TIME: Almanac 1993/TIME Almanac 1993.iso/time/072291/0722200.000

Text File | 1992-08-28 | 9.5 KB | 189 lines

                                                                                BUSINESS, Page 46

SCANDALS

Taken for a Royal Ride


In the wake of the B.C.C.I. debacle, a trustful sheik and more
than a million depositors are left holding the bag

By JOHN GREENWALD -- Reported by Jonathan Beaty and S.C. Gwynne/
Washington and Aileen Keating/Bahrain


    How could an impeccably honest Bedouin sheik get stuck in
a mess like this? Despite his solid-gold reputation, Sheik
Zayed bin Sultan al-Nahayan, ruler of Abu Dhabi and President
of the United Arab Emirates, found himself last week at the
center of the largest global banking scandal ever. As the most
recent owner of the notoriously corrupt Bank of Credit &
Commerce International, which regulators closed earlier this
month, Zayed has become the unwitting goat for nearly two
decades of alleged fraud by the bank's Pakistan-based managers
and for years of neglect by banking authorities around the
world. After investing $1 billion to shore up B.C.C.I. since he
acquired it last year, Zayed faces the humiliation of losing
control of the bank, and the moral -- if not legal --
responsibility for helping to bail out depositors who were
victims of fraud.

    The sheik had plenty of companions in misery as shock
waves from the B.C.C.I. shutdown rippled across the globe.
Authorities seized more than 75% of the bank's $20 billion of
assets in 69 countries. Customers from Bahrain to Beijing
suddenly found themselves cut off from their funds. Political
sniping broke out in Britain when members of the opposition
Labour Party attacked regulators for hastily closing 25 branches
of B.C.C.I. across the country. Panama pleaded with the Bank of
England to return $18 million of government funds that ousted
dictator Manuel Noriega had squirreled away in B.C.C.I. accounts
in Britain. In the African republic of Botswana, officials kept
the local B.C.C.I. branch open and guaranteed all loans and
deposits to prevent a run.

    Everywhere the same wrenching question arose. How could
regulators in the U.S., Britain and other countries have allowed
B.C.C.I. to develop into a monstrous criminal enterprise whose
activities ranged from laundering drug money to financing
clandestine arms sales? Authorities seemed content for years to
ignore mounting evidence, provided by private audits and former
B.C.C.I. officers, of the bank's misdeeds. According to leaked
audit reports, B.C.C.I. used deposits to enrich many of its Arab
investors -- and then covered up the fraudulent transactions.
The bank also cultivated a global network of political contacts
to help keep regulators at bay. The heavy hitters in cluded
former Defense Secretary Clark Clifford, since 1982 chairman of
Washington's First American Bankshares, which B.C.C.I. secretly
gained control of in the mid-1980s. (Clifford has denied
knowledge of B.C.C.I.'s ownership.)

    Nowhere was the anguish and turmoil over B.C.C.I.'s
collapse greater than in Britain, where the Bank of England
froze more than $400 million of deposits in 120,000 accounts
held largely by Indian and Pakistani families and small
businesses. The outraged depositors included some 60
municipalities that had placed as much as $160 million of public
funds in B.C.C.I. accounts. Customers may have to wait months
to receive what is insured under British law: 75% of their
money, up to a maximum of (pounds)15,000, or $24,000 at current
exchange rates. Shaken B.C.C.I. depositors jammed hastily
arranged telephone hot lines, some manned by fluent speakers of
Hindi, Urdu and other Asian languages, with calls for advice.
At the same time, many of the 1,200 B.C.C.I. employees who lost
their jobs in the shutdown marched outside the Bank of England
to protest the move.

    As British anger mounted, some financial experts accused
the Bank of England and the accounting firm Price Waterhouse,
which had audited B.C.C.I.'s books since 1985, of failing to
warn the public early enough about the huge problems at the
bank. While a recent audit uncovered widespread fraud at
B.C.C.I. and triggered this month's global crackdown, U.S.-based
Price Waterhouse had previously signed its public audits of the
bank without exposing irregular practices. Price Waterhouse
vehemently denied that it had overlooked problems at the bank
and said the firm was insured against any lawsuits that
disgruntled B.C.C.I. customers might bring.

    Many countries swiftly joined the B.C.C.I. crackdown after
the global sweep shut most of the bank's operations. In China
authorities closed B.C.C.I.'s branch in the Shenzhen Special
Economic Zone, nerve center of the country's program to
encourage private enterprise. Next door, Hong Kong closed the
bank's 25 branches, which had 40,000 depositors, after
regulators dithered for days while insisting that the offices
were "viable and sound."

    Furious Abu Dhabi officials protested the timing of the
global shutdown. It came, they said, just as Zayed was planning
to pony up fresh funds to buttress B.C.C.I.'s finances and was
preparing to reorganize the bank into three units based in
London, Abu Dhabi and Hong Kong. Perhaps adding insult, the Bank
of England tried to persuade Abu Dhabi to help rescue British
depositors. While British officials conceded that the sheik had
no legal obligation to reimburse customers, they hoped he might
act "as a matter of honor." But Zayed seemed in no mood to offer
assistance. Declared Keith Vaz, a Labour Member of Parliament:
"It is incredible that the Bank of England did not contact the
sheik, the leader of a friendly gulf state that supported us
strongly in the war, and inform him what was happening."

    Zayed, whose access to $15 billion a year in national oil
revenues makes him one of the world's richest men, does not
easily forgive slights. Acquaintances say the ruler, who is in
his mid-70s, will probably cover any losses suffered by gulf
Arabs and may even extend his generosity to depositors in the
rest of the Middle East. But he is unlikely to bail out anyone
else, insiders say. They predict the ruler will seek to redress
his own losses and public embarrassment by bringing lawsuits
against any non-Arabs he deems responsible for his plight.

    While Zayed is revered throughout the Middle East for his
honesty and diplomatic skills, he has proved less adroit in his
financial affairs. The sheik was among Arab investors who in
1980 sustained heavy losses on silver investments when prices
collapsed after the Texas-based Hunt brothers tried to corner
the market. At home, Zayed's openhanded ways have led him to
spend lavishly on his 19 sons and 22 daughters (he is rumored
to have been married either 12 or 14 times). To celebrate his
eldest son's 1981 wedding, Zayed threw a $40 million bash in Abu
Dhabi that featured seven nights of revelry in a 20,000-seat
amphitheater built for the occasion.

    Zayed is every bit as passionate a sportsman as he is an
indulgent father. The lithe sheik is a fervent falconer who
decamps regularly with an army of servants for lengthy hunting
trips in Pakistan and the Sudan. He has raised camel racing to
the status of a national pastime and financed efforts to
reintroduce teeming herds of gazelles to Abu Dhabi (pop.
700,000), which in Arabic means "Father of the Gazelle." Zayed
also loves greenery, and has lined Abu Dhabi's boulevards with
flowers, trees and lawns.

    Zayed's free-spending habits made him an easy mark for
Agha Hasan Abedi, a visionary Pakistani financier who founded
B.C.C.I. in 1972. Abedi joined Zayed on falconry expeditions
and, after winning the sheik's trust, persuaded him to acquire
a 35% stake in the bank, which Abedi described as a Muslim-owned
institution that would play a key role in financing Third World
development. "Zayed is a totally instinctive man," says a
Western diplomat who knows the sheik well. "He reacts from the
heart and the gut, which is what gives him his sense of morality
and fair play. But this, and his loyalty, is also why he stayed
so close to Abedi even after he began to learn that things with
Abedi and the bank were not as he thought."

    While the sheik remained personally aloof from financial
details and steadfastly supported Abedi, B.C.C.I. was acquiring
a reputation as the "bank of crooks and criminals," and its
foundation was crumbling. In an effort to rescue the bank, Zayed
put up $1 billion last year with the encouragement of the Bank
of England and thereby raised his stake in B.C.C.I. to a
controlling 77%. Zayed has maintained his man-of-the-desert
dignity in the midst of the bank's turmoil. The sheik agreed to
provide $200 million of fresh capital to First American, which
is struggling with real estate loan problems in Washington, when
he learned that his control of B.C.C.I. also made him owner of
the U.S. bank.

    Zayed now appears headed for a showdown with his old
friend Abedi, who is suffering from a heart ailment, and with
B.C.C.I. managers in Pakistan, where the bank's dirty-tricks
operations are headquartered. "There's going to be a big fight,"
said a Karachi-based B.C.C.I. official, who predicted that
"Pakistan will refuse to go along" with global efforts to wind
down the bank. The official added that B.C.C.I. managers in
Pakistan were "trying to figure out a way to restructure it,
maybe shut it down and open under a new name in Southeast Asia."
But with his eyes open at last, Zayed will have little
reluctance to thwart such schemes -- or walk away from them.