SORTING out the mess left by the collapse of BCCI is taking nearly as long as the brief 19-year life of the world’s most notorious bank. Agha Hasan Abedi, a charming Pakistani banker and mystic, set up his brainchild in 1972, with the aid of sympathetic Gulf backers who wanted an alternative to Western banks.

By the time that the Bank of England finally pulled the plug in 1991, BCCI had become the political standard bearer for Third World banking, the favoured choice of many British Asians and wealthy Arab depositors, and a global money laundry for drug-smugglers, earning the soubriquet Bank of Crooks and Cocaine International.

Its collapse, owing £9 billion, exposed the biggest ever bank fraud. It left British small businesses owed £600 million. UK local authorities that had been attracted by suspiciously high interest rates had to raise council tax for up to a decade. Sheikh Zayed of Abu Dhabi lost his own money and, as the controlling owner of BCCI at the time of its collapse, was honourably obliged to compensate other creditors. Deloitte, the accountancy firm appointed liquidator, won, in the words of a former partner, “the biggest professional assignment ever, anywhere in the world”.

BCCI was the wrong bank in the right place at the right time. Within months of Abedi getting his enterprise going, billions of dollars were pouring into the Gulf as a result of the trebling of Opec oil prices in the winter of 1973-74. Big Western banks were suffering losses and Britain had its own special financial crisis after a string of unregulated secondary banks went to the wall.

A Middle East bank based in London was ideally placed to take deposits and lend to Middle Eastern and Asian business. Abedi was seen as the visionary pioneer of a new world that would accelerate development. BCCI’s status was boosted when Bank of America took a 30 per cent stake (later sold), and Abedi impressed politicians such as Jimmy Carter and James Callaghan.

By the time that UK banking laws were tightened, BCCI seemed well established and won a UK licence in 1979. It managed to avoid the full force of the UK regulatory regime because its parent company was in Luxembourg and had a string of separate subsidiaries, the key one being in the Cayman Islands. The Bank of England took a special regulatory role because BCCI’s main business was in London, but avoided becoming a global regulator.

Abedi, who died in exile in 1995, seems to have been corrupt from the start, along with Swaleh Naqvi, later chief executive, and a host of other senior managers who were later jailed or remain fugitives from justice. Robert Morgenthau, who was then New York attorney-general, claimed that up to $100 billion of drug money a year was laundered through BCCI, making use of the anonymity allowed for depositors.

Systematic fraud seems to have taken over after the 1979 oil price hike triggered a global recession. Many of the borrowers to whom Naqvi and his colleagues had ladled out their ever-rising deposits could not repay them.

The biggest was Abbas Gokal’s Gulf Group. Loans from BCCI propped up the shipping empire in the early 1980s. When Gulf became insolvent, it threatened the bank’s solvency, so money was raided from Sheikh Zayed and other depositors to keep it afloat. By 1991, Gokal and his colleagues owed £750 million, concealed by a bewildering paper trail and used to finance a fabulously expensive lifestyle. Gokal was jailed for 17 years.

In 1987, as rumours grew and confidence in BCCI ebbed, Price Waterhouse was appointed worldwide auditor and the Bank of England and others formed a College of Regulators to collaborate over BCCI. But this was too late, because the system of phantom accounts and secret ledgers was in place to hide fraud.

In January 1990, BCCI was fined $15 million in Florida for money laundering and in April Price Waterhouse reported that BCCI’s 1989 accounts included false or deceitful transactions.

At the behest of the Bank of England, Sheikh Zayed was persuaded to pump in a further £350 million, gaining 77 per cent control, but once Price Waterhouse was on the trail it found further damning evidence, forcing Abedi and Naqvi (who later was jailed in America) to quit. A special investigation ordered by the Bank led to it orchestrating the closure of BCCI worldwide in July 1991.

The Bank came under intense criticism for allowing this notorious bank to go on so long. It has always denied staying its hand because of political correctness. Lord Bingham, who conducted the official inquiry into the Bank’s conduct, was scathing in his criticism.

Deloitte, then called Touche Ross, has been praised for raising enough money to pay creditors more than 80p in the pound and had long hoped to raise the rest from the Bank of England, one way or another.

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