Las organizaciones de los migrantes y de la sociedad civil

In contrast to the ‘official view’, an alternative view is offered by Mitchell et al. (2001). Mitchell et al. argue that in the mid-1980s Ernst and Young were sufficiently concerned about the poor internal controls at BCCI that they declined to be re-appointed as auditors unless they were given respon-sibility for auditing the entire BCCI group and unless BCCI implemented major improvements (Mitchell et al., 2001: 32). The Bank of England agreed that a single auditor was preferable, but instead the audit was given to Price Waterhouse, although they were not able to gain satisfactory access to accounts in some countries.

A problem identified with the audit of BCCI was that the auditors had a conflict of interest between their duty to make appropriate disclosures to the bank regulators and their need to retain the confidence of their client. Although it might be thought that Price Waterhouse was a global firm, in fact its national branches operate with a considerable degree of

autonomy from each other. A report to the US Senate stated that Price Waterhouse (UK) was aware of gross irregularities in BCCI’s handling of certain loans to the parent company of First American Bankshares, but failed to warn Price Waterhouse (USA) or the US regulators (Mitchell et al., 2001: 32–3).

In March 1991 Price Waterhouse was requested by the Bank of England to prepare a report on irregularities at BCCI. The document was given the code name Sandstorm Report and included detailed evidence of fraud by BCCI officials. The report was completed in June 1991 and led to the Bank of England closing down BCCI’s operations. Although a censored version of the Sandstorm Report has been made available to the US Senate and is available to the American public through the Library of Congress, to date the UK government has refused to allow publication in the UK (Mitchell et al., 2001: 40–3).

Mitchell et al. (2001) argue that:

In the banking industry, the stakeholders include not only bank depos-itors, but also the citizens who may ultimately be required to rescue financially distressed banks with tax subsidies and/or bear the conse-quences of economic disruptions caused by bank failures. Yet the audit industry does not owe any ‘duty of care’ to bank depositors, employ-ees or other interested parties. In the BCCI case, the British auditors had no enforceable obligations to depositors, banking authorities, or poli-ties outside the United Kingdom. (Mitchell et al., 2001: 49)

BCCI was effectively shut down by the Bank of England on 5 July 1991.

At first, some of the media appeared to be sympathetic to the dilemma faced by the Bank of England:

There is never a right time to close a bank. Whatever time the banking authorities around the world had pulled the plug on the Bank of Credit and Commerce International they would have been accused of acting too early or too late. But it is important to be clear about one thing:

there was no alternative to shutting it down. The authorities cannot say so in public, but the real reason a further injection of funds to keep the bank running was never a serious option is this. Evidence already avail-able suggests that the fraud goes so far up the management chain that there was no level at which BCCI could satisfy the world’s banking authorities that it would be properly run. (Independent, 10 July 1991, Editorial: 21)

But, within days, following revelations that the Bank of England had known for some years of irregularities at BCCI, the mood in the media seemed to change. Under a headline ‘The dog that didn’t bark’, the Sunday Times stated:

When the Bank of England swooped on Bank of Credit and Commerce International nine days ago, it sent shock waves around the world. On the face of it the Bank had acted with exemplary speed. And with so many discredited financiers making their way through the British courts, it looked as though there was at least one group of regulators who knew their job. The action was unprecedented in scale: assets were seized with precision timing in seven countries. Authorities in more than 60 other countries were eventually involved in what became a global operation. Secrecy was maintained up to the moment liquidators moved in to bar BCCI’s doors. But any admiration won by this swift display of power slowly evaporated last week as the enormity of the affair became apparent. The fraud revealed is vast; it goes back several years and was carried out at the highest levels. (Sunday Times, 14 July 1991, Business Section)

DISCUSSION

The collapse of BCCI did not lead to a collapse in the Western banking system, but there were serious repercussions for a large number of indi-viduals, employees, companies, local authorities and even sovereign governments. In the UK a large number of small Asian businesses banked with BCCI. In addition, dozens of local authorities had been attracted by the higher deposit interest rates offered by BCCI and deposited their funds with the bank. One of the worst affected was the Western Isles Council in the Outer Hebrides in Scotland which had placed $45m on deposit with BCCI. As one of the smallest local authorities in the UK this was a devas-tating loss.

At the time of the collapse it was estimated that around the world BCCI had 14,000 employees and over one million depositors, who would all have been affected in one way or another by the bank’s collapse. Many depos-itors faced substantial losses. In the UK (under banking regulations) some of the smaller depositors were compensated to the extent of 75 per cent of their deposits, but only up to a maximum of £18,000.

It seems that the Bank of England faced a precarious dilemma. It knew by the summer of 1991 that BCCI was in serious trouble and there was substantial evidence of fraud. If the Bank of England tried to issue some sort of warning, there would have been a run on the bank as depositors tried to retrieve their money. Those fortunate enough to act quickly would have retrieved all their savings, with nothing left for those who acted less quickly. The Bank of England may have been hoping that the Abu Dhabi shareholders would inject sufficient capital to rescue BCCI, but appears to have decided in early July 1991 that on balance it would be better to shut down BCCI.

Moreover, the Bank of England faced the difficult task of trying to co-ordinate the actions of regulators in a number of countries in taking

decisive action to close down BCCI’s global operations at one go. Pakistan and Abu Dhabi clearly did not want to co-operate in this operation. It seems that the Bank of England was in an impossible situation. Evidence had been mounting for some years of irregularities at BCCI. But if the Bank of England had decided to close down BCCI in 1988 (at the time of the Tampa trial) it is likely that they would have been criticised for acting pre-maturely when restructuring and refinancing could have solved BCCI’s problems.

It is quite possible that, in the early years of BCCI, its founder, Agha Hasan Abedi was sincere and altruistic in wanting to develop a bank that would help people in the Third World and form a bridge between devel-oped and developing countries. It is also quite possible that Abedi and Naqvi hoped that their frauds in covering up the losses associated with Gulf Group were simply a temporary measure which would allow them a breathing space to bring BCCI back to profitability. Nevertheless, it remains an irony that although Abedi aimed to help the poorer people of the developing countries, at the end of the day they were the ones who were worst off. Abedi died in August 1995 in Karachi, Pakistan. Although a court in Abu Dhabi had served an eight-year sentence on him for fraud, the Pakistani authorities refused to allow his extradition.

Is it likely that a fraud on the scale of BCCI could be repeated? Without doubt, bank regulators will have learned some lessons from the BCCI episode. According to the Financial Times:

The likelihood of there being another BCCI-style fraud is small, how-ever. The breathtaking magnitude of BCCI’s corruption was only possible because the bank operated in a vast number of different countries, each of whose regulators only had responsibility for mon-itoring a tiny piece in the BCCI jigsaw. (Financial Times, 24 October 1992: 7)

BCCI is yet another example of a breakdown in corporate governance where the repercussions are felt for many years after the initial collapse.

In January 2004 in the UK High Court, the liquidators of BCCI (Deloitte) began an action which involved suing the Bank of England for losses amounting to £850m incurred in the fraud and it was estimated that the trial would last until 2006. It was also revealed that, back in 1992, Bingham had prepared a separate and secret report which looked at the role of the British intelligence services in the BCCI affair. It was reported¹⁵ that this document revealed that the Bank of England had received numer-ous warnings from intelligence agencies about alleged misconduct at BCCI. So it is possible that further revelations could emerge from the BCCI saga.

Table 6.1 BCCI: key events

1972 Agha Hasan Abedi founds BCCI; Sheikh Zayed in Abu Dhabi agrees to provide financial support to BCCI

1982 Clark Clifford becomes chairman of First American Bankshares 1987 Price Waterhouse appointed sole auditors of BCCI

1988 Abedi has heart attack and hands over to Swaleh Naqvi; seven BCCI officials arrested in Tampa, Florida

1989 Senior employee alerts Price Waterhouse to fraud at BCCI

1990 Price Waterhouse report finds that BCCI needs additional finance of £1.8bn;

Naqvi seeks additional finance in Abu Dhabi

1991 Price Waterhouse reports on fraud at BCCI (June); Bank of England shuts down BCCI branches (July)

1992 Report into BCCI by Lord Justice Bingham

2004 BCCI’s liquidators (Deloitte) begin legal action in High Court against Bank of England

Discussion questions

1 Should the Bank of England have acted more promptly to shut down BCCI’s operations?

2 To what extent did the complex organizational structure of BCCI assist Abedi and Naqvi in disguising the extent of the fraud at BCCI?

3 What do you believe are the main lessons that can be drawn from the rev-elations of fraud at BCCI?

4 Identify the stakeholders in BCCI who suffered when the bank was shut down in July 1991.

5 Should investors be concerned that a scandal similar to BCCI could be repeated in the future?

REFERENCES

Accountancy, ‘When PW’s concerns failed to move the Bank’, December 1992: 16–17.

Adams, J.R and Frantz, D. (1993) A Full Service Bank: How BCCI Stole Billions Around the World. London: Simon and Schuster.

Bingham, The Right Honourable Lord Justice (1992) Inquiry into the Supervision of the Bank of Credit and Commerce International. London: HMSO.

Mitchell, A., Sikka, P., Arnold. P., Cooper, C., and Willmott, H. (2001) The BCCI Cover-Up.

Basildon: Association for Accountancy and Business Affairs.

NOTES

1 Financial Times, 6 July 1991: 1.

2 Adams and Frantz, 1993: 14.

3 New York Times, 11 October 1998: 1.

4 Independent, 7 July 1991: 1

5 Sunday Times, 7 July 1991, Home News Section.

6 See Adams and Frantz, 1993: 197–9.

7 See Adams and Frantz, 1993: 263.

8 Independent, Business on Sunday, 25 October 1992: 4.

9 Independent, Business on Sunday, 25 October 1992: 4.

10 Accountancy, December 1992: 17.

11 Accountancy, December 1992: 17.

12 Accountancy, December 1992: 17.

13 Sunday Times, 25 October 1992, Business Section.

14 Sunday Times, 25 October 1992, Business Section.

15 Observer, 18 January 2004.

Enron

SEVEN

In 2001 Enron was one of the world’s largest energy groups, operating mainly in the USA. But in that year, the company admitted that there had been a number of financial reporting irregularities over the period 1997 to 2000. During 2001 it became apparent that a number of special-purpose entities were not consolidated in the balance sheet. Consequently, earnings (reported profits) were substantially overstated and in late 2001 the com-pany filed for Chapter 11 bankruptcy.¹

During most of the 1990s Enron’s stock price was rising steadily.

During 1999 the stock price increased dramatically and at the beginning of 2000 was standing at over $70. During 2000 the stock price peaked at just over $90, but by the end of 2000 was standing at just over $80. During 2001 the stock price declined sharply and by the beginning of December 2001 the stock stood at less than $1.

Fortune magazine in early 2001 ranked Enron (on the basis of revenues) as seventh in the Fortune 500 with revenues of over $100bn. Enron during the 1990s had grown at a phenomenal pace and some analysts were already predicting that it would be number one by 2001. For seven years in a row, Enron had been ranked as Fortune’s most innovative company.

At its peak in 2001 Enron had 30,000 employees around the world, of which 6,000 were located in Houston, Texas. The collapse of Enron was devastating for the city of Houston, since many of its inhabitants were related to employees or knew friends who worked at the company.