Fourteen years after the collapse of the Bank of Credit and Commerce International, who should take the fall?
Much of the Arab world has never had it so good. Oil prices are sky high; investors are making millions on the stock and property markets; and foreign companies are bending over backwards to invest in the region.
But the good times haven't always rolled. As many Arabs enjoy unprecedented prosperity, it's important to look back at the failures of corporate Arabia. Because history has an uncanny knack of repeating itself, and the lessons of the past could spare a whole lot of pain in the future.
In 1991 one name dominated the headlines of the international financial press: the Bank of Credit and Commerce International (BCCI), later nicknamed the Bank of Cocaine and Criminals. In July of that year regulators in Britain shut down the bank's international operations when a $15 billion fraud finally unraveled. Enron, WorldCom and Parmalat have since become the benchmarks for corporate crime. But the scandal involving BCCI, whose major shareholders were in the Gulf, remains the biggest fraud in history.
Fast-forward 14 years and the case remains front-page news. In October 2005, the Bank of England rejected an offer to settle out of court a $1.5 billion lawsuit brought by BCCI liquidator Deloitte, ensuring that investigations into what went wrong - and who was to blame - will rumble on for years to come.
"The scope and variety of BCCI's criminality, and the issues raised by that criminality, are immense," wrote US Senator John Kerry in a report on the bank, published the year after its collapse. Another report, the Sandstorm report by BCCI auditor Price Waterhouse in 1991, found "widespread fraud and manipulation" and eventually led to the Bank of England taking action to shut down BCCI.
What exactly did BCCI do wrong? The list is long and not at all distinguished, and includes fraud, money laundering and terrorist financing.
BCCI dates back to India in the 1940s but emerged in its more familiar form in the early 1970s with financial backing from Bank of America and wealthy investors in the Gulf. The driving force was its president Agha Hassan Abedi, a charismatic banker from Pakistan. The Kerry-Brown report said five things came together to form the bank: first, a bank secrecy and confidentiality haven, which he found first in Luxembourg, and then in Grand Caymans. Second, a source of capital, $2.5 million, which Abedi ultimately obtained from Bank of America, supplemented by another $500,000 from the Gulf. Third, a source of initial assets - about $100 million - at least half of which was provided in the form of deposits from the Gulf. Fourth, a group of like-minded Pakistanis to operate the bank, who were then widely available as a result of the nationalization of the Pakistani banking sector around this time. Fifth, credibility in the international community, through a relationship with an established Western financial institution, provided by Bank of America during BCCI's formative years.
The great appeal of BCCI was that it offered its depositors returns well above those offered by mainstream banks in both the West and the Middle East. The great problem was that BCCI turned to crime to deliver these returns.
According to the Kerry-Brown report, "BCCI's criminality included fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the Americas; BCCI's bribery of officials in most of those locations; support of terrorism, arms trafficking, and the sale of nuclear technologies; management of prostitution; the commission and facilitation of income tax evasion, smuggling, and illegal immigration; illicit purchases of banks and real estate; and a panoply of financial crimes limited only by the imagination of its officers and customers."
To achieve these returns, BCCI began building a complex network of subsidiaries. Although nominally registered in Luxembourg and the Caribbean, BCCI owned operations in the United States, the Far East and had its main operational center in London. The bank's crimes were many and varied. In 1988 BCCI's US operation was indicted on money laundering charges in Florida. The bank later pleaded guilty, although claimed the practice was the work of rogue employees. Subsequent investigations following the bank's 1991 collapse revealed that money laundering was a "principal" business, and the main motivation for BCCI buying a Colombian bank in the early 1980s. Clients included Panamanian General Manuel Noriega, for whom it managed some $23 million of criminal proceeds, and Pablo Escobar, Rodriguez Gacha and several members of the Ochoa family, all of the Medellin cartel.
"We knew that the money that we would be getting in Colombia would be drug money. We knew that all the dollar deposits we would be getting would be drug money," Abdur Sakhia, formerly BCCI's chief officer in the United States, testified in 1991.
"The enduring mystery at the heart of the BCCI affair is how the bank got away with this for so many years," Jonathan Beaty and S. C. Gwynne wrote in The Outlaw Bank: A Wild Ride into the Secret Heart of BCCI, a 1993 bestseller. Beaty and Gwynne argue that, as earlier as 1979, US intelligence was aware of BCCI's criminal involvement - but did nothing until compelled to do so by pressure from Robert Morgenthau, then Manhattan's district attorney. The authors claim that William Casey, then CIA director, used the bank to fund anti-Soviet Afghan and Nicaraguan rebels, as well as Iranian extremists.
When the bank finally collapsed in 1991 it had about 1 million customers, almost all of whom eventually lost money. Many, if not the majority, of those customers were from the Arab world.
Who was to blame for the bank's collapse? That debate still rumbles on. In early October of this year, BCCI once again was in the headlines when it emerged that the Bank of England had rebuffed a settlement approach from BCCI's liquidators to end their 850 million lawsuit. Deloitte Touche Tohmatsu is suing the Bank of England for allegedly failing to properly supervise BCCI before it collapsed.
The Bank of England cannot be sued for negligence by law and has instead been accused of "misfeasance" by Deloitte, for allegedly knowingly or recklessly putting BCCI depositors at risk. This is an extremely unusual charge, and one that legal experts say may prove nearly impossible to prove in the courtroom. "The legal hurdles to success are very high," a senior partner in a leading British law firm recently told The Economist.
A trial on the claims opened in January 2004 at the British High Court. The Bank of England, which was stripped of its powers to supervise banks in 1998, says it properly regulated the bank and has called Deloitte's claims "fundamentally implausible."
What is known is that at the time of BCCI's collapse, the UAE government took control of the bank. It has since contributed billions of dollars to compensation funds for BCCI depositors. Indeed, wealthy individuals and institutions in the region claim they were victims of BCCI as depositors. The Kerry-Brown report disputes this. Either way, the incident is a salutary lesson for financiers in the Arab world.
The collapse of the bank not only cost billions, it also, perhaps unfairly, tarnished the image of the Middle East. Following BCCI's high-profile closure, financial institutions in the region began to look much more closely at who was lending and borrowing from whom. Following 9/11, the US has put far greater pressure on Middle East financial institutions to follow the money. As well, the requirements of the landmark Basel II banking accord and the regulatory pressures of doing business in the global marketplace mean that Arab banks simply have to scrutinize their balance sheets much, much more carefully.
As oil prices soar and all that newfound regional wealth is increasingly invested at home, the need for strong and genuinely independent regulatory bodies has never been greater. Across the Gulf, that message seems to have gotten through, more or less, and most states have taken concrete steps to better regulate their financial markets and institutions.
The stakes are much higher today than they were back in 1991, when BCCI went bust. Today, no Gulf state can afford to have its reputation besmirched; if that were to happen, today's investor would simply take his money elsewhere. Looked at in this light, the failure of BCCI has, in fact, strengthened the regional financial system. Was this a painful way to realize the necessity of reform? Yes. Was it costly? Obviously. But perhaps that's exactly why, more than a decade after BCCI's collapse, no one should soon forget its lessons.
By Richard Dean
© Arabies Trends 2005
