By 1990, the Bank of England and Price Waterhouse were already aware of substantial losses, false accounting, fictitious loans and accounts, nominee arrangements and the concealment of BCCI’s true financial position.
These matters had been examined through Price Waterhouse’s audit work, the 1990 BCCI Task Force and investigations commissioned by the Abu Dhabi majority shareholders. They had also led to substantial financial support, the removal of the acting chief executive associated with the relevant instructions, further management changes and proposals for a fundamental restructuring of the BCCI Group.
What Was the 1990 BCCI Task Force?
The Task Force was an internal review team established on 13 March 1990 by the Chief Executive Officer of BCCI Holdings (Luxembourg) SA, following concerns raised by Price Waterhouse during its audit of BCCI’s 1989 accounts. Working with Price Waterhouse, it examined international loans and related transactions, assessed their financial implications and reported its findings to both the Chief Executive and the auditors. Its report was completed in April 1990.
A comparison with Price Waterhouse’s later Section 41 report is important because many of the transactions and concerns presented in 1991 had already been identified and examined by the Task Force in 1990. The comparison should establish which findings were genuinely new, which were based upon or confirmed the Task Force’s earlier work, and whether there was any material difference between the two reports.
Agreement to restructuring
On 27 November 1990, the Bank of England informed Price Waterhouse that it had agreed in principle to a restructuring under which BCCI would be divided into three separately regulated banks.
The proposed restructuring was supported by the Abu Dhabi majority shareholders and contemplated new capital, changes in management and the separation of viable banking operations from impaired or disputed assets.
The Bank of England formally commissioned the Section 41 investigation on 4 March 1991, after the Abu Dhabi majority shareholders had confirmed their continuing financial support and the Bank of England had agreed to the restructuring in principle. The investigation proceeded while the detailed arrangements for implementing the restructuring were being developed.
What did the Section 41 report add?
The Bingham Report did not provide a detailed comparison between the draft Section 41 report and the information already available from the 1990 investigations. It is therefore difficult to determine precisely what material evidence was genuinely new.
When the draft was discussed with the Bank of England on 24 June 1991, Price Waterhouse reportedly did not regard it as containing a substantial body of new information. Its perceived significance appears to have arisen mainly from the cumulative presentation of matters already known or under investigation, together with further allegations that had not been fully examined or tested.
This leaves an important unanswered question: what new evidence in the draft Section 41 report justified abandoning the restructuring programme that the Bank of England had already agreed in principle?
Delivery and status of the draft report
Price Waterhouse delivered its draft Section 41 report to the Bank of England on the night of Saturday, 22 June 1991. Although addressed to a Bank official, it was handed to a security guard. The Bingham Report provides no explanation as to why a document of such importance was delivered in this manner.
The document remained a draft. Price Waterhouse expected further discussion with the Bank of England and did not understand that its delivery in draft form would lead directly to the abandonment of the restructuring or the immediate worldwide closure of BCCI.
When the draft report was discussed on 24 June, Price Waterhouse reportedly regarded its effect as cumulative rather than as the discovery of an entirely new financial position. Immediate closure had not been its anticipated outcome, and the firm subsequently expressed serious reservations about the timing and consequences of that course.
The influence of the United States
The Section 41 report cannot be considered in isolation from pressure arising in the United States.
By late 1990, the Bank of England was concerned to preserve its relationship with the Federal Reserve and was reluctant to see the proposed restructuring - which it considered beneficial to depositors - jeopardised by damaging American proceedings. During 1991, opposition from US authorities and political figures became increasingly important.
US authorities communicated their belief that BCCI was involved in serious misconduct and made clear their intention to take action. The prospect of American proceedings, adverse publicity and criticism of regulators placed additional pressure on the Bank of England while the restructuring remained under consideration.
Within days of receiving the draft Section 41 report, the Bank of England moved from the three-bank restructuring - its agreement in principle to which it had previously communicated to Price Waterhouse - to deciding, with other European regulators, that BCCI should be closed.
The unresolved question
The draft Section 41 report contained allegations requiring further investigation and appropriate action. Price Waterhouse did not, however, consider that its findings required the immediate closure of BCCI and expressed serious reservations about that course.
The unresolved question is why the Bank of England treated the draft report as grounds for abandoning the restructuring and closing the entire international banking group when Price Waterhouse - the firm that prepared the report - did not regard closure as its necessary or appropriate consequence.
By June 1991:
- the Abu Dhabi majority shareholders had committed substantial financial support;
- the Bank of England had agreed to the three-bank restructuring in principle;
- the acting chief executive alleged to have initiated or directed the relevant instructions had already been removed;
- further management changes and strengthened controls were being introduced; and
- Price Waterhouse continued to consider restructuring practicable and opposed immediate closure.
The relevant question is therefore not whether the Section 41 allegations were serious. It is whether the report contained sufficiently new and conclusive evidence to justify abandoning a restructuring already agreed in principle, without first allowing the shareholders to respond fully or considering whether any other implicated individuals could be removed while viable banking operations were preserved.
The timing also requires examination: why did a report commissioned because BCCI was expected to continue become, when combined with mounting pressure from the United States, a principal basis for closing it?