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Statement to the Congress.

Statement by J. Virgil Mattingly, General Counsel, Board of Governors of the Federal Reserve System, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, December 9, 1993

I am pleased to appear today to testify in connection with the committee's heating into recent requests that Sheikh Zayed al-Nahyan and two of his adult sons be granted head of state immunity in connection with pending civil litigation. The litigation relates to the acquisition of the First American banking organization by the Bank of Credit and Commerce International, S.A., and its affiliates (collectively BCCI). Sheikh Zayed is the President of the United Arab Emirates (UAE) and the ruler of Abu Dhabi, one of the emirates that make up the UAE.

FEDERAL RESERVE ENFORCEMENT ACTIONS RELATED TO THE BCCI

At the outset, you have asked me to summarize briefly the BCCI matter and the Board's enforcement actions relating to the BCCI. The irregular and unlawful operations of the BCCI have been described in detail at previous hearings before this and other congressional committees. In brief, before the BCCI closed in July 1991, it operated banking offices in numerous countries throughout the world but was not subject to supervision as a consolidated organization in its home country. This lack of consolidated supervision facilitated the BCCI's ability to carry out fraudulent transactions by, for example, allowing the manipulation of accounts through transfers of funds among its affiliates.

Much evidence has now come to light disclosing a complex and massive fraud at the BCCI, including mismanagement, substantial loan and treasury account losses, misappropriation of funds, unrecorded deposits, the creation and banks, which operated in Virginia, Maryland, Washington, D.C., New York, and Tennessee, as well as the Independence Bank in California and the National Bank of Georgia.

A series of administrative enforcement actions by the Federal Reserve Board have grown out of the BCCI's unlawful acquisition of banking organizations in the United States. First, the Board instituted actions against the BCCI itself and related persons arising out of the First American and National Bank of Georgia transactions. The Board's charges were resolved as part of a comprehensive plea agreement that also resolved parallel criminal prosecutions against the BCCI brought by the Justice Department and the New York County District Attorney. The BCCI pied guilty to the criminal charges, and the BCCI's U.S. assets, estimated at several hundred million dollars, were forfeited to the United States. Under the agreement, half of the forfeited assets would then be paid to a worldwide victims' fund to compensate innocent depositors. The BCCI also consented to the Board's $200 million civil money penalty, with the Board agreeing to stay collection of the penalty in light of the asset forfeiture. The plea agreement also incorporated a requirement that the BCCI's interest in the First American banks would be fully divested, which has now been accomplished, and that the proceeds from the sale of that interest would be forfeited as an asset of the BCCI under the agreement.

Federal Reserve enforcement actions were also aimed at various persons who served as the BCCI's senior management or as nominees of the BCCI in acquiring and retaining control of U.S. banking organizations. These persons include Kamal Adham, a Saudi Arabian businessman who was charged with acquiring and holding shares of First American's holding company as a nominee for the BCCI. Adham has paid a $10 million civil money penalty as well as $3 million in reimbursement to cover investigative costs. He has also been permanently barred from banking in the United States.

The second major BCCI-related enforcement action by the Federal Reserve involves Ghaith Pharaon, another Saudi businessman. This action seeks a civil money penalty of $37 million and an order prohibiting Pharaon from the banking industry, primarily for his alleged participation in the BCCI's unlawful acquisition of the Independence Bank. The Board's proceedings against Pharaon are pending. To assure that any possible civil money penalty assessed by the Board can be collected, the Board has obtained a federal district court order freezing Pharaon's U.S. assets until administrative proceedings before the Board have been completed. Pharaon is also facing three federal indictments and an indictment in New York County.

Of the other persons charged in this proceeding and those of First American, five are now subject to Board orders assessing penalties or banning them from banking, including Agha Hasan Abedi, the founder and president of the BCCI, and Swaleh Naqvi, a principal officer of the organization. Actions seeking to impose similar sanctions against three other persons are pending.

A third major enforcement action brought by the Federal Reserve involves Clark Clifford and Robert Altman, who, among other things, served as counsel for the BCCI and the CCAH and as senior management of the First American organization. The Board's case has been stayed pending a final decision on whether federal criminal charges against these persons will be reinstated.

The fourth major BCCI-related action is against Khalid bin Mahfouz, a Saudi banker, and the bank his family owns in Saudi Arabia, who are charged with unlawfully acquiring and holding a 28 percent block of shares of First American's holding company from 1986 through at least 1990 without regulatory approval. The Board's action seeks a $170 million civil money penalty from Mahfouz. As a result of a federal court asset freeze lawsuit, letters of credit, totaling $122 million, have been provided to the Board in connection with the civil penalty proceeding. Mahfouz has also been indicted in the County of New York.

INVOLVEMENT OF THE RULING FAMILY OF ABU DHABI WITH THE BCCI

The Abu Dhabi ruling family had substantial ownership interests in both the BCCI and the First American organization. After the Board's August 1981 approval of the acquisition of the First American banks by CCAH, Sheikh Zayed and his oldest son, Khalifa, became substantial investors in the CCAH, each one holding about 10 percent of its voting shares. Since the formation of the CCAH, the Abu Dhabi Investment Authority (ADIA) has separately owned between 6 percent and 8 percent of voting shares of that company.

At this time, none of the Federal Reserve's pending enforcement actions names the Abu Dhabi ruling family or the ADIA; nor in any of the actions brought by the Federal Reserve against others has the Abu Dhabi ruling family or ADIA been alleged to have served as BCCI nominees in controlling the shares of First American's holding company.

The Federal Reserve has not, however, had access to all of the evidence relating to the ownership of CCAH shares by members of the Abu Dhabi ruling family and related interests and has requests outstanding for access to witnesses and documents in Abu Dhabi. We are continuing to pursue all relevant information relating to the ownership of shares of the CCAH.

REQUESTS FOR HEAD OF STATE IMMUNITY BY SHEIKH ZAYED AND HIS SONS

Sheikh Zayed and his sons have moved to be dismissed as defendants in a civil lawsuit brought against them and several other BCCI-related persons by the First American organization. The lawsuit, filed in federal district court in Washington, D.C., seeks, among other things, damages for injuries to the organization resulting from its unlawful acquisition by the BCCI. As we understand, Sheikh Zayed asserts that, under the doctrine of head of state immunity, he, as the head of state of the UAE, and his immediate family are not subject to lawsuits in the United States. We understand that the State Department has been requested to express a view on whether head of state immunity applies to Sheikh Zayed and his sons.

Thus, the specific question as to whether head of state immunity requires the dismissal of Sheikh Zayed and his sons as defendants in the pending civil suit is now before the federal district court and the Department of State, which traditionally speaks for the executive branch on questions of immunity for foreign rulers. The Board is not a party to the civil litigation and has not taken a position on the head of state immunity issue. Staff members of the State Department have solicited the views of the Board's staff on the possible effects on the Board's bank regulatory powers if this immunity request was granted.

EFFECT OF GRANTING IMMUNITY TO THE ABU DHABI RULING FAMILY

If, as a result of the Board's ongoing investigation into BCCI matters, a formal enforcement action were to be taken against the ruler of Abu Dhabi, it is very possible that the Board's ability to prosecute such an action could be impaired if immunity were granted. As we understand it, the scope of head of state immunity has not been precisely defined, but it is possible that such immunity could be interpreted as affording complete protection against any type of civil action in this country, including a regulatory enforcement proceeding. Moreover, it is not clear whether the grant of head of state immunity to the ruler would cover his adult sons. We are not aware of any situation in the past in which a bank regulatory agency sought to take formal enforcement action against a foreign head of state.

IMPACT OF IMMUNITY GRANT ON REGULATION OF FOREIGN GOVERNMENT-OWNED BANKS

With regard to the more general question, a grant of immunity to a head of state who owns or controls a banking organization operating in the United States could restrict the Board's ability to ensure compliance with the banking laws. As explained earlier, in such a case the grant of head of state immunity could be interpreted as barring the Board from taking any enforcement action against a head of state who was a principal shareholder of the organization. In addition, because of this potential limitation on the exercise of an important regulatory tool, the issue of head of state immunity would be a significant factor in any application by a head of state to acquire a U.S. bank unless there was an effective waiver of immunity by the head of state.

Based on a review of available data, we are unaware of any instance in which a person who can be identified as a head of state, or as a member of the household of a head of state, at the present time owns 5 percent or more of the shares of a bank with operations in the United States. However, in shareholder lists required to be filed with the Federal Reserve we do not request that a head of state be identified as such, so that we cannot say for certain that no head of state currently owns shares of a bank doing business here.

As this committee is aware, foreign government entities own several banking organizations operating in the United States. The scope of the immunity granted to a foreign government entity in a civil action is governed by the Foreign Sovereign Immunities Act (FSIA). That act does not extend immunity to commercial activity by a foreign state entity in the United States, which we believe should include the acquisition and control of U.S. banks or the conduct by a foreign bank of activities in this country. Accordingly, under this view of the FSIA, we believe that a defense of sovereign immunity should not interfere with the effective regulation of the operations of foreign government owned banks in the United States in the future. In this regard, the defense of sovereign immunity has not been raised in any of the enforcement actions taken to date by the Board against foreign government-owned banks.

CONCLUSION

Although questions as to the existence and scope of immunity for the heads of foreign states or foreign government entities are determined by authorities other than the Federal Reserve, a grant of head of state immunity to an person controlling a banking organization with operations in the United States could possibly block regulatory actions against the head of state to enforce the banking laws. However, we are not aware of any situation in the past when immunity has restricted the exercise of regulatory powers over foreign government-owned banking organizations, and possible problems related to immunity for foreign heads of state might be dealt with in the future by requiring a waiver of such immunity as a condition for approval.
COPYRIGHT 1994 Board of Governors of the Federal Reserve System
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Title Annotation:J. Virgil Mattingly on Federal Reserve actions related to the Bank of Credit and Commerce International
Publication:Federal Reserve Bulletin
Article Type:Transcript
Date:Feb 1, 1994
Words:2042
Previous Article:Residential lending to low-income and minority families: evidence from the 1992 HMDA data.
Next Article:Minutes of the Federal Open Market Committee meeting of November 16, 1993.
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