Bank of Boston: its image needs laundering

When the Bank of Boston celebrated its 200th birthday last year, the fife piped and the drum rolled. Chairman William L. Brown, in an almost patriotic ceremony, sank a plastic ``time capsule'' containing memorabilia into a wall outside the brown marble headquarters here. It is to be opened in 50 years. No capsule, however, could contain the history being made at the bank now. Fifty years hence, business school students are likely to be boning up on Bank of Boston case studies in public relations, in business ethics, and in bank regulation.

The latest details of the case, at least, indicate there will be plenty to study in all three areas:

Last week, for instance, the State of Rhode Island decided to reconsider its approval of having the towering Boston bank take over Rhode Island's third-largest bank. (Growth through regional acquisition is key to Bank of Boston strategy.)

Rhode Island's attitude changed when it heard the bank pleaded guilty Feb. 7 to a felony of ``willfully and knowingly'' failing to report $1.22 billion in international cash transactions to the Internal Revenue Service from 1980 to 1984. A ``systems failure'' at the bank was the cause; the law was simply not interpreted properly, bank officers hold. The bank was fined $500,000.

A week later, while talking of a separate issue, chairman Brown said employees used ``poor judgment'' in handling sizable cash transactions for two companies owned by the Angiulo family, reputed ringleaders of organized crime in New England.

As Rhode Island wavered, a New York Times article reported that some of these employees had accepted gifts of liquor and other ``little satisfactions'' from the Angiulos. Only a few days before, Brown had insisted at a press conference that no employee ``benefited in any way'' from the Angiulo relationship. A later story in the Boston Globe quoted a teller as saying no cash gifts were received from the Angiulos.

The situation appeared to worsen last week: The United States Comptroller of the Currency sent a letter to a congressional subcommittee saying regulators had informed a Bank of Boston vice-president of the international currency violations in 1982 -- two years before the bank said it knew anything about the international currency reporting laws. But the Comptroller's office later in the week admitted it was mistaken. That appeared to bolster the bank's contention that it did not know of the violations until last summer, thereafter reporting the discovery to the federal government. Public image tarnished

``Thinking of pulling your account? We'll be right over.''

Senior bank officers are making house calls on corporate customers to explain their side of the story and reinforce confidence in the bank. Shareholders are being sent reviews of the bank's recent press conferences.

According to one corporate executive considering severing First National Bank of Boston ties, a question corporate depositors ask is: ``Do you want to give your fees to people who (a) aren't good managers and don't know the rules and (b) have loose connections [to organized crime]?'' First National is Bank of Boston's prime banking subsidiary.

The City of Malden has pulled deposits out of the First. The City of Medford has considered a similar move, but a Bank of Boston spokesman says he does not think Medford will carry through. Two bills in the legislature would in effect cause the Commonwealth of Massachusetts to get out also. In an interview, however, Thomas Finneran, chairman of the Massachusetts House Banking Committee, said that ``most of the members of the House feel all we have is a series of very limited disclosures. . . . `An attitude of let's wait and see what the Feds come up with' prevails.''

The bank has been under investigation by a federal grand jury for a year in regard to the Angiulos. Because it is against the law to discuss the details of an ongoing grand jury case, bank officials were tight-lipped about it until granted special permission by the US Attorney's office to open up. Their silence, as well as some errors in the press, helped form the image of a bank linked to the mob.

But even employees at the First say the bank bungled in public relations. ``[The chairman] was arrogant about it. He told the press, `You'll know what we tell you.' . . . This situation has been poorly handled, and it's going to cost us for a long time,'' an insider at the bank told the Monitor. Big-time investors undisturbed

This source, who works in the corporate trust group, also says that while the bank's retail customers are anxious, institutional investors don't feel the Bank of Boston is a hot potato. They have been inquiring, but not reacting, the source says.

That seems to be confirmed by Wall Street. Interviews with traders of commercial paper, an essential source of funds for a bank, show that the bank's short-term debt costs have not increased.

Bank of Boston stock had reached a high of $47 before the scandal broke, tumbled to $41.75 on the scandal news, then rose another three points, says Martha Locke, a bank analyst in Advest brokerage's Boston office. ``It appears [investors] are not throwing in the towel entirely,'' she said. ``It's my guess that the impact is not going to be severe financially. They are a very sound bank with a good balance sheet.''

Neither has the bank's credit rating slipped. Moody's still rates its long-term debt Prime 1, says James Bray, vice-president. ``A lot of this is consumer-type, populist-type data that doesn't really affect the fat cats,'' he says.

One manager of $800 million in money market mutual funds disagrees. ``Small customers are the people who make us big institutional investors. One thing we sell is security, peace of mind.'' This fund manager is not selling present investments in Bank of Boston commercial paper, but when the current paper matures, new paper won't be bought, says the manager. `Know your customer'

The Boston public has expressed disbelief that the biggest bank in New England did business with a well-known organized-crime family for 20 years without ever questioning it. Two real estate companies owned by the Angiulos were put on the bank's exempt list of cash-intensive businesses whose transactions need not be reported to the federal government.

When the Boston Globe, at a press conference, asked the chairman how such companies could have been put on the list, he replied: ``They [the Angiulos] were well known to some people. They weren't well known to me.'' Although the Angiulos were not reputed to be the No. 1 Boston crime family in the late '70s, when the companies were put on the list, they still made headlines in the Boston papers.

In its October 1984 report to President Reagan, the President's Commission on Organized Crime wrote, ``Every financial institution . . . should assume that it is a potential target for use by organized crime in money laundering schemes.'' The report says that customers who wish to be on a bank's ``exempt list'' should be scrutinized as carefully as if they were applying for a loan.

``Bank officials from top to bottom should be held accountable for what's publicly known, and in this day and age the identity of major organized-crime figures is generally known . . . ,'' James Harmon, executive director of the commission, told the Monitor.

Because of the publicity, this ``know your customer'' standard is now getting closer attention by banks. But bankers maintain it's not a cut-and-dried policy to apply.

The Bank Secrecy Act, which requires financial institutions to report cash transactions over $10,000 to the IRS, ``does not impose an obligation upon banks -- or imbue them with the authority -- to investigate the activities of their customers beyond the normal recording of account information and verification of customer identity,'' chairman Brown read in a statement before the press Feb. 21. ``To go beyond this raises serious questions about invasion of privacy.''

But it doesn't take an investigation to spot customers approaching a teller with bags brimming with cash or the corporate customer who has virtually no debt and uses no credit. These are sometimes signs of money laundering. Tellers and branch managers should be trained to alert officers of the bank, who in turn should alert law enforcers, when they see something this suspicious, Harmon advises.

``Banks should be put in the position of any other citizen who sees or suspects that a crime has been committed,'' Mr. Harmon said. In itself, he adds, it is not against the law to do business with a customer reputed to be a mob member.

Between 1979 and 1983, the two Angiulo companies purchased $2.2 million in cashier's checks at the bank's branch in Boston's North End, an Italian neighborhood. On one day the branch exchanged $250,000 in cash for cashier's checks payable to J. Angiulo, a bank memorandum says. These transactions would have been reported to the IRS if the companies had not been on the bank's exempt list. In his statements, however, Brown denied there was any collusion between branch employees and the Angiulos. Watchdogs with no bark?

Over the last two weeks investigators have hightailed it up to Boston like hounds on the hunt. In addition to the ongoing federal grand jury investigation and attention to the case by the Organized Crime Strike Force here, three congressional committees have begun looking into the matter. The bank itself just appointed a task force of five of its outside directors to examine the whole episode, pinpoint the areas of management responsibility, and suggest corrective action.

Last week Rep. Fernand St Germain (D) of Rhode Island announced that the House Banking Committee would begin hearings in Boston on March 20 that would look at all aspects of the Bank of Boston case. He particularly questioned the competency of the regulatory agencies involved.