Briefing Paper : BCCI: Behind the Bank Scandal

QUESTION: What is BCCI?

ANSWER: BCCI stands for Bank of Credit and Commerce International, although since it became embroiled in scandal, wags have renamed it “Bank of Crooks and Criminals International.”

Over the years, BCCI enjoyed acclaim in developing nations for extending credit in areas Western banks avoided. It was reputed to be more sympathetic to Third World economic problems than what are often seen in developing nations as the indifferent financial institutions of the industrialized world. It developed close relationships to central banks in developing countries, where officials often deposited funds in BCCI accounts.

But it also has been linked for years to criminal enterprises--tied, for example, to drug-related money-laundering activities, including some involving former Panamanian dictator Manuel A. Noriega. In 1990, two of its units pleaded guilty in federal court in Tampa, Fla., to money laundering. Later that year, six current and former BCCI employees were convicted of conspiring to launder $32 million in cocaine money.

Last July 5, banking regulators from around the world teamed up to shut down most BCCI operations, alleging widespread fraud.

What is unique about BCCI is not its size but its reach. BCCI’s operations and influence stretch throughout the world to about 70 countries and 1 million depositors. Its principal operations are based in Luxembourg and the Cayman Islands, two areas with some of the world’s most lax banking regulations.

With $20 billion in assets, the bank is not especially big by world standards. Indeed, it is smaller than California’s four largest banks--BankAmerica, Security Pacific National Bank, Wells Fargo and First Interstate.

Q. What is BCCI accused of?

A. BCCI’s seizure was prompted by the alleged disappearance of billions of dollars. Some investigators estimate that associated losses could be as high as $15 billion, which would make it by far history’s biggest banking scandal.

Where all of that money went is still a mystery. The seizure followed an audit by the accounting firm Price Waterhouse that showed, among other things, that the bank failed to record deposits, apparently in an effort to camouflage huge losses on bad loans and investments. In addition, British authorities allege that BCCI assisted people in dodging taxes by falsifying transaction records.

BCCI is said to have been the favorite bank of some of the world’s notorious dictators and terrorists, including Iraq’s Saddam Hussein and Palestinian terrorist Abu Nidal. Also, allegations are surfacing that the CIA regularly used the bank as part of such covert activities as assistance to rebels in Afghanistan and the Iran-Contra scandal.

Q. What American banks or financial firms are involved?

A. Authorities have alleged that two U.S. banks are secretly owned by BCCI: First American Bankshares in Washington and Encino-based Independence Bank, the largest commercial bank in the San Fernando Valley. BCCI is said to have used a front man, Saudi financier Ghaith R. Pharaon, to buy the U.S. banks because officials would never have approved an investment by the scandal-ridden BCCI. Federal Reserve officials have ordered BCCI to sell its secret interest--a process that has been delayed by the bank’s seizure.

BCCI could not operate as a conventional bank in the United States, taking deposits, but it did have a token presence with representative offices in New York and Los Angeles that were closed by state regulators on July 5.

The U.S. Federal Reserve Board is seeking $200 million from BCCI, alleging that it broke U.S. banking laws by secretly buying shares in First American, National Bank of Georgia (later acquired by First American) and Centrust Savings Bank in Miami.

Q. Who are the leading figures in the case? What did they allegedly do?

A. Agha Hasan Abedi founded the bank in 1972 and ran it for years. He is now retired and living in his native Pakistan.

Sheik Zayed ibn Sultan al Nahayan, the ruler of oil-rich Abu Dhabi in the Persian Gulf region, and his government purchased a controlling interest in BCCI last year and now face billions of dollars in claims. He is under pressure to use his country’s oil wealth to make good on depositors’ losses.

Clark M. Clifford, former U.S. secretary of defense, is chairman of First American and represented Abedi. Questions have been raised about whether he was aware that BCCI secretly controlled the bank. Clifford says he was unaware.

Robert Altman, a Washington lawyer and the husband of actress Lynda Carter, television’s “Wonder Woman,” is president of First American. He is a law partner of Clifford’s.

Pharaon is a Saudi financier who allegedly served as a front man in secretly buying First American and Independence Bank for BCCI. The Federal Reserve is seeking to ban him from U.S. banking operations.

Alan Garcia, former president of Peru, is being investigated for his alleged financial ties to BCCI.

Swaleh Naqvi is a former top BCCI officer. It has been reported that he may cooperate with investigators to help them unravel the BCCI case.

Q. Why are so many famous names being drawn into the scandal?

A. BCCI, like many alleged criminal enterprises, actively courted influential people such as Clifford and Altman. BCCI officials, for example, contributed $9 million to pet projects of former President Jimmy Carter. It also cultivated ties with former Atlanta Mayor Andrew Young.

Through Saudi Arabian financier Pharaon, BCCI bought the National Bank of Georgia, the bank of Carter’s former budget director, Bert Lance. It was later sold to First American.

Q. How far-reaching is the scandal?

A. That question is hard to answer now. The Justice Department has said that it is investigating possible bribery by BCCI of U.S. officials, indicating that the affair could turn into a major political scandal.

BCCI’s alleged ties to the CIA suggest that it will be even harder for President Bush to gain Senate approval for former senior CIA official Robert M. Gates to head the agency. In Britain, Prime Minister John Major and other officials are under fire for allegedly being lax in monitoring the bank.

In addition, the Federal Reserve and the Justice Department are being criticized for failing to adequately monitor and pursue investigations of BCCI.

Q. Who actually stands to lose money in the scandal?

A. Part of that depends on how much is missing and how much of the loss Sheik Zayed covers.

Customers, particularly those from some Third World countries without enough depositor protection, are at risk, as are central banks in developing countries, such as Nigeria, that deposited money with BCCI.

Deposits in the United States are not at risk. Both First American and Independence Bank appeared to be adequately capitalized. And federal deposit insurance would cover accounts up to the $100,000 legal limit.

Q. Will many bank officials face criminal prosecution?

A. It looks that way. On Monday, Abedi and Naqvi were indicted by a grand jury in New York on charges that they masterminded a scheme to defraud. BCCI was also named in the indictment.

Manhattan Dist. Atty. Robert M. Morgenthau is credited with being one of the first to recognize alleged fraud at BCCI. More information is likely to be unearthed through congressional investigations. Sen. John Kerry (D-Mass.) has been especially active in pushing for an extensive probe of BCCI.

All of the investigations were bolstered by BCCI’s seizure because it makes available extensive records and will bring forth new witnesses.

Q. Why is this more important than other bank or corporate failures?

A. BCCI is a global scandal that touches nearly every region of the world. Add to that the billions of dollars lost, which makes it possibly the world’s biggest banking scandal.

Moreover, the BCCI affair has clearly shown that the world’s bank-regulatory system is badly in need of overhaul. BCCI was regulated by more agencies worldwide than nearly every other bank in the world, yet for years it eluded serious scrutiny. Some have called it a Stealth-like bank, evading the regulatory radar systems that countries establish.