BCCI which is a financial institution was established in 1972 in Pakistan. The organization operated in 78 countries and had over 40 branches. With assets over the US $ 20 billion, it was the seventh-largest private bank in terms of assets (Bank of Credit and Commerce International para. 3). The company was registered in Luxembourg, UK. The bank committed the greatest bank fraud experienced in the history of banking by defrauding approximately 1.4 million depositors over $200billion(Sikkim et al10). The purpose of this study is to investigate the factors that contributed to BCCI’s successful operation under the noses of US and UK authorities. In addition, the paper proposes measures that can be adopted by various governments to prevent such frauds from occurring in the future.
The criminal activities
BCCI criminality involved fraud involving billions of dollars by BCCI and its customers. In addition, money laundering in all the four continents in which the institutions operated was evident. These include Europe, Asia, Africa, and America. In addition, some officials of BCCI got themselves involved in acts of bribery, offering support to acts of terrorism, trafficking of arms, evasion of income tax, nuclear technology sales, smuggling, prostitution management, acquiring of banks through illicit means, as well as the illegal acquisition of real estate. The corporation through its officers and officials used various mechanisms to facilitate its success and avoid detection.
The major issues
One of the mechanisms used by the bank included the use of Shell Corporation and bank confidentiality as a secret haven. This was attained because BCCI had multiple ownerships consisting of affiliates, banks within banks, holding companies, and subsidiaries. In addition, insider trading was also evident within the bank. The firm also did not comply with the legal requirement about the transfer of capital and goods. This was propagated via integrating a fractured corporate structure, ineffective audits, and record keeping.
Another mechanism employed by BCCI entailed the establishment of relationships with key political figures to access insider information on the decisions passed by governments. This included important people in government such as former US Defense Secretary Clark Clifford and United States senator Stuart Symington among others. The corporation also bribed its auditors to confirm to its depositors and other stakeholders that the financial statements represented a true and fair position of the firm’s operation which was not the case. This bribery took different forms from “loans” and financial benefits advanced to officials of the audit firms contracted to house and sexual favors advanced to members affiliated to these audit firms. In return, the corporation obtained vital information that enabled the organization to obtain cash to prop up its book. By accessing crucial information, the bank was able to gain access to the country’s deposits. Preferential treatment about processing cash inflow and outflow out of the country was practiced. This was practiced despite the existence of various policies regarding foreign ownership of financial institutions such as a bank in the country and other monetary control policies.
The result was that BCCI had relationships with major countries which enabled it to accomplish all its plans including owning four banks in the US. In the United States, foreign ownership of banks is restricted through a rigorous process and regulatory barriers. Despite all these regulatory barriers, BCCI was able to infiltrate the US banking system through techniques perfected in other countries such as the use of nominees to purchase banks and arranging to have its activities shielded through a bevy of prestigious lawyers and accountants. There was also the use of prominent personalities who lent their names and reputation to BCCI.
Lack of any initiative among intelligence agencies and failure of the US justice department to investigate and prosecute Abedi and his associates who included Swaleh Naqvi, his assistant made the environment conducive for the operation of BCCI. The first case related to drug laundering in which BCCI was implicated depicts the authority’s inefficiency in conducting their operation. This was evident in that Tampa did not pay attention to other information they received concerning the bank’s involvement in other crimes. The justice department in association with the US customs and Treasury department failed to provide adequate support to the personnel investigating BCCI’s operations in 1988 and 1990. The resultant plea agreement between BCCI and the US attorney in Tampa prevented BCCI officials from disclosing what they knew about the company’s larger criminality. There was reluctance on the part of the Central Intelligence Agency (CIA) to report the information they had gathered on BCCI to those who could use it to prosecute the company for all these crimes. This has been attributed to the fact that the CIA and former CIA officials had contacts and links to BCCI and its stakeholders.
The company’s acquisition of First American Bank has also been attributed to the flawed decisions by US regulators and by gaps in the regulatory process. Despite the numerous suspicions that BCCI was purchasing First American Bank, the Federal Reserve chose instead to rely on assurances provided by various agents such as the CIA, State Department, and BCCI’s lawyers. The Federal Reserve should have carried its investigations instead of relying on the assurances from other agencies. The Federal Reserve’s approval of the institution to operate as an information conduit and investment advisor about CCAH shareholders created a loophole for BCCI to perpetuate its criminal activities. In addition, the approval enabled BCCI to continue concealing its CCAH and First American Bank ownership. Despite gaining a comprehensive understanding of the bank’s involvement in fraud, the Federal Reserve did not take steps that would lead to the closure of the firm’s operation. However, the Federal Reserve decided to secure the stakeholders suffering upon the firm collapsing.
The Bank of England also played a role in shielding BCCI from discovery and eventual prosecution. This arises from the fact that the Bank of England did not conduct adequate protection of the bank’s creditors and depositors. In addition, it withheld vital information regarding the bank’s operation from being accessed by the public. Lack of disclosing information was conducted until the closure of the bank. Despite learning of BCCI‘s involvement in terrorism and drugs trafficking, it took limited supervision of BCCI and failed to inform the stakeholders about the true nature and scope of BCCI’s activities. The result was the defrauding of approximately one million depositors. If this information had been released sooner, it would have saved innocent depositors and creditors who did business with BCCI following that date.
Effects of BCCI’s crime on the country’s economy and society
During the 1980s, the wealthy elites made use of financial institutions such as banks to propagate crime. By using banks such as BCCI, these individuals were able to siphon money out of the country. The result is that most of these countries continue to languish in poverty because the country is left with enormous debts to repay. For instance, Venezuela had borrowed $36 billion but $41billion left the country via corrupt means (Winslow 6). The result is that these countries have remained heavily dependent on such organizations as the International Monetary Fund. Since these organizations emphasize investment and especially foreign investment. The result is that Multinational Corporation such as BCCI is the prime beneficiaries of these policies. This continues to impoverish third-world countries.
The case of white-collar crime such as that of BCCI can undermine public confidence in the banking sector. This may in turn threaten the stability of the public sector and as a result, cause a run on other banks. The result is negative and abnormal returns or high volatility of the affected stock. This could translate into even more serious repercussions such as increased liquidity that has negative implications for a given economy in terms of inflation and the effect on the exchange rate.
White-collar crime has repercussions not just for the affected individuals but also for the economy and society as a whole. There is a need for the government to put in place measures aimed at protecting its citizens. For example, it should be ensured that there is compliance with all the necessary regulations before firms are registered and allowed to transact. There is also a need for accountable and transparent leadership that will act in the interest of the people and not out of greed. Consumers also need to be educated on how they can protect themselves from white-collar crime to avoid losing money-to-money launders and other perpetrators of white-collar crime. In this way, society can protect itself from adverse effects associated with this vice.
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Mitchell, Austin, Sikkia, Prem, Arnold, Patricia, Cooper, Christine and Wilmot, Hugh.
The BCCI cover up: Shedding light on darker practices working for an open and democratic society. New York: Association for Accountancy & Business Affairs. Web.
Winslow, George. BCCI the Big picture: A system out of control not just one bank. 1997. Washington: Butterworth. Print.