What Was a Section 41 Investigation, and Why Was It Commissioned for BCCI?

The Task Force was an internal review team set up BCCI after Price Waterhouse raised concerns during its audit of the 1989 accounts.

By 1990, the Bank of England, Price Waterhouse, BCCI's senior management and the Abu Dhabi majority shareholders all knew of serious problems within parts of BCCI. These included substantial losses, problem lending, false accounting, fictitious loans and accounts, nominee arrangements and concealment of the Bank's true financial position.

These matters had already been examined through Price Waterhouse's audit work, the 1990 BCCI Task Force and investigations commissioned by Abu Dhabi. They had also been acted on. Abu Dhabi provided substantial financial support, the acting chief executive associated with the relevant instructions was removed, further management changes followed, and a fundamental restructuring of the BCCI Group was proposed.

That does not mean every allegation in the later Section 41 draft was already known. But it does mean that the central question is not whether BCCI had serious problems. It is what the Section 41 report added that made those problems impossible to deal with through the restructuring already agreed.

The 1990 Task Force

The Task Force was an internal review team set up on 13 March 1990 by the Chief Executive of BCCI Holdings (Luxembourg) SA, after Price Waterhouse raised concerns during its audit of the 1989 accounts. Working with Price Waterhouse, it examined international loans and related transactions, assessed their financial effect and the additional provisions required, and reported to both the Chief Executive and the auditors in April 1990.

Many of the transactions and concerns later presented in the Section 41 draft had already been identified and examined by the Task Force.

Restructuring agreed, then investigation commissioned

The order of events matters.

27 November 1990: the Bank of England informed Price Waterhouse that it had agreed in principle to a restructuring dividing BCCI into three separately capitalised and regulated banks. The plan included new capital, new boards and management, stronger supervision, and the separation of viable banking from problem assets.
4 March 1991: the Bank of England commissioned a confidential Section 41 investigation without informing Abu Dhabi. This came after it had agreed to the restructuring in principle and after Abu Dhabi had confirmed its continuing support.
March-June 1991: the investigation ran alongside the detailed work of implementing the restructuring.

The confidential report was therefore commissioned when BCCI was expected to continue under new ownership, new management and a new structure.

Delivery and status of the draft

Price Waterhouse delivered its report in draft on the night of Saturday 22 June 1991. Although it was addressed to a Bank of England official, it was handed to a security guard. The Bingham Report does not explain why a document of such importance was delivered in this way.

It remained a draft. Price Waterhouse expected further discussion with the Bank of England. The draft did not recommend closure, and the firm did not expect it to lead to the abandonment of the restructuring or the worldwide closure of BCCI.

What was genuinely new?

When the draft was discussed on Monday 24 June, Price Waterhouse partner Chris Cowan reportedly considered there was "not very much new" in it. Much of its effect came from bringing together matters already known or under investigation, along with further allegations that had not been fully examined or verified. Bank of England officials, by contrast, attached decisive weight to the cumulative picture based on the draft report.

Those two views were never reconciled. The Bingham Report provides no item-by-item comparison between the draft and what was already known from the 1990 investigations. Without that comparison, the basis on which the Bank of England abandoned the restructuring cannot be tested. Five questions remain unanswered:

Which findings were genuinely new?
Which simply confirmed, extended or restated matters already identified and were addressed under the restructuring?
Which were supported by evidence not previously available, and which were untested allegations?
Which concerned past practices under the removed management, and which were continuing?
Which, if any, could not have been dealt with by revising a restructuring that Abu Dhabi had already funded?

The United States dimension

The draft cannot be considered in isolation. Bank of England officials met US authorities in New York between 23 and 25 June 1991, in the very days the draft was being considered. The US authorities made clear their belief that BCCI was involved in serious misconduct, and their intention to act. The prospect of US proceedings, adverse publicity and criticism of regulators added to the pressure on the Bank of England.

Lord Justice Bingham who conducted the inquiry into the supervision of BCCI concluded that knowledge of US beliefs and intended action, added to the draft, helped turn the balance decisively towards closure. This does not show that the United States ordered the closure. It does show that, on the Inquiry's own finding, the decision did not rest on the draft alone.

When closure was pursued

Within days of receiving the draft, the Bank of England moved from the three-bank restructuring it had agreed in principle to deciding, with some European central banks, that BCCI should be closed. When Price Waterhouse was told on 3 July that closure was being pursued, it expressed serious reservations about the timing and consequences.

The unresolved question

By June 1991:

Abu Dhabi had committed substantial financial support;
the Bank of England had agreed the three-bank restructuring in principle;
the acting chief executive associated with the relevant instructions had been removed;
further management changes and stronger controls were being introduced;
applications and business plans for the successor banks had been submitted; and
Price Waterhouse, the firm that prepared the report, did not regard immediate closure as its necessary consequence.

The question is therefore not whether the draft contained serious allegations. It did. The question is: what materially new and verified information made the agreed restructuring no longer viable?

Two further questions follow. Why did the Bank of England not give the Abu Dhabi shareholders the opportunity to respond, or to remove any other implicated individuals while preserving the viable banking operations? And why did a report commissioned when BCCI was expected to continue become, alongside mounting US pressure, the principal basis for closing it?

Answering these requires a document-by-document comparison of the earlier Price Waterhouse reports, the Task Force material, the Section 41 working papers, the draft report and the information already held by the Bank of England. That comparison has never been published.

Also read

Research note

This analysis reflects the documentary record available at the time of writing. Where official records remain subject to information and disclosure requests, the conclusions should be read as provisional and capable of revision in light of new evidence.