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THE BCCI AFFAIR

THE REGULATORS

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)

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