Building the Bank

Western banks concentrate on the visible. whereas we stress the invisible.

-Agha Hasan Abedi, founder, the Bank of Credit and Commerce International

A Reverse Robin Hood

One o'clock in the afternoon on July 5, 1991, officials of the Bank of England marched into the twenty-five branches of the Bank of Credit and Commerce International in Britain and ordered employees to leave. From small offices in the Asian north end of London to the lavish main office in the financial district, the regulators locked the doors and began boxing up thousands of bank records. Simultaneously, regulators swept down on the bank's branches and offices in the United States, France, the Cayman Islands, Spain, and Switzerland.

In Luxembourg, the bank's official headquarters, the tiny duchy's entire judiciary was attending an official picnic in the countryside. Bank regulators had to track them down and find a judge to sign an order to close the bank. While the order was being signed, armed guards stood outside the conference room at the bank's headquarters. Behind the closed doors, representatives of the government of Abu Dhabi, BCCI's principal shareholder, were meeting in a last-ditch attempt to salvage the bank with an infusion of cash and new management, unaware of the drama beginning around the world. So desperate was the Persian Gulf sheikdom to keep the bank open that its officials were meeting on a Friday, the Muslim Sabbath. The bank's board members were still inside the conference room when the regulators arrived to seize the bank.

It was eight-thirty that morning on the East Coast of the United States when examiners from the Federal Reserve Board showed up at the bank's office in New York and locked the doors. In the dark hours of predawn in Los Angeles, examiners arrived at the BCCI office downtown and sealed the doors.

These were only the first dominoes to fall. By the end of the weekend, BCCI's operations had been closed in eighteen countries and put under tight supervision or restricted in forty-four others. The coordinated shutdown was a drastic step and a risky one, since the bank's operations were spread around the world and the repercussions within the interna tional financial system could be disastrous, but Robin Leigh-Pemberton, governor of the Bank of England, defended the unprecedented action. The regulators had moved, he said that day, only after being convinced the bank was guilty of "fraudulent conduct on a worldwide scale."

What had been one of the world's largest privately owned banks, with $20 billion in assets and 400 branches spread across seventy-three countries at its zenith, was paralyzed. With near-military precision, banking regulators in seven countries had acted in concert to close down the offices of the Bank of Credit and Commerce International. A bank created explicitly to avoid a central regulator, after nearly two decades of growing like Topsy with scant supervision, was being brought down through the unique cooperation among the regulators of seven nations.

As other countries fell in line, accounts large and small at BCCI branches worldwide were frozen. Depositors faced the loss of their savings. Businesses were paralyzed; ships stranded in ports, unable to deliver cargo. Customers massed outside offices in London, Hong Kong, and a dozen other cities to plead for their money. Hundreds of the bank's 14,000 employees demonstrated against what they labeled a reckless, racist takeover by Western interests.

Some countries resisted the rush to shut down the bank. In Pakistan, the home of the bank's founder and its senior executives, BCCI's three branches remained open on orders from the nation's president, who had once headed a charitable foundation set up by the bank. A sign taped to the front door of the Karachi branch read, "Under State Bank of Pakistan instructions we are operating normally." Across the street, officials at Pakistan's central bank said they were trying to protect the bank's 71,000 depositors in the country.

In Abu Dhabi, home of the ruling family that had bankrolled the bank's beginnings and struggled to save it at the end, it was business as usual. On Sunday, the offices opened for business without a sign of the turmoil engulfing the bank elsewhere. Accounts of the seizures in London and Europe were cut out of foreign newspapers as they arrived. The collapse of the bank was not even reported in Abu Dhabi, where people see only what the government permits.

The shutdown occurred in the midst of a four-day holiday weekend in the United States. That Friday, a county prosecutor named John Moscow was sitting in his cluttered office in lower Manhattan anyway when word came that regulators had taken action against his target. Throughout the day, his phone rang constantly. Present and former bank employees were scurrying forward, offering new information and testimony in hopes of cutting a deal for immunity. They could see the massive global assault on BCCI for what it was, the beginning of the end.

In the midst of the calls came one from Robert Morgenthau, the New York district attorney who was Moscow's boss. As Moscow outlined the calls pouring into the office, one piece of information stood out. A New York-based bank had $30 million in accounts at BCCI when the deposits were frozen. In all probability, the money would be lost. Here was a real victim for the two-year-old investigation that Morgenthau and Moscow had been waging, a loss that would provide compelling evidence of fraud and help complete their indictment.

That same day, on the third floor of the Federal Reserve System headquarters in Washington, D.C., Bill Taylor, the chief of bank supervision and regulation, juggled calls from across the country and around the world. For months, Taylor had been directing the Fed's investigation of BCCI's trail in the United States. It was the most far-reaching and complicated investigation in the history of American bank regulation. Taylor's staff needed more time before confronting the touchy business of shutting down the rogue bank. They were trying to close a major international bank without sending the world's financial system into panic and chaos. Now time had run out.

It had been nearly three years since the public first glimpsed the corruption beneath the surface respectability of the Bank of Credit and Commerce International. In October 1988, the bank and eight of its employees were indicted in Tampa, Florida, on charges of laundering millions of dollars for the Medellin cartel.

The money-laundering charges had been the first fruits of an under cover operation run by the U.S. Customs Service. The federal agents had stumbled onto the bank while pursuing Colombia's Medellin drug cartel. It was one of the luckiest moments in the history of law enforcement, transforming a routine investigation into a case that eventually broke open the world's biggest banking scandal.

That start was small. As a result of the Tampa case, in early 1990, the bank pleaded guilty, paid a record $15 million fine, and then went on about its business. Five employees were tried and convicted of money laundering, with two getting stiff twelve-year prison terms. The bank tried to explain away the incident as the isolated work of lower-level employees, dispatching its army of retainers to smooth the ruffled feathers of customers and regulators alike.

But the Tampa convictions were only the first step in the global unmasking of the secret bank, a bank that thrived in a financial underworld where billions of illicit dollars flow over borders and out of reach of authorities with the press of a computer key.

Much of this dirty money comes from narcotics trafficking, the richest criminal enterprise in history. It generates money by the bag, by the box, by the truckload. Profits accumulate by the ton. Estimates of profits from cocaine sales in the United States alone reach as high as $110 billion a year. The result of this profit is an underground torrent of dollars that oils the machinery of drug corruption.

This river of illegal money does not all spring from drug trafficking. Tributaries flow in from Third World countries, where dictators with names such as Marcos, Duvalier, and Noriega plunder the meager wealth of their people. There is flight capital as rich citizens of unstable countries evade currency restrictions and drain nations of the funds intended to finance their development. There are profits from illegal arms transactions, millions of dollars in American aid siphoned off in Asia and Africa. All finds its way into the flow of hot money. And the customers of the Bank of Credit and Commerce included flotsam from all of these streams.

BCCI appealed to a wide range of customers, among them the U.S. Central Intelligence Agency, which maintained secret accounts at BCCI branches for years. Payments were made to finance covert aid to the Afghan rebels and to bribe General Manuel Antonio Noriega of Panama, himself a favored customer of BCCI. With its operations in most of the world's nastiest corners, BCCI fit the needs of the CIA.

The relationship carried an added benefit. From its vantage as a bank customer, the CIA kept an eye on others who were using the bank-a rogue's gallery of terrorists, corrupt public officials, and arms merchants. Topping the list was the world's most feared and lethal anti-Western terrorist, Abu Nidal. He and his Fatah Revolutionary Council main tained a $60 million account at BCCI's fashionable Sloane Street branch in London to finance terrorism and arms transactions around the world. In cooperation with the branch manager, the CIA, the U.S. State Department's counter-terrorism division, and Britain's MIS all used the bank as a window on the operations of the Palestinian extremist.

The Bank of Credit and Commerce International was so dirty that the second-ranking official at the CIA described it in 1988 as "the bank of crooks and criminals international."

The doors were open to customers of any stripe, no questions asked. When the government of Peru wanted to hide its cash reserves from creditor banks, BCCI was there. When Iran needed U.S. antitank missiles to fight Iraq, BCCI was there. When General Noriega was indicted by the United States on drug charges and tried to move $23 million out of reach of American authorities, BCCI was there. When Arab tycoons and Pakistani shipping magnates needed cash to prop up faltering businesses, BCCI was there with loans that were never repaid.

Founded by Pakistanis and financed by Arabs, BCCI had billed itself as a Third World bank, as the financial tool that would help developing countries pull themselves out of poverty and starvation. It had disguised itself through numerous charitable operations, and had hired influence peddlers and respected politicians worldwide to embellish that image. Yet in the end, it was the money of the honest depositors that would disappear in the ruins of the bank. The bank would turn out to be a reverse Robin Hood, stealing from the poor and giving to the rich.

The worst fears of the regulators did not materialize. The shutdown of the bank on July s did not disrupt the world's financial system, but it did disrupt the lives and livelihoods of those thousands of people around the world who had trusted the bank.

The failure of a bank is not gauged by the financial markets alone. It must be measured in human terms, as well. And in this case, the costs were steep. Bank accounts were frozen. Life savings were imperiled. Entire national economies were threatened.

In the tiny, impoverished West African nation of Cameroon, the central bank faced the loss of $200 million in BCCI accounts. A palm-oil refinery shut down because its account with BCCI was frozen and $2 million in spare parts sat undelivered. Work on Africa's first pharmaceutical factory stopped because the project was being financed by BCCI. In all, BCCI was the primary banker in eighteen African nations and its insolvency added another layer of misery to the world's most beleaguered continent.

The government of China, always desperate for cash to finance its halting economic progress, had $400 million on deposit when accounts were frozen at BCCI Hong Kong and the adjacent Shenzhen trade zone. Most of the money sat in accounts controlled by the government's financial and trading agencies. For Chinese leaders, the loss was com pounded by embarrassment. They had embraced BCCI and its founder, Agha Hasan Abedi, largely because of Abedi's relationship with former U.S. President Jimmy Carter. For years, Carter had accompanied Abedi on trips to China and other developing countries and had provided the banker with invaluable access and respectability.

In fact, Carter was only one of many world leaders and political figures who befriended the charismatic Abedi as he rose from obscurity in Pakistan to the pinnacle of a global financial empire. In Washington, he also was befriended by Clark Clifford, a former presidential adviser and elder statesman of the Democratic Party whose reputation and influence helped Abedi acquire secret control of the biggest banking company in the U.S. capital. Around the world, Abedi and his bank acquired the services of influential people who lent a patina of respectability to the bank. All of them would lose something, too.

And so did people like John Sheehan. On the morning of July s, 1991, he wrote 200 paychecks to workers at his hauling and labor contracting business in London. The checks were drawn on his BCCI business account, which had a balance of about $1 million. Sheehan had moved his account to BCCI a year earlier because it offered a slightly higher interest rate than his previous bank.

That afternoon, angry employees started showing up at Sheehan's office in Southall, waving paychecks that they had been unable to cash. When BCCI was shut down, no bank in Britain would honor checks drawn on accounts there. Sheehan's accountant finally tracked him down about six o'clock that evening and delivered the news. "At that moment, I thought I was finished," said Sheehan, who had built his business up over the past twenty years and was forced to scramble for new funds to pay the workers and keep his business going.

As many as 55,000 of Britain's small Asian businesses banked with BCCI, among them about sixty percent of the clothing importers and exporters along East London's Whitechapel Road. "The garment trade was already in difficulties because of the recession, but the Bank of England may have put the final nail in the coffin," Hanwantbir Chadha, a clothing trader and president of the local business association on Whitechapel Road, said sadly after the closing. "This is a very big tragedy."

Chadha had learned of BCCI's closing when a small manufacturer returned one of his checks for $50,000 on Friday, July 5. The manufacturer had been unable to cash it because it was drawn on Chadha's BCCI account.

Not just businesses were affected. Throughout May and June of 1991, Spectrum Radio, a station geared to Asian-born listeners, had appealed for donations to construct a shelter in Bangladesh for victims of the recent cyclone. More than 1,000 checks had been mailed in to the station. On July 4, Shafik Rehman, the anchor of Spectrum's broadcasts in Bengali, had deposited the last $80,000 of donations in an account at BCCI. The bank was a natural choice because of its Third World message and strong presence in Bangladesh. When its doors were closed the next day, $55,000 of the contributions could be counted as lost since British deposit insurance would cover only about $25,000.

About sixty local governments in Britain had deposited nearly $200 million in municipal funds with BCCI branches in response to its interest rates, which were as much as a percentage point above those of other British banks. The Western Isles Council in Scotland's Outer Hebrides had $45 million on deposit with BCCI. The local government had to seek permission to borrow replacement funds. It also suspended its finance director for five days before deciding he was not to blame.

Shipments around the world, involving more than 1,000 vessels, were brought to a halt, with key documents necessary to complete the transactions locked inside the closed offices of BCCI. The documents were letters of credit that allow purchasers to pay for goods on delivery. Without them, the shippers refused to deliver the goods and ships sat unloaded at docks.