BUSINESS

A BANK OF SCANDAL

THE MASSIVE BCCI FRAUD RAISES A QUESTION: WHY DID THE AUTHORITIES NOT ACT SOONER?

MARCI McDONALD August 5 1991
BUSINESS

A BANK OF SCANDAL

THE MASSIVE BCCI FRAUD RAISES A QUESTION: WHY DID THE AUTHORITIES NOT ACT SOONER?

MARCI McDONALD August 5 1991

A BANK OF SCANDAL

BUSINESS

THE MASSIVE BCCI FRAUD RAISES A QUESTION: WHY DID THE AUTHORITIES NOT ACT SOONER?

Abu Nidal, the world’s most wanted terrorist, maintained an account— under the pseudonym Shakir Farhan—at a discreet branch on London’s fashionable Sloane Street, just steps from Harrod’s department store. Saudi arms dealer Adnan Khashoggi preferred the palm-fringed charms of the Monte Carlo office to finance his covert 1986 weapons shipments to Tehran in what became known as the Iran-Contra scandal. And former Panamanian dictator Manuel Noriega was so impressed with the personal service at the Panama City branch that he deposited at least $33 million and had an aide recommend the bank’s facilities to a U.S. narcotics ring searching for a place to launder its profits. That roster of shadowy clients attracted the attention of regulators, who on July 5 closed down the operations in Canada, the United States, Britain and five other countries of the Luxembourg-chartered Bank of Credit and Commerce International (BCCI).

But last week, as new evidence of the most massive fraud in banking history rocked London and Washington and sent shock waves around the world, the main issue was why authorities took so long to act. In fact, representatives of the $23-billion global financial rogue had pleaded guilty to money laundering in Florida in January, 1990, and had attracted the interest of law-enforcement and banking authorities, including regulators in Canada, for at least a decade (page 29). Still, officials in several countries showed a curious reluctance to investigate an institution that former Central Intelligence Agency deputy director Robert Gates referred to in 1988 as the “bank of criminals and con men international.” One possible explanation: BCCI had friends in high places, including the CIA, which Pakistani officials say may have used the bank’s murky networks to fund covert operations in Afghani-

stan and elsewhere. Said former senate investigator Jack Blum: “How many people have an interest in the lid being kept on this particular stew pot? The answer is: lots of people.”

Charges of a politically motivated coverup of BCCl’s activities spread rapidly last week through many of the 69 countries where the bank operated. In Britain, Prime Minister John Major responded ashen-faced and shaking with rage to Labour Leader Neil Kinnock’s allegations that he had been “utterly negligent” in not moving against the bank during his term as chancellor of the exchequer from October, 1989, until he became Conservative party leader late last year. Retorted Major: “If you are saying I am a liar, you had better say so bluntly. If you are not, you had better stop insinuating.” Meanwhile, The Wall Street Journal reported that U.S. officials are investigating potential financial irregularities by prominent unnamed U.S. political figures whose names were discovered in BCCI records.

The furor over the London-headquartered bank threatens to haunt the British and U.S.

governments for months to come. Testifying before a Commons committee last week, Bank of England governor Robin Leigh-Pemberton conceded that his officials had known of financial irregularities at the bank as early as April, 1990. He added that a regular audit of BCCI, which had been filed with the central bank that month by the international accounting firm of Price Waterhouse, found transactions that were “either false or deceitful.” A second report six months later was so damaging that the day after Price Waterhouse delivered it to the Bank of England last October, the bank’s founder and president, 68-year-old Pakistani entrepreneur Agha Hasan Abedi, and his chief executive, Swaleh Naqvi, resigned.

Despite those warning signals, it was not until a third auditor’s report on June 28, which detailed “one of the most complex deceptions in banking history,” that England’s central bank stepped in. Only after its officials had studied 6,000 pages of Naqvi’s private files, which revealed BCCl’s efforts to hide as much as $690 million in unrecorded deposits, did the

Bank of England conclude it had evidence of “massive and widespread fraud going back over a number of years.” Declared LeighPemberton: “The culture of the bank is criminal.”

The extent of the alleged criminality has stunned even veteran financial investigators. They charge that between $5.8 billion and $17 billion remains unaccounted for in an intricate maze in which bad debts were transferred through secretive tax havens and that included a mysterious Cayman Island-based “bank with-

in a bank” to hide billions in fictitious loans. Indeed, ever since Abedi founded BCCI in 1972—after Pakistani authorities had nationalized his United Bank Inc.—its very structure seemed designed to frustrate official scrutiny. With its assets split between holding companies in Luxembourg and the _

Cayman Islands, both of which have strict laws to protect the secrecy of banking information, BCCI grew into the world’s fifth-largest private bank, unanswerable to any single regulatory authority—and with no clear lender to protect its clients as a last resort.

Throughout the Third World—unlike most international banks, BCCI maintained branches even in impoverished sub-Saharan nations— governments face potentially disastrous repercussions from the scandal. In Lima, a Peruvian congressman

charged that former president Alan Garcia had used BCCl’s Panama branch to loot the national treasury before leaving office last year, enabling him to enjoy a luxurious lifestyle in spite of his current $2,875-a-month salary. In Argentina, Ghaith Pharaon, an Arab financier who moves in high political circles in the country, is a leading suspect in several investigations of BCCI. And in Bangladesh, hundreds of BCCl’s 40,000 irate deposit holders demonstrated outside the bank’s local branch, which closed its doors on July 6.

In Bangladesh, as in other Third World countries, the clampdown on BCCI is certain to have far-reaching effects. Small businessmen and entrepreneurs in developing countries have long depended on BCCI for loans that other international banks regarded as too risky. BCCl’s reputation in the Third World was further enhanced by the fact that it financed several charitable organizations and had founded an international magazine, South, devoted to Third World issues.

But the scandal’s impact was widest-reaching in a country where BCCI claimed few depositors—at least officially. In Washington, Attorney General Richard Thornburgh found himself on the 2 defensive against charges E that the justice department 2 had repeatedly failed to act on the growing evidence of 2 criminality by BCCI. For the g past two months, New York § county district attorney Robr ert Morgenthau has accused federal authorities of refusing to co-operate with his two-year investigation of the bank. But as the scandal escalated, Justice representatives abruptly announced that this week one of their top officials will meet Morgenthau.

For his part, Thornburgh pointed out that

_ his office is so far the only one

in the United States to prosecute BCCI. In January, 1990, the bank and five of its midlevel executives pleaded guilty to federal charges of money laundering in Tampa, Fla., paying a record fine of $17 million in exchange for being allowed to remain in business. That case had its origins in a 1988 investiga0 tion led by Senator John Ker-

0 ry, a Massachusetts Demoli crat who first exposed

1 Noriega’s patronage of BCCI. Ü Last week, Kerry accused £ the attorney general’s office g of failing to pursue the bank’s i top officers or other docu-

merited allegations of wider wrongdoing. Said Kerry: “In 1988, we knew the bank was an international scam.”

Most damaging is evidence that federal regulators ignored taped testimony from former bank officials that BCCI secretly bought control of three U.S. banks, one based in Washington. This fall, the House of Representatives banking committee begins hearings into how Abedi and foreign-owned BCCI—already vetoed in a previous attempt to buy a U.S. bank because of questions about BCCI activities—used a complex system of loans to Arab shareholders to take over the capital’s largest bank holding company, patriotically renamed First American Bankshares, in 1981.

Central to that inquiry is one of Washington’s most distinguished power brokers: 84-year-old Clark Clifford, who served as First American’s chairman—and BCCl’s lawyer. A former defence secretary under Lyndon Johnson and an adviser to every Democratic president since Harry Truman, Clifford now faces possible criminal charges for his 1982 testimony to the Federal Reserve that BCCI had no direct involvement in his bank holding company. Clifford, however, says that he was “duped” by BCCI and had no idea that the two banks were closely connected.

Clifford was only one of many political influential figures whom BCCl’s founder, Abedi, managed to befriend.

Among his closest associates and staunchest defenders: former president Jimmy Carter. Inside the entrance to the Carter Center and presidential library in Atlanta, opened in 1983, the Pakistani banker’s name is carved in stone as one of two chief donors who contributed $575,000. He also served as co-chairman of Carter’s Global 2000 Inc., a foundation designed to promote Third World agricultural and environmental projects, to which he has donated $9.2 million over the past five years. His co-chairman: right-wing Japanese billionaire Ryoichi Sasaka, who once called himself “the world’s wealthiest fascist.”

Another recipient of the banker’s patronage was former Atlanta mayor Andrew Young, who was Carter’s UN ambassador and is now an Atlanta consultant. He acknowledged receiving a $57,500 annual retainer from Abedi over 10 years, in return for introducing him to Third World leaders. In Britain, BCCI sought out the advice of former Labour prime minister James Callaghan, who once hailed Abedi as a figure of “deep moral concern” because of his willingness to support Third World projects. And UN Secretary-General Javier Pérez de Cuéllar acknowledged last week that he had used a private jet owned by a major shareholder of BCCI on two occasions in the mid-1980s.

Those connections may help explain official reluctance to pursue the suspicions that have dogged BCCI for at least a decade. But even

more effective in discouraging regulators may have been the discretion and global facilities that BCCI offered to intelligence agencies in several countries. Last week, Leigh-Pemberton confirmed that the Bank of England knew by March, 1988, that terrorist organizations were doing business with BCCl’s London branches. Published reports in Britain said that as many as 11 terrorist groups—possibly including the one behind the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, that killed 270 people—had used BCCI accounts

to finance their activities. And Pakistan’s finance minister, Sartaj Asis, said last week that the bank’s Karachi operation had handled profits from the country’s huge heroin trade.

But the bank’s links with terrorist leaders, arms dealers and drug runners appear not to have prevented the CIA from using BCCI to funnel millions in covert aid to Afghan resistance fighters and co-operative Pakistani generals over the past 11 years. As Thomas Blanton of Washington’s independent National Security Archive pointed out, the same secrecy that appealed to underworld groups made BCCI “a natural haven for covert operators.”

For the past month, thousands of BCCl’s 115,000 British depositors—many of them shopkeepers from the country’s flourishing Asian community—have picketed Bank of England headquarters to protest the shutdown, which could cost some their life savings. In response, a High Court judge delayed the central bank’s request to liquidate BCCI until this week in order to give its new chief share-

holders, led by Abu Dhabi ruler Sheik Zayed bin Sultan al-Nahayan, time to work out a compensation package for small depositors and former staff. In fact, sources close to the investigation said that one reason U.S. and British authorities failed to act last fall against BCCI was that they feared offending Sheik Zayed, who had just injected $1.15 billion into the bank—and who was a close ally of the U.S.-led forces in the Persian Gulf War.

The BCCI scandal has exposed a sinister netherworld in which spies, terrorists and mer-

chants of death traded secrets, favors and payoffs—in some cases, under the cloak of national security. Financial regulators and police forces in several countries are now discussing ways to shutter that shadowy universe and prevent any would-be BCCls from ever again evading international scrutiny. But Rod Ständer, for one, the former head of the RCMP’s commercial and economic crime division and now a partner at the accounting firm KPMG Peat Marwick Thorne in Toronto, says that he doubts that regulators will achieve such a goal for at least two decades. He added: “There are too many pieces of the puzzle. And there’s no real sophisticated capability to take the kind of action one would expect on the international level.” That complexity is already baffling investigators as they pick over the pieces of the BCCI puzzle, which, they predict, may take years to put together.

MARCI McDONALD

ANDREW PHILLIPS