The BCCI Scandal

Written by Holly Whitehead on Friday 19 August, 2016

After reading the comments on my previous blog on some of the biggest money laundering cases of the last 30 years, I have been inspired to look into one of those cases in more detail. The case involved the Bank of Credit and Commerce International, or BCCI, and it has made for very interesting reading.

The early years

The bank was established in 1972 by Agha Hassan Abedi, a Pakistani banker who envisaged a bank focused on the third world, and was incorporated in Luxembourg, with headquarters in London. Abedi had financial help in setting up the bank from Abu Dhabi, which became BCCI’s major shareholder.

In the late 1970s, the Gulf shipping group owned by Abbas Gokal (who was BCCI’s main borrower) was close to bankruptcy. BCCI secretly threw money at Gulf to keep it going and falsified the books at the same time. This carried on for the next 15 years, with BCCI creating fictional transactions to cover up other non-performing loans, and by the end, the bank was consistently using customer deposits to paint a picture of financial health.

In 1980, the Bank of England (BoE) granted BCCI a licence to trade in the UK; a move which was regarded as a mistake by BCCI’s creditors. They subsequently claimed that the BoE received alarming reports about BCCI, but because it was the BoE that had granted a licence, it refused to admit its mistake. One BoE memo in 1982 actually described BCCI as ‘on its way to becoming the financial equivalent of the Titanic’.

During 1987, the BoE, along with others, formed a group of regulators to supervise BCCI. BCCI was then investigated for allegations of money laundering by a US Senate sub-committee, as well as links to the Panamanian dictator Manual Noriega. BCCI has also been linked to many other unsavoury customers, for example, Colombian drug barons and the Abu Nidal terrorist organisation, while the CIA admitted in August 1991 that it used BCCI ‘as a way to move money’.

The beginning of the end

Robert Mazur (we will come back to him later) was a federal agent who went undercover in the mid-80s in an operation named C-Chase, and was able to infiltrate the Colombian Medellin Cartel by posing as a well-connected businessman. He then used this to infiltrate the private client division of BCCI and uncovered how it was able to manipulate complex international finance systems to help drug lords, tax cheats and corrupt politicians launder money. In 1988, he created a fake wedding in Tampa, Florida, to which he invited BCCI executives and drug dealers he had befriended while undercover. This was actually a dramatic takedown operation and led to more than 80 men and women being charged worldwide and BCCI pleading guilty to money laundering in a case that lasted six months. Four bank officers were convicted and the bank had to pay a $14.8 million fine.

In 1990, auditors Price Waterhouse alleged that some transactions on BCCI’s 1989 accounts were ‘false or deceitful’ and Swaleh Naqvi (the BCCI chief) resigned. Abedi, who had already retired following a heart attack, severed ties with the bank.

Exposed

Finally, in March 1991, the BoE ordered an investigation by Price Waterhouse, which found that there was ‘evidence of massive and widespread fraud’. This investigation caused the BoE to announce that BCCI might never have been profitable and to close it down in July 1991, with liabilities of $14 billion, later reduced to $10 billion. Its collapse caused over 6,500 depositors to lose their money, including the Emirate of Abu Dhabi, which is believed to have lost $2 billion.

Later in July the same year, Robin Leigh-Pemberton, the BoE Governor, told a parliamentary committee that fraud at BCCI involved current and former management and the culture was ‘criminal’. The US Federal Reserve then fined BCCI $200 million for violation of ownership laws involving three American banks. Abedi and Naqvi were indicted by New York District Attorney Robert Morgenthau, who called the case the ‘largest bank fraud in world financial history’. Abedi, however, was in Pakistan, where officials refused to give him up; he died in 1995, never having been brought to justice.

Meanwhile BCCI’s liquidator, Deloitte Touche Tohmatsu, started trying to recover money on behalf of the creditors.

Official reports

In the wake of BCCI’s closure, a report was published by Lord Bingham in 1992, which stated that the BoE failed to spot widespread fraud in BCCI. However, the conclusion was that the BoE was responsible for mistakes, rather than a conspiracy or deliberate negligence. In response to this, the BoE created a special investigations team to identify and prevent further fraud.

Later that year, the Americans published their own report entitled The BCCI Affair, written by Senators John Kerry and Hank Brown. This report was very scathing about BCCI and the BoE, which subsequently caused the BoE to describe Kerry's conclusions as 'extraordinary' and having 'no factual basis'. The report was, however, equally critical of the CIA, the Justice Department and of US regulators, saying they had information on BCCI and didn’t use it and made flawed decisions which ‘allowed BCCI to secretly acquire US banks’

The report claimed that BCCI had bribed world leaders and political figures as well as befriending them, discredited people who were telling the truth, ‘engaged in billions of dollars of largely anonymous trading in the US which included a very substantial level of money laundering’ and didn’t protect innocent depositors from the aftermath of the bank’s poor practices, which were something the auditors knew about for years.

Justice

Deloitte began litigation in 1993 against the BoE, accusing the bank of ‘malicious recklessness’. Then, after two years, the Luxembourg court granted a compensation deal which started the ball rolling on the first major payout since the bank collapsed.

In 1997, Abbas Gokal was found guilty of conspiracy to defraud and account falsely and sentenced to 14 years in prison. As well as this, he was fined £2.9 million to be paid in two years or have an extra three years added to his sentence. He appealed this in 1999 and lost. He was then released in 2003 by the Home Office, even though he didn’t meet the terms of his fine.

In the same year, Gordon Brown, when he became the UK’s Chancellor of the Exchequer, transferred banking supervision from the BoE to the Financial Services Authority. The BCCI case is thought to have played a part in this.

The trial