In July 1991, the largest scandal in the financial history exploded when the branch offices of the Bank of Credit and Commerce (BCCI) has been seized by regulators in seven countries. The closure of the bank is mainly due to massive fraud and corruption that happened at the heart of the bank. BCCI also involved in other illegal activities such as money laundering, dubious lending, fraudulent record-keeping and support in terrorism. The BCCI was a supranational bank founded in London in 1972 by a Pakistani financier, Agha Hasan Abedi. Overall, BCCI was expanded from 19 branches in five countries in 1973 to 108 branches in 78 countries in 1976 with excess assets of around US$20 billions at its peak.
BCCI has been set up deliberately to avoid consolidated supervision and operated in bank secrecy jurisdiction. BCCI was chartered in Luxembourg and the Grand Caymans, but neither its holding company nor the subsidiaries has conducted any banking activities there. Thus, Luxembourg did not regulate it. Its real home which was BCCI’s headquarter and where most of the operations were carried out was actually in the UK. Because it was chartered in Luxembourg and Grand Caymans, Bank of England (BOE) thus thought itself as a secondary role in supervising BCCI, thereby reducing the level of scrutiny imposed on BCCI. In addition, BCCI has an uncommon auditing system. Price Waterhouse (PW) was the accountants for BCCI overseas, while Ernst & Whitney in charged of BCCI holdings. Two sets of auditors being used was to avoid them from publishing a meaningful consolidated accounts and make sure neither of the audit team had full jurisdiction over it.
BCCI’s founder, Abedi and his assistant, Naqvi were the critical leader of its rapid growth and a guarantee of its final collapse. By fracturing its corporate structure and record keeping, the complex BCCI group was able to avoid regulation on the transfer of capitals and goods between its internal banks. Throughout its history, BCCI had made large loans to companies and individuals without properly managing them. When these loans went bad, the bank couldn’t made legal claim, and was forced to absorb these losses. As a result, BCCI was forced to use deposits to meet operating expenses rather than to properly invest them in legitimate loans or other financing.
By the late 1970s, BCCI’s biggest borrower, the Gulf shipping group, has declared bankruptcy. Bothered that regulators will close BCCI down if its exposures were leaked out, Abedi and his men edited the books as it injected money into Gulf to make it look like a going concern entity that will be able to clear its debts.
Negligence in few parties was the reason why BCCI’s fraud could went undetected for so long. BOE was castigated for the failure in supervision. Actually, the BOE has already noted about BCCI’s many illegal activities in the early 1988, but they engaged only limited oversight on it. Moreover, BOE’s decision which permitted BCCI to restructure itself as three separate institutions based in London, Abu Dhabi and Hong Kong and allowed them to move their headquarter out of the British jurisdiction has caused an irretrievable consequence. All of the essential records and evidence about BCCI has thus been removed from British jurisdiction to the Abu Dhabi government. This made the regulators in the US and UK difficult to investigate it. This decision showed that BOE has made an extraordinarily poor judgment.
Besides that, PW (UK) was another party in negligence. PW continued to sign off BCCI’s financial statement even though PW (UK) has identified enormous fraudulent record of its accounting transactions. PW also cooperated with BOE and the government of Abu Dhabi to keep the very serious nature of BCCI secretly. As long as the government of Abu Dhabi agreed to inject fund into BCCI, PW (UK) will continue to certify the annual statement of BCCI as true and fair....
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