Lax Rules Blamed in Bank Schemes : Crime: Secret foreign control led to money laundering, other abuses, say officials. Weak regulations are at root of problem, they warn.

Inadequate and ineffective U.S. banking regulations enabled Arab financiers involved in international drug-money laundering to acquire secret control over at least one U.S. bank, and the problem is likely to repeat itself, according to congressional investigators and federal officials.

Recent revelations surrounding the Bank of Credit & Commerce International have underscored the weaknesses of existing regulations, and officials fear that similar problems involving foreign banks will increasingly turn up unless new safeguards are adopted.

With operations of foreign banks in this country growing rapidly and electronic transfers shifting billions of dollars around the globe in seconds, officials say the weak rules make it possible for criminals to hide vast sums of money with little risk of detection.

Investigators believe, for instance, that $100 billion in cocaine profits alone is moved out of the United States to foreign bank accounts each year, although not all of this money passes through foreign-owned banks.

The inability of the Federal Reserve Board to effectively monitor foreign banks operating in the United States has been highlighted by the involvement of Arab-owned BCCI and First American Bank of Washington, D.C.

Ten years after questions were first raised about whether BCCI secretly owned Washington’s largest bank, the Federal Reserve finally has concluded that the answer is yes. BCCI was ordered last month to sell its stake in First American and close its doors in this country.

“I want to know why it has taken nearly a decade to determine that a notorious foreign bank controlled a prominent bank right here in our nation’s capital,” said Rep. Chalmers P. Wylie (R-Ohio), the ranking Republican on the House Banking Committee.

Federal Reserve Board general counsel Virgil Mattingly acknowledged that regulators were unable to pierce the secrecy surrounding BCCI and First American for years despite rumors, news stories, a Senate investigation and BCCI’s guilty plea to money laundering. He said new powers may be needed and that the agency is trying to develop them.

BCCI’s hidden control of First American is only part of the story of how the privately owned Middle Eastern bank became a vehicle for drug traffickers. Using influence, front men and complex financial maneuvers, BCCI eventually became a major world banking power and a magnet for international flight capital.

A New York City grand jury is investigating whether banking regulators were knowingly deceived by BCCI lawyers and officials on the First American issue. In addition, the Justice Department is conducting a criminal inquiry and the Federal Reserve is continuing a civil investigation. Part of the Fed’s probe involves the ownership of Independence Bank in Encino, Calif., by Gaith Pharaon, a Saudi businessman with long-standing ties to BCCI.

Last year, BCCI pleaded guilty to money laundering charges in Tampa, Fla., and paid a record $14.6-million fine. Five BCCI employees were convicted and sent to prison for their roles in the scheme. One of them was the personal banker to former Panamanian strongman Manuel A. Noriega.

House and Senate committees also are investigating how the Fed regulated BCCI and First American and whether current regulations are tough enough to effectively monitor foreign banks here.

Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) said questions have been raised about whether the Federal Reserve has access to financial and other records necessary to verify claims by foreign banks operating in this country and to supervise them. He said new laws may be necessary, including subpoena power for the Fed.

“We are in a global economy and global money flows and foreign institutions operating in the United States are a growing fact of life,” Riegle said.

The flow of dollars--the currency of choice for drug traffickers--has reached an unprecedented level worldwide. The New York Clearing House handles 95% of the world’s dollar transactions through electronic money transfers between banks.

The volume often reaches a staggering $1 trillion a day at the clearing house’s secret computer operation in Manhattan. But the money is only blips on a computer screen. Once cash enters the banking system, it is impossible to separate legal from illegal. This is particularly true when banks use sophisticated schemes to transfer cash deposits at foreign branches into U.S. offices through electronic transfers, as BCCI did.

“There is no way to deter illegal money transfers,” said John F. Lee, president of the clearing house. “Once traffickers get the cash to the bank, they’ve bought into the money stream. I have no doubt that there are other BCCI’s out there that have not been found yet.”

Among those facing scrutiny in the BCCI case are Clark M. Clifford, one of Washington’s most respected lawyers and political advisers, and Robert A. Altman, his law partner. Clifford is chairman of First American Bancshares and Altman is its president.

Manhattan Dist. Atty. Robert M. Morgenthau has said that he believes BCCI secretly controlled First American. He also is investigating whether Clifford and Altman knew the truth about the relationship and misled bank regulators.

Clifford and Altman maintain that they were duped by BCCI officials and did nothing wrong.

Their involvement with BCCI began in 1981, when four of BCCI’s Middle Eastern shareholders were trying to buy Financial General Bankshares of Washington, the predecessor to First American. Clifford persuaded nervous regulators at the Federal Reserve that the investors were acting as individuals, not as representatives of BCCI.

“There is no function of any kind on the part of BCCI,” he said at an April 23, 1981, hearing.

Based largely on Clifford’s assurances and background checks conducted on the shareholders, the Federal Reserve approved the application. The Washington bank eventually grew to $11 billion and Clifford and Altman remained executives with First American and lawyers for BCCI throughout that time.

The first hint that BCCI was playing a direct role in First American’s affairs came in 1988 when a Customs Service undercover agent penetrated BCCI money laundering in Miami and Tampa.

Amjad Awan, a high-level BCCI officer whose accounts included Noriega, told the agent in a taped conversation that BCCI controlled First American Bank and other U.S. banks through private individuals. One of the names he mentioned was Clifford.

At the time, Sen. John Kerry (D-Mass.) was investigating money laundering and Noriega. Kerry’s lead investigator, Jack Blum, contacted Awan about testifying. In a conversation on Sept. 9, 1988, Awan told the undercover agent that he had discussed the potential testimony with BCCI lawyers and Altman suggested that the bank transfer Awan to Paris immediately.

In October, 1988, Awan was among several bank officials and the bank itself charged with laundering millions in drug profits. At the time, First American had an application pending at the Federal Reserve to acquire a bank in Pensacola, Fla. Mattingly said regulators were concerned about the BCCI charges, but they were unable to uncover evidence of links between BCCI and the operations of First American.

In a Feb. 16, 1989, letter approving the acquisition, the Fed said: “A recent inspection and investigation by the Federal Reserve System indicate that applicants have adhered to their original commitments to the board and have taken steps to ensure future compliance with the commitments.”

Mattingly defended the finding, saying: “Obviously, the money laundering was of great concern to us. We talked to law enforcement authorities and to the bank and its officers and inquired of BCCI. We couldn’t find any evidence to indicate that the application should be held up.”

After months of plea negotiations, the bank pleaded guilty in January, 1990, and was fined $14.6 million. Still, the Fed maintained that it could find no evidence of a link between BCCI and First American.

Frustrated with the failure of regulators to move against BCCI, Blum took the information developed in the Kerry investigation to Morgenthau, a prosecutor with a reputation for integrity and investigating financial crimes. The Manhattan district attorney started his own inquiry into papers filed by First American with New York regulators and has been credited widely with causing the Federal Reserve and Justice Department to re-open their inquiries.

Mattingly said the Federal Reserve finally obtained information last December that BCCI controlled a substantial amount of First American’s stock through a series of hidden loans. The foreign bank had undergone an ownership shakeup, and Mattingly said the new owners and their lawyers responded by providing additional information confirming the suspicion.

Last month, the Federal Reserve issued its order demanding that BCCI sell its stake in First American and close its remaining U.S. offices, including one in Los Angeles.