It's perhaps the biggest banking scandal of the 20th Century and the worst in the history of international finance. The spotlight fell on the shadowy doings of Bank of Credit and Commerce International when authorities in seven countries seized the bank's operations a week ago in a coordinated global crackdown of unprecedented proportions. An audit revealed BCCI hid massive losses and was on the verge of financial collapse.
The unfolding saga of BCCI reads like a novel with a plot and a cast that only Hollywood could love. Secrecy, drug money, arm sales, fraud and corruption built the complex financial empire that spanned 69 countries. BCCI adroitly structured its vast holdings to take advantage of loopholes in the regulation of global banking. It managed to operate in fuzzy legal territory despite the fact that central bank supervisors in six countries were supposed to directly watch over BCCI within their borders and 60 others monitored BCCI units operating in their jurisdictions.
THE HODGEPODGE: BCCI flourished precisely because of this hodgepodge of supervision. While BCCI wove its complex web of far-flung banking activities, no one country or agency was monitoring its operations beyond national borders. BCCI illustrates the weakness of the anti-fraud laws in the international banking system and the need for coordinated global supervision and regulation.
Even authorities within the United States have been chasing BCCI in a fragmented way: Separate federal grand juries were convened in Washington, Miami and Tampa and investigations were begun by the New York district attorney's office and the Federal Reserve.
BCCI was founded in 1972 by Pakistani banker Agha Hasan Abedi and is now controlled primarily by Arab shareholders. Its holding company was headquartered in Luxembourg and its major operating banks were incorporated both there and in the Cayman Islands. But BCCI operated primarily out of London. Its major shareholder, Sheik Zayed ibn Sultan al Nuhayan, ruler of the United Arab Emirates, did business from the Mideast.
BCCI secured big deposits from Third World central banks and was believed to have laundered international drug money through those banks. BCCI's problems became more visible to U.S. authorities when some company employees pleaded guilty to money laundering in Miami last year in unrelated prosecutions and agreed to pay about $15 million in a case linked to former Panamanian leader Manuel Noriega.
THE DAMAGE: The seizures of BCCI occurred where the bank had its biggest operations--Luxembourg, Britain, the Cayman Islands, the United States, France, Spain and Switzerland. The sweeps have put 75% of the bank's $20 billion in assets into government hands. Estimated losses range between $10 billion and $15 billion.
The Federal Reserve moved quickly to assure depositors at two U.S. banks linked to BCCI--First American Bank in Washington, D.C., and Independence Bank in Encino--that their money was safe. Both are federally insured and separately capitalized, so they are not threatened by the BCCI seizures. The Fed on Friday moved to bar four principals in the BCCI scandal from banking activities in the United States.
So secretive was BCCI that former Defense Secretary Clark Clifford, chairman of First American Bankshares, maintains he was unaware of BCCI's stake in his company.
As authorities try to unravel BCCI's web, it is clear that it's time for a major overhaul of international banking regulations and supervision.
Existing laws have proven parochial and thus inadequate to cope with the sophisticated schemes that make the abuses of the "stateless" BCCI possible. U.S. banking authorities ought to make this difficult but necessary task a top priority.