Questions of Bad Faith

Was Closure Already Predetermined?

The question of bad faith goes beyond whether the Bank of England made the right decision. A central bank's decision may be mistaken, unreasonable or unnecessarily damaging without being taken in bad faith.

Bad faith raises a more serious question. Were BCCI, its Abu Dhabi majority shareholders and the professional advisers working on the restructuring allowed to believe that restructuring remained a genuine possibility, when the Bank of England had already decided, or was preparing, to close the Bank?

The available evidence does not by itself prove dishonesty or conspiracy. Lord Justice Bingham rejected allegations of bad faith and concluded that closure was appropriate. But his conclusion does not end the matter. As this page sets out, his Inquiry left central questions about the final weeks unanswered, and the chronology raises serious questions about intention, openness and fair dealing.

The restructuring was real and substantially funded

BCCI's restructuring was not an informal proposal put forward to delay regulatory action. It was a detailed programme, funded by Abu Dhabi and developed with respected international advisers: Price Waterhouse, BCCI's auditor and financial adviser; the management consultants Booz Allen & Hamilton; the law firm Allen & Overy; BCCI's new management; and the Abu Dhabi-backed Task Force.

The proposals included substantial new capital, changes in senior management, the transfer of central operations to Abu Dhabi, the closure or consolidation of some branches, stronger supervision, and the separation of viable banking operations from doubtful loans, concealed liabilities and other problem assets. Three separately capitalised and regulated successor banks were planned, centred on London, Abu Dhabi and Hong Kong, with separate arrangements for recovering the problem assets. Abu Dhabi had already committed billions of dollars.

The Bank of England treated the programme seriously:

• 29 May 1991: the Bank of England received a draft application for the proposed new UK bank.
• 31 May: BCCI, Price Waterhouse, Booz Allen & Hamilton and the Abu Dhabi shareholders presented the proposals in detail.
• 4 June: Brian Quinn of the Bank of England recorded that he had seen nothing to make him believe the Bank should object to the restructuring.
• 6 June: the Banking Supervision Division envisaged approval in principle for the new UK bank before the end of June, provided outstanding issues were resolved and the US investigations did not reveal matters serious enough to undermine the reconstruction.
• 18 June: twelve copies of a revised application, with an updated business plan and financial projections, were submitted. Lord Justice Bingham later described these as substantial documents.

This was not a paper exercise. It was a developed programme that the Bank of England was, weeks before closure, preparing to approve in principle.

A confidential investigation running alongside

On 4 March 1991, while the restructuring was being developed, the Bank of England commissioned Price Waterhouse to carry out a separate confidential investigation under Section 41 of the Banking Act 1987.

BCCI, the Abu Dhabi shareholders and the other advisers were not told of this investigation or its purpose. Nor were they told that its findings might decide whether the restructuring would be allowed to proceed.

Price Waterhouse was therefore working on two parallel tracks. On one, it was helping to identify BCCI's problems and develop the arrangements to address them. On the other, it was conducting a confidential statutory investigation for the Bank of England.

Regulatory investigations may properly require confidentiality. The difficulty is that Abu Dhabi was committing billions of dollars to a restructuring being discussed with the Bank of England, without being told that a separate investigation was under way. That investigation would later become central to abandoning the same restructuring.

This raises a basic question: was the Bank of England still genuinely considering restructuring, or was it already building a separate basis on which BCCI could be closed?

The available public record does not establish that the Section 41 investigation was commissioned in order to secure closure, and that should not be presented as fact. But its timing and secrecy make the question legitimate.

Reliance on an unfinished draft

Price Waterhouse delivered its Section 41 report in draft on the night of Saturday 22 June 1991, outside working hours, to a security guard at the Bank of England. Bank officials discussed it with Price Waterhouse on Monday 24 June.

The draft contained serious allegations concerning BCCI's accounts, losses, liabilities, lending, nominee arrangements, Treasury activities and dealings with associated companies. Yet Price Waterhouse partner Chris Cowan reportedly considered there was "not very much new" in it, while Bank of England officials reacted strongly to the cumulative picture it presented.

The report had not been completed or finalised, and some matters remained subject to verification. No published record identifies:

• which findings were genuinely new;
• which confirmed or extended matters already known;
• which remained unverified;
• whether the practices alleged were continuing under the new management; and
• which findings, if any, made a substantially funded restructuring unworkable.

The question is not whether the draft contained serious material. It plainly did. The question is why a decision of such consequence was taken on an unfinished report, without first requiring Price Waterhouse to complete its work and identify clearly what had changed since the restructuring was agreed in principle.

No opportunity to respond

BCCI and the Abu Dhabi shareholders were not shown the draft report before closure. They had no opportunity to examine any genuinely new allegations, correct errors, produce documents or explanations, remove any further officers considered unsuitable, provide more capital or guarantees, accept additional safeguards, or revise the restructuring.

This matters because Abu Dhabi had already accepted the need for sweeping change. It had supported new management, new capital, the separation of problem assets and new successor institutions. There is no reason to assume it would have refused to address further findings. It was never asked.

The rapid move towards closure

BCCI was closed publicly on 5 July 1991, but the decision-making had moved towards closure days earlier.

• After receiving the draft, Bank of England officials held discussions with American regulators and prosecutors.
• By 27–28 June, the Bank of England's approach had shifted from restructuring to preparing coordinated regulatory action.
• By 1 July, European regulators were being brought together to coordinate action that could lead to the freezing and closure of BCCI's operations.
• On 3 July, an updated composite restructuring plan was sent to the Bank of England and the Luxembourg authorities, reportedly at their request.
• By 4 July, Price Waterhouse considered approaching the Governor to object to what it regarded as precipitate and prejudicial action. It did not proceed because it believed the decision had effectively been made.

Why were restructuring documents and financial support still being accepted after the Bank of England had moved towards coordinated closure?

The United States

US regulators and prosecutors were investigating serious allegations against BCCI, including its alleged concealed ownership of American banks. The United States was not a member of BCCI's College of Regulators, but it was in regular contact with the Bank of England.

Lord Justice Bingham records that in April 1991, Gerald Corrigan, President of the Federal Reserve Bank of New York, warned the Bank of England that the Federal Reserve intended to act swiftly and publicly against BCCI. He said the resulting disclosures could lead to criticism of other authorities, including the Bank of England. Corrigan considered it unwise to proceed with reconstruction until the US investigations became clearer, and suggested the restructuring be stalled.

The Bank of England initially rejected that suggestion. It concluded that the US authorities had not established their case sufficiently to justify abandoning reconstruction. On 9 May, the Board of Banking Supervision supported continuing with the protection and restructuring of the UK operations.

At the beginning of July, the Bank of England Board of Banking Supervision and the College of Regulators favoured sending a mission to Abu Dhabi to put the concerns to the authorities there and seek the shareholders' cooperation. On the evening of 1 July, Corrigan telephoned the Bank of England. He questioned the value of the mission, considered the whole exercise was being rushed, and was concerned about the consequences for the dollar payments system. Bingham records that Corrigan was "much opposed" to the Gulf mission, and support for it faded.

The evidence does not support a claim that the United States ordered the Bank of England to close BCCI. It does establish that a highly influential US central banker opposed reconstruction, warned of damaging US proceedings and publicity, suggested the restructuring be stalled, and opposed the Abu Dhabi mission. (Bingham Report, paragraphs 2.378, 2.386, 2.457 and 2.460.)

Bingham concluded that it was impossible to say what effect the American information would have had on its own. But he found that knowledge of the US authorities' beliefs and intended actions, added to the draft Section 41 report, helped turn the balance decisively towards closure. This leaves open several questions:

• What evidence did the US authorities actually supply?
• Did earlier US communications influence the decision to commission the Section 41 investigation?
• Did the prospect of US action influence the decision to act on the draft rather than wait for a finalised report?
• Did the Bank of England fear that US action would expose weaknesses in its own supervision of BCCI?

The US$650 million transfer

On 4 July 1991, Abu Dhabi transferred a further US$650 million under the agreed capital and restructuring arrangements. By then, the Bank of England had already moved towards coordinated closure, and Price Waterhouse believed the decision had effectively been made. Abu Dhabi was not warned. BCCI was closed the next day.

After learning of the closure, Abu Dhabi recalled the transfer and took steps to prevent uncashed promissory notes from its wider support package being used in the liquidation.

The public record does not establish that information was withheld in order to secure the money before closure, and that should not be stated as fact. But why were the majority shareholders not told that closure had effectively been decided before they transferred a further US$650 million? That requires a clear explanation.

Excluding the UAE Central Bank

The UAE Central Bank was a member of BCCI's College of Supervisors and the regulator most directly concerned with the proposed Abu Dhabi bank and the shareholders providing the support. It was nevertheless excluded from the decisive European discussions.

The stated concern was that informing the UAE authorities might allow information to reach BCCI or the shareholders and put the planned action at risk. That may explain the wish for secrecy once closure had been chosen. It does not answer the question of fairness. If Abu Dhabi was still being treated as a participant in a genuine restructuring, excluding its regulator from the discussions that abandoned that restructuring is hard to reconcile with open regulatory cooperation.

Was closure already predetermined?

Bad faith in this context does not simply mean that the Bank of England made the wrong decision. The question is whether regulators continued to deal with BCCI and its Abu Dhabi majority shareholders as though restructuring remained a genuine possibility when, internally, they had already decided that closure would proceed.

The evidence does not show that the Section 41 investigation was commissioned in March 1991 with closure in mind. But as late as 6 June, the Bank of England was considering approval in principle for a new UK bank, and detailed proposals followed on 18 June. Within days of receiving an unfinished draft, the Bank of England had moved to closure, while restructuring documents and Abu Dhabi's money were still being received.

These facts bear directly on whether Abu Dhabi and those working to save BCCI were treated honestly and fairly.

The Bingham Inquiry: what it concluded and what it left out

Lord Justice Bingham rejected allegations that the Bank of England had acted dishonestly or in bad faith. He described the story of BCCI's supervision as a tragedy of errors, misunderstandings and failures of communication, and he concluded that closure was appropriate. The Bank of England later acknowledged that closure was not the only possible course.

The Inquiry's terms of reference were to inquire into the supervision of BCCI under the Banking Acts; to consider whether the action taken by all the United Kingdom authorities was appropriate and timely; and to make recommendations.

The Inquiry owed much to sustained pressure from Keith Vaz, MP for Leicester East UK. On 12 July 1991, a week after the closure, he tabled a Commons motion calling for an urgent public inquiry into the way the Bank of England had handled the circumstances surrounding BCCI's closure. The same motion urged that, even at that late stage, the Bank of England should agree a financial package with the shareholders to keep the Bank afloat. Vaz later recorded that the Chancellor had at first refused an independent inquiry, only to back-track a few days later.

The inquiry that was set up, however, was framed around supervision: whether the authorities had acted appropriately and in time. Whether closure was the right choice, over a funded restructuring already under way, was precisely the question Vaz had raised. It received far less attention.

Within those terms, Bingham was entitled to judge whether closure was appropriate. But "appropriate" is a comparative judgment: appropriate compared with what? In July 1991 there was only one alternative, the restructuring. To conclude that closure was appropriate, the Inquiry needed to show that the restructuring could not have dealt with whatever the draft report had found. That required establishing which findings were genuinely new, whether they had been verified, whether they made the restructuring unworkable, and how Abu Dhabi would have responded if they had been put to it.

The report records no response from Abu Dhabi to any new, verified allegation, because none was ever sought. A finding that closure was appropriate, made without the response of the party that was funding the alternative, rests on one side of the case.

The omissions in Bingham's inquiry go further:

• The draft. The report does not explain why the Bank of England acted on an unfinished draft rather than requiring Price Waterhouse to finalise and verify it.
• The Price Waterhouse view. It does not resolve the difference between Cowan's view that the draft contained not very much new and the Bank of England's view that it was decisive.
• The US factor. Bingham found that US intentions, added to the draft, turned the balance decisively, yet said he could not assess the US information on its own. On his own account, then, the decision rested partly on another country's anticipated action rather than solely on verified findings. The report does not test whether that was a proper basis for abandoning a restructuring the Bank of England had supported weeks earlier.
• The US$650 million. The report does not squarely address whether Abu Dhabi continued the restructuring and transferred US$650 million in good faith, one day before closure, without being told that the Bank of England had already moved to close BCCI.
• The alternative. If closure was not the only possible course, a finding that it was appropriate needed to explain why the alternative was worse. The report does not set out that comparison.

The evidence behind these conclusions also remains largely beyond public scrutiny. When the Inquiry was announced, the Prime Minister promised that Bingham would have access to all relevant papers, officials and Ministers, that nothing and no one would be held back, and that the conclusions would be made public. The conclusions were published. The underlying records were not: the National Archives catalogue lists the Bingham Inquiry records, series BS 25, covering 1988 to 1992, with the access condition "records not yet transferred". More than three decades later, the material on which the Inquiry relied cannot be independently examined. 

Bingham's finding that closure was appropriate may therefore be better read as a finding that the Bank of England was entitled to act on the information before it. It is not a finding that closure was the only or best course, or that a restructuring funded by Abu Dhabi could not have succeeded. That question has never been properly examined.

What can reasonably be concluded?

The available evidence does not, by itself, prove bad faith. It does give strong reasons to question whether the restructuring process was conducted openly and genuinely in its final days, and whether the Bingham Inquiry tested the decision of the Bank of England to close as fully as its consequences required.

The unresolved issue is whether the majority shareholders, the UAE authorities and the advisers working to address BCCI's problems were treated fairly and openly once the Bank of England's internal position began moving towards closure.

Readers have the right to examine the chronology and documentary evidence and reach their own conclusions.

Also read

 

• Move to Close BCCI - From Restructuring to Coordinated Closure

• The Restructuring Programme

• What Was the Section 41 Investigation?

• What Did the Section 41 Report Add Beyond the 1990 Task Force?

• The Timing of Closure and the US$650 Million Transfer

• The United States and BCCI

• The Exclusion of the UAE Central Bank

• The Bingham Report

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 open to revision in light of new evidence.