NUGAN HAND BANK -- WAS THERE CLOAK & DAGGER UNDER THE NOSE OF MAS (PART I)

No matter how strict the banking regulators, how incorruptible and well-qualified its personnel, and how good the legislation, no country is spared the occasional crisis of financial fraud, huge credit defaults, money-laundering, and bank failures.

Singapore has had its fair share. The worst on the patch was the 1995 failure of Barings Bank due to fraudulent options trading conducted by its Singapore branch. Much has been written and spoken about the affair but none has ever suggested attribution to regulatory failure. In my humble opinion, a policy meant to shield MAS personnel from influence buying takes some blame. During my time in the banking industry, MAS personnel were basically forbidden to accept even lunch invitations from the banking fraternity. Their absence from the drinking holes and other socialising functions meant they were like generals commanding from HQ, unwary of what's going on in the foxholes. They do not have their hands on the pulse, thus missing out on critical intel. For example, in the case of Barings, regulatory personnel had no idea what the market had long suspected was going on at their options trading desk. MAS was two or three steps behind.

More serious a matter is where a financial entity is being operated by foreign governments or agents for cloak and dagger operations. Has there been any in Singapore?

I blogged about Nugan Hand Bank last year in the article on "Truman shows".

"Back in 1978 when I was working in a bank, I had lunch with a friend one day. I shall conceal any trace to ID this friend. Just suffice to say I found him a very mysterious and mystical character given to access to some information that few have. He seems to have a knack for any subject matter that creeps up in idle conversation and acquainted either directly or indirectly with personalities referenced. I had long suspected him to be working for some Intelligence organisation. On his part, he enjoys my company because he said, unlike most ordinary folks, I could engage him in all sorts of unusual subject matter, a compliment I attribute to my scattered interests and I was widely read at the time, devouring magazines like Newsweek, The Economist, Time Magazine, Financial Times etc.

Over lunch that day, I brought up the matter of Nugan Hand Bank opening a branch in Singapore. He asked what I thought of the matter. I felt it strange that MAS should approve the licence for a bank that had hardly any history (it was incorporated in Australia in 1973), without any reciprocity which has been MAS policy, and owned by a couple of guys no one in the industry knew. He told me he knew one of the co-founders, Michael Hand, back in Vietnam War days. According to him, Hand was a decorated Green Beret, but was already dabbling in drugs during the war. Nugan Hand was set up as CIA banker, sourcing funds from drug operations. Today one can google and dive deep into the CIA-drugs-gun running-money laundering operations of Nugan Hand. But back in 1978 we had no access to any info. Of course I took my friend's claims with a pinch of salt. Then to my amazement, in 1980 Frank Nugan, the partner of Hand, was found dead in a car in Australia, execution style. The bank collapsed in 1980 under a cloud of massive fraud and criminal activities including drug trafficking. Hand disappeared, lots of international investigation and inquiries, but no one went to jail. Except one - the accountant Mr. Tan who ended up in Singapore jail on account of the fact he was the Local Principal of the branch. Innocent chap, the sacrificial goat to close the chapter in Singapore."

As to why MAS issued a banking licence to a practically unheard of entity which operated a branch in the Golden Triangle of Burma, let's just label it under "mystery".

To make sense of all these, we should take a look at how MAS handled another interesting foreign bank application. BCCI was founded by Pakistani private banker Agha Hasan Abedi. It was incorporated in Luxembourg in 1972 . It counted Middle Eastern royalties amongst its shareholders. At its height, BCCI was one of the largest private banking groups in the world with a presence in 69 countries.

BCCI desired to set up a branch in Singapore and submitted an application for an offshore banking licence in 1973. It was rejected as the bank had no track record. In following years, BCCI doggedly sent their executives to meet MAS managers. One such lobbyist was Van Oenen, head of BOA Singapore, who was one time a BCCI director when BOA was a shareholder. Van Oenen was well-known to MAS, having helped advise the setting up of the Asian Currency Unit. In 1980 BCCI re-applied unsuccessfully. MAS rejected BCCI again, this time on grounds of its poor international standing. Van Oenen met with Dy PM Goh Keng Swee and Finance Minister Hon Sui Sen to appeal for reconsideration. MAS re-studied the status of BCCI and denied the request. BCCI tried again in 1985 with a letter of recommendation from British PM Harold Wilson to Lee Kuan Yew. Once again, MAS did not approve the application.

MAS' decision had considered feedback from banks and regulators in the jurisdictions where BCCI operated, advices of other central bankers and international banks, and its own instincts when reviewing the bank. One key issue was BCCI used different auditors in different branches and there was a lack of consolidated supervision. MAS stressed their decisions were never "dazzled or intimidated by well-known names or high-powered connections", or majority opinion, but strictly disciplined on "principles of ensuring that any institution admitted to Singapore must have high prudential standards, a strong international reputation, and management with integrity."

MAS was proven right when BCCI collapsed in 1991 with US$15b missing from its balance sheet, making it the biggest bank fraud in world history. The bank moved dark and dirty money of mafias, human and drug traffickers, weapons' traders, corrupt money of dictators and despots. It loaned huge sums to shareholders.

In his memoir, Lee Kuan Yew mentioned this episode. He had concluded Harold Wilson's letter was merely a pro-forma he signed doing someone a favor. It was not a personal appeal to him. He had observed the endearment "Yours Sincerely" was type written. It should have been hand written in a personal letter. On that score he supported MAS' decision to reject the BCCI yet again. One wonders had the letter been personal, would Lee Kuan Yew have been 'dazzled' by Harold Wilson's recommendations and override MAS' decision?

MAS' disciplined approach to vet applicants is to be lauded. But the question no one asks is why did it not apply in the case of Nugan Hand Bank? In fact, Nugan Hand was not an isolated case. The same level of rigour in assessing applicants was also not applied in the case of Tat Lee Bank.


Coming up -  Part 2 (Moscow Narodny Bank)

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