Bank of Credit and Commerce International

BCCI CASE

Introduction:

On 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 banks 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. BCCIs activities, and those of some of its officers, included dubious lending, fraudulent record-keeping, rogue trading, flouting of bank ownership regulations and money laundering in addition to legitimate banking activities. The banks 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 banks risk management structure and between its subsidiaries, to serve various purposes. This put at a disadvantage other stakeholders, such as the million or so small depositors around the world and certain institutional depositors attracted by BCCIs relatively high rates, who provided much of the banks funding. Meanwhile, other bank officers had little understanding of the banks structure and overall financial position, and were encouraged not to question bank practices, or the reason for the flow of funds between bank entities.

Lessons Learned:

• The critical role of senior management and key investors in establishing an honest, open and prudent 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 conglomerates;

• 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 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.

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. BCCIs 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 BCCIs 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 high-level government connections that BCCIs leaders cultivated. Although they may not have endorsed the banks activities, various influential figures in the US and around the world overlooked signs that could have exposed the scandal before 1991, and lent the institution a veneer of respectability.

One such sign was the banks involvement in money laundering and the financing of arms trafficking. BCCIs 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 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