Federal Reserve Board

The Board of Governors of the Federal Reserve System (Federal Reserve Board) is the governing body of the United States central banking system, established by the Federal Reserve Act of 1913 and headquartered in Washington, D.C. The Board consists of seven members appointed by the President and confirmed by the Senate, serving 14-year terms. The Federal Reserve is responsible for U.S. monetary policy, banking supervision and regulation, and maintenance of the financial system's stability. As a bank regulator, the Federal Reserve holds primary supervisory authority over bank holding companies - a jurisdiction directly relevant to the BCCI scandal.¹

BCCI and First American Bankshares

The Federal Reserve Board is prominently implicated in the BCCI scandal through its regulatory approval of the acquisition of First American Bankshares, the largest bank holding company in the Washington, D.C. area. In 1981-1982, a group of Middle Eastern investors fronted by Clark Clifford - the Washington super-lawyer and former Secretary of Defense - and his law partner Robert Altman sought Federal Reserve approval to purchase First American (then called Financial General Bankshares). The investors represented themselves as independent Arab investors with no connection to BCCI.

The Federal Reserve approved the acquisition. In reality, BCCI secretly controlled the purchase: the nominally independent Arab investors were BCCI nominees whose shares were financed by BCCI, and BCCI chairman Agha Hasan Abedi made the key decisions about First American's management. Clifford and Altman maintained publicly - and in sworn testimony to the Federal Reserve - that BCCI did not control First American, which congressional investigators and prosecutors subsequently concluded was false. Clifford and Altman were indicted in 1992 for fraud in connection with the deception of the Federal Reserve; Clifford was ultimately not tried due to ill health, while Altman was acquitted.²

The Federal Reserve's failure to detect BCCI's secret ownership of First American - despite BCCI's known reputation in the international banking community as an institution with irregular practices - was identified by the Kerry Committee investigation and the Bank of England's Bingham Report as reflecting significant regulatory failure. The Federal Reserve paid insufficiently close attention to the backgrounds of investors seeking approval, relied on representations without adequate independent investigation, and permitted BCCI principals to escape detection for nearly a decade.

Post-BCCI Response

Following the July 1991 closure of BCCI by international regulators, the Federal Reserve conducted its own investigation into BCCI's U.S. operations and imposed one of the largest fines in Federal Reserve history, 200 million dollars against BCCI, assessed on July 29, 1991. The settlement included the Federal Reserve's finding that BCCI and its principals had made false representations to the Board in connection with the First American acquisition, engaged in unsafe banking practices, and violated U.S. banking law.¹

Iran-Contra Financial Flows

The Federal Reserve System's broader role in the Iran-Contra Affair was as the institutional infrastructure through which the financial flows of the "Enterprise" - Oliver North's off-books covert operations fund - moved through the banking system. Accounts at major U.S. banks, Swiss numbered accounts, and the network of front companies managed by Richard Secord and Albert Hakim all operated through correspondent banking relationships that passed through the Federal Reserve's payment system. The Federal Reserve itself was not involved in or aware of these operations, but its payment infrastructure was the medium through which the illegal financial transactions moved.²

The Kerry-Brown Findings

The Kerry-Brown Senate Report found that when the Board approved the takeover of Financial General Bankshares by Credit and Commerce American Holdings in 1981 "it had substantial circumstantial evidence before it to suggest that BCCI was behind the bank's purchase," and that it "would not have approved the CCAH application but for the false statements made to it." It relied on representations from the Central Intelligence Agency, the State Department and other agencies that they had no objections, and on the reputation of BCCI's lawyers, Clark Clifford and the former Federal Reserve counsel Baldwin Tuttle. Paul Volcker, who signed the approval, testified in 1991 that he "wasn't aware" of Kamal Adham's intelligence background. The Treasury failed to pass on what the CIA told it in 1985 and 1986 about BCCI's ownership of First American, although "IRS agents did provide important information to the Federal Reserve on this issue in early 1989, which the Federal Reserve failed adequately to investigate at the time." The purchase of the National Bank of Georgia in 1986 was an obvious warning sign not investigated until late 1990.³⁴

The Board opened a formal investigation on January 3, 1991, which the report called "aggressive and diligent." In mid-March 1991 it sent two investigators, Richard Small and Thomas Baxter, to Abu Dhabi, where they were refused direct access to BCCI's files. On July 29, 1991, the day of the New York County indictments, it assessed a fine of 200 million dollars against BCCI, one of 37 million dollars against Ghaith Pharaon and one of 20 million dollars against the BCCI official Kemal Shoaib; with the Justice Department and District Attorney Robert Morgenthau it reached a plea agreement on December 17, 1991, under which BCCI's liquidators forfeited about 500 million dollars of BCCI's American assets. The report said that the Board's cooperation with the subcommittee "was unique among federal agencies."³ The Justice Department's head of the Criminal Division, Robert Mueller, told the subcommittee that the information on BCCI's secret ownership "was passed on to the Federal Reserve after the October 1988 takedown," quoting the Board's general counsel, Virgil Mattingly, that it was "the kind of allegation [that] they had heard before."⁵