available for such property investments, and with such other
objects as are usable and necessary for such investment companies, including
borrowing powers.
You may appoint your own nominee directors for the
said Linden Investment Co. Ltd. and transfer to their names such shares as may
be necessary according to the legal requirements. The remaining shares
may be held by you in your name or in the name of any other company as your
nominee.
I hereby authorize you to appoint any agents for the
aforesaid purpose and to do, execute and perform or cause to be done, executed
and performed all acts, deeds and things that may be required or necessary in a
fiduciary capacity for the aforesaid purpose and to give any other authority or
writing that you may require or deem necessary for this purpose.(11)
Hammoud's real estate investments include property
he purchased from a church in Alexandria, Virginia, an office building in New
York, a building in Boston adjacent to Boston Symphony Hall, and a development
in the small town of Sherman, Connecticut. All of these investments were
financed by BCCI and none of the loans was ever serviced. Carlson Farms, for
instance, received a $1 million letter of credit from BCCI secured by only the
guarantee of Linden Investments, which apparently held no other properties.(12)
In his Senate testimony, Sakhia described the
Hammoud's real estate holdings in the US with which he was familiar. According
to Sakhia:
We did a loan to him from BCCI in New York, which we
were told from London to give that loan in the first place.
In the second instance, when we had acquired the
property and we wanted to develop a property in Washington, he contacted us to
make a construction loan-- which we refused to do because we were not equipped
to handle constructions loans."(13)
Sakhia testified that he "completely refused to
do the second transaction," but that the Central Credit Division in London
ordered him to the first transaction, which wound up being "110% of the
loan". Sakhia acknowledged that the loan did not make business sense. (14)
After Sakhia refused to do the construction loan,
the Central Credit Committee in London told its New York regional manager
"[W]hy don't you introduce him to First American, because the property is
in Washington. First American is located in Washington and First American is
big in real estate loans." First American subsequently issued a $4 million
letter of credit to Hammoud.(15)
Senator Kerry was struck by the fact that Hammoud
needed an introduction to First American after Hammoud had become a shareholder
of First American, having purchased his shares in First American/CCAH from
First American's chairman and president, Clark Clifford and Robert Altman.
Sakhia testified that he too was baffled by the events:
It's [First American] not like a big corporation
with hundreds of shareholders. The handful of shareholders -- [Hammmoud]
directly bought the shares from the Chairman and the President. And he wants me
to introduce the officers of First American. It didn't make any sense to me.(16)
In 1990, the U.S. General Manager of BCCI, in an
effort to avoid the scrutiny of bank regulators, recommended "immediate
transfer" of Hammoud's assets "to an off shore unit."
Holdings
of CCAH Stock
Hammoud's investment in First American Bank came
about as a result of his acquisition of stock throughout the 1980s through
BCCI, and in fact, as a nominee for BCCI. In 1986, Hammoud first began
acquiring stock at $2,200 a share as BCCI's nominee. By 1990, Hammoud had
acquired 6% of the shares of the bank on BCCI's behalf.
In March 1988, Hammoud bought stock from Clifford
and Altman, the Chairman and President of First American, for a whopping $6,800
a share -- the highest price ever paid for First American stock. Hammoud's $25
million purchase of First American shares was bankrolled by BCCI, although in
testimony before the Subcommittee, Altman stated that:
[M]r. Hammoud was one of the individuals not listed
by the Federal Reserve as a nominee in their notice of charges. He was in their
category of bona fide shareholder.(17)
Altman added that after Hammoud's death in the
spring of 1990, "we had been contacted by Hammoud's estate."
According to Altman:
His estate believes that the stock is stock that
belonged to Mr. Hammoud and now belongs to his heirs. They certainly take the
position that Mr. Hammoud was no nominee. He was a bona fide shareholder. And
they had asked that the stock be transferred into the names of the heirs. And
we were seeking certain documentation in that regard before the transfer could
be lawfully effected.(18)
Altman's representations before the Subcommittee
regarding the bona fides of Mohammed Hammoud were recently challenged in the
indictment of Clifford and Altman by the Manhattan District Attorney. The
indictment charged that:
As part of the business of the corrupt enterprise,
assets were purchased with depositors' funds, but were falsely maintained as
ostensibly separate from the BCC group. These assets were purchased in the
names of, among others ....Mohammed M. Hammoud, a Lebanese businessman who
reportedly died in 1990.
Moreover, Masihur Rahman, BCCI's chief financial
officer, provided detail on the mechanism that Hammoud employed to mask the
sham transactions involving CCAH stock. Rahman testified that Hammoud used two
front companies, Mid-Gulf and Rubstone, to purchase the shares. According to
Rahman, after Price Waterhouse raised concerns about BCCI and the bank began an
internal investigation, Rahman confronted Hammoud: "He [Hammoud] was first
denying, but finally it was accepted that both of them belonged to
Hammoud."(19) Rahman did not know what the companies did,
"except that they had some loans [from BCCI] for CCAH." According to
Rahman, the amount loaned to Rubstone to purchase First American shares was
around $14 million and the amount loaned to Mid-Gulf to purchase First American
shares was $44 million."(20)
The Subcommittee has obtained an undated letter of
instruction from Hammoud to the Manager of BCCI, Overseas, Grand Cayman, which
support Rahman's testimony. The letter specifically states:
With reference to the loan advanced by you on my
recommendation to Mssrs. Rubstone Trading, of amount up to $US 12 million, I
hereby authorize you to hold my shares in Credit and Commerce American Holdings
N.V., as security to cover the outstanding balance of the loan.(21)
By April 1990, as the auditors scrutinized BCCI and
its CCAH loans, Hammoud informed BCCI that he did "not hold any
shares" in either Midgulf or Rubstone.(22) Apparently, both
Hammoud and BCCI had decided that it was not in their interest to have Hammoud
seen as a nominee for BCCI holding CCAH shares. This, of course, was during the
period that Price Waterhouse was uncovering massive fraud and deception at
BCCI, and just weeks before Hammoud's sudden death.
Altman
and Hammoud
Documents obtained by the Subcommittee from BCCI's
liquidators show that Robert Altman, who was also BCCI's U.S. attorney, held a
power of attorney for Hammoud, giving Altman the right to dispose of Hammoud's
stock in CCAH at any time as Hammoud's agent. Altman testified he was unaware
that he had such a power of attorney and when shown the document by Senator
Kerry, he expressed profound shock:
[T]his gives an authority to sell shares, and that
is something that to the best of my recollection, I'd never seen before. I do
not know how to explain it. I don't know where it came from, but I don't
believe it was ever in our files.(23)
Thus, Altman, who sold his stock to Hammoud for
three times what Altman paid for the stock, had the ability through the power
of attorney also to buy and sell shares of CCAH to and from Hammoud in any
case.
Altman testified that he never met Hammoud. This
statement seems odd given that Hammoud was in Washington on a number of
occasions, and was ostensibly a major shareholder of First American, on whose
behalf Altman was running the bank. On the other hand, there was really no
reason for Altman to have met Hammoud if Hammoud was the flexible front man
that he has been portrayed to have been. It is entirely possible that Hammoud
was not even aware of his holdings in First American: the loans were arranged
by BCCI; the purchase and sale may have been arranged by Altman using the power
of attorney.
Hammoud
and Ambassador Hostler
Hammoud also had contacts with US Ambassador to
Bahrain Charles Hostler. As a businessman in Beirut in the 1960's, Hammoud met
Hostler when Hostler was a young U.S. Air Force officer, attached to Lebanon,
Jordan and Cyprus, and based in Beirut, Lebanon. Hammoud's wife taught Arabic
to the young Mr. Hostler, and the Hammouds and Hostler became good friends. (24)
Later, Hostler returned to Beirut as the manager of the Douglas Aircraft
Company in Lebanon from 1965 to 1967, before accepting a position with
McDonnell Douglas in the U.S. As the report to the Foreign Relations Committee
on Hostler described his career:
Mr. Hostler served at the United States Department
of Commerce as Deputy Assistant Secretary of International Commerce from 1974
to 1976, where he was responsible for establishing and managing the nation's
export expansion program. From 1963 to 1969 he worked in numerous capacities
for McDonnell Douglas Corporation including Director of International
Operations for the Middle East and North Africa. . . and Manager of
International Marketing for Missiles and Space.(25)
According to the Wall Street Journal, Ambassador
Hostler stated that he has from time to time given financial advice to Hammoud.
Hostler told the Subcommittee that he advised Hammoud on three properties:
"vacant land" in Sherman Connecticut, an "old building" in
Boston, Massachusetts and a "tear-down" in New York City.(26)
Curtis Hagen, a real estate broker, also worked with
Hammoud on the three properties referenced by the Ambassador in his affidavit.
Concerning the tear-down in New York City, Hagen
told the Subcommittee:
In NYC I engineered a joint venture between BCCI and
Skanska with an agreed to land evaluation of 5 million (BCCI purchased it at
$1.1 million) In the midst of contract negotiation between the two law firms
representing each entity. In the meantime I turned down an offer of 4 million
in cash by Paul Milstein, because the tax burden was too severe. However, he
eventually built the project, although the chain of title after Hammoud came on
the scene with Hostler is unclear to me.(27)
Concerning the "old building" in Boston,
Hagen told the Subcommittee:
I arranged a zoning change from a two story Taxpayer
to a 17 story and lower condominium residential & commercial building with
on-parking premises. This process, as you know, was extremely complex and took
2 and 1/2 years to bring to a point, where only a very routine submission of a
detail was needed to finalize. BSO now has ownership. Hostler arranged the sale
to BSO for Hammoud, however I do not know what consideration BSO gave to
Hammoud/Hostler.(28)
Concerning the "vacant land" in Sherman,
Connecticut, Hagen told the Subcommittee:
After 6 tons of papers, maps, demographics, etc. the
final subdivision was approved and I negotiated the required road bond.(29)
In short, the vacant land, the old building and the
tear down were substantial properties with real value.
In his affidavit to the Subcommittee, Ambassador
Hostler stated that "He [Hammoud] considered me expert in real estate
matters, since he lived abroad and was then largely unacquainted with US real
estate practices."(30) However, Hagen, the New York real estate
broker, didn't think Hostler knew much about real estate: "[H]ostler, the
real estate typhoon, knew as much about real estate as my Aunt Matilda knew in
1860 about building a space shuttle."(31)
It appears that Hagen did the lion's share of work
to make Hammoud's various real estate investments marketable and saleable. The
question arises as to what Hostler's role was and what compensation he was
received.
According to the Ambassador:
"His inquiries and my advisory activities for
him were intermittent and limited. I would estimate that they involved perhaps
an average of several hours a month in the period between 1982 and 1988."(32)
Hostler claims that he "received no salary,
gifts or other gratuities or compensation from Hammoud, though I was reimbursed
for my direct, nominal, actual receipted expenses."(33)
Hagen, however, recalls a meeting at the Pierre
Hotel in Hammoud's suite on July 16, 1982 between Hammoud, Hostler, Pisani [an
architect] Milne [a Utah real estate developer] and Hagen and his daughter.
According to Hagen, "It was either at that meeting or a few days before
wherein Hammoud placed both hands on Hostler's shoulders and said: "there
will be a Cadillac in your driveway, tomorrow morning."(34)
The Subcommittee has been unable to ascertain
whether or not Ambassador Hostler received the Cadillac. However, it is
certainly unusual for anyone to provide business services to someone else for
several hours a month for six years without receiving any form of compensation
for it in return. Hence, Ambassador Hostler's described willingness to work for
Hammoud for nothing for this lengthy period raises the question of why
Ambassador Hostler did perform these services.
Hammoud
and Pillsbury
Michael Pillsbury is a former Senate staffer. He was
formerly an Assistant Secretary of Defense. According to the Washington Post,
Pillsbury was "a member of the top-secret "208 Committee," the
interagency group that oversees Central Intelligence Agency covert operations
for the President and meets in the situation room and room 208 of the Old
Executive Office Building."
Pillsbury has told Subcommittee staff that he
initially met Hammoud in the context of his work in the Senate when a real
estate developer, Earl Milne, introduced him in 1981 or 1982. According to
Pillsbury, Hammoud was "unusual" because he was a wealthy, Lebanese
shi'ite. Pillsbury subsequently developed a personal relationship with Hammoud
and over the course of the decade met him "ten to twenty" times in
several cities around the world, including Washington, London, Geneva, Beirut,
Damascus and "possibly Paris". According to Pillsbury, Hammoud
provided him with intelligence related information concerning U.S. hostages
held in Lebanon, which Pillsbury then passed on to US government agencies. As a
letter to Subcommittee staff from Pillsbury's attorney, former Watergate
prosecutor Seymour Glanzer, states:
Mr. Pillsbury has never said that he is
"withholding important information" [from the Subcommittee]. What he
did say was that he was reticent about disclosing inflrmation that might be
needed about Mr. Hammoud's purported assistance to the United States
Government. That was because he was alluding to two State Depeartment
communications which may be "classified" and which can be obtained
from the State Department. Thus, he does not believe he is at liberty to
disclose their contents. One of these communications is a cable from the
American Ambassador in Beirut in approximately November 1983, and the other is
a cable from the American Ambassador in Damascus in approximately April 1989.
Therefore, Mr. Pillsbury believes it is appropriate that disclosure be taken up
with the State Department.(35)
Following receipt of the letter from Glanzer, Senator
Kerry asked the State Department to retrieve the documents described.
Unfortunately, the State Department was not able to locate the 1983 cable. It
was able to locate the second cable and that cable remains classified. At the
time of the second cable, Edward Derejian was U.S. Ambassador to Syria, and
since that time has been appointed Assistant Secretary of State for Middle
Eastern Affairs. Contemporaneous notes from BCCI's attorneys show that
Pillsbury was contending that Hammoud was directly involved in assisting the
U.S. on negotiations concerning the release of the U.S. hostages held in
Lebanon as of the fall of 1989.(36)
In the early-1980's Pillsbury moved from the Senate
to become the assistant undersecretary for Defense. In that position he championed
the provision of advanced weapon systems, notably stinger missiles, to
anti-communist insurgencies around the world, including Savimbi's UNITA forces
in Angola and the Mujahadin in Afghanistan. Pillsbury is known to have made
frequent trips to both countries.
The Task Force on Terrorism and Unconventional
Warfare -- House Republican Research Committee claims that Hammoud was an arms
merchant:
In order to insert large quantities of explosive and
related equipment into target countries, the Hizballah established a web of
import-export companies in Western Europe as part of its dormant network.
Lebanon's leading shi'ite businessmen, including Mohammed Hammoud, who would
later become a key financier of BCCI, provided crucial expertise,
organizational and financial assistance without which projects could not have
been undertaken.
Pillsbury has denied that he ever used Hammoud or
BCCI either to arrange or to finance the provision of sophisticated weapons to
anti-communist insurgencies.
In fact, Pillsbury has stated that his contact with
Hammoud, aside from the information he provided on the US hostages held in
Lebanon, was in the context of a book that they were writing together about the
Shi'ites of Lebanon.
According to Pillsbury, Hammoud paid him an advance
to coauthor a scholarly text about the Shi'ites and Pillsbury had completed
some 200 pages of this book by the time of Hammoud's death. Pillsbury told the
Subcommittee that he disclosed the book deal to the Senate Ethics Committee.
However, Pillsbury refused to disclose the amount he had been paid by Hammoud,
and when the payment was made. Pillsbury argued that these facts were
irrelevant since he ultimately returned the money, although he refused to
specify when that occurred. Pillsbury stated that his expenses had never been
paid by either Hammoud or BCCI. However, these statements are contradicted by
notes taken by BCCI's lawyers in October, l989 state that Pillsbury travelled
to Europe on several occasions on tips paid for by Hammoud, raising in their
minds concerns about whether Pillsbury's trips were actually being paid for by
BCCI. Both BCCI officials and Pillsbury denied BCCI's involvement in the
payments. However, given Hammoud's $110 million debt to BCCI at the time, and
his frequent front-man status for BCCI, the distinction between Hammoud's
activities and BCCI's activities does not seem to be very clear.(37)
Subcommittee staff have seen a law enforcement
document which alleges that after Hammoud's death, Pillsbury travelled to
Geneva to identify the body. Pillsbury denies the allegation. Pillsbury may or
may not have identified the body, but after Hammoud's alleged death Pillsbury
maintained a close relationship with Hammoud's family. The Subcommittee has
been provided a document which appears to show that after the death of Hammoud,
Pillsbury met in New York with Robert Altman, one of BCCI's lawyers, and with
Hammoud's son, to discuss settlement of the elder Hammoud's estate. Pillsbury
has told the Subcommittee that he only met Altman only twice -- both times in
the context of Senate business.
Hammoud
and BCCI's Criminal Defense
In the fall of 1989, Hammoud began to take an active
interest in BCCI's legal problems in the United States as a result of its
indictment for drug money laundering in Tampa, Florida. He met with Pillsbury
on a number of occasions concerning these problems. Pillsbury in turn
identified key Treasury and Justice Department officials in Washington who in
Pillsbury's view would be key to assisting BCCI if they determined that the
sting operation against BCCI were improper. Hammoud met with some,
unidentified, officials from both Treasury and Justice, as well as with BCCI's
criminal defense team in Washington. Available documentation concerning
Hammoud's activities in this period suggests he may have undertaken other steps
in connection with assisting BCCI with its criminal defense, but information on
this point is, unfortunately, inadequate to determine precisely what.(38)
Hammoud's
Death
Hammoud, unfortunately, cannot shed any light on his
political or government connections because he is, as prosecutors describe his
status, "reportedly dead."(39) He allegedly died in Geneva
in 1990 while visiting his doctor and he is buried in Beirut. However,
insurance companies have reportedly refused to pay out on the life policy
because Hammoud's corpse was found to be several inches shorter than the height
recorded at his last medical examination. Several former BCCI officials who
have testified before the Subcommittee have testified that they do not believe
Hammoud is dead.
Hammoud was reportedly buried in Beirut and his
family provided his London lawyers with a video of the funeral which allegedly
shows high ranking Syrian intelligence officials in attendance. In its August
10, 1992 edition, Newsweek reports:
Intelligence officials now say that Mohammed
Hammoud, an alleged BCCI front man, was taped saying over the telephone,
"If anybody knew how dirty the Americans are in this BCCI business, they'd
be surprised -- they're dirtier than the Pakistanis." He then said he was
about to tell someone about the American role. Eight hours later he was found
dead.(40)
Much about Mohammed Hammoud's life, business with
BCCI, and alleged death remains a mystery to the Subcommittee. He clearly had very
close ties not only to BCCI, but also to several US political and government
officials as well as to various intelligence agencies.
1. An
account of these meetings is contained in the chapter concerning BCCI's lawyers
and their contacts with Hammoud and Michael Pillsbury.
2.
See e.g. indictment, People v. Abedi, New York Supreme
Court, County of New York, July 29, 1992.
3. S.
Hrg. 102-350. pt. 2, p.612. In an interview with staff prior to his testimony
Sakhia stated, "I went to Beirut to a seminar at American University in
1960. Hammoud used to have an office, a storefront the size of this sofa. His
store was three feet deep and eight feet wide."
4.
Staff interview, Nazir Chinoy, March 9, 1992.
5.
BCCI memorandum, Central Credit Division, re:Congressional Place Ltd./M M
Hammoud. March 30, 1989.
6. S.
Hrg. 102-350, Pt.4 p. 374.
7.
BCCI memorandum, reprinted in S. Hrg. 102-350, pt.4, p.762.
8. S.
Hrg. 102-350. Pt.1, p.534.
9.
Id. p.374.
10.
See documents at S. Hrg. 102-350, Pt. 1 pp. 356-358.
11.
Letter to ICIC from Mohammed Hammoud, November 1, 1978, reprinted in S. Hrg.
102-350, pt. 4. p.740.
12.
BCCI Memorandum, reprinted in S. Hrg. 102-350, pt.4, p.762.
13.
pt. 2, p.612.
14.
Id.
15.
Id. Sakhia explained in his interview with staff, "This transaction was
done by First American not directly secured by the assets of Hammoud, but by a
counter guarantee of First American. BCCI issued the guarantee which was
confirmed by First American."
16.
Id. p.614. In his interview with staff prior to his testimony Sakhia asked
rhetorically, "If he had bought and sold shares from Clifford &
Altman, why would he want my introduction? -- Since he didn't put a cent of his
own into First American, he didn't feel like he owned it."
17.
Id. p.176.
18.
Id. p.176
19.
pt. 1, p.534.
20.
Id. p. 535.
21.
Letter to "the Manager" from Mohammad M. Hammoud, reprinted in S.
Hrg. 102-350, pt. 4.p 782.
22.
Letter to BCCI, London, from i.H. Ansari, dated 4.4.90.
23.
S. Hrg. pt.3, p.195.
24.
See Hostler Affidavit, S. Hrg. 102-350 Pt. 4 p. 768, Hostler Resume, submitted
to Foreign Relations Committee as part of confirmation process.
25.
Report for the Committee on Foreign Relations, U.S. Senate, Ambassadorial
Nomination for State of Bahrain, Charles Warren Hostler.
26.
S. Hrg. 102-350 Pt. 4 pp. 769-771.
27.
Letter to Jonathan Winer from Curtis Hagen, February 10, 1992, reprinted in S.
Hrg. 102-350, pt. 4, p.765.
28.
Id.
29.
Id.
30.
Id. pt.4., p.770.
31.
Id.
32.
Affidavit of Ambassador Hostler, reprinted in S. Hrg. 102-350, Pt.4, p.771.
33.
Id. p.771.
34.
Id. 766.
35.
Seymour Glanzer to David S. McKean, July 31, 1992, concerning Michael
Pillsbury.
36.
Staff interviews with Pillsbury, March-July, 1992; see also attorney notes of
interviews with Pillsbury, October, l989, provided to Subcommittee by BCCI
attorney Raymond Banoun on September 3, l992.
37.
Documentation on this issues is provided in a series of memoranda created by
BCCI's criminal defense team and provided to the Subcommittee on September 3,
1992 by former BCCI lawyer Raymond Banoun and by the law firm of Janis,
Schuelke and Wechsler on behalf of Lawrence Wechsler.
38.
The fullest account of Hammoud's activities on BCCI's behalf in connection with
its criminal defense appears in notes taken by BCCI's lawyers in the U.S. and
provided to the Subcommittee on September 3, 1992 by Raymond Banoun and
Lawrence Wechsler. These documents form the basis for the information set forth
concerning this section.
39. People
v. Abedi, New York Supreme Court, New York County, July 29, 1992.
40.
Newsweek, August 10, 1992,
Introduction
When BCCI began its surreptitious takeover of First
American, Jimmy Carter was President of the United States. The point man for
that takeover, of course, was the President's close personal friend and former
Director of the Office of Management and Budget, T. Bertram Lance.
Lance ultimately was forced to abandon his role in
the takeover, but he maintained his contacts with BCCI for another decade.
During that time, Lance introduced BCCI, and its president, Agha Hasan Abedi,
to former President Carter and to the President's friend and former UN
Ambassador, Andrew Young. During the 1980's these three former powerful
government officials used, and were used, by BCCI, to varying degrees and for
various purposes.
Of the three, Lance was far and away the most
visibly involved with BCCI. In 1977, when Lance became Director of the Office
of Management and Budget, he had serious financial problems. After resigning
later that year amid accusations that he had mismanaged corporate and personal
financial matters, Lance went to work for BCCI as a consultant. He appears to
have traded on his access to the President for BCCI's ability to bail him out
of his crushing debt. After getting millions from BCCI, Lance provided services
to the bank for the next decade.
BCCI courted the rich and powerful all over the
world and so it was natural that President Carter should be approached with an
eye towards using him to give credibility to the bank. The President apparently
did not establish a relationship with BCCI or Abedi, until after he left
office. However, throughout the 1980's, Abedi used President Carter as a means
of gaining stature for himself and for BCCI in a number of third world
countries. The President, in return, received millions of dollars for his
charities.(1)
Andrew Young is one of the most famous black
politicians, not only in this country, but all over the world. A former
Congressman, Young is also a past Mayor of Atlanta. Perhaps most significant
for BCCI, Young was the first black US Ambassador to the United Nations under
President Carter. In that position he often championed Third World causes. BCCI
used Young in much the same way as it used Carter -- for introductions and
access to government leaders in developing countries. Young, in return received
a salary and loans, although his financial relationship never amounted to that
of his colleague Lance.
It is no coincidence that at the time the bank
closed, BCCI had established its presence in Georgia in many different ways
ranging from the ownership of the National Bank of Georgia to the headquarters
for BCCI front man Ghaith Pharaon's U.S. corporate headquarters.
Bert
Lance
Lance
Meets Abedi
Bert Lance, who provided testimony to the
Subcommittee on October 23, 1991 about his role in the BCCI affair, told the
Subcommittee that he is "mystified" by the "whole developing
scandal."(2)
Lance was the Director of the Office of Management
and Budget under President Carter from January 20, 1977 until September 21,
1977. He was forced to resign after it was alleged that he engaged in
questionable financial dealings at the National Bank of Georgia where he was
chairman for two years, and, earlier, at the Calhoun National Bank where he was
also chairman.(3)
Lance has stated on many occasions that he first met
Agha Hasan Abedi, the President of BCCI, in October, 1977 when he was
introduced by a member of the Georgia state assembly, an oil man named Eugene
Holley. According to Lance, Holley:
had some conversations with Mr. Abedi about me and
whatever few abilities I might have and things of that nature; and that he
thought it would be worthwhile if I had occasion to meet Mr. Abedi and discuss
with him what his interest might or may not have been in regard to the United
States, in regard to investments, in regarding to banking generally, and so on.(4)
Holley was the Chairman of the Georgia state Senate
Banking and Finance Committee. According to press reports Holley "had
sought aid from Middle Eastern sources for his petroleum and real estate
ventures."(5) According to the Washington Post, "Several
Georgia banks that lent money for his [Holley's] ventures have suffered grave
losses," noting that "NBG, under Lance's direction, was among the
lenders."(6)
In September 1977, Lance met with Holley, Abedi and
Naqvi at the Waldorf Astoria hotel in New York. Lance testified that Abedi told
him:
I am building a bank headquarters in London that has
a deep and abiding interest in the problems of health, hunger, economic
development, things primarily in the Third World, problems that we are all
familiar with and problems that we all want to see resolved in one form or
another.(7)
According to Lance, who was in serious financial
trouble at the time, "I shared that concern."(8)
Lance told the Subcommittee that he subsequently met
with Abedi and told him that "I am not about to get involved in situation
whereby the relationships that I establish after having resigned would create
any problem of embarrassment, concern, or anything else for the President of
the United States."(9) Lance ultimately did introduce Abedi to
Carter, which ultimately caused substantial embarrassment and concern for the
former President, but this was until 1981 after Carter had left the Presidency.
In October 1977, Lance decided that he should
"do due diligence about Mr. Abedi and BCCI" before getting involved
with them. To handle this task, he chose Clifford and Altman, who had
represented him before the Senate.(10) Lance told the Subcommittee
that Clifford "told me . . . Mr. Abedi was a man of integrity and
character, that BCCI . . . they were people of integrity and character."(11)
With assurances from Clifford and Altman that BCCI
was a reputable institution, Lance began to advise Abedi on gaining a foothold
in the United States. He testified to the Subcommittee his advice to Abedi was:
very clear and precise, as I recall, that you need
to acquainted, you need to go through the regulatory process in the United
States; that, obviously, despite my difficulty sometimes in dealing with them,
that I thought it to be the best process in the world; that banks who were
regulated in the United States offered their depositors safety; that it was the
kind of climate that was appropriate and proper, and that it was they ought to
do.(12)
Lance
and the Initial Takeover of FGB
In line with this sage advice, in late 1977 Lance
led a group of Middle-eastern investors, including Abedi, in an attempt to take
over Washington D.C. based Financial General Bankshares. The effort was blocked
when the SEC discovered that the investors had secretly acquired a 19% holding
in the bank and had to divest it.(13) Lance was forced to sign a
consent decree by the SEC.(14)
Lance explained to the Subcommittee that he had
recommended the purchase of Financial General to Abedi. He told the
Subcommittee that he "happened to know about Financial General because
when I was at the National Bank of Georgia, they were owned by Financial General."
Lance also testified that he "happened to have an awareness of ...other
stockholders in Financial General at that point in time... [who] had [not] been
very happy about their investment."(15) Indeed, Lance was
accused by the SEC of having been involved in the struggle for control of FGB
while he was still director for the office of management and budget.(16)
At the same time that Lance was assisting Abedi in
the takeover of Financial General, Ghaith Pharaon, a BCCI front man, offered to
buy 60% of the former budget director's stock in the National Bank of Georgia
stock for $20 a share, $3 more than Lance had originally paid for it. At the
time Lance held 12% of the bank's stock and his sale of some 120,000 shares
provided him with a gross gain of approximately $2.4 million. According to
press reports, the stock had been trading for about $10.50 to $11.25 before the
sale became imminent.(17)
In testimony before the Subcommittee, Lance
explained that Abedi told him that he "had an investor who, by the name of
Gaith Pharaon, who has acquired banks in the United States previously. . . And
he said to that would appear to make a lot of sense." (18)
Indeed, it did make sense for Lance, who had previously listed liabilities in
excess of $5 million, including a $3.4 million loan form the National bank of
Chicago.(19)
At the time the transaction raised concern that
Pharaon may have been paying an inflated price in order to help Lance, save
President Carter further embarrassment from his association with Lance, and gain
influence with the administration. However, Lance stated publicly that
"I'm not for sale; I've never been for sale, and that stands on its
own."(20) Pharaon also disputed any claims that he was trying
to buy influence: "Why should I buy influence? We have many ways of
reaching your President through our channels. We have a great deal of influence
already."(21)
Lance also testified about Clifford and Altman's
role in the Pharaon's purchase of his shares: "Mr. Clifford and Bob Altman
represented me at that point in time ...They were very aware of what I was
trying to do and were very helpful to me in trying to do that."(22)
In summary, Lance explained:
[T]here were two groups of investors there that
Abedi said he was representing. One happened to be the investors that
subsequently ended up as the individual shareholders in Financial General, and,
Gaith Pharaon, who ended up as the sole investor in the National Bank of
Georgia...
And during November and December 1977, it pretty
well took place in the broad beginnings of the purchase of Financial General on
the one hand and, obviously, the acquisition of the National bank of Georgia on
the other.
[T]here were two different entities, is what I'm
trying to say to you, that were involved. I guess I was central to both of
them. Mr. Clifford and Bob Altman were central to both of them. Mr. Clifford
and Bob Altman were central to both of them. And, in fact, Mr. Clifford and Bob
Altman represented me in a legal sense.(23)
While Lance took pains to separate the two
transactions -- the purchase of his NBG stock and the acquisition of Financial
General -- for the Subcommittee, he testified that at a meeting in Atlanta over
Thanksgiving weekend in 1977, "there was basic discussion and negotiation
about the purchase of NBG. But there was also negotiation -- not
"negotiation" as such, but conversation -- about the purchase of
Financial General." Pharaon, the purchaser of NBG, was not present, but
Abedi, Naqvi, Abdus Sami and Dildar Rizvi, the elite of BCCI, were all present.(24)
In fact, Lance never met Pharaon until the night of the closing on the sale of
NBG in January, 1978. Nevertheless, he testified that it was his
"impression" that "he [Pharaon] was obviously a person who comes
across as being in charge of whatever he's doing, and makes decisions and that
sort of thing."(25)
Lance
Advises BCCI; The Second Takeover Attempt
After the sale of NBG stock to Pharaon and the
failed takeover of Financial General, Lance continued as an advisor to Abedi
and BCCI. Lance described his role as offering advice on "investments in
the United States" and "economic development around the world."
For these services Lance was paid by BCCI through ICIC, the "bank within a
bank", which Lance understood to be a kind of "commercial finance
operation."(26) When asked by Senator Pressler what ICIC paid
him, Lance responded that he had been asked the same question recently by the
SEC and he had refused to answer and he therefore would not answer the Senator.
Lance added that "All of that is matter of public record."(27)
The Washington Post reported in March, 1978 that:
The president of an Arab-controlled bank paid off a
$3.5 million loan for Bert Lance without even asking Lance to sign a note, an
attorney claimed yesterday at a court hearing in the Financial General
Bankshares case.
Lance's $3.5 million loan from First National Bank
of Chicago was repaid in January by Agha Hasan Abedi, president of Bank of
Credit and Commerce international, said Edward McAmis, attorney for Financial
General in a civil lawsuit against Lance, Abedi, BCCI and others accused of
using illegal methods in seeking control of Financial General.
McAmis said Lance told him in a sworn statement made
on Monday that Abedi repaid the loan directly, without any discussion of the
interest rate or how and when Lance would repay Abedi. The multi-million loan
made with only an oral promise to repay showed Lance's close ties and
obligation to Abedi and BCCI, McAmis argued.
Lance's attorney, Robert Altman, accused McAmis of
deliberately misconstructing the loan as part of a campaign to smear Lance.
"It wasn't like that at all," Altman said.
he said formal loan documents were being drawn up, but had not been completed
because of the lawsuit and other complications.
The article continues:
The revelation that Abedi repaid the Chicago loan
came as a surprise. It had been reported earlier that Lance had sold his NBG
stock for $2.4 million and used the money to pay off some of his debts,
including the Chicago loan.
Court records in Georgia showed the Chicago loan was
repaid on January 4, the same day lance completed the sale of his NBG stock to
Gaith R. Pharaon, a Saudi Arabian financier who has business ties to Abedi.
That same day Lance paid back a $443,000 loan to a Tennessee bank, raising
questions about how he paid nearly $4 million in debts with $2.4 million in
cash.
Yesterdays's assertions suggest Lance got money from
two Arab sources in January, when he moved to extricate himself from past debts
-- the sale of stock to Pharaon plus the loan from Abedi.(28)
Although no longer personally involved in the
takeover of Financial General Bankshares, Lance continued to provide advice on
the acquisition of the bank. He testified, for instance, that in 1978, at the
suggestion of Abedi, he met separately with two of the potential shareholders,
Sheik Kamal Adham and Sheik Zayed, the ruler of the United Arab Emirates. Lance
told the Subcommittee that he met Zayed in Lahore, Pakistan in "February
or March, 1978."(29) According to a February 12, 1978 story in
the Washington Post, "In recent weeks, Lance was in Karachi, Pakistan, and
sources say the trip was in connection with his dealings with Abedi."(30)
Despite the fact that he no longer worked for the government, Lance made the
trip on an official, US diplomatic passport.(31)
A meeting during this period would have followed the
memorandum written by Abdus Sami to Mr. Abedi on January 30, 1978
in which Mr. Sami discusses the strategy for the
takeover of Financial General Bankshares. Sami expresses the need "to keep
individual ownership to below 5 percent" and he states that "we want
two other names immediately." The two names who ultimately were submitted
as investors were those of Sheik Zayed's son's Khalifa and Mohammad. When
Senator Kerry asked Lance if he travelled to Pakistan in order to solicit the
use of the names of investors from Sheik Zayed, Lance responded, "That's
not my understanding of what actually took place."(32) Lance
then told the Subcommittee, "Mr. Sami and I never and a conversation along
these lines."(33) The Sami memorandum, however, contains a
provocative reference to "our friend" involved in the FGB
negotiations.
Lance admitted to the Subcommittee that the
reference was to him, but testified:
[T]he acquisition of shares were basically handled
by Mr. Sami, and he was the man who was responsible. I was not involved in
that.(34)
As a new strategy for acquisition of Financial
General Bankshares progressed, Lance told the Subcommittee that he reiterated
to Abedi the need to "go through the regulatory process." He further
advised:
[t]hat you take an outstanding American citizen who
has no blemish in regard to anything in a public sense, and you take the stock
that these individual investors are going to own, and then you put that
together in some sort of trust and give that trustee irrevocable voting rights
about that stock, and you will have taken a major step in dealing with some of
the perception problems that you may have about individual investors.(35)
Abedi followed Lance's advice almost to the letter.
Clifford and Altman created a shell corporation, in a form of a trust, to hold
the FGB stock. Clifford, who became Chairman of First American was essentially
a trustee since his associate, Robert Altman, the President of First American,
held a power of attorney for virtually every shareholder. And perhaps most
importantly, Clifford had the reputation as being "an outstanding American
citizen." Clifford helped to alleviate some of the "perception
problems" not only in the acquisition stage, but also throughout the
1980's.
Lance
Theorizes About the CIA and BCCI
Lance's relationship with Abedi and BCCI was
interrupted in May, 1979 when he was indicted in the northern district of
Georgia. After a sixteen week trial, he was acquitted.(36) Lance
testified, "[B]asically, in all of 1979, I was out of the picture as it
related to BCCI, as it related to Financial General, and so on."(37)
According to Lance, Clifford, Altman and Abedi decided that he was "too
controversial" and that he "would bring down the wrath of the
regulators."
Despite the fact that he was no longer involved in
the takeover of Financial General, Lance testified "my relationship with
Mr. Abedi, from the standpoint of personal relationships, moved forward from
that point on."(38) Lance said that he did "continue to
have conversations and visits with Mr. Abedi."(39)
Lance described one of those conversation with Mr.
Abedi to the Subcommittee. In 1983 Lance and Abedi attended a symposium at
Emory University. In a car ride to Abedi's hotel from the University, Abedi,
according to Lance, explained how he had been he had been placed on a CIA watch
list in 1980 because he was a "Third World liberal." Lance testified
that "subsequently, beginning in 1984, I would say, I sensed a change in
Mr. Abedi, that he no longer had any concerns about visits to the United
States." Lance concluded that in 1984 there was an attempt by the CIA to
"co-opt" Abedi, although he could offer no proof.(40)
Lance also believed that the CIA Director Casey may
have used wealthy businessman Bruce Rappaport to "spy" on Lance to
see what he may have known about Abedi and the Agency's involvement with the
bank. According to Lance, Rappaport befriended him for no apparent reason, but
"He made it very clear to me that he had a very close and definitive
relationship with Mr. Casey; the Director of the CIA." Lance said that
Rappaport maintained contact with him for a period of years until the death of
Director Casey.(41) Again, Lance offered no proof of his theory,
and, in fact, he failed to mention in his testimony that despite his suspicions
of Rappaport, he arranged with him to have one of his sons work in the
financier's New York bank.
Lance
and BCCI During the 1980's
Besides advising Abedi and BCCI, Lance, during the
1980's pursued financial investments with BCCI-related individuals such as P.S.
Prasad, an Indian who was BCCI's largest individual borrower in the United
States with over $30 million in outstanding loans. At the time of BCCI's
collapse in 1991 Prasad fled the country and returned to India.
Lance served on the board of McDowell Industries, a
construction company. In 1984, using various holding companies, Prasad bought
out McDowell and merged it with Maxpharma, a publicly traded company owned by
Prasad which manufactured generic over-the-counter and prescription drug
products. The buy out was handled by the investment banking firm of Drexel
Burnham Lambert Inc. According to Lance, he personally met Dennis Levine, the
investment banker who put the deal together. Levine does not recall having ever
met Lance or Prasad. Lance continued to serve on the Board of directors of
McDowell until approximately 1986. In 1988, Maxpharma was delisted from the
American stock exchange after having multimillion dollar losses for the prior
seven years, including a nearly eight million dollar loss in 1988.(42)
It is unclear exactly what Lance's role was in Prasad's shuffling of companies,
but one source close to the negotiations has alleged that "Lance was
released of a multimillion loan he had guaranteed (either personally or through
National bank of Georgia) for Maxpharma."(43)
Lance's involvement in another Prasad venture is
clearly documented. Dr. Prasad borrowed $450,000 from "a bank" to
purchase a small business investment company (SBIC) in 1983 called Falcon
Capital Corporation.(44) The purpose of SBICs are to provide
financing for venture capitalists, provided or guaranteed by the US Government,
with the goal of creating new jobs. On September 15, 1986 Prasad's Falcon
Capital made an unsecured loan of $75,000 to Bert Lance at an interest rate of
14 percent per annum for a period of five years. The ostensible purpose of the
loan was to set up a consulting business in mergers and acquisitions. According
to the SBA Assistant Inspector General for Audit, "[I]n 1988, review did
not disclose that T. Bert Lance used the proceeds of the loan in a regular and
continuous business operation."(45) Moreover, as of September
30, 1987 principal of $9,738.40 and interest of $8,990.27 were delinquent on
the loan. Lance has told the Subcommittee that he eventually paid off the
entire loan, but the Subcommittee has been unable to independently verify his
claim.
1988
-- Lance emerges again
In June 1988, Forbes Magazine reported that Lance
was being considered by BCCI shareholders and management to run the bank in the
absence of Aga Hasan Abedi who had suffered a debilitating heart attack.
According to Forbes, "An Arab investor group suggested a compromise
candidate to run things, a man who could keep the Saudi and Pakistani factions
within the bank at bay. That man: Bert Lance."(46)
Also in 1988, Lance was an unofficial advisor to
Presidential candidate Jesse Jackson, who Lance also introduced to Abedi. Nazir
Chinoy, former branch manager of BCCI Paris, testified that when Jackson stayed
in Paris, all of his expenses were paid by BCCI.
Finally, after the indictment in Florida of BCCI and
BCCI personnel, Lance reportedly flew to London with former Chairman of the
Democratic Party John White to meet with Naqvi and to advise BCCI on the best
strategy for fighting the indictment.
The
Lance Relationship
The full story of Bert Lance's involvement with BCCI
remains to be told. Lance was intimately involved with the bank between late
1977 and his indictment in 1979 during which time he provided advice to BCCI in
exchange for being relieved his financial burdens. During the 1980's Lance
continued his relationship with BCCI, offering advice and providing important
introductions, most notably to former President Carter. While Lance's
relationship spanned the decade, there are many gaps in the public record as to
exactly what services Lance performed for the bank and what compensation he
received. This merits further investigation.
Jimmy
Carter
Introduction
Former President Carter has enormous respect and
admiration throughout the world, but particularly in the Third World where he
focused much of human rights policy while he was President. The President's
focus on "Third World" issues, combined with BCCI's need for rapid
worldwide expansion led the bank, and its president, Aga Hasan Abedi, to court
President Carter after he left office. BCCI, which styled itself as a
"Third World", bank successfully exploited the President's reputation
and access by providing large amounts of funding to the his charitable
organizations. In turn, the President became an unwitting pawn of BCCI, failing
to acknowledge, even when it became obvious, that the bank was a criminal
institution.
The
President and Saudi Front Men
There is nothing to suggest that Jimmy Carter was
even aware of BCCI or Aga Hasan Abedi while he was President of the United
States. However, the president would have known of at least two important BCCI
front men, Kamal Adham and Gaith Pharaon. President Carter undoubtedly met
Kamal Adham in the negotiations over the Camp David Accords as Adham, the chief
of Saudi intelligence, acted as an important liaison for Anwar Sadat. This is
discussed in more detail in the chapter on BCCI's contacts with the CIA and
foreign intelligence.
President Carter would have known of Gaith Pharaon
because Pharaon bought the National Bank of Georgia where the President's good
friend Bert Lance had been chairman and where the President had business loans.
According to a 1980 Jack Anderson story, Senator Orrin Hatch, a member of the
Senate Judiciary Committee, investigated the Carter loans at NBG. In his story
Anderson quotes from a confidential, investigative memorandum to Senator Hatch:
The assumption in financial circles is that Pharaon
acted for the Saudi royal family in purchasing the national bank of Georgia.
The bank's biggest borrower just happened to be Jimmy Carter. Thus the
President of the United States found himself to be deeply in hock to a Saudi
Arabian financier with close ties to the Saudi royal family.(47)
The memorandum to Senator Hatch continues:
[T]he bank's confidential files contained
embarrassing information about the president's financial affairs. The files
revealed that the Carter peanut business wrote $3 million in overdrafts and
unprocessed checks to repay peanut commodity loans during the 1975-1977 period.
While Carter was scrounging for money in his 1976
presidential campaign, the business borrowed $1.15 from the bank to buy
peanuts, without a single peanut in bonded storage to secure the loan, in
violation of the loan agreement. By September 1, 1977 , the business was
insolvent to the tune of $410,000.
Of course, the Saudis remained discretely silent.
The friendly Pharaon not only kept quiet about Carter's irregularities, but
renegotiated the loan to Carter's advantage.
According to a memo in the bank files, the bank
renegotiated the repayment terms. This resulted in a savings of $60,000 for the
Carter family in 1987. The President owned 62% of the business and therefore
was the largest beneficiary.(48)
The memorandum concludes:
The press and public have been conditioned by
Watergate to expect a smoking gun -- a taped conversation, a full confession by
one of the conspirators or some other dramatic evidence... Perhaps the American
people need to be reeducated about scandal.(49)
The Subcommittee has not been able to verify the
accuracy of the information supplied by Senator Hatch's investigator.
After
the White House: Carter and Abedi
Since leaving the White House and the office of he
Presidency in 1980, Jimmy Carter has devoted himself to several charities,
including providing assistance to several organizations for fighting disease in
the Third World. In this capacity the former President developed a friendship
and working relationship with the founder and President of BCCI, Aga Hasan
Abedi.
President Carter was introduced to Abedi in 1982 by
Bert Lance who brought the banker to Plains, Georgia . Lance remembers,
"There was an immediate relationship that developed between the two of
them. You could sense it as they talked there in the living room of the Carter
residence."(50)
According to Carter, Abedi approached him to
undertake charity work on the third world:
The foundation or the bank, I never did know which,
had a massive program in the third world called South. They published a monthly
magazine that had major conferences in different cities around -- in the
developing nations. Mr. Abedi, when he came to see me, said that they were just
holding conferences, they were issuing publications, they were doing scholarly
work, but they'd never actually planted a seek, or immunized a child or did
anything of a specific nature. And he knew that our relationship with the
Center for Disease Control let us have access to health care programs, and we
were already embarked on those. So his relationship with us was one of "I
want to do something practical to help people who are suffering, and we will
help you."(51)
During the 1980's Carter and Abedi met over a dozen
times and established a very warm, personal relationship. In 1983, for
instance, when Carter and former President Ford held a joint symposium on
conflict resolution at Emory University, Mr. Abedi was in attendance. (52)
When Abedi suffered a heart attack in February 1988, Carter contacted heart
specialist Norman Shumway who, at the former President's request, flew to
London to examine Abedi, and oversaw a heart transplant operation for the BCCI
president. Carter even visited Abedi during his hospitalization and was quoted
as calling Mr. Abedi "one of the most unusual men I have met."(53)
Carter's
Travels With Abedi
The President travelled several thousand miles
together with Abedi on the BCCI corporate jet and they visited at least seven
countries together. Abedi has stated publicly that he has been "to every
country...All the top politicians and heads of state were my friends, Jimmy
Carter, James Callahan, I knew them all."(54) Callahan, the
former British Prime Minister, has claimed that Carter introduced him to Abedi
in 1981 at a charity dinner for the Cambridge Commonwealth Trust in London.(55)
In October 1986 the Carter Center opened in Atlanta.
The center was created to study third world issues among the guests was Abedi,
who had contributed over $500,000 to the center.(56) Moreover, Abedi
and BCCI donated $8 million Carter's Global 2,000 project, helping to fund
programs in Asia and Africa. Abedi was appointed the co-chairman of Global
2,000.
Less than one month after the Carter Center opened,
the former President travelled with Abedi to Pakistan and to Bangladesh to sign
agreements with government officials starting Global 2,000 health care programs
in those countries. According to a Global 2,000 statement at the time, the
programs sponsored by Carter focused on control of polio, measles, tetanus and
diarrheal diseases.(57) BCCI either had, or was to develop corrupt
relationships with several of the countries visited by Carter and Abedi,
including Bangladesh and Suriname. In 1986 Carter also travelled to the United
Arab Emirates, again accompanied by Abedi, for a three day visit during which
time he met Sheik Zayed.(58)
In 1987, they met in Bangkok with the King of
Thailand before flying on to Hong Kong and back to China.(59) In Beijing
they attended a state dinner with Chinese leader Deng Xiaoping where they
shared a toast with Premier Zhao Ziyang. President Carter has acknowledged that
his travels with Abedi helped the BCCI president in his business:
[I] don't think there's any doubt that when a former
President of the United States goes to a country and has anybody in his
entourage, that person has some advantage to be derived.(60)
Indeed, the countries to which President Carter
travelled with Abedi became important banking centers for BCCI. In China, for
instance, BCCI opened the first foreign branch and reportedly conducted weapons
transactions involving the Chinese government.
What
the US Government Didn't Tell Carter
By 1986, of course, several US government agencies,
including the Central intelligence Agency, the Justice Department and the
Treasury were aware of BCCI's criminal connections. The CIA, for instance, knew
that BCCI had secretly -- and illegally -- acquired First American Bankshares,
Washington D.C.'s largest financial institution. The State Department knew that
the terrorist Abu Nidal was using the bank to finance his operations in Europe.
And the Customs Agency was working with the US Attorney's office in Tampa in
Operation C-Chase, an undercover sting operation designed to expose drug money
laundering in South Florida, which ultimately targeted BCCI.
During this entire period, President Carter was
never briefed by any agency of the US government concerning BCCI.
This seems all the more extraordinary given that during
several of his trips with Abedi the State Department asked the former President
to raise particular issues with the governments of those countries.(61)
However, the former President has said that neither did he ever ask for a
briefing, nor did he ever feel the need to request one. Carter has said that he
does not feel either "betrayed or deceived". According to the former
President he did not become concerned about his association with the bank until
the revelations that BCCI had been General Noriega's banker. At that point, the
President stated:
[W]e were quite concerned , but the public news
media reports -- I believe including statements from the Justice Department --
was that this was a problem that was apparently confined to the one bank
operation in Panama dealing with Noriega. We had no information that it was
broader.(62)
In point of fact, the indictment in Tampa charged
BCCI with having a "corporate policy" of soliciting narcotics
proceeds which clearly suggests that knowledge of BCCI's criminal activity was
broader than President Carter has suggested was publicly available.
Carter's
Other BCCI-related Benefactors
In 1987 President Carter invited BCCI's most famous
Georgia resident, Gaith Pharaon to have lunch at the Carter center. According
to published reports, Pharaon brought David Paul, the President of Centrust
with him.(63) Although Pharaon never contributed any funds to
President Carter's charities, Centrust made a corporate contribution of
$100,000, which arrived with a note instructing Carter fundraisers to
"credit it to Gaith Pharaon."(64)
In 1991 after the Federal Reserve issued a cease and
desist order concerning BCCI's ownership of First American, the President began
to disassociate himself from Abedi and the bank. On April 15, 1991 President
Carter said:
We have, at the Carter Center, about 20,000
contributors to our programs, and we appreciate very much what BCCI did at the
beginning to get this project started. But now, one of our major contributors
is Sheik Zayed, in Abu Dhabi.(65)
Sheik Zayed, of course, was a major shareholder in
BCCI from its inception and at the time that President Carter made his remarks,
actually controlled the bank. According to the Atlanta Constitution, President
Carter was aware of this: [W]hen BCCI changed owners and stopped payments on
its Global 2,000 commitments, Mr. Carter asked the new owner, the President of
the United Arab Emirates, to pay the $2.5 million balance due."(66)
Carter
Aide Used BCCI To Defraud Former President
On August 26, 1992, George G. Schira, the first
executive director of the Carter Presidential Center, was indicted on charges
that he impersonated former President Jimmy Carter and defrauded the center and
one of its financial contributors out of $650,000.(67)
In committing this fraud on the former President,
Schira used BCCI to receive some $650,000 from a shipping magnate through
impersonating President Carter and Prince Bandar Bin Sultan, the Saudi Arabian
ambassador to the United States, and calling on the magnate for help.
The funds were first transferred to BCCI in London,
and then to BCCI's secretly owned U.S. subsidiary, the First American Bank of
Georga, and to BCCI's secretly owned Swiss subsidiary, the Banque de Commerce
et Placements.
The
Relationship Between Jimmy Carter and BCCI
President Carter was used by BCCI to enhance its
credibility around the world and particularly in developing countries.
President Carter travelled to a number of these countries with BCCI's
president, Abedi, increasing Abedi's status and helping Abedi gain access and
entry to political leaders from those countries. At the same time, the former
President became beholden to the bank for its generous contributions to his
charities. While President Carter did not show sufficient interest in establishing
the bona fides of the bank, the CIA, which had substantial negative information
on BCCI, failed to provide him with that information. When a President of the
United States becomes a private citizen, it is obviously his choice with whom
he associates. Nevertheless, former Presidents are afforded physical
protection, and should be afforded, to the extent possible, protection of their
reputation. As a result of his own lack of diligence in seeking information on
BCCI's poor reputation, and the CIA's lack of diligence in telling President
Carter what they knew, President Carter became closely associated for a decade
with a bank that constituted organized crime. This outcome was not in the
interests of the United States.
Andy
Young
Introduction
Andrew Young is one of the most prominent Black
Americans in the country and has a record of high achievement in public
service. However, The Subcommittee finds that Young's relationship with BCCI
was inappropriate, particularly during the period that Young served as the
Mayor of Atlanta. While he may technically have violated no ethical rules of
his office, his financial relationship with BCCI has the appearance of
influence-peddling.
Young
Meets Abedi
Former UN Ambassador and Mayor of Atlanta Andrew
Young represented BCCI as a consultant. Young has said that he learned about
BCCI after leaving his position as UN Ambassador in 1979. While he does not
recollect who introduced him to Aga Hasan Abedi, BCCI's president, he believes
it may have been Gaith Pharaon, the man who purchased Bert Lance's holdings in
the National Bank of Georgia.(68)
While he was Mayor, Young made at least four
international trips on which he made key introductions for BCCI. According to
Young, BCCI officials were occasionally involved during trips that he made with
the Atlanta Chamber of Commerce. He has explained that he performed services
for the bank or met with officials in Tunisia, Nicaragua, Zimbabwe and several
Persian Gulf states.(69)
In recent indictments issued by the Manhattan
District Attorney, Robert Morgenthau, Tunisia and Zimbabwe were described as
countries where government officials were bribed by BCCI officials. There is no
information that Mayor Young had any knowledge of any impropriety committed by
BCCI officials in either of these countries.
A
Financial Relationship With BCCI
While serving as the Mayor of Atlanta, Young, like
Lance, provided services for BCCI in return for financial benefits. Young had a
$50,000 annual retainer with the bank, and has claimed that he only became a
paid consultant in 1986 after he travelled with former President Carter to
Africa on a BCCI jet. Young's fees were paid to his consulting firm, Andrew
Young Associates. The relationship between Andrew Young Associates and BCCI
lasted for eight years until 1989. During most of that period, the BCCI's loans
were booked, and according to BCCI's records, "parked," at its
offices in Panama.(70)
According to a loan review document from the
National Bank of Georgia, AYA had "initially served as a vehicle for
Andrew Young's lecture and occasional consulting fee income," but that
following his election as Mayor, the firm "was reorganized to focus
primarily on offering consulting services to domestic businesses working to
achieve sales to various third world countries."(71) According
to the memorandum, AYA relies "largely upon name recognition and third
world political contacts."(72)
The document described characterized the company as
"small, illiquid, unprofitable, and infinitely leveraged."(73)
According to Stony Cooks, Young's business and
political associate, expenses incurred from Mr. Young's travels on behalf of
BCCI were used to reduce the balance on the credit line. Cooks has claimed, the
"offset" arrangement was worked out between himself and Swaleh Naqvi,
the chief operating officer of BCCI without specifying the date of the
arrangement.(74)
As of October 10, 1989, the outstanding loan to AYA
(Andrew Young Associates) was $197,000 and while interest on the loan had been
paid, the principal had not paid down. (75) In a letter from Asif
Mujtaba, the Group Vice-President of First American Bank in Georgia to Bande
Hasan, BCCI Miami, Mujtaba wrote "This loan matured on October 6, 1986 and
I have written to the borrower demanding payment."(76) Cook's
assertion following BCCI's global closure that payment of the principal, nearly
$200,000, was offset by Young's travel expenses, is difficult to believe. Young
would have had to have a large number of trips on BCCI's behalf in order to
accumulate $200,000 in expenses, and there is evidence, as discussed below,
that when he made trips on behalf of BCCI, he immediately sought cash
reimbursement from the bank.
Documents show that Andrew Young Associates received
its line of credit from the National Bank of Georgia beginning in 1980 which
was transferred to BCCI Panama sometime after June 1985, the year Young was
re-elected Mayor of Atlanta. (that same year the National Bank of Georgia
donated at least $10,000 to Young's successful candidacy for Mayor of Atlanta
in 1985.) (77) There is no explanation for why the loans were
transferred. Documents do show that while AYA was paying down interest, Young's
brother, Walter Young was not servicing the loan. In 1988, after several years
of non-payment BCCI's Tariq Jamil wrote S.M. Shafi: "I understand that
this loan is also guaranteed by Mayor Young, and therefore I would submit that
the collection should be handled delicately as we would like to preserve the
relationship between the BCC group and Mayor Young."(78)
Young's
Travels For BCCI
According to published reports, Young travelled
extensively on behalf of BCCI. The Subcommittee has obtained documents showing
one trip which Young made to Nicaragua. In a May, 1987 memorandum written by
S.S. Shafi to Ameer Siddiki, BCCI London, Shafi recounts a meeting with
government officials in Managua, Nicaragua that had been arranged by Young:
Our first meeting with the Cabinet Ministers and
other important personalities of Nicaragua was arranged by Mr. Andrew Young,
Mayor of Atlanta who had travelled there for this purpose. Most of the Cabinet
Ministers attended the dinner and after some time we were joined by the
President of the Republic, Mr. Daniel Ortega. He explained to us at great
length the great recession and losses and the widening of the trade gap in his
country. The idea behind was to impress on us that BCCI primary concern being
the promotion of economic growth in Third World countries we should arrange for
credit lines for their pre-export financing of their coffee, sugar, bananas and
other items.(79)
In the same memo Shafi reports that "The
Minister [of Foreign Trade] added that a delegation headed by him would visit
London to meet Mr. Abedi within a few days through good offices of Mr. Andrew
Young."(80)
In September, 1987, Tariq Jamil, BCCI London, who
had previously worked at the National Bank of Georgia, wrote to Saheb Shafi,
BCC LACRO, requesting that Young be reimbursed for his travel expenses to
Nicaragua, noting:
Needless to say, we shall continue to receive
patronage and help from the Mayor in any of our endeavors in Central America
for developing contacts and business for Latin American Region.(81)
The request for $2,345.17 reimbursement was
accompanied by a July 15, 1987 letter from Young's assistant Stony Cooks
stating that "[p]resently, Mayor Andrew Young's anticipated dates for his
visit to Guatemala are August 12-6, 1987."(82) Cooks has told
the press, as noted earlier, that Young's travel expenses were used to pay down
his loan. The Subcommittee has been unable to verify that assertion, but finds
the account -- that Young's travel expenses on behalf of BCCI amounted to
nearly $200,000, and were used to offset the loan -- difficult to believe,
especially given the reimbursement request in the case of the Nicaragua trip.
An NBG Loan memorandum also shows that Young
proposed a joint venture in the country of Nigeria:
[T]o establish a joint venture agreement between
A.I.C. and a Nigerian partner, former Head of State, General O. Obasanjo, is
being negotiated. The joint venture company would cooperate in the assembly,
manufacture and sale of farm equipment in Nigeria and throughout Africa.
Andrew Young Associates will consult with A.I.C. to
provide advice and information about the business environment and business
development opportunities in the developing nations.(83)
The significance of the Nigerian proposal is simply
that it involves a former head of state of the Nigerian government, which was
pervasively involved in receiving corrupt payments from BCCI in the form of
bribes, kick-backs, money laundering, and other services specified in the
chapter on BCCI's activities in foreign countries.
Other
Georgia Contacts
Consistent with its strategy of buying political
influence, BCCI used Georgia lawyer and political operative Charlie Jones to
court powerful government officials. For example, Jones was hired by Clifford
and Warnke to lobby the Georgia state legislature during the takeover of
National Bank of Georgia by First American. In order for the takeover to have
proceeded, a technicality in the banking law had to be changed. According to
Roy Carlson, Jones was paid "the vicinity of $1 million" for
successfully lobbying the legislature.(84) NBC reported in February
1991 that members of the legislature had flown to a resort at the expense of
BCCI.
Jones also arranged to have Senator Sam Nunn invited
to lunch by the Egyptian Ambassador to the United States where Jones introduced
the Senator to Gaith Pharaon. Nunn subsequently met with Pharaon on three occasions
-- each meeting was arranged by Charlie Jones. There is nothing to suggest,
however, that Senator Nunn had any relationship with BCCI or knowledge of
Pharaon's ties to the bank.
According to Senator Hatch, Jones also used the
offices of Senator Wyche Fowler to set us a meeting between himself, Amir
Lohdi, a BCCI employee and aide to Gaith Pharaon, and Danny Wall, the nation's
top savings and loan operator. According to a report released by Senator Hatch
in 1991, at the time, Centrust was seeking US authority to sell $200 million in
bonds to stave off its failure. Senator Fowler has denied that he or anyone in
his office played any role in setting up the meeting.(85)
Conclusion
Beginning in the late 1970's BCCI made a concerted
effort to court important members of the Carter administration, including the
President himself. Bert Lance, for example, appears to have been relieved of
substantial debt by the bank. While Mr. Lance's financial dealings have been
thoroughly investigated and he has to date been convicted of no crime, the
Subcommittee has concluded that from the beginning Lance traded on his time in
public office for personal gain. In short, while his dealings with BCCI may not
have been criminal, they can only be characterized as corrupt.
Former President Carter demonstrated an astounding
lack of curiosity about a man with whom he travelled around the world and who
funded his charities. While someone in the US government should have alerted
the former President to the criminal nature of BCCI before 1986, President
Carter never asked. Moreover, the former President demonstrated some
insensitivity to the appearances of impropriety in accepting money from Sheik
Zayed, the owner of BCCI, after the 1988 indictment, even though BCCI had been
identified as having a corporate policy of soliciting drug money.
Andrew Young did not have as extensive relationship
with BCCI as his former colleague Bert Lance, but he seems to have been equally
willing to profit by that relationship. While Young may not have broken any
criminal laws, he showed poor ethical judgment in performing services for a
foreign bank while he was Mayor of Atlanta. Mayor Young's actions could be more
easily characterized as business and economic development were it not for the
$50,000 he received in consulting fees and the nearly $200,000 his consulting
firm borrowed.
What is perhaps most surprising about the actions of
former President Carter and former Mayor Young is that they established a
relationship with BCCI or Abedi at all given that they knew Bert Lance was
intimately involved with the bank and had, in fact, been bailed out by the
bank. Lance has a history of showing poor judgment concerning his personal and
business finances and his recommendation of BCCI, instead of providing comfort,
should have raised red flags.
1. It
is important to note that President Carter never personally profited from his
relationship with either Abedi or BCCI.
2. S.
Hrg. 102-350. Pt.3, p.16.
3.
"Saudi to Acquire Lance Stock," by John Berry and Art Harris, The
Washington Post, December 21, 1977.
4. S.
Hrg. 102-350, pt. 3, p.5.
5.
"Arab Investors Want Lance to Manage Funds," by Art Harris and John
Berry, The Washington Post, December 18, 1977. p.A1.
6.
Id. In 1979 the Justice Department brought a civil suit against Holly and an
associate in 1979 claiming that they had sought to bribe an official of Quatar
with a $1.5 million cash payment in order to get renewal of oil concessions
that were worth millions of dollars. The department also said that Lance was
instrumental in arranging the meeting between the businessmen and a State
Department official in 1978, after he had left government, that were intended
to pave the way for a bribe offer to an official of Qatar. Holly entered a
consent order in which he agreed no to bribe officials in the officials. The
Associated Press, by James Rubin, April 9, 1979.
7.
Id.
8.
Id.
9.
Id. p.6.
10.
Id.
11.
Id. p.7
12.
Id. p.7
13.
"Is Bert Lance Back," By Gretchen Morgenson, Forbes Magazine, june
13, 1988, p.12.
14. Id.
p.17.
15.
S. Hrg. 102-350. pt.3, p.8.
16.
"SEC Charges Lance," by John F. Berry and Jerry Knight, The
Washington Post, March 18, 1978, p. A1.
17.
Lance Sells Stock, by Michael Doan, Associated Press, December 20, 1977.
18.
Id. p. 11.
19.
Berry and Harris, Id. p.3.
20.
Lance Stock Sale, by Robert Furlow, The Associated Press, December 27, 1977.
21.
Id.
22.
S. Hrg. 102-350, Pt. 3, p.11.
23.
Id. p.12.
24.
Id. p.13.
25.
Id. p.16.
26.
Id. p.15.
27.
Id. p.37
28.
"$3.5 Million Lance Loan An Issue In Takeover Suit," by Jerry Knight
and John F. Berry, The Washington Post, March 23, 1978.
29.
Id. p.20.
30.
"Lance Tied to Bank's Takeover," By John Berry, The Washington Post,
February 12, 1978.
31.
By Michael Sniffen, The Associated Press, March 27, 1978.
32.
Id. p.28.
33.
see Sami memo, Id. p.25.
34.
Id. p.28.
35.
Id. p.19.
36.
Id. p. 33.
37.
Id. p.34.
38.
Id. p.34.
39.
Id.
40.
Id. p.40
41.
Id. p.43.
42.
Memorandum, Application to Strike from Listing and Registration, "In the
matter of Maxpharma, February 8, 1989, The American Stock Exchange.
43.
Letter from Subcommittee source, August 14, 1991.
44.
On April 18, 1984, Presad wrote to Marvin Klapp, the southeast regional chief
for the SBA, and thanked him for his assistance. He also wrote:
I
should also like to take this opportunity to apologize for any inconvenience
caused as a result of Congressman Walter Jones, Sr. calling on our behalf. He
may have been over zealous in his attempt to help us since he feels that as a
minority owned SBIC we required extra help and guidance.
45.
memorandum from Assistant Inspector general for Audit to the Associate
Administrator for Finance and Investment, US Small Business Administration,
March 8, 1988, p5-6.
46.
Morgenson, p.12.
47.
"The President's Saudi Windmill," by Jack Anderson, The Washington
Post, July 29, 1980.
48.
Id.
49.
Id.
50.
S. Hrg. 102-350, Pt.3, p.38.
51.
"Jimmy Carter's Relationship With BCCI," ABC News Nightline, show
#2664, August 8, 1991.
52.
Id. p.38.
53.
Fritz, p.1.
54.
Id.
55.
"BCCI Adept at Courting the Powerful and Rich," by Stuart Auerbach,
The Washington Post, August 7, 1991, p.A1.
56.
According to U.S. News and World Report, "Most of the Abedi money --
representing less than 3 percent of the 350 million the nonprofit Carter center
has raised since its founding in 1982 -- went for eradication of Guinea worm
disease, an intestinal disorder affecting millions in Asia and Africa." se
"the Atlanta Connection," by Gloria Borger and Matthew Cooper, August
12, 1991, p.30.
57.
"Carter Travels to Sudan to visit Grain Experiments," by Carolyn S.
Carlson, the Associated Press, October 26, 1986
58.
Carter also travelled to Ghana and Nigeria with Abedi where he attended
conferences on eradication of Guinea worm disease. see "Nigeria:New
Efforts to Eliminate Guinea Worm Disease," Inter Press Service, March 14,
1988.
59.
The Los Angeles Times reported, "On June 21, 1987, former President Jimmy
Carter was the star attraction at a ceremony dedicating a rehabilitation center
for former prostitutes near Bangkok. By his side was Aga Hasan Abedi..."
"How the BCCI Gained Friends in High Places," by Sarah Fritz, the Los
Angeles Times, July 28, 1991, p.1.
Ironically,
Nazir Chinoy testified that BCCI provided prostitutes to its best customers in
the Middle East.
60.
Nightline, Id.
61.
Fritz, p.1. The article indicates that Abedi was excluded during these
meetings.
62.
Id.
63.
Pharaon acquired 20% of Centrust in 1987.
64.
Fritz, p.1.
65.
Id.
66.
"Carter Donors: Questionable Givers?" by Elizabeth Kurylo, The
Atlanta Constitution, April 14, 1991, p.1.
67.
Atlanta Constitution, August 26, 1992, "Former Carter Center chief
indicted in fraud."
68.
"Young Disturbed by Charges Against BCCI," by Elizabeth Kurylo, The
Atlanta Constitution, July 20, 1991, p.1.
69.
Id.
70.
Id.
71.
NBG Loan Review Memorandum, Andrew Young Associates, 10/17/83.
72.
Id.
73.
NBG Loan Review Document, p.2.
74.
"Seized Bank Helped Atlanta's Ex-Mayor and Carter Charities," by
Ronald Smothers, The New York Times, July 15, 1992, p.1.
75.
In a memorandum, dated March 25, 1988, from SM Shafi, BCCI LACRO to Akbar
Bilgrami, BCCI Panama, Shafi writes, "We have been advised that Mr. Andrew
Young will repay the loan of the company by December 31, 1988."
76.
letter to Bande Hasan from Asif Mujtaba, October 10, 1989.
77.
Smothers, p.1.
78.
letter from Tariq Jamil to S.M. Shafi, February 24, 1988.
79.
memorandum from S.M. Shafi to Ameer Siddiki, BCCI London, May 1(3?)m 1987. p.1.
80.
Id.
81.
letter from Tariq Jamil, BCCI London to S.M. Shafi, BCCI, LACRO, September 18,
1987
82.
letter from Stony Cooks to Tariq Jamil, BCCI London, July 15, 1987.
83.
National bank of Georgia, Loan Memorandum, Andrew Young Associates Inc.,
8/9/84.
84.
staff telephone interview with R.P. Carlson, July 10, 1991.
85.
"Hatch Adds Partisan Spice to BCCI Stew," by Edward T. Pound, The
Wall Street Journal, August 6, 1991, p.A8.
In hiring lawyers and lobbyists in the United States
to help it deal with its problems, BCCI did not think small. BCCI's cadre of
professional help in Washington, D.C. alone included, at various times a former
Secretary of Defense (Clark Clifford), former Senators and Congressmen (John
Culver and Michael Barnes), former federal prosecutors (Raymond Banoun,
Lawrence Barcella and Lawrence Wechsler), and former Federal Reserve attorneys
(Baldwin Tuttle and Jerry Hawke).
Still other prominent figures were recruited for
BCCI's secretly-held American subsidiary, First American, such as former
Senator and Democratic presidential candidate Stuart Symington and former
Republican Senator from Maryland Charles Mac Mathias, who each sat on First
American's board of director.
Other firms consisting of important former officials
-- such as Kissinger Associates, then home to former Secretary of State Henry
Kissinger, current Under Secretary of State Lawrence Eagleburger and current
National Security Advisor Brent Scowcroft -- were recruited by BCCI, but
refused to accept BCCI's business following its indictment on drug money
laundering charges.
The revolving door between government and the
private sector made it possible for BCCI to retain former government officials
with intimate knowledge of how the U.S. government operates to aid BCCI's agenda.
Ironically, BCCI used these former officials against the agencies they once
served as instruments of its violations of U.S. laws and its attempts to slow
or stop investigations of its wrongdoing.
Much of the activity of BCCI's lawyers in the United
States was normal representation, often extremely aggressive, but within the
borders of the kind of work the firms involved did for other clients. At other
times, however, lawyers for BCCI participated in decisions to hire private
investigators to investigate the private lives of government investigators
pursuing BCCI; sought to use "political chits" to shut down
Congressional investigations of BCCI; threatened publications considering
publishing articles about BCCI with libel suits; and refused to refer BCCI foreign
branches to federal law enforcement when BCCI's own employees in the U.S.
believed such referrals were legally required because of the degree of the
branch's involvement in money laundering.
The most aggressive activity by BCC's lawyers and
lobbyists took place at the beginning and at the end of BCCI's
Two periods of activity by BCCI's lawyers in the
U.S. illustrate how BCCI accomplished illegal or improper objectives were:
** Assisting BCCI and its nominees in restructuring
the takeover attempt of Financial General Bankshares after the initial attempt
was stopped by the Securities and Exchanges Commission (SEC), on the ground
that BCCI had secretly colluded with other shareholders by purchasing 4.9% of
the FGB stock each to evade securities laws requiring the reporting of their
purchases at 5% or more. Among the key attorneys involved in the restructuring
of the BCCI takeover were Clifford, Altman, and former Federal Reserve lawyer
Baldwin Tuttle. (1978-1981)
** Structuring the purchase of National Bank of
Georgia by First American from BCCI's nominee, Ghaith Pharoan. (1985-1986)
Response to Senate
Joint Defense Agreement
BCCI's
Lawyers and Lobbyists
In hiring lawyers and lobbyists in the United States
to help it deal with its problems vis a vis the government, BCCI pursued a
strategy that it had practiced successfully around the world: the hiring of
former government officials.
BCCI's cadre of professional help in Washington D.C.
included, at various times, a former Secretary of Defense (Clark Clifford),
former Senators and Congressmen (John Culver, Mike Barnes), and former federal
prosecutors (Larry Wechsler, Raymond Banoun, and Larry Barcella), and former
Federal Reserve Attorneys (Baldwin Tuttle, Jerry Hawke, and Michael Bradfield).
Their involvement in representing BCCI, following their government employment,
illustrates the perils of the revolving door, and the danger of former
government officials using the expertise they gained in government at the
service of private clients. Often, such former officials have no idea of the
real agenda or problems their clients may be hiding. And yet their actions can,
and in the case of BCCI, did, substantially impede the ability of government to
do its work.
Apart from Clifford and Tuttle, this team was brou
ght in only after BCCI's indictment on drug money
laundering charges in October 1988. Since the indictment, at various times,
these former officials were used by BCCI to stall investigations, prevent the
bank from being closed by regulators, and to stop legislation that would have
mandated BCCI's closure.
Some of the questionable tactics employed by BCCI's
team of former government officials included:
** Investigating government agents.
** Working outside the normal law enforcement
channels to keep the bank open in Florida.
** Lobbying Senators as registered foreign agents in
pursuit of their criminal defense work, in order to stop BCCI from being
closed.
** Delaying and impeding an authorized U.S. Senate
investigation of the bank.
** Refusing to refer BCCI customers and accounts for
criminal investigation even after being advised by BCCI's own offiers that the
customers and the accounts raised serious questions.
** In the case of Clifford and Altman, using the
attorney work product and attorney client privileges as shields to protect
their own potential cupability.
Larry Barcella
Larry Barcella is a former Assistant US Attorney who
gained national prominence for his successful prosecution of Edwin Wilson, the
American convicted of selling secrets to Lybia. Barcella was brought onto the
BCCI case shortly after the October 1988 indictment of BCCI in Tampa, Florida.
Larry Wechsler, with whom Barcella had practiced law in the US Justice
Department recruited him to coordinate the bank's defense.
Although the full extent of Barcella's activities on
behalf of BCCI remains unknown, he did engage in the following:
-- In 1988 Barcella tried to persuade his firm's
lead partner, former US Senator Paul Laxalt, meet with Swaleh Naqvi, BCCI's
CEO, in London, and to engage in lobbying on behalf of the bank on Capitol
Hill. The Subcommittee has been unable to determine what, if any, services
Senator Laxalt performed on behalf of BCCI.
-- In 1989 and 1990 Barcella joined John Vardaman, a
partner at Williams and Conolly and Robert Altman in warning Larry Gurwin, a
freelance journalist writing an article about BCCI and First American Bank for
Regardie's magazine, that it would be improper to write anything that linked
the two institutions. Barcella has called Gurwin's allegations
"absurd".(1)
- In early 1990, after BCCI pleaded guilty to money
laundering charges in Tampa, Florida, several members of the US Congress
criticized the plea bargain as to lenient on the bank. Documents obtained by
the Subcommittee show that Barcella met with Senator Dennis Deconcini, one of
the critics of the plea bargain, in an effort to persuade him that BCCI was not
the corrupt institution that he and others had claimed.
Most recently, of course, Barcella has been hired by
the House Foreign Affairs Committee to investigate the "October
Surprise", the allegations surrounding a political deal for release of the
US hostages held in Iran in 1980. On leave from the Justice Department to
assist Barcella in his investigation is Greg Kehoe -- the Justice Department
official with whom BCCi lawyers, including Barcella, negotiated the bank's plea
agreement in Tampa.
Ray Banoun
Raymond Banoun is also a former federal prosecutor
who was brought into the BCCI case by Robert Altman to assist in the bank's
defense. At the time Banoun was with the law of Arent Fox; he is currently the
head of the white collar criminal defense team in the Washington office of
Caldawater, Wickersham and Taft.
Aside from Altman, the lawyer who had the most
contact with the Subcommittee concerning BCCI was Banoun. In reviewing the
record, the Subcommittee has concluded that Banoun may have acted unethically
by willfully misleading it in an attempt to impede the investigation.
Banoun was initially charged by Altman to oversee
the production of documents respondent to the series of subpoenas issued by the
Subcommittee to BCCI in the summer of 1988. Among the documents under subpoena
were all records relating to General Noriega's accounts in the United States.
While the Subcommittee did receive some information from BCCI, it was clearly
incomplete and Senator Kerry has stated publicly on several occasions that he
does not believe the Subcommittee received full cooperation. In response,
Banoun has made the following extraordinary comments to the press:
-- Banoun told Newsweek that he fully cooperated
with the Subcommittee, but that "lawyers don't go around searching for
documents for clients."(2)
-- Banoun told the National Journal that the
Subcommittee had been "outlawyered." He added that "We don't
allow our clients to get pushed around. This is an adversary system, not a
roll-over system." (3)
-- Banoun also complained to the Legal Times that
"more and more these days the government [is] wanting information obtained
under the attorney-client privilege and attorney work product." Banoun
stated,"It's an unfortunate and frightening sign because it erodes very
seriously the ability of a lawyer to represent a client." BCCI, of course,
waived it attorney client privilege.(4)
Taken together these comments suggest that Banoun's
approach to the subpoenas was to advise BCCI to turn over all relevant
documents, but to take no steps to ascertain whether, indeed, that had been
accomplished.
The Subcommittee is also disturbed by a memo written
by Roma Theus, a partner in the Florida law firm of Holland Knight, which
states that Altman and Banoun "were doing everything within their power to
call in political markers."(5) Banoun has called the author of
the memo a misinformed "fruitcake."(6) But Theus, a highly
respected lawyer, told the Subcommittee that his information came from private
investigator Phillip Manuel, who had worked for Banoun's colleague, Larry
Barcella. Manuel told the Subcommittee he had no idea why Theus would write
such a thing and that his only information about the Subcommittee's
investigation came from "journalists with who he played poker."
In the fall of 1988 Banoun was also charged with
reviewing all the accounts for BCCI in Florida to determine whether criminal
referrals should be made. The Subcommittee has obtained documents that suggest
that despite evidence of criminal activity produced by the manager of one of
BCCI Florida offices (one of BCCI's few honest officers) Banoun made no
criminal referrals.
Larry Wechsler
Larry Wechsler is a former government prosecutor in
the Washington D.C. US Attorney's office who now practices with the Washington
D.C. firm of Janis, Shuelke and Wechsler. Wechsler previously represented
Albert Hakim in the Iran Contra affair and was brought in by his close friend
Robert Altman to put together a legal defense team for BCCI in Florida.
Wechsler recruited Barcella and bevy of other top lawyers.
Wechsler has refused to meet with Subcommittee
staff, but documents show that he and Banoun lobbied the US Senate on behalf of
BCCI.
The Congressmen
Many who serve in Congress come to public service
from other professions, frequently the legal profession. So it is natural that
once out of office, those with law degreees return to the practice of law.
While former public servants are entitled to pursue
careers once they return to private life, all too often they remain in
Washington and pursue legal careers that entail lobbying. Again, while there is
nothing improper as long as ethical rules are followed, the BCCI case points
out how easily it is for former lawmakers to have their reputations, and
therefore the reputation of the government they served, tarnished by
representation of unsavory clients.
The Subcommittee has no solution to this sticky
problem, except to note that those who develop influence within the Congress,
need be cautious in the exercise of that influence at all times, but especially
when they leave the Congress.
Senator Culver
John Culver, a former US Senator, was another partner
at the law firm of Arent Fox who did work on behalf of BCCI. While Culver's
involvement was relatively limited, he did contact the Subcommittee in the
winter of 1989 in an attempt to gain an advance copy of the Subcommittee's
report on narcotics trafficking, which included references to BCCI. He also
lobbied the Subcommittee with Banoun, Weschler and Altman, assuring
Subccommittee staff that the bank was fully cooperating, and that, save events
in Florida, a sound and honorable institution.
Senator Mathias
Senator Mathias became a director of First American
holding company after leaving the Senate in 1986. Mathias also became chairman
of the board of directors audit committee.
On August 2, 1991, mathias wrote to lark Clifford
and urged him and Robert Altman to resign. According to the Wall Street
Journal, Mathias told Clifford, "In recent weeks, there has been a
worrisome outflow of deposits which continues to this day." He added,
"you and Bob are perceived as the link between BCCI ...and First American."(7)
Michael Barnes
Barnes, a former US Congressman from Maryland, is a
partner in the Washington D.C. law firm of Arent Fox. In the spring of 1990,
Barnes was called in by his colleague Ray Banoun, who was concerned about the
impact of a pending article on First American bank by freelance journalist,
Larry Gurwin for Regardies Magazine. Barnes called William A. Regardies to
complain about the article. Regardies published Gurwin's work anyway.
The
Fed officials
The Federal Reserve is a quasi independent government
insitution which has enormous power in setting the economic agenda for the
country. Because of its unique status, it is somewhat insulated form direct
accountbility to the legislative and executive branches of government. While
government ethics laws apply to the Fed in a similar fashion as to other
government agencies, the BCCI case suggests the Fed has become too much of a
club where former employees are able to lobby current employees on critical
banking issues.
Baldwin Tuttle
Balwdin Tuttle served as the deputy general counsel
at the Federal Reserve during the mid- 1970's. After leaving the Federal
Reserve Tuttle moved to private practice where he became the outside counsel to
Clifford and Altman for their BCCI related work. He is currently a resident
partner in the Washington D.C. office of Milbank, Tweed, Hadley and McCloy.
Tuttle represented the middle eastern investors
along with Clifford and Altman at the 1981 Federal Reserve hearing on the
takeover of Financial General Bankshares. That hearing was chaired by Robert E.
Manion, now at the law firm of Arnold and Porter. Manion had been one of
Tuttle's former subordinates and replaced Tuttle when he left as the Fed's
deputy general counsel.
Besides Manion, Tuttle knew Jack Ryan, the director
of the division of banking supervision and regulation. Tuttle fielded most of
the tough questions at the hearing and it is clear that his representation
impressed his former colleagues at the Federal Reserve.
Tuttle also filed the investors application to the
Federal Reserve. In that application, he represented that BCCI "neither is
it a lender, nor will it be" to First American's Middle-eastern
purchasers. That, of course, has been shown to have been completely untrue.
Tuttle provided legal advice to BCCI and the
Middle-Eastern investors throughout the 1980's. The Federal Reserve, in its
civil complaint against Clifford and Altman, noted Tuttle's involvement in the
NBG takeover in 1986. In a "brief and hostile" meeting, Altman
castigated Tuttle for questioning the proprietary of the takeover and warned
him that he if he ever raised the issue again, he would be fired. Apparently
Tuttle heeded Altman's advice, and never made his concerns known to bank
regulators.
Jerry Hawke
Jerry Hawke, a former general counsel to the Federal
Reserve, is currently a partner with the Washington D.C. law firm of Arnold and
Porter where he specializes in banking law.
Hawke was hired by First American Bank to lobby the
federal reserve against the creation of a trust for the bank to facilitate its
sale. Apparently, the management at First American Bank believed that they and
not an independent trustee should handle the sale. As the Washington Post
reported, "That means Virgil Mattingly, general counsel at the Fed who is personally
handling the trust issue, is being lobbied by the man he once worked for."(8)
Michael Bradfield
Michael Bradfield, a former counsel at the Federal
Reserve, is with the law firm of Jones, Day, Reavis and Pogue in their
Washington D.C. office. During the 1980's Bradfield responsibilities at the
Federal Reserve included monitoring First American bank. In 1989 he became a
partner in Jones, Day where he does work for First American pertaining to
BCCI's interest in the bank holding company. His firm has also done work for
the bank's oversight committee.
1.
Clark Clifford and a Legal Armada Gave BCCI a Patina of respectability,"
by Jill Abramson, the Wall Street Journal, August 1, 1991. Also, BCCI's British
solicitors wrote Gurwin about an article he did for the Economist. British
solicitors threatened to sue and based their charges on information they had
received from the Washington lawyers who had spoken to Gurwin. At this point
Gurwin had only spoken to Wechsler and Barcella.
2.
"The Influence Game," Newsweek, August 26, 1991, p.20.
3.
"BCCI's Washington Web," by Paul Starobin, The National Journal,
9/7/91, p.2131.
4.
"Top Lawyers are Subpoenaed in BCCI Probe," by Linda Himelstein, The
Legal Times, April 27, 1992, p.1.
5.
Memo to the files, Roma Theus, August, 1990.
6.
Starobin, p.2131.
7.
"Revolving Door between Fed and First American," by Peter Truell, The
Wall Street Journal, September 6, 1991, p.A10.
8.
"First American: Drop Trustee Idea," by Sharon Walsh, the Washington
Post, April 14, 1992, p.D1.
Introduction
Two days following its indictment in Tampa in
October, 1988 as a result of the Operation C-Chase sting, BCCI did what many
businesses in trouble do under such circumstances -- it hired a public
relations firm to help it reduce the bad publicity surrounding the indictment.
The firm selected by BCCI was, consistent with BCCI's usual strategy, unusually
well-connected politically: Hill and Knowlton, home to Republican Robert Gray
and Democrat Frank Mankiewicz, and generally considered the most politically
prominent public relations firm in Washington.(1) During the
following two years, Hill and Knowlton provided various services to BCCI and to
its secretly-held affiliate, First American.(2)
On August 1, 1991, former Customs Service
Commissioner William von Raab, in testimony before the Subcommittee, criticized
the public relations firm, implicating its activities as a factor in BCCI's
success in staying open following its indictment, and suggesting that the
January, 1990 plea agreement between BCCI and the U.S. Attorney in Tampa was
"a tribute to the influence team that was marching up and down the Eastern
seaboard helping BCCI keep its neck off the block."(3)
In response to the Von Raab testimony, Hill and
Knowlton's Vice Chairman, Frank Mankiewicz, immediately issued the following
statement on the PR Newswire, which is set forth in full:
Mr. Von Raab's testimony as to Hill and Knowlton is
incredibly irresponsible and totally false. Neither I, nor Robert Gray, nor
anyone else from Hill and Knowlton ever contacted, on behalf of BCCI, anyone in
the Department of Justice or anywhere else in the Executive Branch, or for that
matter, on Capitol Hill.(4)
The import of Hill and Knowlton's release was that
whatever it did for BCCI, its work had not involved lobbying.
But Mankiewicz's strong statements concerning what
Hill and Knowlton did not do for BCCI failed to explain exactly what Hill and
Knowlton did do.
In fact, Hill and Knowlton had represented BCCI at a
critical time in its history, following the Tampa drug-money laundering
indictment.(5) Moreover, according to statements made by former Hill
and Knowlton partners to the press, Hill and Knowlton partners did know BCCI
was "sleazy," and at least one partner did leave the firm in part as
a result of disagreements over the BCCI account.(6)
Moreover, Hill and Knowlton did have contact with
Capitol Hill on behalf of First American, Clark Clifford and Robert Altman, on
BCCI related matters, in the period when BCCI still secretly-held First
American, and after BCCI's ownership of First American was a matter of public
record and established fact.(7)
Finally, Hill and Knowlton did have contact with at
least one Congressional staffer, Michael Pillsbury, on behalf of BCCI itself,
in January, 1990. At that time, Senate staffer Pillsbury wrote Karna Small at
Hill and Knowlton, soliciting information from Hill and Knowlton concerning
what it was doing for BCCI, and offering to be of assistance to BCCI in its public
relations efforts.
Small's involvement provides further evidence of the
fact that Hill and Knowlton assigned politically-connected staff to the BCCI
account. Small's previous work had included being assistant press secretary to
James Brady under President Reagan, press spokesperson for National Security
Advisor Robert McFarlane, and an assistant to the National Security Counsel
during the period in which McFarlane and Admiral John Poindexter were in charge
of the NSC.(8)
The record before the Subcommittee suggests that the
contact between Small at Hill and Knowlton and Capitol Hill was initiated by
Pillsbury, rather than Small or Hill and Knowlton. Hence, Mankiewicz's
statement was technically correct, if incomplete, on this point.(9)
Hill and Knowlton's activities on behalf of BCCI,
First American, Clifford and Altman resulted in Hill and Knowlton making
statements that in the end proved to be materially misleading, and attacking
individuals who were making accurate, but damaging statements about their
clients. While there is no evidence that any Hill and Knowlton partner knew
that the information it was disseminating was false, BCCI's use of Hill and
Knowlton raises questions about the role of public relations firms in our
political system.
When a public relations firm disseminates
information, does it have any independent responsibility to the public to make
sure that the information disseminated is accurate?
Are there other issues of public policy at stake
when a public relations firm that is politically well-connected, on behalf of a
client who has been indicted for illegal acts, disseminates materials attacking
and discrediting people who are making accurate statements? Is corrective
industry or legislative action warranted?
Findings
** Hill and Knowlton partners knew of BCCI's
reputation as a "sleazy" bank at the time it accepted the account in
October, 1988. Some of this information came from then Commissioner of Customs
William von Raab, in response to questions from a friend who was a partner at
Hill and Knowlton.
** Hill and Knowlton made contacts with Capitol Hill
on behalf of First American, and BCCI's lawyers, Clark Clifford and Robert
Altman, on issues pertaining to BCCI. Materials prepared in part by Hill and
Knowlton and provided to Capitol Hill were provided to federal bank regulators
in the spring of 1990 in an effort to discourage those regulators from
crediting allegations in the media that BCCI secretly owned First American.
** In 1988 and 1989, Hill and Knowlton assisted BCCI
with an aggressive public relations campaign designed to demonstrate that BCCI
was not a criminal enterprise, and to put the best face possible on the Tampa
drug money laundering indictments. In so doing, it disseminated materials
discrediting persons and publications whose statements were later proved
accurate about BCCI's criminality.
** Important information provided by Hill and
Knowlton to Capitol Hill and provided by First American to regulators
concerning the relationship between BCCI and First American in April, 1990
proved to be incorrect. The misleading material represented the position of
BCCI, First American, Clifford and Altman concerning the relationship, and was
contrary to facts known by BCCI, Clifford and Altman. There is no evidence that
Hill and Knowlton partners knew the information to be inaccurate, or reason to
believe that their clients' account was correct.
Retention
and Initial Services to BCCI of Hill and Knowlton
On October 10, 1988, BCCI was indicted in Tampa on
drug money laundering, sparking an immediate need by BCCI to respond by every
means possible. As Abdur Sakhia, one of BCCI's senior officers in the United
States, recommended Hill and Knowlton.
I started the Hill and Knowlton connection. The day
we were indicted we were inundated by everyone. I said we have to tell our side
of the story. I am not capable of telling it. You need to have a PR firm to
handle this. To me, BCCI's problems here were like Johnson and Johnson's
Tylenol crisis, or the indictment of Drexel for insider trading.(10)
Hill and Knowlton had been purchased by a London
advertising and public relations conglomerate, the WPP group and now had
offices in London. A British BCCI director, John Hilbery, who lived in London,
had contacts there, and BCCI's main offices in London hired the firm, at a rate
of $50,000 per month.
At the outset of the retention of Hill and Knowlton
by BCCI, some Hill and Knowlton partners in Washington expressed concern about
the account.
As former Commissioner Von Raab testified:
I was in my office when a friend of mine from Hill
& Knowlton came to me and he said, Willie, he said, BCCI wants to hire Hill
& Knowlton and they want me to work on it.
And he said, what should I do? And I said, don't
work on it, it is a sleazy operation. Well, the result was, Bob Gray and Frank
Mankiewicz worked on it. My friend left Hill & Knowlton.(11)
Before the month of October was over, Hill and
Knowlton had deployed a team of six of its public relations professionals in
New York, Tampa, and Washington, D.C., as well as 16 additional Hill and
Knowlton staff in ten other countries. The firm's initial work included such
standard public relations tasks as handling BCCI's press strategy, developing
various BCCI officials as press spokesmen, creating a public relations history
of BCCI and a public relations position paper to be used to rebut the Florida
indictments, and developing a recommended advertising campaign for BCCI in
major newspapers around the world.(12)
Hill and Knowlton documents found by the Subcommittee
at BCCI's document repository in Florida describe this work in some detail.
A document evidently generated by Hill and Knowlton
in London in October, 1988, entitled, "BCCI Worldwide Action
Program," carried recommendations for generating positive press for BCCI
through interviews between BCCI officials trained by Hill and Knowlton on what
to say with influential journalists such as Lou Dobbs at CNN, Louis Rukeyser at
PBS, and James Stewart of the Wall Street Journal.
A second Hill and Knowlton document dated October
27, 1988, described as "Background on the Tampa Indictments And BCC
Position on Compliance," described the approach to be taken by BCCI
officers in these interviews:
Management of BCCI was surprised and shocked to
learn in news reports that the bank and nine of its employees had been indicted
in Tampa, Florida on charges of laundering drug money. The bank had no warning
that it or any of its people were under investigation, nor is its management
aware that any employee anywhere had violated long-standing bank policies to do
business in a manner fully consistent with the laws and regulations of every
jurisdiction in which it operates.
The specific facts of the charges are not known to
BCCI at this time; the bank has, however, reaffirmed its commitment to legal
integrity and pledged to cooperate with all legal authorities in the resolution
of these troubling developments. BCC has taken the further step of launching an
extensive internal review under the direction of a special committee of outside
directors to review the allegations.(13)
Senior BCCI officials to whom the document was being
distributed knew at the time that many of these statements were inaccurate.
Even mid-level BCCI officials knew that some of these statements were inaccurate.
For example, according to BCCI officers such as Amjad Awan and Akbar Bilgrami,
both convicted of money laundering, BCCI had never, even on paper, created a
package of "long-standing bank policies" against committing any kind
of criminal act, let again directed against laundering money.(14)
Creating an anti money-laundering policy after the
fact was one of the urgent tasks management was about to engage in as part of
BCCI's damage control operation. BCCI official Akbar Bilgrami was in this
period told to write a memorandum concerning a meeting which he had not
attended in which BCCI had supposedly reiterated its policies against money
laundering with BCCI's banking staff in Miami. According to Bilgrami, he
declined the request to write the memorandum for two reasons. First, its
substance was misleading. Second, he felt ridiculous trying to write an account
of an event at which he was not even present.(15) Bilgrami made
clear his understanding that the notion that BCCI had an anti-money laundering
policy in place prior to his indictment was absurd.(16)
The backgrounder on BCCI prepared by Hill and
Knowlton at the time for use with the press stressed BCCI's total institutional
commitment to conservative and ethical practices:
BCC draws upon Eastern traditions of trust,
confidentiality, hospitality and cordiality in business dealings. The bank has
an unusually egalitarian management structure with many functional, as opposed
to ceremonial, titles for managers . . .It stresses conservativism, prudence
and liquidity in its deposit taking and lending activities. . . Although it has
never publicized the fact, BCC is a major participating in recognized
charitable and philanthropic programs around the world . . . The BCC Group as a
matter of corporate policy adheres strictly to the rules and regulations of all
countries in which it does business . . . Financial transactions of the bank
are subject to four levels of review by regional auditors, by central auditors,
external auditors (Price Waterhouse is the bank's outside audit firm) and by
the auditors of various state banking authorities.(17)
The truth, of course, was at the time the words were
written, BCCI's top officials had engaged in massive fraud for over a decade
and was billions of dollars in the hole, and had survived, to date, through
phony bookkeeping designed to hide practices that were neither conservative nor
prudent. The material created by Hill and Knowlton was thus unrelated to the
facts, and merely an articulated form of what BCCI wanted the world to believe.
On October 21, 1988, Hill and Knowlton released a
press statement on BCCI's behalf stating that "BCCI has never knowingly
violated the laws of any country," and "would not countenance any
such violation or activity." At that time, BCCI had been cited for
regulatory violations in numerous countries around the world, despite its
practice -- well-known within BCCI -- of bribing public officials around the
world in an effort to limit the number of citations for such violations.(18)
In November and December, 1988, Hill and Knowlton
coordinated briefings of BCCI employees on how to handle themselves as press
representatives, including "media training" classes, and a seminar by
BCCI's lawyers to BCCI employees to discuss the implications of the Tampa
indictments for the bank and for unindicted bank officials.
On December 8, 1988, Hill and Knowlton registered
with the Justice Department as a foreign agent for BCCI in preparation for
engaging in lobbying efforts on behalf of BCCI in Washington.
In December, 1988, the Subcommittee deposed a former
BCCI official, Aziz Rehman, who testified under oath that BCCI had engaged in
wrongdoing beyond the actions for which BCCI was indicted in Tampa. According
to Rehman these included maintaining a "Nassau" branch of BCCI in
Miami at a time that the bank did not have an office in Nassau, and which it
was using to assist clients in tax evasion. According to Rehman, customers were
able to make deposits in the Nassau branch in Miami which earned interest
"outside" the United States, were not reported by BCCI to the IRS,
and thus permitting the customer to evade paying taxes. Rehman's statements
were later supported by two other BCCI officers, Akbar Bilgrami and Amjad Awan,
in statements to the Subcommittee, as well as by BCCI records stored in Miami.
In a press release from Hill and Knowlton in New
York, BCCI defended itself by attacking Rehman and calling his charges, which
were accurate, wild lies. The December 22, 1988 press release, issued on Hill
and Knowlton New York letterhead, with two Hill and Knowlton account executives
listed as press contacts stated:
The allegations made about the Bank of Credit and
Commerce International S.A. by Mr. Aziz Rehman before hearings of the U.S.
Senate Subcommittee on Terrorism, Narcotics and International Communications
[sic] in October, 1988 [sic] have absolutely no basis in fact.
Mr. Rehman was fired from BCCI in 1984. Whether this
influenced his sworn Senate testimony in any way we do not know. At no time has
BCCI operated any "fictitious" branches in the Bahamas or elsewhere.
Nor has the Bank chartered aircraft to transport cash illegally.
Mr. Rehman's statements are fantastic and erroneous
interpretations of routine and legitimate banking transactions.(19)
The activities described by Rehman were neither
routine nor legitimate; his statements neither fantastic nor erroneous.
Rehman's statements were even possibly verifiable at the time they were made.
Numerous BCCI employees in Miami knew that Rehman was telling the truth, and
that BCCI had maintained its Nassau books in Miami at a desk labelled
"Nassau" opposite a desk that handled Miami's transactions. As BCCI
officials interviewed by the Subcommittee acknowledged, the Nassau account of
BCCI was for years nothing more than a separate set of books kept in BCCI's
Miami office and labelled "Nassau."(20)
As these officials later told the Subcommittee in
confirming Rehman's account, the Nassau branch of BCCI in Miami was used by
BCCI clients for the purpose of shielding assets from U.S. taxation. The Nassau
branch was established in Miami at a time when BCCI had no operation in Nassau
-- even a post office box. Officers at the "Nassau" branch of BCCI
sat across the table at BCCI's office in Miami from the "Miami"
branch of BCCI in Miami, so that customers of BCCI could "shift"
funds from the on-shore branch of BCCI to the off-shore branch. Moreover, since
BCCI, as a foreign bank outside of the Federal Deposit Insurance Corporation
(FDIC) system, could not accept deposits from U.S. citizens in the United
States, its "Nassau" branch was used to allow U.S. citizens to make
deposits "offshore."(21)
There is no indication in BCCI records that any
independent fact-checking was done by the firm. Apart from blind acceptance of
whatever BCCI told them, Hill and Knowlton also had no reason to believe that
Rehman's statements were either true or false. The public relations firm did
nothing more, and nothing less, then peddle BCCI's position without regard to
the damage to the reputation of the person its client hired it to disparage.
Attacking
The Press
In May, 1990, Regardie's Magazine published a cover
story concerning the relationship between BCCI and First American by financial
journalist Larry Gurwin. The story was entitled, "Who Really Owns First
American Bank?" It provided detailed information concerning that issue,
suggesting that one very possible answer was BCCI. The article also contained a
comprehensive and detailed history of BCCI's takeover of Financial General
Bankshares, BCCI's previous run-ins with regulators and law enforcement, the
role played in First American and in BCCI by Clark Clifford and Robert Altman,
and questions concerning BCCI's shareholders. The Gurwin article in Regardie's
made available in public significant material concerning these issues not
previously known. As a consequence, it has been justifiably credited by many as
substantially advancing knowledge of BCCI's activities in the United States,
and helping prompt the investigative work that led to the unravelling of BCCI's
ownership of First American.
When the Regardie's article appeared, on behalf of
"First American," Hill and Knowlton created a "Fact Sheet"
on the article which consisted of an attack on the story, the magazine itself,
and the reporter who wrote it. The "Fact Sheet" was not released
generally to the press, but to specific persons who might have a special
interest in whether the article was true -- people like the chairman of the
Subcommittee, Senator Kerry, and the Comptroller of the Currency, Robert L.
Clarke, each of whom received a seven page fact sheet rebutting the allegations
in Regardies in late April, 1990. The "Fact Sheet" was provided to
Senator Kerry by Mankiewicz, in his capacity as Vice Chairman of Hill and
Knowlton.
The Hill and Knowlton "Fact Sheet" began
with the following assessment of the Regardie's article:
The May 1990 issue of Regardie's magazine carries a
cover story on First American Bankshares which is full of inaccuracies and
outright falsehoods, utilizing a sensationalist approach to yesterday's news.
It has been published with the clear intent of denigrating and injuring the
company, its officers, and directors, and its shareholders. With glaring bias
and distortion, Regardie's fails to report fairly the story of First American.
. .(22)
According to the Hill and Knowlton release, the
Regardie's article consisted of a:
rehash of stale allegations and charges . . .
rejected by the Federal Reserve and other regulators . . . seeks to prove First
American may somehow be controlled by the Bank of Credit and Commerce
International (BCCI).(23)
Hill and Knowlton then made the following
representations of fact concerning the relationship between BCCI and First
American, which proved to be untrue:
** BCCI's management is not involved in any respect
in the policy or affairs of First American, a point that is easily checked.
** BCCI has never owned any stock in First American.
** First American is not controlled by BCCI in any
sense and all dealings between the two institutions (which have actually been
quite limited) have been proper and on an arms-length basis.(24)
Again, Hill and Knowlton had no particular knowledge
of the true state of affairs. It acted merely as a conduit for the position of
its clients. That position, however, was misleading and false.
Hill and Knowlton then made the following
representations of fact concerning the use of First American by General Manuel
Noriega:
First American has never had any banking
relationship of any kind with Manuel Noriega, nor has it ever knowingly handled
any funds of Manuel Noriega . . . Nor is there any indication in First
American's bank documents [that] any deposit contained funds belonging to
Manuel Noriega.(25)
In fact, dozens of documents at First American's
offices in Washington showed, quite clearly, the handling of Noriega assets by
First American through the bank account maintained by BCCI at First American in
Washington. Thus, Hill and Knowlton's client, First American, or its officers,
were again providing untrue information to the PR firm on this point, which the
firm in turn was disseminating on First American's behalf.
The "Fact Sheet" distributed by Hill and
Knowlton made similarly erroneous statements concerning the relationship
between Clifford and Altman and BCCI.(26)
Once again, there is no evidence to demonstrate that
Hill and Knowlton had conducted any independent investigation of the facts that
they were distributing.
To the contrary, their presentation was identical
with the position that was being taken then and to this day, by BCCI, Clifford
and Altman concerning these issues. Untrue statements by BCCI, Clifford and
Altman concerning these issues are among the central matters on which each has
been indicted by law enforcement and cited by regulators.
Once again, Hill and Knowlton acted merely as a
conduit for the version of events being promoted by their clients. Once again,
the materials it disseminated contained numerous statements that proved to be
false. Once again, its attacks -- this time on investigative reporter Larry
Gurwin and on Regardie's magazine by Hill and Knowlton in its capacity as
public relations firm for First American, Clifford and Altman -- served to
discredit people who were telling the truth.
In May, 1991, Hill and Knowlton disseminated another
memorandum pertaining to First American and BCCI. This memorandum was written
in response to a May 5, 1991 article in the Washington Post concerning Clifford
and Altman's purchase of stock in First American through secret lending from
BCCI.
A cover page to the Memorandum written by Frank
Mankiewicz stated the following:
I would like to stress a few points:
- The fundamental contention of the Washington Post
story of May 5, indeed its lead sentence - is untrue, and worse, never supported
in the article. The Post says regulators were told "that BCCI would have
no financial relationship with First American and its senior management."
No such statement was ever made. In fact, First American was free to have
financial dealings with BCCI on an arms-length basis - as it did with many
banks - and audits have confirmed that no impropriety occurred. As to financial
dealings with senior management, I have no idea what representation or
discussion the Post is talking about.
- These investments were not secretive ownership;
rather, the Directors had full knowledge of both the purchases, and approved
them. They were also encouraged by shareholders, and the ownership was timely
reported to regulators, as required.
- The loan from BCCI was made with the advice of New
York counsel . . . none, then or now, believes the loan contravened any
commitment to the Federal Reserve . . .(27)
Mankiewicz then enclosed a memorandum, on Hill and
Knowlton stationery, which further stated that "there was no reason at the
time of these transactions for any one to consider the role played by BCCI [in
lending funds to Clifford and Altman] to be remarkable or inappropriate."(28)
The positions taken, identical to those taken by
Clifford and Altman, were at best, gross simplifications and distortions of the
truth, as the public record at the time, available to Hill and Knowlton,
demonstrated. Specific representations had indeed been made to the Office of
the Comptroller of the Currency that BCCI would not be involved in any aspect
of financing First American's ownership either at the time of the FGB takeover,
or later. These representations were part of the record on which the Federal
Reserve agreed to permit the takeover of First American by the group linked
with BCCI. While Clifford and Altman's ownership of BCCI stock had been
disclosed to and approved by First American directors, their loans from BCCI
had not. While Clifford and Altman's ownership of BCCI stock had been disclosed
to regulators, their loans from BCCI had not. Clifford and Altman's personal
attorneys may not have believed the loans contravened any commitment to the
Federal Reserve. But that has not been the position of the regulators
themselves. Indeed, the Federal Reserve has formally charged Clifford and
Altman with conflict of interest, breach of fiduciary duty, and other
violations of their statutory responsibilities in connection with these very
transactions. In fact, the Federal Reserve has viewed these transactions to be
sufficiently improper to justify banning Clifford and Altman from banking for
life.(29)
Again, there is no evidence to demonstrate that Hill
and Knowlton had conducted any independent investigation of the facts that they
were distributing. The firm acted as a conduit for a position, which contained
numerous statements that proved to be misleading at best.
Should
Hill and Knowlton Have Known Better?
According to press accounts, some Hill and Knowlton
executives from the beginning raised ethical questions concerning the firm's
representation of BCCI and refused to work on the account -- suggesting that
sufficient information had always been available to Hill and Knowlton to reject
the account on the ground that BCCI had in fact engaged in sleazy practices,
and that if Hill and Knowlton accepted BCCI's account, it might end up
tarnished.(30)
According to an August 17, 1991 account in the
National Journal, in October, 1988, Lawrence J. Brady, an ex-senior vice
president in Hill and Knowlton's Washington office and two other Hill and Knowlton
executives had told Mankiewicz in a conversation involving all four officials
that BCCI was, to use Brady's word, a "sleazy" bank, after Brady
discussed the possible representation with Von Raab. The National Journal
article quoted another former Hill and Knowlton official as saying "the
smell test was used, and [BCCI] did not seem to pass the muster."(31)
Regardless of such concerns, Hill and Knowlton kept
the account for 18 months, and represented BCCI's secretly-held U.S.
subsidiary, First American, another 15 months beyond that, until Clifford and
Altman's resignation in August 1991.
What is the responsibility, if any, of a public
relations firm to ensure that it does not assist clients in misleading the
public, the Congress, or the Executive Branch, through the dissemination of
false information?
The baseline standard is one defined by the Code of
Professional Standards of the Public Relations Society of America, which states
that "a member shall adhere to the highest standards of accuracy and truth"
and "shall not knowingly disseminate false or misleading
information."
In the case of Hill and Knowlton, BCCI, and First
American, there is no evidence that Hill and Knowlton executives actually knew
that the specific information they were disseminating was false. But there were
obvious warning signs present from the beginning that served as cautions to
some Hill and Knowlton partners, who did not want the firm to keep the account
because of these warnings. These warnings initially consisted of a lengthy
number of press accounts detailing BCCI's past bad behavior; the various
filings made with regulators by various parties in connection with the FGB
litigation; the Operation C-Chase drug money laundering indictment in Tampa
itself. In December, 1988, they also included the Aziz Rehman deposition before
the Subcommittee; the information provided Hill and Knowlton executives who
refused to work on the account by Customs Commissioner Von Raab and others. By
1990, they included serious allegations being raised by the press in 1990.
Conclusion
Hill and Knowlton's representation of BCCI was not
an unusual event. Institutions charged with wrongdoing hire public relations
help all the time to ensure that their side of the story is told.
The result in the case of BCCI was that Hill and
Knowlton ended up providing information to the Congress and to the press and
public that was not merely misleading or distorted, but actually false. Hill
and Knowlton assisted in discrediting people who were providing accurate information
about the underlying situation, including a former BCCI officer, an
investigative journalist and his publisher. Given Hill and Knowlton's close
ties to both political parties, and its influence in Washington, this was
especially unfortunate. Hill and Knowlton did not violate any laws. It may not
have violated any of the standards of the public relations industry. But its
actions raise questions concerning an apparent conflict in this case between
the role played by Hill and Knowlton as BCCI's public relations firm, and the
public interest.
As former Commissioner Von Raab testified concerning
this issue:
So, it should not happen . . . [but] it happens all
the time. It should not happen and maybe the BCCI case will be the example that
will cause someone to change this influence peddling culture, to try to ask
some reasonable questions of the integrity of the people that they are going to
be representing.(32)
The public relations industry needs to consider
whether additional internal standards may be appropriate to discourage the kind
of representation provided BCCI by Hill and Knowlton. Such standards, could, at
a minimum, require firms to conduct due diligence before agreeing to represent
a client on any matter, backed up by the possibility of some form of sanction
for gross violations of the standard.
SENATOR
BROWN'S VIEW:
Clearly, Hill and Knowlton's
representation of BCCI during the Chairman's investigaiton increased the
pressure to cease the Subcommittee's efforts to make public the bank's nefarious
methods. As the report itself concedes, no laws were violated. No ethical
standards were breached. Neither my office nor my staff were approached or
lobbied by Hill and Knowlton on this subject, nor felt that Hill and Knowlton
went beyond their ethical mandate as they presented BCCI's "side of the
story" to the public. The experience of Senator Kerry and his staff was
quite different. Our comments in this section are especially critical of Hill
and Knowlton, and should be evaluated in light of these facts.
1.
See lengthy descriptions of Hill and Knowlton's political contacts in The
Power House, Robert Keith Gray and the Selling of Access and Influence in
Washington, Susan B. Trento, St. Martin's Press, 1992. The book also
contains interviews with former Hill and Knowlton executives concerning the
discussions within Hill and Knowlton about the BCCI account.
2.
Subcommittee documents on Hill and Knowlton stationery obtained from BCCI New
York and BCCI Miami; letters and memoranda from Frank Mankiewicz to Senator
Kerry on behalf of First American; See Hill and Knowlton's "BCCI Worldwide
Action Program" memorandum, October, 1988.
3. S.
Hrg. 102-350 PT. 1 p. 51.
4.
Hill and Knowlton press release to PR Newswire, August 1, 1991, "To
National and Business Editors."
5.
Documents on Hill and Knowlton stationery concerning representation of BCCI,
October-December, 1988; BCCI internal memoranda concerning Hill and Knowlton,
October, 1988-January, 1990; BCCI lawyers notes produced by Raymond Banoun to
Subcommittee on September 3, 1992 concerning Hill and Knowlton; correspondence,
Michael Pillsbury to Hill and Knowlton, January, 1990.
6.
See chapter on BCCI in The Power House, Trento, id.
7.
See letter and memorandum from Frank Mankiewicz to Senator John Kerry, May 6,
1991.
8.
Numerous press accounts chronicle Small's career. See e.g. UPI, October 15,
1985, Washington Post, November 5, 1985, and some 165 other citations in Nexis
database prior to 1991.
9.
Letter, Michael Pillsbury, on Senate stationery, to Karna Small, Hill and
Knowlton, January 11, 1990, regarding Hill and Knowlton's media strategy for
BCCI.
10.
Staff interview, Abdur Sakhia, October 7, 1991.
11.
Id. p. 52.
12.
Neither Frank Mankiewicz nor Robert Gray were among the team of Hill and
Knowlton professionals hired by BCCI in this period, nor do any documents in
the possession of the Subcommittee show them to have worked on BCCI matters at
all. Mankiewicz, however, along with others at Hill and Knowlton, did provide
assistance to First American on the charges that it was secretly owned by BCCI,
after the handling of the Hill and Knowlton retention by BCCI in the U.S. was
switched from BCCI-London to Clifford and Altman in the spring of 1989.
13.
Draft Appendix A to White Paper, October 27, 1988, Hill and Knowlton.
14.
Staff interviews, July, 1992, Amjad Awan and Akbar Bilgrami. BCCI Miami
documents provide ample evidence for the proposition that money laundering at
BCCI was systematic, as do the various indictments of BCCI by federal and local
U.S. law enforcement. See indictment, U.S. v. Awan, BCCI et al, Middle
District of Florida, 1988, 88-330-Cr.-T-13(B), "BCCI . . . would and did
formulate and implement a corporate strategy for increasing BCCI's deposits by
encouraging placements of funds from whatever sources, specifically including
"flight capital," "black market capital," and the proceeds
of drug sales, in conscious disregard of the currency regulations, tax laws and
anti-drug laws of the United States and of other nations. Paragraph 7.
15.
Staff interview, Bilgrami, July 20-29, 1992.
16.
Bilgrami, staff interviews, July 20-28, 1992.
17.
October 26, 1988, Hill and Knowlton, "Background: The Bank of Credit and
Commerce."
18.
Among the foreign countries which had cited BCCI for various infractions prior
to Hill and Knowlton's representation of BCCI were France, Kenya, Nigeria, and
Sudan, as reported in press accounts available to Hill and Knowlton on the
Lexis database. See Reuters, November 11, 1987. As BCCI officer Abdur Sakhia
testified before the Subcommittee, "BCCI officers were indicted and jailed
in other countries, like Sudan, Kenya, India, and in each case there was a
terror in the bank that, you know, this has happened, that has happened. And
somehow then some deal would be struck. People would be freed, BCCI would start
doing business all over again." S. Hrg. 102-350 Pt. 2.
19.
News Release, Hill and Knowlton, For: Bank of Credit and Commerce
International, December 22, 1988.
20.
Staff interviews, Amjad Awan and Akbar Bilgrami, July, 1992.
21.
Staff interviews, Akbar Bilgrami, July 20-28, 1992; see also staff interviews
with Nazir Chinoy, March 9, 1992.
22.
"FACT SHEET," Re: Regardie's Article, provided to Senator John Kerry
on April 30, 1990 by Hill and Knowlton.
23.
Id.
24. Id.
25.
Id.
26.
Id.
27.
Memorandum, From Frank Mankiewicz, Hill and Knowlton, May 6, 1991.
28.
Id.
29.
Board of Governors of the Federal Reserve, Summary of Charges, In the matter of
Clifford, July 29, 1992.
30. A
lengthy treatment of this question is contained in The Power House by Susan
Trento, id. The book describes meetings about BCCI by Hill and Knowlton
executives who wanted the firm to reject the account as a consequence of its
poor reputation, but were rebuffed by firm management.
31.
National Journal, August 17, 1991, "BCCI Passed PR Firm's Smell
Test."
32.
S. Hrg. 102-350 Pt. 1 p. 52.
Introduction
In the view of the Subcommittee, the real story of
Ed Rogers' involvement in the BCCI scandal has yet to be fully revealed.
Rogers, a former White House Political Director, left his position at the White
House in early August 1991 to start the political consulting firm of Rogers and
Barbour in Washington D.C. By the end of August Rogers, who had only briefly
practiced law, was offered a $600,000 contract with Kamal Adham.
Rogers was deposed by the Subcommittee in March
1992. His account of how he received the contract with Adham, who he consulted
before accepting Adham as a client, and his relationship to Adham after
withdrawing from the contract, are all called into question by his telephone
logs, documents provided to the Subcommittee and interviews conducted by the
Subcommittee.
Initial
Contacts
Rogers described to the Subcommittee the events
leading up to his representation of Kamal Adham. According to Rogers, in
mid-August after he left the White House, a friend of his, the General Manager
at the Grand Hotel, Samir Darwisch, called him to tell him that "his
friend Moussa Raphael was in town looking for lawyers and asked me if I would
please come by the hotel and meet him."(1) Rogers stated that
he knew Darwish from "being around the hotel and events at the
hotel."(2) Rogers said while at the White House he went to the
hotel "once every couple of weeks." He also explained that the
Hotel's owner, Joe Yazbek, had been to the White House, to discuss "events
in Lebanon" with then White House Chief of Staff, John Sununu. At some
point Rogers learned that Moussa Raphael was the lawyer for the Mr. Yazbek's
business interests.
Rogers says that when Darwish first called him he
did not mention the name Kamal Adham, but Rogers was nonetheless sufficiently
interested by Darwish's invitation that he met with Raphael that same night at
the Grand Hotel. According to Rogers, Raphael "provided a general overview
of what was doing here on behalf of the sheik, in order to organize the sheik's
legal affairs." The general overview included "the problems that were
relevant to the sheik, or First American, BCCI," and, testified Rogers, at
some point Raphael "must have" identified Plato Cacheris as the
criminal defense lawyer for Adham.(3) In his testimony Rogers did
not indicate whether Raphael discussed the Sheik's financial affairs in the
United States.
After meeting with Raphael, Rogers discussed the
possibility of representing Adham with his partner, former political director
of the Reagan White House, Haley Barbour. They decided, however, that before
accepting the account, Rogers should get more information on Adham.
Rogers has provided at least three different
accounts of whom he consulted before accepting the Adham account. In his letter
to White House Counsel Boyden Gray on October 28, Rogers stated, "Prior to
agreeing to represent Mr. Adham, I made inquiries about him among former
government officials and people in the private sector who have had dealings in
Saudi Arabia. Invariably those who knew or knew of Mr. Adham said he was a man
of stature and prestige in the region and that he had the respect of Americans
who had dealt with him in the past."(4)
On December 18, 1991, Rogers was contacted by
Subcommittee staff concerning prospective testimony to the Subcommittee. During
the conversation, Rogers indicated that he "checked out Adham with a guy
who does business in the Middle East, checked him out with a widely respected
former government official, and finally talked to two other former government
officials." Rogers claimed that each of these contacts urged him to take
the account, noting that with his experience he would not be getting offers
from non-controversial entities like "Quaker Oats."(5)
In his deposition with the Subcommittee, Rogers
indicated that he only contacted Sam Bamieh, a businessman and Sandra Charles,
a mid-level former NSC and Defense Department staffer. Rogers explained the
discrepancies in the following way: "Perhaps as I prepared that [his
letter to Boyden Gray] I used those two people as plural, but I don't have any
recollection of talking to other people."(6)
Sam
Bamieh
Although there is some difference of opinion between
Rogers and White House Counsel Boyden Gray as to exactly when in early August
Rogers left the White House, Rogers' office phone logs at Rogers and Barbour
indicate that on August 5th, he placed a phone call to Mr. Sam Bamieh at Intertrade
Group in San Mateo, California. According to Mr. Gray, Rogers officially left
the White House on August 6, the day after phone records show Rogers called
Bamieh.
Sam Bamieh is someone whom Rogers has indicated that
he spoke with concerning the advisability of taking on the Adham account.
Bamieh is a well know Palestinian-American businessman with strong ties to the
Republican party and to various individuals in the Middle East, including the
Saudi Royal family. According to press reports, in the late 1970's Bamieh
financed the trip of Ruth Carter Stapleton, President Carter's sister, to the
Middle East. During the 1980's Bamieh testified on several occasions before the
US Congress on issues related to the Middle East.(7)
According to Rogers he met Bamieh during the 1988
campaign because "he was a friend of Lee Atwater's who I worked for."(8)
Rogers told subcommittee staff that while he was at the White House he spoke on
the telephone to Bamieh on a regular basis, indicating "There was no
pattern to it, but monthly."(9)
However, shortly after he left the White House,
Rogers was in frequent contact in with Bamieh placing calls to him on August
5,13,14,15,16,26,28 and attending a party at his house in San Mateo, California
on August 27 which Bamieh hosted for Adnan Khashoggi.
Rogers could not explain his frequent contact with
Bamieh, other than to say that he and Bamieh were friends and "It would
not be unusual for him to call."(10) Rogers did not say why he
was calling Bamieh on such a regular basis. According to Bamieh, who was
interviewed on the telephone by staff on two separate occasions, he wanted
Rogers to come to work for him. But in his deposition, Rogers stated that he
could not recall discussing possible representation of Bamieh and said that
neither was he "soliciting business."
Rogers meeting with Khashoggi at a party hosted by
Bamieh is of particular interest to the Subcommittee because of Khashoggi's ties
in the Middle East, including reported business dealings with Adham, and his
role in BCCI. Khashoggi had accounts with BCCI in France and used those
accounts to move millions of dollars for financing US arms sales to Iran.
The Subcommittee learned of the Bamieh party for
Khashoggi from Bamieh: Mr Rogers did not offer this information at his
pre-deposition interview by Subcommittee staff. When asked under oath, Rogers
told the Subcommittee that at Bamieh's party he only engaged in "social
chit-chat" with Khashoggi and did not discuss Adham.(11) He
described his conversation as "just a few polite moments -- a couple of
minutes at the most."(12) Rogers testified that "there
were several other people" at the party.(13) In fact, besides
Rogers and his wife, Bamieh invited only a dozen people to meet Khashoggi.(14)
Bamieh also contradicted Rogers when he told Subcommittee staff that Rogers did
discuss Adham with Khashoggi. Moreover, Bamieh claims that when Rogers first
called him to discuss Adham, Bamieh told him that representing Adham
"would be a political mistake", but he promised to find out more
about the Sheik. When asked with whom he checked, Bamieh said "Khashoggi."(15)
Sandra
Charles
The other person with whom Rogers claims to have
discussed Kamal Adham was Sandra Charles, a former staffer on the National
Security Council who left the White House at approximately the same time Rogers
did in order to work for the International Planing and Analysis Center, a
consulting firm headed by Frank Carlucci, the former Deputy Director of the CIA
and Secretary of Defense. Like Bamieh, Charles had a background in the Middle
East.(16)
Charles checked her calendars and told the
Subcommittee that she first talked to Rogers on August 26 when he indicated
that he was being considered as one of a team of advisors to Sheik Kamal Adham.
She told Subcommittee staff that Rogers identified Adham to her as a
"former chief of Saudi intelligence."(17) (Rogers can not
remember from whom or when he learned that Adham was a former chief of Saudi
intelligence) Charles told Rogers that she didn't know much about Adham, but
that she would try to gather information and report back to him. According to
Charles, she then called "a Saudi diplomatic source at the embassy"
who confirmed that Adham was a former head of Saudi intelligence, that he was
related by marriage to the former king, and that he was a wealthy businessman. (18)
Her source also told her that Adham had a very close relationship to Sadat and
that he was man of great status in the Middle East.(19)
According to Rogers, he later asked Charles to set
up a meeting for him with Frank Carlucci to discuss whether or not Mr.
Carlucci's firm could act as "financial advisors" to Sheik Adham. The
meeting took place on October 7, 1991 and, according to Rogers, Carlucci told
him "[w]e don't manage finances. We don't manage people's money. We do
things on a deal-by-deal basis."(20) That, testified Rogers,
was the extent of the meeting.
Rogers'
Trips To the Middle East
Rogers did not ultimately decide to accept the Adham
account until he and Haley Barbour actually met with Adham. On August 31, the
two political operatives flew to Jeddah where, according to Rogers, they had
three days of meetings with the Sheik's legal and financial advisors. Although
he had dinner with Adham one evening, Rogers implied to the Subcommittee that
the trip was all work: he never discussed his friend Sam Bamieh or his acquaintance
Adnan Khashoggi with the Sheik. According to Rogers, near the end of their
three day stay, Adham made him an offer. In his deposition, Rogers explained
why he believes he was hired:
Mr. Pilcher. [Office of Senator Brown] When you go
to talk to somebody ....How do you sell yourself. What is it that you say about
your firm that is interesting?
Mr. Rogers. That we are two lawyers. I am of counsel
to a 120 person firm that provides a broad array of experience.
Mr. Pilcher. What do you consider your personal
specialty? When you say broad array of experience, what expertise in particular
o you have?
Mr. Rogers. Managing other people's affairs.
Managing other people's problems, managing other people's business.
Mr. Pilcher. My mother-in-law is like that, but what
do you mean exactly by it?
Mr. Rogers. When people present me with a problem, I
like to think that they can turn their back on it. They can tell me what the
problem is and they'll know that I'll know how to go about my business to
organize their affairs and do things on their behalf.
Mr. Pilcher. When this particular case was brought
to you, what specific problem did you see that you thought you might be able to
solve?
Mr. Rogers. An organizational problem. A large
business concern that needed a lot of different kinds of representation.
Mr. Pilcher. Meaning BCCI?
Mr. Rogers. Meaning Sheik Adham, not BCCI.
Rogers' counsel in the deposition explained to
Subcommittee staff that "[i]t's hard for him to say what he was doing
since it had a very short life."(21) Nevertheless, the
Subcommittee finds it odd that Mr. Rogers who represented Sheik Adham for over
two months and met with him and his advisors for several days at a time in the
Middle East, could be so vague about his duties.
After Rogers returned to the United States, he wrote
Sheik Adham thanking him for the opportunity to join his legal team. One week
later he received a $136,000 down payment on his $600,000 contract. And ten
days later he registered with the Justice Department as a foreign agent,
indicating that his work on behalf of Adham might "border on
political." In his deposition, Rogers acknowledged that his representation
of Sheik Adham related to "the Sheik's problems with the Feds."(22)
Moreover, Rogers provided the Subcommittee with copies of letters written by
Cacheris concerning the investigations being conducted by the US Federal
Reserve and the Manhattan District Attorney's Office.(23) Rogers
received these letters only days before flying to Cairo to meet with the Sheik.
These events appear to contradict other Rogers testimony that his agreement
with Sheik Adham specified that "matters regarding criminal investigations
didn't come to me for any type of management participation."(24)
Rogers had two more meetings with the Adham legal
and financial team. At the end of September he flew to Cairo, stopping over in
London at the Four Seasons --Inn on the Park, where BCCI regularly hosted
important clients. Rogers would not discuss with the Subcommittee the substance
of any of his meetings in Cairo with Adham or his "legal or financial
advisors" citing attorney-client privilege.
Rogers flew to Cairo with Plato Cacheris, the
prominent Washington criminal defense attorney for Sheik Adham. By this time,
of course, both the Justice Department and the Manhattan District Attorney had
communicated with Adham their concern over his involvement with BCCI,
particularly as it related to the Sheik's "holdings" in First
American Bank. With no background in business, in criminal law, or in any facet
of the law for that matter, the 33 year old Rogers must have accompanied
Cacheris for one reason only: his political skills and access.
Rogers returned to the Middle East one more time to
meet with the Sheik in mid-October in Jeddah. On this trip, Rogers met briefly
on two occasions with David Eisenberg of the Justice Department. According to
Rogers, "[h]e [Eisenberg] came into the room to meet with the Sheik. I
walked out and we shook hands."(25) Rogers testified that he
met Eisenberg the next morning in a "virtual identical encounter."(26)
Robert Mueller, the Assistant Attorney General, provided a similar account of
events several months earlier in testimony before the Subcommittee.(27)
Rogers
Resigns Account -- The White House Investigates
On October 23, the story of Rogers's representation
of Adham was reported in the press. Two days later, President Bush, in a press
conference, said that he didn't know what Ed Rogers "is selling," and
that "he didn't know anything about the man."(28) From the
President's comments it was unclear whether or not he was referring to Rogers
or Adham, but, in fact, he appears to know both men reasonably well. In his
deposition, Rogers testified that he sat in on meetings with the President
"on numerous occasions."(29) In an interview with the
Middle East News Network, Kamal Adham, who was head of Saudi intelligence
during the same years that President Bush headed the CIA, stated:
[t]here was a period of overlap, but whatever the
case it is not possible for a President to say that. The next day, nobody
mentioned the White House spokesman came out and said that the President knows
Mr. Adham and he did not like what was written in the papers..."(30)
Shortly thereafter Rogers reportedly resigned the
Adham account, writing to Boyden Gray:
I registered [with the Justice Department] out of an
abundance of caution. The ethics atmosphere at the Bush White House was to go
the extra mile to assure that no one could ever say any ethics requirement was
violated or avoided. I followed this philosophy and registered, as I did not
want anyone to say that I should have registered but did not do so.
Unfortunately, going beyond the requirements of the law has resulted in an
embarrassing spate of stories for my client, the Administration and me.(31)
Responding to Congressman's Charles Schumer's call
for an investigation of the matter, Counsel Gray purported to mount an inquiry.
However, Gray never met with Rogers. Instead, two of Grays's assistants, with
whom Rogers was "friendly" called him on the telephone two times each
to discuss the matter.(32) According to Rogers, the conversations
lasted ten to fifteen minutes each. On November 1, 1991, Gray wrote Congressman
Schumer that "Mr. Rogers was not responsible for and did not participate
in any matters concerning to BCCI at the White House."(33)
The question, however, is not only whether Rogers
had access to information on BCCI at the White House, but whether or not he
began the process of negotiating his contract with Adham while he was at the
White House. On this point, Rogers provided conflicting and confusing
testimony:
Mr. McKean. [staff of Senator John Kerry] He [Moussa
Raphael] was here in March. Did you meet with him then?
Mr. Rogers. Mr. Raphael?
Mr. McKean. Yes.
Mr. Rogers. Yes.
Mr. McKean. You met with in March of 1991?
Mr. Rogers. Oh,no, I'm sorry. I thought you meant --
this is March now.
Mr. McKean. Right.
Mr. Rogers. No, I thought you meant -- I have met
with him since this whole thing blew up.(34)
Later in the deposition Rogers also denied having
met with Raphael in March, 1992 and after the deposition his counsel wrote the
Subcommittee indicating that "Mr. Rogers did not meet with Mr. Raphael in
March 1991 or in March 1992."(35) Hotel records indicate that
Raphael stayed at the Grand Hotel in March 1991, but not in March 1992. It
seems plausible that Rogers could have met Raphael in March 1991: Rogers told
the Subcommittee that he gave his notice to the White House in January and
Adham needed help as the Federal Reserve Board had just issued a cease and
desist order to First American concerning its status vis a vis BCCI. The most
logical time for Adham to have sought political influence and access was March
1991.(36)
Continued
Contacts
Rogers ostensibly resigned the Adham account in
October, although he will not reveal whether or not he returned his retainer to
Sheik Adham. Rogers' counsel has told the Subcommittee that Rogers' fees are a
confidential matter.(37)
During the month of November 1991 Rogers continued
to work on the Adham account in so far as he provided assistance to other
lawyers for Adham who assumed his responsibilities. He also continued to meet
with Moussa Raphael. According to Rogers:
"I met with him to finalize and hand over
matters we were working on, specifically on the trust, then I met with him one
more time subsequently to that, just -- I dropped by the Grand Hotel to say
hello. He asked me to. He was worried about me."(38)
Subsequent to Rogers' deposition, his lawyer wrote
the Subcommittee that the last time his client met with Mr. Raphael was in
December 1991, or January of this year. However, as recently as April, the
Subcommittee has learned that Raphael was calling Rogers' office.(39)
Conclusion
Ed Rogers is not a major player in the BCCI scandal,
but his involvement with Sheik Adham is illustrative of how the bank tried to
buy influence in order to ameliorate its problems. Rogers is neither an experienced
businessman nor a prominent lawyer: rather, he is political operative who
achieved significant political influence and access by the age of 33, and who
sought to "cash in" on those political skills. The story he provided
to the Subcommittee of how he came to represent one the most important figures
in the BCCI scandal is shallow and unconvincing, but the greater failing and
more worrisome aspect in the Rogers affair may be that of the White House
inquiry. The columnist William Saffire predicted in November 1991 that the
Boyden Gray, charged by the President to investigate the Rogers affair, would
"pass along the denials and the White House whitewash will continue."(40)
There is nothing in the record that suggests Mr. Saffire's assessment was
inaccurate.
1. S.
Hrg. 102-350 Pt.4, p.935. Subcommittee staff met with Darwish and talked to him
on the telephone. His account of how Moussa Raphael met Rogers is essentiaally
the same as Rogers' account. According to Darwish, Raphael asked the hotel
executive if he knew any good lawyers," and Darwish recommended Rogers.
Despite the similarlity of accounts, the Subcommittee is skeptical of his
story: Rogers had virtually no legal experience and Moussa Raphael was well
acquainted with Adham's criminal lawyer, Plato Cacheris, who presumedly had
better contacts in Washington's legal establishment than the general manager of
the Grand Hotel.
2.
Rogers told the Subcommittee that there Republican political events at the
Grand Hotel.
Darwish
told the Subcommittee that he knew Senate Majority leader George Mitchell well
(Senator Mitchell is of Lebanese extraction), but that he did not know and, in
fact, had never even met Governor Sununu (also of Lebanese extraction).
3.
Id. p.935.
4.
Letter to C. Boyden Gray, Counsel to the President, from Ed Rogers, October 28,
1991.
5.
Memo to Files, From Jonathan M Winer, Conversation with Ed Rogers, December 18,
1991.
6. S.
Hrg. 102-350, pt. 5,p.944.
7.
According to press reports, in 1987, Bamieh told the House Foreign Affairs
Subcommittee on Africa the following:
-- In
November 1981, prince Fahd, who later became the king, told Bamieh that he was
pleased Congress had agreed to sell AWACS surveillance planes to the kingdom.
In exchange for AWACS, Fahd said, "We will help you guys fight
anti-communist movements," according to Bamieh.
--In
1983 [Prince] Bandar asked Bamieh if he would go into business with Richard V.
Secord and Albert Hakim to bid on a security project at a Saudi airport. Secord
and Hakim were key figures in the plan to channel money from the sale of US
weapons to Iran to the Contra rebels fighting Nicaragua's leftist government.
The business relationship was never cemented because the three never got the
contract.
-- In
1983, Saudi officials asked Bamieh to funnel money to Morocco for the training
of UNITA guerrillas. The Saudis said former CIA Director William Casey was
aware of the plan, Bamieh said.
-- In
February 1984, Bandar approached Bamieh in Cannes, France, asking him to set up
an offshore company that would supply goods and services to anti-communist
movements and oil to South Africa. Bandar aid he declined, even though Bandar
said, "Don't worry about the legalities" because Casey was discussing
the matter with King Fahd.
Another
newspaper article reported on Bamieh's statements about the Iran Contra affair:
An
American businessman with extensive ties to Saudi Arabia's royal family
contends King Fahd was the chief financier of Iran's secret US weapons
purchases in 1985 and 1986.
Sam
Bamieh, a naturalized American citizen, said in an interview with United Press
International Tuesday that Fahd was hoping to gain favor with Ayatollah
Ruhollah Khomeini to ward off possible threats to Saudi security.
Investigators
of the Iran-Contra scandal have concluded Iran paid about $30 million for the
arms, at prices double or triple the Pentagon's cost, and about $3.5 million of
the profits were diverted to the Nicaraguan Contra rebels.
The
reason they paid those high prices was because the money wasn't theirs,"
he said of the Iranians.
Bamieh,
of San Mateo, California, said he based his assertion that Fahd paid for the
arms on statements made to him by confidants of Fahd and international arms
dealer Adnan Khashoggi and on dealings and on dealings made in his presence by
Khashoggi.
Khashoggi,
a Saudi Arabian who investigators have found played a significant role in
financing the early US arms shipments to Iran, was serving as Fahd's emissary
in the deals, Bamieh said.
Finally,
Bamieh is quoted in the press on the CIA's involvement in an assassination
attempt of a high ranking Lebanese official:
Top
secret CIA reports in 1985, conflicting with author Bob Woodward's recent
assertions, said Syria masterminded an assassination attempt against a radical
Moslem leader without agency cooperation, U.S. intelligence officials say.
But
California businessman Sam Bamieh, who describes himself as a former close
friend of Saudi King Fahd, said he has evidence of reports of Syria's
involvement were part of a Saudi cover story and that Woodward's report in his
new book is largely correct.
Woodward,
an assistant managing editor at the Washington Post, described the unsuccessful
attempt to kill Hezbolah leader Sheik Fadahllah, whose organization bombed
several American facilities in Lebanon in his book, "Veil: The Secret Wars
of the CIA in 1981-1987."
8. S.
Hrg. 102-350, pt. 5. p.937.
9.
Id. p.938.
10.
Id. p.941.
11.
Id. p.939.
12.
Id. p.945.
13.
Id. p.939.
14.
Invitation list. 8/27/91. Provided by Sam Bamieh.
15.
telephone interview with Mr. Bamieh, 2/10/92. Bamieh also told staff that he
had met Adham on two occassions: once in 1975 for about ten minutes and then
again in December, 1991. According to Bamieh he was staying at the Hilton in
Cairo when Adham called and asked for a meeting. According to Bamieh, Adham
"wanted to get things off his chest."
16.
According to a recent article in the New York Times:
The
Bush Administration today confirmed reports that Saudi Arabia engaged in
unauthorized transfers of American made military equipment to Iraq, Syria and
Bangladesh.
Administration
officials said, however, that they had brought these unauthorized transfers to
the attention of both Saudi Arabia and the Congress, as required by law, and
had been told by the Saudis that the shipments were "inadvertent."
Sandra
Charles, the former director of Middle East and South Asia affairs at the
Defense Department in 1986, and she recalled that the Saudis had gone out of
their way to alert Washington about the inadvertent. Other officials, though,
say it was American military officials in Saudi Arabia who first detected the
transfer.
"It
was a small number," Miss Charles said. "It was not considered significant.
The bombs were in a warehouse with equipment for other countries."
She
said she not recall whether Washington pressed Riyadh to get the bombs back,
adding, "It just didn't seem very consequential at the time.
17.
telephone conversation with Sandra Charles, 2/10/92.
18.
Id.
19.
telephone conversation with Sandy Charles, 1/29/9.
20.
S. Hrg. 102-250, pt. 5. p.943.
21.
Id. p.950.
22.
Id. p.942. When asked if he was discussing his representation of Sheik Adham
with Mr. Bamieh, Rogers replied, "Never, I wouldn't have discussed any
matters relating to the Sheik's problems with the Feds."
23.
see letter to John Moscow, Deputy Chief Investigations, New York Country
District Attorney's Office, from Plato Cacheris, September 25, 1991 and letter
to J. Virgil Mattingly, General Counsel, Federal Reserve from Plato Cacheris,
September 26, 1991.
24.
S. Hrg. 102-250. pt. 5. p. 950.
25.
Id. p.943.
26.
Id.
27.
S. Hrg. 102-350. pt.3. p.800.
28.
Transcript, White House Press Conference, President Bush, 10/25/91.
29.
S. Hrg. 102-350. pt. 5. p.933.
30.
"A Victim of Operation Overkill by West, Says Adham." Middle East
News Network, 1/18/92.
31.
letter to C. Boyden Gray, Counsel to the President, from Ed Rogers, October 28,
1991.
32.
Id. p.946.
33.
letter to Congressman Charles Schumer from C. Boyden Gray, Counsel to the
President, November 1, 1991.
34.
Id. p. 941.
35.
Id. p.931.
36.
William Safire, columnist for the New York Times, speculated that the
relationship arose in another context:
This
same Sununu toady helped organize the meeting on May 23 that founded the Arab
American Council, an oil backed elite lobbying group scorns broader-based
Arab-American organizations. Mr. Sununu and the Syrian Ambassador were stars of
the gathering; out of Lebanese contacts made there or later, I presume, came
Mr. Roger's huge contact.
see
"BCCI and Sununu", by William Safire, The New York Times, November
28, 1991, p.25.
It is
worth noting that Sam Bamieh is a member of the Arab-American Council and that
Mr. Bamieh acknowledges contacts with Mr. Sununu when Sununu was Chief of Staff
at the White House and afterwards.
37.
staff conversation with Jonathan Schiller, 8/20/92.
38.
Id. p. 941.
39.
phone records of Moussa Raphael at The Grand Hotel, subpoenaed by the Subcommittee.
40.
Safire, p.25.
Introduction
Beginning in the fall of 1986, and continuing
through early 1989, BCCI initiated a series of contacts with perhaps the most
politically prominent international and business consulting firm in the United
States -- Kissinger Associates.
At the time, Kissinger Associates had five partners:
former Secretary of State Henry Kissinger, former Assistant and current
National Security Advisor Brent Scowcroft, former Under Secretary and current
Acting Secretary of State Lawrence Eagleburger, international economist Alan
Stoga, and investment bank T. Jefferson Cunningham III.
Ultimately both Stoga and a retired Brazilian
Ambassador working as a consultant to Kissinger Associates, Sergio Correa da
Costa, seriously explored finding ways to link BCCI's global network of banks
with the services being offered by Kissinger Associates. Discussions between
representatives of BCCI and representatives of Kissinger Associates took place
over an 18 month period concerning the possibility of merging the capabilities
of BCCI and Kissinger Associates on various, mostly unspecified, projects.
Following BCCI's indictment, discussions continued as to whether Kissinger
Associates could help BCCI respond to the ramifications of that indictment.
These discussions ended in early 1989 at Henry Kissinger's personal insistence.
During the discussions, Stoga provided advice to
BCCI on a possible public relations campaign. At their conclusion, Kissinger
Associates referred BCCI to one its own directors, former Assistant Secretary
of State William Rogers, and his firm, Arnold & Porter, who already
represented Kissinger Associates on its own legal work. Rogers and Arnold &
Porter in turn agreed to provide BCCI with legal services arising out of its
indictment, although few services were provided as a consequence of the
opposition of Clark Clifford and Robert Altman to the firm's involvement.
Although discussions concerning a broader
relationship were cut short by the indictment, the BCCI-Kissinger Associates
correspondence reveals much about BCCI's approach to seeking political
influence in the United States. The correspondence also highlights BCCI's focus
on doing business with, and ability, given its $23 billion in reported assets
and 73 countries of operation, to attract interest from, some of the most
politically well-connected people in the United States.
Genesis
of Interest in BCCI-Kissinger Relationship
And
Position Of Kissinger Associates Concerning BCCI
In late July, 1991, the Subcommittee received
documents from BCCI's liquidators describing BCCI's use of a retired Brazilian
Ambassador, Sergio da Costa, as a front-man for its purchase of a bank in
Brazil while da Costa was also working -- according to the BCCI documents -- as
a partner in Kissinger Associates.
In September, 1991, staff was advised by press that
there were a number of documents at BCCI's document depositories concerning its
relationship with Kissinger Associates. Staff were provided some of these
documents by reporters, and found others in subsequent reviews of BCCI
documents at its former offices in New York. These documents, on both Kissinger
Associates and BCCI stationery, discussed in general terms the services
Kissinger Associates might perform for BCCI, and were dated both before and
after BCCI's indictment on drug money laundering charges in Tampa. Accordingly,
they raised the question of whether Kissinger Associates had ever been retained
by BCCI.
In November, 1991, the Committee on Foreign
Relations authorized a subpoena for all documents to Kissinger Associates and
related entities, for all documents pertaining to BCCI, and for its client
lists.
In response, Kissinger Associates promised to
cooperate with the Subcommittee investigation and to provide all documents
pertaining to BCCI, under an agreement that the subpoena not be served.
Kissinger Associates refused, however, to provide the client list, arguing that
the list was beyond the parameters of the investigation into BCCI by the
Subcommittee, and advising the Subcommittee that if it pursued the list,
Kissinger Associates would litigate the matter, if necessary, through an
extensive appellate process to the Supreme Court.
In providing several dozen documents material to the
Subcommittee investigation on January 30, 1992, Kissinger Associates,
represented by its attorney, former Presidential counsel Lloyd Cutler, made the
following representations:
At the outset, it should be made clear that
Kissinger Associates, Kent Associates, and China Joint Ventures (collectively
referred to hereinafter as "Kissinger Associates") have never
represented or provided any services for BCCI, ICIC, or any BCCI shareholder.
Neither BCCI or ICIC nor any person known to be a BCCI shareholder has ever
been a client of Kissinger Associates.
The only substantive contact between Kissinger
Associates and BCCI occurred in late 1988-early 1989, when [BCCI officer] Abol
Helmy met several times with Alan Stoga of Kissinger Associates to discuss a
possible consulting arrangement for BCCI . . . In December, 1988, Mr. Stoga
advised Mr. Helmy that Kissinger Associates was not interested in a consulting
relationship with BCCI. At Mr. Helmy's request, Mr. Stoga met with Mr. Helmy
again in January, 1989, at which time in response to a further inquiry from Mr.
Helmy he again advised Mr. Helmy that Kissinger Associates did not want to
proceed with a relationship. In February 1989, in response to Mr. Helmy's
request for a recommendation for Washington-based legal counsel, Mr. Stoga
recommended Arnold & Porter. Mr. Stoga has had a number of other meetings
with Mr. Helmy since February, 1989, but these meetings have been of a purely
social nature.(1)
While this account of the relationship is not
untrue, it does fail to characterize the full extent of the contacts between
BCCI and Kissinger Associates and the series of meetings and contacts between
representatives of the two organizations. In fact, both Stoga, as a partner of
Kissinger Associates, as well as its consultant, da Costa, worked over an
extended period to bring the two organizations together, and such a
relationship could well have developed but for BCCI's drug money laundering indictment.
The following account, while not necessarily complete, is intended to provide a
fuller picture of the contacts between BCCI and Kissinger Associates, of BCCI's
goals and intentions in soliciting the relationship with Kissinger Associates,
and of the assistance, albeit limited, provided to BCCI by Kissinger Associates
in BCCI's time of trouble.
Background:
BCCI and Ambassador Sergio da Costa
In the fall of 1986, Sergio da Costa, the most
senior member of the Brazilian diplomatic corps and a close associate of then
Brazilian president Jose Sarney, decided to retire at the age of 67 after four
decades of serving Brazil as its Ambassador to such significant postings as
England, Canada, the United Nations, and the United States. Da Costa was
anxious to enter the private sector, and ultimately accepted offers from three
organizations. Da Costa would move to Paris and set up an office there as a
consultant to an international law firm, Coudert Brothers. He would
simultaneously also work for BCCI, on a monthly retainer. And he would become a
consultant to Kissinger Associates, for a third monthly retainer.
At the time, BCCI already knew Ambassador da Costa
well. Months earlier, he had provided BCCI with advice on selecting possible
front-men for BCCI's intended acquisition of a bank in Brazil. Under Brazilian
law, foreign banks were not permitted to own a majority interest in any
Brazilian bank. Accordingly, BCCI had decided to buy a Brazilian bank, purchase
a minority interest in the bank openly, and hold additional shares to guarantee
BCCI's control of the bank through cooperating Brazilian nominees, in what was
essentially a conspiracy to circumvent Brazilian banking laws.
Da Costa was extremely politically well-connected in
Brazil. He had been brought to BCCI by BCCI shareholder and front-man Ghaith
Pharaon, who in late April, 1986 had met with Da Costa in Miami to seek Da
Costa's help in responding to the problems posed for BCCI in circumventing the
Brazilian bank laws. A telex from Miami branch manager Abdur Sakhia to
BCCI-London on May 6, 1986 described the meeting having ended positively for
BCCI:
Ambassador Da Costa has promised Dr. Pharaon to
assist the Bank in any way he can and he also had asked Mr. Ferreira [a
prominent Brazilian businessman close to President Sarney] to use his
association with the President of the Republic to assist BCC.(2)
By September of 1986, da Costa had agreed to himself
become a front-man for BCCI in Brazil. In return, BCCI agreed to pay him
$150,000 a year, with no further responsibilities beyond being a front-man and
using his influence to help BCCI with Brazilian authorities in Brasilia, the
capital city.
Under the terms of the arrangement, da Costa agreed
to be a director and shareholder, secretly acting as BCCI's nominee, of the
bank BCCI was purchasing in Brazil, in a transaction structured by BCCI officer
Abol Helmy, who later himself had a series of contacts with Kissinger Associates.
Helmy drafted a memorandum, "Strictly Private
and Confidential," regarding "Brazil," on September 2, 1986,
under which da Costa and a second prominent Brazilian would each own 50 percent
of a Brazilian company that would buy 12,622,500 voting ordinary shares in BCCI
Brazil, pledge those shares to BCCI, give BCCI the right to vote its shares,
and give BCCI the right to buy those shares. Da Costa would agree to serve on
the three man board of directors as BCCI's front-man, to guarantee BCCI control
of the bank. He would 'pay' $1,233,580 for his 'share' of BCCI Brazil's stock,
and BCCI would reimburse him that amount in New York. The internal BCCI
memorandum drafted by Helmy makes explicit the fact that these arrangements
were designed to deceive Brazilian authorities:
It must be emphasized that the Brazilian
economy and bureaucracy are highly sophisticated. As such any payments
made by Brazilians must have the appropriate ORIGINATION OF FUNDS. That
is, the Brazilian 'investors' must have the necessary net worth for
Brazilian taxation authorities' purposes to support any investments made. . .
Messrs. Da Costa and Leoni to ensure that the
transaction is fully acceptable to the Central Bank and to ensure that there
are no adverse public consequences will be purchasing their shares in cash. . .
Both Ambassador Da Costa and Mr. Leoni are reluctant
to take loans from any bank to finance the transaction for Central Bank and
public image purposes . . . I have negotiated, subject to BCC management
approval, an interest free loan to the individuals concerned . . . to enable
them to complete the transaction.(3) (emphasis in original)
The memorandum demonstrated that BCCI would provide
da Costa with $2,467,160 for the purchase of his stock in BCCI Brazil, every
penny the stock would cost. In a staff interview, Helmy acknowledged that da
Costa was not at risk and that the transaction was a standard nominee
arrangement by which BCCI circumvented local laws and that this approached had
been used a numerous of times previously by BCCI. Helmy also said it was BCCI's
understanding that da Costa would take care of arrangements with Brazil's
central bank and other Brazilian officials to make sure that they acquiesced in
the transaction as structured.(4) Thus, in essence, Helmy at BCCI
and da Costa, while still Brazil's Ambassador to the United States, had with
other BCCI officials and other prominent Brazilians, created a plan by which
they would together make possible BCCI's purchase of a bank in Brazil to
circumvent Brazilian law.
BCCI officials were ecstatic at da Costa's
participation in their plan for Brazil, and his agreement to be a Senior
Advisor to BCCI. On October 28, 1986, while da Costa was still Brazil's
Ambassador to the United States, the head of BCCI's Miami office, S. M. Shafi,
sent him a congratulatory telex at the Embassy:
congratulations from myself and my colleagues on
your joing [sic] our Brazilian project. We welcome you to the fold BCC family.
I am very certain your experience, qualifications and contacts not only in
Brazil but also internationally will go a long way in turning our subsidiary in
Brazil into one of the most successful units of BCCI.(5)
Da Costa signed a three-year consultancy agreement
with BCCI on November 3, 1986, under which he committed to acting as
"Director of [BCCI's] investment bank in Brazil," and a front-man for
BCCI there.(6) Da Costa then followed through in participating in
the plan developed by Helmy under which BCCI would secretly purchase a majority
interest in BCCI Brazil through nominees. He received his 'loans,' from BCCI,
and purchased his 'stock' in the Brazilian bank. BCCI duly reported its loans
to him on its books in Panama, characterized as "International
Loans," as if they were normal loans that BCCI anticipated would be
repaid. By April 30, 1988, da Costa's 'loans,' from BCCI amounted to
$1,563,723.85. In fact, da Costa did not pay interest or principal on the
loans, which were shams to mask BCCI's ownership of the 'da Costa' shares of
the bank.
Among themselves, BCCI officials were also pleased
about another aspect of being connected to da Costa. As he entered his
agreement with BCCI to circumvent Brazilian banking laws, he had told them that
he was also joining Kissinger Associates. A BCCI telex that circulated in New
York and London in early December, 1986 described da Costa's principal work to
now be as a partner in Kissinger Associates, with BCCI understanding the
Coudert Brothers work, by comparison, as merely a consultancy.
Da
Costa and Kissinger Associates
In September, 1986, while da Costa was negotiating
the terms of his consultancy with BCCI, he also reached out to determine if he
could reach a similar relationship with Henry Kissinger. In early September, he
sent Kissinger a copy of a biography he had written, "Every Inch a
King," concerning Brazilian emperor Dom Pedro I.
In November, 1986, da Costa and Kissinger concluded
their discussions concerning the services da Costa would provide Kissinger
Associates. Letters between da Costa and Kissinger, dated November 3, 1986, set
forth the terms of their agreement, under which da Costa would be paid $40,000
a year as a consultant to Kissinger Associates, plus a 10 percent to 20 percent
fee for putting together transactions for Kissinger Associates. The letters
show that Kissinger sought an agreement from da Costa that he would work only
for Kissinger Associates and for Coudert Brothers, and that da Costa told
Kissinger in return that he would also be working for BCCI, as he and Kissinger
had previously discussed. As da Costa wrote Kissinger:
From our brief conversation, I gathered that you had
in mind, basically, the Brazilian "market", i.e. you would expect me
to channel through Kissinger Associates whatever Brazil-related project is
secured by me. . . What concerns me is the case of companies that have already
indicated their firm intention of retaining my services as consultant under a
permanent retainer agreement soon after November 1st . . . There is
particularly the case of B.C.C.I., mentioned to you when we first discussed our
association. They not only wish to retain me as a permanent consultant, but
insist that I become member of the Board and shareholder of their Brazilian operation,
obviously seeking to benefit from my standing in the country. . . In short,
since we are both acting in good faith and are reasonable men, I cannot even
visualize a possibility of discomfort in our business relationship. I am
convinced that a simple reflection in a side letter like this would be far
better than any attempt at spelling out a paragraph on the exact meaning of
"exclusivity."(7)
Kissinger accepted da Costa's simultaneous
involvement in acting as a consultant to Kissinger Associates and BCCI, and da
Costa signed up for a two-year commitment.
On December 8, 1986, da Costa received the first of
a series of payments of $12,500 a month from BCCI Grand Caymans to his account
at BCCI's agency in New York for his consultancy to BCCI. In the same period,
he received the first of a series of payments from Kissinger Associates of
$10,000 a quarter.
Beginning in early 1987, da Costa began to act as a
business agent for Kissinger Associates in Brazil on projects involving
purchases of companies, plants, or assets in Brazil by foreign companies.
During 1987, he made several trips to Brazil on behalf of Kissinger Associates,
and attended in the summer of 1987 what he described in a letter to Kissinger
Associates as "that amusing luncheon with the BNL crowd," referring
to a meeting with people involved in the Banco Nationale del Lavaro, an Italian
bank from whom Kissinger was a consultant, and which has recently been under investigation
by the House Committee on Banking, Finance and Urban Affairs for its role in
the illegal arming of Iraq using U.S. commodity credits.(8)
Da
Costa, Kissinger and Ghaith Pharaon
On September 20, 1987, da Costa wrote Kissinger to
invite him to a party hosted by BCCI front-man Ghaith Pharaon, suggesting that
Kissinger might want to obtain Pharaon as a client for Kissinger Associates:
I was asked to convey an invitation of Dr. Gaith
Pharaon to a dinner at his plantation at Richmond Hill, Georgia, Saturday
October 31st.
Although with residences in Paris and in Saudi
Arabia, his real "home" seems to be the River Oaks Plantation, which
once belonged to Henry Ford. His main local asset was the National Bank of
Georgia, which he recently agreed to sell to First American Bankshare Inc of
Washington DC for some $230 million. I believe that the latter bank is owned by
the main shareholders of BCCI, of which Pharaon was or still is a shareholder .
. .
As [Pharaon] admires you intensely and has a wide
range of business interests in the US, I have thought of him for some time as a
potential client. Hence my acquiescence to forward the invitation.(9)
In October, 1987, while da Costa was seeking to put
together an acquisition of a plant in Brazil involving the New York firm of
Kohlberg Kravis Roberts & Co., ("KKR") on behalf of Kissinger
Associates, he wrote Lawrence Eagleburger and Alan Stoga, again referencing his
invitation to Kissinger to attend the Pharaon dinner with da Costa.(10)
However, Kissinger declined the invitation.
Da
Costa Introduces BCCI to Kissinger Associates
On May 28, 1987, da Costa decided to introduce BCCI
acquisitions officer Abol Helmy, who had crafted BCCI's purchase of the bank in
Brazil, and da Costa's participation as a BCCI front man, to Kissinger
Associates partner Alan Stoga. A chronology provided the Subcommittee by
Kissinger Associates' attorneys, and apparently prepared by Stoga in November,
1991, describes the meeting as follows:
Da Costa introduces Abol Helmy to Stoga without any
specific purpose. Helmy is described as responsible for BCCI's acquisitions in
Latin America.(11)
According to the Stoga chronology, on June 10, 1987,
Stoga met Helmy again to discuss the possibility of a relationship between
Kissinger Associates and BCCI. According to the Stoga chronology, no specifics
of the relationship were discussed.(12)
On August 26, 1987, Pakistan's former Ambassador to
the United States, Sultan M. Khan, who now worked at BCCI's representative
office in Washington, D.C., wrote Kissinger, on BCCI stationery, to invite
Kissinger to attend a dinner he and BCCI were hosting, honoring the leader of
the Chinese delegation to the annual International Monetary Fund dinner.
Although Khan had worked closely with Kissinger when he was U.S. Secretary of
State and Khan was Pakistan's foreign minister, Kissinger declined the invitation.(13)
The Stoga chronology shows no further meetings
between Stoga and Helmy until September, 1988. However, Helmy told Subcommittee
staff that he had a series of meetings in this period with Stoga regarding
possible links between BCCI and Kissinger Associates. Moreover, a November 2,
1988 letter on Kissinger Associates letterhead from Stoga to da Costa states,
"I have been in regular contact with Abol Helmy for more than two years
and, during that time, we have discussed the possibility of a consulting
relationship [by Kissinger Associates for BCCI] several times."(14)
Helmy
and Stoga's Attempts to Develop
Business
Between Kissinger Associates and BCCI
Helmy viewed his meetings with Stoga as a means to
engage in business development for BCCI, and believed that Stoga also believed
that it could be to both of their benefits within their respective
organizations to provide one another with business.(15)
This process moved forward slowly, and it was not
until October 7, 1988 that Stoga sent Helmy and BCCI written material from
Kissinger Associates describing the nature of their business and the possible
benefits to both organizations of a relationship. As Stoga wrote Helmy:
I enjoyed lunch yesterday and, even more, your
suggestion that BCCI might be interested in developing a relationship with
Kissinger Associates.
As you suggested, I am enclosing a brief explanation
of our firm and biographical sketches of our principals. I am not sure the
former really does us justice, but I am reluctant to be more specific, at least
on paper, about the kinds of consulting projects we undertake for clients. . .
I agree that a next step should be for me to meet
your [BCCI's] management in London or in New York.(16)
The materials enclosed by Helmy, and retrieved later
by Subcommittee staff at BCCI's offices in New York, consisted of a six
paragraph summary of Kissinger Associates approach to its business, and a two
page biographical summary of its partners' credentials. According to the
summary:
Kissinger Associates' purpose is to utilize the
diverse backgrounds, experiences, contacts, and relationships of its senior
personnel to assist client companies in sorting through and coming to terms with
the increasingly complicated international environment. . . The firm does not
provide detailed written materials to clients, in large part to assure the
confidentiality and the frankness of communications.(17) (emphasis
in original)
Less than one week later, BCCI was indicted in
Tampa, prompting an immediate memorandum from Helmy to Swaleh Naqvi, then
BCCI's chief:
Further to our recent conversation in London, I met
with Mr. Alan Stoga who is one of the 3 partners of Kissinger Associates, Inc.
Subsequently, the developments in the United States took place. Judging by the
high level of adverse publicity that is being generated by the media, it is
imperative that a firm response be made.
I received a call today from Mr. Stoga who informed
me that Dr. Kissinger recommends that a public relations offensive be made by
us and in that context has suggested using Burson-Marstellar, a highly
reputable public relations firm that successfully dealt with 1st Chicago crises
last year. Kissinger Associates, Inc. have indicated that they shall be happy
to use their personal contacts with the firm and make the necessary
recommendations. I shall, of course, not proceed in any way without explicit
instructions from you.(18)
The next day, Helmy sent another memorandum to
Naqvi, enclosing the materials he had received from Stoga concerning Kissinger
Associates and advising Naqvi that he would meet with Stoga on October 14.
Helmy and Naqvi then discussed the overture to Kissinger Associates by
telephone, evidently to discuss the qualms that Kissinger Associates might have
to working with BCCI now that it had been indicted. Following Helmy and Stoga's
next meeting, Helmy reported back to BCCI London as follows:
I just met with Mr. Alan Stoga, Dr. Kissinger's
partner, and discussed the relevant matters as per our phone conversation of
yesterday.
I emphasized to Mr. Stoga that our conversations in
getting our two respective organizations together have been going on for over a
year and hence, have not been generated as result of the present circumstances.
I feel that a relationship could be established in
the near future depending on how fast the present publicity ends.
I shall keep you duly informed of my next meeting
with Dr. Kissinger himself which should be sometime next week.(19)
The correspondence makes clear Helmy's desire to
secure this important relationship for BCCI as a means of helping BCCI reduce
its current problems in the United States, and as a means for Helmy himself to
increase his power within the BCCI organization.
While Helmy pursued the relationship from his office
at BCCI New York, da Costa in the meantime also tried to push a relationship
forward. Kissinger Associates had decided to end his consultancy in September
as a consequence of his not having developed enough business in Brazil to
justify his $40,000 a year stipend, and sent da Costa a letter to that effect
which he evidently did not receive. In the meantime, Helmy had contacted da
Costa to seek da Costa's assistance in reassuring Kissinger Associates that
BCCI was truly an ethical institution.
On October 25, 1988, da Costa wrote Eagleburger and
Stoga to remind them that the discussions to link the two organizations went
back many months and were not prompted by the indictments:
On two or three different occasions last year and
early this year, I suggested to BCCI to seek the assistance of K.A. [Kissinger
Associates] to obtain their assessments worldwide and particularly regarding
the Untied States. The suggestion was well received and matter virtually
cleared six months ago. However, the situation created by the serious heart
condition which stroke [sic] BCCI's president and founding father delayed the
implementation until September 29th when I was asked to a meeting in London.
During the meeting, a few questions were put to me
as to the type of work that KA did normally for their clients and the Deputy
Chairman [Naqvi] indicated that instructions would be promptly sent to Mr. Abol
Helmy in new York to approach KA and negotiate a contract.
That was Thursday September 29th. Thirteen days
later, October 12th., the blow of the accusation for money-laundering, of which
the bank expects to be entirely cleared, having offered the fullest cooperation
with the investigators.
Mr. Abol Helmy has already contacted Alan Stoga last
week and asked me to refer to the early conversations held at the bank about my
recommendation, not to appear that he is seeking support in a moment of
distress. . .
Perhaps you could start talking to Mr. Helmy in the
clear understanding that a contract would be signed only after you had
the opportunity to ascertain - to your satisfaction - that the procedures
adopted by the bank to defend itself from the allegations are adequate enough.(20)
In response, Stoga wrote da Costa November 2, 1988.
The letter from Stoga to da Costa was not to advise him
that Kissinger Associates was sufficiently concerned about BCCI's drug money
laundering indictments to preclude a relationship. The letter instead politely
advised da Costa that as far as Stoga was concerned, the prospective
relationship was Stoga's, not da Costa's, and that da Costa was not welcome to
participate in further discussions between BCCI and Kissinger Associates. As
Stoga wrote da Costa:
Thank you for your fax regarding BCC. After your
kind introduction, I have been in regular contact with Abol Helmy for more than
two years and, during that time, we have discussed the possibility of a
consulting relationship several times. Abol raised this issue again in
September saying that he was urging Mr. Naqvi to consider hiring us. Helmy did
not mention your involvement during any of these discussions and said he, too,
was surprised by your fax.
I am not sure how we will proceed with respect to
BCC, but I will remain directly in contact with Abol.(21)
Da Costa acknowledged Stoga's position and had no
further involvement with Kissinger Associates until December, when he wrote to
remind the firm that he had not received his quarterly stipend, and was told
that his consultancy was at an end, other than on a case-by-case basis should
da Costa generate transactions for Kissinger Associates. Da Costa replied with
a fax transmission to Kissinger, thanking him for being welcomed to Kissinger
Associates "at that precise moment when I was leaving a life-long
protected life to explore on my own the other side of the fence," and promising
to do his best to generate more business in Brazil on a case-by-case basis in
the future.(22)
Kissinger
Associates Says No to BCCI, Provides Legal Referral
Kissinger Associates determined to take its time in
considering the risks and benefits of any relationship with BCCI, with
Kissinger himself apparently taking the view throughout that the relationship
was not worth having, while Stoga sought to continue to explore it.
The chronology provided the Subcommittee by
Kissinger Associates states that Stoga telephoned Helmy in December to advise
him that Kissinger Associates would not be interested in any relationship with
BCCI, but that Helmy requested another meeting with Stoga "after holidays
to discuss."(23)
BCCI files tell a different story. According to a
December 19, 1988 memorandum from Helmy to Naqvi, he continued to be in
communication with Stoga about the proposed relationship, and continued to
anticipate that they would work something out despite the drug money laundering
indictment:
I am in communication with Mr. Alan Stoga, Partner
of Kissinger Associates, Inc. Their response was they are interested in
principal but would like to wait a bit longer. I will be meeting Mr. Stoga in
the first week of January, 1989 and will be discussing the issue further. It
would be of interest for you to know that Mr. Scowcroft is now the National Security
Advisor Designate in the Bush Administration and another Partner of Kissinger
Associates is being tapped for Assistant Secretary of State in the Bush
Administration. I shall keep you informed of my next meeting. You may agree
that this association with Kissinger Associates, Inc. needs time to be
cultivated. I am working in that direction.(24)
Evidence of what Helmy was referring to is a
proposal which Kissinger Associates found in its files from Helmy to Stoga,
dated January 9, 1989.
The proposal refers to a California bank known by
Stoga to be available for a price of $76 million, a price which he estimated
was less than 10 times the bank's expected earnings. The bank was for sale, and
if Kissinger Associates could find a buyer, there was an opportunity for
everyone to make money. Helmy provided Stoga with a 17 page outline for the
proposal transaction, and asked him to consider it.
The proposal revealed that the bank involved was the
Independence Bank of Encino, held by BCCI shareholder and front-man Ghaith
Pharaon.
There is no record that Helmy advised Stoga or
Kissinger Associates of what he also knew about Independence Bank -- that the
bank was secretly owned by BCCI, in arrangements similar to the nominee
arrangements Helmy had personally crafted for da Costa in Brazil. Helmy himself
may not have known Independence Bank's other secret -- that at the time, it was
already in the deep financial trouble that three years later lead to a $150
million bailout of Independence Bank, with funds lent by the U.S. Treasury, of
the Bank Insurance Fund.
At about this time, in January, 1989, according to
the Stoga chronology, Stoga again met with Helmy to repeat that Kissinger Associates
would not proceed with a relationship with BCCI. The Stoga chronology states
that Helmy said he understood that the time was not right and he hoped if
circumstances changed, the firm would reconsider.
The Stoga chronology is again contradicted by BCCI
files. A memorandum written January 11, 1989 from Helmy to Naqvi, found in
BCCI's Kissinger Associate files in New York, presents an entirely different
picture of the relationship at this stage:
I had a lunch meeting with the gentleman in January
5, 1989 and a follow up telephone conversation on January 10, 1989. It was
established that it is in our interest for both parties to continue with the
conversations. As such, the door for an eventual relationship remains open.
They were far more knowledgeable of the details of
our situation during this meeting and made certain "unofficial"
general recommendations which I shall convey to you at our next meeting. I am
meeting my contacts senior partner by the end of January with a view of
discussing our overall worldwide activities.(25)
In staff interviews, Helmy later confirmed that the
memorandum referred to Stoga and to the "senior partner" to an
intended meeting with Kissinger.
There are four possible explanations of the
difference between Helmy's understanding and the Kissinger Associates
chronology.
First, Helmy could have been wilfully misleading his
superiors at BCCI about the relationship, although it is hard to understand why
he would do this, persistently, for months, unless he had in fact received some
encouragement from Stoga. Moreover, Stoga had in fact continued to meet month
after month with Helmy.
Second, Helmy could have misunderstood what Stoga
was telling him. Again, this would fail to explain why Stoga continued meeting
with him to discuss these matters.
Third, Stoga could himself have been trying to keep
the door open, despite instructions from Kissinger to the contrary. There is
some evidence for this from the various memoranda, including Stoga's later
representations as to what happened. It would be plausible that Stoga as the
most junior member of the partnership would at the time have had a greater need
than Kissinger himself to take advantage of BCCI's 73 nation financial network
and reported $23 billion in assets to generate new business,
Finally, Kissinger Associates as an organization
might at the time have been seeking to keep its options open concerning a
possible relationship with BCCI, and rewritten history once BCCI had become
notorious. The documents provided do not either preclude such a possibility, or
prove it.
It is impossible to make a definitive judgment on
this issue because of the remarkable absence of any contemporaneous documents
concerning Kissinger Associates' rejection of the relationship with BCCI, at
least among the documents provided the Subcommittee by Kissinger Associates.
While Kissinger Associates did provide the Subcommittee with Stoga's November,
1991 reconstruction of what took place, for better or worse, the only
contemporaneous documents available to the Subcommittee concerning this issue
were those created by Helmy while he was at BCCI.
However, there is no evidence from any source that
Helmy ever met with Kissinger, as Helmy had implied he would do in two of his
memoranda to Naqvi. Moreover, there is no evidence that Stoga took any action
to follow up on Helmy's business suggestions.
It is not contested, however, that Kissinger
Associates did make "certain 'unofficial' general recommendations" to
BCCI, just as Helmy's January 11, 1989 memorandum stated.
The Stoga chronology shows that Stoga did stay in
contact with Helmy through January, 1989. The chronology states that Helmy
asked to meet with Stoga, and did so on January 25, 1989, when Helmy told Stoga
that he was now in charge of the Tampa legal case, and would appreciate Stoga
recommending new lawyers for BCCI in Washington.
As Helmy later explained, he, among others at BCCI,
felt that Clark Clifford and Robert Altman had their own agenda and own
problems, and were not ideally situated to manage the overall handling of the
Tampa case. He had received authority to try to go around Clifford and Altman,
and was using the best contacts he had to develop an alternative.(26)
According to the Stoga chronology, Stoga reported
the request for assistance to Kissinger, and after consulting with Kissinger,
told Helmy he could recommend William Rogers and a team of lawyers at Arnold
and Porter, which Kissinger Associates had long used to handle legal matters
pertaining to the firm and its principals. According to the Stoga chronology,
this was "without reference to HAK," that is, Henry Kissinger. At the
time, Rogers was also on the Board of Directors of Kissinger Associates.(27)
Referral
to William Rogers and Arnold and Porter
BCCI's records in New York first alerted the
Subcommittee to the possibility that BCCI had been represented by Arnold &
Porter and former Assistant Secretary of State William D. Rogers. An undated
document maintained in the Kissinger Associates file at BCCI listed as BCCI's
team of representatives:
FIRM: ARNOLD & PORTER
1. Mr. William D. Rogers
(Formerly Assistant Secretary of State)
2. Mr. Jerry Hawke
(Formerly General Counsel Federal Reserve Board)
3. Mr. Irv Nathan
(Formerly Deputy Attorney General of the US)
FIRM: Kissinger Associates
1. Dr. Henry Kissinger
2. General Scowcroft
(Presently: National Security Counsel Chief)
3. Mr Eagleburger
(Presently: Assistant Secretary of State (Designate)
4. Mr. Alan Stoga(28)
The listing of the present and former government
titles of the "team" BCCI was seeking to assemble gives a clue as to
BCCI's intentions. Consistent with BCCI's historic approach to responding to
its problems, it was seeking to retain people as close to the heart of the U.S.
government as it could find to fix its problems, and in its view, this
appropriately included people who worked for the Justice Department, State
Department, and Federal Reserve.
In fact, while Kissinger Associates did not perform
any services for BCCI apart from its referral of Arnold & Porter, Arnold
& Porter did agree to represent BCCI, although that representation never
developed into any substantial activity on the part of the firm. According to
BCCI officers Abol Helmy and Abdur Sakhia, the principal reason the
representation did not ultimately take hold was that Clifford and Altman did
not want BCCI to develop any independent representation in Washington, and
squelched the Arnold & Porter representation. As Sakhia recollected, in the
period after BCCI's indictment:
We had a longish meeting about Kissinger
representing us. I came in late in the meeting, and the upshot of it was they
referred him to William Rogers. Then Rogers met with Naqvi and Abedi, but Clifford
did not want Rogers involved.(29)
As Rogers described the representation:
Our relationship with BCCI consisted of about 10
meetings and telephone calls with BCCI people, one meeting with Messrs.
Clifford and Altman and related office work. The purpose of the discussions was
to explore legal services that Arnold & Porter might render BCCI. We geared
up to provide services with background reading and the like. But we did not
communicate on behalf of BCCI with any public official in connection with any
BCCI matter, either orally or in writing. We made no appearances on behalf of
BCCI in any judicial proceedings or in any administrative matter. We did not
lobby on behalf of BCCI. And we did not communicate with any Senator,
Representative or Hill staff.(30)
In all, four Arnold & Porter partners worked on
BCCI matters between June 12, 1989, the date Arnold & Porter agreed to
"provide legal advice from time to time to BCCI and its affiliates as and
when requested to do so by BCCI," and January, 1990, including the three
referred to in the BCCI memorandum concerning Arnold & Porter and Kissinger
Associates. The firm did about $16,000 in legal work for BCCI in all, a
fraction compared with the $20 million BCCI paid the various attorneys whose
services were managed on BCCI's behalf by Clifford and Altman.(31)
Further
Contacts Between Stoga and Helmy
During the spring of 1989, Abol Helmy, frustrated in
his attempts to wrest control of BCCI's legal strategy in the U.S. from
Clifford and Altman, and BCCI's unwillingness to take advantage of the Arnold
& Porter representation he had arranged, decided to leave BCCI and form his
own company, Equicap.
During this period, Helmy had several meetings with
Stoga which the Kissinger Associates chronology characterized as "social."
Helmy also provided Stoga with copies of detailed proposals he was working on
for a Brazilian investment fund, which appears to be a suggestion to Stoga that
Stoga help him solicit possible investors for the fund.
Response
to Press and Congressional Inquiries
In November 1991, after BCCI's global closure,
Kissinger Associates began to receive queries from the press concerning its
contacts with BCCI. In response to those queries, Kissinger asked Stoga to
reconstruct his contacts with BCCI. Stoga reviewed the documents concerning
BCCI contained at Kissinger Associates files that were later provided the
Subcommittee, and prepared a memorandum to Kissinger on November 11, 1991 that
described the contacts as follows:
The most titillating passage in Helmy's memos claim
I passed along a recommendation from you about a public relations offensive
involving Burson Marstellar which we would help facilitate. Another memo
implies that he met you. And another says that we had been discussing a client
relationship for over a year.
To the best of my collection, I did not talk to
Helmy about Burson (which had not been a client for almost two years at that
point), in particular, or about public relations in general. The only
"advice" I do recall giving is telling him in an aside that, based on
what I read in the papers, BCCI would be lucky to survive as a bank in the U.S.
unless there was a thorough house cleaning. And, of course, when Helmy in
February, 1989, asked for the name of a good lawyer, we referred him to Bill [Rogers].
With regard to meeting you, as you know, there is no
reference on your calendars, you have no recollection, and da Costa says it did
not happen. Additionally, I asked Helmy (with whom I developed a social
relationship after he left BCCI) and he says he did not meet with you.
Finally, I remember that Helmy said when he
approached us in September, 1988 that after meeting me a year earlier he had
begun thinking about proposing a relationship. He was concerned that we would
think his 1988 overture was a product of the indictment, but insisted that it
was not. At the same time da Costa -- whose contract had not been renewed --
sent us a memo which said he had been having conversations with BCCI about a
relationship with us for some time. If so, he did not tell us about them until
the moment it looked like a contract might be in the offing. Then da Costa
tried to prove he would deserve a fee.(32)
Stoga offers no explanation in the memorandum to
Kissinger as to how Helmy could have set forth the supposed recommendation to
BCCI of Burson Marstellar from Stoga and Kissinger himself if Stoga had said
nothing concerning the firm. But it seems less than likely that Helmy would as
a matter of sheer coincidence fabricate the supposed recommendation by Stoga
and Kissinger of a firm who had indeed been a client. An alternative theory
might be simply that Stoga did make the recommendation, represented it as
Kissinger's, and failed to recollect it three years later. A third possibility
is that Stoga chose not to remember the recommendation, or whether it actually
came from Kissinger himself, given its "titillating" quality.
Helmy was by his own account distraught to find out
that his overtures to Stoga and Kissinger Associates were about to become
public. As he later told Subcommittee staff, he had sought to nurture his
relationship with Stoga before while he was at BCCI and since he had left,
considered him a personal friend, and feared the exposure would damage a
relationship of some personal importance to Helmy. Helmy understood that
exposure of the BCCI-Kissinger Associates letters could potentially injure
Stoga's standing with Kissinger himself, and wished to help Stoga out of a situation
which Helmy felt Helmy had created. Accordingly, after talking with Stoga,
Helmy drafted a letter, dated November 13, 1991, to describe his current view
of what had taken place.
In the letter, Helmy wrote Stoga as follows:
Obviously both you and I are distressed by the
recent articles in The Boston Globe and the New York Times which discuss my
1988 recommendation to BCC that I retain the services of Kissinger Associates
after BCCI was indicted in Tampa, Florida.
I am, of course, surprised that a recommendation
that BCCI retain the services of an organization enjoying the fine reputation
held by Kissinger Associates warrants publicity, but I suppose that in the
current milieu this kind of thing makes the news too. . .
On the merits, while we were discussing the
possibility of BCCI's retention of Kissinger Associates, the fact is that you
never told me or led me to believe that Dr. Kissinger himself actually made any
recommendation. Only my enthusiasm to encourage Mr. Naqvi and BCC inadvertently
resulted in my memorandum suggesting otherwise. Also, as you told The New York
Times, and to the best of my knowledge, Kissinger Associates was never actually
retained by BCCI in any kind of professional, advisory, or any other
relationship. . .
Since no good deed goes unpunished, my efforts to
assist BCCI in gaining the valuable services of Kissinger Associates, seem,
now, to have caused both Kissinger Associates and myself a degree of harm for
which I apologize to you and your organization.(33)
Thus, Helmy sought to make clear that Henry
Kissinger himself had never to Helmy's knowledge been involved in his attempts
to link the two organizations. His letter did not refer to the one thing that
definitely happened during the course of his discussions with Stoga -- the
initially successful referral of BCCI to William D. Rogers and Arnold &
Porter.
Conclusion
The solicitation by BCCI of a relationship with
Kissinger Associates was largely based on personal contacts. It began with
overtures by Ambassador da Costa, a man Kissinger knew was simultaneously a
consultant to Kissinger Associates and to BCCI. The solicitation then developed
through the burgeoning personal relationship between BCCI officer Helmy and
Kissinger Associates partner Stoga.
Although Henry Kissinger was never himself
especially interested in this potential client, BCCI become aggressively
interested in Kissinger Associates because of its political connections, at a
time when BCCI was struggling for survival.
Following the Tampa indictments, Kissinger himself
recognized the potential risk to the reputation of his firm should it perform
services for BCCI, and by December or January instructed Stoga to advise BCCI that
no relationship was possible. Unable to respond to Helmy's overtures directly,
Stoga, with Kissinger's participation, eventually agreed to pass BCCI on to
William Rogers at Arnold & Porter as a means of helping Helmy and BCCI,
while protecting Kissinger Associates.
The result was that through the Kissinger Associates
connection, BCCI retained lawyers who had previously represented the Justice
Department, State Department, and Federal Reserve, agencies of some relevance
to BCCI's predicament. That relationship failed to develop not because of any
lack of willingness by Arnold & Porter or Helmy at BCCI, but as the direct
result of Clifford and Altman's need to maintain control over BCCI's affairs in
the United States.
This story highlights once again BCCI's consistent
strategy of responding to problems through reaching out to prominent political
figures and retired government officials in hopes that it could use political
influence to solve its problems. The failure of this strategy was a reflection
of BCCI's own naivete about how to do business in the United States, the care
which Kissinger himself took to protect his own reputation in dealing with
clients, and Clifford and Altman's role of primacy in BCCI's U.S. affairs.
BCCI's ability to get its foot in the door at such politically well-connected
institutions, does, however, raise questions about the general vulnerability of
such politically well-connected firms to providing services that advance the
secret agendas of other clients who may be less notorious than, but equally
noxious as, BCCI.
1.
Letter, Lloyd N. Cutler to Senator Kerry, January 30, 1992.
2.
Memorandum/telex, Sakhia to Siddiki, May 6, 1986, Senate document.
3.
BCCI internal memorandum, Helmy to Ameer Saddiki, September 2, 1986, Senate document
000653.
4.
Staff interview, Abol Helmy, January 12, 1992.
5.
Telex, Shafi to da Costa, October 28, 1986, BCCI Senate Document 000645.
6.
BCCI Luxembourg Letter of Appointment, Ameer H. Siddiki to Ambassador Correa da
Costa, October 28, 1986, Senate document.
7.
Letter, November 3, 1987, da Costa to Kissinger.
8.
Letter, Sergio Correa da Costa to Chris Vicks, Kissinger Associates, August 13,
1987.
9.
Letter, Da Costa to Kissinger, September 20, 1987.
10.
Da Costa Memorandum to L. Eagleburger and A. Stoga Re: Kohlberg Kravis Robert
& Co -- KKR; October 6, 1987.
11.
BCCI Chronology, January 30, 1992, provided to Subcommittee by attorneys for
Kissinger Associates.
12.
Id.
13.
Letter, Khan to Kissinger, August 26, 1987.
14.
Letter, Stoga to da Costa, November 2, 1988.
15.
Helmy staff interview, January 12, 1992.
16.
Letter, Stoga to Helmy, October 7, 1988.
17.
Attachment, KISSINGER ASSOCIATES, INC., to Stoga letter to Helmy, October 7,
1988.
18.
Letter, BCCI New York, from Abol Fazl Helmy to Swaleh Naqvi, October 12, 1988.
19.
Memorandum, BCCI New York, Helmy to Naqvi, October 14, 1988.
20.
Memorandum, Sergio Correa da Costa, to Kissinger Associates, October 25, 1988,
Ref. BCCI as client of KA, Attention: Mr. L. Eagleburger, Mr. Alan Stoga.
21.
Letter, Stoga to da Costa, November 2, 1988.
22.
Letters, Cunningham to da Costa, December 12, 1988; da Costa to Kissinger,
December 13, 1988.
23.
BCCI Chronology, provided to Subcommittee by Kissinger Associates.
24.
Letter, BCCI New York, Helmy to Naqvi, December 19, 1991.
25.
Memorandum, BCCI New York, Helmy to Naqvi, January 11, 1989.
26.
Helmy staff interview, January 12, 1992.
27.
BCCI Chronology provided by Kissinger Associates to Subcommittee.
28.
BCCI Document in Kissinger Associates file, BCCI New York.
29.
Staff interview, Abdur Sakhia, October, 1991.
30.
Letter, Rogers to Winer, March 3, 1992.
31.
Id and attachments.
32.
Stoga to Kissinger, November 11, 1991, RE: BCCI.
33.
Letter, Abol F. Helmy to Alan Stoga, November 13, 1991.
CAPCOM
Introduction
In the entire BCCI affair, perhaps no entity is more
mysterious and yet more central to BCCI's collapse and criminality than Capcom,
a London and Chicago based commodities futures firm which operated between 1984
and 1988. Capcom is vital to understanding BCCI because BCCI's top management
and most important Saudi shareholders were involved with the firm. Moreover,
Capcom moved huge amounts of money -- billions of dollars -- which passed
through the future's markets in a largely anonymous fashion.
Capcom was created by the former head of BCCI's
Treasury Department, Ziauddin Ali Akbar, who capitalized it with funds from
BCCI and BCCI customers. The company was staffed, primarily, by former BCCI
bankers, many of whom had worked with Akbar in Oman and few of whom had any
experience in the commodities markets. The major investors in the company were
almost exclusively Saudi and were largely controlled by Sheik AR Khalil, the
chief of Saudi intelligence. Additionally, the company employed many of the
same practices as BCCI, especially the use of nominees and front companies to
disguise ownership and the movement of money. Four Americans, Larry Romrell,
Robert Magness, Kerry Fox and Robert Powell -- none of whom had any experience
or expertise in the commodities markets -- played important and varied roles as
frontmen.
While the Subcommittee has been able to piece
together the history of Capcom and can point to many unusual and even criminal
acts committed by the firm, it still has not been able to determine
satisfactorily the reason Capcom was created and the purposes it served for the
various parties connected to the BCCI scandal. It appears from the available
evidence that Akbar, BCCI, and the Saudis all may have pursued different goals
through Capcom, including:
-- misappropriation of BCCI assets for personal
enrichment.
-- laundering billions of dollars from the Middle
East to the US and other parts of the world.
-- siphoning off assets from BCCI to create a safe
haven for them outside of the official BCCI empire.
Conditions
At BCCI Which Spawned Capcom
By early 1985, BCCI was on the verge of financial
collapse as the result of losses in the commodities markets executed by the
head of the bank's Treasury Department, Mr. Z.A. Akbar.(1) Akbar, a
young Pakistani and protege of Swaleh Naqvi, the bank's Chief Executive
Officer, had been plucked from his job at National Bank of Oman in 1981 to
manage BCCI's investments from its headquarters in London. Despite the fact
that Akbar had no apparent experience in the commodities, foreign exchange or
securities markets, by 1984 he was managing over $5.5 billion at BCCI Treasury.(2)
As Akbar invested heavily in the futures' markets,
losses at BCCI treasury began to mount. According to Masihur Rahman, BCCI's
former chief financial officer, Akbar made highly unusual investments based on
unsound assumptions:
He [Akbar] was taking positions on silver and 20
year bonds, suggesting that 20 year bonds would be 7% or 6.8%, and things like
that,, which anybody who understands treasury knows how deeply discounted it
would be if you project that sort of thing for 20 years. And he was taking
those sorts of positions for a premium.(3)
As the losses increased to staggering levels, Akbar
created a maze of artificial accounting. According to a 1991 Price Waterhouse
report, Akbar split the department's functions into normal Treasury activities
and 'Number Two' account activities" . . . outside the scope of external
audit . . . in the name of private clients but for [BCCI]. . ."(4)
The report explained that the "Number Two" accounts derived from :
"misappropriation of external funds deposited
under trust with [BCCI] to be managed on behalf of a few prominent people who
are also shareholders of Holdings, and maintaining a pool of funds in the
private named accounts of A. R. Khalil which were used freely by Z. Akbar to
fund adjustments. . ."(5)
In other words, Akbar inflated BCCI Treasury profits
through the use of unrecorded deposits in the accounts of important BCCI
"customers", such as Khalil.
By 1985, Akbar's treasury department had accumulated
losses approaching $1 billion, leading to a near collapse of the bank.(6)
Akbar and, presumably Naqvi, recognized that the off-balance sheet accounting
in the "Number Two" accounts could no longer adequately hide the
massive losses. Accordingly, "out-of-book" or unrecorded deposits
were moved "out-of-bank" to a new financial entity -- Capcom Financial
Services, Ltd.
At Capcom, Akbar and Naqvi reasoned, the phony BCCI
accounts could be further disguised and placed beyond the reach of bank
auditors. In short, Capcom afforded BCCI a wider scope of options for the
manipulation of accounts, the continuation of frauds and, perhaps, a last ditch
attempt at fiscal recovery.
Creation
of Capcom 1984-1985
On April 26, 1984 Akbar registered an obscure
company named Hourcharm, Ltd, at his home address in London. On May 22, 1984,
Hourcharm was renamed Capital Commodity Dealers, Ltd., and then in July, Capcom
Financial Services. Capcom was funded with a capital of 1 million which during
the first year was augmented to 10,00,000 pounds and then increased to
25,000,000 pounds (approximately $37,000,000).
Capcom commenced trading in London on September 17,
1984. According to the June 22, 1991 Price Waterhouse Report to the Bank of
England, "Capcom ... rapidly became one of the most significant of the
brokers used by Treasury [BCCI]."(7) Indeed, within the first
year customer accounts bulged to over 100,000,000 (approximately $160,000,000),
inordinately large sums for a fledgling commodities brokerage company.(8)
According to Masihur Rahman, "Capcom was given an official credit
line" by BCCI.(9)
A 1991 documentary on BCCI, produced in London,
featured Jehangir Masud, a former employee of the Abu Dhabi Investment
Authority, and Shahid Suleri, a former BCCI employee, commenting on the
connections between Capcom and BCCI. Masud claimed, "the [BCCI] Treasury
put huge volumes of business through generating large brokerage fees for
Capcom." Suleri recounted that Capcom allocated profits to their own
account, losses to BCCI, using BCCI funds as margin deposits.(10) In
testimony to the Subcommittee, Rahman concurred, noting that "many of the
transactions that the bank was doing [were] being routed through Capcom, who
obviously was scaling out the differentials ....and passing on the heavy losses
and things to the bank."(11)
Capcom
Operations
Capcom operated as a broker in the London and
Chicago commodities markets. Commodities markets should be distinguished from
the stock markets, which are more or less "cash markets" designed for
"direct investment." As author Martin Mayer has explained, "you
own what you buy and your success is a function of the success of the company
in which you have purchased shares."(12) According to Mayer,
futures markets, in contrast to cash markets, do not offer the investor the
"commodity that underlies the activity." Mayer has written that
futures investors:
"trade contracts to purchase or sell that
commodity on a future date. The contract is inescapable. Those who purchase
must stand ready to receive the commodity at a specified delivery point at this
price on a specified date (or to buy an offsetting obligation from someone who
has a contract to deliver to that point on that date, thus permitting the
"clearing corporation" that serves the exchange to extinguish both
contracts.) Those who sell futures contracts must stand ready to deliver the
commodity to the delivery point for this price on the specified date (or buy in
someone else's contract to accept delivery.) As a result future's markets are
not situations where everyone can win.(13)
The commodities markets in the U.K. and the U.S. are
not restricted, regulated or supervised as stringently as the banking industry
or the securities markets.(14)
Moreover, the commodities markets can sustain almost
limitless volume, a necessary prerequisite for crime on the scale of that
contemplated by BCCI since fraudulent transactions may be hidden in a multitude
of legitimate ones. In a letter to the directors, the Chairman of Capcom, Larry
Romrell, reported that 165 million in trading during the first four months of
operation, and profits of 883,393. That trend continued until 1988 leading
Akbar to boast to agent Mazur: "We have contracted 165,000 contracts
totalling $53 billion with Drexel Burnham," and later, "we have done
over $90 billion total in 1988."(15)
While the number of contracts and dollar volume
seems unbelievable, a commodities company can artificially create massive
volume by many small or no-risk trading methods. Indeed, the volume generated
by Capcom helped it to generate respectability and acceptance with reputable
banks and brokers.(16) For example, listed under "Auditors and
Advisers" in Capcom's 1987 Annual Report were the following major
international banks: Manufacturers Hanover Trust Company, London, National
Westminster Bank Plc, Manufacturers Hanover Trust Company, New York, Deutsche
Westminster Bank, A.G., and National Westminster Bank, plc. Elsewhere, Capcom
noted its ties to Dean Witter Reynolds, American Express Bank, Refco,
Prudential Bache Trading Corp., and Sumitomo Trust and Banking, Ltd.(17)
Like BCCI, Capcom attempted to buy legitimacy to assist its rapid expansion.
Capcom's expansion took it to the United States
where it opened Capcom Futures in late 1984.(18) Mohammed Saghir,
born in the same town in India as Abedi, and a former cohort of Akbar's at the
National Bank of Oman, was brought in to run the Chicago operations. The
American Board of Directors mirrored that of London with Larry Romrell serving
as the Chairman.
In testimony before the Subcommittee, Wendy Gramm,
the Chairperson of the Commodities Futures Trading Association (CFTC) described
the relationship between Capcom US and Capcom UK:
Capcom UK and Capcom US were intertwined. Both
companies had common directors and shareholders. Capcom UK owned 82% of Capcom
US from May 1985 until June 30, 1987.
BCCI
Pulls Out
In July, 1985 the BCCI accounts were ostensibly
withdrawn from Capcom, apparently on the advice of the firm's auditors who
counseled that the bank should not be engaged in the kind of speculation
intrinsic to the commodities markets.(19) With all visible BCCI
accounts closed, Chairman Larry Romrell observed in Capcom's annual report:
"The cessation of BCCI business obviously had an impact upon our
volume."(20)
However, according to the 1991 Price Waterhouse
report, at the same time that BCCI withdrew from Capcom an amount of $68
million was paid by BCCI Treasury to Brenchase, Ltd, a subsidiary of Capcom,
controlled by Akbar, raising the question of whether or not BCCI had really
withdrawn from the firm.(21) Moreover, the Price Waterhouse report
notes that, "...despite an apparent cessation of trading links with Capcom
...two payments of $50 million were made to Capcom in March, 1986 out of
external funds for which no liability for repayment was recorded."(22)
These and other comparable payments clearly suggest that Naqvi and Akbar
continued to use Capcom to shield BCCI funds and perhaps to move money.
Moreover, as late as 1989 the client list for Capcom
Futures, the US subsidiary of London-based Capcom Financial Services, consists
of several apparent BCCI accounts in the names of BCCI employees controlled by
Z.A. Akbar.
It is not clear why Naqvi and Akbar chose to
maintain the public facade of a split between Capcom and BCCI. One possible
explanation is that Naqvi and Akbar profited from BCCI losses both at BCCI
treasury and later at Capcom. When Senator Kerry asked Mr. Rahman if Mr. Naqvi
had profited from the BCCI losses, the former BCCI manager responded,
"since only two, three people are involved ...somebody has profited a
lot."(23)
Akbar
and Capcom
In 1986, after the discovery of BCCI losses on
cotton trading, Akbar left the BCCI Treasury to join Capcom. According to
Masihur Rahman, Akbar "was released" from BCCI, taking "his
company car and other benefits."(24)
Upon moving to Capcom, Akbar formed Financial
Advisory Services (FAS), an introducing broker, or marketing arm for Capcom.
FAS was owned by Akbar's Panamanian-registered, Liechtenstein operated nominee
company, ZASK Trading and Investments, Ltd.
Akbar did not immediately become a Director of
Capcom, sitting instead in the FAS offices which adjoined Capcom. Akbar
explained to Mazur his reasons for not joining Capcom's Board of Directors:
when I left the bank, BCCI people, they said 'Mr.
Akbar, for, for at least a couple of years you don't go and sit in the
office...it doesn't look nice that you leave the bank...and establish your own
company'... they said 'please keep away'...(25)
But it was Akbar, nevertheless, who directed
operations at Capcom. With the freedom of singular control over a vast pool of
BCCI's "out-of-book", "Number Two" Treasury funds deposited
at Capcom, Akbar manipulated to enrich himself. The Subcommittee has concluded
that with Akbar at the helm, Capcom engaged in blackmail, bogus loans,
"bucket shop" trading, use of nominee frontmen, artificial
mirror-image trades, co-mingling of funds, money-laundering, theft, skimming of
accounts, and kickbacks to insiders.
For example, Akbar arranged for kickbacks to Peniel
Investments, a Liechtenstein-based, Panamanian-registered company that he
owned. This arrangement, and others, specified commissions that he paid to
himself of between $5.00 and $12.00 per contract on business he had introduced
to Capcom, specifying "BCCI Overseas" as a qualifying account. In the
months during which BCCI lost $430 million at Capcom, Akbar paid himself a
total kickback of 4,671,579.86 (approximately $7,000,000).(26) It is
not clear whether Naqvi and anyone else at BCCI knew about or participated in
these kickback schemes.
Capcom
and Money Laundering
There is evidence that Capcom engaged in money
laundering for a variety of clients both in the United States and in London.
For example, some 50 transactions were identified in the Futures, Inc. accounts
with insufficient or no supporting documentation regarding the source or
disposition of funds. These transactions totalled more than $125,000,000.(27)
In testimony to the Subcommittee, Customs agent
Robert Mazur testified how Akbar used "mirror-image" trading to
launder huge sums of money. Mirror image trading involves buying contracts for
one account while selling an equal number from another account. Since both
accounts are controlled by the same individual any profit or loss is
effectively netted. According to Mazur, Akbar explained that because these
"mirror image" transactions can be lost among many millions of
dollars worth of legitimate transactions "it would take forever for anyone
to ever find it."(28)
Using mirror-image trading, Akbar bilked the BCCI
Treasury accounts and laundered money for one of Capcom's most notorious
clients, General Manuel Antonio Noriega.(29) Although complex, the
series of transactions involving Noriega, BCCI and Capcom provide an
illustration of textbook money laundering.
Capcom,
BCCI and Noriega
From 1982 through 1986 Noriega opened accounts with
BCCI for the "placement of secret funds of the [Panama] National Guard --
money which Noriega was using for his personal use and that of his
family."(30) Despite the fact that the accounts were "no
correspondence" accounts in countries with strict bank secrecy laws,
Noriega was not completely free from risk in his use of the public funds
because the accounts were opened in his name and with his signature.(31)
As of 1986, Noriega had placed approximately $23
million in BCCI accounts in Luxembourg and London. In July of that year, BCCI
and Noriega began to shuffle these funds. On 26 July 1986, two Noriega accounts
containing $8.1 million and $3 million were transferred from BCCI, Luxembourg,
to the account of the Banco Nacionale de Panama at the Union Bank of
Switzerland in Zurich(32) in the name of a company called [sic]
"Finlay International."(33)
On this same day, other Noriega accounts at BCCI
totalling $11.8 million were transferred into the accounts of Banco Nacionale
de Panama at Deutsche Sudamerikanische Bank in Hamburg, Germany, also in the
name of [sic] "Finlay International."(34) Thus, in a
complicated set of transactions, the entire sum of Noriega's BCCI accounts was
transferred to banks other than BCCI, held in accounts not opened by Noriega,
and held in the name of an entity other than Noriega.
The transfers became even more convoluted over the
next two years. On 8 September 1988, the entire $23 million was transferred to
the Banco Nacionale de Panama account at the Middle Eastern Bank in London in
the name of [sic] "Findlays."(35) This transfer served to
consolidate the funds in a single account. Despite the fact that the funds were
nominally held in the account of the Banco Nacionale de Panama, the accounts
themselves had been opened by Noriega (who personally signed the account
opening documents) and remained in his control.(36)
On 13 September 1988, the Chief of the Private and
Investment Banking Division of the Nacionale Banco de Panama instructed Middle
East Bank to transfer the money from its account to the account of [sic]
"Finleys International Ltd."(37) This transfer thus served
to remove Banco Nacionale de Panama from the transaction altogether.
From 15 September 1988 through 19 September 1988,
Finley instructed Middle East Bank to disburse almost the entire balance which
had been amassed in Finley's account. The letters from Finley were signed by
Capcom's President, Z.A. Akbar.(38) Three of these payments
totalling $20.5 million were made to Capcom and credited to the GESS and GOOD
Capcom customer accounts.(39)
Another $2.6 million was paid to a coded account at
the Trade Development Bank in Geneva, Switzerland.
The transfers between Finley and Capcom effectively
laundered the funds originally deposited in BCCI by Noriega. The transactions
constituted "mirror image" trading; in effect, the same person --
Akbar -- stood on both sides of the transaction. Akbar was the managing
director of Capcom and almost certainly possessed the controlling interest in
the majority of the company's shares.(40) He also was the chairman
and director of Finley. Moreover, he possessed a Power of Attorney for the GESS
account and his brother was a director of the company behind the GESS account.(41)
In the entire set of transfers between Capcom,
Finley, and the Capcom Accounts, the funds were under Akbar's control and
subject to his direction. In order to disguise the transactions, Akbar
continually sought to inject other parties into the scenario and to portray the
transfers as legitimate business transactions between non-identical parties.(42)
However, the documents indicate that Akbar moved funds from a bank account
under his control to a company of which he was the managing director and then
into Capcom customer accounts under his control.(43) What appeared
to be transactions between different entities were merely transfers of funds
between nominally different accounts under the control of the same individual.
Akbar used Capcom and its accounts to conceal the source of the funds and
"transform" them into facially legitimate business capital, brokerage
fees, and bank account deposits.
Capcom
and Shakarchi
Capcom may also have laundered money in the
so-called "Lebanese connection" case. According to the Peat, Marwick
report, on February 10th, 1988, Capcom received a telex from Ahmed Tawfik
giving instructions to make a payment of $150,000 to Shakarchi Trading.
Shakarchi trading was a Zurich-based currency trading firm, principally
involved in gold bullion trading. Reportedly, a number of wealthy Egyptians had
accounts with the firm which was owned by Mohammed Shakarchi.
In February, 1989 Shakarchi was linked by U.S. and
Swiss investigators to two Lebanese brothers, Jean and Barkev Magharian, who
admitted that some of the two billion swiss francs they channeled into Swiss
banks and trading houses between 1985 and 1988 derived from drug transactions.
The Magharian brothers told investigators that $36 million the couriers brought
to them in Switzerland from Los Angeles came from cocaine profits.
The case gained notoriety when Swiss Minister of
Justice was forced to resign in January 1989 after admitting that she told her
husband, who worked for Shakarchi, that the firm was about to be implicated in
Switzerland's biggest financial scandal.
Capcom
and AMBROS
Yet another suspicious relationship maintained by
Capcom was with a German trading company, Ambros Holdings. Approximately 44% of
the Capcom U.S. client base consisted of West German individual and corporate
accounts controlled by a handful of Western German companies such as "A
and G management", SFS GmbH management" and "Ralf Ltd." For
example, Metzler SFS controlled 37 of the accounts, or 39% of the total. The
most important of the German clients was Ambros holdings which accounted for
50% to 70% of Capcom Future's gross commissions and revenues in the period
September/October 1988. According to Capcom's records, the ledger balance was
$40 million.
Ambros was a Panama registered company with offices
in both Germany and Liechtenstein. The company's President and Secretary was
Richard Sax, who traded for Ambros through Capcom Futures, and elsewhere in
Chicago, under the alias of Richard Wagner.
Ambros declared bankruptcy in Germany in 1991.
German prosecutors have been investigating the collapse of the firm which may
have lost as much DM 500m in the commodity futures markets. According to press
reports, German investigators believe that Ambros operated as a giant Ponzi scheme.(44)
Majority
Shareholder of
Kamal
Adham and A.R. Khalil
The June, 1991 Price Waterhouse Report noted the
overlap of shareholders between BCCI and Capcom: "[Capcom's]...initial
shareholders were dominated by major shareholders of [BCCI]."(45)
A.R. Khalil, Minister of Communications for Saudi Arabia and Deputy Chief of
Intelligence -- and a major BCCI shareholder -- was the dominant shareholder
and director of Capcom from its foundation until its termination. Besides
Khalil, the "Saudi Group", included, Kamal Adham, Khalil's former
boss and the lead investor in the FGB takeover; J.J. Uddin, who acted as a
substitute for Khalil; El Sayed E. El Jawhary, an associate of Adham and
Khalil; and Robert E. Powell, an American with long-standing ties to Adham and
Khalil.
Although little is known about Mr. Khalil, the
Subcommittee has learned that in 1976 he became Director General of Ministry
of Communications of Saudi Arabia . The Subcommittee has also obtained a
brief description of Khalil's background which he provided to officials of the
Federal Reserve on April 23, 1981 in connection with the proposed acquisition
of Financial General Bankshares:
My career has been devoted to business and I
presently hold interests in real estate, mechanical and electrical maintenance
projects, and commodities. In addition, I have been involved in some business
ventures with American and British manufacturers for the installation of
electronic and computer equipment in Saudi Arabia.(46)
In a document entitled "A Brief Resume of the
Company and Its Directors, Capital Commodities Dealers, Ltd.", Khalil is
identified as a prominent Saudi Businessman, involved in real estate and
construction, mainly in Saudi Arabia, U.A.E. and Oman. He is also listed as the
owner or director of the following companies: Arabian Electronic Project
Establishment, Global Chemical and Maintenance Systems (where Robert E. Powell
was CEO), and Rockwell International, USA (where Kerry Fox worked). The resume
estimated Khalil's net worth to be "US $300,000,000."
It is noteworthy that during the same years that the
Chief of Saudi Intelligence, Kamal Adham, is entering the American banking
industry through the purchase of First American, his successor in Saudi
intelligence, Mr. Khalil, is quietly purchasing three houses in the United
States with the assistance of Americans Kerry Fox and Larry Romrell -- key
players in Capcom.
U.S.
Connection: Romrell, Magness and Fox
The investor relationships in Capcom represent the
culmination of a long relationship between members of Saudi intelligence and
important figures in the US communications industry. The record establishes the
relationship between Khalil and the Americans, Romrell, Magness, and Fox had
its genesis in the communications industry prior to the creation of
Capcom.(47) First, Kerry Fox had a long relationship with Khalil
through his work in the electronics business for Martin Marietta and Rockwell
International with the Saudi government dating five to ten years prior
to the creation of Capcom.
Second, Romrell and Magness proposed numerous
ventures in communications to BCCI and Khalil in the three years prior to the
formation of Capcom, 1982-1985. The proposals included the installation of
state-of-the-art electronics and communications in the Saudi military command
center. In October, 1982 Romrell expressed interest to Akbar in "working
with the bank [BCCI] and managing any interests they may have in our area."
US Investments
Proposed By Romrell/Magness
Larry Romrell has told the Subcommittee that he met
Khalil in 1981. The timing of the meeting appears to have been just subsequent
to Khalil's appearance at the Federal Reserve in Washington D.C. in connection
with the takeover of Financial General Bankshares.(48)
After entering into a real estate venture with
Khalil, Romrell moved quickly to solidify his relationship with Akbar, BCCI and
Khalil. The Subcommittee has compiled a log of business proposals by Romrell
for BCCI. (see Appendix I) Mr. Romrell explained the various propositions in a
response to written questions from the Subcommittee:
Mr. Akbar had indicated to me that his clients or
BCCI -- I always had difficulty distinguishing between Mr. Akbar's actions on
behalf of his Mid-East investment client and his actions on behalf of BCCi --
might be interested in investing in the United States, principally in
"bricks and mortar" office buildings. I suggested some possible
investments to Mr. Akbar. I never sought or received any compensation from BCCI
or Mr. Akbar for managing properties or anything else.(49)
While there is insufficient evidence to determine
whether or not any of these proposals were consummated between the parties, the
heavy traffic of proposals in 1983 to 1985 raises many serious questions about
Romrell's and Magness' involvement with BCCI. Moreover, documents suggest that
during this period BCCI credit was an important vehicle for Mr. Romrell and Mr.
Magness in their personal affairs.
BCCI
and TCI
Documents provided to the Subcommittee also indicate
that BCCI may have been a shareholder in TCI, the largest cable company in the
United States.(50) All TCI shareholders were issued WTCI stock when
the latter was spun-off from TCI as a separate company. The WTCI stock was then
listed independently and was publicly traded on its own. In a letter to Akbar,
Romrell wrote:
"I am enclosing an Information Statement which
has just become available this morning covering the distribution to the TCI
shareholders of all the outstanding shares of WTCI...the stock will be
distributed by today by mail along with the enclosed Information Statement to
all TCI shareholders...there is a possibility that the WTCI stock price will
sell for a price upwards from $8.00. I still intend to buy for our accounts
at the best possible price somewhere between $2 to $4.50. If you have any
comments or require any additional information, please give me a call."(51)
Six months later, Romrell wrote Akbar about an
apparent agreement:
"I understand the WTCI stock will officially
start trading at opening of business tomorrow, March 20. I want to confirm my
understanding that I have established pursuant to my conversation with you a
$100,000 credit line with which to purchase stock and, in addition, that you
have authorized me to purchase stock in your behalf up to a $100,000 limit. The
combined credit line would then be $200,000, except that I would reduce my
credit line within 30 days from $100,000 to $85,000. If this is not your
understanding or does not meet with your approval, please contact me
immediately.(52)
Romrell has told the Subcommittee that, in fact,
there was no agreement and no combined credit line. He acknowledged that the
wording of the letter "did not sound good".(53)
Perhaps the most provocative document suggests that
Romrell was seeking a $200 million credit line from BCCI for TCI:
"...the TCI finance group that they are
interested in obtaining a loan facility...I asked Bob Magness...he asked me to
determine whether there would be any interest ion the part of BCCI...I believe
the credit facility that TCI is looking for is around $200,000,000...as a
separate matter, WTCI will soon be looking for approximately $50,000,000 to
construct a new microwave route...there may be an opportunity to put this deal
together with BCCI if you are interested."(54)
According to TCI's lawyers, the company has never
had any relationship of any kind with BCCI:
[There is] no evidence that the TCI or the Related
companies had any business dealings with Capcom, BCCI, or any currently
identified related entity or person... (55)
Romrell,
Magness and Capcom
During the period that Romrell is passing on WTCI
information to Akbar, he is also contemplating an investment in Capcom:
"Magness and I have discussed your proposal to invest in a U.S. brokerage
firm in Chicago or New York and to participate in the ownership and operation
to the mutual benefit of BCCI and ourselves."(56) To entice the
participation of Romrell and Magness in Capcom, Akbar represented to the
Americans that the firm would earn a minimum of $4 million per year, and
potentially as much as $10 to $15 million.(57)
Despite the fact that neither of them had any
experience or expertise in the futures markets, Magness and Romrell agreed to
become directors on May 27, 1984.(58) They also decided to make a
financial investment in the firm. Magness, in a notarized statement dated May
12, 1992, explained to the Subcommittee:
"...I agreed to buy a 1 percent interest for
approximately $15,000."(59)
"I was not offered anything for my investment
beyond the [above stated 1 percent] interest in Capcom. Nor was I offered
anything as an inducement to become a member of Capcom's board of
directors."(60)
However, Magness and Romrell also purchased a stake
in Capcom with funds provided by BCCI. In a "Note for file" written
November 9, 1984, Romrell scribbled:
"Bob and I" funded our share capital and
loan stock as follows: "We agreed to fund $14,744(61)
and borrow $75,000 each from BCCI London...Balance
of current amount due was funded from our Credit Lines at BCCI, London."(62)
The Subcommittee has obtained documents which appear
to show that, in fact there were other loans beyond those provided by BCCI.
Magness and Romrell executed no-risk loans to purchase Capcom stock in a
September 17, 1984 agreement with a Panamanian company secretly owned by Akbar,
managed in Liechtenstein by a Dr. Franz Pucher. The company was named
"Peniel Investments, Inc."(63) Akbar provided Romrell and
Magness with subordinated Loan Stock in the amounts of 330,000 (approximately
$450,000) for Romrell and 69,300 (approximately $90,000) for Magness.(64)
A very unusual aspect of the loans is that they were self-liquidating: funds
paid into Romrell's and Magness' loan accounts from profits in their
"managed investment" accounts would be used to pay down the loan
principal. (65) In other words, these loans resembled the standard
issue BCCI no-risk loans provided to those who acted as nominees for the bank.
Another set of documents dating some months later
shows additional loans to Magness and Romrell from Paten Holdings, Inc., a
different Panamanian company, operated out of Geneva by Mme. Cecile Ringenberg,
and again, secretly owned by Akbar. (66)
Romrell has told the Subcommittee that "at the
time I understood Paten Holdings to be a Swiss bank."(67)
On May 23, 1985, the Capcom directors used Paten
Holdings to increase the capital base in Capcom from L10,000,000 to
L25,000,000. By increasing the capital base of the firm, Romrell's and Magness'
overall holdings were also increased. Romrell, who had placed only $15,000 of
his own money into the firm, found himself with holdings valued in excess of $2
million.(68)
The Loan Agreement, dated June 17, 1985, between
Paten Holdings, Inc. and Romrell and Magness provides both men with 169,500
(approx. $250,000). The terms require payment no later than June 17, 1987. The
collateral for the loans was the shares secured by an attached memorandum of
deposit and dividends and interest were to be retained in order to reduce the
outstanding balance of the loans. As Romrell explained: "...with regard to
Paten Holdings, Inc...we had originally planned to reduce that loan with
dividends from Capcom."(69)
Indeed two years later, in July 1987, Romrell
proposed a 30 percent dividend in a letter to Khalil, Adham, and Jawhary.(70)
However, upset from the events surrounding the CBOT investigation, the Saudi
Group refused to allow the dividends. In order to accommodate the Americans,
Akbar arranged for Romrell and Magness to enter into replacement loan
agreements with Paten Holdings, Inc. The new loans were for an increased
amount, 221,157.93 (approx. $330,000) and were secured by the Capcom shares. (71)
The year-end 1987 audit of Capcom in London by
Arthur Anderson raised the issue of disclosure of the Paten and Peniel loans:
"All transactions with related or associated
parties have, where material and appropriate for the presentation of a true and
fair view...There are no agreements whereby the directors could receive benefit
from dealing transactions either directly or indirectly through agency
agreements...In respect of the agency agreements between Capcom Financial
Services, Ltd and the following companies: a) Peniel Investments, Ltd, and b)
Paten Holdings, Inc. ...In addition, we confirm that the agreements were
entered into at arms length and that no director or shareholder has an
interest in either agent company. The company and its subsidiaries have at
no time during the period entered into any arrangement, transaction or
agreement to provide credit facilities (including loans, quasi-loans, credit
transactions, mutually beneficial arrangements or guarantees or security for
liabilities for any directors, shadow directors, officers or their connected
persons (except as permitted by the Companies Act 1985 and as disclosed in
the accounts.)(72)
The Paten and Peniel loan documents show this
statement by the auditors to be completely false. Either the auditors colluded
with Capcom management, or more likely, they were misled as to Paten and Peniel
by the management of Capcom.
Ultimately, Romrell tried to sever his connection to
Paten. According to Cecile Ringenberg, an emergency meeting was called in
London by Sheik Khalil. At that meeting, control of Paten passed from Romrell
to Akbar. Romrell has indicated to the Subcommittee that he has never met
Cecile Ringenberg, although a xerox of her calling card was provided by him to
the Subcommittee.(73)
Capcom
Nominees
The Subcommittee has uncovered documents which show
that Romrell and Magness clearly understood that they were acting as nominees
on behalf of Capcom. In a 1987 letter to Khalil, Romrell wrote:
"it was my understanding that the majority
shareholders were not willing to sign these guarantees ...As far as I
personally am concerned, except for my paid-up stock and notes, I have acted
as nominee for one or more of the original shareholders."(74)
Five days later, Romrell reiterated this point in
another letter:
"...It was my understanding at that time the
majority shareholders representing yourself, Sheikh Kamal, and Mr.
Jawhary...but it was the only one [plan] we could see that would retain the
original shareholders through voting trusts and nominees and meet the needs of
the Chicago Board of Trade. It was understood by the reorganized shareholders
that they were nominees for the original shareholders. Thus, the actual
beneficial ownership did not change."(75)
The reason for using American nominees by Capcom was
clearly stated by Akbar in his taped conversation with undercover U.S. Customs
agent Robert Mazur: "...it's better if we use some other people as our
nominees, instead of showing [Capcom] as BCC subsidiary"(76)
This is the identical strategy to that pursued by BCCI in its acquisition of
First American Bank in Washington D.C.
Robert
Powell
Robert Powell, a California businessman with
interests in the Middle East, was also a director of Capcom, and, he claims,
unbeknownst to him, a nominee for the company. Powell, like so many others
involved in the BCCI affair, claims to feel "deceived, duped, humiliated
...etc...etc."(77)
Powell has a background in infrastructure and
aircraft maintenance for the U.S. military, having provided "contract
services to the United States Air Force, Military Airlift command, for the
operation and maintenance of United States Air Force facilities located at
Wake-Island, Mid Pacific."(78) Despite his close relationship
to the U.S. military during the Vietnam War, Powell claims to have no
background in, or affiliation with, military intelligence. Rather, he told
Subcommittee staff that he simply follows the military "where they
go."
According to Powell, in 1968 he was contacted by an
assistant to Sheik Kamal Adham named Mamoud Arabe who met with him in
Washington D.C. and subsequently set up meetings for him with Adham, then chief
of Saudi Intelligence, and A.R. Khalil, the Deputy Chief of Saudi Intelligence,
in New York. According to Powell, he believed that Adham and Khalil were simply
"advisor(s)" to the King of Saudi Arabia and that during their
meeting they only discussed "differences between Democratic and
Residential candidates [with] a little bit of talk about the company and the
services we offer."(79) Nevertheless, at some point thereafter,
Powell settled in Saudi Arabia where he became the managing director for Global
Chemical and Maintenance Systems, a company owned by A.R. Khalil. When Global
Chemical opened an office in Oman in 1976 Powell met Z.A. Akbar who was then
working at the National Bank of Oman, which was partially owned by BCCI. The
next year Powell established a banking relationship for Global Chemical with
BCCI, and while he lists BCCI as Global's bank in its annual report, he claims
under oath that "no Global entity or myself borrowed any money from
BCCI."(80)
Powell became involved with Capcom in 1984 at the
suggestion of Akbar.(81) According to Powell he invested 80,000
Pounds Sterling in Capcom, money which was financed, although as of June 21,
1992, Powell was uncertain the nature or source of the financing.(82)
Powell told the Subcommittee that he believed his initial investment
represented the extent of his holdings. In July, 1992, however, prompted by
questions from the Subcommittee, Powell contacted Capcom in London which
advised him that by July 1985 he had accumulated 3,500,000 shares of stock -- 15%
of the firm's holdings. Most of that stock was transferred from his account in
1987 but as of July 1992 he still owned 250,000 shares of stock. According to
Powell, "When or how I became the owner of a 250,000 shares is not
explained by the record nor do I have any knowledge about the activities that
created this apparent paper increase." Powell wrote the Subcommittee
"[I]t is obvious that the company can do anything it pleases with its
shares without informing the affected parties. Is not hindsight beautiful?"(83)
Powell's account of Akbar's deception and of his
relationship with BCCI, however, require further investigation. By his own
admission, Powell met with Akbar "once or twice a year" in London to
review Capcom and his stock holdings.(84) Moreover, he acknowledges
having met Abedi on at least one occasion and Naqvi on at least a half dozen
occasions.(85) These meetings with BCCI's top management strike the
Subcommittee as strange given Powell's claim that he had such a limited
relationship with BCCI as an institution.
Kerry
Fox
As mentioned earlier, the genesis of Capcom's links
to the U.S. lies in the relationship between Kerry Fox and A.R. Khalil. Fox had
been Vice-President and General Manager of communications and electronics at
Martin Marietta and President of two of Rockwell International's major
divisions when he met A.R. Khalil while doing business with the Saudi
government.(86)
Correspondence between Fox and Khalil suggests that
they maintained a close relationship: "A.R. Khalil was and is a good
friend of mine."(87) According to Fox, "I had known Sheikh
Khalil for several years prior to that through business relationships with the
Saudi government...(prior to 1982.)"(88) Moreover, Fox and
Khalil owned neighboring homes in Texas and in Florida.(89)
During the early 1980's Fox went to work for U.S.
Telephone Communications, which by 1982, had experienced "phenomenal
growth and revenues of $90 million annually." In 1985 Fox founded his own
company in the telecommunications industry -- American Telecommunications Inc.
He also invested in a number of real estate projects with his partner, Larry E.
Romrell.(90)
In an affidavit, Fox described his relationship with
Akbar who "at that time... was personally handling many of Sheikh Khalil's
world-wide financial transactions."(91) According to Fox,
"I worked closely with Mr. Akbar both as managing director of the
Capital Fund, but more importantly for me when he served as a Director of
American Telecommunications Corporation."(92) Fox described
Akbar's role with ATC: "I worked closely with him by telephone to assist
our company through some very difficult start-up and financial problems. Mr.
Akbar provided badly needed financial resources to the company, first as equity
and later as debt, which was instrumental to the company's survival."(93)
Indeed, Capcom and related entities purchased in excess of 350,000 shares of
ATC stock, over 100,000 ATC warrants and loaned the company hundreds of
thousands of dollars. In the affidavit, Fox defended Akbar as: "absolutely
honest, trustworthy, and very honorable. He is a man of the highest integrity,
having a strict code of high morals and business ethics."(94)
After Akbar was indicted for money laundering by the
US Attorney's office in Tampa Florida, he resigned from the board of ATC. Akbar
was replaced by Larry Romrell on the board, even though Romrell told the
Subcommittee that "by the late 1980's he and Fox had a personal
falling-out."(95)
This background raises questions about Fox, who
along with Romrell acted on behalf of Khalil in 1981 and 1982 to purchase three
residences in the U.S. and manage them. The Subcommittee has learned that the
three properties located in New Smyrna Beach, Florida; Dallas, Texas; and Vail,
Colorado were each financed by BCCI and managed by Akbar.(96)
Second, while Fox and Romrell "used the houses from time to time",
the property deals may have been used to financially benefit the two Americans
who at the time were salaried employees. (97)
The Subcommittee invited Fox to testify on these
matters at its July 30, 1992 hearing, but Fox, though his attorneys, invoked
his fifth amendment privilege not to incriminate himself.(98)
The
Capital Fund
Kerry Fox, although not a director of Capcom, was a
director of The Capital Fund, an open-ended public investment fund launched by
Capcom. The stated purpose of the FUND was investment in stocks, bonds, metals,
options, and commodities. Control of the FUND resided in the
"Manager", Capital Management Services, which had its operating base
in Muttra, Oman. The original Directors were Paten Holdings and Zask Trading
and Investment, Ltd, Akbar's secretly held Panamanian companies operated out of
Liechtenstein. These entities were replaced as directors by Kerry Fox in
October, 1985, indicating that Akbar had complete confidence in his ability to
control Fox.(99)
By January 1, 1986 the initial L10,000,000 share
capital had been fully subscribed, making it appear that the general public had
invested in the Capital Fund.(100) In fact, however, Akbar
controlled almost everything behind the FUND, including Zask Investment, Paten
Holdings, his brother and Dr. Franz Pucher, the Liechtenstein lawyer. Akbar
secretly contributed $8,145,000 (81 percent) of the $10,000,000 deposited in
the FUND with the remaining 19 percent coming from BCCI/Capcom insiders,
including Kamal Adham and Mr. E. El Jawhary.
The first year of investments by the Capital Fund
resulted in an impressive profit, $2,278,708, and, in fact, the FUND produced
profits in every other year until its termination in 1988. However, Ian Watt of
Peat Marwick McLintock, characterized the profits as "artificial" and
explained that through "matched" and "back to back"
transactions, money from at least 17 accounts was transferred into Fund, totalling
an estimated $3,334,480.(101) Watt concluded that the FUND played a
significant role in Capcom's operations: "In all, save a number of
insignificant cases, the client account in which profit was created was
FUND."(102)
The Capital Fund continued to increase and prosper
until Akbar's indictment for drug money-laundering on October 10, 1988. After
the indictments, Kerry Fox met A.J. Puri in December, 1988 at the Dallas-Ft.
Worth airport and was advised that the Capital Fund would be wound up.(103)
However, it was not until September 18, 1990 that Capital Management Services
ceased trading and was liquidated.(104)
The
1987 Chicago Investigation
In early 1987 the Chicago Board of Trade (CBOT)
clearing corporation imposed a requirement that the owner of 5% or more of a
clearing member guarantee the house obligations of such member. Accordingly, in
June, 1987 the ownership of Capcom UK in Capcom US was reduced from 82% to 4%.
The individuals who purchased Capcom UK shares in Capcom-U.S. did so with a
loan from Capcom UK. One month later, in July 1987, Capcom US loaned Capcom UK
nearly $3 million. That loan was never serviced and the Subcommittee has
concluded that Capcom was involved in nothing more than a shell game to
restructure its US operations.
At the same time that the restructuring was taking
place, an investigation of Capcom had been undertaken by the CBOT to determine
the identities of the individuals and entities which had an ownership interest
in Capcom. In response to the investigation, A.R. Khalil wrote to Capcom's
chairman, Larry Romrell, demanding that all the directors be fully advised of
the true owners of Zask Investment and Trading, Akbar's company, which had
surreptitiously increased its ownership in various Capcom entities. Ironically,
Khalil ask that Romrell keep "my advisor, Mr. Z. Akbar, fully
informed."
The issue was resolved when the secretly held
Akbar-controlled interests in Capcom declined and the Saudi Group
re-established its majority position using relatives and associates of Adham
and Khalil on the Boards to escape the disclosure requirements of the US
regulators. For instance, Mr. Wadia Sayed Khalil acquired a 39 percent
ownership, and Mr. Robert E. Powell a 1 percent ownership, which combined with
others in the "Saudi Group" totals 52 percent.(105)
In its investigation of Capcom the CBOT also disclosed
that Capcom had engaged in numerous serious violations. Stephen Early, General
Counsel to the CBOT testified before the Subcommittee:
[O]ne of the violations was that Capcom London was
acting as a principal rather than an agent in transactions entered into on
behalf of its customers. Now in essence, what that means, if I can put it in
simplest terms, is that Capcom London was selling to its customers out of its
inventory of positions of contracts traded at the board of trade....It is
illegal in the United States...What we require is that the customer gets is the
trade that was transacted in the public auction on the floor of the exchange
and nothing else.(106)
Early concluded that "a trading practice such
as this ...may be a means to further cloud what you have already encountered as
the disarray of records, which is typical of Capcom and BCCI." Capcom
settled with the CBOT and agreed to "cease and desist" from further
violations and to pay a $124,000 fine.(107)
Early also testified that at the time "[W]e had
no direct evidence of money laundering on behalf of Capcom."(108)
However, during the same period, undercover Customs agent Robert Mazur was
learning from BCCI insiders that Capcom was, in fact, being used to launder
money. Mazur's undercover tapes formed the basis for the October, 1988
indictment of the trading firm.
Akbar
Blackmails BCCI
In the summer of 1988, just months before the
indictment in Tampa, Akbar contacted the Special Counsel to the Foreign
Relations Committee, Jack Blum, and during a luncheon meeting in New York,
claimed that he could lay out in detail the criminality of BCCI. Akbar boasts
were real: according to the 1991 Price Waterhouse Report, "...Akbar took
certain documents with him when he left [BCCI]. In 1988 he used this information
to blackmail [BCCI], which paid $32 million to prevent him disclosing the true
nature of the activities of Treasury..."(109) Akbar may have
been using his meeting Blum to threaten BCCI. In testimony to the Subcommittee,
Blum characterized his meeting with Akbar as "a $30 million lunch."(110)
The alleged bribes from BCCI to Akbar were paid into
the TWOY account at Capcom. According to the Ian Watt audit, "TWOY and
TWOY2 are both controlled by Akbar's brother, Mr. R. Akbar. The beneficial
owners are not known..."(111) But Watt notes, "Akbar
possessed a power of attorney over both TWOY accounts."(112)
In a secretly taped conversation Akbar explained to
agent Bob Mazur the use of coded accounts to disguise ownership. Akbar used the
example of TWOY, which he described as his account, and explained that
"TWOY" was a translation, presumably from his native language, of the
word "who":
"But if somebody asks, who's that person.
Number two, it means who? For my account and Tawoy. It is called Tawoye. Tawoy.
My account is Tawoye. Tawoye means who. No one asks who's Tawoye. We are not
supposed to. (113)
The auditors noted the booking of a $31 million loss
in the TWOY account in March 1987 from Standard and Poors Index futures trades.(114)
In short, Akbar may have used the Twoy account to launder money that he had
extorted from BCCI.
The
1988 Indictment
Capcom Financial Services, Ltd., the British parent
company of the Chicago-based Capcom Futures, Inc., was indicted by a grand jury
in Tampa, Florida on October 10, 1988.(115) S.Z.A. Akbar and BCCI
were also named in the indictment.
The indictment charged that Capcom had participated
in a conspiracy to launder money and to violate federal narcotics laws.(116)
The indictment specifically charged that Capcom had used its bank and customer
accounts to launder drug money for the Medellin cartel and other Latin American
sources.(117)
Just as BCCI mounted a full scale public relations
assault following the October 1988 indictment, so it appears did those with
ties to Capcom contemplate a similar campaign. In his January office diary,
Romrell noted "talked to Magness about CNN report and Capcom... waiting to
know the source of the misinformation."(118) TCI, which Magness
is chairman of, owns 20% of CNN. During the same period, Romrell also scribbled
in his diary "Ramsey Clark/Lyndon Johnson/ Atty Gen is talking to people
in Wash D.C. ... Drug charges may be lifted against Capcom."(119)
But the charges were not dropped and, in fact, a
second, superseding indictment against BCCI was issued in 1989.(120)
This second indictment added 14 additional defendants but it neither deleted
Akbar or Capcom as defendants nor did it alter the legal claims made against
them.(121)
Akbar was arrested in the UK where he had also been
indicted. He was found guilty and sentenced to 18 months in prison. After his
release, he fled to Paris where he was again arrested. Akbar is currently
awaiting extradition to the United States. While Capcom Financial Services,
Ltd., the UK parent, has been indicted, Capcom Futures, the U.S. subsidiary,
has never been indicted.
The day after Akbar and Capcom were indicted in the
U.S. for drug money-laundering, a memorandum was written by Romrell and John
Parry, which revealed that Romrell had working knowledge of some of the
"sensitive" accounts at Capcom, and that a joint agreement existed
between Romrell and Capcom to make investments:
"On Tuesday 11th October 1986 it was decided by
mutual agreement between John Parry and Larry Romrell that it would be in the
best interests of the company to liquidate the open positions in the account
GESS (General Securities). This decision was taken in light of the sensitive
nature of the account pertaining at the time...
"It was decided to close the account slowly
over a matter of days, if necessary, so as to preclude any market comment
concerning unnatural activity at Capcom.
For all of the above reasons it was also decided to liquidate
any open positions in the accounts of Little and Large."(122)
1989
Chicago Investigation
Following the announcements in October 1988 of the
Florida indictments of Capcom UK for money laundering and drug trafficking, the
futures markets activities of Capcom US, according to CFTC Chairperson Gramm,
"became of great concern" to the CFTC.(123)
Indeed, the CFTC and the Chicago Mercantile Exchange
commenced an inquiry into Capcom. According to Chairperson Gramm:
We were also interested in examining the Capcom US
records to identify potential evidence that might suggest money laundering.
Although money laundering is not a violation of the Commodity Exchange Act, the
commission staff wanted to be sure all relevant information was available to
the authorities who could best use it.(124)
On August 15, 1989, the CME Clearing House Finance
Subcommittee reviewed the staff report of the activities of Capcom Futures from
January, 1986 through May, 1989 and concluded that there was a reasonable basis
to charge Capcom U.S. with the following violations: "Act of bad
faith" (commingling customer funds with house funds); Permitting the
Misuse of facilities; Detrimental Act; Uncommercial conduct; Accepting new
trades when account undermargined; Transfers of positions with no change in
ownership; notification of reduction in capital in excess of 20%; and
non-compliance with financial requirements.
The CME found that trading at Capcom was often done
on the basis of oral instructions received from customers which were then
confirmed in writing. In some instances, according to the CME, "the files
showed no confirmations." Moreover, the CME's internal investigation found
that:
There were several transfers of funds from
unaffiliated Capcom-U.S. customer accounts into the Ixora account, an account
owned and controlled by Z.A. Akbar. According to the CME, no written
authorizations were obtained prior to the transfer of the funds.
According to the CME, Akbar, the owner of the Ixora
account, told the firm "he intended to use the account for trading and the
firm anticipated significant trading volume."(125) The Ixora
account actively traded from December, 1986 until May, 1987. From November,
1987 through October, 1988, there were twelve receipts into the account
totaling $9.84 million and twenty-five disbursements totaling $9.82 million.
CFTC Chairperson Gramm testified that IXORA was also "involved in a
complicated $2 million transaction involving Finley International, Ltd. and
Capcom UK."(126) Finley, as noted earlier, was the account used
to launder General Noriega's money.
Certain of the trades in the Ixora account were
clearly BCCI-related. For instance, a confirmation letter, dated April 27, 1987
is addressed to Mustafa Kamal c/o Bande Hasan. Mr. Hasan was an employee of
BCCI in Miami. Moreover, CFTC Chairperson Gramm told the Subcommittee that:
Information developed in our inquiry with respect to
the Ixora account at Capcom US, however, indicated that certain disbursements
were made to persons apparently unrelated to the purported account owners,
including Akbar Bilgrami, who may be the same Akbar Bilgrami identified as the
Director of Latin American Overseas by the October 1988 indictment.(127)
The Subcommittee has obtained documents which show
that Romrell is the individual named on the IXORA account at First National
Bank of Chicago. Moreover, Ixora account statements and bank statements were
sent to him at his Western Telecommunications offices. CFTC Chairperson Gramm
testified to the Subcommittee that "In February of 1988 S.Z.A. Akbar
instructed that a cash disbursement of $100,000 be made the IXORA account ...
to Mr. Romrell's account." (128) Concerning the IXORA account,
Romrell told the Subcommittee:
[I] learned from the Subcommittee that Ixora also
had an account at Capcom, but I have no knowledge of that account.
Ixora was a Cayman Islands corporation that was
owned by Mr. Akbar. Mr. Akbar asked me to find the name of a Cayman Islands
lawyer to handle this matter....To my knowledge, Ixora never conducted any
business whatsoever.(129)
According to Chairperson Gramm, investigators were
unable to learn anything more about the IXORA account because "Mr. Saghir
exercised his fifth amendment rights with respect to all questions concerning
this account when his investigative testimony was taken by the CFTC.(130)
The CME also found that there were multiple
transfers of funds between Mohammed Zaheer, the brother of Capcom Futures'
President, M. Saghir and two unaffiliated customer accounts.
On October 29 1987 there were six receipts in the
Zaheer account totaling $4.84 million and the next day there were two
disbursements totaling $4.80 million. The CME noted that "from the period
December 31, 1986 through May 31, 1989, the ledger balance of the account was
usually less than $150,000." These transfers are particularly suspect
because an investigative firm retained by the CME discovered that Mr. Zaheer
worked in a service station in Karachi, Pakistan and his position at this
service station is described as "not very high."(131)
After reviewing the Saghir/Zaheer transactions,
Gerald Beyer, Vice President for the CME, told the Subcommittee that "On a
person level, when I was involved in this investigation, I was certain that it
involved drug money and laundering of money.
But there was no way we could prove that. We
discussed that in our committee; we discussed that among ourselves."(132)
Despite suspicions about highly unusual
transactions, CFTC Chairperson Wendy Gramm told the Subcommittee:
In terms of finding trading violations or Commodity
Exchange Act violations that perhaps could support money laundering, we did not
find any discernible pattern...[N]o one has ben able to --at least other law
enforcement officials have not been able to find money laundering in Capcom US,
to our knowledge, as of now.(133)
Money laundering, as Chairperson Gramm testified, is
not even a violation of the Commodities Futures Trading Act. Incredibly, it
appears that the CFTC and the self-regulatory organizations have never even
made a criminal referral for possible money laundering:
Senator Kerry. [H]ave you ever specifically
referred, or have any of the exchanges ever made a criminal referral for money
laundering?
Dr. Gramm. We have raised concerns.
Senator Kerry. Have you made a criminal referral for
money laundering?
Dr. Gramm. No. Not-- not specifically in that
regard...
Capcom
Today
Chairperson Gramm told the Subcommittee that the
results of the inquiry by the CFTC "contributed to the removal of Capcom
US from US financial markets."(134) According to Gramm:
The Chicago Mercantile Exchange, CME, immediately
restricted the trading activities of Akbar and subsequently made specific
findings in October of 1989 that Capcom US had violated CME rules, including
accepting new trades in an undermargined account and improperly transferring
positions between accounts. Capcom US paid a fine of $500,000 and agreed to
withdraw as a CME clearing member.
Early in 1989 the Chicago Board of Trade, the only
US exchange for which Capcom UK was a member, suspended Capcom UK indefinitely
and Capcom UK was subsequently expelled on August 24, 1989. Also, on June 30,
1989 they allowed Capcom US to withdraw from CBOT membership. In accepting the
Capcom UK settlement, the Board of Trade had reason to believe that Capcom UK
had entered into reckless and unbusinesslike dealings, was unable to
demonstrate capital compliance, and engaged in fraud and dishonorable conduct
in its dealings with the exchanges, among other things.
In October of 1990 the NFA, the National Futures
Association, found Capcom US to have violated NFA rules by making
misrepresentations to a customer and making unauthorized trades, failing to
collect proper margin from a customer, and failing to supervise employees and
agents. As a consequence NFA ordered Capcom US to relinquish its FCM
registration and NFA membership and never to reapply, and to dissolve its
corporate status at the earliest possible date.
Ms. Gramm also stated that "all of the
information developed by the commission [including that developed by the
exchanges]....was made available to the prosecutors in charge of the criminal
case pending in Tampa."
While Capcom UK was indicted in the US, it has never
been tried and has successfully avoided service of process. More amazingly,
Capcom UK continues to operate in London to this day. In fact, it has developed
new European clients. While ZA Akbar is in jail in France, his legal defense
bills, in excess of $100,000 a year are being picked up by Capcom. Moreover,
Akbar's brother and Mrs. Puri, until recently, served on the board of Capcom.
Conclusion
Turmoil in the Persian Gulf after the fall of the
Shah of Iran in 1979 left a vacuum in the CIA's capability to gather
information. The huge CIA operation in Iran was lost, including its most
important listening stations to monitor the Soviet Union and China. With Iran
and Iraq locked in a land war, options remaining were limited to several
friendly nations: Saudi Arabia, U.A.E., Oman, and Kuwait. With the
revolutionary changes in technology that spawned the modern communications
industry in the 1980's came the need for the proper U.S. agencies to employ it,
and, conversely, for our allies to gain access to it.
It was in this climate that majority shareholders in
BCCI approached U.S. executives in the communications industry to serve on the
board of Capcom. The Americans, Larry Romrell, Robert Magness, both of
Telecommunications Inc., and Kerry Fox of American Telecommunications Company,
had no knowledge or background in commodities trading, and evidently were never
involved in the management of the firm.
The evidence of the role of Saudi Intelligence
officials, Adham and Khalil, who are the principle liaisons with the CIA over
two decades, owning and controlling Capcom, is disturbing to the Subcommittee
for two reasons. First, the Subcommittee is concerned by the possibility of a
foreign intelligence service promoting a policy agenda in the U.S. Secondly,
the close relationship of Saudi Intelligence to the CIA leads to the question
of whether or not the CIA was aware of Saudi activities in the U.S.. The CIA
has unequivocally told the Subcommittee that it did not use and has no
knowledge of Capcom, and that it was unaware of the investments in Capcom by
Sheik Adham and Sheik Khalil.
Unfortunately, it will be increasingly difficult to
ascertain the purposes for which Capcom was used. In a December, 1990 letter,
it was noted that Mrs. Puri, wife of A.J. Puri, was handling the "final
details" of the Capital Fund wind-up. Although the meaning of final
details is ambiguous, the London Independent reported in August, 1991 that
"more than 100 boxes of files and other papers belonging to BCCI-linked
Capcom Financial Services...were destroyed on the orders of a senior Capcom
official...The request to destroy the documents was made by Sushma Puri...Ms.
Puri is also co-director along with Capcom's founder, S.Z.A. Akbar, of Futures
Advisory Services."(135)
Documents do still exist in the United States.
Andrea Cocoran of the CFTC told the Subcommittee that the CFTC has all the
records. Chairperson Gramm added that "We do have an investigation that
continues regarding Capcom US."(136)
While it is encouraging to learn that the CFTC is
continuing to investigate Capcom, four years have lapsed since Capcom was
originally indicted. Counsel for Larry Romrell, the Chairman of Capcom, told
the Subcommittee in the spring of 1992 that his client had not been interviewed
nor had his records been subpoenaed by any law enforcement agency: the
Subcommittee was the first government entity to show interest in Mr. Romrell's
role in the entire Capcom affair. Clearly, in the United States, a much greater
investigative effort needs to be devoted to Capcom. It is hard to understand
why British regulators -- in light of the Peat Marwick report -- have allowed
Capcom UK to continue operations. Subcommittee staff have been advised that
Lord Justice Bingham has looked into the irregularities surrounding Capcom in
the United Kingdom. His findings regarding Capcom's activities in the UK will,
it is hoped, expose more of the facts concerning its extensive activities in
the UK than the US investigations have been able to uncover.
In
terms of the broader lessons of Capcom, regulation of the futures markets need
to be greatly strengthened. Even a cursory background check on Akbar would have
revealed that he had managed the Treasury accounts at BCCI which lost $400
million in the futures markets in the early eighties. Moreover, regulators who
appeared before the Subcommittee testified on the one hand that annual audits
of Capcom US turned up nothing irregular, but that Capcom's books and records
were a mess. That such a contradiction was allowed to continue for four years
indicates that the CFTC needs to critically review the effectiveness of the
various exchange audits. Finally, money laundering should be made a crime under
the Commodities Futures Trading Act.
APPENDIX 1
Romrell
Proposals To Akbar
1. Installation of a subscription T.V. service in
Saudi Arabia: "...I would rather work with you and Mr. Khalil on this
venture."(137) (Khalil was the Minister of Communications in
Saudi Arabia.)
2. "...Mr. Khalil, the Saudi Sheikh...I will go
over the material with him and I feel confident he will be interested..."(138)
3. Advice on how to proceed on TCI's bid to the Saudi
Arabian government for cable television distribution system located at the
Royal Saudi Air Defense Command School, Jeddah.(139)
4. Advice on proposal to TCI to install a cable
system for the Ministry of Defense and Aviation Army Air Defense Command.(140)
5. $90,000,000 investment in a hospital in Houston,
Northwest Medical Center. Proposal that Magness and Romrell take 25 percent,
BCCI 50 percent, doctors 25 percent.(141)
6. $22,000,000 joint purchase of Stouffers Inn,
Denver.(142)
7. BCCI loan proposed for $2,600,000 for a related
investor group to purchase 30 percent in cattle feedlots owned partly by
Magness and Romrell.(143)
8. Purchase proposal of Winterwood Townhomes,
Steamboat Springs, using BCCI loan of $2,500,000 arranged by Romrell.(144)
9. Proposal of an investment of $3,100,000 in Marina
Del Rey, California.(145)
10. $300,000 credit line from BCCI for operation of
Amigo Farms. (April 18, 1984)(146)
11. $50,000 credit line for Romrell and Magness from
BCCI. (June 5, 1984)
12. Beehive International building in Salt Lake
City, Utah; Corporate Secretary and General Counsel is Romrell's brother;
"with his inside information we could make a good deal."(147)
13. Oil and gas investment in Windsor Reservoir.(148)
14. "$6 million of credit on real estate to a
friend of Romrell.(149)
15. "Duds 'n Suds" share offering purchase
proposal before public issue proposed by Romrell to Akbar.(150)
16. Proposal for BCCI to be a partner in a land deal
in Phoenix with Mr. Noel Cullison, who Romrell had arranged to borrow $525,000
from Capcom.(151)
17. $2,635,899 balance in loan credit from BCCI to
Winterwood.(152)
18. "I scheduled a meeting with Mr. Shoaib and
Mr. Nazarian with myself and Mr. Magness."(153)
19. "Also, I am enclosing another letter
from Tony Coelho. Tony Coelho would be the third most important man in the U.S.
Government, with the President and the Speaker of the House being first and
second most important."(154)
APPENDIX II
Money
Flow From BCCI to Capcom and Related Individuals
The following transactions are an indication of the
dimension of the relationship between the BCCI group and Capcom and related
individuals, transactions which occurred in Capcom, and other financial details
which have been found on documents produced to the Subcommittee. In some
instances, this information resolves and explains questions regarding Capcom,
but in others it raises questions.
The itemization of these transactions is presented
here only as a log to put on public record in some consolidated order the
evidence of financial events which relate to Capcom.
A. ATC / FOX / Akbar et al.
Akbar and entities which be controlled issued credit
and purchased equity in American Telecommunications, Inc (ATC). The Chairman
and CEO of ATC is Mr. Kerry Fox. Mr. Larry E. Romrell is a Director of ATC. Mr.
Fox was a Director of Capital Fund, a Capcom public investment fund which was
the recipient of large amounts of moneys skimmed or laundered by Capcom, as described
later in this report.
The following transactions occurred between Mr.
Kerry Fox, ATC, Akbar, Capcom, Financial Advisory Services, and BCCI:
1. 150,000 shares of ATC purchased by Zask Investments
and Trading, owned by Akbar, operated out of Liechtenstein.
2. 30,000 shares purchased as in 1 above.
3. 177,102 shares purchased by Financial Advisory
Services (FAS), owned and controlled by Akbar, linked to Capcom as an
"introducing agent".
April 20, 1988.
4. $100,000 borrowed by ATC from Zask, June 1, 1989.
5. 50,000 warrants of ATC stock purchased by FAS.
6. 50,000 warrants of ATC stock purchased by Zask.
7. 25,000 warrants of ATC stock (not purchased)
owned by Akbar.
8. June 11, 1991 letter from Fox to Akbar offers ATC
warrants to Capital Fund, referring to the February 12, 1987 and August 5, 1988
grants of warrants.
9. September 30, 1988 letter from Fox to Akbar
solicited Akbar's support in arranging receivables financing in the amount of
$1.5 million.
10. $100,000 loaned to ATC June 15, 1988 by Akbar.
Fox refers to ATC making losses and asks Akbar to consider making another
$100,000 credit.
11. Request from Fox to Akbar May 3, 1988, stating
that Fox had "nowhere else to turn" and was in a "near
term but critical cash flow problem" (emphasis added), for
"another" immediate loan of $250,000 and longer term $2-3,000,000
financing package.
NOTE: Akbar was a
Director of ATC to November 4, 1988, when he resigned subsequent to his and
Capcom's October 10, 1988 indictments for drug money-laundering. Some of the
above transactions occurred after the indictment and conviction of Akbar.
B. BCCI / Fox, Romrell / Khalil / Adham
Fox and Romrell acted as a front for A.R. Khalil for
the purchase of three real estate assets in the U.S., as described later in
this report. Akbar was the BCCI officer who arranged the financing.
1. $530,000 loan from BCCI to Fox/Romrell for
construction of "Potato Patch" house, Vail, Colorado.
2. $908,625 loan from BCCI as of February 7, 1983,
apparently for Vail Associates apartments.(155)
3. $2,000,000 loan BCCI to Dr. Charles Howard,
Houston for sale of "Potato Patch" house by Romrell/Fox, who arranged
loan and received part of proceeds.
4. November 8, 1982 letter from BCCI, Cayman to
Fox/Romrell confirming loans outstanding:
$754,619 (Potato Patch, Vail)
$108,742
$532,003 (collateral: 1st mortgage on Khalil's Vail
house)
5. Payments of $15,000, $34,995, and $20,000 were
paid by Khalil to Fox/Romrell in March, April 1981, apparently to find costs of
a real estate construction project.
6. Fox/Romrell had an account at BCCI, Cayman,
#03002241, which had a balance of $388,486.33 on December 1, 1981.
7. $2,635,899 balance in loan accounts at BCCI for
Magness, Romrell properties (Amigo Farms).(156)
8. $2,000,000 loan request by Romrell from BCCI,
Cayman for IXORA Investments, Ltd, a company owned by Akbar cited by the CME in
1987 for 53 irregular transactions which imply money-laundering, although the
Audit Report stated "We cannot speculate on the reasons, known only to
them." The CME required total financial disclosures against the threat of
expulsion, which caused ownership and directorship changes in 1987/88.
The transfers into the account came from A.
Bilgrami, the BCCI officer convicted of drug money-laundering and presently
serving prison sentence in Florida.
$1,950,000 was dispersed from the IXORA account at
Capcom U.S. to Capcom U.K. on September 23, 1988.
A letter of January 1990 from First Chicago
indicates that IXORA is an account owned by Akbar c/o Romrell, who had
apparently acted for the company IXORA for many years.
9. A British accountant investigating for the Serious
Fraud Office, London, noted:
"...a series of transfers made out of and back
to the Winterwood Associates [Romrell/Magness] funding around year end 1985.
Two amounts of $1,000,000 were credited to this account from Bank America
Int'l, N.Y. prior to Dec. 31, 1985. Subsequently, on 2 Jan. 1986, one amount of
$1,000,000 was transferred to 1st Interstate Bank favoring Larry Romrell and
another of $1,018,750 transferred to Account No. 01024628 of Mr. A.R. Khalil
with BCCI. Ziauddin Akbar and K. Muneer were involved in authorizing both
transfers." "The 01024628 account has been identified from our
investigation into treasury operations as a London treasury pool account."
This suggests that the Winterwood Associates account
of Romrell/Magness and/or Romrell may have been connected to the "routing
of funds" by BCCI.
10. Kamal Adham, majority shareholder of Capcom, was
responsible for estimated losses at BCCI of $199 million as of December 29,
1990.(157)
11. A "Note for File 11.9.84" indicates
that BCCI loaned Magness and Romrell $75,000 each to buy shares in Capcom.
C. Capital Fund (Capcom) / Kerry Fox
This was a public investment fund organized by
Akbar/Capcom with Kerry Fox as Director. It was the recipient of funds from skimming
and money-laundering.
1. October 14, 1985 share capital of $900,000 was
authorized and by January 1, 1986, $10,000,000 was fully subscribed by
investors.(158)
2. Akbar controlled entities, Notan Trading and
Investment, Zask Investments and Trading, Pate Holdings, Riziaudden Akbar
contributed $8,145,000 of the $10,000,000 to capital fund, thereby benefiting
of 80 percent of the funds skimmed or laundered into Capital Fund.
3. October 31, 1988 Special Audit identified
$2,900,000 of funds artificially "processed" between certain accounts
of which Capital Fund was the recipient.
4. $734,158 was skimmed into Capital Fund from 16
customer accounts by "internal matching."(159)
D. Capcom Financial Information
1. Audit as at October 31, 1988 for Capcom: 1988
showed Brokerage Commission Income 7,156,692 and loss on ordinary activities
8,514,936. Stock ownership at this date by Directors was as follows:
a. Romrell: 250,000 shares, down from 2,750,000
shares in 1987
b. A.R. Khalil: 8,250,000 shares (1/3 of
outstanding)
c. A.K. Puri: 3,620,000 shares
d. B. Magness: 250,000 shares
e. S.Z.A. Akbar: 6,000,000 shares
2. February 3, 1988 Khalil "sold"
8,250,000 shares to Akbar for 8,250,000. However, 4,000,000 cash was debited to
a Capcom account which did not have sufficient funds and the balance of
4,250,000 was offset of "other obligations." The transaction appears
to be only a camouflage of Khalil's interest to circumvent disclosure
requirements imposed by regulatory authorities in late 1987.(160)
3. October 31, 1988 Special Audit revealed a total
of $3,600,000 of artificially processed transactions between accounts at
Capcom.
4. October 31, 1988 Special Audit detailed
11,518,360 provision against "doubtful customer balances."
5. Auditors noted an unexplained deposit in Capcom
of 8.6 million by an Egyptian Dr. Attia with no trading having taken place.
6. $53,000,000 schedule of "profits" for
the ARKY account at Capcom found in Akbar's desk. Presumably this is the
account of A.R. Khalil. These "profits were made from October, 1984 to
September, 1985, the period in which BCCI lost $430 million at Capcom. This is
the clearest evidence that the shareholders of Capcom and/or Akbar stole funds
from BCCI through artificial market transactions.(161)
7. $525,000 loan to Mr. Noel Cullison for a real
estate development in Phoenix, arranged and managed by Romrell.(162)
8. Romrell borrowed $400,000 from Mideast Finances,
Ltd., P.O. Box 211, Port Vila, Vanuatu for the purchase of his shares in Capcom
Futures, Chicago. the credit was strictly limited to the value of his Capcom
Futures shares, with no other liability. The document is dated September 30,
1988, but is not signed, leaving open the issue of whether this was the actual
form of financing for his share purchase.
9. Magness entered into the same financing
arrangement with Mideast Finances, Ltd, Vanuatu as in (8) above, dated
September 30, 1988. The document in file is not a signed copy either.
10. A Resolution of the Board October 3, 1988
Authorized Share Capital Increase of Capcom Financial Services, Ltd, London to
100,000,000 (approximately $150,000,000). The intent evidenced by this document
evidences the large scope of business contemplated by Capcom. Such a
capitalization would have placed it among the largest brokerage houses in the
world within three years from start-up.
11. May 11, 1989 letter from Parry to Romrell
requiring confirmation of the debt of Romrell ($400,000) and Magness ($100,000)
to Capcom Financial Services, Ltd, requesting repayment and confirmation that
Capcom Futures, Inc shares are the security for this indebtedness.
This document suggests that the financing of
Romrell's and Magness' shares was not done through Mideast Finances Ltd,
Vanuatu, or that Capcom Financial Services, Ltd owns Mideast Finances, Ltd and
assigned the debt.
It should be noted that in the Capcom group was a
company called Capcom Bankers, Ltd, Suite 11, Melitco House, Rue Pastenn, port
Vila, Vanuatu.
12. August 14, 1986 letter from Akbar, Capcom
Financial Services to Romrell, Western Telecommunications states that Romrell's
balances on July 18, 1986 at Capcom were as follows:
Investment Account $48,670 CR
Loan Account 53,250 DR
The loan account had been paid down with profits
from the Investment Account leading to a new balance as follows:
Investment Account $14,260 CR
Loan Account 30,000 DR
This implies that the Capcom share financing was
"self-liquidating" from internal Capcom transactions, so that Romrell
would finally own the shares without paying for them.
13. It is reported that BCCI lost $430,000,000 in
the Capcom affair.(163) This allegedly occurred from September, 1984
to July, 1985.
14. An internal Capcom account GESS (General
Securities Corp) loaned FAS (Financial Advisory Services, Ltd, owned by Akbar)
1,627,812.03 to purchase its office building at 107 Grays Inn Road, London on
September 1, 1986.
The repayment of the loan does not connect to its
funding, having come from the following. Sources: Sheikh Nooruddin, Middle East
Bank, with funds which should have gone to GESS, instead going to GOOD
(195,000), TWOY (350,000), GESS (1,209), totalling 1,754,000.
15. A snapshot of internal account management at
Capcom is provided by an audit review revealing the following:
Finley International (presumably the company through
which Noriega's money passed) sent $1,000,000 on September 16, 1988 and
$10,000,000 on September 19, 1988. Akbar's explanation to the auditors was that
"funds were to cover losses made by GESS when covering GOOD's position in
silver in 1987."
16. The audit report stated that Predelict
Investments, Ltd, owned by the Nigerian National Petroleum Corporation, loaned
Capcom $10,000,000 from its Capcom Sub-account 134-170-054/52/200, with a two
percent fee paid to Predelict, as noted on a letter October 4, 1988. The funds
were returned to Predelict 12/10/88.
17. "The owner of the GOOD account is El Rayan,
an Islamic Investment company based in Cairo...one of the largest in Egypt in
import/export and real estate and funds management...Egyptian authorities
closed El Rayan in November 1988." It was described as "Capcom's
biggest account" and may have "lost" up to $90,000,000.(164)
It should be noted that the code used on all telexes
from Romrell to A.R. Khalil at the Kamal Adham office in Jeddah is
"GOOD".
18. A total of $47,500,000 in nine separate
transfers was paid to Capcom from Credit and Finance Corp, Cayman; BCCI
Overseas, Cayman; Bank of New York. These transactions relate to Blackmail,
Akbar, $32 million as discussed later.(165)
19. $150,000 payment February 10, 1988 through
Capcom from Ahmed Tawfick to Shakarchi Trading, A.G., the Zürich-based company
recently identified in a $1 billion money-laundering scandal in Switzerland.(166)
20. $68,000,000 was paid from Treasury at BCCI to
Brenchase, Ltd, a wholly owned Capcom subsidiary, on June 25, 1985, "for
an unknown purpose."(167)
21. "Two payments of $50,000,000 were made to
Capcom in March, 1986 out of external funds [BCCI Treasury] for which no
liability for repayment was recorded."(168)
22. Capcom Financial Services, Ltd loaned
$10,000,000 originally to Capcom Futures, Inc, Chicago, then replaced that loan
with a $12,500,000 loan.(169)
23. Romrell had a series of payments to and from
Capcom in London around July 1, 1987 for his personal account at Capcom:
$25,000, $148,000, $22,000, $50,000.
1.
According to Akbar Bilgrami, the losses at BCCI were accumulating long before
Akbar assumed his responsibilities at BCCI's Treasury. According to Bilgrami,
the "hole" in BCCI dated from the mid-seventies and increased until
the early 1980's when the accountants began to suspect that BCCI was in
financial difficulty. BCCI's Treasury losses were nothing more than a
convenient means for explaining the actual financial condition of the bank.
2.
Tape 150N, 9/2/88, 11:20 a.m., London, from U.S. v. BCCI, et al in Tampa.
3. S.
Hrg. 102-305, Pt.1, p.513.
4.
Price Waterhouse, 1991 Report, Section 4, Treasury, p.16.
5. Id
at 17.
6.
Price Waterhouse, 1991 Report, p.2.
7.
Id. p.21.
8. By
October 3, 1988, a Resolution of the Board of Directors authorized an increase
in share capital to 100,000,000, a staggering amount, raising the question as
to how the firm planned to grow so quickly.
9. S.
Hrg. 102-350, Pt. 1, p.513.
10.
Bandung Productions, transcript, "The Fraud of the Century",
September 11, 1991, pp. 53-59.
11.
S. Hrg. 102-350, Pt. 1, p.513.
12.
Markets, by Martin Mayer, Norton Publishing, 1988, p.xxi.
13.
Id. p. xxiv.
14.
According to the Chairperson of the Commodities Futures Trading Commission,
Wendy Gramm, the futures markets operate on the same principle of "know
your customer" as banks. According to Gramm:
The
futures broker, the futures commission merchant, does have responsibilities
with regard to its customer accounts, including knowing its customers. The
self-regulatory organizations have an obligation to ensure that they are
meeting those responsibilities, and also do audits concerning brokers'
activities with regard to their customers. see Gramm testimony, S. Hrg.
102-350, Pt. 6, p.647.
15.
Price Waterhouse Report, June 22, 1991, p.21, Reprinted in S. Hrg. 102-350,
Pt.5.
16.
According to the Chairperson of the Commodities Futures Trading Commission,
Wendy Gramm, Capcom US "was a relatively small, smaller than average
company, with not many customer accounts and unremarkable in its trading."
see Gramm testimony, S. Hrg. 102 -350, Pt.6, p. 647.
17.
Capcom 1987 Annual Report. In testimony before the Subcommittee, Andrea
Cocoran, Director of Planning and Supervision at the CFTC, confirmed that
Capcom UK realized a net loss on futures trading of $76,206,064 to Refco. see
testimony, Andrea Cocoran, S. Hrg. Pt.6, p.651.
18.
In her testimony to the Subcommittee on July 30, 1992, Wendy Gramm, the
Chairperson of the Commodities Futures Exchange Commission (CFTC), noted that
"we found that certain principals of Capcom US, specifically S.Z.A. Akbar,
Sushma Puri, and Mohammed Saghir, had previously worked at BCCI. S. Hrg. Pt. 6,
p.7.
19.
Price Waterhouse Report, June 22, 1991, p.21, emphasis added
20.
Id.
21.
Price Waterhouse Report, July 22, 1991, p.20. Reprinted in S. Hrg. Pt. 5.
22.
Id. p.21
23.
S. Hrg. 102-350, Pt. 1, p.513.
24.
Id. p. 513.
25.
Mazur tapes 150N, 9/20/88, 11:20 p.m., p.73, line 22-23, p.74, line 15
26.
Handwritten Consolidated Profit and Loss Statement, Capcom, October 31, 1985.
27.
February 17, 1989 Audit, Coopers and Lybrand Investigation of Capcom, p. 2.
28.
Wall Street Journal, Peter Truell, 11/22/91, p.A1.
29.
According to the 1991 Price Waterhouse report, "the adjustments in 1985
occurred in the period 25-28 June when amounts totalling $191 million were
drawn down in the names of Khalil [and others]" and were paid to
"Z.A.Akbar ($142 million) to adjust various Treasury pool accounts."
Price Waterhouse Report, June 22, 1991, p.30.
30.
For example, the account was to be in his name; accounts were opened in the
name of his wife; BCCI Visa cards were issued to him, his wife and their
children, and the bills were paid from the BCCI accounts.
31.
Account Opening Forms, dated 24 August 1982. Correspondence was to be sent to
Amjad Awan, BCCI Branch Manager in Panama.
32. 158626
July 1988 Letter from Subhan Siddiqui to BCCI Luxembourg.
33.
Throughout the course of these events, "Finley International Ltd." is
alternatively spelled "Findlays," "Finlay," "Finley International
Co.," or "Finleys International Ltd." The account numbers and
transfer letters of the various banks leave no doubt that all the names refer
to Finley International Ltd., a Capcom customer. Finley International Ltd. is a
company registered in Liberia whose only two officers are S. Z. Akbar and G. R.
Khan. Akbar served as its chairman and treasurer.
34.
26 July 1988 Letter from Noriega to the manager of BCCI Luxembourg.
35. 8
September 1988 Letter from Eva de Teran of Banco Nacionale de Panama to Middle
East Bank (to the attention of Amanullah Khan).
36.
Complaint, Republic of Panama v. BCCI Holdings, et al., Case No.
90-2913-CIV-RYSKAMP (D.C. Fla.), dated 18 January 1991, at 6.
37.
13 September 1988 Letter from Eva de Teran of Banco Nacionale de Panama to
Middle East Bank (to the attention of Amanullah Khan).
38.
Akbar claimed that the $23 million received by Finley were remitted by a real
estate investor named Al Fathi Tawfik who died in 1988. Akbar denied that any
connection existed between the Finley deposits and Noriega. Ian Glendinning
Watt, a Chartered Accountant of Peat, Marwick appointed to investigate Capcom's
trading, found Akbar's explanations on this and every other matter to be
"unsatisfactory," Affidavit of Ian Glendinning Watt dated 20 January
1989, at 44, "deficien[t]," id. at 45, "most
curious," "illogical," and "not capable of
corroboration." Id. at 46.
39.
Among various papers in Mr. Akbar's desk at the time of his arrest was a
schedule indicating that an account with the code name ARKY [presumed to be
A.R. Khalil] earned profits of $53 million between October 1984 and September
1985." "The owner of account GOOD is El Rayan, an Islamic Investment
Company based in Cairo...Egyptian authorities closed El Rayan in November,s
1988." "...it may have lost $90,000,000." The closing of El
Rayan was the month following Akbar's indictment for drug money-laundering,
October 19, 1988. Numerous fax transmissions from Romrell to Khalil at the
"Kamal Adham Office" in Jeddah are inscribed "Code: GOOD".
40.
Watt Affidavit, p 18. Reprinted in S. Hrg. 102-350, Pt. 6.
41.
The company behind the GESS account is General Securities, registered in
Panama. Watt Affidavit at 20.
42. See,
e.g., Watt Affidavit, at 38, 40, and 42.
43.
The Finley account at Middle East Bank. See 13 September 1988 Letter
from Akbar and Khan (on Finley letterhead) to Middle East Bank. Akbar admitted
that he controlled the GESS account, see Watt Affidavit at 20, denied
having any control over the GOOD account, id. at 38, and offered no
explanation for the $2.5 million transfer to the Red Roses Account at the Trade
Development Bank in Zurich. Id. at 42.
44.
Staff Review of Capcom client list, provided by the Commodities Futures
Exchange Commission. The Subcommittee would like to thank the staff of the
Commodities Futures Exchange Commission which has provided important assistance
to the Subcommittee.
45.
The Price Waterhouse Report stated that Adham's exposure of losses at BCCI as
of December 29, 1990, was $249,000,000; estimated losses were $199,000,000.
Price Waterhouse Report, June 22, 1991, p.6
46.
Transcript, Federal Reserve Board Hearing, April 23, 1981, p.65.
47.
Khalil also had known Powell for several years prior to the creation of Capcom,
although Powell was not connected, as far as the Subcommittee knows, to any
communications business.
48.
Letter, Romrell to Akbar, November 17, 1981.
49.
Answers of Larry Romrell to questions from Subcommittee, July 3, 1992,
questions 28.
50.
"89225 1 BCCLNA G.
TCI
ENGL
6/9/83
Attn.
Mr. Akbar
At
the TCI Stockholders meeting this morning it was announced there would be a one
for one stock split of TCI stock, effective date 6/24/83.
Best
regards,
Larry
Romrell. (Telex, 6/9/83)
51. Letter,
Romrell to Akbar, April 2, 1984, WTCI letterhead
Further
in the same letter:Magness and I are most anxious to visit with you with regard
to the business opportunity we discussed in Chicago or New York." The opportunity referred to in
the letter appears to be the founding of Capcom.
52.
Letter, March 19, 1984, draft of Telex to Akbar.
53.
staff interview with Romrell, 6/16/92. In his written response, provided under
oath, Romrell stated: "In 1984 following the spin-off of WTCI, the stock
might become available on the market. I contacted Mr. Akbar to inquire whether
BCCI would lend money with which I could purchase shares. In that conversation,
I understood that Mr. Akbar agreed to establish a line of credit for me, and
that he was also interested in purchasing stock. There was no discussion of any
joint line of credit, or even of how Mr, Akbar might finance his purchase. The
March 19, 1984 reflects that understanding. However, I never received a
response from Mr. Akbar. I never received the line of credit mentioned, I never
put Akbar in touch with my broker, and, to my knowledge, Mr. Akbar never
invested in TCI or WTCI." Affidavit, Larry Romrell, July 3, 1992, answer
40.
54.
Letter, November 14, 1984, Romrell to Akbar at BCCI, London.
55.
Letter, Betram Perkel, Law Offices of Jerome Kern, February 11, 1992. p.2,
Reprinted in S. Hrg. 102-350. Pt.6.
56.
Letter, February 27, 1984
57.
Undated note on Western TCI note paper, styled Romrell.
Akbar's
representation, as recorded by Romrell, is further evidence that from the
beginning Akbar contemplated a BCCI link since there could not possibly be any
other means for earning such commissions in a start-up company.
58.
Telex, May 27, 1984.
59.
Magness Affidavit, 5/19/92, p.3.
60.
Id, p.3.
61.
While Magness was already a wealthy man, this must be considered a significant
investment on the part of Romrell who was at that time a salaried employee
making $38,000.00.
62.
Note for file, 11.9.84, hand-written.
63.
Letter, February 6, 1985, Romrell to Mr. Ajay Puri, Capcom, London.
64.
Letter, November 7, 1984, Larry Romrell to Mr. Ajay Puri, Capital Commodities
Dealers, Ltd, London, attached.
65.
Letter, November 7, 1984, Larry Romrell to Mr. Ajay Puri, Capital Commodities
Dealers, Ltd, London.
66.
Letter and loan documents attached, June 11, 1985, Letter from Romrell to Mr.
Ajay Puri, Capcom.
67.
Written responses from Larry Romrell, July 3, 1992, answer 53.
68.
Staff interview with Larry Romrell, June 5, 1992.
69.
Letter, August 22, 1986, Romrell to Akbar.
70.
Letter, Romrell to Khalil, Adham, July 27, 1987.
71.
The loan documents specified: "(a) that the total liability of the
borrower in the repayment of the loan and all its accrued interests is strictly
limited to the value of his shares in Capcom Financial Services, Ltd..."
Paten loan agreement ("old and new loans"), signed, Romrell, June 30
1987.
72.
Signed Larry Romrell et al, letter March 28, 1988, Capcom to Arthur Anderson,
London, emphasis added.
73.
Written responses from Larry Romrell, July 3, 1992, answer 58.
74.
Letter, July 20, 1987, L.E. Romrell to Sheik Abdul Raouf H. Khalil, Sheik Kamal
Adham, Mr. El Ghary, emphasis added.
75.
Letter, July 25, 1987, L.E. Romrell to Sheikh Abdul Raouf H. Khalil, H.E.
Sheikh Kamal Adham, El Sayed E. El Jawhary.
76.
Mazur tape 150N, 9/20/88, p.9, line 1.
77.
Affidavit, Robert E. Powell, July 8, 1992, p.5. Reprinted in S. Hrg. 102-350,
Pt. 6.
78.
Letter, Harry H. Schneider, Department of the Air Force, "To Whom it may
Concern," January 3, 1977.
79.
Affidavit, Robert E. Powell, July 8, 1992, p. 1. Reprinted in S. Hrg. 102-350,
Pt. 6.
80.
Affidavit, Robert E. Powell, August 2, 1992, p.1. Reprinted in S. Hrg. 102-350,
Pt.6.
81.
Affidavit, Robert E. Powell, June 21, 1992, answer to question 17. Reprinted in
S. Hrg. 102 -350, Pt. 6.
82.
Id., answer to question 19.
83.
Affidavit, Robert E. Powell, August 2, 1992, p.2. Reprinted in S. Hrg. 102-
350, Pt. 6.
84.
Affidavit, Robert E. Powell, June 21, 1992 answer to question 23. Reprinted in
S. Hrg. 102- 350., Pt.6.
85.
Id. answer to question 24.
86.
Fox has acknowledged to the Subcommittee that he maintained a top secret
clearance during this period because he worked with sophisticated electronics
components in Saudi Arabia for Martin Marietta and Rockwell International.
Romrell
told the Subcommittee that Fox once worked for ARAMCO -- the middle east oil
concern. Staff interview with Romrell, June 5, 1992.
87.
Letter, Fox to Jamil Khan, BCCI Overseas, Cayman Islands, April 22, 1987.
88.
Statement of Witness, Kerry Fox, September 19, 1990
89.
Interview with Larry Romrell, June 5, 1992.
90.
Letter, June 28, 1982, Fox to Richard Bowman and Statement of Witness,
September 19, 1990.
91.
Id.
92.
Id.
93.
Id, p.2.
94.
Statement of Witness, Kerry Fox, September 19, 1990.
95.
Staff interview with Larry Romrell, June 5, 1992.
96.
Documents show that "the Lake House", Rockwall, Texas, was purchased
"with or through BCCI...Khalil bought the house in 1981, but immediately
conveyed the property to BCCI in full satisfaction of debt to Khalil Investment
and Trading Co., Panama. Letter, Fox to Khan, August 23, 1989.
97.
Letter, Fox to Akbar, February 2, 1982. In 1984, Romrell's annual salary was
approximately $38,000.00. Staff interview with Larry Romrell, June 5, 1992.
98.
Letter, Lynn H. Cole, lawyer for Kerry Fox, to David McKean, July 27, 1992.
99.
Letter from S. Walker and Co., October 4, 1985.
The
"Advisor" to the Fund was Futures Advisory Services, an Akbar
controlled company. The Administrator for the Fund was Cayhaven Corporate
Services, Cayman Islands. The broker for the Fund was Capcom, London. Letter
attached to Capital Fund prospectus, October 11, 1985. he main U.S. bank for
the FUND was Bank of America International, New York. Authorized share capital
in October, 1985 was $900,000. Account 2-04-19489 / BOA, Cayman Islands.
100.
Letter, Puri to Fox, December 4, 1985.
101.
Watt Affidavit, p.25. Reprinted in S. Hrg. 102- 350, Pt.6.
102.
Id.
103.
Note to File, Fox, December, 1988.
104.
Fox affidavit, September 18, 1990.
105.
Resolution of Board of Directors of Capcom Financial Services, Ltd, July 30,
1987; letter, December 22, 1987, Saghir to Romrell.
106.
S. Hrg. 102-350, Pt.6, p.15.
107.
Id.
108.
Id.
109.
Price Waterhouse Report, June 22, 1991, p.18.
110.
S. Hrg. 102- 305, Pt. 1, p.30.
111.
Peat Marwick McLintock Audit of Capcom for CBOT, May 4, 1989, p.21(b).
112.
Id p. 21(b).
113.
Mazur tape, 150N, 9/20/88, 11:20 a.m., p.57, lines 6-18.
114.
Peat Marwick McLintock audit for CBOT, May 4, 1989.
115.
Capcom Futures Inc. was not named in the original indictment. See
11/23/88 letter from Robert E. Powis of Interpass, Ltd., to Gerald E. Beyer of
the Chicago Mercantile Exchange. Nor was it named in the second superseding
indictment. See Second Superseding Indictment, United States District
Court, Middle District of Florida, case no. 88-330-Cr-T-13(B).
116.
Specifically, the indictment charged that the defendants had violated the
following provisions of the United States Code: 21 U.S.C. s.846, the Attempt
and Conspiracy section of the Drug Abuse Prevention Act; 18 U.S.C. s.371, the
general provision regarding criminal conspiracy, and 18 U.S.C. s.1956,
regarding the laundering of monetary instruments.
117. See,
e.g., the Affidavit of Ian Glendinning Watt, dated 01/20/89, at 1.
118.
Romrell office diary. To January 18, 1889. p. 6.
119.
Id.
120. See
Second Superseding Indictment, dated _______, United States District Court,
Middle District of Florida, case no. 88-330-Cr-T-13(B).
121. See
"Superseding Indictment Still Names Capcom Financial Services," Securities
Week, 05/15/89, at 6.
122.
Memorandum, 11 October 1988, signed by L. Romrell and J.C.F. Parry.
123.
S. Hrg. 102-350, Pt.6, p.7.
124.
S. Hrg. 102-350, Pt.6,p.8.
125.
CFTC Chairperson Wendy Gramm did not indicate who the owner of the account was,
but rather testified that "S.Z.A. Akbar had a power of attorney to direct
trading in this account." S. Hrg. 102-350, Pt. 6, p.11.
126.
S. Hrg. 102-350, Pt.6, p.12.
127.
Id.
128.
S. Hrg. 1-2-350. Pt.6, p.11.
129.
Affidavit, Larry Romrell, July 3, 1992. Answer to question 61.
130.
S. Hrg. 102-350, Pt. 6, p12.
131.
In response to questions from the CME staff, Capcom characterized Mr. Zaheer as
"a self-employed auto dealer with a dealership in Karachi, Pakistan."
132.
S. Hrg. 102-350, Pt.6, p.658.
133.
S. Hrg. 102-350, Pt.6, p.647.
134.
S. Hrg. 102-350. Pt.6, p.7.
135.
Independent, 18.8.91, p.6.
136.
S. Hrg. 102-350, Pt.6, p.660.
137.
Letter, Romrell to Akbar, October 27, 1982.
138.
Letter, Mr. J. Barnathan, ABC, N.Y., April 29, 1982.
139.
Letter, Romrell to Akbar, January 6, 1983.
140.
Telex, Romrell to Akbar, December 17, 1982
141.
Telex, Romrell to Akbar.
142.
Letter, Romrell to Akbar, March 30, 1983.
143.
Memo, Bob Saffel, August 17, 1983.
144.
Letter, Romrell to Akbar, December 16, 1983.
145.
Romrell to Puri, January 5, 1984.
146.
Letter, Romrell to Akbar, [Personal guarantees given by Magness, Romrell to
BCCI], April 18, 1984.
147.
Letter, June 8, 1984, Romrell to Akbar.
148.
Letter, Romrell to Akbar, December 18, 1984.
149.
Letter, June 4, 1985, Romrell to Akbar.
150.
Letter, January 17, 1986, Romrell to Akbar.
151.
Letter, January 17, 1986, Romrell to Akbar.
152.
Letter, July 7, 1987.
153.
Letter, April 13, 1988, Romrell to Akbar, while at FAS, Ltd, after he left BCCI
indicating continued interaction.
154.
Letter, July 27, 1987, Romrell to Puri, emphasis added.
155.
Letter, February 10, 1983 from Romrell to Fox.
156.
Letter, July 7, 1987, Romrell to Ehrlich
157.
Price Waterhouse Report, June 22, 1991
158.
' 1712Letter, December 4, 1985, Puri to Fox.
159.
Watt Affidavit, p.25.
160.
Arthur Anderson Special Audit Prepared for Counsel of Association of Futures
Brokers and Dealers, Ltd, London, 5/10/89, p.22.
161.
Watt Affidavit, p.22.
162.
Letter, January 17, 1986, Romrell to Akbar.
163.
September 11, 1991, "The Fraud of the Century", Bandung Productions,
53-79 highgate Road, London.
164.
Peat Marwick McLintock audit of Capcom for CBOT, May 4, 1989, p.22(c).
165.
Peat Marwick McLintock audit of Capcom for CBOT, May 4, 1989.
166.
WATT Affidavit, supporting documents, Exhibit 20 (iii).
167.
Price Waterhouse Report, June 22, 1991, p.20.
168.
Price Waterhouse
Report, June 22, 1991, p.21.
169.
April 16, 1987,
Joint Unanimous Resolution of Capcom Futures, Inc, Board of Directors.
1.
THE SUBCOMMITTEE RECOMMENDS THAT THE UNITED STATES DEVELOP A MORE AGGRESSIVE
AND COORDINATED APPROACH TO COMBAT INTERNATIONAL FINANCIAL CRIME. THE U.S.
NEEDS TO TAKE FIRM ACTION AGAINST NATIONS WHO PERMIT THEIR PRIVACY AND
CONFIDENTIALITY LAWS TO PROTECT CRIMINALS FROM U.S. REGULATORS AND LAW
ENFORCEMENT.
Both BCCI and its customers used foreign bank
secrecy and confidentiality laws to commit crimes, to prevent the detection of
those crimes, and to obstruct law enforcement efforts to investigate and
prosecute crimes once they were discovered.
The traditional approach of smaller nations such as
the Cayman Islands and Luxembourg of offering strict bank secrecy as an
inducement to attract foreign deposits has is poor international public policy,
and threatens vital interests of the United States.
Current practices of major financial centers such as
the United Kingdom and Switzerland, while providing for the exchange of
information among regulators, and some mechanisms for the exchange of
information among federal law enforcement, after criminal activity is
uncovered, still impede an adequate flow of financial information concerning
such activity in the earlier, investigative phase.
The United States needs to take a more aggressive
and coordinated approach to developing an international regime for the sharing
of financial information among governmental entities, and a substantial
loosening in financial confidentiality and privacy laws to insure that
government investigators in the U.S. can gain adequate access to and
information about, financial transactions that cross international boundaries,
but impact the U.S.
While the U.S. has become more focused in fighting
drug money laundering through international cooperation in recent years, it has
continued to take the position that the process of sharing on applications
between law enforcement agencies is sufficient to protect U.S. interests, and
no broad-scale changes in foreign bank secrecy laws are necessary. As Federal
Reserve counsel Virgil Mattingly testified, sixteen months after the Federal
Reserve began its formal investigation of BCCI, Swiss and French authorities
were still denying it critical information as a consequence of their secrecy
laws.(1) A much more aggressive approach by the United States to
changing attitudes among the G-10 nations on this issue is essential.
Current toleration by the United States of bank
secrecy and regulatory havens such as the Grand Caymans, Liechtenstein, the
Bahamas, the Channel Islands, Vanuatu, Hong Kong, Aruba, and the Netherlands
Antilles needs to be replaced by a policy that threatens to withhold access to
the U.S. market for banks doing business in any nation that does not meet
minimum standards for regulation and the sharing of information with the United
States.
The Treasury, as the lead agency for handling U.S.
policies concerning international financial crime, needs to be much more
aggressive on these issues, to place substantial limits on the ability of
criminals to use confidentiality and privacy laws as a shield against law
enforcement.
2.
THE SUBCOMMITTEE RECOMMENDS THAT THE INSPECTOR GENERAL OF THE JUSTICE
DEPARTMENT INVESTIGATE THE POLICIES AND PRACTICES THAT LED TO THE JUSTICE
DEPARTMENT'S INEFFECTIVENESS IN INVESTIGATING AND PROSECUTING BCCI, AND
IMPAIRED ITS ABILITY TO COOPERATE WITH OTHER INVESTIGATIONS OF BCCI. THE
JUSTICE DEPARTMENT NEEDS FUNDAMENTALLY TO RECONSIDER ITS POLICIES IN DEALING
WITH COMPLEX FINANCIAL CASES. FUNDAMENTAL CHANGE IN HOW THE JUSTICE DEPARTMENT
HANDLES INQUIRIES FROM OTHER GOVERNMENT AGENCIES AND THE CONGRESS IS ALSO
ESSENTIAL.
The problems encountered by the Justice Department
in investigating and prosecuting BCCI are familiar ones. As a consequence of a
lack of understanding of the significance of the case, requests for additional
resources from the Customs Agents and prosecutors involved were ignored,
broader investigated leads were abandoned, and ultimately, BCCI was permitted
to plead guilty and thereby avoid a trial that could have helped bring down the
bank entirely.
Other problems compounded these original problems.
Most significant was the Justice Department's unwillingness to share
information with other ongoing governmental investigations, including those of
the Federal Reserve, the New York District Attorney and the Senate. Instead,
the Justice Department appeared on numerous occasions to be more concerned with
protecting its ability to control information about BCCI, than with assisting
the investigative efforts of others. Related to this problem was the lack of
candor demonstrated by individual Justice Department employees in responding to
inquiries of the Federal Reserve, New York District Attorney, and Senate. In
addition, there were substantial problems of coordination between the Justice
Department in Washington and its U.S. Attorneys office, as was especially
demonstrated by the breakdown in communication between the U.S. Attorney in
Miami and the Criminal Division of the Justice Department in Washington in
1991.
In response to the resource and coordination issues
arising in BCCI, consideration needs to be given within the Justice Department
to the recreation of the strike force concept, abandoned during the early years
of the Reagan Administration, and used to devote substantial resources to major
cases.
In response to the cooperation issues pertaining the
Federal Reserve, New York District Attorney and Senate, consideration needs to
be given by the Attorney General to adopting a new set of procedures and
regulations governing such contacts, to direct Justice Department personnel to
give a far higher priority to providing assistance in response to the
legitimate requests of other governmental entities, limited only by such legal
requirements as the withholding of documents placed before a grand jury.
3.
THE SUBCOMMITTEE RECOMMENDS THAT THE CENTRAL INTELLIGENCE AGENCY AND STATE
DEPARTMENT TARGET FOREIGN FINANCIAL INSTITUTIONS AS SUBJECTS FOR INTELLIGENCE
GATHERING AND ANALYSIS.
Prior to BCCI's collapse, the CIA had disseminated
only three analytic reports on BCCI itself, one of which was lost and of which
no original remains. While the reports demonstrate the Agency's early
recognition of BCCI's systematic engagement in money laundering and other
criminality, they are also oddly limited in detail and scope, given the serious
nature of the allegations discussed, and there was little follow up by the CIA
to any of them. Moreover, these reports were not provided to the users, the
Federal Reserve and the Justice Department, who most required them. Finally,
these reports contained no information concerning several individuals who were
affiliated with or owned BCCI, and with whom the CIA had had or was still
having substantial contact. These gaps would suggest a remarkable lack of
information at the CIA about the basic business dealings of important CIA
contacts in the Middle East.
The State Department, by contrast to the CIA, knew
almost nothing about BCCI prior to its collapse, and seemed to view the
collection of information on foreign financial institutions as largely beyond
its scope of responsibilities.
Given the risk to the United States from
international financial crime, both agencies need to upgrade their capabilities
to understand the strategies being employed by foreign financial institutions
that may impact on vital U.S. interests, and to begin to include such entities
as targets for collection and analysis.
4.
THE SUBCOMMITTEE RECOMMENDS THAT THE CONGRESS CONSIDER ADOPTING ADDITIONAL
OVERSIGHT MECHANISMS TO ENSURE THE CIA'S ACCOUNTABILITY ON THE PROVISION OF
INFORMATION.
At various times, the Central Intelligence Agency
provided information to the Subcommittee during the course of its investigation
that was both misleading and untrue. Documents that existed were characterized
as not existing. Information that was provided was incomplete. It required
repeated efforts by the Subcommittee, extending over a year, to obtain more
complete information, which was provided only following a meeting in February,
1992 between the Subcommittee chairman and Director Gates. Even then, as the
CIA purported to provide a full account of its knowledge of BCCI, it cautioned
the Subcommittee that its system of record-keeping could not guarantee that all
information had in fact been provided. Moreover, information regarding certain
persons who were shareholders, nominees, officers, or affiliates of BCCI, was
provided solely in a summary form, containing relatively limited information
and far less than is clearly in the CIA's possession.
Staff of the officer of the Inspector General of the
Central Intelligence Agency has recently requested meetings with Subcommittee
staff to discuss these issues.
It is recommended that the House and Senate Select
Committees on Intelligence consider whether the current procedures and
mechanisms are adequate to ensure accountability by the CIA in its responses to
Congressional requests. Of particular concern is the lack of any practical mechanism
for members who do not serve on the Committees to insure the CIA's
responsiveness to their legitimate requests, as well as the difficulties of
establishing whether or not the CIA's responses to inquiries are forthright and
accurate.
5.
THE SUBCOMMITTEE RECOMMENDS THAT FEDERAL AGENCIES IMPOSE NEW REQUIREMENTS ON
FOREIGN AUDITORS TO PROTECT U.S. INTERESTS IN ANY CASE IN WHICH ANY SUCH AGENCY
IS RELYING ON AN AUDIT CERTIFIED BY A FOREIGN AUDITOR. AT MINIMUM, THIS SHOULD
REQUIRE FOREIGN AUDITORS WHOSE CERTIFICATIONS ARE USED BY INSTITUTIONS DOING
BUSINESS IN THE U.S. AGREE TO SUBMIT THEMSELVES TO U.S. LAWS.
As the Subcommittee discovered during the course of
investigating BCCI, the major accounting firms, such as Price Waterhouse, while
operating globally, are structured to be independent partnerships in which no
national partnership has financial obligations or ties to any other. As a
consequence, when a foreign auditor certifies the audit of an entity doing
business in the United States, the domestic auditor views itself to be not
legally responsible for any of the actions taken by the foreign auditor, nor
for providing any information to U.S. regulators and law enforcement personnel
that may be in the possession of the foreign auditor. In the case of BCCI, this
meant that Price Waterhouse in the United States was able to take the position
that it could not answer any questions or provide the information requested by
investigators, while Price Waterhouse in the United Kingdom -- which certified
BCCI's books -- was able to take the position that it did not do business the
United States, was not subject to service of process in the United States, and
was not responsible to provide information to the United States, although BCCI
was licensed as a foreign bank in several states.
The inability of U.S. regulators and law enforcement
to gain access to foreign auditors who may have certified the accounts of
entities doing business in the United States substantially impeded investigations
and prosecutions of BCCI. It is recommended that the Congress develop a
statutory mechanism to require all U.S. agencies to develop regulations
imposing the requirement that any entity certifying the audit of an entity
which is provided to any U.S. agency in so doing submit itself to U.S.
jurisdiction and agree to the provision of documents and records as required by
U.S. law. Additional mechanisms to insure accountability by auditors to
government regulators and investigators should also be explored.
6.
THE SUBCOMMITTEE RECOMMENDS THAT THE PRESIDENT AND THE SECRETARY OF STATE
ADVISE THE GOVERNMENT OF ABU DHABI THAT ITS WITHHOLDING OF DOCUMENTS AND
WITNESSES PERTAINING TO BCCI FROM U.S. FEDERAL LAW ENFORCEMENT INVESTIGATORS,
THE FEDERAL RESERVE, THE NEW YORK DISTRICT ATTORNEY AND THE CONGRESS THREATENS
VITAL U.S. INTERESTS AND WILL NOT BE TOLERATED.
As of the writing of this report, the most important
remaining impediment to investigating and prosecuting the BCCI case is the
withholding of critical documents and witnesses from U.S. law enforcement and
regulators by the Abu Dhabi authorities. Given the ownership of BCCI by Abu
Dhabi, and Abu Dhabi's controlling interest, through BCCI and its own shares,
in CCAH, holding company for the First American Banks, the Abu Dhabi government
has engaged in substantial non-sovereign activities in the United States. Its
continued suppression of evidence in the case is so serious that it should
raise some questions about the previously friendly relationship between the two
nations. To date, neither the White House nor the State Department has made any
statement criticizing the Abu Dhabi government for its refusal to cooperate
adequately with the United States on this matter. The United States needs to
express its deep concern over this matter, and its intention to take further
steps if the failure to provide access to the witnesses and documents is not
rectified immediately.
7.
FURTHER ATTENTION NEEDS TO BE GIVEN TO THE PROBLEM OF THE REVOLVING DOOR IN
WASHINGTON, AND THE IMPACT ON THE REGULATORY PROCESS AND ON LAW ENFORCEMENT OF
POLITICAL INFLUENCE IN WASHINGTON. THE SUBCOMMITTEE RECOMMENDS THE
CONSIDERATION OF LEGISLATING A FEDERAL STATUTORY CODE OF CONDUCT FOR ATTORNEYS
WHO PRACTICE BEFORE FEDERAL AGENCIES.
BCCI's political connections in Washington had a
material impact on its ability to accomplish its goals in the United States. In
hiring lawyers, lobbyists and public relations firms in the United States to
help it deal with its problems vis a vis the government, BCCI pursued a
strategy that it had practiced successfully around the world: the hiring of
former government officials. These former government officials played a major
role both in making it possible for BCCI secretly to purchase Financial General
Bankshares, and then to evade detection and impede investigative efforts to
expose what it had done.
There is something fundamentally wrong with a
political system in which former government officials, as in the case of BCCI,
too frequently appear to be willing to provide assistance
in circumventing U.S. laws and regulations to anyone
who is willing to pay their fee.
In theory, ethical considerations would discourage
former high public officials, government prosecutors, and regulators from using
the skills and knowledge they obtained in government to assist clients who wish
to circumvent, or at least, bend, the obvious import of the laws. However, in
the highly competitive day-to-day practice of law and lobbying in Washington,
D.C., it appears that such considerations are too often thrown aside to the
need of the former officials to generate fees.
The problem of the revolving door and
influence-peddling is serious enough when applied to domestic clients looking
to influence the legislative, regulatory, or law enforcement process. However,
as with BCCI, when former government officials provide put their expertise to
use for foreign clients, even deeper problems emerge. First, the foreign
clients have little stake in our society beyond their own self-interest, and
thus, there is less incentive for them to adhere to U.S. laws apart from the
threat of sanctions if they are caught breaking them. Second, some foreign
clients may be accustomed to political influence and corruption within their
own countries, and therefore pay for and expect such services to circumvent
laws in the United States. Third, as in BCCI, foreign clients are less
susceptible to being investigated, and prosecuted or held liable in the United
States, if something goes wrong. Fourth, it is more difficult to determine the
ultimate agenda of an entity which is based outside the United States.
Foreign investment in the United States may in some
respects be an essential component of long-term prosperity, and in any case
inevitable. Yet the continued willingness of so many attorneys and lobbyists in
Washington to represent foreign clients without regard to the special problems
they pose, suggests that consideration needs to be given to legislation that
would force lawyers and lobbyists who represent foreign interests to adhere to
a higher standard of practice, adequate to protect U.S. interests.
At present, essentially no mechanism exists whereby
sanctions can be imposed on attorneys who fail to meet basic ethical obligations
to regulatory bodies. Serious attention needs to be given to the development of
a federal code of professional conduct, that would supplement the industry code
adopted by the American Bar Association. Such a code would set forth minimum
ethical standards for the practice of law before federal regulatory bodies,
including requiring certain disclosures to the government by the attorney in
cases in which the attorney has reason to believe the client may have made
false statements to the government. The code would allow for any party,
including the regulators themselves, to seek revocation of a lawyer's right to
practice before that regulatory body for an infraction of the code, or before
any federal regulatory body for a serious such infraction.
8.
THE SELF-REGULATION OF THE U.S COMMODITIES MARKETS BY THE COMMODITIES FUTURES
TRADING COMMISSION, THE CHICAGO BOARD OF TRADE, AND THE CHICAGO MERCANTILE
EXCHANGE IS INADEQUATE TO PROTECT THOSE MARKETS AGAINST MONEY LAUNDERING
INVOLVING TRADES
FROM
ABROAD. THE SUBCOMMITTEE RECOMMENDS
THAT THE EXCHANGES MAKE MONEY LAUNDERING ILLEGAL, AND DEMAND THAT THIS
REQUIREMENT BE ACCEPTED BY FOREIGN COMMODITIES EXCHANGES WITH WHOM THEY DO
BUSINESS, AS A CONDITION OF ACCESS TO US EXCHANGES.
As the Subcommittee investigation found, commodities
regulators with the responsibility for investigating Capcom showed little
interest in conducting a thorough investigation of its activities, and in 1989
allowed Capcom to avoid such an investigation through agreeing to cease doing business
in the United States. While the exchanges have developed sophisticated
mechanisms for detecting money laundering that takes place within the U.S.
markets, those markets interact with foreign commodities markets in a manner
that makes detection of money-laundering that crosses international boundaries
very difficult.
At present, the laundering of money, in and of
itself, does not violate commodities regulations, and is not grounds for
expulsion from the exchanges.
Commodities regulators in the U.S. need to push for
the definition and criminalization of money laundering in all commodities
exchanges with whom they deal, including those in foreign countries, and
develop procedures for "spot" checks of various investment houses to
detect money laundering. They also need to develop mechanisms with foreign
commodities regulators to insure that mirror imaging and similar techniques for
money laundering are not tolerated simply because the mirror images are
separated by national borders.
9.
THE SUBCOMMITTEE RECOMMENDS THAT FURTHER STEPS BE TAKEN TO INSURE ADEQUATE
ACCOUNTABILITY OF FOREIGN FINANCIAL INSTITUTIONS DOING BUSINESS IN THE UNITED
STATES, INCLUDING REQUIRING THAT FOREIGN BANKS FORM SEPARATELY CAPITALIZED
HOLDING COMPANIES IN THE UNITED STATES AS A CONDITION OF LICENSE AND THE
ESTABLISHMENT BY THE FEDERAL RESERVE OF A MINIMUM STANDARD FOR CONSOLIDATED
REGULATION THAT EXCLUDES BANK REGULATORY HAVENS.
While foreign bank regulation in the United States
has already been substantially strengthened as a result of the BCCI affair,
foreign banks doing business in the United States are still treated differently
from domestic banks, and to the competitive detriment of domestic banks. Under
the changes in law implemented last year through the passage of the Foreign
Bank Supervisory Enhancement Act as part of the banking reform bill, foreign
banks are now effectively regulated, supervised, and examined at a level
equivalent to U.S. banks. However, they are not separately capitalized within
the United States, and are merely required to maintain certain levels of
reserves here as a means of protecting U.S. creditors.
The result is that U.S. regulators have no means for
determining the nature, source, and backing of these reserves, or the real
ability to keep such reserves in the U.S. in the event of a crisis involving
the foreign bank. The Treasury has already recommended that foreign banks
engaging in the sale of securities and other expanded-banking activities be
required to establish separately capitalized holding companies in the U.S. This
approach should be adopted for all foreign banks as a matter of enhancing
overall accountability.
In addition, the Federal Reserve needs to move
forward with a certification process which reaches a determination as to
whether the home country supervision of a foreign bank meets a base-line
standard sufficient to justify granting banks regulated by that country the
right to operate in the United States.
Under current law, any foreign bank operating on a
consolidated basis regulated by any home country bank regulator is on an equal
footing with all other foreign banks similarly regulated in seeking permission
to operate in the United States. With the passage of the Foreign Bank
Supervisory Enhancement Act last year, the Congress has implemented a number of
suggestions made by the Federal Reserve to strengthen U.S. regulatory oversight
of such institutions, which includes the ability of the Federal Reserve to
differentiate among such institutions based on the quality or extent of regulation
by the home state regulator. The Federal Reserve needs to make use of the
authority granted in the Foreign Bank Supervisory Enhancement Act to specify
what the baseline requirements for consolidated regulation are, and which
jurisdictions do and which do not meet these requirements.
As BCCI demonstrated, lax regulation in such
jurisdictions as Luxembourg and the Grand Caymans can enable an institution
bent on fraud to engage in manipulation of accounts and assets at a significant
level as a means of securing legitimate deposits. The U.S. remains a key market
for foreign banks, and few nations would be willing to give up the right for
their banks to operate in the United States. A certification process under
which the Federal Reserve sets criteria under which home country regulation is
deemed adequate, and excludes banks regulated by "havens" which fail
to meet those standards, would have no impact on banks regulated by countries
that met basic standards for such regulation. The adoption of such a process,
including the creation of an approve and non-approved list of country
regulators, is essential to protect U.S. banking from being infiltrated by
criminals.
10.
THE SUBCOMMITTEE RECOMMENDS THAT FOREIGN INVESTORS WHO PURCHASE SUBSTANTIAL
SHARES OF U.S. BUSINESSES BE REQUIRED TO APPEAR PERSONALLY IN THE UNITED STATES
AS INSURANCE THAT THE FOREIGN INVESTOR IS NOT ACTING AS A NOMINEE FOR SOMEONE
ELSE.
Currently, U.S. lawyers are allowed to establish a
nominee company on behalf of foreign investors. While there are certain
disclosure requirements for investors who purchase over 5% of a company, there
exists no requirement that the individual appear in the United States. Nominees
whose names are used to purchase businesses on behalf of others is a common practice
in much of the world, especially Latin America and the Middle East.
A requirement that any foreign investor who purchase
more than 5% of a U.S. company, business, bank or financial entity, appear
personally before the appropriate regulatory authority, with a waiver for
investors who met certain defined criteria, such as showing adequate assets in
the United States to meet judgments against them personally, would help to
curtail the practice, as illustrated in the BCCI case, of nominee shareholders.
If the investor refuses to be present at a hearing,
the legislation could required that the investment be made provided the U.S.
attorney is willing to waive the attorney/client privilege and incur liability
should the investment subsequently prove to be fraudulent in any way.
11.
TURF WARS CONTINUE TO SEVERELY DAMAGE THE ABILITY OF LAW-ENFORCEMENT AGENCIES
IN THE UNITED STATES TO DO THEIR JOB. THE SUBCOMMITTEE RECOMMENDS THE
ESTABLISHMENT OF A COMMITTEE OF LAW ENFORCEMENT OFFICIALS WHOSE JOB IT IS TO CONDUCT
OVERSIGHT OF, PREVENT, AND RESPOND TO FAILURES OF COOPERATION IN LAW
ENFORCEMENT.
Turf wars in the BCCI case were evident everywhere,
including within the U.S. Customs Service itself, among competing federal law
enforcement agencies, within the Justice Department and U.S. Attorneys'
Offices, and between federal law enforcement, the Federal Reserve, the New York
District Attorney, and the Congress. These bureaucratic battles had a
substantial and negative impact on investigating and prosecuting BCCI. They are
not unique to the BCCI case, but endemic, and some structural response is
essential.
This Subcommittee previously encountered this
problem during the course of its investigations in 1987 and 1988. Since that
time, the problem has not improved, and the Subcommittee has seen no signs that
it is effectively being responded to by federal law enforcement.
It is recommended that the Congress establish, by
statute, a law enforcement committee, reporting annually to the Justice
Department and the Congress, which focuses on developing solutions to the
continuing "turf wars" in the sharing of information and coordination
of prosecutions among law enforcement entities in the U.S. The committee would
consist of a representative from the Justice Department, a U.S. Attorney, a
state Attorney General and a District Attorney, all appointed by the President
and each subject to confirmation by the Senate.
12.
THE SUBCOMMITTEE RECOMMENDS THAT A STATUTORY MECHANISM FOR THE RECEIPT BY
CONGRESS OF FOREIGN FINANCIAL INFORMATION BE ESTABLISHED.
The Justice Department has for a number of years
taken the position that U.S. treaties with foreign jurisdictions for the
sharing of information in criminal, regulatory and investigative matters does
not encompass the Congress, even when Mutual Legal Assistance Treaties (MLATs)
have been entered into with those countries which do not by their language
exclude the Congress. Accordingly, the Justice Department refused to assist the
Subcommittee, and will not in general assist Congressional requests for
information, including the enforcement of Congressional subpoenas, to the
extent that they seek information that is held abroad. This position has
recently been modified so that the Justice Department will cooperate in such
assistance in cases in which the Foreign Country has already explicitly agreed
to provide it to the Congress.
As the Iran-Contra Committees found in 1987, and as
this Subcommittee has found during its work from 1988 through 1992, the
inability of the Congress to obtain information from abroad either directly or
through the Executive Branch due to the lack of procedures has substantially
impeded the Congress' constitutional responsibilities in fact-finding and
oversight of U.S. foreign policy and other extra-territorial activities.
Two possible legislative solutions would be a
statute explicitly adding the enforcement of legislative branch subpoenas as a
matter of U.S. domestic law to the mutual enforcement responsibilities of the
Executive Branch under mutual legal assistance treaties with foreign countries;
and a statute providing for direct application by the Congress to the foreign
government for enforcement of the subpoena, backed by some form of limitation
on Executive Branch cooperation with that foreign government in the event of
non-compliance.
1. S.
Hrg. 102-350 Pt. 5 p. 153.
Matters
For Further Investigation
There have been a number of matters which the
Subcommittee has received some information on, but has not been able to investigate
adequately, due such factors as lack of resources, lack of time, documents
being withheld by foreign governments, and limited evidentiary sources or
witnesses. Some of the main areas which deserve further investigation include:
1. The extent of BCCI's involvement in Pakistan's
nuclear program. As set forth in the chapter on BCCI in foreign countries,
there is good reason to conclude that BCCI did finance Pakistan's nuclear
program through the BCCI Foundation in Pakistan, as well as through BCCI-Canada
in the Parvez case. However, details on BCCI's involvement remain unavailable.
Further investigation is needed to understand the extent to which BCCI and
Pakistan were able to evade U.S. and international nuclear non-proliferation
regimes to acquire nuclear technologies.
2. BCCI's manipulation of commodities and securities
markets in Europe and Canada. The Subcommittee has received information that
remains not fully substantiated that BCCI defrauded investors, as well as some
major U.S. and European financial firms, through manipulating commodities and
securities markets, especially in Canada, the Netherlands, and Luxembourg. This
alleged fraud requires further investigation in those countries.
3. BCCI's activities in India, including its relationship
with the business empire of the Hinduja family. The Subcommittee has not had
access to BCCI records regarding India. The substantial lending by BCCI to the
Indian industrialist family, the Hindujas, reported in press accounts, deserves
further scrutiny, as do the press reports concerning alleged kick-backs and
bribes to Indian officials.
4. BCCI's relationships with convicted Iraqi arms
dealer Sarkis Soghanalian, Syrian drug trafficker, terrorist, and arms
trafficker Monzer Al-Kassar, and other major arms dealers. Sarkenalian was a
principal seller of arms to Iraq. Monzer Al-Kassar has been implicated in
terrorist bombings in connection with terrorist organizations such as the
Popular Front for the Liberation of Palestine. Other arms dealers, including
some who provided machine guns and trained Medellin cartel death squads, also
used BCCI. Tracing their assets through the bank would likely lead to important
information concerning international terrorist and arms trafficker networks.
5. The use of BCCI by central figures in arms sales
to Iran during the 1980's. The late Cyrus Hashemi, a key figure in allegations
concerning an alleged deal involving the return of U.S. hostages from Iran in
1980, banked at BCCI London. His records have been withheld from disclosure to
the Subcommittee by a British judge. Their release might aid in reaching
judgments concerning Hashemi's activities in 1980, with the CIA under President
Carter and allegedly with William Casey.
6. BCCI's activities with the Central Bank of Syria
and with the Foreign Trade Mission of the Soviet Union in London. BCCI was used
by both the Syrian and Soviet governments in the period in which each was
involved in supporting activities hostile to the United States. Obtaining the
records of those financial transactions would be critical to understanding what
the Soviet Union under Brezhnev, Chernenko, and Andropov was doing in the West;
and might document the nature and extent of Syria's support for international
terrorism.
7. BCCI's involvement with foreign intelligence
agencies. A British source has told the Bank of England and British
investigators that BCCI was used by numerous foreign intelligence agencies in
the United Kingdom. The British intelligence service, the MI-5, has sealed documents
from BCCI's records in the UK which could shed light on this allegation.
8. The financial dealings of BCCI directors with
Charles Keating and several Keating affiliates and front-companies, including
the possibility that BCCI related entities may have laundered funds for Keating
to move them outside the United States. The Subcommittee found numerous
connections among Keating and BCCI-related persons and entities, such as BCCI
director Alfred Hartman; CenTrust chief David Paul and CenTrust itself; Capcom
front-man Lawrence Romrell; BCCI shipping affiliate, the Gokal group and the
Gokal family; and possibly Ghaith Pharaon. The ties between BCCI and Keating's
financial empire require further investigation.
9. BCCI's financing of commodities and other
business dealings of international criminal financier Marc Rich. Marc Rich
remains the most important figure in the international commodities markets, and
remains a fugitive from the United States following his indictment on
securities fraud. BCCI lending to Rich in the 1980's amounted to tens of
millions of dollars. Moreover, Rich's commodities firms were used by BCCI in
connection with BCCI's involving in U.S. guarantee programs through the
Department of Agriculture. The nature and extent of Rich's relationship with
BCCI requires further investigation.
10. The nature, extent and meaning of the ownership
of shares of other U.S. financial institutions by Middle Eastern political
figures. Political figures and members of the ruling family of various Middle
Eastern countries have very substantial investments in the United States, in
some cases, owning substantial shares of major U.S. banks. Given BCCI's routine
use of nominees from the Middle East, and the pervasive practice of using
nominees within the Middle East, further investigation may be warranted of
Middle Eastern ownership of domestic U.S. financial institutions.
11. The nature, extent, and meaning of real estate
and financial investments in the United States by major shareholders of BCCI. BCCI's
shareholders and front-men have made substantial investments in real estate
throughout the United States, owning major office buildings in such key cities
as New York and Washington, D.C. Given BCCI's pervasiveness criminality, and
the role of these shareholders and front-men in the BCCI affair, a complete
review of their holdings in the United States is warranted.
12. BCCI's collusion in Savings & Loan fraud in
the U.S. The Subcommittee found ties between BCCI and two failed Savings and
Loan institutions, CenTrust, which BCCI came to have a controlling interest in,
and Caprock Savings and Loan in Texas, and as noted above, the involvement of
BCCI figures with Charles Keating and his business empire. In each case, BCCI's
involvement cost the U. S. taxpayers money. A comprehensive review of BCCI's
account holders in the U.S. and globally might well reveal additional such
cases. In addition, the issue of whether David Paul and CenTrust's political
relationships were used by Paul on behalf of BCCI merits further investigation.
13. The sale of BCCI affiliate Banque de Commerce et
de Placements (BCP) in Geneva, to the Cukorova Group of Turkey, which owned an
entity involved in the BNL Iraqi arms sales, among others. Given BNL's links to
BCCI, and Cukorova Groups' involvement through its subsidiary, Entrade, with
BNL in the sales to Iraq, the swift sale of BCP to Cukorova just weeks after
BCCI's closure -- prior to due diligence being conducted -- raises questions as
to whether a prior relationship existed between BCCI and Cukorova, and
Cukorova's intentions in making the purchase. Within the past year, Cukorova
also applied to purchase a New York bank. Cukorova's actions pertaining to BCP
require further investigation in Switzerland by Swiss authorities, and by the
Federal Reserve New York.
14. BCCI's role in China. As noted in the chapter on
BCCI's activities in foreign countries, BCCI had extensive activity in China,
and the Chinese government allegedly lost $500 million when BCCI closed, mostly
from government accounts. While there have been allegations that bribes and
pay-offs were involved, these allegations require further investigation and
detail to determine what actually happened, and who was involved.
15. The relationship between Capcom and BCCI,
between Capcom and the intelligence community, and between Capcom's
shareholders and U.S. telecommunications industry figures. The Subcommittee was
able to interview people and review documents concerning Capcom that no other
investigators had to date interviewed or reviewed. Much more needs to be done
to understand what Capcom was doing in the United States, the United Kingdom,
Egypt, Oman, and the Middle East, including whether the firm was, as has been
alleged but not proven, used by the intelligence community to move funds for
intelligence operations; and whether any person involved with Capcom was
seeking secretly to acquire interests in the U.S. telecommunications industry.
16. The relationship of important BCCI figures and
important intelligence figures to the collapse of the Hong Kong Deposit and
Guaranty Bank and Tetra Finance (HK) in 1983. The circumstances surrounding the
collpase of these two Hong Kong banks; the Hong Kong banks' practices of using
nominees, front-companies, and back-to-back financial transactions; the Hong
Banks' directors having included several important BCCI figures, including
Ghanim Al Mazrui, and a close associate of then CIA director William Casey; all
raise the question of whether there was a relationship between these two
institutions and BCCI-Hong Kong, and whether the two Hong Kong institutions
were used for domestic or foreign intelligence operations.
17. BCCI's activities in Atlanta and its acquisition
of the National Bank of Georgia through First American. Although the Justice
Department indictments of Clark Clifford and Robert Altman cover portions of
how BCCI acquired National Bank of Georgia, other important allegations
regarding the possible involvement of political figures in Georgia in BCCI's
activities there remain outside the indictment. These allegations, as well as
the underlying facts regarding BCCI's activities in Georgia, require further
investigation.
18. The relationship between BCCI and the Banca
Nazionale del Lavoro. BCCI and the Atlanta Branch of BNL had an extensive
relationship in the United States, with the Atlanta Branch of BNL having a
substantial number of accounts in BCCI's Miami offices. BNL was, according to
federal indictments, a significant financial conduit for weapons to Iraq. BCCI
also made loans to Iraq, although of a substantially smaller nature. Given the
criminality of both institutions, and their interlocking activities, further
investigation of the relationship could produce further understanding of Saddam
Hussein's international network for acquiring weapons, and how Iraq evaded
governmental restrictions on such weapons acquisitions.
19. The alleged relationship between the late CIA
director William Casey and BCCI. As set forth in the chapter on intelligence,
numerous trails lead from BCCI to Casey, and from Casey to BCCI, and the
investigation has been unable to follow any of them to the end to determine
whether there was indeed a relationship, and if there was, its nature and
extent. If any such relationship existed, it could have a significant impact on
the findings and conclusions concerning the CIA and BCCI's role in U.S. foreign
policy and intelligence operations during the Casey era. The investigation's
work detailing the ties of BCCI to the intelligence community generally also
remains far from complete, and much about these ties remains obscure and in need
of further investigation.
20. Money laundering by other major international
banks. Numerous BCCI officials told the Subcommittee that BCCI's money
laundering was no different from activities they observed at other
international banks, and provided the names of a number of prominent U.S. and
European banks which they alleged engaged in money laundering. There is no
question that BCCI's laundering of drug money, while pervading the institution,
constituted a small component of the total money laundering taking place in
international banking. Further investigation to determine which international
banks are soliciting and handling drug money should be undertaken.
WITNESSES
(All witnesses testified in public session or in
published depositions printed by the Subcommittee, except witnesses with *, who
testified at hearing conducted within Subcommittee on Consumer and Regulatory
Affairs of Senate Committee on Banking, Housing and Urban Affairs in
coordination with this investigation, May 23, 1991.)
Robert A. Altman, former president, First American
Bankshares and attorney for BCCI.
Fausto Alvarado, Member, Peruvian House of Deputies.
Fernando Ramon Marin Amaya. Investigator retained by
Attorney General of Guatemala to investigate BCCI's activities in Guatemala.
Amjad Awan, federal prisoner, former BCCI official
who handled accounts of Panamanian General Manuel Noriega.
Sidney Bailey, Virginia Commissioner of Financial
Institutions, Richmond, Virginia.*
Robert R. Bench, Partner, Price Waterhouse, Former
Deputy Comptroller for International Relations and Financial Evaluation.
Gerald Beyer, Executive Vice President, Chicago Merchantile
Exchange.
Akbar Bilgrami, federal prisoner, former head of
Latin American and Caribbean Regional Office, BCCI, Miami.
Jack Blum. A private attorney at the firm of Novins,
Lamont & Flug. Formerly special counsel to the Foreign Relations Committee
for the investigation of the Subcommittee on Narcotics, Terrorism, and
International Operations into Drugs, Law Enforcement, and Foreign Policy,
1987-1988.
Parker W. Borg. Deputy Assistant Secretary of the
Bureau of International Narcotics Matters at the Department of State.
James Bruton, Acting Assistant Attorney General, Tax
Divisin, Department of Justice.
A. Peter Burleigh, Coordinator for Counter-Terrorism
at the Department of State.
Jorge Del Castillo, Member, Peruvian House of
Delegates.
Pedro Cateriano, Member, Peruvian House of Deputies.
Nazir Chinoy, federal prisoner, former General
Manager, BCCI Paris.
Clark M. Clifford, formerly, chairman of First
American Bankshares and attorney for BCCI.
Andrea Cocoran, Director of Planning and Compliance,
Commodities Futures Trading Commission.
Michael Crystal, Queen's Counsel, representing
English court-appointed liquidators of BCCI.
George Davis, President and CEO, First American
Bankshares, Washington, D.C.
James F. Dougherty, Attorney, Miami Florida.
Representing Lloyds of London in litigation concerning alleged fraud involving
BCCI.
Scott M. Early, General Counsel, Chicago Board of
Trade.
Lourdes Flores, Member, Peruvian House of Deputies.
Robert Genzman, U.S. Attorney for the Middle
District of Florida.
Wendy Gramm, Commissioner, Commodities Futures
Trading Commission.
John Heimann, former New York State Bank Supervisor
and Comptroller of the Currency.*
Mark Jackowski, Assistant U.S. Attorney for the Middle
District of Florida.
Nicholas de B. Katzenbach, Chairman, First American
Bankshares, Washington, D.C.
Gregory Kehoe, First Assistant U.S. Attorney,
Criminal Division, for the Middle District of Florida.
Richard Kerr, Acting Director, Central Intelligence
Agency.
Alan J. Kreczko. Deputy Legal Advisor at the U.S.
Department of State.
T. Bertram Lance, Former Director of the Office of
Management and Budget.
Dexter Lehtinen, Former U.S. Attorney, Southern
District of Miami, Florida.
Richard A. Lehrman, Esq., attorney, Miami, Florida.
Represented Lloyds of London in case involving BCCI commmodities fraud.
Ricardo Llaque, Deputy Director of Exchange
Operations, Federal Reserve Bank of Peru.
Paul Maloney, Deputy Assistant Attorney General for
Criminal Division, U.S. Department of Justice, Washington, D.C.*
Virgil Mattingly, General Counsel, Board of Governors,
Federal Reserve System.
Robert Mazur, Undercover Agent for Operation
C-Chase, Drug Enforcement Administration.
Douglas P. Mulholland, Assistant Secretary for
Intelligence and Research, Department of State.
Robert Morgenthau, District Attorney, County of New
York, New York.*
Robert S. Mueller, III, Assistant Attorney General,
Department of Justice, Washington, D.C.
Fernando Olivera, Member, Peruvian House of
Deputies.
Laurence Pope, Associate Coordinator for Counter-Terrorism,
Department of State.
William Von Raab. An attorney at the firm of William
H. Bode Associates. Formerly Commissioner of the United States Customs Service,
1985-1989, oversaw Customs' handling of the sting operation that targeted BCCI,
Operation C-Chase.
Masihur Rahman, Former Chief Financial Officer, BCCI
London.
Mark Richard, Deputy Assistant Attorney General,
Criminal Division, Department of Justice.
Edward M. Rogers, Jr., former White House aide.
Jesus Rodriguez, Member, Chamber of Deputies,
Argentina.
Abdur Sakhia, former head, BCCI Miami.
Ahmed Al Sayegh, Director, Abu Dhabi National Oil
Company.
Raul Alconada Sempe, former Secretary of Defense and
former Secretary for Special Projects, Foreign Ministry, Argentina.
Grant Smith, Deputy Assistant Secretary,
International Narcotics Matters, Department of State.
Brian Smouha, Court Appointed Fiduciary for BCCI
Holdings (Luxembourg) SA and Bank of Credit and Commerce International, S.A.,
London, England.
John W. Stone, Chief of Enforcement, Federal Deposit
Insurance Corporation.
William Taylor, Staff Director, Division of Banking
Supervision and Regulation, Federal Reserve, Washington, D.C.
WRITS AND SUBPOENAS AUTHORIZED DURING INVESTIGATION
WRITS
AUTHORIZED (4)
Amjad Awan
Akbar Bilgrami
Nazir Chinoy
Ian Howard
SUBPOENAS
AUTHORIZED (17)
Sani Ahmed
BCCI
Roy Carlson
Kerry Fox
Grand Hotel, Washington DC
Abol Helmy
Kissinger Associates
Office of the Comptroller of the Currency
Price Waterhouse (US)
Price Waterhouse (UK)
First American
First American Georgia
Robert Magness
David Paul
Robert Powell
Ed Rogers
Larry Romrell