Report to the Committee on Foreign Relations US Senate

US Senator John Kerry chaired the Senate Foreign Relations subcommittee on terrorism that investigated the Bank of Credit and Commerce International.

The BCCI Affair

The BCCI Affair: A Report to the Committee on Foreign Relations, United States Senate was prepared by Senator John Kerry, Chairman of the Subcommittee on Terrorism, Narcotics and International Operations, and Senator Hank Brown, its ranking Republican member. It was issued in December 1992 as Senate Print 102-140.

The report followed an extensive investigation by the Subcommittee into BCCI’s activities, particularly in the United States. It examined the Bank’s ownership, management, international operations, relationships with governments and intelligence agencies, alleged criminal activity, acquisition of American banks and the conduct of regulators, auditors, lawyers and government departments.

The report was published approximately seventeen months after BCCI was closed on 5 July 1991. It therefore did not bring about the worldwide closure of BCCI, although the Subcommittee’s investigations, hearings and public disclosures contributed substantially to the political and public narrative surrounding the Bank before and after its closure.

The Senate hearings

The report was supported by a large body of testimony, exhibits, internal documents, affidavits, depositions and correspondence published as:

The BCCI Affair: Hearings before the Subcommittee on Terrorism, Narcotics and International Operations of the Committee on Foreign Relations, United States Senate
S. Hrg. 102-350, Parts 1–6

Although sometimes referred to as four principal hearing volumes, the complete published series consists of six numbered parts. The hearings were conducted during 1991 and 1992 and included testimony from former BCCI officers, regulators, auditors, law-enforcement officials, government representatives, lawyers and persons connected with BCCI’s American banking interests.

The hearing volumes are important because they contain much of the underlying material cited in the final report. They enable readers to compare the report’s conclusions with the actual testimony, documentary exhibits, qualifications and differing accounts placed before the Subcommittee.

The final report should therefore be read together with the hearing record rather than as a self-contained judicial finding.

The report’s central allegation

The report’s most widely quoted conclusion was that BCCI represented international financial crime on a massive and global scale. It characterised the Bank as having developed what it called a “criminal culture” and alleged that misconduct was not confined to isolated employees but extended into parts of senior management and the Group’s associated corporate structures.

This conclusion became one of the most influential descriptions of BCCI and was repeated extensively by governments, regulators, journalists and later commentators.

The breadth of the description raises important questions. BCCI operated through a large international network employing thousands of people in numerous legal and regulatory jurisdictions. Any assessment must therefore distinguish between:

wrongdoing attributed to particular senior executives;
transactions conducted through central accounts and associated companies;
misconduct by individual branches or officers;
activities of particular customers; and
the ordinary banking operations of the wider branch network and workforce.

The report’s use of institutional language frequently attributed the alleged conduct to “BCCI” as a whole. The evidence supporting each allegation should therefore be examined to determine which individuals, companies, offices or transactions were actually involved.

Principal allegations made in the report

Criminality and false accounting

The report alleged that BCCI engaged in false accounting, concealed losses, fictitious lending, nominee arrangements and the manipulation of its reported capital and profits.

It placed particular emphasis on the use of associated ICIC companies, describing the structure as a “bank within a bank” through which transactions and ownership interests could allegedly be kept outside BCCI’s published accounts.

These allegations should be considered alongside the Price Waterhouse reports, BCCI’s internal investigations, the financial shortfall identified in 1990, the subsequent Abu Dhabi support package and the value of assets acquired through some of the disputed transactions.

A further distinction is required between transactions intended to conceal losses or regulatory ownership and transactions producing personal financial enrichment. The Bingham Report and Price Waterhouse material indicated that much of the alleged scheme appeared to support BCCI’s expansion, finance Group overheads, conceal losses or acquire interests in other institutions, rather than establish a general pattern of personal enrichment by senior management.

Manager’s ledgers and numbered accounts

The report alleged that BCCI maintained confidential manager’s ledgers, numbered accounts and special arrangements that restricted the information available to ordinary branch staff, auditors and regulators.

Such arrangements were presented as mechanisms through which sensitive customers, undisclosed loans and exceptional transactions could be concealed.

This subject requires examination of the precise nature and legitimate banking use of numbered accounts, the authority under which particular ledgers were maintained, the persons who controlled them and whether the records were hidden from auditors or merely subject to additional confidentiality.

Treasury losses

The report alleged that BCCI incurred substantial treasury losses during the 1980s and concealed their extent through false entries, fictitious profits and transfers involving related companies and customer accounts.

The issues requiring further examination include:

when the losses first arose;
their actual amount;
which officers were responsible;
when senior management, auditors and regulators became aware of them;
the methods used to conceal or defer recognition; and
how far the losses contributed to BCCI’s financial shortfall in 1990.

The gross value of transactions associated with the alleged concealment should not automatically be treated as the net loss ultimately suffered by the Bank or its creditors.

ICIC - the alleged “bank within a bank”

The report described International Credit and Investment Company and related ICIC companies as a parallel financial structure controlled or influenced by BCCI executives.

It alleged that ICIC entities were used for nominee shareholdings, undisclosed lending, movements of funds, concealment of BCCI’s interests and transactions not properly reflected in the Bank’s published accounts.

These commercial ICIC companies must be distinguished from the independently constituted ICIC Staff Benefit Trust and Staff Benefit Fund. BCCI shares acquired through ICIC entities were transferred to staff-benefit bodies established for employees, former employees and their dependants.

The ownership, governance and transactions of each ICIC company, trust and fund should therefore be examined separately rather than treating every entity bearing the ICIC name as part of one undifferentiated organisation.

Money laundering

The report examined BCCI’s involvement in money laundering, particularly following the United States Customs operation in Tampa known as Operation C-Chase.

BCCI officers and entities entered guilty pleas in the United States in 1990 arising from the handling of funds represented to be drug proceeds. The case caused severe reputational damage and was repeatedly cited as evidence of institutional involvement in money laundering.

Questions to be considered include:

whether the conduct was confined to particular officers and locations;
the extent of authorisation or knowledge within senior management;
BCCI’s internal response after the indictments;
the terms and scope of the plea agreement;
the methods used in the undercover operation;
the issue of entrapment raised by some commentators; and
whether the conduct justified conclusions about the entire worldwide organisation.

Bribery and political payments

The report alleged that BCCI made payments, loans, gifts and other financial arrangements involving political leaders, public officials and influential figures in several countries.

It characterised some of these transactions as bribery or influence-peddling and suggested that BCCI cultivated political relationships to obtain deposits, licences, official support or protection from regulatory action.

However, the report also acknowledged that some payments were unusual or potentially improper without reaching definitive conclusions in every case.

Each allegation should therefore be examined by reference to:

the recipient;
the source and purpose of the payment;
whether it was a loan, gift, political contribution, charitable payment or commercial transaction;
the applicable law in the relevant jurisdiction;
evidence of any benefit obtained by BCCI; and
whether the allegation was tested in judicial proceedings.

Dealings with terrorists and arms traffickers

The report alleged that BCCI maintained accounts for individuals and organisations associated with terrorism, arms trafficking and covert political activity.

The existence of such accounts was used to support claims that BCCI provided financial services to dangerous or unlawful customers.

A bank’s maintenance of an account for a customer does not, without more, establish that the institution knew of, approved or participated in the customer’s activities. The relevant questions include what information was available at the time, whether intelligence or law-enforcement agencies were themselves monitoring the accounts, and whether BCCI was instructed or encouraged to maintain them.

The allegations relating to Abu Nidal, arms transactions and intelligence operations should therefore be examined separately, with careful attention to dates, account activity, knowledge and official involvement.

Alleged support for covert operations

The report reviewed BCCI’s contacts with intelligence agencies and persons engaged in covert operations. It examined allegations involving the Central Intelligence Agency, foreign intelligence services and politically sensitive transactions.

The report was critical of the completeness and timing of information supplied by intelligence agencies to the Subcommittee.

This area remains complicated by secrecy, classified information and the use of BCCI accounts by governments, intelligence officers, intermediaries and private customers. The existence of intelligence-related accounts could indicate misconduct, official use of the Bank, monitoring by intelligence agencies, or a combination of these factors.

Acquisition and control of United States banks

One of the report’s most important allegations was that BCCI secretly acquired or controlled American financial institutions despite regulatory restrictions intended to prevent it from doing so.

The report focused particularly on Financial General Bankshares, later renamed First American Bankshares, and on the involvement of nominees, Middle Eastern investors, Clark Clifford, Robert Altman and other lawyers and advisers.

It alleged that BCCI financed or controlled the acquisition while presenting the nominal investors as independent owners.

The issues requiring examination include:

the source of the acquisition finance;
the legal and beneficial ownership of the shares;
representations made to the Federal Reserve;
the extent of BCCI’s management or financial control;
the knowledge and role of the nominal shareholders;
the advice given by lawyers and regulators; and
the value of the banking assets acquired.

The report repeatedly relied upon the six-part hearing record and Federal Reserve proceedings in developing these conclusions.

CAPCOM

The report examined the activities of BCCI’s commodities affiliate, CAPCOM Financial Services.

It alleged that CAPCOM conducted billions of dollars of largely anonymous commodities trading and that some of its accounts and transactions were associated with money laundering, intelligence figures and influential business interests.

The scale of gross trading turnover should be distinguished from profits, losses or funds proven to have been laundered. Further examination is required of CAPCOM’s ownership, customers, internal controls, regulatory supervision and the particular transactions relied upon by the report.

“Black Network”

The report discussed allegations concerning an internal BCCI group commonly described as the “Black Network.” It was alleged to have carried out intelligence, security, enforcement or covert activities on behalf of the Bank.

The precise existence, structure and functions of such a network remain among the more controversial elements of the BCCI narrative.

The allegation appears to have relied significantly on testimony, interviews and secondary accounts. It should be tested against contemporaneous organisational records, identified personnel, reporting lines and evidence of specific operations.

The term should not be repeated as an established institutional fact without identifying the evidence upon which the allegation rests.

Intimidation of witnesses

The report alleged that witnesses, former officers and persons cooperating with investigations were subjected to threats, pressure or intimidation.

Any such allegation is serious but should be attributed to identified persons and incidents. Evidence that an individual witness felt threatened does not necessarily establish the existence of a centrally directed BCCI policy.

Other sensational allegations

The report also referred to allegations involving prostitution, death-squad training, arms trafficking and other criminal or covert activities.

Some of these claims became prominent in media descriptions of BCCI but were supported by varying levels of evidence. They should be treated individually and not grouped together merely because they appeared within a report dealing with the Bank.

The strength of the documentary evidence, corroboration, witness credibility and outcome of any legal proceedings should be stated in each case.

Findings concerning institutions outside BCCI

The report was not confined to allegations against the Bank. It was also highly critical of the conduct of government departments, regulators, auditors, lawyers and other institutions.

United States Department of Justice

The report concluded that the Department of Justice mishandled aspects of the investigation and prosecution of BCCI and failed to coordinate effectively with other government agencies.

It criticised delays, restrictions on information-sharing and the handling of evidence obtained through the Tampa prosecution and other investigations.

United States regulators

The report concluded that weaknesses and gaps in the American regulatory system helped BCCI acquire control of American banks without timely detection.

It also alleged that BCCI used prominent and politically connected lawyers and advisers to navigate the regulatory process and reassure officials.

This finding raises the question of whether regulatory failure resulted solely from deception by BCCI or also from inadequate investigation, fragmented responsibilities and excessive reliance on professional representations.

Bank of England

The report strongly criticised the Bank of England’s supervision of BCCI and alleged that it failed adequately to protect depositors and creditors.

It also alleged that information about BCCI’s problems was withheld from public knowledge before the coordinated closure in July 1991.

These conclusions should be read alongside the Bingham Report, which was specifically commissioned to examine the supervision of BCCI by the Bank of England and the actions of the UK authorities.

Auditors

The report alleged that BCCI’s auditors failed to protect depositors and creditors from the consequences of practices about which they had become aware.

The respective roles of Ernst & Whinney and Price Waterhouse need to be considered separately, taking account of the periods during which each acted, the information available, the reports made to regulators and shareholders, and Price Waterhouse’s later investigation of the shortfall.

Lawyers and professional advisers

The report examined the role of lawyers, lobbyists, public-relations advisers and other prominent professionals engaged by BCCI or persons associated with it.

It alleged that BCCI used well-connected advisers to obtain access, influence regulatory decisions, defend its reputation and facilitate its American banking interests.

Professional representation in itself was lawful and expected. The relevant issue is whether particular advisers knowingly assisted deception or merely acted on information supplied by their clients.

Unanswered questions and limitations

The report acknowledged that important questions remained unanswered and that numerous investigative leads had not been fully explored.

Some transactions were described as suspicious, unusual or possibly improper rather than conclusively unlawful. In several areas, the report relied upon allegations, interviews, regulatory charges, plea agreements and testimony that had not all been tested through completed trials.

The report was a congressional investigative document, not a judgment of a court. Its findings were politically and historically important, but they did not carry the same status as judicial findings reached after evidence had been tested through examination and cross-examination.

The hearings also demonstrate that witnesses provided differing accounts, asserted lack of knowledge, disputed allegations or qualified their evidence. Those qualifications should form part of any balanced assessment.

Did the report establish that BCCI was bankrupt?

BCCI was widely described following closure as bankrupt and as having losses of between US$10 billion and US$17 billion.

Such estimates may combine different figures, including gross suspect transactions, unsupported loans, concealed losses, potential claims and estimated liquidation deficiencies.

They should be compared with:

the value of assets acquired through disputed transactions;
recoveries achieved by the liquidators;
settlements obtained from auditors and other parties;
financial support provided by Abu Dhabi; and
the eventual distributions made to creditors.

Creditors in many jurisdictions ultimately recovered more than 90 per cent of their admitted claims, while distributions in Hong Kong exceeded 100 per cent when interest was included. These recoveries do not remove the accounting irregularities identified after closure, but they raise legitimate questions about the frequent use of gross figures to describe BCCI’s ultimate financial deficiency.

Criminal culture and the wider BCCI organisation

The report’s description of a “criminal culture” became a defining label attached to the entire BCCI organisation.

That characterisation should be examined against the size and diversity of the Group. At its height, BCCI operated in numerous countries and employed up to approximately 14,000 people. Most employees worked in ordinary banking, administration, operations, technology, training and customer service and were not accused of criminal conduct.

A balanced assessment should therefore distinguish between:

proven criminal offences;
allegations against named individuals;
institutional control failures;
undisclosed central transactions;
conduct by customers;
actions taken by regulators and intelligence agencies; and
the legitimate banking, educational, charitable and developmental work undertaken elsewhere within the Group.

The existence of serious wrongdoing in parts of an organisation does not automatically determine the character or conduct of every branch, employee or activity.

Matters for examination by BCCI Insights

This section of BCCI Insights does not seek simply to dismiss or repeat the Senate report. It examines the principal allegations against the supporting documents, hearing testimony and wider historical context.

The following subjects will be considered separately:

the meaning and evidential basis of the term “criminal culture”;
BCCI’s actual financial position at closure;
money laundering and Operation C-Chase;
the alleged concealment of treasury losses;
ICIC companies and staff-benefit bodies;
the acquisition of First American and other United States banks;
BCCI’s relationships with political figures;
accounts associated with terrorism and arms dealing;
BCCI, the CIA and other intelligence services;
CAPCOM;
the alleged Black Network;
bribery and unusual payments;
BCCI’s lending practices;
the Third World Foundation and Third World Prize programmes;
the conduct of the United States Department of Justice;
regulatory failures in the United States and United Kingdom;
the role of BCCI’s auditors and advisers; and
allegations made against the Institute of Islamic Banking and Insurance.

The purpose is to identify what was alleged, what was established, what remained disputed and what further evidence became available after the report was published.

Historical importance

The Kerry–Brown Report remains one of the most influential accounts of BCCI. It assembled a substantial volume of evidence, exposed serious regulatory and institutional failures and ensured that BCCI’s activities received sustained congressional examination.

At the same time, its conclusions must be understood within the context of a political investigation conducted amid criminal proceedings, regulatory action, worldwide liquidation and intense media attention.

The report and its six-part hearing record should be preserved and studied as important historical sources. They should also be read critically, with attention to the distinction between allegation and proof, individual and institutional responsibility, gross transactions and actual losses, and the conduct of particular senior officials compared with that of BCCI’s wider international workforce.