Globalization in finance has allowed the emergence of global banks, able to participate with ease in different markets around the world as barriers to the international flow of capital have been dismantled. However, global banks are not as easily regulated as those constrained to a single country, especially when closer international cooperation amongst regulatory and judicial authorities was in its infancy.
Able to base their operations in low tax and regulation-light jurisdictions, understanding the entirety of these firms’ operations was nearly impossible for any single government’s regulators. The Bank of Credit and Commerce International was able to use these conditions to support and engage in criminal activities until it was shut down in 1991.
Agha Hasan Abedi
In 1922, the founder of the Bank of Credit and Commerce International (BCCI), Agha Hasan Abedi, was born in British India to a middle-class family. He left for Pakistan upon the partition of India and there worked for a bank that had also recently relocated to Pakistan. After resigning this job in 1958, he formed a successful new bank called United Bank, which became the second largest in the country. A socialist administration in Pakistan had United Bank nationalized and Abedi was put under house arrest in the early 1970s. While under arrest, Abedi was planning his next venture, this time a Pakistani bank beyond the borders of the country and thus well outside the reach of its government.
The result was the Bank of Credit and Commerce International. Legally formed in Luxembourg and the Cayman Islands but based in Abu Dhabi, Abedi would no longer need to worry about intrusive governments. His vision was to create a banking organization large enough to compete with large Western banks but focused on developing countries.
BCCI was founded with $2.5 million from Bank of America, an amount which bought it a stake of 30%, and another $500,000 from the Sheikh Zayed, the ruler of Abu Dhabi, who also gave Abedi’s new bank deposits of $100 million. For Bank of America, it was a cheap way of getting a foothold in the Middle East just as the surge in oil prices was enrichening the region. As it happens, it was funding the birth of one of the most boldly criminal banks in history.
Under Abedi’s leadership, BCCI grew quickly and seemingly out of proportion with the amount of money it launched with. Whereas the bank had nineteen branches in five countries and $200 million in assets in 1973, it had 146 branches across forty-three countries and $2.2 billion in assets by 1977. Yet, it was still largely a Middle Eastern firm. In the late 1970s though, the bank began expanding into Africa, where it used bribes in an already corrupt environment to accelerate its growth. Next came Asia and the Americas and GCCI opened branches in Hong Kong, Canada, the United States, Venezuela, and elsewhere. By the 1980s, the bank had branches in seventy-three countries and assets of $22 billion. The bank’s headquarters moved from Abu Dhabi to London.
In its bid to become one of the world’s largest banks, BCCI was willing to count dictators, drug runners, spies, and terrorists among its customers. In Jordan, it managed to secure the despots of the Jordanian army after hiring the brother-in-law of the army commander. In Colombia, it opened branches in centers for drug production and GCCI had a reputation for asking no questions about the origins of deposits and allowing money laundering to happen unchecked. In various Third World countries, GCCI bribed officials to secure central bank deposits or other benefits.
The bank was practically designed for facilitating criminal activities. It had a fractured corporate structure leveraging shell corporations, bank confidentiality, and havens of bank secrecy. Thus, it was free of any one government’s close oversight. Abedi had succeeded in building a bank free from legal restrictions but also one eager to let illegal activities take place if it meant obtaining competitive advantage.
Abedi, who had the reputation of a mystic, ran a very secret bank. Responsibility for the bank’s audit was split between two firms for all but the final years of its life. This meant GCCI avoided giving any one firm visibility into the entire bank. Inside GCCI, some loan documents were inaccessible even to internal auditors.
The $3 million in equity capital with which BCCI was established was tiny compared to Abedi’s ambitions. Yet somehow, BCCI grew, acquiring banks in Kuwait, Switzerland, and Oman. In each case, the bank officially purchased only a minority interest due to restrictions on foreign ownership of local banks in these countries, but GCCI controlled the firms anyway through front-men who acted as though they were independent investors.
This expansion was not profitable but the bank prioritized asset growth. To achieve this growth, the bank courted high net-worth clients valuing secrecy unable to be adequately served by other banks, often the rulers of Persian Gulf states enriched with oil money. Some of these depositors were also borrowers and some were not particularly reliable.
When a large borrower, a Pakistani shipping and trading company and one of GCCI’s earliest customers named Gulf Group, encountered financial difficulties, GCCI covered the missed payments itself to give the appearance that its loans to Gulf Group were performing. This was not a small undertaking; the amounts loaned to Gulf Group came to more than $700 million. BCCI deployed concealed and unrecorded deposits to cover these loan payments. Because these deposit liabilities were unrecorded, it allowed the bank’s books to appear balanced when they did not balance in reality. Trading losses also deepened a hole in the bank’s finances.
In the late 1970s, Bank of America grew wary of investing more money into GCCI and divested itself of its holdings in the bank by 1980. The bank’s Arab sponsors grew their share of ownership but more often by providing favors than by actually injecting new capital. Often, the bank would lend the money used by new investors to purchase stock issued by the bank itself to raise new capital. Thus, the bank was essentially using customer deposits to fill its deficit. This was unknown to the company’s auditors and regulators because the stock loans were made through a Cayman Islands-affiliate of BCCI and the Cayman Islands had strict bank secrecy laws.
The bank might never have been profitable in its entire history and GCCI was nearing a several-billion-dollar accumulated loss by around 1990. Price Waterhouse, one of BCCI’s auditors, conditioned its April 1990 certification of BCCI’s accounts on the bank receiving a bailout from the government of Abu Dhabi and restructuring with the assistance of the Bank of England, the government of Abu Dhabi, and Price Waterhouse itself. Members of the royal family of Abu Dhabi owned almost one-quarter of the bank.
First American Bankshares
BCCI had also attempted to acquire a bank in the United States but was blocked by regulators. Rather than back down, it hired American government officials, legislators, and bank regulators to benefit from their names and reputations. It also arranged to buy an American bank by proxy. A group of investors associated with GCCI organized Credit and Commerce American Holdings (CCAH) to purchase First American Bankshares, a Washington D.C. based bank.
CCAH was merely a front for GCCI but the investors insisted to American regulators that BCCI was neither financing or directing the acquisition. This was untrue but the sale to CCAH was approved. In reality, GCCI was funding the acquisition by lending against CCAH / First American stock and the investors were paid by GCCI to act as a front for the bank. First American, under GCCI’s control, then expanded by purchasing banks elsewhere in the United States.
Both BCCI and First American Bankshares were used by the Central Intelligence Agency in its operations. The bank was involved in handling the arms for hostages deal at the center of the Iran-Contra affair. Because of its dealings with these firms, the CIA was aware of BCCI’s corruption and its purchase of First American but this information was not shared with the bodies most inclined and able to take action to punish the flagrant transgression of the law.
The CIA was not the only secret customer of the bank. Besides the accounts of the CIA, GCCI maintained secret accounts for Saddam Hussein and Manuel Noriega, the dictators of Iraq and Panama respectively. Illegal transactions were recorded in separate books and records from those of ordinary clients.
Kerry and Sandstorm
After a heart attack and stroke, Abedi ceased running GCCI in 1988. Shortly after, the secrecy was lost and the criminality began to be illuminated. BCCI was investigated for money laundering but reached a plea agreement with American prosecutors in 1990. The next year through, the company’s antics were exposed to the world.
Leading a U.S. Senate subcommittee investigating BCCI after its collapse, U.S. Senator and eventual Secretary of State John Kerry released a report in December 1992. It listed BCCI’s offenses, which included fraud, money laundering, tax evasion, bribery, support of terrorism, arms trafficking, the sale of nuclear technology, and far more.
This was not the spark that brought about the end of GCCI. The Bank of England, after years of suspicions, had already discovered BCCI’s involvement in financing terrorism and money laundering in the late 1980s. In 1990, it received more information about BCCI from the company’s auditors, Price Waterhouse, but kept this secret to avoid a run on the bank. BCCI had 1.2 million depositors, mostly from Third World countries. Instead, the Bank of England allowed BCCI to restructure. In the meantime, BCCI moved its headquarters back to Abu Dhabi, removing access to the bank’s records from the reach of Western regulators and enforcers.
In the end, a pending indictment from authorities in New York thwarted any restructuring. The Bank of England had also received a new report from Price Waterhouse, codenamed the ‘Sandstorm Report’, which provided the final evidence needed to prompt drastic action. The Bank of England changed course and worked with foreign regulators to shut the bank in June 1991. In the words of Robin Leigh-Pemberton, Governor of the Bank of England at the time, “the culture of the bank is criminal”.
Documents and testimony released as part of the indictment and special commissions brought the extent of GCCI’s criminality to light in the early 1990s. In the end, the collapse of Abedi’s bold bank had limited reverberations elsewhere in the global financial system. For years even more suspicious of GCCI than regulators, other major banks largely avoided doing business with the firm.
The story of BCCI reveals just how useful the secretive bank was to those who also needed secrecy. The bank was able to serve intelligence agencies like the CIA and dictators like Saddam Hussein alike. Why though was the bank so unsuccessful in the end? Surely this secrecy provided an advantage. In the end, BCCI’s managers may have made better financial smugglers than bankers. “Western Banks concentrate on the visible, whereas we stress the invisible,” Abedi said in 1978. That may have been a reference to the hidden crimes of Abedi’s bank but could just as well have been an admission of the bank’s slim capital and nonexistent profits.
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1. Lohr, Steve. World-Class Fraud: How B.C.C.I. Pulled It off — a Special Report.; at the End of a Twisted Trail, Piggy Bank for a Favored Few. The New York Times, 12 Aug. 1991.
2. Mufson, Steven, and Jim McGee. BCCI Scandal: Behind the ‘Bank of Crooks and Criminals’. The Washington Post, 28 July 1991.
3. Passas, Nikos, and Richard B. Groskin. “Overseeing and Overlooking: The US Federal Authorities’ Response to Money Laundering and Other Misconduct at BCCI.” The Organized Criminal Activities of the Bank of Credit and Commerce International: Essays and Documentation, 2001, pp. 141–175.
4. Passas, Nikos. “The Genesis of the BCCI Scandal.” Journal of Law and Society, vol. 23, no. 1, Mar. 1996, pp. 57–72.
5. United States, Congress, Kerry, John, and Hank Brown. The BCCI Affair A Report to the Committee on Foreign Relations (United States Senate), 1992.