The Biggest Bank Fraud in History _ Banks _ Financial Services imf money laundering

N july 5, 1991, an inci- 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.Imf money laundering

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 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 understanding of the bank’s struc- ture and overall financial position, and were encouraged not to ques- tion bank practices, or the reason for the flow of funds between bank entities.Imf money laundering

Agha hasan abedi, a pakistani banker with arab backing, founded the bank of credit and commerce international in 1972. The institution was chartered in luxembourg, but its treasury and other key functions were based in the cayman islands and in london before decamping to abu dhabi in 1990. Its branches and subsidiaries in 70 countries were held together by a complex structure of holding companies, cross-holdings and 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 full jurisdiction over it. Although institutions such as the CIA and the bank of england reportedly had some knowledge of BCCI’s activities before the scandal broke, regulators worldwide – including a special college of regu- lators set up to oversee the institu- tion in 1987 – proved unable to take early and decisive action against the bank.Imf money laundering regulation was made difficult by inadequate communication among agencies, and by the high- level government connections that BCCI’s leaders cultivated. Although they may not have endorsed the bank’s activities, various influential figures in the US and around the world overlooked signs that could

, 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.Imf money laundering 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 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.Imf money laundering 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 june 2001

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 year earlier, BCCI had set its sights on financial general bankshares, the company that would later become first american.Imf money laundering 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 charge of the purchased institution, and the deal was allowed.Imf money laundering 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 york state court, while charges against clifford were set aside due to his ill health. In 1998, not long before clifford died, both men reached a $5 million settlement with the federal reserve board without admitting any of the alle- gations. BCCI’s involvement in US banking was not limited to washington. In 1987, first american made an all- cash offer for the national bank of georgia that, the federal reserve later alleged, was simply a way for BCCI to secure covert investments it had made a decade or so earlier.Imf money laundering like first american, national bank of georgia was sold, to south trust corp, after its BCCI connection was revealed. Other institutions fatally embroiled in BCCI’s complex deals and shadowy investments included the independence bank, encino, california and centrust, an already troubled miami-based thrift.