Bank of Credit and Commerce International (BCCI)
A Case Study on Money Laundering
“The only laws that are permanent are the laws of nature. Everything else is flexible. We can always work in and around the laws. The laws change.” …… Agha Hasan Abedi (1989)
The bank should more appropriately be called the “Bank of Crooks and Criminals.” …… Roberg Gates (1991), the then Assistant Director, US Central Intelligence Agency.
The Bank of Credit and Commerce International (BCCI) was created in India before independence from British rule. After independence and partition of the sub-continent in 1947, BCCI moved to Pakistan.
In 1958, BCCI’s founder, Agha Hasan Abedi formed a new bank known as United Bank which was licensed by the Pakistani government. Within ten years, and with considerable political patronage, United Bank became the second largest bank in Pakistan and its operations expanded to other countries, including many in the Middle East.
In the early 1970s, Abedi prepared to move the United Bank outside Pakistan due to the changing political climate. The new government had plans to exercise more control over financial institutions. Abedi’s desire to relocate was considered suspicious and he was placed under house arrest.
During his house arrest, Abedi dreamed of his bank becoming international, providing a link between economically developed and developing nations. He planned to locate it outside Pakistan to compete with western banks by offering not only financial services, but also involvement in areas in areas as diverse as shipping, insurance, commodities, real estate and even charitable works.
To realize his international ambitions, Abedi needed financial support and cultivated a relationship with Sheikh Zayed bin Sultan al Nahyan, the ruler of the oil-rich state of Abu Dhabi. Following the involvement of the Sheikh in BCCI, the bank’s assets were at any time, often half made up of assets derived from Abu Dhabi, the Sheikh and his family.
Bank of America, which hoped to use Abedi’s connections to expand its activities in the Middle East, became a 25% stakeholder in September 1970 and provided BCCI with the much-needed acceptability necessary to gain links with western financial institutions. On he strength of it Bank of America’s connections, BCCI was allowed to operated from its six offices - in London, Luxembourg, Lebanon, Dubai, Sharjah and Abu Dhabi.
Abedi wishing to further expand and avoid regulatory supervision, chose Luxembourg, a place known in financial circles to be a “loosely-regulated banking center” in which to incorporate BCCI. Later, he created a holding company, BCCI Holdings in order to split the bank in two parts - BCCI (SA) with head office in Luxembourg, and BCCI Overseas with head offices in the Cayman Islands.
The Luxembourg office handled European and Middle East operations while the Cayman office dealt with developing countries. The organisation split was also accompanied by the creation of a series of parallel entitles to circumvent local regulations.
BCCI’s expansion was rapid. In 1976 it moved its head office to London although it remained incorporated in Luxembourg. By 1977, BCCI became the world’s fastest growing bank, operating from 146 branches (including 45 in the United Kingdom) in 43 countries including Africa, the Far East, and the Americas. Its assets for the same period increased from $200 million to approximately $2.2 billion. By the mid-1980s, it was operating from 73 countries with assets of around $22 billion.
To assist this rapid expansion, BCCI staff was often pressured into accepting any business that came their way, legal or otherwise, and would often be penalized for rejecting business. The organizational structure was segregated so that the nature of one unit’s activities would not be known to another, and where senior officials were discouraged from ‘asking too many questions’.
Another example of this compartmentalization was BCCI’s decision to divide its operations between two auditors - Price Waterhouse and Ernst & Whinney, neither of whom had the right to audit all BCCI operations. This was significant factor in helping BCCI to hide fraud during its early years. For more than a decade, neither of BCCI’s auditors objected to this practice. However, Ernst & Whinney did resign as Auditors in 1986.
In mid-1970s, the US authorities rejected BCCI’s attempt to purchase an American bank. The major concern was the absence of a primary designated regulator and the lender of last resort to supervise BCCI’s consolidated banking operations. BCCI was forced to rely upon Bank of America as its correspondent bank. The development and expansion of BCCI was dependent on a link to the United States since all its activities were in US Dollars (as the dominant world currency). The Bank of America relationship gradually deteriorated, as BCCI officials were not always forthcoming with information and documents requested by Bank of America. They eventually sold their stake in BCCI in 1980 although they remained BCCI’s clearing bank.
Abedi enlisted the help of senior US political figures and in the late 1970s overcame regulatory obstacles to acquire four major banks, including the National Bank of Georgia and First American Bank. In violation of US federal banking laws, the US acquisitions were made in the names of secret nominees in order to conceal BCCI’s involvement and circumvent requirements to file financial information and to have a recognised regulator.
The Bank of England welcomed BCCI’s presence in the United Kingdom even though it was concerned about the absence of a single international regulator and lender of last resort. BCCI did little banking business in Luxembourg and the Luxembourg Banking Commission felt that “it was impossible to supervise BCCI (SA) effectively from Luxembourg”. Following enactment of the Banking Act of 1979, the Bank of England licensed BCCI (SA) as a deposit taking institution (although not a full bank) based, in part, on the assurance that “external auditors were not qualifying the reports”.
BCCI’s activities in many of the 73 countries in which it operates were dependent on the widespread use of pay-offs to prominent political figures. BCCI would obtain an important figure’s agreement to give BCCI deposits from a country’s Central Bank, exclusive handling of a country’s use of U.S. commodity credits. BCCI gained preferential treatment on the processing of money coming in and out of the country where monetary controls were in place, the right to own a bank, secretly if necessary, in countries where foreign banks were not legal, or other questionable means of securing assets or profits. In return, BCCI would pay bribes to the figure, or give him other reward in the form of goods and/or services.
The result was that BCCI had relationships that ranged from the questionable, to the improper, to the fully corrupt with officials from countries all over the world. Amongst those countries were; Argentina, Bangladesh, Botswana, Brazil, Cameroon, China, Colombia, the Congo, Ghana, Guatemala, the Ivory Coast, India, Jamaica, Kuwait, Lebanon, Mauritius, Morocco, Nigeria, Pakistan, Panama, Peru, Saudi Arabia, Senegal, Sri Lanka, Sudan, Suriname, Tunisia, the United Arab Emirates, the United States, Zambia, and Zimbabwe.
To manage the $10 billion pool of cash that lay in its international network, BCCI decided to centralize its treasury operations in 1982. However, the Banks excursions into the money market were not very successful and its officials resorted to “creative accounting” to cover trading losses.
One of the techniques employed was to sell large quantities of “options” to purchase currency or securities at a set price at a later date. The proceeds of these sales were shown in the books as profits. As liabilities materialized, BCCI was forced to sell even more contracts to keep the cash flow and profits running. The workings of a classic Ponzi scheme began. As BCCI’s internal operations were split, it was also possible for executives to move the accounts around and cover-up their losses.
The complicated structure involving its use of shell corporations, bank confidentiality and secrecy havens, a layered corporate structure of front-men and nominees together with the endemic corruption ingrained in BCCI’s operations made it an ideal environment for crime.
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 purchase of banks and real estate.
In October 1988 the US authorities in Tampa, Florida indicted BCCI and its officers on charges of fraud, money laundering and falsifying bank records following an elaborate sting operation conducted by US Customs. The BCCI attorneys argued that it was inevitable that a bank operating in so many countries and where banking laws afforded maximum secrecy would be used by drug traffickers. In January 1990 in its guilty plea BCCI was only admitting that a few of its employees had engaged in money laundering and their guilt was solely on a theory of corporate responsibility.
BCCI’s clients for money laundering included Panamanian General Manuel Noriega, for whom it managed some $23 million of criminal proceeds out of its London branches; Pablo Escobar, of the Medellin cartel; Rodriguez Gacha, of the Medellin cartel; and several members of the Ochoa family.
Despite the US money laundering scandal and the reports from Price Waterhouse (UK auditors) advice that they had found serious problems with the BCCI, the Bank of England’s response was not to close BCCI down, but find a way to prevent its collapse. In hindsight, many ideas as to why this happened, including fears that repercussions in the Middle East would result, to suspicious that BCCI had been involved in ongoing intelligence activities at the time, have been circulated.
In April 1990, the Bank of England reached an agreement with BCCI, Abu Dhabi, and Price Waterhouse to keep BCCI from collapsing. Under this agreement, Abu Dhabi agreed to guarantee BCCI’s losses and Price Waterhouse agreed to certify BCCI’s books. BCCI was permitted to move its headquarters, officers and records to Abu Dhabi. Consequently, innocent depositors and creditors were deceived into believing that BCCI had no serious financial problems. Following the eventual closure of the Bank in June 1991, investigators from the US and elsewhere were hampered in their enquiries by essential documents and witnesses being in the grasp of the Abu Dhabi government.
On July 5, 1991, when BCCI was closed, some one million small depositors in BCCI around the world lost their deposits. There was no way of knowing even now precisely who were among all those who lost money. BCCI made frequent use of “managers’ ledgers” or numbered accounts for its most sensitive depositors, whose identities were typically kept secret from everyone other than their personal banker at BCCI. Given the anonymity, the secrecy, and the source of the income behind many of these deposits, some depositors, including government officials or agencies, have not necessarily been in a position to asset claims to the money they have lost.
There is no doubt that there was corporate culture at BCCI of secrecy, fraud, deception and looking the other way at money coming from criminal enterprises. This culture extended to the highest level of the bank and probably started in the early 1980’s. Bank officials were advised by US Customs undercover agents that money being deposited in the bank came from cocaine sales. Money laundering of the proceeds of narcotics trafficking becomes a relatively easy thing to do when a banking institution such as BCCI and a number of its key officials cooperate fully in the laundering activity.
Note:
Parts of this article are excepts from an paper submitted by Australian Federal Police and Australian Customs Service.