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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

 

 

 

 

 

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FAS Note: This December 1992 document is the penultimate draft of the Senate Foreign Relations Committee report on the BCCI Affair. After it was released by the Committee, Sen. Hank Brown, reportedly acting at the behest of Henry Kissinger, pressed for the deletion of a few passages, particularly in Chapter 20 on "BCCI and Kissinger Associates." As a result, the final hardcopy version of the report, as published by the Government Printing Office, differs slightly from the Committee's softcopy version presented below.--Steven Aftergood

and Thierry Meyssan article  and go to Alfred Hartmann Banque de Commerce et Placements and Collateral Damage 9/11  and The Red Symphony (text) and Le Cercle


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

 

 
THE BCCI AFFAIR

EXECUTIVE SUMMARY 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.

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Introduction and Summary of Investigation 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.

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THE ORIGIN AND EARLY YEARS OF BCCI 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.

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BCCI'S RELATIONSHIP WITH FOREIGN GOVERNMENTS CENTRAL BANKS, AND INTERNATIONAL ORGANIZATIONS 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.

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BCCI IN THE UNITED STATES

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.

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BCCI IN THE UNITED STATES, PART TWO

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.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

BCCI AND LAW ENFORCEMENT:

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.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxx

BCCI AND LAW ENFORCEMENT:

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.

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BCCI AND ITS ACCOUNTANTS

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.

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BCCI, THE CIA AND FOREIGN INTELLIGENCE 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.

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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)

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.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

CLARK CLIFFORD AND ROBERT ALTMAN

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