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Bank of Credit and Commerce International Case

Introduction

When the branch offices of the Bank of Credit and Commerce International (BCCI) in seven countries were raided and taken control of by the law enforcing agencies in the respective countries in early July 1991 one of the major bank scams involving billions of dollars was brought to light. The fraudulent operations of the BCCI have resulted in a monetary loss of somewhere between $ 10 billion to $ 17 billion. Through the efforts of the liquidators of the bank Deloitte & Touche, recovery of large sums have been made for settlement to the creditors of the bank. The scandal has been in existence for at least two decades and encompassed a number of subsidiary financial institutions and entities which had escaped all the regulatory provisions. BCCI and its officers among the legitimate banking activities had indulged in dubious lending, fraudulent record keeping, rogue trading, flouting of bank ownership regulations and money laundering. The bank had made its structure and dealings in such a complex manner that even after considerable time has passed after its liquidation, there was no possibility of understanding them completely.

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Issues Connected With BCCI Scandal

The fraudulent activities of the BCCI had given rise to a number of management and accounting issues that it was not possible to establish any plausible explanation of how the bank was allowed to defraud the depositors and other stakeholders to the extent of billions of dollars. The following are some of the issues that a study of the case of BCCI reveals for the information of the accounting and management world.

  • Total lack of risk management practices that led to the operations of the bank being conducted to the personal advantages of the senior executives and other interested parties.
  • Serious ethical issues concerning the activities of the senior management and key investors in establishing trustable, honest, open and prudent banking operations and culture
  • Complete lack of corporate governance structure within the banking institution to secure the interests of the deposit holders and other stakeholders of the bank
  • Absence of unified regulations and auditing practices to control the financial irregularities of a large organization like the bank
  • Presence of serious conflicts of interest that had clearly an overriding personal interest than the organizational interests
  • Utter disregard of confidentiality requirements and privacy norms that made the transactions between the bank and the constituents a complete farce
  • Lack of leadership qualities among the top management and absence of a superior organizational culture that demands business ethics

Lack of Risk Management Practices

BCCI had been created as an organization devoid of any risk management practices. In conducting the operations of the bank some of the senior bank executives and other interested parties not only overlooked the risks to which the bank was exposed but also took personal advantage of the gaps in the risk management structure of the bank and its various subsidiaries. This attitude of the bank and its officers has put the millions of small depositors around the world that represented the major stakeholders of the bank into a completely disadvantageous position. In fact, these deposit holders were lured by the offering by the BCCI of comparatively higher rates of interest and their deposits provided the maximum proportion of funding for the bank’s financial activities. Meanwhile, other bank officials had no complete understanding of the structure and overall financial position of the bank to practice and risk management. Even if some of them had the knowledge they were asked not to raise any questions on the reasons for the flow of funds between any bank entities.

Ethical Issues

BCCI was formed from the earlier days with a completely different and complicated structure made of multiplying layers of entities related to one another through an impenetrable array of “holding companies, affiliates subsidiaries, banks-within-banks, insider dealings, and nominee relationships”. By completely breaking the corporate structure, avoiding any systematic record-keeping, disregard regulatory reviews, and ineffective audits the bank was able to evade even ordinary legal restrictions on the flow of funds between entities. All these activities are completely against the business ethical standards of the banks and the rules governing their operations. “In creating BCCI as a vehicle fundamentally free of government control, Abedi developed in BCCI an ideal mechanism for facilitating illicit activity by others, including such activity by officials of many of the governments whose laws BCCI was breaking” (APFN).

Lack of ethical standards on the part of the bank can also be seen from the criminal activities in which the bank was engaged. Such criminal activities include money laundering to the extent of billions of dollars in Europe, Africa, Asia and the Americas, large scale bribery of officials of most of those countries, active support of terrorism by handling the account of Osama Bin Laden, wide support of trafficking of arms and sale of nuclear technology for illegitimate purposes. All these activities can never find a place in an ethical business ideology of a bank. The criminalities of BCCI further continue with the management of organized prostitution, facilitating large sums of tax evasion, promoting smuggling and illegal immigration, illegitimate ways involved in purchasing real estate and smaller banks and several other crimes that came to the mind of the bank’s officers and other fraudulent constituents. All these activities had made BCCI one institution that completely lacks ethical standards of any kind.

Lack of Corporate Governance

Throughout the period the bank was in existence the bank had made large loans to companies and individuals without proper backing by securities. The loans represented massive concentrations of credit risk much to the detriment of the interests of a large number of depositors and creditors of the bank. There was no proper documentation or monitoring of the credits sanctioned. In cases where the loans went bad, BCCI was left with no possibility of any legal recourse against the defaulters and it necessitated the bank to absorb those losses which again went against the interests of the stakeholders. This strategy of advancing huge loans without a proper security and absorbing the losses where the recovery was not possible ran against all good principles of lending and resulted in huge losses for BCCI. The bank covered this problem by taking up new deposits by advertising higher rates of interest on deposits and attracting innocent depositors only to lose their life savings. Further much against the corporate governance norms, the bank indulged in “not recording these straightforwardly on its books, and by otherwise creating a matrix of false accounts that hid the losses for years”.

Conflicts of Interest

The major criticism raised against the functioning of BCCI is its large scale involvement in money laundering and other illegitimate practices. Money laundering could pose a major threat to the proper functioning of the financial and monetary system of any country.

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There are different laws promulgated by countries all over the world. There are two conflicts of interest that may arise in the case of banking operations.

Firstly in the competitive world, the senior executives of the bank are under constant and strong pressure to bring in new business and increase the profits. In fact some of the banks including the off-shore banks assumed that only money laundering could make them stay afloat. This attitude can be exemplified by the activities of BCCI in this direction. In this case the bank was under pressure to earn profits to make up the losses it had absorbed from writing off of the huge losses from trading and loans. The bank believed in the simple solution of money laundering as an effective way to earn more profits (Ranojit Banerjee).

Secondly there is the conflict of personal interests of the bank officials and that of the bank. In most of the cases the loans were sanctioned purely out of favoritism and devoid of any risk management and security procedures. There was large number of incidences where loans were granted by the officials taking huge bribes thus keeping their personal interest in the front with utter disregard of the organizational interest.

Absence of Auditing Procedures

One of the tactics adopted by the perpetrators of money laundering using BCCI was to buy the Certificates of Deposits in six countries with drug money for huge values running usually to billions of dollars. Such certificates were then used as collateral for securing additional loans from BCCI. One of the reasons the perpetrators could carry on with this operation was the failure on the part of the auditors and banking regulators to oversee the operations of the bank and report on the anomaly of these transactions so that alarm could be raised to control the operations of the bank in this direction. This was the case in many of the jurisdictions where the bank carried on its business. The severity of the problem may be understood from the fact that after the BCCI scandal was revealed the international organized financial crime came to the lime light and the FATF made almost 40 recommendations “related to the legal issues, financial services regulations, and international cooperation designed to help the governments to fight money laundering” (Gerson James. S)

Confidentiality Requirements

The pool of anonymous money in the banking parlance is known as ‘flight capital’. This includes the enormous profits earned in illegitimate transactions of drug trafficking. BCCI had been charged by the Federal Court in Tampa United States that the bank had adopted a strategy of increasing its deposits by seeking specifically flight capital. The court alleged that the bank obtained the flight capital from the sale proceeds of drugs. The court further observed that this activity is in gross violation of the currency regulations, taxation laws, and anti-drug laws of the United States and of other countries. The deposits of BCCI included the hidden funds from Gen. Manuel Antonio Noriega the deposed leader of Panama who has been sentenced to imprisonment in the US for charges of drug and money laundering. This had given rise to the issue of identification by the banks of the customers and the sources of their deposits. “Federal banking regulators are now asking banks for the first time to report ”suspicious transactions,” including a financial transaction known as the back-to-back loan – a tactic central to the Bank of Credit and Commerce case and one that the prosecutors say is often used to hide money”(Jeff Gerth).

In the money laundering transactions there may be deposits made by a customer out of the money earned from sale of drugs in one of the branches of a highly reputed bank like BCCI. The bank then uses the same money to finance a loan to the customer through another branch. The whole thing is done confidentially. In this case the original money which was illegally earned is safely hidden in one of the branches of the bank. The confidentiality requirements with respect to the nature of business of the customer and the source from which he obtained large sums of money were never given consideration by BCCI only to facilitate the illegal activities of its fraudulent customers.

Conclusion

Despite the institution of various legal proceedings and serious investigations, it was difficult to really arrive at the precise causes for the BCCI Scandal. The lack of corporate governance structures within the bank, manipulations of the transactions by the bank officials and the interested parties to their personal advantages, general fraud, lack of fundamental risk management check points, bribery and corruption at the highest levels of the bank can be considered as some of the causes that had contributed to the huge losses to the stakeholders of the bank. To be more precise the unprofitable loans granted by the bank, the wrong acquisition strategies, poor treasury and record keeping practices and the practice of the bank in hiding the losses that occurred have led to the failure of the bank. A number of regulatory violations and legal liabilities and the gross negligence of the bank in protecting the interests of its numerous depositors are some of the other causes that had contributed to the debacle of BCCI.

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References

APFN ‘Bank of Credit and Commerce International: Follow the Money – The BCCI Affair’. Web.

Gerson James S. ‘The CPA’s Role in Fighting Money Laundering’ Journal of Accountancy. Web.

Jeff Gerth ‘Tougher US Stance on Big Bank Deposits’ The New York Times. Web.

Ranojit Banerjee ‘Money Laundering in the EU’. Web.

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StudyCorgi. (2021, October 19). Bank of Credit and Commerce International Case. Retrieved from https://studycorgi.com/bank-of-credit-and-commerce-international-case/

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"Bank of Credit and Commerce International Case." StudyCorgi, 19 Oct. 2021, studycorgi.com/bank-of-credit-and-commerce-international-case/.

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