Scandals: Taken for a Royal Ride

By John Greenwald

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

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

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

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

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

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

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

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

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

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

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

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

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

With reporting by Jonathan Beaty and S.C. Gwynne/Washington and Aileen Keating/Bahrain