“MORAL HAZARD”: MOSCOW’S DUBIOUS BANKING OPERATIONS MAY MAKE THE BCCI AND BNL AFFAIRS LOOK LIKE SMALL CHANGE

(Washington, D.C.): As Western regulators and law enforcement agencies scrutinize the activities of the Bank of Credit and Commerce International (BCCI) and the Banca Nazionale del Lavoro (BNL) — looking for evidence that these institutions financed international terrorism and covert arms sales, engaged in money-laundering and other reprehensible activities — the machinations of one other network of banks have yet to be subjected to comparable investigative attention.

For decades, a network of Soviet foreign-based subsidiaries, branches and representative offices have operated in a highly suspect manner around the globe. These banks include, among others: Moscow Narodny Bank, Ltd. (London), Banque Commerciale pour l’Europe du Nord SA — also known as Eurobank (Paris), Ost-West Handelsbank AG (Frankfurt), Donaubank AG (Vienna), East-West United Bank (Luxembourg) and Moscow Narodny Bank (Singapore-based branch of the London bank); and the Soviet Bank for Foreign Economic Affairs (which has a branch office in Zurich and a representative office in New York).

The Soviet foreign banking network is wholly owned by the Kremlin and utilized routinely by the KGB, the CPSU and the Soviet military to fund a range of activities inimical to vital Western interests. Indeed, there is evidence that such Soviet institutions have played an integral part in Moscow center’s funding of client states hostile to the United States, Western technology theft, espionage and other subversive activities around the globe.

The parallels between the use the Soviet Union has made of its foreign banking operations and the alleged connections between Western intelligence services and BCCI and BNL are quite striking. A description of the latter published by Jim Hoagland in yesterday’s Washington Postin spades to the Soviet overseas banks and their patrons in the Kremlin: applies

"The close relationship between bankers and spies is a necessary one. Like you or me, spies have a lot of bills to pay. But they must frequently pay them in odd, scary or merely surreptitious ways to odd, scary or merely surreptitious people in faraway places. To buy or rent these people, it takes money, skill and discretion — but mostly money."

 

 

"It also takes the benign neglect of banking regulators and other government officials who turn a blind eye to fishy balance sheets and hidden cash flows that would normally trigger audits and fraud investigations. Spies need bankers, and bankers need friends in high places." (Emphasis added.)

 

There are two important differences in the Soviet case, however. First, the Kremlin’s banks are unquestionably instruments for its global economic as well as political, intelligence and subversion campaigns. These activities have been documented repeatedly over the past five years by Roger W. Robinson, Jr, former Senior Director for International Economic Affairs at the National Security Council and a former Vice President of the Chase Manhattan Bank with responsibilities for Chase’s loan portfolio in the USSR, Eastern Europe and Yugoslavia.(1) For example, the attached article, which appeared in the Post on 22 June 1986, illustrates how these banks serve as important devices for untied, largely non-transparent sovereign borrowing by the USSR.

Second, in the case of the Soviet banking network, the "benign neglect of banking regulators and other government officials" to which Hoagland refers does not, of course, apply to the attitude of those in the USSRthose responsible in the Soviet Union for these institutions are actually directly involved in the banks’ nefarious activities. charged with overseeing the operations of these institutions. To the contrary, given the purposes to which Moscow’s overseas banks and representative offices are put, it seems reasonable to conclude that — far from "benign neglect" —

Where there does appear to be "benign neglect," however, is on the part of those in Western capitals charged with supervising and monitoring the banking practices of the Soviet Union’s financing network. Indeed, Moscow has proved at least as adroit as BCCI and BNL in identifying and exploiting regulatory laxity among G-7 and other financial capitals. For example, when the Bank of England began to tighten slightly its oversight of Moscow Narodny Bank in London after 1986, the USSR simply moved at least a portion of its more risque banking activities to Eurobank in Paris and East-West United Bank in Luxembourg — where regulatory officials were more laissez-faire. A similar consideration appears to have prompted BNL to chose the hospitable southern city of Atlanta as the venue for funnelling roughly one billion dollars to Iraq through the Commodity Credit Corporation’s taxpayer loan guarantee program.

Importantly, among the localities of choice for some of Moscow center’s more insidious global financial transactions — at least until the revolutionary developments of 1989 — were the Soviet satellites in Eastern and Central Europe. An award-winning documentary entitled "Follow the Money" produced by the Blackwell Corporation and aired nationwide on 12 July 1989 on PBS provided compelling evidence of how, for example, East Germany’s Foreign Trade Bank played a key role in the financing of a terrorist attack on U.S. nationals. Questions raised by this powerful piece of investigative journalism and other reports can presumably be resolved at last by a thorough examination of the real books of the Communist-run East and Central European banks used to advance this and similar illegal activities.

Soviet abuse of its overseas banking network takes on special significance at a moment when the USSR faces desperate financial circumstances. As a practical matter, Moscow’s ability to attract interbank deposits, renew short-term credit lines and secure Western loans has been sharply curtailed by the Soviet Union’s non-creditworthy status and its massive arrearages to Western firms. The implications of these deficiencies were on vivid display even sharper relief by the Soviet bid yesterday for full IMF and World Bank membership — less than one week after the economic summiteers clearly eschewed such a step as premature.

This profound financial squeeze is likely having at least two major effects: First, Soviet banking authorities are probably reaping a windfall benefit attendant to the precipitous decline in the country’s creditworthiness, which commercial bankers refer to as "moral hazard." That is, as the value of Soviet debt declines on the secondary market (perhaps to as little as 50 cents to the dollar) thanks to non-payment of creditors and other factors, Soviet bankers then buy back their own debt at a deep discount — largely with funds provided by Western governments. Such a "debt buy-back scheme" could, over time, result in a substantial reduction of Moscow’s roughly $75-80 billion of total indebtedness at the direct expense of unwitting Western creditors.

Second, Moscow’s financial crisis adds a powerful additional incentive for the USSR to obtain Western financing through deceptive means. At a minimum, it encourages the unsound structuring of their borrowing activity — for example, through the USSR’s tapping of Western interbank short-term deposits to fund medium-term purposes at home and abroad. With commercial banks gradually pulling their interbank and short-term credit lines from Soviet institutions and completely cutting off medium-term lending, the Kremlin’s authorities are tempted, if not compelled, to take on higher pay-off banking transactions internationally. Just as BCCI is reported to have done in similar straights, the Soviet Union is probably engaging in more and more unconventional banking practices.

Worse yet for Moscow center, the USSR has as much as $60 billion or more in hard currency loans outstanding to the Third World. Most of these credits were extended to finance Soviet arms sales or "white elephant" projects in client states; the recipients either never expected to repay them or are now in no position to do so. This situation begs the following questions: What is true magnitude of the Soviet debt crisis? What are the Bank of England and other international regulatory authorities doing to assess and publicly report on contribution being made to this crisis by unsound Soviet lending and borrowing activities?

"The Soviet Union is already in a piecemeal debt rescheduling with a series of ‘quiet’ Western government ‘refinancings’ likely this year — all in the interest of avoiding a more formal and debilitating Paris Club process," Center Board member Robinson said. "The global reach of the Soviet Bank for Foreign Economic Affairs alone, with some 2,000 or more correspondent banks makes the combined financial network of BCCI and BNL look very modest."

Robinson added, "Under present circumstances, it only makes sense that the appropriate authorities conduct a thorough investigation of Moscow’s banking activities and loan and interbank deposit portfolios before any further Western taxpayer guaranteed credits are pledged to Moscow. To do otherwise would be to turn, yet again, a blind eye to security-related — as well as financial — Soviet improprieties that could make recent revelations about international banking scandals pale by comparison."

"International banks can no longer be viewed by Western regulatory agencies as they have been in the past — as virtually sacrosanct institutions somehow above the law, "said Frank J. Gaffney, director of the Center. "Soviet banking practices in particular represent a ‘moral hazard’ to the American taxpayer, in more ways than one. It is incumbent upon those charged with investigating international banking irregularities to make Moscow’s foreign financial network one of the targets of their inquiry."

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1. See, for example, "Moscow’s ‘Shell Game’: Soviet Bankers Use Our Money Against Us," Washington Post, 22 June 1986; "Soviet Cash & Western Banks," The National Interest, Summer 1986; "Financing the East Bloc," Hoover Institution Press, September 1988; American Interests Special, "Follow the Money," 12 July 1989; "Trade and Financial Relations with The Soviet Union: A Risk Assessment," Washington Publications Conference, 9 November 1989; "Gorbachev’s Empire on the Cheap" Wall Street Journal, 16 March 1990.