William Taylor, Staff Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System (Statements to the Congress) (transcript)

Statement by William Taylor, Staff Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer and Regulatory Affairs of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, May 23, 1991.

I am pleased to appear before the subcommittee on Consumer and Regulatory Affairs of the Senate Banking Committee to testify about the experience of the Federal Reserve System with the Bank of Credit and Commerce International (BCCI). This part of the testimony will focus first on the BCCI's structure, the nature of supervision over its worldwide activities, and the origin of its offices in the United States and their supervision. Thereafter, I will describe some of the efforts undertaken by the Federal Reserve to investigate the relationship between the BCCI and First American Bankshares. Finally, I will discuss some of the steps that we are taking to strengthen the supervision of foreign banks in light of our experience.

Bank of Credit and Commerce

Through a network of subsidiaries, affiliates, and branches, the Bank of Credit and Commerce has operated in seventy-three countries, with most of its banking offices located in Europe, Africa, the Middle East, the Caribbean, and South America. The holding company for these entities--BCCI (Holdings)--is chartered in Luxembourg. Two major subsidiaries of the BCCI (Holdings), Bank of Credit and Commerce International S.A. (BCCI S.A.) in Luxembourg and Bank of Credit and Commerce International (Overseas) Limited (BCCI Overseas) in the Cayman Islands, have operated agencies in the United States that are licensed by the states of California, New York, and Florida. Agency operations are limited by law, and, as such, the BCCI's offices in this country were not allowed to accept consumer deposits, nor were they able to offer insured deposits of any kind. As I will discuss, these offices have either been closed or will be shut down before the end of the year.

The BCCI is primarily owned by investors located in the Middle East, with control of most of its shares now held by the ruling family and government of Abu Dhabi. The bank is presently undertaking a restructuring that will focus its business activity in Europe, the Middle East, and the Far East.

Supervision over the BCCI's Activities by Foreign Bank Regulatory Authorities 

At the outset, I want to make it clear that the BCCI, unlike virtually any other major international bank, was not subject to a comprehensive system of supervisory oversight by authorities in its home country. As I indicated, both the holding company for the BCCI and one of its major banking subsidiaries are chartered in Luxembourg; but neither the holding company nor the subsidiary has conducted a banking business in that country. The BCCI appears to manage most of its global business out of offices in London. The regulatory authorities in Luxembourg, therefore, did not provide consolidated supervision of the BCCI organization. Based on its experience with the BCCI, Luxembourg has indicated that it will no longer license a bank or a bank holding company that does not conduct a banking business in that country.

Given the structure of the BCCI group, periodic reporting of prudential information on a consolidated basis was not produced. The financial accounts of each BCCI subsidiary had been audited yearly by different accounting firms. It was not until recently that a single firm was responsible for auditing all of the BCCI organization. Bank supervisors in each country where BCCI maintained a banking subsidiary required prudential and financial information that pertained to the BCCI entity incorporated locally. Given this approach, information about other BCCI-related organizations outside the jurisdiction of the local bank supervisor had to be obtained through direct contact with other central banks or bank regulatory authorities.

To provide some oversight of the BCCI's activities in a more structured format, several bank supervisors with significant BCCI banking operations in their countries decided several years ago to meet periodically to discuss the activities of the BCCI and to meet with management and the external auditor. These bank supervisors have, from time to time, required reporting from the external auditor on areas of particular concern.

Activities of the BCCI in the United States

As previously mentioned, the BCCI group had state-licensed agency offices in California, Florida, and New York. As directed by the International Banking Act of 1978, the primary supervisory effort was carried out by the various states with the Federal Reserve providing support and residual supervision. The BCCI offices were established under state licenses from 1982 through 1984 and were examined roughly every eighteen months. Agency offices exhibiting problems were examined more frequently, while those offices that received a satisfactory rating were examined less frequently. Before the BCCI was indicted for money laundering in October 1988, twenty-two examinations of its U.S. offices had been conducted.

Offices in New York and in Tampa and Boca Raton, Florida, generally exhibited no significant problems. The examinations of the Miami and San Francisco offices, however, from time to time revealed problems in asset quality and internal controls. The 1984 report of the examination by the State of Florida and the Federal Reserve Bank of Atlanta of the Miami office, for example, cited internal control deficiencies. After a 1987 examination, a criminal referral was filed by the Federal Reserve Bank of Atlanta alerting law enforcement authorities to transactions uncovered during the examination that could be indicative of money laundering through the Miami office, and staff members of the Board of Governors forwarded this referral to the Internal Revenue Service for action by that agency.

On October 11, 1988, the BCCI and certain of its employees were indicted for laundering money through the Tampa, Florida, office. In continuing efforts to cooperate with other international, federal, and state authorities, the Federal Reserve immediately commenced simultaneous examinations of all the U.S. offices of the BCCI to determine whether any other improper transactions were evident and to assess the internal controls and asset quality of those offices. Board staff members also discussed the indictment and its potential ramifications with bank regulatory authorities in the United Kingdom, Cayman Islands, Luxembourg, and Hong Kong. Discussions with these authorities centered on whether they were aware of any money-laundering activity in their respective markets and whether the BCCI could meet its financial commitments in the United States.

The simultaneous examinations conducted after the indictment revealed that internal controls were deficient. Also, multiple referrals were made by the Federal Reserve in the ensuing months to the U.S. Attorney concerning money laundering transactions at the New York and Boca Raton, Florida, offices. As a direct result of the examinations, a cease and desist order was issued by the Federal Reserve on June 12, 1989, against the BCCI (Holdings) and the two subsidiary banks that maintained agency offices in the United States. The order required that the BCCI strengthen internal controls over all its U.S. operations, especially those controls designed to guard against money laundering. Other prudential safeguards were required, including establishing better systems and procedures to control lending activities and to assure compliance with U.S. laws and regulations.

Status of the BCCI's U.S. Operations

After the BCCI pled guilty to the charges of money laundering, the Florida Comptroller of Banks refused to renew the BCCI's agency licenses. As of January 11 of this year, the Florida offices of the BCCI (Overseas) have been closed. The San Francisco office of the BCCI S.A. has been voluntarily closed. The remaining offices of the BCCI S.A. in New York and Los Angeles are to be terminated by year-end under another Federal Reserve cease and desist order.

Investigation of the BCCI's Involvement with Credit and Commerce American Holdings

Mr. Mattingly will discuss in detail the investigation into the BCCI's connections with certain U.S. banks, including the First American organization.(1) I would like, however, to offer some general remarks as to the actions taken by the Federal Reserve to determine the connection between the BCCI and First American Bankshares.

Allegations of a linkage between the BCCI and First American was a major concern of the Federal Reserve when a group of foreign persons sought control of First American in 1981. In approving the holding company structure sought by these persons, the Federal Reserve held special hearings and relied, in the absence of any evidence to the contrary, on the representations of the new owners that the acquisition would not be financed by the BCCI and that the only role played by the BCCI was that of investment adviser to the individual shareholders.

As the money laundering activities of the BCCI began to unfold in 1987 and 1988, there was a growing concern regarding the company's overall management and character. Continuing reviews and examinations of First American and its banks failed to provide evidence that would substantiate control by the BCCI, and access to the books and records of the BCCI held outside the United States was limited not only by bank secrecy laws in some jurisdictions but also by the disjointed structure of the BCCI.

As already noted, although the company operated in many countries, no one country had a clear view of the BCCI's worldwide activities or the responsibility to supervise the company on a consolidated basis. During 1989 and 1990, we contacted various international, federal, and state authorities regarding the BCCI. Finally, in late 1990, a series of events, including new and specific information provided by interested authorities both here at home and abroad, led us to issue an order of investigation on January 4, 1991, and to seek the consent cease and desist order that was issued on January 22, 1991. Our investigation continues, as does our cooperation with, and reliance on, various state, federal, and international authorities.

Supervision of Foreign Financial Institutions

Based on the Federal Reserve's experience with the BCCI and other foreign organizations and our continuing concern that sound prudential policies apply to all banking institutions in this country, we believe, that it is essential that steps be taken to strengthen the supervision of foreign banks operating in the United States. Mr. Mattingly will discuss a number of important legislative improvements the Board has proposed--changes that we hope the Congress will consider and enact at the earliest possible occasion.

At the same time, we recognize that there are steps, other than new legislation, that can be taken to strengthen our supervisory policies and procedures. The Federal Reserve has recently stepped up its efforts to coordinate with the primary state and federal supervisors of foreign branches and agencies to ensure that these offices are subject to examination on a regular basis. As part of this process, we are developing common examination procedures to be used by state and federal agencies in examining branches and agencies of foreign banks. We have also instituted a program for conducting, to the extent possible under current law, the simultaneous examination of the U.S. offices of selected foreign banks to obtain a compehensive view of the foreign banks' U.S. operations. The Board and the Reserve Banks have also taken steps to increase and improve the sharing of information between the Federal Reserve and the state authorities that license foreign banks.

In addition, the Federal Reserve is in the process of developing proposals that would provide for the examination of foreign bank offices in the United States on the same basis as is currently employed for state member banks. Such supervision would, at a minimum, include annual onsite examinations by Federal Reserve examiners in close cooperation with state authorities, as well as a program of formal Federal Reserve comment to state licensing authorities when foreign banks seek to open new offices. While some of these steps will have significant budgetary implications, we believe that enhanced on-site examination coverage of foreign branches and agencies is essential if we are to have a fully adequate supervisory framework in place.

Let me conclude by stating that the Federal Reserve recognizes that the supervision and regulation of foreign banks must be strengthened. We are committed to working with the primary regulators of foreign branches and agencies, as well as the Congress, to see that this is accomplished in an effective and timely manner. (1)The text of Mr. Mattingly's statement follows this one.