By all accounts, the case of the Bank of Credit and Commerce International is already shaping up to be the biggest bank fraud scandal in history.
Estimated losses range as high as $15 billion. Central banks of several Third World nations are in danger of collapse as a result of BCCI's closure. Competing lawsuits brought by disgruntled depositors are certain to tie up courts around the world for years go come.
And, in the United States, where perhaps as many as four grand juries and several congressional committees are exploring aspects of the BCCI case, the alleged fraud by bank officials threatens to tarnish the reputation of some prominent political figures, such as Democratic super-lawyer Clark M. Clifford.
BCCI was seized last Friday by banking regulators in Britain, Luxembourg, the United States, Switzerland, Spain, France and the Cayman Islands after an audit discovered that the bank was hiding massive losses and was on the verge of financial collapse. Until then, major questions existed about the allegedly fraudulent international financial empire that had been secretly built by the Abu Dhabi-owned bank. BCCI executives had cleverly evaded the efforts of banking authorities to penetrate the firm's internal affairs.
But, as a result of the seizure, law enforcement officials are now expected to gain access to BCCI internal documents that will disclose the full scope of the alleged scandal and possibly result in major indictments in several countries. Even before Friday's action, sources say, ex-BCCI employees previously convicted of laundering drug money had been cooperating with law enforcement officials in Florida.
What already seems clear to bank regulators is that BCCI Holdings, a $20-billion banking firm controlled primarily by Arab shareholders, is at the center of an alleged fraud of unprecedented complexity that demonstrates the weakness of the anti-fraud laws in the international banking system.
"We're going to see an international liquidation, and it's going to be a mess," a top U.S. official who is familiar with the investigations predicted. "There are going to be a lot of people who are going to lose money."
Although the exact losses caused by BCCI's demise are not likely to be known for some time, congressional sources estimate them at between $10 billion and $15 billion. U.S. law enforcement sources peg it at more than $5 billion, and the bank's shareholders reportedly have acknowledged a loss of $4.5 billion caused by bad loans and other problems.
No matter which of these estimates proves correct, experts say the foreign exchange losses caused by BCCI will far exceed the previous benchmark set in the late 1970s with the collapse of Massey Ferguson, an over-borrowed multinational tractor manufacturer.
With BCCI's collapse, many depositors are looking to Abu Dhabi's ruler, Sheik Zayed ibn Sultan al Nuhayan, who controls 77% of BCCI, to compensate the victims. Officials of Abu Dhabi and the Bank of England are currently meeting in London to discuss the matter.
Among the hardest-hit victims are European depositors, mostly Asian small business owners, who apparently were lured to BCCI by a scheme that allowed them to avoid paying withholding and value-added (indirect sales) taxes. Under British law, residents' deposits are insured up to 75%, to a maximum of 15,000 pounds.
Meanwhile, the central banks of a number of countries such as Nigeria, Swaziland, Peru and a few Caribbean countries are threatened by the demise of BCCI, which is believed to have held large deposits from many Third World nations. In Peru, investigators are probing the dealings between BCCI and former President Alan Garcia Perez.
In the United States, the political impact may far exceed the financial fallout of BCCI's collapse. In fact, U.S. officials say, it appears that BCCI may have been using the money it took from Third World banks to shore up the institutions it controlled in the United States.
BCCI-installed officers are still running First American Bank in Washington, D.C., and banking authorities maintain that BCCI has a secret controlling interest in Independence Bank in Encino, Calif. Earlier this year, the Federal Reserve Board acted to sever the link that officials believe had existed between those two institutions and BCCI.
Both banks are federally insured and separately capitalized, so they are not threatened by BCCI's seizure.
First American executives deny that there has been any untoward influence on them from BCCI. "We don't take orders from them," said Jack Beddow, First American's president and chief executive officer.
Still, sources say Clifford and his law partner, Robert Altman, will soon be removed as officers of First American, and they--along with other unidentified political figures in both parties--are under investigation by law enforcement officials.
Loans to Politicians
According to investigators, First American's portfolio included numerous loans to both Republican and Democratic politicians.
BCCI, founded in 1972 by Pakistani banker Agha Hasan Abedi in a partnership with Bank of America, had from its earliest days a financial alliance with Arab financier Ghaith R. Pharaon, whose father was an adviser to Saudi kings. BCCI provided financing for many of Pharaon's business projects, such as the development of hotels in Jidda.
Although Bank of America eventually withdrew from the partnership, BCCI quickly expanded its influence in Europe, the United States and the Third World, eventually operating about 350 branches worldwide with ties to about 70 countries.
In most of those places, according to investigators, the bank sought to win the favor of prominent politicians with kickbacks, loans and jobs for relatives. In fact, it is widely believed that the bank was founded, in part, to promote Arab interests in the United States--presumably in hopes of influencing U.S. foreign policy in the Middle East.
As an international bank with strong ties in the Third World, BCCI was a perfect conduit for covert money transfers by the Central Intelligence Agency. CIA officials funneled cash through First American, investigators say, even though the agency was aware of the unsavory reputation of the bank's parent company.
Former Customs Commissioner William von Raab recalls that, when he contacted then-CIA Deputy Director Robert M. Gates in the late 1980s to ask about BCCI's role in laundering drug money, Gates joked: "Oh, you mean the Bank of Crooks and Criminals International?"
In 1978, apparently acting as a proxy for BCCI, Pharaon purchased the National Bank of Georgia from the financially troubled Bert Lance, ex-budget director and confidant to former President Jimmy Carter. Pharaon, who did not return telephone calls placed earlier this week to his homes in Paris and Saudi Arabia, earlier told The Times that BCCI advised him, but he has consistently maintained that BCCI's role in his business ventures never went beyond advice.
With a firm foothold in Georgia, BCCI executives headed for the nation's capital, where in 1981 they took control of politically connected First American and installed Clifford and Altman as the bank's top officers. First American soon became Washington's biggest bank.
In June, 1986, after BCCI suffered a huge loss by speculating on options on Treasury securities, First American bought National Bank of Georgia from Pharaon for a rich price of at least $220 million. At the time, according to investigators, the Georgia bank was already owned by BCCI, which used the sale to, in effect, transfer cash to shore up its Luxembourg-based operation.
BCCI allegedly bypassed banking laws and avoided regulatory scrutiny in its dealings in the United States. Federal banking law requires bank holding companies such as BCCI to gain federal approval before acquiring a bank and becoming involved in its affairs. This was not done in the case of the U.S. banks BCCI allegedly controlled, National Bank of Georgia, Independence Bank of Encino and First American of Washington.
BCCI's role with Independence started in 1985, when it arranged a $5-million letter of credit from a French bank. Pharaon used the letter of credit to borrow $11 million from the Bank of Boston to finance his purchase of Independence. Authorities now maintain that Pharaon has acted as a front man and that BCCI actually controls Independence in secret.
Pharaon has said BCCI's only involvement with Independence Bank was to advise him on the purchase. But interviews with former bank officers suggest, for the first time, that BCCI's involvement with Independence Bank went well beyond the advisory role and that contact with BCCI executives occurred frequently.
"When you look back at the doggone thing in retrospect, you want to shrug your shoulders," said Morton R. Michaels, Independence's former president. "There was an awful lot of contact with BCCI people. This stuff starts to make a little more sense."
Before the sale closed, Michaels said, BCCI executives reviewed the books. Afterward, Pharaon brought in a senior BCCI executive from London, Kemal Shoaib, as chief executive and chairman. Senior BCCI executives regularly visited Encino.
In 1988, when Michaels wanted to hire a new senior vice president to oversee Independence Bank's branches, the candidate was asked to fly to London for interviews with BCCI executives. "We were told that they preferred we not hire him," he said.
Executives of Independence and First American had periodic contact, even though there was no publicly acknowledged link between the banks. Mike English, former Independence executive vice president, recalled that, when he wanted to buy data-processing equipment, he was told to fly to Washington to examine First American's.
Clifford and Altman contend they were unaware that BCCI owned an interest in First American. Federal Reserve officials say they would never have approved the sale of First American to Arab investors associated with BCCI if they had not been assured by Clifford and others that it would have no relationship to the foreign bank.
BCCI and Pharaon invested also in the financially troubled CenTrust savings and loan of Miami before it became insolvent. CenTrust owner David Paul was an active contributor to many American politicians.
For years, the Fed suspected there was--in the words of one official--"something fishy" about these transactions involving BCCI. But officials insist that they were powerless to intervene under current banking laws.
Indeed, it now appears that BCCI was structured in such a way as to evade the control of any single national regulatory agency. Its operations were centered in the Cayman Islands and Luxembourg, two jurisdictions that are notorious for loose banking laws. As one investigator put it, "BCCI was located everywhere and nowhere at the same time."
In many ways, BCCI resembled some of the high-flying savings and loans in the United States during the 1980s because it frequently baffled rivals by its ability to offer exceptionally high rates of interest for deposits while undercutting the competition on loans.
"We would wonder how do they do it?" recalled a former officer of a major Dutch bank. "What's the trick? We knew we couldn't pay out the same sort of interest, do those loan deals and make our books meet."
Authorities now believe that deposits were taken in, but not recorded, and, instead, were used to help cover huge losses on bad loans and for other activities, such as currency trading. One improper loan to a London shipping company reportedly was disguised by using 95 shell companies.
One major source of BCCI funds was the central banks in developing countries. BCCI courted Third World leaders, who viewed their deposits in the bank as a source of pride. "They would look for financially weak, politically weak countries that could be seduced," said financial author James Ring Adams, who is writing a book about BCCI.
Investigators believe that BCCI executives used the Third World central banks to disguise money-laundering activities for drug dealers throughout the world. In fact, a few U.S. officials woke up to the problems associated with BCCI when company employees pleaded guilty to money-laundering charges in Miami in 1990 and paid a fine of about $15 million.
Yet it was not until officials at the Bank of England received a report by the accounting firm of Price Waterhouse alleging massive wrongdoing that banking authorities realized the need to clamp down on BCCI. The report told banking officials that BCCI was operating a secret "bank within a bank" designed to disguise the losses.
Investigators in the United States and elsewhere who had been fighting to obtain BCCI records clearly welcomed Friday's seizure. Among them was Manhattan Dist. Atty. Robert Morgenthau, who for more than a year has been investigating allegations of banking fraud and public corruption relating to BCCI.
"Our investigation has been impeded by banking and securities laws in Great Britain, Luxembourg, Cayman Islands and Abu Dhabi," Morgenthau told The Times. "However, the action taken last week tends to support our theory of the case . . . . More people with relevant information now may come forward and cooperate with us."
In recent months, federal prosecutors in Washington have joined in the BCCI inquiry, investigating complaints that First American, Independence and the National Bank of Georgia misrepresented themselves to federal authorities. Federal grand juries in Miami and Tampa are believed to be hearing related cases.
Clifford and Altman have testified before a federal grand jury in Washington as well as in closed proceedings conducted by the Federal Reserve. They are being represented by Washington attorney Robert Bennett and former U.S. Atty. Robert Fiske in New York.
Bennett said that Clifford and Altman are fully cooperating with authorities and "are completely innocent of any wrongdoing."
On Capitol Hill, several committees are contemplating hearings on the BCCI case. Sen. John Kerry (D-Mass.) has asked banking regulators to supply his Senate Foreign Relations subcommittee with BCCI documents that previously were being sought from the bank. In London, the Serious Fraud Office also has undertaken an investigation of BCCI.
At a minimum, the case is certain to bring about reform of banking regulations in the United States and elsewhere. Although regulators are now being blamed for failing to act sooner, even their critics acknowledge that the laws were inadequate to deal with BCCI.
Nevertheless, as one U.S. official observes, "No amount of national regulation or international coordination is going to stop bankers who want to cook the books."
Fritz reported from Washington and Bates from Los Angeles. Staff writers Joel Havemann in Brussels and Robert L. Jackson, Ronald J. Ostrow and Karen Tumulty in Washington also contributed to this story.