Bank of England was "frightened of the dangers BCCI posed"
14 January 2004
The Bank of England “ran away” from its responsibility to supervise and regulate BCCI for more than ten years, the High Court heard yesterday, as the collapsed bank's creditors opened their case against the BoE.
The BCCI collapsed in 1991 with £7 billion of undeclared debts and links to terrorist organisations, arms dealing in the Middle East and South American drug cartels.
The Bank of England is being sued by the BCCI's creditors - led by liquidators Deloitte and Touche - for £850 million, who accuse the Bank of “misfeasance” - a form of deliberate negligence. At the time the Bank of England regulated the financial sector and the creditors claim that it turned a blind eye to the frauds going on at the BCCI.
If the creditors are successful they would set a precedent as the case challenges the statutory immunity of the Bank. That precedent may then benefit Equitable Life policyholders and shareholders in Railtrack. The Bank has dismissed the claim as “highly implausible”, and warned that that case is “not only misconceived but dangerous” for this reason.
Gordon Pollock QC told the court that, “the main reason the Bank was unwilling to take proper supervisory responsibility is because they were frightened of the dangers BCCI posed.”
Mr Pollock alleged that the Bank ignored its responsibilities with regard to BCCI, fearing that it might have had to act as a lender of last resort in the event of a collapse.
After bending the rules, “having bent them once they found themselves on a somewhat slippery slope”, the counsel claimed.
“Whenever there was a perceived conflict of interest between the depositors and the Bank it was the latter which prevailed”, Mr Pollock declared.
BCCI was formed in 1972 by Agha Hasan Abedi, a banker from Pakistan, and a group of other high-ranking Pakistanis. It operated in 60 countries and employed 14,000 people. The BCCI used two auditors and was held in the tax havens of Luxembourg and the Cayman Islands, which avoided the need for producing any meaningful accounts.
The BCCI used the accounts to hide the fact that the bank's biggest borrower, Gulf shipping group owned by Abbas Gokal, was becoming bankrupt. The bank's executives became concerned that the regulators would shut their operations down if they found out about the problems, so they started a 15-year campaign of falsifying its books.
To cover the cost of its failing loans and the increasing black hole in its finances, BCCI plundered the accounts of its deposit holders.
After the BCCI collapsed the Bank of England's actions were severely criticised by Lord Bingham's inquiry in 1992 for failing to supervise the BCCI properly.
A string of court actions has meant that creditors have recovered around 75 per cent of their investments and the case against the Bank of England is seen as the final step.