TIME: Almanac 1993/TIME Almanac 1993.iso/time/072991/0729200.000

Text File | 1992-08-28 | 25.0 KB | 510 lines

                                                                                BUSINESS, Page 42

COVER STORY

The Dirtiest Bank of All


How B.C.C.I. and its "black network" became a financial
supermarket for crooks and spies -- and how the U.S. is trying to
cover up its role

By JONATHAN BEATY and S.C. GWYNNE/NEW YORK -- With reporting by
Cathy Booth/Miami, Jay Branegan/Hong Kong and Helen Gibson/London


    "I could tell you what you want to know, but I must worry
about my wife and family -- they could be killed."

    -- a former top B.C.C.I. officer


    "We better not talk about this over the phone. We've found
some bugs in offices that haven't been put there by law
enforcement."

    -- a Manhattan investigator probing B.C.C.I.


    Bank-fraud cases are usually dry, tedious affairs. Not
this one. Nothing in the history of modern financial scandals
rivals the unfolding saga of the Bank of Credit & Commerce
International, the $20 billion rogue empire that regulators in
62 countries shut down early this month in a stunning global
sweep. Never has a single scandal involved so much money, so
many nations or so many prominent people.

    Superlatives are quickly exhausted: it is the largest
corporate criminal enterprise ever, the biggest Ponzi scheme,
the most pervasive money-laundering operation and financial
supermarket ever created for the likes of Manuel Noriega,
Ferdinand Marcos, Saddam Hussein and the Colombian drug barons.
B.C.C.I. even accomplished a Stealth-like invasion of the U.S.
banking industry by secretly buying First American Bankshares,
a Washington-based holding company with offices stretching from
Florida to New York, whose chairman is former U.S. Defense
Secretary Clark Clifford.

    But B.C.C.I. is more than just a criminal bank. From
interviews with sources close to B.C.C.I., TIME has pieced
together a portrait of a clandestine division of the bank called
the "black network," which functions as a global intelligence
operation and a Mafia-like enforcement squad. Operating
primarily out of the bank's offices in Karachi, Pakistan, the
1,500-employee black network has used sophisticated spy
equipment and techniques, along with bribery, extortion,
kidnapping and even, by some accounts, murder. The black network
-- so named by its own members -- stops at almost nothing to
further the bank's aims the world over.

    The more conventional departments of B.C.C.I. handled such
services as laundering money for the drug trade and helping
dictators loot their national treasuries. The black network,
which is still functioning, operates a lucrative arms-trade
business and transports drugs and gold. According to
investigators and participants in those operations, it often
works with Western and Middle Eastern intelligence agencies. The
strange and still murky ties between B.C.C.I. and the
intelligence agencies of several countries are so pervasive that
even the White House has become entangled. As TIME reported
earlier this month, the National Security Council used B.C.C.I.
to funnel money for the Iran-contra deals, and the CIA
maintained accounts in B.C.C.I. for covert operations. Moreover,
investigators have told TIME that the Defense Intelligence
Agency has maintained a slush-fund account with B.C.C.I.,
apparently to pay for clandestine activities.

    But the CIA may have used B.C.C.I. as more than an
undercover banker: U.S. agents collaborated with the black
network in several operations, according to a B.C.C.I.
black-network "officer" who is now a secret U.S. government
witness. Sources have told investigators that B.C.C.I. worked
closely with Israel's spy agencies and other Western
intelligence groups as well, especially in arms deals. The bank
also maintained cozy relationships with international
terrorists, say investigators who discovered suspected terrorist
accounts for Libya, Syria and the Palestine Liberation
Organization in B.C.C.I.'s London offices.

    The bank's intelligence connections and alleged bribery of
public officials around the world point to an explanation for
the most persistent mystery in the B.C.C.I. scandal: why banking
and law-enforcement authorities allowed the bank to spin out of
control for so long.

    In the U.S. investigators now say openly that the Justice
Department has not only reined in its own probe of the bank but
is also part of a concerted campaign to derail any full
investigation. Says Robert Morgenthau, the Manhattan district
attorney, who first launched his investigations into B.C.C.I.
two years ago: "We have had no cooperation from the Justice
Department since we first asked for records in March 1990. In
fact they are impeding our investigation, and Justice Department
representatives are asking witnesses not to cooperate with us."

    B.C.C.I. was started in 1972 with the putative mission of
becoming the Muslim world's first banking powerhouse. Though it
was incorporated in Luxembourg and headquartered in London, had
more than 400 branches and subsidiaries around the world and was
nominally owned by Arab shareholders from the gulf countries,
B.C.C.I. was always a Pakistani bank, with its heart in Karachi.
Agha Hasan Abedi, the bank's founder and leader until his
ouster last year, is a Pakistani, as are most of the bank's
former middle managers. And it was in Pakistan that the bank's
most prodigiously corrupt division was spawned.

    The Soviet invasion of Afghanistan in 1979 and the
resulting strategic importance of neighboring Pakistan
accelerated the growth of B.C.C.I.'s geopolitical power and its
unbridled use of the black network. Because the U.S. wanted to
supply the mujahedin rebels in Afghanistan with Stinger missiles
and other military hardware, it needed the full cooperation of
Pakistan, across whose border the weapons would be shipped. By
the mid-1980s, the CIA's Islamabad operation was one of the
largest U.S. intelligence stations in the world. "If B.C.C.I.
is such an embarrassment to the U.S. that forthright
investigations are not being pursued, it has a lot to do with
the blind eye the U.S. turned to the heroin trafficking in
Pakistan," says a U.S. intelligence officer.

    The black network was a natural outgrowth of B.C.C.I.'s
dubious and criminal associations. The bank was in a unique
position to operate an intelligence-gathering unit because it
dealt with such figures as Noriega, Saddam, Marcos, Peruvian
President Alan Garcia, Daniel Ortega, contra leader Adolfo
Calero and arms dealers like Adnan Khashoggi. Its original
purpose was to pay bribes, intimidate authorities and quash
investigations. But according to a former operative, sometime
in the early 1980s the black network began running its own
drugs, weapons and currency deals.

    "I was recruited by the black network in the early 1980s,"
says an Arab-born employee who has ties to a ruling family in
the Middle East and has told U.S. authorities of his role in
running one of the black units. "They came to me while I was in
school in the U.S.; they spoke my language, knew all of my
friends and gave me money. They told me they wanted me to join
the organization, and described its wealth and political power,
but at first they never said exactly what the organization did."

    This operative -- call him Mustafa -- underwent a year of
training that began with education in psychology and the
principles of leadership and proceeded into spycraft, with
lessons in electronic surveillance, breaking and entering, and
interrogation techniques. "Then the nature of our advisers
changed," says Mustafa. "The pleasantness was gone, and we moved
to Pakistan, where we trained with firearms." Mustafa's first
operational assignment took him to London. "They gave us
passports and identification, and we moved a shipment of
((unidentified)) goods. In England they had more I.D. waiting
for us, because customs and immigration are strict, but when we
moved many places, into India or China or Latin America, matters
were taken care of, and we just slipped through borders. We
would be met. It was always all arranged."

    A typical operation took place in April 1989, when a
container ship from Colombia docked during the night at Karachi,
Pakistan. Black-unit operatives met the ship after paying
$100,000 in bribes to Pakistani customs officials. The band
unloaded large wooden crates from several containers. "They were
so heavy we had to use a crane rather than a forklift," says a
participant. The crates were trucked to a "secure airport" and
loaded aboard an unmarked 707 jet, where an American, believed
by the black-unit members to be a CIA agent, supervised the
frantic activity.

    The plane then departed for Czechoslovakia, taking the
place of a scheduled Pakistan International Airlines commercial
flight that was aborted at the last minute by prearrangement.
The 707's radar transponder was altered to beep out the code of
a commercial airliner, which enabled the plane to overfly
several countries without arousing suspicion. "From
Czechoslovakia the 707 flew to the U.S.," said the informant,
insisting that none of the black-unit workers had any knowledge
of what was in the heavy wooden crates. "It could have been
gold. It could have been drugs. It could have been guns. We
dealt in those commodities," Mustafa told U.S. authorities.

    Other informants with details about the black network have
come forward as the banking disaster has unfolded. "B.C.C.I.
was a full-service bank," says an international arms dealer who
frequently worked with the clandestine bank units. "They not
only financed arms deals that one government or another wanted
to keep secret, they shipped the goods in their own ships,
insured them with their own agency and provided manpower and
security. They worked with intelligence agencies from all the
Western countries and did a lot of business with East bloc
countries."

    In Lima, where a probe of B.C.C.I.'s stewardship of Peru's
central-bank funds is under way, local investigators are trying
to trace what happened to money in an aborted B.C.C.I.-brokered
deal to sell French-made Mirage jet fighters to the
impoverished nation. Sources in the clandestine arms trade say
B.C.C.I. eventually sold the planes to Pakistan and India.

    U.S. intelligence agencies were well aware of such
activities. "B.C.C.I. played an indispensable role in
facilitating deals between Israel and some Middle Eastern
countries," says a former State Department official. "And when
you look at the Saudi support of the contras, ask yourself who
the middleman was: there was no government-to-government
connection between the Saudis and Nicaragua."

    As an equal-opportunity smuggler, the bank dealt in arms
from many countries. "It was B.C.C.I. that financed and
brokered ((Chinese)) Silkworm missiles that went to Saudi
Arabia," the former official says, "and those were equipped with
sophisticated Israeli guidance systems. When you couldn't use
direct government transfers or national banks, B.C.C.I. was
there to hot-wire the connections between Saudi Arabia, China
and Israel." The bank also helped transfer North Korean Scud-B
missiles to Syria, a B.C.C.I. source told TIME.

    Yet the bank's arms business was benign compared with the
black network's other missions. Sources say B.C.C.I. officials,
known as protocol officers, were responsible for providing a
smorgasbord of services for customers and national officials:
paying bribes to politicians, supplying "young beauties from
Lahore," moving drugs and expediting insider business deals.

    When it came to recruiting and persuading, the black
network usually got its way. "We would put money in the accounts
of people we wanted to seduce to work for us," says Mustafa,
"or we would use terror tactics," including kidnapping and
blackmail. "The Pakistanis were easy to terrorize; perhaps we
might send someone his brother's hand with the rings still on
it." Adds Mustafa: "We were after business cooperation or
military or industrial secrets that we would use or broker, and
we targeted generals, businessmen and politicians. In America
it was easy: money almost always worked, and we sought out
politicians known to be corruptible."

    The black network was the bank's deepest secret, but
rumors of its activities filtered through the bank's managerial
level with chilling effectiveness. Senior bankers voice fears
that they will be financially ruined or physically maimed --
even killed -- if they are found talking about B.C.C.I.'s
activities. High-level bank officers know what happened to a
Karachi-based protocol officer whom the black network suspected
of unreliability last year. "They found he had been trying to
liquidate his assets and quietly sell his house," says Mustafa.
"So, first they killed his brother, and then they sent brigands
to rape his wife. He fled to the U.S., where he is hiding." U.S.
investigators confirm the account but have little hope he will
volunteer any secrets if he is located.

    Businessmen who pursued shady deals with B.C.C.I. are just
as frightened. "Look," says an arms dealer, "these people work
hand in hand with the drug cartels; they can have anybody
killed. I personally know one fellow who got crossed up with
B.C.C.I., and he is a cripple now. A bunch of thugs beat him
nearly to death, and he knows who ordered it and why. He's not
about to talk." Currently the black units have focused their
scrutiny and intimidation on investigators. "Our own people have
been staked out or followed, and we suspect tapped telephones,"
says a New York law-enforcement officer.

    The black unit's mission eventually became the pursuit of
power and influence for its own sake, but its primary purpose
was to foster a global looting operation that bilked depositors
of billions of dollars. Price Waterhouse, the accounting firm
whose audit triggered the worldwide seizure of B.C.C.I. assets
earlier this month, says the disarray is so extreme that the
firm cannot even put together a coherent financial statement.
But investigators believe $10 billion or more is missing, fully
half of B.C.C.I.'s worldwide assets.

    How did it happen? B.C.C.I.'s corporate structure allowed
the bank to operate virtually without regulation all over the
world. The bank's organizational web consisted of dozens of
shell companies, offshore banks, branches and subsidiaries in
70 countries. It was incomprehensible even to its own financial
officers and auditors. The bank's extensive use of unregulated
Cayman Islands accounts enabled it to hide almost anything. The
bank's complex organization and unique method of accounting --
longhand in paper ledgers, written in Pakistan's Urdu language
-- make it unlikely that most of the missing money will be
traced. Nor is it likely that anyone will ever know just how
much Abedi, who has incorporated a new bank, called the
Progressive Bank, in Karachi, stole from the rest of the world.

    B.C.C.I.'s downfall was inevitable because it was
essentially a planetary Ponzi scheme, a rip-off technique
pioneered by American flimflam man Charles Ponzi in 1920.
B.C.C.I. gathered deposits, looted most of them, but kept enough
new deposits flowing in so that there was always sufficient cash
on hand to pay anyone who asked for his money. During the years
of its most explosive growth in the late 1970s and mid-1980s,
B.C.C.I. became a magnet for drug money, capital-flight money,
tax-evading money and money from corrupt government officials.
B.C.C.I. quickly gained a reputation as a bank that could move
money anywhere and hide it without a trace. It was the bank that
knew how to get around foreign-exchange rules and falsify
letters of credit in support of smuggling. Among its alleged
services:

    -- In Panama, according to a little-known racketeering
suit that the country brought against B.C.C.I., the bank
systematically helped Noriega loot the national treasury.
B.C.C.I. allowed the leader to open secret offshore accounts
under the names of the Panamanian National Guard, the Panamanian
Defense Forces and the Panamanian Treasury, to transfer national
funds into those accounts and then to tap the funds himself.

    -- In Iraq, B.C.C.I. became one of the principal conduits
for money that Saddam Hussein skimmed from national oil
revenues during the 1980s. According to investigator Jules
Kroll, who is tracking Saddam's fortune, B.C.C.I. helped the
dictator move and hide money all over the world.

    -- In Guatemala the collapse of B.C.C.I. has triggered a
government probe into a $30 million loan that the bank extended
to the country in 1988-89. Government officials told TIME they
suspect that some of the money may have gone to pay bribes to
stifle a four-year-old investigation of a major B.C.C.I. client,
coffee smuggler and arms merchant Munther Bilbeisi. "If the $30
million was given to corrupt public officials and that can be
proved, then the loan should be wiped out or reduced," says
Fernando Arevalo Reina of the Guatemalan Attorney General's
office. (Bilbeisi has denied any wrongdoing.)

    As B.C.C.I.'s influence grew, a corrupt core of middle
management evolved, described by bank employees as "100
entrepreneurs," usually branch officers in foreign countries who
were free to pursue their own agendas. One such was Amjad Awan,
the B.C.C.I. officer who was convicted in Florida for the
money-laundering services he provided for Noriega. As long as
these remote managers kept on gathering deposits, they were
given wide latitude to do as they pleased, which increasingly
meant serving a core clientele of what investigators estimate
to be some 3,500 corrupt business people around the world.

    The more B.C.C.I. became a conduit for such money, the
more deposit gathering became the bank's chief goal. At annual
meetings, founder Abedi would harangue his employees for days
on the importance of luring deposits. That was probably because
billions of dollars were vanishing. At the highest levels,
B.C.C.I. officials whisked deposits into secret accounts in the
Cayman Islands. These accounts constituted a hidden bank within
B.C.C.I., known only to founder Abedi and a few others. From
those accounts, B.C.C.I. would lend massive amounts to curry
favor with governments -- as in its $1 billion loan to Nigeria
-- or to buy secret control of companies.

    U.S. regulators discovered recently that such loans had
enabled B.C.C.I. to buy clandestine control in three American
banks: First American Bankshares in Washington, National Bank
of Georgia (later purchased by First American) and Independence
Bank of Encino, Calif. The latter two were bought officially by
Abedi's front man, Ghaith Pharaon, the putative Saudi tycoon who
received an estimated $500 million in B.C.C.I. loans in the
1970s and '80s. Those loans were secured only by shares of stock
in the companies Pharaon purchased, which meant that they were
never to be repaid.

    What Abedi got in return for such loans was de facto
ownership of three American banks, since he held their shares
as collateral for the unrepayable loans. More important, this
"nominee" shareholder arrangement meant that B.C.C.I. itself
remained invisible to U.S. banking regulators. Following its
discovery earlier this year that B.C.C.I. owned both First
American and Independence Bank, the Federal Reserve ordered it
to sell them off.

    B.C.C.I.'s deposits also disappeared through the black
network, which used the money to pay bribes and conduct its
weapons and currency deals. According to a former officer,
B.C.C.I. bought virtual control of customs officials in ports
and air terminals around the world. In the U.S. millions of
dollars flowed through B.C.C.I.'s Washington office, allegedly
destined to pay off U.S. officials.

    The bribes and intelligence connections may offer an
explanation for the startling regulatory inaction. The Justice
Department has hindered an investigation by Massachusetts
Senator John Kerry, whose Subcommittee on Terrorism, Narcotics
and International Operations was the first to probe B.C.C.I.'s
illegal operations. According to Kerry, the Justice Department
has refused to provide documents and has blocked a deposition
by a key witness, citing interference with its own investigation
of B.C.C.I. To date, however, the Justice Department
investigation in Washington has issued only one subpoena. "We
have had a lot of difficulty getting any answers at all out of
Justice," says Kerry. "We've been shuffled back and forth so
many times between bureaus, trying to find somebody who was
accountable. These things are very serious. What's shocking is
that more energy hasn't been expended. Somebody consciously or
negligently took their eyes off the ball in this investigation."
According to Jack Blum, Kerry's chief investigator in 1988-89,
the lack of cooperation was so pervasive and so successful in
frustrating his efforts to investigate B.C.C.I. that he now says
he believes it was part of a deliberate strategy. Says Blum:
"There's no question in my mind that it's a calculated effort
inside the Federal Government to limit the investigation. The
only issue is whether it's a result of high-level corruption or
if it's designed to hide illegal government activities."

    The Justice Department denies any reluctance to
investigate. Said spokesman Dan Eramian: "We believe there has
been good cooperation between law-enforcement ((agencies)) in
this investigation. We're often accused of dragging our feet,
and part of that we believe is partisan in nature." Yet the
evidence of a cover-up is mounting:

    -- In one of the most mysterious events in the case,
B.C.C.I. bank records from Panama City relating to Noriega
"disappeared" in transit to Washington while under guard by the
Drug Enforcement Administration. After an internal
investigation, the DEA said it had no idea what had happened to
the documents.

    -- Lloyd's of London, which is enmeshed in a racketeering
lawsuit against B.C.C.I., has fruitlessly made offers to provide
evidence of bribery and kickbacks and has made "repeated pleas"
to U.S. Attorneys in Miami and New Orleans to seize B.C.C.I.
records. Lloyd's accuses B.C.C.I. of taking part in smuggling
operations and falsifying shipping documents. The insurance
underwriters offered the results of their voluminous research
into the bank's illegal activities. The Justice Department
attorneys ignored the offers, Lloyd's says.

    -- The U.S. Attorney General has assigned only a handful
of FBI agents to its Washington grand jury investigation of
B.C.C.I.'s relationship to First American Bankshares. The
department's main probe of B.C.C.I. itself is being handled by
a sole Assistant U.S. Attorney in Tampa, who has recently been
assigned another major case. Similar understaffing is evident
in a Miami grand jury probe of the relationship between B.C.C.I.
and the CenTrust savings and loan, whose failure is estimated
to cost taxpayers $2 billion. This may help account for the fact
that a 16-month investigation has yielded no indictments.

    Just as perplexing is why the Bank of England and other
authorities took so long to intervene. Britain's main financial
regulator waited more than a year after seeing a Price
Waterhouse audit that raised serious questions about B.C.C.I.'s
viability before seizing its 25 branches in Britain. One
explanation: the Bank of England was conducting extended
negotiations with Abu Dhabi authorities, apparently hoping that
B.C.C.I.'s current owner, Sheik Zayed bin Sultan al-Nahayan,
would shore up the bank. But more suspicious experts raise
questions about B.C.C.I.'s links to Western intelligence
agencies. Leaders in Parliament have expressed outrage at the
regulatory failure, which among other things has endangered
deposits from as many as 45 municipalities and four utilities.

    As authorities sift through B.C.C.I. subsidiaries around
the world, they are trying to cope with potentially massive
losses of depositors' money. The Pakistani press spoke of "panic
withdrawals," and one paper added that "smugglers and drug
barons" were desperately trying to rescue their offshore
accounts. In such countries as Nigeria and Botswana, officials
were worried that central-bank deposits at B.C.C.I. might be
lost.

    Still to be probed, with potentially explosive results, is
B.C.C.I.'s Washington office. Sources have told TIME that one
of B.C.C.I.'s Washington representatives distributed millions
of dollars in payoffs to U.S. officials during the past decade.
If that is true, the banker's black book may be the single
hottest source since Deep Throat in the Watergate investigation.
U.S. authorities are searching for the Washington representative
and other B.C.C.I. protocol officers, but most have fled to
Pakistan. In this investigation, many roads lead to Karachi,
where the infamous black network is enduring its most desperate
hour. As it falters, the testimony by once fearful witnesses is
likely to yield a succession of startling details about one of
history's most ornate and ruthless frauds.