A BANKING scandal that involves alleged drug money laundering in Montreal, a

bank collapse in Phnom Penh and losses on futures trading in Chicago now

threatens to suck in senior Cambodian government officials, according to

documents obtained by the Post.

Official corruption and grossly negligent

supervision of the banking system have been alleged.

The Credit Bank of

Cambodia (CBC), which was closed by the Cambodian government and its assets

formally frozen on 6 May, is at the center of the scandal that has implicated

senior government officials in illegal activities.

It has also given

credence to long-held suspicions that the Cambodian financial services sector is

riddled with banks that fail to meet basic minimum requirements under current

Cambodian law that will likely lead to more bank closures in coming months,

according to banking sources.

The CBC was shut down earlier this month

after it was revealed that it failed to meet the Cambodian central bank's

minimum capital requirements after it suffered losses of $1.5 million on the

Chicago futures market in March. The losses prompted a Canadian securities firm,

Marleau Lemire, to take legal action against the CBC's shareholders in Canada

and Cambodia. This now threatens to draw in senior Cambodian government

officials in illegalities and further undermine the reputation of the banking

sector as a whole.

The Cambodian government acknowledges that the CBC has

ignored the Cambodian National Bank's (NBC) reporting demands, misrepresented to

the NBC the value of its assets, refused to name the CBC's real shareholders as

required by law, and failed to appoint a required auditor.

"The decision

to withdraw the license was taken after long consultation and careful

consideration of all the facts, and was made to protect banking customers," said

the NBC governor Thor Peng Leath on 11 May.

But the bank's creditors and

senior government officials say it is too little too late, and that the central

bank governor is implicated in illegal activities and preferential treatment to

the bank. They question why, and the manner in which, the CBC was given a

license to operate in the first place.

The CBC was issued a $3 million

loan from the central bank on 31 May 1994 by Governor Leath to establish the

minimum capital the law requires for the central bank to issue an operating

license to the CBC. The use of a loan from a central bank - charged with

regulating and supervising the commercial banking sector - to shareholders in a

private bank to establish minimum capital required by the government is highly

irregular, admit central bank officials. Both the loan - and the license - were

issued on the last day by law when banks were issued licenses in

Cambodia.

Governor Leath issued the loan to Leng Ky Lech and her husband

- two principle shareholders of the CBC - at the same time that Canadian

authorities were moving to arrest her for money laundering. According to

Canadian court documents, she is alleged to have exchanged Canadian$101,000 into

foreign currency between March and June 1994 in a series of sting operations

conducted by Canadian undercover narcotics police. Each time the cops identified

themselves as drug dealers in need of laundering money, she is alleged to have

agreed to accommodate them, according to sources. She is now under indictment

for eight counts of money laundering in Montreal. Leng Ky Lech and her husband

are also facing criminal and other charges in Canada for fraud in relation to

the losses they suffered when they couldn't meet a margin call on the futures

market in Chicago in March. Their assets have been frozen in

Canada.

Officials of Marleau Lemire, who say the CBC never had the

capital required under Cambodian law, say the Cambodian government should be

held accountable to the CBC creditors because they issued a license in violation

of Cambodian law. They are threatening to file legal action against the NBC in

the Cambodian court.

But when Marleau Lemire moved to seize their assets

in Cambodia, things became more complicated.

The Canadian securities firm

first asked the Cambodian central bank to freeze the assets of the CBC on 4

April, but according to their officials, were met with a less than enthusiastic

response from the central bank Governor.

"The National Bank on receipt

of our complaint should have taken immediate action to see that our funds were

secured, instead of waiting a month," says Howard Eisen, executive vice

president of Marleau Lemire. "The National Bank acted with serious

improprieties. Their conduct has been irregular, inappropriate and illegal...

this has been a complete sham that the government has been party

to."

Eisen points the finger at the bank governor and the Cambodian

banking system, saying that the CBC should never have been issued an operating

license and that the assets of the bank were never secured.

"The

malfeasance and dereliction of duty of a senior bank officer - the bank governor

Thor Peng Leath - has caused us harm in both licensing the bank, regulating the

bank, and solving the problem. The National Bank misrepresented facts and did

not perform their proper duties."

Eisen says the CBC "misrepresented

their financials. We know they never had five million dollars. The NBC, by

allowing the CBC to represent themselves as a bank and to represent themselves

as being funded by $5 million in assets, is responsible."

And, to add

insult to injury, the central bank allowed assets to be withdrawn from the CBC

after it had been officially closed and its assets seized on 6 May. On 6 May,

the central bank placed its own officials on the premises of the CBC, failing to

appoint an independent auditor for more than ten days, central bank officials

confirm. Some say it is like putting a fox in the chicken coop.

According

to CBC documents obtained by the Post, on May 4 former Cambodian commerce

minister and now ambassador to Washington Var Huot deposited $145,000 in $100

dollar bills into a personal account at the CBC, according to a CBC deposit slip

signed by Huot and obtained by the Post. Var Huot is a long time associate of

central bank governor Leath. The CBC was on the verge of being closed at the

time of his deposit on 4 May - a fact which was well known within government

circles, say central bank officials. On Saturday May 6, two days later, the

central bank froze the CBC assets. On Monday morning, May 8, Leath authorized

the withdrawal of Var Huot's $145,000 - despite the CBC assets being frozen.

In a handwritten note, dated 8 May and signed by the head of the central

bank's supervision department on Var Huot's CBC bank account balance sheet, the

central bank official wrote: "I have received a phone call and received direct

orders from H.E. the Governor General at 9:30am on 8 May, 1995 to make the

transfer as requested by H.E. Var Huot for the cause of the Cambodian

nation."

The chief of the central bank's supervision department, Chea

Sok, was placed in charge of the CBC by the central bank on May 6. He was also

the official who signed the loan agreement between the central bank and the CBC,

per order of the central bank governor, on 31 May 1994.

Var Huot, who

only arrived in Washington on 27 May to assume his new post as ambassador,

acknowledged the transfer of money. In a telephone interview on 30 May, he said:

"We made a deposit at the CBC for transfering the money to the U.S. It is

government money to bring to Washington."

Var Huot said: "We withdrew

the money (from the CBC) because it was time for me to leave Cambodia... in

Cambodia, we can put the money in any bank. There was no preferential

treatment."

He refused to answer why he deposited the money at CBC for

transfer, only to take it out four days later if the intent was to use the CBC

to transfer the funds to Washington. He declined comment when asked why it was

neccesary to withdraw the money from one local bank to deposit in another local

bank, had the purpose been to later transfer it to Washinton.

When asked

whether the money was brought to the United States in cash, he replied: "That is

my secret."

Some banking officials believe that the deposit was only on

paper and was an attempt to illegally remove bank assets from the CBC,

contending it was Cambodian government money and therefore exempt.

Senior

government officials confirm that the Finance Ministry released $148,000 on 14

April to Var Huot for repairs on the Cambodian embassy in Washington.

Central Bank officials say that the central bank's authorization to

withdraw the money was based on the contention that the deposit was Cambodian

government funds, which they decided to exempt from the order to freeze assets.

But Cambodian law requires that government funds be deposited in the central

bank, not commercial or personal bank accounts. This makes the deposit to Var

Huot's personal account illegal, according to Phnom Penh based

lawyers.

Var Huot acknowledged that the bank account was his personal

account, but said: "In Cambodia an official can put the money in any bank

providing this money is safe."

Says Eisen of the Canadian securities

firm: "Why would he transfer money to the bank on May 4 if he knew it was under

investigation? It would be a prudent impression that this was a fake

deposit."

Regardless, central bank officials acknowledge that the

withdrawal on May 8 from the CBC violated the central banks own directive to

freeze all assets.

On May 9 - three days after CBC assets were frozen - a

letter acknowledging a transfer from CBC of $380,380 to Theraprim pharmaceutical

company in France was received at the CBC, according to a copy of the document

on Theraprim letterhead dated May 9. According to French government documents,

Therprim is 100% owned by Hay Ly Eang, who is also a nephew of the central bank

governor Thor Peng Leath.

But how much assets the CBC actually has

remains very murky, government sources acknowledge. According to documents

obtained by the Post, the CBC in March declared to the government that their

bank had a total of only $4,000 deposits and $12,000 cash on hand.

Other

documents contradict the bank's official reports. For instance, three

certificate of deposits of one customer amounting to $230,000 were uncovered,

but no evidence of the whereabouts of the money has been found. When queried,

the CBC bank chairman informed officials that the deposits "were a personal loan

from him to the customer and not a bank transaction." The certificates of

deposit are stamped with the bank seal as on official bank documents.

The

Post has learned that an independent liquidater appointed last week intends to

file charges against the CBC in Cambodian court, saying that the bank has failed

to produce any formal records. "The liquidaters have found no accounting

records, almost no documents of transfers, withdrawals, bank records," said one

source close the investigation. "They are receiving no cooperation from the

CBC."

Sources say that the CBC has produced no records of it's banking

activities in 1995 and few were found on the bank premises after it's closure.

Officials say that the CBC bank vault "was virtually empty" when central bank

officials entered it on 6 May.

In a May 18 letter to the central bank

Governor Leath, Marleau Lemire threatened to "take legal action against the

National Bank of Cambodia for irregularities in licensing and capitalization of

the CBC at the outset." In addition, on May 22, the company wrote again to the

governor saying: "We have uncovered and observed a pattern of preferential

treatment of the CBC by the National Bank... unfortunately the National Bank's

irregularities continued after the closure of the CBC... We protest the delay in

which the administrator was appointed. During this delay the pattern of partial

and favorable treatment was continued by the temporary "administrators"

appointed by the National Bank."

Senior government sources say that

similar problems exposed at CBC are likely to be revealed in other banks in

coming months. Of the 30 banks in Phnom Penh - including 16 local banks with no

other branches - several are suspected to be undercapitalized and may be closed

after audits are scrutinized. The CBC case, they say, may only be the beginning.