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For Release on Delivery 9:30 A.M. EDT September 13, 1991 Testimony by Robert P. Forrestal President Federal Reserve Bank of Atlanta before the Committee on Banking, Finance and Urban Affairs United States House of Representatives September 13, 1991 FEDERAL RESERVE BANK OF ATLANTA TESTIMONY re: BANK OF CREDIT AND COMMERCE INTERNATIONAL AND THE NATIONAL BANK OF GEORGIA INTRODUCTION Mr. Chairman and members of the Committee, I am pleased to appear today to discuss with you the role of the Federal Reserve Bank of Atlanta in the supervision of the Florida offices of the Bank of Credit supervision of and the Commerce NBG International Financial (BCCI) , and Corporation, holding company of the National Bank of Georgia My remarks will first address BCCI. the in parent the bank (NBG). Since the previous witnesses have set forth the supervisory and regulatory framework within which the Federal Reserve System operates with respect to its supervision of international branches and agencies, I will therefore confine my remarks regarding BCCI to the Atlanta Reserve Bank's supervision and regulation of B C C I 's offices in Miami, Boca Raton, and Tampa, Florida. HISTORY OP BCCI IN THE SIXTH FEDERAL RESERVE DISTRICT The BCCI-Miami agency opened on March 15, 1982; the Boca Raton agency opened on September 12, 1983; and the Tampa agency opened on June 29, 1984. Each of these offices was licensed by the Comptroller's Office of the Department of Banking and Finance of the State of Florida. These were not the initial entries by BCCI into the United States, as its first office was opened on September 1, 1981, in San Francisco. Other offices in Los Angeles (February 7, 1983) and New York (April 16, 1984) were also opened. BCCI also had an administrative office in supervised Latin American and Caribbean activities, back office support administrative office to the three was permitted Florida under Miami which and provided agencies. Florida law The and was supervised by the Florida Department of Banking and Finance. The Miami agency managed and coordinated the activities of the Tampa and Boca Raton offices, including regulatory reporting to the Federal Reserve. From the opening of the BCCI-Miami office, the Atlanta Reserve Bank carried out its supervisory responsibilities pursuant to the International Banking Act of 1978. As was the case with other Florida agencies under that Act, our responsibility as the residual supervisor of the State-licensed agencies was essentially to assure that the BCCI Florida offices received timely examinations from the licensing authority, the State of Florida. During examinations this in time, a our limited examiners manner. Our participated participation in these normally consisted of a one or two day visitation of the agency, in which we 3 conducted a review of financial reports submitted to the Reserve Bank, and a review of compliance including the Bank Secrecy Act. with federal banking laws, These visitations coincided with the State's examinations and during the visitations, our examiners learned the State's preliminary findings. compliance visit, detailing Copies their of responses the were Reserve findings State's and final forwarded Federal Reserve System. Bank to examiners the State's report the After conducting the of wrote a memorandum preliminary examination appropriate results. and offices B C C I 's within the Irregularities in compliance with the Bank Secrecy Act were detected at various times during our visitations and resulted in two criminal referrals, which are described below. In 1983, the Treasury Department referred numerous institutions, including BCCI-Miami, to our attention after finding technical deficiencies in their reporting of transactions subject to the Financial Recordkeeping Act. The deficiencies improper completion of forms designed to report concerned individual cash transactions of $10,000 or more. We found additional technical compliance problems in a visit at BCCI-Miami in 1984, in which examiners noted the agency had failed to file currency transaction forms for three cash transactions over $10,000. the forms during the examination. technical problems, laundering. action. and did In each instance, In examination, March 1985, Reserve Both cases represented isolated not visiting examiners 4 raise suspicions of money agency management took corrective while Bank The agency filed during detected the State's suspicious transactions becoming carried aware of out the by a customer transactions, business with the customer. of BCCI-Miami. the agency To our knowledge, After ceased doing this customer has not been implicated in subsequent indictments of B C C I . Following the receipt in August, 1985, final Report of Examination continued asset problems, 1985, of of the State's March BCCI-Miami which noted the Atlanta Reserve Bank conducted an independent examination of the Miami office in October, 1985. The examination revealed a significant deterioration in asset quality. However, no further evidence of suspicious transactions was noted at the time. As a result of the deterioration in asset quality, the Atlanta Reserve Bank requested BCCI begin quarterly reporting on its classified assets. While participating in an April 1987 examination of BCCI- Miami, examiners discovered possible money laundering transactions that appeared to be structured to evade reporting requirements. The transactions were detected in a review of checks and money orders sent from BCCI-Panama to BCCI-Miami for payment. The following circumstances prompted examiners' BCCI-Miami frequently received such deposits from suspicions. BCCI-Panama, consisting of 300 to 500 individual money orders totaling $300,000 and more. These money orders were all purchased from institutions in the New York City area and were issued stamped payable endorsements to ever the order of one appeared. in bearer account The purchasers number. then No other of the money order wrote in their name and address and the date purchased. 5 form, The same handwriting appeared for different names and different addresses. Some money orders bore sequential numbers but were given different purchase dates. facilitate These a money transactions laundering appeared operation. to A be designed criminal to referral concerning the activities discovered at the Miami agency was filed with the U. S. Attorney's office in Miami, and the Federal Bureau of Investigation in North Miami Beach on May 18, 1987. of the Board of Governors copied the referral to The staff the Internal Revenue Service, Washington, D.C. on June 5, 1987. In October, indictments laundering. 1988, against In the BCCI connection U.S. Attorney and several with the in Tampa employees indictments, issued for U.S. money Customs agents searched the offices of BCCI in Florida over the weekend of October 8. Reserve Bank examiners entered the Miami, Boca Raton, and Tampa agencies to monitor liguidity and review operations in the week following the search by law enforcement officials, and remained on-site for several weeks until the situation stabilized. Our efforts were part of a System review of all of B C C I 's U.S. offices. During this period, activities resulting in the Atlanta Reserve Bank's second criminal referral were discovered. Reserve examiners detected two separate series transactions while on-site at BCCI-Boca Raton. similar to the scheme detected in Miami in 1987. of Federal suspicious Both cases were Our ability to investigate the suspected schemes was limited because many original records had been seized by law enforcement authorities 6 in their search. The second criminal 1988, with the U. referral was filed on November S. Attorneys in Tampa and Miami, 7, and the FBI. The staff of the Board of Governors sent a copy of the referral to the IRS, Washington, D.C. on November 14, 1988. Copies of workpapers and documents supporting the two referrals were provided in response to a subpoena from the U.S. Attorney in Miami on February 27, have continued to cooperate with 1989. law Reserve Bank personnel enforcement authorities, including the U.S. Attorney, the Federal Bureau of Investigation, and the Internal Revenue Service, on matters relating to B C C I . June 12, the 1989, U.S. the Reserve Bank received a second subpoena, Attorney in Tampa, Florida, requesting relating to BCCI, the National Bank of Georgia companies. all On from records (NBG), and related All information was supplied as requested. As a result of the System's review of B C C I 's U.S. operations in 1988, a cease and desist order against BCCI was issued by the Board of Governors on June 12, 1989, requiring BCCI to strengthen U.S. operations and enforcing compliance with the Bank Secrecy Act. The Reserve Bank conducted an independent examination of BCCI-Miami as of September 30, 1989, to assess the condition of the agency and determine compliance with the Board's order. This examination was coordinated with other Reserve Banks' examinations of B C C I 's U.S. offices. weaknesses Examiners noted significant asset quality problems, and in credit administration, audit function. 7 internal controls, and the The need for further examination of B C C I 's Florida offices was eliminated when September, the Tampa and Boca Raton offices closed 1989, and the Miami agency closed in January, in 1991. RESERVE BANK'S SUPERVISION OF NBG Application History of NBG Ghaith interest Pharaon, in NBG a Saudi in 1978, national, acquired and continued to acquire until by December 3 0 , 1980, shares. Arabian a stock in NBG he owned 98.6% of total outstanding Because NBG was a national bank, the Comptroller of the Currency (OCC) was its primary regulator. According to information supplied by the Office of the Comptroller of the Currency Pharaon 60% purchased numerous the individuals, tender offers. shares through in NBG from direct Bert Lance negotiations (OCC), and and other through A change of ownership notice was filed with the OCC on August 7, 1978. The Reserve Bank was not a party to this notice because NBG was not yet owned by a holding company. Pharaon incorporated GRP, Inc. in Georgia in March, the purpose of forming a bank holding company. 1981, for The Reserve Bank learned of Pharaon's intent and requested information regarding his financial strength and business activities. No negative information was received. Pharaon's banking interests first came under the jurisdiction of the Atlanta Reserve Bank in July, 1981, when GRP, Inc., filed an application to become a bank holding company by acquiring existing bank holding company and its bank subsidiary — located in Cobb County, Georgia. 8 an not NBG — The Reserve Bank approved the application in October, 1981, based on the following factors: 1) the positive impact of Pharaon's ownership on his existing banking interests, as evidenced by the O C C 's recognition of the improved condition of NBG, and Pharaon's injection of $3 million to improve its capital; and 2) Pharaon's ability to repay debt associated with the acquisition, company. and Pharaon's provide continued financial statement support to showed a the net holding worth in excess of $100 million, not including the bulk of his assets which were in Saudi acquired the Arabia. Pursuant to Cobb County bank, the and thus, application, became GRP, Inc. subject to the Reserve Bank's supervision. The Federal Reserve regulation responsibility began in November, his stock Bank of Atlanta's supervision for N B G 's parent bank holding and company 1981, when Pharaon filed applications to place in NBG under his existing bank holding Inc. , and to acquire two more banks, and in Gwinnett County, Georgia. company, in Clayton County, GRP, Georgia, In evaluating the applications, the Atlanta Reserve Bank again considered Reports of Examination, issued by N B G 's primary regulator, NBG had improved under Pharaon's the OCC, which indicated that ownership, and again reviewed Pharaon's ability to financially support the bank, by requesting a summary of the sources of the most recent year's income, and a list of annual obligations. Pharaon again provided evidence of a non Saudi net worth in excess of $100 million, and committed to make an additional capital injection of $10 million into NBG. He also offered not to take dividends from the bank to allow it to improve 9 its capital condition, financial position. and The Pharaon's support were continued ability positive improvement and willingness factors Reserve Bank's approval recommendation. leading to to in NBG's contribute the Atlanta The Board of Governors of the Federal Reserve System approved the application in March, 1982, and the parent holding company came under the Federal Reserve's supervision. the Reserve The OCC remained the primary regulator of NBG, while Bank directly supervised GRP, Inc., NBG's parent company. The Reserve Bank approved the reorganization of NBG's parent holding company structure in two subsequent applications, processed in 1982 and 1983. In connection with the reorganization, GRP, Inc. changed its name to NBG Financial Corporation. The applications involved the creation of two new bank holding companies, and the merger of Pharaon's Atlanta banking interests into a single bank. Pharaon remained the sole shareholder of NBG and its parent bank holding companies. reorganization was The for stated estate and purpose tax of planning, the and proposed to take advantage of a Georgia law related to bank mergers. Prior to approving these applications, the Reserve Bank again considered the condition of banks controlled by Pharaon, reviewing reports of examination from the OCC and the State of Georgia, and considered his ability to provide According to the application, any parties additional (Pharaon, debt. or the holding company) projected 10 support for NBG. the transactions would not require the bank, The financial cash needs of NBG to incur Financial Corporation, the "new" bank holding company, would be met through Pharaon's personal resources. After considering these factors, the application The was approved. transactions proposed in the applications were consummated in 1983. In response to the Committee's question, let me reiterate that, during this period, there was no information or evidence to indicate that Pharaon was not in fact the owner of NBG or that his source of funds for acquisitions differed from that he reported. Pharaon had been the owner of record of NBG for several years prior to the formation of the holding company, and he had established a satisfactory record during his control of the bank, as evidenced by the improvement in condition of the bank, his ability to make capital injections, and his ability to defer dividends. In January, the Board of 1985, the Atlanta Reserve Bank recommended that Governors approve an application filed by NBG to convert an existing wholly owned service subsidiary to an Agreement Corporation, called NBG International Bank. (An Agreement Corporation is permitted to conduct business of an international nature only, similar to an Edge Act corporation. NBG could not own a Edge Act corporation because Pharaon was not a U.S. The approval recommendation was based on an citizen.) evaluation of the condition of NBG, using Reports of Examination provided by the OCC, and other financial data supplied by the applicant. The Board of Governors approved the application on February 25, 1985. 11 The Atlanta Reserve Bank received an application from NBG International Bank in 1987 to increase the authorized capital stock in the Agreement Corporation. The application was submitted to correct an inadvertent violation of Regulation K. The corporation increased its capital stock without prior approval from the Reserve Bank. The Board of Governors approved the application on April 26, 1989, after NBG International Bank took steps to ensure violations would not occur. On October 23, 1987, the further Atlanta Reserve Bank approved an application by NBG International to change its name to First American International Bank. Inspection/Examination Supervision of NBG and NBG International Bank The activities and financial condition of NBG's parent bank holding company were routinely monitored by the Federal Reserve Bank of Atlanta, through inspections of NBG Financial Corporation, and examinations supervision of programs NBG International adopted Federal Reserve System. by the Bank, Board of according to the Governors of the These supervision programs were developed pursuant to the authority granted in the Bank Holding Company Act of 1956, and its various amendments, and Section 25(a) of the Federal Reserve Act. The bank holding company supervision program focuses on assessing the condition of the bank holding company and determining its ability to serve as a source of strength for its subsidiaries. In 1978, annual inspections were mandated for companies with assets in excess of $300 million. In accordance with this program, 12 the Atlanta Reserve Bank inspected NBG's holding company once each year from 1983 through 1986. the bank holding Each inspection considered the ability of company to support its bank found the contribution of the sole indirect Pharaon, to be positive. Ghaith including reviews of the Examination Reports of the primary regulator, any shareholder, and Never in the course of our supervision of the parent holding company, discover subsidiaries, information the OCC, indicating did the Reserve Bank B C C I 1s ownership of NBG Financial Corporation. NBG International Bank (now First American International Bank) has been examined annually by the Atlanta Reserve Bank since its inception. NBG Financial Bankshares, Inc., Corporation Washington, was D.C., acquired on by First August 19, American 1987. The acquisition application was processed by the Federal Reserve Bank of Richmond, Bankshares, the responsible Reserve Bank for First American Inc. CONTACTS WITH OTHER REGULATORS In keeping with the regulatory structure proscribed Bank Holding Act 1978, the Reserve State of Florida, routine relying, of 1956, and the International Bank has maintained regular Banking Act of contact with the and with the Comptroller of the Currency in its supervision as directed of BCCI and by statute, NBG's parent company, of these other When concerns regarding the condition of B C C I 's Florida agencies arose, 13 holding on the reports supervisory agencies whenever possible. in the the Reserve Bank departed from its usual residual supervision and conducted independent examination to directly assess B C C I 's condition. an The Reserve Bank continues to participate in coordinated investigations of BCCI and related parties within the Federal Reserve System and is also continuing to cooperate with law enforcement agencies in their ongoing investigations of BCCI and NBG. SUMMARY In summary, the Federal Reserve Bank of Atlanta supervised B C C I 's and NBG's activities in the Sixth District as directed by the International Banking Act of 1978 and the Bank Holding Company Act of 1956. We made criminal referrals of suspicious activity and increased our on-site presence as warranted. With respect to NBG and First American, we evaluated on several occasions the owner of record, Pharaon, and had every reason to believe that he was a person of substance financially, and that he was acting on his own behalf. Throughout this period, we have cooperated with law enforcement agencies in every way possible, and even at the present time, are contributing an examiner to the U.S. Attorney's ongoing efforts in Atlanta. 14 Board of Governors of the Federal Reserve System W ashington, D .C . 20551 POSTAGE AND FEES PAID Board of Governors of the Federal Reserve System 622 OFFICIAL SUSINESS F w lty for P riv iii Dee. 1300 First Class