Bank of Credit and Commerce International
The Bank of Credit and Commerce International was an international bank founded in 1972 by Agha Hasan Abedi, a Pakistani financier. The bank was registered in Luxembourg with head offices in Karachi and London. A decade after opening, BCCI had over 400 branches in 78 countries and assets in excess of US$20 billion, making it the seventh largest private bank in the world.
BCCI came under the scrutiny of financial regulators and intelligence agencies in the 1980s, due to concerns that it was poorly regulated. Subsequent investigations revealed that it was involved in massive money laundering and other financial crimes, and had illegally gained controlling interest in a major American bank. BCCI became the focus of a massive regulatory battle in 1991, and, on 5 July of that year, customs and bank regulators in seven countries raided and locked down records of its branch offices during Operation C-Chase.
Investigators in the United States and the UK determined 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".
The liquidators, Deloitte & Touche, filed a lawsuit against the bank's auditors, Price Waterhouse and Ernst & Young, which was settled for $175 million in 1998. By 2013, Deloitte & Touche claimed to have recovered about 75% of the creditors' lost money.
BCCI continues to be cited as a lesson to be heeded by leading figures in the world of finance and banking. In March 2023, the United States' Acting Comptroller of the Currency Michael J. Hsu stated that "there are strong parallels between FTX and the Bank of Credit and Commerce International, better known in bank regulatory circles as BCCI, which failed in 1991 and led to significant changes in how global banks are supervised."
History
BCCI's founder, Agha Hasan Abedi, established the bank in 1972. Abedi, a prolific banker, had previously set up the United Bank Limited in Pakistan in 1959 sponsored by Saigols. Preceding the nationalization of United Bank Limited in 1974, he sought to create a new supranational banking entity. BCCI was created with capital 25% of which came from Bank of America and the remaining 75% from Sheikh Zayed bin Sultan Al Nahyan, the ruler of Abu Dhabi in the United Arab Emirates.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 and BCCI Overseas. BCCI also acquired parallel banks through acquisitions: buying the Banque de Commerce et Placements of Geneva in 1976, and creating KIFCO, Credit & Finance Corporation Ltd, and a series of Cayman-based companies held together as ICIC. Overall, BCCI expanded from 19 branches in five countries in 1973 to 27 branches in 1974 and 108 branches by 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. Investigative journalist and author Joseph J. Trento has argued that the bank's transformation was guided by the head of Saudi intelligence with a view to enabling it to finance covert American intelligence operations at a time, in the aftermath of Watergate, when the American intelligence agencies were defending themselves from investigations by domestic authorities.
In 1973, the BCCI applied for an offshore banking licence in Singapore that was rejected by the Monetary Authority of Singapore on the basis that the bank was too new at just a year old and low in capitalisation. In 1980, they attempted to reapply but were yet again turned down by the MAS on the basis of its weak international regard.
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 Shenzhen Special Economic Zone which bore testament to Agha Hasan Abedi's public relations skills, a feat that had 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.
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 no single country had 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, a bureau within the U.S. Department of the Treasury that regulates national banks, told the Federal Reserve in no uncertain terms that BCCI must not be allowed to buy any American bank because it was poorly regulated.
By 1980, BCCI was reported to have assets of over $4 billion with over 150 branches in 46 countries. Bank of America was "bewildered" by BCCI and reduced its holding in 1980, and the company came to be held by a number of groups, with International Credit and Investment Corp 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.
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's reputation in the United States was so poor that it could not hope to buy an American 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 First American.
BCCI had an unusual annual auditing system: Price Waterhouse were the accountants for BCCI Overseas, while Ernst & Young audited BCCI and BCCI Holdings. Other companies such as KIFCO and ICIC were audited by neither. In October 1985, the Bank of England and the Monetary Institute of Luxembourg ordered BCCI to change to a single accountant, alarmed at reported BCCI losses on the commodities and financial markets. Price Waterhouse became the bank's sole accountant 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 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 watched BCCI 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 the 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. When they failed to make interest payments, BCCI took control of the shares. It was later estimated that in this manner, BCCI had ended up with 60% 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. Abedi 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 1980s.
Lending practices
BCCI contended that its growth was fueled by the increasingly large number of deposits by oil-rich states that owned stock in the bank as well as by sovereign developing nations. However, this claim failed to mollify the regulators. For example, the Bank of England ordered BCCI to cap its branch network in the United Kingdom at 45 branches.There was particular concern over BCCI's loan portfolio, because of its roots in areas where modern banking was still an alien concept. For instance, a large number of its customers were devout Muslims who are against charging interest on loans a major pillar of modern banking because they consider it to be riba, or usury. In many third-world countries, a person's financial standing did not matter as much as his relationship with his banker. One particularly notable example is the Gokal family, a prominent family of shipping magnates. The three Gokal brothers, Abbas, Mustafa and Murtaza, were owners of the Gulf Group. 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 US$1.2 billion, three times the bank's capital. The case of Nazmu Virani, the UK based property tycoon who borrowed £500 million unsecured, was widely reported. Longstanding banking practice dictates that a bank not lend more than 10% of its capital to a single customer.