The Bank of Credit and Commerce International (BCCI) was a major international bank founded in London, United Kingdom in 1972 by Agha Hasan Abedi, a leading Pakistani financier. The company was registered in Luxembourg. At its peak, it operated in 78 countries, had over 400 branches, and had assets in excess of US$ 20 billion making it the 7th largest bank in the world by assets.
BCCI became the focus in 1991 of the world's worst financial scandal and what was called a "$20-billion-plus heist". Regulators in the United States and the United Kingdom found it to be involved in money laundering, bribery, support of terrorism, arms trafficking, the sale of nuclear technologies, the commission and facilitation of tax evasion, smuggling, illegal immigration, and the illicit purchases of banks and real estate. The bank was found to have at least $13 billion unaccounted for. The bank was dubbed satirically the "Bank of Crooks and Criminals International.
Investigators in the U.S. and the UK revealed that BCCI had been "set up deliberately to avoid centralized regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs were extraordinarily complex. Its officers were sophisticated international bankers whose apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to avoid detection"; BCCI organized its own intelligence network, diplomatic corps and shipping & trading companies.
The liquidators, Deloitte & Touche, filed a lawsuit against Price Waterhouse and Ernst & Young - the bank's auditors - which was settled for $175 million in 1998. A further lawsuit against the Emir of Abu Dhabi, a major shareholder, was launched in 1999 for approximately $400 million. BCCI creditors also instituted a $1 billion suit against the Bank of England as a regulatory body. After a nine-year struggle, due to the Bank's statutory immunity, the case went to trial in January 2004. However, in November 2005, liquidators Deloitte &c. dropped any action against the Bank of England as it was no longer considered in the best interests of the creditors after a High Court ruling.
BCCI expanded rapidly in the 1970s, pursuing 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 split into BCCI SA (Luxembourg) and BCCI Overseas (Grand Cayman). BCCI also acquired parallel banks through acquisitions: buying the 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.). 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. This growth caused extensive underlying capital problems. By 1977, BCCI was in sufficiently dire financial straits that the Guardian later wrote that at this time that it was most likely insolvent.. It was using cash from deposits to fund operating expenses, rather than making investments, taking on the attributes of a Ponzi scheme. Nevertheless BCCI continued to expand, moving into the African markets in 1979, and Asia in the early 1980s. They were among the first foreign banks awarded a license to operate in the Chinese Special Economic Zone Shenzhen. Some of China's largest state banks were depositors in BCCI's Shenzhen branch.
The internal structure of the bank was unusual. There was rigid compartmentalization; the 248 managers and general managers reported directly to Abedi and the CEO Swaleh Naqvi. It was structured in such a way that a single country didn't have overall regulatory supervision over it. Its two holding companies were based in Luxembourg and the Cayman Islands--two jurisdictions where banking regulation was notoriously weak. It was also not regulated by a country that had a central bank. On several occasions, the Office of the Comptroller of the Currency told the Fed in no uncertain terms that BCCI must not be allowed to buy any American bank because it was poorly regulated.
By 1980, BCCI was reported to have assets of over $4 billion with over 150 branches in 46 countries. Bank of America was "bewildered with BCCI and reduced its holding in 1980, and the company came to be held by a number of groups, with ICIC owning 70%. By 1989, ICIC's shareholding was reduced to 11% with Abu Dhabi groups holding almost 40%, however large numbers of shares were held by BCCI nominees. It was very common for Middle Eastern elites to use nominees to hold their stock, as they did not want the public to know the details of their holdings.
In 1982, 15 Middle Eastern investors bought Financial General Bankshares, a large bank holding company headquartered in Washington, D.C. All the investors were BCCI clients, but the Federal Reserve received assurances that BCCI would be in no way involved in the management of the company, which was renamed First American Bankshares. To alleviate regulators' concerns, Clark Clifford, an adviser to five presidents, was named First American's chairman. Clifford headed a board composed of himself and several other distinguished American citizens, including former United States Senator Stuart Symington. In truth, BCCI had been involved in the purchase of FGB/First American from the beginning. Abedi had been approached about buying it as early as 1977, but by this time BCCI's reputation was such that it could not hope to buy a bank on its own. Rather, it used the First American investors as nominees. Moreover, Clifford's law firm was retained as general counsel, and also handled most of BCCI's American legal work. BCCI was also heavily involved in First American personnel matters. The relationship between the two was so close that rumors spread BCCI was the real owner of First American.
BCCI had an uncommon annual auditing system: Price Waterhouse were the accountants for BCCI Overseas, while Ernst & Young audited BCCI and BCCI Holdings (London and Luxembourg). Other companies such as KIFCO and ICIC were audited by neither. In October 1985, the Bank of England and the Institut Monétaire Luxembourgeois (Luxembourg's bank regulator) ordered BCCI to change to a single accountant, alarmed at reported BCCI losses on the commodities and financial markets. 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. The bank approached Sheikh Zayed bin Sultan Al Nahyan, who made good the loss in exchange for an increased shareholding of 78%. Much of BCCI's documentation was then also transferred to Abu Dhabi. The audit also revealed numerous irregularities. Most seriously, BCCI had made a staggering $1.48 billion worth of loans to its own shareholders, who used BCCI stock as collateral.
The audit also confirmed what many Americans who had watched BCCI had long suspected--that BCCI secretly owned First American. When the Fed cleared the group of Arab investors to buy First American, it did so on condition that they supplement their personal funds with money borrowed from banks with no connection to BCCI. Contrary to that agreement, several stockholders had borrowed heavily from BCCI. Even more seriously, they pledged their First American stock as collateral, and when they didn't make interest payments BCCI took control of the shares. It was later estimated that in this manner, BCCI had ended up with 60 percent or more of First American's stock.
Despite these problems, Price Waterhouse signed BCCI's 1989 annual report, largely due to Zayed's commitment to propping up the bank.
There was particular concern over BCCI's loan portfolio because of its roots in an area where modern banking was still an alien concept. In Abedi's native Pakistan, the borrower's status in the community and relationship with his banker were more important than the ability to pay. 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 three times the bank's capital. Standard banking practices dictate that a bank not lend more than 10 percent of its capital to a single customer. As early as 1977, BCCI began concealing its shakier loans from regulators and auditors by transferring some of them to the Caymans, using a network of dummy companies to make it appear that they were being kept current.
The ICIC group was also used to perpetuate two egregious abuses of depositors' trust. Management moved money between BCCI, ICIC and other parts of the network to manufacture equity capital and manipulate the stock price. Most of the bank's stockholders, as it turned out, didn't put actual capital into the bank. Rather, they borrowed money from BCCI and used it to buy BCCI stock. In exchange for not having to repay the loans, they were promised guaranteed rates of return on their stock. This made it appear that the bank was sounder than it actually was. More seriously, the bank actually siphoned off depositors' money to shore up the bank's shaky loan portfolio and pay off the "shareholders."
BCCI was also not shy about dealing with criminal elements. It frequently handled laundered money for various purposes, and was the banker for such dictators as Saddam Hussein, Manuel Noriega, Hussain Mohammad Ershad and Samuel Doe. In some cases, it actively took part in criminal activity. This led some to nickname the bank "the Bank of Crooks and Criminals International."
In 1988, BCCI was implicated in a drug-money-laundering scheme based in Tampa, Florida: the C-Chase case. The BCCI was called the CIA’s money-laundering facility. BCCI pleaded guilty in 1990, but only on the grounds of respondeat superior. While federal regulators took no action, Florida regulators forced BCCI to pull out of the state.
The Abu Nidal link man for the BCCI accounts was an Arab based in Iraq named Samir Najmeddin or Najmedeen. Throughout the 80s, BCCI had set up millions of dollars worth of letters of credit for Najmeddin, largely for arms deals with Iraq. Qassem later swore in an affidavit that Najmeddin was often accompanied by an American, whom Qassem subsequently identified as the financier Marc Rich. Rich was later indicted in the U.S. for tax evasion and racketeering in an apparently unrelated case, fled the country, and received a controversial pardon from Bill Clinton on January 20, 2001.
Qassem also told reporters that he had once escorted Abu Nidal, who was allegedly using the name Shakir Farhan, around town to buy a tie, without realizing who he was. This revelation led in 1991 to one of the London Evening Standard's best-known front-page headlines: "I Took Abu Nidal Shopping."
On July 5, 1991, the regulators persuaded a court in Luxembourg to order BCCI liquidated because it was hopelessly insolvent and had lost more than its entire capital and reserves in 1990. At 1 pm London time that day (8 am in New York City), regulators in five countries marched into BCCI's offices and shut them down. Within a few days, BCCI was no more.
Around a million depositors were affected. Amongst the customers of the bank at this time was Garrards and Mappin and Webb, the jewellers responsible for maintaining the crown jewels and makers of the trophy for the America's Cup. Court-appointed liquidators for BCCI later found that its balance sheet was a total fabrication; some of its liabilities and most of its assets didn't even exist. Moreover, $9.5 billion had been lost or stolen.
On July 17, officials in the United Kingdom revealed that BCCI had used First American's stock as collateral for loans used to cover up fraud at BCCI. They also revealed BCCI had probably never turned a profit during its existence.
In 2002, Denis Robert and Ernest Backes, former number three of Clearstream, described as a "bank of banks" which practices "financial clearing", discovered that the BCCI had continued to maintain its activities after its official closure, with "microfiches" of Clearstream's illegal unpublished accounts.
A few weeks after the seizure, on July 29, Manhattan District Attorney Robert Morgenthau announced that a Manhattan grand jury had indicted BCCI, Abedi and Naqvi on twelve counts of fraud, money laundering and larceny. Morgenthau, who had been investigating BCCI for over two years, claimed jurisdiction because millions of dollars laundered by the bank flowed through Manhattan. Also, Morgenthau cited BCCI's secret ownership of First American, which operated a subsidiary in New York City. Morgenthau said that all of BCCI's deposits had been fraudulently collected because the bank misled depositors about its ownership structure and financial condition. He described BCCI as "the largest bank fraud in world financial history."
On November 15, BCCI, Abedi and Naqvi were indicted on federal charges that it had illegally bought control of another American bank, Independence Bank of Los Angeles, using Saudi businessman Ghaith Pharaon as the puppet owner. Earlier, Pharaon was revealed to have been the puppet owner of National Bank of Georgia, a bank formerly owned by Lance and later sold to First American.
Just a month later, BCCI's liquidators pleaded guilty to all American criminal charges pending against the bank. clearing the way for BCCI's formal liquidation that fall. BCCI paid $10 million in fines and forfeited all $550 million of its American assets—at the time, the largest single criminal forfeiture ever obtained by federal prosecutors. The money was used to repay losses to First American and Independence and to make restitution to BCCI's victims. It wasn't enough to save the two banks, however; Independence was seized later in 1992, while First American was forced into a merger with First Union in 1993.
However, many of the major players in the scandal have never been brought to trial in American or UK courts. Abedi, for example, died in 1995, Pharaon is still a fugitive as of 2008.
In 1992, United States Senators John Kerry and Hank Brown co-authored a report on BCCI, which was delivered to the Committee on Foreign Relations. The BCCI scandal was one of a number of crimes and disasters that influenced thinking leading to the Public Interest Disclosure Act 1998. The report found that Clifford and his legal/business partner Robert A. Altman had been closely involved with the bank from 1978, when they were introduced to BCCI by Bert Lance, the former director of the Office of Management and Budget, to 1991. Clifford and Altman testified to the committee that they had never observed any suspicious activity, and had themselves been deceived about BCCI's control of First American. However, the federal government and Morgenthau contended that the two men knew or should have known BCCI controlled First American.
Morgenthau and the federal government brought indictments against Clifford and Altman, but did not pursue Clifford due to his age and deteriorating health (he died in 1998). Altman, however, was indicted and ultimately tried in New York. Despite a failure to convict in the New York trial, Altman nevertheless accepted a de facto lifetime ban from any role in the banking industry to settle a civil suit by the Fed.
The British government also set up an independent inquiry, chaired by Lord Justice Bingham, in 1992. Its House of Commons Paper, Inquiry into the Supervision of the Bank of Credit and Commerce International, was published in October of that year. Following the report, the bank's liquidators launched the Three Rivers vs. Bank of England case, on behalf of thousands of BCCI creditors who are suing the Bank of England for its failure to properly oversee the bank. The BCCI creditors sought £850m in damages, claiming that the Bank of England was guilty of misfeasance in public office. The case collapsed in November 2005, with the Bank of England seeking to re-claim legal bills. The cost of the case to the creditors could be as high as £100m.