IN Arab businessman recalls a typical set-up at one of the many overseas branches of Bank of Credit and Commerce International (BCCI): a wide open room, filled with desks in no particular order. Absent an identifiable hierarchy, he quips, it's difficult to pin down individual responsibility.This scenario is an appropriate metaphor for the broadest-based banking scandal in history. BCCI's $20 billion operation, covering some 70 countries, is now under investigation and indictment for massive fraud. Branches around the world have been shut down due to allegations ranging from laundering arms- and narcotics-sales profits to financing clandestine nuclear-weapons programs. Investigators are slowly uncovering the implicated governments, corporations, and individuals; their estimates put BCCI's criminal customer base at 3,000 worldwide. Observers assert that the lax international financial system, with poor control over global banking transactions, provided a vacuum for illicit dealings. "Things don't work when no one has a clear sense of responsibility," says Lawrence Summers, chief economist of the World Bank. "And when you're [based in London,] headquartered in Luxembourg, and you're operating all over the world, there's no one whose fault it clearly is, if things go wrong."
Deposits and loans Since its inception, allege international investigators, the bank doled out more money than it took on deposit and bankrolled commercially unviable and criminal enterprises. BCCI branch managers often solicited deposits through bribery, and then used those funds to cover bad loans, skimming huge profits and falsifying records to show a positive balance sheet, investigators allege. The worldwide impact of this recklessness looms large. Casualties may include central banks from Jamaica to Cameroon that put their nation's savings on deposit with BCCI. The nest eggs of tens of thousands of small, African, Asian, Middle Eastern, and Latin depositors are in jeopardy. BCCI was ready with money for government leaders whose own economic policies rendered their countries unacceptable for certain International Monetary Fund (IMF) or World Bank assistance, says Jack Blum, a former US Senate investigator into BCCI. The bank is the largest private bank in Nigeria. "BCCI lent the Nigerian government $1 billion to get around requirements put on it by the IMF." The bank has served African governments, corporations, and small businesses from Egypt to Zimbabwe. The closure of many African BCCI branches has hit hard a large portion of African society dependent on BCCI financing. In Latin America, according to Mr. Blum, BCCI encouraged capital flight by offering to do the illegal transport and conversion of the local currency, "destroying the opportunity of that country to develop ... and leaving the continent with the begging bowl and the World Bank and other public institutions which have to make up the difference." In Southwest Asia, Blum says, BCCI may have helped transport the goods and finances of Afghan guerrillas involved in heroin trafficking. Investigators are exploring the relationship between the largely Pakistani-run BCCI, the government of Pakistan, and its military. Components of Pakistan's nuclear program are suspected of being financed through BCCI.
How it happened How did such pervasive criminal activity escape the attention or the action of regulators? "Under Luxembourg law, holding companies are not subject to supervision. Thus, BCCI was able to avoid consolidated home-country supervision of its activities," J. Virgil Mattingly Jr., and William Taylor, officials of the Federal Reserve Board's division of banking supervision and regulation, said last week. "Virtually from BCCI's formation, concerns were raised about a bank operating internationally without a home-country regulator." Concerns were raised, but not until recent weeks have federal officials from selected countries taken action to expose BCCI's criminal network. Bank regulators in the United Kingdom [Bank of England], Luxembourg, Grand Cayman, the United States, and several other countries seized control of BCCI on July 5, "in response to evidence of widespread fraudulent conduct by BCCI and its management," according to US officials. Further US action includes $200 million in civil fines imposed by the Federal Reserve Board against BCCI, criminal indictments handed down by the New York district attorney last week, congressional hearings, and a Justice Department probe that includes grand jury investigations in four states. US Attorney General Richard Thornburgh says that federal indictments will be announced within six weeks.
Reactionary regulation Responding to the charge that US law enforcement was slow to act, a senior US Treasury official says: "The federal government takes the fireman's approach to regulation - fire here, put it out; fire there, put it out." Smoke from BCCI's corruption, he says, was insufficient to prove the danger of fire. "Let's say we didn't have enough proof but we went in and closed them down. We'd get blasted for going against a third-world institution that is trying to represent the little people," says the Treasury official, who specializes in international finance. That's precisely what has transpired anyway. BCCI operations remain open in Pakistan, home of Agha Hasan Abedi, who founded the bank in 1972. Pakistanis staunchly defend the bank; the Pakistani press has been full of anti-Western rhetoric recently, faulting the rich developed world for the demise of a bank representing the aspirations of the developing world. But critics say BCCI was ultimately far more damaging than helpful to third-world interests. "Those countries who put their money with BCCI and their trust with BCCI, I think they have been looted," Blum testified before Congress last week. "And now that the bank is closing they will see that this was not an assist to the third world, but rather a looting of the third world by some very rich people who made themselves all the richer."