Bank of Credit and Commerce International
Bank of Credit and Commerce International
The Bank of Credit and Commerce International
(BCCI) was a major international bank founded in Karachi, Pakistan
in 1972 by Agha Hasan Abedi, a 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 private bank in the world by assets.
BCCI came under the radar of regulatory
bodies and intelligence agencies in the 1980s due to its perceived
avoidance of falling under one regulatory banking authority, a
fact that was later, after extensive investigations, proven to
be true. BCCI became the focus of a massive regulatory battle
in 1991 and was described as a "$20-billion-plus heist".
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, Deloitte dropped its action against
the Bank of England as contrary to creditors' interests.[citation
needed][vague][which?] To date liquidators have
recovered about 90% of the creditors' lost money.
BCCI's founder, Agha Hasan Abedi, started
the bank in Pakistan in 1972. Abedi, a prolific banker, had previously
set up the United Bank of Pakistan in 1959. Following the nationalization
of United Bank in 1971 he sought to create a new supranational
banking entity. Abidi 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 1990. 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. There is some
speculation by conspiracy theorists that BCCI, a bank that was
quickly expanding into Third World markets in Asia, Africa, the
Middle East, and South America, was specifically targeted as it
was successful in emerging markets and posed a threat to more
established banks. 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
Shenzhen which bore testament to Agha Hasan Abedi's public relations
skills, a feat that was 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.
The internal structure of the bank was
unusual yet dynamic in some ways. 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 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
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
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 had been maligned by its rivals to such an extent 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
F. Lee Bailey and Florida state prosecutor
Richard Gerstein were the directors of CenTrust Federal Savings
Bank, a failed satellite of BCCI.
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 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 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 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 proved not to be enough
to mollify the regulators. For example, the Bank of England ordered
BCCI to cap its branch network in the United Kingdom at 45 branches.[citation
There was particular concern over BCCI's
loan portfolio because of its roots in areas where modern banking
was still an alien concept. Much of its customer base was located
in Islamic countries, in spite of the fact that Islam does not
allow charging interest on loans. 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.[citation
needed] Standard banking practices these days dictate that
a bank not lend more than 10 percent of its capital to a single
BCCI was accused of siphoning off depositors'
money to shore up the bank's shaky loan portfolio and repay shareholders.
However, such allegations were later proven to be incorrect[citation
needed] and untrue due to the fact that as of 2008, BCCI's
liquidators have paid back as much as 90% of depositor's funds
back to BCCI's customers as part of the liquidation process.[citation
needed] If BCCI were insolvent, as had been alleged and claimed
by regulators, governments, and writers around the world, then
it would not have been able to pay back almost the entire amount
that its customers had deposited with it during its functional
BCCI was not shy about dealing with questionable
elements. It frequently handled money for for such dictators as
Saddam Hussein, Manuel Noriega, Hussain Mohammad Ershad and Samuel
Doe. Preferential treatment by some of
the world's moneyed leaders to BCCI led to it being nicknamed
by some of its rivals as "the Bank of Crooks and Criminals
International." Third World leaders
and governments trusted Agha Hasan Abedi and BCCI much more than
American, British, French, and Swiss bankers.
In 1988 the bank was implicated in a drug-money-laundering
scheme based in Tampa, Florida: the C-Chase case. It was later
found out that the FBI had used its agents as drug dealers who
had gone to deposit money in a BCCI branch, and due to poor KYC
procedures adopted by the branch manager, the bank had accepted
the deposit. BCCI was called many names,
including the CIA's money-laundering facility, an allegation that
once again was never proven to be true.
BCCI, under immense pressure from US authorities, pleaded guilty
in 1990, but only on the grounds of respondent superior.[citation
needed] While federal regulators took no action, Florida regulators
forced BCCI to pull out of the state.
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),
GIK (Institute of Science, Engineering, & Technology), and
LUMS (Lahore University of Management Sciences), in addition to
regular support for the IBA in Karachi (Institute of Business
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. Philanthropy was at the heart of the institution and
a value that was instilled in every employee by the bank's founder
Agha Hasan Abedi. A significant percentage of employee's salaries
were regularly contributed through their consent to global charitable
The Sandstorm report
In March 1991, the Bank of England asked
Price Waterhouse to carry out an inquiry. On June 24, 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 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
and fled the country; he received a controversial pardon from
Bill Clinton on January 20, 2001, the day Clinton's administration
as President of the United States ended.
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 July 5, 1991, regulators persuaded
a court in Luxembourg to order BCCI liquidated on the grounds
that it had lost 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
In 2002, Denis Robert and Ernest Backes,
former number three of Clearstream, described as a "bank
of banks" which practices "financial clearing",
discovered that 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.
Just a month later, BCCI's liquidators
(Deloitte, PWC) 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 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, being a highly revered individual
in the UAE and Pakistan, died peacefully in his native country
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. Ghaith Pharaon, a man who
Abedi trusted, is still a fugitive from the law and is alleged
to be in Syria. Ghaith Pharaon betrayed Abedi's trust in 1991
by fraudulently seizing control of some of BCCI's cement and oil
assets in Pakistan, the Attock Group.
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 and later sold
to First American. 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, 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 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.