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THE BCCI AFFAIR


S. Hrg. 102-350, Pt. 1


HEARINGS

BEFORE THE

SUBCOMMITTEE ON

TERRORISM, NARCOTICS, AND INTERNATIONAL

OPERATIONS

OF THE

COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE

ONE HUNDRED SECOND CONGRESS

FIRST SESSION


AUGUST 1, 2 AND 8, 1991


PART 1


Printed for the use of the Committee on Foreign Relations



U.S. GOVERNMENT PRINTING OFFICE
45-702 ±5 WASHINGTON : 1992


For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-037256-9




COMMITTEE ON FOREIGN RELATIONS


CLAIBORNE PELL, Rhode Island, Chairman


JOSEPH R. BIDEN, Jr., Delaware
PAUL S. SARBANES, Maryland
ALAN CRANSTON, California
CHRISTOPHER J. DODD, Connecticut
JOHN F. KERRY, Massachusetts
PAUL SIMON, Illinois
TERRY SANFORD, North Carolina
DANIEL P. MOYNIHAN, New York
CHARLES S. ROBB, Virginia
HARRIS WOFFORD, Pennsylvania


JESSE HELMS, North Carolina
RICHARD G. LUGAR, Indiana
NANCY L. KASSEBAUM, Kansas
LARRY PRESSLER, South Dakota
FRANK H. MURKOWSKI, Alaska
MITCH McCONNELL, Kentucky
HANK BROWN, Colorado
JAMES M. JEFFORDS, Vermont


Geryld B. Christianson, Staff Director
James P. Luciee, Minority Staff Director


Subcommittee on Terrorism, Narcotics and International Operations


PAUL SIMON, Illinois

DANIEL P. MOYNIHAN, New York

CLAIBORNE PELL, Rhode Island


JOHN F. KERRY, Massachusetts, Chairman

HANK BROWN, Colorado
MITCH McCONNELL, Kentucky
JAMES M. JEFFORDS, Vermont


(II)



CONTENTS


August 1, 1991

MORNING SESSION

1 . Page

Blum, Jack, Lobel, Novins, Lamont & Flug 15

Prepared statement 38

Von Raab, William, William H. Bode Associates 11

AFTERNOON SESSION

Borg, Parker W., prepared statement 103

Burleigh, A. Peter, prepared statement 106

Kreczko, Alan J., prepared statement 105

Mattingly, Virgil, General Counsel, Board of Governors, Federal Reserve

System 79

Prepared statements 85

August 2, 1991

Del Castillo, Jorge, Member, Peruvian House of Delegates 213

Llaque, Ricardo, Deputy Director of Exchange Operations, Federal Reserve

Bank of Peru 164

Olivera, Fernando, Member, Peruvian House of Deputies 194

Rodriguez, Jesus, Member, Chamber of Deputies, Argentina 236

August 8, 1991

MORNING AND AFTERNOON SESSIONS

Rahman, Masihur, Former Chief Financial Officer, BCCI, London 254


(in)




NARCOTICS AND FOREIGN POLICY
IMPLICATIONS OF THE BCCI AFFAIR


THURSDAY, AUGUST 1, 1991
U.S. Senate,

Subcommittee on Terrorism, Narcotics, and

International Operations
of the Committee on Foreign Relations,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:01 a.m., in room
SD-419, Dirksen Senate Office Building, Hon. John F. Kerry (chair-
man of the subcommittee) presiding.

Present: Senators Kerry, Helms, Cranston, Brown, and Jeffords.

Senator Kerry. This hearing of the Senate Foreign Relations
Subcommittee on Narcotics, Terrorism, and International Oper-
ations will come to order.

I would like to begin by thanking Senator Pell, the chairman of
the full Foreign Relations Committee for permitting this committee
to proceed forward, and not only with this hearing, but with this
investigation over the long period of the last few years. I would
also like to thank him for the consistent support that he has pro-
vided me at moments when I know he felt very strongly that this
was not the normal role for this committee.

What we want to try to do today is begin to tell the story. Arid I
think we are going to begin at the beginning in order to lay out
factually precisely what brought us to this point, what it is we
know in broad terms. There is a great deal more to be said by a lot
of different parties in this. I caution people to recognize that this is
only a beginning, that there is a lot of testimony yet to come before
the entire Congress. There are other committees that will be look-
ing at this issue. There are other entities that will be looking at
this issue. And it would be a mistake to draw final conclusions of
many kinds until all of that testimony has been drawn.

The nature of a congressional hearing process is such that you
cannot do it all at once. You cannot even do it in continuum. There
is much that is not told in 1 day that does need elucidation in an-
other day.

We are going to start with the big picture and with a few small
pictures that are snapshots inside of this extraordinary banking
scandal.

This committee will be hearing testimony in early September
from Mr. Clifford and Mr. Altman. I was in touch with their attor-
ney over the course of the last days and we have locked in dates in
September, and we will announce those dates formally in the near

(l)



2


future. They will testify voluntarily and without any subpoenas or
compulsion. They want to testify and we look forward to hearing
their testimony.

In May of this year before the Senate Banking Committee when
we held a hearing on BCCI, I shared my belief that I thought this
would turn out to be the biggest financial scandal that we had ever
seen. The disclosures of recent weeks have suggested that I might
even have understated the case.

This is not just another story, of big-time, big-money con artists.
It is a story of international lawlessness, of extraordinary greed
which is becoming too much the centerpiece of recent history. It is
a story of the big guys getting away with things that the little guy
could never hope to escape responsibility for, and the little guy
winding up getting screwed in the process. It is a story of the abuse
of power and the abuse of system. It is a big white-collar crime that
facilitates and encourages the two-bit street crime that kills.

{'BCCI is the most prominent and dramatic symbol of a way of
doing business that challenges and diminishes people’s faith in
Government, our Government and governments around the world.
Average people really do not believe, I think, that government is
on their side these days. They do not believe that we can or that
we want to protect them as we are supposed to do, and certainly
that we do not protect them from banks that become the private
playthings of the very rich and sometimes the crooked. They do not
believe that large and powerful corporations orTpowerful people
v play by the same rules or are required to play by the same rules as
1 everybody els^) And they are convinced that if you can afford to
hire the best lawyers and the best accountants, you can get away
with almost anything in the world.

There may be those who say that what BCCI did is somehow a
victimless crime. I do not believe that. I do not think it is true.
There are a lot of victims. The first is our system in which we have
invested so much. And it is a victim because it tears apart people’s
belief in the system and the ability of the system to work. But it is
a lot more than that. How is it after all, that drugs get into the
veins of our kids in our streets? Banks have become the facilitators


*

K


of drug trafficking. Banks are part of the conspiracy where they
have engaged in this. Banks that do not live by the rules adopted'
at the Basel Convention of knowing their customer have been part
of the process of putting those drugs into our communities.

The same is true of guns that get into the hands of thugs in our
streets, or bombs into the luggage compartments of our airplanes.
Banks are often the depository of the secret funds and the secrecy
laws that protect that money is often purposefully there to protect
the nefarious transactions which surround those kinds of criminal


enterprises.

Manhattan district attorney, Bob Morgenthau, who has done an
extraordinary job in the course of this case, who is probably the
dean of all district attorneys in America, and a man of extraordi-
nary. integrity and capacity, he talked about this very thing the
Other day in announcing the indictments in the BCCI case. He
sends thousands of drug users and common criminals to jail every
year. But as he pointed out, the people that make the real money,
^the people who get filthy rich preying on the weaknesses and temp-



3


tations of others hardly ever get caught. So when corporations like
BCCI get away with either corrupting governments and regulatory
agents, or by simply evading them while serving as the bank of
choice for criminals, drug traffickers, illicit arms dealers, despots,
con men, and terrorists around the world, we all lose.

And if and when we turn over the rocks that have hidden the
truth about BCCI and its activities for the past decade or more,
when we bring to light of day their activities, I think that we have
an opportunity to win. It is that simple. I also think, maybe this is
a little naive, but I do believe it, that if you can do this and send a
signal to people that you can make the system respond, that by
doing so you can eat away at a little bit of the cynicism and the
anger and the sense of hopelessness that an awful lot of people
feel, and which is an attitude that truly corrodes American politics
today.

What is amazing, and I guess, frustrating to a lot of us, is that
BCCI’s day of reckoning was so long delayed. Red flags were
jresent almost from the beginning. In England, the Bank of Eng-
and in the late 1970’s refused to grant BCCI a full-service banking
icense because BCCI could not produce the financial records to ex-
plain its remarkable growth in the United Kingdom. In this coun-
try, the New York Superintendent for Banks, and the SEC, to their
credit, each blocked an attempt by BCCI to acquire a banking insti-
tution in this country. And the Federal Reserve, which had serious
reservations about BCCI and the Middle Eastern shareholders who
were attempting to take over Financial General Bankshares took
the unusual step of holding a public hearing 10 years ago. And that
raised some of the issues that we are now reexploring and examin-
ing today.

Notwithstanding those efforts, BCCI found a way not only to sur-
vive, but to flourish. It found a way to escape real scrutiny by gain-
ing the trust of infl uential people an d using them to maintai n a
cloak of legitimacy . We are TnevitaBIjTreft "with the question of
whether the mere presence of these influential people was suffi-
cient to keep lawyers and accountants and regulators from doing
their jobs for so long.

Three actions just this past month demonstrate the enormity and
the longstanding nature of BCCI’s regulatory evasion. The Bank of
England submitted to the High Court of Justice Chancery Division
a petition to wind it up, affecting it in countries all over this
planet. The Federal Reserve levied the largest civil fine in the his-
tory, against BCCI, $200 million. And the Manhattan district attor-
ney indicted the top managers of the bank.

In announcing the indictments, Mr. Morgenthau stated that
BCCI operated corruptly for 19 years, that it systematically falsi-
fied its records, laundered the money of drug traffickers and other
criminals, and that it paid kickbacks and bribes to public officials.
He also said that this largest of Ponzi schemes is over, but that we
have much to discover about this bank.

We do indeed. Mr. Morgenthau is correct. The crime has been
discovered, but the story has not been told. So today we begin to
tell some of that story. We will hear from witnesses who have
knowledge of how this bank operated in foreign countries and how



4


^cultivated world leaders, of how central bank funds were placed
on deposit, and whether or not those funds can now be retrieved.

We will consider as well whether U.S. agencies could have acted
sooner based on information known to them. Two months ago I
asked the CIA for a memorandum that it had given in 1988 to
former Customs Commissioner William Von Raab, who will testify
today, a memorandum about BCCI. That memo was written in
1986. It was described by Commissioner Von Raab as discussing in
a general way BCCI’s corporate criminality. When I asked the CIA
in conjunction with our investigation for that memorandum, my
staff was told it does not exist. Later, the CIA told us they had lo-
cated it, but asked because of its “extremely sensitive nature,” that
it be held at the Senate Select Committee on Intelligence. It was, I
went there and read it, and subsequently requested the declassifi-
cation of one sentence. And that sentence showed that the informa-
tion regarding BCCI as a criminal entity, that it already owned
American banks, and that we knew that in 1982. It showed that
their information had been disseminated to a number of agencies
years ago.

I think the entire question about secrecy in government is once
again raised by this issue. Too often too many of us have seen in-
stances where information that people want to keep away from the
accoun ta bility proces s is merely classified. There is no rightful
reason fur il tTTbe classified, there is no matter of national security
or urgency contained therein, but it is classified, and thereby we
have a secret government kept away from people, which is really
part of the constitutional process of this country.

I will tell you that in my judgment there is not one piece of that
memorandum that ought to be classified, and I have sought its full
declassification. And I hope that we can achieve a process that
somehowjrectifies the imbalance between legislative and executive
branch^Truly our country is threatened when there is a branch of
government that can hide whatever it does merely by putting a
stamp on a piece of pape£>

I do not have the answer for why certain agencies or individuals
did not respond at certain times in the course of this. And I want
to be fair in this process. We are all capable of oversight. We are
all of us capable of just missing something. We are all of us capable
of being too busy, of having too much on our plate, of not having
adequate resources, there are reasons these things can happen.
And I am not going to make judgments at the outset of this process
as to what happened, except to try to examine and understand so
that there is nothing that is hidden when we finish this.

Over the 3 years that this investigative effort has gone on, we
have learned a great deal about the structure and organization and
practices of this bank. In some ways this investigation is just begin-
ning, and I am certain that we are going to learn a great deal more
in the months to come.

I would just take one moment, if I may, I want to thank those
who have investigated it thus far, particularly one of our witnesses,
Mr. Blum, who will talk shortly who has spent enormous energy
and effort on it; and Jonathan Winer and David McKean of my
staff who have toiled at great length in order to try to pull these
facts together over a long period of time. Senator.



5


Senator Helms. You know, Mr. Chairman, if you and I sat down
to write a book on such circumstances as this, there is not a pub-
lisher in the land that would accept it. This is too bizaare. It is out-
rageous.

\j But anyway, we have got the job, in part, of sorting out a welter
'?f~- of facts and fictions and relationships that is almost impossible to
sort out. Before I make my comments, I am glad to see you, Mr.
Von Raab, we miss you. Mr. Blum, we appreciate your coming.

But John, seriously, about this book business. Just imagine, if
you will, that we sat down to write a book, a novel, about a group
of drug traffickers and arms smugglers and terrorists and money
launders, about 3,000 of them. Just suppose they had names like
Noriega and Abu Nidal and Saddam Hussein, and suppose further
that they wanted to start a full-service bank to advance their vari-
ous enterprises, and suppose that they are smart enough to realize
that a single bank in a single country, even a small country with
convenient banking laws would be too exposed and isolated to
escape inquiry by a smart group of bank examiners.

If you put all those factors together, you would come up with the
founding concept of BCCI, or the Bank of Credit and Commerce
International. Now of course, there is a lot more that we could fill
in in this novelthat we are going to write, which is going to turn
out to be true<£These people need a bank based on dollars because
y dollars are obviously the currency of the world, and their oper-
ations are worldwide. So the bank of these crooks and criminals is
highly desirous of penetrating the United States. Do you see the
plot developing?

r Now after a few false moves are repulsed, these crooks and
^criminals realized that they need to do more than just penetrate
the U.S. banking system, they need to penetrate the U.S. political
system^ So now the plot thickens. Now I have a chart over there
that will illustrate just how interwoven this operation is. And I
have passed out copies of this chart, I hope to all who want them.
You will see that a Pakistani man, no stranger in this town, set up
a group of banks and the first one, BCCI Luxembourg was estab-
lished in 1971. Then he set up BCCI Holdings, also in Luxembourg,
in 1974, and then he set up BCCI Overseas in Grand Cayman in
1975. These three banks made up the BCCI group. Then this Paki-
stani set up International Credit and Investment Corp. Overseas,
or ICCI Overseas, also in Grand Cayman.

Now, readers of our book might say, well, why did he need so
many banks? According to the indictment handed down in New
York this week, the banks were undercapitalized arid listed non-
/ existent assets. As one bank was examined, money flowed in for
/the examiner to count. The money stayed for a while, then it
flowed into the next bank in the group under examination. It is
known that this Pakistani’s associate, Mr. Naqvi, kept two sets of
books. The banks operation, what the New York prosecutor called
a Ponzi scheme, needed cash coming in constantly through the
front door to cover the laundered cash going out the back door.

Now, do you not think our book is coming along pretty well?

Although $21 billion was taken in from the depositors, many of
them, of course, legitimate, the promoters, according to the indict-
ment, skimmed off as much as $5 billion for themselves. Now, to



cover themselves, these ersatz bankers needed some front men. On
the one hand, according to the indictment, they hired a group of
Middle Eastern businessmen to pretend that rich oil sheiks owned
the bank and were putting their cash behind it. That, however, was
part of the scam, of course, because the purported owners did not
own the bank. They allegedly had contracts that held them harm-
less for personal liability.

The other scam was penetration of the U.S. political culture. We
know that BCCI illegally purchase First American Bank in this
city using the good offices of Clark Clifford and Robert Altman,
both of whom maintain that they were deceived. Perhaps they
were deceived, but the press reports that in the process of being de-
ceived, the pain of deception was eased just a little bit by a consid-
erable sum of money.

So anyhow, the staff of this committee and many others have
analyzed these reports, and based upon the public figures, it ap-
pears that Mr. Clifford and Mr. Altman had the opportunity to
make about $33,300,000 in 18 months time — I don’t know what that
is an hour, but it is a fair amount-abased upon insider loans from
BCCI to buy First American stock at an inside price, and the later
purchase of some of the stock by BCCI at three times the price.

Now, I understand that Senator Brown intends to discuss this in
some detail, and I shall listen with great interest. It is my hope
that Mr. Clifford and Mr. Altman will provide us with firsthand
testimony on these points as well. Now, Mr. Clifford’s good fortune
was not his alone. It appears that BCCI’s group through Credit and
Commerce American Holdings, also purchased Burt Lance’s Na-
tional Bank of Georgia and Mr. David Paul’s Centrust Savings
Bank in Miami, both of which were having, do you not know,
urgent cash flow problems.

Now, Mr. Lance’s political connections need no introduction to
anybody nor do Mr. David Paul’s. Not even did our former Presi-
dent, Mr. Carter, escape the kind attentions of BCCI either. The
press and other media have already discussed the millions of dol-
lars from BCCI that went to President Carter’s charities and the
personal assistance that BCCI provided for his high profile travels
around the world.

Nevertheless, however embarrassing as these events may be for
our friends in the Democratic Party, even more embarrassing to
me is the failure of our own administration to take vigorous action
against BCCI. In 1987 the Justice Department was on notice that
BCCI was a nefarious operation when former Customs Director,
William Von Raab, sitting right before us today, turned up evi-
dence of money laundering in Miami which resulted in plea bar-
gained judgments against BCCI operatives. Willie Von Raab provid-
ed voluminous information on further BCCI activities which was
ever followed up.

Iri fact, Mr. Von Raab himself was followed up, in the sense that
the administration made it clear that Willie Von Raab was persona
non grata in the fight against drugs. I think Mr. Von Raab will ac-
knowledge that he and I went down that road together because I
made recommendations for Willie Von Raab to be put in places of
responsibility. I know first hand that he was personal non grata. It



7


is a tragedy for this country not to have Mr. Von Raab in an effec-
tive, responsible position.

Willie Von Raab was the only one, the only one in the Reagan
administration that took vigorous and effective measures against
the drug threat and against money laundering. And 1 am glad to
have a chance to say that publicly on your behalf, Mr. Von Raab. I
never could understand why Willie Von Raab was not given the
Medal of Freedom for his outstanding accomplishments in this
regard, but he could not even get a job in the administration de-
spite the firm recommendations from this Senator and scores of
other Senators who admire and respect him.

a Finally I note that the first solid information that the Senate re-
ceived about the BCCI problem in testimony before this subcommit-
tee was from a former associate of Mr. Noriega who defected to the
United States and gave detailed information against his former em-
ployer. In fact, he was a principal witness in the indictment
against Mr. Noriega in 1988. And after Noriega was captured, he
was a key adviser in evaluating the Noriega papers and preparing
the case against that dictator. But the administration has never
cared for Mr. Blandon. While Noriega was still in power, officials
attempted to get Mr. Blandon deported back to Panama. So I am
making this a bipartisan folly. It is not just on one side, it is on
both sides.

In recent months, the Justice Department has pursued a merci-
less vendetta against Mr. Blandon, charging him with stealing U.S.
Government property. However, the property in question consists
of his own notes about Noriega. It is a mystery why the Justice De-
partment is seeking to bring a criminal indictment against the
most important witness the prosecution has against Mr. Noriega
and against Noriega’s involvement in BCCI. Mr. Blandon, appar-
ently knows too much about the failure of the Justice Department
to act. So, I guess, he must be eliminated.

There is plenty of blame to go around in this matter, Mr. Chair-
man. So let us start the hearing.

Senator Kerry. Thank you very much. Senator Helms. Senator
Cranston.

Senator Cranston. First, Senator Kerry, I want to congratulate
you for the excellent work you have done, beginning sometime
back, on unearthing what columnist William Satire has rightly
called, “an underworld-wide financial institution.” You, Senator
Kerry, took on this when many others who should have joined you,
particularly within the administration, were looking away. Time
has proven you right and the credit is yours for bringing us to this
point today.

As a way of opening our deliberation today, I would like to
review for a moment just what kind of activities I understand the
BCCI has been up to in the last decade, and perhaps longer. Top
British banking official, Robin Leigh-Pemberton charged that “the
culture of the bank is criminal.” According to the London Econo-
mist, “BCCI is uniquely baffling and unusually corrupt.” Investiga-
tors say there is evidence of fund transfers between BCCI and the
Atlanta branch of the Banca Nazionale Di Lavoro, the bank in-
volved in the Iraq loan scandal.



8

/ This week, as we all know, district attorney Robert Morgenthau
/ charged that BCCI has paid up to $3 million in bribes to senior offi-
cials of the Peruvian Central Bank in 1986 and 1987 in order to
capture hundreds of millions of dollars in deposits.

The bank was used by Panama’s drug-running dictator, Manuel
Noriega. It was used by Saddam Hussein. It was used by Haiti’s
Duvaliers, by Ferdinand Marcos, and his well-heeled wife, Imelda,
and by the South American drug cartels.

BCCI has also been linked to Pakistan’s renegade nuclear weap-
\ ons program, a project reportedly carried out by the help of Libya’s
V Qadhafi, and Argentina’s dirty war generals — last seen training
the Reagan administration’s Nicaraguan freedom fighters.

BCCI is also at the center of a complex affair concerning allega-
tions of illegal shipments of American-made arms to Guatemala’s
vicious military.

This last item may very well have been the cause of a very spe-
cial tragedy.

This week a British journalist, Anson Ng, was found shot to
death in his Guatemala City apartment. Guatemalan authorities
are claiming the murder was the work of common criminals. Inde-
pendent Guatemalan journalists say that Ng, who had a bullet
wound in the head and appeared to have been struck in the neck,
had not been robbed, but his personal archives were looted. Three
Guatemalan generals are rumored to be behind the illegal U.S.
arms shipments. One wonders whether Ng was murdered because
his work on BCCI had brought him face to face with the truth.

What has become abundantly clear is that this sinister, criminal
enterprise, which Morgenthau has called one of the most complex
and secretive criminal organizations we have ever encountered,
served as the foreign policy arm of its owners, the rulers of the
United Arab Emirates.

Sheikh Zayed, the President of the United Arab Emirates, was
an early investor in BCCI and continues to be the principal share-
holder in the bank.

The United Arab Emirate connection does not end there, howev-
er.

One of Zayed’s sons and the crown prince of Abu Dhabi; the Abu
Dhabi Investment Authority; the personal holding company of
Sheikh Hamad Bin Mohammed Al-Sharqi, the ruler of Fujara, an-
other of the Emirates, and Sheikh Humaid Bin Rashid al-Naomi,
the deputy ruler of Ajman, a third emirate, are all shareholders in
BCCI front institutions.

According to the Financial Times, “The fraud which lead to the
closure of BCCI involved ’representatives of the shareholders,’ the
ruler, and the Government of Abu Dhabi.”

Why is this important?

Beyond the distress caused to BCCI depositors, tens of thousands
of whom are individuals and small businesses from the Third
World, beyond the lessons BCCI offers to the international banking
community, and beyond the damage done to society’s fabric when
such criminality is carried out on such a scale, there is a further
consideration.



9



The Bush administration has proposed to sell $682 million worth
of sophisticated conventional weapons to the United Arab Emir-
ates.

This bristling bonanza includes 20 AH-64 Apache attack helicop-
ters, the most advanced we have in our arsenal, and 620 Hellfire
missiles.

A second proposed sale of M1A1 tanks and Bradley fighting vehi-
cles, was nixed by the UAE leadership themselves. According to an
unclassified cable from the U.S. Ambassador to the United Arab
Emirates, Edward Walker, published in this week’s Defense News,
the United Arab Emirates decided to delay its decision on the tank
procurement “based in part on the conviction that UAE should not
go through a congressional notification process at this time, given
the potential for congressional criticism on unrelated subject.’’

This was clearly a reference to questions about whether the
United Arab Emirates would use drug profits laundered by BCCI to
pay the United States for these weapons, questions that I raised a
few days ago on the Senate floor.

The emiris may not have been very good bankers — after all, they
presided over a criminal enterprise seemingly destined to go down
in history books as the world’s worst financial scandal.

They do, however, show some basic common sense strangely
absent in a Bush administration seemingly unconcerned about—
shades of Noriega, shades of Saddam Hussein — the potential scan-
dal of arms being paid for with BCCI drug money.

The administration justifies this foolish and indefensible sale of
the helicopters and missiles to the United Arab Emirates as a
payoff to Sheikh Zayed for his loyalty during the Persian Gulf war.

So inescapably the question arises, why the silence? Why the
lack of action on BCCI by this administration, so good at managing
the crises they themselves create. During the past years there were
no lack of danger signs concerning this full service banking service
for terrorists, for drug mobsters, for nuclear proliferators, for as-
sorted rogues and professional confidence men.

Who were they afraid of offending, and why? Or, why were they
so incompetent in their pursuit of greed’s global reach?

I agree with Senator Kerry’s remarks that we can only conjec-
ture about the answers to questions like this. Well-meaning human
beings do make innocent mistakes, but we must now seek the an-
swers. Senator Brown.

Senator Brown. Thank you, Mr. Chairman. I must say I am
shocked by your remarks. I believe the purpose of this investiga-
tion ought to uncover the facts. I do not think it should be used as
a forum to launch a smear of an administration. I think the pur-
pose of a Senate investigation committee is to get the facts out.
And I must say listening to the remarks just made, it seems to me
that the facts fell victim to the rhetoric.

I think it is appropriate we have these hearings. And I think the
purpose of the hearings ought to be to look into what broke down
here. The fact that there are crooks and thieves in this world is not
a surprise. We live in a world where we know and understand that.
What is a surprise is that the United States and its banking system
would fall victim to that scheme. It strikes me we ought to make
sure that these hearings are balanced, that they are thorough, that




10


they are fair, and that the outcome of these hearings is one that
allows us to correct policy and change personnel where they are
necessary.

I am concerned that we make sure that every aspect of the U.S.
banking system, whether it is the Federal Reserve, whether it is
the Justice Department, or whether it is the system itself, be exam-
ined and that all the facts brought out. I note that the Clifford-
Altman stock deal, in 18 months saw the stock triple in value. At
the same time, the same people were receiving both fees as attor-
neys and payment as bank officers. It seems to me that this is an
area that we need to follow up on, as well as the entire BCCI area.

But Mr. Chairman, I would close with this thought. If we are to
do our responsibility, it must be one done in a bipartisan manner,
not designed to gain political advantage, but to serve our constitu-
ents that I think have a far more important interest here, and that
is to make sure the system works properly.

Senator Cranston [presiding]. Well, let me respond by saying
yes, of course we have to find who is responsible, we have to find
what policies and regulatory practices have failed and why, and
what to do about them. And I agree with Senator Helms that this
is a bipartisan failing in some respects. Yet at the same time we
have had Republican administrations in charge of the executive
branch, the banch that basically is responsible for regulation and
for these matters, for a good many years in the recent past.

The primary purpose of my remarks was to focus on the dire
dangers of permitting nuclear proliferation to occur while crooks of
the sort that have been involved in BCCI are involved. And my
purpose, in part, is to see to it that we change a policy of unwise
proliferation of all sorts of weapons in which our own country is
involved. And if we find that BCCI and its money launderers are
involved in all of that, that gives us a new facet to deal with, of
what I think is a genuine policy issue question, one very much on
the front burner in our country and in the Middle East, and in the
world. Senator Jeffords.

Senator Jeffords. Thank you, I certainly believe this committee
has the obligation to investigate, but I would hope that we would
keep in mind what our role ought to be. The burden has to lie with
the Department of Justice to continue along with other law-en-
forcement agencies to seek out the culprits and the problems that
were created in this country.

But I think it is important for us to take a look at what went on
and to provide leadership to develop the international methodolo-
gies to prevent a reoccurrence. International corporations that can
move and operate around the world without any effective regula-
tion is the real problem which this committee should end up deal-
ing with. And as the Senator from California has pointed out, that
is true not only in the sense of what we saw with money launder-
ing here, but in the large sense, the more important problems of a
proliferation of nuclear weapons and other systems that enhance
the ability of nations to make war.

So I would hope that our ultimate goal would be to work toward
a system, an international system will effectively regulate these
matters without the kind of intervention of the law enforcement



11


agencies as is being required in this situation. I thank the Chair-
man.

Senator Cranston. Did either of our witnesses have opening
statements that they would like to make at this point?

TESTIMONY OF MR. WILLIAM VON RAAB, WILLIAM H. BODE

ASSOCIATES

Mr. Von Raab. It might be helpful for the record maybe just to
give some idea how this started off. I am often asked that question.
When I took over the responsibilities for Customs in the Reagan
administration, I was asked to increase the energy and muscle that
was being applied to criminal enforcement, particularly drug en-
forcement. It became quite clear to me as time went on that the
nature of criminal activity was such, and the amount of money in-
volved in it was so sufficient that banking was a much bigger part
of organized crime than it had been in the thirties when people
could keep their profits in suitcases and spend them in the local
bar. And that banks had to play a very, very important role, cer-
tainly, in drug crime, and as well as even smuggling arms out of
the United States.

So the Customs Service undertook an effort to try to examine
"7/Some of the illegal banking activities under the money-laundering
laws for which it was responsible at the time. It was then called
the Bank Secrecy Act, and it was subsequently improved and
strengthened by the Congress. And, as part of this exercise, the
Customs Service would set up stings around the country in which
it would actually go undercover an offer to launder money for drug
traffickers.

And in one of these stings, the Customs Service was using BCCI
1 '] in Tampa.

Senator Kerry [presiding]. May I interrupt you for just one
second? I apologize for doing that, but I thought I would get back
here more quickly following the Senate floor vote. We do want to
put all witnesses who appear here under oath. I think you knew
that, so I would just like to swear you, if I can, both of you, before
we go on, so that all testimony here will be sworn.

Mr. Von Raab. Will that be retrospectively as well as prospec-
tively?

Senator Kerry. We will presume that you did not get far enough
or with anything complicated enough.

I will just ask you both to rise, if you would. And would you raise
your right hand? Do you swear to tell the truth, the whole truth,

and nothing but the truth, so help you God?

Mr. Von Raab. I do.

Mr. Blum. I do.

Senator Kerry. Thank you.

Mr. Von Raab. So the Customs agents began to use BCCI, among
other banks, as a place to facilitate the laundering of their funds,
and the BCCI local managers recognized what the undercover
agents were doing, although they didn’t recognize them for Federal
agents. And, they basically offered to assist them and to provide
them with even better schemes, and more facilities, and it became
clear after a short time that BCCI, certainly as a matter of local



12


policy, was aiding, abetting, conspiring with, and actively partici-
pating in money laundering.

As the investigation proceeded, it became clear to the Customs
agents, and now we are talking late 1987, that BCCI itself, appar-

k ently, had a corporate policy of involving itself in any kind of activ-
ity. It didn’t matter whether it was criminal or not. As a result, the
Customs Service began a broader ranging investigation of BCCI,
largely centered out of it’s Tampa office.

Senator Kerry. At that point, when you became aware of this
corporate policy, that was as a consequence of what?

Mr. Von Raab. That was a consequence as our undercover
agents talking to individuals who worked for BCCI and who were
encouraging our Customs officers, once again, not known as Cus-
toms officers, to introduce them directly to drug traffickers.

Senator Kerry. Was Customs alone in that investigation at that
time?


Mr. Von Raab. No, the IRS would have been involved in that be-
a cause it was typically — any drug money-laundering operation was
A/ typically carried out by a joint team of Customs officers and IRS
?Ga officers. Although, in this case, the investigation was conducted by
A the Customs special agent in charge, who was Bonnie Tischler at
that time, in Tampa.

Senator Kerry. Were the findings with respect to this corporate
policy and money laundering memorialized?

Mr. Von Raab. They certainly would have been written down in
the Customs agents’ daily and weekly reports. They were never me-
morialized in a particular report to me that I can remember, al-
though that that information was passed up to me in conversations
that I would have had with the individuals responsible for the in-
vestigation.

Senator Kerry. Did you disseminate that information?

Mr. Von Raab. That information would, as a matter of regular
practice, would have been passed over to the Treasury Department
because they had a liaison officer in the Customs headquarters
who, on a daily basis, was made aware of all that headquarters
knew in Customs, and then he or she was expected by both Treas-
ury and Customs, to relay what information was felt was important
for Treasury to know.

./ 4 — - Senator Kerry. This was in 1987?

Mr. Von Raab. This would have been late 1987. I mean, any in-
vestigation like that necessarily begins at a very local level, and
it’s only as its significance becomes more apparent to the loCal
people that they start to pass more information up top. But cer-
tainly by the time we are in 1988, 1 was aware that this was a very,
very significant operation, and that BCCI was a very unusual and
probably a highly criminally oriented organization.

It was at this point that I felt that we should, if you will, interna-
tionalize our effor t and w e then put together an operation which
we called ^Op e^rations Sea Chase , or Cash nr Currency, and I spoke
to my counterparts at British Customs and at French Customs and
told them that we had a very, very important case, and that I be-
lieved it was important for international law enforcement that we
craft an international money-laundering team, almost sort of like
Interpol, that would specialize in money laundering. As a result of



13


which we then put together an investigative unit consisting of sev-
( eral British Customs agents, several French Customs agents, and a
I larger number of U.S. Customs agents and Internal Revenue Serv-
' ice agents.

^ This team worked on this in all three countries, although the
effort was obviously centralized in Tampa. And it proceeded and
we developed a case that ultimately resulted in a serious of arrests
that took place in Tampa, in London, and in Paris. I think it was
in October 1988, fairly well covered by the news at the time be-
cause not only was it an important financial — international finan-
cial institution, but there were also a number of other characteris-
tics surrounding it.CThere was a phony wedding and other things,
which basically resulted in absolutely complete national news cov-
erage of this particular matter^)

From that point on

Senator Kerry. This was when?

Mr. Von Raab. My guess is it was the end of 1988, October 1988,
something like that.

Senator Kerry. You said other kinds. What other kinds of
things?

Mr. Von Raab. Well, there was a famous marriage that never
took place. One of the ways that we persuaded some of the bad
guys to come to the United States was to pretend to have the two
t Customs agents who had masqueraded as boyfriend and girlfriend
Nplan to get married, and so all the bankers and all the drug traf-
/fickers planned to come to Tampa to go to this wedding, and they
[ were all arrested at the bachelors’ party the night before.

V Senator Kerry. I take it not at any strategic point in the pro-
ceedings? [Laughter.]

Mr. Von Raab. No, no. As a matter of fact, one of the particular- --
ly bizarre drug traffickers, when he was arrested at the bachelors’ /
party and was told that he was in Tampa, he was under arrest, and(
they put some handcuffs on him and started reading his rights, \
turned to the agent that was arresting him and said boy, this is j
really some kinky bachelors’ party. [Laughter.] ^

But I’m afraid that was the end of the party and he went right
off to jail.

So then what proceeded from that is your normal continuing and
followup investigations following the initial set of arrests, which
took place in Florida, in London — or in England — and in Paris, and
this proceeded through 1988. More and more information was de-
ll veloped, and it was carried out under the auspices of the U.S. attor-
| ney in Tampa whose name was Genzman.

As 1989 came along, it was clear that the bank was highly illegal
in many of its activities and some prominent names started to sur-
face, particularly Noriega, as a client of the bank. At this point
there was a number — or, a number of documents that had been
produced were seized by British Customs which everyone felt would
be very, very significant. Those documents were subject to any
number of lawsuits, as to whether the U.S. Government would get
its hands on them.

At about this point in time, the Treasury Department decided
that I should be removed from the BCCI case, and so I was cut off
from any information.



14


Senator Kerry. What date was that?

Mr. Von Raab. I don’t remember exactly what it was, but it was
somewhere, I would say, April 1989. I am not certain when it was,
and I only

Senator Kerry. At what point did Justice become involved with
Mr. Genzman?

Mr. Von Raab. Justice would have become involved certainly
before the arrests took place in Tampa, so Justice certainly was in-
volved way back in 1988, and their involvement, of course, is a
technical question.

I am sure the agents in Tampa had told Justice about the case
before Justice formally accepted the case as a Federal prosecution,
but they certainly were deeply involved well into the early part of
1988.

In any case, the other surrounding activity that is of some inter-
est is the Customs Service did make some effort during the early
part of 1989 somehow to involve other banking governmental units,
and we held one or two meetings on a low level to try to inspire
the Controller’s office and some of the other sort of Treasury-ori-
ented banking organizations maybe to set up in some cohesive unit
to deal not only with the BCCI effort but also subsequently to es-
tablish a unit within the Treasury Department that we felt would
be useful to deal with this kind of international money-driven, in
terms of money-laundering, crime.

Senator Kerry. Is this still 1989?

Mr. Von Raab. It was still 1989, and I say just parenthetically
that the Treasury Department actually, on the day following my
resignation, announced the establishment of the Customs-designed
center which they called Fin Cen, which I would have assumed
would have played a large role in the further examination of BCCI,
and I think it is up to this committee to find out what exactly Fin
Cen did, but it was Treasury’s special coordinating unit for dealing
with international criminal banking activity.

To bring the story to a close, I was cut out of the BCCI investiga-
tion as I said early or mid-1989, and then the story really comes
from the newspapers as to the fact that there was subsequently a
plea bargain with the BCCI.

I was annoyed at the time of the arrest in Tampa that there
were not more significant indictments brought against higher level
BCCI officers and more significant charges brought against BCCI
as a corporation. At the time, and it sounded reasonable to me, the
Justice Department felt that the evidence that had been collected
up to that point was not sufficient to indict on the basis that we
wanted to the BCCI itself, and they did not feel that our evidence
was sufficient to drag in some of the more senior officials.

I had always hoped at that point that that would happen subse-
quently. It certainly was the desire of the Customs agents that that
happen.

Senator Kerry. Did you note any frustration from the Customs
agents with respect to this investigation?

Mr. Von Raab. The frustration really came more, at least from
what I saw, in 1989. They were quite excited about the fact that
they got some arrests and were starting off in 1988, so there was
an initial flush of great enthusiasm because we really had stum-



15


' bled onto what we thought was — certainly it was in my opinion the
most significant case that Customs had ever worked on in my ad-
ministration, and I was there for 8 years.

In any case, I left the Government at the end of July 1989, and I
can only say that I was very disappointed in the fact that the plea
agreement that was made with BCCI was not what I think it
should have been, and that was tough and holding them up as a
bad example to the rest of the banking community. So— but at that
point I was not in a position to be arguing with Justice, since I was
out in the private sector.

So that is briefly a rundown of how the Government finally got
into the BCCI issue and how it dealt with it at least during my
term and, of course, I will answer any more specific questions that
you or your colleagues have.

Senator Kerry. Before we proceed, let me ask Senator Kasse-
baum, who has not had a chance to have an opening statement, if
she has any?

Senator Kassebaum. No, I do not. Thank you, Mr. Chairman.

Senator Kerry. Mr. Von Raab, what I would like to do is come
back to questions, but I would like Mr. Blum to draw a larger pic-
ture here, and then we will come back with our questions. Mr.
Blum, would you identify yourself for the record?

STATEMENT OF JACK BLUM, LOBEL, NOVINS, LAMONT & FLUG

Mr. Blum. My name is Jack Blum. I am an attorney in private
practice in Washington with the firm of Lobel, Novins, Lamont &
Flug. I did work for this committee over a period of years, first
from 1972 to 1976 doing a number of investigations under Senator
Church, and then at your request I came back

Senator Kerry. What investigations? Just give me a little bit of
background.

Mr. Blum. The most important was ITT. We did an investigation
of international banking which included IOS and Robert Vesco. We
did — probably the most important of all was Lockheed Aircraft
overseas payments. The investigation there created a furor in
Japan.

After that, I went into private practice. I was in private practice
for 10 years. My first encounter with BCCI came during that period
in private practice, when I was working with a private client who
wanted to do a business deal with an affiliate of the bank.

I was asked to attend the meeting where he was seeking financ-
ing from an American bank, and the client brought up the name of
BCCI and the response from the American banker was, we don’t
want anything to do with that bank. We won’t take their letter of
credit. I thought it was odd, but my role at that time was not inves-
tigator. I just stored the information in the back of my head.

In 1987, I returned to the Foreign Relations Committee at your
i invitation to work on the investigation of narcotics trafficking and
law enforcement and foreign policy. During that investigation, in
early 1988, we took the testimony of ^Jose Blandon, and as you’ll
recall, Blandon put a chart up that showed wEat he called Norie-
ga’s criminal empire, and at the center of the chart he had
Suddenly, the information I had parked in the back of my fiead



16


years before became relevant, and I began to seek out more infor-
mation about BCCI.

Mr. Chairman, I understand that the staff has unearthed a series
of contemporaneous memoranda which outlined what 1 found and
who I. talked to, and I’d ask that those memoranda be made part of
the record so that people can understand what was going on con-
temporaneously.

Senator Kerry. Without objection, they will be.

[The information referred to follows:]



17


MEMORANDUM


1U> r,ies

FROM: Jack A. Blum

DATE: September 24. 1988

SUBJECT: Memcon with Amjad Awan

WARNING: THE CONTENTS OF THIS MEMO ARE COMMITTEE SENSITIVE.
DISCLOSURE OF THE CONTENTS OR THE FACT OF MR. AWAN’S
COOPERATION WITH THE COMMITTEE COULD ENDANGER HIS LIFE.


Awan was born in Pakistan on July 30, 1947. He left Pakistan and
travelled to Britain as a political refugee. His wife was born in the U.K. and
that made Mr. Awan eligible for a British passport and British citizenship.

A wan's first banking job was with Mr. Abadi when he was the head of
the United Bank, a bank that Abadi set up before the nationalization of the
Pakistani banking system. Awan left United Bank and was working at the In-
ternational Resources and Finance Bank, a Luxembourg subsidiary of the Bank
of Montreal, when Abadi recruited him to come to BCCI.

Awan's first assignment with BCCI was as the marketing manager in
London, a job which he took on December 7, 1978. His job was ruunning the
main branch of BCCI in London. Awan explained why the bank grew rapidly
in London. He said that at the time it started there were a large number of
Ugandan refugees in London who were being treated badly by the major
British banks. They did not want to continue dealing with them and found
BCCI a comfortable alternative. BCCI became known as ’’the immigrant's bank”,
and the fact that it was owned by key figures in the Middle East and run by
Pakistanis and other third world nationals was appealing.

Awan held the London job for three years. During that time, Mr. Shaik,
his immediate superior, introduced him to Noriega at a dinner party Shaik
gave for Noriega in London. Noriega introduced Shaik to President Royo and
when Royo came to London, Awan was given the job of escorting him around
the city. Shaik had been introduced to Noriega by his friend, the Panamanian
Ambassador to London. Mr. Shaik used his relationship with Noriega to get
BCCI the license to operate in Panama.

At the end of the Awan's three year term in London, he wanted to take
over a branch operation. He was offered a newly opened African branch but
opted instead to take over the Branch operation in Panama.

He moved to Panama in 1981. The branch there had been in operation,
for one year. When he arrived, there was a single office in Panama City and
the deposit base of the bank was about $40 million. Most of the depositors
had medium-sized accounts ranging from $50,000 to $200,000. The depositors
wt*re Lebanese and Palestinian merchants living in Panama. Later, a sig-
nificant part of the Jewish community in Panama came to the bank. Awan said
that many of them had come from Syria to Panama and spoke Arabic.

The bank was almost entirely deposit focused. There was little lending
authority at the branch level. Awan, as the branch manager could not make a
loan of over $50,000 without approval from London. Deposits were another



18


matter. The bank paid the depositors the market rate on their money and
Awan sent the money to the Bank’s central treasury operation in London
where he was credited with an automatic 1% spread.

When Awan arrived in Panama he made a conscious effort to cultivate
both President Royo and Noriega. He said that he was particularly interested
in getting some of the banking business of the Panamanian Defense Forces.
Although Noriega referred some business to him, it was marginal and the ef-
forts to get serious business did not bear fruit until 1982 when Noriega
opened an account.

Awan first came to know Enrique Pretelt through the Christmas gifts the
bank purchased from him for its significant customers. Pretelt owned the
highest class gift and jewelry shop in Panama City. Besides the store in
Panama City, he had two shops at the airport and had the concessions for
Cartier and other famous lin^s of crystal and jewelry.

Although Awan pressed him for account business, Pretelt did not come
to the bank until the bank opened an operation in the Colon free zone.
Pretelt asked the bank for a $100-5150,000 line of credit on his name alone
which Awan granted. He said that although it was well known that Pretelt
was a "wheeler-dealer” the account was satisfactory to the bank.

Awan described the free zone as the smuggling center for all of Latin
America and the Caribbean. Electronics, watches, perfume and other luxury
goods were imported there and then picked up by the families which con-
trolled the smuggling in the important centers of the region. All the sales to
smugglers were for cash and the importers and wholesalers generated a sig-
nificant demand for letters of credit.

Bilonick came to the bank once before the Inair bust to try to get a SI
million line of credit. He offered no security for the proposed loan and when
Awan asked him about how he intended to repay the amount he pointed to his
gold Rolex. Awan said he threw him out of the bank.

. . Later, Bilonick came into the bank, and through one of Awan’s assistants
opened an account with a large cash deposit. He then borrowed the maximum
he could against the deposit and left the bank. When the principal and inter-
est on the loan reached the amount of the deposit, the bank wiped out the
deposit and closed its books on him. Awan says he later learned that Bilonick
had disappeared because of his role in the Inair affair.

Asked why anyone would want to borrow against their just-inade cash
deposit, Awan explained that that was one of the most common transactions in
Panama. The account would be opened in the name of a corporation and the
borrowing would be by the signatory on the account. Although the bank re-
lated the two transactions and indeed used the deposit by the corporation as
collateral, all records of the connection between the two disappeared when the
account was closed out as collateral for the loan.

Awan did not meet Cesar Rodriguez until 1983, when he was introduced
to him by Enrique Pretelt. Pretelt said that Rodriguez was a "business
associate" but never described the business they were in. The first request
was that the bank finance a fleet of limousines for Pretelt who wanted to start
a limousine business in Panama. The bank went forward with that project and



19


Rodriguez asked the bank to finance the construction of a "bankers club” on
the top floor of the Bank of Boston building in Panama City*

Awan thought the idea was a good one and extended the line of credit.

He also financed a number of theatrical events for Rodriguez who, as an im-
presario, brought performers into the country. Finally, Rodriguez came to the
bank to find financing for his bid on a S50-S60 million hydroelectric project.

He was certain that his group would get the contract and that a Polish con-
sortium would be hired to do the construction.

The Polish group never got the contract and the Bank was left with
about $3 million in outstanding loans when Rodriguez's plane crashed in
Colombia. Awan says that after the crash the staff of the bank came to him
and told him that Rodriguez was a gun runner, had a bad reputation and had
been involved in the Inair deal. When he went to Pretelt to complain, Pretelt
said that they were no longer business partners and that he, Pretelt, could do
nothing to help the bank recover the money.

Awan met Mike Harari at one of Noriega's parties. The word in Panama
was that Harari was the Mossad chief for the region. He was believed to have
been assigned to Panama after messing up an assassination effort aimed at the
Black Septemberist involved in. the Munich Olympics j&assacre. Instead of kill-
ing the terrorist, he killed an innocent waiter in Lillehammer, Norway, causing
a significant scandal.

Harari was known to be involved in the arms trade, but all of the in-
volvement was assumed to be official. There were a large number of Israelis
throughout the region all engaged in arms sales and the all dealt with Harari.

Awan became involved in the sale of Contadora island when he was
asked to meet with President Dei Valle in New York after he had been trans-
ferred from Panama to the United States. Del Valle said that he was sent by
Noriega who wanted him to help find a buyer for Contadora Island. Noriega
had made the decision to sell the Island and he knew that Awan knew Gaith
Pharon, a wealthy Saudi who was a shareholder in the bank at that time. ^
. Pharon had an interest in Club Med and the Hyatt hotel chain. Noriega
thought Pharon would be interested in bidding.

Pharon took a close look at the deal and decided to make a relatively
low bid. Awan said that the problems with the proposal were that Contadora
lacked sufficient water, the hotel was run down and at least S5 million would
have to be invested to bring it up to first class standards, there was very
limited air service to the island from Panama and the owner would have to run
his own air taxi service.

Awan said that Aoki was a friend of Noriega and that he bought the is-
land at a price that was too high, not one that was too low.

Awan said that BCCI stayed out of the arms trade. He said that the
bank did not finance weapons deals and that the only proposal he saw regard-
ing a weapons deal was from Iranians who were trying to buy weapons in
Europe and wanted to finance them in Panama.

As Awan described it, cash came into Panama from all over the world
and all the banks that need cash tapped the Panamanian market. He said that



20


BCCI stayed out of the cash handling business because it was too expensive.
He said that an employee of the bank had been approached by Brinks, which
ran the only armored car business in Panama, and was told that for a commis-
sion paid to Brinks, the bank could get cash deposits referred to it.

Awan said that the National Bank of Panama charged a 1% cash handling
fee and the people at the National Bank always short counted the money sent
there by several hundred dollars. Given the low return that Awan could get
on deposits by sending them to London, it made no sense for him to pay com-
mission to get the cash.

The bank did not use armored cars to handle the transfer of excess
cash. Awan carried the cash himself in the trunk of his car and did not
worry about being robbed. He said that Panama at the time was quite safe.

Awan said that the cash business that the bank did was in connection
with the Colon branch, where the cash was handled as an accommodation for
their customers. These customers were the wholesalers and importers who
were selling to smugglers who paid in cash. When asked about the Cuban
business in the Colon zone, Awan said that he knew that there was a Cuban
corporation in operation there and that the bank had one customer who did a
substantial business selling hotel equipment made in the United States to the
Cubans. He said he was unaware of the use of Colon as a place to move high
tech equipment to Cuba around the U.S. embargo.


Certain banks paid higher than market rates for deposits and seemed
far more interested in the ca9h deposits. These included the Swiss, Colombian
and large American banks. The Swiss established regular flights from Panama
to Switzerland to carry accumulated currency out of the country so that it
would not have to be turned over to the National Bank of Panama.


//


i*


The questioning returned to the account General Noriega opened with
the bank. Awan said that he had been asking Noriega for business regularly
when one day Noriega called the bank and said that he wanted to open an ac-
count. He told Awan that the account would be the secret funds of the
Panamanian Defense Forces and that he, Noriega, would deposit the money and
then call Awan to tell him how to disburse it. No Panamanian was to see the
account, it was not to be booked in Panama and Noriega did not want any
paper kept on it.


Awan said that he had to explain to Noriega that an account could not
be opened without some paper and that there had to ber an owner of the ac-
count who had the authority to make withdrawals. Awan drew up appropriate
papers and brought them to Noriega. The papers put the account in
Noriega's name.


The first deposit in the account was mostly cash in an amount around
S200,000. There were some small checks in the deposit. Later, the deposits
were in the form of both cash and checks with most of the checks coming
from the Panamanian Defense Forces accounts and made payable to the bank.


Cash payments were frequently made out of ^he account. Noriega would
call Awan and tell him that someone would be coming to the bank to ask for a
cash payment. The person would then show Awan a note signed by Noriega
and Awan would th^n pay the money out. Most of the people who came for


1



21


these payments were politicans and the first use of the fund was to. buy
political figures in connection with the 1984 Presidential election.

As Awan recalled it, the largest amount of cash to be deposited to the
account was $900,000 and the balances in the account never topped $25 million.

In 1983, the bank issued its Visa card to General Noriega, his wife and

his daughters. Payments on the Visa cards were made from the interest that

the amounts on deposit generated and the balances were automatically debited
to the account. Awan would also use the account to pay travel expenses for
the General and members of his party. He would accompany the General on
his trips and make sure that there was cash available as needed.

On one occasion the account was used to offset a loan on an apartment

in Paris. The total amount of the loan was $400,000 which meant that the
principal amount was somewhat lower. The loan was paid off from the interest
the account generated.

Awan left Panama in 1984. • He had reached the usual end of tour for a
manger and had the additional problem of having allowed the branch to be-
come involved in a multimillion dollar fraud Cmvolving fraudulent treasu ry
checks^ The fraud scheme started with a reputable Panamanian law firm open-
ing an account in the name of a front corporation. The bank dealt with the
law firm because they were reputable and had given the bank good business
in the past. The beneficial owners of the account, BCCI was told, were Hong
Kong Chinese. The lawyers deposited several million dollars worth of Treasury
checks. BCCI refuse to credit them until they had cleared and sent them to
the Bank of New York for collection.

When the Bank of New York notified BCCI that the checks had cleared
BCCI released the funds which were immediately transferred. Almost the day
the funds moved, BCCI \<as visited by Treasury investigators who said that
the checks were fraudulent and that the credit was being reversed. Although
some money was recovered the bank lost substantial sums. When that loss
was combined with the loss on the Cesar Rodriguez loans Awan did not look
too good.

When he was told that he was being transferred to Washington to work
in the representative office of the bank, Noriega called Abadi and told him
that he wanted Awan to stay in Panama. Abadi said that that could not be
done but that Noriega could continue to deal with Awan as his personal
banker. In that role, Awan traveled to Panama once every few months, con-
sulted with Noriega on the phone and accompanied him on his visits to the
United States. ^ Awan says that his main function was to present Noriega
with a statement of his account, showing him what bills were paid and how
much cash had been delivered according to his instructions.

In July 1987, Awan was sent to Florida where he became the marketing
manager for the Latin American and Caribbean. He was based in the Miami
agency. The function of the bank’s agency offices is to take deposits from
rmn-resident foreigners. The money is almost exclusively flight, capital.

*

The nominal boss of the Miami operation was Mr. Shafi. He is old and

has the job because of his long standing relationship with Abadi. Ho had

little understanding of what was going on and holds his position as a



22


figurehead. Patrick Lynch was the man in charge of the three Florida offices.
Mr. Jindani handled administration and personnel management, Marvin Hancock
ran the credit division, and Mr. Hassan was Awan's predecessor as the head of
the marketing department.

I asked Mr. Awan if he had ever been approached to launder drug
money. He said that the bank had a conscious policy of avoiding drug money
and that he was aware of only one situation where that sort of money had
been offered as part of a government sting operation. The bank told the
people involved that they would fill out the currency form on the deposit and
the conversation ended.



23


MEMORANDUM

TO: Senator John F. Kerry

FROM: Jack A. Blum

DATE: October 7, 1988

SUBJECT: BCCI: The Takedown, Background and Talking Points


Background


'ring the next three days more than eighty people as-
sociate.. with the Bank of Credit and Commerce International and
related companies will be arrested for money laundering and drug
dealing. The arrests will be in more than a dozen locations here
and in Europe and have been carefully coordinated.

At the same time the bank itself and a variety of acounts
which have been indentified as drug accounts will be seized here
and in London and Paris. The seizures should total more than $50
million dollars if the police are lucky.


The operation is being run by the Customs service. The Cus-
toms Service, the Treasury Department and the Justice Department
will have a joint press conference. My understanding is that
they are working on snappy graphics and an elaborate show.


This is the centerpiece of a three part drug extravaganza
set for next week. The other peices involve large scale arrests
directed at the Jamaican posses and a roundup of a large smug-
gling organization. All of this is timed to preceed the Thursday
debate .


The Customs operation is the result of a two year sting
operation. Officials of the bank were lured into a house in
Tampa rigged up as a recording studio where a variety of drug
deals were proposed and transacted. The. indictments all. come off
the underoverwork and do not really tie ’the bank back to-'Noriega .
Further, the investigators have a somewhat limited knowledge of
the bank's shareholders, business activities and other connec-
tions .



; the bank began in April of 1987 when we
yolvement in money lai^gg^ing ^ac -
into the public testllmo^^Sf^^Tiose
t is part of the Noriega Criminal
igh Rich and Mike Vogel who said
b^th’e bank by Noriega to launder money.

In Marcfi ^ 1 9 i 1 1 e e voted to issue subpoenas against
the bank and k nulnbexf* -of named individuals. When the Subpoenas


were voted --^he \Jp.Btlde Department asked the committee to delay
its investigation %e15aGse of the undercover operation underway.


1


24


V.e agreed to the delay and told the Department that we did not
want to do anything to endanger their work.

At that time I talked to Joe Magri, the Chief Assistant; i r »
the Tampa office about the case. I told Magr; that we had infor-
mation about Noriega’s invovlement with the bank. I tried to
describe the international operations of the bank and encouraged
the U.S. Attorney to look at the larger international picture.
In subsequent conversations I shared a considerable amount of
background information about the ai»K.

I continued to develop information about the bank through a
former high level officer who was not involved in the criminal
activity but suspected it was going on
not like what the bank was doing.


The attached documents and the deposition should give you all the
information you need to handle the press inquiries. In my veiw
once Awan is arrested all our promises about keeping his material
confidential are off. I plan to call Altman shortly after the
arrests and tell him that all bets are off.

The only piece of information missing from the package is about
two other Pakistanis and two affiliated companies who will be
taken down at the same time. They are Capcom Finacial Services,
Ltd. a commodities brokerage firm with offices in London, Miami
and Chicago, and its President Mr. Akbar as well as a London
based trading company run by Mr. Ali Shaik.

Capcom is owned by the Saudi, Gaith Pharon, who financed Akbar 's
entry into the business. People who know Pharon are certain that
he would know that the company was engaging in illegal activity
because he keeps his investments under very close watch. We have
met with Mr. Akbar on two occasions hfc lied about the % * nature of
his activities but gave us some general background.

Ali Akbar was the man who arranged the billion dollar loan to the
government of Nigeria. He developed close relationships with the
Nigerian government and we believe is involved in the laundering
of heroin money through New York and Lagos.

New Material for the Press

We should release the - details of the bank's dealings with
Noriega, the Awan transcript, and the Noriega hotel bills. You
should ask why the government didn't do more to tie up Noriega's
money.

Note that the Swiss government has decided not to cooperate in
the takedown and complain about the Swiss lack of cooperation.



and quit because h e did


2



25


Note that th~- Saudi 3 who own the bank "are thcT'same 'people who own
First American in Washington. This will not be mentioned bv t.h*
Feds although the press will be very aiware of it.

This bank has close connections with the government of Bolivia
and the top people in that government. The President of Nigeria
keeps his account with the bank and the bank is close to the
Nigerian Government. Note the international implications.

T he bank is uninsured and will most likely fail as the re*»«lt of
seizure and the raid because it will be followed b> run
whiL. the bank cannot meet. Luxembourg does not back up ts
financial instiutions and no central bank will keep BCCI afloat.

Note that key Saudi shareholders were involved in financing
operations for the U.S. in Central America and it is widely
believed they were involved elsewhere. This raises the question
of whether the bank has intelligence connections. (Sources in
the intelligence community have said on an off the record basis
that it does have connections.)

This will be the largest financial scandal in world hisory and
repeats a pattern we have seen ^before starting with Bernard
Cornfeld in I.O.S. followed by Vesco then Nugen Hand Bank and
Bishop Rewald. 10S was a $2 Billion dollar offshore fund, this
is a $20 billion institution.

You must alert the debate preparation team that this is going to
happen and prepare them for it.

We should take credit for fingering the situation and clearly
make the press look at the big picture rather than focus on the
busts and the bad guy transactions.

You are set with NBC for Tuesday and the Today show Wednesday
morning. ,

I would stress the questions it raises and insist oh full inves-
tigation of the related companies and the other connections to
governments .


3



26


BCCI has very strong relationships in China and is said to be the largest for-
eign bank operation in that country. Part of the strength of the relationship is
based on the relationship between the Chinese and the Pakistanis and the political
connections between Abadi and President Zia. MBBsaid that when Abadi had his
heart attack Zia was told about it and left his dinner table and guests to go to the
hospital to be with him.



ships which are kept in Miami because the account executives are paid on a per-
centage of the deposits which the generate. The region mu6t know about there
deposits no matter where they are booked so that the individuals involved can be
rewarded appropriately.

I askedJHmfif the operation wan similar to the Kornfeld-Vesco IOS scam of
the 1970’s and he said that it was. The difference is that the operation has taken
the form of a bank rather than a mutual fund and the techniques for moveing
money have become more sophisticated that the salement carrying suitcases employed
by Kornfeld.

Blum Observation: The Bank appears to be both a major money laundering

operation and to have relationships with the intelligence community. Much of what
was described by Calvo can be verified by getting the Bank records from the Miami
office and from the individuals involved.

The key players are:

2. Bank of Credit and Commerce International Overseas Limited, Miami
Agency 19th Floor 1200 Brickell Avenue

3. Bank of Credit and Commerce, Latin American Region, 15th floor


27


Senator Kerry. But I would like you to describe it yourself at
this time.

Mr. Blum. Certainly. The first piece of luck I had in the investi-
gation was to find a very senior BCCI officer who was in the proc-
ess of disengaging from the bank.

Senator Kerry. When was this?

Mr. Blum. This was in the spring of 1988, probably early March.
He met with me in Miami and said, look, I’m getting out of this
place. You have to understand the business of this bank is dealing
with roughly 3,000 high net worth criminal clients, that most of
the other activity, the branch activity, the myriad corporations, is
not real banking business for them. What they do is fully service
these 3,000 clients.

He went on to say, for example, that they’d bought a bank in Co-
lumbia, and the purpose was to get access to the drug cartel
money, to be in a position to service the drug cartels. He went on
to describe the relationship between the bank and General Nor-
iega.

He identified for me the man in Miami who handled Noriega’s
.-accounts, Amjad Awan. He identified all of the senior staff in
Miami familiar with Latin American operations, and he said that
Noriega’s money was being managed by Awan from Miami and
that there were records in Miami relating to his activities as a
money manager.

Senator Kerry. Now, we are talking about 1988, the summer?

Mr. Blum. We are talking about 1988, the spring of 1988, while
we were then holding hearings on Noriega and money laundering.

Senator Kerry. You committed that to writing at that time?

Mr. Blum. Yes, and there’s a memorandum, and the memoran-
dum reflects roughly what he said.

Senator Kerry. Well, do not let me interrupt. Keep going with
what you discovered.

Mr. Blum. We then — I came back to the committee and request-
ed that the committee authorize the issuance of subpoenas against
the bank and against the named individuals for records relating to
Noriega and other matters. The committee unanimously voted
those subpoenas, and before the subpoenas were in fact granted
and issued I communicated with the U.S. attorneys in both Miami
and Tampa.

The problem was this. We knew there were pending indictments
of General Noriega. We also understood that if we gave a Senate
subpoena with a 30-day return date, if these people were as evil as
we thought they would destroy the documents, and I wanted to
make sure the U.S. attorneys had the opportunity to get a search
warrant, go in and get the necessary paper on Noriega, so that if
there were moneys available that they could reach they could seize
them and they could get the record of his financial dealings.

When I called Miami, I was referred to Tampa. I talked to Mr.
Joe Maigre, who was then the deputy in Tampa, who told me there
was an undercover operation underway, and that was the well-ad-
t vanced operation C-Chase that was described by Mr. Von Raab.

I was not told the nature of the undercover operation. What I
was told was that agents’ lives were in danger, and that he — and
then he was followed up by the -Department, of Justice in a formal



28


way — requested that we defer the issuance of the subpoena until
we got a go-ahead, or else we would jeopardize this very major un-
dercover operation. There’s a memo that discusses that request and
the followthrough to it.

We deferred on the issuance of the subpoena, but I said to
Maigre, look, what I’d like you to do is give me the opportunity to
tell the agents working the case the depth and the seriousness of
the problems with this bank. Based on my conversations with the
witness in Miami and other information I had then gathered, it
was clear that I could add. something.

Maigre arranged a conference call in which I talked to all of the
undercovers and the supervisors working the case. None of them
were ever identified on the phone. I subsequently learned the
names of a few of the people who were in the room, but the conver-
sation was fundamentally with Maigre.

In the course of that, we laid out some of the history of the bank,
the nature of the criminal clientele, and the connections the bank
had. I invited them to come back at me with questions. The invita-
tion was never followed up.

In July — this is now July 1988 — we were beginning to reach a
- point with the subcommittee where it was clear that unless we
began to act quickly to issue the subpoena the work of the subcom-
mittee was coming to a close. The investigation had been voted for
a 2-year period. My commitment with the subcommittee was for 2
years, and we simply had to get on with that subpoena or we
weren’t going to do it.

We called the Department of Justice and the Department of Jus-
tice, for reasons I do not know, said go ahead. There is no problem
with Tampa. I made that call. Kathleen Smith was on another line.
She was working with me. Tampa signed off, and we went forward
with the subpoenas.

As soon as those subpoenas hit Miami, my phone began to ring.
The first call was from a woman in London who wouldn’t identify

herself and said there’s a man you ought to talk to. His name is Ali

Akbar. Mr. Akbar has important information about the bank. Call
him. Here’s his number.

I called Mr. Akbar and he said yes, he did have important infor-
mation, that he had worked for the bank and he had run its cen-
tral treasury operation. I asked, would he be willing to come to
Washington to talk to me about it, and he said yes, he would, if I
would fax him a letter inviting him — and that letter is one of the
documents, I believe, that has been released — he would be over im-
mediately, and 2 days later he was sitting in my office.

Senator Kerry. Let me just interrupt you to say that that letter
will also be made a part of the record.

[The information referred to follows:]



29


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ala' CRANSTON CA1NOAMA
Cnwat^mca j oooo cowNfcncvt
jom*. cl aat. uASSACHusrrrs

• PAUL SIMON ILLINOIS

Timor SANTORO. NORTH CAAOUNA
• . SHOCK ADAMS. WASHINGTON
OAfNSL R MOTNMAM. NfW TORS


JISUMILMS north Carolina

NCMARO 6 IUCAR INOtANA

NANCY L KASSf BAUM KANSAS
ROOT SOSCHWITZ. UIMNISOTA
LARRY RRISSUR. SOUTH DAKOTA
TRANK N M«.*«OwSKl ALASKA
RAM. S TRW j. . vmoiNW
OANNL i IVANS. WASHINGTON
MITCH McCONNCLL KINTUCKT


CIRVIO >- CHMSTUNSONi START omcctor
JAMS R LUCK* M INORTTY STARR OMICTOR


Bnited States Senate

COMMITTEE ON FOREIGN RELATIONS
Washington. DC 20510-6225


Jiily 26, 1988


Mr - " Akbar

Capccu financial Services, Ltd.

9-13 St. Andrew Street

London EC4

England

Dear Mr. Akbar:

Thank you for taking the time to talk to me on the
telephone today.

As I indicated during our conversation, the Senate Foreign
Relations Committee’s Subcommittee on Terrorism, Narcotics and
International Operations has been actively investigating
certain international banking issues. Your name has been
suggested to us by an expert in the field who has told us that
you might be able to provide helpful infomation and insight.

My colleague Kathleen Smith and I are most anxious to talk
to you at an early opportunity and would like to arrange a
meeting at a mutually convenient time and place. We would
prefer meeting you here in Washington, although we are prepared
to meet you elsewhere in the United States or in London.

Please let us know as soon a possible what your schedule
is like so that we can make the necessary arrangements.

We are looking forward to meeting with you and again thank
you for your cooperation.


Sincerely,

Vs -6.fr, ..

Jack A. Blum
Special Counsel



30


Mr. Blum. Mr. Akbar began to talk a bit about the capitalization
of the bank, and hinted that there were very, very serious prob-
lems and that the bank’s high officials were extremely nervous
about the investigation that I was undertaking. He was clearly
trying to find out what I knew, and we did a little bit of that inves-
tigative horse-trading.

Then he said, by the way, I’m a good friend of Mr. Awan, the
man you have subpoenaed, and you may not know this, but the
subpoena was misdirected. A wrong Mr. Awan got the subpoena.
The Marshals Service gave it to the wrong guy, and now the law-
yers for BCCI are trying to tell him to leave the country so he
won’t have to get served with a subpoena. I think that I can ar-
range to have you meet with him. I’m going to go down to Miami
and see if he won’t follow their instructions and whether a meeting
can be set up.

He went to Miami, and I agreed to meet him 1 week later, or
several days later, in New York, and I met him, and we had lunch
at the Intercontinental Hotel. I am delighted to say that I paid for
. lunch, and I later found out that that was a $30 million lunch, be-
cause according to reports that have recently been released, Mr.

f Akbar was paid roughly $30 million not to deliver to the committee
computer diskettes which would have laid out in detail the fraud at
the heart of the bank.

Mr. Akbar arranged the meeting with Awan, and another week

later Mr. Awan came to my home in Annapolis.

At that time, another very interesting thing happened. I have
some very close friends in law enforcement here in Washington
who called me, and they told me that they were close friends of un-
dercovers working in the operation in Tampa, and they wanted to
pass a warning to me that I shouldn’t allow Mr. Awan near my
home, and I said, why is that, and they said these people are mur-
derers, drug dealers, they’re actually dealing in the narcotics, and
you’re taking a great risk.

I had talked to him on the phone. He certainly seemed pleasant
enough, and I thought under the circumstances the risk was worth
it. We met and talked for probably 8 hours at my home. There’s a
lengthy mp mn thaL ^ofts-intQL SOme of what ha -said.

He was clearly playing games. He gave me some information but
, , not all, and in that conversation it became clear that this bank was
• a major criminal enterprise with many, many problems.

He arranged — I told him that I wanted him represented by coun-
sel. I gave him a list of lawyers.

Senator Kerry. Would you share with the committee, perhaps at
that point — when you said many, many problems, a major criminal
enterprise, give us a sense, then, of what you knew about this
bank. What was motivating you then? What kind of knowledge did
you have that said, this is worth taking risks, this is worth pursu-
ing? Why should we care about it?

Mr. Blum. Well, first we had information that it was Noriega’s
bank, which was in itself pretty significant. But then he goes on to
say, look, this bank is tangled up in a wide range of other activities
and it’s dealing with criminals all over the world. That it’s not just
here, it’s in many other places that they are handling drug money.



31


( But on top of that he went on and talked about the ownership of
V First. A mpripan Bank He talked about meetings that were held in
Europe where First American Bank was described as part of the
BCCI empire. He discussed the relationships between BCCI and
various Governments, and all of this led me to believe it was a very
major business.

From there, we made arrangements for him to get private coun-
sel and proceeded to take his deposition, I believe in very early Oc-
tober, and that deposition was released publicly the day after the
takedown on OperationJCdChase.

Senator Kerry. What date would that have been?

Mr. Blum. That probably would have been early October. I don’t
have a precise date. It would have been around October 6 or 8,
something like that.

Senator Kerry. 1988?

Mr. Blum. 1988. This was just prior to the committee really clos-
ing down because of the coming election. Again, there’s a contem-
poraneous memo of the events surrounding the release of the infor-
mation.

By then, I was also getting calls, back channel calls and helpful
calls, from former employees of the Washington office of BCCI, and
here, remember, we had a subpoena out with a return date. An ex-
tension was granted on that subpoena, and the return date was set
for September.

While that process of document collection was underway — and
we were visited by Robert Altman and another partner of his, Mr.
Kovens and assured there would be complete cooperation. They ex-
pressed great mystification at the reasons for our request — while
the search for these documents was underway, I began to get calls
that Mr. Naqvi had flown over from London and the documents
had been shipped up from Miami and were being shredded in the
Washington office, that there was a team of people at work shred-
ding documents that were due us under the subpoena.

I talked to Mr. Altman who assured me nothing like that could
be going on, that they were still trying to find documents, and
again with great protestations of cooperation kept telling me they
couldn’t find anything. The problem was at that point we ran out
of time. There was nothing more I could do. To get contempt, you
need a committee. The committee was not to meet again, and we
discussed various options. The only option was to turn what we
— — . affair^ Ferirrnl nut h oritjf *1

Again pursuant to your request, I contacted the authorities in
October, after the takedown, to say we had more information, did
they want it? They said they’d be back in touch, and there was no
further contact at that point. They never followed up to get the
further information we had.

We then began the process of wrapping up the investigation, as
you will recall, and that included writing a report, cleaning up all
kinds of things, boxing the documents, and getting them to ar-
chives.

In the last week of March 1989, while I was in the process of
cleaning out my desk, literally, I received a telephone call from a
former client of mine who said, I was just talking to this guy who
was very highly placed at BCCI, and he brought your name up, and


32


/


[



he said that your investigation almost brought the house down
there and that there was a full court press to make sure that it did
not get anywhere, and I said, would this guy talk to me?

I arranged then with Customs and IRS to have a hotel room
wired in Miami, to meet this guy to find out what he had to say
and why this was going on. Customs and IRS wired the room. It
was in the Embassy Suites Hotel near the Miami Airport.

There were many sort of funny scenes, one of them when the
agents discovered that Embassy Suites uses cinder block between
rooms, and you can’t drill through cinder block to run a wire
through the wall so they had to figure out how to get the wire
through the wall.

But we then debriefed this guy for 3 days — SV 2 days — and in the
course of that debriefing he laid out in exquisite detail the false
capitalization of the bank, the question of strawmen holding stock,
loans to the strawmen to pay for the stock but the loans would
never be collected, the use of the bank to purchase First American,
National Bank of Georgia, Independence Federal in Encino, CA —
he went through the litany of things you are now reading about,
perhaps not to the final level of the so-called black unit in the
bank, but he was extraordinarily knowledgeable.

I have never identified him. The Customs Service and the IRS
have kept his name secret. He genuinely fears for his life. But in
any event, this man’s tapes were then in the hands of Customs and

ms.

At the end of the 3-day period, I said to him, look

Senator Kerry. Mr. Blum, let me just interrupt you. Just so the
continuity here is right and clear, the tapes were in their hands at
what time, now?

Mr. Blum. Well, this is now March.

Senator Kerry. The debriefing.

Mr. Blum. The last week of March 1989.

Senator Kerry. At that time, efforts to secure the documents
under the subpoena were continuing through Mr. McKean and Mr.
Winer.

Mr. Blum. Yes, and further you will find in the documents that
are made a part of the record I communicated to you the materials
I’d heard about this fellow along with certain other memoranda
which I believe, to protect him, are still being kept confidential. I
do not believe they are part of the package, but you have, and had
at the time, those memoranda.

Senator Kerry. Correct.

Mr. Blum. We then proceeded to have a conversation. This fellow
in the hotel room and I, and I said, look, you’re in a very serious
jam. You were very close to extraordinarily illegal activities. I
think you should become a cooperating Government witness, and
after working on him for about 2 hours — and all of this is on
tape — I persuaded him to go to Tampa with me.

Customs and IRS accompanied us on the plane. We flew up to
Tampa and met with a team that consisted of other Customs and
IRS agents and two representatives of the U.S. attorney’s office.
The agents were quite excited. They seemed ready and eager to go
forward.



j I had lengthy conversations with at least one of the assistants,
j Mark Jakowski. He was eager to go forward. They seemed very ex-
cited by the new information they received and by the evidence.

Two weeks later, off the Senate staff by then, moved out of my
office, I made a second set of arrangements for the — an earlier wit-
, ness who I’d encountered to come back, meet me in Miami and do
' the same thing, and we went through the same routine. This time
we tried a hotel with more hospitable walls, and we flew with him
back up to Tampa where he talked again to further agents, laid out
his story, and agreed to cooperate with the Government as a wit-
ness.

The strange thing is that after that effort to put this all in the
hands of the Justice Department — and I might add that at the time
I went to Miami, at the instruction of the chairman I shared with
the agents working the case materials we had gathered, memos I
had written and other materials we had gathered, so that they
would have a complete picture of what we knew.

I waited for something to happen, and what happened was, I
started getting calls from the two guys I took to Tampa who said,
they’re not following up. Then I talked to the agents, and the
agents said well, we’re very busy. We’re working on preparations
for the trial.

No follow up, and I began to worry that something was very
wrong with this case. In — I now believe it was late May, I decided
that I would bring this matter to another jurisdiction, and that was
New York. Our Federal system mercifully allows for parallel activi-
ty. If the State government fails, the Federal Government is there,
and vice versa.

Senator Cranston. Could I ask what you thought was wrong in
that jurisdiction? Why did you think it necessary to change?

Mr. Blum. I thought that if this evidence was before them and
they had so few agents that they couldn’t follow up on this — and
the other problem was, Senator, they had seized so many docu-
ments from that bank, the agents told me they paid $30,000 to
make one xerox copy of the documents.

When I got to Miami and met the team, they had IV 2 IRS agents
on the case, period, full stop. They had no one reading the docu-
ments, and they were not following up in any way I could under-
stand, and I believe that with that level of effort, they were never
going to get to the evidence that I brought them, and I thought this
was really significant.

So I went up to New York and I talked to Bob Morgenthau and
essentially told him what I knew. On the basis of the same evi-
dence, essentially, and he ultimately communicated with the same
witnesses, he produced the indictment that you read about the
other day.

Senator Kerry. Let me just interrupt you. We had already previ-
ously had Bob Morgenthau into the committee to testify regarding
the New York link, had we not?

Mr. Blum. We had talked to him. We had had him here as a wit-
ness on the issue of money laundering.

Senator Kerry. Prior to that time?

Mr. Blum. Prior to that time, that’s correct. Morgenthau really
did the investigation. He finished out the piece that I couldn’t. He



34


found the additional witnesses, and using a grand jury was able to
seriously subpoena documents in a way that was not possible from
where I sat. I then continued to be interested in this essentially as
a private citizen, and there are several additional pieces of infor-
mation.

Because of my involvement, I became a magnet for people who
were interested in the problem and I got to meet even more people
who were associated with the bank and become involved in more of
the bank’s problems.

As a footnote, Mr. Von Raab tells you about the flap that oc-
curred when certain documents from British Customs became


public in the United States. Well, I was — in the summer of 1989,
July 1989, my wife and I were on our way to Europe for a month’s
vacation and we were literally— the cab was in the driveway, the
bags were about to be loaded, and the phone rang. Customs, Inter-
nal Affairs. We have to talk to you. It is absolutely urgent.

I said, nothing I can do. The plane’s leaving. We are on the way
to the airport. If we don’t make this flight, my marriage is fin-
ished. They said, we’ll meet you at the airport, and sure enough,
two Customs Internal Affairs agents came to the airport, and they
didn’t want to know about what was going on in Tampa or who
didn’t follow up or why.

— They wanted to know, what did I know about how NBC got these
documents that I had never seen, and they were so anxious to find
it out, they held the plane for half-an-hour, and of course my fellow
\ passengers must have wondered who I was, with Customs holding
\^the flight to talk to me while they’re waiting for the takeoff.

I was surprised at the vigor they pursued the leak, and the lack
of vigor they used in the rest of the investigation.

There were additional pieces that began to come clear, and they
became clear because the witnesses continued to talk to me and I


met yet other witnesses. The people who talked to me talked about
a variety of issues that have not yet been surfaced, and I’d like to
tick off a few of them because it may give you some idea of the
directions in which this investigation may go.

First, on the banking issue

Senator Kerry. Just before you get to that, so that we are clear
in the continuum here, during the period of early 1989, that was
the period when the report that the subcommittee put out was
being completed, is that correct?

Mr. Blum. That’s correct.



Senator Kerry. Then subsequent to that, after the committee
report came out, when you were no longer formally assigned to the
committee or part of the committee, you continued, however, I be-
lieve, to discuss matters with staff on the committee?

Mr. Blum. I continued to talk to David McKean and Jonathan


Winer.


Senator Kerry. During that period the committee, I believe, con-
tinued to try to get its subpoena enforced, but was very frustrated
by the inability to get the documents which eventually Bob Mor-
genthau was able to get hold of.

Mr. Blum. I think the frustration about getting documents from
people who say they’re cooperating fully was pretty enormous.
There would be— even in the period of the late or early fall of 1988,



35


I there were protests yes, we’re cooperating fully, and then docu-
j ments we knew existed never materialized. So that was a terribly
frustrating piece of business.

Senator Kerry. Now, what were these matters that you suggest-
ed you had been learning about since that the inquiry should focus
on?

Mr. Blum. Well, I should double back and mention one other
thing. When the plea agreement was entered into by the Depart-
\ ment of Justice in January 1990, 1 was personally infuriated.

\ 1 had taken what I considered to be considerable risk and gone

to, I thought, great length to put serious evidence in front of the
Department of Justice. The agents knew. The assistants well
knew — well knew — that there was more to this case, and that plea
agreement said, in relevant part, that the bank would not be pros-
ecuted for matters then known to the U.S. attorney for the middle
district of Florida.

The problem was that everything on those tapes were matters
then known to the U.S. attorney for the middle district of Florida. I
could not understand that plea agreement.

To this day, I can’t understand that plea agreement and, Sena-
tor, I know you and others went to the floor to complain about it at
the time it was entered, but I think I can now add a piece so that
people can really understand the dimension of my upset at the
time that agreement was entered into.

Senator Kerry. Please do.

Mr. Blum. I also in that period of time heard all kinds of rumors
and reports about myself, and that is a kind of awkward business
to hear.

For example, I was told that lawyers for BCCI around the time of
j the plea agreement walked into one Senator’s office, asked him to
\ do a floor statement saying it was a great agreement, and when he
/said, but wasn’t there some problem at Foreign Relations, wasn’t
/ there an investigator who worked on it, I was told that they said,
| oh, he was fired. He was running off on his own and doing things
v that nobody wanted done, and you shouldn’t pay any attention to
that.

I tried to track that down. I brought that to the attention of Sen-
ator Kerry. We didn’t have a real way to get a handle on it, but it
was very distressing because there were an army of people working
in Washington on all sides trying to say this bank was a wonderful
bank, the people involved in it were honest, good, and true people,
and that anybody who said they were the criminals that I was
making them out to be had to be crazy.

I think the record today speaks for itself on that subject. I think
the record is also clear

Senator Helms. Excuse me.

Mr. Blum. Yes?

Senator Helms. I will direct this question to the chairman and to
you. Did you make a matter of record at the time the identity of
the lawyer and the Senator?

Mr. Blum. I would be happy to share that in closed session. I
have subsequently attempted to contact the lawyer. He denies it. I
don’t want to go into it in public session at the moment.



36


Senator Helms. Well, I do not care whether he is trying to em-
barrass anybody or not. I am in favor of embarrassing.

Mr. Blum. Well, I don’t have enough to be sure that the anec-
dote is absolutely accurate, and I don’t want to embarrass those
people. I would be happy to tell you about it in closed session and
allow you to follow up, but I think there ought to be an opportuni-
ty for the people involved to describe what happened.

Senator Helms. I think we should, Mr. Chairman. Thank you. Go
ahead.


Mr. Blum. The areas that I think are going to open up that are
still totally unexplained are, this business was a factory. This bank
was a factory for the creation of falsified letters of credit.

In the last number of weeks, I’ve had the opportunity to go to
Miami and review files, some public files in the so-called Bilbeisi
cpffee case. Those files indicate that BCCI had a very strange letter
of credit business. The letters of credit only went from one BCCI
bank to another BCCI bank. Instead of charging a half point, which
is a normal bank rate for letters of credit, they were charging 12
points.

’ The letters of credit appeared to be to falsify documents to aid in
smuggling, and false valuation of goods for Customs purposes. The
point being that a letter of credit is sort of a basic indicia that you
have paid what you’re supposed to have paid and the goods that
are supposed to be there are really the goods, because a bank has
to check the box to make sure that the goods are the goods, and
you paid what you’re supposed to have paid. These people would
apparently create letters of credit for anybody for anything.

It turns out that the record of BCCI in that area was brought to
the attention of the U.S. attorney for the southern district of Flori-
da by the attorney in the case being brought about that smuggling
against BCCI, and he offered no response.

Further, a review of the record indicates that no effort was made
to prosecute any of the people involved until an IRS agent almost
at the end of the term of the grand jury himself insisted that a
case be brought against the arms smuggler who was involved in it,
one Munther Bilbeisi, and that has received considerable attention.

There’s a story about it in last Sunday’s New York Times and
there’s no need for me to go into detail.

One other matter that I feel is one that will come up is a matter
of Third World debt. I began to hear that BCCI had gone into the
jbusiness of brokering Third World debt.

That would mean that if a country had obligations that it de-
faulted on, was not going to repay — 20 cents on the dollar perhaps
would be the value — you could find the right middle man and,
working through BCCI, connect with the head of the government
and get them to decide that this particular debt would be paid 100
cents on the dollar, and maybe there would be a swap involved,
that you would have to make an equity investment in the country,
but if you worked with BCCI, the equity investment would be an-
nounced but never made, and BCCI would illegally handle the con-
version of the currency.

That, I think, is very major business. I think it runs to billions of
dollars, and I think the people working this have been so immersed
in the internal fraud of the bank they haven’t begun to look at



37


nondeposit loan relationships or beyond straightforward arms deal-
ing and money laundering.

Senator Kerry. Mr. Blum, we now have records which will sub-
sequently be forthcoming on BCCI and the swaps with a number of
central banks, and there is evidence — you are familiar with the sit-
uation in Peru and other countries. You might want to talk a little
bit and give members a sense of what this really means.

Mr. Blum. Well, the people I talked to at the bank would say,
this was a bank that was very strange, because it needed deposits

all the time, and if you’re running a Ponzi scheme you need more „ Jj

and more cash in to support the whole system of fraud that you’ve <j
generated.

What it meant was that BCCI people would go out and bribe cen-
tral bank officials and high government officials to get them to de-
posit their country’s foreign exchange at BCCI, and in exchange for
whatever amount of money, suddenly the foreign exchange re-
serves of a country would be put there and put to use, and I am
assuming that once these relationships developed with the people
who controlled the central bank, the issue of debt equity swap and
Third World debt became a very simple matter.

There are other issues that are very much unresolved. People re-
peatedly told me that this bank was a product of the Afghan war,
and people who were very close to the Mujahadeen have said that
many of the Pakistani military officials who were deeply involved
in assisting and supporting the Afghan rebel movement were steal-
ing our foreign assistance money and using this bank both to hide
the money they stole, to hide and market American weapons that
were to be delivered that they stole, and to market and manage the
funds that came from the selling of heroin that was apparently en-
gineered by one of the Mujahadeen groups.

This is an issue that has largely been unexplored in public. It’s
an issue that should be. It’s a major issue of oversight.

Senator Helms. Now, Mr. Blum, in executive session, are you
prepared to give us those names of the people?

Mr. Blum. Yes, indeed, and indeed, I have given some of those to
the Department of Justice at length, and again, some of it is in
memoranda in your possession.

Senator Helms. Well, I think we ought to finish this loop in exec-
utive session, because you are getting down to it.

Mr. Blum. I’ll be happy to come back to do that, because I know
you have a very heavy schedule.

But you know, the other areas here are, this organization appar- \
ently — and I talked to one of the people who said it was part of \
what they called their black unit — served as a Federal Express
service for the delivery of various things, and as he described it,
that was weapons, drugs, arms of different kinds, and gold and cur- f
rency, for anyone who wanted it, wherever they wanted it deliv-
ered. What he said tied back to other things people at this bank
had told me.

I think that the Department of Justice now has the obligation to
carry forward with the case, and I am certain, based on what I’ve
heard, that there are a lot of people working on it.



38


I should return to one aspect of the case which I think people
would want to know about. That is, the discovery that CenTrust, a
bank in Miami, was a virtual subsidiary of BCCI.

Senator Kerry. What was that, I am sorry? I missed that.

Mr. Blum. CenTrust, a large savings and loan in Miami which
failed, left the taxpayers with a $2 billion hangover, was a subsidi-
ary of CenTrust.

That may not have been the only S&L subsidiary of CenTrust.
CenTrust was involved in a wide range of dealings, and in those
dealing’s appears to have had contact with people at other S&L’s
through Independence Bank in Encino, and this is an area that re-
quires substantial further investigation.

Senator Kerry. Jack, let me just ask you, because you have
raised a question and I have said let the chips fall where they may
in this thing, and I am going to do that. It is a matter of record
that I knew David Paul previously when I was chairman of the
Campaign Committee. That is a matter of fact. The question I ask
you, and you are under oath, is when did you first learn of any
linkage between BCCI or CenTrust?

Mr. Blum. As I left the committee in March 1989.

Senator Kerry. 1989?

Mr. Blum. 1989, and you will recall I told you when I found that
out, and told you about it.

Senator Kerry. Correct.

Mr. Blum. I recall your shock.

Senator Kerry. Now, with respect to — well, I don’t want to cut
you off if you were going to finish on one other aspect, but I would
like to try to get in some questions.

Mr. Blum. Well, I think the subject is so wide and difficult, I
think it would be useful if I simply stopped talking and turned to
questions, because there are different aspects of this, and I’m pre-
pared to try to answer as much as I can as you feel it necessary.

[The prepared statement of Mr. Blum follows:]

Prepared Statement of Jack Blum

Mr. Chairman and Mr. Ranking Members, and distinguished members of the
Committee: Thank you for giving me the opportunity to testify before the Subcom-
mittee today about my involvement in the investigation of BCCI.

When I left my job as Special Counsel to the Foreign Relations Committee in
March of 1989, BCCI was the most important piece of unfinished business I left
behind. I am delighted that this business is finally being finished.

What I propose to do this morning is to review the chronology of the BCCI investi-
gation, outline what I learned, and detail the steps I took to bring the case to the
attention of the Department of Justice. It is my understanding that the Subcommit-
tee has released the memos I wrote about the investigation at the time it was in
progress. Those memos will add substantially to a full understanding of what oc-
curred.

In all, I have worked for the Senate for 14 years. My first employer was Senator
Philip Hart of Michigan. Six of those 14 years were with the Foreign Relations Com-
mittee — first from 1972 to 1976 and then from 1987 to 1989. My first work with For-
eign Relations was with Senator Frank Church on the investigation of Multination-
al Corporations. The subcommittee he chaired, and to which I was assigned, investi-
gated ITT’s role in Chile, multinational oil companies, international banking — in-
cluding the IOS/Vesco case, and the Lockheed foreign bribery affair.

My first contact with BCCI came in private practice in the early eighties when a
client of mine tried to do a business deal with a BCCI affiliate. In the course of seek-
ing financing we learned to our amazement that major American banks refused to
accept BCCI letters of credit. My client sought a different business partner.



39


I returned to the Foreign Relations Committee after a 10 year stint in private
practice in early 1987. My agreement with the Chairman at that time was that I
would work on the investigation of drug law enforcement and foreign policy which
he proposed for 2 years.

My knowledge about BCCI’s reputation remained dormant until the day Jose
Blandon testified about General Noriega's “criminal empire". He identified BCCI as
part of that empire and told the subcommittee that BCCI was central to his oper-
ations.

When I heard BCCI's name mentioned I tracked down a senior BCCI executive
who was then in the process of leaving the bank. He told me the bank was in busi-
ness to service roughly 3,000 criminal clients in addition to General Noriega, and
that the rest of the bank’s operations were a cover for this, its central business.
Based on his information which I memorialized for the Committee, the Committee
voted to subpoena the bank’s records in March, 1988. '

Before the subpoena was issued I called the prosecutors handling the Noriega case
to be sure that the action we were about to take would not interfere with the De-
partment’s ability to trace Noriega’s money. As a result of the call I was told that
there was an undercover operation under way and the Department formally re-
quested that we delay service of process.

In March of 1988 I called Joe Maigre, the Deputy in the Tampa U.S. Attorney’s
office and told him that we knew that BCCI was Noriega’s banker, we knew who
was handling the money and we knew where the records were. He arranged a con-
ference call with all the agents in the undercover operation. I briefed them fully on
what I knew.

In July of 1988 the Justice Department informed us that they no longer objected
to the subpoena for BCCI. I drafted, and the chairman signed the papers.

While we were waiting for the return of service I was contacted by another
former BCCI officer, Ali Akbar who offered me further information about BCCI.
Specifically he told me that the bank had a “capital problem” and that its accounts
were less than accurate. He also arranged to have me meet with Amjad Awan.
Awan provided more information.

Messrs. Altman and Clifford appeared as BCCI’s lawyers and requested a 30 day
extension on the subpoena. It was granted. They also said they represented Awan
and that Awan could not testify because he was transferred out of the country. I
knew better because I was talking to him.

In October, I deposed Mr. Awan, who was then represented by separate counsel,
this was done without the knowledge of Mr. Altman. At the same time a bank insid-
er called to tell me that documents were being destroyed at BCCI's Washington
office. Unknown to me, Mr. Awan was making similar statements about obstruction
of our investigation to undercover Customs agents.

Unfortunately, no one from Justice ever advised me of this fact.

At the same time we were hearing about the destruction of documents Messrs.
Altman and Kovins were assuring us that they would cooperate fully and that they
were totally surprised by our suspicions.

In October, after the Tampa arrests, we were contacted by another BCCI ex-em-
ployee who told us of the use of the Miami office for drug money laundering and of
his fruitless efforts to get the Federal government to act. His testimony and Awan’s
testimony are part of the Subcommittee’s printed public record.

Ultimately, in March, 1989, 1 arranged with agents of the Customs service to have
a hotel room in Miami wired. Through a mutual friend I arranged to have a senior
former official of the Bank, a man close to Abedi, the banks’ chairman meet me. We
talked for about 10 hours over a 3 day period.

He laid out the entire story. It included BCCI’s ownership of 1st American, the
lack of capital, the loan and stock transactions and the stealing by insiders. I per-
suaded him to become a government witness and flew with him to Tampa. I intro-
duced him to the Assistants on the case and was assured that they would follow up.

Two weeks later I did the same thing with a second witness.

The witnesses and the agents continued to talk to me and it became apparent
that little or nothing was being done to follow up on the allegations. When I real-
ized that I went to the New York county District Attorney, Robert Morgenthau. His
investigation began with the same evidence and the same witnesses the Federal gov-
ernment had in its possession.

I was personally outraged by the government’s January 1990 plea agreement with
the bank which included a clause barring further prosecution for “matters then
known by the Department of Justice”. The agreement precluded the use of the ma-
terial I had furnished the Tampa team in any further case against the bank. \



40


Drug dealers need money launderers. BCCI was the biggest of the launderers. On
the day it was finally closed in the United States, the money on deposit here to-
talled over $900 million. My guess is that little of that was legitimate. The people
who protected this bank on all levels must be held accountable — at least as account-
able as the street dealers, and the “kingpins” who face the death penalty under re-
cently passed legislation.

I will be pleased to answer any questions you may have.

Senator Kerry. Let me ask you an additional question, if I can.
Mr. Von Raab, Mr. Blum has described his reaction with respect to
the plea agreement and you expressed something with respect to it.
Were you in concurrence with his judgment on that agreement at
that time?

Mr. Von Raab. I think it was a shameless agreement. It had a
number of terrible aspects. First, before the plea agreement, the
international banking community had begun to recognize that
BCCI was a pariah, if not a criminal enterprise. They were begin-
ning to stop doing business with BCCI in many cases, and so the
dynamic was such that BCCI was basically being spurned.

When the plea agreement was made, that dynamic was turned
around and BCCI was not exactly welcomed back into, but it reap-
peared as an accepted part of the international banking communi-
ty. It was a disaster in terms of the punishment that should have
been meted out to both the officers of the bank and the bank itself.

The amount, the fine that was levied or the asset forfeiture, de-
pending on how technical you want to get, was only about $15 mil-
lion, which was actually less than the bank had made from its
money-laundering activities. And so the bank didn't even have to
return to the American taxpayer its profits from the illegal activi-
ty.

Now admittedly, this, in relative terms was a big fine, but it was
only with respect to other banking fines, but no one had ever seen
a crime quite like this. So I mean, the Federal Reserve’s suggestion
of $200 million is probably closer to the mark, although I suppose
the real punishment for BCCI should be maybe in the billions of
dollars.

Mr. Blum. If I could interrupt, just for a second, my understand-
ing is that that $14 million was not even the bank’s money. It was
the profit that the agents had created in the drug deals.

Mr. Von Raab. That is what I am saying. It was the profits.

Mr. Blum. It was the profit from the drug dealing.

Mr. Von Raab. Then obviously the individuals who were really
responsible, that is the higher level officials who promoted the
policy weren’t touched by this exercise. They weren’t punished and
then last and no one knows the problems that this would cause and
that is, that the U.S. attorney in Tampa, the middle district of
Florida basically had his arms tied with respect to any further
prosecution of the bank for those matters of which he had knowl-
edge.

So I mean, it was a real triumph by the Washington power brok-
ing establishment. I mean, we talk about a black unit within the
bank itself, I mean, there is a gray unit in Washington that was
working this case for all it was worth.

And let me tell you, whatever the Washington brokers got for
their involvement in protecting BCCI against the Federal Govern-
ment, they earned every million dollar that they received.



Senator Kerry. Now, Mr. Von Raab, I have asked some questions
as we have gone along. I want to get my colleagues into this.

I just want to ask you one other area and then I am going to
pass the baton here, but with respect to the CIA memo, how did
you come to see that memo and what were the circumstances
under which you

Mr. Von Raab. Thank you for asking this. This issue has come
up so many times. When I was preparing in the final stages of the
investigation to announce the BCCI case, and I wanted to get more
information about BCCI, both for my own purposes as Commission-
er of Customs and also to answer questions responsibly to the
press, I rang up the agency. I rang up Bob Gates.

And I told them what we were doing and I asked him what he
knew about BCCI and he quipped that it was known among his col-
leagues, the agency, intelligence services as the bank of crooks and
criminals international.

And that he said that he was certain that the agency had
some

Senator Kerry. When was that? What was the date?

Mr. Von Raab. This would have been September or October
1988. It would have been sometime, a short time before the take-
down.

Senator Kerry. Before the takedown.

Mr. Von Raab. And I don’t remember exactly what it was, but it
was a telephone conversation. It was not a person-to-person meet-
ing and it was a spontaneous act on my part. I am not an old
friend of Robert Gates.

Senator Cranston. Can I interrupt? You started to say, he said
the agency had some, and then?

Mr. Von Raab. Yes, I am sorry. I was backing up. And so he pro-
vided me, he said I will send you a piece that we have done on
BCCI, and shortly thereafter came over to the Customs intelligence
unit, which was typically the way agency documents would be
passed over, I don’t remember it that well, but a five- to seven-page
paper produced by the agency, typical, first-call agency printing
job, that described sort of the origins of the bank, its MO.

Who they thought the owners were at the time and characterized
it in terms that implied that certainly it was involved in lots of
questionable or at least criminal activity.

It didn’t prove to be particularly useful to us as an investigative
tool. It was useful to me because I got a sense of when the bank
was formed, what its corporate structure was and although I think
the information was probably somewhat inaccurate in terms of
who the owners were, it gave me a sense of the type of people that
owned the bank, should I have been asked that question.

And that was the complete loop with respect to the now famous
conversation between Bob Gates and me with respect to this memo
and his knowledge, as he told it to me of BCCI.

Senator Cranston. Did he say anything about the agency’s rela-
tionship with BCCI?

Mr. Von Raab. No. There was no — I didn’t ask him about it and
he didn’t tell me about it.

Senator Kerry. Senator Helms.



Senator Helms. Let us get baek to the British Customs seizure of
a large amount of BCCI documents. What can you tell the commit-
tee about what happened to those documents and the relations be-
tween the Treasury Department and Customs, relative to those
documents?

Mr. Von Raab. Yes. Well, as part of Operation C-Chase, the Brit-
ish Customs Service served warrants on the bank’s offices in
London and collected a fair amount of documents.

The U.S. Government, meaning the Customs Service very much
wanted those documents to further its prosecution in Tampa. We
made those requests. We were aware, because of comments that
had been made by British Customs agents to U.S. Customs’ agents
that among other things there was information in those files about
Noriega. That obviously made it even more interesting and excit-
ing.

The documents were subject to a number of lawsuits in Great
Britain in an effort made by BCCI to prevent the documents from
being given to the United States. As the lawsuits progressed, the
filial result was that the documents were turned over the United
States through the Customs Service.

However, some time before the documents were turned over, I
was prohibited by the Treasury Department from receiving any of
these documents. The documents were sealed up by my own Cus-
toms’ agents. I will admit that they did manage to pull one or two
or three documents which they gave to me as a sort of sentimental
favorite, which did describe in some minimal detail Noriega’s, at
least, some accounts he had.

But the bulk of the documents, which were substantial, I mean,
there were boxes and boxes and boxes, were loaded up, sealed with
some sort of duct tape, what have you, and were sent directly to
the Treasury Department; and I was, although I was not told per-
sonally, the agents were told that I was not to have any informa-
tion on the BCCI case and that was the period in which I was actu-
ally cut out of the case and that was some time before I left the
Treasury Department.

Senator Helms. The staff has just handed me a photostat of a
speech I made on the Senate floor on October 14, 1988, in which I
discussed what you had been doing.

Mr. Von Raab. I wonder if that speech did me any good or
whether it was bad for me.

Senator Helms. It probably hurt you, which was not its intent.

All right. Now on this September 1986 CIA document, there was
a report this morning, I believe it was, that Treasury was on -the
distribution list. Is that right?

Mr. Von Raab. There was a regular routine scheme in which
various intelligence documents were circulated among the so-called
intelligence community, which were certain departments and cer-
tain agencies.

Without confusing the issue too much, the Customs Service was
not “in the intelligence community” because the Treasury Depart-
ment was. And that meant that any highly classified documents
were given to the Treasury Department and it was its job to refer
them to the Customs Service if they felt it was of interest to the
Customs Service.



43


Which meant we couldn’t get documents on a routine matter
from the agency. We could ask for them, but they always went
through the Treasury Department. So it is likely that that docu-
ment would have been given to the Treasury Department in a
normal course of business. Whether it actually was received by
Customs, I don’t know the answer to that because some of the doc-
uments that Treasury got, it didn’t pass on to the Customs Service.

Senator Helms. Willie Von Raab didn’t get it from Treasury?

Mr. Von Raab. I didn’t receive that document from the Treas-
ury.

Senator Helms. Willie Von Raab got it from the CIA.

Mr. Von Raab. I got it directly from the CIA, that is right.

Senator Helms. That is the point. Somebody had been screening
what the Commissioner of Customs is going to see.

Mr. Von Raab. Yes. Without implying anything sinister, there
was a screening process. They regarded it as administrative in
nature, but they could make a judgment as to what Customs would
see.

Senator Helms. Let me ask you, I am not asking you to toot your
own horn, and I know the answer to this, wouldn’t it be fair to say
that Customs and not the Department of Justice came up with the
idea of Operation C-Chase? Didn’t that come from you?

Mr. Von Raab. Well, you are forcing me to be somewhat parochi-
al, but in any Federal prosecution there is an investigative agency
and the Justice Department prosecutes the case. The investigative
agency could be the FBI. It could be DEA. It could be Customs.

In the case of Operation C-Chase, the sole investigative agencies
were the Customs Service and the IRS. Any involvement of any
Justice investigative agencies was purely a matter of assistance,
maybe serving a warrant one day or what have you.

The operation was conducted under the supervision of an agent,
a woman by the name of Bonnie Tischler in Tampa and the in-
volvement of the Justice Department in the BCCI investigation in
Tampa was solely as a prosecuting arm.

Now that is significant, but Customs and IRS were the support-
ive investigative agencies. And so in law enforcement parlance,
this would have been called a Customs case and if anyone had sug-
gested that this was a Justice Department case, they would have
been punched out by the Customs agent that was working on it.

Senator Helms. I just wanted to get that on the record.

Mr. Von Raab. So that is how it works.

Senator Helms. Now while I went over to vote, I was filled in on
your discussion about the phony wedding sting operation.

Mr. Von Raab. That is right.

Senator Helms. Now didn’t the Customs officers risk their lives
in doing this?

Mr. Von Raab. There is no question but that the nature of the
drug traffickers involved, the level of money, influence, power that
all of the Customs agents who were undercover were risking their
lives, because the people they were playing with were mean, tough,
and had killed people before and would they had found out what
was going on, they would have certainly thought about killing the
agents. There is no question they were risking their lives.



44


Senator Helms. They arrested the crooks at this so-called bache-
lors party and it is not a fact that it was a Customs officer, not the
FBI, who arrested the BCCI money launders?

Mr. Von Raab. All of the arrests that took place in the hotel
which was the putative site of the bachelor party were made by
Customs officers with some IRS officers as well.

Senator Helms. Right. But it was the Customs officers who seized
the BCCI documents, right?

Mr. Von Raab. That is correct.

Senator Helms. And when it was all over, did not Customs turn
the defendants and the seized materials over to the Justice Depart-
ment in one little neat package for prosecution? Isn’t that about
the size of it?

Mr. Von Raab. In the simplest, but accurate terms, all of that
information would have been turned over by Customs to the Jus-
tice Department by virtue of its working with the U.S. attorney’s
office who would receive all of these documents.

Senator Helms. Now Mr. Blum, you figured into this thing too,
^rnd you interrupt and fill in anything that I am leaving out.
j Now there were the bond hearings for these BCCI defendants in
r the Tampa money-laundering case in 1988, right?

Mr. Blum. That is right.

Senator Helms. And the assistant U.S. attorney stated that the
defendants had bragged in secretly taped conversations and you
know all about that, that they had the approval of BCCI’s board of
directors to engage in money laundering of drug profits. Is that cor-
rect?

Mr. Blum. Now those tape recordings, and this is something that
I would like to make very clear, there are two different sets of tape
recordings.

One is the set of tape recordings made by the Customs under-
covers in the course of the investigation. Those tape recordings
ended at the time of the takedown. They were no longer meeting
with them and recording.

Those tape recordings make some of the most interesting reading
you will ever pick up, because what you get is the people that this
committee serve subpoenas on talking to the Customs agents about
what they are going to do about our subpoena and what they are
being told by their lawyers.

And if you read that tape you will find that Amjad Awan says to
a Customs undercover that he is being advised by the BCCI law-
yers, in this case, Robert Altman, that he is going to leave the
country for Paris, never to return so that he does not have to
answer the subpoena and talk to us.

Senator Kerry. Would my colleague yield for a moment?

Senator Helms. Sure.

Senator Kerry. In the affidavit which will be made a part of the
record and I will label these, we will leave the record open for la-
beling so they are in consecutive order. But the affidavit signed by
David Burris, who is the special agent with the IRS that you are
referring to, said in his affidavit said, quote: “Your affiant believes
the following statutes have been violated based on the information
in this affidavit: Title XXI, United States Code, Narcotics Conspira-
cy; Title XVIII, United States Code, General Conspiracy; Title



45


XVIII, United States Code, Financial Transaction Money Launder-
ing; Title XVIII, United States Code, Transportation Money Laun-
dering; Title XXI, United States Code, Using a Communication Fa-
cility in the Process of Committing Another Offense; Title XXI,
Travel Act; and Title XVHI, United States Code, Obstruction of the
Senate Investigation.”

And there were subsequent paragraphs referring specifically
thereto.

[The information referred to follows:]



FFI2AVIT


5®jot )


David H. Burris# have been duly sworn, states as follows:


rour affiant states that the facts stated in this affidavit are personally
known by your affiant or personally told to hie by individuals identified
below .

I have been a Special Agent with the Crieinal Investigation Oivision of the
Internal Revenue Service for 11 years* For the past 7 years I have bean
assigned to investigate narcotics aoney laundering cases jointly with the
0. S. Customs Service*

I have been assigned to an investigation referred to as Operation C-Chase
since July 1966* This investigation has involved the U* S. Customs Service*
the Internal Revenue Service Crieinal Investigation Division* the Federal
Bureau of Investigation* the Drug Enforcement Administration and authorities
in the United Kingdom and France. The investigation has utilized a U* S.
Customs Service undercover operation to gather evidence against numerous
individuals and corpor ations* I have been assigned as the Internal Revenue
Service case agent since the ease was initiated* In that capacity I have
t pee personally familiar with the evidence described in this affidavit and
hfcJe. summarized that evidence herein* Since this affidavit is made for the
limited purpose of obtaining a search warrant* I have not set forth each and
every fact learned during the course of this investigation*

Your affiant believes that the following statutes have been violated based
on the information in this affidavit:

a* Title 21* United States Code* Section 846 (Narcotics conspiracy)

b. Title IS* United States Code* Section 371 (General conspiracy)

c* Title 18» United States Code* Section 1956(a)(1) (Financial transaction
money laundering)

d. Title 10* United States Code* Section 1956(a)(2) (Transportation money
launder ing)

*

e) Title 21* United States Code* Section 843(b) (Using a communication
facility in the process of committing another offense)

f> Title 21* United States Code* Section 1952 (Travel act)

3* Title 18* United States Code* Section 1505 (Obstruction of a Senate

investigation )

me following information relates to f inancial* tr ansact ions conducted by a
ranking system* a financial service company and others* and undercover
:ontactS with officers of the banking system* the financia 1 * service company
ind others. Almost all conversations with the officers and others were tape



47


4) AWAN stye BCCI Mill not backdate documents to allow UuaelU to recaiva tha
S725.000 (eS9) frozen In his Panamanian account bocause they fear losing the
bank's charter In Panama if the backdating la discovered by a new government.

b) Uuseila told AWAN that a lot of South American clients are flying money
out of the U. S. to Colombia where they are later using the easn to pay people
in Bolivia and Peru who are actually ■ Involved in cooking their stuff*.

o) awan said that BCCI and five other banka are being scrutinized by a U. S.
Senate subcommittee because of Blatters arising from the NORIEGA indictments.
awan stye that he personally will be looked at because he wae the uanager of
the Panama hr men when the American (Steven KALI SH) saye he wae doing business
with Noriega and had dealings with BCCI. AWAN said he doesn't recognize
KALISH, but It le possible he could have done business with him* BCCI found
out about this investigation because they have friends who are close to the
Subcommittee's activities.

d) AWAN aald that BCCI has bought and controls First American Bank and ^
Nat lona hBank of Georgia through private individuals. The banke were bought.,
through Individual names rather than BCCI because bcci could not buy the banka
and run them due to U. $. law. Former secretary of Defense, Clark CLIFFORD,

le one of the persons who li working on behalf of BCCI to gain control of
these U. S. banke.

e) Uuseila tel la AWAN that one of Uucella'i Colombian clients. Jorge ochoa
sent NORIEGA a coffin with a note. The note said thtt If the ochoa's lost
any of their money In Panama, NORIEGA would be needing the coffin.


71. On March 29, 198B, Musetia and Amjad awan had a conversation in a limousine
in Nsw York City. That convsrsstion included the followingt

a) AWAN aald that the etoek of BCCI It privately held, primarily by groups
of Individuals bated in the uiddle East. The biggest block of stock Is owned
by the Pakistani group of which AWAN it a member. About 20% of BCCl's stock
is ownsd by a Saudi group.

b) The president of BCCI had a heart attack about a month ago. He had his
heart attack a few days after awan spoke with him in New York concerning, among
other things, BCCCt activities with Gsnsral NORIEGA. AWAN wsnt to New York
aftsr travelling to London to give the BCCI board a full report concerning

the bank's transactions with NORIEGA.

c) Last March, AWAN and several of his banking associates spent several days

In Las Vsgas with General. NORIEGA. *


72. On March 30, 1988. Uuseila and Amjad awan mat In Room 1005 at the Sherry


■n


48


directors concerning Saintsea Shipping Limited and Berens Limited.

b) 6ILGRAHI advised Husella to close the Saintsea account at BCCI Paris becav*
the Panama BCCI Saintsea account is in a risk position because checks or. that "
account are given to Husella's clients.


c) Husella explained that one of his clients generates $50 million per mo
BILGRAHI asked Kusella if it didn't bather hie that he dealt with thvse
individuals because BILGRAHI knew thee or suspected thee to have rather
difficult dispositions*


a


15$. On September 8* 1988* Husella eet with Akbtr A. 6ZLGRAHZ at the Hia
BCCI office located at 1200 Bricktll Avenue. BZL6RAHZ furnished Husella
the original articles of incorporation and particular! of directors whie
Husella had provided to BILGRAHI the day before.


155. On Septeeber ?» 1988* Husella eet with Aejad AMAN at the Grand Bay Hotel
in Miami* Florida. They discussed the following;

a) AMAN said that GCCX had received three separate subpoenas from the U. s.
Senate . Subcoeeittee. The bank received a subpoena for records of all
- transactions conducted on behalf of Panaeanian corporations. AHAN said that
he had been subpoenaed individually as had Hr. SHAFI (the General Manager of
the Latin American Division of BCCI). AHAN said he believed he had been
subpoenaed because of his former association with NORIEGA.

. b ) AHAN said that the bank and its attorney* Clark CLIFFORD* advised that AHA
V should be transferred to Paris to slow down the Senate investigation, ahan
said that he could hurt the bank badly if he were to fully cooperate* but he
uill not.

c) AHAN said that he will speak with a friend of his in Panama in an attempt
to remove all but the most essential records of Husella* s account activity
at the Panama branch of BCCI because of the Senate subpoenas.


156* On September IS* 1988* $63*010 in U. S» currency was picked up in Hian.
Florida from Juan T080N (Transaction #102* hereafter: #102). This currency
transported to Tampa* Florida by government agents and deposited to the FNB
account in St. Petersburg* Florida* A total of $63*480 was transferred into
Barkeville Limited account at BCCI Panama by check drawn on the FNB account.
September 16* 1968* Husella was given #1*000 in currency* $2*000 m traveler
- checks* and was told that TOBON's funds had been converted to pesos on the
•black market* in Colombia. These pesos were transferred to the account of
Jairo TQB0N (TOBON's brother), account #350010342 at Banco Canadero Sucurso!
Poblado as follows, a check was issued against account #039-27568-8 of Judi*


52



49


Senator Helms. Mr. Blum, I want you to repeat carefully and
slowly what you said about Mr. Altman and the statement about
leaving the country for good.

Mr. Blum. Well, this was what Mr. Awan told me about what he
was being advised by the BCCI attorneys

Senator Kerry. Would it be more helpful

Mr. Blum. The transcript

Senator Kerry. The transcript speaks for itself and that has
been released to the public.

Mr. Blum. But in addition

Senator Helms. Excuse me, Mr. Chairman, but this is a lot better
than a transcript, to tell you the truth. It will get people thinking
about it. You go ahead.

Mr. Blum. Both the transcript and my conversations with Awan,
he repeated the same thing, which was he was being advised to
leave the country, go to Paris, and stay out of reach so that we
would not be able to serve a correct subpoena on him and he would
not have to testify.

Senator Helms. Advised by whom?

Mr. Blum. By his attorney and the people representing him at
that time, and they said they were representing him

Senator Helms. Who was

Mr. Blum. Robert Altman and his partner, Mr. Kovins and of
course, the senior partner in the firm, Mr. Clifford.

Senator Helms. Mr. Chairman, I am going to finish up. I need
another minute or two.

Now I want both of you to tell me why you think the Depart-
ment of Justice accepted this minor plea bargain and did not
assign a task force to prosecute aggressively the higher officials of
the BCCI?

Mr. Von Raab. That is part of the larger question which this
committee is trying to drive at and why not much happened and
why didn’t much happen for 3 years.

Senator Helms. Thank you.

Mr. Von Raab. So the first indication that not much was hap-
pening was this bad plea bargain. I believe that it was a combina-
tion of a general softening of resolve in the senior U.S. officials by
the incredible pounding they were taking.

The result is that senior U.S. policy level officials were constant-
ly under the impression that BCCI was probably not that bad be-
cause all these good guys that they play golf with all the time were
representing them.

Second, the Justice Department was very, very concerned about
its Noriega prosecution. They wanted the best evidence they could
possibly get to prosecute Noriega. It was believed that BCCI was a
repository for great evidence against Noriega and if you look at the
plea bargain you will see that one of the parts of it was a coopera-
tion by BCCI with respect to providing cooperation to get evidence
that may have been in BCCI against Noriega.

I believe that the Justice Department was blinded by that possi-
bility and they saw the case much too much as a place to collect
evidence in another case and this was compounded by just a lacka-
daisical and sort of worked over, tired Treasury Department and
Justice Department that resulted from the constant pounding it



50


was receiving from the influence peddlers who either had been flat-
tered, bought, or were just plain on contract by BCCI.

Senator Helms. I noticed you were nodding your head.

Mr. Blum. I should say that the way I described

Senator Kerry. May I just say, before you answer the question,
let me just ask you this, has Noriega been indicted for money laun-
dering?

Mr. Blum. As far as I know that is not one of the counts.

Mr. Von Raab. They didn't get much out of this agreement with
respect to BCCI, and so that was a

Senator Helms. I do not know why I am laughing, it is a tragedy.

Mr. Blum. The description I would give of what happened was
high price anesthesia. What happened was, everybody was hired
and we know understand the bill for the legal defense of the
Tampa case, which included a guilty plea by the bank to all but
one count and convictions for all of the individual defendants to-
talled $35 million.

Senator Kerry. Mr. Blum, with respect to those five defendants,
is it your understanding — do you know, not your understanding,
but do you know whether or not their legal bills were paid for by
the bank?

Mr. Blum. All of the individual defendants’ legal bills were paid
for by the bank.

Senator Kerry. So the corporate entity got away and the five in-
dividuals had $35 million worth of legal bills paid for by the bank.

Mr. Blum. Absolutely.

Senator Kerry. Were there some condos involved or something?

Mr. Blum. Well, now what happened was the individual defend-
ants never spent much time in jail prior to their conviction. The
bank arranged to have them live in a condominium in Tampa
which were procured by the bank and they were under guard by
local police in Tampa who were off-duty policemen.

And that kept them out of the prison culture where they would
have quickly come to understand that the only real out for a guy in
the position they were in is a plea bargain, and as a result, it is my
understanding, and I have heard this from a number of people con-
nected with the case, although I cannot say it is firsthand knowl-
edge, that there was never a serious effort to plea bargain the indi-
vidual defendants.

I do not personally buy the Noriega case theory. The Noriega
case theory to me is one that does not hold up, because after all
you had the bank. You had the records, but moreover, we, this
committee, told all the people involved about General Noriega and
who his banker was in March 1988, and no one followed up on that
information.

I find it very hard to figure out why they are disinterested in
1988, in the spring, but so interested in January 1990 that they
give everything else away with respect to the bank.

Senator Kerry. Senator Pell. Let me say first, there is a vote on.
I understand we have back-to-back votes. We have another witness
from the Federal Reserve and I have the Banking Committee
markup. So we are running into problems. But, Senator Pell.



51


The Chairman. Thank you very much, Mr. Chairman. I appreci-
ate tremendously the kind remarks you made during your opening
statement.

And as you said, I was reluctant at first to authorize the investi-
gation that you requested early in 1987. I was uncomfortable at
that time with the idea of departing from the committee’s tradi-
tional role of overseeing foreign policy, getting into investigations
of criminal activities which were properly under the purview of
other committees.

I was persuaded though that the foreign policy implications were
so compelling that we approved the investigation, and provided
substantial staff and resources.

I congratulate you for your hard work in unearthing activities
that are troubling to all of us, and hopefully this hearing and ones
to follow will help to achieve that goal and I look forward to being
of any help that I can as you move into this cesspool and trying to
clean it up.

Senator Kerry. Mr. Chairman, I really appreciate that. I want to
thank you and Gerry Christianson. I know you have taken some
flack on occasion for some of the salesmanship that Jack Blum re-
ferred to in the city, and I appreciate the fact that you have al-
lowed this committee to do this. Senator Jeffords.

Senator Jeffords. Thank you.

Mr. Von Raab, I am sorry. I missed your testimony. I just
dropped in on this committee, and so I am trying to get into the
middle of things.

There is one comment that you made with respect to the plea,
that the USD A down there had its hands tied by the agreement
and the power brokers in Washington, DC.

I wonder if you would amplify what you meant by that.

Mr. Von Raab. Well, as part of the agreement they basically
agreed not to prosecute the bank or the individuals for anything
that was — I am not sure what the exact words were, but anything
which the U.S. attorney there already knew about.

And that was a lot. I mean, most of the documents were there.
And it is not an unusual agreement, where you really have fin-
ished off an investigation and you are trying to tie up loose ends
and you are getting some meaningful cooperation.

But it was unbelievable, considering all of the loose ends and pos-
sible directions in which this could go to agree to exempt from the
prospective scope of any investigation or prosecution all of the in-
formation that was available or was known to the U.S. attorney
there.

It is once again a tribute to the influence team that was march-
ing up and down the Eastern seaboard helping BCCI keep its neck
off the block.

Senator Jeffords. Were they just pushing their influence ped-
dling in Washington or did they also

Mr. Von Raab. No, there was a team in Tampa as well. They
were Washington lawyers, but they were operating there.

Senator Jeffords. Do you remember any of the lawyers names
that were there?


52


Mr. Von Raab. I cannot give you, maybe Mr. Blum knows who
were actually down negotiating the plea agreement. But it is all
the same crowd.

Mr. Blum. I think to give you the flavor of how much was given
away in that agreement

Senator Kerry. Let me ask you a question, were any former Jus-
tice prosecutors involved in that lawyering team?

Mr. Blum. I believe there were a number of them. One of them
was Larry Barcella for the bank; John Hume for Amjad Awan, but
I really don’t know the full range of people who were involved.

Mr. Von Raab. If you were to get BCCI’s roladex for its influence
peddlers, you would have the blue chip list of Washington influ-
ence peddlers.

Senator Kerry. Let me ask you something, sort of getting at
that, and I apologize to my colleague.

Senator Jeffords. That is all right, follow it up.

Senator Kerry. I hate to say this, but what is unusual about
that? I mean, doesn’t every big corporation come to Washington
and hire the biggest and best and hire people who can get them
what they need?

Mr. Von Raab. I don’t know what is unusual about it. I was in
my office when a friend of mine from Hill & Knowlton came to me
and he said, Willie, he said, BCCI wants to hire Hill & Knowlton
and they want me to work on it.

, And he said, what should I do? And I said, don’t work on it, it is
a sleazy operation. Well, the result was. Bob Gray and Frank Man-
kiewicz worked on it. My friend left Hill & Knowlton.

So, it should not happen, and I think that the nature — —

Senator Kerry. Let me ask you a further question. I agree with
what you said, but, and here is the but, what if others didn’t ask
you that question or had not sort of asked that and therefore didn’t
know and along comes a big bank, but they aren’t privy to the in-
vestigations. They aren’t privy to the insider reports. They aren’t
privy to anything you knew and hadn’t had the good fortune to ask
you.

So along comes a client and they ask, gee, this is a big client. It
is a big bank. It is all over the world. Why shouldn’t we represent
it? I am just trying to flesh this out a little bit.

Mr. Von Raab. It happens all the time. It should not happen,
and maybe the BCCI case will be the example that will cause some-
one to change this influence peddling culture, to try to ask some
reasonable questions of the integrity of the people that they are
going to be representing.

I have no problem with someone representing a company on a
policy issue, but this is a criminal matter involving really, really
bad conduct.

Senator Kerry. What you are really suggesting is a kind of due
diligence standard that needs to be exercised, is that correct?

Mr. Von Raab. I think so, yes.

Senator Kerry. I am sorry. I thank my colleague.

Senator Jeffords. Who was running the showdown in Florida
from Justice?

Mr. Von Raab. The U.S. attorney is a fellow, was a fellow by the
name of Bob Genzman, who was new on the scene. He had just



53

come out of Washington and so he was the titular sort of head of
the operation.

Senator Jeffords. He wasn’t the district attorney.

Mr. Von Raab. He was the U.S. attorney for the middle district.
He was the Federal prosecuting, senior prosecuting attorney for
the middle district of Florida. He reported directly, in effect, to the
Attorney General through the normal staff procedure.

But as a practical matter, the Customs Service was running the
investigation up until the point that the arrest took place and then
the U.S. attorneys office more or less took over the lead.

Senator Jeffords. Mr. Blum.

Mr. Blum. Senator, the failure is not limited to the U.S. attor-
ney’s office in the middle district.

Senator Kerry. Mr. Blum, let me just interrupt you for a second
to say that I am going to go vote. Senator Cranston apparently is
going to stay through that and he has some questions and then I
will return. Excuse me. I will ask them to hold the vote for you,
Senator.

Mr. Blum. To finish, there are failings as well in the southern
district of Florida. The southern district has been aware for at least
14 months, possibly longer, that CenTrust, the very large S&L, $2
billion down the hole, the president with a yacht as large as a de-
stroyer, an office worthy of the Emir of Kuwait, this was a subsidi-
ary of BCCI, illegally.

That case has been in the hands of the U.S. attorney for the
southern district of Florida, there is yet to be an indictment.

Senator Cranston [presiding]. Which case is that? Would you
repeat that?

Mr. Blum. That is the case involving CenTrust and the illegal
ownership of CenTrust, of which David Paul was president by
BCCI. They have known all about this. We are now well over a
year and some into it. The Fed was able to put it together. I cer-
tainly heard about it and figured it out.

Everyone else who has looked at the records of a perfectly public,
private lawsuit has been able to figure out. Where are the prosecu-
tors? I can’t understand it. Are there more important cases in the
southern district than a $2 billion S&L fraud tied to this criminal
mess? What he is doing?

When in the southern district, again, this smuggling case involv-
ing Bilbeisi was put directly to the U.S. attorney in 1989. Nothing
was done. And the only way something happened was when IRS on
its own pressed the matter and the public record shows that.

Someone should be asking the IRS what they went through to
get that case on the table. I would call the IRS agent and say, what
were we up against?

Senator Jeffords. Your testimony is terribly disturbing from
both of you and I have got to run over and vote. I think I am a
cosponsor of this amendment, Mr. Chairman. So maybe you can
pursue this line. I will be right back.

Senator Cranston. Mr. Blum, I want to say first that I admire
your courage in taking the risk that you took, knowing that the
sort of people you were investigating wouldn’t like what you were
up to.



54


Was there any time when you felt that you were under surveil-
lance or that others working with you were under some sort of sur-
veillance?

Mr. Blum. Well, the most recent period has been the most inter-
esting. I have a telephone which is one of the more interesting set
of electronic noises you can find anywhere, and that started rough-
ly when the publicity on this round about BCCI started.

But I don t think that I have been directly under surveillance
and I don’t want to overstate any of that issue. I have, however,
heard of an instance where there may have been an effort to get
the book on me, that a private detective may have been hired by
BCCI to investigate my personal life, to see if there was anything
they could find on me to discredit me. And I have made that infor-
mation available appropriately.

And I would be happy to share that again with the committee in
executive session.

Senator Cranston. What is your view or your theory about why
so little was done by those who might have done more to investi-
gate and prosecute?

Mr. Blum. This scandal is an embarrassment to everybody who
has anything to do with it. It is like the cesspool overflowing on the
front lawn. There is culpability all around. There is culpability by
foreign governments, within our own Government.

People know that they dealt with some of the same influence
peddlers and fixers. There is a trail here in which almost everyone
who touches it, says, my God, this is going to wind up sticking to
me. And I think there is a kind of overall sort of distaste for get-
ting into it because they know where all of these different pieces
lead.

Now you could talk about some of the pieces: Iran Contra. These
people were the original bankers who helped establish the bank ac-
counts for the enterprise. They worked in providing arms in Cen-
tral America. They were Noriega’s banker. This reopens a raft of
Iran Contra related questions.

There is the bribery in Guatemala. The generals in Guatemala
and the issue of what happened there. Why was a retired senior
U.S. military officer working with this crook to sell weapons in
Guatemala?

When I look at the range of people and issues and countries in-
volved, I am not at all surprised at the reluctance. Everyone
wanted it to go away. The Bank of England desperately looking at
the biggest scandal in history. How do you explain yourself as a
regulator when you have a bank that for 15 years has cooked the
books, totally cooked the books?

To give you the flavor of that, one of the most difficult problems
I face and everybody else who has looked at paper in this case has
faced, is the paper doesn’t mean anything. That is say normally
you try to follow a paper trail. You match a document with an-
other document.

You try to figure out the corporate structure. You figure out who
was an officer. What these people did was steal the money and
invent the paper. What you would do would be anytime there was
a hole in the balance sheet, you would invent a depositor, invent a
borrower, put the paper in place and hope like hell that nobody



55


would ask questions as to who they were or where they were or
what they borrowed.

And I think that that, the enormity of it is so embarrassing, it’s
not at all surprising that there have been multiple proposals for
packaging all of the bad loans and letting them rule of Abu Dhabi
bail them out, anything, get it off my front lawn.

Senator Cranston. What is your opinion of the handling of the
case by the U.S. attorney in Miami, Mr. Genzman?

Mr. Blum. I’ve told him to his face, I think it is worse than abys-
mal.

Senator Cranston. Do you have a view, an answer to that same
question about Mr. Genzman?

Mr. Von Raab. Well, Genzman had a problem. He was new. He
was scared. He was inexperienced. He had a red hot case on his
hands. He really was nervous about taking any decisions himself,
and he was referring all kinds of decisions to the Justice Depart-
ment.

So I just think that his failed performance was a function of basi-
cally a lack of backbone and experience. So apart from that, I
think he did a good job.

Senator Cranston. Mr. Blum, do you have a further comment?

Mr. Blum. I have a further comment here. I have some docu-
ments which I would like to have made part of the record, a deposi-
tion of Adolfo Calero in the lawsuit in Miami which involves this
arms dealer, Munther Bilbeise in which the bank is a defendant.

And that lawsuit rather outlines some of the connections in Cen-
tral America with the bank, and I would ask that this be made
part of the record.

Senator Cranston. That will be made a part of the record.

Mr. Blum. Also, the general who was down there helping sell the
arms, Gen. James Vought, was deposed in the same case, and I
would like to have that deposition made part of the record.

Senator Cranston. That will go in the record.

Mr. Blum. Finally, the letter that was sent by the attorney for
Lloyds in this case with a copy to Richard Thornburgh, that went
to Dexter Lehtinen and that lays out what ought to be done and
the problems here, and the investigation that should have been un-
dertaken by Dexter Lehtinen.

Now the important issue is this, and I tell you it’s an important
issue for everybody who looks at this case: The records have to be
preserved. There are records everywhere. There are records in
London. There are records in Miami. There are records at the Fed.
There are records, I am sure, in the Middle East and in Pakistan.

People are trying to destroy, hide, and lose those records as we
speak; 3 weeks ago there was a large fire in a warehouse in
London. My understanding is several firemen were injured fighting
it. That was BCCI records.

There are a lot of people who will be embarrassed by those
records. I think every effort should be made, both by this commit-
tee and by the courts to protect the records that exist from destruc-
tion and make sure that the various agencies and committees that
investigate don’t come and find empty boxes.

I would remind everyone in this room that this committee has
already seen what can happen within our own Government. We



56


were in Miami in the spring of 1988. We were approached by a
DEA informant, in fact, Deborah DeMoss of the minority staff was
the one who he approached.

And he had a box of BCCI documents he was trying to remove
from Panama. He brought them to the American Embassy in
Panama City. He sealed them. He came up here independently. He
said if he was caught smuggling them out, they would kill him.

He got to Miami and the DEA headquarters. The box had been
opened. The documents were missing. We raised it in the hearing.
DEA said we have an internal affairs investigation. To my knowl-
edge, the documents were never found, no one was ever prosecuted.

Senator Cranston. Can I add on the matter of the documents,
the records this committee has subpoenaed, a subpoena is supposed
to mean you get what you request, and that we have received as a
result of those subpoenas are uniquely fragmentary and very in-
complete. That’s the sort of response we get from this sort of a
bank.

Mr. Blum. Well, you have to understand that they begin with
the proposition of being complete criminals, so the notion of well,
we will face contempt. What is contempt when you are up for
murder, delivery of weapons, and heroin dealing?

And it really is trivial. That is the least of the crimes you have
to worry about, so why bother sweating a mere contempt citation
from Congress.

Senator Cranston. One more question about U.S. Attorney
Genzman, who in Justice would have been supervising his work in
this matter?

Mr. Blum. U.S. attorneys report to the Attorney General.

Senator Cranston. What did you mean when you said a bit ago
Regarding CenTrust? You said the Fed was able to put it together.

Mr. Blum. Well, the Fed, in its most recent release, has linked
^he two banks and has made it clear, based on the records in its
possession that CenTrust was effectively floated past an audit in
Atlanta by the Home Loan Bank Board with money from BCCI and
in connivance with key BCCI people.

The Fed has that out as a public document. It has been known
for months and months and months and the U.S. attorney is no-
where.

Senator Cranston. In your opinion, did the Fed have a similar
opportunity to be aware of what was transpiring in connection
with the acquisition of First American and Independence Bank in
California.

Mr. Blum. I really am not familiar enough with the situation at
the Federal Reserve to tell you what they knew or what they
should have known, and what in fact they should have done about
it. .

I can say this, I have heard that the Fed has its share of extraor-
dinarily interesting documents, and you might want to ask them
about an audit they did of First American Bank which I have
heard includes information about payoffs in Washington and the
lists that they appear to have seen of people who were paid off by
the bank and where those lists are and who they have given them
to.



57


Senator Cranston. We will most certainly follow that lead. As
you know, when pressure began to be put on Panama’s General
Noriega for his participation in illicit narcotic operations, many of
these enterprises moved south and particularly to southern South
America.

What can you tell us about this and do you make a connection
between this activity and the decision of BCCI and people like Mr.
Pharaon to invest in countries like Argentina, Chile, and Uruguay.

Mr. Blum. I think the Argentine connection, in particular, needs
careful examination. Mr. Pharaon moved south as the money op-
portunities moved south. He has engaged in debt equity swap. He
has been involved in a wide range of dealings, financed by BCCI in
Argentina and I would argue that that merits careful investigation.

I don’t have personal knowledge of it, but I can tell you from the
patterns I have seen emerge, that an investigation would be fruit-
ful.

Senator Cranston. There was talk a few years ago, back in Ar-
gentina, of setting up an offshore banking zone. Do you believe that
proposal had anything to do with Mr. Pharaon’s presence in Argen-
tina?

Mr. Blum. The first I heard the idea, believe it or not, of an off-
shore banking zone was when Robert Vesco tried to persuade
Mu’ammar Qadhafi to open one up. The idea of a place where
there was no bank regulation at all has appealed to international
crooks and con men for a long time.

I have talked to people from Argentina who maintain that that
was a particular project of Mr. Feron’s. That he wanted an interna-
tional bank zone between Paraguay and Argentina and that he
would have an opportunity to move in there.

I really don’t know more about it than the comments I have
heard.

Senator Cranston. There have been allegations that Argentina,
during its military rule, and Libya under Qadhafi, and Pakistan
used BCCI in their efforts to construct a nuclear device. Do you
have any information on that?

Mr. Blum. I don’t, but again, the people involved in BCCI who I
have talked to, have suggested that that was probably the case.
They don’t have firsthand knowledge. What has to happen is this
has to be probed through. We have to get those bank people. They
have to be put under oath and they have to be given the opportuni-
ty to tell the story.

I think we are going to find out an awful lot. Look, I was told in
one meeting about BCCI helping finance and ship scud missiles
from North Korea to Syria; assist in the movement of Chinese silk-
worm missiles from China to the Middle East; handle the financing
and the payoffs involved in the purchase of Chinese armaments in
many parts of the world.

I found it extraordinary that the Government of China, and ap-
parently it had to have been the Government of China, intervened
to block the closing the Hong Kong branch- of BCCI.

Mind you, the Bank of England close it one day and BCCI Hong
Kong waited another several days. And I can’t help but wonder if
that was not to give certain people the chance to get their money
out of the bank.



58


Senator Cranston. I mentioned a bank in California that was in-
volved with BCCI and just for the record, I would like to note that
California and Florida and the District of Columbia, are not the
only States that have banks of a BCCI connection. Other States
where we have discovered that sort of a connection include Tennes-
see, Maryland, Virginia, New York, and Georgia.

This case seems to have far-reaching foreign policy and defense
implications, as well as financial and drug and criminal aspects.

Have you seen any evidence that pressure has been brought to
bear by the State Department in connection with any of these ac-
tivities?

Mr. Blum. Yes, Senator, I know of one instance in which an
agent tried to get permission to travel to a foreign country to inter-
view people about Mr. Feron, and the State Department refused
him permission to go. The State Department gets a final signoff on
the travel of law enforcement people to foreign countries.

There is a second thing which I found utterly astonishing, seren-
dipitously, when I left the committee in March 1989, I was invited
by the U.S. Information Agency to travel to Thailand and Pakistan
to talk about narcotics law enforcement issues.

When I got to Pakistan I found the Ambassador was rather upset
with the idea of my coming because he figured out that I was asso-
ciated with the BCCI matter. My visit then planned to Islamabad
was quickly canceled and I was advised not to talk about BCCI
while in country.

Senator Cranston. Advised by whom?

Mr. Blum. By the USIA people, and I believe there were a series
of unclassified cables that lay that out, but more astonishingly, I
talked in country to State Department people who said, oh, yes, we
know all about the linkages between the government and the bank
and all kinds of things, and it was clear that the State Department
in Pakistan was way ahead of the Justice Department in Tampa.

I would guess that there is a need for closer coordination be-
tween the two.

Senator Cranston. There seems to be a need for a lot more co-
ordination on a lot of fronts.

Do you recall at any time during the summer of 1988 receiving a
phone call from the Ambassador of Nigeria?

Mr. Blum. I did.

Senator Cranston. Could you describe that conversation?

Mr. Blum. He said my President had asked me to call, what can
you tell me about BCCI? It is rather astonishing when you are a
member of the Senate staff and an Ambassador of a country calls
you by name and says, the President of his country called him to
call you.

I have never met the President of Nigeria.

Senator Cranston. Did you, during the same time, receive a
phone call from President Seaga of Jamaica?

Mr. Blum. We had a hearing, and that was. another time in
which BCCI was mentioned, in which one of our witnesses testified
that there had been a lot of money laundering through Grand
Cayman. His name was Lee Ritch, and one of the things he said
was that high officials in Jamaica, particularly Prime Minister



59

Seaga, then Prime Minister Seaga, had done it through Grand
Cayman.

I received an astonishing telephone call from the Prime Minister
himself lambasting me for allowing this guy to make a remark he
made absolutely off the cuff. I think it was to an open-ended ques-
tion from Senator Kerry.

I think now we discover that Jamaica had central bank deposits
at BCCI. The Jamaica state oil company, JamOil banked with BCCI
and a series of people closely connected with Jamaica have been
BCCI’s good customers in Boca Raton.

I think that bears further investigation and discussion.

Senator Cranston. Apparently, the Government of Jamaica had
connections with BCCI too, is that correct?

Mr. Blum. That would be the central bank deposits, yes.

Senator Cranston. You mentioned that a faction of the Afghani-
stan guerrillas, the Majahadeen were involved in heroin traffick-
ing. Could you tell us which of the factions were?

Mr. Blum. Again, this is from people who are involved in it, but
I don’t have firsthand knowledge. It is the faction controlled by
Hecmonti Ar, which is the faction we have supported. There has
been some reporting on that. I think there should be a lot more.

Senator Cranston. Can you tell us anything you know about
BCCI’s relationship, if there is one, to narcotics trafficking next
door to Afghanistan — in Pakistan and in China?

Mr. Blum. It is very hard to say except that the people I talked
to at the bank, again, one who was a participate in the black unit,
said the branch networks in China were established to service the
needs of people who were smuggling heroin out of southern China.
BCCI was one of the very few private banks operating in southern
China.

As far as the relationships in Pakistan, people have said that
that is the core of the matter, and that we should be looking, at an
investigative matter, about the links between the bank, the Paki-
stani Government and the Pakistani military, and particularly the
links with the money we have expended in support of the war in
Afghanistan, through that military.

Senator Cranston. Do you have any indications that the late
military strongman, dictator Zia, tolerated or benefited in any way
from these activities?

Mr. Blum. I have been told that Zia and Mr. Abedi were very
close friends, to the point where when he had a severe coronary, it
is said that Zia left a State dinner to be at his bedside. Beyond that
I can’t offer you anything.

Senator Cranston. Given the revelations that were made yester-
day by Senator Kerry concerning CIA knowledge of BCCI activities,
and looking in retrospect, what do you think was the relationship
between BCCI and U.S. Government agencies, including the CIA
and any others?

Mr. Blum. Senator, I am very terribly reluctant to speculate
about who and which and how. I know that there are many people,
particularly at the CIA, who thought very badly of this organiza-
tion.

Whether there were other intelligence people who were involved
in it is very hard to sort out, however, we can say that there are



60


links back to what appear to have been the old network that was
being run out of the NSC, and whether that continued, whether
there is information in this bank that that network continued, I
can’t answer. But I think that is a matter for serious inquiry.

Senator Cranston. Thank you very much for your responses.

Mr. Blum. I should add one thing on the nuclear weapons issue
you asked me about. The man involved with the bank that is now
being sued in Miami,- Bilbeisi, was in fact involved in an attempt to
sell enriched uranium to South Africa, from South Africa, and that
was supposed to go into a Middle East country, and there are docu-
ments to that effect in the case in Florida.

Now whether the bank was involved in it, I can’t say, but Bilbei-
si’s brother was the branch manager in Jordan and Bilbeisi was
the reason for their operation in Boca Raton, and he was at the
center of whole range of business that the bank was involved in.

Senator Cranston. Was that supposedly going to a Middle East
country, en route to South Africa?

Mr. Blum. No, it was from South Africa to a Middle East coun-
try.

Senator Cranston. Did the Hong Kong and Shanghai Bank have
a relationship with BCCI, as far as you know?

Mr. Blum. I really can’t speak to that. I haven’t seen the docu-
ments.

Senator Cranston. I want to get back to you with one question a
bit later, after I — a joint question for you and Mr. Von Raab, and
Mr. Von Raab, I want to compliment you too on your perseverance
and your diligence and the fine record you have of trying to get to
the bottom of things, and working so hard on fronts like this.

There have been allegations that Argentina, during its military
rule, and Libya under Qadhafi, and Pakistan — this is a question I
put also to Mr. Blum— used BCCI in their efforts to construct a nu-
clear device.

Obviously, given the fact that the administration is now unable
to certify that Pakistan does not have a nuclear device, this charge
is very, very grave. Do you have any information on this?

Mr. Von Raab. No, I don’t have any information on it.

Senator Cranston. In 1983 a Dutch court convicted Dr. Abdul
Quadir Khan, the chief of Pakistan’s nuclear program, on charges
of stealing blueprints for a uranium enrichment factory.

A similar plant was then built in Kahuta in Pakistan. According
to the British newspaper, the Guardian, Khan’s lawyer, a former
Pakistani justice minister, was paid by the bank. Do you know any-
thing about that case?

Mr. Von Raab. No, I don’t.

Mr. Blum. I don’t either.

Senator Cranston. If you do at any point, please say so. In 1984,
Nazir Vaid, and two other Pakistanis were indicted in Houston
with attempting to buy and ship to Pakistan high speed switches,
instruments that could be used to trigger nuclear weapons.

According to the Guardian, the trio offered to pay in BCCI sup-
plied gold. Do you know anything about that?

Mr. Von Raab. That would have been a Customs case. I don’t
• recall from the time when I was there and the case was being con-
ducted, that BCCI came up in that, but in fairness, BCCI was not



quite the household word that it is today and therefore, it may or
may not have.

And I think the best way to look at that would be to ask the
present Customs administration to review that file and see whether
it came up. I am sure if it did it is still in the file.

Senator Cranston. I would like to ask about just two more cases.
In 1987, two Americans, Rona and Arnold Mandel were, together
with a Hong Kong businessman named Leung Yiu Hung, indicated
by the U.S. attorney in Sacramento, CA, on charges of illegally ex-
porting to Pakistan nearly $1 billion worth of oscilloscopes and
computer equipment for Pakistan’s nuclear program.

It's reported that 15 shipments were made between July 1982
and August 1983 through Mr. Leung’s Fortune company in Hong
Kong to a Pakistani company called Aftab Bros. Do you have any
evidence of BCCI’s involvement in that transaction?

Mr. Von Raab. I don’t have any evidence of their involvement or
lack of involvement. I just don’t know the answer to that.

Senator Cranston. I am told there are court records to that
effect.

Finally, a Pakistani born Canadian, Arshad Pervez, was indicat-
ed in Philadelphia of conspiring to export to Pakistan restricted
specialty steel and metal which can enhance a nuclear explosion.
According to court documents, BCCI was involved in financing that
particular deal. Is that case familiar to you?

Mr. Von Raab. The case is, but BCCI’s connection, I am not
aware of it, but it is quite possible. As Mr. Blum indicated, that
was one of the lines of business that they had was basically helping
to finance and make easier deals like that.

Mr. Blum. Senator, the problem that we are all having in deal-
ing with this bank is that, go back to the first proposition: It had
3,000 criminal customers and every one of those 3,000 criminal cus-
tomers is a page 1 story.

So if you pick up any one of those accounts you could find financ-
ing from nuclear weapons, gun running, narcotics dealing, and you
will find all manner and means of crime around the world in the
records of this bank.

And what we have to do is kind of find some structural frame-
work in which to look at the various issues raised by the bank, and
I think one thing that we have to be absolutely certain of is that
the records of these 1,000 criminal clients are maintained and that
is the thing that I think is the most important of all.

Senator Cranston. One final question. You said earlier, Mr.

Blum, that the bank was a factory for falsified letters of credit. I
thought that Mr. Von Raab might have information on the ship-
ments to Pakistan because of the issue of false Customs declara-
tions and the question I would really like to put to both of you is
whether you know of transactions of this sort of nuclear devices or
otherwise that were financed with false letters of credit from
BCCI?

Mr. Blum. I don’t. I just can say to you that the letter of credit
business they maintained was like none other in the banking
world.

Senator Cranston. Do you have any information?

Mr. Von Raab. No.


62


Senator Cranston. It seems to me that it is a logical speculation
that that was the case.

Mr. Chairman, that completes what I wanted to do at this point.

Senator Kerry [presiding]. Thank you very much, Senator, and
thank you for carrying on during the break. I appreciate it very
much.

Senator Jeffords.

Senator Jeffords. I will pass.

Senator Kerry. Senator Simon.

Senator Simon. Mr. Von Raab, you mentioned that you were
squeezed out of the information circle in the Florida situation by
the Treasury Department.

Mr. Von Raab. Right.

Senator Simon. Why were you squeezed out?

Mr. Von Raab. That’s a tough question. They felt that I was
overzealous in my drug enforcement efforts and they were uncom-
fortable with the degree to which I worked with Congress and the
press in trying to push some of the cases.

And so in this case, they felt once again that I was pushing the
case too hard publicly. I am not suggesting that they were opposed
to my pushing the case with agents, but they felt that I was being
too cooperative with the news, too cooperative with Congress. I
don’t agree with them.

I felt and still feel that one way to get good response on a law
enforcement case is to be as cooperative as you can with Congress
and with the press, because that in turn brings more pressure on
that, gets you more agents, makes people more nervous.

And it was basically a fundamental disagreement between Treas-
ury and me as to how the Customs Service should be run. They
wanted it run quietly, on a much more low-keyed basis and I felt
that drug enforcement had to be run at the highest energy level.
We split there, and one of the areas in which we had a disagree-
ment was on the BCCI case.

Senator Simon. Mr. Blum, would you agree with that assess-
ment?

Mr. Blum. I really don’t know what happened. I know that the
public zeal for drug law enforcement tapered off considerably as we
moved into the new administration, and the issue began to get a
much lower profile attention.

I think what happened may have been associated with it, but I
really don’t know what happened inside the Treasury Department.
I have heard that the battalion of lawyers involved went to great
lengths to isolate people who were very hot on this case. I simply
don’t know whether they got to anybody at Treasury.

Senator Simon. Mr. Von Raab, do you know who at Treasury
made the decision to keep you out of the information circle?

Mr. Von Raab. No, but it would have — I mean, I reported to the
Secretary of the Treasury, so it certainly wasn’t some GS-9. It was
certainly, at least him or his deputy.

Senator Simon. It had to be at the very highest level?

Mr. Von Raab. Yes.

Senator Simon. And who was Secretary of Treasury at the time?

Mr. Von Raab. Brady.



63


Senator Simon. Mr. Blum, and I regret, I was over voting when
the two African questions came up, one while I was here, South
Africa. Was this a South African bank that was involved or one of
the branches of BCCI

Mr. Blum. What happened was an arms dealer who was connect-
ed with the bank, whose brother was a branch bank manager, who
was a major bank customer, was involved in an effort to sell the
enriched uranium from South Africa to the Middle East, and that
is in documents which are in the court in Miami.

Senator Simon. And was there any South African governmental
involvement?

Mr. Blum. I really can’t speak to that. I can only speak to the
telexes that this arms dealer had. So what you have to do is look at
that and then go back and see whether it married any kind of re-
ality on the other side.

There is one cautionary note I should put forward here. What we
have discovered in looking at documents is, sometimes these docu-
ments don’t mean anything. So for example, inside the bank you
will find documents saying so and so borrowed $400 million.

Well, they didn’t. The loan documents in the files were created
for the express purpose of creating assets on the books where there
were none, and it’s that kind of thing that is very, very troubling.

Senator Simon. I think you are getting a little additional infor-
mation there. [Pause.]

Mr. Blum. Yes, one other thing I am reminded of by a friend and
colleague is that Bilbeisi sold weapons from Jordan to South Africa
and he has a long record as an arms dealer and he was a close col-
league of the bank’s.

Senator Simon. And this would have been approximately at what
time period?

Mr. Blum. In the 1970’s, 1975, mid-1970’s.

Senator Simon. So it was well before the de Klerk regime?

Mr. Blum. Right.

Senator Simon. And my colleague, while I was over voting asked
about Nigeria. I chair the African subcommittee, and if you don’t
mind

Mr. Blum. Well, BCCI is the largest private bank in Nigeria.
BCCI has more branches than any other bank in Nigeria and BCCI
lent the Nigerian Government $1 billion to get around require-
ments put on it by the IMF.

There are extraordinarily close relationships at all levels of the
Nigerian Government with BCCI. And what I had pointed out was
that I had been called when this investigation was going on by the
Nigerian Ambassador who had been asked to call by the President
to say, what’s happening here? What are you guys doing with re-
spect to BCCI?

I don’t know that that is probative of what his interest was, but
the bank had an enormous set of connections in that country.

Senator Simon. One of the things, Mr. Chairman, that is in-
volved here, there are those in developing nations who said, our
only resource in terms of getting funds for our needs has been
BCCI.

Mr. Blum. Those countries who put their money with BCCI and
their trust with BCCI, I think have been looted and now that the



64


bank is closing, they will see that this was not an assist to the
Third World, but rather a looting of the Third World by some very
rich people who made themselves all the richer, and in the process
of doing that looting, also brought all manner of crime and corrup-
tion to their countries.

And I don’t think this was any benefit to the Third World at all.

Senator Simon. No question about it, but what it means is that
by our failure to be diligent and do what we should, we have im-
posed an additional penalty on the poorest of the poor in the world.

Mr. Blum. Absolutely, and I will point out one other thing, take
a country like Argentina, Argentina has more external assets, that
is to say, Argentines hold more wealth outside of Argentina than
Argentina owes to all of the banks it’s borrowed from.

And the story there is that Argentina’s economic development
has been starved by flight capital. When a bank like this comes
along and says, we will help you get your money out, we will move
all the money you want by suitcase or otherwise. We will convert
the money. They are destroying the opportunity of that country to
develop and that is exactly what has gone on in places like Argen-
tina and Peru and all over Latin America.

And we have been here before. The same thing happened with
Robert Vesco and IOS and the history of Latin America has been
major banking institutions facilitating the movement of capital out
of the continent and leaving the continent with the begging bowl
and the World Bank and other public institutions which have to
make up the difference.

And I think a lot of this has to do with bank regulation and bank
policy.

Senator Simon. And the net result is that people who are desper-
ate, you mentioned Peru for example, massive economic problems
there, and those problems have been compounded by our lack of
diligence here.

Mr. Blum. I think that that is very much the issue, and we owe,
we owe these countries and ourselves, the obligation of regulating,
because they certainly couldn’t regulate BCCI.

Senator Simon. I have no further questions right now, Mr. Chair-
man.

Senator Kerry. Thank you very much, Senator Simon. Senator
Jeffords.

Senator Jeffords. No further question.

Senator Kerry. Senator Cranston. ■

Senator Cranston. What can you tell us about the knowledge or
lack thereof of BCCI activities in the Third World countries by the
World Bank and IMF officials?

Mr. Blum. Well, one of the areas that is going to have to be ex-
amined carefully is BCCI maintained a huge representative office
in Washington. That representative office spent a lot of time deal-
ing with the World Bank.

I am very curious about the nature of those dealings. I don’t
know what was going on there, but I would certainly like to. I
know too that the BCCI people spent a lot of time cultivating the
U.N.

Perez de Cuellar was flying around in their airplane when the
U.N. couldn’t afford to transport him in appropriate style, it was



65

the BCCI jet that carried him around. The U.N. lost money in
BCCI.

They obviously got very close to the major international organi-
zations and institutions, and the question is, to what end and for
what purpose?

Senator Cranston. Let me finally put this question to both of
you. The premise first, it is bad enough that we have this corrup-
tion and criminality in financial circles in our country and else-
where. It is bad enough that many innocent individuals have lost
their fortunes or a significant part of their fortunes by making ill-
advised deposits in this bank.

It is worse that poverty in the Third World countries which can
contribute to world unrest and grave dangers has been aggravated,
not reduced, by the activities of this bank. It is still worse that one
of the worst plagues of the human race right now, narcotics, has
been served to spread by this bank; and finally, it seems to me that
it is worst of all that the grave threat of nuclear weapon use has
been enhanced by BCCI’s involvement and transference of nuclear
technology from one place to another and one country to another.

What advice can the two of you give us as to what policy and
regulatory steps we should try to institute to reduce, if not abolish,
the danger that this sort of thing can happen again?

Mr. Blum. I would start off by saying that we are now confront-
ed with an extraordinarily serious question, and that is, can the
system cleanse itself? Will there be the will to follow these trails to
ground? Will there the resources?

Will the various prosecutors and agencies of Government in fact
cleanse themselves and not be so embarrassed by past errors that
they find it difficult to really do the mop up and the clean up?

I think that is the first question. The second one is we can’t go to
sleep at the switch. You can’t tell the regulators, look, this is busi-
ness, we are not going to look at it. You can’t walk away.

Banking is the kind of business which is almost like a religion,
you believe in money. You believe in banks. You believe in the way
it works, and when someone comes along and perverts the entire
system, the only protection you have is government and regulation.

And I must say that this country now has been given the oppor-
tunity to learn that lesson, painfully, over a long period of time.
We have had S&L’s, commercial banks, insurance companies, and
now this which just for ugliness surpasses everything, not dollars,
but for sheer ugliness surpasses anything else we have seen.

You can’t not mind that store.

Senator Cranston. Mr. Von Raab?

Mr. Von Raab. Well, there are two other points that strike me.
One is that regardless of the slowness of law enforcement in re-
sponding, it is quite clear that they didn’t have a mechanism or
anything else with which to deal with this.

I mean, we have basically relied on the press, Congress, everyone
else to develop information, and yet, the Government itself, you
would think, could start to pull together some of that information.

I, in a small way, tried to establish this very minimal interna-
tional money-laundering team which we called Operation C-Chase,
and the Treasury Department began to fumble with the issue of a
central repository for collection of data, passage of data back and



66


forth, and communication among those agencies that have respon-
sibility for dealing with international financial enterprises.

Someone has to breath some life into that because the problem
with international financial transactions is more and more signifi-
cant with respect to any activities, criminal activities, whether
they be the bilking of Nigeria’s treasury or whether they be arms
deals from one country to the other.

And our executive branch doesn’t have any legitimate cross-de-
jartmental coordinating effort. I think Treasury is on the right
ine, maybe that is the right place to put it, but someone has got to
;ry to pull together a cooperative effort, collect the data. And
;his — I don’t mean it is expensive, I think it is more a matter of
l eadership on the part of some cabinet secretary to pull this togeth-
er.

Senator Kerry. Well, is FinCen not envisioned as that entity?

Mr. Von Raab. It is supposed to be, but all it has done so far is
rent some space and it hasn't gotten the cooperation of anything
outside the Treasury Department. It has not received any leader-
ship that I have seen from anyone other than the people that work
directly in it.

So I think that should be looked at as to why we don’t have
something that could at least pull some of this that you are trying
to pull together — I mean, it’s very nice that you are doing it, but
really it should be the executive branch.

And then second, I just think it’s a real problem in Washington,
and that is foreign influence being brought to bear on the execu-
tive branch, whether it’s a matter of tariff rates on trucks coming
into the United States or whether it is a matter of a foreign finan-
cial enterprise being protected by hiring lots of important people,
that just shouldn’t happen.

We should be able to take care of our own affairs without having
hired guns, paid enormous sums by people from outside the United
States who desire to bilk or defraud or in some way, to pull the
wool over our eyes.

And I don’t know how you do that. I don’t know if you do that
by

Senator Kerry. Let me ask you a question on that, if I could
interject. I mean, the marketplace, I am coming from a strange
place, but the marketplace is the marketplace and people have the
right to push their ideas and hire people to push their ideas and it
has always been a reality.

Is that the problem, per se? Is it the problem that those who are
there to serve as the watchdogs, those who are there to regulate,
those who are there, are not doing that part of the job?

Mr. Von Raab. The problem is that in too many case those who
are regulated are afraid of the influence that the people who are
attempting to change their minds have. I mean, if Bob Gray or
Frank Mankiewicz goes to somebody and talks about something,
they realize that they are going to be at dinner the next night at
the White House.

Or if Clark Clifford goes to see somebody, he realizes that at the
next important Democratic meeting, Clark Clifford will be there
and he is afraid of what is going to happen. And I don’t know how
you do it. I hesitate to say that you should prohibit it.



67


But someone should give a strong talking to the men and women
in Washington who we look up to but who are doing nothing but
selling their reputations to foreigners who want to make a quick
buck.

Senator Kerry. Senator Simon. I am sorry, Senator Cranston.

Senator Cranston. I would just like to thank you both, you are
two remarkable Americans.

Senator Simon. I join in that sentiment.

But let me ask you this, you said we need a watchdog. Ultimate-
ly the watchdog on law enforcement in this country is the Justice
Department. Do we need some restructuring there? Has the Justice
Department done an adequate job in this deal?

Mr. Von Raab. I didn’t say we needed a new watchdog. Senator
Kerry said we needed a new watchdog.

Senator Simon. Someone did, all right.

Mr. Von Raab. I don’t think the fundamental structure is wrong.
I just think that somehow the concept of public service for its own
good has got to be brought back and we cannot continue to hold
people in high regard because they are rich and they are powerful.
That in turn converts to influence, and that in turn converts to
venal and corrupt activity.

And maybe that is the — that is what’s happening in Washington,
and if you look at the important names who have assisted BCCI in
this, they are all embarrassed, but I wonder if they would do it
again.

Senator Simon. But if it is not a structural change that is
needed, what you are saying is clearly, there is a change in will
that is needed.

Mr. Von Raab. That’s right.

Senator Kerry. Gentlemen, let me ask you, if you will, we have
gone longer than we thought we would. We are going to put, I need
to ask you both, Senator Brown does have a few questions.

We would like to tide you over to 2 p.m., if we can, for a brief
period of time and then we will do Mr. Mattingly and I think we
are going to have to adjust on the question — and Mr. Taylor.

And we will have to adjust on the question of the subsequent
portion of the testimony.

Senator Simon. I think Mr. Blum was going to answer me.

Mr. Blum. I just had one point I wanted to add to your question
about what do we do?

I worked with Senator Kerry, it was his amendment on the issue
of drug money laundering and how we were going to get some

international agreements that would begin to reign in the money-

laundering operations.

And I have watched how the State Department has danced and
waffled and woven and failed to deliver up on the necessary agree-
ments that would begin to get a handle on this.

Then the question is: How do you hold them accountable? What
do you do when an administration says, hey, that is the law but we
don’t care, we are not going to do it. Or, we will do it so slowly, it’s
largely irrelevant.

We have got to find some answer to that. There has got to be
better accountability, and I don’t know quite what the answer is.



68


but it’s at the heart of the system of checks and balances, and right
now, Congress is losing that one.

Congress doesn’t have the tools to force accountability and bring
people to book when they don’t deliver. You can hold a hearing.
You can embarrass them for a few minutes, but it has gotten so
bad, they don’t even come to hearings anymore.

Senator Kerry. Let me just say to both of you that I appreciate
your testimony very much. You will be back at 2 p.m., and maybe
return on another occasion, depending on developments here.

The committee will be following up, as I said, with Mr. Clifford,
Mr. Altman, and others in September. But let me just say one
thing, you know, I know, personally that what you have said is dif-
ficult.

I guess you sort of cast caution to the wind and it’s no fun being
a target. And both of you, by being direct and being blunt, are obvi-
ously not going to win friends and there are those who are going to
try to attack you and attack the process and so forth.

I want to express my appreciation for your bluntness. We need
some bluntness around here, and we need people who are willing to
tell it like it is and do something about it.

And I think that both of you serve notice to people that individ-
uals actually can make a difference if they are willing to take
things on a little bit, and I think you have done that over the
course of time.

Mr. Blum, your perseverance and efforts to take this to the dis-
trict attorney and to stay in touch with Us and to keep prodding
and pushing have been important, and I think you deserve enor-
mous credit for the courage that you displayed in the course of the
investigation, the risks you took on occasion, and I know about
those personally from that time.

Mr. Von Raab, I know exactly what happened to you, and I was
here on this committee and I was chairman of the Narcotics and I
was very much involved in the early effort of the drug war and I
helped draft the two drug bills we passed, and I have seen what
has happened to that effort.

And yoii have been willing to suffer the slings and arrows by
virtue of your decision to speak up and that is painful, but it is also
part of the best of our process, and I just want to express my appre-
ciation to both of you for it.

And thank you for being here for this morning. I look forward to
when Senator Brown has some questions that he wants to ask you
this afternoon.

[Whereupon, at 1:03 p.m., the subcommittee adjourned, to recon-
vened at 2 p.m., the same day.]

AFTERNOON SESSION

The subcommittee met, pursuant to notice, at 2:01 p.m., in room
SD-419, Dirksen Senate Office Building, Hon. John F. Kerry (chair-
man of the subcommittee) presiding.

Present: Senators Cranstoh, Kerry, Simon, Wofford, Kassebaum,
Brown, and Jeffords. /

Senator Kerry. The hearing will come back to order.



69


We are waiting for Senator Brown who said he had some ques-
tions of Mr. Blum and Mr. Von Raab.

What I would like to do prior to the arrival of Senator Brown, if
I may, Mr. Blum, is ask you a couple of questions.

I would like you to give us a sense of what you think, No. 1, the
foreign policy implications are of this bank. What does this mean
in general terms. And second, overall, I tried in my small way at
the opening of the hearing to say what I think this means to
people. What do you think this means to people? Why should
people care about this?

Mr. Blum. The first and foremost policy message is a straightfor-
ward one that we worked on for a number of years which is the
narcotics problem. This bank provides a worldwide infrastructure
for narcotics dealers. And we're talking about cocaine, heroin, the
drugs of choice in different places.

And what this is a support system for crime on the streets in the
United States and the death and destruction of a generation of
children. In that sense, it’s an immediate domestic issue.

In the larger sense it has implications for democracy everywhere
because when you have a group of people running around the
world corrupting fragile governments in places that are having a
hard time, what you get is not democracy, what you get is a kind of
Mafia government. And that doesn’t do anything for average
people. It destroys the faith of people in democratic institutions.

The issues with respect to development, the perversion of inter-
national lending schemes to support Third World development, I
think is another major foreign policy issue.

And finally, there is an overwhelming domestic policy issue. I
can’t imagine why the United States of America would allow key
people who are connected to the intelligence services of foreign gov-
ernments to own a major bank in Washington, DC. Banks are noto-
rious places for the collection of intelligence. And when you own a
bank you can get to see the bank records of all the depositors. You
get to see who’s vulnerable. You get to be in a position to put
money in the right places. I think that is an aspect of this that
hasn’t been looked at.

In other words, was this a political influence peddling scheme in
Washington by foreign governments? We should know that.

Mr. Von Raab. Senator, may I just add one point to that?

I know that the Congress has attempted to deal with this issue a
number of times and this case may give it a renewed basis for ad-
dressing it again. And that is there really is no effective interna-
tional cooperative mechanism for dealing with international bank-
ing crimes. Each country has its own banking regulators. .They
don’t exchange information.

Once a bank transaction has left the shores of one country,
whether it be in cash or whether it be by virtue of a wire or some-
thing else, that information is effectively lost to the regulators or
the law enforcement people of the country from which it went.

And I know that this steps right into the issue of banking as reg-
ulated or as managed by one country versus another, different pri-
vacy rules, and the fact that banking is central to business.

Banking is also central to crime. And somehow the State Depart-
ment, the Treasury Department, and the Justice Department have



70


/

/

got to get together in some way and get together with their respec-
tive pieces in other countries and work out some schemes in which
we have effective law enforcement and regulation of the kind of
international transactions that can lead to the creation of the
BCCI’s of this world.

Senator Kerry. Well, do you not think that the so-called Kerry
amendments were an effort to try to force exactly that?

Mr. Von Raab. I was an internal supporter of the Kerry amend-
ments. That’s why I never testified on the Kerry amendments.

I think that there are legitimate concerns about the Kerry
amendments, but I think the balance of interest would have to sup-
port the Kerry amendments, yes.

Senator Kerry. Does not the change in the marketplace now, the
rapid-fire transfer of trillions of dollars, the movement of capital so
quickly between countries, the increasing relaxation of the lines
that used to be both barriers as well as just demarcation points be-
tween countries, all of that is being erased now.

So in terms of international law enforcement efforts, in terms of
fighting lawlessness internationally, and the kind of thing we have
seen, we have seen whole governments taken over by criminal en-
terprises or nearly taken over in recent years. Banks and the way
in which capital is moved are integral to that.

Mr. Von Raab. Absolutely.

Senator Kerry. Therefore, it seems to cry out, BCCI seems to
say, boy, here is an example of how, if all of you want to maintain
the sovereignty of our governments and the sanctity of your laws,
you better have a means of cooperating and of having some inter-
national standards that people adhere to or you are always going
to have somebody out there who can subvert that. Is that accurate?

Mr. Von Raab. And I watched the fumbling that went on when
your amendments were being discussed and the administration was
attempting to oppose them. They were desperate to get even a level
of cooperation in discussion that they could describe to the Senate.
They weren’t even coming close to getting a real level of coopera-
tion in a practical sense.

But the other countries were so unwilling to unbend and to open
up some of their systems to us that even the preliminary discus-
sions were almost fruitless.

Senator Kerry. We held you over here for Senator Brown. We
have the Federal Reserve waiting and a number of other witnesses
waiting. And we really need to try to keep things moving.

So, Senator Brown, I will yield to you.

Senator Brown. Mr. Chairman, thank you. I particularly appre-
ciate the opportunity to chat with these witnesses.

And I might say I think I share with you a shock at the kind of
revelations that have come out today.

Mr. Blum, you reported incidences of people at the bank shred-
ding documents that were under subpoena. Can you tell us who it
was at the bank that was shredding the documents?

Mr. Blum. My information, which was provided by one of the
people who worked at the Washington office, was that documents
had been boxed in Miami, shipped to Washington, and the people
had come over from the bank’s London office and were systemati-
cally shredding them.



71


I confronted the attorneys for the bank and they said no, no, it
couldn’t be and assured me that was not the case. On the other
hand, I now learned that many documents that we asked for then
are suddenly being found piecemeal and haltingly. And it’s taken
Senator Kerry’s staff years of badgering the bank to ecker out
what remains of what wasn’t shredded.

Senator Brown. Can you tell us who was it that told you this
story?

Mr. Blum. Yes, it’s one of the witnesses whose names are
blacked out in those memoranda.

Senator Brown. So I take it that is available to the committee?

Mr. Blum. Yes, it is.

Senator Brown. I take it that means it’s available to follow up
on?

Mr. Blum. Absolutely. And it was given to Justice at the time.

Senator Brown. Why was it that it was blacked out?

Mr. Blum. It was blacked out because the man involved was not
an American, is not living in the United States, and is in a country
where this issue is extremely hot. And he has a genuine and well-
founded fear for his life.

Senator Brown. Did you pass this information on to the Justice
Department?

Mr. Blum. Yes.

Senator Brown. Who was it you told about it?

Mr. Blum. Well, where do we begin? I worked first with a series
of Customs and IRS agents, Steve Cook, Bob Moore, Dave Burris. I
talked to the U.S. attorney.

Senator Brown. Are these all Customs agents?

Mr. Blum. Burris is IRS. Cook is Customs. Moore is Customs.
And I want to say and I think the record should clearly reflect this,
I have rarely worked with people of such courage and skill. And I
was amazed frankly that some of them would stay on the job, given
the stress and the salary level and the things they were being
asked to do. I have no fault at all with them.

Senator Brown. Mr. Chairman, the reason I want those on the
record is I would assume one of the things that is going to interest
us is to follow this chain where significant evidence is involved.

Mr. Blum. Then I also dealt with the assistants in the Tampa
office. I dealt directly with Mark Jakowski and an assistant by the
name of Rubenstein.

Senator Brown. And they were advised of this destruction of evi-
dence under subpoena?

Mr. Blum. They were. In fact, if you will recall, there is an affi-
davit from Burris about the problem with the witness being asked
to leave the country. So I would say there was a real understand-
ing. There was an effort to tamper with this investigation.

Senator Brown. But just to make the record clear, you conveyed
that to these two gentlemen in the Tampa office. And as far as you
know, they did nothing to follow up?

Mr. Blum. I have to say too I can’t be precise as to whether the
shredding incident by itself was, but certainly problems with the
documents were.

I just don’t recall at this point precisely what I told them. But
they knew it was a serious problem with the investigation.



72


Senator Brown. What about the two witnesses that were de-
briefed, I believe you said in 1988? You mentioned that both Cus-
toms and IRS officials had received that information.

Mr. Blum. Yes.

Senator Brown. Can you tell us who that was?

Mr. Blum. Well, the two bank people who were debriefed, you
have the identity of one of them. Both of them are under

Senator Brown. I meant the agents for the IRS.

Mr. Blum. Oh, the agents? Again, it was the same people who set
up the tapes and ran the tapes. And most tapes, by the way, have
now been turned over to Robert Morgenthau and I believe are
under the — are grand jury material.

Senator Brown. I meant the names of the agents.

Mr. Blum. The names of the agents? The same ones. It was the
same team.

Senator Brown. Can you tell us the names of the agents then?

Mr. Blum. That worked on this? Again, Bobby Moore, Dave
Burris, Steve Cook.

Senator Brown. The Customs agents who held up the plane, to
follow up on your source of information, do you recall any names of
those people?

Mr. Blum. No, those were internal affairs. And what they
wanted to know was how some documents had gotten into the
hands of the network. And these were documents relating to the
Noriega case, BCCI documents seized in London. And most guys
were from an internal affairs unit and I’ve forgotten their names. I
wasn’t taking notes. I wanted to get on with my vacation.

Senator Brown. Sure. You mentioned letters of credit were
issued with a 12-point differential, which is as you described, highly
unusual.

Mr. Blum. Right.

Senator Brown. Can you give us an idea of who that was report-
ed to?

Mr. Blum. That was material that was turned over to the U.S.
attorney in the southern district of Florida by the attorneys for
Lloyd’s of London in the Bilbeisi coffee smuggling case.

What makes this significant is there is a lot of smuggling that
goes on. And that smuggling, to get away with it, you need to
paper your shipments so that people can’t understand what’s going
on. If this place was churning out as many letters of credit as the
records in that case suggest, this was a factory for assisting smug-
glers and assisting people who wanted to misvalue their goods and
come in and show Customs, hey, look, this is what we paid for.
Don’t bother us and try to collect extra tariffs.

And I’m sure Mr. Von Raab can tell you how significant and
dangerous that kind of problem would be.

Senator Brown. As far as you know, this particular practice was
never prosecuted?

Mr. Blum. It wasn’t. Indeed, Dexter Lehtinen, the U.S. attorney
for the southern district never followed up on the materials that
were given to him.

Senator Kerry. To your knowledge.

Mr. Blum. To my knowledge.

Senator Brown. Sure.



73


Mr. Blum. Now I would say that IRS on its own came in and
went after one of the parties to the smuggling transaction. But the
other part of it, the letter of credit part of it that was brought to
the U.S. attorney’s attention was never followed up on. And I be-
lieve the statute of limitations may have, by now, run on some of
that.

Senator Brown. In this process of reviewing, which is really an
indepth process that you have been through, were there reports
that resulted, that had recommendations with regard to legislation
that might be helpful in this?

Mr. Blum. Well, I didn’t at that time generate reports other than
help draft a committee report which was issued that had signifi-
cant legislative recommendations and policy recommendations.
And that report, of course, is a committee document. And I am
sure it bears rereading because I think it will hold up in light of
what’s being disclosed as being a not bad piece of work.

Senator Brown. I cannot recall if it was you or Mr. Von Raab
who talked about Third World debts and the potential scam in that
area.

Mr. Blum. I did.

Senator Brown. Can you give us specifics with regard to coun-
tries?

Mr. Blum. I’m reluctant to do that because what I’ve heard there
is not of my direct knowledge. And I think it needs to be fleshed
out more.

The country that has been mentioned to me is in Latin America.
I don’t want to go beyond that. I would be happy to do it in a
closed session. But I think it would create unnecessary further tur-
moil. And at this point to name it publicly and now have a hard
back of material would be wrong.

Senator Brown. I would appreciate that and I am sure we all
would appreciate that information in closed session.

Can you give us the names of the people at Justice that you had
passed this information on to? At least my recollection is that you
mentioned them.

Mr. Blum. I will say again that the people I’ve named are the
ones who I dealt with.

I think the question of Third World debt is not one that I’ve dis-
cussed with Justice. That’s come to my attention more recently
from other people. And frankly, Justice certainly hasn’t sought me
out. I’ve been available at all times and I’ve offered to help.

Senator Brown. I would appreciate your evaluation of whether
or not you think a coverup was involved here, either by Justice or
the Customs Service or the Internal Revenue Service.

Mr. Blum. That’s a very difficult question to answer, to make a
judgment on. It’s something that really has to be asked, though.
And it has to be probed through. Without going into the internal
processes of the Department of Justice, you can’t really answer it.

But I’ve got to tell you these cases should have been prosecuted.
Somebody, given 1984 a man walks into IRS and he says I’m drag-
ging sacks of money around Miami. He gives them documents. He
supports it. That man’s name was Azziz Ruman.



74


In 1986 there’s a money laundering case in Chicago, a Miami
BCCI banker is convicted. Nobody links it up with the earlier
report.

In 1987 you have the Tampa case and you get that plea bargain,
that God-awful plea bargain. You can go right down this list of
warning flags and signals.

And if you want to go through the banking end of it, the number
of warning flags and signals of the ownership of First American, on
the ownership of National Bank of Georgia, this case has been vir-
tually dancing in public and nobody’s bothered to go track it down
or see it through to the end.

Senator Brown. On Azziz, Azziz Ruman, I think you mentioned,
can you tell me when that information was made available and to
who?

Mr. Blum. Well, precisely, we had a deposition. We deposed him.
The information was given by him to the Internal Revenue Service.
And all of that material including a receipt for the data he deliv-
ered from IRS is in a transfer to this committee.

Senator Brown. Well that should give us the specifics we need to
follow up.

Mr. Von Raab. Senator, if I might just respond to your question
just to tell you my exposure to Customs agents today, obviously, is
much different from what it was. But I still know a lot of them. I
have never heard any of them suggest that there was a coverup.
And they typically would. If they saw it, they would comment and
bridle, as it were.

But a lot of them have suggested there was just no interest in
the case and just a complete sort of going to sleep on the part of
the higher level officials from whom they take their signals. I
mean, whatever commitment agents have, they take their signals
from the people for whom they work. And there was virtually no
interest or encouragement that came from that level, which im-
plies to me that there was a sort of lethargy, a feeling good about
things that just shouldn’t have been there.

It’s obviously not conclusive, but I have never been told by an
agent that he or she felt that someone somewhere was stopping
something. I think it was a question of not encouraging this thing.

Senator Brown. But in light of some of the extremely inflamma-
tory — —

Mr. Von Raab. Oh, I agree.

Senator Brown [continuing]. Of what I think is the inflamma-
tory nature of some of this, are not these the kind of revelations
that would generate their own followup? I mean, you would almost
have to take action to stop. I do not mean to lead you to a conclu-
sion.

Mr. Von Raab. No, I understand what you’re saying.

Senator Brown. But I think the question asks itself.

Mr. Von Raab. But I think there is a difference between a cover-
up and getting an agency to move forward on something. Agents
are necessarily looking at specifics. And agents, unless they feel
there is support at higher levels, are less likely to begin a broad-
ranging investigation.

I mean, the result of my problems with the Treasury Depart-
ment, my being taken out of BCCI, I can assure you caused the



75


Custom agents in Tampa immediately to limit their scope because
they realized — and it’s not because someone told them to do that —
but what they realized was that no longer was the fellow in charge
going to protect them if they spent a few extra days chasing down
something that didn’t work or if they got in trouble because they
were pushing their own jurisdictional authority somewhere. They
knew that was over.

And so what they did is they dropped back and did exactly what
they were told when they came to the office. And that’s a big dif-
ference.

Senator Kerry. Would my colleague yield for one question?

Senator Brown. Yes.

Senator Kerry. Did any of the agents while you were there
reduce to writing any of their frustration in any memos?

Mr. Von Raab. Not that I saw. And I’m not saying that they
didn’t do it and it went somewhere or I didn’t do it. I didn’t receive
that.

Senator Brown. One last question for my part.

I wonder if you all could summarize for me the crimes or at least
indications of crimes that could have been prosecuted that were
not prosecuted because of the plea bargain agreement.

Mr. Blum. I would start out by saying you had almost 2 tons of
documents seized from a bank in Miami, Boca Raton, and Tampa
and virtually all of its business was in some manner or other,
criminal. That suggests to me that there are an awful lot of crimes
in that stack. And that somebody should have been over them very,
very carefully and been fishing for that and saying we’re going to
move forward.

But the most significant crimes on which the ball was dropped
all together are misrepresentations to the Fed, misstatements on
audit papers delivered to regulatory authorities everywhere, falsifi-
cation of all of the bank’s books, aiding and abetting a variety of
smuggling schemes, which would make them co-conspirators. And
then I think a wide array of other pieces of business, including
bribery and other forms of corruption. All of that was on the table.

We are beginning to see how much there was. I just hope people
will insist that you follow through and get to the bottom of all of
that criminal activity.

Senator Brown. Was there evidence of other money laundering
schemes other than the what that

Mr. Blum. You bet. You bet everything that you touch with this
bank. It’s like every time you turn over a rock, all of these things
start scurrying around. It’s like turning the lights on in a roach-
filled kitchen. [Laughter.]

Everywhere. And I’ll give you an example. We began to look at
the papers that Azziz Ruman gave us. And this is early on. and
there was a very peculiar thing, a $20 million deposit for the North
Miami General Hospital. Well, that was in the Bahamas branch of
BCCI and it was paying a point less interest than the going rate.
That ought to be a significant clue that something is very wrong.

If you backtrack through the history of the North Miami Hospi-
tal, you found out that it was sold by some people. It was a charity
and they sold out to a Texas corporation. The rules are that when
a charity sells its assets, it has to give the money to another char-



76


ity. And here is the money sitting in the BCCI Bahamas account,
paying less than market interest. Was there a crime? You bet
there probably was.

Mr. Von Raab. To give you an idea, even at the time of the ar-
rests in October 1988, there was unhappiness among the Customs
Service at the kinds of charges that were brought at that time be-
cause Customs felt that we could have charged people higher in the
bank and we could have made stronger charges against the bank
itself.

But we were, I won’t say assured, but lead to believe that that
would follow. Well, let’s just get this done. We’ll arrest these
people, but we don’t want to cause that problem now. So in effect,
Justice acknowledged that with a small amount more work to fill
some technical requirements, those greater charges against more
important people and against the bank could be brought.

Well, those were never brought. Those were then, in effect, I
won’t say prohibited, but probably covered by this plea bargaining
agreement. The kinds of charges that Morgenthau brought in New
York respecting money laundering are the same as could have
been brought in October 1988, October 1989, October 1990, and they
weren’t.

Mr. Blum. What’s so startling, Senator, is that when this bank
was finally seized, my understanding is they showed some $900 mil-
lion booked in U S. accounts. This is 2 years after the plea bargain
in Tampa when everyone knew what they were all about. I have to
wonder what went on that enabled the bank to go out and tell the
world that this was a minor problem limited to a few people in
Tampa and that the bank had now cleaned up its operations.
That’s just an amazing development given what we now know.

Mr. Von Raab. Hill & Knowlton is a very good public relations
firm.

Senator Brown. How did the plea bargain agreement jeopardize
cases outside of, that could be prosecuted outside of that district or


did it?

Mr. Von Raab. I don’t know. I don’t know the details or the tech-
nical side of it.

Mr. Blum. As I read the language, there is a prohibition on the
use of material then known to the U.S. Government.

I understand that the Justice Department argued that that is
only limited to what is known to the U.S. attorney in Tampa, FL.
As far as I am concerned, that is splitting hairs. That kind of a
clause should never have been in a plea agreement and there was
no reason for him to accept it in the first place.

Senator Brown. Thank you, Mr. Chairman.

Senator Kerry. Senator Jeffords?

Senator Jeffords. I just have one followup question. If you have
answered this, I will look at the record. But you made the state-
ment, I believe, that you did not believe the Noriega excuse. I
wonder if you would elaborate on that.

Mr. Blum. I just think we brought about information about Nor-
iega to the Department early. And the response was rather, we’re
going after the money launderers. We’re going to hold back on sub-
poenaing the records of his banks accounts and his dealings and all
the rest of it.


\



77


Then after the arrest and the indictments come January, we get
to a point of now we’re going to bring these people to trial and
we’re going to use them to make the case against Noriega. So the
odd thing is when there was a chance to get the evidence up front,
they didn’t take it. And then after the fact, they say the reason
they don’t go after the bank is because it’s going to give them a
shot at Noriega. I just can’t put the two together.

Mr. Von Raab. We disagree on this point.

Senator Jeffords. Maybe that is why I asked.

Mr. Von Raab. But there isn’t a lot of disagreement.

I am aware the Noriega prosecution originally was very much
opposed by DEA. DEA felt that Noriega had cooperated a lot with
them. And Jack Blum and Tom Kelly just could not believe that
this guy was as bad as everybody said. And they questioned the
witnesses and a lot of other things.

So they weren’t moving very smartly on that case. And they just
were reluctant because they felt this was a fellow that had helped
them in many respects. But once the case was basically accepted by
the Justice Department, the attorney general got behind it and ob-
viously the President as well, the DEA and everyone else changed
their position. And at that point, I think they became desperate to
develop a good case against Noriega because they saw all this pres-
sure coming down on them.

Senator Kerry. The only issue is, let me just ask you, and I am
not contesting any of this.

Mr. Von Raab. This is all speculation.

Senator Kerry. I agree it is speculation. But the critical question
if all of that is true is, one would have thought there might have
been superseding indictments or you would have looked for a
money laundering charge or you would have looked to see, and
there has not been any of that. Am I correct?

Mr. Von Raab. Yes, but I think they got conned by BCCI. They
didn’t get any good information out of BCCI.

But the Noriega prosecution is a whole other issue. I will say this
much. It does give you an example of the kind of pressure that can
be put on a case if the right people get involved. I mean, they
really did jump on the Noriega issue for a while. But I feel and I
have some reason to believe from some of the agents that the
agents felt that the Justice Department looked at the BCCI cases
as a source of evidence.

Senator Kerry. Let me just make a comment there because I
think this really underscores the kind of problem that has been dis-
cussed here.

I was very much involved in the Noriega effort. This is the com-
mittee that first let people know in this country that Noriega was
banking in America, money laundering in America, and so forth.
And it was our hearings that created a lot of public view of this.

Mr. Von Raab. I was the first Federal official to get into trouble
for being critical about Noriega, too.

Senator Kerry. You were very good about it and Senator Helms
was working jointly in an effort to say something ought to be done
about this guy.

Frankly, nothing was being done until the press picked up on
what General Noriega and the linkages meant. Then you had sort



78


of a public issue. And then it became a political necessity, not a
public obligation. And it was because it was a political necessity
that, as former commissioner says, people suddenly jumped on it.

And, indeed, I agree. It was a hell of a good example of what
people could do when they put their mind to it in the span of a few
months to make something happen. And something did happen.

But unless it seems like there is that fire under it or something
is happening, there does not seem to be that spontaneous sense of
public obligation. And I think that is what both of our witnesses
have been trying to underscore to us today.

I do not want to put words in your mouth.

Mr. Von Raab. Oh, no, I agree.

Senator Kerry. Senator Simon?

Senator Simon. I just have one policy question.

Within the next few months Congress is going to be facing the
question do we take down the firewalls of Glass-Steagall that pro-
hibit banks from getting into insurance and securities and other
things.

What do you, as you reflect on BCCI, would it be wise for Con-
gress to do this? Can we learn something from this operation?

Mr. Von Raab. I think if you can get the Secretary of the Treas-
ury to come before this committee and convince you that he under-
stood what happened in BCCI, then you should do what he sug-
gests. But if he comes before this committee and draws a blank,
then you’ll realize that the Treasury Department doesn’t know
what crime is. They only know what bank loans are.

Mr. Blum. I think that there is a lesson. And the lesson is not
only that it’s very dangerous to play around with those firewalls
because you’ve seen that it’s difficult enough in straight banking to
keep track of what’s happening.

Now you see that where they are criminal and they’re playing
around with the books, it’s even more difficult. Just add to the
complexity of the institution and the regulators will be totally, to-
tally swamped.

Senator Simon. Without those firewalls, BCCI could have been in
both the insurance business and the securities business.

Mr. Von Raab. With all due respect, if BCCI wanted to be in
those businesses, it would be in those businesses anyway.

Mr. Blum. I hate to say this. I may have been. It turns out that
Ghaith Pharaon owned an insurance company. David Paul owned
an insurance company. We may yet find out that despite firewalls,
because various people were asleep at the switch, they owned it
anyway.

Mr. Von Raab. Firewalls are only good for people that respect
them. And the people involved in BCCI respected nothing.

Senator Simon. Thank you. Thank you, Mr. Chairman.

Senator Kerry. Thank you very much.

Gentlemen, I want to thank you. As I say we are reserving the
right if we may to recall you if such questions arise or if there is
followup by the members. There is a lot of material that you have
laid out. As I said earlier, we wanted to start with the big picture.
You have given us the big picture. This is not a narrow trail, but a
very broad one.


79


But I thought it was appropriate at the start of this hearing to
really get a sense of what the record is, where it began, and where
we are leading to.

This afternoon we have yet to hear from the Federal Reserve.
There are some major implications about the currency and the
First American Bank in Washington and so forth.

We are going to recess for about 5 minutes or 10 minutes so that
we can vote. We will return as soon as this vote is over.

[A brief recess was taken.]

Senator Kerry. The hearing will come to order please.

Thank you very much.

We have Mr. Virgil Mattingly, General Counsel of the Board of
Governors of the Federal Reserve System and Mr. Williams Taylor,
Staff Director for the Banking Supervision and Regulation Section
of the Board of Governors Federal Reserve System.

Gentlemen, I am very appreciative to you for your patience. This
has been a longer day than we anticipated. And I think you can
understand why. And I thank you for hanging in there.

We would like to invite your opening statements. I would ask
you if you have long, prepared statements if you want to submit
them for the record and can summarize, I think it would be very
helpful. Your full statements will appear in the record as if read.

I would like to ask both of you if you would also rise so I could
swear you in as we are swearing all witnesses.

Do you, Mr. Taylor and Mr. Mattingly, do you swear to tell the
truth, the whole truth, and nothing but the truth, so help you God?

Mr. Taylor. I do.

Mr. Mattingly. I do. Senator Kerry. Who is leading off?

STATEMENT OF MR. VIRGIL MATTINGLY, GENERAL COUNSEL,

BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM; ACCOM-
PANIED BY MR. WILLIAM TAYLOR, STAFF DIRECTOR, BANKING

SUPERVISION AND REGULATION, FEDERAL RESERVE SYSTEM

Mr. Taylor. I am. Thank you, Senator Kerry,

Mr. Mattingly and I have filed a joint statement, which we ap-
preciate your putting in the record in its entirety. I will try to sum-
marize and shorten it.

Senator Kerry. Without objection, your full statement will be
placed in as if read in full.

Mr. Taylor. Thank you.

Most of the background, I think, has been given on BCCI. And in
our previous hearing I think we’ve talked and discussed with the
committee what actions that we had taken leading up to the point
of the more recent events.

So what I would really like to do if I could is to skip that part
and just go into the part commencing really since the committee’s
last hearing.

The early 1991 information received by the Bank of England
about BCCI and its activities raised fresh questions about the con-
dition and integrity of the institution as a whole. In turn the infor-
mation prompted the Bank of England to commission Price Water-
house to undertake a special audit under the provisions of British
banking law. The results were



80


Senator Kerry. Just a quick question. Has Price Waterhouse
done previous audits?

Mr. Taylor. Price Waterhouse had done previous audits, yes.

Senator Kerry. Price Waterhouse was the auditor of record in
the past?

Mr. Taylor. It was the auditor of record as of the date it was
appointed on the special, I think it started as the auditor with the
statements of yearend 1989.

Senator Kerry. Thank you.

Mr. Taylor. The resulting so-called section 41 report was com-
pleted and made available to the Bank of England in draft form on
June 22, 1991.

The Bank of England’s filings in British court indicate that the
report disclosed evidence of a complex and massive fraud at BCCI.
It was the findings of this report that led to the decision by the
authorities in the United Kingdom, Luxembourg, and the Cayman
Islands to seize BCCI.

The Federal Reserve was informed by the Bank of England on
Friday, June 28, that a near-term seizure of BCCI was in the
works. In light of this information the Federal Reserve promptly
dispatched senior officials from the Federal Reserve Bank of New
York and the Board of Governors to London, myself specifically
from the Board of Governors to begin the coordination efforts that
led to the seizure of the BCCI offices on July 5.

The primary concern of the Federal Reserve was to take all rea-
sonable responsible steps to insure that the seizure of the BCCI
banks did not precipitate serious disruptions to the U.S. banking
markets or in the dollar-based payments and clearing systems both
here and abroad.

Four factors loomed in the deliberations of the Federal Reserve
in this regard. First, while BCCI’s banking activities in the United
States were small in balance sheet terms, a large global share of its
activities, a large share of its global activities were conducted in
dollars, which must be settled in banks within the United States.

Second, while the Federal Reserve was reasonably confident that
the direct exposure of U.S. banks to BCCI was rather limited, we
could not be sure that banking exposures in other banking markets
or to other institutions might not cause disruptions in the inter-
bank markets, payment flows, and foreign exchange transactions.
These could spill over into U.S. markets and to U.S. institutions.

Third, there was also a danger that other banking institutions in
the Gulf could come under pressure by virtue of uncertainties cre-
ated by the BCCI seizure.

And finally, there was a more general concern that the prece-
dent of seizing an institution with operations in 69 countries could
by its very nature unsettle banking markets on a global scale.

By midday Wednesday, July 3, it was increasingly clear that the
seizure would, in fact, take place on Friday, July 5. The Federal
Reserve informed senior officials at the State banking departments
in New York and California. As the licensing authorities for the
BCCI agencies in New York and Los Angeles, these departments,
and not the Federal Reserve, were responsible for initiating actions
to close these agencies.



81


While the exact timing of the seizure of the BCCI banks had not
yet been determined, the expectation on July 3 was that it would
be timed to coincide with the close of business in New York on
July 5. A special unit was established at the Bank of England to
coordinate global regulatory actions and to provide a central point
of supervisory information and advice.

For several days officials of the Federal Reserve Board and the
Federal Reserve Bank in New York were stationed at the Bank of
England to assist in that effort. A parallel unit focusing on pay-
ments and settlements issues, as well as activities in U.S. banking
markets more generally, was established at the New York Federal
Reserve Bank. This unit and a counterpart group at the Board here
in Washington were staffed 16 hours daily during the first week
after the closure.

Throughout the day of July 4 the Federal Reserve maintained
close contact with the Bank of England. Based on these discussions,
it was still expected that the closure would occur on the close of
business in New York, July 5.

On the evening of July 4, however, the Federal Reserve was in-
formed that the timing of the closure was being reconsidered due
to legal issues that had arisen in Luxembourg. Over the course of
the night of July 4 it became apparent that the goal of effecting
the seizure at the close of business at New York time could not be
realized.

Rather than have the seizure occur during the business day, it
was decided to accelerate the seizure so that it would precede the
opening of business in New York. This created a complicated task
of getting the personnel and other arrangements in place in the
early hours of the morning after the Fourth of July holiday. It was
accomplished without major problems or difficulties.I21Public an-
nouncements in Europe and the United States were coordinated at
8:30 a.m. New York time. The States of California and New York
acted promptly. Bank examination personnel were fully deployed
by 8:30 a.m. and the information clearing centers at the Bank of
England and the Federal Reserve remained operational throughout
the day of July 5 and over the ensuing weekend.

Because of this cooperative effort among central banks world-
wide and because the Federal Reserve and State authorities had al-
ready acted to scale back BCCI’s limited operations in the United
States, the seizure of BCCI was effected on a global scale with vir-
tually no adverse effect on U.S. markets.

As a result of earlier regulatory action on the day, the U.S. of-
fices of BCCI were closed by the States of California and New York.
BCCI was funding its business in the United States basically from
other non-U.S. BCCI operations, and as a result, had very little ex-
posure to creditors in this country.

Although the exposure of this firm on a balance sheet basis had
been over $1 billion some 2 years before, 18 months before, by the
time the business was wound down, the net exposure on the day of
closure was less than $20 million.

Mr. Mattingly will now discuss how BCCI was unable to obtain a
substantial legal presence in the United States and decided to se-
cretly control the shares of certain U.S. banks.



82


I might just add here that what is significant, I think, and some-
thing that concerns us, as it did the former witnesses, is the fact
that we consciously, consciously from 1978 on, sought to avoid the
presence of this company in this country and the Federal Reserve
at no time approved any application of BCCI to do anything in this
country. It is especially upsetting to us that they would do this ille-
gally. Mr. Mattingly?

Mr. Mattingly. Senator Kerry, I, too, am pleased to be here
today to appear before this subcommittee.

I won’t go over or rehearse the history of the First American
matter. That’s contained in our earlier testimony.

I’ll go right to the Board’s investigation and what that has un-
covered.

Senator Cranston. Could you move the microphone a little bit
closer, please?

Senator Kerry. And when you refer to your earlier testimony,
what do you mean? The one submitted today.

Mr. Mattingly. No. That is the testimony before the Subcommit-
tee on Consumer

Senator Kerry. Before the Banking Committee, the one where
you testified before me in May.

Mr. Mattingly. May 23, yes, sir.

Senator Kerry. I think what we will do is make that testimony a
part of this record also. Without objection.

Mr. Mattingly. It is attached to our longer statement.

Senator Kerry, as you know, on January 4 the Board ordered a
formal investigation as to whether BCCI had illegally and secretly
acquired control of the First American banks here in Washington
in 1982 and whether false or misleading statements were made to
the Board by BCCI and others in order to achieve and conceal that
secret control.

This investigation, the Board’s investigation, built on prior in-
quiries that the Board had conducted into a possible link between
BCCI and First American. These inquiries had gone all the way
back to the time of the initial application in 1981.

A very significant development in the Board’s inquiries into this
matter came in late 1990 when the New York County District At-
torney, Mr. Morgenthau, with whom the Federal Reserve had been
working, advised that he had received information from an inform-
ant that an auditor’s report showed BCCI loans to CCAH share-
holders.

The Federal Reserve had been attempting for some time to deter-
mine whether those loans existed despite having been told repeat-
edly and as late as 1990 by BCCI that it had not lent to acquire
those shares.

The Fed demanded access to the report from BCCI and, after
some resistance, we were able to review a copy of that report dated
October 3, 1990, in London in early December 1990. The report con-
firmed the existence, this is the Price Waterhouse report, it con-
firmed the existence of over $1 billion in longstanding nonperform-
ing loans by BCCI secured by the shares of CCAH. CCAH is the
parent, top-tier holding company, for First American.

Senator Kerry. Did it have a date as to when that transaction
was effective?



83


Mr. Mattingly. No, it did not. The report merely listed the fact
that there were over $1 billion in loans going back some years se-
cured by the stock.

That review provided the Federal Reserve with evidence of a vio-
lation of the Board’s 1981 order which approved CCAH’s acquisi-
tion of First American on the basis that BCCI would have no role
in that acquisition and would not fund the shareholders’ acquisi-
tion. The Board, thereupon, ordered the formal investigation.

That investigation has gone on for some 7 months now and has
uncovered evidence of extensive and secret loan and nominee ar-
rangements between BCCI and its customers. These arrangements
were designed to allow BCCI to acquire in the name of these cus-
tomers the stock of the First American banking organization as
well as three other federally insured depository institutions in this
country.

These arrangements in many cases, most cases, involve sham
loans to the BCCI customers with side agreements, which we have
seen, with the customers that the customers would not be required
to repay or service the loans and that BCCI at any time it chose
could sell the shares and retain the profits. In return for the use of
their names, our evidence suggests, that the customers received
fees and indemnities.

Most of the CCAH loans were never serviced or repaid except
through other loans from BCCI. From the evidence available, it ap-
pears that though bookkeeping manipulations of CCAH stock and
loans to repay or service loans, BCCI generated hundreds of mil-
lions of dollars in fictitious paper profits to cover massive losses in
its trading and lending accounts.

As a result of the information acquired in the early stages of our
investigation, as soon as we had information about these nominee
arrangements, the Board on January 22 made criminal referrals to
the Department of Justice and proposed a cease and desist order
against BCCI.

As issued in March, the cease and desist order had four principle
aims. It required BCCI to divest promptly its CCAH shares accord-
ing to a plan to be submitted to the Fed. It required termination of
transactions between BCCI and the First American banks. It re-
quired BCCI to have sufficient liquid assets at its New York agency
to cover liabilities in those agencies. And finally, it required termi-
nation of BCCI’s residual business presence in the United States
within 1 year, as quickly as possible, but within 1 year. In other
words, the Federal Reserve decided that BCCI should leave this
country.

In connection with the investigation, the Board has also taken
steps to monitor through the examination process the operations of
the First American banks. Events have made the requirement that
BCCI divest the CCAH shares under its control more difficult.
BCCI had submitted to the Board two proposed divestiture plans.
These plans called for a transfer, at our suggestion, of the shares of
CCAH held by BCCI to a trustee acceptable to the Federal Reserve.
The trustee would have complete control over that stock and would
be directed by the trust agreement to negotiate the sale of that
stock to a third party acceptable to the Federal Reserve as prompt-
ly as possible. The Federal Reserve would have given the trustee a



84


certain amount of time to negotiate the sale. At the end of that
time without a sale, the Federal Reserve could have directed the
holding of a public auction on the stock.

Implementation of BCCI’s divestiture plans has, however, been
delayed by the seizure of BCCI by the regulatory authorities on
July 5. After that date, the officers and counsel for BCCI were no
longer able to negotiate or effectuate a divestiture of CCAH or the
other bank stock that BCCI acquired.

The July 5 seizure does not, however, void the Board’s divestiture
orders. Those orders remain fully effective and legally binding. The
seizure shifts the responsibility and the task of implementing those
orders from BCCI to the receivers for BCCI.

Senator Kerry. Let me understand that now for a minute. The
receivers for BCCI? Where?

Mr. Mattingly. This would be the receiver

Senator Kerry. Does that take us to London?

Mr. Mattingly. It would take us to Mr. Smouha, yes, to London
and Luxembourg.

Senator Kerry. So you are now telling us that resolution of First
American bank shares lies, not in our hands or our control, but es-
sentially in control in another country?

Mr. Mattingly. No, I’m not.

Senator Kerry. That is what I am trying to understand.

Mr. Mattingly. The Board has an order outstanding, a divesti-
ture order.

Senator Kerry. The Board has an order outstanding, but the
Board cannot get its order implemented. Is that accurate?

Mr. Mattingly. We have asked for a plan from the receiver to
implement that divestiture order.

Senator Kerry. But you cannot do it until you receive a plan
from Luxembourg?

Mr. Mattingly. We have asked them for the plan, yes.

Senator Kerry. What would the date be? Do you have an antici-
pated date?

Mr. Mattingly. I have a meeting arranged with them. I have
met with them already. I have been in contact with their lawyers.

Senator Kerry. Let me let you finish, and then I will pursue
some questions.

Mr. Mattingly. We are going to meet again with them next
week regarding this point.

The receivers have stated in these meetings with us that they
intend to cooperate with the Federal Reserve to achieve a divesti-
ture. Our discussions are continuing. The Board is also exploring
other avenues to regularize the ownership of CCAH. We do have
an effective order outstanding. And there are certain remedies
available to the Board to make sure that that order is enforced and
carried out.

The Board’s investigation of the BCCI matter is continuing and
is the most comprehensive in our experience. As part of the investi-
gation, the Board is proceeding with enforcement actions as the
evidence to support those actions is accumulated. Thus, on July 29
the Board assessed a civil money penalty against BCCI of $200 mil-
lion. The notice covered the illegal acquisition of First American
and two other banks, the National Bank of Georgia and CenTrust



85


Savings Bank. I should also note that the Board earlier in July
issued a notice with regard to BCCI's alleged illegal acquisition of
the Independence Bank in California.

The Board has also taken actions to bar permanently nine indi-
viduals associated with this from any involvement in U.S. banking.
At the request of the U.S. attorney for the District of Columbia, the
Board has deferred temporarily the assessment of substantial civil
money penalties against the individuals charged pending comple-
tion of the U.S. attorney’s criminal inquiry.

Senator Kerry, as you know, as a result of the BCCI matter and
other recent compliance problems that the Federal Reserve has
had with foreign banks, the Board has proposed and recommended
legislation to strengthen the supervision and regulation of foreign
banks in the United States. Those proposals were introduced in the
Senate as Senate bill 1019 by Senator Riegle, Senator Kerry, and
Senator Garn and are being considered as we speak by the Senate
Banking Committee as part of a comprehensive banking reform
proposal.

Senate bill 1019 is intended to help assure that the important
banking policies established by the Congress are applied to all
bank operations in the United States and that the sizable foreign
bank community in this country adheres to legal requirements and
operates in a safe and sound manner.

One of the most important of those recommendations is a recom-
mendation that no foreign bank be allowed to open additional of-
fices in this country unless the Federal Reserve is assured that
there is home country supervision for that bank. And that recom-
mendation grows directly out of our experience with the BCCI
matter.

BCCI at its apex was a holding company. It was also a bank hold-
ing company. But it was a holding company and it operated with-
out a supervisor that could ensure consolidated supervision over
the organization as a whole. The absence of supervision, of consoli-
dated supervision, was crucial, critical, to BCCI's ability to carry
out the manipulation of its books and the concealment of its actual
financial condition.

In closing, I wish to point out that the Board’s legislative recom-
mendations do not guarantee that BCCI problems will never reoc-
cur. Fraud is hard for any regulator to detect, especially when the
transactions are deliberately and intentionally structured to con-
ceal relationships and when the relevant information is maintained
outside of the United States.

The Board’s proposal is an attempt to address the potential for
such illegal activities by creating a bar to U.S. entry by weakly
capitalized, poorly managed, and inadequately supervised organiza-
tions. Thank you.

[The prepared joint statements of Mr. Taylor and Mr. Mattingly
follows:]

Prepared Statements of J. Virgil Mattingly, Jr., and William Taylor

We are pleased to appear before this Subcommittee to describe recent develop-
ments in the case of Bank of Credit and Commerce International, S.A. and its affili-
ates (collectively “BCCI”). As has been widely reported, bank regulatory authorities
in the United Kingdom, Luxembourg, Grand Cayman, the United States, and sever-


86


al other countries took action on July 5, 1991, to secure control of the BCCI banks
as an initial step toward the liquidation of BCCI. This action was taken in response
to evidence of widespread fraudulent conduct by BCCI and its management. More
recently, the Federal Reserve assessed a civil money penalty of $200 million against
BCCI for its unlawful acquisition of the stock of U.S. banks and its concealment of
this control in regulatory filings. The Federal Reserve has also initiated actions to
bar nine individuals associated with BCCI from involvement with U.S. banks. The
New York County District Attorney's Office has also secured indictments against
BCCI and two of its senior officers.

SUMMARY OF REMARKS

Our remarks today begin with a summary of BCCI's operations, both abroad and
in the United States, and a description of the events leading to the seizure of the
bank's assets. We will then discuss the effect of BCCI's seizure on two U.S. banking
organizations, First American Bankshares of Washington, DC, and Independence
Bank, Encino, CA, the shares of which the Board believes are controlled by BCCI.
Finally, we will discuss the Board's ongoing enforcement actions and its legislative
proposals to strengthen the supervision of foreign banks operating in the United
States.


BANK OF CREDIT AND COMMERCE INTERNATIONAL


Structure of BCCI

BCCI was founded in 1972 and until recently operated principally under the lead-
ership and management control of individuals from Pakistan. Initial equity financ-
ing of BCCI was provided by Middle Eastern investors and Bank of America. Bank
of America's ownership interest in BCCI was sold in 1980. In April 1990, in order to
bolster BCCI's sagging financial position, the ruling family and the Government of
Abu Dhabi provided additional capital that increased their ownership interest in
the shares of BCCI from about 30 percent to 77 percent.

BCCI's operations encompassed subsidiaries, branches and affiliates in 69 coun-
tries, principally in developing countries. BCCI, however, was not one of the largest
banks in the world. Its total assets of roughly $20 billion ranked it about 200th in
the world. The parent holding company, BCCI Holdings (Luxembourg) S.A., was
chartered and headquartered in Luxembourg, and the two largest banking subsidi-
aries of the company — Bank of Credit and Commerce International S.A. and Bank
of Credit and Commerce International (Overseas) Limited — were chartered in Lux-
embourg and the Cayman Islands, respectively. Although nominally headquartered
in Luxembourg, BCCI's global business was operated out of its London offices.

Under Luxembourg law, holding companies are not subject to supervision. Thus,
BCCI was able to avoid consolidated home country supervision of its activities. Vir-
tually from BCCI's formation, concerns were raised about a bank operating interna-
tionally without a home country regulator.

BCCI's Operations in the United States

BCCI has never been permitted to operate a branch in the United States that ac-
cepts deposits from the general public; nor was it permitted to operate or control an
insured bank. BCCI at one time maintained state-licensed agencies in New York,
San Francisco, Los Angeles, Miami, Tampa, and Boca Raton and representative of-
fices in Washington, DC, and Houston. None of these offices could accept domestic
deposits. Because of actions taken by state and federal supervisory authorities as
well as BCCI's plans to restructure its operations, four of the six agencies were
closed by January 1991, and the remaining two had very substantially reduced their
operations. The representative offices were closed by August 1990.

Under a Federal Reserve Order issued earlier this year, BCCI's remaining oper-
ations in this country were scaled back and the company was ordered to terminate
its activities in the United States within a year. On July 5, 1991, the two remaining
state-licensed agencies — in Los Angeles and New York — held combined assets of ap-
proximately $250 million but less than $20 million in liabilities to unrelated credi-
tors.

BCCI's offices in the United States were licensed and supervised on a regular
basis by state authorities. As the residual supervisor of U.S. branches and agencies
of foreign banks, the Federal Reserve participated in some state examinations and
conducted some examinations of its own. Under the current framework governing
foreign bank operations in the United States established in the International Bank-
ing Act of 1978, the states are the primary regulators of the branches and agencies
they license, and the Federal Reserve is directed to rely on their reports of examina-



87


tion insofar as possible. As described in the last section of this testimony, the Feder-
al Reserve believes that the time has come to require the same type of federal su-
pervision and examination for foreign bank operations in the United States that ap-
plies to U.S. banks.

Supervisory Actions — Money Laundering

In May 1987, a Federal Reserve examination of the Miami office of BCCI identi-
fied money laundering activities, and a criminal referral was filed with the Internal
Revenue Service, the Federal Bureau of Investigation and the U.S. Attorney in
Miami. In October 1988, BCCI and a number of its U.S. employees were indicted for
money laundering through BCCFs Tampa, FL, office. The Federal Reserve, with co-
operation from state authorities, immediately commenced a coordinated examina-
tion of all of BCCFs U.S. offices. The examinations of the New York and Boca Raton
offices revealed other money laundering activities, and additional criminal referrals
were made in October and November of 1988.

The examinations also revealed that internal controls and lending practices of the
BCCI agencies were poor and that remedial action was required. The Federal Re-
serve issued a cease and desist order against BCCI in June 1989 designed to
strengthen the U.S. banking operations of BCCI and enforce compliance with cur-
rency reporting requirements.

Post-Indictment Period

The indictment for money laundering in the United States further weakened
BCCFs already fragile reputation in the world financial community. Federal Re-
serve staff was advised, that BCCI was experiencing some outflow of deposits in
London and was encountering difficulty in finding counterparties for its banking
transactions. In addition, BCCFs auditors had raised questions about whether cer-
tain loans were collectible, which brought into sharper focus the need for fresh cap-
ital. To address these developments, the Government and ruling family of Abu
Dhabi in the spring of 1990 provided capital resources of nearly $400 million, in-
creasing their ownership of BCCI from 30 percent to about 77 percent.

BCCFs problems, however, continued to mount. In October 1990, Price Water-
house delivered a report to BCCFs board of directors that identified substantial ad-
ditional problem loans. This report gave rise to renewed discussions between the
bank and its principal shareholder and European banking authorities concerning
possible approaches to a broad-based restructuring of the bank. These discussions
continued into 1991.

By early 1991 information received by the Bank of England about BCCI and its
activities raised fresh questions about the financial condition and integrity of the
institution as a whole. In turn, this information prompted the Bank of England to
commission Price Waterhouse to undertake a special audit under the provisions of
British banking law. The resulting so-called section 41 report was completed and
made available to the Bank of England on June 22, 1991. The Bank of England’s
filings in British courts indicate that the report disclosed evidence of a complex and
massive fraud at BCCI, including mismanagement, substantial loan and treasury ac-
count losses, misappropriation of funds, unrecorded deposits, the creation and ma-
nipulation of fictitious accounts to conceal bank losses, and concealment from regu-
latory authorities of BCCFs true financial position. It was the findings of this report
that led to the decision by the authorities in the United Kingdom, Luxembourg and
the Cayman Islands to seize BCCI.

The Seizure of BCCI on July 5

On Friday, June 28, the Bank of England informed the Federal Reserve that the
findings contained in the Price Waterhouse report made it likely that the authori-
ties in the United Kingdom, Luxembourg and the Cayman Islands would move
during the following week to take control of the principal banks in the BCCI group.
This information, while still tentative in nature, was provided to the Federal Re-
serve in part as an outgrowth of the continuing dialogue that had been occurring
between the Federal Reserve and the Bank of England regarding the overall investi-
gation into the BCCI affair, but also because it was recognized that the seizure of a
global bank operating around the clock in some 69 countries would have to be exe-
cuted with great care in order to avoid banking disruptions on a national or interna-
tional scale.

In light of this information, the Federal Reserve promptly dispatched senior offi-
cials of the Federal Reserve Bank of New York and the Board of Governors to
London to begin the coordination of efforts that led to the seizure of the BCCI banks
on July 5, 1991. With respect to that action, the primary concern of the Federal Re-
serve was to take all reasonable steps to ensure that the seizure of the BCCI banks



88


did not precipitate serious disruptions in U.S. banking markets or in dollar-based
payment and clearing systems here or abroad. Four factors loomed large in the de-
liberations of the Federal Reserve in this regard:

First, while BCCI's banking activities in the U.S. were very small in balance
sheet terms, a large share of its global activities were conducted in dollars,
which must be settled with banks in the United States. From the perspective of
the Federal Reserve, and with the experience of the Herstatt failure of 1974
very much in mind, this fact made it very important that the announcement of
the seizure of the BCCI banks be timed so as not to occur during normal busi-
ness hours in New York— a judgment that was shared by the Bank of England
and others.

Second, while the Federal Reserve was reasonably confident that the direct
exposure of U.S. banks to BCCI was limited, we could not be sure — especially in
the face of the multiple uncertainties about the underlying condition of BCCI —
that banking exposures in other markets or to other institutions might not
cause disruptions in interbank markets, payment flows, and foreign exchange
transactions that could spill over into U.S. markets and institutions.

Third, there was also the danger that other banking institutions in the
Gulf— institutions with no connections with BCCI and several of which have a
major presence in London and New York — could come under pressure by virtue
of uncertainties created by the BCCI seizure.

Finally, there was the more general concern that the precedent of seizing an
institution with operations in some 69 countries could — by its very nature — un-
settle banking markets on a global scale.

Over the course of Tuesday, July 2 and Wednesday, July 3, the Federal Reserve
briefed the Treasury Department, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation and others about the unfolding develop-
ments in Europe. The Federal Reserve's efforts took place in confidence in part be-
cause of the still uncertain course of events in Europe and in part to ensure that
premature disclosure of information did not place some creditors of BCCI-related en-
tities in a preferred position.

By midday Wednesday, July 3, it was increasingly clear that the seizure would, in
fact, take place on Friday, July 5. In these circumstances, the Federal Reserve in-
formed senior officials at the state banking departments in New York and Califor-
nia. As the licensing authorities for the BCCI agencies in New York and Los Ange-
les, the state banking departments — not the Federal Reserve — were responsible for
initiating the actions to close those agencies.

While the exact timing of the seizure of the BCCI banks had not yet been deter-
mined, the expectation on July 3 was that it would be timed to coincide with the
close of business in New York on July 5. A special unit was established at the Bank
of England to coordinate global regulatory actions and to provide a central point of
supervisory information and advice. For several days, officials from the Federal Re-
serve Board and the Federal Reserve Bank of New York were stationed at the Bank
of England to assist in that effort. A parallel unit, focusing particularly on payment
and settlement issues, as well as activities in U.S. banking markets more generally,
was established at the New York Federal Reserve Bank. This unit and a counter-
part group at the Board here in Washington were staffed 16 hours daily during the
first week after the closure.

Throughout the day of July 4, the Federal Reserve maintained close communica-
tion with the Bank of England. Based on those discussions, it was still expected that
the closure would occur at the close of the business day in New York on July 5. On
the evening of July 4, however, the Federal Reserve was informed that the timing of
the closure was being reconsidered due to legal issues that had arisen in Luxem-
bourg. Over the course of the night of July 4, it became apparent that the goal of
effecting the seizure at the close of business New York time could not be realized.
At about 2 a.m., Friday, July 5, the Federal Reserve was informed that the only
practical options were to coordinate the seizure either at mid-morning New York
time or to accelerate the action so that it would precede the opening of business in
New York. The choice to accelerate the process was clear. This created a complicat-
ed task of getting the personnel and other arrangements in place in the early hours
of the morning after the Fourth of July holiday, but it was accomplished without
major problems or difficulties. Public announcements in Europe and the United
States were coordinated at 8:30 a.m., New York time, the states of New York and
California acted promptly, bank examination personnel were fully deployed by 8:30
a.m., and the information clearing centers at the Bank of England and the Federal
Reserve remained operational throughout the day of July 5 and over the ensuing
weekend.



89


Because of this effort involving the close cooperation of authorities in a number of
countries and because the Federal Reserve and state authorities had already scaled
back BCCI's limited operations in the United States, the seizure of BCCI was effect-
ed on a global scale with virtually no adverse affects on U.S. markets and institu-
tions. As a result of earlier regulatory action, on the day the U.S. offices of BCCI
were closed by the states of California and New York, BCCI was funding its business
in the United States from other non-U.S. BCCI offices and not from U.S. sources. As
of July 30, it appears that less than $20 million of the $252 million in liabilities on
the books of the U.S. offices of BCCI are to third parities.

THE FIRST AMERICAN BANKS AND INDEPENDENCE BANK

As the Chairman of this Subcommittee, Senator Kerry, will recall, we testified on
May 23 about BCCI's efforts to gain control of U.S. banks before a subcommittee of
the Senate Banking, Housing and Urban Affairs Committee. That testimony, a copy
of which is attached and which we will not repeat in detail here, indicated BCCI
had used loans and nominee agreements to secretly gain control of the majority of
the shares of First American Bankshares in 1982. The testimony also describes con-
tinuing efforts of the Federal Reserve to detect and prevent BCCI control of First
American's shares, and the violation of explicit commitments that BCCI would have
no interest in the First American organization and would not fund the acquisition
of First American.

On January 4, 1991, the Board authorized a formal investigation concerning
whether BCCI had violated the Bank Holding Company Act by unlawfully gaining
control of First American, and whether false or misleading statements were made to
the Board by BCCI and others in order to conceal BCCI's control. This investigation
built on prior inquiries into a possible First American-BCCI link made by the Feder-
al Reserve in 1989 and 1990.

In late 1990, the New York County District Attorney, with whom the Federal Re-
serve had been working, advised that he had received information about an audi-
tor's report showing BCCI loans to shareholders of Credit and Commerce American
Holdings, N.V. (CCAH), First American's parent. The Federal Reserve had been at-
tempting for some time to determine whether such loans existed, despite having
been told by BCCI as late as 1990 that it had not lent to acquire CCAH shares. As a
result of the information, the Federal Reserve demanded that BCCI provide access
to the auditor's report. After initial reluctance by BCCI's auditors, the Board's staff
was able to review a copy of that report in London in early December 1990. The
report confirmed the existence of over $1 billion in nonperforming loans by BCCI
secured by shares of CCAH. That review provided the Federal Reserve with substan-
tive evidence of a BCCI-First American link, and the Board thereupon ordered the
formal investigation.

That investigation as it progressed over the next several months uncovered evi-
dence of extensive and secret loan and nominee arrangements between BCCI and
customers of BCCI designed to allow BCCI to acquire in the name of these custom-
ers the stock of the First American banking organization as well as other depository
institutions in the United States. These arrangements in many cases involved sham
loans to the BCCI customers with side agreements that the customers would not be
required to repay or service the loans and that BCCI could sell the shares and
retain the profits. In return for their services, the customers received fees and in-
demnities. These nominee arrangements are described in detail in the Board’s civil
money penalty and prohibition actions of July 12 and 29, 1991.

Many of these CCAH loans were never serviced or repaid except through other
loans from BCCI. From the evidence available, it appears that these arrangements,
particularly in later years, enabled BCCI to generate hundreds of millions of dollars
m fictitious profits to cover massive losses in its trading and lending accounts.

The Board's Cease and Desist Orders

As a result of information acquired in the early stages of the Board's investiga-
tion, the Board on January 22, 1991, made criminal referrals to the Department of
Justice and proposed a cease and desist order for BCCI. The cease and desist order,
which was joined in by the New York banking authorities and consented to by BCCI
on March 4, had four principal components: requiring BCCI to divest promptly its
CCAH shares; ending business transactions between BCCI and the First American
banks; ensuring that BCCI had sufficient liquid assets to cover liabilities in the U.S.
agencies; and terminating BCCI's residual business presence in the United States.

The order required BCCI promptly to divest its interest in CCAH through a plan
to be submitted to the Board for its approval. The order, and a similar one against
CCAH, also prohibited transactions between BCCI and the First American banks



90


(other than capital injections into the banks and certain clearing transactions in the
ordinary course of business). After entry of the order, the Richmond Reserve Bank
informed the First American Bank of New York that its clearing transactions for
BCCI should be wound down and terminated before the end of 1991.

The Board's investigation continued after issuance of the March 4 order and dis-
covered further evidence indicating that BCCI also had acted through a nominee,
Ghaith Pharaon, to acquire the Independence Bank, Encino, CA, in violation of the
Bank Holding Company Act. On May 3, the Board issued a second cease and desist
order requiring BCCI to submit to the Board a plan for the divestiture of any shares
of Independence Bank within its control. A criminal referral relating to this viola-
tion was also filed.

In conjunction with the investigation, the Board has also taken steps to monitor
through the examination process the operations of the First American banks, and to
determine any relationship with BCCI. Examinations and special reviews were un-
dertaken by the Federal Reserve and other federal and state banking authorities in
January 1991. These efforts continue.

Implementation of the Orders

As a result of the orders, transactions between BCCI and the First American
banks and Independence Bank have been steadily eliminated. The relationship be-
tween BCCI and the First American Bank of New York — with which BCCI had
maintained a correspondent relationship — was wound down substantially by July 5.

Events have made the requirement that BCCI divest the shares of CCAH under
its control more difficult to achieve. On May 3, BCCI submitted to the Board a pro-
posed divestiture plan for the CCAH shares, and on July 3, BCCI submitted a dives-
titure plan for the Independence Bank shares. The CCAH plan called for transfer of
the shares of CCAH held by BCCI, and possibly shares held by other CCAH share-
holders, to a trust administered by an independent trustee acceptable to the Board.
The trustee would vote the stock and negotiate its sale within a time frame agreed
to by the Board. We found the trust arrangement to be acceptable, but considered
the proposal to be deficient because it failed to set forth the timing of the sale —
specifically, there were no guarantees that the divestiture would be a prompt one,
as required in the Board’s order. We therefore rejected BCCI’s proposal by letter of
May 10, and required BCCI to submit within 10 days a revised plan that addressed
this concern.

On May 20, BCCI did submit a revised plan, which also relied on a trust arrange-
ment. Although this new plan did not contain a timetable, it did contain details and
conditions that appeared to expedite the sale. A preliminary draft of the trust
agreement was submitted by BCCI on June 20.

Implementation of BCCI's proposed divestiture plans has been delayed by the sei-
zure of BCCI by regulatory authorities. After those authorities seized control of
BCCI on July 5, the officers and directors of BCCI were no longer able to negotiate
or effectuate a divestiture of CCAH or Independence Bank stock on behalf of BCCI.

The July 5 seizure order does not void the Board's divestiture orders, however.
The orders remain fully effective and legally binding. The seizure shifts the task of
implementing the orders from BCCI to the receivers for BCCI. We have been in con-
tact with the receivers, explaining to them the need to achieve total divestiture as
soon as possible, and requesting that they submit promptly a revised divestiture
plan. The receivers have indicated a desire to cooperate with the Federal Reserve to
achieve divestiture, and our discussions are continuing. The Board is also exploring
other avenues to regularize the ownership of CCAH and Independence.

ENFORCEMENT

The Board's investigation of the BCCI matter is continuing and is the most com-
prehensive in our experience. As part of its investigation, the Board is proceeding
with enforcement actions as the evidence to support such actions is accumulated.
On July 12, the Board issued a notice of intent to bar from U.S. banking individuals
participating in the Independence Bank violation. Those individuals are Agha
Hasan Abedi and Swaleh Naqvi, two former senior officers of BCCI; Kemal Shoaib,
a former officer of BCCI and the former chairman of Independence Bank; and
Ghaith Pharaon, the owner of record of Independence Bank and a shareholder of
BCCI.

More recently, on July 29, the Board issued a Notice of Assessment of $200 mil-
lion in civil money penalties against BCCI for its illegal acquisition of CCAH, the
National Bank of Georgia and CenTrust Savings Bank. The Board also issued a
notice of intent to bar permanently nine individuals associated with BCCI from any



91


future involvement with U.S. banking organizations. On the same day, the District
Attorney's Office for the County of New York secured indictments of BCCI.

The Board is continuing to cooperate with law enforcement agencies, and will of
course consult those agencies before taking enforcement action so as to avoid preju-
dicing any criminal investigation. Thus, at the request of the U.S. Attorney for the
District of Columbia, the Board has deferred temporarily the assessment of substan-
tial civil money penalties against the individuals already charged, pending comple-
tion of the U.S. Attorney's criminal inquiry.

CURRENT STATUS

As of July 6, 1991, governments of 18 countries were known to have closed or re-
stricted the activities of BCCI operations in their jurisdictions. By July 29, 1991, a
total of 44 countries had closed BCCI offices in their respective jurisdictions. BCCI
offices continued to be open under varying degrees of regulatory presence in 25
other countries as of the same date. Although complete information is not yet avail-
able, it appears that governments of some developing countries could have some ex-
posure to BCCI.


LEGISLATIVE INITIATIVES

As a result of the BCCI matter and other recent compliance problems with for-
eign banks, the Board reviewed the statutes, regulations, and supervisory policies
governing foreign bank operations in the United States. In order to help prevent
problems such as those presented by BCCI from recurring, the Board has sent to
Congress a set of proposals to strengthen the supervision and regulation of foreign
banks operating in this country. Those proposals, collected as the Foreign Bank Su-
pervision Enhancement Act of 1991, were introduced in the Senate as S. 1019 by
Senators Riegle, Kerry and Garn, and are to be considered as part of the compre-
hensive banking reform proposal currently before the Senate Banking Committee.

This legislation would establish uniform federal standards for entry and expan-
sion of foreign banks in the United States, including, importantly, a requirement of
consolidated home country supervision and the application of the same financial,
managerial, and operational standards that govern U.S. banks. The proposal would
also grant regulators the power to terminate the activities of a foreign bank that is
engaging in illegal, unsafe, or unsound practices. Regulators would be provided with
the information-gathering tools necessary to carry out their supervisory responsibil-
ities.

As this case amply demonstrates, continuing consolidated supervisory oversight of
a bank's operations is essential to maintaining the integrity of the bank's operations
and preventing adverse effects on the financial system. BCCI operated without a su-
pervisor that could demand consolidated financial reports; this method of operation
was critical to its ability to carry out the manipulation of its books and the conceal-
ment of its actual financial condition.

The proposed foreign bank legislation is intended to ensure that no other foreign
bank may participate in this country's banking system unless the books and records
showing the financial condition of that organization are open to inspection by a
home country supervisor and the bank is supervised on a consolidated basis. The
legislation provides the regulatory tools needed to implement this policy.

CONCLUSION

The Federal Reserve is monitoring the BCCI situation closely and will continue to
cooperate with Federal, state, and foreign bank supervisors and law enforcement
agencies. Further information concerning the extent of BCCI’s fraudulent activities

and the individuals involved may come to light as the numerous investigations un-
derway progress.

Our immediate goal is to make the current separation in fact between BCCI and
CCAH and Independence a complete separation in law, so that these banks can be
relieved of any taint that they might be suffering from an association with BCCI. In
the coming weeks, we will be working with British, Cayman and Luxembourg au-
thorities toward that end.

Senator Kerry. Thank you very much, Mr. Mattingly.

Let me just say, because I think it is important, as criticisms are
surfacing here and as questions arise about performance, I think it
is also important to point out where there has been good perform-
ance and where people have been responsive.



92


And I want to personally thank you and I want to thank Chair-
man Greenspan and the Fed who have been very responsive to our
concerns this year. The Chairman personally has responded a
couple of times to suggestions that we had. I want to congratulate
the Fed for its recent efforts in this.

I know the Chairman was in touch with the Bank of England
some months ago and was talking with them about the problem
and there were great questions about how to proceed.

I think in recent months you have proceeded courageously and
appropriately.

There are questions, obviously, about who knew what and when
and who should have known what when and whose responsibility it
was to do what when. And those are clearly on the table to a cer-
tain degree here.

I think one also has to put all of that in perspective and balance
it against the role of the Fed and what the Fed is really equipped
to do and supposed to do and so forth.

The record is clear and I concur with the record that in recent
years there has been a conscious effort to prevent BCCI from being
able to gain the foothold that it did gain surreptitiously. But there
are other questions that I want to ask you in terms of this.

And I would like to begin in one area and then we will move
over to another. Who, according to the Fed, owns First American
Bank now? Who owns the bank?

Mr. Mattingly. The banks, the First American banks are owned
by a bank holding company registered with the Board located here
in Washington, DC. The holding company is called First American
Bankshares.

First American Bankshares is owned by a series of holding com-
panies, three other holding companies. The top tier holding compa-
ny is called CCAH.

Senator Kerry. And who are the principals of CCAH?

Mr. Mattingly. It is the stock of CCAH that we believe, over 50
percent of the stock of that holding company, we believe, is con-
trolled by BCCI. We also know that 29 percent of that stock is con-
trolled, owned and controlled, by the Government and ruling
family of Abu Dhabi, one of the United Arab Emirates.

Senator Kerry. So in effect, when you peel off the layers and
work down the corporate ladder, in point of real control of who has
the capacity to govern, it is fair to say that the Government of Abu
Dhabi owns First American Bank?

Mr. Mattingly. I would say that the Government of Abu Dhabi,
the Government and the ruling family, the Government and the
.yal family of Abu Dhabi, have a control block, yes. I would agree
with that.

Senator Kerry. So the largest bank in Washington — do you have
a correction of that, Mr. Taylor?

Mr. Taylor. No. Other than to observe that I agree with Mr.
Mattingly. However, I think if you were to ask those people and
they were here, they would say they don’t have very much control
at all in reality in the sense of calling the day-to-day shots.

Senator Kerry. And the reason for that would be what?



93


Mr. Mattingly. Pursuant to the original Board approval order
in 1981, control of those banks was put in the hands of an Ameri-
can board of directors, the First American Bankshares directors.

At that time, it was Mr. Clark Clifford, Mr. Altman, Senator
Stuart Symington, General Quesada, General Gavin. Representa-
tions were made to the Board that these Middle Eastern investors
were only in this as a passive investment, that real control of the
operations of those American banks would be in the hands of this
American board of directors that I’ve described.

Senator Kerry. Now in terms of the legal issues here and the
rights of the Fed, so to speak, is there a legitimate distinction be-
tween legal control by shares owned and day-to-day control as it is
exercised?

Mr. Mattingly. Under our statute there is such a distinction,
yes.

Senator Kerry. Can you clarify that for the sake of the commit-
tee?

Mr. Mattingly. There are two types of control. The first type of
control under the Bank Holding Company Act is ownership or con-
trol over the stock of a bank. It is that which we believe that BCCI
has.

The other kind of control covered by the Bank Holding Company
Act is control over the way the bank does business, a so-called con-
trolling influence test; can this person cause the bank to do certain
things or not do certain things. That is the control that, when the
Board approved the order, was vested in the board of directors, the
American board of directors.

Senator Kerry. Was it vested in the board of directors in the
knowledge that the bank would, in effect, by virtue of stock con-
trol, passive or otherwise, be in the hands of the ruling family and
connections of Abu Dhabi?

Mr. Mattingly. Yes, at that time the Abu Dhabi, part of the
royal family of Abu Dhabi, I believe, was to own approximately 10
percent of the CCAH. And ADI A, the Abu Dhabi Investment Au-
thority was to own about 8 percent. So the original

Senator Kerry. The original transaction which took place in

1981.

Mr. Mattingly [continuing]. Was consummated on April 17,

1982. The Abu Dhabi interest, I believe, had about — I can get you
the exact figure. I think it’s 18 or 20.

Senator Kerry. We would like the exact figure for the record if
you have it. You do not have to do that now, but is it 18 percent or

20 percent?

Mr. Mattingly. I have it right here.

Senator Kerry. Then I will wait for you.

Mr. Mattingly. The Abu Dhabi Investment Authority had 8.24
percent. And then it shows here, I’m sorry — 13.72 percent that was
held by a gentlemen named Abdullah Darwash. And he was hold-
ing those shares as trustee or personal representative for a minor
son of the ruler of Abu Dhabi. So, together you have approximately

21 percent, a little over 21 percent, 22 percent.

Senator Kerry. Now Darwash at that time was under house
arrest, was he not, I believe? And this is the issue that came up in
the course of



94


Mr. Mattingly. Yes, on the day that the Board approved the
order. The Board subsequently learned that Mr. Dharuash was
under house arrest in Abu Dhabi.

Senator Kerry. Subsequent to this purchase, a clandestine series
of transactions took place, is that accurate?

Mr. Mattingly. That’s our information, yes.

Senator Kerry. And those specifically were what?

Mr. Mattingly. The manipulation in the stock.

Mr. Taylor. A series of loans were basically made by BCCI to
individuals secured by the stock. And indeed, the terms at least
from what we can determine, the terms of the loans were such as
to not make them loans at all, but really to cast them more in the
light of a nominee holding. That’s in layman’s terms.

Senator Kerry. And in effect, because they were not serviced,
ownership was transferred?

Mr. Taylor. Not just because — I should let the counsel answer.

Senator Kerry. Not just because they were not serviced. Go
ahead.

Mr. Mattingly. They were sham loans. You know, in our view.
What it alleges, the Board has issued a 110-page indictment that
describes the various transactions that occurred in that stock be-
ginning in 1982. What’s alleged in here is that they weren’t loans,
that that stock was owned by BCCI right from the beginning and
loans were — there were loans made to individuals, stock was regis-
tered in individuals names, and fictitious loans were made to those
individuals to purchase the shares.

Senator Kerry. And as a consequence of those fictitious loans, it
is the judgment of the Fed Reserve today that BCCI in effect owns
First American, is that correct?

Mr. Taylor. That’s correct.

Mr. Mattingly. What is alleged in this document is that begin-
ning in 1982 they had at least 25 percent, which is legal control
under the Bank Holding Company Act and over the ensuing years
they may have had more. Over the ensuing years ending in 1989,
they acquired, we believe they hold today, 60 percent of the stock
ofCCAH.

Mr. Taylor. But one of the questions that comes up when one
looks back to see what happened and when it happened, and the
question is not, could BCCI lend to these individuals. There is noth-
ing in our order that prohibited BCCI from lending to individuals
for other purposes.

But it was very clearly in the intent in the original application
and it was the Board’s understanding when it approved this appli-
cation that they would not borrow from BCCI for the purpose of
affecting the transaction. Not just because the loans were past due,
but also because of other documents that were found indicating
prior arrangement as opposed to straight debt.

Mr. Mattingly. I think for the benefit of the committee, if I
could, in our prior testimony before the Banking Committee, there
are listed out on pages 8 and 9 a sampling of the various state-
ments and representations made to the Federal Reserve Board in
1981 in connection with that application. And one of them, I think,
bears repeating.



95


The application stated, quote, “BCCI owns no shares of FGB,”
that’s First American, “CCAH or CCAI either directly or indirect-
ly, nor will it if the application is approved. Neither is it, BCCI, a
lender nor will it be with respect to the acquisition by any of the
investors of either First American, CCAI, or CCAH shares.”

In our view, nothing could be clearer.

Senator Kerry. Now, Mr. Mattingly, Mr. Taylor, are you pre-
pared to make available to the committee a copy of the Price Wa-
terhouse report?

Mr. Mattingly. This is the Price Waterhouse report dated June?

Senator Kerry. The June Price Waterhouse report.

Mr. Mattingly. I would think that if the Federal Reserve re-
ceived a formal request from the committee, that would be given
appropriate consideration, serious consideration. [Laughter.]

Senator, I am not at liberty to make that decision. That decision
would have to be made by the Board.

Senator Kerry. Can you tell me any reason why the committee,
we are just looking at this issue, should not be able to see the
report on which the judgment was made that massive fraud was
involved?

Mr. Mattingly. The Federal Reserve received that report from
the

Senator Kerry. You guys do not classify things, too, do you?

Mr. Mattingly. No, we did not. We received that report from
the Bank of England. And we received it under an arrangement
from the Bank of England that we would have to notify them of
any request that we received for access to the report. I add that
that report

Senator Kerry. Well, I would take the liberty, we are a quorum
here of the committee, I do not know how everybody feels, but I
would like to see that report and I would like to request it? Does
anybody disagree? [No response.]

So consider this a formal request of the committee.

Mr. Mattingly. I would hope that we could submit that report.

Senator Kerry. Let me ask you another question. And we would
hope that you can submit it shortly.

Have you or any of your investigative staff, Mr. Taylor, seen an
alleged list of U.S. officials reportedly prepared by officials at BCCI
that indicates payoffs or bribes in any form?

Mr. Taylor. We have been hearing about this list for the last 3
weeks or 4 weeks. We have questioned almost everyone we can find
in our organization to see if there is anything that could have been
determined to be such a list. And we have not been able to find
such.

The only thing I can think of is that early in the examination I
told the examiners to be sure and get a full list of all of the cus-
tomers of First American so that when we had known names from
the Middle East or from Europe or from wherever who were people
who might be linked to BCCI, that they could check it against the
full list of the customers.

So our examiners have that list. But we do not — to answer your
question directly — I know of no list of individuals who received
payoffs. I would like to have such a list. And I would be happy to
turn that over to the committee immediately.



96


Senator Kerry. Do you have any evidence at this point of either
bribes or payoffs?

Mr. Taylor. We have a few instances where there are expenses
paid for people to take trips and attend conferences and the like.
There are some expenses — you know obviously, any bill to a law
firm, any bill paid to a law firm — that you have to know what’s
behind them. We don’t know of anything at this point.

We have some list of people as consultants — really not a list, I
guess one or two consultancies — that you could say, what did the
consultant do and so forth. But we don’t have any big list.

Senator Kerry. Just one last question before I turn it over to my
colleague here.

Are you aware of an audit completed recently by the auditors for
First American which suggests that certain U.S. officials may have
received unusual services or payoffs from the bank? Have you
heard of that?

Mr. Taylor. I’m not aware of that.

Senator Kerry. You are not aware of that? So you do not have
either of those in your possession?

Mr. Taylor. No.

Mr. Mattingly. I’m not aware of it, Senator.

Senator Kerry. Fine. We have just been hearing about it and I
wanted to ask.

Mr. Taylor. We have, too. And we are most interested in any
information that could lead us to find such a list we would appreci-
ate.

Senator Kerry. Thank you very much. Senator Brown?

Senator Brown. Thank you, Mr. Chairman.

Mr. Taylor, or perhaps Mr. Mattingly, I wonder if you can tell
me when the Federal Reserve first had information forwarded to it
that raised the question of BCCI having taken control of the bank
or purchased indirectly controlling interest?

Mr. Taylor. We had, I think the first indication that I had was
really through a contact that our Mr. Ryback had internationally
that indicated there were loans at BCCI in Luxembourg. I mean,
that was the first time I think I had heard of a specific statement.
There were allegations from the beginning, I mean from 1978 on.

But as far as information on someone having control and there
being an identifiable individual that made that statement* I think
it was not until the middle of November 1989 that we had anything
specific.

Mr. Mattingly. I think that’s correct. As I testified in front Of
the Senate Banking Committee — I’m groping here for the date.

Senator Brown. Well, that is about 13 months prior to when the
investigation was ordered.

Mr. Taylor. That’s until the order of investigation was given,
that’s correct.

Mr. Mattingly. What we did after we received that was to — do
you want to continue?

Mr. Taylor. Let me back up.

First of all, as it relates to BCCI and what I’ll call the modern
era of 1986, 1987 on, I mean, in 1987, of course, the Federal Reserve
through its examiner in Miami made a criminal referral for money
laundering in 1987 to the Justice Department and to the Internal



97


Revenue Service, which was then the procedure for Bank Secrecy
Act suspected violations.

Senator Brown. I am sorry, repeat that for me? Who was it that
made that?

Mr. Taylor. Our examiner in an examination of the agency of
BCCI in Miami suspected money laundering and made, through the
Atlanta office of the Federal Reserve Bank, a criminal referral to
the Justice Department.

I believe the procedure was that after they had made that refer-
ral, we received it in Washington at the Fed, and we were the ones
in Washington who made the referral on to the Internal Revenue
Service. So there were two referrals of the money laundering in
1987.

Senator Brown. Was there anything in that period that was
passed on to the Fed that would have suggested that BCCI had an
equity interest?

Mr. Mattingly. Yes. There was telephone call that a member of
the supervisory staff received from a Customs official on December
27, 1988, a Customs officer asking our supervisory person about a
possible connection between First American National Bank of
Georgia and BCCI. The Customs official asked for all the docu-
ments, the Y-7's, the reports and anything else that we had. And
in the course of that conversation he mentioned to this Federal Re-
serve staff person that he had an indication from a BCCI employee
that BCCI owned First American banks.

Senator Smith: What action did the Federal Reserve take when
that information came to their attention?

Mr. Mattingly. I don’t know whether this was in response to
that or not, but in January 1989 the Federal Reserve Bank of Rich-
mond conducted a review to determine whether First American,
whether there was a link between First American and BCCI.

Senator Brown. So the information came in 1988 and 1989, and
they began a review?

Mr. Mattingly. And the review did not detect

Mr. Taylor. You have to remember that the information that
came to us was a statement that someone had made. There is no
corroborating evidence of that, that I’m aware, and the first time
we found a place where there might be corroborating evidence is
really when we had the supervisor in Luxembourg tell our Mr.
Ryback that there certainly are loans.

Senator Brown. That was when, again?

Mr. Taylor. That was November 1989.

Senator Brown. November 1989. Tell me, in the financial state-
ments that the nominees had submitted when they acquired their
interests in the banks that as I understand it you all review, were
those consistent? I mean, looking back on them, are they financial
statements that you think would be reasonable for people acquiring
this large an interest?

Mr. Mattingly. Remember, BCCI did not purchase First Ameri-
can as far as we knew.

Senator Brown. I understand that, but the people who were the
so-called — the purported purchasers of the bank.



98


Mr. Mattingly. Yes, the original application — they were submit-
ted with the original application statements by those people show-
ing, in most cases, very, very substantial net worths.

Senator Brown. Were those financial statements audited?

Mr. Mattingly. No, they were not. There were some of them
that were submitted by accounting firms. There were also confir-
mations of account balances at banks. In addition to that, the Fed-
eral Reserve went to the point of holding a hearing and having
four of those investors come in and testify in front of that hearing.
Those individuals came in — it was an informal hearing. Those indi-
viduals came in and made statements that they were going to
make the acquisition with their own personal funds. They were not
borrowing from BCCI.

Senator Brown. What did the Fed do to verify those bank state-
ments — those personal financial statements?

Mr. Mattingly. The staff of the Federal Reserve made inquiries
of other Government agencies about any information that they
might have about these particular individuals. They went to the
CIA, the State Department, the Commerce Department, and so
forth.

As I said, the financial statements that were submitted with the
application, there were requirements that they also submit in cer-
tain cases statements from banks indicating that the banks were
holding balances for those individuals.

Senator Brown. Now, according to our press, Mr. Clifford and
Mr. Altman or about May 3 presented Federal bank regulators
with a financial statement outlining their purchase and sale of
First American stock in the 1986-88 period. Do you understand
that to be correct? Is that newspaper report correct?

Mr. Mattingly. Well, the Federal Reserve did not find out —
well, Mr. Altman and Mr. Clifford reported in certain of the official
filings with the Board by the company that they had purchased
stock of CCAH. During our investigation, we found out that BCCI —
that those acquisitions — that those acquisitions of stock were fi-
nanced by BCCI, and that is the report that I think you’re refer-
ring to.

Senator Brown. Uh-huh.

Now, there is a chart before you that may help, but basically, as
I understand it, the stock in the roughly 1 V 2 -year period tripled in
value. A portion of that was sold at an enormous profit, and a por-
tion of that stock remains in those gentlemen’s names.

My question is, what is going to happen to the stock that they
continue to hold, and what will happen to the stock — to the profit
that was recognized off of those stock sales?

Mr. Mattingly. Senator, as I indicated, the Board’s investigation
into this matter is continuing, and I believe it would be — I would
ask your consideration that we not answer that question. That is a
matter that’s directly involved in our investigation as well as your
investigation.

Senator Brown. I can appreciate your position. Let me ask, is it
within the purview of the Board to take action regarding a stock
sale and take action regarding the stock? Is that one of the things
that Gomes under



99


Mr. Mattingly. That would be within the purview of the Board
under our supervisory responsibilities, yes.

Senator Brown. If I understand what you said, these are both
areas which you are looking into?

Mr. Mattingly. The Board is looking into the entire matter of
this BCCI-First American link from 1978 when it started until the
present. We are looking at every aspect of that from every possible
angle, and as I indicated, when we get evidence, we take action.

Now, in this indictment that we issued the other day, there are
schedules which set out who bought the stock when and for how
much, and when they sold it. I can read. I can tell you that from
that document it’s alleged that Mr. Clifford and Mr. Altman — that
Mr. Clifford and Mr. Altman in a rights offering conducted in July
1986, Mr. Clifford purchased 4,495 shares of CCAH at $2,216 per
share; Mr. Altman purchased 2,247 of CCAH at $2,216 per share.

I can also say that the notice that was issued by the Federal Re-
serve Board indicates that in 1987 Mr. — I’m sorry. In 1988, Mr.
Clifford sold 3,200 of the shares for $6,800 a share. Mr. Altman sold
1,600 of his shares for $6,800 a share.

Senator Brown. Thank you. One last question if I may, Mr.
Chairman. I would be interested in knowing your view as to wheth-
er or not it would be of value to ask for audited financial state-
ments from individuals when they are making applications.
Wouldn’t that have solved some of this problem?

Mr. Taylor. Not if they were, the kind of audits that were done
on BCCI. I mean, a serious answer is that we oftentimes find that
an audited statement does not necessarily give you the picture that
you would expect it to, and it’s sorely disappointing that that hap-
pens as frequently as it does.

Senator Brown. Well, I can appreciate if you are talking about
an international bank, but if you are talking about an individual
financial statement, surely if someone has dramatically misrepre-
sented their net worth, a financial — an audited financial statement
is of great value, is it not?

Mr. Taylor. It certainly doesn’t hurt a thing. It certainly can’t
detract. But I mean, it is not necessarily a comprehensive state-
ment of truth, unfortunately.

Senator Brown. Well, I assume without knowing the substance
of those statements, if someone showed the ability to buy hundreds
of millions of dollars worth of stock and it turns out they have
nothing in the way of assets, a basic check of those financial state-
ments could have shown that — turned that up, could it not?

Mr. Mattingly. Senator, that’s exactly why the Federal Reserve
requested detailed financial statements. The individuals — these
Middle Eastern investors who the Fed was told were going to buy
this stock are very — the statements show that they are wealthy.
There are a number of them who are rulers of emirates of the
United Arab Emirates.

Senator Brown. One last question. My understanding is Mr. Clif-
ford is the chairman of First American and Mr. Altman is its presi-
dent. I also understand that you have the authority or the ability
to remove them or replace them with officers or directors that are
not tainted by connects to BCCI. Is it your intention to exercise
that authority?



100


Mr. Mattingly. As I indicated, Senator Brown, the Board’s in-
vestigation is continuing, and when we obtain evidence that indi-
cates that enforcement action should be taken, we take it. Other
than that, I really would not like to comment on the status of the
decisionmaking going on within the Federal Reserve about what
additional supervisory — what specific additional supervisory ac-
tions should or could be taken next.

Senator Kerry. But that is within the purview of the Board?

Mr. Mattingly. The Federal Reserve Board has authority under
the statute to remove a director or an officer of an American Bank
or bank holding company upon— if it meets certain tests. There has
to be a violation of law, damage to the bank, and so forth.

Mr. Taylor. I might add, not as it relates to this case, but the
removal of an officer from a U.S. bank is no easy task. It is very
difficult, in a legal sense, to do that, and in fact we have offered
corrective language, have we not?

Mr. Mattingly. We have proposed corrective language.

Senator Kerry. What, if any, action is the Fed taking to protect
records and guarantee the records are not destroyed?

Mr. Mattingly. Senator Kerry, when we commenced our investi-
gation one of the first things that we did was to take physical pos-
session of every piece of— all of the CCAH records that we could
get our hands on.

Now, there are certain records that we were not — that we have
not yet been able to gain access to because of claims of attorney-
client privilege. There were procedures put in place, however, to
safeguard those documents, but when anyone told us of documents
we acted. When we were told that there were records at the Miami
agency that were useful for our investigation, we issued a subpoe-
na, and we have thousands of boxes of documents from the Miami
agency under subpoena. When we are told of information, we go
after it.

Senator Kerry. Senator Cranston?

Senator Cranston. Thank you very much, Mr. Chairman.

Am I correct in my understanding that BCCI has or had repre-
sentative or agency offices in Washington, DC, New York, Miami,
San Francisco, Los Angeles, Boca Raton, and Tampa?

Mr. Mattingly. Senator Cranston, they had offices in those
cities. In Washington, DC, was what’s called a representative office
and in Houston it was a representative office. In others there were
agencies.

Senator Cranston. Are they still active and open?

Mr. Mattingly. On July 5, there were two left. There was one in
Los Angeles and there was one in New York, and both of those
were seized on July 5 by the State of California and the State of
New York.

Senator Cranston. What about the agencies?

Mr. Mattingly. Those were agencies.

Senator Cranston. I mentioned this morning some banks with
some sort of relationship in some other States, or in addition to
those we have been discussing.

One is the former Bank of Commerce, now First American, in
New York. In Florida, the former Bank of Escambia, now First
American of Florida. In Maryland, former Financial General, now



101


First American, Maryland. In Virginia, former Financial General,
now First American, Virginia, and in Tennessee, First American.

First, am I correct in my understanding that these are not con-
nected with First American here in Washington?

Mr. Mattingly. No, they are. First American here in Washing-
ton, DC, owns most of the banks directly that you named. They
own a bank in Washington, DC, a bank in Maryland, a bank in
Virginia, a bank in New York, a bank in Tennessee, and a bank in
Florida.

Senator Cranston. Is that within a holding company?

Mr. Mattingly. Yes. It’s a holding company and they own sub-
sidiary banks.

Senator Cranston. Regarding the Independence Bank of Encino
out in California and part of Los Angeles, does — or did Ghaith
Pharaon own the Independence Bank?

Mr. Mattingly. Yes.

Mr. Taylor. Yes and no.

Mr. Mattingly. The bank was bought in his name. We allege
that BCCI used Mr. Pharaon as a nominee to purchase the bank.

Senator Cranston. Is he still the owner?

Mr. Mattingly. He is the record owner.

Senator Cranston. What is the current status of that bank?

Mr. Mattingly. That bank is under a divestiture. BCCI is under
a divestiture order from the Federal Reserve to dispose of that
bank as promptly as possible.

Senator Cranston. Have there been transactions between Inde-
pendence Bank and the BCCI office in California or with other
BCCI institutions?

Mr. Mattingly. The Federal Reserve issued an order against
BCCI in connection with the Independence matter in May of this
year and that order was intended to terminate the transactions be-
tween the bank and the BCCI. There were some transactions, how-
ever, between Independence Bank, I believe, and BCCI’s operations
in the United States. Those transactions are being looked at by the
Federal Reserve.

Senator Cranston. Were any former BCCI employees employed
by Independence Bank?

Mr. Mattingly. Yes. There was a BCCI employee named — yes.
There was a BCCI employee who, our information is, negotiated
the acquisition of the Independence Bank and then was — our in-
dictment says was — then put in as the chairman or chief executive
officer of Independence Bank.

The Federal Reserve has issued an action removing, barring that
person. He’s no longer at Independence Bank, but there’s an action
outstanding to keep him out of U.S. banking in the future.

Senator Cranston. Ghaith Pharaon, while owning the Encino
Bank on behalf of BCCI, also helped BCCI acquire 25 percent of
CenTrust in Florida, according to the Federal Reserve order of July
29 which just came out. Can you tell us how, and for what purpose,
Pharaon and BCCI obtained an interest in this failing S&L?

Mr. Mattingly. Senator Cranston, the Federal Reserve — the
focus of the Federal Reserve’s investigation — has been on the First
American organization. In the course of that investigation, we



102

come across other information that BCCI has acquired banks and
we act on it.

In this particular case, the CenTrust Savings Bank in Florida, we
came across that within the last 3 or 4 weeks. We found some docu-
ments in London that indicated that in fact BCCI had funded Phar-
aon’s acquisition and that the shares had been pledged to BCCI and
that BCCI had voting control over those shares. I cannot answer
your question about why BCCI acted in that way.

Senator Cranston. Regarding First American here in Washing-
ton, does the Federal Reserve have any questions about whether of-
ficials of the Government of Abu Dhabi may have violated U.S.
laws in acquiring the bank?

Mr. Mattingly. Senator, again the Board’s investigation, as I in-
dicated before, is looking at all aspects of this thing. As we get evi-
dence, we act on it. The indictment that the Federal Reserve issued
on July 29 does not charge the Government or ruling family of Abu
Dhabi with illegally acquiring control of First American.

Senator Cranston. But that may be a matter that is being
looked at, is that correct?

Mr. Mattingly. We are looking at all matters in connection with
this case.

Senator Cranston. What is the current financial status of First
American? For example, has new capital been placed in First
American in 1991?

Mr. Taylor. That’s correct.

Senator Cranston. Can you tell us by whom and how much?

Mr. Taylor. Yes. The Abu Dhabi Government and Abu Dhabi in-
vestment authority and Abu Dhabi ruling family since— really
since, let’s say, September 1990 — within the last year, has placed
approximately slightly over $200 million into First American, some
of it to deal with debt at the holding company level and some of it
to put into capital of the subsidiary banks.

Basically what happened in the beginning of the year is we
asked the other agencies — the Federal Reserve is not the primary
supervisor of any of these banks, but we asked and received the co-
operation of the other supervisors, the Comptroller of the Curren-
cy, the FDIC, the various States involved, and they have examined
the bank. What we then did was go to the Abu Dhabi people and
say that the capital requirements of the supervisors are x, and we
expect you to put that in there. And they did, and a little more ac-
tually.

So they’ve been fairly cooperative, even though they fully under-
stand that they’re under — that the whole thing is to be divested as
soon as possible.

Senator Cranston. Do you know if any commitments were made
by the U.S. Government in return for this infusion of capital?

Mr. Taylor. None that I know of, and I’m the one who asked for
the money.

Senator Cranston. Mr. Taylor, you mentioned in 1987 criminal
referral by

Senator Kerry. Would my colleague yield for just a minute? We
are trying to cover some logistics here. We are almost at 4 p.m. We
have not had the State Department folks on yet.



103


What I am going to do, with the permission of my colleagues, is
suggest that we put State Department's current statements in the
record as if read but not proceed forward to question them today,
and build off those and have them back at a time when we have
more time to pursue those questions, because I think there are
going to be limits to what we can digest, and we do have another —
we want to try to deal with the issue of Peru and so forth. Is that
agreeable?

Senator Wofford. Yes.

Senator Cranston. Yes.

[The prepared statements of Messrs. Borg, Kreczko, and Burleigh
follow:]


Prepared Statement of Parker W. Borg

Mr. Chairman: Good afternoon. I am Parker Borg. I have been Deputy Assistant
Secretary in the Bureau of International Narcotic Matters at the Department of
State since May 1989. I would like to focus my statement on the narcotics money
laundering issues arising out of the BCCI affair.

The Bureau of International Narcotics Matters (INM) works with other Bureaus
at State and other U.S. agencies in the development of narcotics money laundering
policy, strategy and implementation. While State plays an important role in policy
formulation, it is not the lead agency in implementation, but cooperates on a day-to-
day basis with Justice, Treasury, the Drug Enforcement Administration, Customs
and other agencies.

Some examples of INM’s efforts against money laundering might be useful. INM
is a member of the U.S. delegation to the Financial Action Task Force (FATF); our
staff monitors money laundering developments around the world, and participates
in numerous international meetings, including U.S. delegations to both bilateral
and multilateral meetings, some of which it chairs. INM develops the money laun-
dering chapter of the annual International Narcotics Control Strategy Report,
known as the INCSR. We draw on information from Embassies, the intelligence
community, the law enforcement and the financial affairs agencies. That informa-
tion has helped detail illicit activities undertaken by BCCI worldwide.

In 1986, Congress mandated that narcotics-related money laundering be one of the
three criteria for making the Presidential determination to certify whether govern-
ments were cooperating on international narcotics control matters.

As a result, we decided to add a chapter devoted specifically to money laundering
in the INCSR beginning with the March 1988 Report. The 1991 report contained a
money laundering chapter of 63 pages, with detailed reports covering 122 govern-
ments. Each of the four annual reports since 1988 has contained information on in-
vestigations that involved BCCI, although legal and intelligence sensitivities pre-
vented us from identifying BCCI by name in as many cases as we would have liked.

The 1989 INCSR provided 13 paragraphs of discussion of the charges against BCCI
and its officers, resulting from Operation C-Chase, a U.S. Customs operation, which
focused inter alia on BCCI operations in the United States and overseas. A follow-up
report on this investigation of BCCI was provided in the 1990 and 1991 INCSR re-
ports to Congress.

The March 1991 Report noted as a final tally of results:

— Operation C-Chase resulted in the arrest of 53 individuals, 9 of whom were
high-ranking BCCI officials;

— BCCI had pled guilty to one count of conspiracy and 28 counts of money laun-
dering;

— BCCI SA had pled guilty to one count of conspiracy and two counts of money
laundering;

— These convictions resulted in BCCI’s forfeiture of approximately $15.3 million in
criminal penalties to the United States;

— Five BCCI officials in Florida and two in the United Kingdom were convicted of
money laundering conspiracy and given prison sentences;

— From BCCI forfeited funds, we shared $2 million with the Government of
France and $3 million with the Government of the United Kingdom through
the U.S. Customs asset sharing program.

— We noted also the role of the United Arab Emirates in the ownership of the
bank and their pledge of cooperation in the investigation of BCCI operations.



104


What have we learned?

The BCCI affair and other investigations have demonstrated we need controls
that are specific to narcotics money laundering. BCCI has figured in several narcot-
ics money laundering investigations, but it is by no means the only bank through
which drug proceeds have been laundered. We do not know how many drug dollars
may have been bottled up by the closing on about July 5 of BCCI branches around
the world, but we know enough about their global networks to know that narcotics
money laundering did not stop on that date.

Where there is a criminal conspiracy to conceal money transactions and a deliber-
ate will to circumvent reporting and other disclosure requirements, even the best
narcotic countermeasure programs with the most comprehensive of laws are vulner-
able to exploitation.

What are we doing?

What we can do, and are doing, is to understand the methods used to launder
money, through BCCI and other banks as well, and continuously refine our counter-
measures while expanding our networks of cooperation.

Working bilaterally and through multilateral organizations, the United States has
become a leader in the effort to expand the global consensus on good banking prac-
tices to prevent narcotics money laundering.

Our efforts have promoted initiatives against money laundering over the last 3
years as an important foreign policy issue as well as a financial management priori-
ty in many key financial center countries. These priorities are reflected in whole-
sale changes of laws and regulations in many countries.

Cooperation between the financial and enforcement communities in these govern-
ments has improved considerably, abetted in good part by the ratification of the
United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotrop-
ic Substances (the Vienna Convention), the adoption of the recommendations of the
Financial Action Task Force, the approval of the European Community's new policy
directive and other commitments — and especially by the deliberations which led to
the drafting and approval of these international accords.

We have addressed these concerns vigorously on a bilateral basis with numerous
governments, including countries as diverse as the United Kingdom, France, Swit-
zerland, Austria, Australia, Panama, Luxembourg, Hong Kong and Singapore. In
the past year, we have participated in regional discussions about money laundering
in Latin America, the Middle East, Africa and Asia, where we have promoted the
findings of the FATF.

In accord with the Vienna Convention and FATF recommendations, numerous
countries have adopted or are now deliberating provisions which criminalize money
laundering, regulate the flow of currency and monetary instruments, mandate
records of currency and other monetary instrument transactions, require declara-
tions of beneficial owners of accounts, and compel disclosure of suspicious transac-
tions.

Banks and bankers are compelled by due diligence conventions and other sanc-
tions in numerous countries to accept responsibility for ensuring that their institu-
tions take affirmative steps to prevent narcotics money laundering. These changes,
and a much improved attitude on international cooperation, have strengthened law
enforcement agencies on every continent, and help ensure that the kinds of narcot-
ics-related transactions attributed to BCCI and other banks do not recur.

Thanks to the adoption of these new laws and regulations, we believe banking sys-
tems in many key countries are less vulnerable today. These changes result from a
growing international conviction that drug trafficking cannot be halted unless we
deprive trafficking organizations of their vast proceeds and develop a shared sense
of responsibility for reducing the production, trafficking and consumption of drugs,
which have been increasing dramatically in Europe and Asia.

We believe this challenge is becoming more complex. As we noted in the 1991
INCSR, we are detecting money laundering schemes involving a second tier of coun-
tries which were not of major concern to us 3 years ago. Traffickers, and more par-
ticularly their professional money managers, are actively seeking those countries
and territories where there are central banks with minimal capabilities, financial
systems with limited controls on foreign exchange, and restrictive bank secrecy
practices. We are responding by extending the dialogue throughout the world.

While compliance with the Vienna Convention and the FATF recommendation
will remain high priorities, the challenge for the future will also include the appli-
cation of these same standards to non-bank financial institutions. We need to work
to tighten requirements for incorporating or licensing businesses which might
engage in financial transactions or make use of bearer shares and certificates. We
need to develop means to regulate exchange houses and other traditional family fi-



105

nancial systems which are at the core of financial exchanges in many developing
countries around the world.

In summary, we have been aware of BCCIs involvement in narcotics money laun-
dering for a number of years, and have indicated that awareness in our reports to
Congress. Working with information from the Embassies, the law enforcement and
intelligence communities, we have acted on the lessons learned from the BCCI expe-
rience, on how hanking systems can be penetrated and manipulated. By working
with enforcement agencies as well as policymakers at Justice and Treasury we have
formulated recommendations for the Financial Action Task Force and other multi-
lateral organizations, as well as for use in our bilateral negotiations with other fi-
nancial center countries on cooperative countermeasures. We have made important
progress in the last few years, but there is a lot more to do.


Prepared Statement of Alan J. Kreczko

Mr. Chairman and Members of the Committee: Good morning. I am Alan J.
Kreczko, Deputy Legal Adviser at the U.S. Department of State, and I am pleased to
be here with you today to provide the Committee with information relating to the
Department's efforts to facilitate the ongoing investigation into the operations of
the Bank of Commerce and Credit International (BCCI).

Let me begin by emphasizing that the State Department has viewed this matter
from the outset as one properly conducted and controlled by law enforcement and
bank regulatory officials. The Department has undertaken to cooperate to the full-
est extent in assisting the various investigative efforts of the Federal Reserve and
the Department of Justice.

With the support of our embassies and consulates abroad, the Department has on
various occasions provided direct assistance to U.S. investigative authorities. While I
cannot disclose in public all of the details of our involvement, we have, for example,
obtained and distributed certain background information to U.S. investigators, and
provided advice and technical assistance to the Federal Reserve in connection with
their investigation of BCCI.

We have also assisted in providing such investigators with access to bank records,
as well as opportunities for discussions with current and former bank officials,
stockholders and others in possession of relevant information concerning the bank's
ownership structure and overseas operations. We are, of course, pledged to continue
our involvement, particularly with respect to facilitating contacts between U.S. gov-
ernment officials and foreign government investigative agencies, and current or
former foreign government officials. In addition, the Department has endeavored to
keep itself informed, of the course of the various investigations so that we would be
aware of, and be able to prepare for, any foreign policy implications.

The Committee has indicated its interest in pursuing our understanding of the
history of BCCI, in addition to a wide range of foreign policy questions which may
flow from the recent disclosures and charges in connection with that history. As to
the details of BCCI operations in the United States and abroad, the State Depart-
ment will defer to the Federal Reserve and the Justice Department, both of which
undoubtedly have a far greater understanding than do we, in the wake of their in-
vestigative efforts to date.

In terms of the broad implications for our foreign policy, I can state that we have
not seen an adverse impact on our bilateral relations with the countries whose na-
tionals have been named in the recent Federal Reserve enforcement action. We
have repeatedly made clear that from our perspective our BCCI investigation is pri-
marily a law enforcement matter: persons doing business within the United States
must obey the laws of the United States or face the consequences for failing to do
so.

While we will try to be responsive to the Committee's questions, I would note that
we are necessarily constrained in our testimony for several reasons. First, as the
Committee is well aware, there is an ongoing criminal investigation of BCCI and its
operations being undertaken by the Justice Department. We are not privy to the
details of this investigation, but even if we were, we would not wish to say anything
that might jeopardize or complicate these efforts. Second, given the early stage of
this investigation, we are unable to reach firm conclusions on the potential implica-
tions for our foreign policy. In light of the complexity and worldwide scope of this
scandal, until the investigative efforts of the Federal Reserve and the Justice De-
partment have been completed and all of the details of the BCCI operations have
been made public, and other governments have completed their actions, the State



106

Department will be unable to systematically review the full extent of the implica-
tions of this case.

Having said that, I would note that many of the policy issues raised by the disclo-
sures to date are ones with which the State Department is quite familiar. We have
for some time been well aware of the ability of international narcotics trafficking
organizations to employ the resources of sophisticated financial institutions, and we
have long worked with this Committee on efforts to fight the vexing problem of
money laundering. Similarly, we have made a concerted effort in the past few years
to develop a comprehensive approach to fighting international terrorist organiza-
tions.

With me today are representatives from the Department’s Bureau of Internation-
al Narcotics Matters, and the Office of the Coordinator for Counter-Terrorism, who
will speak to the policy issues addressed by their respective offices.


Prepared Statement of A. Peter Burleigh

Mr. Chairman and Members of the Committee: I am A. Peter Burleigh, the Coor-
dinator for Counter-Terrorism at the Department of State. I have recently assumed
this position, replacing Ambassador Morris Busby. I look forward to working closely
with this Committee particularly, in pursuit of our common goals.

I have a short statement which addresses the links between BCCI and the Abu
Nidal Organization (ANO) and the actions the U.S. Government took and continues
to take in cooperation with other governments to disrupt the ANO’s commercial en-
terprises. The Committee will understand that there may well be issues raised
which I cannot discuss in “open session”, given the criminal proceedings which are
underway and the need, as always, to protect intelligence sources and methods.

What I can say about BCCI and its links to terrorists can be summarized as fol-
lows:

• The ANO organization, in view of its lethality, its international reach, and its
virulent anti-American and anti-Western bias, has been and remains a signifi-
cant threat to U.S. interests. A major and continuing objective of U.S. counter-
terrorism policy has been to eliminate the ANO’s terrorist capacity.

• In 1986, the intelligence community developed and disseminated information
that linked ANO activities to a BCCI branch in Europe. We learned that Sabri
al-Banna, the leader of the ANO had established significant business operations
through the use of front companies. Operating through a business center in
Warsaw, and under the direction of his key financial aide, the notorious Samir
Najmeddin, the ANO traded profitably and successfully in weapons, construc-
tion services, and other business enterprises. We launched a major diplomatic
effort to have the concerned governments — which included the previous Com-
munist regimes in East Germany as well as Poland— expel the ANO personnel
responsible for these businesses and to close down the companies themselves.

Mr. Chairman, the efforts we undertook in close cooperation with other govern-
ments to disrupt the ANO’s commercial activities have been comprehensive and suc-
cessful. The business front companies that financed a major portion of ANO’s activi-
ties have been shut down. We have shared with many friendly governments infor-
mation on the ANO’s business activities and helped alert these governments against
similar activities. The United States and other countries have strengthened their
domestic legislation against financial support for terrorist groups; some of the U.S.
proposals are incorporated in the “Crime Bill” recently passed by the Senate.

Meanwhile, the ANO itself has experienced significant internal purges. Neverthe-
less, it still retains major capabilities to engage in terrorism.

The efforts that we undertook regarding ANO are another example of the Admin-
istration’s commitment to counter the terrorist threat posed to American interests
around the world. Consistent with the three-pronged strategy for countering the
international terrorist threat explained by my predecessors in previous appearances
before this Committee, the United States will continue our long-standing “no con-
cessions” policy, our efforts to convince state sponsors to withdraw their essential
support to terrorist groups, and a variety of initiatives that we refer to as “practical
measures.” Included among these “practical measures” are efforts such as those we
undertook against the ANO and its commercial fronts.

Mr. Chairman, this completes my prepared statement. I will be pleased to address
your questions as fully as possible, consistent with the public nature of this proceed-
ing.

Senator Kerry. I am sorry to interrupt you.



107


Senator Cranston. Mr. Taylor, you mentioned in 1987 a criminal
referral by an examiner to Justice regarding BCCI in money laun-
dering. Do you know if that led to a criminal investigation?

Mr. Taylor. I do not. I know that a criminal investigation result-
ed within 1 year — within 1 year after that. I think it was in April
1987 that the referral was made and the raid in the Tampa situa-
tion occurred in October 1988, I believe, approximately 14 months
later.

Senator Cranston. Mr. Mattingly, you mentioned a criminal re-
ferral also. Was that the same one or a different one?

Mr. Mattingly. The criminal referrals that I mentioned were
with respect to when we obtained evidence in January that sug-
gested that there was an illegal acquisition by BCCI of the First
American organization, the CCAH stock. We made criminal refer-
rals to Justice in connection with that.

Senator Cranston. Do you know if that led to a Justice Depart-
ment criminal investigation?

Mr. Mattingly. I’m not at liberty to answer.

Senator Cranston. Back to the matter of infusion of capital.
When did the last capital come into First American?

Mr. Taylor. The last capital came into First American I believe
in June, the first or second week in June — the last week in June. It
was either mid to late June, just prior to the closing, I might say.

Senator Cranston. Was that a large infusion?

Mr. Taylor. No. I believe the capital that went into the banks
was something on the order of $39 million — pretty sizable — and of
course at the same time I believe Abu Dhabi people assumed the
holding company’s debt, which was somewhere on the order of
magnitude of $80 million.

Senator Cranston. In addition to the several banks that I have
mentioned that you verified have been owned or affiliated with
BCCI in the United States, do they own or control any businesses
beyond that in our country?

Mr. Taylor. Not that I am aware, Senator. Virgil probably has
more from the investigation.

Mr. Mattingly. Senator, I don’t think the investigation has
turned up any evidence of that, but you know, according to the re-
ports they filed with the Fed they didn’t own any banks in the
United States either, and one has to question their credibility on
all points.

Senator Cranston. That would not be a thing that you would be
looking into as much as you would be looking into financial institu-
tions.

Mr. Mattingly. Our investigation — it’s difficult to keep it fo-
cused, but our investigation is directed and focused at those banks,
but to the extent that we get any evidence of any other illegal con-
duct or suspected illegal conduct, we make appropriate referrals.

Senator Cranston. Mr. Chairman, I have just a few more ques-
tions, but my time is up.

Senator Kerry. Well, let me just see if Senator Wofford has ques-
tions. He has not had a chance. Then we will come back to you,
Senator Cranston. Senator Wofford?

Senator Wofford. I have three simple questions. Did the CIA
ever tell you that BCCI owned First American?



108


Mr. Mattingly. Senator, I do not believe so. We have — as you
can imagine, we have searched our records. There is no indication
that that information was conveyed to the Federal Reserve. I have
asked the individuals at the Board who routinely receive informa-
tion from CIA. They indicate they do not recall ever seeing that
document. They believe they would have recalled seeing a docu-
ment if it had in fact been submitted to the Fed.

Senator Wofford. Did the Treasury Department ever tell you
that BCCI owned First American?

Mr. Mattingly. Senator, I can only speak for myself. I have re-
viewed the record in this matter. It is voluminous. I find no evi-
dence that anyone — that the Treasury advised us. I cannot say that
they did not advise some other official who did not make a note of
it. I just can’t say.

Senator Wofford. By “you,” I mean you and the corporate body,
too, so I appreciate the answer.

Mr. Mattingly. Well, we looked through the records and we can
find no indication that information was transmitted to us.

Senator Wofford. Do you think they were obligated to tell you?

Mr. Mattingly. I would hope that when any American or U.S.
agency finds information about irregularities under the Bank Hold-
ing Company Act or the statutes that the Federal Reserve adminis-
ters, we would hope that that would be referred to us. We try to do
the same when we come across information about irregularities
under other — involving other agencies.

Mr. Taylor. My understanding, though, is that the information
in the CIA report is more or less speculative in the sense that it’s
not documented with any evidence that you could follow up on,
that it makes kind of the assertion. We have had that assertion,
but it doesn’t

Senator Kerry. Well, the assertion — the CIA document, if I
recall correctly — I do not have it in front of me — states as a matter
of fact that they tried to buy the bank shares in 1982, 1981, were
rebuffed, but completed control — completed the transaction and
takeover. It states it as a matter of fact.

Mr. Taylor. Six months later, right?

Senator Kerry. Six months later. It says this was completed —
the one thing they do say is, we do not know the exact structure of
ownership, but they state as a matter of fact it was completed and
purchased.

Mr. Taylor. Yes, and that may have been helpful in the sense of
alerting us

Senator Kerry. May I say also that I have seen the entire rest of
the document, and as I said earlier I cannot understand — there is
no national security in it whatsoever that this Senator can see, and
I think the entire document ought to be released, and we are going
to ask for it.

Senator Wofford. I appreciate Senator Kerry’s helpful persist-
ence right now, but most of all his persistence in getting at this
matter which turns out to be persistence that was well-justified.

Could I turn to the procedure by which the Federal Reserve
checks the background of foreign investors with the CIA, and for-
give me if you have gone through this before, before I was able to
get here. Could you just take us through that procedure and show



109


us what the paper trail would be in checking the background of
foreign investors with the CIA once again?

Mr. Mattingly. Well, in this particular case — as it stands now,
we check foreign investors with law enforcement authorities, the
DEA, CIA, FBI— there are detailed procedures to do background
checks on any foreign individual or company that seeks to acquire
an American bank.

In this particular case, the information that we had, which listed
10 or 13 Middle Eastern investors, was sent to State Department,
CIA, Commerce — at least those three. We received back no adverse
information from those three agencies.

Senator Wofford. So you did not have that, and therefore you
did not take any action?

Mr. Mattingly. No. We got back affirmative responses from the
CIA and the State Department that they had no objection, no ad-
verse information.

Senator Wofford. No more questions right now.

Senator Kerry. Senator Cranston?

Senator Cranston. I want to ask you just a few questions about
central banks and their problems out of all of this. Has the Federal
Reserve learned of the use of BCCI by any foreign central banks?

Mr. Taylor. We have various reports of the use of BCCI by cen-
tral banks. For example — not necessarily central banks, but by
Governments. The Peruvians have been up to see us about that sit-
uation, and there are other rumors about various developing
nation banks being involved with BCCI.

As yet, I don't believe they have documented — the receiver or
any of the Bank of England people have documented — any specific
deposits or losses to date by central banks, although it indeed may
be in the works.

Senator Cranston. What are the implications of this for central
banks with the sizable deposits of BCCI, and what are the implica-
tions for international financial markets?

Mr. Taylor. Well, I think the thing that has been almost deafen-
ing is really the lack of specific information yet, as it relates to any
major loss. In other words, a loss that would really take some large
bank or country or charitable institution down.

We think that most of the central bank activity — we are just not
aware at this point of anything that has any dramatic impact as
yet, although all of this is unfolding, and I would underscore that
we watch it day by day and that when we make these statements
we might indeed be forced to make another statement the next
day.

Mr. Mattingly. Senator Cranston, I have some information from
the Board’s legal files in response to the question that Senator
Wofford asked, and if it’s permissible, could I read that into the
record? This has to do with the Federal Reserve’s background
checks of those individuals in 1981.

Senator Cranston. Yes.

Mr. Mattingly [reading]. Board staff has consulted the Central
Intelligence Agency and the Departments of State and Commerce
to determine if they possess any information that would have any
bearing on the integrity of these individuals and the other inves-
tors, or that would suggest that they should not be permitted to be



110


associated with the U.S. banking organization. Board staff was in-
formed that the CIA has no derogatory information in its files,
while individuals consulted at the Departments of State and Com-
merce stated their belief that there is no reason why the investors
in CCAH and BCCI should not be associated with a U.S. bank.

Senator Kerry. That is what year? That is 1981?

Mr. Mattingly. Yes, sir.

Senator Kerry. That is 1981, and that is referencing specifically
Sheikh Zayed and other

Mr. Mattingly. Well, Sheikh Zayed was not an investor in the
original application.

Senator Kerry. Kamal Adham?

Mr. Mattingly. Yes.

Senator Kerry. Well, that is Kamal Adham & Co. at that point
in time?

Mr. Mattingly. Yes.

Senator Cranston. Would funds deposited by a central bank in
any country

Senator Kerry. Excuse me, was he not either former head or
chief of Saudi Intelligence?

Mr. Mattingly. That is what was reported, yes.

Senator Cranston. Would funds deposited by the central bank of
any of these foreign countries with BCCI be guaranteed in any
way?

Mr. Mattingly. Not to our knowledge.

Mr. Taylor. They may in some cases have been wise enough to
take collateral, and maybe not, and in that sense they would have
a chance of a prior lien, but we are not aware of any insurance spe-
cifically.

Senator Cranston. One final, broader question. You spoke of the
legislation that Senator Riegle, Senator Gam, and Senator Kerry
have introduced to try to prevent things like this from happening
in the future. Obviously, we have to give that a lot of scrutiny to
make sure that it is as strong as possible, and the hearings there
and in the Banking Committee now going on — the markup there
and hearings here will lead, I hope, to strong legislation.

But let me ask this question: Can any American laws that we
might write really deal adequately with what is an international
problem, or do we not need to take a look at what strengthening of
international regulatory institutions may be required to really cope
with this kind of a situation?

Mr. Taylor. I think clearly it is — I mean, your question is in a
sense rhetorical, and I agree with it. Obviously we must do some-
thing internationally. We just can’t pass laws here, although it
would be helpful in certain instances, but internationally I think it
is very critical that we create, I think as indicated by prior wit-
nesses, a greater sense of cooperation and information exchange
and a certain setting of standard.

We’ve started that process in a number of areas through the
Basel Committee on Banking Supervision that meets at the BIS.
We meet there quarterly, and although sometimes it seems that
progress is painstakingly slow, there have been very encouraging
instances of breakthroughs in recent years. I point to the capital
agreement, whereby we finally got an agreement that somewhat



Ill


defines capital and says how much a bank should have to operate
internationally.

We had some success in an American-sponsored approach to
money laundering whereby it was recognized by the member na-
tions and the member central banks that using the banking system
for illicit purposes was something that no one wished to permit.
And, indeed, I think in the European countries that have reputa-
tions for secrecy, you see that secrecy perspective lessening, and
you see more open philosophies, and you see more States in Europe
sponsoring legislation against money laundering in favor of an
openness that protects the banking system and the public from
these criminalities.

Senator Cranston. I thank you both very much. You have both
been very helpful, and I applaud your direct, concise, and brief re-
sponses to our questions. Thank you.

Senator Kerry. Senator Kassebaum.

Senator Kassebaum. Thank you, Mr. Chairman. My apologies.
We are marking up the banking bill in the Banking Committee,
but I was anxious to come down for just a moment to ask the rep-
resentatives here of the Federal Reserve particularly a question in
response to a letter that I had received from a constituent regard-
ing the BCCI settlement and the whole plea bargaining relation-
ship.

I bucked the letter over to the Department of Justice, and the
letter I got back had a sentence which I thought was interesting,
and if I just may read that sentence: “Moreover, the bank has been
placed on a 5-year probationary term which contemplates intense
scrutiny of its activities by the Federal Reserve Board of Gover-
nors. Should BCCI violate its probation, the trial court could fine
the bank $500,000 for each violation.”

I guess at that point I would be curious — with this plea bargain-
ing arrangement, which I am not really familiar with other than
as it has begun to unfold in recent stories, did it trigger any sort of
additional activity on the part of the Federal Reserve, or would you
normally be involved in a situation such as this?

Mr. Mattingly. Well, I’ll tell you what I know about that, Sena-
tor. The plea bargain that was negotiated between the Justice De-
partment and BCCI, I believe one of the provisions

[Pause.]

Mr. Mattingly. Senator Kassebaum, as a result of the indict-
ment the Federal Reserve issued a cease and desist order in mid-
1989 against BCCI requiring them to put in — their management
and procedures were abysmal here in the United States, so the Fed
put in a cease and desist order requiring them to clean up their
act, have appropriate books and records and things like that, and
that was — I believe that was done in June 1989.

The Justice Department then incorporated — when they had their
plea agreement and conviction or guilty plea, they incorporated
that order into that and therefore required BCCI to comply with
the order through that mechanism also.

Mr. Taylor. But we were not a part of the plea bargain at all.

Senator Kassebaum. I realize that.

Mr. Mattingly. They knew that we had a cease and desist order,
and they just simply incorporated in their plea agreement a re-



112


quirement that BCCI obey the Board’s cease and desist order and if
they failed to obey it, then they would be subject to the fines that
you mentioned.

Mr. Taylor. Immediately upon the sting operation in Tampa, as
soon as that happened, in conjunction with the States who were
really the primary supervisor of these agencies, with their coopera-
tion the Federal Reserve and the States immediately examined all
of the agencies in the United States of BCCI to see if there was any
more money laundering and to see if they were complying with
reasonable procedures.

As a result of that, the two — the additional criminal referrals
were made out of New York and the cease and desist order was
issued to correct what we thought were rather substantial deficien-
cies in the recordkeeping and in the controls.

Senator Kassebaum. Was it that cease and desist order — and you
say that was June 1989, that you first entered that?

Mr. Taylor. I believe that’s correct.

Senator KassebAum. It did not seem to have much effect, did it,
at that point?

Mr. Taylor. No.

Senator Kassebaum. Well, I came in late, and I expect you have
covered a lot of this territory, and I do not want to keep you here
any longer, but I do appreciate the answer to that, and I regret
that I came so late because I would like to have heard some further
testimony. I will read your statements.

Thank you. Thank you, Mr. Chairman.

Senator Kerry. Thank you, Senator. Thank you very much.

First of all, let me ask just a few questions before we wrap up.
You hear of varying amounts of money that are supposedly just
gone. In England, they are talking about $5 or $6 billion, may be
more. We have heard $4 to $8 billion. Some people say more than
$10 billion. Is that correct?

Mr. Taylor. All of those figures are correct, as far as I know. It’s
very hard to get a sense of where it starts and where it stops. I
think only when the liquidator really gets a chance to see what is
there and what isn’t there will you have any accurate figures. It’s
pretty safe to say, from the statements that I’ve seen, that there is
massive fraud involved. Massive fraud would mean massive money.
Whether it’s $5 or $10 billion, it’s hard to say.

Senator Kerry. Do you have any indication of where the money
that we do know about, whatever concrete number there is — I
think one of the complaints alleges $4 billion to $5 billion. Where is
that? Where did it go?

Mr. Mattingly. We would love to know. That is the unanswered
question in this matter, which is where did all of that money go?

Senator Kerry. But there is no doubt that it has gone some-
where.

Mr. Taylor. There are clearly loans that have been made that
the accountants feel are not repayable, and those are substantial.
Some to various types of companies, shipping companies, real
estate interests, oil, whatever, but I mean, it is not a case of — I
mean, there may indeed be basic fraud, but there are also lending
problems where the loans are overvalued on the books.



113


Senator Kerry. Were they overvalued on the books as part of the
scheme to enrich people, or were they overvalued because these
people were doing bad business?

Mr. Mattingly. It might be a bit of both. It’s clear they were
doing very bad business. I mean, from what we’ve been able to see,
everything they touched turned to a loss and they had to cover
those losses up. I mean, this is a bank that showed profits. Its re-
ports that were filed showed profits every year. The profits were,
our evidence suggests, fictitious.

Senator Kerry. Well, you talked about sham transactions with
respect to the purchase in Washington, DC.

Mr. Mattingly. Correct.

Senator Kerry. Do you have evidence of other sham loans?

Mr. Mattingly. Senator, those are the ones that we’re looking
at. We do not have any direct evidence of other sham loans.

Senator Kerry. Well, is it not true that the Price Waterhouse
report which you are going to deliver to us very shortly is indica-
tive of that kind of

Mr. Taylor. I think the Price Waterhouse report will show you,
you know, where some of the bad loans — it’ll show you the names
of bad loans, and so forth, but it is not in sufficient detail to really
give one a grounding in what the loss amount is.

Senator Kerry. Now, with respect to that, this is the report that
triggered the closing, correct?

Mr. Taylor. This is the report

Senator Kerry. This is the report by the hired auditor. You are
saying it is not sufficiently detailed to be able to tell you what hap-
pened, yet it is an audited report?

Mr. Taylor. No, I think it’s sufficiently detailed. I mean, one of
the statements in the report that captures your attention is one
that says we cannot put a balance sheet together on this bank, so
we don’t know what it has and what it owes to whom,

Senator Kerry. But do you not think it would be interesting for
Price Waterhouse to come in here and explain its auditing proce-
dure on this bank?

Mr. Taylor. Well, you know, I think what they found — and I
think it was really quite — I mean, it’s quite a courageous audit
report. It says that — —

Senator Kerry. Well, let me ask you about that. It conducted an
audit report how many months prior to that?

Mr. Taylor. I think the last statement was 1989, so that would

have been

Senator Kerry. How about October 1990?

Mr. Mattingly. There was a statement that they — that was the
critical statement that I discussed in my testimony, October 3,
1990.

Senator Kerry. Prior to that there was one in 1989. Well, what
happened to Price Waterhouse that suddenly between 1989 and
1990 they noticed their figures were wrong?

Mr. Taylor. I would have to say that it is a good idea to get
Price Waterhouse in here and let them explain it.

Senator Kerry. Now, what are the foreign implications of the
central bank infusions that we are learning about in this? Are
there implications?



114


I mean, in Peru right now there are a lot of questions. We are
going to be hearing from witnesses probably tomorrow morning
now, at the rate we are going, who are going to describe some of
the problems down there. We have got problems in Nigeria. We
have got other countries that are reeling from this. Are there im-
plications for us in that context?

Mr. Taylor. Well, I think there are implications to the extent
that that turns out to be the case, and it is material enough to ad-
versely affect those nations’ central banks ability to carry out their
mission. We just don’t know if that’s the case as yet.

Senator Kerry. OK.

Now, Mr. Mattingly, at the last hearing we had I asked you ques-
tions about Mr. Adham, and we just talked about it briefly. Mr.
Adham was one of the original CCAH shareholders and was a
former head of Saudi Intelligence, and that was known at the time,
correct?

Mr. Mattingly. That was reported at the time, yes.

Senator Kerry. But did anybody advise the Fed that another
original investor in CCAH, Mohammed Irvani, was funding former
CIA director Richard Helms’ Washington consulting office? Were
you aware of that?

Mr. Mattingly. Senator, I have looked through the records. I
have seen no evidence of that. I have seen no evidence that anyone
reported that to us.

Senator Kerry. Or that you knew of it then? Did the CIA advise
the Federal Reserve that Adham had employed agency personnel
in his business ventures?

Mr. Mattingly. Agency personnel? CIA personnel?

Senator Kerry. Correct.

Mr. Mattingly. No, sir.

Senator Kerry. After the 1981 takeover, was the Federal Reserve
ever advised by the CIA or the State Department or the Treasury
Department or the Justice Department that First American was
owned by BCCI? Did any one of those entities ever advise you, for-
mally or otherwise?

Mr. Taylor. We have — I have no record of that, and we’ve
searched the record and will continue to search the record.

Senator Kerry. What would the format be for such notification?
I mean, would you get a letter? Would you get mail? This was pre-
fax, I believe.

Mr. Mattingly. Pre-fax, yes. This would probably have been a
letter or some sort of memorandum that would be submitted to the
Fed.

Senator Kerry. Normally when a matter is called to your atten-
tion of that import that is the normal process, is that correct — the
customary business procedure, as we say?

Mr. Taylor. Yes. You know, once again

Senator Kerry. Those records have been checked and there is no
record at the Federal Reserve of any notification of ownership?

Mr. Taylor. I know of none.

Mr. Mattingly. By

Mr. Taylor. By Treasury, CIA.

Senator Kerry. Treasury, CIA, State Department, or Justice?



115


Mr. Mattingly. Treasury, CIA, Department of Justice, State De-
partment. Certainly not the CIA until just

Mr. Taylor. Recently.

\ Mr. Mattingly. Until very recently.

Mr. Taylor. Everybody now seems to know it.

Mr. Mattingly. Senator, I — to the best of my recollection, no,
not from those.

Senator Kerry. Well, do you want to go back to the record one
more time and just be certain?

Mr. Mattingly. I will, and I will be happy to answer that for the
record. The answer is “no.”

Senator Kerry. Now, on page 2 of the July 29 press release an-
nouncing the civil money penalty, you make the following state-
ment: “At the request of the U.S. attorney for the District of Co-
lumbia, the Board has deferred temporarily the assessment of sub-
stantial civil money penalties against individuals pending comple-
tion of the U.S. attorney’s criminal inquiry.” Did you meet person-
ally with Jay Stevens regarding that?

Mr. Mattingly. No, we did not. Obviously, the Federal Reserve
does not want to take any action or to do anything that would
interfere with bringing the responsible parties to justice.

Senator Kerry. I understand, but did you make a judgment — did
the Federal Reserve make a judgment that it wanted to impose
civil penalties but that you were told by Justice that might inter-
fere with the criminal process?

Mr. Mattingly. Senator Kerry, we sent the notices over to the
Justice Department. There were civil money penalties assessed in
the draft notices.

The Justice Department said that there were legal problems with
the Federal Reserve — there could be legal problems with the Feder-
al Reserve proceeding to assess civil money penalties, that a civil
money penalty assessment could be — could preclude subsequent
criminal prosecution of these individuals and the Justice Depart-
ment —

Senator Kerry. What is the theory of law there?

Mr. Mattingly. It appears there was a Supreme Court case that
came down — I think it’s 2 years now. Halper, the United States v.
Halper — which indicates that under certain circumstances — it may
indicate that under certain circumstances a civil penalty, or a
civil — a civil penalty could be so substantial that it could be pun-
ishment and trigger the double jeopardy clause.

The Justice Department hasn’t made any decision on that, of
course, but they are looking into that question and that is the
reason for this

Senator Kerry. No, fair enough. I just want to understand it,
and I accept that.

Did you meet with anyone at the Justice Department in the
course of the last couple of months regarding this matter?

Mr. Mattingly. We have had a number of meetings with the De-
partment of Justice personnel about this investigation, yes.

Senator Kerry. Beginning in what period of time?

Mr. Mattingly. Oh, right after the criminal referral. We met
with the — I met with the U.S. attorneys assigned to the case. The
actual attorneys who are investigating this matter have met on



116


any number of occasions with Department of Justice personnel
about this case.

Senator Kerry. Now, Mr. Mattingly, I know you have been very
cooperative with the district attorney in New York, and we went
through the issue of cooperation last hearing. This may be a hard
question for you, but I am going to ask it.

Has anyone at Justice Department suggested to you that you
should cooperate more with them than with the district attorney in
New York?

Mr. Mattingly. No, sir.

Senator Kerry. It has never been suggested to you?

Mr. Mattingly. Not to me.

Senator Kerry. What about any of your investigators?

Mr. Mattingly. I haven’t had that brought to my attention.

Senator Kerry. Let me ask you this. The complaint that you
issued the other day suggests that — makes several references to the
fact that BCCI owned CenTrust Savings & Loan in Florida. When
did the Fed learn of that connection, and how?

Mr. Mattingly. Our investigators were in London trying to get
documents. We were going to interview some witnesses — it was 2 or
3 weeks ago — interview witnesses and obtain documents with re-
spect to the illegal acquisition of the National Bank of Georgia.

When we looked through some documents that were seized from
BCCI’s offices, we found documents in there that I described that
indicate that BCCI actually had a substantial interest in CenTrust.

If I could, just about the Justice Department, one comment. I
mean, we did go to them with this last civil money penalty of $200
million, and I want — they gave us the green light to proceed with
that. I want that on the record. I would like to put that on the
record.

Senator Kerry. To proceed with the civil penalty?

Mr. Mattingly. Yes. They gave us a green light to go ahead and
assess the $200 million civil money penalty against BCCI.

Senator Kerry. Did they think it was a little steep?

Mr. Mattingly. They did not convey that to me, no, sir.

Senator Kerry. Do you have any evidence that the shredding of
documents or destruction of documents that Mr. Blum referred to
earlier in fact has taken place? Is there any way for you to deter-
mine gaps in the records you have, or partial?

Mr. Mattingly. We, with the seizure — with the seizure of the
New York agency on July 5 we commenced inquiries to try to
locate the files at the Washington, DC, representative office. The
State of New York has taken action to secure those, as has the
county attorney in New York, and I believe the Justice Depart-
ment also.

Senator Kerry. Does that mean that you are having difficulty
doing that?

Mr. Mattingly. I don’t know the current status of that. I’m in-
formed it has been done.

Senator Kerry. It has been done, so those have been secured in
full, but you do not know whether or not some items are missing or
not missing? You have no way of telling?

Mr. Mattingly. No, sir. We have not had the time to go through
those files. We certainly intend to do so.



117


I might add that the California authorities have also seized the
files at the Los Angeles agency, and they are in the process of
going through those records to determine what is there.

Senator Kerry. Let me say that I am going to move on here.
There are some sort of housekeeping areas of inquiry. There are a
lot of detailed questions that we do not need to go through right
now, but we would like to leave the record open so that some of
those can be asked. We have been at this for a long time, and I do
not want to — I think people are getting a little bleary-eyed. I know
this Senator is.

Senator Jeffords, do you want to inquire for a moment?

Senator Jeffords. Just for a moment yes, although if Senator
Cranston wants to go ahead, he was here ahead of me.

The New York grand jury indicted BCCI — I think it was count
4 — for grand larceny committed against the American Express
sometime after January 1, 1983. When did the American Govern-
ment discover that American Express was a target of criminal ac-
tivity by BCCI, if you know?

Mr. Mattingly. Senator, the first that we heard of that was in
the indictment. The first that the Federal Reserve heard of that
was when we received a copy of the indictment.

Senator Jeffords. Do you know of anyone else in the Govern-
ment that had prior notice?

Mr. Mattingly. I do not, sir.

Senator Jeffords. I believe you testified earlier about some activ-
ity on the international scene looking at how to prevent further oc-
currences of such things. I think you talked about money launder-
ing discussions and matters like that. Are there any other meetings
or discussions going on as to what ought to be done at the interna-
tional level to try to make sure that a BCCI does not occur again?

Mr. Taylor. I think first of all the Basel Committee continues
and there are also efforts underway in the European group, the
EEC Group, which is another bank supervisory group — and I am
sure that when this BCCI thing is fully out on the table both com-
mittees — will look at it and try to take what actions are appropri-
ate. I think it’s very significant, at least from a U.S. perspective.

We are very happy to see the chairmanship of the Basel Supervi-
sors Group pass to Jerry Corrigan of the Federal Reserve Bank of
New York. He will chair that committee, and in fact he has been
voted as the chairman, so the U.S. perspective will get a clear
statement from the chairman’s seat.

Senator Jeffords. Well, would that be the kind of group that
would be looking at international mechanisms to observe what is
going on and have regulatory authority in the international sector,
or things along those lines?

Mr. Taylor. Yes. The Basel Supervisors Group consists of major
industrialized countries — and the representatives of those countries
that came to the meetings are basically central banks and bank su-
pervisors. They have authority in their own countries and have
powers in their own countries to make these kind of coordinated
arrangements work. So it is the right body to be working with.

Sometimes they — some countries will have to go back and get
their laws changed, but I think there has been progress, especially
on money laundering. And I don't think there’s anyone on the com-



118


mittee that feels anything else than the banking system shouldn’t
be used for criminal purposes at all and all are prepared to do
what’s necessary to make sure that doesn’t happen.

Mr. Mattingly. I might just add a footnote to that, Senator Jef-
fords. The banking bill that’s being marked up today has a provi-
sion, an important provision, in it that provides that if a foreign
bank wishes to do business in the United States, the Board cannot
give its approval unless the Board is satisfied that the foreign bank
is supervised on a consolidated basis by its home country.

Senator Jeffords. Would these kinds of mechanisms apply to
what you are doing, to monitoring the transfer of funds country to
country?

Mr. Taylor. Well, I think that’s one of the things that is being
discussed, the whole question of the safety of the payments mecha-
nisms, not just the use — the potential criminal use of it, but the
effect of that criminal use should you have some kind of blowup. In
other words, would you, in effect, stop the capacity of the world to
clear its transactions?

So there is not only the interest in excluding the criminal ele-
ment, but there is also the self-interest of the system itself, that
only if the participating countries respect the system will it func-
tion properly.

So I think it’s probably an area that needs work and should re-
ceive attention.

Senator Jeffords. I have certainly heard about the shell-game-
type situations that we saw with BCCI and how they may or may
not be criminal. You cannot really tell. But unless you are able to
monitor a pattern of activity of those kinds of things

Mr. Taylor. Well, over the years in banking supervision we’ve
had the same problem domestically in the sense that you see some-
one abuse a bank in North Dakota and all of a sudden you find
him down in New Mexico doing the same thing. And it’s a sore dis-
appointment to the examination business to ever allow that to
happen.

I think that systems, and specially the electronic progress, is
coming to the point where that type of thing is going to be much
harder to do domestically and much harder to do internationally.

For example, we have a criminal referral system now among the
agencies whereby we plan to have all criminal referrals exchanged,
so that there’s an automated record. Not just so that we have all
the paper, but so that we have access to the paper, and so that we
can type the name into the computer and have it tell us if any-
thing exists, as opposed to just seeing boxes and boxes of file cabi-
nets. And I think that type of thing is also working internationally.

Senator Jeffords. I know we have the international stock mar-
kets and futures markets operating. I am concerned as to how in
the world we are ever going to know what is going on.

Thank you. Thank you, Mr. Chairman.

Senator Kerry. Thank you very much, Senator Jeffords.

Gentlemen, just before we wrap up here, has anyone at any level
to your knowledge in any way at any time tried to interfere with
the regulatory efforts of the Federal Reserve?

Mr. Mattingly. No, sir.

Senator Kerry. Mr. Taylor?



119


Mr. Taylor. No, sir.

Senator Kerry. Have you come across any evidence in the course
of your investigation that indicates that anyone at any time any-
where has tried to interfere with other regulatory efforts in other
States, or even within the law enforcement regulatory efforts?

Mr. Mattingly. I can’t think of any offhand, sir.

Mr. Taylor. I can’t, either.

Senator Kerry. Do you concur with the judgment of the commit-
tee that there is a legitimate concern with the change in the finan-
cial marketplace and the potential for criminal elements to move
money as easily as they can, and to create cardboard cutout enti-
ties which mask true ownership and which in a sense threaten law
enforcement’s capacity as well as the sovereignty of some Govern-
ments? Is that a concern to the Federal Reserve?

Mr. Mattingly. Absolutely.

Mr. Taylor. Absolutely.

Senator Kerry. Is it your sense that we should be doing more
with respect to money laundering and the tracking of the origin of
funds?

Mr. Taylor. Yes.

Senator Kerry. That runs right up against the bank secrecy that
has pervaded the system for these last 60 years or more, does it
not? 90 years, maybe.

Mr. Taylor. I and a lot of my colleagues around the world in su-
pervision feel that it’s absolutely essential that that secrecy — no
matter the respect for privacy — that there must be a way to stop
the criminal element from using that as an excuse to just launder
money, so we fully concur with the committee on that.

Senator Kerry. Is it fair to say that it is more than simply laun-
dering money, but that it is a really false facade of business, that
in some cases is not laundering money but is legitimately moving
money into concerns. I mean, it is what used to happen here in this
country with organized crime but now has far more ways of
moving that capital. I mean, is it not really

Mr. Taylor. It’s the whole scope of illicit activity that really has
to be looked at, Senator, and not just money laundering.

Senator Kerry. It has to be done without multilateral protocol?

Mr. Taylor. I think it would be difficult to have any — to partici-
pate in the world financial community while trying to do that just
in isolation. I really think you must have a multilateral approach
to it to be effective.

Senator Kerry. Is it not also fair to say that the G-7 at least,
maybe the G-15 or something, but that the G-7 and G-5 certainly
have the ability, because of the power of their currencies and the
need to clear through their systems, to leverage the Cayman Is-
lands, Luxembourg, Hong Kong, and various other places into a
stronger standard of behavior?

Mr. Taylor. I think it’s quite possible, and also leveraging a
stronger sense of behavior within their own countries.

Senator Kerry. Why don’t we do it? Why isn’t it happening?

Mr. Taylor. Well, I think that, although, as I said, it looks pains-
takingly slow, I think that the mechanism is in place and there can
be an effective multilateral effort through Basel. There has been
on some things, and this just needs to have a priority.



120


Senator Kerry. Before we wrap up, we have legislative friends
here from Peru and we have officials, previous officials from Ar-
gentina and Peru, and they have waited very patiently all day. I
appreciate that. Our interpreters who are going to be necessary for
this have also waited all day, and I think they would prefer if we
went over into the morning. I just want to make certain that is
clear.

So I think what we will do is take that portion of the testimony
in a very brief session tomorrow morning at 10 a.m., and if there
are no further questions I just want to place in the record — this
morning Senator Cranston mentioned the case of a Financial
Times journalist who was murdered in Guatemala.

On Wednesday, an article appeared in the Mexican newspaper,
Excelsior, which links this death with the investigation that the Fi-
nancial Times reporter was doing on BCCI, and I ask that a copy of
this article be translated and then placed in the record in full.

Without objection, that will occur.

[The information referred to follows:]

British Journalist Killed in Guatemala

Guatemala City, July 29, 1991 (AP). — A British journalist who worked for the Fi-
nancial Times of London was found shot to death in his Guatemala City apartment,
officials said Monday.

A maid found the body of Anson Ng Yong, a British citizen born in Malaysia, in
his apartment Monday morning, police said.

He had a bullet wound to the head and appeared to have been struck in the neck,

the police statement said.

Yong had lived in Guatemala for 7 years.

British Embassy officials said they had no additional information on Yong’s
death.

Senator Kerry. Gentlemen, I want to thank you very much.
Again, I repeat, I think the Fed has been very forthcoming in this
process. We appreciate enormously the response and the coopera-
tion, and we look forward to working with you as we go down the
road here, and I want to thank you very much.

I know there are reasons that you are under pressure here, and I
want to thank the chairman for making you available and I want
to thank the chairman for his cooperation.

Mr. Mattingly. Thank you, Senator.

Mr. Taylor. Thank you, sir.

Senator Kerry. We stand adjourned.

[Whereupon, at 4:36 p.m., the subcommittee adjourned, to recon-
vene at 10:10 a.m., August 2, 1991.]



NARCOTICS AND FOREIGN POLICY
IMPLICATIONS OF THE BCCI AFFAIR


FRIDAY, AUGUST 2, 1991
U.S. Senate,

Subcommittee on Terrorism, Narcotics, and

International Operations
of the Committee on Foreign Relations,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a-m., in room
SD-419, Dirksen Senate Office Building, Hon. John F. Kerry (chair-
man of the subcommittee) presiding.

Present: Senators Kerry, Cranston, Brown, and Jeffords.

Senator Kerry. The hearing will come to order.

I am going to start by making a few opening comments.

We have a vote that just started at the moment that we are be-
ginning. So I apologize that there will be a small interruption here.

We meet this morning to resume consideration of the global fi-
nancial banking scandal involving BCCI. Before I move to explain
today’s proceedings, I would like to make one or two comments.

Last night I noticed that the distinguished minority leader of the
Senate seemed to suggest in a statement on the floor of the Senate
that he at least discerns conceivably some partisan political pur-
poses in the investigation.

I want to make it very clear that if that is what Senator Dole
meant to suggest, I truly believe that he is mistaken. And I regret
that he felt that way.

At our hearing yesterday the senior Senator from North Caroli-
na, who is certainly not usually known as a partisan of Democratic
causes said that if there was an ever an issue of legitimate biparti-
san concern, it is BCCI. And I agree with the Senator from North
Carolina. The fundamental issue raised by this scandal has nothing
to do with partisan politics.

The issue is very simply whether we are going to allow a crimi-
nal conspiracy of the size and influence of BCCI to be able to run
all over our political and financial system, and to bankroll terror-
ists, to launder drug money, and to take average citizens to the
cleaners. That is the issue.

And yesterday there were enough Democratic names and Repub-
lican administration criticisms to fill everybody’s pot. It had noth-
ing to do with one or the other. I would hope that members of both
political parties would simply agree that this is an effort to try to
get at the truth.


( 121 )



122


Now there will be some who will want to discredit the process
and who want to discredit those involved with it. We have, unfortu-
nately, been subjected to that kind of attack before. And there are
some who will be embarrassed at the process of this effort. There
are some who may not want to see the full record on the table.

But I did not see how I could begin a hearing or begin a legiti-
mate investigation that does not lay the groundwork of where we
have been and how we have gotten here. And if you are not willing
to look at where you have been and how you have gotten here, you
are certainly not willing to look at what is at stake here.

I would also say that the minority leader asked rhetorically
whether Democrats have shown an interest in investigating the ac-
tivities of CenTrust. It is sort of ironic that he asks that on the
evening of the very day in which Democrats such as me have asked
numerous questions at a public hearing about CenTrust, a financial
institution in southern Florida that has been under investigation
for a number of years.

As the record makes very clear, this subcommittee and this
chairman issued a subpoena for the records of CenTrust several
months ago. We have been looking for those records. We have been
asking about that investigation. And yesterday we received more
testimony about it and this chairman asked about it.

So in summary, I hope that my impression of the minority lead-
er’s statement was wrong. I look forward to working with him and
with my Republican colleagues in an effort to try to continue down
the road that we have embarked on.

Now this morning’s hearing is different from yesterday and dif-
ferent from the hearings this committee normally has.

First of all, we do not normally have, although we have had on
occasions, foreign nationals testifying before the committee. We
certainly do not do it as to policy issues that involve the national
security of the country in normal terms. But this is a factfinding
quest.

It is also very important for us in order to be able to understand
the implications of the scandal to have an understanding as to how
it has played out in other parts of the world. We need to learn how
BCCI operated overseas, so we can better understand how it may
have undermined U.S. efforts to combat drugs.

We need to understand BCCI’s participation in arms trafficking
that has run counter to American interest in the world.

Moreover, it is important for law enforcement to have an under-
standing. We have mutual legal assistance treaties with other
countries. We have international cooperative efforts legally. And it
is vital for us to understand that the implications of our law en-
forcement efforts and how those may or may not be impacted by
what is happening in other countries.

I would like to make one thing very clear. I have said this previ-
ously to the witnesses and they understand it and agree. This com-
mittee does not want to get involved in the internal politics of an-
other country. We are not seeking to do so. That is not our pur-
pose.

We do not want to know about the internal squabbles or battles
similar to our own between parties and between factions. And we
certainly are not looking to impune any present or past official. We



123


want to know about BCCI. We want to know how BCCI functioned
in these countries and what the impact has been on those countries
of consequence to the actions that BCCI took. Those are the param-
eters of today's hearing.

I look forward to the witnesses adhering to that standard.

Our first witness today is the Deputy Director of Exchange Oper-
ations of the Federal Reserve Bank of Peru, Mr. Ricardo Llaque. I
would ask Mr. Llaque if you would rise so that I may swear you in
before we take your opening. And I am going to go vote before we
do that.

Mr. Llaque, would you raise your right hand? Do you swear to
tell the truth, the whole truth, and nothing but the truth, so help
you God?

Mr. Llaque. I promise.

Senator Kerry. Thank you.

Now we will recess, I regret, momentarily until I can go vote and
come back from the vote, at which time we will pick up.

The committee will stand in recess until that time.

[A brief recess was taken.]

Senator Cranston [presiding]. The hearing will please return to
order.

Let me explain, we will not proceed with the witnesses until Sen-
ator Kerry returns. But I have an opening statement that I wish to
make at this point.

First, let me add my voice of welcome to the witnesses today.
They have come many miles to help us understand the global di-
mensions of the BCCI mess. I appreciate the sacrifices they have
made and I look forward to hearing the views of the witnesses.

Before we begin, I would like to make two general comments and
one specific matter I want to discuss briefly. The first concerns
something I read in yesterday’s New York Times which worries me
very much. If this report is true, virulently antisemitic and anti-
Israel slanders have been voiced by an important Pakistani official
in connection with the BCCI scandal.

The chief minister of the Sindh Province, Jam Dadoq Ali,
reached into a timeworn bag of canards to put out a bigot’s chest-
nut, “The West and Israel,” he said, “were responsible for the clos-
ing of the bank. BCCI,” he said, “was the Third World Bank, and it
took to the challenge of breaking a hegemonistic control of the
Jewish lobby on the world’s financial institutions.”

These comments seek not only to inflame hatred and intolerance,
nor are they merely outrageous on their face. Scapegoating is
always one of mankind’s more miserable ways of explaining fail-
ure.

If, in fact, these words were uttered, I call on the Government of
Pakistan to publicly repudiate Dadoq Ali’s remarks. They are
shameful and the mark of a terribly ignorant man.

And as far as BCCI being the Third World’s bank, we heard testi-
mony yesterday about how it diverted funds intended to alleviate
poverty in Third World to the private profit, criminally, of a few
individuals.

Second, I want to express my concern about Argentine President
Carlos Menem’s apparent desire to blame his own current political
difficulties on Argentina’s independent press, which is working



124


under very difficult circumstances to uncover the truth about BCCI
in that country.

Yesterday I spoke about a Financial Times journalist whose
murder a few days ago in Guatemala may be related to his own
probing of BCCI’s ties to arms smuggling there.

Now in Argentina Menem has publicly rebuked the muckraking
Buenos Aires daily newspaper, Pagina 12, in a way which appeared
to harken back to the days of Argentina's authoritarian past. He
has attempted in the crudest sort of way to smear Pagina 12 as an
organ of terrorist and drug peddlers.

Pagina 12, which was recently written up in Time Magazine for
its innovative and incisive reporting, has been giving extensive cov-
erage to the BCCI scandal and its effects in Argentina. It has
sought to investigate charges already in the public domain about
involvement by Menem family members and friends in the drug
trade.

Finally, it was Pagina 12 which unearthed the so-called Swiftgate
scandal, an apparent attempt to extort an American company in
Argentina. The attempt was allegedly made by a top government
official.

I know how criticism, especially that from the fourth estate can
hurt, but President Menem is way out of line. I urge him to stop.

Before we begin I would like to place into the record documents
just received by the committee as a result of a subpoena of BCCI
records in Miami. The 42 pages I am submitting seem to bear out
some of the worst suspicions about BCCI’s role in international
arms trafficking.

The pages describe in a luxury of detail French Mirage III/B’s
owned by the Argentine Air Force. From them we learn that these
planes were “modified to Argentine Air Force requirements follow-
ing years of combat experience.”

We also learn that they are constructed with Delta wings, have
aerodynamic airflow fuselage, are powered by an improved and
augmented ATAR 9c5 engine, and have a maximum air speed of 2
mach.

According to these documents, these airplanes include wing edge
stations modified for Sidewinder and Shafrir missiles, making them
very dangerous instruments of war.

On page 34, why BCCI has these documents, papers whose details
suggest that somewhere they might be considered a military secret,
comes into focus. All spares and repairs, the document on page 34
says, “will cover 2 years of operation at the organizational and in-
termediate levels. Long-lead items will be identified immediately
after program go ahead to assure early procurement action.”

The next page tells us that “ground support equipment will be
provided for all models of aircraft.” Adding, “The AAF” — presum-
ably Argentine Air Force — “will provide an engine test cell — porta-
ble.”

Page 38 concerns pilot training, “It is proposed that is the cus-
tomer country training is required,” the document reads, “the AAF
is prepared to provide this training in Argentina. A complete flight
training program will be defined between AAF and customer coun-
try with all costs to be negotiated separately at that time.”



125


“After completion,” it goes on, “the flight training AAF is pre-
pared to provide a pilot in the customer country as an adviser for a
defined period of time.”

And concerning packing and crating, page 41 tells us that, “AAF
will pack and crate logistic support material and store it at Rio
Cuarto, Argentina, for picking up customer country.”

Mr. Chairman, these documents exist. They are in our hands.
They come to us from the liquidators of BCCI in Miami. The se-
quence of pages is as I read it. But in fact the best information was
revealed right here on page 2 down in the right-hand corner where
there is a little handwritten notation on these documents.

In pen someone, presumably from BCCI, has written in English,
quote, “22 units of aircraft plus adequate spare parts, including six
spare engines, at a price of $110 million.” That is the end of that
handwritten notation on the document.

I do not know what policy guidelines Argentina follows in pro-
curing and selling weapons. I look forward to asking Mr. Alconada
Sempe, who is a former Secretary of Defense, whether he has any
knowledge of this proposed sale of 22 high technology fighters or
whether this has been discussed publicly.

But I do find it worrisome, very worrisome, that BCCI Miami, an
institution which served as Gen. Manuel Noriega’s banker and
about which all kinds of allegations of criminality abound, appears
to have been given the go-ahead as a go-between for the sale of
military instruments. ^

I also think these documents suggest in a very vivid way the
degree of which Ghaith Pharaon and BCCI have penetrated to the
upper reaches of government, including specifically, Argentina’s
political and/or military establishment, for the purpose of profit-
eering on the sale of weapons to Lord knows who. They speak of a
customer country. These documents do not, however, make it clear
where these weapons were headed.

But this is the sort of activity by this international bank that
plainly cannot be tolerated. We have to understand all of its rami-
fications and then cope with what it takes to prevent this sort of
thing from happening in the future.

Mr. Chairman, thank you very much.

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Senator Kerry [presiding]. Thank you very much, Senator Cran-
ston.

Senator Cranston. Let me add that those documents will be
made available to the press if they have not already gotten them.

Senator Kerry. Senator Brown?

Senator Brown. Thank you, Mr. Chairman.

Mr. Chairman, I simply wanted to mention at the start of our
hearings today that I believe the course of inquiry that our sub-
committee is on is one that is not guided by partisan approach, nOr
should it be. I believe a fair review of the actions of the subcommit-
tee thus far would bear that out.

We are looking for the facts wherever they are going to lead us
whether they embarrass Democrats or Republicans or Independ-
ents or Liberals or Conservatives, no matter what interest. This
committee has a responsibility, I think, to bring those facts out.

And I believe that thus far the way you have conducted the hear-
ings, the inquiries that have been made, the information subpoe-
naed has shown a commitment to that kind of open, full, unbiased
inquiry. It is in that spirit that I want to express my appreciation
to you for the way this has gone forward and pledge to you that I
will do my best to work with you to make sure that continues
along that path.

Senator Kerry. Senator Brown, thank you very much. I appreci-
ate the comment.

I also want to say that I have enjoyed enormously working with
you. We have been doing extraordinarily well working on this and
also on the POW/MIA issue. I look forward to continuing to work
with you on that, to get to the bottom of that one, too.

Let me reiterate one thing before we begin, Mr. Llaque. This
committee’s job is not to try also to prosecute any issue in Peru.
We are really factfinding, and factfinding exclusively.

There is no effort by this committee, and I want to absolutely
assure this for any foreign journalist or any people who are con-
cerned about it, there is no effort by this committee, I underline
this, no effort by this committee to influence those decisions in the
country or to influence politics whatsoever.

But because this bank was involved in each of our countries all
around the world and because of the many implications of drug
trafficking, arms dealing, covert activities, and so forth that have
tied our countries, it is very important for each of us to try to un-
derstand what is the truth here. That is the spirit in which we ap-
proach this morning and the questions.

Mr. Llaque, I am particularly appreciative for your patience. We
thank you. You have traveled some distance to be here. You put up
with the inconvenience of yesterday as did the other members of
your party and other witnesses. And we really appreciate your re-
specting our delays and our process here.

We thank you for taking the time to come here and share with
us your knowledge.

If you have an opening statement, we would now receive that.



164


STATEMENT OF RICARDO LLAQUE, DEPUTY DIRECTOR OF

EXCHANGE OPERATIONS, FEDERAL RESERVE BANK OF PERU

Mr. Llaque. I have been asked by the board of directors of the
Reserve Bank of Peru to cooperate with your committee and report
on the relations that the Central Bank of Reserve of Peru had with
BCCI.

First of all, I would like to recount the financial situation that
my country was in at the beginning of 1986. We had very restricted
availability of line of credit abroad to finance our foreign trade.

In the face of this situation, the Central Bank took measures to
enter into operations with new corresponding banks, trying to get
reciprocity for deposits made by our Central Bank. Reciprocity
meant the granting of lines of credit to Peru channeled through
the local banks.

In April 1986, we received the instruction from our management
to talk to a number of banks to see if it would be possible to estab-
lish corresponding relationships and get such reciprocity. I am talk-
ing about in order to get credit for our country.

The technical areas of the Central Bank, or the technical depart-
ments, analyzed the situation of a number of banks, including
BCCI. Finally, after drawing up a technical report, the board of the
Central Bank in April 1986 instructed us to establish a correspond-
ing relationship with BCCI.

Our steps culminated on April 28 of that year. That was the date
when, after having reviewed all of the relevant documentation;
namely, the documents which are usually requested, the general
business agreement for the handling of numbered accounts, et
cetera, et cetera, we signed an account for a numbered account
with BCCI in Panama.

I want to explain why we established numbered accounts. Under
these circumstances, there was the possibility of an embargo
against the Central Bank accounts, since we had stopped paying on
our foreign public debt, so we established call accounts and time
accounts in BCCI’s office in Panama.

The Central Bank in BCCI set up its accounts on May 6, 1986, for
1 month, placing $15 million in one checking account. That same
month we made deposits up to an amount of $200 million during
that same month. At the end of that same month, we signed the
first agreement with BCCI whereby that bank placed at the dispos-
al of our Central Bank a line of credit for $60 million to be used for
Peruvian foreign trade in order to confirm letters of credit for im-
ports.

What the Central Bank did was distribute this $60 million
among the various major Peruvian banks so that they could fi-
nance our foreign trade. Considering the benefit brought to the
country by the use of this line of credit, we asked BCCI to increase
this line of credit by $50 million more. That is to say, to $110 mil-
lion.

That, at the request of BCCI, required an increase of deposits of
the same amount. In other words, that our deposits of the Central
Bank of Peru, to Peru, became $250 million. We are talking about
March 1986. March 1986.



165


Thereafter, in August 1986 the Central Bank again asked for an
increase in this line of credit by an additional $50 million. That is,
the line went up to $160 million. At that time, the Central Bank
did not increase its deposits in BCCI.

It is important to point out that during this period the interest
rates paid by BCCI on our deposits were varied and sometimes
were related to market rates, although I must underscore, too, that
in the period between October 1986 and March 1987 interest rates
paid by BCCI were under average international market rates for
deposits.

A very important point that I also want to underscore is that the
amount of deposits of the Central Reserve Bank of Peru in BCCI
were about 25 percent of the total deposits of the Central Bank. We
also had deposits in other banks — German, Japanese — and in re-
gional economic or financial organizations such as the Andean Re-
serve Fund.

During the middle of 1987, new information arose to be taken
into account in our relationship with BCCI, especially the rather
unsatisfactory results of the BCCI holding company in Luxembourg
and the fact that profits went down a great deal, indicting poor
performance by the bank during the year ending in December
1986.

At the same time, it was established that BCCI’s legal constitu-
tion in Luxembourg did not allow it to be a lender of last resort,
especially if there were to be a default in any of the operating
units such as the one in Panama.

In the face of this situation, the Central Bank of Peru decided to
restrict or cut its deposits which would go beyond any reasonable
reciprocal compensation. The withdrawal was made gradually by
the Central Bank of Peru, considering that we had a debt vis-a-vis
that bank of $160 million and that the last period would come due
in about October 1988. The last due date would be then.

So the deposits of the Reserve Bank of Peru culminated as fol-
lows: The dollar deposits, U.S. dollar deposits, were kept until the
end of October 1988. That was the month, as I said a moment ago,
when we stopped paying our last payment, or when we finished
paying the last payment of our line of credit.

We obviously had to suspend the distribution of funds from this
line of credit to our various Peruvian banks. The Central Bank also
had deposits in German marks and yen which were maintained
until June 1988. The final payoff, or closure, of the numbered
checking accounts happened on May 31, 1989, which ended the
whole relationship of the Peruvian Central Reserve Bank with
BCCI.

That is all I have to say. Thank you, Mr. Chairman.

Senator Kerry. Thank you very much, Mr. Llaque.

Let me ask you first of all some details, if I can. What is your
official position at the Reserve Bank?

Mr. Llaque. My official position is that I am the deputy manag-
er of exchange operations. This is a job that I have held since about
1981.

Senator Kerry. The first involvement that you came to have
with BCCI was specifically what — the first involvement?



166


Mr. Llaque. As I said, approximately March 1986 when, upon in-
struction from the board, we began to look for new corresponding
banks that were not already creditors of Peru.

Senator Kerry. The reason you had to look for the new corre-
sponding banks, not creditors, was that your credit with the other
banks was a problem, correct?

Mr. Llaque. That is right.

Senator Kerry. How did you come across BCCI? Did somebody
recommend it to you? Did you know about the bank?

Mr. Llaque. BCCI presented itself to Peruvian authorities in
about 1984, introduced itself and asked to open a branch office
under Peruvian law foreign branches of banks are approved by the
Superintendency of Banks and Insurance at the favorable recom-
mendation of the Central Bank. That was when in the country we
first learned of the existence of this bank.

Its request was approved by the superintendency, but the bank
changed its mind and did not set up this branch. It had sent its
people to Peru, and when we began to look for new corresponding
banks the bank was already there. It was in Panama, and it was in
Panama where we were holding most of our deposits anyway be-
cause of our fear of this possibility of embargo that I mentioned.

Senator Kerry. So you had already put Central Bank’s funds,
Peru, into the branch of BCCI in Panama — in other banks?

Mr. Llaque. In other banks in Panama. German banks, Swiss
banks, but not in BCCI.

Senator Kerry. Was there any one individual who presented
himself to you to suggest that BCCI would be able to deal with
your credit problem?

Mr. Llaque. No. I do not remember that there was any specific
person who came forward. Normally letters come, telexes come
into the Central Bank offering. That is normal. That is what
always happens.

At that time, for instance, we received letters from other banks
offering us good conditions, favorable conditions for deposits, con-
sidering, Mr. Chairman, that for a bank to have a Central Bank
deposit is a source of prestige, because Central Banks are usually
very careful because they manage the reserves of their countries,
so they first take into account security or safety, and only after
that, profitability.

Senator Kerry. What was there about BCCI at that time that
commended it to you in terms of meeting the standards that you
just articulated?

Mr. Llaque. Well, first of all the bank at that time— as I said at
the beginning of my statement, we were looking for two things:
safety and reciprocity. As to reciprocity, the bank offered us the
line of credit that I already talked about and also a series or a
whole range of services which go along with any commercial bank.

Senator Kerry. Were these the same services as other commer-
cial banks, or were they different?

Mr. Llaque. They were the same as other commercial banks.
They also offered to keep a numbered account for us in Panama,
and this was of interest to us because of the possibility of an em-
bargo, which I have already mentioned.



167


Senator Kerry. If I can interrupt you, I apologize. When you say
“it offered us a numbered account in Panama," one of the services
that you were looking for was an ability to be able to hide the
money from seizure, was it not? You did not want the money to be
snatched by a creditor?

Mr. Llaque. Yes. Perhaps “hide” is not the word, but it was that
the Central Bank would have security, having secured deposits out-
side of places where an embargo could happen, but this embargo
did happen. We had at least two cases of embargoes of funds from
the Central Bank in U.S. banks, and also an embargo of funds from
commercial banks in the United States as well.

Senator Kerry. Now, it is my understanding on the deposits of
Central Bank funds that you made with BCCI you only got credit
for half the dollar that you put in. In other words, you would put
in $1, but you were only credited with 50 cents on the dollar. Is
that accurate?

Mr. Llaque. That is right. Indeed, exactly.

Senator Kerry. Why would that be?

Mr. Llaque. I cannot give you an exact reason, but you have to
consider that Peru’s situation at that time was not very favorable
in the sense, in the first place, that we did not have very many
places to deposit our money, and second the scarcity of lines of
credit, so there was not necessarily an equivalent relationship be-
tween deposits and the line of credit. Deposits could be much
higher.

We have had cases of deposits at very high levels in banks that
did not offer us lines of credit. That was the case of the Interna-
tional Bank of Settlements, where we had about $1.3 billion on de-
posit and we did not get a line of credit at all. It was not that
bank’s mission. All we were considering then was the aspect of
safety or security.

Senator Kerry. Did not other banks in Panama offer numbered
accounts?

Mr. Llaque. Yes, but not levels of credit which were very high.
We had numbered accounts, for instance, in the Deutsch-Sidmen-
kanische Bank in Panama, which is a branch of the Hamburg
bank.

Senator Kerry. The key to you was the line of credit which you
believed you were receiving or did receive from BCCI?

Mr. Llaque. It was one of the most important points in the deci-
sion of the board of the Central Bank to accept the corresponding
relationship, the deposits, and the line of credit which reached a
level of $160 million, and since it was a revolving line of credit it
meant that this was a benefit for Peruvian industry at an amount
much higher than what the nominal amount of the line of credit
really was.

Senator Kerry. It is my understanding that efforts were made
to, in a sense, hide , the BCCI-Peru money trail. I mean, that was
the essence of security. Security meant that this is out of reach of
somebody’s capacity to attach it. That is why they chose the num-
bered account, that is why Panama, and that is why BCCI. Is that
accurate?

Mr. Llaque. Well, I want to clarify this point in the following
manner. Indeed, an important factor was the possibility of an em-



168


bargo, an attachment, but we had the same criterion in mind with
other deposits, and let me mention deposits at the end of 1986 and
during 1987 in the Bank of International Settlements that I al-
ready mentioned, in the National Bank of Argentina where we de^
posited a large amount of money, in the Deutsch-Sidmenkanische
Bank, in the Banco de Brazil, the Bank of Tokyo, in Bladiks, which
is an import-export regional bank headquartered in Panama, and
Credit Lyonnais of France, so there we use the same criteria to try
to avoid these seizures or attachments or embargoes.

Senator Kerry. Let me try to ask that a different way because I
am not sure that you are answering my question directly. Does the
code name Terra Firma mean something to you?

Mr. Llaque. No, it does not.

Senator Kerry. The code name Terra Firma in connection with
BCCI and Central Bank money?

Mr. Llaque. No, we have never heard that. Our accounts were in
our name with a number, as is the customary way of doing it.

Senator Kerry. I understand that. I just wondered if you had
heard of this code name.

Do you know whether or not

Mr. Llaque. I did not hear you, I think.

Senator Kerry. Are you aware of any evidence of payoffs having
been made by BCCI to officials of the Central Bank?

Mr. Llaque. No, we have no evidence of that in the Peruvian
Central Bank. Absolutely no evidence of that.

Senator Kerry. You have heard of allegations to that effect; is
that accurate?

Mr. LlaqUe. Of course. Just Monday of this week we have all
read about that.

Senator Kerry. I do have some more questions with respect to
what began to happen to BCCI and your perception of it that made
you change and pull money out. I want to turn to Senator Brown
before we do that.

Senator Brown. Mr. Chairman, thank you.

Let me reiterate the comments you made earlier and how much
we appreciate your coming to help us in this inquiry.

I would be interested in knowing if there were reasons other
than economic reasons that you completed or finished your rela-
tionship with BCCI. Was it simply a matter of getting a better deal,
better return on your deposits elsewhere?

Mr. Llaque. We had some information alerting us that our de-
posits were not safe in BCCI. This happened at the end of July
1987. Not only that, we received a telex at our own request from
IBCA Banking Analysis of London informing us that over the past
few years, that bank had had significant losses in its operations on
the options market. And this institution also told us that the bank
was using an accounting system which was rather unusual, that
did not allow easy identification of the level of losses as well as the
activity that gave rise to such losses.

When we got this information and of a technical nature, we in-
formed the board of the Central Bank and we recommended that
we cut our deposits gradually, as I explained in my statement.



169


Senator Brown. Very wise. Did BCCI ever suggest anything to
you that you considered improper? Illegal? Any course of activity
that would be illegal or improper?

Mr. Llaque. No. They never suggested anything of this sort. Our
relations with that bank were strictly financial and deposit — rela-
tions like you would have with any corresponding bank. The only
thing we got was a request from them to maintain our deposits in
the face of our gradual withdrawals between August and Septem-
ber 1987.

The telexes we got from Panama were almost begging us to keep
our deposits there, but we had already decided to withdraw them.
We took out $30 million. That was a large amount. And then we
took out similar amounts until we finished in October 1988. Before
anything was heard in the press about the problems of BCCI, we
had withdrawn practically all, virtually all, of our money from that
bank.

Senator Brown. I would be interested in knowing during the
period that your country has suspended payments on foreign debt,
if there is any portion of that in which you have gone back and
paid off. Have all foreign creditor been treated the same, or have
some been paid off during this period?

Mr. Llaque. We stopped paying our debt unilaterally at about
the end of 1984. The suspension of payments was more pronounced
starting in middle of 1985. I am talking about our public debt, our
government debt, and public enterprise debt. Before that and be-
cause of balance of payments problems, we had already stopped
paying on our short-term working capital debt. That was one of the
reasons why we had to look for new corresponding banks.

We have just reinitiated some payments starting in 1991 on our
foreign debt. We have reached some specific agreements, swaps. We
have been paying off debt with certain commodities on the basis of
certain agreements. We have been doing this with countries as well
as with certain banks.

Senator Brown. Did BCCI ever make recommendations to you
with regard to how those obligations should be handled?

Mr. Llaque. No. We never received any suggestion or recommen-
dation from BCCI. Our relationship was strictly one of a depositor
bank and a creditor bank in respect of commercial credits.

Senator Brown. Thank you.

Senator Kerry. Mr. Llaque. No central bank is going to make a
decision to put its deposits somewhere simply on the basis of a
telex and a secret number of letter. There had to be some contact
with somebody.

Mr. Llaque. Yes, of course. We had coming to Lima some officers
of BCCI with whom we had formal conversations. These were au-
thorized representatives to negotiate the account, the deposits, and
the line of credit. I have the names of some of these people which
appear in formal letters.

Senator Kerry. Who did come and negotiate?

Mr. Llaque. One person, Bilgrami, he signed the communication
offering us the line of credit.

Senator Kerry. Is that Mr. Akbar Bilgrami?

Mr. Llaque. Yes. Initials A.M. Bilgrami.

Senator Kerry. Did you do any background check on him?



170

Mr. Llaque. No, we did not investigative those representatives of
the bank.

Mr. Kerry. The record should show that this is the same Mr.
Akba who was subsequently convicted of the money laundering in
BCCI in Tampa.

Who are the other individuals who came?

Mr. Llaque. I do not have any other name right here but I re-
member one. I will look for it here in the document. But his name
was Kureshi.

Senator Kerry. Do you know what Mr. Kureshi did? What was
his role?

Mr. Llaque. Just like the other official. He was discussing terms
for opening the account and the line of credit. That was all.

Senator Kerry. Whom did he meet with? Who made the deci-
sion?

Mr. Llaque. The final decision is usually taken by the board of
the Federal Reserve Bank of Peru on the basis of technical docu-
mentation.

Senator Kerry. Who did he specifically meet with? Who were
the meetings between? Who represented Peru in those meetings?

Mr. Llaque. Well, it is not a representation of Peru; it is techni-
cal representation. In the Central Bank, the people managing for
an accounts are the people in them, in the management office, for
foreign accounts. This is the manager of international operations.
And it is up to him to deal with corresponding banks, and we do
this every day.

Senator Kerry. Do you happen to know who met with Mr. Bil-
grami?

Mr. Llaque. No. I do not have any evidence, but it is up to the
management for international operations. There are a number of
different managers over the years.

Senator Kerry. Would there have been just one meeting, or were
there a series of meetings which Mr. Bilgrami took part in?

Mr. Llaque. I personally was not there, but I understand there
were a number of meetings. This is customary. At least four or five
meetings, I am sure, to discuss the terms and the details.

Senator Kerry. When you say, Mr. Llaque, that an analysis or
evaluation was undertaken of the central deposits at BCCI, what
prompted that? Anything in particular?

Mr. Llaque. Well, we received news or reports that BCCI was
having some financial problems. That is why we asked the special-
ized organization in London to give us this information. This was
in August 1987, as I said a moment ago.

Senator Kerry. Did you learn at that time anything about drug
laundering? Money laundering?

Mr. Llaque. No, at that time we knew nothing. We found out
nothing of that sort at all. This we found out much, much later
from press reports after we had withdrawn all the funds of the
Central Bank of Peru from BCCI.

Senator Kerry. Now, when you received the information in 1987
about the difficulties that BCCI was having, was that reported to
any other agencies of the Peruvian Government or was it simply a
Federal Reserve decision on its own?



171


Mr. Llaque. The only one that had relations and deposits with
BCCI was the Central Bank, but when we were given a line of
credit, we had to establish accounts by local banks with the BCCI
in Panama. So we informed the local commercial banks that we
were ending our relationship with BCCI, and when the last pay-
ment was made on the debt with that bank, those Peruvian com-
mercial banks would also have to close their accounts with the
BCCI branch in Panama.

Senator Kerry. To what degree was the decision to move out mo-
tivated by concern over General Noriega and his involvement in
Panama?

Mr. Llaque. No, really, we did not take that into account at all.
We were just worrying about the problems of BCCI itself. In any
case, Panama really did not offer us the security it used to because
of its political problems. So the Central Bank was looking for other
places to deposit its funds. So in 1988, approximately, our bank
made its deposits in Swiss banks.

Senator Kerry. Who is Mr. Alberto Calvo, R. Alberto Calvo?

Mr. Llaque. I do not know him, Mr. Chairman.

Senator Kerry. Do you know who Mr. Daniel Carbonetto is?

Mr. Llaque. Daniel Carbonetto was an adviser to the Peruvian
Government between 1980 and 1985. He was an adviser to the
President of Peru. I meant 1985 to 1990. Excuse me.

Senator Kerry. We have a vote. We will stand in recess for the
duration of the vote. As soon as we return, we will pick up where
we leave off.

We stand in recess.

[A brief recess was taken.]

Senator Kerry. The hearing will come to order.

Mr. Llaque, thank you. We are just going to be a few more min-
utes. I just want to try to establish a couple of things here if we
can. Let me ask you again. You are saying that Mr. R. Alberto
Calvo is not somebody who is known to you? You never heard of
him?

Mr. Llaque. That is correct. I have never heard of him, Mr.
Chairman.

Senator Kerry. What about Mr. Shafi?

Mr. Llaque. Shafi. No. I do not know him nor do I have him in
the documents that I have here before me.

Senator Kerry. What about Mr. Oscar Riizo Patron?

Mr. Llaque. No, I do not know him either.

Senator Kerry. Just asking a curious question to see if you can
identify any of these documents. Now, I want to understand then

the substance of your testimony is that BCCI presented itself be-
cause of the need to find credit somewhere, because there was a
number to count, because there was security, and the decision was
made to get the line of credit from BCCI and put Central Bank
money into BCCI in return. Is that accurate?

Mr. Llaque. Yes, if you would allow me. I would just like to ex-
plain these decisions were taken gradually. Let me explain.

At the outset, we had information — here I am talking about
April 1986 — that BCCI had capital of a bit more than $1 billion — or
$100 billion. So through the board of directors, we decided that we
could deposit approximately 10 percent of that amount in capital.



172


Later, in the face of our need to get more credit, this percentage
went up and that was when we had a bit more than $200 million
on account. This was decided first at a technical level. It was a rec-
ommendation, not a decision.

We have a staff in the Central Bank which is very professional.
They are investigators and economists, and they draw up reports
and they are taken to management — first to the general manager
and then to the board of directors. And that is where the decision
is taken. So you cannot talk about a person negotiating for the
Central Bank. The terms, the concrete terms, were simply estab-
lished for the deposits and the credit. Then this was taken to the
board for its final approval.

Senator Kerry. On August 7, 1987, you received a memorandum
which said in three paragraphs — let me read the paragraphs.

Paragraph A: The legal establishment of the BCCI Holding Luxembourg, with
headquarters in Luxembourg, does not offer the guaranty of being the lender of last
resort in case of a default in any of its operational units.

B, the last 2 years of the bank in mention showed significant losses in operations
in the options market, and C, it uses an unusual accounting system in that it does
not make it possible to clearly identify the level of losses of the fiscal year or the
activity that led to them.

Now those are the three substantive reasons that you decided to
begin to pull money out. Is that accurate?

Mr. Llaque. That is right. I was referring to that memorandum
when I first spoke. This was August 7, 1987, and there was another
memorandum to the general manager recommending the with-
drawal of funds specifically. This is a document dated July 21, and
it was approved by the board August 13, and there it was decided
finally to withdraw the deposits.

Senator Kerry. So in 1987, it was known that the bank had an
unusual accounting system, and that was known in London. It was
known that the bank had significant losses in the options market,
not a traditional place for banks to be fooling around. And you did
not have the ability to be the lender of last resort — that is, its de-
posit base, its capitalization was in question. Correct? In 1987.

Mr. Llaque. That is right.

Senator Kerry. This document will be made part of the record in
sequential order.

[The information referred to follows:]



173


CRS-15


Translation - Spanish

Central Reserve Bank of Peru

SABE/3.08.2.1.2NO. 020-87

MEMORANDUM


To:

Juan Villanueva


Asst. Manager of Inti. Investments,
Planning and Relations

From:

Gonzalo Aramburu
Chief, Section Analysis of
Foreign Banks

Ref:

Telex IBCA Banking Analysis Ltd.
London DEL 07/31/87

Date:

August 7, 1987


Attached to this document you will find the telex received from IBCA Banking Analysis
Ltd., London, where they report the following to us:

a) The legal establishment of the BCCI Holding Luxembourg, SA., with headquarters in
Luxembourg, does not offer the guarantee of being the lender of last resort in case of a default
in any of its operational units.

b) The last two years of the bank in mention showed significant losses in operations in the
options market.

c) It uses an unusual accounting system in that it does not make it possible to clearly identify
the level of losses of the fiscal year, or the activity that led to them.

Because of the above, as well as the high level of placement that this Central Bank has
in that bank, it is recommended that the operational technical level be reduced.


Sincerely,



174


CRS-19


Translation - Spanish
CENTRAL RESERVE BANK OF PERU
MEMORANDUM


To: Ana Ma. de Reategui

Manager, International Operations

From: Carlos Saito

Asst. Manager, International Investments,
Planning, Relations

REF: Evolution of BCRP deposits abroad

Date: July 8, 1987


According to your request, I am pleased to send you a report on the evolution of the
BCRP deposits abroad, considering the fundamental aspects that affected their operative
handling and the decisions to mobilize the assets abroad.

At the same time, reports are included corresponding to the International Settlements
Bank (BIS) and the Bank of Credit and Commerce International (BCCI).


Sincerely,



175


CRS-20


DEVELOPMENT OF BCRP DEPOSITS ABROAD

1. Until mid-October 1984, the administration of the currency deposits abroad was carried out
according to the joint application and consideration of the criteria related to the administration
of assets in normal times: reciprocity, security, liquidity, efficiency, and yield. Column 1 of the
attached chart reflects what was in practice the application of the criteria of reciprocity and
security (diversification of risk) reflecting the number of banks and markets involved. The
distribution of funds by types of deposit (current, call and term) which responded to the
criteria of liquidity, (efficiency, and yield.

2. As of mid-October 1984 the country began to have a series of problems with its private
creditors as well as some international organizations, due to problems related to the payment
of its foreign debt, it being necessary to take emergency measures whose results can be seen
in the second column of the attachment.

3. The first measure taken was to withdraw practically all our deposits from U.S. banks,
transferring the majority to the Fondo Andino de Reserves ( FAR: Andean Reserve Fund) as
of November 1, 1984, and to European banks. In addition, in the desire to ensure all of our
funds, the BCRP decided to seek markets or institutions that met the fundamental
requirement of funds not being subject to attachment.

4. In this context deposits were made in several currencies in the Bank for International
Settlements (BIS); the only institution at that time that met the requirement mentioned above,
and it began to receive funds as of November 18, 1985 even though the remuneration for our
deposits was always 1/4 below the referential market rate. Toward the end of January 1985,
FAR and the BIS had almost 50% of our term deposits abroad. (See column 3)

5. Diverse inquiries and legal definitions determined that the FAR funds were not immune to
a attachment and therefore, as of July 15, 1985 the funds began to be withdrawn and
transferred to the BIS. (See column 4). The US $70 million remaining in the FAR were kept
as reciprocity for the loan that this organization had made to the country.

6. Having the BIS as a safe institution and fearing that the reprisals could come also from the
rest of international correspondent banking, since at the end of September the divergences
became accentuated between the new Peruvian government and the IMF and creditor banking,
it was decided to withdraw all the time deposits (even before their date of expiration) from all
correspondent banking and to concentrate them in the BIS. This process culminated at the end
of October (see column 5).

7. Once these emergency measures were taken, the BCRP decided to reestablish its policy for
investments of current assets within a context of maximum security and hot just in the part
corresponding to foreign currencies but also in those made up of precious metals. In addition,
an additional element is introduced, that of reorganization of portfolios.

Regarding foreign currencies, it was decided to open special accounts in the market in
Panama, which have maximum security. Also consultations were made in places such as



176


CRS-21


Austria, Switzerland, Liechtenstein and others but they do not manage to meet the BCRP
requirements.

8. Toward the end of November 1985, the search for correspondents with numbered accounts
in Panama was necessary in view of the BIS refusal to provide yield for our funds that were
renewed as of that date if they were not decreased considerably. At the end of December work
was underway with four .banks in Panama in which around US $333 million had been
deposited in term deposits coming exclusively from the BIS, thus alleviating the above-
mentioned problem with the latter institution.

9. This process of opening accounts in Panama continued; so it is that at the end of June 1986
work was already underway with seven banks, which had US$ 362 million in deposits. The last
bank with which correspondent relations were established was the Bank of Credit and
Commerce International (BCCI) with which work was begun under the system of special
accounts as of June 27, 1986. At the end of the same month this bank had deposits of US$ 65
million. (See column 7)

Regarding the numbered accounts in Panama and the deposits maintained in the banks
of this market, two aspects must be kept in mind. On the one hand, the conditions that make
the BCRP prevail are "sui generis" (special contracts for the handling of accounts, commitments
of no possibility of attachlment, right of set-off, comfort letters, etc.) and in some cases they
hinder the negotiations and in many cases they cancel them definitively.

On the other hand, it is known that one of the conditions of security for keeping funds
in a bank is not to exceed a certain total related to its capital and reserves, for example. In this
respect care was taken, except for special cases or acts of god, to keep them within those limits.

10. The situation described in the above section continued to mean keeping deposits in the BIS.
This lasted until February 18, 1987 when all funds were finally withdrawn, which at the end
of 1986 had already been reduced to US$ 293 million allowing the Panama market to gain US$
565 million on that same date.

Meanwhile, given the credit facilities granted by the BCCI, the BCRP in reciprocity
went on increasing its deposits in that bank. On September 30, 1986 the term deposits
exceeded US$ 145 million, at the end of 1986 they were US$ 229 million and in February of
this year rose to US$ 242 million.

11. The situation from February to date has undergone slight modifications. On the one hand,
thanks to the creation of the FAR Treasury Notes, highly liquid, and of easy transfer by
endorsement, the deposits have been increased in this institution, and they currently total
some US$ 113 million.

On the other hand, the agreement for the handling of numbered accounts was signed
with Credit Lyonais.

Regarding the distribution of time deposits in Panama, which represented 84% of the
total of this type of deposit, one should note the share of the BCCI, which with US$ 245
million constitutes 27% of the funds deposited in that market and 31% of the total term
deposits.



177


CRS-22


12. The steps that the BCRP was taking were also reflected in the handling of the call
accounts, this in respect to a number of banks since the level of funds to be maintained in this
account follows the operational goals of the moment. This evolution can be seen in attachment
2 .


Although the number of banks that handled the call accounts was reduced to almost
half, it is worth noting the concentration of these funds. Just three banks with numbered
accounts in Panama currently handle more than 90% of the call accounts. (See attachment 2)

13. Finally, some comment must be made on the profitability of our funds abroad. In this
sense it should be mentioned that with the exception of the BIS, which always paid on our
funds with 1/4 percent below market, all the rest of our deposits on time have been paid at a
rate similar to or above the market rate.

Regarding our deposits in the BCCI, for example, a calculation of the accumulated yield
of all our deposits until June 1987 with respect to a referential market rate, shows a favorable
total for this bank (See attached graph).



178


CRS-7


Translation - Spanish


Central Reserve Bank of Peru

DIM/3.08.2.1.0-NO. 003-87


MEMORANDUM


To: Carlos Saito

Asst. Manager of Internatinal Investments,

Relations, and Planning

From: Arturo Handabaka

Chief, Market Research Dept.

Re: Relations with the BCCI

Ref: 1) Memo SGP 11/45 of 4/1/86

2) Board Agreement of 8/14/86

3) Memo SGP11/256 of 12/26/86

4) Memo SGP 11/279 of 7/13/86

5) Telex BCCI-Panama of 7/22/87

Date: July 22, 1987

The purpose of this memorandum is to do an inventoiy of the main aspects that have
determined our relations of international treasurership with the BCCI, as well as to make
known new elements of judgment that should be taken into account in our future relations
with that institution.

Through the first document of reference, the Asst. Management of International
Investments, Relations and Planning, at the suggestion of the General Management, proposed
the opening of correspondent relations with the BCCI-Panama, in view of the wilingness of
that entity to grant us lines of credit for purposes of foreign trade, as well as because of the
good financial-economic situation of the home office in Luxembourg, i.e. the BCCI Holding,
100% owner of the BCCI Overseas of Grand Cayman and at the same time 100% of its Panama
branch.

Due to the existing relationship between the BCCI-Panama and the home office, as well
as the commitment of the latter to back all the activities of the first, it was established that
the deposits that the BCRP made in the future would have as reference the capital and



179


CRS-8


reserves of the home office, since in 1984 it exceeded US$ 1.009 billion, and the limit of
deposits US$ 100 million (in capital and reserves).

/Note: text may be missing, as the next page of the memo begins with a 3./

3. Given the difficulties at that time in getting facilities for purposes of foreign trade and the
amount that the BCCI was granting in exchange, the Board of the Bank approved the
correspondent relations, accepting the concrete proposal of that foreign bank to the effect that
it would grant us a line of credit up to US$ 60 million, at the same time making a deposit up
to US$ 200 million. (Document 2).

4. Subsequently, around the end of 1986, the BCCI decided to increase the previously-
mentioned line to US$ 110 million in exchange for the increase in our deposits up to US$ 250
million. As indicated in document 3 of reference, our deposits between call and time rose on
11/26/86 to US$ 255 million. This level, with some variations, has been maintained to the
present.

5. The utilization of the line of credit, according to the Department of Operations in Foreign
Curremy, has at its moments of highest demand reached US$ 80 million, approximately, there
being no operational problems in the handling of the line, nor with the deposits which are kept
in that institution.

6. However, it should be mentioned that the reciprocity that the BCRP maintains with the
BCCI is more than what it has with the other banks with which it currently works, with the
exception of the Deutsche Sudamerikanische Bank, which handles almost all the call accounts
in Panama and has preferential treatment because of being regional. Something similar can
be observed in the level of the ratio deposits BCRP/Capital and BCCI Reserves.

In effect, with the exception of the Banks Sudameris and Bladex, which being small
have quite a high statement in Peru regarding their own capital and reserves, the deposits that
the BCRP maintains in the BCCI represent 18% of the capital and reserves of this bank.

7. New elements of judgment have arisen that have led to this memorandum and that we
believe should be taken into account for our future relations with the BCCI. In fact, in
document No. 4 of reference, endorsed by No. 5, one can see unsatisfactoxy results of the BCCI
Holding SA (Luxembourg) and what is more, they seem to worsen year by year. Their net
earnings decreased substantially and with them the yield on their assets, indicating bad
performance of the bank during 1985 and 1986.

In its annual report for 1986, the BCCI credited these poor results to adverse effects
coming, on the one hand, from significant devaluations in certain developing countries where
the Group operates and the smaller differential margins during the year; and, on the other
hand, to the exceptional losses that the group had to assume as a result of the poor
transactions of options contracts by the Grand Cayman subsidiary, which at the end of 1985
had lost US$ 150 million.

These losses were absorbed almost totally during the 1986 fiscal year and it is hoped
that they will not have a considerable influence on the results of this fiscal year.



180


CRS-9


In addition, proceeding with the Group policy of strengthening its patrimonial base, the
1986 report pointed to a considerable increase in the bank’s capital. A part of this increase
comes from the issuance and total subscription (by the stockholders themselves) of US$ 250
million in stock, as well as of other subscriptions for US$ 370 million In replacement of US$
306.5 million that they were redeeming.

8. Because of the above, and precluding some other greater problem that the BCCI could face,
a fact that recently could be known in the middle of the next year with the bank balances or
just shortly before through specialized means, this Department suggests reviewing the level
of deposits being held in the BCCI, to the extent that the necessaiy reciprocity that should be
maintained allows.

Sincerely

/illegible/



181


CRS-10


Translation • Spanish


Central Reserve Bank of Peru (BCRP)
MEMORANDUM

Date: 8/26/87

To: Cesar Ferrari Quine

General Manager a.i.

From: Ana Maria T. de Reategui

Manager, International Operations

RE: BCRP relations with the BCCI

Ref: Memo No. 302.2.0.1,0.0


Attached to this memorandum you will find the report referring to our relations with the Bank
of Credit and Commerce International, which was requested by the Board of Directors of our
Institution through the memorandum of reference, in expansion of Document No. 0536 heard
in the session of the 13th of this month.


Sincerely,



182


CRS-ll


BCRP RELATIONS WITH THE BCCI


1. In view of the restrictions that were being observed regarding the availability of lines of
credit from abroad, the Board of Directors of this Central Bank decided to adopt measures
leading to seeking, through the direct participation of the Central Bank, to offset those
restrictions somewhat.

Among these measures was one to carry out operations with new correspondents,
seeking to obtain reciprocity for deposits of the Central Bank, through lines of credit offered
by those banks. In this respect the Board designated the President and General Manager to
establish contact with banks from abroad.

2. In this context, in March 1986 I received the order from the General Management to
evaluate the possibility of opening a correspondent relationship with the Bank of Credit and
Commerce International (BCCI).

3. The Board of Directors of this Central Bank, in a session of April 1, noted the report
prepared by the Management under my responsibility, in which it was recommended that the
bank proceed to open the corespondent relationship with the BCCI and make deposits in that
bank up to US$ 100 million, a sum equivalent to 10% of the capital and reserves of the BCCI
(Attachment 1).

In that matter, it should be noted that as a general standard for the purposes of proposing the
maximum sums to be deposited in our correspondent banks, one takes into account 10% of the
capital and reserves of the respective banks.

4. After analyzing the report mentioned in point 3, and after taking note of the verbal report
presented by General Management, noting the offer of the BCCI to grant a credit line for
purposes of foreign trade of up to US$ 60 million, the Board of this Central Bank, in a session
of April 1, agreed to make deposits up to US$ 200 million. (Attachment 2)

5. From that time, the Management under me began steps to establish a correspondent
relationship with the BCCI, Panama, as well as to sign an agreement on numbered accounts
with that bank.

6. The steps referred to in point 5 culminated on April 28, 1986, the date on which after having
reviewed the pertinent documentation (General Business Agreement for the Handling of
Numbered Accounts, Comfort Letter and Commitment Letter), the "Numbered Account"
agreement was signed with the BCCI, Panama, in which the opening of current accounts was
made feasible, as well as call and term deposits. (Attachment 3).

7. On that same date (4/28/86) the BCCI, through its officials in Panama, formalized their
offer of a commercial credit line of US$ 60 million, to be used in the confirmation of letters of
credit of importation and on demand and in the financing of exports. The offer was for a one-
year period, with possibilities of renewal, and with an interest rate of prime plus 1%.
(Attachment 4).


183


CRS-12


That offer was contingent upon the deposits madeby this Central Bank, up to US$ 200
million, being maintained with "sufficient equivalent totals," as noted in the communique of
4/28/86 (Attachment 5), which was attached to the letter in which the credit line mentioned
above was offered.

In that respect, it should be noted that these communications were delivered as
preliminary working documents, and were signed just by the BCCI officials, Panama, and
without having evaluated the details of the operativeness of that line of credit.

8. Regarding the beginning of our deposits, through the instructions of General Management,
action was taken in the following manner:

a) On May 5, 1986, the Deutsche Sudamerikanische Bank, Panama, was instructed to transfer
with value date of May 6, US$ 15 million to the BCCI, Panama, for the purposes of opening
a current account in that correspondent. That transfer was aimed at initiating the correspon-
dent relations and that sum of US$ 15 million was maintained until the agreement was signed,
through which they granted us the credit line up to US$ 60 million.

b) As of May 7 and 8, 1986, deposits were made in call accounts, for US$ 100 million,
respectively, the sum of US$ 200 million being kept until the end of that month.

The Board of this Bank, in a session of May 16, 1986, approved the creation of the
Export-Import Fund (FIEX), in order to facilitate foreign trade. That fund was initially formed
with US$ 60 million offered by the BCCI.

In that session in addition, the distribution of these resources among the entities of the
Financial System, at the proposal of the Assistant General Management, was approved
(Attachment 6).

/page missing in text, including remainder of 8, as well as 9, part of 10/

of import credit on demad and with payment deferred up to 90 days, financing of exports based
on letters of credit on demand or term of payment up to 180 days and financing of exports not
based on credit letters with term of payment up to 180 days.

That line of credit was signed for a period of one year, subject to review every six
months, and renewable after the year. The distribution of resources was the one agreed upon
by the Board in its session of May 12, 1986 and the rate of interest on the financing was set
at 1.25% over the prime rate, which is competitive with those charged by other foreign trade
credit sources, ours being considered a "risk country."

As can be seen, the rate differed by 0.25% from the one offered by the BCCI in its
communique of 4/28/87. This rate was the minimum one accepted by the Regional Office for
Latin America of the BCCI, whose officials were responsible for the signing of the agreement,
in consideration of the operational costs associated with the participation of more than 20
banking institutions of Peru. Initially the BCCI, Panama, made its interest rate offer under
the understanding that the line would be handled exclusively by the BCRP and used for
operations of significant sums.



184


CRS-13


11. In signing the agreement mentioned above, the BCCI notified us that in view of our
deposit of US$ 200 million, they were puting at our disposal the line of US$ 60 million, under
our mutual understanding that in case the total deposits should decline to below the credit
facilities granted, the lines of credit would be reduced for us accordingly. (Attachment 8)

12. As of June 19, 1986 the BCRP signed the corresponding contracts of allocation of the
FIEX-BCCI with the different financial entities, so that the resources of that line would be
used.

13.. The utilization of the FIEX-BCCI line, although quite gradual, did not show operational
difficulties; to the contrary, in few months the banks of greater movement began to demand
increases in that line.

In view of that situation, in December 1986, this Management began conversations with
the BCCI in order to gain an increase in the line. After the evaluation of the banking needs
and in coordination with the General Management, a request for increase in the line of US$
50 million was formalized, whose distribution is seen in Attachment 9. On this occasion, there
was negotiation so that the line would take place with an increase in the deposits by US$50
million.

14. On March 12, 1987, the second FIEX-BCCI agreement was signed, in the amount of US$
110 million, which included the US$ 60 million from the first agreement (Attachment 10).

In this new agreement there are some favorable variations: the time for confirmation
of the import credit letters is increased from 90 to 180 days and the financing of imports up
to 180 days is included.

With the signing of this second agreement, the BCCI delivered to us a communique, in
terms similar to those described in point 11, with the change that the deposits were US$ 250
million and the line was for US$ 110 million (Attachment 11).

15. It should be noted that throughout the period of validity of the FIEX-BCCI agreements,
there have been redistributions of resources between the financial entities, based on the rates
of utilization of those resources.

16. The initial deposits made by this Central Bank under the modality of current and call
accounts, were subsequently converted to time deposits for the most part, keeping in mind the
larger yield that this latter would provide compared with the former. (Attachment 12)

With respect to the characteristics of the term deposits, it should be noted that they
have been being renewed generally in periods of one month, a rate of interest being obtained
whose accumulated yield shows favorable results with respect to the one that would be
obtained according to the referential market rate.

It should be noted that the rate obtained is significantly higher than the yield obtained
by our deposits in oti. - correspondent banks (Bank for International Settlements, BLADEX,
Swiss Bank, Bank of Tokyo, Credit Lyonnais, among others), in which, however, we have found
it necessary to maintain deposits for security in case of attachment and in order to diversify
our risks.



185


CRS-14


At present, this Management is taking steps with the BCCI for a new increase in the
line, of US$ 110 million to US$ 140 million, which would be obtained in reciprocity to the
deposits already made in the amount of US$ 250 million, which through a telex of 8/19/87 has
been accepted by the BCCI. (Attachment 13).

That increase will be of great utility given the recent greater reductions observed in the
availability of lines of credit from abroad.

Additionally, and in coordination with the General Management, the BCCI has been
asked for US$ 20 million additional, which would raise the line to US$ 160 million.



FROM F.F^OPT 0 * PFPUVIAK CONTROLLER GENERAL 88-CG/SF



Congressional Research Service • The Library of Congress • Washington, D.C. 20540


Translation - Spanish


Chart No. 6


Surpluses Shown in 1986

(Millions of US$)


Banking Entity

Approved
Tech. Lt

Jan

Feb

Mar Apr

May June July

Aug

Sept Oct

Deutch Sud.

140

268

117

90

64

23

47

93

9

.

29

Swiss Bank C.

140

148

163

-

-

3

-

-

-

-

-

Bco. Nac. Argentina

50

63


1

1

1

1

1

1

1

2

Bladex

20

.


-

-

-

-

-

.

.

-

Banque Sudamer.

20

1


-

1

1

1

1

1

1

1

Bank of Tokyo

140

-


5

7

8

10

11

11

29

9

Bank of Brazil

50

.


1

1

1

-

8

5

7

-

BCCI

200

-


-

-

15

16

3

2

-

6

Total:


480

280

97

74

52

75

117

29

38

47


The surpluses observed during the first months and which reached a total of US$480
million and US$ 280 million respectively are explained by the need to increase the number of
banks with which the BCRP could operate through numbered accounts, and by the refusal of
the BIS to renew the growing deposits that were kept in that entity.

However, during the months of March to October significant excesses were registered
over the maximum limits of deposits approved by the Board of Directors, without the express
authorization of that level, mainly in the Deutsche Sudamerikanische, Bank of Tokyo, Bank
of Brazil and the BCCI.

Although the BCRP call accounts were handled in the Deutsche Bank, during the
months cited the issuing institute kept resources in this account that exceeded the limit
approved by the Board of Directors, without considering the important time deposits that were
renewed in that entity. In the Bank of Tokyo and the Bank of Brazil, time deposits were made
and kept above the limits referred to, which, in the case of the first bank, caused a greater
excess, in considering the deposits in call accounts on the order of US$ 6 to 7 million.

Early in November of 1986, an extraordinary entry of foreign currency coming from the
sale of gold made came about, causing an increase in the levels of deposits of the BCRP in
banks abroad. At a session of the Board of Directors (November 7, 1986), the limits were
modified for the handling of the deposits according to what has been stated, and it was
determined that they would be adjusted periodically at the suggestion of the International
Operations Management, after acceptance of the General Management.



187


CRS-2


In evaluating the compliance with said limits, permanent surpluses were seen in the
Deutsche Sudamerikanische and in the BCCI (overseas), in the amounts indicated in the
following chart:

Chart 7

Excess Amounts Appearing in 1987
(Millions of US$)


Banking Entity Approved 1986 1987

Tech. Lt. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. July Aug. Sept. Oct.


Deutsch Sudam.

200

11




61



89

61

45

29

93

3 6

BCCI

200*

7

53

41

63

20

4

7

14

18

1

2828

TOTAL


18

53

41

124

20

93

68

59

47

94

3134


*A s of Sept. 10, 1987, it is reduced to US $160 upon the orders of General Management

The surpluses in the Deutsche are explained because of the decision of the BCRP to
maintain time deposits in that bank above the US$ 114 million after February 1987, among
which some US$ 38 to 45 million are included as collateral for the line of credit of DM 66
million granted, which, added to the resources in call accounts above US$ 120 million, caused
said situation. The BCCI case is discussed in a specific observation.

The deficiency mentioned originated in the lack of periodic information to high
management regarding the status of total deposits per bank (time deposits, call and demand
accounts), and the maximum limit approved by the Board of Directors in the matter, as well
as the reasons that cause any excess, in order to decide on the pertinent corrective measures.
This information is obtained, partly, through the daily reports called "Position of Eurodeposits
on time” and "liquid assets in foreign currency," which, because of being statistical documents
issued by different areas of the bank, are not consolidated or analyzed in order to issue a
timely opinion on the facts noted.

One should also note the case of the deposits made by International Operations
Management in the Credit Lyonnais during 1987, which, between February and July of that
year reached a level fluctuating between US $90 and 100 million.

The opening of the respective numbered account and the setting of the maximum limit
to be deposited in that financial entity was not approved by the Board of Directors, as seen in
the respective minutes, and according to what the Bank Administration admits. However, it
is adduced that said authorization of the Board of Directors, regarding the periodic adjustment
of the maximum limits for deposits (Session of November 7, 1986) included the power to decide
on depositing resources in the Credit Lyonnais, which was not in keeping with the text of the
session proceedings and attachments.

These situations have caused the failure to comply with the express instructions of the
Board of Directors, meaning that greater risks were taken than those technically recommend-
able and authorized regarding the international reserves deposited in Panamanian banks.



188


CRS-3


3.4 Deposits have been made up to US $270 million in numbered accounts opened
in the BCCI (Overseas), obviating minimum standards of security and credit
reciprocity

During the period in which numbered accounts were opened in Panamanian banks, an
effort was being made fundamentally to protect the international assets against any risk of
attachment or coercive action promoted by the creditors of the country, without overlooking
the evaluation of the financial entity in which the resources would be deposited. Thus, to
January 1986, authorization had been granted to operate with eight Panamanian banks up to
certain maximum deposit limits.

Given the accelerated restriction of the short-term lines of credit for financing the
foreign trade of the country, the Central Reserve Bank decided to work with banks that agreed
to give some reciprocity for its deposits, through lines of credit.

Under these circumstances, the Board of Directors, in a session of April 1, 1986,
approved a correspondent relationship with the Bank of Credit and Commerce Int. (Overseas)-
BCCI, accepting the concrete proposal in the sense of receiving a line of credit for US$ 60
million for making a deposit of US$ 200 million, this being the first line of credit of this nature
granted throughout the history of the deposits made by the BCRP.

The approval of the correspondent relationship under the conditions mentioned lacked
the necessary information for meeting the assurances of the case and the minimum reciprocity,
as seen below:

a. Document No. 212 attached to the minutes of the Board of Directors of April 1, 1986
as support for the approval, does not include all the minimum information required as general
standards for approving correspondent relationships with banks abroad (Session of 3/4/82). In
fact, information is not included on the financial status of the BCCI (Overseas) or of
management ratios of the past three years, it being mistakenly pointed out that the BCRP only
had information up to 1981. It is understood that for reasons of security it was necessary to
evaluate the BCCI Holding, for purposes of requiring a "Comfort Letter" as an additional
guarantee; but the fundamental security of the BCRP deposits in the BCCI (Overseas) was
based on the management and performance of this bank, which was not evaluated. .

Nor was there a comparison of the information of the Holding and the bank with the
performance of other correspondent banks of similar magnitude, in order to evaluate their
importance and management.

Document 212 evaluates the importance of BCCI Holding by comparing the level of its
assets with respect to the largest banks in the world (IBCA Banking Analysis Limited-1984)
sidestepping the analysis of the financial-economic status of the subject of the corresponding
relationship: the BCCI (Overseas), and neglecting to comment on the importance of the bank
in the financial markets in which it operates.

It should be noted that the approval of the correspondent relationship by the Board of
Directors does not mean the corroboration of the sufficiency of the information provided by the
Bank’s administration and specifically the Management of International Operations. It is the



189


CRS-4


responsibility of the technical area to provide sufficient information to allow the adoption of
correct decisions.

b. There was no evaluation of the background of the BCCI - Holding or of its main
subsidiaries (BCCI-Luxembourg and BCCI-Overseas), considering that they were not
correspondents of the BCRP, they lacked exposure and in the files of the issuing institution
there was qualitative and quantitative referential information on these banks, contained in the
"Application of the BCCI-Luxembourg for opening a branch in Peru" (A/D of 2/1/85). Among
that information was a report of IBCA Banking Analysis Limited London which indicates the
BCCI S A. of Luxembourg as being "aggressive and innovative and that on several occasions
it had had problems with the supervisory authorities," such as the Bank of England.

In addition, in evaluating that Bank from the legal point of view it considered it in 4th
or 5th place, i.e. it placed it in one of the last places.

Although International Operations Management states it did not have such information
in its possession, it knew of its existence and could have made an effort to obtain it. In any
case the Bank Administration proposed to the Board the approval of the corresponding
relationship, neglecting to report on that background dealt with at that level by the members
of the Board operating until 1985.

c. There was no analysis or evaluation for practical purposes of the security of the BCRP
deposits and of the effectiveness of a Comfort Letter, and of the importance of the fact that
BCCI-Holding and its two most important subsidiaries had their main offices in Luxembourg
and the Grand Cayman. Those financial centers were characterized by their great liberalness
and because the monetary authority does not guarantee the deposits or offer any services such
as lender of last resort, i.e. in case of financial emergency the authority will not come with
assistance from these financial institutions, the latter having to rely on the financial capacity
of its stockholders.

It should be noted that this opinion was shared by the Central Bank, and it was a
preponderant factor for withdrawing some 58,000 O.T. in gold which it kept in the Dresdner
Bank-Luxembourg (A/D 6/6/85).

d. Documentary evidence is lacking prior to the approval of the correspondent relationship,
of having requested and/or negotiated other concrete proposals for lines of credit in order to
have alternatives among which to choose the best, considering the criteria of security and of
minimum reciprocity. It is estimated that the BCCI (Overseas) proposal was the only one that
existed and that it was accepted under conditions far from a minimum security policy.

The Bank Administration indicates that subsequently they requested lines of credit from
all correspondent banks with which they maintained numbered accounts in Panama, which
refused to increase their exposure in Peru. That action has not been documented.

The pertinent documentation (General Business Agreement for the Handling of
Numbered Accounts, Comfort Letter and Commitment Letter) was signed on 4/28/86, the
commitment being obtained from the head office (BCCI-Holding) to back its BCCI (Overseas)
affiliate in all its activities. It is on the basis of this consideration that initially the Deputy
Management of International Investments and Investments recommended a maximum deposit



190


CRS-5


limit of US$ 100 million, equivalent to 10% of the capital and reserves of the Holding, in order
to obtain the line of credit of US$ 60 million; however, the Board authorized the deposit of
US$ 200 million for the same total line of credit.

CHART No/8


Evolution and Importance of Deposits in the BCCI


DATE

Deposits in the

Share in the

Amount Above


BCCI (US Millions)

Total Deposits

Limit

5/14

215,196

16

15,196

6/27

201,933

15

1,933

7/31

204,042

15

4,042

8/29

199,031

16

-

9/30

196,380

15

-

10/31

206,772

15

6,772

11/21

207,056

17

7,056

12/31

253,287

24

53,387

1/30

257*597

25

57,597

2/27

261,499

28

61,499

3/31

254,423

31

4,423

4/30

253,435

28

3,435

5/29

256,231

26

6,341

6/30

270,709

28

20,705

7/31

262,568

28

12,568

8/31

251,269

29

1,265

9/30

188,143

28

28,143

10/30

188,227

31

28,227

11/20

153,126

36



12/30

114,353

33

-


With respect to the technical limits for deposits in the BCCI approved by the Board in
the amount of US $200 million as of May 1986 and of US$ 250 million as of March 1987,
excesses have been shown almost constantly in those authorized levels during the period May
1986 - October 1987 (one year and four months) as shown in Chart No. 8, the case appearing
that between December 1986 and March 12, 1987 these were more than US$ 50 million in
excess, explaining the concentration of deposits in the BCCI (Overseas) Ltd., on the order of
24% to 28% without the express authorization of the Board or of the General Manager,
according to the Agreement of the Board of November 7, 1986, but with the knowledge of the
Management of International Operations, as indicated in Memorandum SGPII/3.08.2.0.0/256
of December 26, 1986.

In addition, through a letter of April 28, 1986 the BCCI (Overseas) Limited informed
the BCRP that in consideration of the deposits of US$ 200 million it was granting it a line of
credit for US$ 60 million, it being understood that in case of decline in the deposits below the
credit facilities granted, the line would be reduced.



191


CRS-6


It is appropriate to note that in March 1987, the line was increased to US$ 110 million,
but that the maximum amounts debited in their use only reached around US$ 85 million.
However, the reciprocity that the BCRP maintained with the BCCI was always above that
received (US$ 250 million in deposit against the line of credit used up to US$ 85 million) and
even much above what it was keeping with other banks with which it worked, no evidence
being found of the reasons for this significant concentration of resources.

As can be seen in the following chart, the reciprocity that the BCR maintained with the
BCCI was 3.31 more than what it had with the other banks with the exception of the Deutsche
Sudamerikanische BK, which handled the call accounts of the BCRP in Panama and had
preferential treatment since it was a regional bank.

The facts pointed out show that initially the BCRP did not investigate sufficiently into
the background of the BCCI (Overseas), which would receive a significant part of the country’s
reserves in deposit, nor into the Holding that would support it in the operations, assuming a
risk greater than the one technically recommendable and without considering a criterion of
minimum reciprocity.

At the same time, during 1986 and 1987, the issuing institution kept high sums in the
international reserves deposited in those banks, generating a high concentration of assets in
currencies in that bank, thus increasing the risk initially assumed. On December 31, 1987, the
total deposits in this bank reached US$ 114,353,000.

If it had not maintained such high immobilized sums in this bank, the BCRP would
have been more dynamic in the search for new lines of credit as reciprocity for the deposits
that it could establish.

The lack of constant information for the Board on the total deposits maintained in the
correspondent banks (term, call, etc.), and their relationship to the technical limit approved for
that level, explain the permanence of this situation.

CHART No. 9

Concentration of Deposits and Credit Reciprocity of the BCCI with respect to Other

Correspondent Banks



Capital &
Reserv,

Total Depost.
BCR-7/20/87

Expos.**

Recip.

Dp BCR/C
& Res.


12/86

(1)

(2)

(3)

(2) + (3)

(2) div. (2)

BCCI

1,471

265

80

3.31

18.0

D. Sudamerika BG

3,432

267

47

4.82

6.6

Credit Lyonnais

2,518

93

123

0.76

3.7

Banco do Brasil

5,448

66

86

0.77

1.2

Banco Nac. Arg.

1,145

53

16

3.30

4.6

Banque Sudameris

151

38

64

0.59

25.2

Swiss Bank Corp.

5,220

32

70

0.46

0.6

Bladex *

75

20

55

0.36

26.6

** Latter data known provided

by the foreign bank itself





192


Senator Kerry. Let me ask you this. What is the impact of this
experience in terms of the Federal Reserve in Peru in its dealings
with BCCI?

Mr. Llaque. Well, we have always been very careful in our rela-
tionship with our corresponding banks, as I said at the outset. This
time, fortunately, we had no loss of any damage. This is very im-
portant for our Central Bank because under our constitution, our
Central Bank does administer our country’s reserves. And that is
why we are so careful, I repeat.

Senator Kerry. When you say you had no loss, you were giving
50 percent on the dollar. So you took dollars and devalued them by
50 percent in order to be able to use BCCI in Panama. Is that not
accurate?

Mr. Llaque. No. Technically in interbank operations this is not
exactly the way it is. Let me explain. The deposits in a bank obvi-
ously earn passive rates and credits get active rates. There is a dif-
ferential there. It is not a loss, but there is a differential between
the passive rate it pays on the deposits and what it charges. This is
really not a loss. This is a normal banking

Senator Kerry. Is it normal to give 50 cents on the dollar?

Mr. Llaque. No. It is not that they gave us 50 cents on the
dollar. It was simply a line of credit, and I want to recall once
again what I already said. We had deposits in banks that did not
give us any credits at all. It is not a matter of loss or gain. There
was not an effective loss in the sense of the resulting account.

Senator Kerry. Mr. Llaque, thank you. Senator Cranston has a
couple of questions and then we will move on to the next panel.

Senator Cranston. I think I have just two questions. First, how
important is the phenomenon of drug money laundering in Peru? I
would like to ask you to please be as specific as you can in terms of
the amounts of money involved and its relative importance within
the system of your country.

Mr. Llaque. We do not have any precise information on money
laundering in Peru. We in the Central Bank set up standards, or
set down standards for exchange operations, and we have free ex-
change at the present time so there is free availability and free
transferability of foreign currency in Peru. Therefore, we cannot
give any figures that could be indicative of money laundering. Our
banks work freely abroad both in sales and in purchases and in all
other banking transactions.

Senator Cranston. Do you have any impressions about the scale
of money laundering without having any precise figures?

Mr. Llaque. Well, I do not have any information. I am talking as
an official of the Central Bank. I have an area under me which has
to do with exchange operations, but I do not have any information
on the magnitude of this. We have not done any calculations of this
kind.

Senator Cranston. What can you tell us about patterns of flight
capital from Peru in the last 10 years?

Mr. Llaque. Well, in Peru there has been an economic policy
which has changed a great deal over time. We have had differen-
tial exchange rates, we have had certain restrictions on capital,
and this has caused some capital flight, more than likely, an aspect
which has changed over the last few months. There is a lot of cap-



193


ital returning now, and there has been a notable return of capital
to Peru over the last few months.

Senator Cranston. What has caused that return?

Mr. Llaque. In the first place, we established an exchange
policy — a free exchange policy. For instance, there is no need to
give the Central Bank the value of exports. There is no export con*
trol, and there is a new policy — a new investment policy from the
point of view of the rules in the country as well as from the point
of view of the rules of the Andean Group to which we belong under
the Cartagena Charter, so there are certain advantages for foreign
investors now, and this is what caused a return of capital. Not just
foreign capital, but Peruvian national capital which had been held
abroad.

Senator Cranston. Thank you very much.

Senator Kerry. Mr. Llaque, thank you very much. Again, we. ap-
preciate your testimony and we very much appreciate your pa-
tience and waiting until today. Thank you.

If we could have the second panel come up, Mr. Fausto Alvarado,
Ms. Lourdes Flores, Pedro Cateriano, and Fernando Olivera.

Senator Kerry. Could I ask you each to stand and raise your
right hand? Would you raise your right hand, please? Do you swear
to tell the truth, the whole truth, and nothing but the truth, so
help you God?

Mr. Alvarado. Yes.

Mr. Olivera. Yes.

Ms. Flores. Yes.

Mr. Cateriano. Yes.

Senator Kerry. Would you each identify yourself, please? State
your name and title or position, and bring the microphone close to
you. State your name and your title.

Mr. Alvarado. I am Fausto Alvarado. I am a deputy. I am a
member of the investigating committee on the illicit enrichment.

Mr. Olivera. I am Fernando Olivera. I am president of the inves-
tigative committee of the Parliament of Peru, the deputies examin-
ing the financial operations in Peru and abroad regarding the
former President of Peru, Alan Garcia Perez. -

Ms. Flores. Lourdes Flores, the commission’s head.

Mr. Cateriano. Pedro Cateriano. I am a deputy and member of
the investigative committee regarding the presumed illicit enrich-
ment of former Peruvian President Alan Garcia Perez.

Senator Kerry. Each of you has identified yourselves in a way
that makes a statement about the former President, which is not
what we are looking at here.

We are looking at the question of BCCI, and I want to know the
relationships, but I do not want to know unsubstantiated allega-
tions or anything that is not known as a matter of fact, that is not
supported by document or by testimony. What we really want to
know is how BCCI operated in Peru, and to get a sense of what is
known as a matter of record about its dealings there.

I must ask you in the openings to try to be brief, because we
really want to have some time for questions. We are running
behind again. We cannot go into the afternoon, and we have Ar-
gentina, which we also want to cover afterward, so the shorter you


194


are with respect to the openings, the more time we will have to ask
questions.

Now, is one person going to speak for you in an opening? Is your
chairman going to speak? I gather, Mr. Olivera, you will be pre-
senting an opening statement?

Mr. Olivera. That is correct.

Senator Kerry. We look forward to receiving it, and again, I will
repeat to all of you we are very appreciative for your patience, and
thank you for making this journey.

STATEMENT OF FERNANDO OLIVERA, MEMBER, PERUVIAN

HOUSE OF DEPUTIES; ACCOMPANIED BY FAUSTO ALVARADO,

LOURDES FLORES, AND PEDRO CATERIANO

Mr. Olivera. Mr. Chairman, distinguished Members of the U.S.
Senate, allow me as my first words to express a feeling as a Peruvi-
an which all of Us in the committee feel, and I am sure almost ev-
erybody in the country. It is a feeling of indignation and enormous
concern to see the name of Peru involved, in a case of corruption
where the eyes of the world have been targeted.

Yesterday, we saw the picture which showed how the BCCI oper-
ated and an example of corruption of the Central Bank was given.
This was the Central Bank of Peru, I mean. I have to say very
briefly that despite the fact that this is a case where corruption of
officers of the bank, the Reserve Bank of Peru, has been demon-
strated, it is not representative of what we, the Peruvians, are.

The great majority of Peruvians are hard working and honorable
from their ancestors the Incas,, when they summarized the feelings
of Peruvian people by saying “No seas osioso, no seas mentiroso, no
seas ladron.”

This means, don’t be lazy, don’t be a liar, and don’t be a thief,
and I mean by that that in Peru we live in a democracy where the
authorities don’t cover up the commission of crimes, and that’s
why, in the Congress of my country, investigating committees have
been set up to shed light on any commission of crimes or bribes,
even up to the highest level.

These commissions before the U.S. Senate and before the eyes of
the world are bound and determined to shed light on this case, and
we have come here with a spirit of mutual cooperation between the
two investigations which you are presiding over so well. Senator
Kerry, and the investigations being carried on by our investigative
committees, because unfortunately we must say that corruption
transcends party lines. It does not distinguish as between ideolo-
gies. It does not respect frontiers or borders.

' We can say here that the BCCI — BCCI are initials, not of Bank of
Credit and Commerce International, but mean the Bank of Crime
and Corruption International, and we have to defeat corruption ev-
erywhere, wherever it is, and we have to close ranks and fight to-
gether, all of us who fight for the cause of justice.

That is why I have come here to buttress our request for collabo-
ration insofar as possible, because we are members of an investiga-
tive committee which has to expose its findings to the Peruvian
Parliament and we will reveal things which can be revealed so that



195


1

the authorities of the world can support us in our investigations as
well.

Moreover, we have to reserve some investigations that are still
ongoing and which are still being confirmed or worked on. I will
refer fundamentally to the operation of deposits of the internation-
al reserves of Peru in BCCI, in its Panama branch, and the oper-
ation of resale of 14 Mirage jets which belonged to the State of
Peru and in which BCCI also participated, especially in its London
office.

In 1986, the Central Bank of Peru deposited in Panama in the
BCCI substantial amounts of our international reserves. It did so
by a decision approved or made in May of 1986, and thereafter de-
posits were made reaching substantial amounts, and at one point
even exceeded $200 million.

Senator Kerry. Let me interrupt you there. The question would
be asked by the casual observer, so what? The bank competed.

There were other banks that wanted to get into extending a line of
credit because this meant money to them. They are in the business
of making money. Peru needed an outlet, so what is so strange
about that? I am just trying to take us down the road here a little
bit.

Mr. Olivera. It was argued, as the officer of the Peruvian and
Central Bank already said, that there was a possibility of attach-
ment of our international reserves, and by means of legal studies
conducted, Panama was chosen as a place which offered security to
avoid such seizures or attachments because the Government of
Peru had entered into a kind of rebellion.

In 1986 in Panama the Reserve Bank had reserves already in a
number of prestigious banks — the Deutsch-Sidmenkanische Bank,

Banco Tokyo, the Bank of the Argentine Nation, the Swiss Bank
Corp. — this means that not necessarily did they have to go and de-
posit Peru’s reserves in the BCCI as well.

Also, we have to say that in the decision taken to choose BCCI in
Panama there were some very irregular procedures used, to say
the least. Fernando Olivera is not the only one saying this, and nei-
ther is my commission. We are a bipartisan commission represent-
ing all the political sectors, including the Marxist Party, but our
Office of Central Audit says this. This is the office which is sup-
posed to supervise our accounts.

Report 008 of this year does say this in its report on how foreign
deposits were handled. The Controller General of the Republic says
that after documented study that deposits were made up to $270
million in numbered accounts opened in BCCI overseas following
procedures for credit reciprocity and to get numbered accounts.

It is said here that to decide to place the Peruvian reserves there
not all minimum information was even considered, as is usually
considered to make such a decision, and in accordance with the
rules of the board of directors itself.

Information was not included on the accounts and the state of
accounts of BCCI overseas. The only accounts included were the
holding committee— or company, rather, in Luxembourg, and this
didn’t have anything to do with BCCI in Panama and still doesn’t.
Panama is not the same thing as the holding company with head-
quarters in Luxembourg. So in a deceitful way, BCCI in Luxem-



196


r

bourg’s records were used to justify deposits up to $100 million at
the outset.

Neither was there an analysis made of the financial situation
over the past 3 years, saying in error that the Bank of Peru had
data up to 1981. This was not so. It was understood that it was nec-
essary to evaluate BCCI holdings in order to issue a letter.

In the second place, it was omitted to talk about the background
of BCCI holding company and its principal branches because these
were not corresponding banks of the Central Bank of Peru, and
there was nothing about them in the files of the bank, whereas
there was qualitative and quantitative information about these
banks when they came to try to open accounts in Peru in February
1985.

There is a report which is the Institution of Banking Analysis
Limited of London which said that BCCI already in 1985 was an
aggressive, innovative bank which on a number of occasions had
bothered the supervisory authorities such as the Bank of England
in 1985 from the legal point of view. It was considered to be in a
ranking four out of five. In other words, it was ranked very low,
though the management

Senator Kerry. Whose ranking was that?

Mr. Olivera. The General Office of the Controller of Peru. The
General Office of the Controller of Peru. This information is in
report 008 — 1988. Of the year 1988.

Pedro Cateriano has asked to say something.

Mr. Cateriano. The General Office of the Controller of Peru
•under our constitution is a body which is autonomous.

Senator Kerry. I just wanted to know who had made that par-
ticular judgment. Please continue.

Mr. Olivera. Yes, sir. The report of the Office of Controller con-
tinues saying that though the Office of International Operations
says it did not have this information at its disposal, it knew that it
existed and it could have gotten it.

In any case, the administration or the management of the bank
proposed that this corresponding relationship be set up and re-
frained from telling the board about this information at that time.

In the third place, the Office of the Controller says that evi-
dence — documentary evidence does not exist before the approval of
the corresponding relationship that other concrete proposals for
lines of credit were or were not negotiated to decide which would
be the best, using the criteria of security and minimum reciprocity.
It is believed that BCCI’s proposal was the only one that existed
and was adopted in conditions that are very far from minimum rec-
iprocity.

Senator Kerry. Are you saying you believe it was the only pro-
posal or might there have been others?

Mr. Olivera. No, Mr. Chairman. This is what the officers were
saying who were arguing to justify, we think, precisely that what
should have been done was that other proposals should have been
sought, especially because we already had relations with the Bank
of Tokyo, the Swiss Bank, the Bank of the Argentine Nation- There
were a lot of banks in Panama with which relationships already
existed with Peru.



197


Senator Kerry. Excuse me for interrupting you, but I just want
to understand. You are saying that you have found as a matter of
fact that no other proposal was solicited. Is that accurate?

Mr. Olivera. This is what we have investigated in our investigat-
ing committee.

Senator Kerry. What is your conclusion? Only one proposal?

Mr. Olivera. Sir, the conclusion that we are supporting here,
and that is why I am giving you this documented explanation, is
that there was here in the decision to place Peru’s international re-
serves in BCCI a powerful force at work which caused decisions to
be taken very rapidly. A 3-page report, only 3 pages on BCCI Hold-
ing Co. in Luxembourg, was what made the decision to be taken to
place huge amounts of Peru’s reserves in Panama.

I was reading the conclusion about reciprocity that — the reciproc-
ity that Peru got. The Office of the Controller said reciprocity, that
the Reserve Bank of Peru got with BCCI, was always greater than
what it got; $250 million in deposits versus about $85 million in
lines of credit. This is much greater than the differential with
other banks. No evidence has been found for any reason for this
significant concentration of resources in this one bank.

Senator Kerry. The gentleman from the Reserve asserted that
no deposits were lost, that nothing was lost to the people of Peru.
Is that accurate? That in effect all the deposits that were made
were then withdrawn, so there was no loss, ultimately?

Mr. Olivera. The losses can be quantified in a number of differ-
ent ways. First of all, using the concept of reciprocity, Peru needed
lines of credit, and it placed its international reserves without get-
ting lines of credit in equal proportion.

Second, the officer of the Central Bank forgot to say that in May
1986 and in June 1986 when the accounts were opened in BCCI,
$50 million were held in a checking account that does not earn any
interest at all. And this is concrete damage.

Third, there were deposits made above the limits authorized by
the Central Bank of Reserve allowing BCCI to earn a profit. And
we have to say to reach conclusions about why we feel that this
conduct was irregular and suspicious and even criminal, as District
Attorney Morgenthau alleges, is that there were very concrete ob-
servations made in 1987 regard the BCCI situation in the world,
which have been mentioned here. There are the reports which al-
ready recommended withdrawal of deposits in July 1987. These
were reports from London which were taken up by the Central
Bank’s relevant department.

Senator Kerry. When did those withdrawals take place?

Mr. Olivera. But despite that, substantial amounts were main-
tained, at least until December 1987 and January 1988. Coinciden-
tally, that is when Panama entered into a crisis because of the de-
nunciations or accusations against Manuel Noriega.

Ms. Flores. This is a very important point. The information re-
garding the bad situation of BCCI around July 1987, although argu-
ing that some credit should be paid, funds were not returned. They
began to return them, but they did not finish returning them up to
December 1988. That is something that for us sounds really curi-
ous. Although there were very clear reports saying that there was
no reciprocity and that given argument in 1986 that we wanted to



198


protect funds, that was the main argument— we are trying to pro-
tect funds, we are trying not to be withdrawn. Nevertheless, know-
ing that we were in a risk situation, even more risky than the risk
of it appears, we maintained ourselves up to December 1988.

Senator Kerry. Have you discovered anything with respect to
the bank and its dealings with respect to officials who were respon-
sible? Have you discovered anything concrete as to why that money
was not withdrawn more rapidly? Do you have any answer to that?

Mr. Olivera. That was just what I was getting to, Mr. Chairman.
We began this investigation because within our job, which is to ex-
amine investigations and financial operations having to do with
President Garcia’s state, in 1987 there was published in a maga-
zine, Oiga, the fact that the President of Peru had an account in
BCCI for $450 million. That was where the connection came with
the work of our committee.

After having had meetings with District Attorney Morgenthau in
May and then again in June on the part of members of the com-
mittee, we discovered that all of this irregular and suspicious be-
havior and these transactions vis-a-vis our reserves and BCCI had a
cause, and the cause was bribery. It was a payment of commissions,
illicit commissions to officers of the Central Bank and to other per-
sons which are still to be identified, which remains to be identified.

We have seen and we have — the documents exist in New York,
as stated by District Attorney Morgenthau. In the complaint he
filed before the corresponding court, he says the following. And I
hope that Ms. Flores will read this out in English.

Ms. Flores. I do know it.

Senator Kerry. Thank you.

Ms. Flores. It is the third point of the indictment saying that
defendants authorized, and caused to be authorized, the payments
of bribes and kickbacks to agents of other banking and financial
institutions. By virtue of that practice, defendants attempted to
avoid and did avoid scrutiny by other banking and financial insti-
tutions. In 1986 and 1987 to obtain deposits and a banking relation-
ship with the Central Reserve Bank of Peru, Defendants Abedi and
Naqvi authorized and directed employees of the BCCI-BCC group to
open a bank account in a Swiss bank in Panama to transfer bribes
and kickbacks in the amount of a percentage of the deposits main-
tained by the Central Reserve Bank of Peru to two senior officers
of that bank. The total of such payments was approximately $3
million.

But you were also speaking of the 1987 documents, or possibili-
ties. Yes, up to now we have received some documents showing us
that there were very close relationships, not precisely from officers
of the bank but from people outside the bank in a very high level.

Senator Kerry. What we would like to do is receive those docu-
ments into the record, if we may, because they certainly go to the
question of a pattern of behavior. But again, I do not want to turn
this into a trial court or something or into an accusatory panel. So
I want to do that within the record, and we will decide how to treat
those in the terms of the record.

But you have established both through your testimony and
through the indictment that there is an allegation sufficient to
bring an indictment with respect to the question of payoffs being



199


made in order to solicit the business. And you have described the
inconsistencies in the decisionmaking that seem to support the
notion that something happened. Yes.

Mr. Olivera. Yes. Definitely. And we think that the cause of this
behavior and the decision to place Peru’s international reserves in
BCCI was corruption. And here we have a document of the Swiss
Bank Corp. in Panama proving that BCCI oversees George Town
Grand Cayman. From there, transfers were made to the Security
Bank to the Swiss Bank in New York and transferred from there
to an account in Panama of the Swiss Bank. These were the bribes
for these officers. We do not know who handled these accounts. We
know that the accounts were opened by Leonel Figueroa and
Hector Neyra, the president and the general manager at the time,
according to the counts filed by Morgenthau.

But there are other people under the Selva Negra and Terra
Firma codes, and this required some clarification because we are
convinced that there are other authorities higher up who inter-
vened, as I am about to explain. I think it is important to say that
in the indictment by the grand jury, two people are specified,
Abedi and Naqvi, who ordered these transfers. This implies a very
high level relationship in BCCI, not even at the officer level, who
we have said participated in the transactions with BCCI.

Interpreter. Deputy Cateriano has also asked to speak.

Mr. Cateriano. Mr. Chairman, it is also important to underscore
that the usual practice of the Peruvian Central Bank in making
this kind of a transaction is to have it done by the officials and
technicians. Now, in this case, Panama, the general manager and
the president of the Central Bank of Peru went to Peru themselves.
This is very unusual and this was something that the Peruvian
Central Bank did not do in carrying out this kind of operation nor-
mally.

Because in Peru the members of the board of directors are politi-
cal. They are named by political people. The President of the Re-
public, in the case of the President and the members of the board,
including the — there are four named by the President and three
named by the Senate. That is why the function they carry out is
not really technical. It is basically political. So traditionally, in the
Central Bank, technicians, experts, carry out this sort of operation
or transaction.

Mr. Olivera. I would like to continue, if I may. The contracts
were signed with the Central Bank by A.M. Bilgrami, Cristian
Nassim, J.M. Hrizui, and Akthar Kureshi.

We have discovered in our investigation and in our committee,
the entry into the country of two persons involved in this BCCI
scandal and who have been convicted for drug money laundering in
a Tampa court. This is a document dated 1991, which I will give
the committee in a spirit of mutual cooperation.

In this document that I am going to give you it is proven that
this Pakistani national, Akbar Bilgrami Avida, entered Peru from
Panama on December 18, 1986. A great coincidence here. That
same date, General Manuel Antonio Noriega traveled to Peru, too.
And why did he go to Peru? To be decorated by President Alan
Garcia with the highest decoration offered by the Army.



200


Here is the proof of that. The relationship with General Noriega
included unrecorded visits, as the Kerry committee heard from Mr.
Blandon, who was the consul general in New York of Panama and
who said that there was a disappearance in his official visit for 6
hours.

We also see here — we have also recorded another entry into Peru
of another person who has also been convicted in Tampa, Amjad
Awan. This is a person who had a great deal to do with the man-
agement of the personal accounts of corrupt people, such as being
the personal banker of General Noriega. He entered Peru January
18, 1988, and stayed until there was a crisis in Panama and then
this person, Amjad Awan, according to some information which has
reached the commission, may be the personal banker of our own
former President, President Alan Garcia.

Senator Kerry. I really do not want comments “according to
somebody,” “maybe.” These are the allegations that I am really
not interested in and the committee does not want. And I want to
caution you against that. I want to know about BCCI specifically,
but I do not want to know about somebody else’s rumor or allega-
tion at this point.

It is not going to be relevant to what the committee is trying to
decide. I think we have really almost established — the critical com-
ponent here, the critical component — is the pattern of visits by
people and people that they met with or talked to. The degree that
normal procedures were not followed. The degree to which the
bank specifically undertook to meet with people in ways that were
irregular and so forth. I think it is a question of influence and
movement but not allegations by people outside.

Mr. Olivera. Mr. Chairman, I am referring to concrete facts. We
have reports stating these things. I understand what you meant
when you said what you just said. I understand very well. But this
has a connection and the allusions are relevant.

I will reserve referring to the reports of very highly reputable in-
vestigators, private detectives such as Crowell & Associates who in-
vestigated Saddam Hussein, Duvalier, Marcos. I will reserve that
for now and I will talk about the LARC report, because I do not
want anybody to interpret what I am saying as being off the sub-
ject. But I am going to give you grounds, with documents to show
how there is a connection — in connection with the decision to place
our reserves in BCCI.

Did you want to say something, Senator Kerry?

Senator Kerry. I want specifically to see the connection with
BCCI and the decision, very much. But let me just say, we have
been going on for almost an hour now for a short opening state-
ment, and we need — although I have interrupted it a number of
times, we are going to need to try to tie this up.

What I need— and I think you have been doing it. Believe me, I
think it has been very helpful that you showed deviation from pro-
cedure, you showed a pattern. What I want to understand is, were
there any specific meetings that you are aware of and so forth.

Thank you.

Ms. Flores. The main thing that you are asking, and I think you
are right on that, is that if there was a personal relationship which
was not relations just with the formal requests which are useful in



this case, which are common in this cases. And we do think there
were. In 1986, Mr. Morgenthau has established, the former Presi-
dent Alan Garcia was consulted. That was the first fact which has
been demonstrated.

Senator Kerry. Consulted by whom?

Ms. Flores. He did not tell us exactly who he was. But there are
some other facts which I think would help. Mr. Bilgrami was in
Peru in 1986. What he said is that representatives of BCCI spoke
with him, met him, and a decision was made at that level. We have
that record.

Senator Kerry. Do you know the name of R. Alberto Calvo?

Ms. Flores. No, I do not, but Mr. Cateriano could explain to you
exactly who he was.

Mr. Oliver a. Mr. Chairman, that is just what we are getting to,
if you will allow me. I have a document here which we have ob-
tained from the office of BCCI in Miami, FL, dated February 10,
1987. This is a document to Mr. Shafi and its says the following:
Mr. Oscar Riizo Patron called from Lima to confirm that the Presi-
dent of Peru at any moment during the course of next week, Feb-
ruary 16 to 20, can receive you. Because of the floods and other sit-
uations, President Garcia is traveling in the interior of Peru. Mr.
Riizo Patron suggests to put 2 days on your schedule for this visit
so as to give time for this meeting.

We will give you this document too.

Mr. Shafi

Senator Kerry. Let me interrupt you, if I may. Let me just estab-
lish this document. This is a February 10 memo to Mr. Shafi from
whom? Do you know?

Ms. Flores. No.

Mr. Olivera. It is signed by someone called Cecile.

Senator Kerry. It is from the BCCI Bank, Latin American and
Caribbean region, based in Miami, FL. Correct?

Mr. Cateriano. Yes.

Senator Kerry. That document will be placed in the record.

[The information referred to follows:]



202


*>b. JO/87 ’ 4:i5p.n.

Mr • Shaf i >

Mr. Oscar Riso Patron just called
froa Lima, Peru: to confirm that the
President, of Peru can meet you any time
and day/ during next week, Feb-16-20. ; .

Racausa of floods and other situation!*
President* Garcia is travailing inside
•ha country.

ilr^'Riso.patroo suggcstad to schedule

»t least 2 days of your visit so that

there will be some flexibility for the
%*

seating.


U


t"


Ir. Riso Patron requested to please ad rise
•im today or tomorrow your date of arrival

I • •

«hd time you yould like to meet the President

/ \ ;•


ext week.


V

Cecile. ,


SEN 000504


BCC -- Latin American and Caribbean
Region




C 0002070



203


SEN 000467


1) Deposits on 17/08/87

- Approximately 8265 millions.

- Of this amount, $248,334,000 are in term deposits.

The difference in operational accounts.

. The rentability is according to the market levels.

- The deposits are not subject to any conditions,
nevertheless, if deposits are reduced below the line
of credit (at this moment# $110 millions) the line
of credit would be reduced to the limits of the
placements.

- Eventually the rentability of the deposits could
be increased. But some worries persist about the
quality and soundness of BCCI.

2) The first line of credit for (US60 millions) was offered

at a rate of Prime plus 1% in april/86# but it was nego-
tiated in May 1986 at a higher rate (Prime plus 1.25%).
This rate has been kept up to now and maybe it could be
reduced. - ;

Through telex of 17/8/87 it has been asked to' increase
the line of credit for# at least# $30 millions (eventually
$50 additional millions).

- The Central Bank would be more receptive if the
existing credit facility is increased substantially#
maybe duplicating it in order to keep a balance
with the level of deposits.

Lima# August 18# 1987


C 0002017



204


Mr. Oliver a. What I mean is that in February of

Senator Kerry. I need to interrupt you. We get 15 minutes to
vote, and I have a few minutes now to get over to the floor and
vote.

I need to ask you to try to confer to see if you can organize
maybe in the next 15 minutes or so because I do need to get to the
next panelist and to Argentina, and I want to try to keep it as fac-
tually tight as we can.

We will stand in recess for the next few minutes.

[A brief recess was taken.]

Senator Kerry. The hearing will come to order.

Let me just explain to everybody that regrettably we are running
tighter than we want to be. I have got to get to the Banking Com-
mittee markup before too long, so we need to be somewhat in sum-
mary, and some of the documents can be placed in the record. We
will release some of the documents that explain some of what is
going on, so if you summarize and we put the documents in, I think
we are going to have the record that we need in terms of this issue.

Mr. Oliver a. May I continue?

Senator Kerry. Yes.

Mr. Olivera. Thank you very much. I was just talking about the
February 10, 1987, document coordinating a trip of Mr. Shafi to
Peru to have a meeting with President Garcia. This was not to talk
about the floods, quite obviously, floods that were going on in Peru
at the time. I must say that in February 1987 the deposits in Peru
and BCCI went up to $261 million, in excess of $61 million over the
limit. This was the maximum excess over the limit throughout the
whole period.

Here I have another document talking about Alberto Calvo. This
is a document from Alberto Calvo to Mr. Shafi of BCCI, the Latin-
American Caribbean Office, regional office, July 21. When the re-
ports were received — negative reports about BCCI, Panama — mean-
ing that the Reserve Bank was considering withdrawing its depos-
its, here I have this document which talks about a conversation
with Alberto Calvo, who is not a BCR or BCCI or a Peruvian offi-
cial.

This is a conversation with Daniel Carbonetto, who is an adviser
of the President of the Republic, talking about how it’s possible
that steps are being taken to have a new conversation with Presi-
dent Garcia to see what can happen or what can be done about
Peru’s deposits. We will give you this document so it can be on the
record.

Senator Kerry. I have the document. Tell me, who is Alberto
Calvo?

Mr. Olivera. Mr. Cateriano can tell you.

Mr. Cateriano. We have investigated who Mr. Calvo is, and we
received the information that this is a banker managing Latin
American relations for BCCI. He is an Argentine national. Mr. Al-
berto Calvo had relations before he was in BCCI in the Inter-Amer-
ican Bank, where he had some relations with Peruvian officers also
working in the Inter-American Bank.

Senator Kerry. This memo that I am going to put in the record
that follows the previous memo of February 10, this memo talks
about further meetings and says that they agree to meet with the



205


president of the Central Bank 1 week after he takes office and
after that they will visit with the President of the Republic.

So this is BCCI talking about top-level meetings between the
president of the Central Bank and the President of the Republic. Is
that correct?

OK, let me try to speed this along a little bit. There is a subse-
quent July 21, 1987, memo which is also from Mr. Alberto Calvo,
also to Mr. Shafi. No, I have the wrong one here. Excuse me. There
is an August 25 memo from Mr. Alberto Calvo to Mr. Shafi, and
that memo talks about the relation with the Central Bank of Peru
and

Mr. Olivera. And a meeting with a friend.

Senator Kerry. Correct, and a meeting with a friend, and it talks
about the Central Bank continuing its present operational relation-
ship with BCCI if the line of credit could be increased, is that cor-
rect? Was the line of credit at that time increased?

Mr. Olivera. There was a statement that the line of credit would
be increased.

Senator Kerry. This memo will also be made a part of the
record.

[The information referred to follows:]



206


SEN 000557


4 >


Latin Amfrita & Carim* an Rigionai Omn

imaneimMwt HM»iooa imw iioneAuwiMuu


tun JUly 11, 1987 -Ml / 3847


R. Alberto CaIvo


gyutct Conversation with Mr. Daniel Carbonetto




On Saturday July 11, 198?, between 8:00 and 10:00 a .m. 1 had a
working breakfast at the Cease r Hotel, in Lima, with Mr. Daniel
Carbonetto, Economic Advisor of the President of Peru, whom the
public opinion considers the most influezy^rtial person in the
decision-making process regarding economic policies.

The purpose of the meeting was to exchange ideas about the best
ways and means in which the Peruvian government could maximize
the bargaining 'capacity of its gross reserves in order to get
access to new loans or fresh lines of credit. In the course of
the conversation Mr. Carbonetto expressed the worries of the
President of the Republic about Panama's political situation,
because of the placements that the government has in that coun-
try.

Mr. Carbonetto also told me that the presidency of the Central
Bank has been offered to Mr*. Javier Tantaledn, Minister of Plan-
ning, who has not accepted! but it is probable that the President
Alan Garcia will insist.

Mr. Carbonetto asked me to go with him to visit the President
Mr. Alan Garcia, and to brief him about our conversation. I
politely refused with the excuse that I was leaving for Chile.

In reality X prefer to meet with the President after knowing
what will be the policy of the Central Bank regarding the place-
•ment of it's reserves and after having a chance .of receiving
your instructions on this matter.


He agree to Rieet with the President of the Central Bank one
week after he takes office and after that we will visit the
President of the Republic.


Sincerely yours.


R. Alberto Calvo


Enclosure: A paragraph of an article published
in the weekly magazine "Olga”, dated
July 6, 1987/page 16. BANK OF CREDIT

it COMMERCE L A. R.
— * .15FLCC-

cc: Mr. Bande Hasan JUL - .VJ




C 0002134


207



• suutCT Relation With the Central B£nk of Peru ' CONFIDENTIAL


Attached please find a verbatim translation of the confi-
dential document that our friend from Peru showed to you

' • yesterday^;:^:- _ \ :*

From the conversation Z had with him at dinner, X came to
the conclusion that the Central Bank would be willing to
continue its present operational relation with BCC if the
line of credit could be increased*

It would be important to counterbalance the unfavorable
reports that the Central Bank has received from BCC*

Best regards.


R* Alberto Calvo
/eb


C 0002016



208


R.Albehto Calvo


Ncrvenber 27, 1987

Mr. Jlmer Iodhi

Chairmen ft Chief tecutive

X nf # *rti r ilnr Group of ^ i g pon jcs

P.O. Bax 670

Richaond Hill, QL 31324


Following oar con versa tion about Ms. Michelle l a n ar che, I have nde
the following contacts:

1. Peru

«

At the Banco Central de Reservas del Peru, I talked to the
Manager of the International Division, Mrs. Ana Maria de Reategui
(Wei. 27-4810 and 27-6250) Mho told me that the Peruvian Govern-
ment is interested in discussing that type of a rra n gements. For
this kind of transactions the Banco Central de Res er vas del
Peru operate s through the Institute de Cbmercio Exterior (I.C.E.),
where the Central Bade has a Delegate. I contacted the office
of tie General Ifanager, Mr. Eduardo Morales (Del. 62-5742) but
he has resigned effective Ib wte 30th. For that reason, X
cont a cted Dr. Dora Valdivia (Tel. 62-5673) who is'the Secretary
of the Board and very knowledgeable about counter trade opera-
tions. ■ The Institute de Ctm eicl o Bcterior decides upon the pro-
ducts that Could be subject of the wim ** r and the Dime—

cidn General de Qcddito FSblioo of the Ministerio de B a n al a,
de c ides about all the aspec t s of the utilization of tie public
papers ini the transa c ti on. In the Direocidn General de Ckdditb
Publico, I got in touch with the Director Xng. Guillermo Rud-
nfn (Tel. 27-0276) and with the Deputy Director Mr. Eduardo
Pnwnec (Tel. 27-4)276). Mr. Dcmenac told me that they are very
i nt eres t ed in listening to the lizard Freres Proposal.



209


R. Albehto Calvo


The Institute de Camercio Exterior, the Ministerio de Eoonania
and the Banco Central de Beservas del Peru, would be able to
receive Ms. l a n ar che on/about De ce m be r 15th. The person Who
would coordinate the Meetings is Mr. Enrique Santa Gadea, As-
sistant to Mrs. Valdivia at the Institute de Ccnercio Exterior
(Tel. 62-5673).

2. Colombia :

As you know, Colombia does not have any ar r an gement far Debt
Equity Swap and, on the other hand, the public docixnents of
external debt have the lowest discount rate in Iatin America,
but the Government is interested in discussing the possibili-
ties of counter trade operations. In Colombia, I contacted
Dr. Rodrigo Llorente (Tel. 285-2539; Tlx. 43326 GAMC-OO) who
as a former representative of the Inter-American Development
Bank in Baris, has dose contacts with some executives of
Lazaxd Freres, (Mr. Christian Valenci). Dr. Llorente told
me that he could organize and coordinate the' meetings of Ms.
l a n a rche with all interested parties (Banco de la Republics,
Federacion Hadanal de Cafeteros, etc.). Be thinks that the
meetings would take no more than 2 working days and that the
ideal dates would be immediately before the 15th. of December.

i

% *

Suggestions: I s u gg est that Ms. l a n ar che considers the possibility
traveling first to Oolcnfaia around December 10th. and then pr ocee d
to Becd. She can contact directly Or. Rodrigo Larente in Bogota
and Mr. Enrique Santa Gadea in Uau

As you know, I will be travelling cn those days but I will be very
glad to assit Ms. l anarc h e as nuch as possible in this endeavor.

Best regards*




210


Senator Kerry. Then there is — is there any other memorandum
or letter or document pertaining to BCCI meetings with respect to
these transactions?

Mr. Olivera. No, not for now, but what we have to say is that
the Reserve Bank, being autonomous in nature, is made up of four
representatives of the executive branch named by the President
and three members named by the Senate. During Garcia’s Presi-
dency his party had a majority, named as President a person who
had been the Secretary of the Presidency, so it has been proven
that there is no reason for Alan Garcia to have been in any of this.

I would like to say very briefly what happened with the Mirage.
This is a case which really deserves your attention if you will allow
me.

Senator Kerry. We need to do it very quickly.

Mr. Olivera. In August 1986, Peru decided it would not make
profits, substantial profits on the sale of the 14 Mirages. This was a
decision that the Peruvian Government made to get rid of these
Mirages because they could not — Peru could not afford to pay any
more but it could resell these planes to another country.

This was in the sales contract with Marcel Dassault that ap-
peared in three different paragraphs. But Peru did not do this. Ac-
cording to statements made by the representative of the Govern-
ment, the statements made in the committee I preside, these sales
were not made to third countries because this was not authorized
by President Alan Garcia.

The damage to the country and the profit to third parties resides
in the fact that the market price of these 14 Mirages, the price
which was paid for each plane at that time, was $37 million as stip-
ulated in the statement of the Peruvian negotiator, Hector Delgado
Parker. What Peru had to pay to Marcel Dassault, the manufactur-
er for each plane, because these planes were contracted for in 1982
to be manufactured later, were $12 million. That is to say, there
was a difference of $25 million per aircraft.

Peru, however, did not make this transfer to third countries, for
which all it needed to do was get the approval of the French Gov-
ernment. We have discovered, however, by Mr. Morgenthau’s work,
that this operation ended up as a resale.

BCCI ended up being the resale’s agent and the London office of
BCCI approved this sale, and according to what we’ve heard there
was a falsification of documents to hide the country which was the
final destination of these aircraft. We have received information
that this plane was Iraq, was alleged to be Iraq during the period
of Saddam Hussein. This true customer was being hidden because
arms traffickers — international arms traffickers — were involved in
this, an officer Asa working in BCCI of London.

Senator Kerry. Is this something that is fully documented?

Mr. Olivera. The documents exist in Mr. Morgenthau’s office.
They are in investigation phase and that is why we are stating this
here in the Kerry commission to ask for the cooperation of interna-
tional authorities so that we can clarify this. Mr. Morgenthau’s
people think that there was $100 million gap, and we think it’s be-
tween $150 million and $200 million.

Mr. Cateriano. Sir, this requires an investigation, obviously. We
have gotten a statement from Mr. Morgenthau for Peruvian televi-



211


sion. This was broadcast to our whole country, and there he affirms
that this negotiation caused Peru to lose $100 million and BCCI
was apparently linked to this. This is something we need to go into.

Senator Kerry. Let me just say there is absolutely no disagree-
ment from me. It is something that needs to be gone into, but this
is not the place where we are going to be able to resolve it, and
what I am trying to establish here are really the questions without
unfairly making any accusations, even though the accusations have
already been made specifically by the indictment by Bob Morgen-
thau and by your commission.

There are certain things that are on the table and you cannot
avoid those, and I agree with that. But again, I do not want to go
through every detail of them because there is no way that this
committee can sort that out.

What we are trying to do is show the degree to which BCCI and
its method of operation and the personalities and people who were
involved with it have in fact created a situation in your country
and in other countries where now people are left picking up the
pieces and trying to sort it out.

In addition to that, to show the way in which by high level oper-
ations and conversations and meetings it appears as though they
have left many people wondering what happened to the procedures
in countries. That is not true only of Peru, it is true in some 60
nations or so, and it is true very much right here in the United
States, so we share that.

Now having said that; I would like to ask you one question, if I
may, and that is, has your effort to get at tins as an investigative
body been hindered by the bank secrecy laws? Has that made it dif-
ficult to find out what has happened here?

Mr. Olivera. Definitely. We have to state that present legisla-
tion favors the criminal, unfortunately, and the action of justice
meets many obstacles. The information and the controls which are
necessary are not forthcoming in order to — and this allows crime to
be committed through legally constituted financial institutions. I
think the situation has to be corrected.

Senator Kerry. Let me ask Ms. Flores, would you tell me to
what extent Peru is threatened by drug money laundering and
drug trafficking, and what has been the impact in Peruvian life of
this kind of corporate activity?

Ms. Flores. Let me tell you with numbers something which is a
movement of money regarding the drugs. Peru receives or moves
around $2,000 million a year from money coming from drugs. That
means that in all our foreign relationships and reestablishing cred-
its and financial relationships with other countries, it is a very big
problem to think that we could avoid the money we are taking
from drugs. It is around $2,000 million a year of money moving
through drugs.

Senator Kerry. When you say $2,000 million, I think we are
probably losing something in the currency conversion, conceivably.

Mr. Olivera. It is $2 billion in English. Mr. Kerry, on this same
subject I want to give you two examples.

Senator Kerry. I must be fair. I have a neighboring country of
yours waiting in the back here, and I really want to ask you for the
summary statement very briefly, if I can.



212


Mr. Olivera. Yes. I will conclude saying that on this subject in
the Upper Huallaga Valley there were four planes which went to
pick up money every week, and it was detected that one citizen
who was just a peasant had changed $6 million in just 1 month,
and finally we discovered he was connected to cocaine, and be-
tween 1985 and 1990 the number of acres went from 60,000 to
225,000 acres, and it’s very difficult not to connect all of this thing
to increased drug trafficking.

We need the cooperation of the authorities of the United States
and the authorities of the rest of the world to achieve the goals of
our investigation, that is, justice. We need to recognize the work
done by Mr. Morgenthau. We want to be very clear about the
shared feelings we have of cooperation with what you are doing.

We are getting cooperation from other bodies but not as much, so
we would like to ask for cooperation from the Department of Jus-
tice, the Department of the Treasury, the Customs, and other of-
fices in the Federal Reserve, for example, to awake their conscious-
ness so that they will realize that this is a fight for justice — that
this is a fight for justice and they cannot use bureaucratic proce-
dures to deny cooperation in this fight for justice and our desire to
defend the rule of law and which will allow us once and for all to
defeat corruption and to get to those who are first and primary vio-
lators of human rights in Peru, which are the terrorists, so that
there will be no quarter given them by our Government.

So I would like to thank you on behalf of my committee. I hope
that we will continue this very full cooperation that we have had
up to now. Thank you very much.

Senator Kerry. I want to thank you each of you for taking the
time to be here, and let me say, as chairman of the Narcotics Com-
mittee we have sat here in this room and listened to our own As-
sistant Secretary of State for Narcotic Affairs talk to us about the
problems in Peru.

I am personally very aware of the difficulties in the Huallaga
Valley, the efforts and dangers that are going on there, and the
great tensions in your society as a consequence of both the Sendero
Luminoso as well as the whole problem of drug trafficking linked
to those kind of efforts, and I simply say to you that banks that
involve themselves in laundering that money are as much a part of
the problem as anybody else who is involved in the entire line and
chain of command.

So you have raised many questions. We have not answered a
whole lot of them here today, and I think one has to say that, but
the questions are very legitimate. They are very real, and they
need to be addressed, and I think we will proceed here to continue
to try to gather information and understand this, that it is very
clear that BCCI launched one of those offensives that we have
heard about in order to secure these funds and deal in Panama and
present itself falsely, and I think that there is a great deal more of
this story, though, yet to be told.

But I want to thank you very much. We appreciate it.

If I could ask the next panel quickly, because we really only have
about 20 more minutes here to continue. Thank you very much.

Senator Kerry. I think, Mr. Castillo, it is my impression that
there is not really a need for you to testify very much, because I



213


think we tried to steer clear of the gravamen any of the offenses. If
you have something that you want to clarify in a couple of min-
utes, I would be delighted.

Raise your hand, raise your right hand, please. Do you promise
to tell the truth, the whole truth, and nothing but the truth, so
help you God?

Mr. Del Castillo. I do.

Senator Kerry. Would you identify yourself, please, for the
record?

STATEMENT OF JORGE DEL CASTILLO, MEMBER, PERUVIAN
HOUSE OF DELEGATES

Mr. Del Castillo. My name is Jorge Del Castillo. I am a deputy
in Peru, too, representing the Aprista Party, and I am a member of
the investigating committee in which the other people who preced-
ed me are serving. I want to be very specific here and brief in hon-
oring your request. Irresponsible accusations have been made.

Senator Kerry. There were no accusations made here that are
not part of the indictment. And we are not going to try the indict-
ment here, so if there is something that was said specifically here
that is incorrect, then I want you to address that, but we are not
going to go into whether or not the indictment is correct or incor-
rect.

Mr. Del Castillo. No, I am not talking about Morgenthau’s in-
dictment. I am talking about the comments on the Mirage busi-
ness, for instance. Let me start there. It seems that there is a con-
fusion here with Deputy Olivera when he involves the contract of
the Peruvian Mirages with BCCI. When the session began, you had
not come in yet, but Senator Cranston read some documents con-
necting the Argentine operation of the Mirages with BCCI, not
Peru.

Peru bought from Marcel Dassault, a State-owned enterprise of
France, a total of 26 aircraft between 1982 and 1984 before Dr.
Garcia was President. Fernando Belaunde-Thierrie was President
at the time. When Dr. Alan Garcia became President, and I am
going to give you a specific document on this.

Senator Kerry. The issue here on the Mirage is not really the
record previously. The issue as I understood it was that BCCI facili-
tated a sale that was made to a Middle Eastern country. Now that
is the issue. Is that true or not true?

Mr. Del Castillo. That is not true. The Government of Peru
under President Alan Garcia, the same day, July 20, 1985, as he
took power, announced that since Peru was a poor country, it could
not be spending money on weapons. And therefore, instead of
buying 26 planes, he had given orders to reduce the order.

This was a restructuring of the contract, which was done directly
between the Peruvian Government and the French Government.
And I am going to give you the signed documents by the Foreign
Ministers of Peru, Alan Wagner, and the French Foreign Minister
as well, restructuring this contract.

Peru is not a country which is aggressive, nor one which encour-
ages wars with other countries. Therefore, it would not resell
planes.



214


Senator Kerry. But sir, the question is whether or not BCCI was
part of the transaction for the sale of weapons. Were Mirages sold?
Did Peru sell Mirages to another country?

Mr. Del Castillo. Peru did not sell planes to other countries. It
cut its contract back in a direct contract with the French Govern-
ment, govemment-to-government, without any middlemen.

Senator Kerry. It is your testimony, then, that no planes were to
be transferred from Peru to any other country?

Mr. Del Castillo. In no way.

Senator Kerry. Let me move away from that. We are not here to
get into, I am not going to be the decider of fact between this. You
stated on the record that it did not happen; they have stated on the
record that it did happen. And as I said, a lot of questions have
been raised here.

The question I ask you is, with respect to BCCI, is there anything
that you have heard with respect to BCCI that is factually incor-
rect or that you can help the committee to understand better?

Because the dispute with respect to President Garcia, as I said at
the outset, is not for this committee to decide. I have tried to steer
the people who testified a moment ago away from any accusations.
I am not here to hear them. We know what is out in public. What I
want to know is about BCCI. And so I am confident that in Peru
this issue is going to be litigated, investigated, decided. It is not
here that it should happen. And I have tried to acknowledge that
there is a total other side to that.

There is no effort here to say that President Garcia did know,
did not know, did something, or did not do something. And I accept
yoUr statement on its face. There is a controversy. And we cannot
resolve it, we are not here to resolve it.

So if you could help me with respect to BCCI, is there a fact that
you can show me, by document or otherwise, that is incorrect in
our current understanding of BCCI’s relationship with Peru?

Mr. Del Castillo. Yes, I will discuss that, and I will try not to
get off the subject. I am going to give you the documents to con-
clude the prior subject on the government-to-government contract.

Senator Kerry. I will make those a part of the record.

[The information referred to follows:]


215




i) ' “DiwBa —



Bank of Credit and Commerce International

lOVMMMID UMItMD


AfAWAOOHIOJ CStAPCTA CLOONAOO PAKAMA AIPUIUC Of PANAMA


*311


:» dii mayo da 1991


Dootor

Jorge del Castillo dtlves

E.i.ii'


Estimado dootor del Castillo Gdlvesi

9 %

Nos penult linos raspcndar a las preguntaa contenldas an
att nota del 2 de mayo de 1991 de la slgulente format

1« Bn esta ZnstituciOn Bancarla no exists ninguna cuanta
eapecial No. 000144000 a nombre de Marla del Pilar Noras
Bodereau de Garcia o Marla de Garcia ni del seflor Alan
Gabriel Ludwig Garoli Pirsz nl de ninguna otra persona.

2« Per no exlstir dicha cuenta No. 000144000 an esta
. ZnstituciOn Bancarla no as ban ef aotuado depOsltoe ni
transferenclas de ningQn tipo an relaciOn con la misma.

3. Bn esta ZnstituciOn Bancarla no exists ni he existido
cuenta o depOsito it nombre de Marla del Pilar Moras
Bodereau de Garda, de Marla de Garcia, de maria Mores,
de Marla N. Bodereau nl a nombre del seflor Alan Gabriel



PHONES. 19 1) II mix iNTIl !••« 1154BOJBI TAT 1 1 IT CAtLlI BAMCMCOM



216



Banco

Santander


tort M. MwciU
tukdirormr (Viml AdiUW

To, Joed Manual Maoaaa ?aru&*d*B, Subdirant.nr Ggnaral Ad-
junto da Banco do Santander, S.A, da C. y Seeratari© Canaral
da au Division Xntarnael onal, a aollcltud da D» Marla , dal
vnar Nftrn« Bffdaraau

V

c B fc t t r i c o


Quo no ho VAitUlO U VU»tn mm n i-i i uifliin ni minn i
nombre da la anlloitanto, ni da ~ Marla Norco* ni da A. V.
Alejandro Noras# y Qua# por tanto # ny ®* ba aoaliyuciri - ill
podido raaliaar - trana f aranoia alguna a «u favor.


sa axpido acta oarti flcacidn an Madrid al 22 da Mayo d#
XWX.



Ann rfe Jurtdk*
DltUttn UUrnodooAl



217



GENERALE


Service Communication.


Bruxdles, le 17 mai 19?1 '
L/FLo/cv/19^1


Monsieur,


i

Oocleur A. CARRANZA GUEVARA:

c/oJe£mDOER£IER

rue Aldriugen. 1 3>.

' • • ♦ . - 1 ?

L- 1118 LUXEMBOURG


En rfpanse & votre lettre du 1$ mav Jft vous confirms qiifi la Sori&6 c^n$rale:de
Belgique SA. ea.iani qud sod4t6'i'portefeunie tf tixeresrpas d’aettvitd bancaire et
ne peut recevoir des depots da pariiculieri. -


Uf.
•K ii, •


Veufilez agrger, Monsieur, regression de mes sentiments distinguls.



( — rurdij ^. •


Filip Lowette

Responsible Communication Groupe


4as*MG*italefe»£«uc

MS«irtt*XB-l0008MMl*3«l^iim

7<in(2)soro2ii



Generate de Banque


Direction


Bruxelles, lo 17 nai 1991


Monsieur,


Rous nous r§f«rons & le vlslte que vous nous ever fendue le 14 mal 1991 at au


pir' Uwt invptiwUiVc acKUVfCd cw aareste o nwmvui rwMwtuv vi.*np.nn,
felputado Presldente, Fronto Independlente Moral Izador, dose Brands 105; OeptA^
14, SAN ISIDRO, LIMA. PERDU. . . & . • - — -f


... ... ••

TI / exaaieii""3u document en' question, en particulier des raisons soci ales des -^u?!
Institutions flnanclSres mentionnSps, nous amSne & .vous confirmer que notre-ty
banque n'est en aucune facon vlsSe par ce rapport d enquSte pour le motif qua- 1
nous n'y somnes pas citfes. Bn effet, la raison soclale de notre J> a jjque en *
Belgique, tant 4 l'fipoque des faits rapportSs qq'actuellement, est •GEHERALE Dl
E



Monsieur Alfredo


Elias

MTB«Ct


Aguirre

noire _


0 CARRArarfX^^''
" of. 3dfc( "

nroAil \ C\ slftiS#


219


P.*4



DIRECTION DCS AFFAIRES INTIRNATtONAUft
kotU • w "® rf ciht*aii rr omntau

AAO»QU« IAJ1NL HOCMI rr MOt«N4)mMT

Paris, le li Juliist j.i*i


Monsieur Alan GARCIA

C/O HOTEL DE LUTECE

65, rue de St Louis on l'lle

75004 PARIS


Monsieur,


Comite suite A votre demands, nous vous confirmons que
la SOCIETE GENERALE n'a pas de suocursale ni A BRUXELLES ni dans
ttueune autre villa de BELGIQUE.

Nous vous prions d'agrder, Monsieur, nos saj.uLailv..a
dis£>nguees .



220





Monsieur Alan Gabriel GARCIA PEREZ
Madame Maria del Pilar NORES DE GARCIA


9»M?r«ON COMMSftOALE


Comme suite h * otre demands par' lettre du 10 juillet 1991, nous
ddclarons par la presents, que nous sonunes la SOCIETE GENERALE
ALSACIENNE DE BANQUE, en abrdg* la SOGEKAL.


En consequence, nous ne sommes pas concernds par le rapport fait en
date du 28 fdvrier 1991 par Larc Investigative Services A Miami
(Florida) 1515 NW, 7th Street, National Office Building suite 310,
ce qui est d'ailleurs confirm*, sauf erreur ou omission de notre
part, par les recherche* que nous avons effectuAes dans notre
Etablissement.


La presents ddclaration est faite . sans reconnaissance prdjudiciable
de notre part. .. ,


Bruxelles, le 10 juillet 1991


/A QUOIx
omtAM




AFF.JUR. & CONTENTieuX


&



221



Bank op Credit ane- Comm irci In^brnational

* ** m * jr m # "W ft ^owxmh ppat rmw r M N^oi tcrM omamo Catmam


MN/acm/1214
Hay 22, 1991


Hr Jorge Del caatill) Olivers
Holder of Peru Paeepsre I O0S391
Cohgreao Naclenal
Lima, Peru.


Dear Sir,

RZl A/C « 000144000


With reference to year latter of nay 22, 1991 wo confirm
that the eubjeet account number quoted by you doea not
pertain to thie office-



"WOOiMW TMC«aHCNI*m eWMWMMOOH




WM



222


GREAT WESTERN BANK EE

A Federal Savings Bank iOOSE StesocSw.

Miami Fto?oa 33‘2*-2*98

May 23, 1991


Deborah S. Prutzman, Esq.
ARNOLD. 6 PORTER
65 East 55th Street
New York, NY 10022-3219


Re: Alan Gabriel Garcia Perez,. > born in 1949; and

Maria Del Pilar Noras Bordereau De Garcia,

. a/k/a Maria Del Garcia, Maria Noras, or
Maria N. Bordereau, also bor n in 1949.


Dear Ms* Prutzman:

This is to advise you that our Research Department searched
Great Western Bank's account base, as well as CenTrust Bank's
records, for any accounts corresponding to the above-referenced
names. Those names were in turn matched to the birthdates you
previously provided us. We were unable to locate any account
matching that information. -

If you should have any questions, please do not hesitate to
contact me.

Very truly yours.


GREAT WESTERN BANK
Legal Department



~~Mabel I. Nemrow, Esquire
Associate Counsel

AINseb

cc: Dr* Jorge Del Castillo Galvez

by Hand Delivery



223


WJMOM •M^VUNOriOt
0»M«*Mea

IlMKAM

«L J*«. MJWTV CMOkWA mo*


PATTON. BOGGS & BLOW

2560 M STREET. N.W.
WASHINGTON. D.C. 200370360
(202) 457*5000

TIliMMIO 4*74111

'nrrriu* i»r*#o


May 24,1991


«,iMimoMe. •iow'v, cAAOLitA r«c'
4 1 *! P»tm


ion



(202) 457-6030


VIA TELECOPY (212-223-1939)


Daborah S. Prutiman, Esq.

Arnold 6 Porttr
65 East 55th Straat
Maw York# MY 10022

Daar Ms. Pruttaans

Our eliant BCCX has lnformsd us that ths nine-dloit account
nusbsr you rsfsrancsd in your fax of 4Uy 6# 1991 (1000144000)
dots not conport with ths standard numbering systsn SCSI ussa for
its accounts. Our elltnt suggests that perhaps the Soclete
Generale In Brussels, Btlglua night bt able to further assist
you. Please let ne know If I can be of further assistance..

Sincerely*

JXbmL —

Deborah ’M. Lodged

DML/elc

cci Jerone Levinson, lag.



224


Private Eye, in Odd BCCI Tale, Tells
Of Snooping on Ex-President of Peru


By Michael Allen
And Jose dc Couoba


JUjyitaportT i tfTwtWutlw

MIAMI- It was a slow day in the pri-
vate-eye business when Rafael “Ralph"
Garcia got the call. Peruvians. A pack of
them with titles a mile long and a real itch
to know more about the finances of some
ex-president Would he take the case?

Would he ever! "I’m saying to myself.
Tm in the major leagues now!’ ’’ says Mr.
Garcia, a former
Drug Enforcement
Administration
agent who operates
a detective service
out of his house
when he isn’t parked
behind his desk at
the Miami jai-alai
arena, where he's
head of security. He
figured he'd charge
Us new clients S50,-
000- twice what he
normally makA in a
whole year of sleuth-
**•

And (Or awhile, it looked as tt he was
onto something big. Mr. Garcia produced a
preliminary report suggesting that Alan
Garcia, the charismatic former president
of Pent and no kin to Ralph, looted mil-
lions of dollars through the now-notorious

Bank of Credit A Commerce International.



Rafael Garcia


The Peruvian political scene was plunged
into turmoil. There was even talk the ex-
president might wind up in Jail.

But now. Ralph Garcia wishes he'd
stuck with divorce cases. Peruvian power
brokers are finding boles in Mr. Garcia’s
dossier against the ex-president. The Peru*
vian media have bounded him and ewe*
suggested that he doesn’t exist The Flor-
ida State Department has lodged an ad-
ministrative complaint charging, among
other things, that he "conducted regulated
activities in a negligent manner." Worst of
all. he says, be isn't getting paid any
longer.

"Fifty thousand dollars." he snorts, as
the closed-circuit television in his office
flickers with the latest round of jai alal. a
betting sport played somewhat like rac*
quetbalL "I haven’t gotten another SSO."

Whatever the outcome of the travails of
the two Garcias-some of it might be
sorted out Thursday at . a hearing by the
U.S. Senate subcommittee on narcotics and


terrorism -the story offers an unusual
peek into the world of financial snooping.
It also shows how hard it is to separate
fact from fiction in the mushrooming scan-
dal surrounding BCG. the rogue banking
operation shut down this month by regula-
tors amid allegations of massive fraud.


Ralph Garcia, a burly 42-year-old whose
size and good-natured bluster suggest a
Cuban-American Jackie Gleason, has spent
a career plying the fringes of the under
world. Hired by the Washington. D.C., po-
lice department in 1970, Mr. Garcia says
he spent his first year "deep, deep under-
cover." infiltrating Cuban organized-crime
circles.

Soon after, be joined the DBA. begin-
ning a seven-year federal career that he
concedes was a bit rocky. Though he re-
ceived praise for his willingness to take on
tough assignments and won the nickname
“Machine-Gun Garcia" for spraying a ~
drug dealer's deserted car with bullets, he
also says he got into administrative squab-
bles over postings and other matters.
Eventually. Mr. Garcia says he and his
bosses reached a mutual agreement "It
was like, retire or we'll send you to Tim-
buktu." he recalls.

Mr. Garcia moved to Miami and opened '
a one-man private detective agency. Wott-
ing with local criminal defense attorneys,
be got involved in a few high-profile cases.

He also got a job with the jai-alai arena.
But he never really hit the big time.

Until he ran into Fernando Olivers. Mr.
OUvera. a young Peruvian congressman
who has made a career of fighting corrup-
tion. was looking for evidence that the for
mer president. Alan Garcia, bad looted the
treasury. He obtained Ralph Garcia's
name through a Miami tax attorney who
had done some probate work for him. In a
first meeting in a bayside condominium.
Mr. Olivers produced a few leads. For ex-
ample. the politician recalled seeing an in-
terview of Julio Iglesias in which the Latin -
crooner mentioned that a former Peruvian
president had bought property next to Mm
In swank Indian Creek Isle here, says the
detective.

And there was also the controversial re-
lationship between the Peruvian Central
Bank and BCCI during Mr. Garcia's presi-
dency. la the mid-1960s. Peru deposited
half the country's foreign -exchange re-
serves in BCG’s Panama operation, de-
spite warnings from some Peruvian cen-
tral bank officials that BCG was in bad fi-
nancial shape and paid low interest For-
mer President Garcia has defended the ac-
tion. noting that he wanted to protect
Peru’s reserves from foreign creditors an-
gered by his decision to suspend payments
on the country’s S22 billion foreign debt.
Bank Records Cited

The Miami real estate lead hasn’t
panned out. But the private detective
scored big in peering into Alan Garcia's
bank records -or so he thought.

Not only had Alan Garcia been intro-
duced to BOG by former Panamanian


strongman Manuel Antonio Noriega, but he
had used the bank to deposit S50 million be
tween 1966 and 1969, detective Garcia said
in his report to Mr. Oiivera. Then, the
money allegedly was moved to a string
of accounts at other financial institutions
In Europe and the U.S. The level of detail
was astonishing. The report listed specific
account numbers and names under which
they were opened, many of them a varia-
tion of the Peruvian flrst lady’s name, Ma-
ria del Pilar Nores Bodereau de Garda.

Mr. Ollvera trumpeted the findings in
the Peruvian Chamber of Deputies in
April, breathing new life Into what had
been a flagging investigation by his com-
mission. Mr. Oliver! became a national
hero and Mr. Garcia's APRA party
plunged into chaos.

But Alan Garda's operatives quickly
took the offensive, passionately denying
that he had accounts abroad or had stolen
any money. Jorge del Castillo, the former
mayor of Lima, produced letters from sev-
eral of the banks in the report denying that
any such account could be found. In some
cases, the Institutions noted that they
didn’t even use the sort of account num-
bers mentioned in the detective's report

Back in Miami, Ralph Garda's fortunes
plummeted. Peruvian journalists began
appearing at an office address listed on
Ralph Garcia’s stationery. Because of a
misprint there wasn’t such an office, a
fact that was dutifully reported in Lima in
articles suggesting that there wasn't a
Ralph Garda. When the reporters finally
tracked him down, they laid siege to his
house. The detective’s teen-age son drove
them off with water balloons.

Protest FUed With State

Harder to dismiss was the Florida State
Department, which regulates detectives.
Acting on a protest from Alan Garda’s
representative, Mr. del Castillo, the de-
partment last month lodged an administra-
tive complaint that Ralph Garcia operated
a branch office without a proper license,
that be failed to cooperate with a division
investigator and that he "provided infor-
mation to his client and represented the
information to be factual when he knew
such information had not been verified."

Mr. Garda's attorney, Dennis G.
Kainen. concedes that the first count might
be true, strictly speaking, but vehemently
denies the rest. He says Florida regulators
moved much faster than they normally
do- in this case, the complaint followed a
one-month Investigation -and hints at po-
litical manipulation. "You would have
thought from the way these guys came in
here like gang-busters that they were talk-
ing about 1,000 kilos of cocaine."

John RussL director of the depart-
ment's licensing division, denies that his
men acted hastily.. "When we get a com-
plaint eo somewie, we investigate it [and]
we fary to handle it as quickly as possible."
he says.

So how exactly did the disputed infor-
mation wind up in Ralph Garda's hands?
"I wish like hell I knew," he shrugs. He


225


flMtefOtttfRNntFMtLuiikrdatecQah
May called Mercantile Credtt Association
lae^ widely used by private detectives tad
which. Mr. Garcia says, has given him ac-
curate information in past cases. He ate
notes, that he hadn't expected that Mr. OH*
ven would release the report so soon.

Mercantile Credit which hills Itself as
providing the “world's most accurate, up*
to-date, informative credit reports." wont
Identify the source of its information. Wal-
lace Iroff, president says Florida authori-
ties Instructed him not to comment and
“when two elephants are fighting,
you get out of their way."

But a person familiar with Mer c a ntile 's
operations asserts that the alleged infor-
mation about Alan Garcia was procured
through an Intermediary who, in turn, con-
tacted a third person unknown to Mercan-
tile. Mercantile charged its customer. In
this case Ralph Garcia, $200 per bank ac-
count found in the U.S. and $650 for Inter
national accounts, according to th$ per-.

Mr. Garcia Is consoled the support
offered him by patrons at the jai-alai
arena, as far as it goes. “I have to defend
myself 24 hours a day,” says Mr. Garcia,
who has netted Just $3,500 for hb troubles.
“1 can deal with this, but what I can't deal
with is that 1 haven't made any money.”




? r tOa


fippartmpnt of &tat*


I, Jim Smith, Secretary of State of the State of
Florida, do hereby certify that the attached letter
from John M. Russi, Director of the Division of
^Licensing, to Mr. Jorge Del Castillo Galvez, is an
accurate and correct statement of the status of the
investigation currently being conducted on LARC
Investigative Services, Rafael Nicasio Garcia,
President, pursuant to Chapter 493, Florida Statutes.



Cgtben unber Ijanb anb tlje
(great Seal of the State of Tloriba,
at (Tallahassee, the Capital, this tlje
11th June 1991


3)im Smitl]

Secretary of State







227



FLORIDA DEPARTMENT OF STATE
Jim Smith

Secretary of State

DIVISION OF LICENSING
The Capitol MS #4
Tallahassee, Florida 32399-0250
(904) 487-0482 FAX 488-2789


June 11, 1991


Mr. Jorge Del Castillo
Diputado Congreso Nacional
Lima, Peru

Dear Mr. Del Castillo:

As regards your complaint of May 16, 1991 regarding LARC ,

Investigative Services of Miami, Florida, Rafael N. Garcia, r

President, and the investigation conducted by Mr. Garcia on Mr.^
Alan Gabriel Ludwig Garcia, you are respectfully advised that the
investigation conducted by the Miami Regional Office, Florida
Department of State has been forwarded to Tallahassee for review
to determine investigative completeness and legal sufficiency.

An initial review of the^ investigation that has been conducted to
date is deemed to be sufficient to determine that probable cause
exists to proceed by Administrative Complaint against Mr. Garcia
of LARC Investigations for various violations of Chapter 493,
Florida Statutes, the chapter which regulates private
investigators in the State of Florida. The totality of the
administrative charges to be lodged against Mr. Garcia have not
yet been determined. No Administrative Complaint has been
prepared since it has not yet been determined whether or not the
investigation is complete.

Upon final conclusion of the investigation, within two weeks a
copy of the Administrative Complaint, the charging document in an
administrative proceeding, will be provided to you.

If I may assist you further in this matter, please feel free to
contact me at your convenience. Otherwise, I will provide copies
of the investigative report and the Administrative Complaint as
indicated.


Sincerely,



Director


JR/bt


228


SuibeltSavings' »

May 21, 1991


Ka. Deborah Prut nan
Arnold and Portar
park Avanua Tower
65 S. 55th Straat
Naw York, Haw York 10022


Pa I *1-6612, Sunbelt Padaral Savings. P*8

Irving, Taxaa - Zn Conaarvat cehlp (4/26/91)
AIAM fiABCIA BBM


Daar Ms. Prutnani


Z an .sanding this lattar to you pursuant to our talaphon*

Mium'Mtlen on Friday, Kay 10, 1991. z an an attorney in sunbelt
Padaral Savings, PSB'e Legal Division. on Tuesday, May 7, z
rsealvad Mr. Jorga Dal eaatlllo Oalvas at Sunbalt Padaral savings.
After reviewing a Pevar of Attorney exeouted by Alan oabrial Garcia
Parar and Karla Dal Pilar Noras Bedsraau da Garcia, and after
confirming the authenticity of auoh document, z undertook a review
of sunbelt's records to deteraino if certain account relationships
existed.

Specifically, Z was requested to search Sunbelt's records for
an account allegedly in the 'name of Alan Garcia pares which uae
dosed sometime prior to December ef 1969. This account was
allegedly originally established with Western Padaral Savings and
been Association prior to the formation of sunbalt Savings
Association and Sunbalt federal savings, .PSB. A search of cur
records indicated that no such account, either open or Closed,
existed under any variation or Mr. Pores' nano.

i was also specifically requested to determine whether or not
there was an aeoount in the nans of K. Bodareau. One# again, Z waa
presented with information that auoh an aeoount did exist,
including an aeoount number, allegedly from Western federal Savings
end Lean Association, z have been unable to looete such account
for Merle Bodareau. further, review ef the lata May, June and
early July lists wire transfer records revealed no information
relating to e $2,000,000.00 wlra transfer.

Therefore, a review ef account records transferred te Sunbalt
Savings and subsequently transferred to Sunbalt Padaral Savings,
PSB from Wastarn, lndioata no aeeounte under the nemee or
variations thereof listed above. The aeoount number as referenced
la net • valid Western Savings account number and wee no help in
locating any -documentation, further, review of the wire transfer


100 Cut Cvpcntcr Franny ♦ P.0. Boa U0M9 • Irvin#, T*«u 7501M962 • (214) 541-2000



229


MS. Deborah Prutzman
May 21, 1991
Pag* 2


records do net indioata the receipt in June of 1998 of an
approximate $2, 000 , 000 . 00 wire.

. IS you have any questions, please five as a call.


Oineerely,



Barry D. Johnson

suntelt Federal savings, ran


fiVMnvtnsSNMIUlH.Mj



230


I SuMMitSavlngs',

» aaima am

Kay at, im


Xa. oaborah frutxaan
Arnold and Port or
Park Avanuo Tovar
<i a. otca ttroat
Kav York, v« York loots

Mi st-ooia, tunhoit rodorai Savings, m

Zrvlag, Tan as ■ In Consarvatorahlp (4/is/ti)
itav a»en mt«

oaar Ms. Prutxaani

Z fcavs previously given to you tka results at an lntamal
Investigation performed st your reguest ralatlnt to eartola daposlt
aosoonto la tka fanar Wsatatn Savings Aaseolatlaa of Toms and a
vlra transfer allegedly aada la Juaa of list late wsatam Savinas
Assealatlon.

Sunbelt was iavoatigatlnf aa syproxlaata It. 9 million vlra
transfac la Juno of 1900, umiak did not go lata any dapeelt
account a. tfa kavo suhaaguantly datacalnad that tka approximate
SI. 9 alllion vlra tranSfor raaalvad la June of IMS is net lavalvad
a a va oaa determine, vitk Mr. Carols or klo vita.

Zt would too ay kopa that tkls lattar ansvaro any guaatlens
vblak you nave relating to this sattor.


Slaearaly,



Barry 9. Johnson

sunhalt Podaral savings, psb


oai Jorge Oal Castillo Oalvsa
o/a Alda ostoiesa
(via fast (117) 904-ltSt)


fi\usars\ray\vpdata\kdj\9iss.kdj


JSOMlCmmaftwm • t.Q.U*UBm • fa*»Ta» mum • (KOKU000



231



Resolution Trust Corporation


July 19, 1991


Ms. Lourdes Flores
Member of Commission
Guardia Civil 1150
San Isidro
Lima, Peru

Dear Congresswoman Flores:

Based on the information provided to the Resolution Trust
Corporation (RTC) by you and other members of the Commission, ve
could not confirm % the existence of transactions or account
relationships with either Centrust Savings or Western savings (now
Sunbelt, Savings) .

Of course, ve would give consideration to making further
should additional information become available.


cc: C. J. SrPi'WD

Wm. Dudley
wm. Roelle
T. Schulz
Mr. Jones



Sincerely,


f



sistant Director, Investigations


Ml 17tt) Street. NW ■ Washington. DC 30434-0001


232


Mr. Del Castillo. BCCI, Mr. Chairman, came to Peru in 1984.
Probably it was a source of surprise in Peru, as in 60 other coun-
tries as well, how much good faith people had. As you know, it
seems that when any bank wants to get into a country, it wants to
get in touch and contact with important groups of people in the
country.

And in March 1984, BCCI in Peru asked for authorization from
the Superintendency of Banks and Insurance to set up a branch. So
you will see the level of reliability that a bank, apparently a very
solvent bank, seemed to have at that time.

BCCI, to ask for this authorization, asked for and got the legal
advice of a very important law firm in Peru, and here in exhibit
No. 1, that I am going to give you, I am going to give you a sealed
copy dated March 14, 1984, from the Superintendency showing that
BCCI asked for permission to set up a branch.

And it says that its legal domicile will be the law office of Ster-
ling, Arias & Davis & Associates, which is a very well known law
firm. Dr. Sterling, who is a person whom all of us respect and could
not possibly be suspected of anything illegal, he is a member of Dr.
Lunes-Flores' party, and is the President of the Peruvian Senate.
He is beyond reproach. This is exhibit No. 1.

In 1984 the Superintendency, in a document in November, asked
the Central Bank to process the approval. I am giving you a list of
all of the Central Bank staff members from 1980-90.

Here there is a very interesting person who was the general
manager of the Central Bank between 1980 and 1984, until October
1984. Remember that BCCI’s request came in March, and he was
there until October. They say in Lima, and this is a saying or spec-
ulation, I recognize, that this same person, the general manager,
was the promoter of BCCI in Peru.

This person is called Brian Jensen Rullio. In 1984, Mr. Brian
Jensen Rullio resigned from this post at the Central Bank, and he
moved to Miami. And in Miami he was named manager of BCCI.
So if anyone knows about the links of Peru with BCCI, it is Brian
Jensen, because he had been general manager of the Central Bank,
and because he was later a Miami manager of BCCI.

Brian Jensen, until yesterday, was representative in Peru,
named by the Minister of the Economy, Carlos Bolona, as the rep-
resentative of Peru to the World Bank. Yesterday, though, the
President of Peru, Alberto Fujimori, dismissed him from this posi-
tion when he learned of evidence that this person, Brian Jensen,
was allegedly a link to BCCI. And he lives in Washington now, and
I think it would be interesting for you to hear his testimony.

He was general manager, starting January 19, 1981, until Octo-
ber 1984, when BCCI already had 6 — had been working 6 or 7
months. Or had been working for 6 or 7 months to try to set up its
branch in Peru. The branch in Peru was approved by the director
of the Central Bank on February 1, 1985. We are still talking about
the prior administration before Dr. Garcia.

Senator Kerry. Can you get into the 1986 and 1987 stage, where
the transaction began in terms of the credit line?

Mr. Del Castilix). Yes, I just want to read two lines of the direc-
tor’s report of February 1985. This board of directors is made up of
very serious people, I think all of them have impeccable reputa-



233


tions in the county, and I am sure that they were all surprised, as
Dr. Sterling was, and as many other people who were on it in good
faith must have been.

The report said, or the agreement said, that the Board, feeling
that the opening of a foreign bank at this point shows confidence
in our country, and taking into account that this is a bank which is
presently one of the most important in the world, and nothing has
been found against it, the Board has decided to act in favor of the
request.

This same report includes an authorization of the Superinten-
dency, and I am including the documents, the official documents
which appeared in the press in Lima, establishing this branch.
Later this branch was not actually set up, but all of the steps were
taken by the public authorities of Peru so that it could have been
set up.

On April 1, 1986, and I am sending the text of the board of direc-
tors’ report, the decision was taken by the board of the Central
Bank to establish a corresponding relationship and deposits, and I
do not want to refer to more details because Mr. Llaque has ex-
plained all of this very clearly indeed. It was the Director of BCCI
in July that said it was necessary to revise some factors or some
areas.

Senator Kerry. I hate to interrupt you here, but as you know, I
promised I would give you an opportunity to respond to the prior
panel. I cannot go through another entire panel of testimony sepa-
rately now.

Let me come to some key questions. It has been asserted by the
investigative team as they have spoken that there are irregular-
ities in the way that the line of credit was extended. And that
there are significant questions in Peru.

And let us leave the President completely out of this. Let us
assume that there is no President Garcia. Just the way BCCI
worked, when suddenly the Government made a decision that it
needed some credit, and went to Panama. Now, why did it go to
Panama? Was there something about the way BCCI worked? Do
you find that? Or do you think that BCCI is a terrific bank with no
problems?

Mr. Del Castillo. Mr. Chairman, I am going to refer to the Pe-
ruvian constitution, and I am going to leave you a copy of it. But
there it says that the Central Bank is an autonomous body. It does
not depend on the executive branch. This is very important.

Senator Kerry. I accept that. But answer my question. I mean, I
take it that what you are saying is the BCCI relationship was bad,
but that somebody else had something to do with that, and that not
the President. Is that what you are saying to us?

Mr. Del Castillo. The only officers who were responsible for the
BCCI matter were the members of the Board, no one else.

Senator Kerry. The members of the Board of the Federal Re-
serve are responsible, correct, is that what you are saying?

Mr. Del Castillo. Yes, sir.

Senator Kerry. Was BCCI a good bank to deal with or not? Yes
or no?

Mr. Del Castillo. I do not know this background. I have come
with the purpose, as you know, of stopping — and you have not al-



234


lowed this to happen, fortunately, but stopping undue links to be
drawn to be drawn here. I do not judge BCCI pro or con.

Senator Kerry. Fair enough.

Now, from your perspective, can you share with the committee a
view of BCCI? If you do not have knowledge of that, then I will
make part of the record any clarification you have of any comment
to which you object. But I do not want to take the time now be-
cause of the gentleman from Argentina who is waiting, and I want
to get some of that on the table because it is important as to Ar-
gentina’s experience with BCCI.

Mr. Del Castillo. Senator, it has been said here that Mr. Mor-
genthau allegedly made a link between President Garcia and BCCI
regarding presumed bribes. And we have begun an investigation in
Peru on this. But I have, and I am leaving you, an EFE cable,
which was the only one that referred to a question of this sort. And
this press release says — asks if President Alan Garcia was being in-
vestigated in Peru regarding his links with BCCI, and if this was
connected to the bribes. Morgenthau said, no. I leave this with you
because there is no evidence that Morgenthau said anything differ-
ent from this.

Senator Kerry. Let me say to you, Mr. Castillo, that I respect
that and the committee accepts what we have heard today com-
pletely neutrally, with respect to President Garcia. As far as we
are concerned, that is outside of this committee at this time.

It is between the people of Peru and its own Government and
own processes for determining that, and it is between Mr. Morgen-
thau and his indictment process, which is totally separate from
here.

But at the moment we are really trying to get a picture of the
questions that have been raised by this. The fact that there was a
soft credit line, if you will, with an imbalance in the amount of
credit for the amount of cost, the fact that it had to go to Panama
and BCCI was so prepared to help the country find a way around
the laws and went to Panama and had secret accounts and so forth,
raises the very kinds of issues that we are trying to raise.

And while nothing is dispositive here of any of those issues, that
is what we are trying to show. In a sense, your very conflict is
itself a statement about BCCI. And the kind of operation that it
has left behind it. And this is the wake, if you will. This is the fall-
out.

Those banking institutions or those institutions that perform
above board and so forth, do not have these kinds of accusations
flying around them, and do not leave these kinds of question
marks, hopefully.

So I think it has served its purpose of leaving in people’s minds
the sense that it came in, offered itself where other banks would
not go, provided an opportunity to get around the legitimate credit
interests of the rest of the banking world, took advantage of a
country’s plight in that respect, made money off it, and left a lot of
chaos in its wake.

And as I say, nothing here is dispositive of any of that. But I
genuinely want you to feel that this record is open to you, and if
there is any comment that you feel you need to make publicly be-



235


cause putting it in the record is not sufficient, I want to give you a
last opportunity to do that now.

Mr. Del Castillo. I will be very brief. It was very good not to
accept comments on presumed or alleged bribes by BCCI, not to
these officers mentioned by Mr. Morgenthau, but having to do with
the President having accounts in BCCI. In your power, you have
records from all of the banks, without exception, all the banks
mentioned in the reports of Cole and Belar, proving that these ac-
counts do not exist. Not only are these from BCCI, but these are
from the Sun Belt Bank of Dallas, the Societe General from
France, the Societe Santander from Spain.

Senator Kerry. Let me say that you are putting in the record
things that never came out previously. I mean, none of this was
talked about.

Mr. Del Castillo. Yes, but Senator, they have not been talked
about here, but in the press.

Senator Kerry. But we are not here to try to sift out what has
been out in the press, and I think the other side very respectfully
heeded to my earlier caution. So I think it is really fair not to
make this committee now the recipient of any rebuttal of some-
thing that has not been set forth.

So on that note, I would like to, again, leave the record open for
you to submit some of this, but I am not going to receive it at this
point in time, if that is fair.

Mr. Del Castillo. Very well, I will conclude. These are matters
to be refuted in other bodies.

What I would like to say, you asked me what my impression was
about this whole BCCI business. My general impression, without
admitting any value judgment about this bank, which I see is a
bank with multiple evidence of corruption in many parts of the
world, but my impression is that when it went to Peru in 1984 and
later in 1986, this evidence that we have now was not known at
that time.

BCCI worked in London until 2 weeks ago. It has had offices
until last year here in the United States, if I am not mistaken. In
Peru where it came and surprised people, but if people of the Cen-
tral Bank in 1987 on their own initiative decided to reduce their
deposits in BCCI, but I think this was a decision which is sort of
indicative of what we are seeing now.

And I think that here there has been an attempt to have coin-
cide certain meetings held by the President with BCCI people. I say
supposed meetings because they haven’t been proven. Nobody
knows who this Riizo Patron even is. He’s not an officer or an offi-
cial of the Peruvian Government. I do not know who Oscar Riizo
Patron even is. Calvo, I don’t know who he is either. These people
have been mentioned.

Senator Kerry. Let me say it is very obvious that BCCI have left
investigators in Peru a lot to do, investigators in London a lot to
do, investigators in New York and Washington and all around the
world. And it is too bad that so much investigative effort is going
to have to be consumed by this one enterprise, but obviously it is.

Mr. Del Castillo. I just want to thank you for your courtesy and
for the opportunity you have given me to speak, and I think that
you have acted with great justice.



Senator Kerry. Thank you, sir.

Gentlemen, if you could please take your places there. I ask you
if you would stand and would you raise your right hand. Do you
swear to tell the truth, the whole truth, and nothing but the truth,
so help you God?

Mr. Rodriguez. Yes, we do.

Mr. Alconada Semp6. Yes.

Senator Kerry. Would you state your name, please, for the
record?

Mr. Rodriguez. Yes, I am Jesus Rodriguez. I am a Deputy of the
Argentine Congress.

Mr. Alconada Semp£. My name is Raul Alconada Sempe. I was
Secretary of Defense and Secretary for Special Projects of the For-
eign Ministry of Argentina.

Senator Kerry. Would you please describe briefly for the com-
mittee the history and the significance of the involvement by BCCI
in Argentina?

STATEMENT OF JESUS RODRIGUEZ, MEMBER, CHAMBER OF DEP-
UTIES, ARGENTINA; ACCOMPANIED BY RAUL ALCONADA

SEMPE, FORMER SECRETARY OF DEFENSE AND FORMER SEC-
RETARY FOR SPECIAL PROJECTS, FOREIGN MINISTRY, ARGEN-
TINA

Mr. Rodriguez. Yes, sir. To save time, we will try to be brief.

We know that Ghaith Pharaon came to Argentina May 17, 1981,
that November 18, 1986, the Central Bank of our country author-
ized the transfer of 28 percent of the capital and votes of a finan-
cial holding company property of the Company Rio de la Plata.
This company was having economic difficulties and today its offi-
cers are being tried, and these trials have been going on since 1985,
approximately.

Then on November 2, 1987, an authorization of the Central Bank
of Argentina was given to this financial company to increase its
capital and to acquire more stock, and it became BCCI.

Senator Kerry. What year did it become BCCI in Argentina?

Mr. Rodriguez. November 2, 1987.

Senator Kerry. Did BCCI or Mr. Pharaon, to your knowledge,
seek political influence through their investments in Argentina?

Mr. Rodriguez. I really do not know, Mr. Chairman, but I could
refer to some statements that Mr. Pharaon made in trying to
become an Argentine citizen at that time. He said that he had been
working for 22 years in business; that he had graduated from Har-
vard Business School and was on the staff of Harvard Business
School as an expert; and that he was an industrialist with much
experience in the Middle East and other countries of the world;
that he worked in cement, petrochemicals, shipbuilding, oil, insur-
ance, hotels in the United States and in other countries.

He said that he was a majority shareholder in Intergroup Devel-
opment Co., and in accordance with information from a specialized
magazine, Building Design and Construction of 1987, he was
number 27 in rank of all companies, so that he had offices in
Dallas and Florida, and BCCI was a bank originating in Luxem-
bourg with branches in 72 countries, including the United States;



237


and that he had activities in the Citrus Bank in Miami and in the
Central Trust Bank in California.

Now, regarding your concrete question

Senator Kerry. What year did he say all these things? When did
all these things come out?

Mr. Rodriguez. According to our information, about 1988.

Senator Kerry. He was involved prior to that, was he not?

Mr. Rodriguez. He said that he had been working in business for
22 years before that.

Senator Kerry. What role has the Argentine Parliament had in
investigating BCCI’s involvement in Argentina?

Mr. Rodriguez. You know, Mr. Chairman, Argentina, the Con-
gress of Argentina is one of the branches of Government, and there
are a number of different types of background that the Congress
has at its disposal, different kinds of documentation that I would
like to give you. This documentation refers to the following.

March 2, 1990, there was a request to the executive branch for
information made by Deputy Felgueras regarding information of
an international nature regarding the illegal activities of BCCI.

On May 31, 1990, there is another request for information by
Deputies Jello Rosas and Alvarez-Guerrero, also in connection with
BCCI activities and the establishment of a hotel which was being
built in Buenos Aires.

July 13, 1990, another deputy and I presented reports regarding
these linkages, and in July 19, 1990, additionally another request
for information was submitted by Mr. Felgueras regarding the con-
nection with Hotel Hyatt being built at that time in Buenos Aires.

Unfortunately, none of these requests for information was re-
sponded to by the executive branch of our Government. I ask that
a translation of these requests be inserted in the record.

Senator Kerry. So ordered.

[The information referred to follows:]

Parlamentary Form No. 58 — July 19, 1990

8 — Felgueras and Rodriguez (Jesus): a resolution. Information request from the
Executive Branch concerning presidential statements about the construction of the
Hyatt Hotel at 1433/35 Cerrito Street in the Federal Capital and the bilateral
treaty proposals being studied by 'the Foreign Ministry in order to impound the
bank deposits in cases of drug trafficking.

Resolution project

THE CHAMBER OF DEPUTIES OF THE NATION RESOLVES

Addresses itself to the National Executive Branch in order to receive information
from the competent entities:

1. What was the “personal” call that President Carlos S. Menem had to make to
free up from “red tape, corruption and the hope of gifts” the authorization to con-
struct the Hyatt Hotel alongside the French Embassy? * * * (La Nacion t page 3,
July 13, 1990)

2. What are the “things” that — according to the same declarations in the afore-
mentioned newspaper — which, according to the President “* * * could put a break
on an investment which in this case was worth $30 million dollars?”

3. If the sale of the Alzaga Unzue mansion — Cerrito 1433/35 — at the hands of the
Hotel Corporation of Argentina (HCA), belong to the Hyatt chain, has anything to
do with the presidential statements in La Nacion on July 13.

4. If the link between the Bank of Credit and Commerce International (BCCI) and
the Hyatt chain is the multimillionaire Ghaith Pharaon?

5. If there exist links between the banking entity Bank of Credit and Commerce
International and the laundering of drug money.



238


6. If in the scandal created by the sale of the Alzaga Unzue house there is an
owner-stockholder of a bank which takes care of the laundering of dollars that come
from the traffick of drugs.

7. If among the projects under study in the Foreign Ministry of bilateral treaties
with the United States, the United Kingdom and Italy, among other countries, 1 'de-
signed to authorize the impounding of bank deposits in the cases of narcotics traf-
fickers,” it is understood that the bank of Credit and Commerce International
(BCCI) recognized before the courts in Miami its culpability in the laundering of $32
million dollars coming from the traffick of drugs by the Medellin Cartel.

8. If the investment of BCCI in the deposit of $32 million dollars — for the pur-
chase of the Alzaga Unzue mansion — a deal which counted on the support of the
Economy Ministry, under the rubric of the foreign debt capitalization scheme, re-
sponds to that announced in an advertisement by the hotel business which said:
“* * * the presence of a banking entity responds exclusively to the determinations
of Central Bank circular A1.109.

9. If the motives which caused Menem to invite into his office the principal shares
holder of a bank accused of drug money laundering (Ghaith Pharaon) are linked to
the fact that the then head of the Central Bank, Javier Gonzalez Fraga and Hector
Grimberg, the former partner of President Menem in a law firm, were, respectively,
economic and legal advisors to the Hotel Corporation of Argentina (HCA) of the
Hyatt chain.

10. If another member of the hotel enterprise is Cristian Zimerman, the ex-presi-
dent of the Central Bank during the time of Martinez de Hoz.

Ricardo E. Felgueras — Jesus Rodriguez.

Fundaments

Mr. President: Carlos Menem, president of the nation, declared to the press that
he had to "personally” make a call in order to free up from "red tape, corruption
and the hope of gifts*’ the authorization to construct the Hyatt Hotel alongside the
French Embassy. He said these actions could put a break on an investment worth
$30 million. On March 2, 1990, we presented a Resolution Project (No. 4,273-D-89)
in which we asked whether if the scandal created around the sale of the Alzaga
Unzue house there was (sic) an owner-stockholder of a bank in charge of laundering
dollars coming from the trafficking of drugs. We also asked if there existed ties be-
tween the banking entity Bank of Credit and Commerce International (BCCI) with
the laundering of narcodollars.

The Foreign Ministry announced (Ambito Financiero f July 17, 1990) the study of
bilateral treaties with the United States, the United Kingdom and Italy, among
other countries, to “authorize the impounding of bank deposits in the cases of nar-
cotics traffickers.” The Bank of Credit and Commerce International (BCCI) recog-
nized before judicial authorities in Miami its culpability for the laundering of $32
million from drug trafficking by the Medellin Cartel and the same entity (BCCI) in-
vested $32 million to purchase the Alzaga Unzue mansion, by HCA before the Cen-
tral Bank even though the hotel enterprise communicated that "its presence in the
deal was due to a disposition of Central Bank circular A1.109.”

Faced with the presidential declarations and the bilateral treaty proposals being
studied by the Foreign Ministry to "impound the bank deposits in cases of narco-
traffickers,” we ask the quick response to our current question and to that which we
brought up on March 2.

The silence of the Executive Branch and of the pertinent entities on this subject
causes us to demand the quick approval of this project.

Ricardo E. Felgueras — Jesus Rodriguez.

Senator Kerry. Is this in conjunction with BCCI?

Mr. Rodriguez. Yes, sir. Because we knew that through the capi-
talization process, BCCI was investing in a Hyatt Hotel which was
being built in Argentina, and from a newspaper report in La
Nation in October 1988, we knew about the accusation against
BCCI in the United States, and we had at our disposal the analysis
of this committee, Senator Pell’s analysis regarding money laun-
dering.

Senator Kerry. What time period, Mr. Rodriguez, are you now
referring to?

Mr. Rodriguez. We are talking about the year 1990. More re-
cently than that, Mr. Chairman, May 17, 1991, the president of our



239


bloc, our electoral bloc, and other deputies submitted the idea to
the Congress of setting up a commission to analyze drug trafficking
and the modus operandi of the way they work and their effects on
society and the State.

In order to be brief, Mr. Chairman, and not to abuse your pa-
tience, I would like to very briefly quote some of the bases used for
setting up this congressional committee.

Senator Kerry. This congressional committee was for investigat-
ing BCCI?

Mr. Rodriguez. To investigate everything having to do with
drugs in Argentina. The urgency of setting up the committee, we
thought — or think, is based on the need to clarify to public opinion
the various responsibilities and liabilities of various officials in-
volved. If this is not done, the credibility of the whole Government,
and even the democratic system, will be jeopardized.

Second, the history of drug traffic has shown that infiltration of
drug trafficking rings into Government has been a decisive step in
their growth. This is not true in Argentina, but we could imagine
consequences, the consequences if this were to happen in the
future.

Third, the need to draw up policies which will allow us to act co-
herently and consistently throughout the Government at the vari-
ous levels to get information which is now being done in a very dis-
jointed way.

Four, the advisability, Mr. Chairman, to stop intervention of for-
eign bodies, which would be tantamount to admitting that the na-
tional bodies are impotent.

Five, to allow a multidisciplinary and multiparty report to be set
up.

And six, to see how much penetration there has been into the
drug enforcement bodies and police bodies in Argentina. The Gov-
ernment and most of the parties in Argentina find the setting up of
this committee a positive thing.

Senator Kerry. That committee was set up when?

Mr. Rodriguez. Let me be clear. We asked that the committee be
set up May 17, 1991.

Senator Kerry. Prior to that, had you, in the course of your par-
liamentary efforts, had any contact with BCCI?

Mr. Rodriguez. No. Personal contacts of no kind at all, but I did
have the desire of clarifying episodes which had come out in the
press, and that was the reason why we had been asking for infor-
mation. The President, in a report published in the La Nacion
newspaper, talked about the construction of the Hyatt Hotel, which
was being built in Buenos Aires. This happened in 1990, and this
was an article which came out in La Nacion, which is the newspa-
per in Buenos Aires.

Senator Kerry. Now, the efforts that you are currently making
to investigate, Mr. Rodriguez, is the Government — are you meeting
with cooperation in this effort?

Mr. Rodriguez. In Buenos Aires or in Argentina, there are many
intensive judicial investigations going on.

Senator Kerry. These judicial investigations that are going on,
do they center on BCCI at the current moment?



240


Mr. Rodriguez. No. Some are connected with a Spanish suit
having to do with drug trafficking, being investigated by Judge Ser-
vini de Cubria in Argentina; also involved here is BCCI. This week
there was a seizure of the BCCI offices in the city of Buenos Aires.

You understand, sir, that on this subject we can only say that we
respect the functioning of justice, and our desire that this situation
will be clarified very soon, and finally, to say to you, adding some
information, that our party in the Chamber of Deputies has initiat-
ed a political suit against the judge who was handling this case.
Servini de Cubria is her name.

Senator Kerry. Now, Mr. Rodriguez, one of the things that you
have been involved with in your career is the effort to try to open
up the stock ownership process and, in other words, to have more
open system of knowing who owns what and moves what. Is that
correct?

Mr. Rodriguez. Yes, Mr. Chairman. We, together with some
other legislators, are authors of a law which was promulgated in
Argentina providing for giving names, or putting names on all
stock of all corporations in order to identify clearly who are the
owners of each of these companies, following the comparative legis-
lation in many other countries as well.

Unfortunately, one of the initiatives of President Menem’s Gov-
ernment in August, September 1990, was to derogate this law or
cancel it, which makes it more difficult to investigate or to find out
exactly who is the owner of each one of the companies existing in
Argentina.

Senator Kerry. Does it also frustrate the capacity to learn more
about BCCI?

Mr. Rodriguez. It makes it more difficult to find out, for in-
stance, if the shareholders of BCCI or the members of the Board of
BCCI, Argentina, are also owners of stock in other companies in
Argentina.

Senator Kerry. Is that a frustration to the investigative effort to
determine the BCCI track?

Mr. Rodriguez. It is an additional difficulty, Mr. Chairman, but I
wanted to be absolutely clear that this was not the reason used by
President Menem to cancel that law to which I referred.

Senator Kerry. What is the status of BCCI in Argentina now?

Mr. Rodriguez. Very concisely, let me say, first, never did the
Central Bank of Argentina have deposits of its international re-
serves in BCCI. Never. I also must add that during 1990 the Cen-
tral Bank of Argentina, in its analyses of the regulatory practices
in the BCCI branch, reached an agreement whereby the branch
would cease all operations in Argentina. Toward the end of May
1991, this subsidiary was not operating any longer, having closed
its branches.

Finally, BCCI Argentina was totally closed July 30, 1991. And, as
I said this week, I do not have the exact information, Mr. Chair-
man, because I do not have the report of the Central Bank in order
to answer this question properly.

Senator Kerry. Do you recall what was said in the press with
respect to the closing?



241


Mr. Rodriguez. No, I do not. If you forgive me, they are saying
here that BCCI asked for its own closure. It asked itself that its ac-
tivities be closed in Argentina.

Senator Kerry. We are on the back of a vote here. We are going
to take our last recess. We will complete this in total when I return
in about 10 minutes from now.

We will stand in recess for 10 minutes.

[A brief recess was taken.]

Senator Kerry. The hearing will come back to order. We need to
try to proceed very rapidly. I apologize for that, but I have a bank-
ing wrap-up. They are trying to get the banking bill out, and I have
been here all morning and, therefore, need to try to get over there.
So we will have to truncate this a little bit, and I ask your under-
standing on that.

Mr. Rodriguez, share with the committee, if you will, what the
status of money laundering and drugs are in Argentina right now.

Mr. Rodriguez. It is difficult to answer that, Mr. Chairman, es-
pecially because precisely on the matter of drug trafficking, an in-
vestigation, a judicial investigation is opening just today.

Senator Kerry. Is it known to be a problem in the country? I
take it if there is a judicial commission that is opening, it is a prob-
lem.

Mr. Rodriguez. Indeed, it is a problem, and so much so that I
read you the bases for our party’s coalition asking for this commis-
sion. It is not that we are trying to interfere with the work of the
justice system, but because we think it is necessary to instill in col-
lective consciousness and in everyone’s mind the political and
social implications of drugs and thus the power of drugs.

Mr. Alconada SempIs. Mr. Chairman, just one brief clarification.
During Dr. Alfonsin’s Presidency, when I was in the Foreign Minis-
try, we had a major concern with introducing the whole subject of
drug trafficking in Argentina because, thank God, until some time
ago, Argentina was not affected, either as a consumer or producing
country. And it was starting to be used as a transit country.

One of the serious problems is that society sometimes is not
aware of the tragedy that occurs. And we think that we have noth-
ing to do with it. The effects that foreign investigations are having
and investigations in Argentina now are useful for us to become
aware of how serious this is. That is why Deputy Rodriguez was
talking about investigating a phenomenon that we do not want to
consolidate itself or to have time to consolidate itself because if we
do not do something now, it will be too late.

Senator Kerry. Mr. Alconada Semp6, I agree with that, and let
me just ask you now that you have spoken lip. When you worked
in the Foreign and Defense Ministries, and you are a former Secre-
tary of Defense for Argentina, what was the policy of the Govern-
ment with respect to amis sales?

Mr. Alconada Semp6. Argentina is not an important weapons-
producing country. We produce secondary or medium-sized weap-
ons, but the main principle guiding us was not to sell weapons to
any county involved or potentially involved in any conflict with an-
other country. We did not sell to either one, either side.

Second, we did not sell weapons to countries subject to doubt
about their international policies. That 'meant that despite great



242


economic problems and despite the fact that we needed to make
such sales of planes or ships, that we did not do so because the
countries that wanted to buy were countries that were fighting
each other.

When these operations are conducted, they have to appear in the
budget as possible income. In other words, the Parliament takes
cognizance of weapon sales whenever they occur.

Senator Kerry. Just as we do. Did the Government at some time
seek to sell its fleet of Mirage aircraft?

Mr. Alconada Semp6. Yes. Are you talking about President Al-
fonsin’s Government or this one?

Senator Kerry. I am saying normally. When you were Secretary,
when you were at Defense. If a sale was to take place, how would
that transaction have been effected?

Mr. Alconada SempIs. First a political decision had to be taken
by the Defense and Foreign Ministries and the Economics Ministry.
A special committee made up of three State secretaries which
would be deputy ministers. And they had to authorize both sales
and purchase operations. And when there was a sale, it was a spe-
cial committee within the Defense Ministry which dealt with the
operation, having people in the Ministry carry out the sale.

But during our ministry — answering the question now and a
statement by a Senator of California this morning, during Presi-
dent Alfonsin’s administration, the Mirage planes were not offered
for sale — the Mirage sales to which reference was made this morn-
ing.

Senator Kerry. When did you leave Government service, as Min-
ister of Defense?

Mr. Alconada Semp£. I left Defense in May 1988. But I contin-
ued as Secretary of Special Issues in the Foreign Ministry, which
also had to do with the sales of arms. And that I left in July 1989.

Senator Kerry. Did you learn some information, such as sale of
military weapons that was to take place, of the Mirage?

Mr. Alconada Semp£. Not through the press. Through contacts
with armed forces people, air force people. I suppose if an attempt
was made to sell that many planes or such an important number of
planes for Argentina, we would have known about it or heard
about it.

Senator Kerry. Did you learn anything about BCCI in any kind
of sale?

Mr. Alconada SempIs. No. During our Government and during
these 2 years of the new Government, I had no knowledge that this
bank was directly connected to this.

Senator Kerry. Mr. Alconada Sempt were you shown some doc-
uments earlier today regarding BCCI’s transaction of some weap-
ons, the Mirage, et cetera? Have you seen those?

Mr. Alconada SempIs. This morning here I saw a copy of some
documents connected to Mirage aircraft with photographs and
analysis of planes with flight hours, et cetera. These were anony-
mous papers. I can’t say anything about where they came from or
who their authorship. I do not know what the origin of these docu-
ments might be. I was told that they were found in an office of that
bank, in the Miami offices. But I do not know that these are au-
thentic or what their origin might be.



243


Senator Kerry. Let me say for the record that these are docu-
ments provided to us by BCCI in response to our subpoena. And
they speak specifically about Mirage 3CB, general description of
airplanes manufactured in France, modified to the Argentine Air
Force requirements following years of combat experience.

Is there any particular reason why documents involving Mirage
aircraft from Argentina would be in the hands of BCCI?

Mr. Alconada Semp£. Yes. This is a question that I am asking
myself as well. If it was air force documentation, and the cases that
I have known about in the Defense Ministry, these are papers
which have the letterhead of the Defense Ministry or the air force
or the combined chiefs of staff. I suppose these are papers that this
bank had. I do not doubt that, but I repeat that I do not know any-
thing about their origin or how the bank came into possession of
such details.

Senator Kerry. Do you know anything about whether or not at
recent— in the last few years, there was an attempt to try to make
this kind of transaction through BCCI?

Mr. Alconada SempJs. No, I don’t know r anything about that.

Senator Kerry. On pages 31-35 of these documents regarding
ground, support equipment, it is suggested that the Argentine Air
Force will provide engine test cell, portable. On another page it
says Argentine Air Force will provide necessary contractor to sup-
port intermediate level component repair until full capability is es-
tablished in customer country. Costs will be negotiated directly
with contractor representative.

With respect to pilot training, in any and all training in Argenti-
na, customer country spares and equipment will be provided to
support the training effort. Total costs to be negotiated separately.

This seems to be indicative of a transaction which was being bro-
kered through the bank, and I wonder if you can shed any light as
former Defense Minister on how that might be, given the proce-
dures that you’ve described that existed for the sale of weapons.
Obviously, as a former Defense Minister, this seems to be a trans-
action you are unaware of. Is there any way in which this kind of
sale can be carried on secretly without your knowledge?

Mr. Alconada SempJs. No. Sales without the Defense Minister
knowing, from 1983 on, it was impossible, because it was only the
Defense Ministry that authorized such sales. What does exist, and I
think this is a general problem throughout all countries, is that
there are countries that have arms, countries that need arms, and
the famous middlemen crop up. The brokers, the sales agents, and
these are the people that try to match the buyer and the seller.

And sometime these people just crop up spontaneously, not at
the instructions of either the buyer or the seller. They just try to
look for such a deal. This is what may have happened. It may have
happened that the bank was trying to find information in order to
go out and find a buyer and get the buyer interested in dealing
with the seller.

Senator Kerry. The reference here is to Mirage aircraft that
have been modified to the Argentine Air Force requirements. That
is what it says right here. It says Mirage 3CB. General description.
Manufactured by Avion Marcel Dassault, France. Modified to Ar-
gentina Air Force requirements. Down here in the bottom is a no-


244


tation; 22 units of aircraft, plus adequate spare parts, including 6
spare engines, compare at a price of $110 million.

Is this the first time you ever saw this document? Today?

Mr. Alconada SempI. Yes. This morning.

Senator Kerry. Have you ever heard discussion of the sale of 22
units of aircraft by Argentina through the Bank of Credit Com-
merce International for $110 million?

Mr. Alconada Semp£. No, not until today.

Senator Kerry. That has never surfaced in any way in your ex-
perience in Argentina itself?

Mr. Alconada Semp£. That’s right.

Senator Kerry. Is there a way in which 22 aircraft could be sold
and shipped out of Argentina through a bank like this under the
circumstances that appear in this kind of document?

Mr. Alconada SempJs. I would dare to affirm that the economic
situation of Argentina is impossible, because the volume of $110
million is a substantial amount for the work of the Treasury and
the Finance Ministry. This amount of money could not have gone
unnoticed.

And from the military point of view, this could not have gone un-
noticed that 22 planes were missing because this is a substantial
percentage of the total number of aircraft that the Argentine Air
Force possesses.

Senator Kerry. It could be that the transaction did not, in effect,
get consummated. It may have been in some kind of shopping stage
where no customer was found. I do not know.

Mr. Alconada SempIs. That’s a possibility. That is a possibility.
As I said before, that they were looking for somebody to then make
a deal. But as far as the Argentine Government — yes? But I would
like to stress as far as the prior Argentine Government and as far
as I know about this Argentine Government, the planes were not
sold or placed for sale.

What is possible though that this bank, as a broker or middle-
man, tried to find someone interested and then see if they could
get the seller interested as well.

Senator Kerry. Rio Cuarto is what? Rio Cuarto.

Mr. Alconada SempIs. It is one of the Air Force bases of the Ar-
gentine Air Force. 1

Senator Kerry. Page 39 of this! document says Argentine Air
Force will provide an organizational and intermediate training pro-
gram, including on-the-job training,, and will provide fully qualified
instructor personnel to conduct the training. The training will be
provided in Rio Cuarto, Argentina. 1

How could that kind of offer be Imade without somebody in Ar-
gentina in the Air Force agreeing to provide training and without
providing the base?

Mr. Alconada SempIs. Of course the offer is made based on the
Defense Ministry and the Air Force authorizing the sale. It’s a
premise, a hypothesis of the author of this paper that they would
have the air base and the pilots for purposes of this training. It is
part of the purchasing of aircraft, that if you buy aircraft of cer-
tain sophistication, the training goes with the purchase.

Senator Kerry. Did any sales of aircraft take place while you
were the Defense Minister?



245


Mr. Alconada SempJL The only attempt that occurred during my
job was the sale of planes to the United States. Unfortunately, this
attempt failed.

Senator Kerry. Did BCCI handle that?

Mr. Alconada Semp£. We dealt directly with the Pentagon, the
head of the Joint Staff. The Minister of Defense came up here to
talk to Pentagon officials, and this was CID. The idea was to sell
Argentine planes, but unfortunately, this never came to fruition.

Senator Kerry. What year was that?

Mr. Alconada SempIs. 1988. The end of 1987, the beginning of
1988. But these were not Mirages. These were aircraft produced,
manufactured in Argentina.

Senator Kerry. So there was no sale that you ever knew of or
were aware of of Mirage aircraft.

Just one or two last questions, if I may, Mr. Rodriguez. Are the
accusations that are currently being made in Argentina about
what is called Yomagate, which is a whole series of questions refer-
ring to former in-laws of the President. Are those accusations at all
related to BCCI’s involvement in Argentina?

Mr. Rodriguez. The case is before the courts right now. I recall
that the judge, the lady judge, has also been indicted by the Cham-
ber of Deputies. Her actions are being also audited by the Supreme
Court. Therefore, we can’t really say much at this point. Just add
information from the newspapers exclusively where there is a wit-
ness who has appeared in court saying that he came to Argentina
at the suggestion of Mr. Pharaon, and that this witness also in-
volves former officials of the Argentine Government in this whole
episode which we have come to call Yomagate.

I repeat, these are just newspaper reports about such episodes.

Senator Kerry. Did any high Government officials ever inter-
vene on behalf of BCCI’s hotel project or other projects?

Mr. Rodriguez. In the public presentation of the hotel project, in
capitalizing the foreign debt, professional role was taken by a
person who later became the president of the Central Bank, Javier
Gonzales Fraga. He was an adviser at the time.

Senator Kerry. And his name, that was president of the Central
Bank?

Mr. Rodriguez. Javier Gonzales Fraga, president of the Central
Bank under Menem.

Senator Kerry. Did the President ever say whether or not he
had to intervene personally? Did he say that publicly?

Mr. Rodriguez. I will give you a concrete reference on this, Mr.
Chairman. In a report in a newspaper, La Nacion, July 13, 1990,
the President, answering a question, said personally he had to free
the adjudication or the bidding to build the Hyatt Hotel free from
bribes and kickbacks, et cetera.

Certainly because our request for information points exactly
there, to find out why President Menem said this and the officials
presumably involved in a matter of this kind, and when he talks
about demarches or steps, what kind of steps was he talking about
that the President had to engage in?

Senator Kerry. Has your effort to try to get into BCCI’s dealings
now been frustrated or difficult for any reason?



246


Mr. Rodriguez. Unfortunately, we have received no reply I men-
tioned to you for request for information that we in the Chamber
of Deputies have forwarded to the executive, and none of them
have received a reply to date.

Senator Kerry. Well, unfortunately we have gone well beyond
the time that I thought I was going to be able to hear, and I regret
that because I know that this winds up being a little bit shorter
and somewhat constricted. I am going to leave the record open be-
cause I think staff may want to talk to you about specifically what
we are going to put in in terms of your documentation.

I would like to thank the interpreters very, very much for the
excellent job that they have done. I know it is very difficult to do
this simultaneously and with some of the complicated concepts that
we have been dealing with here, but I very much appreciate it.

And I particularly appreciate the time that you have taken. I
think it has been helpful to us to try to understand what you do
know and what you do not know and what the state of knowledge
is with respect to Argentina and what the capacity to be able to get
at this is.

I think there are some serious questions about what BCCI was
doing there. We are not going to ask them all here, but we are get-
ting at least a sense of some of the tentacles that are out there.
And it may be that down the road we are going to want to talk to
some of your law enforcement experts about the problems of
money laundering and the bank enforcement issues which neither
of you are expert in but which are very important to us in under-
standing the international linkages of the flow of this money.

There is an awful lot of information that is going to come out in
the course of the Morgenthau investigation and also our own. We
are going to probably have to wait until some further investigative
work has been done before we proceed down that road.

Thank you very much, gentlemen.

[Whereupon, at 2:30 p.m., the committee adjourned, to reconvene
at 10:03 a.m., August 8, 1991.]



NARCOTICS AND FOREIGN POLICY
IMPLICATIONS OF THE BCCI AFFAIR


THURSDAY, AUGUST 8, 1991
U.S. Senate,

Subcommittee on Terrorism, Narcotics, and

International Operations
of the Committee on Foreign Relations,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:03 a.m., in room
SD-419, Dirksen Senate Office Building, Hon. John F. Kerry (chair-
man of the subcommittee) presiding.

Present: Senator Kerry.

Senator Kerry. The hearing will come to order.

Good morning. This morning we are going to hear the testimony
under oath of Mr. Masihur Rahman, who was the Chief Financial
Officer for BCCI from 1975 through 1990. I want to say for the
record that Mr. Rahman is here voluntarily having come to the
United States following threats to his physical safety in London.
He has not been able to talk publicly for the last year about BCCI
as a result of a court order that was entered into in London at
BCCI’s request.

On Saturday, my staff and the staff of the Federal Reserve went
to meet Mr. Rahman at Kennedy Airport in New York with a
short amount of notice that he was coming, and that he was con-
cerned about his physical safety. And in cooperation with U.S. Cus-
toms officials and Immigration officials. And I express my appre-
ciation to the State Department and to Bob Kimmet who assisted
in guaranteeing that his entry was facilitated. He is now here
before us of his own desire.

He is testifying today in accordance with a revised court order
granted in London last week at my request, which permits him to
testify. This court order specifically permits him to testify before
the U.S. Senate. And in addition, I would add, that his testimony is
secured with the full and complete cooperation of the Federal Re-
serve and the Manhattan District Attorney, Mr. Bob Morgenthau,
and of the Justice Department.

Now obviously, and I say it right up front, the scheduling of a
hearing like this during recess and on short notice is unusual. I
was personally reluctant to do it, but I think that the circum-
stances are urgent enough that it was important that we do it.
Most importantly, I think Mr. Rahman feels very strongly that he
wants to get this story out, that he has been living under a person-
al cloud, which I have come to understand quite well, as I have met

(247)


248


him and his family yesterday. He has two very attractive, intelli-
gent young children who are feeling the pressures of this transi-
tion. And his wife is here, who joins him, who is seated right in
back of him. She is American, from New York, and is also feeling
the tensions and pressures of what has happened to their life as a
consequence of this.

Therefore, we really made a decision that because of the threat
to physical safety, and because of his own personal feelings about
the need to get this behind him, that we would proceed today. I
personally talked to Senator Pell and to Senator Brown in order to
clear with them the notion of proceeding forward. And Senator
Brown, who cannot be here because he is on a trip out of the coun-
try.

Let me just review quickly for the record, the BCCI road that we
have travelled to this point, and then Senator Cranston has asked
me to read into the record a few comments of his, and he has sub-
mitted some questions.

First, we have learned a lot about BCCI to date. We know that
BCCI was a bank whose senior officers created a web of corruption
that extended literally around the world. Second, we know that be-
cause of its unique status of being located everywhere but regulat-
ed no where, in the context that most of us think of bank regula-
tion, BCCI became a natural haven for the movement of narcotics
money or the proceeds of crime, or even for nefarious deals.

Third, we know that BCCI’s chief officer, Agha Hasan Abedi, and
others systematically developed ties with leaders around the world,

with people in positions of influence, and provided these people at
various levels with favors and benefits of various kinds, ranging
from creating charities to strengthening these leaders politically or
otherwise, to helping to arrange arms deals, to creating slush funds
of the kind that General Noriega had.

Fourth, BCCI used its political ties to obtain open control of
many banks around the world, which became part of the BCCI
family, and secret control of other banks, which we have seen in
the case of a number of banks here in the United States.

Fifth, foreign and domestic intelligence agencies developed close
ties to BCCI. We know of some of those ties, though not all of
them. Knowing of BCCI’s criminal activities, the CIA and other in-
telligence agencies, made use of BCCI for a variety of purposes,
some yet to be disclosed.

Sixth, we know that law enforcement and regulators in this and
in other countries had a certain amount of information, substantial
by the late 1980’s, concerning the nature and extent of BCCI’s
criminal schemes. And yet with the exception of the prosecution of
some low-level personnel in Miami, that nothing seemed to happen
until this issue hit the front pages, and until recently.

Seventh, we know that BCCI is an institution which lost billions
of dollars, and we will hear something of how that happened this
morning. And those billions in losses were systematically concealed
by BCCI’s leadership. And our witness this morning will define
that leadership and the extent of the knowledge within the bank of
that. And that this loss or series of losses were hidden in part by
BCCI’s practice of obtaining substantial central bank deposits from
governments all over the world. The collapse of BCCI has already


249


threatened some of these governments, and it will be some time
before the full extent of government losses globally will be under-
stood.

Eighth, we know that the accountants a lawyers hired by BCCI
wound up helping the bank to conceal the true nature of its activi-
ties for some time, and that that occurred even after serious allega-
tions had arisen about criminal activity. The consequence of these
facts, largely hidden until recently, is now demonstrated daily
around the world. In India, money laundering rackets involving
BCCI and aides to assassinated Indian leader Rajiv Gandhi are now
under investigation.

In Pakistan, issues arise about BCCI’s involvement in its illegal
nuclear arms development program.

In Egypt, the Government has closed BCCI on money laundering
charges after a run on the bank.

In Argentina, as a result of hearings which this committee held
last week, allegations have been raised that BCCI was brokering
the sale of French Mirage jets to Saddam Hussein.

In Cameroon, a Government with few resources now has even
less as a result of BCCI-related losses.

There isn’t an American who doesn’t understand the impact of
the drug problem in this country. It’s a problem for all of us, but
also for people all around the world, not just Americans. And arms
trafficking has brought misery around the globe. The spread of nu-
clear weapons, needless to say, creates even greater risks of con-
frontation and of destruction.

When a bank like BCCI moves drug money and big dollar weap-
ons money, and helps terrorists acquire the material to make nu-
clear bombs, if that is what they did, while political leaders who
were supposed to be protecting them move aside, then governments
themselves wind up becoming partners in the enterprise of those
criminals. A big part of this problem is that BCCI came to believe
that it could buy anything and facilitate everything.

We have learned a lot in recent weeks, but I must say to you
what strikes me particularly is the degree to which this bank
thought it could steamroll any obstacles that lay in it’s path. Cer-
tainly laws and standards were no barrier. Why? Because BCCI
thought it could buy everything — buy lawyers, buy accountants,
buy regulators, buy access, buy loyalty, buy government, buy
safety, buy protection, and even buy silence. And what it could not
buy or did not need to, it could facilitate.

You need a Mirage jet to go to Saddam Hussein, BCCI could fa-
cilitate it. If you wanted weapons in the Mideast and possibly even
atomic weapons, who do you call? BCCI. You want drug money to
move from cartel to safe haven. BCCI. It gave new meaning to the
term “full service bank.” [Laughter.]

Today, we continue the process of trying to understand what
happened with BCCI and who was responsible. And hopefully, out
of all this will come a stronger effort by government and the pri-
vate sector to prevent this kind of behavior from scarring the polit-
ical landscape, and the business landscape.

Mr. Rahman, we are very pleased to have you here today. You
are an intelligent and thoughtful person who has spent a lifetime
really in the field of finance and who understands this bank as


250


well, I suppose, as most people, with perhaps a few exceptions of
those who were at the highest level, as I think you will describe.

Before we begin, I would like to make a part of the record the
court order which permits you to appear here today, and we will
label that for today’s hearing, exhibit 1.

[The information referred to follows:]



251



By Fax No 202 224 8525
And by Post


A Privy Caneil Ageiu



The Office of Senator John Kerry
United States Senate Committee on
Foreign Relations • *

Washington DC 20510-6225

Attx Mr J Weiner


M A S 0 N S

30 Aylesbury Street
London EClR OER

Vepbooe 071-490 4000


OX 53313 CktttmHllTHa 881110
Facsimile 071-490 254$


RAM/SJG/90451 . 67

Our iiikJkc


Direct line

31st July 1991


D ear Sirs,

Senate Foreign Relations Committee Subcommittee on
Terrorism, Narcotics and international Operations
- Testimony of Mr Masihur Rahman

Thank you for your fax of the 26th July 1991 and please accept
our apologies for the delay in replying^ thereto.

We are pleased to be able to report to you that at our request
the provisional liquidator has consented to a variation of the
Order to allow Mr Rahman to participate as a potential witness
or as a witness in the hearings to be conducted before the
Senate Committee.

It would be of great assistance to us in the future conduct of
matters on behalf of Mr Rahman if you could inform us by return
fax of the particular matters upon whiph the Committee requires
Mr Rahman's assistance by way of evidence.

We should also point out at this stage that due to matters that
have arisen in relation to the on-going conduct of litigation
on behalf of Mr Rahmah in thi^ ^ it- appears most

unlikely that Mr Rahman will be able to travel to the United
States to meet with you until, possibly, sometime around the
23rd August 1991. We will, of course, update you with regard
to Mr Rahman's timetable.


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252


- 2 -


In relation to timetables it would be of assistance to us if
you could inform us of the dates when you would like Mr Rahman
to come to the United States and the likely timetable of events
in relation to his appearance before the Committee.

If you do have any queries please do not hesitate to contact us
and we will do all we can to be of assitance to you.

We look forward to hearing from you by return.


Tours faithfully



MASONS



253

Senator Kerry. And I will read, as I promised Senator Cranston
I would, his opening comments.

This is a statement by Senator Alan Cranston.

Thank you, Mr. Chairman. The events of the last 2 weeks have certainly contrib-
uted to the sense of the enormity of the scandal associated with the Bank of Credit
and Commerce International, as well as to the feeling that we are still a long way of
discovering the full truth about this criminal enterprise.

For that reason, I am pleased to add my welcome to our witness today. I hope he
can shed the kind of light on this investigation which will not only illuminate, but
also serve as beacon for further investigation. Since our hearings last week, infor-
mation on several aspects of the BCCI scandal have come to my attention.

Mr. Chairman, as you remember, last week, I mentioned the case of the London
Financial Times journalist, Anson Engh, who was found murdered in his Guatemala
City apartment. At the time I mentioned the suspicion in journalism circles in Gua-
temala that Engh’s murder was related to arms trafficking allegedly carried out by
BCCI in collusion with top leaders of the Guatemalan military. Since then, informa-
tion concerning Engh’s death has come to my attention, that I believe is of direct
concern to this committee's deliberations.

First, according to people who talked by phone with Engh in the days before his
death, the British journalist mentioned to them he was working on a “big story”
related to BCCI in Guatemala.

Second, although officials in Guatemala have sought to characterize Engh’s assas-
sination as the work of common criminals, the murder seems to be the work of pro-
fessional hit men. In this regard, I mention the following details given to me by
close friends of Engh. Apparently a silencer was used in the killing, which was done
by a single bullet wound to the head. Guatemalan authorities said no bullet was
found either in the body or in the apartment. I am told that Engh’s head was
wrapped in a towel and his body left in the bathroom, something consistent with
efforts to keep the murder secret for a period of time.

According to those closest to Engh, a set of documents were stolen from his desk.
And reportedly, the Guatemalan authorities have impounded a set of computer
disks Engh used for his work.

Once again, I urge President Serano to take all necessary steps to insure that
Engh’s killers are brought to justice, no matter what their rank or station in life.
Some have characterized, wrongly, BCCI’s operation as a victimless crime. Anson
Engh’s death suggests how vacuous a lie that is.

Mr. Chairman, last week, I also brought to the committee’s attention BCCI’s ap-
parent attempt to serve as an intermediary for the sale of 22 Mirage aircraft belong-
ing to the Argentine air force. Yesterday my office received a very credible report
concerning attempts to sell these sophisticated aircraft. According to a highly credi-
ble source in Argentina, whose name I cannot reveal, the planes were to be sold in
August or September of 1989 by way of BCCI. The would-be purchaser was a man
whose name later became sadly familiar to every household in our land, Saddam
Hussein.

According to this Argentine source, whose honesty is not in question, BCCI in Ar-
gentina was working with a retired, high-ranking naval officer in promoting the
sale. It apparently did not take place because of rivalries between the Argentine
armed forces themselves.

Finally, Mr. Chairman, the role played by Pakistani authorities, both those of the
current government and those of the Zia dictatorship in the BCCI scandal, have
raised many questions, some of which I hope we can get answers to today. Among

the questions I hope we can address are those concerning BCCI’s role in Pakistan’s
nuclear program, its alleged participation in the destabilization overthrow of Bena-
zir Bhutto’s democratic government, the reported break off of U.S. foreign assist-
ance moneys, and other issues of generalize corruption in Pakistan.

As I said, I hope there are some answers today, because, as one can see, there are
no lack of questions. Thank you.

Senator Kerry. That completes the statement by Senator Alan
Cranston which he asked that I read this morning.

Mr. Rahman, may I ask, please, that you stand so that I can
swear you in? Would you raise the right hand? Do you swear to tell
the truth, the whole truth, and nothing but the truth, so help you
God?

Mr. Rahman. I do.



254


Senator Kerry. Thank you. Please be seated, and if you could,
pull the microphone close to you. I think that would be very help-
ful. Would you state your full name for the record, please?

TESTIMONY OF MASIHUR RAHMAN, FORMER CHIEF FINANCIAL
OFFICER, BCCI, LONDON

Mr. Rahman. My name is Masihur Rahman, M-a-s-i-h-u-r R-a-h-
m-a-n.

Senator Kerry. Mr. Rahman, where are you currently residing,
or where were you residing until recently?

Mr. Rahman. 1 was residing in London until recently.

Senator Kerry. What day did you leave London?

Mr. Rahman. I left last Saturday.

Senator Kerry. Now, you are how old?

Mr. Rahman. Fifty-seven.

Senator Kerry. You were born where?

Mr. Rahman. I was bom in Calcutta, in India.

Senator Kerry. Could you tell us a little bit about your back-
ground, please?

Mr. Rahman. Yes. My father was in the judiciary. He was Chief
Justice of the High Court, and he was the first Muslim in the sub-
continent to acquire the esteemed title of ICS, Indian Civil Service
rank, and went to judiciary.

Senator Kerry. What years would he have been in that role?

Mr. Rahman. That was going back to the early 1940’s and late
1939’s, and therefore I was born and brought up to an extent in a
judicial home and that has stayed with me, I think, all my life.

He died — we had nine brothers and sisters, and when he died
soon after that the partition of India took place, and we had to
leave for Pakistan. That was East Pakistan, from Calcutta, and
whatever pension rights he had also lapsed because of the chaotic
conditions.

So from a very early age of about 9, all our brothers and sisters
had to self-educate themselves in the house. We didn’t go to any
formal schooling, and I did matriculation along with my sister pri-
vately. After that, I got a scholarship to go to the university and I
finished my university

Senator Kerry. What university was that?

Mr. Rahman. Dacca University — that’s the capital of what was
East Pakistan in those days — and I graduated in 1956 and went to
England where I was working and studying at the same time from
1956 to 1961. I qualified as a CPA — in England it is called FCA. I
am a Fellow of the Institute of Chartered Accountants, which is
the equivalent of C.P.A. in the United States of America. I also did
simultaneously cost and management, which is an FCMA title,
which is industrial accounting.

So literally I and my brothers and sisters have had to grow up on
our own. My mother is illiterate, and we had to sustain ourselves
by working in the day and studying at night, and I became the first
person in the whole of the subcontinent to get both chartered ac-
countancy and cost and management titles, and with these I re-
turned back to Pakistan, and immediately after that

Senator Kerry. What year did you return to P akistan ?



255


Mr. Rahman. 1961, and immediately after that I was appointed
in a Government organization which was the Industrial Develop-
ment Corp., the Pakistan Industrial Development Corp. This corpo-
ration oversaw all the heavy industries of the country, including
petrochemicals, steel mill, refinery, shipbuilding.

Soon after my arrival in Pakistan

Senator Kerry. That was a political appointment?

Mr. Rahman. No, I was a technocrat, and I was appointed direct-
ly as finance chief— chief of finance.

Senator Kerry. Chief of finance of this unit?

Mr. Rahman. Of PIDC, yes. Soon after that, the PIDC itself was
split in two parts, West Pakistan Industrial Development Corp. and
East Pakistan Industrial Development Corp., so I went along with
the East Pakistan Development Corp. and became the chief of fi-
nance of that operation.

We had about 11 industries in that year, and by the time I left in
1966 we had 74, 75 industries, including — it was a very hectic
period of development in Pakistan, in East Pakistan, and we saw
very heavy industries like steel mill and refinery and petrochemi-
cal projects come out.

In that capacity I met a lot of very important organizations like
the World Bank, IMF, various credit agencies of the world, various
large corporate bodies — Japanese, Italian, British — who were actu-
ally doing the construction work, so I had a very full life.

Senator Kerry. Now, is it fair to say, Mr. Rahman, that you
really held two jobs in your life, other than working when you
were getting your education? But from the time you got your
formal education, which was unique because you were the first
person in the subcontinent to have these two degrees, you were
with this Government agency in charge of this finance on the de-
velopment side, and then second you moved to BCCI, is that cor-
rect, or to the other bank?

Mr. Rahman. To another bank.

Senator Kerry. To a second bank, but banking was the only
other job?

Mr. Rahman. Yes.

Senator Kerry. You spent a couple of years with another bank?

Mr. Rahman. Yes. During the time in PIDC, because of the very
big size of this corporation all the banks used to call on us to do
banking business with the corporation. At that time, I met both
Mr. Naqvi and Mr. Abedi.

Senator Kerry. What are the full names of Mr. Naqvi and Mr.

Abedi?

Mr. Rahman. Mr. Naqvi’s name is Mr. Swaleh Naqvi, S-w-a-l-e-h
N-a-q-v-i, and Mr. Abedi was Agha Hasan Abedi — A-g-h-a Hasan,
H-a-s-a-n, A-b-e-d-i.

Senator Kerry. These are the two gentlemen who became pri-
mary figures in BCCI?

Mr. Rahman. Yes. At that time they were in United Bank,
which was also a very new bank in Pakistan, and in 1966 they per-
suaded me to leave the public sector and go to the private sector in
the banking industry, so this was my first entry into the private
sector and into banking, and I was made executive vice president
though I was very, very young. I was hardly 30 at the time, and I



256


had not done banking before, so it was a very esteemed title to get
at that age.

There were six executive vice presidents in United Bank

Senator Kerry. Let me stop you there for 1 minute. I just
wanted to get some of your background up until the beginning of
the bank, and then I want to go back to the beginning of the bank,
but let me come to the present for the moment and the circum-
stances that bring you here.

Would you share with the committee the events recently in your
life that led you to jump onto an aircraft last Saturday and flee to
the United States?

Mr. Rahman. As you will hear later on, I was the chief finance
officer of BCCI and in that capacity I dealt with all the audit af-
fairs of the whole group and met Price Waterhouse, and Ernst
Whinney partners throughout this period.

In 1989, I was made chairman of an investigation committee by
the board at the recommendation of Price Waterhouse, during
which time I got to know many, many affairs of the bank which I
did not, and this disturbed me very much, because I was the profes-
sional in the bank and these were items which horrified me and I
wanted to resign forthwith, as soon as I finished my report.

First, they did not believe me. They tried to persuade me to stay
on. They tried to persuade my wife to stay on and persuade me, but
I refused and I left. That was on August 1 1 left.

Since then, my family and I have been hounded. All sorts of
direct and indirect threats have been used, to the extent that Scot-
land Yard got to know about it and the Guildford police got to
know about it, and the Guildford police is in Surrey, and they had
special security put around our house' and special equipment put in
the house for direct access to the police station, and my wife and
children were suffering greatly because I was continuing to attend
office prior to my handing over, and they were being terrorized by
these situations and my wife was having to put the children under
the bed every night for fear of some physical violence or some gun-
shots.

Because another senior executive, Mr. John Hillbery, who was in
BCC and left at the same time, he informed us — he lived very close
to where we did — that there had been a gunshot through his
window and he had reported to the police. He was going to join me
in trying to make a claim on BCC for compensation because we re-
ceived nothing when we were released. But he withdrew from this
case very hurriedly because of this fear out of this incident.

So my wife having heard this, she was even more terrified and
my children were disturbed. We had to pull them out of school.

Senator Kerry. When did you pull them out of school?

Mr. Rahman. That was — I cant recall exactly. It was after a few
months of my leaving BCC. Then I felt that it was impossible to
have this tension on me while I’m trying to restructure my life, so
I requested them to leave for America. & they left. I found a job in
another bank.

Senator Kerry. When did they leave for America?

Mr. Rahman. They left about 3 months ago, and I continued —
and she was very concerned, and many of my friends and col-
leagues were concerned for me, and they constantly asked me that,



257


how can you carry on with this tension and live in the heart of
London when anything could happen any day? Some even offered
to come and live in my small flat, but I preferred to be on my own.

I sincerely believe that in life all that will happen is already
written down. This is a part of my culture, and I believe anything
which will happen to me, and the date and time it will happen to
me, is already down, so I don’t worry about these things and I don’t
concern myself with these things, and so I stayed on.

In the meanwhile, you may know that I was requested by the dis-
trict attorney to come to America to give a deposition.

Senator Kerry. Before we get to Mr. Morgenthau and his re-
quest to you, can you describe for me some of the things that were
frightening your wife that you told me about last night?

Mr. Rahman. Well, the only direct physical threat was made to
me just as I was leaving by another executive of the bank, Mr.
Abbas — Mazhar Abbas, M-a-z-h-a-r A-b-b-a-s — who was in a meeting
with me, and Mr. Iqbal Chaudhry who was the new CEO after all
this crisis, and I was pleading with Mr. Iqbal Chaudhry and Mr.
Mazhar Abbas, who are both junior to me effectively in the bank,
that why are you sacking so many good executives when the people
who are named are still in the bank, who have been identified by
Price Waterhouse, and by my committee?

They are still in the bank, and if, indeed, you are sacking all of
the other good executives, why are you not paying them compensa-
tion? So this line of argument went on and finally I told them that
if you force such people who have given their life to the bank to
just go and become jobless and with no money to eat grass, then
they may turn to any situation. They may go to court and they can
fight you from the court, and Mr. Abbas said well, they can go to
hell. They can go to court if they like.

So I said, if you carry on like that, I myself may have to join
them, and the moment I said that he became furious and he said
that, let me tell you openly, in front of Mr. Chaudhry that if you
open your mouth, or if you go to court, I’ve personally killed people
in my life in Multan in Pakistan, and I’ll use the same gun on you.

Now, he was so junior to me I didn’t even take it seriously. I
thought it was a funny thing to tell me, so I told him off. I said,
you haven’t even contributed one bit to the growth of the bank.
What are you talking about?

So I just ignored him, but it stayed with me, but after I left, sev-
eral of my friends and ex-colleagues were bringing information
that people from Abu Dhabi, that people from BCC who were
named in this report, have said that my life is not worth the paper
it’s written on, and again I ignored all of this, because, as I said, I
don’t worry about these things.

But more recently my lawyers, who have charged a lot of money
for just getting nothing for me, suddenly began to change their
tune and they started to suggest to me that I should agree with the
liquidator to keep quiet.

I said, this injunction which was brought by the criminal bank,
by the criminal people have all been exposed, so how can I contin-
ue to have an injunction thrust on me after new management is
supposed to be there, liquidator is supposed to be there, Bank of
England is supposed to be there, and they had no real answer, and



258


they said well, apparently Sheikh Zayed will not give money if you
talk, and we need his money because so many millions have suf-
fered, and that is a very powerful argument, because I had helped
in building the better part of the bank, and we will discuss that
also later on, and thousands of people were employed — 14,000
people employed from 83 nationalities.

They were good people, and you will see when we go through this
deposition that not more than 20 people were involved in all that
you are hearing about, and yet thousands of people have suffered
both as employees and over 1 million people have suffered as cus-
tomers, who are very loyal, good customers. They were not illegal
customers, all of them.

So when this argument was given 1 was a bit confused as to
really, is it correct that Sheikh Zayed would not give any more
money if I talked, but at the same time the press in U.K. started
naming me, and some of them started naming me as the whistle-
blower, and even my picture came in the press, and I am not a
whistle-blower in any capacity.

I was a chief finance officer. I happened to be chairman of the
investigation committee to which the board appointed me. I hap-
pened to write an honest report. I happened to resign, and I’ve suf-
fered for that, but I am not a whistle-blower and 1 am not the de-
stroyer of thousands of peoples' lives.

But when this happened, information came to me that even cli-
ents who have lost all their savings, innocent people, any one of
them could come for me any time. So I needed a vehicle through
which I could explain all that I have to explain, and the British
Government and the British judiciary was refusing me this right,
and they would not even explain why everybody could talk what
they liked — all the press could investigate and write what they
wanted, and I am a key central figure about the reports, and I am
not able to talk on some pretension.

So I argued with my own lawyers and I said, you fight back for
the injunction. You fight back. He said, you haven’t paid for all
your fees up to now, and this will cost extra and you’ll never win.
Anyway, we fought back again, and I was horrified to hear that the
Lord Chancellor himself had instructed the judge that my injunc-
tion should continue.

Now, I don’t know why I’m so important. I’m a British subject. I
have my own rights. Why the Lord Chancellor should instruct the
court to injunct me from speaking horrified me, and my own law-
yers were suggesting that after all my life is ruined.

I have no job. I have my house, which was a part of my salary
package, was about to be taken. They told me in so many words
that it will take 3 days for the Government to take the house back
once you start talking.

Senator Kerry. Who told you that?

Mr. Rahman. Sorry?

Senator Kerry. Who told you that?

Mr. Rahman. My own lawyers, that it will take less than 3 days
for you to lose your house as soon as you

Senator Kerry. You lost your house at some point?

Mr. Rahman. Not yet, but it may be happening now.



259

Senator Kerry. But didn’t you take a choice? You sold the house
and moved into London?

Mr. Rahman. No. What had happened is that we had a bigger
house in Surrey, in the better days, I should say.

Senator Kerry. That was the house paid for by the bank?

Mr. Rahman. All, yes. What the bank had, which was a scheme
which I myself helped evolve, is that because the senior founder ex-
ecutives were always moving, traveling, working weekends, our
families were suffering and since we were deemed to be also share-
holders of the bank, which we will explain later on, I recommended
to the president and others that we should at least have a home
sort of Requested to us as sort of advance compensation toward the
share value which is building up rapidly, so that at least the family
whom you are never seeing could at least have a roof over their
head if anything happened.

That scheme was approved. And that scheme is all in writing
and we are required never to pay back the loan as long as we
worked for BCC. Effectively, because we always expected to live
and die with BCC, it was never repayable. And whatever token in-
terest was charged, which was a small amount, 5 percent, was also
given to us as an allowance to be deducted. So effectively, it was a
part of our salary package for which we were working these long
hours.

And within days of this injunction matter, they moved on me
and nobody else for foreclosure of the house. Nobody else has had
their property foreclosed. But they instantly moved on me. I am
fighting that. But my own lawyers are telling me that the day you
open your mouth, 3 days within that, the house will go.

Senator Kerry. Now Mr. Rahman, I just want to finish on the
personal aspects of this before we move back into the history.

I understood from your wife, Ellen, that there were nights when
you were not there, that cars would come into the driveway and
simply turn off the engine and sit there. Then they would turn on
the engine and drive out. Is that accurate?

Mr. Rahman. Yes. She told me several times.

And that is one of the reasons I told her to leave. I don’t know if
they were press people. I don’t know if they were somebody from
JBCC^ But I wasn’t going to take any further risk because it’s a
very, very quiet part of Surrey that we live in. It’s a very, very —
hardly any houses. It’s a wooded area. So we felt that we can’t take
any further risk and we just sent the family away.

Senator Kerry. Did you receive some phone calls or did she re-
ceive phone calls?

Mr. Rahman. She received some she told me about, I have not
received any, where people just tried to find out where I was or
didn’t say anything and just cut off.

Senator Kerry. It is my understanding that on one occasion she
received a phone call in which she was told that you had had a ter-
rible accident and would not be — is that accurate?

Mr. Rahman. Yes, she told me. When I came back she was
crying and she told me about this. I said, look, if anything happens,
somebody you know will tell you rather than an unknown person,
so please don’t get disturbed by unknown people talking like that.



260


Senator Kerry. And on another occasion was she telephoned and
told that you were going to be killed and that your life was not
worth very much?

Mr. Rahman. That, I mean, a lot of people were saying that. A
lot of people were saying this to me, obviously to me and to her,
friends who meant well. But you know it’s incredible how you can
sit over, here knowing that you’re the only one who knows about
the report and you did all this.

Senator Kerry. And finally she told me that there was one occa-
sion, the breaking point was when a telephone call came regarding
the children. Is that accurate?

Mr. Rahman. She told me, also. That’s why we were afraid that,
you know, going to school was also very dangerous. So I just pulled
them off school.

Senator Kerry. And what was that phone call, do you recall?

Mr. Rahman. I can’t remember the details, but it was in this
nature, that the children are at risk.

Senator Kerry. And that is when you decided she should leave
the country?

Mr. Rahman. Yes, I decided that she should leave. Of course, she
did not want to leave, leaving me behind. And I said, look, I cannot
start running because running is a one-way traffic. You know, you
start running and then you don’t stop running. So I was not going
to do that until just last week.

And last week, aS I started to explain, my fear limit went up be-
cause an ordinary depositor has suffered, then any one of them
could be violent. My pictures had come openly in the press. The In-
dependent, Daily Independent, had covered an article saying that
Mr. Rahman has fled for his life and there’s a killer on the loose. I
don’t know whether they just make up the stories or it sounds
good. And that’s how it was.

So I decided that it’s best not to confront everybody, just to leave.

Senator Kerry. Now Mr. Rahman, because today you are going
to, as you tell this story, refer to some documents. I am going to
put those documents into the record now so they are a matter of
public record.

Let me just quickly identify them. Document No. 1 is an interim
report by Price Waterhouse on the audit for 1989. And it is a
report dated November 17, 1989, which was the precursor to the
final audit report coming in. And that is document No. 1.

[The information referred to follows:]



261


Southwark Towers
32 London B'tUye Sueev
London SE 1 9SY


Telephone. 01 407 8989

Ttiec 664057 6
Ty!e*:oy»ei 01-378 064?


Price Waterhouse



17 November 1989


The Board of Directors
BCCI Holdings (Luxembourg) SA
39 Boulevard Royal
Luxembourg


Dear Sirs,

INTERIM REPORT ON RESULTS AND OPERATIONS

At your request we have compiled a br^ef report on the results and
operations covering the nine months to 30 September 1989. We understand
that this information la required for submission co the Insticut Monetaire
Luxembourgeols , the Bank of England and the other banking supervisory
authorities comprising the College of Supervisors.

This report is based on unaudited information which has been provided
to us by management and from our colleagues in other offices who have
recently completed interim audit work at major locations. Such work,
comprised testing of systems and controls and preliminary credit reviews
at major locations throughout the Group; further details of the audit
scope are sec ouc in Appendix I co chis report. Our review of the loan
portfolio Is continuing with a view to reaching agreement on the levels
of provisions required at an early stage, although the number of
Issues co be resolved may cause a delay in the normal reporting timetable.

The concents of this report have been discussed with Group management
and their comments incorporated as appropriate. We have also had
discussions with the Audit Committee about the matters raised in this
report*

The report has been prepared co provide an understanding of the Group's
results and operations to those concerned with its consolidated
supervision* It should not be released to other parties without our
specific permission in writing*

We wish to express our appreciation of the courtesy and co-operation
extended co us by management and staff of the Group during the course
of our work*

* Yours faithfully,

FftICE WATcriHOUSE



262


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

CONTENTS

SECTION ' PACE

1 Unaudited results to 30 September 1989 and outlook, for

the year 1-2

2 Audit and Accounting Isauas 3-4

3 Credit 5-9

4 Treasury Operations 10-13

5 Capital ' 14-15

6 Taxation 15

7 Regulatory, Compliance and Control Issues 17-19

APPENDICES

Audit scope 1

Unaudited results for the 9 months ended 30 September 1989 2

Results by major location for Che 9 months ended 30 September 1989 3

Country risk provisions at 30 September 1989 4

Funded facilities over $30 million st 30 September 1989 5

Provisions by location 5

Executive summary of selected Internet lonel Loans 7



263


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

SECTION 1: UNAUDITED RESULTS TO 30 SEPTEMBER 1989 AND OUTLOOK FOR THE YEAR


Unaudited Results to 30 September 1989


1 The unaudited results Of the Group for Che nine months ended 30 September
1989 are summarised below. Although we have reviewed the aggregation

Of the Group results and made limited enquiries of Croup management we
have not audited these results.

2 From our work and that of local auditors we appreciate chat closing
procedures at 30 September are not as stringent as at the year end, and
adjustments are likely to be required In the following areas, which could
significantly reduce reported net profit:

9 Loan loss provisions

* Increased country risk provisions

3 In addition the application of full year end procedures In two further areas
could result In further adjustments:

* Reconciliation of inter-group balances
4 Taxation

$ million


Unaudited Audited

9 months ended Year ended

30 September 1989 31 December 1988

Net Interest Income
Other operating income
Operating expenses

Profit before loan loss provision
Loan loss provision

Profit before taxation
Taxation

Proflt/(108s) after taxation
Outside shareholders ' interests

Profic/(loss) attributable to
shareholders


A The full unaudited results for the nine months and the Statement of Condition
*at 30 September 1989 are summarised in Appendix 2.


265

399

312

377

(A27 )

(58A)

150

192

(70)

(1A5)

80

A7

(37)

(7A)

23

(27)

(1A)

(22)

9

(A9 )



264


SECTION Is UNAUDITED RESULTS TO 30 SEPTEMBER 1989 AND OUTLOOK FOR THE YEAR
Salient features of che results co dace


5 Overall the bank, has performed reasonably over the past year considering
the significant repercussions that could have resulted from the US
Indictment. The Group has continued to remain relatively liquid and
also attract some new business. Management have informed us that of
the 73 countries Where BCC operates 46 have shown improved results
Since 1988 and 8 more have improved results in local currency terms.
Initiatives are being started in a number of areas such as credit cards
and "one-off” deals, which che bank hopes will further contribute to
profits.

6 The net interest income margin has dropped because fixed interest
income currently earned on long bonds and certificates of deposit is
funded by variable rate deposits, the cost of which has risen in line
with the rise in interest rates and is also affected by the Group's
difficulty in attracting low cost US dollar deposits.

t. ,

7 Other operating Income of $312 million for the period to date is 102
higher than last year principally in the UK where there have been a
number of short term property related transactions which have contributed
over $10 million.

8 Operating expenses have been held in check and totalled $427 million,
which la In line with last year.

9 The results for major locations for the nine months are summarised in
Appendix 3 •

Outlook for the year

10 Senior management are anticipating an improvement in the results in
the fourth quarter in order to report operating profits for the year
of between $220 - $240 million (1988 - $192 million) against- unaudited
operating profit to date of $150 mlllon.

11 In the past the Group has not been able to meet its forecasts, in part
due to special external factors. Management's estimate of $220 - $240
million for the year is reliant upon historically better fourth quarter
operating results end "one-off” deals each generating In the region of
$1-2 million in profits contributing approximately $10 million in the
last quarter. Such deals are, we understand, being pursued vigorously
during the remainder of the year and some have already been identified.

12 Management's estimate for loan loss provisions is $100 million, (1988 -
$145 million), including approximately $11 million for sovereign risk,
and for taxation, $75 million (1988 - $74 million), giving a forecast
profit after tax of $45 million.

13 We believe, however, that additional specific and country risk provisions
are likely.



265


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

SECTION 2: AUDIT AND ACCOUNTING ISSUES


Inter-branch/af filiate balances

1A At 30 September 1989 a net debit balance of $39 million (1988 under $20
million) has been Included in the balance sheet undei the heading 'Due
from banks'. The balance arises from the cancelling out of inter-branch
and inter-affiliate balances resulting in an unreconciled difference,
including in-transit transactions. Whilst we appreciate the volume of
lnter^branch/ inter-affiliate transactions we strongly recommend the
bank carries out a full inter-branch and inter-affiliate balance confirmation
and reconciliation procedure as at 30 November 1989 in order to Investigate
and fully reconcile the outstanding entries before the year end.

Accounting for interest, fee and commission income

13 At periodic intervals the Group debits significant amounts of penalty
interest, management commitment and advisory fees and other charges to
customers' loan accounts*

16 These charges are not always in accordance with the terms of the loan
agreement with the customers. In the past we have noted that certain
customers have rejected the charges and we are concerned that, particularly
In respect of the International Loans, the charges are often. rolled up
into the loan balance. We recommend that the Group should only recognise
such income when the charges are agreed in writing and are substantially
recovered by the end of the relevant accounting period in which the
charges are made.

17 Whilst the bank as a policy suspends Interest on all Identified Risk
Facilities which it believes requires specific provision, we have
expressed concern, in the past, over the Group's policy for the suspension
of interest on other "non-performing loans". We continue to note that
certain of the Group's operating units take an optimistic view of the
recoverability of Interest for accounts that are falling to meet interest
or principal repayment schedules, and clearer guidance is required in
this area.

Accounting for Commission and other Income

18 Whilst its volume of trade related business has continued to Increase,

UR region, in developing new business ereas, has also entered into
certain short-term property related agreements with customers whereby

. BCCI assists In the funding end arrangement of property purchases and
provides administrative assistance In any refurbishment /redevelopment
end subsequent sale of the property. In return BCCI receives either a
fixed minimum commission or part of the profit on the sale.



266


SECTION 2: AUDIT AND ACCOUNTING ISSUES

19 The accounting policy adopted on these arrangements places considerable
emphasis on management's judgement rather than a formal, measurable
basis. In particular we note that at 30 September 1989 UK Region had
credited commission of some $3*4 million to profit and loss in respect,
of underlying transactions that had not been completed until after that

date.

20 Management has confirmed that for the 1989 accounts, the bank will adopt
an acceptably prudent accounting policy for "one-off" deals such chat
front-end fees and profits ere recognised either on completion or over
the life of the transaction, as appropriate*

Valuation of trading securities

21 The Group's policy is to value securities held for trading purposes at
market value, while investments in securities which are intended to be
held until maturity are carried at cost. There are one or two instances
where this policy Is not being strictly applied*

EEC Seventh Directive

22 The EEC Seventh Directive is being implemented in 1989. This has
potentially significant implications for the financial statements for
Holdings and SA both being Luxembourg registered companies. Whilst
the majority of the Seventh Directive Is concerned with Group accounts
and consolidation procedures to which the Group already adheres, the
Directive prohibits asset revaluations. It Is expected that the
Directive will be applicable to banks in 1991.


• 4 -



267


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS ^AND OPERATIONS

SECTION 3: CREDIT


Scope of Work

23 Our work CO dace has comprised a review at major locations only and has
focused on the identification and recoverability of doubtful loans.

The review of loans booked in more than one location (which we call
International Loans) has been coordinated centrally.

24 Thia work has been completed in a number of territories but there are
still major Issues to be resolved in some territories and in respect of
certain International Loans.

Major loans

25 Ac 30 September 1989 the concentration of lending to customer groups
whose exposure exceeds 10Z of the capital fund of the group totalled
$1.9 billion | an increase of $296 million since 31 December 1988, as
set out below and in more detail in Appendix 7:

Total funded Exposure ($ million )


30

September 1989

31 December 1988

CCAH related loans (paragraph 28)

854

689

Cua Comer A

404

349

Customer E

260

194

Customer C (excluding CCAH related)

197

188

Customer F

187

186


1,902

1,606

In our previous report we expressed concern about i

the high concentration


of lending to a small number of individual counterparties. This has
continued in the nine months to 30 September principally through the


application of Interest and charges. Management has initiated negotiations
with these customers to agree reduction programmes and significant
repayments are anticipated before 31 December 1989 and in early 1990.

27 For customers C and E management have Informed us that their priority
is to reduce the clean exposures (which both currently exceed $100
million) and to ensure that interest and charges are serviced. For
customer A management are considering a reduction programme, details
of which are provided in Appendix 7.



268


SECTION 3: CREDIT

CCAH

$ 'million


28 The CCAH related lending may be analysed as follows:

782
52
20


854


29 The Group has provided advances to a group of customers (Including
customers B,C,G,L,N and O) which are secured on approximately 39% of
the shares of CCAH, the holding company of First American Bankshares
Inc, 'a major regional banking group in the Eastern United States with
banking licences to operate in six separate states* The principal
shareholders of CCAH are also shareholders of BCCI*

30 The loans to these customers have Increased by $113 million since
31 December 1988 as a result of interest and charges being applied.

Some $41 million has been repaid during 1989 but this has been offset
by new drawdowns of $42 million*

31 On 18 July 1989 CCAH had a rights issue and the Group advanced $52 million
to a share subscription account* The allocation of this loan between
CCAH shareholders has yet to be established*

32 We understand that BCC management are presently advising the shareholders

in connection with the sale of the shares, of CCAH and that further

developments in this regard may be expected before the end of the year*

33 At 30 September 1989 the bank held approximately 106,400 CCAH shares

as security (before allocation of the rights issue). These shares
had a net asset value per share of ‘$2,868 based upon the unaudited
management accounts at 30 Juna 1989. This implies that the multiple of
net asset values required to cover the existing loans (excluding the
rights issue loans) is 2*57 times. Ue understand that the median multiple

of net assets applicable to bank share transactions in the United

States since 1981 is in the region of 2.1 times* This implies that

a shortfall on the sale of the shares could be of the order of

$140 million which may not be fully recoverable from the shareholders.

34 Management are expecting repayments before 31 December 1989 which
should reduce this shortfall*


Loans to major customers
CCAH Share Subscription Account
CCAH Debenture



269


SECTION 3 : CREDIT


Limit Excesses


35 Ac 30 September 1989 the following loans hart funded balances which were over
$25 million in excess of approved limits.


Borrowers Name

3

million



Funded Balance at

Funded



30 September 1989

Limit

Exccbi

Customer A

404

255

149

Customer E

260

180

80

Customer C

315

265

50

Customer B

178

140

38

Customer L

115

85

30


36 We understand that the Board is currently reviewing these limits and these

loans should be brought within their revised limits before 31 December 1989.


PROVISIONS
Specific Provisions

37 The major locations which have reported as at 30 September 1989 have
provided estimates of the 1989 loan loss provision charge. These estimates
are set out in Appendix 6 and indicate a provision requirement for those
territories that have reported of $67.5 million compared with a forecast
prepared by management of $48 million. This does not include the provision
requirements for five locations who havfe been unable to finalise the provision
at this stage for which management's estimates are 313.2 million.

38 We are also concerned about the recoverability of certain International
Loans, particularly those which have not yet met interest or principal
repayment schedules and certain risk facilities booked in Grand Cayman for
which provisions have yet to be agreed. A full list of these loans has
been provided to management and we have requested additional information in
respect of these accounts. We expect to see evidence of performance and
compliance with repayment programmes, if we are co accept their inclusion
in the 1989 accounts without provision.

39 The auditors of National Bank of Oman have identified a significant number
of accounts which are not meeting interest or principal repayments and for
which provision may well be required.



SECTION 3: CREDIT


Country Risk

A summary of che Group's cross border exposure to lesser developed countries
against which provision is required is umraarlsed below and set out in more
detail in Appendix A:

Exposure at risk ($ million)



30 September 1989

31 December 1988

Nigeria

247

261

Phillipines

30

30

Zambia

26

29

Sudan

20

25

Others

26

26







349

371

Provision

100

100


in 1988 after discussions with che regulators provision for country risk
exposures was made using che Bank of England matrix as a guideline and
taking into account special circumstances relating to BCCI's exposure. The
matrix is unchanged from 31 December 1988 although a revised matrix requiring
higher provision is expected to be published by the Bank of England before
the end of the year. The exact Impact on individual countries is not yet
known although the Bank has Indicated to BCCI at the College meeting that
on major exposures, for examole Nigeria/ It expects the bank to provide at
a higher level.

We have undertaken preliminary calculations of the provisions at
31 December 1989 which shows an additional provision requirement of at
least $20 million in 1989 against which management expect to provide
$11 million. A summary of the Group's exposures together with existing
and proposed additional provisions Is Included In Appendix 4.

General Provision

At the laat meeting of the College of Banking Supervisors, management
reaffirmed their commitment to build-up the general provision over a
period of time to at least IZ of gross advances, as adjusted for
facilities covered by cash collateral or specific provisions.

At 31 December 1988 the general provision amounted to 0.6Z. To Increase
this to 1Z at 30 September 1989 would require a charge against profits
in excess of $35 million. Management on the other hand has indicated that
they will only increase this provision by some $10-12 million (ie to
0.75Z) with additional provisions in 1990/91 to reach the 1Z.



271


SECTION 3: CREDIT


Control Issues

AS Whilst there has been some improvement in credit procedures we still

note the need for more stringent controls over the Group's loan appraisal
and authorisation procedures. We have noted examples of some new
loans totalling $52 million where appropriate documentation supporting
the lending is not available or where Central Credit Committee or Board
approval procedures have not been complied with*

46 We are currently assisting management in a review of the credit management
function carried out by the Central Credit Division*

Conclusion

A7 Management have made considerable efforts to provide us with background
information on the International Loans during 1989 which we are still
evaluating. We remain concerned about the adequacy of provisions held
against accounts which are not meeting principal and interest repayment
schedules .


- 9 -



272


BCC1 HOLDINGS (LUXEMBOURG) SA
INTERIM REPORT ON RESULTS AND OPERATIONS
SECTION 4: TREASURY OPERATIONS

Results

48 The activity levels in Central Treasury have generally shown small
increases over 1988 although volumes still remain relatively low when
measured on a number of deals per day basis and many of the limits are
unutilised. The main features of the current year's trading have been:

* a greater emphasis on the Japanese, securities markets,
particularly the Japanese equity markets. Trading in
these markets is undertaken by a newly formed team within
Central Treasury who work closely with Nomura and other large
securities houses in order to formulate investment strategies;

* a small increase in activity in US stocks and the associated
derivative products;

* Increased activity in the foreign exchange markets (including
futures and options); ,

* lower activity in the US Treasury markets.

49 Whilst the trading results show a considerable improvement over last
year, the investment and liquidity management results reflect the costs
to the Group of maintaining a relatively high level of liquidity.

50 Based upon our estimates of average Investments /borrowings and interest
yields/coscs Che results of Central Treasury may be estimated as follows:


$ million


9 months to

Year to

30 September 1989

31 December 1988


Trading activity



Activities undertaken by Central
Treasury

4.2

(7.5)

externally managed funds

2.1

0.7)


673

(1771)

Liquidity management and investment



Net profit/ (loss) on liquidity
management and Investment activities

(14.9)

6.9

Lose before local overheads

(876)

(43)

Local overheads

(3.6)

(5.9)

Management charge by BCC SA

(0.5)

(0.5)

Loss before intra group subsidy *

(12.7)

(10.7)


* The above figures exclude the effects of paying a IX margin over
LIBOR on funds deposited by Group Companies, the effect of which is
estimated to be an additional cost of $26 million (year to 31 December
1988 - $40 million). We understand that this margin has been reduced
to iZ over LIBOR from 1 October 1989.

-i n-



273


SECTION A: TREASURY OPERATIONS

Accounting records


51 It should be noted that the foregoing figures are only estimates based on

average balance assumptions since the actual results of Central Treasury are
contained within the accounting records of Grand Cayman branch. Given
the organisational structure of Central Treasury including its reporting
lines to the Treasury Committee and its integral role in the management
of the Group’s liquidity, we continue to believe that it is vital that
the results of Central Treasury activities be reported separately. We
are advised that arrangements have since been established for Central
Treasury to become a separate self-accounting unit by the year end.

Utiliaation of funds


52


The source and utilisation of funds by Central Treasury as at 30
September 1989 may be summarised as follows:

$ mi 1 1 ion


Sources


30 September 1989 31 December 1988


Banka

2A2

330

Branches and affiliates

3,768

2,887

Non-banking financial Institutions

A50

650

Repo funds

1.097

719

Currency Swaps

330

227


5,887

A, 813


■ "


Utilisation

*


Due fro* banka

1,063

1 ,028

Certificates of deposit

683

353

Total funds with banks

1.7A6

1,381

Due from branches, affiliates and NBFIs

511

510

Trading portfolio

178

1A3

Investment portfolio

669

691

Externally advised and managed funds

131

125

Currency Swaps

330

2A9

Funds provided to Grand Cayman for

3,565

3,099

banking and treasury activities

2,129

1,515

GNMA/FNMA funding

193

199


$,887


A ,813



274


SECTION 4: TREASURY OPERATIONS

53 It should be noted thac the results shown earlier were based only on funds
managed directly by Central Treasury and hence excluded the funds provided
to Grand Cayman and che GNMA/FNMA funding. The resulCS are therefore
baaed on total funds of $3,565 million (1988 - $3,099 million).

54 The investment portfolio comprises US treasury bonds and other securities
which the Group inteads to hold to maturity. Such investments are
carried at coat and any premiums or discounts are amortised over Che
period remaining to maturity. The market value of the portfolio at 30
September 1989 was $62 million (31 December 1988 - $93 million) below
cost. The Group continues to be exposed to significant interest rate
risk arising from chose investments in long dated instruments which

were acquired In 1985/86 and continue to be funded by short term deposits,
although there has been a reduction in the exposure.

55 The above analysis also demonstrates that the trading portfolio represents
only 5Z of the $3,565 million of funds managed by Central Treasury and
hence 'this activity can be viewed as being totally separate from the
investment and liquidity management activity which utilises the majority
of excess funds placed with Central Treasury.

Risk management issues

56 In our reports to the Audit Committee in November 1988 and March 1989
we recommended that the Group should develop a formal interest race
risk policy together with the relevant limits and interest rate gap
position, as a matter of priority.

57 We understand that Central Treasury has recently purchased an asset and
liability management software system "Sendaro" which, once operational,
will be used as a limit system for managing interest rate risk. However
until such time as the system is implemented the Croup remains exposed
to Interest rate risk.

Reorganisation of the Group Treasury function

58 Throughout 1989, the Group has been developing a strategy for the
reorganisation of the Group Treasury function and in connection with
this two papers have been submitted to the Bank of England giving
details of the proposed new structure. The initial paper dated June
1989 set out a structure based on three 'flagship' dealing rooms to be
located in London, New York and Tokyo. The first step in this strategy
la to enhance the capability of the existing London dealing room.

59 The second paper dated September 1989 added a fourth flagship dealing
room to be located in Abu Dhabi and gave further high level comments on
aspects of the enhancement of the existing London dealing room.

60 Whilst these papers evidence a certain amount of progress towards the
restructuring of the Group Treasury function, progress continues to be
alow with certain elements of the strategy still awaiting approval from

'regulatory authorities. No implementation date can be reliably predicted
at praaent for other parts of the new strategy beyond the UK upgrading
already in hand.


- 12 -



275


SECTION 4: TREASURY OPERATIONS

61 1c should b« noted that in connection with the above approximately
$250 aillion of surplus funds generated by the UK region and previously
Managed by the existing Central Treasury are now managed by the UK
region themselves via their London dealing room. The majority of these
funds are placed on overnight deposit.

62 The bank held a meeting with the Bonk of England in October 1909 at
which it discussed its programme for setting up a UK Treasury operation
and in particular whether the Bank of England would permit BCCI to
"pool" its group funds or merely restrict operations to UK originated
funds.

Other Treasury Operations
BCC (Emirates)

63 Losses of approximately $1.2 million have been incurred in trading
options and futures contracts* We understand that management intend
to prohibit any nsw overnight positions from being taken.

UK Region

64 UK region have one interest rate swap with Hammersmith Borough Council.
On 1 November 1989 the UK courts declared illegal all swaps entered
into by Hammersmith. It appears likely at present that this decision
will be challenged in a higher court. The replacement of this swap
would currently code approximately $0.6 million. In addition $0.2
million of accrued interest has also been credited to the profit and
loss account*


- 13 -


/



276


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS


SECTION 5: CAPITAL


The capital fund shown by the unaudited

accounts at

30 September 1989

amounted to $1,513 million, an increase

of $96 million since

31 December

1988 made up as follows:



Smillion


30 Sept

31 Dec



1989

1988

Change

Share Capital

745

726

19

Reserves

197

160

37


942

886

56

Subordinated capital notes

437

412

25

Outside shareholders interests

134

119

13


1,513

1,417

96


66 There. was an Increase in capital of $100 million in April 1989 which
largely accounts for the change since 31 December 1988.

67 Included within the caption of subordinated capital notes are Convertible
Capital Notes of $330 million which mature on 30 June 1991 unless
converted into Ordinary shares before then at $40 per share. In the
current circumstances we believe there must be some doubt that the
conversion will take place.

Transactions with shareholders

68 Based upon information provided by major locations, loans to and
deposits from shareholders at 30 September 1989 and 31 December 1988
are sec out below:


S million

30 September 1989 31 December 1988

Loans 1,146 1,137

Deposits 836 1,212


69 As noted in our previous report ICIC has provided loans to shareholders,
including ICIC Foundation and ICIC Staff Benefit Fund, secured on BCCI
shares.



SECTION 5: CAPITAL


Capital Adequacy

Information on the capital assets ratio at 30 September cogether with
the risk, adjusted capital ratio at that date is set out below:


$ million



30

7

September 1989

31 December 1988

Total Assets


21,503

20,637

Capital Fund

*

1,513

1 ,417

Approximate risk adjusted


14,800

14,400

Approximate adjusted capital


1 ,270

1,312


30

September 1989

31 December 1988*


Capical/Total assets 7.0Z 7.4Z

Capital/Risk adjusted assets ** 3.3Z 9.1Z

* adjusted for increase In capital of $100 million in April 1989.

** The capltal/rlsk adjusted assets ratios would be 10. 1Z and 10.2Z
respectively on the basis that the capital notes maturing in 1991
are converted into equity capital*



278


BCCI HOLDINGS (LUXEMBOURG) SA
INTERIM REPORT ON RESULTS AND OPERATIONS
SECTION 6: TAXATION

/

Income itatenant charge

71 The tax charge for the period is high because:

° No tax relief is available on losses of $12 million and $39 million
arising in BCCI Holdings and the Grand Cayman branch of BCCI (Overseas)
respectively.

* The group continues to earn significant profits in high tax areas such
as Pakistan, India, Bangladesh and Zambia.

Enquiry by UK Inland Revenue

72 Tha Inland Revenue Special Investigation Section enquiry has continued
to progress slowly although we understand that on the bank’s part

all requested Information has been provided. It now seems unlikely
that the outstanding queries will have been resolved before the accounts
for the year are required to be finalised although management have
expressed their intention to try to reach agreement as soon as possible
and accordingly has sought a direct meeting with the Inland Revenue.



279


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

SECTION 7: REGULATORY, COMPLIANCE AND CONTROL ISSUES

US Litigation

73 The bank’s defence lawyers have informed us chat the Florida trial is
expected to begin on 15 January 1990 and last for three to six months.

The lawyers will attempt to come to a pre-trial settlement with the
prosecution, but the lawyers do not expect the prosecution to be amenable.

As such there is now a real prospect of a trial.

Compliance Issues

74 As a result of inspections carried out by Federal and State Regulators
in the USA at the end of 1988 the bank signed in June 1989 Memoranda of
Understanding ("MOU") with the Federal Reserve Bank under which it
agreed to:

• Desist from violating the Bank Secrecy Act ("BSA" ) and related
regulations

4 Develop policies and procedures to cover:

. BSA compliance

. Detection of suspicious activity related to the flow of funds and
acceptance of deposits

• Establishment and evaluation of loan loss reserves
. Strengthening internal controls

* Prepare and submit progress reports detailing the action taken in respect
of the foregoing*

75 The bank has made great efforts to comply with the MOU particularly in
developing the policies and procedures manuals, with assistance from Price
Waterhouse US, which have been submitted before the due dates.

76 In response to the MOU the US Agencies have undertaken to accept funds
from overseas locations of BCCI only when there is a clear indication
of the source of those funds and a form is completed by the transferor
with details* We understand that there has been a noticeable drop in
the funds transferred from other BCCI locations to the US agencies
because of this onerous requirement to obtain the necessary details
from their customers. Most of their US dollar transactions formerly
with the US agencies are being routed to third party banks. Management
are investigating this matter to satisfy themselves that there is
nothing untoward in such transactions*


280


SECTION 7: REGULATORY , COMPLIANCE AND CONTROL ISSUES


77 L illst the Federal Regulators have yet to formally ^endorse the manuals
the bank, has started Implementing the revised procedures to demonstrate
compliance with best banking practice in the US. It is anticipated
that the manuals will be adapted and implemented in other countries in
due course •

78 Federal Regulators commenced Inspections at each of the US Agencies on

23 October 1989, the results of these Inspections are yet to he determined.

Due Diligence Reviews

79 The programme of due diligence reviews which started earlier in the year
has continued at the locations which are the subject of the indictment
and is being extended to Cayman, Hong Kong, Gibraltar and the Isle of
Man. Reviews are also to be conducted in Canada and Spain. As a
result of the reviews a number of suspicious accounts have been reported
to the authorities and other accounts have been closed.

Internal Controls Group

80 We are pleased to acknowledge the formation of a special group responsible
for the implementation of internal control recommendations, within the
Central Audit Division, the 'Internal Controls Group', and we look
forward to working closely with this group in achieving the required
internal control Improvements throughout the bank.

81 The Internal Controls Group are concentrating their Initial efforts on
the three major units - Hong Kong, Kenya and Cayman - highlighted in 1988
as having major issues yet to be resolved. Our local auditor? in Kenya
have been pleased to note very significant improvements in controls and
those in Hong Kong also noted some improvements.

Internal Controls review

82 Despite the many improvements at operating unit level we would emphasise
that several of the major matters arising from our review of internal
controls during 1988 had Group wide applicability and will require
central management direction and commitment to change if the required
level of Improvement is to be realised. This is especially so in
relation to management structure, credit, treasury and systems. We
recognise that there now appears to be significant management commitment
to Improvement of controls and appreciate it will take time to Implement
fully.



281


SECTION 7 1 REGULATORY, COMPLIANCE AND CONTROL ISSUES


Computer systems

83 Computer audit specialists from our central audit team have continued
to review centrally, updates to the Falcon, Mini Falcon and Autodeal
systems which are utilised by ODerating units. Our reviews confirmed
that these systems continue to provide reasonable controls over the
authorisation, accuracy and completeness of data. We are pleased CO
report that recommendations to address control weaknesses identified in
the course of our reviews have generally been addressed by the bank.

There remain, however, two major outstanding areas:

• disaster recovery and back-up procedures. The bank Is seriously
exposed as a result of the absence of alternative computer facilities,
and a detailed plan which could be implemented in the event of a
major loss of facilities.

* data transmissions between locations are not encrypted which could
result in confidential data being read by unauthorised Individuals.
Management have Informed us chat they are considering the installation
of modems with encryption facilities.



282


APPENDIX 1


BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

AUDIT SCOPE )


As with last year , the 1989 audit of BCCI Holdings (Luxembourg) SA has
been conducted under the supervision of partners and staff from Price
Waterhouse London.

Ue have continued with our practice adopted last year of grouping
reporting units into three categories for the purpose of specifying the
level of audit work for Group reporting purposes at each operating unit.

' Number of locations


Type 1’:

Full scope audit with defined materiality



limits

25

Type 2 :

Limited audit

27

Type 3 :

Statutory/Regulatory audit

20


72


Instructions to Ideal auditors

Detailed audit instructions were issued to local auditors for the audits of
locations specified as Type 1 or Type 2 audit scopes.

* Type 1: Full scope audit with defined materiality limits

Local auditors were required to carry out an interim audit visit and report
to Price Vaterhouse London by end October 1989 on their operating units:

(1) Credit facilities a a at 30 September 1989

(2) System of accounting and internal control with specific emphasis this year
on the status of imp lament at ion of previous years external auditors’
recommendations for Improvement.

The local auditors are required to report to us by end January 1990 on their
operating unit's results for the year ending 31 December 1989. The
materiality limits we have advised to them when considering possible
adjustments to the group results are as follows:

Adjustments affecting asset and liability

reclassifications $5,000,000

Adjustments affecting Income and expenditure
■ reclassifications


Adjustments in aggregate affecting profit after taxation


$500,000

$250,000



283


APPENDIX 1
(Pag* 2)

BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

AUDIT SCOPE

0 Type 2: Limited audit

Local auditors are required to carry out specified procedures to enable
them to report to us by end January 1990. The specified procedures choy are
required to carry out in respect of their operating units are as follows:

(1) An analytical review of the financial position at 31 December 1989 and the
results for the year.

(2) A review of the accounting policies adopted in the preparation of the
accounting statements to identify and quantify any deviations from group
policies.

(3) A review of the recoverability of credit facilities.

(4) A review of specific elements of the system of accounting and internal
control with specific emphasis on the status of implementation of previous
years external auditors' recommendations for improvement.

In reporting to us, the local auditors of Type 2 locations need only consider
potential adjustments within the materiality limits specified for Type 1
locations •

* Type 3: Statucory/Regulatory audit

No group audit requirement has been specified for auditors of Type
3 locations although local auditors have been requested to advise us of any
significant matters which they feel should be brought to our attention.

Central audit team

In addition to the audit work at operating unit level we have also specified
that certain audit work and co-ordination responsibilities be carried out
by the central audit team based in Price Waterhouse London.

The responsibilities of the central audit team comprise, inter alia:

. a review of mejor International Loan facilities operated on a Group
wide basis;

. an audit of the central treasury operations in Abu Dhabi which form
part of the results of BCCI (Overseas) - Grand Cayman;

. an audit of the consolidated financial statements of BCCI (Holdings)
Including the aggregation of the individual branches of BCCI SA and
BCCI (Overseas);

. a review of che computer systems developed centrally but operated
locally.



284


APPENDIX 1
(Page 3)


8CCI HOLDINGS (LUXEMBOURG) SA
INTERIM REPORT ON RESULTS AND OPERATIONS
AUDIT SCOPE
Overseas visits


In order to obtain first hand a current understanding of the operations and
local economic environment staff from the central audit team and other
Price Waterhouse offices have visited or are due to visit certain countries
and operating units as follows:

Grand Cayman

Cameroon

Djibouti

Egypt

Hong Kong

Kenya f

Nigeria

Pakistan

Sudan

Thailand -

USA



285


APPENDIX 2

BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS

UNAUDITED RESULTS FOR THE 9 MONTHS ENDED 3U SEPTEMBER 1989


Consolidated Statement of Earnings


$ million


30

Unaudited
9 months ended
September 1989

Audited
Year ended
31 December 1988

Interest income

1 ,558

1,892

Interest expense

(1,293)

(1,493)

Net interest income

285

399

Other operating income

312

377

Total Income

577

776

Operating expenses

(427)

(584)

Net operating profit

130

192

Loan loss provision

(70)

(145)

Profit before taxation

80

47

Taxation

(57)

(74)

Profic/(lo8s) after taxation 23

(27)

Minority Interests

(14)

(22)

Profit/doss) attributable

to


shareholders

9

(49)



Movements on reserves

Balance brought forward

110

207

Profit/doss) for period

9

(49)

Prealiim on issue of shares

56


Exchange translation and
other reserve movements

(27)

(36)

Appropriations

-

(12)






Balance carried forward

148

no



286


APPENDIX 2
(Page 2)

BCCI HOLDINGS (LUXEMBOURG) SA

INTERIM REPORT ON RESULTS AND OPERATIONS


Unaudited Consolidated Statement of Condition ac 30 September 1989


$ million



Unaudited

Audi Led


30 September 1989

31 December 1988

ASSETS



Cash and due from banks

6,467

5,960

Certificates of Deposit

1,756

1,595

Investment in securities

2,197

2,241

Loans and advances (net)

10,142

9,838

Accrued Interest

372

383

Investment in affiliates

63

65

Property and equipment

248

255

Other assets

258

- 300

TOTAL ASSETS

21,503

20,637

LIABILITIES



Demand deposits

3,042

3,137

Savings and time deposits

13,298

12.524

Due to banks

2,891

2,827

Floating rate notes

22

43

Accrued Interest

311

284


19,564

18,815

Provision for taxes

70

66

Other liabilities

356

339

TOTAL LIABILITIES

19,990

19,220

CAPITAL FUND



Issued and paid up shares

745

726

Legal reserves

49

50

Retained earnings and



other reserves

148

110

Shareholders ' equity

942

886

Subordinated capital notes

437

412

Minority interests

134

119

-

1,513

1,417

CAPITAL FUND AND TOTAL LIABILITIES 21,503

20,637




287


APPENDIX 3


BCCI HOLDINGS (LUXEMBOURG) SA


INTERIM REPORT ON RESULTS AND OPERATIONS


UNAUDITED RESULTS FOR

THE 9 MONTHS ENDED 30

SEPTEMBER 1989


$'000



Estimated

Profit/


Profit/


Operating

Loan Loss

(Loss )


(Loss)

Location

Profit

Provision

Before Tax

Tax

After Tax

BCCI (Overseas)






Grand Cayman

(27,885)

11,000

(38,883)

-

(38,805)

Pakistan

17,067

1,500

15,567

10,275

5,292

Bangladesh

5,793

400

5,393

3,263

2,130

India

6,633

1,500

5,133

3,336

1,797

Turkey

2,448

1,000

1,448

706

742

Panama

3,286

1,000

2,286

-

2 , 286

Jamaica

3,059

-

3,059

1,805

1,254

Sudan

3,128

300

2,828

1,832

996

Florida

3,229

1,000

2,229

300

1 ,929

Others

23,427

3,800

19,627

7,634

11,993

Total Overseas

40,185

21,500

18,685

29,151

(10,466)

BCCI SA






UAE

12,676

6,000

6,676

1,335

5,341

UK

5,701

10,000

(4,299)

-

(4,299)

Jordan

4,683

600

4,083

2,000

2,083

Luxembourg

3,363

2,700.

663

274

389

Los Angeles

(1.021)

100

(1,121)

30

(1,151)

Others

9,752

2,600

7,252

3,161

4,091

Total SA

35,154

22,000

13,254

6,800

6,454

SUBSIDIARIES &






AFFILIATES






UAE

11,263

4,000

7,263


7,263 .

Hong Kong

13,007

5,000

8,007

1,320

6,687

Cameroon

8,598

1,700

6,898

2,621

4,277

Egypt

7,778

2,600

5,178

1,031

4,147

Zambia

6,285

250

6,035

3,106

2,927_

Oman

6,809

4,000

2,809

655

2,154

Canada.

3,190

300

2,890

1,367

1,523

Nigeria

8,069

1,200

6,869

3,160

3,709

Others

9,512

7,450

1,962

7,787

(5,825)

Total Subsidiaries





_ -

and Affiliates

74,511

26,500

47,911

21,049

26,862

CROUP TOTAL

149,850

70,000

79,850

57,000

22,830


288


APPENDIX 4


» u >
o o •*<

Out) U 1


IA o >A IA O

IA (A is. h. on


<n m o in o

c> r-'. *o vn


m ■» <a


<n cn o


vr» %/■ <-i < i

— O O rn !

N J
W I


U -H V
V K > v
<M O «


Z U Ufl lu

m . a • e « bo
od :* 4 <4 01

S O 3 80 S \

O’ m (Jog u

2 43S2: 2-

<3 t- w

< u m o


H <r< 3 w> <A I

H «m • b I •
Z MO «

Q C X < CL

: -s* &

§ " o




Estimate only: balance not expected to have changed significantly since II December 19B8.



289


APPENDIX 4
(Page 2)

BCCI HOLDINGS (LUXEMBOURG) SA

COUNTRY RISK PROVISIONS AT 30 SEPTEMBER 1989

NOTES

1 Nigeria

Interest has .bean received since December 1987 when Che refinancing
agreement was signed. A new schedule for repayment of capital on Che
main CBN exposure was signed in March 1969. Capital repayments have
followed that schedule with repayments ot $7.8m being received by 30
September 1989. If repayments continue then at current exchange rates
the year end balances will be $210. 2m. A further reduction in the
dollar equivalent exposure has resulted from exchange race movements in
the period.

The affactlvs rate of provision has increased from 27% to 29.51. This
sum la satisfactory in relation to the current matrix, however, more
prudent' provision at say 352 for all Nigerian exposure at risk would
require an additional provision in 1989 of $llm (at 402, an additional
provision of $22 million would be required).

Comaierdal exposure has had no significant change. If anything a slight
reduction due to some Improvement in security. Interest continues to
be paid on promissory notes held as security. The net exposure is
already provided at 352.

2 Philippines

Repayment of capital is not due for several years. Up to date information
on the status of the loan to the Central Bank has not been received,
however, no deterioration is anticipated. Level of provision remains
satisfactory whilst being at the lower end of range indicated by the
matrix. Talks on a mors radical plan, like for Mexico, suggests
provision may need to be raised to 352 by the end of the year.

3 Zambia

Repayments of $750,000 per month have continued. At 30 September 1989
ten instalments had been received since October 1988 with a further
instalment received on 9 November 1989. Interest rates of 92-112
have continued to be charged to the account.

The current effective rate of provision, 252 is very low by matrix
^standards, however, at 31 December 1988 while repayments were being
effected it was accepted that BCCI 'a special relationship merited some
recognition but with one repayment now late and the liklihood of Increased
matrix scores, higher provisions of 302 may be more realistic resulting
in additional provision of $2.4 million. (Provision at the race of say 402
would require an additional amount of $4.8 million).

The exposure to the Zambia Oil Project has remained unchanged. Provision
at 752 Is recoamended. A new short term exposure of $5m has arisen in
UK Region end this is expected to be repaid by 31 December 1989.



290


APPENDIX 4
(Page 3)

BCCI HOLDINGS (LUXEMBOURG) SA

COUNTRY RISK PROVISIONS AT 30 SEPTEMBER 1989

NOTES

4 Sudan

The UK exposure which is a current account of the Bank of Sudan fluctuated
between $14 million and $20 million during the period. Provision is
currently held at the rate of SOX of the hard core element. With no
eigne of improvement in Sudan's general economic state a provision of
75X against the estimated $16.5 million hardcore element should be
made.

The $4.9 million Hajj loan was converted into local capital for the
Sudan operations in October 1969. It would be prudent to retain some
of the $3.2 million provision to cover the risk on other exposures.

5 Iraq

The Ireq exposure of $11.8 mil lion le now part of a correspondent bank
line with Rafldian Bank which we are informed is now operational with
active letters of credit.

In accordance with the agreement reeched between ECCI end Rafidian Bank
early in 1989 Interest up to 31 March 1989"of $2.1 million was paid. 1
Capital repayments were not due to commence until 1 October 1989,
however, this payment has not been received yet. Management represent
that there is no conclusive evidence that the agreement will not be
honoured. At 30 September 1989, therefore, the provision made In '

1988 is 'considered low end should be raised to 30Z although this is
still at the lo«*r end of the Bank of England range.

6 Mexico

The recent international discussions on Mexican debt under the Brady
plan indicate that s discount of 35% on outstanding debt is perhaps
more appropriate then that determined by the matrix at 31 December
1988. If provision is raised to 35%, the additional provision required
in 1989 is $1.0 million. Further information on BCCl's debt is required
before the direct Impact of the Brady plan can be identified.

7 Cuba

Interest, at rates of 12Z-14Z, continue to be rolled up on the Bank of
Cuba exposure. Total Interest in the nine months is approximately
>230, O&O. We believe interest should be suspended. Movement in exchange
rates have maintained the balance at e similar dollar equivalent to 31
December 1988. Effective rate of provision almost 30% . Evidence from
some other banks indicates provisions of 7SZ.

8 Sierra Leone

Provision at 25% however, additional exposure identified in UK Region.
Evidence from other banks scoring of the matrix suggests a 60Z provision
would be more appropriate.



291


APPENDIX 4
(Page 4)

BCCI HOLDINGS (LUXEMBOURG) SA

COUNTRY RISK PROVISIONS AT 30 SEPTEMBER 1989

NOTES

9 Ivory Coast

Sovereign exposure not identified last year. Scoring or che matrix and
indications from other banka suggests provision of 7 5% is appropriate.
However, more information required on this advance at the year end*

10 Panama

Small sovereign exposure. Evidence from ocher banks suggests a provision
of SOX would be recommended.



292


APFENDIX 5


BCCI HOLDINGS (LUXEMBOURG) SA


INTERIM REPORT ON RESULTS AND OPERATIONS


FUNDED FACILITIES OVER $50 MILLION AT 30 SEPTEMBER 1989




30 September 1989

31 December 1988



$ million

$ million

GNKA'a


927

436

Custoaer A


404

349

Customer C


315

293

Customer E


260

194

Customer AA


217

226

Customer F


187

186

Custoaer B


179

145

Cua comar G


ISO

136

Custoaer D


139

219

Customer L


117

90

Customer K


" 117

101

Cuscoaer T


109

39

Custoaer N


106

84

Customer X


102

112

Cuatoaar M


98

87

Customer 0

*

91

80

Custoaer P


65

127

Custoaer Z


57


Custoaer V


55

55

Custoaer T


55

-

Cuatoaar X


54

30

Custoaer H


53

29


3,357


3,018



293


APPENDIX 6


BCCI HOLDINGS (LUXEMBOURG) SA


INTERIM REPORT ON RESULTS AND OPERATIONS


PROVISIONS BY LOCATION


$ millions


Major Locations

UAE - Branches
UK

Luxembourg
New York
Japan

San Franclaco

India

Kenya

Pakistan

Sri Lanka

Turkey

Florida

Panama

Cameroon

Hong Kong

Spain

Egypt

Emirates

Bangladesh t


Major Locations yet to report

Colombia

France

Grand Cayman
NBO

Nigeria

International Loans
Other locations


Specific provisions not yet allocated

Country risk

General end roundings


Estimated

Estimated

charge

charge

reported by

prepared by

local auditors

Management

10.0

7.0

6.3

6.3

2.1

>1.6

0.2

0.4

0.3

0.5

3.1

1.5

- (0.1)

-

2.0

2.0

1.0

1.0

3.7

3.3

1.8

2.2

7.8

3.3

1.7

1.7

9.2

6.5

2.9

3.2

4.7

2.9

9.4

3.9

1.4

0.7

67.5

48.0


1.5

0.7

5.0

4.8

1.2


7.5


68.7

1U.0

11.0

10.3


100. 0



294


f APPENDIX 7

BCCI HOLDINGS (LUXEMBOURG) SA
INTERIM REPORT ON RESULTS AND OPERATIONS
EXECUTIVE SUMMARY OF SELECTED INTERNATIONAL LOANS
Customer A

$ Billion 30 September 31 December

1989 1988

Funded gross exposure 404.0 349.0


( 1 ) Background

BCCI have had a business relationship with chla Pakistan Shipping Group and
ice owners, for atnse 10 /ears. The facilities are drawndown to
provide working capital and to finance che purchase of ships.

(2) Security

Security, at values attributed by management, comprises:

30 Septeaber 1989
$' million


Cash deposlts/US bonds 32.6

Ships 3§.5

Stocks 97.7

Freight receivables 137.4

Documents of tide to goods under
letters of credit 34.7

357.9

Shares (in parent company) 382.7


The pledged security of shares in the parent company of the borrower
may be difficult to enforce in practice owing to the possible presence
of prior charges on the assets of the underlying operating entities and
may Include some double counting in respect of the other security
noted above* We also believe that there may be difficulties in
enforcing the stocks and freight receivables security and therefore,
we cannot agree on the values attributed by management.

(3) Developments in 1969

During 1989 835 million has been received in respect of prior year
intarast and charges. There have been further drawdowns of 819
million and payments against documents of $13 million. Interest and
charges for the period to 30 Septeaber 1989 have amounted to 858 million.

An additional 813 million repayment was received in October and further
repayments of 840 million - 850 million ere expected around the end
of the year.*

The Bank is proposing to negotiate an agreement with this customer to
provide e revolving facility for about 25Z of their funding end have
che balance Included as a tern loan with a fixed repayment programme
over 7-8 years.



295


APPENDIX 7
(Page 2)


BCCI HOLDINGS (LUXEMBOURG) SA

EXECUTIVE SUMMARY OF SELECTED INTERNATIONAL LOANS
Cus toner C


$ million 30 September 31 December

1989 1988


Non CCAH related 197.4 188.2


CCAH related 117.2 105.0


(1) Background

The borrower is a Middle Eastern businessman. He has several business
interests including banking, construction and engineering.

(2) Security (non CCAH)

• $57.5 million deposits.

* $34.0 million properties in Saudi Arabia (not formally charged).


(3) Developments in 1989

A repayment programme has been agreed and signed. $18 million was
received in October 1989 and it Is anticipated that the 31 December
1989 balance will be the same as at 31 December 1988 with a further
significant repayment in early 1990. The account should show a net
decrease of $24 million by the end of 1990.



296


APPENDIX 7
(Page 3)

BCCI HOLDINGS (LUXEMBOURG) SA

EXECUTIVE SUMMARY OF SELECTED INTERNATIONAL LOAMS
Customer E

$ million 30 September

1989

Funded gross exposure 260.1

(1) Background

Saudi Arabian entrepreneur with Middle Eastern, US bank and Argentinian
business connections* During 1987 he sold the National Bank of Georgia
to CCAH*

(2) Security

* Shares In Independence Bank/Centrust Savings Bank.

* Deposits.

9 Shares in Eurotunnel* '

(3) Developments in 1989

Although no formal repayment schedule has been signed management have
notified us of the following:

9 $18 million received in October 1989.

9 $5 million expected in November 1989*

9 $35 million expected In December 1989/Jaouary 1990*


31 December
1988


194.3



297


APPENDIX 7
(Page '«)


BCCI HOLDINGS (LUXEMBOURG) SA

EXECUTIVE SUMMARY OF SELECTED INTERNATIONAL LOANS

Customer F
$ 'million

Funded exposure

( 1 ) Background

Customer F la the Government of a Middle Eastern State. Approximately
$153 million relates to a loan for a steam power plant which was rescheduled
in 1987* The balance of the account is an overdraft which is not yet
covered. by a repayment agreement.

(2) Security

* $153 million is covered by post-dated cheques.

(3) Developments in 1989

The second and third quarter instalments due in 1989 have not been met and
management have advlse4 us that they are to meet with the customer shortly to
discuss this.


30 September
1989


187.5


31 December
1988


186.4



298


Senator Kerry. Document No. 2 is a letter or a memorandum
referencing the task force as a consequence of a meeting that you
had with the partners of Price Waterhouse and summarizing the
events of 1990 during which time you set out the goals Of your task
force, the investigative task force, in order to try to determine
what had happened in BCCI.

[The information referred to follows:]



BCCI


*0

/ 2 )

.( 3 )


y < 7 >





TERMS OF REFERENCE FOR TASK FORCE


The task force has been set up to perforin an independent review of
certain p roblem ac counts and areas identified by Price Waterhouse.

The objective of the review should be to:

Ensure all facts, files and documents about problem accounts /areas arc
out in the open, and available to PW.

Address the concerns raised in auditors briefing notes.

Determine extent of problem areas.

Obtain missing documentation.


Obtain independent evidence to support representations made by
management. 4 '

Conclude on - nature of underlying arrangements v'

genuiness of transaction/balances J
recoverability
provision requirements. ✓'


Report to SN and auditors,


The review will involve, inter alia;


independent review of the nature of the shareholders’
arrangements and beneficial ownership of CCAH together with an
assessment of the underlying value of the shares and divestment
plans .


independent investigation of arrangements and relationships
between BCCI and Gulf Group , and offshore accounts, together with
an assessment of financial standing.




investigation of suspiciou s trans actions particularly in Bahrain;
and other transactions without adequate supporting documentation.


S realistic assessment of recoverability and provision requirements
of above accounts, and those booked in the names of*Sh Khalid Bin
Mahfouz and^Sh Mohammed Bin Rashid Al Maktoum.


The task force in conjunction with PW’s representatives will have
a cces s to all the bank * s c us. tome r files and alJL employees . All
employees will be required to give full and frank explanations. .

The task force will have the ability to request the assistance of any
senior members of the bank’s staff, including the Executive Committee.

The ’official story* of the task force is to investigate and reconcile
apparent wide differences in provision requirements , including
Sovereign Risk, between management and the auditors.



300


Page 2


The task force will be provided with Price Vaterhouse executive
summaries of the international loans concerned, and will work closely
with Price Waterhouse personnel, including periodic progress meetings.

The task force will review its brief and background information, and
perform preliminary enquiries to establish the following by Monday
19 March;

(1) How much progress it can realistically expect to make by Sunday 25_

« March ?

. — . i

) How much time it realistically requires to com plete assignm ent in the
knowledge that BCCI's accounts cannot be fi nalised unti l it has
completed its task to PrTc^Vaterhouse's satisfaction.





301

Senator Kerry. Document No. 3 is a private and confidential
report by Price Waterhouse dated 14 March 1990, which was sub-
mitted to BCCI, which was an update audit, which began to show
some of the problems that were taking place in BOCL
[The information referred to follows:]



302


STRICTLY PRIVATE AND CONFIDENTIAL

BCCI HOLDINGS (LUXEMBOURG) SA
INTERNATIONAL LOANS AND ADVANCES
BRIEFING NOTE FOR INDEPENDENT
TASK FORCE
14 MARCH 1990


STRICTLY PRIVATE AND CONFIDENTIAL


This document contains briefing material for the independent task foifce
|l appointed by the Chief Executive of BCCI Holdings (Luxembourg) SA to
* Inve s t iga t eand report on certain international loan facilities.

This document is in two parts:


APPENDIX 1
APPENDIX 2


Summary of Selected International Loans

Additional Background Information and
Correspondence.


Price Waterhouse




303


BCCI HOLDINGS (LUXEMBOURG) SA

SUMMARY OF SELECTED INTERNATIONAL LOANS

1 (I) CCAH

1 (2) Sh Kamal Adham

1 (3) AR Khalil

1 (4) Gulf Group

1 (5) Offshore companies

1 (6) Mahfouz Family

1 (7) Sh Mohammed Bin Rashid A1 Maktoum


APPENDIX 1



304




r ^n ,

GtlwiJ

A/h |

1339

A*«*- */£

tag*

®C£A\t :

.*(+0

95Co


£«\o

'

1

209



© A.*.*’-

1

3o


ac

0Couf

;

ttor

£*»*)

3s 3


t Cfelu^V*) 7

Ijra J3S2.


»<*£?£+)


MM****-}

\


t«5 tlSf 1
134 *** *

f^m3


(ST ; i


*7

isr

15^


©*. ku C £■»£*• • 1


l*t


1.98*


fccJLv'***-

C£> cpt
G >^ c
QD^iw


r 3 »o
L !>'»?■ to


’ >•*■ Cl»t [ts

’- c


IS/.MCO


gjagTtHJ


I'oi


Uo2




luiu t (ns*_



32


Oo


2t3


31-

»2

7

A****


»jwu-i t~-»)


0 C*A H ••
g> SU.A »

(§) AG- 1* :

- (£> tnuf

(?) >
AtU^itvh.

(5) ‘a* K-V-JL •

0 eTVuiv


305


BCCI HOLDINGS (LUXEMBOURG) SA
SUMMARY OF SELECTED INTERNATIONAL LOANS


/


Lending secured on shares in CCAH


APPENDIX 1 (1)


S million

31 December
1989

30 SeDtember
1989

1988

31 December
1987 1986

Funded facilities:






i. Ruler of Fujeirah
2- Ruler of Ajman
3, Faisal Al Fulaij
a . Sh Ali Mohammed Shorafa
iAR Khalil
^Sayed Javhary
7 . Sh Kamal Adham
Midgulf Trading \

3 . Rubstone Trading )(V\ ***•”•* •)






Unfunded facilities :
Ruler of Fujeirah


175 ^


179

84

106

116

121

5

117

43

14


785


20

52


857


175


147

73

86

92

111

6

105

38

12


670


20


124

52

71

52

89

2

78


468


102

41

61

48

83

44


379


175


175


379


175


Income earned on the
accounts





Background

'CCAH was established in 19 77/7 8 as an acquisition vehicle. In August 1982
it acquired First American Bank shares which in turn acquired National
Bank of Georgia in 1987.

''BCCI has provided loan facilities to shareholders of CCAH secured on
their shares since 1984.


''New loans have been provided to enable the shareholders to take up rights
issues and other additional drawdowns have been provided with the backing
of the CCAH shares given as security.

^BCCI act as advisers to the shareholders of CCAH and are currently
providing advice to them on liquidating part or all of their investment.


I




*£!z2f>





£1

a^>

<51»*

G- C* ICC, v

(J.1-I

££3i* %

A2- lv '

> tft-.f'Ww

&1.1

ecs^c > ioi,« »!,.•«*•

0-2-tt

(*(oin *. nai.^3.^*

e. j.-*
0-2.15
e a.o

0-7n« ; 7fc2 .««?.*«
£>7Wi * faviC.***

* “nr.utf £ff»



307


BCCI HOLDINGS (LUXEMBOURG) SA
SUMMARY OF SELECTED INTERNATIONAL LOANS


APPENDIX 1(1)


( 'Q Security


/




^At 31 December 1989 the bank held approximately ll06, 400 CCAiil shares as
security for this lending with a net asset value of $2^ 868 per. share
based on the unaudited financial statements at 30 June" 19 89..

C The realisable value of this security at 31 December 1989 cannot be fully
determined until the 1989 financial statements of CCAH are- available.
Nonetheless the security is likely to have a value in the range of $ 620
million to $720_ million. - '

4he pledging arrangements for the shares are informal - the bank hold the
share certificates and signed blank tranfl for (|U 0 (|q Q»1PP] VlHWl |iy f»wyn|*

chan«d r fr« ' and J he nu * ,1 ’ er 0f ,h * re * P led S ed «oae borrowers h.ve
changed from year to year. Certain ccsss pledges also exist vhar.h.
orrower s shares are pledged against another’s loans. Bank official,
have represented that as the shares are subject to blank transfer fo™.

“rr at Sll™* ^ * >PpUed '****“ "P^’pf^ther”




A


, ^ represented that they hoin a

shares and not s uspl? tRoi7>ledged . although this veaT~7hlV


^he bank '_s_ records of total shareholdings
in the main hold nor e shares in CC AH tharts jney n ave pieuee
but this is inconsistent with the arrangements' noted above

Concerns


_l®*t that the shareholders
iheyj hve pledg ed to the bank u

orf ah/Mta "•»


(1) Absence of critical information

'Promissory notes have only been provided for $270 million of the total
loans outstanding.

4oan agreements have not^been drawn up 'or signed for many of the loans>

<The files maintained by the bank are sparse and do not in our view
support the level of lending. There is a general lack of third party
evidence or customer acknowledgement.

‘No evidence has been provided to support the beneficial ownership of
Midgulf Trading or Rubs tone Tra ding, despite management^agreement to do
so.

Drawdowns in 1989 (totalling $42 milli on) have not been supported by
II written requests from-rhe custornlTS . “ Two of these drawdowns were routed
ll to the same account atJfCB; and the bank represent that they took verbal
1 instructions from only one customer in this instance.





- 2 . ~



308


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1(1)

SUMMARY OP SELECTED INTERNATIONAL LOANS


^(2) Co ntrol of facility within Units

There has' been no real control of these facilities within limits. Limits
have generally been increased on an annual. basis to allow for the
application of interest and new drawdowns.

(3) Irregularities in approval procedur es

New drawdowns in 1909 of $35 million were n ot a pproved by the Board
before disbursement.

The CCAH debenture of $20 million was extended through CFC and therefore
has not had BCCI Board approval. *

The advances in respect of the 1909 rights iss ue - ie share subscription
account - have not been submitted to the Central Credit Committee or the
Board because they are not regarded as advances until they are allocated
to particular borrowers.

^(4) Reliability of management representations ^

At the Audit Committee meeting in N ovember 198 8Gnanagemen5> informed us
that:


each of the CCAH accounts is carefully, monitored and that attempts
are being made to reduce the outstandings.

V' there have been excesses over the CCAH limits but this practice will
be discontinued.

^These representations have not been met. New drawdowns have been allowed
and limits have been exceeded.

^In Ma rch_ 19£L9-<irtina gem^p t represented that the group’s exposure to CCAH
would be re due e^TOTtha t they were discussing ways of effecting this
with the customers concerned. They confirmed that each of the borrowers
would individually make good any shortfall from their own resources.

‘'in fact the outstanding balance at December 1989 is $150^ million greater
than that a year previously; and two borrowers have rejected their loan
commitments .

A ugust 1989 ^Sagement^Lnformed us that the 1 988 and 1989 intere st
would be collect?d7~Tssuming the loans were not repaid by means of a
disposal. This would have required, additional cash receipts of almost
$200 million which has not occurred. ~~


_ 5 -



309


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (1)

SUMMARY OF SELECTED INTERNATIONAL LOANS


At the Audit Committee meeting in Nnv gjnber 19R9 we were informed that:

/ $25, million would be received on CCAH accounts in November or

December

/ a substantial am ount.. pf i nter est and the short term advances would
be recove red'be fore finalising the 1989 BCCI accounts.

'Since that meeting ve are only aware of $5.5 millio n being received in
respect of CCAH facilities.


^ (5) Evidence of recoverability

^The lack of evidence to support the terms of this lending and the recent
drawdowns make it difficult to determine recoverability.

''intejrest has not been serviced and the overall exposure has increased
significantly in the l ast few years. There is no evidence to suggest
that any of these accounts will be repaid or reduced, except to the
extent that the bank are able to sell the CCAH shares held under power of
attorney.

{ We have reque sted the borrowe rs to conf irm to us that:


Z 11


The outstanding balance at 30 September 1989 was correctly
stated.


«fii) They had pl edg ed their shares in CCAH as security for the
lending and where appropriate they had cross pledged their
shares as security for other borrowers.

^(iii) They had instructed the bank^to act on their behalf in
negotiating the sale of the CCAH shares.

^(iv) They would m ake up an y shortf all between their lending

secured on CCAH shares and the value ultimately realised on
the sale of these shares.

^We have had four positive responses^ Two borrowers have r efuse d to

accept these terms, two borrowers have yet to reply and one borrower has
not yet been circularised, because the bank have ceased contact with him
(A R Khalil).

/The borrowers who have not accepted the lending or who have not replied
to the confirmation request, and the one not yet circularised, cause us
significant concern and call into question the ultimate recoverability of
their outstandings.

^Whi lst CCAH is valuable security , as noted above there is likely to be a
considerab le shor tfall, and in any event disposal is unlikely to be
achieved easily.





310


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1(1)

SUMMARY OF SELECTED INTERNATIONAL LOANS


«/“)


Other Concerns

represented that M idgulf and Rubsto ne. whose loans are
!S beneficially owned b y M M Hanaoud , are no t own ed by M M
Hammoud, yet the audit confirmations have been signed by a person at one
time represented to be Mr H ammou d * s representative.

Ilo audit confirmation was received from the Ruler of Ajman in 1J?86, 1987
or 1988. A R Khali l has not confirmed since 198T . Confirmations were
not received from Midgulf and Rubstone in 1968.



/The charges levied by BCCI are substantial and there are no agreements
with the borrowers on the basis of charging.

''There is no evidence that the CCAH shareholders, individually or
collectively, agreed to take up their allocations under the July 1989
Ri ghts i ssue, yet BCCI granted short-term loans of ^$50 million and '
remitted this to' CCAH. The rights issue shares have yet to be allocated
between shareholders, although the provisional allocation shows all
allocations in accordance with purported ownership, except that the
sha res of Sh Khalid Bin Mahfou z and A R Kha lil have been allocated to
Rubstone.


^Repayments of $1.5 m illion each, received without documentation, for the
I Ruler of Fujeirah and the Ruler of Ajman in April 1989 were not allocated
* to the customer accounts until Octooer 1989. Despite follow up action by
the account officer and a request 'to have~interest adjusted, there is no
evidence of communication with either borrower.


Ve understand that an annual return o£~£CAH__shareholders has to be made
to the Federal Reserve. In the pa s t ^mana ggmeSt have represented that,
whilst the original shareholder group was registered with the Fed,
subsequent changes have not a ll been reported as they represent changes
of internal arrangements, and BCCI di(Tnot wish to cause difficulties in
connection with the forthcoming sale. '


- S' -



311




n>

23* d
Lie**


(oq.y 11 , 2 . 1


5tfov^ie>
TV/^i v>W

C«^; IT*
*7.t>

* m Cw gU_

2.


(OUJi^M


. 7

7 <fc<) 7®


w-u z i °* -sviy, ii. \

Jii Su4,

2*,. V ^£! at ^'


fc^On. (-) "


« r/ .c^ . c i^.t ^ v. .

iv^jf) >.


.7 S>WP;

«C;

\O2..*0

~ * 6*V

?3*.2r



312


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (2)

SUMMARY OF SELECTED INTERNATIONAL LOANS



$ Million

31 December

30 Seotember

31 December


1989

1989

1988

1987

1986

S CCAH secured

105.6

117.3

90.8

78.0

44.0

^ ’ Other

207.7 ^

197.3

205.5

121.9

108.2


313.3 /

314.6

296.3

200.2

152.2

Income earned
the account

from

41.4


35.1

24.5



BACKGROUND


Sh Kamal Adham has had significant exposure in BCCI for many years.
He has majo r shareholdings in CCAH and Allied Arab Bank and
construction and engineering interests in Saudi Arabian companies.


He has been allowed $1Q million of new drawdowns in 1989 of which $7
million was repaid. ~

(Q


SECURITY


Sh Kamal Adham* s CCAH related lending is_ secured on/ 16, 142 / shares in
CCAH. In addition h e has p ledged [13,0561 shares in respect of Sh
Sharqi's lending andj5,974jin respect of the borrowings of Faisal Al
Fulaij .


The se curi ty for Sh Kama! Adham* s other lending companies:


/'Deposits under lien
{"Properties in Saudi Arabia
(not mortgaged)


$58.9 million r
$ 34.0 mi llion /-

9 *


The balance of his lending ($114.8 million)


is clean.


CONCERNS


L) Absence of Critical Information


'There are no loan agreements with the customer or formalised repayment
.terms. The customer has agreed to repayment terms for 1989 and 1990
but this is not a formalised arrangement and only deals with a
frac tion of the exposure.

^Drawdowns of $18 million during 1989 have not been supported by
written requests from the customer.


f No valuation has been provided in respect of the properties in Saudi
Arabia, and there is no le gal basi s for this security.

^We have not received an independent n et w orth statement for Sh Kamal
Adham.


c, ~




313


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (2)

SUMMARY OF SELECTED INTERNATIONAL LOANS

Sh Kama! Adhan (continued)


^J.2) Control of Facility Within Limits

Although the facility i» within its Board limits , these have merely
been increased in line with the level of exposure .


/O) Irregularities in Approval Procedures


/


New drawdowns in 1989 of $18 million were not approved by the Board
before drawdown even though limits had been exceeded.


(4) Reliability of Manage ment Representations


i


''At the Audit Committee meeting in Nove mber 198a CWnagementI^epresented
to us that they would take further action to ensure rhatthe mortgage


as enforceable.


mortgage
This


over Sh Kamal Adham's property in Saudi Arabia was
has not happened.

/ • < H

During the course of the 1988 a udit we were told ^h&t a formal
repayment agreement would be finalised between BCCI and the borrower.
Agreement has been reached for 1989 and 1990 only but this does not
address the total outstand±ngs7~^>

'"We have been informeo^ooth' during the course of the 1988 audit and
during the 1989 audi t, that a net worth statement would be drawn up by
a firm of auditors to confirm the worth of Sh Kamal Adham. This has
not been forthcoming.

dOn 6 _Nove mhpr_ iflpo ye were informed^tnat-the overall balance of Sh
Kamal Adham's account would be reduced to the 1988 level by the year
end. At 31 December 1989 it exceeded the prior year by $17 million.




( 5 )


Evidence of Recoverability


The receipt of the audited net worth statement will be helpful to
demonstrate Sh Kamal Adham's ability to repay his loans. In addition
the receipt of funds in accordance with the agreed repayment terms
will demonstrate his willingness to pay but a formal repayment
schedule dealing with the balance of the outstandings will be,
important for the future.



314


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (3)

SUMMARY OF SELECTED INTERNATIONAL LOANS


(J) j~A R Khalill


$ Million

31 December

30 Seotember

31 December


1989

1989

1988

1987

1986

S CCAH secured

120.4

121.3

110.7

89.0

83.0

^Unsecured

29.9

28.7

24.9

21.9

20.0


150.3

150.0

135,6

110.9

103.0

Income earned
the account

from

26.7^


21.4

15.8



(Q BACKGROUN D

Since the cessation of A R Plain 's treasury trading relationship with
BCCI in 198J> there has been little, or no, direct contact with this
borrower.




SECURITY


The secured part of this lending is secured on


13,250 share


in CCAH .


CONCERNS


Absence of Critical Information


There are n o signed loan agreements with the customer. .There is no
correspondence with the customer. There are no net worth statements
or cash flow information. There is no 'documentation (other than bank
notification) to support receipts of $5 m illion from United Overseas
Bank, London an d $7 j nillion from SNCB Bahrain credited to A R Khalil's
accounts during the year.


^(2) Control of Facility Within Limits

The accounts have increased since drawdown in 1984/85 from $79 million
I to $15 0 million mainly through the application of interest . New
limits have been regularly approved by the Board in respect of this
unpaid interest. The current limits are $115 million (secured) and
$30 million (clean). Borrowings have typically run ahead of limits.





315


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (3)

SUMMARY OF SELECTED INTERNATIONAL LOANS


A R Khalil (continued)


^.(3) Irregularity In approval procedures .

The CCC approval in October 1909 included a repayme nt sche dule of:


November 1989
December 1989
February 1990
March 1990
April 1990


$10 million
$10 million
$10 million
$10 million

Reduce exposure to $100 million


there is no evidence that this was agreed with the customer.


no such repayments have been received

^(•4) Reliability of management representations

During the course of
that


the 1988 audit we were informed byfmanagement


(mana


C 198.8 interest of £21 million would be serviced before 31 March
1989 with a further repayment of $10 - $15 million being
received. ' '


S'- the loan balances would be confirmed

the loans would be restructured so that they became due from
cor po rate entities

^Furthermore, at the Audit Committee in April 1989^ r^ NaqvT^conf irmed
that $25 million would be received by 30 June 1989 and a iormal
repayment schedule agreed.


'''These have not happened. The only receipts have been ^$5 million
received in April 1989 and $7 million received in October 1989. t

/At the Audit Committee meeting of Novembe r 1989 ^ management^informed us
that $10jaillion would be received e ach m onth and the unsecured
exposure would be eliminated by the year end.




There have been no receipts since October 1989.'

Management^h2s also told u s that Sh Kamal Adham is planning to (
purchased R Khalil's investments. ~ '


r We have seen no evidence of this.



316


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (3)

SUMMARY OF SELECTED INTERNATIONAL LOANS


A R Khalil (continued)




Evidence of recoverability


S The loan has not been c onf irmed in four year s, ie since 31 December
1985. —


''interest and charges of at least $45 million have not been serviced
during the last five years .

/Lack of documentation to support level of borsovings or any continuing
relationship with borrower; and inconsistent representations about the
relationship.


interest has not been suspend ed as suggested by Price Waterhouse in
1988.

S' No repla cement of deposit s pre vious ly held as security.
yihe only repayments from 1986 to date have been $7 million in 1987 and

$^l^mjJLli^ JLilJLSA? •

'fhere is no evidence to support recoverability and the loan should be
written down to the underlying value of its security.


$6) Other Concerns

Despite an appar ent breakdow n in the rel atio nship between the bor rower
and the bank, A R Khalil appare ntly subscr ibed for t 57,748 right~$ 7 issue
shares of BCCI in Ap ril 1 989. There is no acceptance letter or other
evidence on file that~'Ke~ did subscribe for these shares. Funds were i
received from SNCB Bahr ain without any supporting documentation. '

/ The provisional- allo cation of the 1989 C CAH rights issue shows that A
^ R Khalil is not include d. This may indicate that his relationship
with the bank has f inish ed or that he is no longer the beneficial
owner of CCAH shares - ! T


- to-



BCCI HOLDINGS (LUXEMBOURG) SA
SUMMARY OF SELECTED INTERNATIONAL LOANS


APPENDIX 1 (4)



$ Million 31 December 30 September ’ 31 December



1989

1989

i988

1987

1986

Funded gross exposure

404.9

404.0

352.8

284.4

261.5

Income earned from
the account

74.0


61.8

46.8



BACKGROUND

BCCI have had a busi ness relationship with this Pakistan Shipping
Group and its owners, the Gokal brothers, for over ten years . During
this tine the trend has shown increasing balances to the current high
levels.

SECURITY


The borrowings have been g uarantee d by the G okal broth ers and in
addition the bank hol ds 11.5 Million (90%) shares in Gulf
International Holdings (GIH) . There are first charges over most of
the fJygri asspfg nf rth, b p ld presumably by other banks ; ana tnus
BCCI ’ s recourse would be to the res idual asset s after settlement of
secured creditors. The net assets at 31 March 1989 of GIH vere$416
million. "


In a ddition BCCI hold charges over the following specific assets:


Cash deposits/US Bonds
Ships

LC documents


31 December 1989
$ Million

30.9
33.5 r~

7.0 ^


71.4 /.


Absence of Critical Information

On 12 January 1989 we wrote to Hr S H Ak bar requesting more
information about Gulf International Holdings; a copy of this letter
is included as Appendix 2(2). The response to this letter has been
poor and in particular the following infor mation has not been
provided:




318


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (4)

SUMMARY OF SELECTED INTERNATIONAL LOANS


^ Gulf Group (Cont»d)


/





/


<Tha


Analysis of guarantees (totalling $136 million) provided by Gulf
International Holdings. ■■

Audited finan cial statements of subsidiary companies.

Managem ent acc ounts of the Gul f Gr oup after 31 March 1989.

Cashf lows and forec asts for the Gulf group r

Financi al state ments for non-cons ollda ted subsidiaries.

Evidence of benef icial own ership of non cons olidated
subsidiaries.

Evidence to support beneficial ownership and security valuations
of related lend ing (totalling $37.7 million).




r The only financial information that we have been provided to assess
lending to the Gulf Group is the a udited financial s tatement at 31
March 1989 of Gulf International Holdings. This exclude s lending of
.i $162 million to non-consolidated companies and lending of $ 37.7
a million t o related parties^ 1 —

(2) Control, of. Facility within Limits

At 31 December 1989 the outstanding against limits were as follows:

$ Million Limit Outstanding


Funded

Unfunded


257.0

25.0


404.9*

21.8


* This excludes $ 15.0 million drawdown in Austral ia on a bills
negotiated account for Capric orn Ch artering Pty Ltd - a Gulf Group
company.


The funded excess of $ 147.9 million is an increase of $39 million over
the excess reported at 31 December 1988.


(3) Irregularities in Approval Procedures

'feulf Group companies have limits set by the Board by individual
company and i&t on a Group basis. Limits of less than $7.5 million to
individual companies are not referred to the board despite their being
part, of the Gulf Group.

<lToans of $16_ million to Pilot Petroleum have been approved by the
Board. The Board was informed that Pi lot P etroleum was registered in
the United ^States of America. Whilst It is true that there is a Pilot
Petroleum company in the United States which may be owned by the Gokal
family or Gulf Group, this lending was to ano ther compan y of the same
name, registered in Liberia for which there is no financial
information.


~\ I L'



319


SUMMARY OF SELECTED INTERNATIONAL LOANS




Gulf Group (cont*d)

^Similarly loans of j60 million have been approved by the Board to
Mar co trade .. International Ltd. The Board was informed that this
company was registered in S witze rland. Again, there is a Gulf Group
Company, Marcotrade SA which is registered in Switzerland butthis
lending was to a C ayman Island s company, for which there is no
financial information^ ’

'We believe that providing the Board with incorrect information about /
the residence of these companies has been misleading. '

4) Reliability of Management Representations \




during the 1987 audit we were assured by^anagemen^ that the balance
on this account would not increase from the 31 December 1987 level.


/At the Audit Committee meeting on
that the intention was to bring the outstandings'
down and that discussions were in progress.

ffi i


4 April 198 9^mana gemen^ informed us
oh^fheGul


Gulf Group


These events have not happened and the 31 December exposure is
significantly greater than in 1987 or 1988.

^During the course of our interim audit,/managemei)t^.n formed us that
they expected $50 - 60 million would be received by the end of March
1.990.

rife are still awaiting the outcome but to date this has not happened.
.(5) Evidence of Recoverability


tfen^gement^have informed us that they base their assessment of
recoverability on their understanding and relationship with this
customer. Ve have been given little concrete data on which to assess
recoverability but note the following:




1989 interest has not been se rvic ed.

No evidence has been provided to support the secu rity va lue of
loans to non- con solidated companies.

Most fixed assets of the Gulf International Holdings group
(including its vessels) are mortgaged to other banks in priority
to BCCI.

BCCI has not register ed its debentu res over the assets of the
Gulf Group at the request of the customer, appa rently to enap oe
it t o borrow from other bank s; and until recently fiacl not
informed us of this fact. In previous years we had been led to
believe fthat these debentures represented valid charges over the
assets o^f subsidia^ companies .







320


BCCI HOLDINGS (LUXEMBOURG) SA _ APPENDIX 1 (4)

SUMMARY OF SELECTED INTERNATIONAL LOANS


Gulf Group (cont’d)


^ 6 >


Other Concerns


‘'Loans secured on Pi lot Petr oleum Corporation (incorporated in the US)
are excluded from Gulf Group or Gokal family expenses.


(&ffam&mer(E^kve informed us that Pi lot Petroleum is not pa rt of the |
^-Gulf-Group and yet company searches carrled ^out by Price j jaterhouse I
would seem to indicate that it is.


^ManageiaentPfiave informed us that financial statements for c erta in
Companies are no t pr epared yet for at lea st o ne, of these companies we
have been able to obtain a rec ent set jef financial statements.


f There are a number of relationships between the G i^lf Group and \

o ffshore compan ies which have yet to be satisfactorily explained (in
f ac t/" mantfgemenb inform us that^ they have imparted the sum total of
the ir~Knowl edge on these 1 arrangements to us) such that we cannot be
sure of the extent of the Gulf Group lending.


- *Hr ~



321


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (5)

SUMMARY OF SELECTED INTERNATIONAL LOANS



$ Million 31

December 30 Set

jtember

31 December



1989

1989

1988

1987

1986

Funded gross exposure
Gokal family
Others

27.2^
184.7 ^

27.1

183.7

26.0

131.9

27.5

86.7

26.5

12.1


211.9

210.8

157.9

114.2

38.6

Income earned from
the account

31.6 S


32.1




BACKGROUND

''Although there has been lending to offshore companies beneficially
owned by the Gokal family for a number of years, most of this type of 1
lending c ommenc ed in la te 198 6 and has stead ily grow n since that date. '
The companies concerned^iiavd" traditionally been registered in Liberia
with the beneficial owners being of Indian or Iranian origin, flew
advances in 1989 have been to companies reg iste Te<r*in the Ca ribbea n.

^The loans are parked in a ny mbe-c^of loca tions. To date we have

identified such loans in dayman .^Panama/ Nassau, ^Uruguay , ^iahrain and

/Oman. We understand that pne- of the r eason s for parking these loans

in so many locations is to al ^ogate the i nteres t and fees generated on

these accounts to those locations"' that need the income.

< — ■ —

''‘he lending is usually for^ ahip^ f J^an c jnjp or ^ rade relatej ^purposes . ||

*.p financing is always s upported by a mortgage and valuations from a|*
ondon broker. Certain of the ships have been pu rcha sed from the .Gul f
Group.

^fhe destination of dra wdown s and the source of repaymen ts for all
these accounts are o ften the same despite differe nt beneficial owners.
There appears to be an intermediary function adopted by certain trust
companies in respect of these accounts.


^Certain of the loans are secured by mortgag es over sh ips. The value A
of this security at 31 December 1989 was about $65 million. ^


The balance of the lending is secured__by assignment of re ceivabl es and
hypothecation qf stocks , whiptfi management^a^cept may not be

enforceable . V - — J


- ir-




322


BCCl HOLDINGS (LUXEMBOURG) SA
SUMMARY OF SELECTED INTERNATIONAL LOANS

Qffthaw (Ponfil


J2>.


CONCERNS


Abqm? of .Critical ,inf9ra§t49n


On 12^Januagri989 ve wrote to Mr S N Akbar requesting more
iiifoTnatXbfPabout these accounts; a cony of this letter is included as
Appendix 2(2). Ve have-not had adequate answers to many of the
questions raised and we still do not have the following critical
information:


/



/


Evidence to support the ben eficial ow nership of these companies.
Financial statements.


Ca shflow forecasts.

An understanding of the in ter relation ship between these
companies.

.S An understanding of the so urce and dest ination of fund s relating
to these facilities.

x An understanding of the rel ationsh ip of these companies and the
Gulf Group .

^The standard lo an agre ements contain requirements that f inan cial
statements are provide d prior to disbursement of funds, and other
fina^cJ^l^slatements provided as may reasonably be required, yet
aafiagemenjx'Qo jtot enforce these requirements.




^'Y'Managfimeni have informed us that fi nancial statem ents are n ot pre pared
"for these companies although we have seen evidence to suggest that at
least one company has its financial statements audited.

(2) Control of Facilities Within Limits


<^The majority of the offshore lending has been domiciled in Grand I

dayman, the Bahamas and^Panama and has been controlled by the* General 1
Manager in Grand Cayman.


f During j.989 most of these facilities have operated very clos e to their
limits and may have exceede d limit s either through the application of
interest or by virtue of ne w dr awdowns.

f Certain excess over limits have been authori^gd-bjr'the Grand-Cayman
General'Jjanager con trary to nor mal proced ures. We are not aware
whettferthis was done with CCD ' s agreement .


- \G -



323


BCCX HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (5)

SUMMARY OF SELECTED INTERNATIONAL LOANS

Offshore Loans (Cont’d)




Irregularities in Approval Procedures

/tfe have noted at least jfj^e _loan|J where drawdowns have been allowed in
despite the loan already Tiling in excess ^ of li mits, TliWe
drawdowns have not been approved by Central Credit “Committee .


< ^he offshore loans are not approved by Central-Credit Committee at the
normal'committee meet^jJs^Eut tend to be approved by r otation amongst
committee members. Furthermore only one page summar ies^ are supplied
to Central Credit Committee and not the full ten pagfe proposal
document, which do not permit sufficient information for an -
independent assessment.

^here are jten offshore facilitieiT )with limits o f $5 mi llion or more -
These have _not b eeiwef erred to the Board even though" they were
approved before the referral limit was increased to $7.5 million.


I


*The beneficial owners of the offshore loans may be ind ividual family
members within a fa mily gr oup. The family loan limits have not been
collectively approved by the Board.


*As noted in our report to the Audit Committee in November, new
offshore loans drawndown in 1989 in Bahrain totalling " $20 millio ns
no£~-approvfid by Central Credit Committee before drawdown. The Chief
rpypiaHn ^s about the real pu rpo se of certain of £KeTe~
accounts, and the fact tnat tne drawdowns “On other accounts have been
made to similar companies (some connected with the Gulf Group)
co nsiderably increase our concern s over the offshore lending
generally.


C:


^ 4 )


Reliability of Management Representations

During the course of our 1988 audit/managemep)b informed us * that .there
would be no further drawdowns on the~~offsKore accounts in excess of
limits without Central Credit Committee approval. This has not
happened in a number of cases.


S


(5)


Evidence of Recoverability


/'"'Many of the offshore loans are in excess of their limits and there is
little capacity for further activity through these accounts.


/^The application of interest has taken most of the loans over their
limits and the ability to service interest is in doubt.

s*-The loans have been acknowledged by independent confirmation but not
by the beneficial owners. No guarantees have been given by the
beneficial owners.

^/6ther than ships under mortgage (totalling $65 million) there is no
tangib le sec urity for these accounts. ^ —


- 11 -



324


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (5)

SUMMARY OP SELECTED INTERNATIONAL LOANS

Offghore Loans (Cont’d)


*Ve have no evidence of the ability of these borrowers to service or
repay their loans. Ve understand however, that many of these accounts
may be in breach of Indian or Pakistani exchange control regulations;

( and that recoverability will thus be dependent on the extent to which
the beneficial owners have offshore assets outside India or Pakistan.

informed us that they rely on their knowledge of and
h the beneficial owners, but can provide us with no
evidence of beneficial ownership. Ve are thus unable to take this
into account in assessing recoverability and for those accounts not
being serviced where there is no enforceable security we are unable to
conclude that such amounts are recoverable.



^ \Q-



325


cs>


©




(D

^(i)


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX I (6)

SUMMARY OF SELECTED INTERNATIONAL LOANS


j Mahfouz Family J


$ Million

31 December

30 September

31. December



1989

1989

1988

1987

r Funded gross

exposure

152.5

6.7

68.9

141.2

f Income earned

from





the account


2.7


11.5

3.9

BACKGROUND







During the latter half of 1987 the Mahfouz family (excluding Sh Khalid
Bin Mahfouz) obtained a loan from BCCI of $100 million purportedly to
purchase the remaining 15* share of the partnership in National
Commercial Bank (NCB). The advance was fully repaid in July 1989 .

On 2 October 19 89 an advance of $100 M was allowed to Sh Khalid Bin
Mahfouz out of BCC Emirates and a temporary facility of $J^6 million
out of BCCI - SA Bahrai n. ^

SECURITY


The exposure is supposedly secured on 15% of the partnership in NCB.
In addition deposits o f $149 milli on, including $95 million in the
name of M Barasai n, have been placed by Sh Khalid with BCCI but not
under lien.

CONCERNS


Absence of Critical Information

<^The drawdowns of $146 million have not been suppor ted by req uests from
the customer, nor were payment instructions received from the
customer. The purpose of the lending is not known.

^here are n o lo an agreements, promissory notes or security
documentation for the advance.

^Deposits are not: all in the name of Sh JChalid and are not under lien.
In fact those in the name of -M-Barasain, who we understand is an
o ffic e r at NCB Jeddah , are in accounts which specifically state that
they can only be operate d by h im.


-R-




326


I

BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (6)

SUMMARY OF SELECTED INTERNATIONAL LOANS

Mahfouz Family (Cont'd)


^(2) Irregularities in Approval Procedures

^The bank's internal instructions to remit funds to Sh Khalid Bin
Mahfouz in respect of the $146 million facility allowed in 1989 are
dat ed 28 September 1989 for value 2 O ctob er 1989, although the
proposal to Central Credit Committee was dated 2 October 1989. Board
approval was not given until 27 November 1989.

The Boar d was advised that the loans advanced in 1989 were secured on
a 15% share of the partnership of NCB, which was the security for the
previous advance, although there is no evidence to confirm this. The
Board was not advised of the related exposure to NCB «that BCCI already

[had, being placements of $250 millio n.

S (3) Evidence of Recoverability

^The bank is heavily exposed to the Mahfouz family bank (NCB) with
placements of $250 million due from it.

^We are concerned about this leve l of pla cements particularly because
the accounts of NCB are heavily qualified.

deposits of $46 n million were placed by Sh Khalid with BCCI over the
year end, being withdrawn on 10 January 1990. Ve have seen no
supporting documentation for this.

( 4 ) Other Concerns

'There are no accepta nce lette rs or other evidence from Sh Khalid on
file to confirm the subscription by hi s nominee co mpanies for 375,0 00
BCCI shares of the Apr il 1989 rights issue. "~

/ fhe provisional allocation of the CCAH r ights issue of July 1989
indicates that Sh Khalid is not taking up his rights shares.

' x Sh Khalid has an option to put his shares in CCAH back to the Ruler of
Fujqirah, which may necessitate the latter calling the guarantee of
$175 million issued bv ACCI .





327


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (7)

SUMMARY OF SELECTED INTERNATIONAL LOANS


&i


Sh Mohammed Bin Rashid A1 Maktoum


sj


$ Million 31.

December

30 Sentember

31 December



1989

1989

1988

1987

1986

Funded gross exposure

120.9

116.8

101.4

-

-

Income earned from
the account

19.5


6.9

_

_


^T) BACKGROUND

Sh Mohammed Bin Rashid Al Maktoum is the ilf gctive Ruler of Duba i) In
1288 there were three drawdowns for Sh Mohammed totalling $145 million
of which $50 million was repaid in the same year.

r The above figures ex clud e a s mall account in the UK called the H Dubai
Offi ce Acc ount" and overdrafts for Stock and Crescent Holdings in”^
Dubai .

^(T) SECURI TY

The facilities are clea n. Sh Mohammed does have deposits with BCCI SA
in Luxembourg totalling $109.8 million at 31 December 1989 but these
are not held under lien.

, Cl) concerns

(1) Absence of Critical Information

/ .

*^No written request s for the original drawdowns have ever been received
and no support for the purpose of the loans 'has been given.

/''There are no l oan a g reem ents or promissory notes for the advance.

S’ There is no evidence of communication or correspondence with the
borrower and no instructions to confirm payees.

^No audit confi rmation was received i n 1988 despite management’s
assurance and our expectation that it would be obtained.



Irregularities in Approval Procedures


/The drawdowns were approved by the Boards of BCCI SA and BCCI Overseas
in April 1988 based on the submission of a standard f orm re quest
indicating prior approval of CC C. although no such app roval had been
given.

^Board approval shows repayment period to be determined at the time of
each drawdown, but no repayment arrangements exist.


^ JU -



328


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 1 (7)

SUMMARY OF SELECTED INTERNATIONAL LOANS


Sh Mohammed Bin Rashid AI Maktoum (Confd)


Reliability of Management Representations


During the course of the 1988 Audit , Ca&nagemen jL-afsreed to provide us
with a loan confirmation. This has not been forthcoming.


^(4) Evidence of Recoverability

Given the total lack of documentation for this advance and the absence
of confirmation of the balance, ve are unable to asses the
recoverability of the amounts outstanding.


^(5) Other Concerns

'The initial drawdowns on the accounts of Sh Mohammed of S94 million
fro m CFC were routed to NCB for the attention of Sh Khalid Bin Mahfouz
although we are not aware of any business relationship between them.

^Sh Moh ammed is a BCCI shareho lder through Stork ar »H rrpgrpnt Holdings
witK ^2T375T661 shares (3.3*)J prior to the ,198 9 rights issue. Although
he took up rights to 61,354 shares in April 1989 there is no
acceptance letter; the fundi came from new overdraft accounts in Dubai
and BCCI still hold the share certificate.





-’XX-



329


BCCI


2 ( 1 )
2 ( 2 )
2 (3)

2 (A)


HOLDINGS (LUXEMBOURG) SA


ADDITIONAL BACKGROUND INFORMATION AND CORRESPONDENCE


Memorandum o n Bahrain and NBO offshore lending.

Letter to SMAkbar - 12 January 1990.

Memorandum t o C I Covan - 3 January 1990
(Copied to Mr Ashraf Nawabi and Mr All Abbas).

Letter to S N Naqvi - 1A February 1990.


APPENDIX 2


- ^



330


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 2 (1

LOANS TO OFFSHORE COMPANIES DRAWN DOWN IN BAHRAIN
AND OMAN WITHOUT PROPER DOCUMENTATION


^BahrairT^ as made advances totalling jlO m illion to three offshore
companies incorporated as shown below:


Q Brigadier Investment
© Audley Mercantile
($) Metropole Trading


Place and date of incorporation Loan Amount
Nevis August 1988 $4.0 million

Grand Turk August 1988 $2.5 million

BVI August 1988 $3.5 million

The unusual features of these loans are that they are:

To nominee companies.

Cl) The beneficial owner of the companies is represented to be a member of
the Saudi ro yal family.

The purpose of the loans are stated to be wo rking c apital for trading
~~ purposes but there is no further specific information about the purpose,
activities of the companies or the beneficiary.

^4) There is no evidence of ins truct ions from the customer either for the
loan or the disbursement of funds.

(jP The amounts were all disb ursed on the same date - [l8 April 1989 / -(before
discussions vith central credit) to the following parties:


^ Brigadier
_ Audley Mercantile
^ Metropole Trading


44 million
$2.5 million
$3.5 million


i. Capricorn Chartering *
x Granite Financial Trust r
3 . Hallet Enterprises Pte Ltd




Our discussions with seni^r^anageme nOiave indicated that these loans
will need further investigation and suggested that they may not be bona w
fide. — ‘ 1


C 5n the same and very similar date s a number of new offshore loans were
disbursed in Grand Cayman and CFC, some to the same beneficiaries, and
consequently these also require further investigation:


^CFCj)




i. Byword

$3.5 million

/ 18 April s^\

i. Global Trading

1. Elystan

$2.5 million |

18 April?} /

— Hallet Enterprises

) Sigale

$4.3 million

V^14 April^/

I, Metra Holdings


ai* -



331


BCCI HOLDINGS (LUXEMBOURG) SA APPENDIX 2 (1)

LOANS TO OFFSHORE COMPANIES DRAWN DOWN IN BAHRAIN
AND OMAN WITHOUT PROPER DOCUMENTATION


^Cavman^


• • Template

$1.5

S-. Grantley

$1.2

3. Pembrin

$1.0

4 Parkray

$1.4


million

18 April

million

17 April

million

17 April

million

17 April


t. Kwantung Prov Bank

2. Capricorn Chartering

3. Conrad Finance Inc
N.Mr Garlic Pty Ltd


<^We note that those new loans over $1.5 m illion, which is the limit of Mr
S M Akbar's authority, were routed throug h CFC a nd consequently did not
need Central Credit Committee approval.

<^We are aware that^Hallet Enterprises , Capricorn Chartering and iir Garlic
Pty Ltd are all Gulf companies or have very close links with the Gulf
Group. —

^Loans to offshore companies with repayments fro m Granite Financial Tr ust
(Luxembourg) have also been drawn down at the ^^TTational Bank of Omanjas
follows:


I. Centreplace Trading


22 February $1.6 million Interconsult Ltd

24 February $0.9 million

$ 2 . 5 million


2 Forward Marine Trading 27 February

27 February


$1.3 million j Tavoy
$1.2 million


$ 2 . 5 million


<^Both companies are incorporated in St Kitt s and as noted in our Audit
Committee report of November 198 9, both relate to the s ame custo mer but
have not been reported to the Board. Despite disbursement in February,
Central Credit Committee approval was not given until September.


_ IS -



Price Waterhouse


382



12 January 1990


APPENDIX 2(2)


Mr SM Akbar

Bank of Credit and Commerce
International (Overseas) Ltd.
PO Box 1359
Grand Cayman


Dear Mr Akbar,

^Further to our conversation yesterday afternoon I enclose with this
letter a memorandum of information that we require in connection with
our reviews of lending to the Gulf Group and lending to Offsho re
companies through ^Grand Cayman, Panama and Nassau.

^The total of these exposures is very significant to the BCCI Group.

The information or documentation that I have requested is essential to
enable us to have a full understanding of this lending and to be able
to conclude on its validity and recoverability.

^You will observe that many of the points I have already put to you in
our meetings in November. Unfortunately the information that has been
supplied in answering these questions is not sufficiently detailed and
I have repeated the questions with some further explanation of our
requirements .

I look forward to discussing these exposures with you further.

Yours sincerely,

^ 'hrx''

John A. Guy


JAG/sd


- Att-


end .



333



At 31 March 1989, 1989 fees and charges had not been paid. In order to
;^hcw that 1989 fees and charges have been paid the balance at 31 March
1990 should be reduced to 329m - before the application of interest and
charges in 1990.

In order to assess the collectibil ity of such a large exposure it is
necessary to fully understand the perfoxmance and operations of the Gulf
Group. We have been supplied with audited financial statements of the
Group at 31 March 1989. This provides us with the basic data but we
need more information to fully understand this exposure:

(1) Are the fo llowing enti ties consolidated within the Gul f
I nternational Hold ings S.A. Group? ~

i. - Pilot Petroleum ( incorporated in Liberia)

x - Marcotrade International Ltd. (incorporated in Cayman Islands)

3 - Gulf Pancontinental Inc. (incorporated in Liberia)

H - Gulf Offshore & Coastal Services Limited (incorporated in
Liberia)

f - Harpoon Maritime (incorporated in Liberia)

4. - Hadron Maritime (incorporated in Liberia)

7 - Martel Shipping (incorporated in Liberia)

g - Mandial Shipping (incorporated in Liberia)

J - Marine Equipment Inc. (incorporated in Liberia)

i D - Banafin Trading and Transport Inc. (incorporated in Liberia)

They do not appear in the financial, statements of Gulf
International Holdings. We must therefore assume that they are not
consolidated. If any of these are consolidated, this should be
confirmed by the auditors to Gulf International Holdings .





334


In order to assess the indebtedness of GIH to other banks and to
reconcile BCCI's exposure to that shown in the GIH financial
statements at 31 March 1989 we require a breakdown of the followina
bala nce s shown in the GIH financial statements: -


t^Bank overdrafts and loans

^Long term loans and obligations under finance l eas es


267,507,588

186,136,242


This should be supplied by GIH management or by their auditors.

(3) Note 7(a ) to the Financial Statements refers to UB$fi &,261 f 69 0 of
loans being secured by moi^yages agairwr ressels. In order to
assess which of the Group's assets are given as security for other
parties, we require the following infanation:

y List of vessels owned by GIH (or its subsidiaries) with age,
book value and cu r re nt market value.

<. Details of which of these vessels are mortgaged

(i) to BCCI

(ii) to other banks.

,(4) Jfote 7(a] to the Financial Statements refers to U5£2flL*245*£29 loans
being secured by o ther asse ts of the company. The exposures to
Unimarine Bulk Transport, Tradinaft SA and Gulf International
Holdings (totalling $195m at 31 March 1989) are secured by
Debentures. We therefore seek clarification from management of
)Guif Group or its auditors as to why these exposures are not
.disclosed as secured.

.(5) Note .7(a) to the Financial Statements' also refers to significant
forei gn excha nge lending to the Gulf group that is secured on
pr operty and other assets. We require clarification as to the
status of these charges vis a vis charges registered by BCCI.

(6f ^ fote 9 to the Financial Statements refers to Guarant ees given by
the Group of $136 f 067 f 9Q0. We require an analysis of these
guarantees from GIH management or their auditors to ascertain
whether gua rante es given by .GTH to the following companies are
included?

». Pilot Petroleum


li


i Marco trade International Limited


Also we would like to know the nature of other guarantees given and
their standing vis a vis the guarantees given above.


-Aft-



335


(7) In order to assess the performance and v alue of the underlying
S' companies within the Gulf Grou p and with whan the bank has

exposure, we should like to see the au d ited financial statements of
the following companies at 31 March 1989:

,(1) Gulf International Holdings (unconsolidated)

r (2) Uninvarine Bulk Transport Inc.

^(3) Ttadinaft S.A.

-t 4 ) Marcotrade S.A.




( 8 )


The financial statements of GIH only give informtion to 31 March
1989 . Given that we must assess the collectibility of the Gulf
Group lending at 31 December we require to see more recent
information. Furthermore with the increased exposure since 31
March we need a better understanding of the recent financial
performance of the Gulf Group.


x ^We would therefore like to see financial statements for each of the
major Gulf Group companies at 30 Se ptember 19 89 together with the
consolidated position.

^The loan agreements signed with' the Gu lf Group allow for finaneial f
information, to be provided within 60 da ys of the q uarter e nd. I


/In addition we would like to see cashflows and projections of the
Gulf Group that will enable us to Assess the ability of the Group
to service its overdrafts and repay its loans in the future.

8CCI have seme significant exposures to ccmpanies that d o not appear to
e consolidated within GIH.



$•000


( • Gulf Pancontinental

4,070


x-. Gulf Offshore and Coastal Services Limited

2,923


3. Pilot Petroleum

20,550


i/^.ircotrade International Ltd.

* 54,840

(overdraft)

A *. i^arcotrade International Ltd.

32,894

(loan)

C. Harpoon Maritime

3,041

7. Marine Equipment Inc.

3,952


rr. HHMM

39,036


3- Sana fin Trading

1,055

(est.)


162,361





(i)


We require to see audited financial statements for these companies
or financial statements approved by management, where audited
statements are not available.


z"' If such financial statements are not available then we would like
BCCI to request that financi al sta tements are prepared at least for
the exposure in excess of $10m . The turnover through Pilot
Petrole^_ajxl Marcotra^ IivESna tiq nal Ltd. is signficant and could
only be controlled if 'fihahc'ial records were kept. It should
therefore be possible to prepare financial statements.


- * 2 *-



336


APPENDIX 2(2)


^ 2 L


The security given for the overdrafts to P ilot P etroleum and
Marcotrade International Ltd. are as follows (at 31 December)


$‘000


-Assignment of receivables (Pilot Petroleum)
—Hypothecation of Stocks (Marcotrade Int'l Ltd.)

— and assignemnt of receivables (Marcotrade Int'l Ltd.)


30,000 —


40/000

48/600


y 9p. 1


/tie would like to see evidence supporting these assignments and
receivables at 31 December in greater detail than that currently
provided. We would also like to see evidence of these
receivab les /stocks being paid and their proceeds reimbursed to the
accounts of Pilot Petroleu m and Marcotrade International.


^ 3)


In addition to the lending to Pil ot Petroleu m the bank has exposure
to the shareholders of P ilot Petrole um ($ 10. 9m at 30 September
1989) . This lending was originally booked~in CPC and transferred
to Panama. in 1985. New loan agreements (undated) totalling $10 .1
million h ave "Been signed by the representative s of Intergulf
Holdings / funs cieno^en and BV Food investorsT]


4 Tt> assess the collectibility of these advances we, again require to
see the financial statements of Pilot Petroleum. We also require
the financial statements of BV Food Investors, Ons Genoegen BV and
Intergulf Holdings with a full understanding of their business and
their relationship with Pilot Petroleum.


<^We require evidence frcm the beneficial owners of ^K^Fbod
Investors, Ons Genoegen BV and Intergulf Holdings BV that they will
support and sustain these ccupanies.

also seek clarification of the connection between this EiJ.ot
Petroleum (which is incorporated in the United States) and exposure
noted above which is to a Liberian company.


f w 4) We do not know the ben eficial owners of a nd have seen no evidence
<& to prove the beneficial owners “ofl

l • - Gulf Pancontinental


2 - Gulf Offshore and Coastal Services Limited


j - Pilot Petroleum (except for shares held by BV Food Investors,
Ons Genoegen and Intergulf Holdings

- Marcotrade International Ltd.
f - Harpoon Maritime (II)

k. - Martel Shipping (M)

t - Mondial Shipping (;r)

9 . - Hadron Maritime (h)

3 - Banafin Trading «*-

1 p - Marine Equipment I rc .


-



337


APPENDIX 2(2)


Mr. A bbas Gokal has signed loan agreements for all these companies
except KIP (for which we have seen no loan agreement) and B anafi n
Trading.

We require confirmation from Mr. Abbas Gokal of the beneficial
owners of these carpani.es and their relationship with the Gulf
Group.

«-(5) Please clarify why the Board approval for lending to Pilot

Petroleum says that the carpany is domiciled in the U.S.A. when it
is a Liberian company.


?


(6) Please clarify why Central Credit Committee approvals refer to
Marcotrade International Ltd. as a Swiss Company when it is
reaistered in Grand Cayman.

OFFSHORE LFNmrc

The following loans have been provided in Cayman, Nassau and Panama to
^ inhere companies:


Company


». Serval Trading Inc.
i. Tallowcraft Shipping Ltd.

3. Middle East Tankers
Ur, Blue Sky Bay Marine
S’ Pirion Shipowners Ltd.

C Dolmer Shipping Inc.

7 * endive Enterprises Inc .

S dain Carmercial
*3 Tarakot Trading Inc.
ipCanar Enterprises Ltd.
"•Meltam Inc.
i^Tallowcraft Shipping
ilGambas Maritime
«v Tambriola Maritime
•> Es^bson Navigation SA

16 Meacrest Marine & Transport

17 Nautique Shipping

*o Pixoni Marine Transportation
i«i Byron Bay Shipping
** Misr Gulf Offshore
Intergulf Holdings
a*. Fidelity Holdings
ij Southwold Maritime
Grantley Trading ’
w Pentrin Transportation
\c Parkray Commercial
*9 Byword Ltd.

*4 Elys tan Trading Ltd.

Sigale Enterprises
% Biplate Ltd.


y


location

Balance

31 Dec 1989 30 Sept 1989


$•000

$•000


5,096

4,835

Cayman

5,604

6,597

Cayman

6,657

6,294

Cayman

3,890

3,146

Cayman

2,495

2,355

Cayman

1,734

1,633

Cayman

6,853

6,502

Cayman

4,634

4,398

Cayman

4,918

4,173

Cayman

3,297

3,105

Cayman

10,012

8,650

Cayman

4,573

6,386

Cayman

6,062

5,761

Cayman

4,893

4,641

Cayman

1,747'

1,646

Cayman

4,736

4,496

Cayman

3,963 r

4., 178

Cayman

5,648

5,338

Cayman

3,058

3,262

Caynran

2,741

2,870

Cayman -

2,679

2,818

Cayman

3,654

3,818

Cayman

11,460

10,689

Cayman

1,396

1,336

Cayman

1,163

1,113

Cayman

1,628

1,559

Cayman

3,852

3,679

Cayman

2,753

2,628

Cayman

4,747

4,497

Cayman

1,651

1,577


127,594

124,660


^ -



338


Company

Location

Balance



31 Dec 1989
$•000

30 Sept 1989
$•000

Dsnray Trading

(Banana^


3,454

g. Frenda International

Panama


1,437

% Sindega Trading Inc.

Panama


4,418

4-Onida Trading

Panama


6,718

s Chinnok Trading

Panama


7,753

C Videro Shipping

Panama


899

7. Videro Shipping

Panama


1,265

9* Melrose Maritime

Panama


2,297

9 Aspac Trust

Panama

Not Khown

1,177

29,418


i, «&uja Trading SA

C^Tjassaji

5,028

i. Sxtola Limited •;

Nassau

5,038

3. Tcnar Shipping Inc.

Nassau

1,224

«, Bell Harbour Shipping

Nassau

1,989

s A1 Inshirah Shipping

Nassau

3,525

c A1 Mazan Maritime

Nassau

1,664

7 Mercantile Marine

Nassau

965

? Merlin Navigation

Nassau

967

Loupmer Shipping

Nassau

1,046

i v Voyager Navigation

Nassau

1,766

,i Tamar Shipping Inc.

Nassau

3,772

iwBell Harbour Shipping

Nassau 1

1,203

1 Mazan Maritime

Nassau

3,997

^oupner Shipping

Nassau

1,077




Not Known


<we have included loans in Panaraa-ancLNassau in this list because these *


locations refer to Mr. S.M. Ak faar as being the account officer for these
ensures.


^Security for these loans are normally hypothecations, assignments or
ships.


Whilst there are sane exceptions, the balances on these accounts have
generally inc rease d since the prior year and turnover has decreased.
The valuations ships provided as security have improved.


We have a numbe r of concer ns regarding these accounts:

^(1) Proving the beneficial owners of the companies.

(2) Collectibility.

r

,(3) Understanding the business of these caipanies and their
r interrelationship.


(


'4) Assessing the value attributable to security given as
hypothecations or general assignments.





339


(1) Beneficial owners

/

Whilst you have p rovided us with details of the b eneficial owners,
(fj we have seen nn gvirtenrg i-n p rove sucn ownershi p. Because this
v fonn of lending involves instructions and representations from
) ncminees it is essential that we obtain evidence of the ultimate
beneficial ownership of these companies. Furthermore we are
relying upon the wealth of these owne rs to support the companies.
This evide nce of ownership should preferably be in the form of a
statement from t he benefi cial o wner or alternatively we could
consider evidence from the Trust Companies that ni gi -m- these
companies.

^(2) Collectibility

most of the offshore facilities are in excess of limits or have
exceeded their limits at sane point during the year.

(Tttiilst operating as overdrafts, the accounts generally have got (
experienced significa nt turnover and do not fluctuate below a
relatively high minimum level.


(turnover is typified by one or two tran sactions where the drawdown
is followed by. a repayment a f ew days late r or vice versa.

^I nteres t is generally not being servic ed on these accounts.

('As a consequence of the above we have difficulty in assessing this
lending - particularly in the case of those loans that are not
secured on ships.


1


require evidence that these o ffsho re companies have sufficient
I capacity fn. gpnpra te busine ss that will enable these overdrafts to
be serviced and to have adequate turnover.

/we would like to see fina ncial sta tements prepared for the above
companies to assess their' protitlfrility, capital base and
viability. We would also like to see additional information either
from these companies or their agents outlining their future
^usiness plans.

( We note that the standard loan agreement requires:


-""""a notarial, ly certified copy of - the mos t! recent finan cial
[ nfA-BQtitMPrjmri nf frhg rfivirantnr" tO be Supplied

I prior to disbursement of funds.


nn addition the terms of your debentures with these companies
require them to furnish the Bank with audited financial statements
annually and “other fin ancial state ments in respect of its assets
and liabilities as the Bank may reasonably require" .

trust that it will therefore be possible to arrange for
financial statements to be provided.


^ -



340


APPENDIX 2(2)


^ 3)


Interralationship of offshore companies

x-

We have previously discussed the operation of these companies and
you have informed us that these ccnpanies are not controlled by the
Gulf Group although do seme business with the G ulf Grou p. We seek
clarification of the following: '


X.) An understanding as to wh y all the shi ps held by these

co mpanies are managed by GSf East Ship Managem ent Limited. ([(

^xii) Why do most drawdowns and rep ayments flow through the
fol lowing compa nies?


Is Cedar Investments and Finance Corp.
t-w Transgulf Finance Go.


3. Kira Investments Trust SA

^ Conrad Finance Inc.

iT. Granite Financial Trust Inc.

t Mentesta Finance and Trust SA

What is the b usiness of these companie s? What is the
relationship between the se co mpanies? Who con trols these
companies? tr ~ .


^ iii)- (a) The address of Conra d. Finance Inc. is given as c/o
r E' Estoril, 31 Avenue Pr incess Grace, Monaco.

This is also the address of United Shipping Group SAM a
subsidiary of Gulf Internationa l Holdings.

-Qp The address of Mira In v est ments Trust SA is given as P.0.
Box 604, 2535 Iuxembourg.

^ This is also the address of Interco ntine ntal Shipping and

Trading Servi ces S.A. an associate of Gulf International
Holdings .

Could you please provide a paper explaining the
relationship between the offshore companies, the paying
I agents and the Gulf Group outlining the nature of their
! business relationships, the systems for recording and
controlling the business and the nature of the cashflows
between these entities.





341


APPENDIX 2(2)


.iv) We understand from your discussions with Nic k Fre eland that
< the car panie snoted in (ii) above are operating as paying
agent s. Given this, can we not receive better infraction
from these companies concerning the offshore lending. For
example, can they not prepa re financial statements for these
compa n i e s and provide detai ls of their shipping and trading
activity?

jv) What is the relationship between this lending and simil ar

lend ing ^ext en ded to offshore carpahiesHEi Rgfeainja nd NBQ i n
April 1989. The new loans extended there had paying agents
canno n to the Caynan lending*


/ 4)


Security


For many of these caipanies the only security are h ypothe cations of
stocks and a ssignmen ts of receivables.

^Should you please provide (possibly through the paying agents of
these caipanies) further info rmati on to supp ort the valuatio ns of
the sto cks and re ceivablea_at 3lT pecember 1989 that pertain to
these caipanies. Is it possible to break these down by Bill of
Lading or customer name and after the year end sight their
subsequent recovery through the bank accounts of these offshore
companies?


/

/


-



342



APPENDIX 2(3)


OUR FACSIMILE TELEPHONE NUMBER IS BAHRAIN 271459


EW LONDON (CHRIS OCWAN) RUW1E AND CONFIDENTIAL

«Ok*m BAHRAItP fegRRY HDPCRGFT) TVH/gor/M226
* 3 JAN UARY .1920

| EARLY WARNING - BOCI BAHRAIN Q

am writing to advise that we have been unable to obtain all the
information and explanations that we consider necessary in respect of
the following amounts which are boohed as loans in the accounts of
BOCI Bahrain at 31 December 1989:

$


Interest

• recognised in the

Principal 1989 profit A loss


Name of customer

amount (3000s)

account (30006)

Total

® Audley Mercantile

2,500

226

2,726

^Brigadier Investment

4.000

367

4, 367

(§) Metropole Trading

3,500

317

3,817


10/D00

910

10, 910





^ Mansouri

5,000

264

5, 264 '

(Q Saif Ghumr&n

5,000

284

5,284

0

10,000

548

10, 548




0 )


In respect of the Audley Merca ntile/ Brigadier Investment/Metropole
Trading amounts: ”




We have seen no evidence as to the beneficial owner of
these canpaniea


[ ii ) we have been orally advised of the name of an individual

beneficial owner . hbwever, this information conflicts
with the credit analysis in the credit file. (There are
further conflict! ng carments in the credit analysis of the
credit file al 9 o) .


TOTAL NUMBER OF PAGES!

IF YOU DO NOT RECEIVE ALL PAGES OR HAVE* A PROBLEM WITH RECEIPT
PLEASE TELEPHONE BAHRAIN 233266


~bio -



(iii) The amounts disbursed w ere not paid to the obovement to ned .

com panies , but to otj}er conpanies whose Identities, and |
their relationship to the abovemen ticned companies, is
unknown to looal management


r


(lv) in respect of these companies, the credit files have no
details and local managem ent have no knowledge of (a) the
Directors and (b) who are the authorised signatories.
E hyment was made cn the Instructions of three Individu als
m ^.(rassrs ttohammea, Raja and All respect ivg iy> whose
* relationships to, and authorities m, tfieabuvementioned

oompanios is unclear. local management have rK> idea vAiere
management reside or where the books and records are
kept. The bank statements are addressed "UK" yet
management inform us they are posted to various offshore
addresses .


«^(v) No fin ancia l information is available. No references were
obtained .


^ (vi) We have received n o con firmation of balance and the bank
has no evidence of net worth.

^ (vii) Wo are unclear vheth er the c redit ccn rnittee approved the
amounts before they were disbursed,

(^2^) In respect of the ^Fallah Mans o uri) and ^alf Chuinran yhnounts i

(i) The credit files 6tate that these amounts were advanced
f for projects. However;

(a) the bank has little or no knowledge of the projects or
of the other individuals involved dn the projects

(b) the funds were advanced immediately vAiereas the
projects are not due to coomence for several years.

^(ii) The amounts disbursed were not paid to the abovewentioned
customers and local management are not aware of the
identities of the individuals to whom the funds were
disbursed. No written payment instructions were received
• from the customers .

^ (iii) The credi t cam It tee approved the loans seven months after
the funds were disbursed.


/(iv) The first installment in the Saif Qiumr an exposure is in
default.

Lv) The bank obtained no bank references, no financials and no
^ verification to support the alleged net worth of the

abov emeriti On od individual*.



344


^(vl) No acidic confirmation of the halancna hue been received*


S ^ or theee reasons we ere at present unable to conclude In the validity
or recoverability of the abovementlonod amount a. Unlees we receive
thci above Information it will he necessary to qualify our interoffice
opinion and the local etetutory accounts to the Bahrain Monetary
Agency* We have informed local management in respect of the above*

If you have any detailed queetloue please do no hesitate to contact
me*

Regards,





Mr All Abba* - OCCI D«hr«ln


*• Mr Ashraf N a wa il - BCCI Regional Office, Dubai
J Mr Simon Chapman - PW Dubai





345


Price Waterhouse



(jLU February 19 9o3 APPENDIX 2(4)

STRICTLY PRIVATE & CONFIDENTIAL
BY HAND
M r S NflflMi

Bank of Credit and Commerce International
100 Leadenhall Street
LONDON EC 3 A 3 AD


/ Dear Hr Naqvi,

I thought that it might be helpful to summarise in this letter issues
arising on the major customer accounts which we have discussed in the
last few weeks so that appropriate attention can be given to their
resolution.

related balances""^

'The Ru lers of Fuieir ah and Ajman have both returned to us balance
confirmation letters rejecting information shown concerning loans
totalling $270 m illion at 30 September 1989 secured on CCAH shares.

In connection with these accounts:

^ 1) You are to meet the customers concerned to understand the nature
of their disagreements.

^ 2 ) You are to provide us with your files on these customers with

details of the recent transactions across their accounts.

/' We place heavy reliance upon confirmation procedures and where
disagreements do arise we need to investigate the reasons why these
occur and the implications, if any for other accounts. In these
particular cases I expect that we will need direct access to the
customers concerned to understand the extent and implications of any
disagreement .

^satisfactory balance confirmations have been received from Mid Gulf
/Rubs tone and^Shorafa, the rem ainder are outstand ing. I will let you
know when the others are received.

a separate matter we will need to evaluate the securit y value which
can be attributed to the CCAH shares, taking into account the d ispos al
plans .


- 3 ^-



346




14 February 1990
Mr S Naqvi
Page 2


0


, ^Sheikh Khalld bin^Hahfouz^)






2 )


New loans totalling $146 million were drawn down during the year.
These amounts appear to be unsecur ed, although you had thou ght U

t hat sh ares in NCB h ad been pledged as security and you are to *

pursue this. We will need to discuss the loan details r^i'tTTyou^
at some stage but in the meantime would like to ensure that a
proper bal ance co nfirmation, including details of an y secur ity
and pl edged dep osits, is obtained.

Our work on share capital shows that 375,000 s hares of BCCI
Holdings were allotted to and subscribed b v Mahfou z nominee
companies in April 1989 , although acce ptance le tters or other
evidence from the shareholders are not on file.


I


&

e


the present circumstances, when there is an expectati on that
Mahfouz is to dispose of his shares and public speculation that he may
already have done so, confirmation by him of his shareholding will
overco me concerns about his shareholding and the purpose of the loans
referred to aboy&r 1 — ^ ^

I will provide^you with a draft confir mation request when we next
meet. L X

X

AR Khalil


.. 1 )




There has been little contact with the borrower over the past two
years or more. The borrower holds shares in both BCCI Holdings
and CCA1I which you are seeking to transfer to Sheikh Kamal Adhara
so that the loans outstanding of $150 million can be repaid
either in part or in full.

Our work on share capital shows that 57,748 shares of BCCI
Holdings were allotted to and subscribed by Mr Khalil in 1989
although there is no acceptance ' letter or other evidence on file
from him and given our understanding of the relationship with him
over recent years we find it surprising that he has increased his
investment.


There will be some difficulty in assessing recoverability of loans to
Mr Khalil if the proposed t ransac tion with Shei kh Kamal Adh am does not
proceed before finalisation of the accounts. “

, X'

rAs/you a^re aware this is an account for which we have not received a
confirmation for some time, therefore his acknowledgement of the debt
will be important evidence this year.





347


xvr r LHUlA

H



14 February 1990
Mr S Naqvi
Page 3





rg


Sheikh Mohammed bln Rashid Al Haktoum

^r c 31 December 1989 this customer had loans outstanding of $124
million and deposits of $109 million. This was an account for which
we did not receive a confirmation last year and where our review of
significant transactions reveals absengs^gf customer authorisation for
the drawdowns in 1988. As discussed /\you a^) to provide us with your
file with details of the transactiojns^onCf^rned. I am unsure about
the status of the balance confirmation request but clearly it will be
important to ‘-receive appropriate < confirmation from him as we cannot
y let another ye ar^go by without one.

<^ur work on share capital shows that 61.354 shares of BCCI Holdings
were allotted to and subscribed by Sheil& Jlghammed nominee companies
in April 1989 although acceptance letters or other evidence from the
shareholders are not on file and the share certificates are still held
by yourselves. Evidence of customer authorisation for the rights
issue or confirmation of his shareholding will be required.


0


4


Gulf Group and Offshore companies

Our offices in Cayma n and B ahra in have raised questions which are
still unanswered^ concerning loans to the Gulf Group and to offshore
companies totalling $405 m illion an< L$210 million .respectively. The
q ues tions are impo rtant to our assessment of recov erability and were
set out in detailed memoranda dated 12 January 19~90 an d 3 Janua ry
1990, copies of which we have provided to you, Mr Ahmed and M r Rah man |
as well as to the loca l and regional manage rs.






Other major Cayman and International loans


V}>


The issues are well known and in response to our enquiries som e *

detailed information has now been supplied. However, information is 'fl
still being sought about the colle ctability and a uthoris ation of the "
loans, the repayment terms . ^an d th e financial standing of customers.

We will discuss these with/you opee we have had the opportunity to
review all of the informacion''which is currently being provided by Mr
Akbar and his team, although we need to be satisfied that their
assessment of .provision yequixeme ftfcs is realistic; it seems to us that
substantial increases may be necessary.


-



348



14 February 1990
Mr S Naqvi
Page 4


I am concerned about the number of outstanding Issues on major
accounts and the time that it may take to resolve them satisfactorily.
Given this situation 1 doubt that the normal reporting timetable can
be adhered to and suggest that the likelihood of a delay be brought t o
the attention of your senior rolleagun nnri fthn audit rnnimtt-fpg^
Indeed, you may even feel it appropriate to copy this letter to the
audit committee.


Yours sincerely,


Cl Cowan
CIC/hh





349


Senator Kerry. Document No. 4 is a supplementary document to
document No. 3. It is a supplementary briefing paper from the, for
your task force which came from Price Waterhouse regarding the
problems in the bank.

[The information referred to follows:]



350


STRICTLY PRIVATE, AMD CONFIDENTIAL

BCCI MOLDINGS (LUXEMBOJRG) $A 4

SUPPLEMENTARY BRIEFING PAPER
FOR THE INDEPENDENT TASK FORCE ON
PROBLEM LOANS AND RELATED ISSUES


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER
jj/ Kuwait International Finance Company S.A.K._ (Klfco)


Shareholders :


t

BCCI Holdings (Luxembourg) SA


49

ICIC (Overseas) Ltd *


12

Others


.12


100


(t) I backgroun d 1


s


Klfco la affectively BCCI * a banking arm In Kuwait, although we
understand that certain undertakings have been given to the Kuwaiti
regulatory authorities to the effect that BCCI does not control Klfco.
At 31 December 1989 Klfco had total asaeta of $195.7 million and
shareholders ' funds of $ 16.9 million.

Mr SM Akbar, General Manager In Grand Cayman, was we understand, once
General Manager of Klfco. He has close links with the Klfco
operations .

(J) | CONCERN S^

(L) Absence of Critical Information

Klfco la almost entirely funded by BCCI (Overseas) Ltd through

Grand Cayman. At 31 Decem ber 1989 J Jhowever7 “ — ^

placements recorded by BCCI (Oversea!) with Kifcoare not consistent \
with the financial statements of Klfco: -


/ Per Klfco: time deposits with banks
I Per BCCI (Overseas): acceptances from Klfco
■m Per Klfco: term deposits taken

Per BCCI (Overseas): placements with Klfco
/ Pi


$6. 1m
$9. 3m
$173.4
$204.0


Price Waterhpyse a ye jrot t he auditors of Klfco. The Incumbent
auditors (AnwaxrXl-Qatamt' & Co) have completed a questionnaire and
provided certain financial information to us. This information is,
however, not sufficient for us to review the make up of the Klfco
lending, and we have consequently raised a number of queries with the
auditors in a telecop led letter of 15 February 199 0. Ve have not yet
had a response to this letter.


4.


4 .


In order for us to ascertain whether any Klfco loans have been
extended for the purpose of servicing BCC I len ding elsewhere we
require evidence of the destination of all... significant drawdowns f
during 1989. — 1

X V

He also require a detailed an alys is of the Klfco loans portfo lio In
order to be satisfied that there Is no exposure common to BCCI.



351


V








/ CP < *^ C C' A^ *i«' < s •* 7

e*~i ^v£-

lV iT


»*-««- g ' 3


^ -


m8* ^

(MC - *•'*»

(f) (?)

*f«. __ U.-J *»•’

U-* -

4~te) - PL— *•«■


».»* rrcip


^y. *< ^cuVUi^,/
V^C^l, — fi


- t-t ^ ^ &Cc^*\) '

Co*-*


^ y- 7n >


- X*-£~y : 3 .jt*


t.*»


lc^c


- : a*® *Hu*/Ttro

Ai.l ^(1 ^ »-T* »•••)

7>X


.^^v-W-U A?c (to

fiu^/tu^A^*!)

($) £ , (^>>» f w . Ot -+~~j — z8£j_3

— L ~T“) itti, -if- s -w> -t -* »*■»• ■*•


‘ u \r i ,:;?: \

y^» *?*?*«»£.


£ ( Ct -y^




^ ^lUv>

" M ••■>•» A/ lUqV^ - i*-,C



352


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER


Kuwaitlnternational Finance Company S.A.K. (Kifco) - continued
2) Qthsr , <?on<r?rn?

<We need a better understanding of the IZ_?ompany__for Exchange based in
Kuwait. We do not know whether this company is associated with Kifco.
The IZ Company for Exchange has been the source of loan repayments in
1989, where we now have suspicions as to the propriety of the
transactions .

^We have requested access to the records and management of Kifco in
order to pursue our own enquiries but to date this has been denied.


^5


^ ‘S><- 7


<U- — - X! r


1

Q C Uyfi- ' W: I vt. 4 *

KUi.. V-


vT)U<*«. I vnc f


ty*-




f

(>s , v

if. *•

2 184 ^




cc-u a* bv.j

t,.H A* * • *


C* — ^





353


BCCI HOLDINGS (LUXEMBOURG) S A
SUPPLEMENTARY BRIEFING PAPER




Banaue de Commerce et de Placements SA (BCP)


Shareholders :


I


BCCI Holdings (Luxembourg) SA 15
ICIC Foundation 35
ICIC Staff Benefit Trust 35
Thesaurus - Continental Effekten Gesellschaft 15



BCP is regarded as BCCI's banking representation in Switzerland
although it is not a subsidiary of BCCI. The Swiss authorities did
not accept Arab ownership due to associated reciprocity problems and
hence, shares are held by the ICIC entities. At 31 December 1989, it
had total assets of £3ljL million and shareholders' funds of $29
million.


^T) [ CONCERNS^




(1) Absence of critical Information

Swiss secrecy laws have prevented us from being provided with -
information relating to customer accounts by the incumbent auditors.

(fit 31 December 1989, there were 5 loans g reater than $5 million
outstanding in BCP (compared to 3 loans "at 31 December 1988) . We do
not know who these, or any other borrowers in BCP actually are.




We require evidence of the Ide ntity of these borrow ers in order to be
satisfied that there is no exposure common to BCCI that should be
considered collectively.


<


We also require evidence of the destination of the_dravdowns on the
large loans and other new loans advanced during 1989 to ascertain
whether any BCP loans have been extended in order to service BCCI
lending elsewhere.




We seek to ascertain the utilisation o f $50 mil lion paid to BCP Genev a
on 2 0 Octobe r 1988 by BCCI and charged to the account of S h Moh ammed"
Bin Rashid al Maktoum. This drawdown was not supported by customer
instructions.

^We may also require more information on the source of funds received
from BCP crediting certain loan accounts at ICIC.



354


BCCI HOLDINGS (LUXEMBOURG) SA -y

SUPPLEMENTARY BRIEFING PAPER ( 3^*Arjnr) C Hu. (j*J


j/ Saudi Development and Conmerclal Company (SDCC) .



31 December

31 December

S million


1989


1988

Funded exposure - loans





BCCI (Overseas) - Grand Cayman



15.1

BCCI SA - Bahrain

/ 4.8

4.3

ICIC (Overseas)



8.3

8.2








Total lending ->

Funded exposure - NBFI

"I 9 . k \ i ,fy

(C .

27.8

J *

/'

27.6

BCCI (Overseas) - Grand Cayman &****•• y


25.5 r

K

10.2





— —

Total gross exposure


53.3 >


37.8


| background!

'b understand chat SDCC Is owned by five Saudi Arabians. Ics business
includes, investments, real estate :ariS~ofKer Lenamg;_wi thin Saudi
Arabia-.. • * 1


<An original advance of $10 million was made through Grand. Cayman for
the purchase o f L mi llion shares in the Saudi' Egyptian Company for
Investment and Finance (S. E.Cvi vF). The currenc loan oarance in Grand
Cayman represents this advance plus applied interest less $3 million
in dividend Income . received be twee n 1982 and 1985 .

/In addition, Grand Cayman has maintained short term^placements with
SDCC, the turnover on which has been much higher than the loan
balances outstanding.

1 secu rity]




Security for the BCCI lending is the 1,000,000 shares in £. E.C.I .F. a
Cairo -based company for which the financial statements' showman
underlying value of approximately $6.50 per shar e . > ?

/The* security for the ICIC exposure are shares in CCL Holdings,
representing 29%. CCL Holdings owns CCL Financi al Group^ Pic.



(l) Aba&nss-pf grittagl infyyfflfttten

/ No information has been made available to clarify the nature of SDCC 1 s
operations or its financial position. There are no audited financial
statements or other financial information. Ve do not have adequate
information to assess the underlying assets of SDCC.



355


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER

Saudi Development and Comme rcial Comtanv (SDCC) - continued


^The shareholders of SDCC have not documented any ui^ertaking to
service and repay the~ facility.

<f(o documentation has been provided in support of the repayment of $2
million during 1989.


^/<2) Irreg ular itie s. i n, Ap pt q ya Oroceduyes

We have seen n o Boa rds approvals for either the loan facility or the
NB FI pla cements .

There is no recent Central Credit Committee approval for the Bahrain
facility and we have only seen approval for $15 million of the NBFI
placements through General Cred it Committee^

ReUftbjiity .of . NangReffignt Representations

Management undertook to secure the personal documented support of
SDCC's shareholders for the purposes^of the 1988 audit, including a
formal full repayment schedule. This has not 'Seen received.



Evident .of . rgcpygrability

Permission has not been granted for SEC IF jiivi dend s to be remitted
outside Egypt since 1987, and in any event these are not sufficient to
service the lending or generate principal repayment.


<^here is no evidence to support the ability or willingness of the
shareholders to repay the loans to SDCC.


/the NBFI balances outstanding at 31 December 1989, matured in January
and Febpiajr)rJL990 and have been rolle d over, with no customer
correspondence,^ Inc e maturity on a monthly basis. There is no
evidence to Indicate how these placements will ultimately be settled.


^(5) Other concerns

Sa separate advance of $15. 4m wa s made to SDCC f rom Kifco in January
1989. Local auditors report that this was approved^ only by the
General Manager and the Chairman, that no security was taken, and that
no customer correspondence was available. The balance w as adjus ted in
Apr il 1989 . No further detail of this advance has been provided.

I'w* understand that SDCC is essentially the bank's representation in
Saudi Arabia although this is by no means clear.



356


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER
( Hauaoud
S million

Funded exposure:


31 Pecereber 1989
BCCI ICIC


Inves trade (USA)

G iddle East Commercial Agencies
nvesco S.A.L. — XWiL
Pazcentro Investments SA
Rubs tone Trading Corp.


SA


Daily Holding International SA
Cheynne International SA
Middle East Development
United Group for Trading and Projects
-MM Haanoud - UK —

/MM Haanoud - Gibraltar—
y’Hammoud/Kloss


Hamburg ■ —


5.8 neg.
*6.2-^ 7.6 —
*8.5—* 1.3 —
9.4

*15.1 12.1^

10.1 *

1.9

- 10.4-1

8.1 ?

0 . 8 /

8.5 J


48.8 60.9


*Not recognised by BCCI as being exposure to MM Ha mmoud.

(T) | background)

MM Hammoud is a Lebanese businessman. We understand that he is
principally concerned with property development in the US, UK, Canada
and Lebanon.


He is also a significant shareholder in *BCCI Hold ings with 2,64 6,184
shares and is a shareholder in CCAH. 1 '



/The facilities granted by BCCI to Mr Hammoud in the UK, USA, Hamburg
and Gibraltar are secured on propert y.

he lending to Middle East Commercial Agencies (granted by BCCI -
Cyprus) is clean .

«^ihe lending to Rubs tone Tradin g Corporation (granted by BCCI -
Luxembourg) is secured on MM Hammoud* a shares in CCAH .

r The lending to I nvesco SAL (granted by BCCI - Grand Cayman) is secured
on property in Lebanon and Egypt .

/'fhe ICIC facilities are secured on 622,000 s hares in BCCI Holdings
(Luxembourg) SA.


I




357


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER


MM Hanuiioud - continued

(concerns (

Absence of critica l information

f '

/de have not been supplied with evidence of beneficial ownership of any
of the companies purportedly owned by Mr Hammoud.

''Whilst we have seen evidence to support security, there is generally
little evidence to support drawdowns and ongoing communication with
the customer.



X2) Reliability _of management representations

BCCI manageme nt have represented to us that ^Invesco , Rubstone Trading
and ftiddle East Commercial Agencies are non exposures pertaining to
MM Hammoud. We are told by BCCI managem ent that R ubst one is owned by
K Rah al, and Invesco by IY Younes a nd K Rah al. PW Cyprus have told us
that the lending to MECA^ is secured py tne personal guarantees of the
directors -rtf Shehaddid^lC Rahal and^Y Younes.


/ICIC management have represented to us that these companies are
beneficially owned by M r Hamrqpud Indeed, in ICIC management accounts
these facilities are grouped under the headi ng MM Hammoud .




(3) Evidence of recoverability


(BCCI exposures j


^The exposures Co MM Hanmoud In Che UK, Gibraltar and USA are
performing and are adequately secured.


^The lending to M iddle East Commercial Agen cies was extended to BCCI
CypnisJLn__lR&8. The ultimate recoverability of this amount is not
known. The lending is guaranteed by the directors but we know nothing
about their personal wealth.


/£ he ultimate recoverability of the B CCI Rubstone Tra ding facility has
been addressed in our report on lending secured on CCAH“shar es .
However, no interest has ever been paid on this account.


/The I nvesco facilit y in BCCI has not been performing. The original
advance o ^ $7 million was allowed in order that a previous delinquent
account to Mr M Jabali could be repaid (at a discount of $2.9
million) . Management have established a provision of $ 0.8 million at
31 December 1989. We doubt the commercial reality of this lending -
there appears to be inadequate security ($ 6-$10 million) to warrant a
third party taking over the debts of Mr JaSSli at commercial interest
rates .




358


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER


MM Hamnoud - continued
/"iCIC.SCTMMrgg

Management have been pursuing Che borrower for addi tional s ecurity and
a repayment schedule. These have not been forthcoming.

Inhere is no evidence available to indicate how the loans at_ICIC are
likely .to be reduced without the sale of BC CI shares;

<4) Qtrtrcr..g9nsgrns

f There remain t oo many u nanswered questions about Hr Hammoud:

-/ the confl icting man agement comments concerning his exposures.


/

/

■J


The nature of Mr Ham moud* s bu siness in Lebanon (he appears to
represent BCCI in his own capacity).

the rationale for giving his CCAH sh ares as security for lending
by Midg ulf and Rub s tone for no -apparent consideration.

his connection with delinquent accou nts of BCCI such as the
J aba 11 lo ans .


Ve require independent evidence supporting these exposures and
avidanca that: MM Haamoud la tha banaficial ownar of 2.6 million |h arai
in BCCI.



359


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER
{salgols

$ million 31 December 1989


Repayments

Interest received

in post




Gross


Snmnse Provisions

year -end

Net

^ Grand Cayman

20.9

/

(3.5)

(2.0)

(1.5)

13.9

/Bahrain


8.5

r

-



(2.2)

6.3

s£cc Emirates

1.8

(

(0.2)

-

*

1.6

Total exposure






Jfcf (3.7^



advised by BCCI

31.2


a. d

(2.0)

21.8

ICIC Exposure^

12.9


mm

wm

l ^

12.9

-






(t°l)


{background

l



-




'The principal members o£ the Saigol family have had facilities with
BCCI for many years. Loans were transferred between family members
when repayment was not possible, and the current borrowers have
rescheduled the facilities many times , failing to keep to repayment
arrangements.

*A11 facilities have been rescheduled at least once again during 1989,
and of five principal repayments due in the year, only two were met.

{Security


All Saigol faci liti es are clea n.





360


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER
Saigols - continued
{ CONCERNS \

Evidence of recoverability

Evidence of recoverability of the Saig ol lo ans have been based largely
on receipts of funds in 1989 and 199T5:

30 March 1989 - $2.0 million^ — Habib Bank, Singapore

4 April 1989 - $0.2 million - — IZ Company for Exchange,

Kuwait

3 January 1990 - $0.4 million IZ Company for Exchange,

Kuwait

4 January 1990 - $3. *25 million « — IZ Company for Exchange,

Kuwait

/<fe have seen no other evidence of the ability of the Saig ols or Saigol
businesses to service their lending or repay their outstandings.

have been informed by management that representations previously
given about the beneficial ownership of companies to which new loans

( were extended in Bahrain in 1989 have bee n false . The loans have
been given, in part, to repay delinquent loans in other locations. Ve
are now informed that these lbans are connected to the Saigol family,
although we are still awaiting a full explanati on.

^Although the Saigol loan balances have been regularly confirmed we
have significant doubts about their willingness to repay .the
outstanding amounts , given the extent to which these accounts continue
to be rescheduled. The involvement of the Saigols in relation to the
improper Bahrain len ding adds -to, our concerns.



361


BCCI HOLDINGS (LUXEMBOURG) SA


SUPPLEMENTARY BRIEFING PAPER
Numbered account 11011103
$ wi.il lgp


31 December 31 December
1989 1989


Funded exposure


13.9


11.8




(DC


BACKGROUND


An amount of $11.2 million was drawn down in a Grand Cayman numbered
account in November 1988.


<r


(tT) (securit^


This is a clean facility.


K


CO t§


,(1) Absence of critical information


There is no documentation to support the advance.

^(2) Reliability of management representations

In 1988 , BCCI management in Cayman represented that the account was
part of the exposure to the Ibrahim fami ly. In 1989, management have
represented, after first con firming the exposure as Ibrahim, that the
loan should be classified as landing t-n Maghriq^Hflldlidg& which is
beneficially owned by the Ruler of Fulelrah . Mr Imran Imam
responsible for the Ruler of Fujelrah account has not^ indicated to us
that this account should be included within his total exposure. In
fact, no analyses prepared by the bank have shown this account to be
that of the Ruler of Fujelrah.

^(3) Evident 9f-rgsgygiflfeill£y

There has been no activity on the account other than interest
application in 1989. Given the lack of documentation supporting this
exposure and the conflicting reports on beneficial ownership, we
require further information in order to assess whether the loan is
recoverable .



362


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER


^ | The Pharaon Brothers ^


^ Wabel Pharaon
/ Dr Ghaith Pharaon


Shares in
BCCI Holdings
(Luxembourg)
SA at 31 D ecember 1989

8,599,631

Unknown


Loans outstanding at
31 December 1989
$ million $ million
BCCI ICIC


288.3 /


288.3


75.4

27.8

103.2




BACKGROUND


( Wabel Pharaon is the brother to Dr Ghaith Pharaon a Saudi Arabian
entrepreneur who has diversified business interests. Wabel Pharaon is
also a businessman although we understand that his interests are
primarily in Saudi Arabia. ■-

4fost of Wabel Pharaon 1 s lending from ICIG was extended when Dr Ghaith
Pharaon sold his shares in BCCI to Wabel Pharaon.

^Mr HM Kazmi at ICIC holds power of attorney for Wabel Pharaon.


[security)


The only security for Wabel Pharaon? s lending in ICIC is 2,500,000
shares in BCCI Ho ldings (Luxembourg) SA.

Dr Ghaith Pharaon' s lending I n ICI C is secured on his Interest in the
Att ock- Oil Group . His BCCI- exposure is secured on shares Tahd deposits
although at least $130 million is clean.


CONCERNS


^-<l) Absence of Critical Information

Drawdowns are not supported by re quests from the customers.


'there are n o loan agree ments, promissory notes or correspondence with
the customers at either BCC I o r IC IC.

S

0n‘ 19 Dacfcmhp.r 1089 f $ 5.4 million was debited to the overdraft account
of Dr Ghaith Pharaon in Grand Cayman, representing the purchase
consideration for 111.709 s hares sold by Suhail Paris Al Mazru i .

There are no instructions from Dr Pharaon supporting thTsdrawdown ,
nor any correspondence from the vendor of the shares.


/^Wabel Pharaon has provided no support for his repayments of $4 million
in August 1989 and $10 m illion in 1220.



363


BCCI HOLDINGS (LUXEMBOURG) SA


SUPPLEMENTARY BRIEFING PAPER


he Pharaon Brothers - continued


In December 1987 we were assured by BCCI senior management that we
would receive confirmation that Wabel Pharaon was the beneficial owner
of BCCI shares - this was not fortficomTng.

Evidence of recoverability


Dr Ghaith Pharaon 1 s exposure in BCCI is ftlOO m illion in excess of
limits and exceeds 10% of the capital base of the bank. It is
consequently a caus'e~~for concern. Dr Pharaon has provided security of
approximately $150 million and is known t q^have sig nificant net worth.
Nevertheless, the" v clean exposure has increased" to about $13U m llllonr
partly because of a r educt ion in Dr Pharaon* s deposits ($20 million)
and a decl ine in the value of security given ( $2(P mi 1 1 ion) . J We
require evidence that Dr Pharaon has the ability"" to service and repay
this clean lending.

*He has demonstrated his willingness to repay some of his loans by
reducing this exposure in ICIC by $2^2 million following the sale of
Tradlgr ain to British Pe troleum .

''Wabel Pharaon has provided some evidence of ability to reduce his
lending by making repayments of $14 million since 30 June 1989.
However, we have no net worth statement and no understanding of his
ability to repay. We do not know the extent to which he might be
supported by his brother. It is unclear how his borrowings may
continue to be reduced, other than by the sale of BCCI shares.


*The sale of M azrul 1 s shares in December 198 9 has not been recorded in
the shareholders * register a t 31 DacemherTffBg . or in January or
February 1990 . This causes doubt as to the accuracy of the
s hareholder reco rds. In December 1989 Wabel Pharaon acquired 105,321
BCCI sharesT from Mohamed Taufiq Jiddau according to the Luxembourg -
share register. We are unclear as to how this acquisition was
financed and why Wabel Pharaon should want to purchase further shares
in BCCI when he is trying to reduce his loan exposures in ICIC.

t'we therefore requi re .independe nt confirmat ion by Wa bel Ph araon and
Dr* Ghaith Pharaon at 31 December 1989 of tfieir shareholdings , the
shares pledged as security and of their outstanding liabilities at
that date.



364


S

/


uwu/inud (LUXEMBOURG) sa
SUPPLEMENTARY BRIEFING PAPER

f

Grand Cavan Risk Facilities

Gross
Exposure


Interest in
Suspense


Accounts where cash
has been received:

Haider Bin Khamis
Lisa General
AI Gad - **(*)

Al Hajl Dasukl









hgA.

***

1

'"I


3.6

5.1

4.3

0.7


( 1 . 2 )


Krgvjglon


( 1 . 0 )


Net

Eapogurg


3.6

3.6

3.1

0.7


Other accounts not
subject^ to litigatio n


1.

South Gulf Trading.

/

2.0

-

(1.7)

0.3

J.

A de Vega

f Iwv

2.6

-

(1.3)

0.8

J.

Wintervood Associates WX

3.5^

(0.7)/

-

y 2.J08

•>.

Charles Howard 4?

r

2.2/

Y(o.{) (««*•*■) - 1

(S<t>

X

First Arabian Cdrp

4/ ft

5.8

(2-lj ,

(1.0)

2.7

(

Al HaJ i Daura


0.4/

- (0.1)/

-

0.3/


Accounts subject to







litigation






1

Abbas Hosselhy /f


4.5/

.

1.1 y,

<3&r

2.

Stinnes (ft crfc)) r

33/.

7.3 .

-

(1.0)W

6.3

©



(4S1)



A

| BACKGROUND







It has generally been the case that delinquent accounts at various


locations have been transferred to

Grand Cayman and

these make

up the


Cayman risk facilities.






I CONCERNS ]


(l) EYlfonco of moYgrability

/Accounts where cash has been received during 1989:

No advice was received for the remittances of cash against these
accounts. Given the evidence now received regarding cash receipts on
other delinquent accounts in the BCC group, these balances (totalling
$11 'million) are an area of concern, which in the absence of
independent e vidence , are likely to require f ull provisi on.




365


BCCI HOLDINGS (LUXEMBOURG) SA

SUPPLEMENTARY BRIEFING PAPER

Grand Caym an Risk Facilities - continued




Other^ accounts not subject to litigation :


ftai


anagement have already decided to provide fully


facilities of South Gu lf Tradin g,
extent of the unsecured balance.


irst Arabian,


against the

and A De Vega to the


Ahe loans to Wi nterwood and Howa rd, although partially secured, have
shown little performance and fiCCl have made no effective effort to
regularise the facilities. There is no rationale for their being
booked in Gra nd Caym an, and we believe that the original loans were
extended through Treasury connections with AR Khalil. Ue remain
unconvinced that these loans will e ver be rep aid, nor that the bank
will enforce its security. ~ ~ ~~

f A ccounts subject to litigation :


'Although we recognise that there could be recoveries from the
litigation, it would be prudent to provide in full against these
accounts in 1989. Management have initially determined a further
provision of §1.5m against the Stlnnes facility.



366


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER

Ibrahira-familyl

31 December 31 December 31 December

$ million 12S£ 12M liiZ

Gross exposure 131^7^ 210 . 8




BACKGROUND


a


The Ibrahim family, headed by Sh Ab dul Aziz A1 Ibr ahim, have
maintained significant loan and deposit balances with BCCI for a
number of years. At 31 December 1989 family deposits total $152
million. ‘

2 CONCERNS

f (l) Absence of critical infgiBia£lgD

/ The loans are advanced against deposits pledged to the extent of
$152.4 million, but there is no formal lien over the deposits.

^Je do not understand the rationale for maintaining both loans and
deposit s of the levels concern ed. (Interest is charged at the same
level as deposit interest' £s~paid for loans to the value of 50% of the
deposits held) .

^Deposits are held in the names of the various family members, not all
In the name of Sh Abdul Aziz. This detracts from the comfort gained
from the deposits maintained because in particular no cross guarantees
exist.




Independent d irect confirmation fr om the borrower of all balances is
essential given the absence of formal lien-. *




BCCI HOLDINGS (LUXEMBOURG) SA


SUPPLEMENTARY BRIEFING PAPER
Al Fulfil

S million


31 December 1989


Funded Exposure:

BCCI

ICIC

Security

Faisal Al Fulaij
Middle East Investment

-

1.5

FIIL Shares

Company

Middle East Investment

-

4.9

CCL Shares

Company

-

1.1

CCL Shares

Faisal Al Fulaij

-

8.8

BCCI (H) Shares

Faisal Al Fulaij

-

8.0

BCCI (H) Shares

Faisal Al Fulaij

-

4.4

Clean

Faisal Al Fulaij
Middle East Investment

*

0.3

Clean

Company

-

0.3

CCL Shares

Faisal Al Fulaij

-

5.7

BCCI (H) Shares

Faisal Al Fulaij

7.4

--

CCAH Shares

Faisal Al Fulaij

87.9

-

CCAH Shares

Faisal Al Fulaij

7.3

-

CCAH Shares

Faisal Al Fulaij

10.3



CCAH Shares


112.9

35.0


BACKGROUND j




Faisal Saud Al Fulaij is

a Kuwait

businessman.

He is also Chairman


Kuwait International Finance Company SAK (Kifco)

SECURIT Y^

FIIL: ^Faisal Al Fulaij owns 2% of FIIL which in turn owns Attock

Oil International.

CCL: through Middle East Investment Company, Faisal Al Fulaij '

. owns $29% of CCL H oldings (CCL) which in turn owns CCL
Financial Group Pic.

BCC I : ^Faisal Al Fulaij owns 26,439 shares in CCAH(post rights

issue). He has pledged 5,976 shares as security to BCCI and
a further 10,680 shares have been cross pledged by Sh Kamal
Adham and All Mohamed Shorafa in respect of his borrowings.



368


BCCl HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER



There are generally no loan agreements, customer Instructions or
promissory notes supporting this lending. Balances have been
confirmed. Shares are physically held by ICIC or BCCI as security.




There has been very little performance on any of these accounts in
recent years and exposures Have* been increasing through the
application of interest and charges. The underlying investments are
not generating cash dividends and Faisal Saud Al Fulaij is not meeting
repayments or servicing charges from his own resources.



369


BCCI HOLDINGS (LUXEMBOURG) SA


SUPPLEMENTARY BRIEFING PAPER



BCCI ICIC


Funded exposure

Prince International
Holdings
IMC Group



The IMC Group owns and, operates thp- Cromwell Hospital. It is owned by
theVAbu Dhabi Ruling Family and a*Foundation financed by l£I£_Holdings
- International Health and Welfare Foundation. The IMC Group has
required support from B CCI and ICIC - through Prince International
Holdings in order to meet its commitments. In 1987 a t en year plan
was drawn up which would enable the Qroup's lending to be reduced to a
reasonable level.



The BCCI lending is secured on the assets of the IMC Gr oup including
the Cro mwell Ho spital. The Prince International Holdings lending is



In March 1989 we were told by B CCI senior manage ment that they were
hopeful that the Abu Dhab i Ruling family would provide $10 m illion
additional capital by 30 Jun e and that the bank would deliver a
request for additional capital in the summer of 1989. No additional
capital has yet been provided although we are aware that discussions
are taking place.


13.7 46.3

91.9 -

105.6 46.3


The underlying I MC project is unable to service its lending from BCCI.
There is no source of income to repay the loans to Prince


International Holdings. Repayment of the BCCI and ICIC exposures can
only bo assured by olgnlf leant additional capital in jections by the
Abu Dhabi Ruling-family. Thete Is underlying security co the lending
in the Cromwell Hospital project but given its unique nature this can
only be realistically assessed by Independent valuation.


370


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFING PAPER

Prince International Holdings and International Medical
Corporation (IHC1 Group - continued

j4) ftttttE-sgasRina

S

< Correspondence that has been provided to us indicates that the Abu
Dhabi Ruling family does not a ppear to be receiving up to date
infornationin order to satlsty itself as to the ongoing viability of
the I MC proj ect. The project is dependent on the support oF“the
Ruling Family and they should receive accurate and regular financial
information.

''XHir concerns are more fully addressed in a letter dated 26 F ebruary
1990jto Mr Naqvi which is included as appendix I to this report, which
indicates that finan cial support: of the order of $100 million from the
shareholders is likely to be required. " ’



371


BCCI HOLDINGS (LUXEMBOURG) SA
SUPPLEMENTARY BRIEFINC PAPER



Hall Sultan Fadel


S million


Funded exposure:


2L


December

1989


31 December
1988


BCCI (Overseas) - Grand Cayman
BCCI SA • Bahrain


12.2 11.8

6.2 5.6


r>



18.4 17.4

r B ACKG ROUND /

Al Haji Sultan Fadel is an Onani businessman who controls WJL_X&weJ.l &
Co in Oman. He is Chairman of the National Bank of Oman (NBO) holding
9.9% of the shares in his personal capacity and a further 37% through
NBO. *


C\) /Security]


The loans are secured on 1 ,.818,000 ROl'" shares in NBO (9.9% o£ the
issued capital). _


<S) c


CONCERNS




(1) Evidence of recoverability

^The original advance In 1985 was for $15 million. Interest has not
been serviced and consequently the Incr ease in the outstandings
represents unpaid interest.


<lJhllst

BCCI.


there is value in the security it is unlik ely to be en forced by




fe have not seen evidence of the ability of A l Haji Sultan Fade l to
service his personal external lending, wnusc n e floes have perso nal
wealth and f significant shareholding in VJ Towell & Co we do not know
whether he has the cash flows to repay th ese loan s"

2) Other C9ng%rng

These loans were advanced to enable Al Ha^i Sultan Fa del to purchase
shares In NBO. It is more realistic to treat these as an inve stment
of BCCI ancTvrite them down to net as set value with noninterest
recognition. At 31 December 1 989 thi s would require the loans to be
written down to $3 million - $9 million.



372



APPENDIX I


S Naqvi Esq

Bank of Credit and Commerce International
100 Leadenhall Street
London
EC3A 3 AD


^Dear Hr Naqvi, ;

f \ enclose a paper which we have produced concerning Prince
International Holdings and the IHC Group.

('it seems to us that ther BCCI exposures to these entities have to be .
considered in the aggregate with those of ICIC, and thus the paper is
bapad on this premise .

£ Clearly, as we have discussed previously, there is a need for a

- substa ntial capital i njection into the project in order to achieve the
proposed restructuring programme , and in particular to eliminate the
Prince borrowings which we understand were always intended to be
relatively short-term. Any such restructuring must also ensure that
IHC is able to finance the residual borrowin gs out of its cash flows.

^he objective of the paper is to qua ntify in approximate terms the
likely share holder com mitment required to refinancing the project on
the above basis , which is substantial; and to consider the possible
alternative courses of action to enablq us to be satisfied as to the
collectibility of the outstandings due to the BCC Group and also to
ICIC (Overseas) Ltd.


ZOn


.On the basis that a writ ten commi tment is obtained from the following
that they are pre pared to fund the proje ct then n o provis ion would be
required:


HH Sh Zayed bin Sultan al Nahyan

The Abu Dhabi Ruling Family

International Health and Welfare Foundation


$ # m

31.2 f

52.3 f
22.1 '


105.6



373


26 February 1990
S Naqvi Esq
Page 2


the


amount identified is necessary to ( eliminate I the cur rent loan s to
Prince ($ 60. 0m ) the syndic ated loan to the IMfi Group ($36^. 8m) and the
Grand CaymarPloan to IHC Holdings "T$8 . 8m) . "




Ue would also require evidence of how International Hea lth and Welfare
could fund such an Investment.


( If such a commitment cannot be given we suggest that the interest
subsidies from ICIC to Prin ce for its lending from CFC and t o IHC for
H its lending from the BCC Group be reversed and interest which is not
fl being serviced be suspended wi th ettect rrora December T987 Wt\6tT'Che
f first subsidies were provided. Provisions against principal ate also
required to reduce the cur rent outsta ndings to the approximate
underlying value of the project. The total charge would be as
follows : ^ •


Interest

gygpgndgd Provision T fl . tal


Provision in BCG Group for lending to IKC $13. lm-
Provision in CFC for lending to Prince $3. 7m
Provision in ICIC for lending to Prince -

$16. 8m


/


$13. lm
$5. 7 b'' $9. 4m
$18 .9m ' $18 ,9m

$24. 6a i $41. 4b <■"


These charges are based on reducing the current outstandings to an
amount lower than or equa l to the underlying value of the projec t.

The hospital‘s is Included at its depre ciated replacement cos t although
the underlying value, includin g goodwill , may well be greater than
this. To the extent that this can b e demonstrate d the provision*
require ment could be less . We have provisionally discussed the
possibility of obtaining - such a valuation with Mr Kazmi.



26 February 199®
S Naqvl Esq
Page 3


374


Naturally alternative (1) is the more pref erable but may be difficult
to achieve in the short term and flwiuld be pleased to discuss this
with you once you have had a chance to review the initial paper.


I am sending a copy of this letter to Hr Kazmi, also.


Kind regards.
Yours sincerely,


Cl Cowan
CIC/JAG/MM



375


BANK OF CREDIT AND COMMERCE INTERNATIONAL (BCCI)
INTERNATIONAL CREDIT AND INVESTMENT COMPANY (ICIC)


AC 31 Decembe r 1989 both BCCI and ICIC have significant exposures to
PIH and IMC~as follows:


Prince International Holdings

Loans from ICIC
Loans from CFC


46.3
60.0 /


corporation


Syndicated loan from BCCI Group


(including accrued interest)
Loans from Grand Cayman (BCCI)
Loan from UK Region (HedCorp)
Loan from UK Region (MSI)

36.8 f
8 .8 ^

29.9 S
16.4 S


91.9


The summarised balance sheet of PIH a t 31 December 1989 estimated on
basis of 30 June 1989 figures, isl

$'m


Investment in IMC

8.6 ^

Interest free loans to IMC

35.9

Other assets

0.1 <


44.6 /

Loans from ICIC/CFC ■ — .

60.0

Other liabilities

2.5 ^

Share capital

(including shareholders' loans)

- Abu Dhabi Family

9.8 ^

• International Health

& Welfare Foundation

8.9 ^

Reserves

<36 .6> —



376


The balance sheet of IMC at 31 December 1989 may be summarised as:


Property (including Cromwell Hospital)
Other Fixed Assets
Blocked Funds at BCCI
Other Assets


Loans from BCCI
Loans from PIH
Loans from Sh Z
Share Capital
- PIH
• Sh Z

Revaluation Reserve
Profit and Loss Deficit
Other Liabilities


$ 'm

48.1
13.4
28.6 <
JLSL.l S

I


105.2




91.9 *

35.9 '

2.3 ^

3.4 <
2.3 ^

18.9 '
<56. 2> — -
_JL2 '

105.2 ^


& At 31 December 1989 the non » BCCI fund ing of the I HC Grou p was out of

line with the originally envisaged shareholdings.




&


©



31 December

1989

Original

Plan


$'»

%

%

PIH

39.3

90 <

60 S

Sh Z

4.6

10 /

40 ^









43.9

100%

100%


r


Our understanding is that P rinc e was established as part of a
restructuring programme designed to red uce the debt burd en of the IMC
Croup by the injection of ad ditional equity cap ital. It was envisaged
that the residua l lendin g from BCCI could then be f ully serviced and
repaid over a reasonable time.

At 31 December 1989 the funding of PIH was also out of line with the
original plan: '


Original



31 December

1989

Plan


$'m

%

%

ICIC/CFC loans

60.0

76 '

33

International H&tf

8.9

11 ^

Abu Dhabi Family

9.8

13 '

67 '


UUL

1 0fi%

. 100%



377


/the original plan incorporated a ten year forecast that, if met, would
enable IMC to reduce its debt burden. It was planned that IMC would
service its lending from its own resources and not be subsidised by
the shareholders. This has not happened, as interest on the
syndicated loan has been paid by ICIC through Princ e Intern ational
Holdings: ^


( 1 )


S


J. IMC Croup

1988

Projected

Surplus/(Deficit)

S'ra

1988

Actual

1988
Adjus ted
for interest
.subsidies

Before funding Costs

.8.6

7.8

7.8

After funding Costs

(0.3)

(1.4)

(7.2)


1989

Projected

Surplus/Deficit

S'm

1989

1989

Actual

1989
Adjusted
for Interest
subsidies

Before funding Costs

9.1

11.1

11.1

After funding Costs

0.2

(1.6)

(5.8)


41


> 2 )


Interest is not being fully serviced by IMC - rather interest on the
syndicated loans is being settled by Prince through additional
drawdowns on its loans from ICIC, of $5,18 m illion in 1988 and $4.2
million in 1989 which have been taken up as Income in IMC. Group.

4n addition interest of $0.7 million and $0.4 million has been unpaid
in 1988 and 1989 respectively on^ lending from BCCI - Grand Cayman to
IMC Holdings.

The IMC Group can still not service its lending. It is being
subsidised by PIH. It needs an injection of eq uity capita l at the IMC
Group level prob ably equivalent -t o the total of the syndicated loan
and the* loan from BCCI Grand Cayman of $45.6 rfiliion, on the basis
that interest on this lending .!* not being serviced at present. A-
more precise estimate would require a detailed evaluation of IMC and
the Hospitals current cash flow forecasts. We understand that the
current performance of the Hospital has been depressed and is below
budget. ~~ — rr-

Prince , being entirely reliant on IMG , cannot service its lending from
CFG and ICIC and a further capital injection is required to repay
the^e facilities totalling $60m. =>-■


[



378


We have calculated that the originally planned ratios would be
satisfied if the following capital injections were made to refinance
the lending identified above.:.

* $ million

Sh Z 31.2

Abu Dhabi Ruling Family 52.3

International Health & Welfare 22.1

105.6


If a commitment to such a capital injection could be given, the value
of loans given by BCCI and ICIC would be supportable so long as the
funding of IHW could be proven.

If the commitments cannot be f iven. then the problems faced are :
Non-performing loan in BCCI Grand Cayman to IMC
Syndicated loan to BCCI being serviced by ICIC
CFC loan to Prince being serviced by ICIC
ICIC loan to Prince not being service^.

This situation would be untenable and the accounts need adjustment.

Our suggested treatment of these loans would be:

Reversal of $0.4 million interest on the BCCI Grand Cayman facility of
IMC Holdings in 1989.

Reversal of syndication and CFC subsidies by ICIC through Prince in
1988 and 1989 ($12.8 million) thus transferring $12.8 million out of
Prince lending in ICIC and re establishing the interest payable in
BCCI with an equivalent interest in suspense creditor. (See Appendix

I).

^ The above would require the amounts paid from ICIC to BCCI of $12. 8m
to be reversed from lending to Prince at the expense of the BCCI
group, who should additionally suspend Interest of $4.0m accrued (see
Appendix II) on the Prlnce/IMC Holdings lending at 31 December 1989.

(3) A total of $16.8 million would therefore be expensed in BCCI in 1989.

(4) After adjustment the remaining loan balances would be:


ICIC - $46. 3a

less $12. 8m

$33. 5m

BCCI - $105. 6a

plus $12 .8m accrued interest
less $16. 8m Interest in suspense

$101. 6m

$ 151 . 9 »


S135. lm


This total reduction is accounted for by the expensing in BCCI of
$16.8 million.


10

( 1 )

( 2 )

(3)

<*)

II

( 1 >

( 2 )



If necessary che remaining loans should be written down to the
underlying value of the project.

On the basis of the last f ormal valuati on of the Cromwell Hospital
this implies a shortfall of $36.6 m illion, although the informal
revaluation performed in July 1989 would reduce this to $24.6 million,
as follows: — * *




IMC Group

IMC Croup


Loans

Net A?.?g £s

Revalued Net Assets


$'»

, $'»


ICIC

' 33.5



BCCI

101.6





135.1

98.5

110.5


On this basis the additional provisions required are:

S'm


ICIC 18.9

CFC 5.7

24.6


If the $16.8 million adjustments and interest reversals referred to
above were not made, the total shortfall on the loans outstanding of
$151.9 million against the revalued net asset of S110.5 million would
be $41.4 million. On this basis the provisions required are:


Us

ICIC
CFC

41.4


31.9 ^
JL1 —


The basis of the valuation used above (depreciated replacement cost)
however essentially only values the "bricks and mortar" of the
Hospital. In reality the total value of the project may be greater
given the goodwill interest in the business and clearly the extent to
which this can be demonstrated would mitigate the provision
requirement referred to above.

We would be pleased to discuss this further.



380


APPENDIX I


Interest s ubsidies paid by ICIC

The following amounts have been remitted to CFC by ICIC:

1 On Syndicated lending:

February 1988
August 1988
January 1989
July 1989

£6, 1552b 0 1.6255 - $10. 005m


£2. 454m
£1. 1150m
£1. 1183m
C l. 4679a


2 On CFC loan to Prince International:


December 1987
July 1988
November 1988
May 1989


£0 . 442m
£0.46 8m
£0.317m

CO. 46 6m 0 1.6255 -


Grand Total US Dollars Equivalent-.


$12. 757m


APPENDIX II


Prince/IMC Accrued Interest as at 31 December 1989

Interest accrued on Prince/IMC Holdings lending at 31 December 1989 is
as follows:


$ ' m

On syndicated lending (£1.628m 0 1.6255) 2.65

On IMC Holdings loan in Grand Cayman 0.40

On Prince Inti loan in CFC

(£0. 583m 0 1.6255) 0.95


4.00



381


Senator Kerry. Document No. 5 was a letter which was given to
the directors of the bank from Price Waterhouse summarizing the
problems that had been found as a consequence of their supplemen-
tary audit, which I believe prompted you to decide that you were
going to resign.

[The information referred to follows:]



382


April 1990


Dear Sirs,

{ TRANSACTIONS WITH SHAREHOLDERS

Ue have prepared an analysis of loans Co shareholders of BCCI Holdings
(Luxembourg) SA outstanding in BCCI Group companies or in ICIC
(Overseas) Limited at 31 December 1989 • see Appendix 1. Appendix 2
provides a more detailed analysis of lending to the Abu Dhabi Group.
The analyses are prepared on the basis of information available to us
and may exclude certain small loans which have not been reported to
us. Ue have also not yet been provided with a full listing of
• shareholders at 31 December 1989 and accordingly base the table on the
percentages at 30 September 1989.

Ue have a number of concerns in relation to the shareholder lending:
Abu Dhabi Croup

Included within the Abu Dhabi Group are loans of $109.4 million to HE
S h Hamdan Bin Mohammed Al Nayhan . HE Sh Hamdan died on 12 October
1989 . Ue have seen no evidence that these liabilities will be assumed
by the estate of HE Sh Hamdan nor any other evidence as to how they
might be repaid. At 31 December there were deposits of $38.6 million
with ICIC (Overseas) Ltd in the name of HE Sh Hamdan and preference
shares and placements with ICIC Holdings Ltd of $55.0 million. There
is however, no lien or formal right of offset available for these
balances. Ue require evidence from the estate of HE Sh Hamdan
advising how these loans will be repaid and confirming what set off
’arrangements are applicable.'

Ue have been unable to obtain satisfactory documentation relating to a
US$150 million loan in the name of HH Sh Khalifa drawdown on 11 March
1988 and subsequently repaid in 1988 and 1989.



383


3 April 1990
Page 2


$10 million was withdrawn in cash in September and October 1989 and
charged to an account in the name of HH Sh Zayed. We have seen no
customer authority for this withdrawal, nor confirmation of the
outstanding balance.

P Mahfouz Companies

Dubai Family

Our concerns regarding these loans have already been addressed in our
briefing notes to the independent task force.

Once the outcome of the task force's work is complete and the
situation concerning lending to Sh Mohammed bin Rashid Al Maktoum and
Sh Khalid Din Mahfouz is clarified we shall require independent
confirmation of their loans outstanding at 31 December 1989 and of
their shareholdings in BCC1 Holdings (Luxembourg) SA both at 31
December 1989 and at the date of approval of the 1989 financial
statements .

) Wabcl Pharaon and Dr Ghaith Pharaon

We have a number of concerns in relation to these two borrowers
concerning shareholdings:

(1) We have no evidence that Wabel Pharaon is the beneficial owner of
8, 599, 631 shares in BCCI Holdings (Luxembourg) SA.

(2) The only s ecu rity for Wabel Pharaon' s borrowings in ICIC are 2 , 500 , 000
of his shares in BCCI Holdings (Luxembourg) SA. We have no evidence
to support his capacity to repay these loans without selling these
shares .

(3) In December 1989 Wabel Pharaon acquired 105.321 BCC I shares from
Mohamed Taufiq Jiddau according to the Luxembourg share register. We
are unclear as to how this acquisition was financed and why Wabel
Pharaon should want to purchase further shares in BCCI when he is
trying to reduce his loan exposures in ICIC.

(4) On 19 December 1989, $5.4 million was debited to the overdraft account
of Dr Chaith Pharaon in Grand Cayman, representing the purchase
consideration for 111.709 s hares sold by Suhail Far is Al Maz rui.

There are no instructions from Dr Pharaon supporting this drawdown,
nor any correspondence from the vendor of the shares. The sale of
Mazrui* s shares in December 1989 has not been recorded in the
shareholders' register at 31 December 1989, or in ,bn*ir»r» »

i oon



3 April 1990
Page 3


384



We require independent confirmation by -Uabel Pharaon and Dr Chaith
Pharaon at 31 December 1989 of their shareholdings , the shares pledged
as security and of their outstanding liabilities at that date.

MM llammoud

HM llammoud is a significant shareholder in BCCI Holdings with
2 , 646,1 84^ shares and is also a shareholder in CCA11. (fyZt>o)

*fiis ICIC facilities are secured o n 622. 00Q shares in BCCI Holdings
(Luxembourg) SA. The balance is Clean.

Management at ICIC have been pursuing the borrower for additional
security and a repayment schedule. These have not been forthcoming.
There is no evidence available to indicate how the loans at ICIC arc
likely to be reduced without the sale of MM Hammoud's BCCI shares.


Ue again require independent evidence supporting these exposures and
evidence that MM Hammoud is the beneficial owner of 2,646,184 shares
. in BCCI. ,

i

(1? I- Sh Kamal Adhar.

<T a.Falsal A1 Fulall

♦• Hr Saved Jawharv
♦. Hr AR Khalil
«*HE. AL L H

^Lending to these individuals is principally secured on shares i n CCAH
and is discussed separately in our briefing notes to the independent
task force. Given the problems we have identified concerning the
loans outstanding from AR Khalil, which are detailed in our briefing
notes to the independent task force, we would also like to seek
independent confirmation from him of his shareholdings at 31 December
1989. - • • - -



385


3 April 1990
Page A


,<D




©


tiLRlLPcinsg Turk!

Z?\\aS Corpo r a tion t

i Abdullah Saeed Badar al Rawas
** ShbAU ..Abdullah Bugshpn
iT ll£ Mohammed Habroush Al Sowaidi
C Mohamed Al Qasiwi
1 Sh Snlcro Ahmed Bur.shan
f.Ht Na$?er.Hoh?m?d al Howajs

'Whilst these exposures are smaller than most of those noted above, the
loans arc often non performing and^we are concerned about the
willingness of the shareholders to repay these loans.




We believe that these loans should all be independently confirmed at
31 December 1989. We also suggest that an independent assessment is
made of the ability of these shareholders to repay their loans and of
their performance to date. Where necessary the loans should be
restructured and provisions should be established.

Ij?<3spen<fcnt. shareholders qjrcuiarigation

As we have already referred to, there are a number of instances where
we believe it would be appropriate to inde pendently confirm sh ares
held by individuals or companies. This is a consequence of:


^(D


our necessary reliance on management representations in the past as to
shareholders and the number of shares held.


^(2) the instances noted (and referred to in our report to the independent
task force) when shares subscribed to under the 1989 rights issue have
not been acknowledged by the cus tomer and where there are no
acceptance letters or other documentation from the shareholder.


(3) the tim e d elay that is encountered in the shareholder r egister being
updated.

• ^Tiven the significance of shareholder support at this time we believe
that it is essential that all shareholder details should be

( independently confirmed by Price Waterhouse with the shareholders
concerned. This conformation exercise should include




Confirmation by the shareholder of the shares held in BCCI Holdings
(Luxembourg) SA at 31 December 1989 and at the date of
circularisation.



386


3 April 1990
Page 5


y* 2 >


Confir nation by the shareholder that they are the beneficial owners of
these shares .


/3)


Confirmation of loans outstanding and contingent facilities at 31
December 1989 with BCCI Group companies and ICIC (Overseas) Ltd
in cluding anv restructuri ng t erms that may now have been agreed.


/<>


Details of any BCCI shares pledged as security for this lending.




Details of d eposits place d with BCCI Group companies or ICIC Group
Companies at 31 December 1989 and whether und er lien or free of lien.




Details of any other sig nificant transac tions with BCCI or ICIC.

^fn order that the confirmation exercise is truly independent, it
should be fu1,ly- controlled by Price Waterhouse. We would naturally
conduct this exercise in a discreet manner and treat all information
extremely confidentially.


We look forward to discussing these issues with you further.
Yours faithfully.



387


APPENDIX l


Loans to shareholders


(at 30.9.89)


Balance at
31 December

1989

$ million


BCCI


Shares

Pledged


Balance at
31 December

1989

$ million


IC1C


Shares

Plcdr.ed


Shareholder


Abu Dhabi Group

35.61

371.8

Mahfouz Companies20 . 00

152.5

Mr Wabel Pharaon

11.41

-

ICIC Foundation

8.40

-

Mr MM llammoud

3.55

24.9

Dubai Family



Stock/Crescent

3.27

124.6

Mr AR Khalil
ICIC Staff

3.08

150.3

Benefit Fund

2.94

-

Sh Karaal Adham

2.94

313.5.

Faisal al Fulaij

1.53

113.0

HRH Prince Turki

0.97

9.6

Mr Sayed Jawhary

0.75

19.7

Shaf Corporation
Abdullah Saeed

0.70

20.7

Badar al Rawas

0.55

17.7

HE Ali M Shorafa

0.55

123.3

Ali Mohamed Bin



Aqecl Baomar
Sh Ali Abdullah

0.54

0.1

Bughsan

0.41

3.9

Mohamed al Qasmi
Sh Salem Ahmed

0.15


Bughsan

0.13

9.5


HE Mohammed
Habroush al
Sowaidi 0.11

Hr Nasser
Mohammed

al Nowais ) 0.08

and Mr Yousef )

M Al Nowais )

Mr Abdullah
Nasser Hawaileel 0.08

Juan Salim 0.06


7.5


7.3 58,878


1.4

5.3


17.5

75.4 2 , 500,000 ^

37.9 6,252,811^

60.9 622,000 *

0.1


49.1 2,187,039 0

10.1 - )

380,819 * ^


35.1

12.9


325 ,671 ^


5.4


0.6


2.6


0.7


0.5


25,000


J


2.19


0.2


Others



388


Loans to shareholders - continued


APPENDIX 2


The Abu Dhabi Group lending nay be analysed as follows:


Balance at 31 PecombonlgflE Comments

BCCI ICIC


%

HH Sh Zayed Bin Sultan
Al Nahyan ' 3.88


IIC Sh ilamdan Bin Mohamed
Al Nahyan 0.71


lie Sh Mubarak Bln Mohammed
Al Nahyan 0 . 54


HH Sh Khalifa Bin Zayed
Al Nahyan

19.65

HE Sh Tahnoon Bin Mohammed
Al ' Nahyan 0 . 20

HE Sh Nayhan Bin Mubarak
Al Nahyan

0.10

George Town Funding
Company Limited

0.11

Abu Dhabi Investment
Authority

10.42

Sh Mohammed Bin
Zayed Al Nayhan



$ million


127.1

Personal overdraft


facility.

12.8

Other personal
overdrafts.

2.0


10.0

Personal loan facility.

151.9

— —

74.5

Grand Cayman loan for
investment purposes.

11.1

Grand Cayman overdraft

" 16.2

City Centre Hotel



7 .6 CIC facility

101.8

7.6

6.9

Personal loan facility

16.7

Personal overdraft



facility

23.6



31.9

Personal overdrafts

0.2

-

7.4

6.3

55.0

330 Madison Avenue
Company owned 75% by ADI A

-

3.6 ICIC facility


35.61 371.8 17.5



389

Senator Kerry. And document No. 6 is your task force report,
the summary that you yourself put together with your investiga-
tive task force, in which you summarized the $850 million which
was at risk on the Credit Commerce American holdings; First
American, the $800 million on the shareholder loans, which was all
BCC; the $700 million on the Gokal shipping problems; the $100
million on the Grand Cayman miscellaneous; and subsequently, the
$500 million on the ICIC books, which was a separate entity that
you are going to describe today.

[The information referred to follows:]



REPORT OF THE TASK FORCE

(SET UP BY C.E.O. OF BCCI HOLDINGS (LUXEMBOURG) SA)

TO REVIEW AND REPORT ON SELECTED INTERNATIONAL LOANS AND
TRANSACTIONS


PREPARED BY

M Rahman
S Jamil
A Chaudhry
R Velmi


April 1990


391


Serial

No.

1 .

2 .

3.

4.

5.

6 .

7.

8 .

9.

10 .

11 .

12 .

13.

14.

15.

16.

17.

18.

19.

20 .

21 .

22 .


CONTENTS


Page

Subject Kef.


PREAMBLE

1


WORK OF TASK FORCE

3-

12

DETAILED FINDINGS
Re: PW 1st Report



C.C.A.H.

13

- 20

Sh. Kama! Adham

21

- 23

A.R. Khalil

24


Gulf Group

25

- 27

Off Shore Companies/Loans

28

- 31

Mahfouz Family

32


Sh. Mohd. Bin Shahid Al Matktoum

33


Grand Cayman - Slow Moving Advances

34

• 35

DETAILED FINDINGS
Re: PW - 2nd Renort



K.I.F.C.O.

36

- 37

B.C.P.

38


S.D.CC

39

- 41

Hammoud

42

- 45

Saigois

46

- 47

Grand Cayman - Numbered A/C 11011103

48


G. Pharaon/W. Pharnon

49

- 51

Grand Cayman - Other A/Cs (12)

52


Sh. Ibrahim

53


Prince/IMC

54


Haji Sultan Fade!

55

- 57

Faisal Al Fulaij

58




392


REPORT OF THE TASK FORCE

ON SELECTED INTERNATIONAL LOANS AM) TRANSACTIONS


LOO PREAMBLE :

1.01 Tin’s report by thb special Task Force, addressed to the Chief Executive
Officer, is in response to the specific requirements of the external auditors
of the BCC Group - Messrs. Price Waterhouse (PW).

It incorporates the findings of the Task Force concerning a number of
international loans and transactions related thereto • primarily emanating
from Grand Cayman branch of Bank of Credit and Commerce International
(Overseas) Limited. The external auditors had identified these loans and
transactions during the course of their audit for the year 1989 and had
. expressed severe reservations thereon - necessitating further independent
review and disclosures as to the nature of these accounts and transactions
and their effects on the financial results of the Group and provisions for the
year.

1.02 The report has been prepared after days of continuous work since receiving

the PW report on 14th March 1990 and involved extensive and intensive

interviews of concerned "Accounts Officers" and review of a number of files

and documents connected with these accounts and transactions, as were

available or made available in London. PW presented the Task Force with

kpL

a supplementary report on the 6th >4aom 1990 containing 12 problem
loans/related issues. The Task Force notwithstanding the time constraint has
made all efforts to review each of these accounts and present their findings
in this report.

1.03 While the Task Force has not conducted a detailed audit as done by PW it
has nevertheless reviewed all accounts listed in PW report and additionally
accounts in those locations not covered by PW audit like Kuwait and
'Uruguay which have a similar nature or purpose or relationship.

1.04 The report besides recording the findings of the Committee also makes
specific evaluation of the effects of these findings on the financial results of
the BCC Group for the year 1989, as well as their monetary implications for
1990 and beyond.


393


1.05 The report also makes very specific recommendations on

(a) the additional provision necessary in the bank’s accounts of 1989 to
cover against the resultant drop in the quality of certain specific
portfolio of advances in the books of the bank, primarily in Grand
Cayman branch.

(b) actions necessary by management to prevent the recurrence of
such irregular accounts and activity in the bank any time in the
future.

(c) proposed restructuring in Grand Cayman branch and at the
C.S.O. to avoid similar events in the future.

Regarding any other actions which may be considered necessary against
the concerned officials of the bank, is left to the CEO and senior
management of BCC. However the Task Force has already withdrawn
authority of three of the key concerned personnel from their existing
customer related activities leaving them to do any transactions only if
they are vital to the bank, in which case at least 2 members of the Task
Force will countersign such authorization.



WORK OF THE TASK FORCE


BACKGROUND WORK :

In order to perform their role more effectively the Task Force obtained the
following information from the Group’s central Finance Division :

A - The Global Audit Process

D - The 1989 Audit Details

C - The Grand Cayman Branch Audit Process

THE GLOBAL AUDIT PROCESS :

The BCC Group consisting of 32 banking units in 73 countries has been
audited annually from its inception at group level by Messrs. Ernst &
Whinney and at BCCI (Overseas) Grand Cayman level by Messrs. Price
Waterhouse. In 1987 as a means of consolidating the global audit process
under one firm the entire audit work was transferred to Messrs. Price
Waterhouse.

The annual audit is conducted by Price Waterhouse (and previously by

Messrs. Ernst & Whinney) in two parts :

an extensive interim audit covering the financial results of the Group
for the 9 months up to September 30th of each year which is carried
out at all major locations as selected by the auditors during the months
of November and December each year and

a final audit conducted globally for the entire year which is carried out
from around the first week of January and up to late February (in
normal years). Often this exercise extends into March also.

As a part of the audit routine a very comprehensive ’Audit Instruction
Manual* and ’Questionnaire* is sent by PW in September of each year
to the auditors in all BCC locations.

Copy of the Audit Inslruction/Questionnairc is given at Anncxurc A.

. The global list of auditors is given at Annexure B .



395


Notwithstanding that the majority of the BCC locations are audited by
PW’s own local offices, several senior partners of PW from London and
other locations travel to various BCC locations to directly review the
local operation of BCC and to discuss outstanding audit issues with the
local management and the local offices of PW or other audit firm(s).
This has given PW an extensive understanding of the operations of
BCC globally over the past several years. A list of the locations visited
in 1989 and the names of the partners concerned is given at Annexurc
C.

Task Force were informed that it has always been management’s policy
to give full and complete access to PW to all records and documents of
the bank in all BCC locations and to allow free and intensive direct
discussions between the external auditors and each and every concerned
officer or official of the bank to clarify all transactions and other audit
queries.

PW informed us that they have not had full access to BCP and KIFCO.
Management, in response, told the Task Force that this is due to
certain local regulatory restrictions, as BCC are minority shareholders
in these companies and local auditors have been appointed by the
Company’s Board, who oversee its day to day management.

To smoothen the annual audit process the central Finance Division of
the Group based in the Central Support Office in London (CSO)
coordinates the audit process globally. Counterpart officers are
nominated in each location - normally the location’s finance officer,
with whom ongoing contact is maintained throughout the audit period
to monitor the progress and clear any outstanding audit queries on an
ongoing basis.

2.02 THE 1989 AUDIT DETAILS :

The 1989 audit has been conducted on the same lines as in 2.01 above.