Financial institutions are trusted by billions of people around the world. A fair few of these banks have a colored history, primarily due to the facilitation or engagement in criminal activity.
The History of BCCI
The Bank of Credit and Commerce International, or BCCI, was initially founded in 1972. Its founder goes by the name of Agha Hasan Abedi, who also founded the United Bank of Pakistan 13 years prior. BCCI received 25% of its capital from Bank of America, and the rest from the then-ruler of Abui Dhabi, Sheikh Zayed bin Sultan Al Nahyan.
Despite achieving very rapid succession in the 1970s, the bank also decided to engage in some criminal activities. Considering how there were many acquisitions and branches, one has to wonder why the team decided to pursue this option.
The first allegations surfaced in this period, as The Guardian suggest BCCI was using dash from depositors to fund operating expenses. Despite these rumors, the bank continued to expand to Africa and Asia by early 1980. It was also one of the first foreign banks to operate in the Special Economic Zone of Shenzhen.
The 1990 Accounting Issue
Cracks in the facade of the Bank of Credit and Commerce International began to surface in 1990. A routine audit conducted by Price Waterhouse indicated the bank had a loss of hundreds of millions of dollars. None of these losses could effectively be explained in the accounting books, which raised a number of internal an external alarms.
Thankfully for the bank, Sheikh Zayed bin Sultan al Nahyan decided to help the company out in exchange for more shares.
The audit also confirmed other irregularities, resulting in $1.48 bn in loans to its own shareholders using BCCI stock as collateral. It was also revealed BCCI owned First American, with roughly 60% of the bank’s stocks in their hands.
Malicious Lending Endeavors
Lending has become a crucial staple in any bank’s day-to-day operations. Financial institutions need to make money around the clock and loans are one of the more traditional ways to achieve that goal.
For BCCI, its lending practices were not as transparent or legitimate by any means. The bank’s loan portfolio further highlighted significant concerns and problems. The bank was primarily active in regions where modern banking did not gain traction at that time.
In the Muslim world, charging interest on a loan is not allowed, as it is not a halal practice. This would make it very difficult for the bank to make any real money in that part of the world. With BCCI founder Abedi handing some of his customers’ loans personally, a very dangerous precedent was created.
One crucial example comes in the form of the companies operated by the Gokal brothers. BCCI Founder Abedi didn’t bother checking their creditworthiness, despite signing off on $1.2bn in loans to these companies. This amount was also three times the bank’s own capital, which was – and still is – completely unacceptable.
Money Laundering in 1986
One of the nails in the coffin of BCCI came to light in 1986. The US Customs conducted an undercover operation against the bank. It is this operation that highlighted how the bank didn’t bat an eye regarding taking deposits from money launderers and drug traffickers. It is believed some of the money from the infamous Medellin Cartel passed through this bank at some point.
An official implication against the bank was filed in 1088, following the undercover op. A trial was conducted over the span of six months, forcing BCCI management to plead guilty. However, the management claims the money laundering was conducted by its employees. The result of this trial is how BCCI was forced to leave the state of Florida., while federal regulators took no action.
Fraud and Manipulation in the 1990s
The issues did not end there for the Bank of Credit and Commerce International. A new Price Waterhouse inquiry was conducted in 1991 on behalf of the Bank of England, The outcome wasn’t positive.
BCCI had clearly engaged in manipulation and fraud on a very large scale. The bank’s own financial history could not be pieced together properly. Additionally, fake accounts were opened by members of the Abu Nidal terrorist group.
Again, it seemed the bank would get away without this type of behavior, but the institution would meet its demise soon enough.
The Forced Liquidation
The year 1991 was crucial for BCCI in many different ways. A plan was put forward to restructure the bank and continue under the “Oasis Bank” name. Following the Price Waterhouse inquiry, however, this plan was put on hold indefinitely. Regulators agreed the bank had crossed the line too many times.
After being forced to close its American operations in March of 1991, things went downhill very quickly. In July, BCCI was ordered into liquidation by a court in Luxembourg. The institution had become insolvent in 1990s.
Somehow, the bank lost all of its capital and reserves. On July 5, 1991, BCCI was shut down officially. This was bad news for the over 1 million clients who still had money in their bank accounts at that time.
Two days later, BCCI was forced to shut down in Hong Kong due to its “problematic loan structure”. This branch of the bank was liquidated on July 17, intensifying the downhill snowball effect the institution went through.
Indictments Follow Suit
It did not take long for both founder Agha Hasan Abedi and CEO Swaleh Naqvi to pay the piper. In 1991, both men were indicted on twelve counts of fraud, money laundering, and larceny. Both men also received federal charges in November of the same year for illegally buying control of Independence Bank of Los Angeles.
Even the liquidators of the bank – both Deloitte and PwC – pleaded guilty to all charges against the bank in the US. As a result, the bank paid $10m in fines and forfeited $550m in assets in the United States.
These losses were used to pay damages to First American and Independence, as well as restituting its own depositors. Neither First American and Independence could be rescued, unfortunately
A lot of crucial players making up the management of BCCI managed to avoid prosecution, for reasons unknown. A more thorough investigation could certainly have brought a lot of these individuals to light, but no further action was undertaken in this regard.