Corruption: Feeling the Heat

By John Greenwald

It was as if someone had put a match to a leaking gas pipe. With the disclosure of B.C.C.I.'s "black network" around the world came an explosion of new charges and political recriminations that seem likely to go on for months. The question of the hour: Why had so many countries done so little for so long to rein in the Bank of Credit & Commerce International when, as is now evident, so many were aware of the bank's nefarious operations?

In Washington, the U.S. Justice Department adamantly disputed evidence that it had failed to follow through on reports from undercover agents that B.C.C.I. had engaged in corrupt banking practices. In London, British Prime Minister John Major, pale and rigid with rage, told Parliament he knew nothing of rampant fraud at B.C.C.I. until shortly before July 5, when regulators closed the $20 billion rogue bank in most of the 69 countries where it operated. In Peru the scandal breathed new life into charges that former President Alan Garcia Perez had used B.C.C.I. accounts to loot as much as $50 million from the country's treasury.

From Buenos Aires to United Nations headquarters in New York City, the political heat soared amid a new wave of revelations and signs of impending prosecutions of B.C.C.I. Yet, from London to Bangladesh, the bank's depositors, who may have been bilked of $10 billion in deposits, protested B.C.C.I.'s closure as a Western plot to subjugate the Muslim world.

The cloth of chicanery continues to unravel. Among the developments last week: -- Stung by accusations of inertia, the Justice Department said a task force of 10 federal prosecutors was studying B.C.C.I. activities in Washington, Atlanta, Miami and Tampa. Subjects of the investigation will include U.S. politicians and other leaders suspected of receiving millions of dollars from B.C.C.I. in payoffs and bribes. Attorney General Dick Thornburgh, while denying charges of foot dragging, assured a House subcommittee that his & department has "committed all necessary resources to unraveling any violations of the United States federal and criminal laws and pursuing any evidence that exists of those violations." At the same time, the House Banking Committee said it would hold hearings on B.C.C.I. when Congress reconvenes in September.

-- CIA Director William Webster ordered a full-scale review of any agency ties to the bank following reports in TIME and other media that the agency had kept secret accounts at B.C.C.I. to finance covert aid to U.S.-backed insurgents in Nicaragua and Afghanistan. The scandal may further jeopardize President Bush's nomination of Robert Gates to head the CIA. Last week former Customs commissioner William von Raab named Gates, then deputy director of the CIA, as the source of a five- or six-page 1988 agency report on B.C.C.I., which Gates labeled "the bank of crooks and criminals." That raised potentially embarrassing questions about just how much Gates may have known about the rogue bank.

-- As the charges and countercharges flew, U.S. law-enforcement sources quietly acknowledged what the Gates report to Von Raab clearly indicated: that at least some government officials have known since the late 1980s of the secret black network within the bank whose existence TIME disclosed in articles in July. The network used bribery, extortion, kidnapping and possibly murder to further the bank's aims. Last week sources told TIME that the black network surfaced briefly in the U.S. during a sting operation that forced B.C.C.I. to plead guilty in Tampa last year to laundering drug money. Members of the group came forward to offer their chilling services to undercover U.S. Customs agents who posed as money launderers. But when the agents sought to broaden their investigation to include a probe of the network, their superiors denied the request.

-- A grand jury hearing evidence presented by Manhattan district attorney Robert Morgenthau was readying the first of a series of indictments against B.C.C.I. officials and others in a case stemming from the bank's secret ownership of First American Bankshares, the parent of Washington's largest bank. Among those testifying before the New York jury was former Defense Secretary Clark Clifford, the chairman of First American, who has denied knowing that B.C.C.I. owned his banking firm.

In the supercharged atmosphere surrounding B.C.C.I., sensational -- if largely unconfirmed -- allegations swirled like leaves in a storm. Many originated in Britain, where newspapers and television stations competed fiercely for scoops. According to one such report in the London Guardian, the CIA used B.C.C.I. accounts to pay nearly 500 prominent Britons, apparently for information about British arms sales and overseas contracts. The Guardian also said B.C.C.I. funded a clandestine joint effort by Argentina, Libya and Pakistan to acquire nuclear arms.

The scandal transfixed Britain throughout the week. In a bruising dustup in Parliament, Neil Kinnock, leader of the opposition Labour Party, called Major "utterly negligent" for failing to take action against B.C.C.I. while serving as Chancellor of the Exchequer in January 1990. Replied an ashen-faced Major, who said he had learned of the full extent of the bank fraud only on June 28: "If you are saying I am a liar, you had better say so bluntly." Robin Leigh-Pemberton, governor of the Bank of England, later affirmed that Major first received details of the scandal in late June.

With Britain absorbed by the scandal, a London court suspended the liquidation of B.C.C.I. accounts in the country to seek a bailout for 120,000 local depositors, who held a total of $400 million in the bank. The outraged victims of the shutdown, who included Indian and Pakistani families and some 30 municipalities, stood to receive just 75% of their money, up to a maximum of about $25,000. But Sheik Zayed bin Sultan al-Nahayan, the ruler of Abu Dhabi who acquired control of B.C.C.I. for $1 billion last year, was still fuming because the clampdown shuttered the bank without warning just as he was planning to restructure it. "He will do nothing unless there is incredible political pressure that he simply cannot resist," says a highly placed Arab banker.

British authorities said they were virtually forced to shut the bank. Leigh- Pemberton defended the seizure on grounds that "the culture of the bank is criminal." While he called the well-regarded Zayed's purchase of the bank "a welcome development," he said the corruption that originated with B.C.C.I. founder Agha Hasan Abedi and his fellow Pakistani managers had penetrated the entire institution. "The fraud involved not only past management but continuing management, board members and representatives of the shareholders," Leigh-Pemberton said. Yet he insisted that the full scale of the wrongdoing had only recently come to light.

In shuttering B.C.C.I., the regulators relied on a June audit by the accounting firm Price Waterhouse that called the fraud "one of the most complex deceptions in banking history." Price Waterhouse found that the bank had routinely siphoned funds from deposits and created fictitious loans to generate phony profits. But such practices only created an insatiable demand for more bogus transactions.

Though Clifford and First American president Robert Altman insist that their foreign partners kept hands off First American, the auditors said B.C.C.I. used the U.S. firm's stock as an essential part of many fraudulent deals. B.C.C.I., said Price Waterhouse, covertly acquired the stock of First American, code-named WXYZ in the report, through "prominent Middle Eastern individuals" who thus were merely nominal -- or "nominee" -- owners. B.C.C.I. then used First American shares as collateral for sham loans that produced phony income. Clifford, meanwhile, regularly briefed Abedi and Kamal Adham, a major B.C.C.I. shareholder from Saudi Arabia, on First American's operations. Clifford said the meetings were needed to keep B.C.C.I., as adviser to the Arab owners of First American, informed about the U.S. firm.

Yet he and Altman were also deeply enmeshed in B.C.C.I.'s affairs. The two men served as attorneys for B.C.C.I. and masterminded the bank's defense in the money-laundering case in Florida. Former B.C.C.I. bankers have told TIME that Altman even traveled to London to assure B.C.C.I. shareholders that the money-laundering case was a mere aberration that would be swiftly settled. Altman later returned to London, the insiders said, to soothe shareholders' concerns about B.C.C.I.'s losses by blaming the red ink on depressed conditions in many Third World areas where the sprawling bank operated.

Repercussions from the bank's collapse rippled far beyond Washington and London. In Peru the scandal reinvigorated charges that Garcia, President of the country from 1985 to 1990, had plundered the treasury by whisking funds through a B.C.C.I. branch in Panama. Garcia has called the allegations a political smear to keep him from running again in 1995. But Fernando Olivera, a member of the Peruvian Congress who has been Garcia's nemesis, demanded last week that prosecutors try the allegations in court. Among other things, investigators want to know how Garcia managed to acquire two fashionable Lima homes and take frequent foreign vacations on a presidential salary of just $18,000 a year.

Farther south, the government of Argentina last week gave B.C.C.I. 48 hours / to pack up and leave the country. Authorities were particularly worried by the appearance of links between President Carlos Saul Menem and Saudi billionaire Ghaith Pharaon, a B.C.C.I. front man who is building a Hyatt Hotel in Buenos Aires and is a friend of Javier Gonzalez Fraga, the former president of Argentina's central bank. "We already know that the next scandal is going to tie President Menem with Ghaith Pharaon," an official said.

The B.C.C.I. debacle even rubbed off on the U.N. and its Secretary-General, Javier Perez de Cuellar. The U.N. sullenly confirmed reports that Perez de Cuellar twice took trips in 1986 and 1987 on planes owned by Pharaon. The diplomat has said he was unaware at the time of problems at B.C.C.I.

In stark contrast to the havoc that B.C.C.I. spread from London to Lima was the studied calm at the White House last week. Senior officials described the scandal as more an annoyance than a real concern. Said Press Secretary Marlin Fitzwater: "The Justice Department has been looking into it for some time, and we're satisfied with the way they're handling it." He added, however, "It's clear that the Democrats are going to try to make some political hay out of it. Unfortunately, it looks like everything is going to be political between now and next November."

So far, other than complicating the Gates nomination, the scandal has in no way implicated the West Wing. But with the Gates hearings, congressional investigations and upcoming grand jury indictments all vying for headlines, B.C.C.I. could become an uncomfortably hot issue as the parties head into the 1992 campaign.

With reporting by Jonathan Beaty/New York and Helen Gibson/London, with other bureaus