A Nassau bank owned by a Washington company is being closed after discoveries of improper accounting, apprently related to insider-loans over several years.
The local firm, International Bank of Washington, said the decision could lead to losses of $7.5 million.
A financial services and industrial conglomerate, International Bank revealed over the weekend that its Mercantile Bank and Trust Company, Ltd., of Freeport, Bahamas is expected to be liquidated under the supervision of International accountants and Bahamian courts.
Because of irregularities at the Bahamas bank - which the Washington firm still has not spelled out - International Bank will report a net loss for 1976 of $460,000 compared with restated profits of $863,000 (5 cents a share) in 1975.
International Bank previously had reported 1975 profits of $1.9 million (27 cents a share) but the announcement said problems in the Freeport bank will affect reported earnings for 1973,1974 and 1975, as well as the year recently completed.
Arthur Andersen & Co., accounting firm for International Bank also had withdrawn its endorsement of the Washington company's annual financial statements for the years involved and substituted an opinion qualified as to adjustments that may ultimately result from the Bahamas difficulties.
The Mercantile Bank in Freeport is the second Bahamas bank to be closed under a cloud of scandal this month. As reported earlier, Castle Bank and Trust Limited in Nassau was closed three weeks ago in the wake of charges that Castle and some other offshore banks were being used as illgeal tax dodges for the wealthy and as money laundries for the under-world.
The Bahamas central bank has blamed the closing of Castle Trust on "adverse publicity which could (harm) the reputation of the Bahamas as an offshore financial center." There was no evidence yesterday that the Mercantile Bank closing is related in any way to Castle Trust. In fact, International Bank said it is liquidating Mercantile Bank "voluntarily" and gave no hint that Bahamian bank authoritics were involved in the decision.
The Washington company acquired a two-thirds interest in the Freeport institution in 1973 and the Bahamas bank has continued to be operated by the same local management ever since. The liquidation does not affect another subsidiary of the same name owned by International Bank in the Cayman Islands, which the company said "is a healthy financial institution."
International Bank first indicated that troubles were brewing on March 31, when it said its annual report for 1976 had been delayed pending resolution of "valuation and reporting" problems at an unnamed subsidiary.
At that time, International Bank said a maximum loss could be $10 million but forecast that the potential loss probably would be $3 million.
In the weekend announcement, International Bank said it discovered problems at Mercantile in the course of its own audit. Liabilities of the Bahamas bank now exceed its assets, which were listed in the 1975 annual report of International Bank at $23 million. Thus, "liquidation is in the best interests of the despositors and the IB shareholders," a spokesman said.
Of the total loss reserve of $7.5 million, $1.8 million has been applied to reduce previously reported annual earnings of the overall company by $274,000 for 1973, $452,000 for 1974 and $1.08 million for 1975. The company said only that the restatement of profits reflects a reversal of interest income on certain related party loans and hinted that lawsuits may be filed to recover losses from unnamed parties involved.
"Neither the possibility of any contingent liabilities of IB resulting from claims nor the possibility of recoveries by IB on certain insurance and third party claims are taken into account in the $7.5 million reserve," the company said.
Price Waterhouse and Company, independent accountants for the Bahamas bank before and after International Bank's acquisition, also withdrew its opinion on the bank's financial statements for the last four years. The Washington company said it will file a required annual report for 1976 with the Securities and Exchange Commission later this week.
Headed by chairman and chief executive George Olmsted, International Bank is one of Washington's little known but large business enterprises, with investments in such diverse fields as international merchant banking; commercial banking in the Carribean, Middle East and Far East; insurance; leasing, and industrial production.
The Washington company is administrator of Liberia's maritime relations and owns significant shares of United Services Life Insurance Company and Bankers' Security Life Insurance Society of Washington. Total assets of all firms in which IB has an interest were $2.3 billion in 1975. Olmsted, a retired Army general, has built up the firm in the years since the Korean War.