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.
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
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
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
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.