BCCI’s international structure resulted in supervisory responsibility being divided among several regulatory authorities
Incorporation and Early International Structure
The Bank of Credit and Commerce International S.A. (BCCI S.A.) was incorporated in Luxembourg in 1972. Contemporary BCC Group publications describe its first branches as being located in Luxembourg, the United Arab Emirates and the United Kingdom. Karachi subsequently became an important operational and regional centre for the Group’s South Asian business.
Before incorporating BCCI in Luxembourg, Agha Hasan Abedi had reportedly explored the possibility of establishing the bank in the United Kingdom. According to the Bingham Report, the proposal did not proceed because the Bank of England required a level of capitalisation that could not then be raised. Luxembourg consequently provided BCCI with a European legal base from which it could begin building an international branch network.
Incorporation in Luxembourg also offered a degree of operational flexibility. BCCI was conceived not as a bank confined to one domestic market, but as an international institution intended to serve customers in the Middle East, Asia, Africa, Europe and other emerging markets. Its legal incorporation, operational management and banking activities were therefore spread across several jurisdictions from an early stage.
London and the Central Support Organisation
Although BCCI S.A. was incorporated and maintained its registered office in Luxembourg, many of its principal head-office functions were carried out in London. These functions were organised through a separate Central Office, later commonly known as the Central Support Organisation (CSO).
The President, Chief Executive and a substantial part of the Group’s senior management were based in London. The CSO performed functions normally associated with the head office of an international bank, including strategic planning, financial control, personnel administration, inspection, operations, business development and coordination of the regional offices.
The importance of London went considerably beyond the management of BCCI’s United Kingdom branches. Lord Justice Bingham in his report on the supervision of BCCI concluded that, by 1979–80, if not earlier, the “mind, management and central direction” of BCCI S.A. and the wider Group were situated in London. He therefore regarded London, rather than Luxembourg, as the effective head office and principal place of business of BCCI S.A.
This distinction between the place of incorporation and the place of effective management became central to the question of which regulatory authority should have exercised primary responsibility for supervising the Group.
Division between BCCI S.A. and BCCI Overseas
As BCCI expanded rapidly, the Luxembourg Banking Commission became concerned about the rate at which BCCI S.A. was extending its international operations. This pressure contributed to a restructuring of the Group in 1975–76.
A non-banking holding company, BCCI Holdings (Luxembourg) S.A., was established in Luxembourg. Beneath it were two principal banking subsidiaries:
- BCCI S.A., incorporated in Luxembourg; and
- BCCI (Overseas) Ltd., incorporated in Grand Cayman.
BCCI S.A. principally housed operations in Europe and the Middle East, while BCCI Overseas was used extensively for branches in Asia, Africa and other developing-country markets. The creation of Overseas allowed the Group to continue expanding without placing all of its international operations within BCCI S.A. and under the direct home-country supervision of the Luxembourg authority.
The official record does not establish that the Bank of England and the Luxembourg authority entered into a formal agreement that neither would supervise BCCI’s developing-country operations. It does, however, show a continuing reluctance on the part of both authorities to assume responsibility for consolidated supervision of the expanding worldwide Group.
The Luxembourg authority regarded itself as inadequately equipped to supervise a large international banking group whose business in Luxembourg represented only a small proportion of its worldwide activities. The Bank of England, while recognising the central management role performed from London, was similarly reluctant to become the Group’s lead or consolidated supervisor.
The result was a divided supervisory structure. Luxembourg was formally responsible for BCCI S.A.; the Cayman authority was responsible for BCCI Overseas; and the national regulators in each country supervised the branches or subsidiaries operating within their jurisdictions. No authority had a complete view of the Group’s worldwide activities.
Supervision of the United Kingdom Operations
Before the Banking Act 1979, the Bank of England’s supervision of foreign banks operating in the United Kingdom was largely informal. It relied upon its authority and influence in the City of London, exchange-control powers, meetings with bank management and information obtained from auditors and overseas regulators.
The Bank of England became increasingly concerned about the rapid growth of BCCI’s UK branch network and the confusion created by BCCI S.A. and BCCI Overseas operating branches alongside one another. It therefore proposed that all UK branches of BCCI Overseas should be transferred to BCCI S.A. and that the total number of UK branches should be restricted.
The transfer was completed with effect from 1 January 1979. Thereafter, all BCCI branches in the United Kingdom operated as branches of BCCI S.A. The Bank of England received prudential information concerning those branches and established a programme of routine supervisory meetings. The Luxembourg Banking Commission nevertheless remained the formal home supervisor of BCCI S.A.
BCCI’s Status as a Licensed Deposit-Taker
The Banking Act 1979 introduced formal statutory supervision of deposit-taking institutions in the United Kingdom. It distinguished between institutions that were formally recognised as banks and other institutions that were licensed as deposit-takers.
BCCI S.A. applied for recognition as a bank. The Bank of England refused recognition because it was not satisfied that BCCI had enjoyed, for a reasonable period, the required reputation and standing in the financial community. Concerns were also expressed about the opacity of the Group’s structure, its ownership and the absence of a single authority capable of supervising its worldwide operations.
The Bank nevertheless granted BCCI S.A. a full licence as a deposit-taking institution in June 1980. It was therefore lawfully authorised to accept deposits in the United Kingdom, but under the licensed deposit-taker category rather than as a recognised bank.
The licence was not described in the legislation as merely a temporary authorisation. However, the distinction between recognised banks and licensed deposit-takers was itself later abolished by the Banking Act 1987, which introduced a single system of authorisation for deposit-taking institutions.
In granting the licence, the Bank of England treated Luxembourg as BCCI S.A.’s principal supervisory authority and relied, in part, upon assurances from the Luxembourg Banking Commission concerning the management and financial soundness of the institution.
Lord Justice Bingham later concluded that this approach was based upon an incorrect understanding of BCCI S.A.’s principal place of business. Since the effective mind and management of BCCI were located in London, the Bank of England should not have treated the institution as though its principal place of business were outside the United Kingdom merely because it was legally incorporated in Luxembourg.
The Problem of Consolidated Supervision
BCCI’s corporate structure created an unusually difficult supervisory problem. BCCI Holdings was a non-banking holding company and was not itself subject to banking supervision. BCCI S.A. was supervised from Luxembourg, BCCI Overseas was incorporated in the Cayman Islands, and national regulators were generally concerned only with the operations conducted within their own territories.
The Bank of England recognised that no supervisor was able to see the whole of BCCI’s activities. The Luxembourg authority acknowledged that it lacked the resources and practical capacity to supervise such a large worldwide group from Luxembourg. BCCI Overseas was, for a substantial period, described by the Bingham Report as effectively unsupervised.
The location of the CSO and senior management in London placed the Bank of England in an especially important position. It supervised BCCI’s substantial UK branch network and had access to senior management, but it remained reluctant to assume the role of lead supervisor for the Group as a whole.
Formal responsibility therefore remained divided between:
- the Luxembourg Banking Commission, later the Institut Monétaire Luxembourgeois, as home supervisor of BCCI S.A.;
- the Cayman Islands authority as supervisor of BCCI Overseas;
- the Bank of England as host supervisor of the UK branch network;
- the UAE Central Bank and other national authorities supervising local operations; and
- the auditors, who became an increasingly important source of Group-wide financial information.
Establishment of the College of Supervisors
By the mid-1980s, it had become increasingly apparent that the existing arrangements did not provide any regulator with an adequate picture of BCCI’s worldwide risk profile.
In 1987, consideration was therefore given to a cooperative system under which the principal national supervisors would meet regularly and exchange information. The proposal was partly inspired by the Dutch central banker Huib Muller, who warned that separately incorporated national subsidiaries might create a false sense of security unless supervisors also had access to information concerning the Group as a whole.
A scheme was developed for meetings, normally twice a year, involving the national authorities responsible for supervising significant parts of BCCI. BCCI’s senior management and its Group auditors would attend part of the meetings, and the auditors would present information concerning the Group’s financial position.
The College initially included the Bank of England, the Luxembourg authority, the Swiss Federal Banking Commission and the Bank of Spain. Its membership was subsequently widened to include supervisors from other important jurisdictions, including the Cayman Islands, Hong Kong and the UAE.
The first formal meeting of the College took place in Luxembourg in June 1988. Its purpose was not to replace the responsibilities of individual national regulators or to endorse BCCI’s existing corporate structure. It was intended to provide:
- an organised forum for exchanging information;
- a means of obtaining a broader picture of BCCI’s financial condition;
- direct contact between supervisors, management and auditors; and
- a mechanism through which recommendations could be made to BCCI.
The first meeting was regarded as useful and constructive because it increased the amount of information available to participating regulators. However, the College did not take over direct supervision of the Group and did not resolve the underlying structural problem.
Role and Limitations of the College
The College was an innovative response to the difficulties presented by BCCI’s international structure. It improved communication and made it possible for national supervisors to compare their findings, discuss common concerns and receive Group-wide reports from the auditors.
Nevertheless, it remained an informal coordinating body. It had no independent statutory powers, did not issue a single Group licence and could not compel national authorities to adopt a common supervisory decision. Each member remained responsible for the operations located within its own jurisdiction.
Lord Justice Bingham described the College as an improvement upon the clearly unsatisfactory arrangements that had previously existed, but also as a second-best solution. It could not be as effective as a single, competent consolidated supervisor with authority to examine the totality of BCCI’s worldwide business. Nor could the College, by itself, remedy the underlying corporate division between BCCI Holdings, BCCI S.A., BCCI Overseas and the many branches, subsidiaries and associated companies operating in different countries.
Supervision by National Regulatory Authorities
BCCI was also subject to supervision by the banking regulator or central bank in each country in which it maintained a licensed banking presence. Its branches and locally incorporated subsidiaries were required to comply with the banking laws, licensing conditions, capital requirements, liquidity rules, reporting obligations and other regulatory standards applicable in their respective jurisdictions.
Accordingly, BCCI’s operations were not wholly unsupervised. Regulators in the United Kingdom, Luxembourg, the Cayman Islands, the United Arab Emirates, Hong Kong, Pakistan and numerous other countries exercised responsibility for the branches or subsidiaries operating within their territories. They received regulatory returns, conducted inspections or supervisory meetings, reviewed local financial performance and, where necessary, imposed conditions upon the conduct of the local business.
This national supervision could provide regulators with a reasonably detailed understanding of BCCI’s activities within their own countries.
Supervisory Position in Summary
BCCI was not supervised exclusively by the Bank of England or by any other single authority. The Luxembourg banking authority remained the formal home supervisor of BCCI S.A., while the Cayman Islands authority supervised BCCI Overseas. In addition, the relevant national regulators or central banks supervised BCCI’s branches and subsidiaries within their respective jurisdictions.
The Bank of England nevertheless occupied a particularly important position. It supervised BCCI’s extensive United Kingdom branch network, maintained regular contact with the Group’s senior management based in London and increasingly assumed a leading role in coordinating international supervisory discussions.
BCCI operated as an integrated international banking group, but supervisory responsibility remained divided among numerous national authorities. Each regulator generally had responsibility only for the part of the organisation operating within its own jurisdiction. As a result, no single authority initially possessed both the complete information and the legal authority required to assess the financial condition, management and risks of the Group on a fully consolidated basis.
The College of Supervisors was established to address this weakness by bringing together the principal national regulators, enabling them to exchange information, compare supervisory findings and consider BCCI’s overall financial and organisational position. It did not, however, replace the statutory responsibilities of the individual national regulators, nor did it itself become a single consolidated supervisory authority for the Group.
