Statements to the Congress - statement by J. Virgil Mattingly, Jr. William Taylor, and E. Gerald Corrigan to the House Committee on Banking, Finance and Urban Affairs - Transcript

Federal Reserve Bulletin, Nov, 1991

Statement by J. Virgil Mattingly, Jr., General Counsel, and William Taylor, Staff Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, and 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 We are pleased to appear before the committee to describe the Federal Reserve's role in the supervision of the Bank of Credit and Commerce International (BCCI) and the Federal Reserve's investigation of BCCI's secret acquisition of the shares of several U.S. banking organizations.

This testimony will focus first on the operations of BCCI around the world, particularly BCCI's use of a fragmented, unsupervised structure operating in foreign jurisdictions with minimal supervision and strong bank secrecy laws; second, on the Federal Reserve's efforts to deny BCCI entry into this country; third, on the Federal Reserve's continuing investigation, which has detected and produced hard evidence of BCCI's secret acquisition of the stock of U.S. banks; and finally on the very valuable lessons learned from the Federal Reserve's experience with BCCI.

In considering these matters, we believe that five major points should be stressed:

First, the Federal Reserve has never approved any presence by BCCI in this country, and for that reason BCCI has never been authorized to take deposits from U.S. citizens through an insured bank. Our investigation indicates that BCCI was aware that the Federal Reserve presented a serious obstacle to acquisition of banks in this country-a fact that may well explain BCCI's campaign to acquire illegally and surreptitiously the shares of U.S. banking organizations through a complex web of nominees and sham loan arrangements.

Second, in 1987 and 1988, the Federal Reserve detected money laundering and operational problems at the state-licensed agencies that BCCI established in this country. Through the action of the Federal Reserve and state regulators, BCCI's U.S. agencies were eliminated or substantially wound down over the next three years. By the time of BCCI's seizure on July 5, 1991, BCCI's U.S. operations had shrunk from about $1 billion to $250 million, and BCCI's two remaining U.S. agencies had less than $25 million in liabilities to third parties. Thus, at the time of BCCI's closing, the vast majority of funds at its two remaining U.S. agencies were its own. This situation sets the United States apart from numerous other countries in which local depositors have lost their funds, or access to their funds, as a result of the seizure of BCCI. Third, the Federal Reserve did act to prevent an illegal BCCI presence in this country when Middle Eastern investors applied in 1978 and 1980 to acquire Financial General Bankshares, now renamed First American Bankshares. In considering the application in 1980, the Board sought to make certain that BCCI did not have a stake in the holding company formed to make the acquisition, Credit and Commerce American Holdings, N.V. (CCAH), and was not funding the acquisition.

Although the Federal Reserve did not have at that time any evidence of fraud or illegality in BCCI's overseas banking operations, the Federal Reserve nevertheless was concerned by BCCI's unregulated character and rapid growth. Concerned also because BCCI was acting as adviser to the investors, the Federal Reserve sought to ensure that BCCI would not gain control of First American. The Federal Reserve received explicit commitments from BCCI, the investors, and their representatives that the acquisition of First American was being made with the investors' own funds and that BCCI would not acquire any CCAH shares or finance the investors. The Federal Reserve did not accept these representations without question but made substantial efforts to verify what it was being told.

The Federal Reserve requested and received from the investors financial statements and other documentation confirming the various representations. The numerous materials submitted by the banks and accounting firms of the principal shareholders indicated that the investors were persons of substantial wealth who were fully able to make the investment by using their own funds and without borrowing from BCCI or anyone else. Even today, it is undisputed that some of the principal investors are persons of great wealth. Further, the Federal Reserve conducted background investigations of the investors: The Departments of State and Commerce stated that the investors were persons of substance and, along with the Central Intelligence Agency, reported no adverse information on the investors. Finally, the Federal Reserve took the unusual step of holding a hearing on the application at which the largest investor, three other investors, and the investors' representatives appeared and further denied any BCCI involvement in the investment or its financing.

Throughout this process, there was no evidence that the shareholders and their representatives were being untruthful in their written and oral statements that BCCI was not involved in the financing of the acquisition. Under the Bank Holding Company Act with its due process requirements, the Federal Reserve is not authorized to act on suspicion or rumor but must have evidence to support its decision. The Federal Reserve had no grounds at the time to deny and, operating under this statutory standard, approved the application. The necessary state authorities approved as well.