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BCCI Avoided Huge Tax Bite in Pakistan : Scandal: Much of the bank’s profits went to a charitable foundation that, in turn, collected more money in interest than it spent for charity.

TIMES STAFF WRITER

The Bank of Credit & Commerce International used a veil of charity, nationalism and religious piety in the country of its birth to avoid paying tens of millions of dollars in taxes. Instead, it channeled most of the huge profits it earned in Pakistan to a corporation owned by a close friend of the bank’s founder, to inflationary tax-free bonds and to pet projects of Pakistan’s most powerful politician, President Ghulam Ishaq Khan.

Documents obtained by The Times indicate that Ishaq Khan was serving as the nation’s most senior finance official when BCCI was granted special tax-free status for its highly profitable Pakistani operations in 1981. That was the year the bank’s founder, Agha Hasan Abedi, created a charitable foundation that sheltered the bank’s income from taxes and earned Abedi a reputation as a larger-than-life philanthropist among most of his countrymen.

Ishaq Khan--who does not appear to have benefited financially himself--also served as chairman of the BCCI foundation when it made its largest single donations ever: $10 million in grants in 1988 and 1989 to finance a private institute for science and technology, a now-secret facility where the current project director is A. Qadir Khan, the Pakistani scientist most closely associated with the nation’s attempts to build a nuclear bomb.

The foundation did assist many of Pakistan’s needy and was responsible for many good works. But an analysis of 10 years of BCCI foundation accounts--obtained by The Times and verified in dozens of interviews with present and former BCCI officers--shows that less than 10% of the $60 million in profits BCCI reported it amassed here in the past decade actually went to the nation’s indigent and incapacitated, to the institutions that care for them and to the religious and educational “good works” for which Abedi is best known here.

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Through its large investments in government bonds that the World Bank has cited as a significant cause of Pakistan’s soaring inflation and expanding black economy, the BCCI foundation actually made more money in interest alone than it ever donated to charity.

For each dollar the foundation spent to care for cancer patients or for scholarships for the poor, it spent thousands more on shares of stock in a private Pakistani cement company that has never paid the foundation a single dividend. That company is owned by Abedi’s close friend, Saudi entrepreneur Ghaith R. Pharaon. Pharaon was indicted with Abedi in New York last month in the massive bank fraud scandal that has engulfed BCCI’s operations in the United States.

And for every dollar the foundation donated to its public showcase project--a long-term slum improvement program in suburban Karachi where the director himself believes BCCI exploited charity in the name of Abedi’s personal prestige--it spent tens of thousands more on Abedi’s personal pet projects.

They eventually had to be slashed or abandoned when President Ishaq Khan and the rest of the foundation’s board, instead, allocated funds for the Ghulam Ishaq Khan Institute for Engineering Sciences and Technology.

“The biggest problem with the BCCI thing is that people have now lost faith in philanthropy,” said Prof. S. A. K. Lodhi, a Pakistani scientist who headed for nearly a decade one BCCI-financed sub-foundation that has languished for lack of funds.

Despite apparent conflicts of interest at the top levels of the Pakistani government, the operations of the BCCI foundation do not appear to have violated Pakistani laws.

The foundation’s investment in Pharaon’s Attock Cement Corp. appears to be permitted under at least one of the 28 broad objectives outlined in the foundation’s articles of association, which served as the basis for the government concession allowing it to operate here largely tax-free.

The huge donations to Ishaq Khan’s private institute are permitted under the foundation’s mandate to “encourage research, investigation, invention, planning and development.” That mandate would sanction the financing of nuclear weapons development in a country where an “Islamic Bomb” is viewed popularly and politically as a patriotic mission.

The foundation’s sizable investment in tax-free government bonds has left it with a $60-million endowment that still can be donated to charity, if the board so decides.

But the foundation’s records show a pattern in BCCI’s Pakistani operations that bank sources here said BCCI displayed in many of the 76 counties where Abedi expanded his vast empire into what became the Third World’s largest financial institution.

It is a pattern of using money to make more money, to influence key politicians and to shelter as much of it as possible from taxation. It is a pattern that challenges not only Abedi’s domestic image as a devout benefactor of the poor but also BCCI’s moral case for its defense here and in the West.

Abedi’s supporters and colleagues proudly stressed during interviews that 85% to 90% of all bank profits went to the foundation, and, thus, to charity.

In Pakistan, the foundation that sheltered the bank’s profits was a mirror-image of BCCI’s international network of London-based “charitable foundations.” Each has a variation of the name International Credit and Investment Corp. (ICIC). They not only functioned in a similar way to BCCI’s Pakistan foundation, serving as tax shelters. But, records show, they also invested funds earmarked for charity in separate BCCI-owned travel and insurance corporations.

The Pakistani foundation’s operations offer a dramatic study of how BCCI conducted its business in the one nation that the bank’s top management and staunchest supporters cite as the centerpiece of its international operations.

President Ishaq Khan, a dedicated and lifelong civil servant, is viewed by all analysts here as incorruptible and is widely credited with helping to usher democracy into a nation long-ruled under martial law. He could not be reached for comment about the BCCI foundation, whose board he still chairs.

“The policy is that no one from the foundation is allowed to give an interview with the press,” BCCI foundation director S. U. Khan said.

Politics and BCCI

To fully grasp BCCI’s operations here, it is important to understand the political backdrop against which the bank’s scandal is being played out. Many Pakistanis are outraged by Western actions against BCCI. They view the indictments returned by a New York grand jury, the federal indictments expected soon in Washington and the Bank of England’s sudden decision to shut BCCI worldwide last month as part of a Western conspiracy to prevent any Third World or Islamic institution from growing too large or powerful.

Coming on the heels of the U.S.-led war that smashed Iraqi President Saddam Hussein’s army, even the most respected, restrained Pakistani commentators have blamed BCCI’s collapse on a “unipolar, new world order,” in which the United States and its Western partners will stop at nothing to preserve their monopoly on the world’s military and financial might.

Pakistan’s most senior politicians, some of whom had little-known personal or financial ties to BCCI, have risen to Abedi’s defense. Former Prime Minister Ghulam Mustafa Jatoi called BCCI’s founder “an angel in the form of a human being.” Jatoi offered that praise in an interview in which he denied a recent audit of BCCI’s Pakistani operations that listed a 40-million rupee ($1.6-million) loan to his family business as “bad or doubtful.” Such a loan never was made, he said, adding that whatever loans the company has outstanding at the bank are adequately secured.

Jam Sadiq Ali, the chief minister and highest-ranking official in Karachi’s province of Sind, held a news conference last week in which he professed his admiration and devotion for Abedi, vowing never to permit his extradition. But he did not mention that Abedi and his bank supported the official financially during the years that he spent in self-exile in London. He confirmed this later in an interview.

But not all public assessments here of the BCCI scandal have been sympathetic to Abedi and his empire, reflecting what prominent Pakistanis say was a strong, long-standing suspicion among the country’s small financial elite that all was not what it seemed within BCCI.

The Investments

Records and interviews show that foundation investments in government bearer-bonds, called Khas Deposit Certificates, were no different from those made by many major Pakistani corporations and other charities to shelter profits from Pakistan’s taxes.

The bonds were phased out last year under pressure from the World Bank, partly because they generated no revenue for this impoverished nation of 100 million. They also prevented Pakistan’s economy from expanding by taking billions of dollars out of the job-producing capital market.

As for the BCCI foundation’s investment in Pharaon’s cement company, it was unwise at the time, present and former foundation board members conceded.

According to documents obtained by The Times, the foundation used 74 million rupees (equivalent to $3 million at today’s exchange rates) of BCCI’s sheltered bank profits to buy 740,600 shares in Pharaon’s Attock Cement Co. in 1983 and 1984. The foundation’s investment came at a time when the company listed assets of just 10 million rupees, liabilities of 12.8 million rupees and its directors, headed by Pharaon, conceded in its annual report that its performance and future were a “disappointment.”

The company blamed its losses, which continued until 1990, when it showed a tiny profit for the first time, on slow delivery of equipment from the Romanian government, its partner in building a cement plant in rural Pakistan. Company books indicate that Pharaon’s venture was desperately in need of capital when, former BCCI officers say, Pharaon persuaded his friend Abedi to steer foundation funds into Attock Cement.

That company’s current chief executive, S. Dilawar Abbas, who is also among Pharaon’s close personal aides, first told The Times in an interview in London that BCCI’s investment was a “token” needed to comply with Pakistani laws requiring some “local ownership.” He conceded that the company’s largest shareholder, with about 2.2 million shares, is another corporation based in the tax haven of the Grand Cayman Islands. Abbas asserted that the Grand Cayman Attock Cement company, which, under the islands’ laws cannot be opened to public scrutiny, is wholly owned by Pharaon.

But in a subsequent interview, Abbas conceded that the BCCI foundation did own 25% of Pharaon’s private cement company, based on its 1983 and 1984 investments. He added that he was uncertain there was a legal requirement for partial Pakistani ownership. When asked in the second interview why the BCCI foundation made the investment, he said, “They had lots of money.” He added that Pharaon’s venture must have appeared to be a good investment at the time.

But Abedi’s decision to invest in Attock Cement was, according to the recent U.S. indictments, just one of several partnerships Abedi and his bank formed with Pharaon. In America, investigators have asserted that Pharaon acted as a front-man who brought BCCI into U.S. markets and elsewhere by using assets of banks and corporations purchased on paper in Pharaon’s name as collateral for huge BCCI loans that he later defaulted on; BCCI was left with as much as $500 million in bad debts in Pharaon’s name.

Pharaon could not be reached for comment. Abbas said Pharaon is living on his three-bedroom yacht, last reported to be somewhere in the Mediterranean.

The foundation’s 1983 investment in Pharaon’s Pakistan cement venture reveals more about BCCI’s Pakistani operations than it does about the friendship between Abedi and Pharaon. Not only was it the foundation’s largest single expenditure that year, but it was nearly five times the total amount that the foundation donated that year to more than 50 charitable causes. These included the highly public financing of flights for Pakistani pilgrims traveling to Mecca for the hajj; printing of copies of the Koran, the Islamic holy book; construction of mosques, and funding of eye hospitals and leprosy centers.

In many ways, documents filed with the foundation’s annual report indicate that the 1983 “donation” policies set the tone for years, times when up to 90% of the BCCI bank donations went into high-yield bearer bonds. The foundation did make hundreds of high-profile donations that touched lives--from financing medical trips abroad for the poor, to perhaps the most highly publicized effort, helping to eradicate Guinea worm disease in Pakistan through the Global 2000 project. It was launched by former President Jimmy Carter and apparently formed the basis of Carter’s close personal friendship with Abedi.

But a few former BCCI officers and former foundation employees knew the proportion of foundation income going to charitable works. They said they quit when they grew convinced that the foundation was little more than a legal tax shelter, more intent on maximizing profits and building endowments than promoting human welfare, health and science.

They cited the foundation’s creation of two subsidiary foundations in the early- and mid-1980s. At Abedi’s personal direction, they said, the foundation provided seed money for BCCI-NEST (New and Emerging Sciences and Technology) and BCCI-FAST (Foundation for Advancement of Science and Technology.)

Science Groups

NEST was headed by Pakistan’s pre-eminent nuclear scientist, I. H. Usmani, known here and in the West as the father of Pakistan’s now-controversial nuclear energy program. That foundation received only a few million dollars in BCCI donations before it was forced to fold for lack of funding last year.

In a 1989 NEST brochure, bearing a graphic of a nest filled with four eggs marked Pakistan, Bangladesh, Zambia and Zimbabwe to represent nations where BCCI bank profits were allocated to the NEST project, Usmani declared that the foundation would help the Third World “leap rather than creep into the 21st Century” by developing alternate energy systems. NEST collapsed after building only a handful of solar projects, some of which have now been taken over by a private company that Usmani has started in his own name.

FAST received about $4 million in bank donations after it was formed in 1980 to “bridge the wide gulf of technology lag” between West and East, according to annual reports. It attracted two respected Pakistani scientists who opened two high-tech computer schools in Karachi and Lahore, where FAST continues to offer the nation’s only bachelor’s degree program in computer science.

Under its long-serving projects director, Javed Ashraf, who came home from a high-paying job in Libya to run the Karachi center in 1985, the foundation quickly established a reputation so high that more than 1,000 students applied each year for the few dozen slots available. But Ashraf was forced to resign last year after he challenged foundation funding policies. Ashraf, who asserted in an interview that tens of millions of rupees earmarked for the institute “simply vanished,” said “our good name was being used by some persons for something else.” He offered no speculation on what happened to the money for the foundation, which has been headed for several years by Pakistan’s former finance minister Mahbul ul-Haq, who has lived for the past 18 months in New York, where he serves as a senior adviser to the United Nations.

Another former FAST official said he left because the money that was promised for the institute’s ambitious expansion was donated, instead, to President Ishaq Khan’s institute.

“There was just this one jug of money for the development of science in Pakistan, and it was split up into three pieces that were not even enough for one of the projects,” the former officer said. “That was the biggest tragedy, because even Mr. Abedi knew that without science, Pakistan would never advance.”

The officer said he had complained to FAST’s BCCI benefactors for months that the foundation was run to promote only investment profit and not scientific training or research. In one harsh exchange, he said, “I told them . . . ‘we’re only acting as a finance company, not a foundation for real science or charity.’ ”

FAST records, obtained by The Times, indicate that most of the BCCI annual donation was invested in the same Khas government securities as used by its parent foundation. But FAST employed a financing system that, in effect, permitted BCCI’s banking operation to profit from the very sums it had donated earlier to FAST’s parent foundation. FAST, because it tied up in bonds its donations from the parent BCCI foundation, had to open an overdraft account to pay its day-to-day expenses; that account was opened at a BCCI bank in Karachi, which then charged the foundation 18% interest on its expenditures.

But it wasn’t the accounting system that forced FAST to scale back its ambitious plans to encourage science in a nation that still ranks among the world’s least-developed. Rather, it was the BCCI foundation decision in 1987, when Ishaq Khan was serving as its chairman, to commit 250 million rupees (about $10 million) to the Society for the Promotion of Energy and Science Technology. The society also is headed by President Ishaq Khan. Its only project is the Ghulam Ishaq Khan Institute of Engineering Sciences and Technology.

One Western diplomat in Pakistan described the institute as the president’s “monument.” At the institute headquarters in Islamabad, there is a master plan for a 218-acre campus, donated to the society by the government in Pakistan’s Northwest Frontier Province, adjacent to the country’s largest hydroelectric project, the Tarbela Dam. An administrative employee explained that, when the first phase of construction is completed in 1993, the institute will offer bachelor of science degrees to 150 students; when the project is complete in 1997, it will offer master’s and doctorate degrees to 665 students in metallurgy, electronics, computer science, mechanical engineering and mathematics.

The institute will confirm that its project director is A. Qadir Khan. He has been outspoken about Pakistan’s aspirations for atomic might, and his controversial nuclear program brought Pakistan so close to possessing a nuclear bomb that the U.S. Congress cut all aid to Pakistan last year.

But much of the institute’s plans appear shrouded in secrecy. Its executive director, H.U. Beg, a former Pakistani secretary of finance and close associate of the president who runs a financial consulting service in Islamabad, told The Times that neither he nor anyone else associated with the society or the institute are “authorized to say anything about it.”

Qadir Khan, whose whereabouts and even whose official title are among Pakistan’s most closely guarded secrets, could not be reached for comment. A Times reporter who tried to visit the institute’s construction site was followed by two unmarked military intelligence cars and was stopped at a checkpoint several miles away.

When asked about the propriety of BCCI’s foundation funding the institute, prominent Pakistani analysts stressed that few here would take issue with it. They said it would only build the prestige of the president, Abedi and his bank in most Pakistanis’ eyes. Nuclear weapons capability is not only a source of nationalist pride, but is seen by many as a necessary deterrent against Pakistan’s traditional enemy, India, which exploded a test nuclear device in 1974.

“When you dig deeply into the most sensitive issues here, whether it’s BCCI or the bomb, you have to view it all in context,” said one Pakistani analyst who asked not to be named. “The reality is Agha Hasan Abedi put Pakistan on the map of international finance. No matter what he did with the rest, he did donate tens of millions of rupees to charity. And President Ghulam Ishaq Khan was a critical factor in bringing democracy back to Pakistan. He’s a devout patriot and perhaps the most honest man in Pakistan. So however they may be judged in the West, here, they’re national heroes, and very little could change that.”

Times staff writer Joel Havemann in London contributed to this report.

BCCI OUTPOST IN L.A.: The Bank of Credit & Commerce office is linked to an unsavory cast of characters. D1


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