SECOND ASSIGNMENT OF INTERNATIONAL

BANKING SYSTEM

BANKING FRAUD BY BANK OF CREDIT AND

COMMERCE INTERNATIONAL (BCCI)

Submitted by: Submitted to:

Dipesh Raj Pandey Mr. Niroj Singh Thapa

YEAR: 2015
 1. BACKGROUND OF CASE

1.1 Introduction

Title of the Paper - CORRUPTION IN INTERNATIONAL BANKING AND FINANCIAL

SYSTEMS

Creator - Lynne Walker

Case Study 1 – Bank of Credit and Commerce International (BCCI)

This case gives brief information about the massive money laundering and other financial crimes
done by Bank of Credit and Commerce International (BCCI). This case has been chosen as
banking fraud by BCCI is one of the largest cases of banking fraud till date. I have also given my
opinions on this case and some ideas on how such banking frauds can be prevented.

1.2 Major Stakeholders of Case

➢ Agha Hasan Abedi (The founder of BCCI)

➢ CEO Swaleh Naqvi
➢ Panamanian General Manuel Noriega
➢ Pablo Escobar of the Medellin Cartel
➢ Rodriguez Gacha of the Medellin Cartel
➢ Members of Ochoa family
➢ Officials of BCCI
➢ Bribed government officials of many countries including UK, Pakistan, Sri Lanka, USA,
etc.
➢ Political figures
➢ Drug dealers and chains
➢ Illegal weapon sellers
1.3 Summary

BCCI was created in India but moved to Pakistan after independence in 1947. BCCI’s founder
Agha Hasan Abedi, formed a new bank known as United Bank in 1958 which was licensed by
Pakistani government and Abedi was able to make BCCI second largest bank in Pakistan by
expanding its operations to other countries (mostly in Middle East). When Abedi prepared to
move the United Bank outside Pakistan in the early 1970s due to government’s plan to exercise
more control on financial institutions, he was placed under house arrest. During his house arrest,
Abedi dreamed of making his bank international by locating it outside Pakistan. To do so, he
needed financial support and cultivated a relationship with Sheikh Zayed bin Sultan al Nahyan,
the ruler of oil-rich state of Abu Dhabi.

The Bank of America became a 25% stakeholder in 1972 in the hope of expanding its activities
in the Middle East using Abedi’s connections. From its Bank of America connections, BCCI was
allowed to operate from its 6 offices - in London, Luxembourg, Lebanon, Dubai, Sharjah, and
Abu Dhabi. Later, Abedi created BCCI Holdings Company and split the bank into two parts:
BCCI (SA) and BCCI Overseas. Its two holding companies were based in Luxembourg and the
Cayman Islands--two jurisdictions where banking regulation was notoriously weak. To
circumvent local regulations, BCCI also acquired parallel banks through acquisitions: buying the
Banque de Commerce et Placements (BCP) of Geneva in 1976, and creating KIFCO (Kuwait
International Finance Company), Credit & Finance Corporation Ltd, and a series of Cayman-
based companies held together as ICIC (International Credit and Investment Company Overseas,
International Credit and Commerce [Overseas], etc.).

In 1976, BCCI moved its head office to London although it remained incorporated in
Luxembourg. By 1977, BCCI became the world’s fastest growing bank operating from 146
branches in 43 countries. Its assets increased from $200 million to approximately $2.2 billion. To
assist rapid expansion, BCCI staffs were forced to accept any business that came their way and
were penalized if they did not do so. The internal structure of the bank was unusual yet dynamic
in some ways. There was rigid compartmentalization; the 248 managers and general managers
reported directly to Abedi and the CEO Swaleh Naqvi. One unit’s activities would not be known
to another and senior officials were discouraged from asking too many questions.
BCCI divided its operation between only two auditors (Prince Waterhouse and Ernst and
Whinney) and took their help to hide its fraud and banking practices during the early years of its
operation. BCCI bought many foreign banks including banks in the US and opened offices in
many countries worldwide. None of its auditors ever objected to its financial statements and no
regulatory bodies were aware of its illegal financial activities (for more than a decade) that
included:

• Seeking deposits of drug proceeds and laundering drug money;

• Seeking deposits from persons attempt to evade U.S. income taxes;
• Using "straws" and nominees to acquire control of U.S. financial institutions;
• Lying to regulators and falsifying regulatory documents;
• Creating false bank records and engaging in sham transactions to deceive regulators;
• Bribery of the officials where it operated;
• Support of terrorism, arm trafficking and sale of nuclear technologies

Investigators in the U.S. and the UK revealed that BCCI had been "set up deliberately to avoid
centralized regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs
were extraordinarily complex. Its officers were sophisticated international bankers whose
apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to
avoid detection." BCCI organized its own intelligence network, diplomatic corps and shipping &
trading companies. It was in the 1988 that US authorities in Tampa, Florida indicted officials of
BCCI for the financial fraud, money laundering, bribery and falsifying documents. On July 5,
1991, regulators persuaded a court in Luxembourg to order BCCI liquidated on the grounds that
it had lost its entire capital and reserves the year before. At 1 pm London time that day (8 am in
New York City), regulators in five countries marched into BCCI's offices and shut them down.
 2. CRITICAL ANALYSIS

2.1 Scenario of Case

The Bank of Credit and Commerce International (BCCI) was a major international bank founded
in Karachi, Pakistan in 1972 by Agha Hasan Abedi, a Pakistani financier. The company was
registered in Luxembourg. At 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.

BCCI came under the radar of regulatory bodies and intelligence agencies in the 1980s due to its
perceived avoidance of falling under one regulatory banking authority, a fact that was later, after
extensive investigations, proven to be true. BCCI became the focus of a massive regulatory battle
in 1991 and was described as a "$20-billion-plus heist".

Investigators in the U.S. and the UK revealed that BCCI had been "set up deliberately to avoid
centralized regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs
were extraordinarily complex. Its officers were sophisticated international bankers whose
apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to
avoid detection." BCCI organized its own intelligence network, diplomatic corps and shipping &
trading companies. The liquidators, Deloitte & Touche, filed a lawsuit against the bank's
auditors, Prince Waterhouse and Ernst & Young, which was settled for $175 million in 1998.

2.2 What did they do wrong?

➢ Seeking deposits of drug proceeds, laundering drug money, seeking deposits from
persons having intention of evading taxes;
➢ Laundering money in and out of countries that came from sale of weaponries and drugs;
➢ Accepting deposits from prominent political figures (most of them illegal) and criminals;
➢ Bribing officials;
➢ Writing options to offset risk;
➢ Making up of accounts to show profits earned;
➢ Accepting any business without proper analysis;
 ➢ Hiding information among departments;
➢ Doing off the book transactions for the valued clients;
➢ Not letting one unit know the activities of another unit;
➢ Avoiding asking of too many questions in the offices
➢ Using "straws" and nominees to acquire control of U.S. financial institutions;
➢ Lying to regulators and falsifying regulatory documents;
➢ Creating false bank records and engaging in sham transactions to deceive regulators;
➢ Support of terrorism, arm trafficking and sale of nuclear technologies

2.3 Opinion on BCCI’s actions

In our opinion, BCCI had a culture of fraud, maintaining top secrecy of its banking operations,
trying to deceiving the regulators and trying to make the black money coming from criminal
enterprises white for its growth and expansion. This culture reached the highest level of the bank
and money laundering becomes much possible and easier when a number of key senior officials
of major banking institution such as BCCI cooperate fully in the laundering activity.

But there is some speculation by conspiracy theorists that BCCI, a bank that was quickly
expanding into Third World markets in Asia, Africa, the Middle East, and South America, was
specifically targeted as it was successful in emerging markets and posed a threat to more
established banks. BCCI entered the African markets in 1979, and Asia in the early 1980s. BCCI
was among the first foreign banks to be awarded a license to operate in the Chinese Special
Economic Zone Shenzhen which bore testament to Agha Hasan Abedi's public relations skills, a
feat that was yet to be achieved by the likes of Citicorp and JP Morgan. Some of China's largest
state banks were depositors in BCCI's Shenzhen branch.
 3. CONCLUSION

Banking and financial frauds are very dangerous as they can cause huge financial losses to a
large number of people, countries and even cripple several economies. So, all the business
transactions should be done legally through a legal channel.

Some of the actions which are important to minimize banking frauds are:

i. There should be proper regulation and supervision of banks and financial institutions.
There should be a proper regulatory and supervisory authority in all the nations.
ii. The organization should appoint auditor after properly analyzing the background of
the auditor. Similarly, the audit firm/organization should not agree to undertake duties
of an auditor without securing sufficient knowledge of entire organization.
iii. The bank and financial institutions should be ethical and should not associate
themselves with suspect/criminal entities in the hope of promoting their own aims.
iv. The banks and financial institutions should regularly supervise and monitor their
employees.