Scandal Tying an Octopus in Knots

By John Greenwald

The crackdown was as swift and implacable as a military operation. Shortly after noon last Friday, British authorities strode into the steel-and-glass London headquarters of the Bank of Credit & Commerce International, a notorious cash conduit for drug smugglers, arms dealers and rapacious tyrants. Seizing control of the office, the regulators told bank employees to stop working and go home. The move coincided with similar sweeps of B.C.C.I. operations in Luxembourg, the Cayman Islands, France, Spain, Canada, Switzerland, the Netherlands and the U.S., where regulators shut the bank's loan offices in New York City and Los Angeles. The combined actions placed more than 75% of B.C.C.I.'s $20 billion of assets in 69 countries in government hands and wrested control of the empire from the bank's Middle Eastern ownership.

The wave of shutdowns marked the most drastic attack yet on a shadowy institution that investigators have called the most corrupt corporate enterprise in modern history. Those ensnared in its toils include former Defense Secretary Clark Clifford, the chairman of Washington's First American Bankshares, which B.C.C.I. secretly gained control of during the 1980s. Bank regulators have been probing B.C.C.I. with increasing intensity since last year, when an audit found that more than $1 billion had vanished from its vaults and the bank pleaded guilty to laundering drug money in a case linked to former Panamanian leader Manuel Noriega. Astonished investigators have since put the amount of missing funds at $10 billion.

Authorities in the U.S. and Europe launched their blitz last week, after a Bank of England report uncovered "widespread fraud at the B.C.C.I. Group in a number of jurisdictions and stretching back over a period of years." That clearly confirmed what the governments had long suspected. "It's so bad the auditors couldn't even put together a balance sheet," said William Taylor, staff director of the U.S. Federal Reserve Board's banking supervision and regulation division. Taylor said the Bank of England had been seeking for months to restructure B.C.C.I. "All of a sudden they realized this isn't problem lending," he explained. "This is criminal fraud."

The worldwide closures were a resounding vote of no confidence in B.C.C.I.'s owner, Sheik Zayed bin Sultan al-Nahayan, ruler of the United Arab Emirates. Zayed bailed out the bank last year by acquiring control for $1 billion from Arab partners of Agha Hasan Abedi, a visionary Pakistani financier who founded B.C.C.I. in 1972 and built it into a secretive global giant. But while Zayed put up some $200 million in recent months to help First American cope with real estate loan problems in Washington, regulators have grown increasingly dismayed by the sheik's inability to place B.C.C.I. on a sound footing. Says a European banking expert: "Perhaps now we will see months of intolerable dithering come to an end as the Abu Dhabi government at last puts B.C.C.I.'s house in order."

That has been impossible so far, because Abu Dhabi factions close to B.C.C.I. have kept Zayed from learning the full extent of the bank's problems, insiders say. Some of the sheikdom's most knowledgeable bankers fear reprisals from what they believe to be a clandestine group based in Karachi that specializes in "black operations," among them kidnapping, extortion and blackmail. "Anybody who tries to tell His Highness what has really gone on with the bank will be killed," an apprehensive Abu Dhabi official told TIME.

One of B.C.C.I.'s nefarious dealings was a deep involvement in clandestine arms sales, including transactions among enemies that wanted to keep their ! dealings secret. "If Israel wanted to funnel arms to Middle Eastern states, such as Iran or Iraq, B.C.C.I. was there to handle it," says a former State Department official.

Zayed may have to work fast to salvage any portion of B.C.C.I. before the world's courts dispose of its assets. "The bank will be wound up under the laws of each country," said a Bank of England spokesman. "Depositors and shareholders will be treated according to the law."

The Federal Reserve rushed to assure customers of U.S. banks linked to B.C.C.I. that their funds remained safe. The Fed said the closings would have no effect on units of First American Bankshares or on Independence Bank of Encino, Calif., which B.C.C.I. also secretly owned. "These banks are separately capitalized, U.S. chartered and federally insured institutions," the Fed said. B.C.C.I. is already under orders to divest itself of both institutions by the end of the year.

Prosecutors will keep their sights trained on the bank long after that. Grand juries in Miami, Washington and New York City are probing B.C.C.I.'s U.S. activities. A second Miami grand jury is looking into the bank's ties to Florida's CenTrust Savings and Loan, which collapsed last year. Subjects of the New York investigation include Clifford, who has said he was unaware that B.C.C.I. owned First American.

While B.C.C.I.'s U.S. and European holdings are now in government hands, ending the bank's influence in the Third World could prove to be more difficult. In such places as Jamaica and Nigeria, B.C.C.I. has woven itself firmly into the fabric of the country by holding substantial government deposits. Sheik Zayed may have to restructure the remains of those branches himself if the host countries don't have the gumption to do so. But regulators have at last corralled a runaway global maverick that was left unbridled far too long.

With reporting by Jonathan Beaty/Abu Dhabi and S.C. Gwynne/Washington