Academic journal article Law and Policy in International Business

The Bank of Credit and Commerce International Scandal: A Warning for Bank Regulators

Academic journal article Law and Policy in International Business

The Bank of Credit and Commerce International Scandal: A Warning for Bank Regulators

Article excerpt


In July 1991, assets of the Bank of Credit and Commerce International (BCCI) were seized by regulators in seven countries.(1) Regulators in Great Britain had uncovered evidence of widespread massive fraud affecting the bank's 800,000 depositors around the world.(2) Regulators seized more than $20 billion in assets, making the failure one of the largest for an international bank to date.(3) Although actual losses to depositors and investors are unknown, losses are estimated to be as high as $15 billion, or seventy-five percent of the bank's assets.(4)

The BCCI failure is of great concern because of its worldwide impact. Multinational banks such as BCCI transcend national boundaries to link together the economies of various countries. As a result, a multinational bank, and particularly its solvency, affects many countries. International banking has grown significantly over the past few years.(5) Assets in the United States branches of foreign banks quadrupled in the ten years after 1980, reaching $626 billion in 1990.(6) Although BCCI was large, it was not among the largest of multinational banks.(7)The lessons learned from BCCI may prevent future bank failures that may have an even greater financial impact worldwide. The purposes of this Note are to discuss the weaknesses in the supervision of multinational banks that allowed BCCI to operate for nineteen years and to offer suggestions on how to prevent another scandal from occurring.

A. Background

BCCI was founded by Pakistani financier Aga Hassan Abedi in 1972 with funds from investors in Abu Dhabi.(8) Bank of America was also an investor, with a twenty-five percent share of the bank.(9) BCCI was incorporated through a holding company, BCCI Holdings (Luxembourg) S.A., in Luxembourg.(10) The bank also had offices in London and Abu Dhabi. " From a modest start with only three offices in 1972, BCCI grew within five years to 150 offices in thirty-two countries.(12) Bank of America, which had increased its holdings in BCCI to forty-five percent in 1977, was suspicious of BCCI's exceedingly positive results and audited BCCI's European operations for October and November 1977.(13) The report indicated that BCCI's operations were not in conformity with general banking practices: reserves for bad loans were inadequate, and substantial loans were being made to "insiders."(14) Soon after the report was completed, Bank of America began selling its BCCI shares.(15) This may have been an early indication that BCCI was not as profitable as it appeared to be.

By 1977, BCCI was well established in many countries, but not in the United States.(16) BCCI management considered ownership of an American bank to be the key to international success.(17) In 1978, BCCI attempted a hostile takeover of Financial General Bankshares in Washington, D.C., but the bid was unsuccessful because the Securities and Exchange Commission (SEC) refused to approve the purchase.(18) The SEC requires foreign banks to disclose details about their operations if they plan to own more than five percent of the outstanding shares in an American holding company.(19) BCCI tried to avoid these disclosures by working with several parties to buy the stock.(20) In 1982, BCCI succeeded in gaining control of Financial General, which had been renamed First American Bankshares.(21) BCCI accomplished its goal by loaning the funds to a group of Middle Eastern investors, who then purchased the holding company's stock.(22) Although the Federal Reserve suspected that the investors were really a front for BCCI,(23) First American Chairman and former Secretary of Defense Clark Clifford, assured the agency that BCCI was not involved with the bank.(24) Six years later, in 1988, while federal agents were conducting an investigation of money laundering in Florida, a BCCI official told the agents that BCCI actually owned First American.(25) Through First American, BCCI was able to acquire the National Bank of Georgia and Independence Bank of Encino, California. …

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