CORPORATE GOVERNANCE

FAILURE
Bank of Credit and Commerce International

By :
Kunal Arora (253)
HISTORY
of BCCI

2
• BCCI was founded by Agha Hasan
Abedi in 1972.
• The Bank was registered in
Luxembourg with head offices in
Karachi and London.
• Abedi, a prolific banker has also
founded United Bank of Pakistan in
1959.
• BCCI was created with capital,
25% of which was from Bank of
America and the remaining 75%
from Sheikh Zayed bin Sultan Al
Nahyan, the ruler of Abu Dhabi in
the UAE.
• BCCI expanded rapidly in the
1970s, pursuing long-term asset
growth over profits, seeking high-
net-worth individuals and regular
large deposits.
• The company itself divided into
BCCI Holdings with the bank under
that splitting into BCCI SA
(Luxembourg) and BCCI Overseas
(Grand Cayman).
• Overall, BCCI expanded from 19
branches in five countries in 1973
to 27 branches in 1974, to 108
branches in 1976, with assets
growing from $200 million to $1.6
billion.
3
• BCCI also acquired parallel banks through acquisitions:
• Banque de Commerce et Placements (BCP) of Geneva in 1976, and
creating KIFCO (Kuwait International Finance Company)
• Credit & Finance Corporation Ltd, and a series of Cayman-based
companies held together as ICIC (International Credit and Investment
Company Overseas, International Credit and Commerce [Overseas], etc.).

• BCCI was among the first foreign banks awarded a license to operate in the
Chinese Special Economic Zone of Shenzhen.

• BCCI entered the African Markets in 1979 and Asia in the early 1980s.

• A decade after opening, BCCI had over 400 branches in 78 countries and assets
in excess of US$20 billion, making it the seventh largest private bank in the
world.

4
 LENDING
PRACTICES
of BCCI

5
• BCCI contended that its growth was fueled by the
increasingly large number of deposits by oil-rich states who
owned stock in the bank as well as by sovereign developing
nations.
• There was particular concern over BCCI's loan portfolio,
because of its roots in areas where modern banking was still
an alien concept.
• A person's financial standing did not matter as much as his
relationship with his banker.
• One particularly notable example is the Gokal family, a
prominent family of shipping magnates. They had a
relationship with Abedi dating back to his days at
United Bank. Abedi personally handled their loans,
with little regard for details such as loan documents or
creditworthiness. At one point, BCCI's loans to the
Gokal companies were equivalent to US$1.2 billion,
three times the bank's capital.
• Longstanding banking practice dictates that a bank will
not lend more than 10% of its capital to a single
customer.

6
 MONEY LAUNDERING
In addition to violations of lending laws, BCCI was also accused of
opening accounts or laundering money for figures such as Saddam
Hussein, Manuel Noriega, Hussain Muhammad Ershad, and Samuel Doe,
and for criminal organizations such as the Medellin Cartel and Abu Nidal.
Police and intelligence experts nicknamed BCCI the "Bank of Crooks and
Criminals International" for its penchant for catering to customers who
dealt in arms, drugs, and hot money.
The National Security Council also had accounts at BCCI, which were
used for a variety of covert operations, including transfers of money and
weapons for Iran-Contra.

7
 TITLE
I N V E S T I G AT I O N
BEGINS
• BCCI's demise began in 1986, when a U.S.
Customs undercover operation led by Special
Agent Robert Mazur infiltrated the bank's private
client division and uncovered their active role
soliciting deposits from drug traffickers and money
launderers.
• In 1988, the bank was implicated for being the
center of a major money laundering scheme.
UNUSUAL
AUDITING SYSTEM
• Price Waterhouse Cooper were the accountants for
BCCI Overseas.
• While Ernst & Young audited BCCI & BCCI
Holdings, other companies such as KIFCO & ICIC
were audited by neither.
• In October 1985, the Bank of England and the
Monetary Institute of Luxembourg ordered BCCI
to change to a single accountant. Price Waterhouse
became the sole accountants in 1987.
• In 1990, a Price Waterhouse audit of BCCI
revealed an unaccountable loss of hundreds of
millions of dollars.
8
 TITLE
THE SANDSTORM
R E P O RT
• In March 1991, the Bank of England asked
Price Waterhouse to carry out an inquiry.
On 24 June 1991, using the code name
"Sandstorm" for BCCI, Price Waterhouse
submitted the Sandstorm report showing
that BCCI had engaged in "widespread
fraud and manipulation" that made it
difficult, if not impossible, to reconstruct
BCCI's financial history.
• The magnitude of the fraud was about £7
Billions of undeclared debts.
FORCED
CLOSURE
• BCCI was awaiting final approval for a
restructuring plan in which it would have re-
emerged as the "Oasis Bank". However, after
the Sandstorm report, regulators concluded
BCCI was so fraught with problems that it
had to be seized. It had already been ordered
to shut down its American operations in
March.
9
 W H AT R E A L LY
HAPPENED?
BCCI: BANK OF CROOKS & CRIMINALS

• BCCI was a personal piggy bank for its Arab and

Pakistani owners and its favoured customers.
• For its best customers, millions of dollars were
advanced, often without documentation and
sometimes in violation of the bank's own lending
limits.
• When the loans went bad and losses mounted,
the bank apparently hatched a scheme to cover
them up by making interest payments on loans
with deposits from other customers.

10
• And when capital was needed to absorb further losses,
the bank artificially pumped up its share price by
lending money to existing shareholders to buy more
stock.
• The proceeds from the stock would help balance
the bank's books, but actually the bank was
merely taking depositor money and investing it
in the bank.
• It was essentially a "stateless" bank that operated
in the United States and about 78 other
countries, chartered in Luxembourg, run by
Pakistanis, owned by Arabs, headquartered in
Britain and serviced by outposts in the Cayman
Islands.

11
 H O W B C C I WA S
HIDING LOSSES?

• Bought banks in USA

• Laundered money from tax havens
• Illegal share buying schemes
• Complex ownership structure
• Borrowed from Arabs
• Loan adjusting

12
 REASONS
BEHIND THE
FAILURE
of BCCI

13
 TITLE
• Poor Risk Management

• Non-existent Board of Directors

• Lack of Regulatory Supervision

• Ineffective Audit System

Poor Risk Management:

Lack ofIneffective
Non-existent Board Audit
of Directors:
Regulatory System:
Supervision:
The flaw
The in operations
board
BCCI As
of of earlier
stated
wasdirectors BCCI
structured had
Price
of inBCCI aWaterhouse
way that was
such were
been virtually
that no
it single
made large as
the county
accountant
non-existent loans
had the forto BCCI,
bank
overall was the audit
regulatory
companies
managed & byindividuals
revealed
its founder
supervision without
overnumerous
it. Abedi
It was & irregularities.
not regulated The
CEO
properly securing
Naqvi;byand thethem.
audit When
also
managers
a country that hadfromathese
confirmed
different
central that BCCI
bank.
loans went bad,directly
locations the bank
illegally had tonothem.
owned
report legalAmerican. Despite
First F L AW S I N C O R P O R AT E
recourse, and was these
losses.
forced problems,
to absorb thePrice Waterhouse
signed BCCI’s 1989 annual report.
GOVERNANCE

14
LEARNINGS

15
• The critical role of senior management and key investors in establishing an honest,
open and practical bank culture.
• 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.
• The need for independent and unified regulation and auditing of complex financial
combination.
• 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.
• The oldest lesson of all: the simplicity 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.

16
THANK YOU

17