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The Regulators 12

The Regulators 12

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Published by arielky

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Published by: arielky on Apr 25, 2009
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06/14/2009

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 THE REGULATORS
Introduction
BCCI, which managed to penetrate every country ittargeted, including the United States, was a bankwhich regulators always recognized as a riskyinstitution. Having no lender of last resort and noconsolidated auditor, BCCI presented a structurewhich to Western bank regulators was unsound,regardless of how BCCI happened to use thestructure. From the beginning, regulators in theUnited Kingdom and the United States sought todiscourage BCCI from entering their jurisdictions. Their hostility was not based on a cultural contemptfor a Third World or Pakistani bank, as BCCI's chief,Agha Hasan Abedi, sometimes contended. Rather, itwas based on the very structure of the bank, whichwas viewed, correctly, as having been deliberatelycreated to avoid regulation.As William Taylor, then staff director of the FederalReserve's Division of Banking Supervision andRegulation testified in May, 1991:I want to make it clear that BCCI, unlike virtually anyother major international bank, was not subject to acomprehensive system of supervisory oversight byauthorities in its home country. . . both the holdingcompany for BCCI and one of its major bankingsubsidiaries are chartered in Luxembourg; butneither the holding company nor the subsidiary hasconducted a banking business in that country. BCCIappears to manage most of its global business out of offices in London. The regulatory authorities in
 
Luxembourg, therefore, did not provide consolidatedsupervision of the BCCI organization.
Luxembourg was thus one of BCCI's homes, yet didnot regulate it, because BCCI did not engage inbanking business there. BCCI's other home, theGrand Caymans, did not regulate any bank licensedthere. The Caymans lack of regulation was preciselythe inducement for banks to charter themselvesthere.
BCCI's operational home, the UnitedKingdom, also did not regulate BCCI's activities: theUK regulator, the Bank of England, considered BCCIto be a foreign bank, based in Luxembourg and theGrand Caymans, and thus the responsibility of regulators in those countries. This neat arrangement by BCCI, together with itsdivision of its auditing functions between twoauditors, one for "Luxembourg" and the other for"Grand Caymans," ensured that BCCI's activitiescould not be adequately monitored by anyone. Asformer Comptroller of the Currency John Heimanntestified:Early on in my government service, I learned onevery important and fundamental lesson; namely, thatthose so inclined to manipulate banks for their ownbenefit find it easiest to do so if they operatebetween different supervisory regimes.Many bank swindles have been built around thispractice. For example, an individual owns a bank inNew York State, another bank in Belgium, a thirdbank in Switzerland, and still another bank inArgentina. Each of these banks is regulated by a
 
different Supervisor. . . For years, the same situationapplied domestically. There were some who ownedboth state chartered and national chartered bankswho moved assets between them to improveexamination results. This practice was stoppedduring my term as Comptroller when all relevantagencies began to coordinate examinations.
Despite being chartered elsewhere, BCCI choseLondon as its operational home and headquarters,creating oversight problems that gave regulatorsheadaches for years. The Bank of England indeedconsidered BCCI "the most difficult bank we have todeal with," as far back as the 1970's.
It repeatedlylimited BCCI's ability to expand there and to gain fullbank powers, even as the U.S. halted BCCI'sattempts to purchase U.S. banks openly, leaving itwith the legal ability only to enter the U.S. throughestablishing foreign branches which could not acceptdeposits from Americans. Yet in the face of this regulatory hostility, BCCIultimately succeeded in developing large bankingoperations in both the United States and the UnitedKingdom anyway, through its secret ownerships of U.S. banks and its accretion of licensed deposittaking status in the UK. While BCCI did not need tobribe central officials in the United States and theUnited Kingdom, as it did in many other countries, itssuccess in flourishing in both countries for so longdemonstrates obvious flaws in the regulatoryprocess.In the U.S., BCCI was able first to deceive the FederalReserve, despite making numerous errors in the

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