An ERisk.
com Case Study
Bank of Credit and
Commerce International
n July 5, 1991, an inci-
O dent that has been
described as the big-
gest bank fraud in his-
tory came to a head when regula-
tors in seven countries raided and
took control of branch offices of
the Bank of Credit and Commerce
International (BCCI). Monetary
losses from the scandal were huge,
with estimates ranging from $10 bil-
lion to $17 billion – though many bil-
lions have since been recovered
for creditors by the bank’s liquida-
tors, Deloitte & Touche.
The scandal had been develop-
ing for nearly two decades and
encompassed an intricate interna-
tional web of financial institutions
and shell companies that had
escaped full regulation.
BCCI’s activities, and those of
some of its officers, included dubi-
ous lending, fraudulent record-
keeping, rogue trading, flouting of
bank ownership regulations and
money laundering, in addition to
legitimate banking activities. The
bank’s structure and deal making
was so complex that, a decade
after the institution was liquidated,
its activities are still not completely
understood.
One way to think of the BCCI
saga is as an attempt to create the
polar opposite of a firm with inte-
grated risk management practices.
In this case, certain senior bank per-
sonnel and interested parties did
not simply overlook risks, but manip-
ulated gaps in the bank’s risk man-
agement structure and between its
subsidiaries, to serve various pur-
poses. This put at a disadvantage
other stakeholders, such as the mil-
lion or so small depositors around companies, cross-holdings and
the world and certain institutional
depositors attracted by BCCI’s rela-
tively high rates, who provided
much of the bank’s funding. Mean-
while, other bank officers had little
nominee owners. BCCI’s interna-
tional nature helped the company
avoid a large amount of regulation
because for most of its history no
single regulator or audit team had
understanding of the bank’s struc- full jurisdiction over it.
ture and overall financial position, Although institutions such as the
and were encouraged not to ques- CIA and the Bank of England
tion bank practices, or the reason reportedly had some knowledge of
for the flow of funds between bank BCCI’s activities before the scandal
entities. broke, regulators worldwide –
including a special college of regu-
The story lators set up to oversee the institu-
Agha Hasan Abedi, a Pakistani tion in 1987 – proved unable to take
banker with Arab backing, early and decisive action against
founded the Bank of Credit and the bank.
Commerce International in 1972. Regulation was made difficult by
The institution was chartered in inadequate communication
Luxembourg, but its treasury and among agencies, and by the high-
other key functions were based in level government connections that
the Cayman Islands and in London BCCI’s leaders cultivated. Although
before decamping to Abu Dhabi in they may not have endorsed the
1990. Its branches and subsidiaries bank’s activities, various influential
in 70 countries were held together figures in the US and around the
by a complex structure of holding world overlooked signs that could
Lessons learned
G The critical role of senior management and key investors in
establishing an honest, open and prudent bank culture;
G The need for powerful executives and backers of institutions to be
controlled within a secure enterprise-wide corporate governance
structure, if the interests of other stakeholders, such as deposit holders,
are to be safeguarded;
G The need for independent and unified regulation and auditing of
complex financial conglomerates;
G The danger that attempts to preserve confidence in a bank, even
when well-intentioned, will lead to further cover-ups inside and outside
the bank;
G The oldest lesson of all: the ease with which massive bad loans and
trading losses can be covered up in banks by extending further credit,
failing to record deposits, and juggling accounts.
ERisk.com
01

have exposed the scandal before
1991, and lent the institution a
veneer of respectability.
One such sign was the bank’s
involvement in money laundering
and the financing of arms traffick-
ing. BCCI’s presence in the
Cayman Islands, and its many
offices all around the world, made
it a useful route for tainted funds.
Clients included such figures as for-
mer Panamanian dictator Manuel
Noriega, as well as individuals who
were involved in various drug and
crime cartels. American enforce-
ment officials had uncovered evi-
dence of these transactions by
‘
Throughout its history, BCCI had made large loans to
companies and individuals without properly securing
them. The loans represented massive concentrations
of credit risk, but were often not properly
documented or monitored’
1983, but did not act on them until
1988.
At that point, the US Customs
Service completed an undercover
operation that led to the arrest of
several BCCI figures, who were
convicted of money laundering on
July 29, 1990. The bank itself
pleaded guilty to the laundering
charge and was fined $14 million.
The bank’s international web
began to unravel in 1990 when
Regardies, a Washington-based
business magazine, published a
story that questioned the BCCI links
of the owners of a significant US
bank, First American. The Federal
Reserve began an official probe
into the alleged connection
between BCCI and First American.
In March 1991, BCCI admitted
that it had acquired a 25 per cent
stake in First American, without the
approval of regulators. The Fed
then ordered BCCI to sell the shares
in question. Investigations contin-
ued in the US and, separately, in
London. In June, Price Waterhouse,
a principal BCCI auditor, informed
the Bank of England that it had
found evidence of widespread
fraud and account juggling in
BCCI’s operations. The auditors
came to believe that, despite its
pace of growth, the bank might
never have made a genuine profit
in the whole of its 19-year exis-
tence.
Throughout its history, BCCI had
made large loans to companies
and individuals without properly
securing them. The loans repre-
sented massive concentrations of
credit risk, but were often not prop-
erly documented or monitored.
When these loans went bad, the
bank had no legal recourse, and
was forced to absorb the losses. This
“strategy”, which ran counter to
common sense and all principles of
good lending, racked up huge
losses for BCCI. It covered up this
problem by taking in new deposits
and not recording these straightfor-
wardly on its books, and by other-
wise creating a matrix of false
accounts that hid the losses for
years.
Another way BCCI lost money
June 2001
ERisk.com
Timeline of
events
1972: BCCI is founded.
1977-78: Middle Eastern investors
associated with BCCI take control
of First American and National
Bank of Georgia, while telling
regulators the banks will not be
controlled by BCCI.
Early 1980s: BCCI treasury
operations lose big money through
risky trading.
1988-90: BCCI and some of its staff
are investigated and convicted of
money laundering.
1990: Article in Regardies prompts
renewed investigation of whether
BCCI controls First American.
June 1991: Price Waterhouse's
"Sandstorm" report for UK regulators
details serious fraud at BCCI
July 1991: Regulators take control
of BCCI offices in key countries.
Mid–late 1990s: Key Middle Eastern
figures in the BCCI saga and Abu
Dhabi agree to pay large sums in
restitution.
March 2001: Liquidators seek
damages from the Bank of England
for its role in regulating BCCI.
was through huge losses incurred
by its treasury department, particu-
larly in the early 1980s – though
these losses may themselves have
been a way of disguising other
losses and misdoings. BCCI also
reportedly lost hundreds of millions
of dollars through a financial serv-
ices trading company that it set up.
Ironically, BCCI itself lost huge
amounts of money in the series of
illegal US bank acquisitions – and
from the improperly secured loans
underpinning them – that led to its
02
 ERisk.com

investigation and closure in 1991.
BCCI’s US acquisitions
The regulatory probe that exposed
BCCI’s losses was brought about by
the bank’s illegal control of several
American financial institutions. The
largest, First American, was based
in Washington, DC, and was osten-
sibly run for 12 years by two high-
profile Washington insiders, former
US Secretary of Defense Clark
Clifford and his law partner Robert
Altman.
These two men became involved
with BCCI in 1978, when they were
hired as the bank’s US lawyers. One
charge of the purchased institution,
and the deal was allowed. The two
lawyers became the top execu-
tives of the Washington bank,
which was renamed First American
Bankshares. Eventually, when
BCCI’s involvement with the bank
was publicised, First American lost a
large amount of business and, in
1993, part of it was sold to First Union
Corp.
Clifford and Altman maintained
that they had acted in good faith,
and that BCCI had not gained
effective control over the US bank.
In 1993, Altman was acquitted of
charges of bank fraud in a New
embroiled in BCCI’s complex deals
and shadowy investments included
the Independence Bank, Encino,
California and CenTrust, an already
troubled Miami-based thrift.
The aftermath
When BCCI’s problems were
uncovered in the 1991 probe, regu-
lators in seven countries moved
quickly to take over the bank’s
branches. On July 5, offices in the
UK, US, France, Spain, Switzerland,
Luxembourg and the Cayman
Islands were seized, and the bank’s
business activities were frozen.
BCCI’s assets were ultimately liqui-

year earlier, BCCI had set its sights
on Financial General Bankshares,
the company that would later
become First American.
A takeover group that included
Bert Lance (a banker from Georgia,
better known as the Carter admin-
istration’s budget director) and var-
ious Middle Eastern shareholders
was formed in 1977. By 1978, it had
purchased 25 per cent of the avail-
able shares in Financial General. At
that point, the SEC charged the
group with failing to disclose owner-
ship information, but did not stop
the takeover.
When the takeover group made
a $70 million bid for Financial
General, the Federal Reserve Board
initially rejected it. This hurdle did
not stop BCCI and the investors
connected to it, however, and in
1980, Financial General accepted
a takeover bid of $180 million.
Approval for the deal was delayed
until 1982, while regulators
attempted to verify that BCCI
would not be controlling the US
bank.
Clifford and Altman assured the
authorities that they would be in
‘
Lax corporate governance, manipulation by backers and
bank officers with their own personal agendas, general fraud
and failure of fundamental risk management structures at the
bank can be considered the primary engines driving the
losses to the bank’s stakeholders’
York state court, while charges dated, and a pool was established
against Clifford were set aside due to reimburse depositors who had
to his ill health. In 1998, not long lost their funds when the bank shut
before Clifford died, both men down.
reached a $5 million settlement Despite various investigations
with the Federal Reserve Board and reports since 1991, it’s difficult
without admitting any of the alle- to sum up the cause of the BCCI
gations. scandal in any simple way. Lax cor-
BCCI’s involvement in US banking porate governance, manipulation
was not limited to Washington. In by backers and bank officers with
1987, First American made an all- their own personal agendas, gen-
cash offer for the National Bank of eral fraud and failure of fundamen-
Georgia that, the Federal Reserve tal risk management structures at
later alleged, was simply a way for the highest level of the bank can
BCCI to secure covert investments be considered the primary engines
it had made a decade or so earlier. driving the losses to the bank’s
Like First American, National Bank stakeholders.
of Georgia was sold, to South Trust More specifically, the bank’s
Corp, after its BCCI connection was untenable loan and acquisitions
revealed. Other institutions fatally strategies, poor treasury and

June 2001
03

record-keeping practices, and its
habit of hiding the massive losses
that resulted, led to its downfall.
BCCI’s numerous regulatory viola-
tions and legal liabilities, and its
negligence in protecting the inter-
ests of depositors who were not
wealthy or well connected, hardly
need pointing out.
On a brighter note, the bank offi-
cers and liquidators appointed by
the courts after the scandal have
used settlements, forfeitures and
fines to recover significant monies
for stakeholders – particularly small
depositors – damaged by the
bank’s failure. In December 1991,
BCCI made the first of many large
contributions to the depositors’
restitution pool, when it pleaded
guilty to criminal charges and
agreed to forfeit $550 million.
In 1994, the government of Abu
Dhabi, which took over BCCI after
the scandal broke, agreed to pay
$1.9 billion to the depositors’ pool.
Meanwhile, from 1995, various of
BCCI’s wealthy Middle Eastern
backers who had been sued or
fined for their involvement in the
scandal began to reach settle-
ments worth hundreds of millions of
dollars.
In the most recent twist in the
tale, in March 2001, BCCI’s liquida-
tors were granted leave by the
House of Lords to sue one of BCCI’s
principal regulators, the Bank of
England,for up to £1 billion for fail-
ing to monitor BCCI properly. The
Bank says it plans to “defend the
action with the utmost vigour”.
BCCI, it seems, will not rest in
peace. I
This case history was contributed
to ERisk by Lisa Royan and
Penny Cagan of Zurich IC
Squared.
ERisk.com
Resources and References
Commentary on the BCCI affair is widely available on the Web, and
easily found through searches of the bank's name. Two key resources
are:
The BCCI Affair: A Report to the Committee on Foreign Relations, United
States Senate, by Senator John Kerry and Senator Hank Brown,
December 1992
BCCI page of the Association of Accountancy and Business Affairs. The
association is a non-profit-making pressure group devoted to promoting
openness and scrutiny in business and the accounting profession, and
has a special interest in the long-lived BCCI affair. The BCCI page hosts
a censored version of the original 1991 Sandstorm report, which the UK
government continues to refuse to publish citing confidentiality
concerns.
The best-known book on the affair is A Full Service Bank: How BCCI Stole
Billions Around the World, by James R Adams and Douglas Frantz,
available through http://www.amazon.com/
Additional References (by date)
1991-09-10, Gannett News Service, “Chronology of BCCI Case”.
1991-09-29, The Washington Post, “Probe of BCCI's lost funds leads to an
affiliate; Middle East investors' Capcom Financial Services linked to huge
trading losses, money laundering”, Jerry Knight, page h01.
1992-10-15, The Washington Post, “Questions of Justice”, page 30.
1992-11; Lord Justice Bingham's “Inquiry into the supervision of the Bank
of Credit and Commerce International”, London, HMSO, October 1992.
1993-02-27, The Washington Post, “First American Banks are sold; an
ownership story”, page c01.
1998-02-09, The Washington Post, “BCCI, an international mystery
concluded but not solved”, Rudolph A Pyatt Jr, page F04.
1998-06-27, The Economist, “BCCI: Silver lining”, page 74.
1998-07-09, The Wall Street Journal, “Price Waterhouse hit with higher
fines in BCCI litigation”.
1998-07-08, Financial Times, “Bank’s liquidators find way out of $17bn
black hole” page 3.
1998-09-29, The Wall Street Journal, “BCCI: The mystery lingers”, page
A22.
1999-02-26, The Wall Street Journal, “Banker fined for BCCI role is
ordered to pay interest”, page A2.
1999-06-24, The Wall Street Journal, “Businessman is told to pay $1.2
billion in the BCCI scandal”, page B16.
1999-07-06, The Wall Street Journal, “Forfeiture proceedings against
failed bank end”, page A28
June 2001
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