Partiality in punishing global banking scandals…Comparing IBCC to HSBC/Standard/Barclays
On Tuesday, December 11, 2012, international media was saturated with reports that two international banks, HSBC and Standard Chartered Bank, have been sanctioned by financial services regulators in the United States of America for money laundering and other acts of financial irregularity.
Immediately, my mind went to another international bank, International Bank of Credit and Commerce (IBCC,) which was two decades ago also investigated for the same offence. During the comparison, one set of factors did not add up – the different verdicts handed to IBCC on one hand and HSBC and Standard on the other.
That sent me on the research trip to find out more about the separate set of banks, details of the findings of the investigations and the reasons for the different verdicts.
Key among the major offences was money laundering and so it is important for us to look at that before bringing in the evidence on the banks.
Money Laundering
Anyone who has read John Grisham’s novel, The Firm, may have an idea of what money laundering is. It is the general act of taking money acquired through illicit activities and turning it into “legal” cash by passing it through financial institutions, usually banks. The sources of such illegally-acquired money may be prostitution, gambling, dealing in hard drugs, counterfeiting or corruption, but there is agreement among experts on the subject that the act is illegal because such money is owned by crime/criminal organisations plus its injection into any economy could be harmful, not to mention the fact that it makes matter easy for organised crime.
And the more those organisations launder money and invest it into legal enterprise, the more powerful they become and the less likely state crime fighting/security agencies can defeat them. Also, where criminal organisations are able to launder money across international borders they are able to easily extend and export their activities from one country to another. Money laundering is thus a headache for both national and international regulators and crime fighters, such as the global police agency, Interpol.
For banks the temptation not to turn away such money (even when they are aware of its illicit sources) is great, because the amount of money a bank holds is what makes it a bank and actually differentiates it from other banks on a national or global hierarchy. However, we cannot overlook the obvious fact that any bank that indulges in and/or allows money laundering is aiding crime by helping them to cover their tracks in ways that make it difficult for crime-fighting agencies to be effective in checking the illegal activities.
In the last few decades terrorism has become an international threat. Terrorism comes in two folds; it is killing innocent civilians when there is no war simply to make a political statement, and/or a powerful country using lies as a pretext to wage war on a weaker one. In the first instance, it is committed largely by sectional organisations with a political agenda, but the key point is that the agenda, whether genuine or not, does not in any way justify the killing of innocent people. Sectional terrorism is thus a crime. Classic examples of such terrorism are Islamic fundamentalist groups that sponsor suicide missions, large and small, such as Al-Qaeda, the Taliban. Another example is the Aum Shinrikyo, which was responsible for the Sarin attacked in the Tokyo, (Japan,) subway on March 20, 1995. The second instance is state-on-state terrorism, and the best example in contemporary international affairs is the 2003 US war on Iraq.
Today, it is no longer news that terrorist organisations receive funding from certain governments and organisations that cloak such monies in guises intended to make them appear legal. Experts say terrorist organisations also receive monies from organised-crime entities that sometimes launder the money through banks before wiring the cash to these recipients. Thus tracking such money to find out the critical trails and/or ceasing it to prevent it from reaching terrorist organisations is one of the effective ways of fighting sectional terrorism.
IBCC
On July 5, 1991, the world was greeted one morning with the announcement that IBCC had been forced to close its operations worldwide. Even at that time, young as I was, my big head was wondering how such a huge multi-national company could be forced to close putting thousands out of work all over the world.
Today, Wikipedia tells us BCCI was “a major international bank founded in 1972 by a Pakistani financier, Agha Hasan Abedi,” that it “was registered in Luxembourg, [Europe, and had] head offices in Karachi, [Pakistan,] and London, [United Kingdom,]… [and] operated in 78 countries, had over 400 branches, and had assets in excess of US$20 billion, making it the 7th largest private bank in the world by assets.
“BCCI was created with capital from the ruler of Abu Dhabi in the United Arab Emirates, Sheikh Zayed bin Sultan Al Nahyan, and Bank of America [in the US, which owned] 25%…
The [parent] company [was] divided into [two and one of them,] BCCI Holdings, [was also split] into BCCI SA (in Luxembourg) and BCCI Overseas (in the Grand Cayman Islands in the Caribbean.) BCCI also acquired [other] banks,… the Banque de Commerce et Placements (BCP) of Geneva, [Switzerland,] in 1976, and created KIFCO (Kuwait International Finance Company), Credit & Finance Corporation Ltd, and a series of Cayman-based companies held together as ICIC (International Credit and Investment Company Overseas).
Overall, BCCI expanded from 19 branches in five countries in 1973 to… 108 branches in 1976, with assets growing from $200 million to $1.6 billion… By 1980, BCCI was reported to have assets of over $4 billion with over 150 branches in 46 countries. Bank of America… [is reported to have] reduced its holding in 1980,” but that did not prevent IBCC to increase its assets to US$20 billion in 1991 when it was shut down.
The key point to note is that the fore-going paragraph indicates a very fast-growing bank, a fact that – we will soon see – alarmed bankers, regulators and governments in Western countries.
The Case against IBCC
One of the facts held up against BCCI is that “it was not squeamish about dealing with disreputable clients, [that] it frequently handled money for dictators, such as Saddam Hussein of Iraq; Manuel Noriega of Panama; Hussain Mohammad Ershad, [a Bangladeshi lawmaker,] and; Samuel Doe of Liberia. Other account holders included the [Columbian cocaine dealing family,] the Medellin Cartel, and mercenary terrorist, Abu Nidal.
It is, however, important to note that “the U.S. Central Intelligence Agency held numerous accounts at BCCI, according to William von Raab, former U.S. Commissioner of Customs. [Top brass US soldier,] Colonel Oliver North, also used and held multiple accounts at BCCI. [According to Time magazine,] these bank accounts were used for a variety of illegal covert operations, including transfers of money and weapons related to the Iran-Contra scandal.” (In that scandal, the US Reagan administration sold arms to Iran, although US law was expressly against it, and used the proceeds to finance Contra rebel activities against Daniel Ortega’s socialist government in Nicaragua.)
“The CIA also worked with BCCI in arming and financing the rebel group, Afghan mujahideen, during the Afghan War against the Soviet Union [occupation from 1979 to 1989... The CIA also used] BCCI [accounts] to launder proceeds from trafficking heroin grown in the Pakistan-Afghanistan borderlands, boosting the flow of narcotics to European and U.S. markets… US intelligence agencies used BCCI to funnel drug money to the Afghan Mujahideen… fighting the Soviets… and to insurgents such as Nicaraguan Contras.”
That means money laundering and dealing with drug dealers, terrorists and rebel groups was a key allegation against BCCI.
“In March 1991, the Bank of England asked Price Waterhouse to carry out an inquiry. On June 24, 1991, using the code name “Sandstorm” for BCCI, Price Waterhouse submitted the Sandstorm Report showing that BCCI had engaged in “widespread fraud and manipulation” that made it difficult, if not impossible, to reconstruct BCCI’s financial history. The Sandstorm report… [also showed] that the Abu Nidal terrorist group… [used] fake identities [to] open [an] accounts at BCCI’s Sloane Street branch [in London.”]
“The Abu Nidal link man for the BCCI accounts was a man based in Iraq named Samir Najmeddin or Najmedeen. Throughout the 80s, BCCI had set up millions of dollars worth of letters of credit for Najmeddin, largely for arms deals with Iraq… [A witness during the investigations,] Qassem, later swore in an affidavit that Najmeddin was often accompanied by an American, whom Qassem subsequently identified as the financier Marc Rich. Rich was later indicted in the U.S. for tax evasion and racketeering in an apparently unrelated case and fled the country.”
BCCI was also accused of having weak internal supervision and self-regulation. “It’s two holding companies were based in Luxembourg and the Cayman Islands— two jurisdictions where, [investigators say,] banking regulation was notoriously weak. It was also not regulated by a country that had a central bank. On several occasions [therefore, a department in the US Treasury,] the Office of the Comptroller of the Currency, told the [US] Federal Reserve in no uncertain terms that BCCI must not be allowed to buy any American bank because it was poorly regulated.”
Highlight
“…Tracking such money to find out the critical trails and/or ceasing it to prevent it from reaching terrorist organisations is one of the effective ways of fighting sectional terrorism.”
Immediately, my mind went to another international bank, International Bank of Credit and Commerce (IBCC,) which was two decades ago also investigated for the same offence. During the comparison, one set of factors did not add up – the different verdicts handed to IBCC on one hand and HSBC and Standard on the other.
That sent me on the research trip to find out more about the separate set of banks, details of the findings of the investigations and the reasons for the different verdicts.
Key among the major offences was money laundering and so it is important for us to look at that before bringing in the evidence on the banks.
Money Laundering
Anyone who has read John Grisham’s novel, The Firm, may have an idea of what money laundering is. It is the general act of taking money acquired through illicit activities and turning it into “legal” cash by passing it through financial institutions, usually banks. The sources of such illegally-acquired money may be prostitution, gambling, dealing in hard drugs, counterfeiting or corruption, but there is agreement among experts on the subject that the act is illegal because such money is owned by crime/criminal organisations plus its injection into any economy could be harmful, not to mention the fact that it makes matter easy for organised crime.
And the more those organisations launder money and invest it into legal enterprise, the more powerful they become and the less likely state crime fighting/security agencies can defeat them. Also, where criminal organisations are able to launder money across international borders they are able to easily extend and export their activities from one country to another. Money laundering is thus a headache for both national and international regulators and crime fighters, such as the global police agency, Interpol.
For banks the temptation not to turn away such money (even when they are aware of its illicit sources) is great, because the amount of money a bank holds is what makes it a bank and actually differentiates it from other banks on a national or global hierarchy. However, we cannot overlook the obvious fact that any bank that indulges in and/or allows money laundering is aiding crime by helping them to cover their tracks in ways that make it difficult for crime-fighting agencies to be effective in checking the illegal activities.
In the last few decades terrorism has become an international threat. Terrorism comes in two folds; it is killing innocent civilians when there is no war simply to make a political statement, and/or a powerful country using lies as a pretext to wage war on a weaker one. In the first instance, it is committed largely by sectional organisations with a political agenda, but the key point is that the agenda, whether genuine or not, does not in any way justify the killing of innocent people. Sectional terrorism is thus a crime. Classic examples of such terrorism are Islamic fundamentalist groups that sponsor suicide missions, large and small, such as Al-Qaeda, the Taliban. Another example is the Aum Shinrikyo, which was responsible for the Sarin attacked in the Tokyo, (Japan,) subway on March 20, 1995. The second instance is state-on-state terrorism, and the best example in contemporary international affairs is the 2003 US war on Iraq.
Today, it is no longer news that terrorist organisations receive funding from certain governments and organisations that cloak such monies in guises intended to make them appear legal. Experts say terrorist organisations also receive monies from organised-crime entities that sometimes launder the money through banks before wiring the cash to these recipients. Thus tracking such money to find out the critical trails and/or ceasing it to prevent it from reaching terrorist organisations is one of the effective ways of fighting sectional terrorism.
IBCC
On July 5, 1991, the world was greeted one morning with the announcement that IBCC had been forced to close its operations worldwide. Even at that time, young as I was, my big head was wondering how such a huge multi-national company could be forced to close putting thousands out of work all over the world.
Today, Wikipedia tells us BCCI was “a major international bank founded in 1972 by a Pakistani financier, Agha Hasan Abedi,” that it “was registered in Luxembourg, [Europe, and had] head offices in Karachi, [Pakistan,] and London, [United Kingdom,]… [and] operated in 78 countries, had over 400 branches, and had assets in excess of US$20 billion, making it the 7th largest private bank in the world by assets.
“BCCI was created with capital from the ruler of Abu Dhabi in the United Arab Emirates, Sheikh Zayed bin Sultan Al Nahyan, and Bank of America [in the US, which owned] 25%…
The [parent] company [was] divided into [two and one of them,] BCCI Holdings, [was also split] into BCCI SA (in Luxembourg) and BCCI Overseas (in the Grand Cayman Islands in the Caribbean.) BCCI also acquired [other] banks,… the Banque de Commerce et Placements (BCP) of Geneva, [Switzerland,] in 1976, and created KIFCO (Kuwait International Finance Company), Credit & Finance Corporation Ltd, and a series of Cayman-based companies held together as ICIC (International Credit and Investment Company Overseas).
Overall, BCCI expanded from 19 branches in five countries in 1973 to… 108 branches in 1976, with assets growing from $200 million to $1.6 billion… By 1980, BCCI was reported to have assets of over $4 billion with over 150 branches in 46 countries. Bank of America… [is reported to have] reduced its holding in 1980,” but that did not prevent IBCC to increase its assets to US$20 billion in 1991 when it was shut down.
The key point to note is that the fore-going paragraph indicates a very fast-growing bank, a fact that – we will soon see – alarmed bankers, regulators and governments in Western countries.
The Case against IBCC
One of the facts held up against BCCI is that “it was not squeamish about dealing with disreputable clients, [that] it frequently handled money for dictators, such as Saddam Hussein of Iraq; Manuel Noriega of Panama; Hussain Mohammad Ershad, [a Bangladeshi lawmaker,] and; Samuel Doe of Liberia. Other account holders included the [Columbian cocaine dealing family,] the Medellin Cartel, and mercenary terrorist, Abu Nidal.
It is, however, important to note that “the U.S. Central Intelligence Agency held numerous accounts at BCCI, according to William von Raab, former U.S. Commissioner of Customs. [Top brass US soldier,] Colonel Oliver North, also used and held multiple accounts at BCCI. [According to Time magazine,] these bank accounts were used for a variety of illegal covert operations, including transfers of money and weapons related to the Iran-Contra scandal.” (In that scandal, the US Reagan administration sold arms to Iran, although US law was expressly against it, and used the proceeds to finance Contra rebel activities against Daniel Ortega’s socialist government in Nicaragua.)
“The CIA also worked with BCCI in arming and financing the rebel group, Afghan mujahideen, during the Afghan War against the Soviet Union [occupation from 1979 to 1989... The CIA also used] BCCI [accounts] to launder proceeds from trafficking heroin grown in the Pakistan-Afghanistan borderlands, boosting the flow of narcotics to European and U.S. markets… US intelligence agencies used BCCI to funnel drug money to the Afghan Mujahideen… fighting the Soviets… and to insurgents such as Nicaraguan Contras.”
That means money laundering and dealing with drug dealers, terrorists and rebel groups was a key allegation against BCCI.
“In March 1991, the Bank of England asked Price Waterhouse to carry out an inquiry. On June 24, 1991, using the code name “Sandstorm” for BCCI, Price Waterhouse submitted the Sandstorm Report showing that BCCI had engaged in “widespread fraud and manipulation” that made it difficult, if not impossible, to reconstruct BCCI’s financial history. The Sandstorm report… [also showed] that the Abu Nidal terrorist group… [used] fake identities [to] open [an] accounts at BCCI’s Sloane Street branch [in London.”]
“The Abu Nidal link man for the BCCI accounts was a man based in Iraq named Samir Najmeddin or Najmedeen. Throughout the 80s, BCCI had set up millions of dollars worth of letters of credit for Najmeddin, largely for arms deals with Iraq… [A witness during the investigations,] Qassem, later swore in an affidavit that Najmeddin was often accompanied by an American, whom Qassem subsequently identified as the financier Marc Rich. Rich was later indicted in the U.S. for tax evasion and racketeering in an apparently unrelated case and fled the country.”
BCCI was also accused of having weak internal supervision and self-regulation. “It’s two holding companies were based in Luxembourg and the Cayman Islands— two jurisdictions where, [investigators say,] banking regulation was notoriously weak. It was also not regulated by a country that had a central bank. On several occasions [therefore, a department in the US Treasury,] the Office of the Comptroller of the Currency, told the [US] Federal Reserve in no uncertain terms that BCCI must not be allowed to buy any American bank because it was poorly regulated.”
Highlight
“…Tracking such money to find out the critical trails and/or ceasing it to prevent it from reaching terrorist organisations is one of the effective ways of fighting sectional terrorism.”
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