This is the second of a three-part series of articles with a focus on banking corruption in Pakistan versus global banking corruption.
Two banks have gone down in Pakistan history as being engaged in activities that were not kosher, to put it rather mildly: Mehran Bank and the Bank of Credit and Commerce International (BCCI) - the first accused of interfering in the country's politics at the behest of the Inter Service Intelligence (ISI) by extending bribes to the Islami Jamhoori Ittehad (IJI) including the Sharif family; and the latter of being engaged in money laundering for international black listed personnel including Saddam Hussein, Manuel Noreiga, Hussain Mohammad Ershad, Colombia's Medellin drug cartel and Abu Nidal.
The CIA also reportedly used BCCI for a variety of covert operations including arming the Afghan mujahideen by laundering proceeds from trafficking heroin grown in the Pakistan-Afghanistan border, thereby boosting the flow of narcotics to European and the US markets.
BCCI was set up by Agha Hassan Abedi in 1972, a Pakistani national with capital provided by Sheikh Zayed bin Sultan Al Nahyan the ruler of Abu Dhabi. By 1980 BCCI reportedly had assets in excess of 4 billion dollars with 150 branches in over 46 countries. BCCI came under scrutiny first in the United States and then in Europe. In the US in 1982 around 15 of BCCI clients bought shares in Financial General Bankshares that was renamed First American Bankshares. The Federal Reserve Board allowed the sale on the condition that BCCI would not be involved and the 15 investors would supplement their personal funds with money borrowed from banks with no connection to BCCI. Instead these investors borrowed heavily from BCCI and pledged their First American stock as collateral. When they did not make interest payments, BCCI took control of the shares. It was later estimated that in this manner, BCCI had ended up with 60 percent or more of First American's stock. It was ordered to shut down its American operations in March 1991 for its illegal control of First American.
In October 1985, the Bank of England and the Institut Monétaire Luxembourgeois (Luxembourg's bank regulator) directed BCCI to have one auditor instead of the unusual practice of two with Price Waterhouse auditing BCCI Overseas, and Ernst & Young auditing BCCI and BCCI Holdings (London and Luxembourg). Companies such as KIFCO and ICIC were audited by neither. Price Waterhouse became the sole accountants in 1987 and revealed a staggering $1.48 billion worth of loans to its own shareholders, who used BCCI stock as collateral as well as numerous other irregularities consisting of loss of hundreds of millions of dollars. The audit firm signed off on the report on Sheikh Zayed's firm commitment to prop up the Bank (his share went up to 78 percent).
In March of 1991 Bank of England asked the audit firm to carry out an inquiry and by June 24 Price Waterhouse submitted the Sandstorm report which showed that BCCI had engaged in "widespread fraud and manipulation" that made it difficult, if not impossible, to reconstruct BCCI's financial history. BCCI was awaiting final approval for a restructuring plan in which it would have re-emerged as the "Oasis Bank". However, after the Sandstorm report regulators concluded that BCCI was so fraught with problems that it had to be seized. On July 5, 1991, regulators persuaded a court in Luxembourg to order BCCI liquidated on the grounds that it was hopelessly insolvent. According to the court order, BCCI had lost more than its entire capital and reserves the year before. At 1 pm London time that day regulators in five countries marched into BCCI's offices and shut them down. Around a million depositors were immediately affected by this action. At the time of his death in 1995 Abedi was under indictment in several countries for crimes related to BCCI. However, Pakistani officials refused to give him up for extradition - a refusal that led to allegations of involvement of the then chief executive Ziaul Haq in the bank's nefarious activities.
Mehrangate's (1990-94) impact was limited to this country and relates to the then Director General ISI Asad Durarani extending bribes (140 million rupees) through banker Yunis Habib to right wing IJI members to oppose the PPP.
The officials, now retired, are alleging that they were so ordered by the then Chief of Army Staff Mirza Aslam Beg and the deceased President Ishaq Khan - a charge that Beg denies. This strategy presupposed that cash in hand and not differences in political or economic ideology was sufficient incentive to form political affiliations, and sadly this strategy was successful.
However, the number of scandals that have hit the multinational banks this calendar year 2012 alone with more than four months remaining is three. The latest scandal relates to Standard Chartered that has been accused by the US of laundering 250 billion dollars of Iranian money with the bank accepting that it laundered a fraction of that amount for Iran. The final verdict, still pending, could be closure of the dollar clearing operations in New York and /or penalties. The charge: wilful non-compliance and violative of US sanctions against Iran.
The second instance relates to HSBC which has been accused by the US lawmakers of flouting anti-money laundering regulations and laundering for drug cartels and terrorist groups leading to the resignation of the bank's Compliance Chief. The bank has apologised and the penalty is expected to be around one billion dollars. The only difference between the punishment meted out to HSBC and BCCI is that the former remains solvent.
The third 2012 banking scandal relates to manipulation of the London Inter Bank Rate (LIBOR) by Barclays which is used by the financial sector world wide as a measure of the true cost of borrowing. Libor is set daily by 18 banks, including all the major banks headquartered in the West, which report on the borrowing rate for dollars by banks. Thomson Reuters discards the highest and lowest rates and takes the average of the others to determine the LIBOR. Most consumer credits including mortgages and buying a car as well as traders of financial derivatives use Libor and therefore this scandal led to considerable public anger against banks and the need for an impartial regulatory body with appropriate tools that must remain vigilant. The fine for Libor manipulation to Barclays was 450 million dollars - a sum that the public considered letting off the bank very lightly. Regulation on determination of the Libor is in the pipeline however the Conservatives and Labour are busier hurling accusations against each other rather than in focusing on regulatory reform.
Pakistan's two examples are dated though this, in no way, must be taken to imply that criminal action against those accused need not be taken or that regulations need not be put in place to ensure that there is no recurrence. HSBC, Barclays and Standard Chartered are multinational banks and must take their responsibility seriously. It is a matter of urgency for the West to levy a penalty appropriate to the extent of the crime prior to formulating appropriate regulations and implementing them in letter and spirit while Pakistan must take measures to ensure that there is no recurrence of what ailed the two defunct banks.
(To be continued)