Statements to the Congress.

Statement by E. Gerald Corrigan, President, Federal Reserve Bank of New York, before the Committee on Banking, Finance and Urban Affairs, U.S. House of representatives, September 13, 1991

I am pleased to have this opportunity to appear before you this morning to review the role played by the Federal Reserve Bank of New York in the Bank of Credit and Commerce International (BCCI) affair. To put it briefly, beginning at the time of the October 1988 indictment of BCCI in Tampa and continuing to this day, the Federal Reserve Bank of New York has been intimately involved in virtually every aspect of the Federal Reserve's investigation into BCCI, including its illegal control of banking institutions in the United States. Over the past twelve to fifteen months, 1, personally, have been significantly involved in the investigation, often on a daily basis. My involvement has entailed frequent consultations with my own staff, with Messrs. Mattingly and Taylor, with Chairman Greenspan, with senior regulatory officials from abroad, and, from time to time, with Robert Morgenthau, the New York County District Attorney.

The summary report of the investigation conducted by the Federal Reserve, which is being submitted to this committee today, together with the Board of Governors' July 12 and July 29 Notices of Charges, speak-eloquently in my judgment-to the scope and precision of this investigation, but even they do not tell the whole story. Allow me, therefore, to share with the committee my own observations on the process, its results, and its implications for the future.

For starters, it should be recognized that the scope and complexity of this investigation, together with the almost unimaginable patterns of deceit, lies, misrepresentations, fraud, and criminality that had to be overcome to obtain hard evidence of wrongdoing, is wholly unprecedented in my experience and probably in the seventy-seven-year history of the Federal Reserve. Indeed, Federal Reserve investigators were engaged-successfully I might add-in an investigation that would be considered very formidable by even the most sophisticated law enforcement authorities.

Having said that, it is only appropriate to ask why it took so long to produce the results that are now before us. In part, the answer to that question lies in the pattern of lies and deceit that had to be overcome in getting at the truth. In that regard, it is important to note that there is no other governmental institution here or abroad that has had a greater or faster measure of success in getting at the truth than has the Federal Reserve, even though some of those institutions have considerably more experience and discovery power in this type of investigation than the Federal Reserve. But, even allowing for these factors, there were other considerations that help account for the duration of the investigation. Among these other factors are the following:

First, we wanted to be absolutely sure that our efforts were always consistent with the dictates of due process. This is a nation of laws. Rumors, allegations, unsupported accusations, and even claims made by informants or "insiders" do not constitute evidence of wrongdoing. Obtaining that hard evidence was an extraordinarily difficult task that was to take the Federal Reserve's lead investigative personnel to locations throughout the United States, Europe, and the Middle East. It also entailed those investigators taking thousands of pages of statements and depositions from individuals here and abroad as well as reviewing tens of thousands of pages of documents. Getting the necessary hard documentation of wrongdoing was not easy, but it was done.

Second, from the earliest stages of the active investigation of the money laundering problem in 1987, we had to be very careful that our own efforts did not compromise the investigative efforts of other supervisory and law enforcement authorities in the United States or elsewhere.

Third, as the scope of the Federal Reserve's and other investigations widened, and as allegations of serious criminal activities of BCCI began to emerge, we had to be concerned about protecting the confidentiality and well-being of witnesses, and, in the latter stages of the investigation, we were mindful of the need to be sensitive to the well-being of the officials in the Federal Reserve who were conducting the investigation. We were also concerned about the possibility that documentary evidence so vital to the outcome of our case might be destroyed.

Finally, the possibility exists that there may have been information available to other official institutions that might have expedited the Federal Reserve's investigation had such information reached the Federal Reserve in a more timely fashion.

Taken together, these factors-especially in a setting of widespread fraud and deceit-made the investigation frustratingly slow at times. Also, and with the benefit of hindsight, there are probably some things that might have been done differently or in a different order that might have saved some time. But, even under optimal conditions, I believe that any such time saved would be measured in months, not years. On the other hand, the experience gained from this investigation surely has influenced our attitudes regarding certain aspects of banking law and supervisory policies and procedures.

To a very important extent, those lessons already are incorporated into the Foreign Bank Supervisory Enhancement Act of 1991 that is currently before the Congress and that I urge be enacted this year. That legislation, it should be noted, will have important resource implications for the Federal Reserve, especially for the Federal Reserve Bank of New York. Beyond that, I think that we must carefully consider the question of whether we should be significantly augmenting our legal staff, including developing a small "SWAT team" of investigative specialists-something we have not felt was needed in the past. We also must guard against efforts that, while well intended, may work in the direction of weakening existing supervisory tools and techniques.

For example, if there was ever any doubt about the necessity of consolidated supervision of overall banking entities, including all of their component parts-and there never was any such doubt in my mind-this case should settle that debate once and for all.

Another area of great importance that has been brought into sharper focus by the BCCI affair is the need to strengthen still further the international coordination of bank supervision and bank supervisory policies. As the committee members may know, in early July of this year, I was named by the Group of Ten (G-10) Central Bank Governors to the position of Chairman of the Basle Committee on Banking Supervision. Last week the committee had its first regularly scheduled meeting since my designation as its chairman. At the meeting, there was a lengthy discussion of the BCCI affair and the lessons to be learned from it by the international community of bank supervisors.

On the basis of that discussion, the committee hopes to have finished by its December meeting an issues paper that will consider a range of subjects stemming from the BCCI matter including (1) whether and how standardized criteria for the establishment by foreign banks of branches or subsidiaries in the G-10 countries should be put in place; (2) what steps can be taken to strengthen procedures for the cross-border sharing of supervisory information, especially in times of stress; (3) whether the potential for contagion problems within a single organization renders distinctions between branches and subsidiaries of little utility in times of stress; (4) the relationship between home country and host country supervisors as it pertains to the supervision of branches; (5) whether the locus of consolidated supervisory responsibility should rest in a single home country supervisor or be shared among several supervisors acting as a college, and (6) whether and to what extent supervisors should be prepared to insist upon changes in corporate structures that, by their nature, hinder effective supervision.

As noted above, my hope and expectation are that an issues paper will be finished for the committee's deliberation at its December meeting. That issues paper will not, however, contain recommendations. Rather, I have in mind that the discussion in December would help the committee to shape a follow-up paper containing recommendations that would be considered over the first half of 1992.

In saying this, I want to caution about expecting too much too soon. Getting eleven countries to agree on these complex matters that strike so close to legitimate issues of national prerogative, if not national sovereignty, will not be easy, especially in a setting in which majority rule is not enough. That is, in this forum, everyone must agree on the chosen course of action or there is no action.

I cannot, in good conscience, leave the subject of international coordination of banking supervision without saying a brief word about what I know will be a sensitive subject. 1, and all members of the international community of banking supervisors, deeply respect the prerogatives of legislative bodies, including their prerogative to seek and obtain information. By the same token, it is vitally important that the manner in which that prerogative is exercised in a cross-border setting is fully sensitive to laws and traditions in other countries, for if it is not, the necessary process of sharing supervisory information across national borders can be seriously impaired.

In closing, let me add one further point. In a nation of law and due process, no system of law and regulation can prevent crime or wrongdoing. That is one of the prices we choose to pay for the enormous benefits of a free and open society that places such a high premium on individual rights. However, preserving a free and open society implies that when transgressions occur, those responsible for administering laws and regulations must see to it that the parties who have violated the law or regulation are found out and are appropriately punished. I would hope that the message growing out of the Federal Reserve's persistent, vigorous, and unrelenting investigation of the BCCI affair would be clear to all, and that message is that we will not tolerate this kind of behavior, no matter how formidable the obstacles put in the way of our efforts to get at the truth.

Statement by Robert P. Black, President, Federal Reserve Bank of Richmond, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, September 13, 1991

I shall describe for you this morning the role of the Federal Reserve Bank of Richmond in the supervision and regulation of Credit and Commerce American Holdings (CCAH) and its subsidiaries located in the United States. Since the only authorized presence of the Bank of Credit and Commerce International (BCCI) in the Fifth Federal Reserve District was a representative office in the District of Columbia, I shall leave the discussion of the Systems's efforts to regulate BCCI's activities in the United States to members of the staff of the Board of Governors and to my colleagues from the Federal Reserve Banks of Atlanta, New York, and San Francisco. Others have testified on the Federal Reserve System's efforts to deny BCCI's entry into the United States and the original acquisition of First American Bankshares by a group of Middle Eastern investors. I shall discuss the role of the Federal Reserve Bank of Richmond in the application process and describe our supervisory work since the purchase, including efforts to determine whether or not any BCCI ownership or influence existed.