The Secret Gold Treaty

Peter Johnston was 54 years old when, in August 1996, he was convicted in England of fraud [i]. Sentenced to two years, he served twelve months in Ford Open Prison before returning to his native Australia to live.  Prison was a desultory experience for Johnston, and aggravated by his innocence. The City of London Fraud Squad, acting in concert with two large gold banks, brought the charge of fraud against him. The banks were the Union Bank of Switzerland, Zurich, and the London branch of Australia's Westpac Banking Corporation.[ii]

Johnston's crime had been to deposit a gold certificate in the City branch of Westpac for "safe custody" on 15 February 1995. He did not attempt to have Westpac negotiate or otherwise attest whether the certificate -- apparently issued by the Union Bank of Switzerland, Zurich – was genuine and even agreed to allow the bank to append a disclaimer on the safe custody receipt as to the value of the documents. It was a straightforward case of securing documents in the vaults of the bank for a brief spell while travelling abroad. By the official standards of the London Gold Market, the certificate represented quite a large cache of gold at 740 metric tonnes.[iii] At slightly more than $300 an ounce, this translated into a market value of approximately US$8 billion, large enough to make eyes pop.

Westpac's Correspondent Banking Manager, David Blenkinsopp, subsequently stated that he felt "uncomfortable" about the deposit of documents and decided he "should record the incident in [the] fraud manual and perhaps alert the authorities to a possible fraud. "His alleged fears did not immediately materialise into action, and would lay dormant for another seven days. However, despite what Blenkinsopp described as his original “discomfort” with the transaction, his later story to the police was that Johnston had been "very cooperative." [iv]

At 2.00 a.m. on the morning following the deposit of the certificate into safe keeping (16 February 1995), Blenkinsopp, unable to sleep due to worry, decided to telephone his head office in Australia. He requested that Bob Hinze, manager of Westpac's Burleigh Heads branch, contact him as soon as possible. The reason for this call was, he said, that Johnston had earlier told Blenkinsopp that both he and his co-director, Alan Bristow, were valued customers of Westpac and that Bristow, in particular, had banked with Westpac/Burleigh Heads for many years.

Hinze returned the call within half an hour and listened as Blenkinsopp outlined his fears, but remained stoic and relaxed. Hinze was able to confirm that he knew Johnston and Bristow personally and that the latter had been "a long-standing customer of the bank." He also said that he had conducted similar lodgments of gold certificates for them in the past and that they were "only trying to earn a brokerage fee." He added that the certificates "had typographical errors in them” and that “this was deliberate because there was a special code that allowed them to be identified as genuine." He continued: "we see little harm in holding the certificates for safe keeping but we recommend that that be the limit of our involvement." [v]

In fact, Johnston and Bristow had kept Bob Hinze fully informed of the progress they were making in negotiating the certificate and had earlier requested his guidance regarding which bank they should deposit the certificate with during Johnston's forthcoming visit to London. Hinze, believing the Westpac's London branch had closed, suggested contacting its London correspondent, Midland Bank Plc. Since Johnston had no account at Midland and was not a UK resident, Midland Bank Plc demurred but suggested that Johnston's London law firm, Linklaters and Paines, could hold the certificates in custody. Linklaters, however, advised Johnston that Westpac did have a London branch. Hence Johnston's arrival at Westpac's office on 15 February 1995. 

Satisfied that he was dealing with pre-existing bank customers, Blenkinsopp relaxed, he later said. This remained the case until 21 February 1995, when a message arrived from Bob Hinze advising that Johnston's Australian lawyer, Morris Milder, would soon be contacting Blenkinsopp to issue a standard "script" receipt describing the contents of the envelope and, in particular, detailing the certificate numbers held in custody. In the ordinary course of a transaction such as this, the bank would sign the receipt and deliver it to Johnston, and he would, upon his return, present the receipt to redeem the certificate from safe keeping.

Blenkinsopp, in fact, was already aware what the safe custody envelope contained, because he had insisted on inspecting it when Johnston first brought it in. This was standard procedure to make sure deposit items contained no drugs, explosives etc. The latest request, for the receipt, however, aggravated Blenkinsopp's anxiety. The reason for his concern, he later explained, was that he already had issued a safe custody receipt on Westpac letterhead and believed the newly requested script receipt could be construed "as an endorsement of Westpac as to the value of the documents, despite [his] handwritten disclaimer as to the value of it [my italics]."[vi]

At the back of his mind, Blenkinsopp told police, he was concerned that the certificates, together with Westpac's "endorsement," [i.e., the script receipt] could be used by Johnston to perpetrate an "advance fee" fraud against another bank. Whether this concern was Blenkinsopp's own creation, we do not know, but we do know the implication that Johnston was attempting to perpetrate an advance fee fraud was repeatedly raised by his police inquisitors during questioning [vii]. However, there was not one shred of evidence to support such an allegation. 

Blenkinsopp told police that the fax letter from Milder requesting the script receipt additionally requested that he confirm the letter by key tested telex (KTT) to another bank. This is untrue. The instruction merely indicated that he may be asked to do this at a later date. [viii] Blenkinsopp was, he said, at this point thoroughly alarmed, so he decided to telephone a contact at the UBS in Switzerland. When he did so, according to his police statement, he was told the certificates were forgeries. Then, he said, he had faxed copies of the certificate to the Union Bank of Switzerland, Head Office, Zurich. Both actions were strictly speaking unusual in terms of banking protocol -- after all, these were confidential client documents. Thereafter, on the afternoon of 22 February 1995, Blenkinsopp contacted the City of London Fraud Squad. 

A return UBS fax, transmitted at 13.54 on 22 February 1995, stated: "We confirm that Union Bank of Switzerland (UBS) never issued such documents. It is a forgery, that means complete fantasy. UBS has nothing to do with these [sic] documents." It was unauthenticated (i.e., it did not possess the usual key test signifying it was an authorised statement of UBS) and it was signed by Rene Schicker, a low level member of UBS Security Services. Schicker was not an authorised officer of UBS.

Earlier, at 13.17, Schicker had sent another fax to Blenkinsopp at Westpac. This stated: 

"We confirm that the Union bank of Switzerland (UBS) never issued such documents. It is a forgery, that means complete fantasy. UBS has nothing to do with the documents. 

We have knowledge about the arrestation [sic] of one person at London Heathrow Airport on 3.11.1994 with similar papers. If you have any questions please do not hesitate to contact me. 

Are the 17 certificates originals or copies?" 

Quite why Schicker, or others in the UBS, decided to truncate the first message with the second remains unexplained, as does the question asking if the certificates were originals or copies. Meanwhile, who was the other person arrested?  Was he/she charged by police or later set free? 

In a telephone conversation with Morris Milder, Johnston's Australian lawyer, Astrid Pankhurst, a barrister for Westpac, told Milder that the police had looked at the certificates and were under no doubt about their fraudulent nature. She then added "…but the police have advised that they are not interested in this case because there is no attempted fraud on the UK mainland and you know this matter is really outside their jurisdiction." Pankhurst was being disingenuous, as we shall see. She made this telephone call after consulting with DC Howard of the City of London Police.

She continued the telephone conversation saying that Westpac no longer cared to hold the certificates and that Milder should arrange for them to be collected. Despite Milder's request to speak directly to DC Howard, this did not occur. DC Howard states he was not aware that Milder wished to speak with him. Unusually, Pankhurst refused to confirm any of Westpac's actions or allegations to Milder in writing despite a request to do so. Not least, Milder's phone conversation with Pankhurst was recorded, but Milder was not made privy to this fact. [ix]

In any event, Johnston, unaware of the entrapment in progress, travelled from Australia to London to collect the certificates as requested by Westpac. Arriving at Westpac offices at 3 p.m. on Monday 6 March 1995, he was promptly arrested.

Eighteen months later, during the trial in August 1996, the prosecution presented its expert witness, Claude Mifsud, formerly a senior manager of Lloyds Bank Plc and latterly a consultant in trade finance. Mifsud’s testimony, purportedly supported by his years of experience in international banking transactions, was used by the prosecution to support its contention that the certificate was fraudulent on its face. Mifsud’s testimony did not support this contention, however, because what he told the police was that he was, in fact, unfamiliar with documents of the type in question. In his pre-trial witness statement, he said, "in my experience I have not encountered documentation of this nature and I must admit to finding it difficult to speculate as to the significance of these names and reference number [shown on the certificate]. "His expertise in certificates of deposit did not extend to the specialised world of bullion trading -- an extremely secretive aspect of international finance. 

It must be said here that the instruments used in international banking are highly varied, according to the branch of banking a transaction originates in. Asking an expert in one type of banking transaction to give expert testimony on another branch of banking he has no knowledge of is similar to asking a gynecologist to testify as to a diagnosis of a brain tumour. In this regard, Mifsud was no expert at all, a fact he was the first to point out. 

Despite having its name associated with a major fraud, the UBS, Zurich, refused to send a member of its Zurich Security or Bullion Division (or for that matter anyone from Zurich) to give testimony at the trial. This was in spite of considerable pressure from the police to do so.

However, UBS eventually agreed to have a member of its London staff make a statement to the police. Andrew Furlong, an authorised officer of UBS, London (but not disciplined in bullion trading), in his statement was – surprisingly, considering the gravity of the charges -- unwilling to state the certificates were forgeries. Instead, he merely commented that "UBS did not issue these documents and has nothing to do with them." He added, "I have consulted our Head Office in Zurich and can categorically confirm that the documents did not emanate from UBS in Zurich." That was the full extent of his statement. [x]  For reasons I explain below, saying a certificate is not “issued by” UBS and does not “emanate from” UBS does not necessarily mean it is a forgery or otherwise fraudulent. Compounding the insufficiency of this testimony is the fact that in law, this type of evidence (that is, a statement of another individual merely repeated by the individual under oath) is known as hearsay and is not generally admitted into evidence. Since it was UBS, Zurichs' allegation that set this ball rolling, it is hard to understand why UBS did not send a gold expert from Zurich to attend the trial. However, it was the only official statement the police were able to obtain from UBS. [xi]

Furlong’s testimony is a far cry from Schicker's earlier charge that the certificate was a "forgery and complete fantasy," -- almost a repudiation, in fact. Johnston and Bristow and their attorney, Morris Milder, believed all along (and did not once conceal the fact) that the certificate was not issued by the UBS but understood it had been issued through the UBS.  UBS was not, therefore, the principal, but rather an agent. The difference is a subtle but important one, as we shall see, but goes a long way to explaining UBS' subsequent actions. The fact is that to have stated in writing, under colour of corporate authority, or in open court, that the certificate was a forgery may have opened the UBS to both criminal and civil charges.

Wolfgang Jentsch is the Managing Director of Commerce Capital Limited, located in Dresha, Germany, with sub offices in Nassau and Vancouver. Possessing a banking background, Jentsch worked for Norddeutschelandesbank between 1970 and '73 and again between 1975 and '79, where he was authorised to make loans up to DM 2 million. He is an expert on the less public side of banking and has considerable knowledge of certain specialised types of certificates of deposit. [xii]

Importantly, Jentsch is familiar with the Byzantine world of gold and gold certificates, and this was the major reason he was asked, and agreed, to act as an expert witness for the defence. His witness statement shows his familiarity with some of the less well known aspects of international banking: "I am aware that Governments in most countries from time to time ask their banks to issue certificates of deposit off balance sheet." This, as Jentsch confirms, means the certificates are issued through, not by, the banks, which, consequently, do not need to establish reserves to pay for the certificates if, and when, they are presented for payment. Instead of being bank obligations, such certificates of deposit are in fact secret Government obligations. 

Jentsch continues: "[Certificates] … may take many forms and quite possibly will not be in the banking form. They are by their very nature private banking documents and will not be in the public domain." He then shares an interesting insight: 

"One finds that the larger the amount concerned, the closer the circle of those who know becomes. Indeed, in respect of any bank concerned it is rare that the main structure of the bank itself would ever know of their existence and this information is very much the domain of the few."

The former banker also adds an interesting insight to banking in general in this regard. "Another area where such private documents would come into being are in circumstances where, for example, the deposit is made by a controversial depositor." These he explains might be "an unpopular regime," or "a Government involved in a war situation." He expands on this theme in some detail: 

"… if it is a private Government transaction, it may not necessarily be recorded. Legally the Government would not be allowed to. As indicated above, this is more likely to happen when one starts dealing with the less disciplined Governments of the world." 

"The owner of the funds which are subject to the security of the deposit would be given a number of other documents in order to secure that certificate. He would be given a letter which will provide the details of only those persons who would be able to verify the existence of the certificates and he would be given coded security numbers. It is not common but it is possible that as a further security measure the certificate of deposit may include other forms of coding. This may take the form of what would appear to be severe spelling or grammatical errors…This also has the advantage that anybody unauthorised dealing in that certificate would go back to the bank and it would enable the bank to deny all knowledge of it…"[xiii]

The deniability aspect that Jentsch raises was crucial to Johnston's defence. Other experts in the unofficial bullion market have confirmed it is not an uncommon procedure on sensitive transactions to see spelling and grammatical errors.  They, too, understand that governments occasionally issue confidential certificates through banks, which allows the named bank to deny them. 

Evert van Vollenhoven of the Dutch firm of Van Vollenhoven & Schultz Associates is a specialist bullion trader. In his letter dated 23 February 1995, he states that "The situation with UBS is as follows: if a bank sends copies of certificates, they answer verbally that they are false but do not dare commit themselves by KTT [Key Tested Telex - in other words full corporate responsibility] to these statements. They can not proof [sic] that these documents are false." 

Van Vollenhoven then added an intriguing fact that may well have a bearing on the mystery of the disappearing paragraphs from the first of the two UBS faxes: 

"This has even gone so far that a bank in London called in the Fraud Squad as to regulations and these investigators, after hearing the bank officials walked out straight away telling them that there was no fraud because UBS had not produced any evidence of such."

He was aware of this situation because it was a transaction he was personally involved with, as he makes clear when he says the "result is that the certificates were not confiscated and again are at our free disposal. "He continued by adding that the "conclusion of all this; these documents are real but the UBS does not want to co-operate in whatever manner with third parties, who, however in their full rights, want the benefit of their own belongings." 

Neither does the German Banker, Wolfgang Jentsch, hold back in his statement further on where he explained: "Simply approaching the bank on whose paper it has been issued will always result in the bank denying all knowledge of it" [my italics]. He then reveals that "the currency that the certificate of deposit is denominated in is the key to knowing who to approach if one is authorised to do so." "If the document is recorded in US Dollars then the US Federal Reserve must have records in respect of this transaction under those security numbers…." 

Jentsch was handed the entire set of certificates (17 in all) representing the 740 metric tons in the name of UBS. For the record, he stated, categorically, that they are not "public domain documents." The banker then offered his opinion that the potential prejudice to Westpac by issuing the safe keeping receipt would be immediately negated by adding to the receipt language an appropriate comment to the effect that the receipt is "without involvement of value." Westpac did add a paragraph to this effect on its safe custody receipt, as we know. 

Based on this evidence, before trial, the defence felt reasonably confident that Johnston would be found innocent. However, during the trial in August 1996, Jentsch -- who had carefully scrutinised the gold documents during his deposition -- became a de facto prosecution witness by stating the certificates were pure nonsense. With this about-face testimony, Peter Johnston's fate was sealed. What accounts for the turnaround?

Footnotes

[i] The actual charge was "using a false instrument with intent." Johnston's defence was that he believed the instrument to be genuine and that there was no "intent" involved. Having investigated this matter for 2 1/2 years I am satisfied Johnston is telling the truth -- I have read all his papers running into thousands.

[ii] The latter owns Mase Westpac, the banking arm that bought the ill-fated Johnson Mathey Bank when it almost crashed in September 1984. One of five houses to have a "seat" at London's twice daily gold fix, JM was reputed to be less than forthright in its bullion dealings. In fact, its management was close to Philippines President Ferdinand Marcos and according to rumours was laundering some of the Japanese and Nazi gold he had recovered in the years following World War II. More on this later in our story. Informed sources tell me JM was advancing funds against these deposits of "tainted" gold and this triggered a cash crisis in the bank. This led to questions in Parliament where speakers from both the Labour and the Liberal party bared their teeth and have the courage to suggest JM were engaged in a VAT scam on gold. The deeper and far more sensitive story remained unuttered by any spokesman of any party. During its final disgrace, JM almost brought down the other four major London gold banks with it, but with the timely intervention of the Bank of England was rescued by Mase Westpac.

[iii] Compare this amount to the largest known central bank sale of 500 metric tonnes.

[iv] Blenkinsopp's witness statement to City of London police.
 
 

[v] Extracted from Hinze's note to Blenkinsopp.
 
 

[vi] Blenkinsopp's witness statement to City of London police.
   

[vii] Johnston's police interrogators were DC Howard and DC Ash of the City of London police. DC Howard is now with the Serious Fraud Office.
   

[viii] Placing the certificate in a bank's safe keeping was not even Johnston's idea. In fact, the idea came from the gold trader he was then negotiating with.This individual (Source "A" and Source "B" below) required this be done in order that the certificates could then be securely transferred into safe keeping at his own bank, prior to concluding the transaction.
   

[ix] I have a copy of the transcription of the conversation provided by City of London police.
   

[x] A copy of his witness statement to the police is in my files.
   

[xi] Furlong's statement is dated 6 April 1995. I understand from Johnston's London lawyer that the police were sufficiently worried about the UBS statement that a police officer travelled to UBS Zurich in an attempt to obtain a more robust statement and/or have a Zurich representative agree to attend the trial in London as a witness for the prosecution. I note here that during questioning on 21 March 1995, D.C. Howard refers to a letter from UBS dated 8 March 1995, that he says states the documents "are false." This letter does not appear in the trial exhibits (so far as I can see) and I have not seen it. However, D.C. Howard continues by saying that the UBS is providing an authorised bank officer to make a statement. This was a reference to Andrew Furlong. I have repeatedly tried to contact D.C. Howard (now at the SFO) to clarify this point, but my attempts have been in vain.

[xii] His deposition is in my possession.
 
[xiii] The "holder" of the certificate in question, Indonesian lawyer Dr. Edison Damanik, was in possession of two business cards issued by the UBS. These named Mr. Shaker J. Otwold, UBS Kloten, Switzerland and Mr. A. Stures Honeghen, UBS Basel, Switzerland. Secreted beneath Kloten Airport is Switzerland's largest bullion repository. These cards were mailed to Johnston by Damanik following his arrest -- the implication being that these two individuals were part of the "charmed circle" able to verify the certificates. This location is extremely secretive and most Swiss, UBS employees included, remain unaware of it, as I discovered in my efforts to track down Mr. Otwold. As at this date of writing Otwold and Honeghen remain "ghosts," despite their colourful business cards, which are in my possession. However, for those with a taste for mysteries, it is interesting to observe that the giant UBS transacts all its bullion dealing through a subsidiary, the Anglo-German, American, Warburg, Dillon Read, located at Glattbrugg, close to Kloten.