Price Waterhouse served as external auditor to the BCCI Group from June 1987 until the Bank’s closure in July 1991.
Its work concerning BCCI extended over several years and produced a number of separate reports, investigations and submissions. These should not be treated as though they formed one continuous “Sandstorm” investigation.
Three distinct stages are particularly important:
- Price Waterhouse’s audit and investigative work during 1990, including reports concerning BCCI’s financial position, problem accounts, unrecorded deposits and management failures;
- the separate Section 41 investigation commissioned by the Bank of England in March 1991, whose draft report was delivered in June 1991; and
- Price Waterhouse’s memorandum of 5 February 1992 to the Treasury and Civil Service Committee, Banking Supervision and BCCI: International and National Supervision.
Price Waterhouse’s Work During 1990
During 1990, Price Waterhouse, BCCI’s internal Task Force and representatives of the Abu Dhabi shareholders investigated substantial losses, problem loans, unrecorded liabilities and weaknesses in the management and accounting of the Group.
Price Waterhouse produced reports during 1990, including reports dated 18 April and 3 October 1990 referred to in the Bingham Report. This work brought major financial and management problems to the attention of BCCI, the Abu Dhabi interests and the Bank of England.
The 1990 work was important because it preceded the Section 41 investigation that was commissioned by the Bank of England shortly before moving to BCCI closure. It led to further investigation, substantial financial support, changes in management and the development of a comprehensive restructuring programme.
It should therefore not be described as the 1991 Section 41 report or treated as though the Bank of England first learned of BCCI’s principal financial problems only when the later draft report was delivered.
Abu Dhabi Support and the Restructuring Programme
By 1990, Abu Dhabi interests had become BCCI’s majority shareholders and were providing substantial financial support while investigations continued.
The restructuring programme contemplated:
- separating viable banking operations from impaired and disputed assets;
- establishing three new and separately regulated banks based in London, Abu Dhabi and Hong Kong;
- transferring problem loans and other impaired assets to a fourth specialist institution;
- replacing existing senior management;
- introducing new boards and stronger regulatory oversight; and
- providing substantial additional capital and financial guarantees.
During May and June 1991, representatives of BCCI, Price Waterhouse, legal and financial advisers and the majority shareholders continued working with the Bank of England on the proposed new UK bank.
The Bingham Report records that real progress was made. By early June, the Bank’s Banking Supervision Division envisaged granting approval in principle for the proposed UK bank, subject to outstanding technical and regulatory matters and provided that the US investigations did not reveal serious new problems.
Bingham concluded that the majority shareholders were given every reason to believe that, if the Bank of England’s requirements were met, it would not prevent implementation of the restructuring.
The Separate Section 41 Investigation
The Section 41 investigation was a separate statutory investigation commissioned by the Bank of England under the Banking Act 1987. Price Waterhouse undertook it pursuant to the Bank’s letter of instruction dated 4 March 1991.
The investigation was commissioned after the Abu Dhabi majority shareholders had decided to continue supporting BCCI and while the Bank of England and other regulators were actively considering a restructuring intended to preserve the Bank. The Bank did not at that stage contemplate using the Section 41 report as a basis for closing BCCI.
At the College of Regulators’ meeting on 4 April 1991, the supervisors considered the restructuring proposals to provide a workable framework for continuing discussions. The Bank of England subsequently continued working with BCCI, Price Waterhouse and the majority shareholders towards approval in principle for the proposed new UK bank.
The resulting document was headed Report on Sandstorm SA under Section 41 of the Banking Act 1987. “Sandstorm” was therefore associated with this statutory investigation and should not be used indiscriminately to describe all Price Waterhouse work undertaken during 1990 and 1991.
The majority shareholders were not told that the continuation of the restructuring depended upon the outcome of the Section 41 investigation. Bingham found that no corresponding condition concerning that investigation had been placed in the Bank’s internal restructuring proposals.
He concluded that this omission was not deliberate duplicity. Bank officials had not themselves regarded the Section 41 investigation as likely to determine the future of the restructuring. The shareholders were therefore understandably surprised when the draft report was subsequently used as the principal basis for abandoning the programme and moving towards closure.
The Draft Report Delivered in June 1991
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 on arrival. The Bingham Report provides no explanation as to why a document of such importance was delivered in this manner.
The Bingham Report records these circumstances but provides no further explanation for the timing or method of delivery. The document remained a draft because Price Waterhouse expected its scope, contents and provisional conclusions to be discussed with the Bank before it was finalised.
The report remained expressly in draft. Price Waterhouse expected to discuss its contents, supporting information and provisional conclusions with the Bank before completing it.
The draft brought together allegations concerning:
- falsification of accounting records;
- problem loans and concealed liabilities;
- external companies used to route transactions;
- nominee and hold-harmless arrangements;
- false confirmations provided to auditors;
- transactions involving ICIC and other associated companies;
- Central Treasury losses; and
- lending and transactions that had not been properly disclosed in BCCI’s accounts.
Some of these matters were extremely serious. However, many of the underlying losses, problem accounts and management failures had already been identified through the 1990 investigations and were being examined or addressed within the Abu Dhabi-backed restructuring programme.
The historical issue is therefore not whether the draft Section 41 report contained serious allegations. It is what information was genuinely new, which matters were already known and being addressed, and whether its findings required immediate worldwide closure rather than further changes to management, capital and restructuring.
The Nature and Purpose of the Transactions
Price Waterhouse’s subsequent evidence indicated that the accounting arrangements and transactions under investigation were principally intended to:
- conceal accumulated losses and problem loans;
- create fictitious profits;
- overstate the Group’s reported capital;
- meet increasing central overheads;
- support BCCI’s continued international expansion;
- finance the acquisition of interests in banks and other institutions; and
- maintain confidence by preventing disclosure of the Bank’s financial weakness.
The wrongdoing identified concerned the manipulation of accounting records and transactions to conceal losses and sustain the Bank. It was not identified as a general diversion of BCCI’s funds for the personal enrichment of its founder or management.
Some transactions were associated with the acquisition of banks, companies and other assets possessing an underlying commercial value. This did not remove the accounting irregularities, but it is relevant when distinguishing transactions intended to conceal losses or acquire assets for the Group from the theft or siphoning of money for personal benefit.
US Pressure and the Movement Towards Closure
The draft Section 41 report may not have been considered in isolation. At the same time, the Bank of England was in close contact with American regulatory and prosecutorial authorities that were preparing further action against BCCI.
Bank of England representatives visited New York between 23 and 25 June 1991. According to Bingham, they were left in no doubt about the determination of the US authorities to act against BCCI. They were also struck by the intensity of the American investigations and the volume of information collected.
The Bingham Report shows that the influence of the US authorities did not begin with the disclosures made during the Bank of England’s June 1991 visit to New York.
By December 1990, the Bank of England was already in an uncomfortable position. As Bingham recorded in paragraph 2.295, it wanted to preserve its traditionally cordial relationship with the Federal Reserve. At the same time, it was reluctant to see BCCI’s proposed reconstruction - which it believed was already in progress and would benefit depositors—jeopardised by highly publicised and damaging proceedings in the United States. Bingham observed that the role of the US authorities would become increasingly significant during the remaining months of BCCI’s existence.
That pressure intensified during 1991. US authorities pressed for documents and further action, warned of prosecutions and damaging publicity and criticised the European supervisors’ handling of BCCI. Senator John Kerry’s letter of 12 April 1991 urged the Federal Reserve not to approve any transfer of BCCI or CCAH assets until they were brought under a single consolidated supervisor. Bingham described that letter as plainly intended to obstruct BCCI’s proposed restructuring.
During meetings in New York from 23 to 25 June 1991, Bank of England representatives were left in no doubt that US authorities were determined to take action against BCCI. They returned increasingly concerned about the possible consequences for the proposed successor banks and about the criticism that might be directed at the Bank of England itself.
Bingham concluded in paragraph 2.415 that it was impossible to determine what effect the information received from the United States would have had if considered alone. He nevertheless expressed the view that knowledge of the US authorities’ beliefs and intended actions, when added to the draft Section 41 report, helped weigh the balance decisively in favour of the action ultimately taken.
The Bingham chronology shows sustained US regulatory, prosecutorial and political pressure from at least late 1990, together with concern within the Bank of England about maintaining relations with the Federal Reserve, anticipated US action, adverse publicity and criticism of its own supervisory conduct. These pressures developed while the Bank of England was also seeking to preserve a restructuring that it believed would benefit depositors, before contributing to the abrupt reversal from reconstruction to closure.
On 28 June 1991, the Bank of England decided that the proposed restructuring could no longer be pursued.
Price Waterhouse Did Not Expect Closure
When Price Waterhouse delivered the draft report, it did not envisage that the report would lead to BCCI’s immediate closure.
It expected the findings to result in further consultation, more extensive management changes and possible amendments to the proposed restructuring. On 24 June, Price Waterhouse considered closure sufficiently unlikely that it anticipated further discussion with the Bank.
After learning that liquidation was being pursued, Price Waterhouse strongly objected. It told Bank officials that closure would not serve the interests of depositors and emphasised that the Abu Dhabi shareholders had already provided substantial support and appeared willing to provide further funds.
Price Waterhouse warned that liquidation would produce competing claims in numerous jurisdictions, prolonged litigation and a disorderly outcome. On 4 July 1991, it described liquidation as a “nightmare scenario” and regarded the proposed action as precipitate and prejudicial.
The firm considered seeking an urgent meeting with the Governor of the Bank of England but decided against doing so because it believed that the decision had already become irreversible.
These objections are important because they came from the firm that had conducted the Section 41 investigation. They demonstrate that the authors of the draft report did not themselves initially regard immediate closure as its necessary or inevitable consequence.
Memorandum to the Treasury and Civil Service Committee
On 5 February 1992, Price Waterhouse submitted its memorandum, Banking Supervision and BCCI: International and National Supervision, to the House of Commons Treasury and Civil Service Committee.
The memorandum addressed the supervision of international banking groups, the information available to auditors and regulators, and the manner in which BCCI’s financial problems had developed and were later identified.
It also placed the disputed transactions in their wider financial and organisational context. Price Waterhouse indicated that their apparent purpose was not simply personal enrichment. The arrangements appeared to have developed to conceal losses, introduce fictitious profits, inflate capital, finance growing central overheads, support expansion and acquire interests in other institutions.
The memorandum should be distinguished from both the Price Waterhouse reports produced during 1990 and the draft Section 41 report delivered in June 1991. It was a later parliamentary submission explaining the development of BCCI’s problems and the wider supervisory issues arising from them.
Reported Losses and Subsequent Recoveries
Contemporary and later accounts gave widely differing estimates of BCCI’s losses, sometimes ranging from approximately US$10 billion to US$17 billion.
Such figures require caution. They may refer to different measurements, including the gross value of irregular transactions, unsupported loans, potential liabilities, accounting deficiencies, estimated liquidation losses or creditor claims. They should not automatically be treated as the amount of money permanently lost or stolen.
The assets recovered by the liquidators, together with settlements and contributions involving Abu Dhabi, enabled creditors in many jurisdictions to recover at least 90 per cent of their admitted claims. Creditors of BCCI Hong Kong ultimately received more than 100 per cent when interest and later distributions were included.
These recoveries do not disprove accounting irregularities or management failures. They do demonstrate the importance of distinguishing between gross transaction values, the estimated deficiency at closure and the ultimate loss suffered after assets and shareholder contributions were recovered.
Questions Requiring Further Examination
Taken together, the Price Waterhouse material raises several questions:
- What information in the draft Section 41 report was genuinely new to the Bank of England?
- Which losses and problem accounts had already been identified and incorporated into the restructuring?
- Why were the shareholders not told that the restructuring might depend upon the Section 41 investigation?
- Why was Price Waterhouse not given a fuller opportunity to discuss and complete its draft report before closure was pursued?
- Why were its warnings about the consequences of liquidation not examined through an independent comparison of closure and restructuring?
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To what extent did the intended action of US authorities influence the Bank of England’s decision?
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Given that the acting chief executive alleged to have initiated or directed the relevant conduct had already been removed, and further management changes were underway, why was the removal of any other implicated individuals - while preserving the Bank’s viable operations - not treated as a realistic alternative to worldwide closure?
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Why could not the problem assets have been separated and managed within the proposed fourth institution?
- Was immediate worldwide closure the only proportionate response available?
The 1990 Price Waterhouse work, the 1991 Section 41 investigation and the 1992 parliamentary memorandum should therefore be examined as three distinct stages, each prepared for a different purpose and in different circumstances.
Reading them together with the Bingham Report, the parliamentary evidence and the restructuring documents permits a more accurate understanding of what was known, what was new, what remedial measures were already underway and why the Bank of England moved so abruptly from restructuring to closure.