-Caveat Lector-
http://www.observer.co.uk/business/story/0,6903,877668,00.html
Spies hide as Bank faces BCCI charges
Victims of the biggest banking fraud ever are putting UK regulators
in the dock - and demanding security service documents.
Conal Walsh, The Observer
Sunday January 19, 2003
A mega-scandal much older than Enron or WorldCom is about to shake the British
financial establishment. More than a decade after the spectacular collapse of
the Bank of Credit and Commerce International, its creditors are finally to
put the Bank of England in the dock.
The stakes could not be higher for the Old Lady of Threadneedle Street. It
was the financial regulator in 1991 when the BCCI crashed with £7 billion of
undeclared debts, and has long been accused of turning a blind eye to fraud
at the Middle Eastern bank.
Now it faces a giant lawsuit brought in London by BCCI's victims, who claim it
is guilty of negligence amounting to 'misfeasance', or wilful misconduct. The
Bank has fiercely denied the charge, and made every effort to get the legal
action thrown out.
And no wonder. BCCI's creditors are claiming up to £1bn in damages. They are
also breaking new ground by challenging the Bank's statutory immunity against
being sued.
The Government's worries do not stop there. It will have to answer potentially
embarrassing questions over what Ministers, civil servants and the regulator
knew about BCCI before it crashed. The Bank's most senior officials, past and
present, are expected to go into the witness box, and the High Court will also
consider evidence from John Major, the former Prime Minister, as well as former
Chancellors Norman Lamont, Nigel Lawson and Denis Healey.
Then there is the small matter of the role played by Britain's intelligence
services, whose relationship with BCCI has long been questioned. Did MI6 use
accounts at the secretive bank to pay sources and operatives around the world?
Did BCCI channel Western funds to Mujahideen fighters in the Eighties - or
even, as some conspiracy theorists have surmised, to Osama bin Laden?
All this may - or may not - come out when the trial begins in October. For now,
though, both sides are engaged in pre-trial legal tussles over secret service
documents.
The creditors are led by accountant Deloitte & Touche, BCCI's liquidator. They
range from East End market traders to local councils to the state of Abu Dhabi,
which had become BCCI's principal shareholder by 1991, and is thought to have
lost £2bn.
BCCI remains the world's biggest-ever banking fraud, and the colour and
complexity of the scam is awesome.
Press attention at the time tended to focus on such unsavoury customers as
Panama's military leader Manuel Noriega, as well as the gilt-edged lifestyles
of the bank's executives, many of whom remain fugitives from justice today.
BCCI laundered drugs money, bribes and dictators' loot. But this reflected only
part of an endemic culture of fraud, which would consume more than 90 per cent
of the bank's assets.
BCCI was founded in 1972 by Agha Hasan Abedi, a charismatic banker and mystic
from Pakistan. It grew rapidly, and would eventually boast offices in 70
countries and 14,000 employees. But from the start, it had a taste for opaque
finances. It was incorporated in two tax havens, Luxembourg and Grand Cayman,
and used two sets of auditors, allowing it to avoid publishing meaningful
consolidated accounts.
Abedi's bank was beloved of Asian and Middle Eastern expatriates, and he
cherished a vision of the BCCI as a force for unity in the developing world.
But by the late Seventies, its biggest borrower, the Gulf shipping group owned
by Abbas Gokal, was heading for bankruptcy. Concerned that regulators would
shut down BCCI if its exposures were revealed, Abedi and other executives
falsified the books. BCCI secretly poured money into Gulf, just to make it
look like a going concern capable of servicing its debts.
This deception lasted for 15 years, involved 750 false accounts and an
estimated total turnover of $15bn. BCCI also created fictitious transactions
to mask other non-performing loans, as well as hundreds of millions of pounds'
worth of losses at its London-based treasury department. Reckless expansion
into the United States and Europe dented profitability further. By the time
it went down, BCCI was routinely plundering customer deposits to maintain an
appearance of solvency.
It had been granted a licence to trade in the UK by the Bank of England in 1980,
and opened dozens of outlets here, its largest branch network in any single
country. BCCI's collapse provoked fury in the UK, as tens of thousands of
depositors were left out of pocket.
Several protagonists, including Gulf's Gokal, were put behind bars by the
Serious Fraud Office, and the Bank of England was castigated for its failures
of supervision by Lord Bingham, whose official inquiry into the BCCI reported
in 1992. Bingham's sentiments were forcefully echoed by a US Senate inquiry.
Despite the criticism, Threadneedle Street has spent an estimated £10m in legal
fees fighting creditors' attempts to gain financial redress. For years, the
trial has been held up in pre-court hearings, with Government lawyers
attempting to withhold reams of classified papers collected by Bingham's inquiry.
Much has been handed over, including witness statements from politicians and
evidence from government depart ments at home and abroad. But the BCCI
creditors have not had as much luck in getting key intelligence documents.
Jack Straw, the Foreign Secretary, secured public interest immunity orders
last year to block the disclosure of 'sensitive' passages from an unpublished
appendix of the Bingham report, which dealt with the security services.
Other material has been kept out of creditors' hands by invoking a statute
that also relates to national security. In an extraordinary twist, however,
the Government is refusing to identify exactly which statute it has invoked.
Government lawyers may fear that to identify the statute would effectively
reveal the nature of the material they are trying to keep secret. The BCCI
creditors, however, are not satisfied. They believe they are not being given
a proper chance to challenge the Government's non-disclosure.
The creditors insist they are not making mischief for British intelligence:
they only want to find out what the Bank of England was told about BCCI. There
are still a lot of secret documents to argue over. Expect more skirmishes in
the months ahead.
Years and years of ignored warnings
1972 BCCI founded. First offices in Luxembourg, UK, Oman and United Arab
Emirates.
1976 US regulators express concern about BCCI's status.
1980 BCCI is plundering accounts to conceal substantial losses by Gulf Shipping.
Bank of England grants banking licence.
1985 Bank of England receives anonymous letter detailing fraud at BCCI. By now,
clients include Abu Nidal's terrorist organisation and Medellin drugs
cartel.
1988 BCCI employees charged with money-laundering in US. Bank of England
ignores warning about BCCI from City fraud squad.
1991 Price Waterhouse reports massive fraud. Top Bank of England officials are
'devastated' and shut BCCI.
1992 Bingham report and the US Senate criticise Bank of England for supervisory
failures.
1993-97 Six convictions following Serious Fraud Office investigations. Other
BCCI suspects go on the run.
2001 House of Lords gives creditors leave to sue Bank of England.
http://www.observer.co.uk/business/story/0,6903,877668,00.html
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