Bcci\'s Role in the Evolution of International Banking

BCCI: Evolution of International Banking

BCCI was a key international bank founded by Agha Hassan Abedi and Swaleh Naqvi, his assistant, in 1972 (APFN 1). The bank was headquartered in London and Karachi, though registered in Luxemburg, and had 400 branches spread across seventy-eight countries in Africa, Europe, Asia, and the Americas (Markham 174). By 1991, BCCI had amassed assets in excess of twenty billion U.S. dollars, and was, by this measurement, the seventh largest bank in the world (Markham 174). Pakistani ISI transformed BCCI into the biggest ever clandestine money network, which resulted in the ignoble closure of the bank's worldwide operations in a scam that illustrated "the disastrous effects of deficient supervision of the international banking system" (Laifer 467).

Pre-BCCI

Concerns regarding the international banking standards started to be raised in 1974, after the failure of prominent banking institutions in the U.S. And Europe (Markham 174). Each of the affected nations' central banks sought to address this concern by tightening banking regulations within their jurisdictions (Laifer 469). In order to achieve increased coordination, twelve central bank governors - from the G-10, Luxemburg and Switzerland, in 1975, met and formed the Basle Committee, tasked with the role of establishing "closer cooperation among the supervisory banking authorities" (Laifer 469). The Basle Concordant, setting out the responsibility for the scrutiny of international banks as being of the host as well as the home authority, was established in the same year (Laifer 469).

The 1975 Concordant, however, failed to effectively address key concerns in the Banco Ambrosiano in Italy, and was revised in 1983 to include two regulatory elements; the dual-key approach and the home country's primary responsibility which collectively gave rise to the consolidated supervision principle (Laifer 469). The FDIC regulated bank activities in the U.S.

The Basle group seized control of the BCCI on the 5th of July, 1991 (Markham 174). Investigations revealed BCCI's large-scale involvement in the illegal nuclear technology trade, arms trafficking, illegal migration, smuggling, tax evasion and the management of prostitution (Markham 175). The bank facilitated these, together with its money laundering and illegal purchasing activities by bribing influential government officials in different countries (Markham 174).

Post-BCCI

The collapse of the BCCI revealed wide gaps in the international bank regulatory system and as a result, countries sought to tighten the rules governing regulation. In response to the BCCI debacle, Congress, in 1991, passed the Foreign Bank Supervision Enhancement Act which "required banks to obtain the permission of the FED before establishing a branch or agency or a commercial lending institution in the" U.S., in addition to maintaining reserves (Markham 175). Other developments included the home-and-host country control, cooperation with foreign supervisors, entry-governing legislation, and non-legislative steps (Laifer 494-498).

Home-and-Host Country Control: the FBSEA mandates the FED to undertake comprehensive supervision of foreign banks operating in the U.S. (Laifer 494). Any potential foreign bank entrant has to identify its parent supervisor. The FED could deny entry if the supervision of the parent regulator differs from that of the U.S. (Laifer 494).

Cooperation with Foreigners: authorizes the sharing of supervisory information between local agencies and foreign banking agencies as long as the foreign agencies maintain confidentiality, and can readily provide relevant information to the FED for compliance checks (Laifer 494).