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An ERisk.

com Case Study

Bank of Credit and

Commerce International
n July 5, 1991, an inci- lion or so small depositors around companies, cross-holdings and

O dent that has been

described as the big-
gest bank fraud in his-
tory came to a head when regula-
tors in seven countries raided and
the world and certain institutional
depositors attracted by BCCI’s rela-
tively high rates, who provided
much of the bank’s funding. Mean-
while, other bank officers had little
nominee owners. BCCI’s interna-
tional nature helped the company
avoid a large amount of regulation
because for most of its history no
single regulator or audit team had
took control of branch offices of understanding of the bank’s struc- full jurisdiction over it.
the Bank of Credit and Commerce ture and overall financial position, Although institutions such as the
International (BCCI). Monetary and were encouraged not to ques- CIA and the Bank of England
losses from the scandal were huge, tion bank practices, or the reason reportedly had some knowledge of
with estimates ranging from $10 bil- for the flow of funds between bank BCCI’s activities before the scandal
lion to $17 billion – though many bil- entities. broke, regulators worldwide –
lions have since been recovered including a special college of regu-
for creditors by the bank’s liquida- The story lators set up to oversee the institu-
tors, Deloitte & Touche. Agha Hasan Abedi, a Pakistani tion in 1987 – proved unable to take
The scandal had been develop- banker with Arab backing, early and decisive action against
ing for nearly two decades and founded the Bank of Credit and the bank.
encompassed an intricate interna- Commerce International in 1972. Regulation was made difficult by
tional web of financial institutions The institution was chartered in inadequate communication
and shell companies that had Luxembourg, but its treasury and among agencies, and by the high-
escaped full regulation. other key functions were based in level government connections that
BCCI’s activities, and those of the Cayman Islands and in London BCCI’s leaders cultivated. Although
some of its officers, included dubi- before decamping to Abu Dhabi in they may not have endorsed the
ous lending, fraudulent record- 1990. Its branches and subsidiaries bank’s activities, various influential
keeping, rogue trading, flouting of in 70 countries were held together figures in the US and around the
bank ownership regulations and by a complex structure of holding world overlooked signs that could
money laundering, in addition to
legitimate banking activities. The
bank’s structure and deal making Lessons learned
was so complex that, a decade
after the institution was liquidated, G The critical role of senior management and key investors in
its activities are still not completely establishing an honest, open and prudent bank culture;
understood. G The need for powerful executives and backers of institutions to be
One way to think of the BCCI controlled within a secure enterprise-wide corporate governance
saga is as an attempt to create the structure, if the interests of other stakeholders, such as deposit holders,
polar opposite of a firm with inte- are to be safeguarded;
grated risk management practices. G The need for independent and unified regulation and auditing of
In this case, certain senior bank per- complex financial conglomerates;
sonnel and interested parties did G The danger that attempts to preserve confidence in a bank, even
not simply overlook risks, but manip- when well-intentioned, will lead to further cover-ups inside and outside
ulated gaps in the bank’s risk man- the bank;
agement structure and between its G The oldest lesson of all: the ease with which massive bad loans and
subsidiaries, to serve various pur- trading losses can be covered up in banks by extending further credit,
poses. This put at a disadvantage failing to record deposits, and juggling accounts.
other stakeholders, such as the mil-

have exposed the scandal before that it had acquired a 25 per cent
1991, and lent the institution a stake in First American, without the Timeline of
veneer of respectability. approval of regulators. The Fed events
One such sign was the bank’s then ordered BCCI to sell the shares
involvement in money laundering in question. Investigations contin- 1972: BCCI is founded.
and the financing of arms traffick- ued in the US and, separately, in 1977-78: Middle Eastern investors
ing. BCCI’s presence in the London. In June, Price Waterhouse, associated with BCCI take control
Cayman Islands, and its many a principal BCCI auditor, informed of First American and National
offices all around the world, made the Bank of England that it had Bank of Georgia, while telling
it a useful route for tainted funds. found evidence of widespread regulators the banks will not be
Clients included such figures as for- fraud and account juggling in controlled by BCCI.
mer Panamanian dictator Manuel BCCI’s operations. The auditors Early 1980s: BCCI treasury
Noriega, as well as individuals who came to believe that, despite its operations lose big money through
were involved in various drug and pace of growth, the bank might risky trading.
crime cartels. American enforce- never have made a genuine profit 1988-90: BCCI and some of its staff
ment officials had uncovered evi- in the whole of its 19-year exis- are investigated and convicted of
dence of these transactions by tence. money laundering.

1990: Article in Regardies prompts
renewed investigation of whether
Throughout its history, BCCI had made large loans to BCCI controls First American.
companies and individuals without properly securing June 1991: Price Waterhouse's
"Sandstorm" report for UK regulators
them. The loans represented massive concentrations details serious fraud at BCCI
of credit risk, but were often not properly July 1991: Regulators take control
of BCCI offices in key countries.
documented or monitored’ Mid–late 1990s: Key Middle Eastern
figures in the BCCI saga and Abu
1983, but did not act on them until Throughout its history, BCCI had Dhabi agree to pay large sums in
1988. made large loans to companies restitution.
At that point, the US Customs and individuals without properly March 2001: Liquidators seek
Service completed an undercover securing them. The loans repre- damages from the Bank of England
operation that led to the arrest of sented massive concentrations of for its role in regulating BCCI.
several BCCI figures, who were credit risk, but were often not prop-
convicted of money laundering on erly documented or monitored.
July 29, 1990. The bank itself When these loans went bad, the was through huge losses incurred
pleaded guilty to the laundering bank had no legal recourse, and by its treasury department, particu-
charge and was fined $14 million. was forced to absorb the losses. This larly in the early 1980s – though
The bank’s international web “strategy”, which ran counter to these losses may themselves have
began to unravel in 1990 when common sense and all principles of been a way of disguising other
Regardies, a Washington-based good lending, racked up huge losses and misdoings. BCCI also
business magazine, published a losses for BCCI. It covered up this reportedly lost hundreds of millions
story that questioned the BCCI links problem by taking in new deposits of dollars through a financial serv-
of the owners of a significant US and not recording these straightfor- ices trading company that it set up.
bank, First American. The Federal wardly on its books, and by other- Ironically, BCCI itself lost huge
Reserve began an official probe wise creating a matrix of false amounts of money in the series of
into the alleged connection accounts that hid the losses for illegal US bank acquisitions – and
between BCCI and First American. years. from the improperly secured loans
In March 1991, BCCI admitted Another way BCCI lost money underpinning them – that led to its

June 2001

investigation and closure in 1991. charge of the purchased institution, embroiled in BCCI’s complex deals
and the deal was allowed. The two and shadowy investments included
BCCI’s US acquisitions lawyers became the top execu- the Independence Bank, Encino,
The regulatory probe that exposed tives of the Washington bank, California and CenTrust, an already
BCCI’s losses was brought about by which was renamed First American troubled Miami-based thrift.
the bank’s illegal control of several Bankshares. Eventually, when
American financial institutions. The BCCI’s involvement with the bank The aftermath
largest, First American, was based was publicised, First American lost a When BCCI’s problems were
in Washington, DC, and was osten- large amount of business and, in uncovered in the 1991 probe, regu-
sibly run for 12 years by two high- 1993, part of it was sold to First Union lators in seven countries moved
profile Washington insiders, former Corp. quickly to take over the bank’s
US Secretary of Defense Clark Clifford and Altman maintained branches. On July 5, offices in the
Clifford and his law partner Robert that they had acted in good faith, UK, US, France, Spain, Switzerland,
Altman. and that BCCI had not gained Luxembourg and the Cayman
These two men became involved effective control over the US bank. Islands were seized, and the bank’s
with BCCI in 1978, when they were In 1993, Altman was acquitted of business activities were frozen.
hired as the bank’s US lawyers. One charges of bank fraud in a New BCCI’s assets were ultimately liqui-

year earlier, BCCI had set its sights
on Financial General Bankshares,
the company that would later Lax corporate governance, manipulation by backers and
become First American.
A takeover group that included
bank officers with their own personal agendas, general fraud
Bert Lance (a banker from Georgia, and failure of fundamental risk management structures at the
better known as the Carter admin-
istration’s budget director) and var-
bank can be considered the primary engines driving the
ious Middle Eastern shareholders losses to the bank’s stakeholders’
was formed in 1977. By 1978, it had
purchased 25 per cent of the avail-
able shares in Financial General. At York state court, while charges dated, and a pool was established
that point, the SEC charged the against Clifford were set aside due to reimburse depositors who had
group with failing to disclose owner- to his ill health. In 1998, not long lost their funds when the bank shut
ship information, but did not stop before Clifford died, both men down.
the takeover. reached a $5 million settlement Despite various investigations
When the takeover group made with the Federal Reserve Board and reports since 1991, it’s difficult
a $70 million bid for Financial without admitting any of the alle- to sum up the cause of the BCCI
General, the Federal Reserve Board gations. scandal in any simple way. Lax cor-
initially rejected it. This hurdle did BCCI’s involvement in US banking porate governance, manipulation
not stop BCCI and the investors was not limited to Washington. In by backers and bank officers with
connected to it, however, and in 1987, First American made an all- their own personal agendas, gen-
1980, Financial General accepted cash offer for the National Bank of eral fraud and failure of fundamen-
a takeover bid of $180 million. Georgia that, the Federal Reserve tal risk management structures at
Approval for the deal was delayed later alleged, was simply a way for the highest level of the bank can
until 1982, while regulators BCCI to secure covert investments be considered the primary engines
attempted to verify that BCCI it had made a decade or so earlier. driving the losses to the bank’s
would not be controlling the US Like First American, National Bank stakeholders.
bank. of Georgia was sold, to South Trust More specifically, the bank’s
Clifford and Altman assured the Corp, after its BCCI connection was untenable loan and acquisitions
authorities that they would be in revealed. Other institutions fatally strategies, poor treasury and

June 2001

record-keeping practices, and its

habit of hiding the massive losses Resources and References
that resulted, led to its downfall.
BCCI’s numerous regulatory viola- Commentary on the BCCI affair is widely available on the Web, and
tions and legal liabilities, and its easily found through searches of the bank's name. Two key resources
negligence in protecting the inter- are:
ests of depositors who were not The BCCI Affair: A Report to the Committee on Foreign Relations, United
wealthy or well connected, hardly States Senate, by Senator John Kerry and Senator Hank Brown,
need pointing out. December 1992
On a brighter note, the bank offi-
cers and liquidators appointed by BCCI page of the Association of Accountancy and Business Affairs. The
the courts after the scandal have association is a non-profit-making pressure group devoted to promoting
used settlements, forfeitures and openness and scrutiny in business and the accounting profession, and
fines to recover significant monies has a special interest in the long-lived BCCI affair. The BCCI page hosts
for stakeholders – particularly small a censored version of the original 1991 Sandstorm report, which the UK
depositors – damaged by the government continues to refuse to publish citing confidentiality
bank’s failure. In December 1991, concerns.
BCCI made the first of many large
contributions to the depositors’ The best-known book on the affair is A Full Service Bank: How BCCI Stole
restitution pool, when it pleaded Billions Around the World, by James R Adams and Douglas Frantz,
guilty to criminal charges and available through
agreed to forfeit $550 million.
In 1994, the government of Abu Additional References (by date)
Dhabi, which took over BCCI after 1991-09-10, Gannett News Service, “Chronology of BCCI Case”.
the scandal broke, agreed to pay 1991-09-29, The Washington Post, “Probe of BCCI's lost funds leads to an
$1.9 billion to the depositors’ pool. affiliate; Middle East investors' Capcom Financial Services linked to huge
Meanwhile, from 1995, various of trading losses, money laundering”, Jerry Knight, page h01.
BCCI’s wealthy Middle Eastern 1992-10-15, The Washington Post, “Questions of Justice”, page 30.
backers who had been sued or 1992-11; Lord Justice Bingham's “Inquiry into the supervision of the Bank
fined for their involvement in the of Credit and Commerce International”, London, HMSO, October 1992.
scandal began to reach settle- 1993-02-27, The Washington Post, “First American Banks are sold; an
ments worth hundreds of millions of ownership story”, page c01.
dollars. 1998-02-09, The Washington Post, “BCCI, an international mystery
In the most recent twist in the concluded but not solved”, Rudolph A Pyatt Jr, page F04.
tale, in March 2001, BCCI’s liquida- 1998-06-27, The Economist, “BCCI: Silver lining”, page 74.
tors were granted leave by the 1998-07-09, The Wall Street Journal, “Price Waterhouse hit with higher
House of Lords to sue one of BCCI’s fines in BCCI litigation”.
principal regulators, the Bank of 1998-07-08, Financial Times, “Bank’s liquidators find way out of $17bn
England,for up to £1 billion for fail- black hole” page 3.
ing to monitor BCCI properly. The 1998-09-29, The Wall Street Journal, “BCCI: The mystery lingers”, page
Bank says it plans to “defend the A22.
action with the utmost vigour”. 1999-02-26, The Wall Street Journal, “Banker fined for BCCI role is
BCCI, it seems, will not rest in ordered to pay interest”, page A2.
peace. I 1999-06-24, The Wall Street Journal, “Businessman is told to pay $1.2
This case history was contributed billion in the BCCI scandal”, page B16.
to ERisk by Lisa Royan and 1999-07-06, The Wall Street Journal, “Forfeiture proceedings against
Penny Cagan of Zurich IC failed bank end”, page A28

June 2001