BANK OF CREDIT AND COMMERCE INTERNATIONAL

History…

The Bank of Credit and Commerce International (BCCI) was a major 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.

Within a decade BCCI touched its peak. It operated in 78 countries, had over 400 branches, and had assets in excess of US$20 billion, making it the 7th largest private bank in the world by assets

The Complexity…

Expanded rapidly in the 1970s, pursuing long-term asset growth over profits, seeking high net-worth individuals and regular large deposits.

Divided itself into BCCI Holdings with the bank under that splitting into BCCI SA (Luxembourg) and BCCI Overseas (Grand Cayman).

BCCI also acquired parallel banks through acquisitions: buying the Banque de Commerce et Placements (BCP) of Geneva in 1976,creating KIFCO (Kuwait International Finance Company), Credit & Finance Corporation Ltd.

International Credit & Investment Group(Cayman Islands)

Abu Dhabi

Credit & Commerce

American Holdings(Dutch Antilles)

Credit and CommerceAmerican Investment BV

(Holland)

First American Corps.(Washington, DC)

First American Bankshares(Washington, DC)Bank in 7 states

Independence Bank(Encino, CA)

BCCI Holdings(Luxembourg)

CenTrust Savings Bank(Miami, FL)

BCCI SA(Luxembourg)

47 branches in 13 countries(24 in Britain)

Subsidiaries in Canada and Gibraltar

BCCI Overseas(Cayman Islands)

63 branches in 28 countries

29 subsidiaries and affiliates in 28

countries

National Bank of Georgia

n = substantial stake or ownership = secret stake or ownership

77.4%

100%

100%

BCCI had an unusual annual auditing system: Price Waterhouse were the accountants for

BCCI Overseas While Ernst & Young audited BCCI and BCCI

Holdings (London and Luxembourg). Other companies such as KIFCO and ICIC

were audited by neither.

•BCCI was shut down in 1991 after Bank of England audits revealed that fraud, improper loans and deceptive accounting practices had been discovered

• BCCI was involved in:• Money laundering• Tax evasion• Bribery, smuggling, arms trafficking• Illegal purchases of banks and real estate. • Accused of catering to drug dealers, arms merchants and

third world dictators

The fraud required a highly compartmentalized organizational structure, designed to foster deception and avoid centralized regulatory review

BCCI’s annual auditing system was designed to be non-transparent, with complexity built in to avoid the detection of illegal accounting practices

£7 billion of undeclared debts

Magnitude of the fraud:

WHAT REALLY HAPPENED?

BCCI : Bank of Crooks & Criminals

BCCI was a personal piggy bank for its Arab and Pakistani owners and its favoured customers.

For its best customers, millions of dollars were advanced, often without documentation and sometimes in violation of the bank's own lending limits.

When the loans went bad and losses mounted, the bank apparently hatched a scheme to cover them up by making interest payments on loans with deposits from other customers.

The scheme also involved offshore funds parked in lightly regulated countries that could be drawn down to patch up losses elsewhere.

And when capital was needed to absorb further losses, the bank artificially pumped up its share price by lending money to existing shareholders to buy more stock. The proceeds from the stock would help

balance the bank's books, but actually the bank was merely taking depositor money and investing it in the bank.

It was essentially a "stateless" bank that operated in the United States and about 70 other countries, chartered in Luxembourg, run by Pakistanis, owned by Arabs, headquartered in Britain and serviced by outposts in the Cayman Islands.

How to hide losses? Bought banks in USA Laundered money from tax havens Illicit share buying schemes Complex ownership structure Borrow from Arabs Loan doctoring

THE SANDSTORM REPORT

In March 1991, the Bank of England asked Price Waterhouse to carry out an inquiry. On June 24, 1991, using the codename "Sandstorm" for BCCI, Price Waterhouse submitted the Sandstorm report showing that BCCI had engaged in "widespread fraud and manipulation".

Support of terrorism

The Sandstorm report, parts of which were leaked to The Sunday Times, included details of how the Abu Nidal terrorist group had held accounts at BCCI's Sloane Street branch, near Harrods in London. Britain's internal security service, MI5, had signed up two sources inside the branch to hand over copies of all documents relating to Abu Nidal's accounts. One source was the Syrian-born branch manager, Ghassan Qassem, the second a young British employee.

The Abu Nidal link man for the BCCI accounts was an Arab based in Iraq named Samir Najmeddin or Najmedeen. Throughout the 80s, BCCI had set up millions of dollars worth of letters of credit for Najmeddin, largely for arms deals with Iraq. Qassem later swore in an affidavit that Najmeddin was

often accompanied by an American, whom Qassem subsequently identified as the financier Marc Rich. Rich was later indicted in the U.S. for tax evasion and racketeering in an apparently unrelated case, fled the country, and received a controversial pardon from Bill Clinton on January 20, 2001.

Qassem also told reporters that he had once escorted Abu Nidal, who was allegedly using the name Shakir Farhan, around town to buy a tie, without realizing who he was. This revelation led in 1991 to one of the London Evening Standard's best-known front-page headlines: "I Took Abu Nidal Shopping."

Closure of the bank?

On July 5, 1991, the Bank of England closed down BCCI. Around a million investors were affected. Amongst the customers of the bank at this time was Garrards and Mappin & Webb, the jewellers responsible for maintaining the crown jewels and makers of the trophy for the America's Cup.

In 1992, United States Senators John Kerry and Hank Brown co-authored a report on BCCI, which was delivered to the Committee on Foreign Relations. The BCCI scandal was one of a number of crimes and disasters that influenced thinking leading to the Public Interest Disclosure Act of 1998.

The report found that former Defense Secretary Clark Clifford and his business partner Robert A. Altman had been closely involved with the bank from 1978, when they were introduced to BCCI by Bert Lance, to 1991.

Clifford and Altman testified to the committee that they had never observed any suspicious activity. The federal government brought indictments against Clifford and Altman and proposed barring them from banking for life, but did not pursue Clifford due to his age and deteriorating health.

Altman, however, was indicted and ultimately tried in New York by the office of District Attorney Robert Morgenthau. Despite a failure to convict in the New York trial, Altman nevertheless agreed to be banned from banking under threat of prosecution by the Securities and Exchange Commission.

The British government also set up an independent inquiry, chaired by Lord Justice Bingham, in 1992. Its House of Commons Paper, Inquiry into the Supervision of the Bank of Credit and Commerce International, was published in October of that year.

Following the report, the bank's liquidators launched the Three Rivers vs. Bank of England case, on behalf of thousands of BCCI creditors who are suing the Bank of England for its failure to properly oversee the bank.

The BCCI creditors sought £850m in damages, claiming that the Bank of England was guilty of misfeasance in public office. The case collapsed in November 2005, with the Bank of England seeking to re-claim legal bills. The cost of the case to the creditors could be as high as £100m

However, in 2002, Denis Robert and Ernest Backes, former number three of Clearstream, described as a "bank of banks" which practices "financial clearing", discovered that the BCCI had continued to maintain its activities after its official closure, with "microfiches" of Clearstream's illegal unpublished account

THE C-CHASE

A typical Bollywood film story – the arrests, the indictments and the mock wedding!

Robert Mazur (a.k.a Musella), Senior Special Agent, U.S. Customs Service

“C-Chase” was shorthand for an appartment complex called Calibre Chase northwest of Tampa where the investigation was launched

The bait : The Columbian Accountant from Long Island

LEARNINGS

•The critical role of senior management and key investors in establishing an honest, open and prudent bank

culture.

•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.

The need for independent and unified regulation and auditing of complex financial conglomerates.

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.

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.

THANK YOU