U.S. Senate committee investigators have named two Canadian banks -- Royal Bank of Canada and Toronto-Dominion Bank -- as participants in a group that lent more than $1-billion in "prepay" financing to Enron Corp.

Such financing assisted Enron in carrying out its widespread accounting deceptions, investigators said, although they did not say the banks did anything wrong.

Enron used such funds to inflate its operating cash flow and conceal its debts, alleges a U.S. Senate committee probing the role played by financial institutions in its collapse.

The funds were advanced to Enron through a so-called "prepay" financing, typically an arrangement where a company receives money up front for services to be provided down the road.

What Enron did was construct elaborate commodity trades in order to book the proceeds from the prepay financings as operating cash flow, Robert Roach, chief investigator of the Senate permanent subcommittee on investigations, said in prepared testimony for a hearing yesterday.

"But when all the bells and whistles are stripped away," he said, what remains is a loan to Enron. The company should have booked the proceeds from the prepay financings as a debt, not a trading liability, he added.

While RBC and TD have been swept up in the scandal surrounding Enron, the Canadian banks are not the target of investigators. In fact, most of yesterday's hearing focused on the role played by New York-based J.P. Morgan Chase & Co. and Citigroup Inc., which together did $8-billion in prepay financings with Enron over a six-year period, Mr. Roach alleges.

Officials from both RBC and TD will not be asked to testify before the committee, Elise Bean, an aide to committee chairman Carl Levin, said in an interview yesterday.

"We have all we can do with doing our own banks here at home," she said. "And to be fair, the two banks that did 95 per cent of it were Citibank and Chase."

The testimony presented at the hearing was the first time TD's name has been mentioned in connection with any investigation into Enron following its bankruptcy filing last December.

"We are confident that our dealings with Enron were entirely appropriate at the time, based on the information provided to us by Enron," TD spokesman Neil Parmenter said yesterday.

RBC has also not been named in any Enron-related investigation prior to yesterday. But it is embroiled in a lawsuit with Rabobank of the Netherlands over a $517-million Enron-related financing. And the three former British employees of RBC who structured that deal have been charged with fraud in connection with a separate Enron financing.

RBC spokesman David Moorcroft said yesterday that the bank is "very comfortable with [the Rabobank] transaction."

Mr. Roach says in his prepared testimony the evidence reviewed by his staff over the past seven months shows that some financial institutions were aware Enron was using questionable accounting and actively aided the company in return for fees and favourable consideration in other business dealings.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deceptions it did, involving billions of dollars, were it not for the active participation of major financial institutions willing to go along with and even expand upon Enron's activities," he alleges.

As well, he said, some of these institutions "knowingly allowed investors to rely on Enron financial statements that they knew or should have known were misleading."

Citigroup did 14 prepay transactions worth $4.8-billion and J.P. Morgan 12 transactions worth $3.7-billion over six years, the hearing was told.

"Enron's practice of using prepay transactions to understate debt and overstate cash flow from operations made its financial statements look much stronger," Mr. Roach states.

If Enron had properly accounted for these transactions, its total debts for 2000 would have soared by $4-billion to $14-billion and its cash flow would have dropped in half to $1.7-billion, he says.

Enron could not have done this without the participation of the financial institutions, notably J.P. Morgan and Citigroup, he alleges. The banks not only provided the funding, they allowed Enron to use their offshore entities as "sham trading partners" so that the company could disguise loans as commodity trades, he alleges.

"By design and intent, the prepays as structured by Enron and the financial institutions made it impossible for investors, analysts and other financial institutions to uncover the true level of the company's debts."