THE LONG AND WINDING ROAD TO BCCI'S DEAD END
It has been fined for laundering drug money in Florida and embroiled in a foreign-exchange scandal in Kenya. Its clients have included former Panamanian strongman Manuel Noriega and Colombian drug lords. It may have violated U. S. law by using front men to acquire a Washington (D. C.) bank. You name it, and the Bank of Credit & Commerce International probably has been accused of doing it. Yet for almost 20 years, BCCI nearly always managed to stay ahead of the law.
No longer. In an unprecedented international operation on July 5, regulators from the U. S., Britain, and five other countries swooped down on local BCCI offices, shuttering most of the sprawling, $20 billion bank for good. The reason: A report commissioned by the Bank of England from BCCI's auditors, Price Waterhouse, disclosing massive bad loans, unrecorded deposits, blatantly phony accounting, and other offenses. "There was firm evidence," says John B. Atkinson, the Cayman Islands' inspector of banks and a member of the international team that shut BCCI down. "It was fraud."
Losses from BCCI could exceed $5 billion, making it one of the world's biggest banking failures. The brunt of the losses will be borne by thousands of depositors, mostly in Europe, the Mideast, and Asia. But the single biggest loser is likely to be Zayed bin Sultan al-Nahayan, Abu Dhabi's ruler, who invested $1 billion in BCCI stock only last year in hopes of turning it around.
With Abu Dhabi now controlling 77% of the bank's shares, international regulators are now pressuring al-Nahayan into making good on at least some of BCCI's commitments. Before the crackdown, the ruler had been planning to inject several billion dollars more into the bank as part of a sweeping restructuring. High-ranking investigators believe al-Nahayan wasn't fully aware of the wreckage behind BCCI's facade.
In the wake of the sudden shutdown, depositors, banking experts, and politicians around the world are raising tough questions. Given BCCI's shady reputation, why didn't regulators spot and deal with its problems earlier? What responsibility, if any, should be borne by Price Waterhouse? Price, BCCI's sole auditor since 1987, failed to provide any explicit public warnings about the bank's health until the fateful report to the Bank of England. And most important, how can a repeat of BCCI be avoided?
TIGHTER GRIP. The final question may be the toughest one of all. Even before the BCCI scandal broke, concerns about global money-laundering had spurred many industrialized nations to consider tighter controls on international banks. The Federal Reserve, for instance, has proposed legislation requiring the home countries of foreign banks to strictly supervise offshore subsidiaries. Says Michael A. Mackenzie, Canada's Superintendent of Financial Institutions: "I recommend saying: `You can't operate in my country until we're satisfied that your home-country regulation is capable of doing the job.' " With police in Britain, a U. S. Senate subcommittee, and grand juries in Washington, New York, and Miami now probing BCCI's affairs, more intensive scrutiny of all banks operating across borders seems nearly certain.
It was the absence of a global regulatory approach that let BCCI thrive (table). Founded in 1972 by Pakistani financier Agha Hasan Abedi, it seemed designed from the start to evade banking oversight. BCCI's registered home base was Luxembourg, but its managers were based in London. Its shareholders were rich Persian Gulf oil sheiks, and its assets were scattered in a branch network that encompassed more than 70 countries.
To further complicate matters, many operations were channeled through the Caymans. That "didn't permit any banking authority to conduct normal regulatory activities," says Nicholas Schaus, director of the Monetary Institute of Luxembourg. BCCI's tight-knit staff didn't make regulators' jobs any easier. Says Roger F. G. Alford, a London School of Economics banking expert: "Massive wrongdoing, where everybody colludes and every single figure is a fake, is much more difficult to spot."
In 1987, regulators became sufficiently concerned about the lack of information on BCCI that Luxembourg, Britain, France, Spain, Switzerland, and the Caymans formed a special "college" just to share notes. But the college didn't include many countries in which BCCI had big operations, including the U. S. And even when BCCI's problems became public, regulators remained unwilling to go beyond their own borders. "Everyone was looking at the pieces, and no one was looking at the entity," says Federal Reserve Governor David W. Mullins Jr.
In 1988, for example, a Senate subcommittee took sworn testimony from a former BCCI manager that the bank had handled illicit money from Noriega and flight capital throughout South America. But the testimony had little impact. "Did the regulators look at it closely enough?," asks London banking analyst Robin Monro-Davies. "Intuition tells you they didn't."
Under the loose regulatory net, Abedi constructed what, for a time, appeared to be a successful global business. Concentrating on trade finance and retail accounts, the bank's mostly Pakistani managers built an enviable network of branches in the Mideast and Third World at a time when most Western banks were pulling back from these areas. Even in the most obscure reaches, BCCI "knew everybody," marvels Mustapha Serageldin, London-based head of the Bank of Kuwait in the Middle East.
CASH CACHE. But one Mideast banker says BCCI succeeded, in part, because it did "whatever it took to get the job done." Among other things, BCCI won a reputation for helping heavily indebted Third World countries hide cash from international monetary authorities by shuffling deposits among branches. "BCCI had an international reputation for capital flight, tax fraud, and money laundering," Manhattan District Attorney Robert M. Morgenthau recently told a Senate committee.
The biggest blow to BCCI's standing--and its business--came in 1988, when a federal sting operation led to the indictments of the bank and 10 executives in Florida on charges of laundering drug money. The bank pleaded guilty and was fined $15 million, and five of the executives were also found guilty and jailed.
The trial threw up a raft of questionable BCCI ties to accused international drug traffickers. It was also a red flag to regulators, who started to look more closely at BCCI. "If it hadn't been for the undercover sting, the other nefarious activities the bank was engaged in might never have come to light," says Charles Intriago, publisher of the Miami-based newsletter Money Laundering Alert.
BCCI's problems started snowballing after that. Prosecutor Morgenthau launched a probe last summer of possible money-laundering links to BCCI's New York branch, which spurred Washington regulators to take a closer look. Early this year, the Federal Reserve concluded that the 1982 takeover of First American Bankshares Inc. by Mideast investors with BCCI ties had improperly given the bank control of the Washington holding company.
EXIT THE SAUDIS. Clark M. Clifford, First American's chairman and Washington superlawyer, had maintained to regulators that his bank was independent of BCCI. But he and other investors in First American stock bought the shares with BCCI loans that were never repaid. Clifford denies any wrongdoing.
The growing legal dragnet exacerbated BCCI's mounting financial problems. It lost at least $150 million trading Treasury options between 1984 and 1986, and was obliged to obtain an infusion of capital from the family owners of the National Commercial Bank of Saudi Arabia, who then owned 22% of BCCI. Then, as bad news mounted and clients fled, BCCI ran up a $498 million loss in 1989.
Fed up, the Saudis sold their stake for $600 million to Abu Dhabi's al-Nahayan, who injected an additional $400 million in capital and promised to restructure the bank. Around the same time, founder Abedi, who had undergone a heart transplant in 1988, resigned as president.
The Abu Dhabi connection helped calm European banking authorities, who assumed the emirate would stand behind the bank. But by this time, BCCI was apparently resorting to extreme measures to deal with its deteriorating finances. One ex-manager says an internal audit given to the bank's board early in 1990 alleged widespread abuses. Then, earlier this year, a BCCI officer tipped the Bank of England about widespread finagling. "They used all imaginable means to make up false accounts," says Luxembourg regulator Schaus. The central bank's revelations come as small comfort for the thousands of small savers who may have lost their life savings in a bank they thought was safe. In many of the Third World countries where BCCI operated, deposit insurance is nonexistent. Even in Britain, where BCCI had 120,000 accounts, depositors are insured for only $24,000. In the future, these and other depositors are likely to be more wary of a friendly banker's pitch. And maybe when the next rogue bank appears, regulators who permitted BCCI to get out of control will ask tough questions a lot sooner.
A HIGH-FLIER'S RISE AND FALL
1972--Pakistani financier Agha Hasan Abedi sets up Bank of Credit & Commerce International in Luxembourg with backing from Bank of America, Arab investors
1978--Abedi and ex-Carter Administration aide Bert Lance unsuccessfully try to buy Washington's First General Bankshares
1980--Complaining it lacked access to BCCI's books, Bank of America sells stake
1981--Arab 2,1--Bank loses at least $150 million in Treasury options market
1988--Ten BCCI executives charged in Florida with laundering $32 million in drug money. Investigators disclose BCCI ties to former Panamanian strongman Manuel Noriega. Accused executive tells federal agents BCCI secretly controls First American
1990--BCCI reveals $498 million loss for 1989 and pleads guilty to money laundering. Abedi resigns as president, and Zayed al-Nahayan, Abu Dhabi ruler and longtime shareholder, invests $1 billion and takes control
1991--Grand juries in New York, Washington, Miami probe BCCI. Federal Reserve orders BCCI to sell First American shares. Unidentified BCCI official warns Bank of England of illegal transactions, and Price Waterhouse ordered to investigate. After Price finds widespread fraud, Britain, U.S., and other countries seize most BCCI assets and close branches
DATA: BWMark Maremont in London, with Blanca Riemer in Paris, Gail DeGeorge in Miami, Suzanne Woolley in New York, and Catherine Yang in Washington