TIME: Almanac 1995

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<text id=91TT0463> <title> Mar. 04, 1991: A Capital Scandal </title> <history> TIME--The Weekly Newsmagazine--1991 Mar. 04, 1991 Into Kuwait! </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 60 A Capital Scandal </hdr><body> The biggest bank in Washington and a legendary American political adviser are ensnared in a probe involving a shadowy money-laundering enterprise By Jonathan Beaty and S.C. Gwynne/Washington--Reported by Richard Behar/New York, Edward W. Desmond/New Delhi and Adam Zagorin/Brussels Could there be any doubt about this bank's nationality? From its name to its flag-waving ads to its slogan--"The Bank for All Americans"--First American Bank of Washington, seems practically like a branch of government. Its chairman and public face is one of America's most respected attorneys and political advisers, Clark Clifford. But what's behind that carefully cultivated image looks decidedly different. Investigators have evidence that First American, the largest bank in the Washington area (1990 assets: $11 billion), has for years been secretly controlled by a criminally tainted, money-laundering, Luxembourg-based global bank. That evidence last week prompted the Federal Reserve to interdict all transfer of money and assets between the two banks. The regulators asked the Justice Department, which has appeared reluctant to pursue allegations, to begin a criminal and civil investigation. The Fed was responding to pressure generated by Manhattan district attorney Robert Morgenthau, who is presenting evidence of fraud, money laundering and disguised ownership to a New York City grand jury. Morgenthau has formally told the Fed his office has evidence that First American is under secret control. First American's alleged parent is one that few people would be proud to claim: the Bank of Credit & Commerce International, convicted of violations in three countries and well known in global finance circles as a banker to Manuel Noriega and Colombian drug lords. The question that won't go away: How could an outfit like B.C.C.I. control a large U.S. bank without regulators knowing or doing anything about it? Investigations in Washington, New York City and Florida are probing deeper into the bizarre affair and uncovering evidence of startling regulatory inaction, if not political chicanery. Clifford, 84, says he and his law partner Robert Altman, president of the bank, "have run First American for long years at the highest ethical level, and we are proud of our stewardship." But he acknowledged to TIME that he has retained a criminal-defense attorney to represent him in connection with the matter. The scandal's most immediate repercussions affect First American, which had trouble enough already. Staggered by the avalanche of distressed real estate loans that has flattened banks across the country, First American lost $182.5 million in 1990, its first red ink ever. The deficit last week led to the resignation of C. Jackson Ritchie, the company's chief executive, and the layoff of nearly 100 of the bank's 6,000 employees. Regulators were worried that First American's secret parent, itself in financial trouble, would start siphoning off funds that would deepen the loss and conceivably fatten the bill to U.S. taxpayers should First American have to be bailed out. To guard against that, the Federal Reserve Board last week ordered First American not to transfer any funds, including management fees, to B.C.C.I., or to exchange any assets with it. Says an investigator involved in the bank probe: "They have been engaged in everything they are now forbidden to do." Suspicion that B.C.C.I. secretly controls First American goes back 10 years, when a group of Arab investors bought the Washington bank, then known as First General. Those same investors also happened to own controlling shares in B.C.C.I., a behemoth that has $20 billion in assets and some 350 branches in 70 countries. Bothered by the connection, regulators insisted on iron guarantees that B.C.C.I. would not run First American. The link that investigators are now talking about is far stronger--and comprehensible enough to anyone who has ever had a mortgage. They say B.C.C.I. lent the investors the money they used to buy stock in First American, with the shares pledged as collateral, just as a mortgage holder pledges his home as collateral. Investigators say those loans are "nonperforming"--the bankers' term that means they aren't being repaid. Everyone knows what happens in that case: the bank gets the collateral, in this case the controlling shares in First American. And presto, an unregulated foreign organization takes over an American bank without U.S. regulators knowing about it. It is hard to imagine more unlikely partners than the blue-blooded Clifford and Agha Hasan Abedi, the hard-driving, visionary founder of B.C.C.I. While Clifford was counseling President Truman in 1947, Abedi was shifting his young career in banking from India to Pakistan. In 1959 he founded his own successful bank there, and by the early 1970s he was aggressively courting Arab money. Abedi lavished special attention on Sheik Zayed bin Sultan al-Nahayan, who now heads Abu Dhabi's ruling family. Abedi ingratiated himself with the sheik, who was suspicious of bankers, by roughing it in tents and aboard camels to join him on falconing expeditions. When Pakistan began to nationalize industries in 1972, Abedi persuaded Zayed to help start B.C.C.I., which was registered in the unregulated tax havens of Luxembourg and the Netherlands Antilles. The new bank had staggering ambitions. Abedi has grandly proclaimed it "a new center for Third World cohesion and a rallying point of thoughts and aspirations of the underprivileged." That grand vision helped attract California-based Bank of America, which put up $2.5 million, or 25% of B.C.C.I.'s original capital, before selling its stake and pulling out in 1980. Abedi continued to woo wealthy Arabs, who became B.C.C.I.'s principal shareholders and first big customers. Rival bankers were long suspicious of the flamboyant B.C.C.I. "You had a $20 billion bank with no central-bank regulator or government lender of last resort," said a U.S. financier. "That gave most bankers a very nervous feeling about B.C.C.I. Who's watching these guys?" In fact, B.C.C.I. seemed far less interested in lending money than in earning fees by electronically whisking deposits through its growing network of global branches. B.C.C.I.'s willingness to transfer funds anywhere at any time was basic corporate policy, and the bank became a primary mover of flight capital from Third World nations. A high-ranking B.C.C.I. officer told investigators that moving money for 2,000 wealthy clients, from dictators to arms dealers, formed the core of the bank's business. Abedi, who left B.C.C.I. last year after a stroke that followed a 1988 heart transplant, built his business on careful attention to the needs of top-drawer customers. In the bank's early days, B.C.C.I. officials in London could be roused in the middle of the night to make good on visiting sheiks' gambling losses. Abedi cultivated the friendship of former Pakistani President Mohammed Zia ul-Haq and other Third World leaders. "He was a collector of people," says a Pakistani journalist who has followed Abedi. "He used Zia as a calling card." To attract deposits, B.C.C.I. opened magnificent offices even in poor surroundings. No matter how incongruous, the facilities were lavishly decorated with Persian rugs and sumptuous paintings. "Walk down the main street in Djibouti," says a Western banker, "and you'll see a building with a marble facade. That's B.C.C.I. On the two buildings on either side, the plaster will be breaking and falling." What Abedi coveted most was the prestige of a bank in the U.S., the nerve center of Western capitalism. After regulators rejected two B.C.C.I. bids for American banks in the 1970s--Abedi wouldn't reveal all the information they wanted--he helped Saudi billionaire Ghaith R. Pharaon acquire the National Bank of Georgia in 1978 from Bert Lance, President Jimmy Carter's former budget director. Soon after that, Lance helped Abedi orchestrate a raid on Financial General Bankshares of Washington. The purchasers were four Middle Eastern shareholders of B.C.C.I. The hostile bid triggered a three-year court battle in which U.S. regulators accused the buyers of acting in effect as fronts for the unregulated B.C.C.I. Enter Clark Clifford. The Washington eminence grise represented B.C.C.I. in the case and persuaded nervous Federal Reserve officials that the buyers were acting as individuals on their own behalf. When questioned about B.C.C.I.'s financial role in the acquisition, Clifford flatly told the officials that there wasn't any. Clifford became chairman of the bank, renamed First American, and his law partner, Robert Altman, became president. Clifford regularly briefed Abedi on the U.S. firm's operations. When queried on the briefings, Clifford explained that B.C.C.I. as adviser to the Arab owners of First American needed to know about the banking company. B.C.C.I. was meanwhile forging into uncharted waters, most notably laundering drug money. In 1983 B.C.C.I. acquired a Colombian bank with 30 branches that included several in Medellin and Cali, homes to the world's most powerful cocaine cartels. Among those laundering drug profits through B.C.C.I., say investigators, was former Panamanian strongman Manuel Noriega, who was collared by U.S. authorities in early 1990. Prosecutors who tracked his finances said Noriega had funneled $500,000 of cocaine funds through First American's flagship bank in Washington. First American officials denied any knowledge of the transaction. B.C.C.I.'s fondness for drug money brought the bank to grief in Florida and eventually led to recent mammoth losses. Undercover customs agents first stumbled onto B.C.C.I. money laundering during a sting operation. As part of the scheme, agents sent several million dollars of Medellin cartel drug funds through a B.C.C.I. bank in Miami. What happened next was worthy of Alice in Wonderland. Bank officers noticed the agents' amateurish attempt at money laundering and offered to teach them more sophisticated methods. Example: the bank would wire funds to B.C.C.I. branches around the world before handing the cash back to drug traffickers in the form of phony loans. The narcotics kings happily paid large fees for the customized service. Armed with virtually ironclad evidence, a Florida grand jury indicted B.C.C.I. for money laundering in 1988. Clifford hired a high-powered criminal lawyer to defend the bank. Despite overwhelming evidence, the government offered B.C.C.I. a plea bargain. The bank thus avoided a trial in which prosecutors planned to present evidence that laundering drug money was an approved policy of the global titan. Other evidence would have proved equally explosive. An executive named Amjad Awan, who managed the bank's Panama office and was Noriega's personal banker, described the extent of B.C.C.I.'s empire in a recorded conversation with an undercover agent. "We own a bank in Washington," Awan told the agent. "It's called the First American Bank. There are six banks bought out by B.C.C.I. about eight years ago. B.C.C.I. was acting as adviser to them, but the truth of the matter is that the bank belongs to B.C.C.I. Those guys are just nominee shareholders." Awan was one of five B.C.C.I. officers later convicted of conspiring to launder cocaine cash and sentenced to 12 years in prison, but he did not testify at his trial. Nor did the government play his taped conversation for the jury. For its part, B.C.C.I. forfeited the $15 million that agents had deposited but was not required to pay additional penalties. Awan's statements are only part of the evidence of B.C.C.I.'s ties to First American that has remained buried for a remarkably long time despite being held by the government. None of the evidence has been forwarded to banking regulators, who might have done something about it. A Senate subcommittee headed by Massachusetts Democrat John Kerry was probing money laundering and turned up more witnesses, who were later secretly taped by teams of customs and IRS agents while being interrogated by Kerry's chief counsel. One provided details of B.C.C.I.'s money-laundering operations in the U.S. and Latin America. The B.C.C.I. executive described a B.C.C.I. management conference in Vienna at which Abedi openly displayed charts of B.C.C.I. holdings that included First American. This senior-level manager said Clifford and Altman were at the meeting. The most startling evidence came from yet another B.C.C.I. officer who in 1989 provided the smoking gun for anyone wondering who really owns First American. His secretly taped remarks described the way B.C.C.I. had provided nonrecourse loans to the Arab investors who bought controlling shares of First American, then took the shares back as collateral for the loans. Since the investors put up no money of their own, and B.C.C.I. held the stock, it was the real owner of First American. Some of the allegedly oil-rich Arabs who appeared to be major shareholders were no more than straw front men for Abedi. Federal agents in an adjoining room listened to this key B.C.C.I. player for three days as he continued to explain B.C.C.I.'s machinations. He described plans to use political influence to derail the Kerry inquiry. Supervising customs agents said the tapes of this executive's remarks had been in their possession and that official reports had been completed, but they declined to say where the tapes and reports had been forwarded. Despite the wealth of new findings, federal prosecutors seemed loath to bring charges against the banking companies. "I think they sold out a lot of charges in return for B.C.C.I. promises that they would deliver up Noriega," said William von Raab, a former U.S. customs commissioner who headed the agency during the investigations. Von Raab also hinted at a darker motive for the lack of action. "That bank [B.C.C.I.] has a penchant for collecting very important friends," he said. "I'm constantly amazed at the ability of the power-brokering establishment to affect government decisions." After arranging the taped sessions for the feds, Kerry's chief counsel, Jack Blum, returned to Washington to find that his subcommittee job had been eliminated. Eventually frustrated by the feds' apparent lack of interest in the leads he provided, Blum delivered his evidence to Manhattan prosecutor Morgenthau, who has a legendary reputation for political independence and integrity. Within weeks the D.A. launched his probe into B.C.C.I. and First American. With B.C.C.I.'s reputation almost completely in tatters after the money-laundering plea, the bank suffered severe financial setbacks. New business dried up just as the bank's freewheeling practices left it awash in bad loans. The struggling company has lost more than $550 million since its 1988 indictment, including a $498 million deficit in 1989. To the rescue has come Sheik Zayed, ruler of Abu Dhabi and Abedi's old falconing partner, who put up $1 billion and thus took control of the bank. Zayed ordered an audit of his new property--and found that an estimated $4 billion had vanished from the company. If the government investigators are right, Zayed also has control of First American, since he currently owns the loans and collateral on B.C.C.I.'s books. For the moment at least, that appears to make First American a virtual arm of the Abu Dhabi state bank. B.C.C.I. is retrenching around the world. The company has closed some 70 offices and laid off more than 2,300 employees, or nearly 17% of its work force, since 1989. Many of its U.S. offices stand empty. According to a statement from Abu Dhabi, the banking firm's modest new goal is "to produce a leaner, fitter and more profitable B.C.C.I." The fate of First American may now rest in the hands of federal and state authorities. B.C.C.I., by design, is not entirely within their reach. A MYSTERIOUS COMPANY'S GROWING INTERESTS 1972 Declaring his intention to form the Third World's first multinational bank, Pakistani financier Agha Hasan Abedi organizes the Bank of Credit & Commerce International. Bank of America puts up $2.5 million, or 25%, of the bank's capital. Arab investors provide the rest of the money. 1975-76 U.S. regulators reject a B.C.C.I. bid for two New York City banks when Abedi fails to disclose requested details about his company. 1977 Abedi helps Saudi billionaire Ghaith R. Pharaon begin his acquisition of the National Bank of Georgia from Bert Lance, Jimmy Carter's former budget director. 1978 B.C.C.I. orchestrates a hostile bid for Financial General Bankshares of Washington. When the SEC seeks to block the bid, B.C.C.I. hires Clark Clifford to help. 1980 Financial General agrees to sell--not to B.C.C.I. but to a group of Arab investors. Regulators, unsure of the investors' backing, hesitate to approve the deal. 1981 Regulators grant approval after Clifford assures them that no link will exist between B.C.C.I. and the U.S. banking company. 1982 Clifford and law partner Robert Altman become chairman and president of the bank holding company, now renamed First American Bankshares, while remaining B.C.C.I.'s chief U.S. attorneys. 1983 B.C.C.I. purchases a Colombian bank with branches in Medellin and Cali, centers of drug traffic and money laundering. 1985-87 B.C.C.I. launders $32 million of drug money; $500,000 from Panamanian dictator Manuel Noriega passes through First American Bank in Washington. 1986 First American Bankshares buys the National Bank of Georgia from Pharaon. 1988 A Florida grand jury indicts B.C.C.I. for laundering drug money. During the investigation, a B.C.C.I. official says Abedi owns First American. 1989 Reeling from the impact of the Florida case and bad loans, B.C.C.I. loses $498 million. Despite evidence that B.C.C.I. controls First America, regulators permit First American to continue to expand by acquiring a bank in Florida. 1990 B.C.C.I. pleads guilty in Florida and pays $15 million. Sheik Zayed bin Sultan al Nahayan of Abu Dhabi, a longtime investor in B.C.C.I., acquires control of the troubled bank and orders an audit, which finds that an estimated $4 billion is missing. First American Bankshares loses $182.5 million for the year. 1991 The Federal Reserve probes whether B.C.C.I. owns First American and orders the banking firms to halt all transactions with each other. The Fed asks the Justice Department to consider possible criminal charges. A grand jury in New York City examines evidence of money laundering and fraud. </body></article> </text>