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The Biggest Bank Fraud in History

The Biggest Bank Fraud in History



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Published by: coil on Dec 25, 2007
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n July 5, 1991, an inci-dent that has beendescribed as the big-gest bank fraud in his-tory came to a head when regula-tors in seven countries raided andtook control of branch offices ofthe Bank of Credit and CommerceInternational (BCCI). Monetarylosses from the scandal were huge,with estimates ranging from $10 bil-lion to $17 billion – though many bil-lions have since been recoveredfor creditors by the bank’s liquida-tors, Deloitte & Touche.The scandal had been develop-ing for nearly two decades andencompassed an intricate interna-tional web of financial institutionsand shell companies that hadescaped full regulation.BCCI’s activities, and those ofsome of its officers, included dubi-ous lending, fraudulent record-keeping, rogue trading, flouting ofbank ownership regulations andmoney laundering, in addition tolegitimate banking activities. Thebank’s structure and deal makingwas so complex that, a decadeafter the institution was liquidated,its activities are still not completelyunderstood.One way to think of the BCCIsaga is as an attempt to create thepolar opposite of a firm with inte-grated risk management practices.In this case, certain senior bank per-sonnel and interested parties didnot simply overlook risks, but manip-ulated gaps in the bank’s risk man-agement structure and between itssubsidiaries, to serve various pur-poses. This put at a disadvantageother stakeholders, such as the mil-lion or so small depositors aroundthe world and certain institutionaldepositors attracted by BCCI’s rela-tively high rates, who providedmuch of the bank’s funding. Mean-while, other bank officers had littleunderstanding of the bank’s struc-ture and overall financial position,and were encouraged not to ques-tion bank practices, or the reasonfor the flow of funds between bank entities.
The story
Agha Hasan Abedi, a Pakistanibanker with Arab backing,founded the Bank of Credit andCommerce International in 1972.The institution was chartered inLuxembourg, but its treasury andother key functions were based inthe Cayman Islands and in Londonbefore decamping to Abu Dhabi in1990. Its branches and subsidiariesin 70 countries were held together by a complex structure of holdingcompanies, cross-holdings andnominee owners. BCCI’s interna-tional nature helped the companyavoid a large amount of regulationbecause for most of its history nosingle regulator or audit team hadfull jurisdiction over it.Although institutions such as theCIA and the Bank of Englandreportedly had some knowledge ofBCCI’s activities before the scandalbroke, regulators worldwide – including a special college of regu-lators set up to oversee the institu-tion in 1987 – proved unable to takeearly and decisive action againstthe bank.Regulation was made difficult byinadequate communicationamong agencies, and by the high-level government connections thatBCCI’s leaders cultivated. Althoughthey may not have endorsed thebank’s activities, various influentialfigures in the US and around theworld overlooked signs that could
Bank of Credit andCommerce International
An ERisk.com Case Study
Lessons learned
The critical role of senior management and key investors inestablishing an honest, open and prudent bank culture;
The need for powerful executives and backers of institutions to becontrolled within a secure enterprise-wide corporate governancestructure, if the interests of other stakeholders, such as deposit holders,are to be safeguarded;
The need for independent and unified regulation and auditing ofcomplex financial conglomerates;
The danger that attempts to preserve confidence in a bank, evenwhen well-intentioned, will lead to further cover-ups inside and outsidethe bank;
The oldest lesson of all: the ease with which massive bad loans andtrading losses can be covered up in banks by extending further credit,failing to record deposits, and juggling accounts.
have exposed the scandal before1991, and lent the institution aveneer of respectability.One such sign was the bank’sinvolvement in money launderingand the financing of arms traffick-ing. BCCI’s presence in theCayman Islands, and its manyoffices all around the world, madeit a useful route for tainted funds.Clients included such figures as for-mer Panamanian dictator ManuelNoriega, as well as individuals whowere involved in various drug andcrime cartels. American enforce-ment officials had uncovered evi-dence of these transactions by1983, but did not act on them until1988.At that point, the US CustomsService completed an undercover operation that led to the arrest ofseveral BCCI figures, who wereconvicted of money laundering onJuly 29, 1990. The bank itselfpleaded guilty to the launderingcharge and was fined $14 million.The bank’s international webbegan to unravel in 1990 when
, a Washington-basedbusiness magazine, published astory that questioned the BCCI linksof the owners of a significant USbank, First American. The FederalReserve began an official probeinto the alleged connectionbetween BCCI and First American.In March 1991, BCCI admittedthat it had acquired a 25 per centstake in First American, without theapproval of regulators. The Fedthen ordered BCCI to sell the sharesin question. Investigations contin-ued in the US and, separately, inLondon. In June, Price Waterhouse,a principal BCCI auditor, informedthe Bank of England that it hadfound evidence of widespreadfraud and account juggling inBCCI’s operations. The auditorscame to believe that, despite itspace of growth, the bank mightnever have made a genuine profitin the whole of its 19-year exis-tence.Throughout its history, BCCI hadmade large loans to companiesand individuals without properlysecuring them. The loans repre-sented massive concentrations ofcredit risk, but were often not prop-erly documented or monitored.When these loans went bad, thebank had no legal recourse, andwas forced to absorb the losses. This“strategy”, which ran counter tocommon sense and all principles ofgood lending, racked up hugelosses for BCCI. It covered up thisproblem by taking in new depositsand not recording these straightfor-wardly on its books, and by other-wise creating a matrix of falseaccounts that hid the losses for years.Another way BCCI lost moneywas through huge losses incurredby its treasury department, particu-larly in the early 1980s – thoughthese losses may themselves havebeen a way of disguising other losses and misdoings. BCCI alsoreportedly lost hundreds of millionsof dollars through a financial serv-ices trading company that it set up.Ironically, BCCI itself lost hugeamounts of money in the series ofillegal US bank acquisitions – andfrom the improperly secured loansunderpinning them – that led to itsJune 2001
Timeline ofevents
BCCI is founded.
Middle Eastern investorsassociated with BCCI take controlof First American and NationalBank of Georgia, while tellingregulators the banks will not becontrolled by BCCI.
Early 1980s:
BCCI treasuryoperations lose big money throughrisky trading.
BCCI and some of its staffare investigated and convicted ofmoney laundering.
Article in Regardies promptsrenewed investigation of whether BCCI controls First American.
June 1991:
Price Waterhouse's"Sandstorm" report for UK regulatorsdetails serious fraud at BCCI
July 1991:
Regulators take controlof BCCI offices in key countries.
Mid–late 1990s:
Key Middle Easternfigures in the BCCI saga and AbuDhabi agree to pay large sums inrestitution.
March 2001
: Liquidators seek damages from the Bank of Englandfor its role in regulating BCCI.
Throughout its history, BCCI had made large loans tocompanies and individuals without properly securingthem. The loans represented massive concentrationsof credit risk, but were often not properlydocumented or monitored’
June 2001
investigation and closure in 1991.
BCCI’s US acquisitions
The regulatory probe that exposedBCCI’s losses was brought about bythe bank’s illegal control of severalAmerican financial institutions. Thelargest, First American, was basedin Washington, DC, and was osten-sibly run for 12 years by two high-profile Washington insiders, former US Secretary of Defense Clark Clifford and his law partner RobertAltman.These two men became involvedwith BCCI in 1978, when they werehired as the bank’s US lawyers. Oneyear earlier, BCCI had set its sightson Financial General Bankshares,the company that would later become First American.A takeover group that includedBert Lance (a banker from Georgia,better known as the Carter admin-istration’s budget director) and var-ious Middle Eastern shareholderswas formed in 1977. By 1978, it hadpurchased 25 per cent of the avail-able shares in Financial General. Atthat point, the SEC charged thegroup with failing to disclose owner-ship information, but did not stopthe takeover.When the takeover group madea $70 million bid for FinancialGeneral, the Federal Reserve Boardinitially rejected it. This hurdle didnot stop BCCI and the investorsconnected to it, however, and in1980, Financial General accepteda takeover bid of $180 million.Approval for the deal was delayeduntil 1982, while regulatorsattempted to verify that BCCIwould not be controlling the USbank.Clifford and Altman assured theauthorities that they would be incharge of the purchased institution,and the deal was allowed. The twolawyers became the top execu-tives of the Washington bank,which was renamed First AmericanBankshares. Eventually, whenBCCI’s involvement with the bank was publicised, First American lost alarge amount of business and, in1993, part of it was sold to First UnionCorp.Clifford and Altman maintainedthat they had acted in good faith,and that BCCI had not gainedeffective control over the US bank.In 1993, Altman was acquitted ofcharges of bank fraud in a NewYork state court, while chargesagainst Clifford were set aside dueto his ill health. In 1998, not longbefore Clifford died, both menreached a $5 million settlementwith the Federal Reserve Boardwithout admitting any of the alle-gations.BCCI’s involvement in US bankingwas not limited to Washington. In1987, First American made an all-cash offer for the National Bank ofGeorgia that, the Federal Reservelater alleged, was simply a way for BCCI to secure covert investmentsit had made a decade or so earlier.Like First American, National Bank of Georgia was sold, to South TrustCorp, after its BCCI connection wasrevealed. Other institutions fatallyembroiled in BCCI’s complex dealsand shadowy investments includedthe Independence Bank, Encino,California and CenTrust, an alreadytroubled Miami-based thrift.
The aftermath
When BCCI’s problems wereuncovered in the 1991 probe, regu-lators in seven countries movedquickly to take over the bank’sbranches. On July 5, offices in theUK, US, France, Spain, Switzerland,Luxembourg and the CaymanIslands were seized, and the bank’sbusiness activities were frozen.BCCI’s assets were ultimately liqui-dated, and a pool was establishedto reimburse depositors who hadlost their funds when the bank shutdown.Despite various investigationsand reports since 1991, it’s difficultto sum up the cause of the BCCIscandal in any simple way. Lax cor-porate governance, manipulationby backers and bank officers withtheir own personal agendas, gen-eral fraud and failure of fundamen-tal risk management structures atthe highest level of the bank canbe considered the primary enginesdriving the losses to the bank’sstakeholders.More specifically, the bank’suntenable loan and acquisitionsstrategies, poor treasury and
Lax corporate governance, manipulation by backers and bank officers with their own personal agendas, general fraudand failure of fundamental risk management structures at the bank can be considered the primary engines driving thelosses to the bank’s stakeholders’

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