The BCCI Scandal

Investigations into the multinational firm known as the Bank of Credit and Commerce International (BCCI) created one of the largest international banking scandals in history. Through a global network of branches and subsidiaries, the bank defrauded investors and conducted illegal transactions around the world. In the United States, former Secretary of Defense Clark Clifford and others were accused of aiding the bank in its illegal operations. In this article from Collier’s 1992 Year Book, Christian Science Monitor columnist and editor David R. Francis examined BCCI’s web of fraud and deception, and its discovery in 1991.

Cartoonists portrayed the Bank of Credit and Commerce International as an evil octopus embracing the globe. Wits nicknamed it the Bank of Crooks and Criminals.

According to Manhattan District Attorney Robert M. Morgenthau, the BCCI scandal that came to light in 1991 was "the largest bank fraud in world history." Perhaps no other criminal enterprise has involved or at least embarrassed so many prominent people, from billionaire Arab sheikhs to Third World dictators to present and former leading figures in the U.S. and British governments. Certainly none could match the international web of financial chicanery, political intrigue, and unsavory figures with which BCCI was said to be associated.

The scandal broke on July 5, when, in a coordinated swoop, authorities seized BCCI's assets in the seven countries or territories with its largest operations—Great Britain, Luxembourg, the Cayman Islands, the United States, France, Spain, and Switzerland. The seven governments acted after a special audit commissioned by the Bank of England found that BCCI "generated significant losses over the last decade and may never have been profitable in its entire history."

More than 60 other countries where the bank operated were notified of the action and asked to cooperate. By July 29, when a Manhattan grand jury indicted BCCI, along with its founder and its former chief executive, on charges of fraud, money laundering, bribery, and theft, a total of 44 countries had closed BCCI offices in their respective jurisdictions.

Total claims against the bank worldwide were estimated at $20 billion, while its total assets were believed to be less than $10 billion.

How It Grew

BCCI had been founded in 1972 by a Pakistani banker, Aga Hassan Abedi, and a handful of compatriots whose ambition was to create a world-class bank that would be a Muslim competitor of the big Western financial institutions and would serve the interests of developing countries. Having little capital, however, they needed massive infusions of funds from other sources. The Bank of America initially held in the bank a 25 percent interest, which it sold in 1980. Pursuing its aim of rapid growth, BCCI gambled on futures and options trading and extended high-risk loans. It raised millions of dollars through bookkeeping tricks that inflated profits and helped cover massive trading and loan losses.

To provide an illusion of financial stability, BCCI executives convinced a few members of ruling families in Middle Eastern countries and several businessmen in the region to pose as owners of the bank's holding company. In April 1990, in order to bolster BCCI's sagging financial position, Sheikh Zayed bin Sultan al-Nahyan, ruler of Abu Dhabi, and his government provided $400 million in additional capital, increasing their ownership share from about 30 percent to 77 percent.

By this time the bank had built up a corporate structure so complex that it could operate virtually unregulated all over the world. With more than 400 shell companies, offshore banks, branches, and subsidiaries, it used unregulated accounts in the Cayman Islands or elsewhere to hide crooked operations with fictitious transactions. BCCI was a giant Ponzi scheme: funds from more than a million depositors and at least 20 central government banks, mostly in developing countries, were shifted around or paid out when necessary to maintain the bank's credibility in financial markets, but huge sums disappeared by means of outright theft or "loans" on which the interest or even the principal was not collected. A separate set of books kept by BCCI's top management concealed these activities from auditors.

BCCI found it profitable to help dictators, drug dealers, and terrorists with their finances. Among those said to have used the bank to loot national treasuries, launder drug profits, or conduct clandestine arms deals were Philippine President Ferdinand Marcos, Iraqi President Saddam Hussein, Panamanian leader Manuel Noreiga, and Palestinian terrorist Abu Nidal. According to a report in Time magazine, BCCI had a secret division known as the black network, through which it engaged in its own arms dealing, contraband smuggling, and intelligence gathering, using such enforcement techniques as bribery, blackmail, kidnapping, and murder.

Banking experts say BCCI avoided exposure for so many years partly by seeking out areas where regulation was weakest. Its parent holding company was chartered and headquartered in Luxembourg, where holding companies are not subject to government supervision, and its two principal banking subsidiaries were in Luxembourg and the Cayman Islands, also known for its lax banking regulations. If BCCI encountered a legal impediment, it would often be able to circumvent the problem by creating a new affiliate or acting through one of its myriad existing entities.

U.S. Activities

Because there was no consolidated home-country supervision of BCCI's banking activities, federal regulatory authorities never gave it permission to operate a branch or accept deposits in the United States. For a time BCCI was able to maintain state-licensed agencies in New York, San Francisco, Los Angeles, Miami, and Tampa and Boca Raton, Fla., as well as representative offices in other U.S. cities. A major blow to its standing came in 1988 when a federal sting operation led to the indictment of the bank and ten executives in Florida on charges of laundering drug money. The bank pled guilty and was fined $15 million, and five of its executives were sent to jail. As a result, tighter controls were imposed on BCCI's U.S. operations.

In March 1991, after signs of financial troubles at BCCI, the Federal Reserve required the bank's U.S. agencies to maintain sufficient liquid assets to cover liabilities in these agencies. BCCI, which had already shrunk its legal activities in the United States, scaled them back further.

Although frustrated in its efforts to establish a substantial U.S. presence by legal means, BCCI was found to have used sham stockholders to illegally acquire three American banks, the largest being First American Bankshares in Washington, D.C. On the basis of this finding, the Federal Reserve on July 29 proposed that Abedi and eight other BCCI-linked figures be barred from banking activities in the United States and that BCCI be fined $200 million.

First American Chairman Clark Clifford and President Robert Altman resigned their First American jobs on August 13 and appeared in the fall before congressional subcommittees investigating the scandal. Clifford, a former secretary of defense and adviser to Democratic presidents, and Altman, Clifford's protégé and junior law partner, denied that they had known of BCCI's secret ownership of their bank. However, Abdur Sakhia, a former BCCI executive, told a Senate subcommittee that "it is impossible to believe that he [Altman] did not know." Sakhia said that many important decisions on First American's staff assignments, marketing, and even rental of office space were ultimately made by BCCI. Clifford described as "legal and proper" a deal in which he and Altman used a loan from BCCI to buy stock in First American, which they sold two years later at a profit of several million dollars.

The largesse that Clifford enjoyed from his association with BCCI, whether or not he knew of it, illustrated another of the bank's primary operating strategies: it bought prestige by financially helping, in one way or another, leaders or other influential people in many countries. In the United States, BCCI cultivated close relations with a number of prominent figures in Georgia, where Gaith Pharaon, a Saudi Arabian financier who ostensibly owned one of the other U.S. banks actually controlled by BCCI, had an estate near Savannah. The beneficiaries included former President Jimmy Carter, whose public-policy center at Emory University received more than $8 million in BCCI donations; former U.S. Budget Director Bert Lance, who sold his struggling National Bank of Georgia to First American in 1978; and former Atlanta Mayor Andrew Young, who was paid $50,000 a year for introducing Abedi to leaders of Third World countries. Lance and Young also received large loans from BCCI.

As stories emerged of years of suspicious conduct by the bank, many observers suggested that BCCI's abundance of friends in high places helped to explain why it had been allowed to go unchecked for so long. There were charges that federal officials, including then Attorney General Richard Thornburgh, had ignored repeated warnings about illegal activities in the United States by BCCI and its customers and had blocked investigations. It was also alleged that the CIA secretly used the bank to support anti-Communist guerrillas in Afghanistan, to sell U.S. arms to Iran, and to divert profits from the arms sales to the Nicaraguan contras, as well as to gather information about terrorism and other activities involving BCCI's clandestine clients. The agency's acting director, Richard Kerr, told the Senate on October 25 that the agency used BCCI as "a normal bank, with accounts associated with lawful, authorized activities." He admitted, however, that the CIA had failed to tell the Federal Reserve or the Justice Department what it knew about BCCI's secret control of First American.

Not long thereafter, Edward M. Rogers, Jr., a former White House aide, withdrew from a two-year $600,000 contract to provide legal services to Sheikh Kamal Adham, the former director of Saudi Arabian intelligence and one of those the Federal Reserve had undertaken to have banned from banking in the United States. Rogers said he wanted to avoid embarrassing President George Bush and raising "unfair inferences" about himself.

U.S. Corrective Moves

In mid-November the Justice Department finally obtained its first indictments in the scandal on charges other than money laundering. Abedi and Pharaon, along with BCCI's acting president, Swaleh Naqvi, were accused of racketeering in a conspiracy to take over the Independence Bank of Encino, Calif. They were also charged with fraud in a stock scheme involving the Centrust Savings Bank in Miami.

The following month government officials reached an agreement with BCCI's court-appointed European liquidators under which BCCI would plead guilty to federal and New York State criminal charges and would forfeit more than $550 million (all of the bank's known U.S. assets). About half of the forfeited amount would be used to shore up First American and Independence Bank, and another half would go to a special fund to help reimburse BCCI's depositors worldwide. BCCI was also to pay a $10 million fine to New York State, while the Federal Reserve was to drop its $200 million civil penalty.

To help prevent a recurrence of the kinds of problems caused by BCCI, a banking bill passed by Congress in late November provided the Federal Reserve with new power to police the activities of foreign banks in the United States. Foreign banks would be permitted to accept insured deposits only through incorporated subsidiaries—not through branches.

British Developments

Meanwhile, in Britain, one of the countries most affected by BCCI's collapse, the bank was under investigation by a parliamentary committee as well as the Serious Fraud Office, a prosecuting agency that deals with white-collar crime. Labor Party members of Parliament criticized Conservative Prime Minister John Major for not acting more vigorously against BCCI when he had been chancellor of the exchequer and thus responsible for banking regulation. As in the United States, however, the scandal touched prominent figures in both major political parties; former Labor Prime Minister James Callaghan, for example, had received BCCI consulting fees.

The government of Abu Dhabi protested the July seizure of BCCI's assets, saying it had been trying to implement its own rescue plan, and a British judge delayed the liquidation of the bank's operations in Britain when the owners agreed to create a £50 million fund from which British depositors could borrow against their frozen BCCI accounts. In September, Abu Dhabi authorities detained more than 30 of the bank's executives, including Swaleh Naqvi.

Many BCCI depositors in Britain could expect to recover 75 percent of their deposits, the proportion protected by the British deposit insurance system. However, the system covered only deposits up to £15,000, so that, barring an infusion of cash, a number of businesses and local governments stood to lose almost all of the hundreds of millions of pounds they had in BCCI accounts.

A British judge delayed until early 1992 a decision on whether to liquidate BCCI operations, thereby giving the appointed liquidators time to try to arrange a settlement. Sheikh Zayed of Abu Dhabi offered to supply up to $2 billion to help pay off creditors (including the more than a million depositors around the world) under a plan that might give them as much as 40 cents on the dollar. With the Abu Dhabi government and the sheikh owning most of BCCI, the sheikh was concerned about potential liability in the scandal and demanded that the settlement require creditors to waive any legal claims against majority shareholders.

Depositors in BCCI's affiliate in Hong Kong were initially offered only 25 cents on the dollar for their accounts, whose book value totaled US$1.4 billion. Hong Kong has no deposit insurance, and the July shutdown of the BCCI operation there, three days after the government issued assurances of its safety, sparked a run on other banks. Depositors' chances of recovering most of their money rose in November when the Hong Kong government gave conditional approval for Hong Kong Chinese Bank, a subsidiary of Indonesia's Lippo Group, to buy BCCI Hong Kong.

Third World Impact

Nowhere was the BCCI collapse more devastating than in Africa, where the bank obtained about 11 percent of its $20 billion in nominal assets. The loss of even part of that money would be a severe blow to a continent already desperately poor. The government of Cameroon, for example, had reportedly deposited one-third of its reserves with BCCI in London.

The disgraced bank, however, retained a reservoir of good will in its original home. In Pakistan, where BCCI had cultivated intimate connections with a wide spectrum of political parties and leaders, its troubles were widely seen as part of a Western or Jewish conspiracy to discredit and destroy an upstart Muslim-owned rival. Government authorities made no effort to extradite the ailing Abedi to New York for trial, and in October two other former top officials of BCCI were among those awarded the first private banking licenses that Pakistan had issued in years.

Source: 1992 Collier’s Year Book.