The regulatory failure: the saga of BCCI

Date01 October 2005
Publication Date01 October 2005
AuthorMohammed B. Hemraj
SubjectAccounting & finance
Journal of Money Laundering Control Ð Vol. 8 No. 4
The Regulatory Failure: The Saga of BCCI
Mohammed B. Hemraj
Bank of Credit and Commerce International (BCCI)
was based in Luxembourg and the Cayman Islands; a
substantial part (90 per cent) of its operations were in
the UK. After an earlier proposal had failed in 1978,
in 1984 the Bank of England proposed the idea that
BCCI should be incorporated in the UK. The
response of BCCI to this was hostile and the idea
was, therefore, abandoned. By 1987, the Bank of
England resisted the suggestion of the Institut Mone-
taire Luxembourgeois that BCCI be required either
to be incorporated in London or should operate as a
UK subsidiary.
It is more than a decade since the saga of BCCI
gradually unfolded but the collapse of BCCI will con-
tinue to haunt auditors and regulators Ð not forget-
ting depositors who lost money and employees who
lost their jobs Ð to their graves. The aim of this
paper is to analyse where the auditors and regulators
went wrong and suggest ways of avoiding such inci-
dences occurring in the future.
The auditors were not independent, as a con¯ict of
interest arose as a result of PricewaterhouseCoopers
((PWC) at the time, they were known as Price Water-
house) playing a four-pronged role in the case of
BCCI; as auditor of BCCI, as consultants to the man-
agement on the bank's restructuring programme; as
reporting accountants to the Bank of England supervi-
sors; and, as investigators of BCCI under the statutory
When PWC issued an unquali®ed report in April
1990, there was still `material uncertainty' as to the
recoverability of signi®cant loans. The international
auditing guidelines
required fundamental disagree-
ment rather than mere uncertainty for the accounts
to be quali®ed. However, under UK auditing rules,
the October 1989 guideline issued by the English
ICA required the auditor to make a report `subject
to' quali®cation, in case of uncertainty.
The role of Abu Dhabi's ruling family in BCCI's
acquisition of shares in Financial General Bank Ð a
US bank, which later became First American Bank
Ð was questionable. This enabled BCCI to acquire
control of the bank through a third-party nominee
without the approval of the US bank authorities.
PWC's audit opinions in eect assisted BCCI in mis-
leading depositors, regulators, investigators and
By the end of 1987, `PW's UK ®rm should have
realised that there could be no basis for certifying
that BCCI's accounts presented a true and fair
The Kerry Report exonerated PWC's US
®rm as they `were not noti®ed of the extent of
BCCI's problems by their UK colleagues'.
`many of the problems BCCI's auditors encountered
arose from frauds which spanned several jurisdictions,
while the audit was performed by local [UK] partner-
Suce it to say that PWC's UK ®rm has failed
to respond to subpoenas issued outside the UK on
the grounds that PWC did not practise in their juris-
PWC had signed the auditor's report on the 1989
accounts as showing a true and fair view of its ®nan-
cial position when the Abu Dhabi government, as
the major shareholder, agreed to inject US$400m,
taking its share stake in the company to 77 per cent.
Note 1 to the accounts mentioned this fact and stated
that there were commitments to reorganise and
restructure BCCI. Should PWC have quali®ed the
accounts of BCCI? The auditors were in a dilemma.
Had they done so, the promised support from Abu
Dhabi (which in fact never materialised) would have
been withdrawn, the bank would have collapsed and
the auditor would have been open to criticism.
Judge Bingham disagreed:
`The adverse consequences of making a disclosure,
otherwise proper, surely cannot be a reason for not
making it . . . Anyone who knew the continuing
uncertainty about some of the major loans would
have taken a more jaundiced view of the group's
performance than anyone who did not. It seems
undesirable that information of this kind should
not be available to ordinary readers of the
accounts, but only to those who are in the know.'
Nevertheless, other auditors placed in the same pos-
ition would not have acted dierently.
Page 346
Journalof Money Laundering Control
Vol.8, No. 4, 2005, pp. 346± 353
#HenryStewart Publications

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