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Follow the Money

Death threats, suicides and million dollar frauds are just part of the job for this Fed bank examiner

June 1, 1998


Follow the Money

Zohab's work in special investigations over the years has exposed him to the seamier side of the normally buttoned-down world of bank examining. Fraud, S&L runs and suicides have been part of his case history.

Arthur Zohab's life had been threatened before. But those threats came when the Richmond Fed bank examiner was away from home on assignment, and the calls usually came to his hotel room.

illustration But in 1988, while working on a grand jury investigation, a death threat came to his house. "That's when it really bothered us," he says. In the past, he never took the threats too seriously, except once—when he was approached in person. "You go back to your hotel room pretty apprehensive, looking around," he says. However, he came to accept those threats as part of his job.

The call to his home, though, was a different matter. After Zohab reported the threat, he didn't even have time to go home to warn his wife about what was happening—he received a phone call from her: "She called me and said 'What is going on?'" Federal agents were already at the house, putting taps on phones and surveying the layout for defensive strategies.

And that was only the beginning: Zohab was given weapons training and issued a permit to carry a firearm, and they wanted to arm Zohab's wife with a pump shotgun. "They said it was an excellent home defense weapon. They had a schematic of our home and said that if she came out into the hallway upstairs, with that weapon, she could not miss anybody coming up the steps," Zohab says. Then he adds with a smile: "And my comment to them was: 'She's been threatening to kill me for 20 years, and you're going to give her a shotgun?'"

In the end, Zohab's wife went unarmed and after several months the alert passed.

Things aren't always that exciting for Zohab, an assistant vice president in the Richmond Fed's Banking Supervision and Regulation Department, but his work in special investigations over the years has exposed him to the seamier side of the normally buttoned-down world of bank examining. Fraud, S&L runs and suicides have been part of his case history. Also, in recent years, Zohab's expertise in such areas as money laundering has taken him to many countries, especially those from the former Soviet Union, to teach bankers and regulators how to establish and monitor an effective anti-money laundering program.

Coincidence becomes a career

For all the excitement that was to follow at the Fed, Zohab's career began inauspiciously enough. He worked his way through the mailroom and Check Department at the Richmond Fed during college and was offered a job in the Banking Supervision and Regulation Department upon graduation, in 1963. In his job as "rookie examiner," he was often a part of teams that would work cooperatively with other Fed banks; one such job called for a partnership with the Atlanta Fed on a large bank in Tennessee. The night before Zohab was scheduled to leave for Nashville, his infant son became ill and Zohab asked to be left off the team.

His request was granted and, in the meantime, a major customer at a small Virginia bank had committed suicide and left some notes indicating the possibility of fraud at the local bank. Zohab's son's illness turned out to be nothing serious, and because he was left off the Nashville team and was now available, Zohab was joined with three senior examiners to investigate the trouble at the small Virginia bank. It turned out that a $700,000 loan fraud had been perpetrated through the use of forged notes; this occurred after the bank had deleted forgery insurance from its coverage because it believed that it was unnecessary—everyone in the small town knew everybody else. Zohab spent six weeks on his first special investigation and soon after was assigned another case involving possible criminal activity. "After that, every time there was a problem institution they would put me on the team," Zohab says. And thus was born a specialist.

During those early years, Zohab's experience in dealing with problem institutions meant that he was acquiring valuable insight into how commercial banks operate, and one of those commercial banks decided to put that experience to work. They lured Zohab from the Fed in 1968 to work in their auditing department. In less than a year, the bank became a holding company and Zohab was promoted to auditing officer in charge of the Capital Region, a responsibility that included special investigations.

"I got a baptism by fire," Zohab says. "Five years of that, at a multibillion dollar institution, gave me a lot more skills." And a lot more experience with special investigations. During his time with the commercial bank, he was involved in cases where a teller had stolen money to help pay medical bills for a child; a note teller had manipulated loans, generating losses of about $200,000; a proof machine operator, just 19 years old, had figured out three different ways to steal within an 18-month period—"She said she was bored"—and a trust officer had killed himself after he was convicted of stealing less than $2,000.

Zohab rejoined the Richmond Fed in 1973 to manage hiring and training for the Supervision and Regulation Department, as well as to establish an internal audit review function. His group began working with the Board to develop educational programs, and some commercial banks took advantage. "We actually did consulting work," Zohab says. "Small banks would call us—we'd get about eight to 10 requests a year—asking us to come out and help them set up internal audit systems." The Richmond Fed still answers that call, he says, helping banks to establish charters for the audit function, to develop proper reporting techniques, to organize workpapers, keep schedules and other important audit functions. In 1973, Zohab also began teaching at the Board of Governors School for Examiners, which he has continued to do each year.

Old Court and the S&L crisis

In the years after he rejoined the Fed, Zohab kept busy running his section, getting involved in particular cases and working with the Board on task forces on internal audit review procedures, white collar criminal investigations and other related areas. Things were mostly quiet—until 1985, when the developing savings and loan crisis rocked Maryland's privately insured S&L industry.

Maryland's governor, in consultation with then Fed Board Chairman Paul Volcker and Richmond Fed President Robert Black, had requested the Federal Reserve's assistance in a review of the Maryland S&L industry. There had been reports of possible problems at a number of institutions including Old Court Savings and Loan, an $850 million state-chartered thrift; but as it turned out, the state had little idea about the extent of the problems, Zohab says.

When the state received the Fed's findings, it immediately removed the executives of Old Court, which precipitated a run on the institution. That run quickly spread to other S&Ls, and soon the Fed found itself with another challenge: trying to control a run on the state's entire S&L industry. At the beginning of the run, there were 15 Fed examiners on site; that number quickly grew to over 200 and "mini-examinations" were conducted at all of Maryland's 102 privately insured S&Ls to qualify them to borrow from the Fed's discount window. The bank made about 80 emergency cash shipments totaling around $50 million, and reviewed about $1.5 billion of collateral used to secure loans.

After the run had been brought under control, the criminal investigation began. In the end, it became the largest white-collar criminal investigation in the state's history, and resulted in the conviction of eight individuals (one of whom suffered a stroke on the first day of the trial). But getting to that end took a long time—three years—and meant that Zohab had to be contracted to the state of Maryland Attorney General's Criminal Investigation Division over that period.

Reconstructing the events that led to Old Court's demise was a complicated process, and required the State of Maryland to create a team of investigators made up of retired FBI and IRS agents. And there were many problems, Zohab says. "We found hydroelectric plants being financed, race horses, hotels from Ocean City to Miami, rehab housing in a number of cities but rarely a residential mortgage. And we said: 'We don't know what this is, but it is not an S—L as we'd define the term.'"

The owners of Old Court began with a smaller S&L but they needed a larger institution in order to do bigger deals. So they purchased a piece of property at $600,000 and had it fraudulently appraised at $6 million; then, based on that appraisal, they had the smaller institution make two loans totaling $2.2 million so they could buy control of Old Court. "It was a fraud, in order to perpetrate more frauds," Zohab says. And it was the first of the 25 criminal counts against the president of Old Court.

Here is another example of the type of fraud that was committed: Institution money was used to purchase property in Florida for $8.4 million, but the property was put in the executives' names. The property was then sold within one or two days to a subsidiary for $9 million, which then sold it to another subsidiary—one subsidiary to another within the same institution—for another $2 million markup. The executive received $600,000 on the first transaction and then paid himself a $110,000 finder's fee on the second with Old Court booking a $2 million paper profit. Within a week Old Court had made a $16 million loan on the property and the executive awarded himself $100,000 in legal fees. The loan eventually totaled $18 million; when the property was sold off, it went for $6 million.

In such a scam, it is almost impossible to finger everyone involved in the deal, Zohab says, even if you follow the money. "The guy up front who sold the property, was he a part of the deal? Who knows. And then along the way you've got developer's fees, manager's fees, consultant's fees, and all sorts of fees. The money was intended to build something, but they drained it off in fees." Similar scenarios were played out across the country during the S&L debacle, Zohab says.

When the man at the top is blatantly stealing, everyone knows it and they start stealing, Zohab says. Nobody can blow the whistle on anybody else. "The president didn't care if you stole, just so you didn't steal more than him. It becomes like a feeding frenzy, or a stealing frenzy."

Once, during the course of the Old Court trial, as Zohab was out for lunch, a car pulled up beside him, the window was lowered, and he saw one of the Old Court executives motioning him toward the car. Zohab just stepped back and went immediately to report the incident to the attorney general, who said: "Why didn't you see what you were worth?"

Impact of fraud on the community

Zohab's initial experiences with fraud cases opened his eyes to the impact that bank fraud can have on a community—not just because it upsets the business of the bank, but because
of the way it affects the employees, customers and stockholders.

"Bankers, especially, are always held up as pillars of their community," Zohab says. "There is a trust factor. Everybody trusts them." So when fraud is exposed, especially fraud committed by a banker, there is a reaction within the community on many levels. Zohab has had people spit at him; employees at banks have broken down in tears and have had to quit their jobs because they couldn't deal with the betrayal of a fellow employee. One wife of a charged banker screamed at a judge and told him about all the good things that her husband had done, to which the judge replied that her husband was not on trial for his good deeds, but for his bad.

In addition to the feelings of people associated with the bank, there are reactions from city government, the social community and the banker's house of worship, Zohab says. "Everyone is touched."

And the perpetrators are usually involved in their house of worship. "I've never worked on a case where a certain percentage of the stolen money wasn't donated to a church or synagogue," Zohab says. "It raises your status in the community. They're all like that. Plus you can be very generous with other people's money." In one case, a banker who had stolen $5 million had donated over $700,000 to her church.

When their wrongdoing is revealed, some bankers can't bear the social stigma, and they kill themselves. When that first happened on a case he was working on, Zohab was deeply bothered and wondered if he was, in part, a cause of the suicide. But others assured him that he was just doing his job; also, he came to understand the psychology of someone who, on the one hand, was so well-trusted and, on the other, would intentionally breach that trust. In one case, a man who committed suicide left three notes, one to his mother, one to his wife and one to the bank. He confessed that of all the notes he was leaving, the one to the bank was the hardest one to write because he had betrayed them.

If you ask Zohab to describe a typical embezzler—whether old or young, male or female, and so on—he says there is no pattern. But it's important to remember that the higher up a person is in an institution, the more he can steal. And that's why it is important to convince banks that their control and audit systems should go all the way to the top, he says.

"All of the people that I have been involved with that stole a million or more have all been very personable, great people," Zohab says. "And I always say, you couldn't be an ass at a bank and be a successful thief, because everybody would be looking at you and trying to get something on you." But if you're nice and share the spoils with others, usually by being generous especially in the area of salaries, you can create unwitting coconspirators. Typically, if the top person is a crook, the first layer of management is usually overpaid and the board of directors is weak, Zohab says.

Join the Fed and see the world

After the Old Court case was settled in Maryland, Zohab had only returned back home to Richmond for one month when he received a call from the Board: They needed someone to work on the newly formed S&L Project Management Group, which was the Resolution Trust Corp's predecessor organization, the agency established to resolve the financial issues dealing with the federal S&L crisis. When he asked how long he would have to stay, he was told: "Bring more than one shirt." He stayed 11 months. Zohab's initial task was to serve as acting coordinator of the Joint Lending Program, but he eventually became the director of funding for the RTC, responsible for placing the first $20 billion appropriated. He remained with the RTC until the fall of 1989.

Following that stint, Zohab began the type of work that would characterize his recent years with the Fed: traveling across the globe to instruct and consult with officials from countries that are trying to develop effective anti-money laundering procedures. In many cases, this means countries—like those in the former Soviet Union—that are also struggling to develop a reliable financial system. He has been to Poland, the Czech Republic, Romania, Uzbekistan, Lebanon, Ukraine, Bosnia, United Arab Emirates, Central American countries and to points throughout Russia—and he has been to many of those places more than once.

During some of those trips-which are scheduled in cooperation with the U.S. State Department—he is part of a team that is brought in to evaluate a country's anti-money laundering initiatives. He will often work with a country's embassy, ministers of finance and justice (or equivalent), the central bank and law enforcement agencies. In some cases, the various agencies in those countries do not work together, which makes it difficult to establish an effective program, Zohab says.

One thing that Zohab and others on the team have learned is to gear their instruction and evaluation toward the individual needs of the country, based on the technical level of the financial services industry. One central banker once commented to Zohab that they had trained him to drive a race car, and when he tried to apply the training to his home institution, he realized that he was working with a donkey. The examination techniques used 20 years ago would fit very well in many of these developing countries, Zohab says. "They have a long way to go, and the scary thing about it is we know that a lot of their banks are going to fail."

One of the highest risks to financial institutions in developing countries is making loans to new businesses, but new businesses are a large part of their loan portfolios. When you combine those loans with inexperienced loan officers, you've got a very difficult task, he says.

The Fed, along with other agencies, also provides training for foreign bankers at locations within the United States, and Zohab has had the experience of sharing his home with some of them, something which has benefited both him and his family, he says.

Zohab has developed a close relationship with a number of agencies providing training to these developing countries, so much so that if he accepted all requests, he could do that type of work full-time. But that likely won't happen; Zohab expects to finish out his career the way it began, working at the Fed to expose the "bad guys," while helping to develop systems to prevent their future success.