An ERisk.

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Bank of Credit and Commerce International

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n July 5, 1991, an incident that has been described as the biggest bank fraud in history came to a head when regulators in seven countries raided and took control of branch offices of the Bank of Credit and Commerce International (BCCI). Monetary losses from the scandal were huge, with estimates ranging from $10 billion to $17 billion – though many billions have since been recovered for creditors by the bank’s liquidators, Deloitte & Touche. The scandal had been developing for nearly two decades and encompassed an intricate international web of financial institutions and shell companies that had escaped full regulation. BCCI’s activities, and those of some of its officers, included dubious lending, fraudulent recordkeeping, rogue trading, flouting of bank ownership regulations and money laundering, in addition to legitimate banking activities. The bank’s structure and deal making was so complex that, a decade after the institution was liquidated, its activities are still not completely understood. One way to think of the BCCI saga is as an attempt to create the polar opposite of a firm with integrated risk management practices. In this case, certain senior bank personnel and interested parties did not simply overlook risks, but manipulated gaps in the bank’s risk management structure and between its subsidiaries, to serve various purposes. This put at a disadvantage other stakeholders, such as the mil-

lion or so small depositors around the world and certain institutional depositors attracted by BCCI’s relatively high rates, who provided much of the bank’s funding. Meanwhile, other bank officers had little understanding of the bank’s structure and overall financial position, and were encouraged not to question bank practices, or the reason for the flow of funds between bank entities.

The story
Agha Hasan Abedi, a Pakistani banker with Arab backing, founded the Bank of Credit and Commerce International in 1972. The institution was chartered in Luxembourg, but its treasury and other key functions were based in the Cayman Islands and in London before decamping to Abu Dhabi in 1990. Its branches and subsidiaries in 70 countries were held together by a complex structure of holding

companies, cross-holdings and nominee owners. BCCI’s international nature helped the company avoid a large amount of regulation because for most of its history no single regulator or audit team had full jurisdiction over it. Although institutions such as the CIA and the Bank of England reportedly had some knowledge of BCCI’s activities before the scandal broke, regulators worldwide – including a special college of regulators set up to oversee the institution in 1987 – proved unable to take early and decisive action against the bank. Regulation was made difficult by inadequate communication among agencies, and by the highlevel government connections that BCCI’s leaders cultivated. Although they may not have endorsed the bank’s activities, various influential figures in the US and around the world overlooked signs that could

Lessons learned
G The critical role of senior management and key investors in establishing an honest, open and prudent bank culture; G The need for powerful executives and backers of institutions to be controlled within a secure enterprise-wide corporate governance structure, if the interests of other stakeholders, such as deposit holders, are to be safeguarded; G The need for independent and unified regulation and auditing of complex financial conglomerates; G The danger that attempts to preserve confidence in a bank, even when well-intentioned, will lead to further cover-ups inside and outside the bank; G The oldest lesson of all: the ease with which massive bad loans and trading losses can be covered up in banks by extending further credit, failing to record deposits, and juggling accounts.

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have exposed the scandal before 1991, and lent the institution a veneer of respectability. One such sign was the bank’s involvement in money laundering and the financing of arms trafficking. BCCI’s presence in the Cayman Islands, and its many offices all around the world, made it a useful route for tainted funds. Clients included such figures as former Panamanian dictator Manuel Noriega, as well as individuals who were involved in various drug and crime cartels. American enforcement officials had uncovered evidence of these transactions by

that it had acquired a 25 per cent stake in First American, without the approval of regulators. The Fed then ordered BCCI to sell the shares in question. Investigations continued in the US and, separately, in London. In June, Price Waterhouse, a principal BCCI auditor, informed the Bank of England that it had found evidence of widespread fraud and account juggling in BCCI’s operations. The auditors came to believe that, despite its pace of growth, the bank might never have made a genuine profit in the whole of its 19-year existence.

Timeline of events
1972: BCCI is founded. 1977-78: Middle Eastern investors associated with BCCI take control of First American and National Bank of Georgia, while telling regulators the banks will not be controlled by BCCI. Early 1980s: BCCI treasury operations lose big money through risky trading. 1988-90: BCCI and some of its staff are investigated and convicted of money laundering. 1990: Article in Regardies prompts renewed investigation of whether BCCI controls First American. June 1991: Price Waterhouse's "Sandstorm" report for UK regulators details serious fraud at BCCI July 1991: Regulators take control of BCCI offices in key countries. Mid–late 1990s: Key Middle Eastern figures in the BCCI saga and Abu Dhabi agree to pay large sums in restitution. March 2001: Liquidators seek damages from the Bank of England for its role in regulating BCCI.

Throughout its history, BCCI had made large loans to companies and individuals without properly securing them. The loans represented massive concentrations of credit risk, but were often not properly documented or monitored’
Throughout its history, BCCI had made large loans to companies and individuals without properly securing them. The loans represented massive concentrations of credit risk, but were often not properly documented or monitored. When these loans went bad, the bank had no legal recourse, and was forced to absorb the losses. This “strategy”, which ran counter to common sense and all principles of good lending, racked up huge losses for BCCI. It covered up this problem by taking in new deposits and not recording these straightforwardly on its books, and by otherwise creating a matrix of false accounts that hid the losses for years. Another way BCCI lost money

1983, but did not act on them until 1988. At that point, the US Customs Service completed an undercover operation that led to the arrest of several BCCI figures, who were convicted of money laundering on July 29, 1990. The bank itself pleaded guilty to the laundering charge and was fined $14 million. The bank’s international web began to unravel in 1990 when Regardies, a Washington-based business magazine, published a story that questioned the BCCI links of the owners of a significant US bank, First American. The Federal Reserve began an official probe into the alleged connection between BCCI and First American. In March 1991, BCCI admitted

was through huge losses incurred by its treasury department, particularly in the early 1980s – though these losses may themselves have been a way of disguising other losses and misdoings. BCCI also reportedly lost hundreds of millions of dollars through a financial services trading company that it set up. Ironically, BCCI itself lost huge amounts of money in the series of illegal US bank acquisitions – and from the improperly secured loans underpinning them – that led to its June 2001

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investigation and closure in 1991.

BCCI’s US acquisitions
The regulatory probe that exposed BCCI’s losses was brought about by the bank’s illegal control of several American financial institutions. The largest, First American, was based in Washington, DC, and was ostensibly run for 12 years by two highprofile Washington insiders, former US Secretary of Defense Clark Clifford and his law partner Robert Altman. These two men became involved with BCCI in 1978, when they were hired as the bank’s US lawyers. One year earlier, BCCI had set its sights on Financial General Bankshares, the company that would later become First American. A takeover group that included Bert Lance (a banker from Georgia, better known as the Carter administration’s budget director) and various Middle Eastern shareholders was formed in 1977. By 1978, it had purchased 25 per cent of the available shares in Financial General. At that point, the SEC charged the group with failing to disclose ownership information, but did not stop the takeover. When the takeover group made a $70 million bid for Financial General, the Federal Reserve Board initially rejected it. This hurdle did not stop BCCI and the investors connected to it, however, and in 1980, Financial General accepted a takeover bid of $180 million. Approval for the deal was delayed until 1982, while regulators attempted to verify that BCCI would not be controlling the US bank. Clifford and Altman assured the authorities that they would be in

charge of the purchased institution, and the deal was allowed. The two lawyers became the top executives of the Washington bank, which was renamed First American Bankshares. Eventually, when BCCI’s involvement with the bank was publicised, First American lost a large amount of business and, in 1993, part of it was sold to First Union Corp. Clifford and Altman maintained that they had acted in good faith, and that BCCI had not gained effective control over the US bank. In 1993, Altman was acquitted of charges of bank fraud in a New

embroiled in BCCI’s complex deals and shadowy investments included the Independence Bank, Encino, California and CenTrust, an already troubled Miami-based thrift.

The aftermath
When BCCI’s problems were uncovered in the 1991 probe, regulators in seven countries moved quickly to take over the bank’s branches. On July 5, offices in the UK, US, France, Spain, Switzerland, Luxembourg and the Cayman Islands were seized, and the bank’s business activities were frozen. BCCI’s assets were ultimately liqui-

Lax corporate governance, manipulation by backers and bank officers with their own personal agendas, general fraud and failure of fundamental risk management structures at the bank can be considered the primary engines driving the losses to the bank’s stakeholders’
dated, and a pool was established to reimburse depositors who had lost their funds when the bank shut down. Despite various investigations and reports since 1991, it’s difficult to sum up the cause of the BCCI scandal in any simple way. Lax corporate governance, manipulation by backers and bank officers with their own personal agendas, general fraud and failure of fundamental risk management structures at the highest level of the bank can be considered the primary engines driving the losses to the bank’s stakeholders. More specifically, the bank’s untenable loan and acquisitions strategies, poor treasury and June 2001

York state court, while charges against Clifford were set aside due to his ill health. In 1998, not long before Clifford died, both men reached a $5 million settlement with the Federal Reserve Board without admitting any of the allegations. BCCI’s involvement in US banking was not limited to Washington. In 1987, First American made an allcash offer for the National Bank of Georgia that, the Federal Reserve later alleged, was simply a way for BCCI to secure covert investments it had made a decade or so earlier. Like First American, National Bank of Georgia was sold, to South Trust Corp, after its BCCI connection was revealed. Other institutions fatally

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record-keeping practices, and its habit of hiding the massive losses that resulted, led to its downfall. BCCI’s numerous regulatory violations and legal liabilities, and its negligence in protecting the interests of depositors who were not wealthy or well connected, hardly need pointing out. On a brighter note, the bank officers and liquidators appointed by the courts after the scandal have used settlements, forfeitures and fines to recover significant monies for stakeholders – particularly small depositors – damaged by the bank’s failure. In December 1991, BCCI made the first of many large contributions to the depositors’ restitution pool, when it pleaded guilty to criminal charges and agreed to forfeit $550 million. In 1994, the government of Abu Dhabi, which took over BCCI after the scandal broke, agreed to pay $1.9 billion to the depositors’ pool. Meanwhile, from 1995, various of BCCI’s wealthy Middle Eastern backers who had been sued or fined for their involvement in the scandal began to reach settlements worth hundreds of millions of dollars. In the most recent twist in the tale, in March 2001, BCCI’s liquidators were granted leave by the House of Lords to sue one of BCCI’s principal regulators, the Bank of England,for up to £1 billion for failing to monitor BCCI properly. The Bank says it plans to “defend the action with the utmost vigour”. BCCI, it seems, will not rest in peace. I This case history was contributed to ERisk by Lisa Royan and Penny Cagan of Zurich IC Squared.

Resources and References
Commentary on the BCCI affair is widely available on the Web, and easily found through searches of the bank's name. Two key resources are: The BCCI Affair: A Report to the Committee on Foreign Relations, United States Senate, by Senator John Kerry and Senator Hank Brown, December 1992 BCCI page of the Association of Accountancy and Business Affairs. The association is a non-profit-making pressure group devoted to promoting openness and scrutiny in business and the accounting profession, and has a special interest in the long-lived BCCI affair. The BCCI page hosts a censored version of the original 1991 Sandstorm report, which the UK government continues to refuse to publish citing confidentiality concerns. The best-known book on the affair is A Full Service Bank: How BCCI Stole Billions Around the World, by James R Adams and Douglas Frantz, available through http://www.amazon.com/ Additional References (by date) 1991-09-10, Gannett News Service, “Chronology of BCCI Case”. 1991-09-29, The Washington Post, “Probe of BCCI's lost funds leads to an affiliate; Middle East investors' Capcom Financial Services linked to huge trading losses, money laundering”, Jerry Knight, page h01. 1992-10-15, The Washington Post, “Questions of Justice”, page 30. 1992-11; Lord Justice Bingham's “Inquiry into the supervision of the Bank of Credit and Commerce International”, London, HMSO, October 1992. 1993-02-27, The Washington Post, “First American Banks are sold; an ownership story”, page c01. 1998-02-09, The Washington Post, “BCCI, an international mystery concluded but not solved”, Rudolph A Pyatt Jr, page F04. 1998-06-27, The Economist, “BCCI: Silver lining”, page 74. 1998-07-09, The Wall Street Journal, “Price Waterhouse hit with higher fines in BCCI litigation”. 1998-07-08, Financial Times, “Bank’s liquidators find way out of $17bn black hole” page 3. 1998-09-29, The Wall Street Journal, “BCCI: The mystery lingers”, page A22. 1999-02-26, The Wall Street Journal, “Banker fined for BCCI role is ordered to pay interest”, page A2. 1999-06-24, The Wall Street Journal, “Businessman is told to pay $1.2 billion in the BCCI scandal”, page B16. 1999-07-06, The Wall Street Journal, “Forfeiture proceedings against failed bank end”, page A28

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