Statements to Congress - statement by Thomas D. Thomson - Transcript

Federal Reserve Bulletin, Nov, 1991

Statement by Thomas D. Thomson, Executive Vice President, Federal Reserve Bank of San Francisco, before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, September 13, 1991

I am pleased to appear before this committee to provide information on the Federal Reserve Bank of San Francisco's supervision and regulation of Bank of Credit and Commerce International (BCCI) and related entities. My name is Thomas D. Thomson. I have overall executive responsibility for the San Francisco Reserve Bank's supervision and regulation activities, among other functions, and, therefore, the supervision and regulation of BCCI in the Twelfth Federal Reserve District. President Parry is unable to deliver this testimony today because he is traveling in Asia to keep a long-standing commitment to meet with other Pacific Rim central bankers.

Overall Federal Reserve supervision of BCCI has been described by other representatives of the Federal Reserve System. My comments will fall into two parts: first, the Federal Reserve Bank of San Francisco's participation in the supervision and regulation of BCCI, and second, our role in the regulation of Independence Bank in Encino, California.

BANK OF CREDIT AND COMMERCE INTERNATIONAL

Twelfth District Supervision and Regulation

The San Francisco Reserve Bank's initial supervisory contact with BCCI was indirect, through the initial acquisition by Bank of America of 2.5 percent of BCCI's outstanding shares on December 21, 1973. Bank of America was a founding shareholder and, over the next three-year period, increased its equity interest in BCCI to 45.0 percent. In 1978, Bank of America began to withdraw from its investment in BCCI and completed its divestment on June 30, 1980.

This Reserve Bank reviewed Bank of America's investment in BCCI annually through the examination of the Edge Act corporation that held Bank of America's interest in BCCI. Because it was not a subsidiary, information required to be made available to our examiners was limited to financial data such as balance sheets and income statements and other documents such as Bank of America's internal investment files on BCCI. Because it was not a controlled subsidiary, no on-site examination was conducted. Our examinations of Bank of America's investment in BCCI during this period did not disclose any suspicious or criminal activities.

BCCI's presence in the Twelfth Federal Reserve District began on September 1, 1981, when its subsidiary, Hong Kong Metropolitan Bank Limited, opened an agency in San Francisco licensed by the State of California. It was converted to a direct office of BCCI on June 1, 1985, and its name changed to reflect its ownership status. BCCI established an agency in Los Angeles on February 7, 1983.

The Federal Reserve Bank of San Francisco has been involved directly in the examinations of both the San Francisco and Los Angeles agencies since their inception as a result of an arrangement with the California State Banking Department. This arrangement was worked out with the state under the provisions of the International Banking Act of 1978, which, at the federal level, gave the Federal Reserve System supervisory responsibilities for monitoring the consolidated operations of foreign banks in the United States, while primary supervisory responsibilities for each branch or agency remained with its chartering authority. Under this arrangement, our Reserve Bank shared examination responsibilities with the California State Banking Department.

The oversight efforts of this Reserve Bank intensified after notification of the BCCI indictments in October 1988 in Tampa, Florida. Our examiners participated in special examinations that were conducted in conjunction with investigations of BCCI's money-laundering activities. Special examinations were conducted at both the Los Angeles and San Francisco agencies of BCCI beginning on October 11, 1988. These examinations focused on a review of the agencies' policies and procedures to ensure compliance with the Bank Secrecy Act. Currency transactions that occurred within the previous year were reviewed for compliance with currency reporting requirements.

No evidence warranting the filing of a criminal referral was discovered as a result of the special examinations of BCCI's Los Angeles and San Francisco agencies in 1988. However, examiners cited BCCI for asset-quality problems and lack of adequate credit documentation, internal control deficiencies, errors in regulatory reporting, and inadequate record-keeping procedures. BCCI's management was criticized for lax supervision. Violations of both state and federal laws and regulations were noted; however, they were technical in nature and related principally to deposit-taking activities.

As a result of these findings, our Reserve Bank participated actively in drafting a Memorandum of Understanding, which was issued to BCCI by the California State Banking Department on February 14, 1989. Our Reserve Bank also participated in drafting a cease and desist order, which addressed these and other deficiencies in BCCI found by other Reserve Banks, which was issued to BCCI by the Federal Reserve Board on June 12, 1989. The memorandum of understanding and the cease and desist order required that BCCI improve asset quality and credit procedures, correct internal control deficiencies, and develop procedures to ensure compliance with all state and federal laws and regulations, including the Bank Secrecy Act.