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How Will Libya Pay Pan Am Families?A primer on the Bank for International Settlements.

By Brendan I. Koerner
Posted Thursday, Aug. 21, 2003, at 6:06 PM ET

To atone for its admitted role in the 1988 bombing of Pan Am Flight 103, Libya has agreed to pay $2.7 billion to the victims' families. The money will not be sent directly to recipients, but rather will be funneled through an escrow account overseen by the Bank for International Settlements. What's the BIS?

The Switzerland-based Bank for International Settlements is basically the mothership of international banking—its shareholders and clients consist solely of national central banks, including our own Federal Reserve. The BIS handles many routine banking functions for these customers, such as making short-term, gold-backed loans or handling massive currency transactions. It's been estimated that about 7 percent of the world's currency deposits are under the auspices of the BIS and that its gold reserves are second only to Fort Knox's.

Yet the BIS is perhaps better-known—particularly among the black-helicopter set—as the ultimate insider's club for financial mandarins. Representatives from the 49 members meet 10 times a year to hash out international fiscal policy, including interest rates and money supplies; the most powerful committee within the BIS is the Group of 10 (G10), which consists of central-bank governors from the world's wealthiest nations. The BIS is the brains behind the Basel Capital Accord of 1988, which set capital adequacy principles for banks worldwide. The BIS is currently updating the accord ("Basel II") to include updated guidelines concerning risk management.

At the regular meetings, BIS officials also determine whether any looming crises demand immediate attention; the bank can help alleviate meltdowns by arranging backing for emergency International Monetary Fund loans. In 1982, for example, the BIS orchestrated a $1.85 billion bailout for Mexico, which was facing bankruptcy at the time.

The Libyan matter, however, hearkens back to the curious origins of the BIS. The bank was created in 1930 as part of the Young Plan, a program intended to help Germany pay the reparations mandated by the World War I-ending Treaty of Versailles. The BIS was designed to streamline the process by replacing a gaggle of Allied committees with one central conduit for German payments. (The annual tab was set at 660 million marks per year, to be paid off by 1988.) During the World War II, the Czechs accused the BIS of laundering Nazi gold, and the bank was nearly mothballed as a result. Since then, it's been more careful about dabbling in hot-potato political matters, though it was instrumental in freezing Iraqi assets during Gulf War I and took on the Libyan account at the behest of lawyers for the victims' families. Some U.S. Treasury officials have proposed that the BIS take an active role in hunting down Saddam Hussein's illicit riches and transferring them back to a reinvigorated Iraqi central bank.

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Brendan I. Koerner is a contributing editor at Wired and a columnist for Gizmodo. His first book, Now the Hell Will Start, is out now.
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