Research Analyst, PAGE
Aug 23 - 29, 2010
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. Within a decade BCCI touched its peak. It operated in 78 countries, had over 400 branches, and had assets in excess of $20 billion making it the 7th largest private bank in the world in terms of assets.
In the late 1980's, BCCI became the target of a two-year undercover operation conducted by the US Customs Service. BCCI came under the scrutiny of regulatory bodies and intelligence agencies in the 80s due to its perceived avoidance of falling under one regulatory banking authority, a fact that was later, after extensive investigations, proven to be false. BCCI became the focus of a massive regulatory battle in 1991 and was described as a ì$20-billion-plus heist".
BCCI expanded rapidly in the 1970s pursuing long-term asset growth over profits seeking high net-worth individuals and regular large deposits. The company itself divided 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, 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).
Overall, BCCI expanded from 19 branches in five countries in 1973 to 27 branches in 1974 and 108 branches in 1976 with assets growing from $200 million to $1.6 billion. This growth caused extensive underlying capital problems. The Guardian alleged that BCCI was using cash from deposits to fund operating expenses, rather than making investments.
BCCI entered the African markets in 1979 and Asia in the early 1980s. BCCI was among the first foreign banks 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. There was rigid compartmentalisation; the 248 managers and general managers reported directly to the chairman and the CEO. It was structured in such a way that a single country didn't have overall regulatory supervision over it so as not to hinder potential growth and expansion opportunities. Its two holding companies were based in Luxembourg and the Cayman Islands--two jurisdictions where banking regulation was notoriously weak. It was also not regulated by a country that had a central bank.
By 1980, BCCI was reported to have assets of over $4 billion with over 150 branches in 46 countries. Bank of America was "bewildered" with BCCI and reduced its holding in 1980, and the company came to be held by a number of groups, with ICIC owning 70 per cent. By 1989, ICIC's shareholding was reduced to 11 per cent with Abu Dhabi groups holding almost 40 per cent, however large numbers of shares were held by BCCI nominees. It was very common for Middle Eastern elites to use nominees to hold their stock, as they did not want the public to know the details of their holdings.
BCCI's demise began in 1986 when a US Customs undercover operation infiltrated the bank's private client division and uncovered their active role soliciting deposits from drug traffickers and money launderers.
In 1990, a Price Waterhouse audit of BCCI revealed an unaccountable loss of hundreds of millions of dollars. The bank approached Sheikh Zayed bin Sultan Al Nahyan, who made good the loss in exchange for an increased shareholding of 78 per cent. Much of BCCI's documentation was also then transferred to Abu Dhabi. According to the American audit firm, BCCI had long suspected that BCCI secretly owned First American. When the Fed cleared the group of Arab investors to buy First American, it did so on condition that they supplement their personal funds with money borrowed from banks with no connection to BCCI.
Contrary to that agreement, several stockholders had borrowed heavily from BCCI. Even more seriously for them, they pledged their First American stock as collateral, and when they didn't make interest payments BCCI took control of the shares. It was later estimated that in this manner, BCCI had ended up with 60 per cent or more of First American's stock.
Despite these problems, Price Waterhouse signed BCCI's 1989 annual report, largely due to Zayed's firm commitment to propping up the bank.
The bank established the Third World Foundation in London, which published the widely circulated Third World Quarterly and paid special attention to the promotion of the Urdu language and literature through the Urdu Markaz located in London. BCCI also established the Infaq Foundation in Pakistan which was instrumental in funding the establishment of some of the top universities of the region such as BCCI FAST (Institute of Computer Sciences) and GIK (Institute of Science, Engineering, & Technology) in addition to regular support for many other educational institutions. BCCI also established the Cromwell Hospital in London.
In addition, BCCI helped revive hundreds of historical buildings and monuments throughout the developing world and contributed significantly to the arts, culture, sports, health, and education in many poor, third world countries. A significant percentage of employees' salaries were regularly contributed through their consent to global charitable causes.
BCCI did what other banks could not. It went so far as to help the poorer countries of Asia, Africa and Latin America particularly Muslim states in building their economy and defences with its aid.
The phenomenal growth of BCCI, and generous contribution to the uplift of humanity was not liked by USA and most of the European countries. They became scornful, and spiteful. They levelled charges of dishonesty and fraud against the bank. No doubt, the end of BCCI's chapter was a huge loss for the third world economy particularly Pakistan.