CHAPTER 22
On Friday, June 28, 1991, the Bank of England
notified the Federal Reserve Board that a new Price Waterhouse audit
had been received. The audit virtually forced the authorities in
Britain, Luxembourg, and the Cayman Islands to take control of the
principal banks in the BCCI group. Alerting the Federal Reserve was
vital. The seizure of a global bank operating around the clock in
seventy countries would have to be executed with great care to avoid
disrupting the banking world on an international scale.
The decision to begin planning the global shutdown
of BCCI had been made that morning in London by the two top officials
of the Bank of England, Robin Leigh-Pemberton and Eddie George. There
had been consultations with officials in Luxembourg and the Cayman
Islands. The new report by Price Waterhouse made the shutdown a
foregone conclusion unless a massive new infusion of cash could be
arranged secretly and immediately from Abu Dhabi. Price Waterhouse had
been working for the Bank of England as its examiners under special
provisions of British law. This new inquiry into the bank had been
authorized by the regulators after the results of Price Waterhouse's
October 1990 report. The latest and most startling findings had been
turned over to the regulators on June 27. That night, Eddie George,
the deputy governor, had taken the report home with him when he left
work. What he had read was a regulator's nightmare, and George had not
slept well.
Ordered by the regulators to perform a full audit
and permitted far broader access to records by the bank's new owners,
the accountants had discovered what they referred to in the report as
a secret "bank within a bank." They found evidence of
massive and complex fraud at BCCI. There were huge losses. Perhaps $5
billion. Perhaps twice or even three times that amount. It was so hard
to tell because the losses had been systematically covered up for
years through an endless array of account ing tricks and outright
fraud. There were fictitious deposits and loans, thousands of
unrecorded transactions, falsified records.
Years of financial manipulations at the Bank of
Credit and Commerce International constituted what Price Waterhouse
described as "probably one of the most complex deceptions in
banking history in service of an effort to conceal "total losses
of several billions of dollars."
In all, more than 6,000 documents were uncovered and
attributed to the secret bank within the bank. According to the
report, Swaleh Naqvi himself had held these files, and the auditors
said it appeared that he had done little more for years than manage
the hidden bank. Deposits were taken in but not recorded on the books.
The funds were then used to cover up losses in bad loans and trading
operations. When customers wanted to withdraw the unrecorded deposits,
further deposits were taken and went unbooked. The potential spiral
was endless. From the books, Price Waterhouse said it appeared
possible that the bank had never earned a profit in its nineteen-year
history. Yet it had grown enormously and reported robust earnings
until the late 1980s-$108 million in 1982, $136 million in 1983, $234
million in 1984. The report's assertion that these may have been the
result of manipulating the books was a classic description of a Ponzi
scheme, only on a grander scale than any such swindle in history.
The Price Waterhouse report of June 1991 itself was
an unusual document, for it went beyond the usual dry rhetoric and
numbers associated with financial audits. An attempt was made to
explain how Agha Hasan Abedi's dream of building the world's biggest
bank had gone so far astray.
The report placed the blame on Abedi and Swaleh
Naqvi, accusing them of making the strategic decisions to manipulate
accounts and ordering other employees to carry out their plans. Price
Waterhouse said the scale and complexity of the deception was so vast
that most senior managers were or should have been aware of at least
certain elements of what was going on.
The report proposed several answers to the question
of why bank officers had not blown the whistle on the manipulations at
BCCI. Many of them, it said, received substantial loans from the bank
that were not repaid so long as they remained with the bank. Others
had been paid off in different ways. The report charged that Syed
Akbar had taken secret documents detailing the fraud within the bank
when he left in 1986 and it said he was later paid $32 million in hush
money. As for the board of directors, the accountants said that they
served mainly as a rubber stamp for Abedi and Naqvi, taken in by trust
and loyalty.
"Many simply followed instructions they should
have questioned," said Price Waterhouse. "Failure to do so
appears to have arisen from a blind loyalty to Abedi and Naqvi brought
about by the cultural back ground where it was unthinkable to
question."
In the end, Price Waterhouse concluded, the fraud
was so widespread that determining the total loss was impossible:
"There is insufficient information available with which to
re-create the bank's accounts with the knowledge that is now
available. But on the basis of the losses which have been concealed,
it would appear that the bank has generated significant losses over
the last decade, and may never have been profitable in its entire
history."
Later, Ian Brindle, the senior partner in the Price
Waterhouse office in London, would describe the task that confronted
the auditors in recon structing BCCI this way: "It was like doing
a huge jigsaw puzzle where you don't have the picture, just the pieces
sitting there, thousands of pieces. Over time you get an idea of what
the picture looks like, but it gets ever more difficult. You are
dealing with deception and manipula tion of information both inside
and outside the company."
When Eddie George telephoned Bill Taylor, the top
banking regulator at the Federal Reserve in Washington on June 28 with
word of the audit, Taylor had promised to be on the first plane to
London.
Leaving Fed general counsel Virgil Mattingly, Jr.,
to handle the American end of preparations for the shutdown, Taylor
and a small team of Fed officials from Washington and New York had
flown to London for a series of meetings with their counterparts at
the Bank of England. On July 2, a Thesday, the Americans and British
sat down at Bank of England headquarters on Threadneedle Street with
officials from the Cayman Islands, France, Luxembourg, Spain, and
Switzerland to discuss how to wind down the operations of BCCI.
The session lasted all day. At the start, there was
talk of approaching Sheik Zayed bin Sultan al-Nahayan of Abu Dhabi for
another massive cash infusion to bail out the bank. One of the world's
richest men, Zayed had already pumped $1 billion into BCCI since
becoming its principal shareholder in 1990 in an effort to salvage it,
but the fraud described by the latest Price Waterhouse report was
deemed so pervasive that there was no hope of eradicating it. The
remainder of the day was spent discussing the timing and strategy for
bringing down the bank.
This in itself was no small matter. BCCI's tentacles
extended to every corner of the globe and the massive step being
planned would ripple through the world's financial system in a matter
of minutes. This was the era of twenty-four-hour stock markets and
global dependence and that system was about to get a major test.
The Federal Reserve was concerned about the
potential for disrupting the U.S. banking markets and the dollar-based
payment and clearing systems around the world. While BCCI's banking
activities in the United States were minimal at this point, a large
portion of its dealings worldwide were conducted in dollars. The Fed
wanted the seizure to occur when American banks were closed and
accounts among institu tions dealing with BCCI had been settled for
the day.
Another danger was that the seizure would set off a
run on other banks in the Persian Gulf, where BCCI was a major player
and tied to the royal families of several nations. The regulators felt
that the herd mentality of bank customers had been demonstrated
countless times over the years. Officials worried that declaring BCCI
insolvent could spark fears about all Gulf banks. Many of these banks
maintained major operations in London, Paris, and New York, which
meant their troubles could ricochet through Western financial
capitals.
Over the course of Thesday and Wednesday, the
regulators determined that the best time to close the bank was at the
close of business in the United States on Friday, July 5. It would be
night in Europe and the bank would simply be stopped from opening over
the weekend.
On Wednesday night, Bill Taylor flew home to brief
Mattingly and top officials at the U.S. Treasury Department and the
Office of the Comptrol ler of the Currency. Re left a senior
regulator, Steve Schemering, behind to work with the special unit of
officials from all seven countries that would coordinate the action
from London.
A career regulator who had been consumed by the BCCI
investigation for months, Taylor was at his desk in Washington on the
Fourth of July when he got word from Schemering that the seizure could
not wait until the end of business in New York on Friday. The BCCI
management was meeting July 5 in Luxembourg and the regulators wanted
to act before they offered up a new restructuring that might force a.
delay. With just hours until the deadline, Taylor contacted Fed
officials in New York and Los Angeles and informed them of the new
schedule.
There would later be criticism that the
international regulators had acted prematurely and should have waited
for a new proposal from the Abu Dhabi government, but the Price
Waterhouse report had convinced everyone who had read it that closing
the bank was inevitable and urgent.
The coordinated shutdown of the Bank of Credit and
Commerce was announced at eight-thirty in the morning New York time on
July 5, 1991. BCCI's remaining American offices in New York and Los
Angeles were taken over by bank examiners. Many of BCCI branches in
Britain had been closed in recent months as part of the layoffs and
restructuring ordered by Abu Dhabi. At one o'clock in the afternoon
London time, Bank of England officials walked into the bank's
remaining twenty-five branches, most of them in the London area, and
ordered employees to leave.
The actions of the seven countries set off a chain
reaction. By the end of the weekend, BCCI's operations had been closed
in eighteen countries around the world and operations were placed
under close supervision in dozens of others. The effect of the
seizures was to place the assets and liabilities of BCCI banks and
branches worldwide under protective control of the regulators and, in
some cases, the courts. Bank accounts large and small were frozen.
Receivers would be appointed to sort out the scrambled finances of the
bank and eventually dole out what remained to thousands of creditors.
For nearly two decades, BCCI had fed off the
illusion that a bottomless reservoir of Arab wealth stood behind the
bank. Now that illusion was being shattered.
Two days after the coordinated swoop on the bank,
the British ambassador to Abu Dhabi relayed a request from the Bank of
England. The British wanted the sheikdom to cover the losses suffered
by the bank's depositors worldwide. The normally friendly relations
between Britain and Sheik Zayed had been strained by the abrupt
seizure. Abu Dhabi's first reaction to the takeover was an attack on
the regulators for not consulting them in advance. Had the regulators
permitted the bank's restructuring to continue, including the infusion
of a planned $5 billion, "no depositors' money would have been
lost," said the government's statement.
As if to thumb its nose at the British regulators,
Abu Dhabi kept open the seventeen branches of the Bank of Credit and
Commerce-Emirates, which was forty percent owned by BCCI and served
customers in aH seven of the tiny city-states comprising the United
Arab Emirates. The possibility was that the bank there would form the
nucleus of a regrouping effort for the entire bank. And there seemed
no doubt that Sheik Zayed, a proud ruler known for generosity to his
citizens, would make sure that no customers in the Gulf lost money in
the collapse. Efforts also were planned by Abu Dhabi to salvage the
bank's three branches in Pakistan.
On July 8, top banking officials from Abu Dhabi
arrived in London for consultations with the Bank of England and other
international regulators over what would happen to the Bank of Credit
and Commerce International. The Abu Dhabi officials wanted an
explanation for the decision to seize the bank's assets without prior
consultation with them.
When a reporter for London's Fin~ncia1 Times asked
one of them whether Abu Dhabi would continue supporting the bank
worldwide, the reply was, "What is there to support now that the
Bank of England has moved in?"
Anger was in evidence elsewhere, too. BCCI employees
in Britain staged demonstrations outside the court hearing the Bank of
England's request for permission to liquidate local operations of BCCI.
They accused the regulators of moving too swiftly and of ignoring
equally pressing problems at British banks. The most violent outbreak
occurred in Hong Kong, where BCCI customers clashed with police.
In Pakistan, the events of July 5 were perceived as
part of a Western conspiracy against BCCI in particular and the Third
World in general. Had it been an American or European bank, they
believed, the difficulties would have been worked out quietly behind
closed doors.
"The West never wanted a Muslim bank to grow so
big because most of the big banks are run by Jews," Asif Ah, a
retired engineer waiting outside the Karachi branch, told a reporter.
Another Pakistani, construction company owner Jashed
Omar, de scribed his reaction to another reporter by saying:
"Shutting down BCCI was a classic case of overreaction. This bank
gave Pakistanis a sense of participation in world finance. I think
BCCI was a threat to some powerful people outside this country and it
was singled out unfairly."
Others saw ghosts of conspiracies. Still, the
questions that they asked should not be ignored.
"If there was a problem with drug money, it is
the same problem that is found at every other big bank," said
Rais Khan, an automobile dealer in Karachi. "What about Swiss
bank accounts? Don't you think drug money, Mafia money, finishes up in
Swiss banks? Isn't there money laundering in American banks?"
Not far from downtown Karachi was the guarded,
walled compound on a dusty road where Agha Hasan Abedi was still
struggling to recuperate from his heart attacks and a stroke. It was
not the home of a man who exhibited great wealth. There was a large
house flanked by two cottages, one of which was home to Abedi's aged
mother.
The Sunday after the seizure of the bank, two
Pakistani newspapers ran stories about the reactions of a man who was
viewed there as a victim, not a victimizer. The articles portrayed Abe
di as a man in failing health, unable to remember many events about
the bank, unable to speak in full sentences. Abedi was able, however,
to deny any responsi bility for what had happened to his bank.
"God knows better," he told one of the
reporters.
There was reason not to believe the worst about
Abedi and BCCI in
Pakistan, neighboring Bangladesh, and other poor
countries in Asia and Africa.
Over the years, BCCI had been a banker of last
resort to businessmen and others who were ignored by the established
international banks. BCCI's employees understood the local culture and
customs and seemed willing to take risks based on a common bond of
trust and belief in Third World development. The bank cultivated the
image of a visionary bank. It used charitable organizations and
respected figures to create a model for the dreams of developing
nations and their citizens. When the collapse came, it was these
customers and those nations that lost the most. As with the
unquestioning employees cited in the last Price Waterhouse report,
trust and loyalty were betrayed.
For Abedi, there was to be more bad news a few weeks
later. And again, it would come from the West.
Word was leaked first to the television stations.
They needed the extra time to arrange for camera crews, so they were
alerted about eleven o'clock on a Sunday night in late July that
something big was on tap for eleven the next morning at the offices of
New York District Attorney Robert Morgenthau.
Throughout the morning of Monday, July 29, 1991,
camera crews loaded their videocameras, sound packs, and cables into
the creaking elevator and rode up to the eighth floor. They hefted the
tools of their trade down the dingy marble hallway, past photographs
of 200 years' worth of glaring district attorneys. Inside the narrow
office of the district attorney, more than fifty journalists and
technicians jostled for position as the bright TV lights bathed the
cluttered desk in harsh light.
At eleven o'clock, Robert Morgenthau walked into the
room and sat down at his desk. With him, dressed in their best suits,
were the men who were leading his investigation into BCCI. John Moscow
wore a shiny blue-gray suit and electric blue shirt. Andrew Rosenzweig,
a former private investigator turned chief of investigations for the
DA, wore a conservative brown suit. Alongside him was the bulky senior
investiga tor, Andrew Finan, in a well-cut suit.
"A New York County grand jury has returned an
indictment that charges that the Bank of Credit and Commerce
International, its related entities, and two of its founders engaged
in a multibillion dollar scheme to defraud its depositors, falsified
bank records to hide illegal money laundering, and committed larcenies
totaling more than $30 million," Morgenthau said, reading from
the prepared press release.
"This indictment spells out the largest bank
fraud in world financial history," he continued. "BCCI was
operated as a corrupt criminal organization throughout its entire
nineteen-year history. It systematically falsified its records. It
knowingly allowed itself to be used to launder the illegal income of
drug sellers and other criminals. And it paid bribes and kickbacks to
public officials."
The long-awaited other shoe had dropped. The
indictment charged BCCI, Agha Abedi, and Swaleh Naqvi with crimes far
broader than those contained in the federal indictment in Tampa nearly
two years earlier. The seizure of the bank worldwide had provided
Morgenthau with the last piece of evidence he needed for his charges,
for the seizure had demonstrated that BCCI customers were going to
lose huge sums of money as a result of the years of fraud and
deception.
The top charge in the twelve-count indictment
accused Abedi and Naqvi of grand larceny in defrauding customers by
misrepresenting the bank's ownership and financial condition. Among
the victims listed was American Express Bank, which stood to lose $30
million of its money that was on deposit with BCCI when the bank was
seized on July 5. A key section of the charge supplied Morgenthau's
jurisdiction. It said that the bank and its officials had provided
false statements on its financial condition to the superintendent of
banks for the State of New York.
The bank also was accused of paying $3 million in
bribes to senior officials of the central bank of Peru to obtain $250
million in deposits in 1986 and 1987. The indictment did not name the
officials, but in his press conference Morgenthau identified them as
Hector Neyra, the central bank of Peru's former general manager, and
Leonel Figueroa, former head of the central bank's board of directors.
Abedi and Naqvi were accused of instructing bank employees to open a
bank account with a Swiss bank in Panama to transmit the bribes and
kickbacks to the Peruvian officials.
And the grand jury accused the bank's New York
agency office of failing to report cash deposits in excess of $10,000
on each of at least eight occasions. This last charge, said the
indictment, constituted money laundering. Americans were not allowed
to deposit money at the agency office, but it could conduct
transactions for foreign nationals. Whoever deposited the allegedly
dirty dollars was not identified.
"This largest of Ponzi schemes is over,"
said Morgenthau. "But we have much yet to discover about this
bank, and much to do in reforming international banking practices. The
key to the scheme was that BCCI was structured in such a way so that
no single central bank was able to monitor its activities. No foreign
bank should be permitted to operate in the United States unless it is
supervised by a single, strong central bank and is not protected by
bank secrecy laws of another jurisdiction. Without these reforms, the
potential for massive worldwide bank fraud remains."
In response to a reporter's question, Morgenthau
estimated that his investigation was only twenty to twenty-five
percent done, but he declined to speculate on what remained to be
covered.
Morgenthau thanked the staffs of the state banking
superintendent and the Federal Reserve in Washington and New York for
their assis tance. He even had kind words for the Bank of England,
saying that once they found a way to do so legally, the British
regulators had shared important information. Missing from the list of
those thanked was the U.S. Department of Justice.
In Washington, Assistant Attorney General Robert
Mueller III, the Justice Department official who had taken over the
federal investigations into BCCI in July, issued a statement saying
that the department had "fully supported" the work of
Morgenthau and provided substantial information. Yet shortly before,
senior officials at Justice had tried to stop the Federal Reserve from
coordinating a major announcement of its own with Morgenthau's
indictment. The Fed, however, had refused.
So at the same time Morgenthau was unveiling his
indictment, the Federal Reserve Board in Washington released the
charges resulting to date from its massive investigation into BCCI.
They were as stunning and far-reaching as those of Morgenthau. And
they were detailed in a hundred-page catalog of surreptitious actions
that provided the public with the most detailed look yet into the
clandestine workings of BCCI in the United States.
The Fed's notice of charges alleged that BCCI
controlled about sixty percent of First American's holding company
through a series of secret arrangements. The regulators portrayed the
Washington banking opera tion as BCCI's stepping-stone to other U.S.
financial institutions, such as the National Bank of Georgia and
CenTrust Savings. All of this was concealed, the Fed claimed, because
BCCI itself could not get necessary approvals to buy a bank in the
United States. The notice also laid out a pattern of hiring decisions
at First American and the National Bank of Georgia in which Abedi and
Naqvi either provided candidates or were consulted.
A record $200 million fine was assessed against BCCI
by the Fed and the regulators sought to bar permanently nine people
associated with the bank from any involvement with a U.S. banking
organization. Along with Abedi, Naqvi, and Pharaon, the Fed asked that
the ban be imposed on Hasan Mahmood Kazmi, the former general manager
of ICIC, the bank's affiliate in the Cayman Islands; Khusro Elley,
manager of BCCI's New York office; and the four major investors in
CCAH who were accused of serving as fronts for the bank's control of
First American. They were Kamal Adham, Faisal Saud al-Fulaij, Saudi
businessman A. R. Khalil, and El Sayed Jawhary, an adviser to Adham.
The twin blows drove the staggering bank to the
canvas. By week's end, lawyers for its British-appointed liquidators
were in U.S. Bankrupt cy Court in New York to seek protection from the
regulators and investigators zeroing in on the bank.
The day after the joint Morgenthau-Fed actions, the
High Court in London agreed to a four-month delay in the Bank of
England's attempt to liquidate BCCI. Abu Dhabi was granted the extra
time to explore possibilities for reviving the shattered institution.
In exchange, the Gulf nation's representatives revealed a plan for
about $80 million in compen sation for depositors in Britain and pay
for BCCI employees.
In a proceeding just before the close of business on
Friday, August 2, a federal bankruptcy judge in New York City approved
a temporary order stopping the bank from paying the $200 million fine
imposed by the Federal Reserve and freezing the production of bank
documents in a host of criminal and civil court cases involving the
bank.
These were holding actions, capable only of delaying
the inevitable. Trust is the essence of banking, and trust in BCCI had
been shattered by disclosures worldwide. Agha Hasan Abedi's invisible
bank was stripped of its cloak of secrecy. And still the blows came.
In Tampa, federal prosecutors were nearing the
completion of another major criminal indictment of bank officials and
the bank itself. It was based on the cooperation of Amjad Awan and the
other bankers convicted the year before.
In Karachi, Pakistan's finance minister acknowledged
that local BCCI branches may have been used to launder money from the
country's heroin trade. Later, he claimed he had been misquoted.
In London, Ghassan Qassem, the manager of BCCI's
Sloane Street branch, went on BBC-TV and described taking Abu Nidal on
shopping sprees and allowing the world's most virulent terrorist to
use the branch as an office when he was in town.
In Washington, stung by allegations about the CIA's
relationship with the bank, one of William Webster's final acts before
retiring as CIA director was to order a full review of the agency's
dealings with BCCI. In a rare public statement, the deputy director of
the CIA, Richard Kerr, admitted to an audience of high school students
that the agency had used BCCI for years to pay for covert operations
and had passed on information about corruption in the bank to other
U.S. agencies since the early 1980s. But he said there was nothing
illegal about the CIA's involvement.
"We, CIA, used it as anyone would use a bank,
not in any illegal way and not in any way that the bankers knew the
objective of," Kerr told the students. "You probably don't
move the quantities of money for the purposes that we do, but
nevertheless, the same point is you use it merely as a transfer
point."
The BCCI scandal had reached such heights that
George Bush entered the debate, calling the widening charges about
BCCI "a very serious matter" during a press conference.
"This bank apparently was doing very bad things," said the
President of the United States.
The day of Bush's remarks, August 1, Jack Blum and
former Customs boss William von Raab appeared together before Senator
John Kerry's Subcommittee on Terrorism, Narcotics and International
Operations. Nearly one hundred journalists jammed the ornate hearing
room and listened as the two men vied for top honors in vilifying the
bank and accusing the Justice Department of failing to respond
aggressively to the long-standing allegations about it. Some of the
charges sounded far fetched.
But the sharks were circling the bloodied bank, and
the scandal seemed so bewilderingly vast that almost any accusation
was given instant credibility. There was a conspiracy theory to fit
any point of view, and shenanigans enough to lend at least temporary
credibility to most of them.
Around the world, investigators from the Justice
Department, Scot land Yard, the New York district attorney's office,
and various regulatory agencies were trying to discover how many
billions of dollars had been stolen from the bank depositors, how it
had been pulled off, and where the money had gone. They faced the same
arduous task that confronted Price Waterhouse in trying to re-create
the Bank of Credit and Com merce International puzzle from a jumble of
pieces carved by years of deception and manipulation.
- As Ian Brindle of Price Waterhouse said after his
accountants turned in the audit that ultimately forced banking
regulators around the globe to act: "Wherever you turn,
whatever you are looking at, all is unreal. You are living in a
world of unreality."