Price Waterhouse served as external auditors to the BCCI Group from June 1987 until its closure in July 1991.
During this period, the firm worked with BCCI’s management and the Abu Dhabi majority shareholders to investigate the Bank’s financial position and the substantial losses identified during 1990.
Two key Price Waterhouse documents are considered in this section:
- the confidential report prepared under section 41 of the Banking Act 1987, commonly known as the Sandstorm Report; and
- the memorandum submitted to the UK Treasury and Civil Service Committee on 5 February 1992, entitled Banking Supervision and BCCI: International and National Supervision.
The Section 41 or Sandstorm Report
“Sandstorm” was the codename used by Price Waterhouse for its confidential investigation into BCCI. The resulting Section 41 report was delivered to the Bank of England in June 1991 and contained serious allegations concerning false accounting, concealed losses, fictitious lending, nominee arrangements and transactions conducted through companies associated with BCCI.
The report also referred to accounts maintained by individuals and organisations alleged to have been connected with terrorism, criminal activity or intelligence interests. Such matters should be examined carefully and separately, since the existence of an account did not necessarily demonstrate that BCCI as an institution endorsed or knowingly supported the activities of its customer.
The report was an important factor in the Bank of England’s decision to coordinate the closure of BCCI on 5 July 1991. However, Price Waterhouse itself raised concerns about the timing and consequences of immediate closure and reportedly favoured allowing further time for the Abu Dhabi shareholders’ restructuring and rescue proposals to be considered.
The status of the report must also be kept in view. It was prepared confidentially for the supervisory authorities under statutory powers and was not a completed judicial determination. Any assessment of the allegations should therefore consider the evidence available at the time, the qualifications attached to the findings, the opportunity given to BCCI and its shareholders to respond, and the subsequent recovery or value of assets associated with the transactions.
Scope of the allegations
The allegations disclosed after closure were frequently presented as evidence that the whole BCCI organisation was engaged in widespread fraud. This description placed a lasting stigma upon the Bank and its worldwide workforce.
A distinction should nevertheless be drawn between misconduct attributed to particular senior executives, central accounts or associated companies and the ordinary activities of hundreds of branches and thousands of employees. BCCI branches continued to operate temporarily in a number of jurisdictions after July 1991, and the Bingham Inquiry’s principal concern was the supervision of the Group rather than an examination of every branch or employee.
Lord Justice Bingham’s terms of reference were limited to the supervision of BCCI under the UK Banking Acts and whether the actions of the relevant UK authorities were appropriate and timely. The report did not attempt to provide a complete history of all BCCI activities or determine the responsibilities of every overseas authority, director or auditor. It also recognised that the supervision of BCCI’s UK branch operations had not itself been the principal source of regulatory concern.
Nature and purpose of the disputed transactions
Price Waterhouse’s later evidence suggested that the transactions under investigation were not directed solely towards the personal enrichment of those responsible. The firm considered that some arrangements appeared to have been used to:
- conceal accumulated losses;
- create fictitious profits;
- overstate the Group’s capital;
- meet increasing central overheads;
- support BCCI’s rapid international growth;
- finance the acquisition of interests in other banks and financial institutions; and
- maintain confidence and avoid the disclosure of financial weakness.
Some of the assets acquired through these arrangements- including interests in banks, companies and other investments - had an underlying commercial value. Their existence did not remove the alleged accounting irregularities, but it is relevant when distinguishing between the diversion of money for personal benefit and transactions intended to acquire or preserve assets for the Group.
The memorandum stated, in substance, that the apparent motivation was not merely dishonest personal enrichment. Price Waterhouse believed that a scheme had developed from the early years of BCCI to introduce fictitious profits and inflate capital in order to conceal losses, finance overheads and support the Bank’s continued expansion.
Discovery of the financial shortfall and Abu Dhabi support
During 1990, BCCI and Price Waterhouse identified a substantial shortfall in the Group’s finances. The position was disclosed to the principal Abu Dhabi shareholders, who commissioned further investigations and provided substantial financial assistance.
The Ruler of Abu Dhabi, the Crown Prince, the Government of Abu Dhabi and associated institutions subsequently acquired an aggregate majority shareholding of approximately 77 per cent in BCCI Holdings (Luxembourg) S.A.
Their support formed part of a wider programme intended to recapitalise the Bank, reorganise its worldwide operations and divide the existing Group into separately regulated banking institutions. The restructuring proposals also contemplated the transfer or recovery of impaired and disputed assets.
The existence of this financial support and restructuring programme is important when considering the description of BCCI as already irretrievably bankrupt at the time of closure. It does not by itself resolve the extent of the losses or alleged misconduct, but it shows that the majority shareholders were attempting to provide capital and implement a reorganisation before the regulators intervened.
Reported losses and creditor recoveries
Contemporary and later accounts gave widely differing estimates of BCCI’s losses, frequently ranging from approximately US$10 billion to US$17 billion. These figures should be treated cautiously because they may refer to different concepts, including gross irregular transactions, unsupported loans, accounting shortfalls, potential claims or estimated liquidation losses.
The eventual recoveries achieved by the liquidators, together with contributions involving Abu Dhabi majority shareholders, enabled creditors in a number of jurisdictions to recover a substantial proportion of their admitted claims. Recoveries reportedly exceeded 90 per cent in many cases, while creditors of BCCI Hong Kong ultimately received more than 100 per cent when interest and later distributions were included.
These results do not disprove the existence of serious financial irregularities. They do, however, demonstrate the importance of distinguishing between the gross amount of allegedly irregular transactions, the net deficiency at closure and the ultimate loss suffered by creditors after assets, settlements and shareholder contributions were recovered.
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 circumstances in which BCCI’s financial problems had developed and later been identified.
It is particularly relevant because it placed the alleged misconduct within a broader financial and organisational context. Price Waterhouse indicated that the apparent purpose of the scheme was not the personal enrichment of those involved. Rather, the transactions appeared to have been undertaken to conceal losses, support BCCI’s rapid expansion, finance increasing Group overheads, acquire interests in other banks and institutions, and maintain the Bank’s reported capital position.
Neither the Bingham Report nor other principal reports identified a general pattern of funds being diverted for the personal enrichment of BCCI’s senior management. This distinction is important when considering the purpose of the transactions and the value of the assets acquired.
The memorandum should be read alongside the Section 41 report, the Bingham Report, the evidence presented to parliamentary committees and the restructuring documents prepared by BCCI and its Abu Dhabi shareholders. Together, these materials allow a more complete assessment of what occurred, who was responsible, the purpose and value of the underlying transactions, and whether immediate worldwide closure was the only available course.