Dirty Cash and Tarnished Vaults

By Stephen Koepp.

Few of Boston's hallowed institutions are held in such respect as the First National Bank, which was founded in 1784. Yet last week First National was under humiliating scrutiny. Politicians, stockholders and the press were asking tough questions about First National's admission that it had broken the law by making unreported cash shipments of $1.2 billion to and from foreign banks.

New disclosures last week raised the possibility that the institution has been involved, perhaps unknowingly, in money laundering, the booming illegal business of covering up the origin of funds earned from drug trafficking and other crimes. Growing concern about the spread of money laundering prompted the Senate Subcommittee on Investigations to announce plans for a probe of the Boston institution, which is New England's largest banking company (assets: $21 billion). Rhode Island Democrat Fernand St Germain, chairman of the House Banking Committee, declared that the Boston episode shows the need for tighter controls over the financial industry.

Meanwhile, Bank of America was trying to clean up its scandal. The banking corporation, the nation's second-largest (assets: $121 billion), has announced that it would have to make a $95 million fourth-quarter write-off to cover the cost of buying back failed securities that the bank had a role in delivering to investors.

The Boston institution's misstep came to light when the bank pleaded guilty to a felony charge--failing to report huge cash shipments to nine foreign banks, primarily three in Switzerland. The Internal Revenue Service requires U.S. banks to file a report any time they make a cash transaction of $10,000 with an individual, company or foreign institution. Federal prosecutors say that during the past four years, First National received $529 million, mainly in small bills (weight: at least 20 tons), and sent out $690 million in bills generally of $100 or more.

First National was fined $500,000, the biggest penalty ever levied for that type of crime. Prosecutors have not accused the bank of laundering money, a more serious offense. But federal officials implied that, intentionally or not, laundering was probably taking place. Racketeers, whose profits frequently take the form of small bills, typically dodge the IRS by sending the cash to overseas banks. Those institutions return the funds to the U.S. via wire transfers, often to accounts with assumed names. The overseas banks, left with piles of small bills, then ship them back to U.S. banks in exchange for larger bills. The simple act of bill swapping is totally legal so long as it is reported correctly.

In a press conference last week at First National's brown marble headquarters, Chairman William L. Brown called the episode an innocent "systems failure" and defended cash swapping as a legitimate banking service. He suggested that banks overseas are being swamped with small bills partly because of the growing army of American tourists.

First National was snared by a federal strike force that has been on the lookout for money laundering in New England, where some of the estimated $100 billion-a-year business has moved because of increasing federal scrutiny of banks in South Florida. An affidavit filed by an FBI agent in 1983 said that the Angiulo family, a reputed organized-crime group, had bought more than $1.7 million in cashier's checks from a First National branch in Boston's North End. Payment for the checks included $250,000 in cash. According to the Boston Globe, the branch gave cash-reporting exemptions to the two companies allegedly connected with the Angiulos. Such exemptions are usually granted to small businesses like grocery stores that handle lots of bills. A retired First National teller said last week that the Angiulos frequently brought in paper bags stuffed with money.

The disclosures last week triggered a community backlash against the bank. The city council of Medford voted to withdraw $64,000 in deposits from First National, and Boston officials began thinking about doing likewise with the $44 million in its accounts. For First National's management it was a public relations nightmare. "They're stunned," said one of the bank's consultants. "They are used to being pillars of the community."

Bank of America fell victim to an elaborate mortgage-securities scam involving overvalued real estate in the Southwest. In one instance, according to charges in a lawsuit filed in Texas, a company run by Southern California Businessman Kent B. Rogers bought three apartment complexes in Houston for about $12 million and hired an appraiser to value them at twice their true worth. Then a Rogers associate bundled the inflated mortgages on the apartments into securities that were sold to savings banks and other investors. Bank of America investigators are looking into why its Inglewood, Calif., branch agreed to act as an agent for handling the payments.

When Rogers and colleagues defaulted, Bank of America went to the firm that had guaranteed the securities, Delaware-chartered Pacific American Insurance, only to discover it too was apparently controlled by Rogers and unable to make good. Rogers denies having had control of the insurance company. Bank of America tried to protect investors and its own reputation by buying back the securities.

A multistate task force is currently trying to unravel the complicated scheme. As for Rogers, two weeks ago, he entered California's Lompoc prison camp to begin serving a six-month sentence on a separate charge of bankruptcy fraud.

Bank of America's stumble occurred just as the institution was starting to recover from four years of slumping profits. Said President Samuel Armacost: "We all hate surprises, but one of this magnitude drives you nuts. It's going to be seen, correctly, as a dumb thing to have occurred."

With reporting by John Kennedy/Boston and Dick Thompson/San Francisco