Issue in Corporate Failure of Bank of Credit and Commerce International (BCCI)
Introduction and background:
Bank of Credit and Commerce International known as BCCI was founded by Pakistani financer Mr. Agha Hasan Abedi in 1972. It’s headquarter was located in London and was incorporated in Luxembourg. BCCI was ranked 7th largest private bank with total assets which amounts to $20.6 billion. By the end of 1988, BCCI’s network included 417 offices in 73 countries. The annual report noted that the bank now served 1.3 million customers through 14,000 staff members of 90 nationalities. (Peter et al. 1992) BCCI was initially funded by rich Arab businessmen who wanted high return on their investment without taking big risks. They haven’t got any solid base of finance since incorporated as they were dependent on their depositors to meets its operating expenses. The Bank of America initially held 25% of BCCI shares which they sold in 1980. BCCI’s main objective was to achieve rapid growth as it wanted to be become global bank which can represent third world. They gambled on futures and options trading and gave some high risk loans. It also raised millions of revenue by accounting techniques to show false profits and hided their losses which occur in trading and bad debt. The biggest bank fraud in history
According to Manhattan District Attorney Robert M. Morgenthau, the BCCI scandal that came to light in 1991 was 'the largest bank fraud in world history.' Perhaps no other criminal enterprise has involved or at least embarrassed so many prominent people, from billionaire Arab sheikhs to Third World dictators to present and former leading figures in the U.S. and British governments. Certainly none could match the international web of financial chicanery, political intrigue, and unsavoury figures with which BCCI was said to be associated. (Source: Encyclopaedia Encarta 2007) BCCI was engaged in four major frauds. One was a cover-up of $633m of losses on treasury trading. The second was the illegal acquisition through nominees of several banks in the US, in which it spend $346m. The third was a complex manipulation of accounts to prop up its largest borrower, the gulf shipping group of Pakistan, to which it lent more than $725m, which was over the limit set by banking regulations. The fourth was fundamental fraud by which BCCI allegedly acquire secret control of 56% of its own shares at a cost of over $500m. BCCI was a serpent eating its own tail. These sums add up to more than $2bn. But this is a minimum: it omits the enormous cost to BCCI of financing its secret losses. The manipulation to cover up the fraud involved another $2bn, bringing the grand total to well over $4bn. BCCI frauds were the main reasons for its corporate failure. The scale the fraud is breathtaking enough. But while most frauds involve the disappearance of real money, BCCI did the exact opposite. It manufactured billions of dollars out of nothing to conceal gaping holes in its balance sheet, like a giant game of ‘Double Your Money’. This involved extraordinary financial gymnastics and illegal loans on a huge scale. When BCCI finally came crashing down, it was not with a thud, but in a shower of paper. (Behind Closed Door: FT Publication) BCCI initiated every single route to excel its growth. In a first place its corporate structure was so complicated which involved uses of shell corporations frequently termed as satellites, bank confidentiality and secrecy. BCCI’s top management including nominees which also includes some famous personalities in politics were involved in corruption and made it a supreme atmosphere for crime. BCCI’s criminalities 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;
Bibliography: • Kanas, A., 2004. Contagion in Banking due to BCCI’s Failure: Evidence from National Equity Indices. International Journal of Finance and Economics [Online] 224 (9), p. 245-255.
• Mohamedi, F., 1991. Political Economy: The Fall of BCCI. Middle East Report, No. 173, Gender and Politics [Online] Nov-Dec., pp. 36-37. Middle East Research and Information Project.
Available at: http://www.jstor.org/stable/3012630?origin=JSTOR-pdf [Accessed 25th April 2008]
• Passas, N., 1996
Available at: http://www.jstor.org/stable/1410467?origin=JSTOR-pdf [Accessed 23rd April 2008]
• Spalek, B., 2001
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