Bank of Credit and Commerce International

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Bank of Credit and Commerce International

Industry Banking
Fate Liquidation / Forced closure
Defunct 1991
Headquarters London (incorporated in Luxembourg)
Key people Agha Hasan Abedi (Founder)
Employees approx. 30,000
The Bank of Credit and Commerce International (BCCI) was a major international bank
founded in 1972 by Agha Hasan Abedi, a Pakistani financier.
[1]
The Bank was registered in
Luxembourg with head offices in Karachi and London. Within a decade BCCI touched 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 private bank in the world by assets.
[2][3]

BCCI came under the scrutiny of numerous financial regulators and intelligence agencies in the
1980s due to concerns that it was poorly regulated. Subsequent investigations revealed that it
was involved in massive money laundering and other financial crimes, and illegally gained
controlling interest in a major American bank. BCCI became the focus of a massive regulatory
battle in 1991 and on 5 July of that year customs and bank regulators in seven countries raided
and locked down records of its branch offices.
[4]

Investigators in the US 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."
[citation needed]

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
UAE President Zayed II, 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, Deloitte persuaded creditor Abu Dhabi to
drop its claims against the Bank of England, except for a claim for return of its deposits, in that
Abu Dhabi owned 77% of the bank shares at closing, and was therefore also facing a major
lawsuit.
[5]
To date liquidators have recovered about 75% of the creditors' lost money.
[6]
A decade
after its liquidation, its activities were still not completely understood.
[4]

History
BCCI's founder, Agha Hasan Abedi, started the bank in 1972. Abedi, a prolific banker, had
previously set up the United Bank of Pakistan in 1959. Preceding the nationalization of United
Bank in 1974 he sought to create a new supranational banking entity. Abedi was succeeded by
Swaleh Naqvi as the bank's chief who, in the aftermath following controversy over BCCI, was
replaced by Zafar Iqbal Chaudhry in the late 1990s. BCCI was created with capital from Sheikh
Zayed bin Sultan Al Nahyan, the ruler of Abu Dhabi in the United Arab Emirates and Bank of
America (25%).
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). 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. The
Guardian alleged that BCCI was using cash from deposits to fund operating expenses, rather
than making investments. Investigative journalist and author Joseph J. Trento has argued that the
bank's transformation was guided by the head of Saudi intelligence with a view to enabling it to
finance covert intelligence operations at a time, in the aftermath of Watergate, when the
American intelligence agencies were defending themselves from investigations by domestic
authorities.
[7]

BCCI entered the African markets in 1979, and Asia in the early 1980s. BCCI was among the
first foreign banks awarded a license to operate in the Chinese Special Economic Zone of
Shenzhen which bore testament to Agha Hasan Abedi's public relations skills, a feat that had yet
to be achieved by the likes of Citicorp and JP Morgan. Some of China's largest state banks were
depositors in BCCI's Shenzhen branch.
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 no single country had
overall regulatory supervision over it so as not to hinder potential growth and expansion
opportunities. 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 Federal Reserve 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"
[8]
by 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.
[citation needed]

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 Fed
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 in the United States was so poor that it could not hope
to buy an American bank on its own (as mentioned above, the OCC was adamantly opposed to
BCCI being allowed to buy its way into the American banking industry). 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.
F. Lee Bailey and Florida state prosecutor Richard Gerstein were the directors of CenTrust
Federal Savings Bank, a failed satellite of BCCI; this would eventually lead to Bailey's
disbarment.
BCCI had an unusual 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 Montaire Luxembourgeois (Luxembourg's bank regulator) ordered
BCCI to change to a single accountant, alarmed at reported BCCI losses on the commodities and
financial markets. Later 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
also then 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 watched BCCI long suspectedthat BCCI
secretly (and illegally) 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. 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 firm commitment to propping up the bank.
BCCI's rapid growth alarmed the financial community, as well as regulators. When a bank grows
rapidly, it is lending more and more money each year. 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. However, this claim failed to mollify the
regulators. For example, the Bank of England ordered BCCI to cap its branch network in the
United Kingdom at 45 branches.
[9]

There was particular concern over BCCI's loan portfolio because of its roots in areas where
modern banking was still an alien concept. For instance, a large number of its customers were
devout Muslims who believed charging interest on loansa major pillar of modern banking
was riba, or usury. In many Third World countries, a person's financial standing didn't 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$1.5 billion, three times the bank's capital. Longstanding banking practice
dictates that a bank not lend more than 10 percent of its capital to a single customer.
[9]

Funding to criminals and dictators
BCCI handled money for Saddam Hussein, Manuel Noriega, Hussain Mohammad Ershad and
Samuel Doe.
[9]
Other account holders included Medellin Cartel and Abu Nidal.
[10]

CIA funding to the Afghan Mujahideen and the Contras
The U.S. Central Intelligence Agency held numerous accounts at BCCI, according to William
von Raab, former U.S. Commissioner of Customs. Oliver North also used and held multiple
accounts at BCCI. These bank accounts were used for a variety of illegal covert operations,
including transfers of money and weapons related to the Iran-Contra scandal, according to Time
Magazine.
[11]
The CIA also worked with BCCI in arming and financing the Afghan mujahideen
during the Afghan War against the Soviet Union, using BCCI to launder proceeds from
trafficking heroin grown in the Pakistan-Afghanistan borderlands, boosting the flow of narcotics
to European and U.S. markets.
[12]

After the decline of Soviet Union
BCCIs demise began in 1986, when a US Customs undercover operation led by Special Agent
Robert Mazur infiltrated the banks private client division and uncovered their active role
soliciting deposits from drug traffickers and money launderers. The so-called C-Chase
investigation began when it was apparent the Soviet Union was weakening and Washington lost
interest in funding the mujahideen. This two-year undercover operation concluded in 1988 with a
fake wedding that was attended by BCCI officers and drug dealers from around the world who
had established a personal friendship and working relationship with undercover agent Mazur. At
the same time he was dealing undercover with BCCI executives, Mazur used his undercover
operation to establish a relationship with the hierarchy of the Medellin Cartel as one of their
sources for laundering drug proceeds.
In 1988, the bank was implicated for being the center of a major money-laundering scheme.
After a six-month trial, BCCI, under immense pressure from US authorities, 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.
[9]

The bank established the Third World Foundation in London, which published the widely
circulated Third World Quarterly and paid special attention to the promotion of the Urdu
language and literature through the Urdu Markaz located in London. BCCI also established the
Infaq Foundation in Pakistan, which was instrumental in funding the establishment of some of
the top universities of the region, such as BCCI FAST (Institute of Computer Sciences) and GIKI
(Ghulam Ishaq Khan Institute of Science, Engineering & Technology), in addition to regular
support for many other educational institutions.
BCCI also established the Cromwell Hospital (now owned by Bupa) in London.
In addition to the above, BCCI helped revive hundreds of historical buildings and monuments
throughout the developing world and contributed significantly to the arts, culture, sports, health,
and education in many poor, Third World countries. A significant percentage of employee's
salaries were regularly contributed through their consent to global charitable causes.

The Sandstorm report
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 Sandstorm report, parts of which were leaked to The Sunday Times, included details of how
the Abu Nidal terrorist group had manipulated details and through using fake identities had
opened accounts at BCCI's Sloane Street branch, near Harrods in London. Britain's internal
security service, MI5, had signed up two sources inside the branch to hand over copies of all
documents relating to Abu Nidal's accounts. One source was the Syrian-born branch manager,
Ghassan Qassem, the second a young British employee.
The Abu Nidal link man for the BCCI accounts was a man 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 and fled the country.
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."
The forced closure of BCCI
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 for its illegal control of First American.
On 5 July 1991, regulators persuaded a court in Luxembourg to order BCCI liquidated on the
grounds that it was hopelessly insolvent. According to the court order, BCCI had lost more than
its entire capital and reserves the year before. 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. Around a
million depositors were immediately affected by this action.
On 7 July 1991, Hong Kong Office of the Commissioner of Banking (forerunner of the Hong
Kong Monetary Authority) ordered BCCI to shut down its business in Hong Kong on the
grounds that BCCI had problem loans and the Sheikh of Abu Dhabi, the major shareholder of
BCCI, refused to provide funds to the Hong Kong BCCI. Hong Kong BCCI was liquidated on 17
July 1991.
In 2002, Denis Robert and Ernest Backes, former number three of financial clearing house
Clearstream, discovered that BCCI had continued to maintain its activities after its official
closure, with microfiches of Clearstream's illegal unpublished accounts.
[13]

A few weeks after the seizure, on 29 July, 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 15 November, 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.
Just a month later, BCCI's liquidators (Deloitte, PWC) pleaded guilty to all criminal charges
pending against the bank in the United States (both those lodged by the federal government and
by Morgenthau), clearing the way for BCCI's formal liquidation that fall. BCCI paid $10 million
in fines and forfeited all $550 million of its American assetsat 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 depositors. None of this was
enough to rescue both 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. He was under indictment in the United States
and UK for crimes related to BCCI, but Pakistani officials refused to give him up for extradition
because they felt the charges were politically motivated. Even without this to consider, he'd been
in poor health since suffering a stroke in the 1980s. Pharaon is still a fugitive as of 2011; at last
report he was believed to be in Syria.
In 1992, United States Senators John Kerry and Hank Brown became the co-authors of a report
on BCCI, which was delivered to the Committee on Foreign Relations. The BCCI scandal was
one of a number of disasters that influenced thinking leading to the Public Interest Disclosure
Act (PIDA) of 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. Earlier,
Pharaon was revealed to have been the puppet owner of National Bank of Georgia, a bank
formerly owned by Lance before being sold back to First American (it had previously been an
FGB subsidiary before Lance bought it). Clifford and Altman testified 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, that 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 was
indicted and tried in New York, though he was ultimately acquitted following a jury finding of
not guilty. Altman later 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 DC v 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.
[14]

International business attorney Matre Laurent Ries challenged the validity of the judgement
(July 2013 from the Luxembourg commercial court) setting a final point to the liquidation
procedure running since 1992 through a class action upon the request from a series of former
creditors.
[15]

[16]

[17]