CHAPTER 4
Relationship between Agha Hasan Abedi and Thomas Bertram Lance
was one of convenience on both sides. Abedi was looking for a way to
expand his empire into America, and Lance needed a staggering amount of
money to bail himself out of a financial jam. Whether one of these two men
wound up taking advantage of the other remains an unanswered question, but
in many ways, before the calamities, they seemed made for each other,
despite their backgrounds.
Bert Lance was a country boy, a devout Southern Baptist whose
father had been an educator in rural Georgia. After starting as a bank
teller in 1951, he had married into the family that controlled First
National Bank of Calhoun, a small bank in the northwest corner of the
state. He was a big, jowly man who spoke with a heavy Georgia drawl. His
height, more than six feet, made his ample paunch all the more dramatic,
and his heavy-lidded eyes gave Lance the doleful cast of a drowsy hound
dog. But he was no dumb cracker. After all, he married the boss's
daughter, and later on he was savvy enough to align himself with another
country boy from Georgia, a state senator by the name of Jimmy Carter.
When Carter was elected governor of the state in 1970, he made Lance
director of the highway department. Under state law, Lance was allowed to
continue running the Calhoun bank.
When Carter left the governor's office, he picked Lance to run
for his spot. Lance mounted an expensive campaign, flying up and down
Georgia in his bank's airplane and advertising extensively on television
and radio. A big chunk of Lance's campaign funds came from overdrafts
written on his accounts at the Calhoun bank. Overdrafts are checks written
without enough money in the account to pay for them. Lance and his family
had the money in other accounts to cover the checks, but the overdrafts
would prove to be a costly mistake.
Lance lost his bid for the governorship in 1974, but his
high-profile campaign had elevated him to stardom in Georgia. The
following year, he became president of the National Bank of Georgia, an
aggressive, fast-growing bank in Atlanta. He took the job on condition
that he be allowed to buy a big block of stock in the institution. He did
not have the money for the stock, so he borrowed $2.6 million from
Manufacturers Hanover Trust in New York. After Lance took over at National
Bank of Georgia, the institution switched its bank-to-bank business, or
corre spondent account, in New York from Citibank to Manufacturers Hano
ver. That's the way things often work in banking.
With the election of his old patron Jimmy Carter to the
presidency of the United States in 1976, Lance moved to Washington as
director of the Office of Management and Budget. 0MB is the White House
agency that monitors financial affairs in the executive branch of the
government. Its role in drafting the federal budget makes it one of
Washington's most important power centers. The move offered the one-time
bank teller a shot at real glory, but there were a couple of hitches.
First, Lance's stock-purchase loan with Manufacturers Hanover re
quired him to remain as chief executive of the bank in Atlanta. But
federal regulations required him to resign. Bank stock prices were weak at
the time, so he couldn't sell his stock and pay off the loan. Instead,
Lance arranged a new loan with The First National Bank of Chicago. The new
loan-for about $3.4 million-would pay off Manufacturers Hanover as well as
a second loan that Lance had taken out with Chemical Bank of New York. A
month before the First National loan was completed, Lance's National Bank
of Georgia deposited $200,000 at the Chicago bank. It also took its
Chicago correspondent account away from Continental Illinois Bank and gave
it to First National.
Second, when the Senate confirmed him for his government job in
early 1977, Lance promised not only to resign his bank post but also to
sell his stock in the institution. Stock prices were still so low that he
would not have netted enough to pay off the First National loan, so he was
reluctant to fulfill the pledge. In July, Lance persuaded President Carter
to ask the Senate to give him an extension on the stock sale so that he
could avoid a ruinous loss on the deal.
Meanwhile, Lance's financial activities had attracted the
attention of Congress. Investigators from the Senate Governmental Affairs
Commit tee began asking questions about whether there was a quid pro quo
between Lance and First National Bank of Chicago regarding the $3.4
million loan. Perhaps it was not coincidence that had resulted in the
opening of the $200,000 account and switching of the correspondent
account. Even if there was a connection, this was not a terrible offense
and there was no criminal violation involved. But Bert Lance was budget
director of the Carter administration and the Senate investigation did not
die after just a few headlines.
The U.S. Comptroller's Office, which regulates national banks,
issued a report in the middle of August that found no criminal wrongdoing
in the relationship between Lance's Georgia bank and First National of
Chicago. But the thoroughly neutral document did note an array of what it
described as "unsafe and unsound" banking practices. Similar
criti cism had been expressed in an earlier report by the regulators that
criticized Lance and the Calhoun bank for allowing those overdrafts to
finance Lance's race for governor, and that document became public, too.
Real estate loans made during his tenure at National Bank of Georgia had
gone bad, providing more fodder for a gleeful press. Then it was
discovered that Lance had pledged his stock in the Atlanta bank as
collateral for two loans at once, one from Manufacturers Hanover and the
other from Chemical Bank.
On Labor Day, 1977, President Jimmy Carter telephoned Clark M.
Clifford, a lawyer who, since the days of Harry Truman, had made a career
out of being the man presidents turn to in times of crisis.
"My budget director Bert Lance is in trouble," said
the president. "Can you help him?"
Lance was scheduled to testify before the Senate three days
later. Clifford accepted the job and assigned the first work to his young
protege, Robert Altman. The young lawyer met with Lance at seven o'clock
the next morning and together they crafted an opening statement that would
accuse the senators of treating rumor and innuendo as the truth.
The day Lance went to the Senate to testify, Clifford and Altman
were at his side. The hearing room was filled to capacity and there was a
loud buzzing of conversation and much paper shuffling as Lance prepared to
read the opening statement that the two lawyers had drafted for him.
Clifford simply raised his hand to the room and it quieted. Such was the
respect that Clark Clifford commanded in Washington, even before a
potentially hostile panel of U.S. senators. In his statement, Lance
defended his actions, claiming that the Calhoun bank had a liberal
overdraft policy that was available to all depositors. He claimed that the
issue of pledging the stock twice was a technical dispute.
The press made a hero out of Lance, at least for a brief time,
portraying him as the victim of a vendetta by the Washington
establishment. But the fire would not be doused. A week later, Lance
resigned as director of the Office of Management and Budget.
Less than a year after taking over one of the most important
jobs in Washington, Bert Lance was nearly broke and out of work. His
prospects for a big job in banking seemed bleak at best. About all he had
left was his friendship with the President of the United States. That
turned out to be enough for Agha Hasan Abedi.
At a Washington hotel in October 1977, the former budget
director and the international banker were brought together by Eugene
Holley, a former state senator from Augusta, Georgia. Holley had met Abedi
the year before while trying to obtain oil rights in the tiny Gulf
sheikdom of Qatar. Indeed, he was still trying to get permission when he
introduced Abedi to Lance.
Abedi described his growing banking empire to Lance. He told the
Georgian that he was interested in making investments in some Ameri can
banks, perhaps even acquiring one or more banks. Lance, of course, was
looking for a buyer for his stock in the National Bank of Georgia and he
viewed BCCI as a prospective purchaser. Naturally, Lance down played his
recent troubles and bragged about his financial acumen. Yes, he said, of
course he was still friends with President Carter. Yes, he thought an
introduction could be arranged later.
Unfortunately for Lance, BCCI was prohibited by law from buying
a major interest in the Georgia bank because of its partnership with the
Bank of America. As long as the California bank owned its chunk of BCCI
stock the deal would violate a federal ban on interstate banking. That did
not mean, however, that Abedi and Lance could not do some business. Abedi
suggested that someone from his list of wealthy clients might be
interested in acquiring Lance's stock. Also, perhaps Lance had ideas about
other institutions that might be available to some of BCCI's shareholders.
So, by the end of the conversation, Abedi had promised to seek a
buyer for Lance's stock and Lance had been retained as a financial adviser
to help Abedi scout for other investment prospects for BCCI's rich share
holders. In fact, Lance confided to Abedi, he might have a candidate very
soon, for the Georgian saw the international banker as a way out of his
financial plight.
Abedi had high hopes for this relationship, too. His sights were
set on coming to America, and Bert Lance was just one stage in his plans
for making that part of the grand dream come true.
As 1977 was drawing to a close, he was touting the Bank of
Credit and Commerce International as the world's fastest-growing bank. Its
total assets had jumped from $200 million in 1973 to $2.2 billion in 1977.
At the same time, its network of banks and branches had soared from 19
branches in five countries to 146 branches in thirty-two countries. BCCI
had expanded from Britain and Abu Dhabi to branches throughout the Persian
Gulf region, in Egypt, and in other African nations. There were branches
in France, West Germany, and Hong Kong. In Switzerland, the bank had
bought seventy percent of the Banque de Commerce et de Placements, which
had branches in Geneva and Zurich. However, this stake was being
challenged by the Swiss government because it violated regulations
governing foreign investment in the country.
The pattern of this growth was rooted in the bank's origins and
Abedi's style. Sheik Zayed had provided the initial backing in Abu Dhabi
and he and members of his family had been rewarded with stock in BCCI and
loans on convenient terms. Similarly, each time the bank had opened in
another Persian Gulf nation, the rulers received shares in the bank. By
1977 small stakes in BCCI were held by the rulers of Bahrain, Saudi
Arabia, and two tiny emirates, Dubai and Sharja. In each location, BCCI
had opened branches at a time when the activities of foreign banks were
restricted. In another Gulf nation, Oman, BCCI had entered a joint venture
with the ruling sultan in 1973 that by 1977 had grown to forty-two
branches within the country.
Despite his bad experience with Bhutto's nationalization, Abedi
assiduously cultivated the Pakistani government. He helped Bhutto's
finance minister float a badly needed foreign bond issue to raise money
for the government and was rewarded with the right to open two branches in
Pakistan, one in Karachi and one in Lahore. After being forced out by
nationalization in 1974, Abedi's reentry into Pakistan added to his
legitimacy, and it also furthered his most broadly based service, handling
the remittances of his expatriate countrymen. Abedi had concentrated many
of his branches in the cities and countries where Pakistan's itinerant
workers were located. He was on his way to becoming a figure of influence
in his home country.
To attract deposits in its pell-mell push to grow, BCCI opened
fancy offices even in impoverished locations. "Walk down the main
street of Djibouti and you'll see a building with a marble facade,"
said a Western banker. "That's BCCI. On the two buildings on either
side, the plaster will be breaking and falling."
Pakistani workers and other immigrants around the world found
friendly service in the offices of BCC I, so they entrusted their life
savings to the bankers who spoke their language. In Britain, with a
quarter million Pakistani workers, BCCI had grown to forty-five branches.
It was the largest foreign bank in the country in terms of branches. While
it still catered to immigrants and continued to promote itself as a Third
World bank when it was convenient, the bank also was bent on solidifying
its image as a world banking power.
No expense was spared in decorating its new headquarters in
London's financial district. Visitors to the headquarters on Leadenhall
Street were greeted by staggering opulence. A jade-encrusted Chinese
screen, rumored to be worth $100,000, marked off one section. Through out
the offices were deep-pile carpets and polished marble walls. Abedi
himself lived in splendor in one of London's richest districts, Harrow-
on-the-Hill. It was a world apart from the Pakistani workers and other
immigrants who had been his first customers in Britain and who remained
his most loyal ones.
In addition to veteran Pakistani bankers, BCCI had hired as top
executives people with the sort of influence that could bring in more
business. There were the former governors of two central banks and a
one-time director of the World Bank. Many of these senior executives were
evidence of Abedi's knack for the politically expedient hire. For
instance, the founding head of the Nigerian branch of BCCI was Ibrahim
Dasuki, an Oxford-educated Nigerian Muslim who had been a leading
government official and an associate of the country's political and
religious leaders. All of these men were promised generous salaries and
bonuses and stock deals that would make them rich, as long as they stayed
with the bank.
Muzaffar Ah Bukhari, who spent those early years at Abedi's
side, recalled Abedi's orders for the recruitment of top bankers from
other organizations and governments.
"He used to say, 'Whenever you come across a good banker-he
may be a governor of a central bank of a country or he may be a general
manager of another bank-if he's available, you take him.' But we said,
'Sir, there is no work for him.' And he'd say, 'He will generate his own
work.' When we go to a developing country in, say, Africa, when we send
him, [the new employee] will say, 'With our experience of twenty or thirty
years as governor of the central bank of Pakistan or someplace, I will
organize your bank.' This is how we expanded."
Loyalty was bought, too, by telling employees at every level
that they had an ownership role in the bank through a foundation
established in the Cayman Islands. It was called International Credit and
Investment Company Holdings, or ICIC, and it was set up to hold stock in
the bank on behalf of its employees.
Back in 1974, Abedi had made employee ownership a key part of
his appeal to Masihur Rahman that he join BCCI as its general manager for
finance, or top accountant. Pakistan's banks had been nationalized and
Rahman was chafing under the government's management at United Bank.
"You have lost everything in this abrupt nationalization
and so did I," Abe di told Rahman. "I don't want to face this
and you shouldn't face this ever again. We are a family and this is like
starting a family business. And we all will have a share in this
bank."
Abedi was not offering to pay much and the bank was still small,
but Rahman was attracted by the chance of owning a piece of the bank.
"It gave us," he said later, "something to work for for
ourselves."
All members of this family, from the lowliest teller to the most
senior executive, were exhorted with evangelical zeal to bring in new
deposits and increase business. Annual meetings, which are terminally
boring at most institutions, were marathon affairs designed to instill a
sense of family and mission. They seemed to have more in common with the
Bible-thumping revival meetings of the American South than the banking
business. Sometimes they lasted fifteen hours, with Abedi talking for
hours about growth and change. Abedi's rhetoric seemed to reflect an
obsession with becoming bigger and bigger.
"The extraordinary success we have achieved is primarily
due to the power we generate by being both an agent of change and a
beneficiary of change at the same time," he explained to the
expanding ranks of BCCI executives one year at the annual meeting in
Vienna, Austria. "We live with the inevitability of change and we
feel it in anticipation. There are times in our lives when change takes on
not only a special but an enormous significance. Such is the time for us
now."
Going on before the audience of nearly a hundred BCCI
executives, board members, and select guests at Vienna's Intercontinental
Hotel, he described a business strategy that he called the External
Marketing Program, or EMP. Under EMP, the bank's various offices and
regional divisions were supposed to generate business for themselves and
also for the other operations within the bank at the same time. Doing so,
he said, would create new energy to propel BCCI forward.
"We should draw from each other and above all from the
infinite and ultimate source, totality, God," he charged. "We
shall endeavor our best to experience totality and experience God."
In later years, EMP would take on a new meaning within BCCI. It
would come to symbolize the shifting of vast sums of capital between the
bank's branches worldwide, moving currency and cash out of one country and
into another at the bidding of anyone willing to pay the bank's fees, no
questions asked. Here, too, Abedi's strategy reflected his heritage, for
the system that he set up, the manner in which BCCI did business, was a
modern version of an ancient Pakistani system of transferring money known
as hundi.
In hundi, an agent in one city accepts cash from a person and
contacts an associate in another city who gives the same amount of cash to
a person designated by the initial depositor. These transactions usually
occur among friends or relatives and business is done in a very discreet
fashion. Even in modern times, hundi serves as a simple, effective, and
secret means of transferring money out of countries with tight currency
restrictions, such as Pakistan and India.
Alvin Rice was one of the first MBAs hired at the Bank of
America. In the 1950s, right after his graduation from Stanford
University, Rice had joined a training program at the big bank. Since
then, with time out for a brief career in the real estate construction
business, he had risen steadily and smoothly at the Bank of America. By
1977, he was in charge of the World Banking Division, which was generating
half of the bank's substantial profits. He was viewed as the heir apparent
to A. W. "Tom" Clausen, the bank's imposing chairman.
Rice's position also made him the bank's ultimate supervisor
over its investment in the Bank of Credit and Commerce International. He
even occupied one of the bank's two seats on the BCCI board of directors.
The other director designated by the Bank of America was Yves Lamarche, an
urbane American who was based in Paris. Lamarche had succeeded Roy Carlson
as the Bank of America's officer in charge of the Middle East when Carlson
left in 1975.
Rice often traveled to the Persian Gulf with Abedi, making joint
calls on government officials and members of various royal families, all
of whom seemed thrilled to see their old friend Abedi. In a real way, BCCI
served as a calling card for the Bank of America in the region. Rice found
Abedi to be a likable business partner.
"Mr. Abedi was a very unusual person and had a very fine
leadership style," Rice recalled years later. "He seemed to me
to develop loyalty among his people to an extent that was very unusual. He
was very thoughtful and quiet. He had a lot of banking experience and he
did a good job of corralling very good people."
The five-year-old relationship between the two banks had been
profitable for both institutions. Bank of America had built up its book of
Middle Eastern business and collected hefty dividends from its BCCI stock.
The bank was so satisfied that it had upped its holdings to thirty percent
of BCCI's stock and then to more than forty percent. However, the same
growth that had fueled the profits and brought in new business was now
causing concern. The Bank of America, an orthodox bank despite its
freewheeling past, could not monitor the activities of its partner.
The swiftness with which BCCI opened offices in new countries
was causing problems with regulators in the States. The Federal Reserve
Board, which regulates bank holding companies, had a rule requiring
American banks to get permission in advance of opening an office in a
foreign country. Because it owned such a hefty chunk of BCCI, the Bank of
America was required to obtain the okay from the Fed before BCCI started
up in a new country. But BCCI was moving too fast for that, and the result
was that the regulators kept pestering the Bank of America. It was more
embarrassing than serious, but bankers are notoriously averse to
embarrassment, especially when it is generated by regulators.
Of more concern was the sloppy way BCCI was growing. The
auditors at Bank of America had long worried over the lack of proper
procedures in granting loans at BCCI. There was precious little paper
trail-the boring but essential forms, appraisals, and assessments that so
warm the heart of a bank auditor or loan officer. Since 1975, Al Rice had
been pushing Abedi to improve this part of his operation, and Abedi kept
promising to do so.
However, there was so little time for formalities, and business
was done a different way in that part of the world. Before he left for a
job in Iran with a big conglomerate, Carlson had argued Abedi's case with
Rice and other top officials. He explained that all Abedi really needed in
the Middle Eastern countries was the ruler's signature, even the ruler's
assurance, that a loan would be repaid.
"It is meaningless to go around in those countries asking
for forms to be filled out," he said over and over. "These
aren't the same standards that are applied by the senior loan committee in
San Francisco."
One of BCCI's senior executives, Abdur Razzak Sakhia, later con
trasted the bank's methods with those of its Western counterparts this
way: "If a client wanted a loan and went to Citibank, they would go
by whatever their data processor spit out. We would know him personally.
We would understand his business, and we would give him that loan based on
our knowledge, not just the computer."
Nonetheless, this was a sometimes unreliable method in the view
of the Bank of America officers. Concerns focused sharply on some
mega-loans that seemed unsupported by any documents. One example was a
series of loans totaling $80 million to the Gokal shipping family, whose
fleet of ships was expanding at a dramatic pace as a result of BCCI's
generous financing. These loans equaled more than two-thirds of the total
capital of BCCI, which meant almost certain catastrophe for the bank
should the shippers default. When Rice raised the issue of support for the
loans and the unsafe exposure, the answer was unsatisfactory.
"I know these people personally," Abedi told him.
"Do not worry."
As in so many of his business decisions, Abedi again reflected
common Pakistani and Muslim practices. Loans among friends are common and
Abedi was always fast to make them to long-time acquain tances. But a
philosophy designed for small-scale, personal transactions does not mesh
with the standards of international banking.
Rice had no reason to doubt the integrity of any of BCCI's
customers, but he also had no ability to analyze the creditworthiness of
many of them. Also, he and others at the bank had been hearing the rumors
about the level of "personal service" provided by BCCI to its
special customers. International banking is really a small world, and
news, especially bad news that could embarrass one's competitors, travels
fast on the world wires. Concerns within Bank of America were fueled by a
memo written by Tony Thcher, a bank official, on April 27, 1976. In it,
Thcher raised the issue of what he called "special patronage"
between BCCI and certain Persian Gulf rulers, particularly in Abu Dhabi
and neighboring Dubai. He provided a laundry list of questionable
activities: bank officers accompanying favored customers on vacations,
arranging travel and providing translators and financial advisers around
the world, as well as Abedi and others hosting rulers in their homes at
lavish parties paid for by the bank. He also expressed concern over what
many had told him was a general lack of control over BCCI's actions by
Hank of America. He suggested that BCCI officers were withholding
information from their American investors and trafficking on the prestige
of Bank of America.
The memo summarized the fears and rumors that had been mounting
for two years, but Rice and others were reluctant to take action that
might sever the profitable relationship. In an internal bank memo a few
days later, Rice defended Abedi and his methods.
"On the subject of 'special patronage,' there is no doubt
the BCCI organization feels that to maximize the business potential in
many of the areas served in the Middle East, it is necessary to remain
very close to leading political figures," Rice wrote. "This is
particularly true in the Arab Emirates where special attention is given to
the ruling sheiks."
He went on to say that the bank had no knowledge of
inappropriate patronage and said that his auditors had not uncovered
evidence of unusual expenses. He said, however, that BCCI's business
development efforts should be monitored closely and added, "Avoiding
rumors on the subject is a good idea."
In the area of controls over loans and general growth, Rice was
more concerned. He felt that BCCI needed tighter administrative controls.
At the time, in an attempt to straighten out the situation, Bank of
America was trying to find one of its own executives who could move over
to BCCI as chief administrative officer. The problem of lack of controls,
Rice thought, would not be solved until someone from the B of A, or
someone from the outside whom the bank knew well and trusted, was in place
at BCCI. One difficulty with getting someone onboard was that the Bank of
America was having a tough time persuading anyone to handle the
administration at BCCI. For the proud and slightly disdainful employees of
the world's largest bank, the prospect of moving even temporarily to an
upstart institution was unappealing, particularly given the rumors that
all the key people in Bank of America's international division had heard
about the way BCCI did business. Another difficulty was that the
California bank had granted extensive control to Abedi in the initial
agreement between the two parties.
Rice wrapped up the memo by observing: "The overall
relationships between BCCI and the Bank of America continue to improve but
are far from what they should be. 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 break throughs in
the near future, we will have to consider alternatives, such as
divestiture."
To some at Bank of America, it appeared that the Bank of Credit
and Commerce wanted to end the relationship. They felt that BCCI had
traded on its association with the more prestigious bank to get started
and now no longer wanted to be tied to its American partner.
In a conversation with Abedi near the middle of 1976, Rice
brought up this sensitive issue. Abedi's response was adamant and angry.
He denied that BCCI was trying to end the association.
"All of my officers are very loyal to the Bank of America
and they understand that your organization has given them the opportunity
for career and personal growth outside of Pakistan," said Abedi.
"You can count on our long-term loyalty and on the long-term loyalty
of all of my associates."
When Rice raised the possibility that information was being
withheld from Bank of America officials, Abedi had a ready answer:
"That is not true. But your people might feel that way because our
bankers are afraid that they might be criticized by their American
colleagnes."
Abedi, a charming and persuasive speaker who rarely lost his
temper with outsiders, was reassuring. Cultural differences, he explained
to Rice, were the root of the problem. His Pakistani employees were trying
in their own way to develop the standards of their American partner.
"Your American style of frank criticism is something that
Pakistanis are not used to," he told Rice. "Criticism in my
culture is taken as a personal affront and for this reason sometimes BCCI
officers have not wanted to disclose operating procedures that they know
would not meet the Bank of America's high-quality standards. Everyone in
my organiza tion admires the quality that you demand everywhere and wants
to do everything they can to bring this same type of quality to all
aspects of our operations."
Abedi's promises of reform proved hollow, his defenses were
lies. In an unguarded moment well after that conversation, a BCCI
executive told an American that the Pakistanis felt the Bank of America
was holding back BCCI's growth. The American bankers, he said, were too
rigid.
"We felt that they were, ah, restricting our growth
somewhat because Bank of America is a very established type of bank,"
the BCCI executive said. "And we wanted to get out and open all over
the world."
The one part of the world where BCCI most wanted its own
presence, even then, was the United States. However, U.S. banking
regulations prohibited BCCI from opening offices in the United States as
long as the Bank of America held such a significant portion of its stock.
So Abedi's dream of expanding into the world's richest nation-a
dream he had kept secret from the Bank of America-was blocked by the
continuing association with the San Francisco banking giant, but that
obstacle was about to be removed.
By 1977, the Bank of America's dissatisfaction had increased as
financial controls failed to materialize at BCCI. In fact, the auditors
found surprisingly serious financial problems that year when they examined
BCCI's portfolio of loans. A two-page summary of the loan examination
report broke the problems into three areas:
· BCCI's loan-loss reserves, the amount of cash available to
cover potential losses on loans, were grossly inadequate. The total
reserve was $3 million and it should be increased by almost six times to
at least $17 million.
· BCCI had engaged in widespread loans to its own shareholders,
a practice known as insider lending. Some of its major Middle Eastern
shareholders had received substantial loans.
· BCCI's portfolio of real estate loans was deemed
unsatisfactory. Huge loans were concentrated in the Persian Gulf region,
opening the bank to major losses in the event of economic or political
problems in that area.
These last two items were interconnected in ways that would
remain muddy for years. BCCI had paid a price for the patronage of Arab
leaders, and the price was millions of dollars worth of loans that were
unlikely to be repaid. Perhaps they were never intended to be repaid. As
for collateral, many of the loans were backed by suspect parcels of land
in sheikdoms where the bank would be prohibited from foreclosing even if
it wished to do so.
For instance, Kamal Adham, the Saudi intelligence chief and
major BCCI shareholder, had borrowed millions and his total loans from
BCCI and its affiliates would eventually top $300 million. Yet auditors
one day would discover that many of the loans were backed by unidentified
properties in Saudi Arabia. There were no valuations for the properties
and, worse, no legal basis for considering them security because mortgages
are not routinely enforced in the kingdom. The Federal Reserve would later
charge that Adham had even borrowed from BCCI the funds he used to invest
in the bank in the first place. Similar discoveries would be made about a
series of major bank customers. But that was a long way off.
The Bank of America auditors had caught merely a glimpse of this
pattern of reckless and rampant insider dealing. BCCI's regular auditors
were seeing even less. At the time, the bank's Luxembourg holding company
was being audited by the big accounting firm of Ernst & Whinney; the
Cayman Islands unit was audited by Price Waterhouse, another large
accounting firm. A Price Waterhouse accountant told a friend a story
showing his firm's difficulty in dealing with BCCI. The auditors of the
bank's London headquarters discovered that its loan files were written in
Urdu. Price Waterhouse employed many Pakistani accountants and one day it
assigned one of them to the BCCI account. When the Urdu speaker showed up
for work at the bank, however, officials there would not let him in the
building. Price Waterhouse agreed to take the accountant off that job.
Outside accountants can earn millions of dollars a year in fees
for auditing big businesses, particularly those that are spread across the
globe. These audits are supposed to show the public and regulators the
true financial picture of the organization. But, as proven in numerous
cases in the American savings and loan debacle, even accountants sometimes
miss the real story. They don't see key information. They are forced to
take the word of management on critical questions. This tendency to accept
management's view of the situation is compounded when management itself is
intent on hiding the true picture of what is going on inside the
organization.
Bank of America had seen enough to get some sense of what was
going on inside BCCI. Even more important to the BCCI relationship, by
1977 Alvin Rice had moved up to vice chairman of the bank. He had been
replaced as head of world banking by Samuel Armacost, who had no stake in
ties to the troublesome partner. Armacost dispatched one of his most
trusted aides, Cal Jones, to London to take a look at what was going on
with BCCI. Jones soon found that he was not going to get a clear picture
of what was happening inside the rapidly expanding bank. Not only was he
prohibited from attending key meetings, he also was denied the minutes of
those sessions as well as access to the internal working records of the
bank. He was, as an associate would later say, put on "a mushroom
diet-kept in the dark and fed shit."
Based on the little that its auditors had seen, the sense that
they were not getting the whole picture, and the long-standing, unresolved
differences over controls, the Bank of America decided to sell its stock
in the Bank of Credit and Commerce in late 1977. An agreement would be
reached for the orderly sale of the stock over a period of more than two
years, so that the price of the shares would not plummet. Abedi arranged
for a wealthy Saudi Arabian associate to acquire some of the shares;
others were moved into ICIC Holdings, the employee benefit fund.
More critical, the Bank of America had gotten a closer look at
BCCI's financial tangle than any regulators, yet the California bankers
did not blow the whistle. At least not loudly. One former Bank of America
official who was involved with the bank said later that Cal Jones met with
Bank of England regulators privately and told them about the poor
documentation of loans and the pell-mell growth that were leading his bank
to sell its stake in BCCI. No additional evidence has surfaced and there
is no record of any report to U.S. banking authorities. Indeed, there was
no legal requirement that the B of A describe what its auditors had seen
inside BCCI to regulators anywhere. However, had the Bank of America
raised an official alarm, authorities in Britain and elsewhere might have
been prompted to demand their own examination back in 1978.
But, of course, blowing the whistle could have dropped BCCI's
value like a stone just when Bank of America was unloading its shares at a
hefty profit. The two institutions were to remain friendly for years to
come, with the Bank of America providing a range of correspondent services
for BCCI.
From BCCI's standpoint, the Bank of America had served its
purpose, midwifing the infant bank into the world. BCCI was now up to
operating independently. Whether by design or not, Agha Abedi was freed of
the Bank of America at just the right moment. His new friend Bert Lance
was on the scene, prepared to open the right doors that would eventually
propel Abedi and his empire into the financial capital of the world.