External auditors of banks everywhere play a critical role
in the self-regulatory process by which both ordinary depositors
as well as players in the financial marketplace evaluate their
own business performance, and that of those with whom they may
place their savings or do business. In addition, in many foreign
jurisdictions, external auditors of banks are relied upon by
regulators to provide them with important internal information
about bank practices, performing the kind of function in those
countries that federal bank examiners do in the United States.
In the case of BCCI, there can be no question that the
auditing process failed to work. As the Bank of England stated in
determining that BCCI be closed:
It appears from the Price Waterhouse Report [of June 1991]
that the accounting records [of BCCI] have completely failed
and continue to fail to meet the standard required of
institutions authorised under the Banking Act. It further
appears that there is not [a] proper or adequate system of
controls for managing the business of BCCI.(1)
Given the demonstrable failure of the auditing process,
serious questions have been raised about how and why BCCI's
outside auditors permitted BCCI to flourish as long as it did,
despite fraud and other bad practices which went back many years.
The record offers both support for assessing blame on BCCI's
auditors, and the suggestion that their work in the spring of
1991 was an essential component of the investigative process that
ultimately forced BCCI's closure.
One view of the culpability of BCCI's accountants was
expressed by BCCI's own chief financial officer, Masihur Rahman.
Rahman testified that as BCCI's top financial official, he did
not know of BCCI's frauds prior to the spring of 1990. He
testified that has the bank's chief financial officer in London,
he did not have access to any of the underlying loan information
and related files at BCCI's various field offices. Rahman
testified that he therefore relied on the work of the outside
auditors, operating around the world at the local level, to
review BCCI's records at its various offices and branches, and
thereby ensure their truth and accuracy.
At the other extreme was the position taken by BCCI's
principal auditor, Price Waterhouse (UK), that it was completely
deceived by BCCI until the spring of 1990, and handled its
responsibilities concerning BCCI without any fault whatsoever.
As Masihur Rahman expressed his position, regarding the
auditors' handling of BCCI's first set of major losses in 1985:
I used to tell the Price Waterhouse and Ernst & Whinney to
please review these reports and also please keep me
informed, because you are more my eyes and ears than my own
inspection division . . .[if] Price Waterhouse had been
doing its job, there's no way that this $1 billion exposure
[in BCCI's Central Treasury] which was taken to $11 billion
exposure in the course of 3 or 4 months [in 1985] could have
According to Rahman, Price Waterhouse (UK) had signed off on
BCCI practices year after year without issuing any red flags,
until suddenly, in April, 1990, it found massive deficiencies at
the bank, in which, as Senator Kerry put it, "every red flag in
the world was flying," raising the question of how Price
Waterhouse could have missed all of BCCI's bad practices
previously.(3) From Rahman's point of view, local auditors at each
of BCCI's locations had the opportunity to review the underlying
loan documentation from the beginning. Rahman believed that
process of review was precisely what they had been hired to do
and failed at. From his point of view, as chief financial
officer, his job was to accept the numbers provided him and
audited locally the accountants, and from there to put together
the overall financial accounts of BCCI. Thus, the deceptions that
took place were made possible through the auditors' failure to
have looked sufficiently closely at BCCI's customer-by-customer
financial records around the world, and especially in the Grand
Caymans. As Rahman explained in an annotation to the report
prepared by Price Waterhouse to the Bank of England in June, 1991
which helped bring about the closure of BCCI globally:
Price Waterhouse should have known from their audit of Grand
Cayman over many years that deposits of BCCI were being
misused. The 'fictitious' loan accounts were in most cases
so obviously fictitious that the year after year audit of PW
should have detected most, if not all. PW not only knew
about ICIC Overseas accounts [where some $600 million of the
fraud had at BCCI had taken place] but irregularly
"certified these accounts. . . It all happened in, or were
initiated by Grand Cayman. . . done by a few people in an
amateurish way, right under the nose of PW (Grand Cayman)
and PW (UK), who had done audit of these units from their
Rahman further stated to the British inquiry into BCCI
undertaken by Lord Justice Bingham that essentially all of BCCI's
serious treasury problems were related to the activities at Grand
Cayman, which had taken place in a blatant and repetitive form
over many years. According to Rahman, BCCI was paying its
auditors $5 million per year to conduct audits which each year
took nearly five months. According to Rahman, if properly done,
these audits should have uncovered the problems and forced action
long before April, 1990.
In contrast, as Price Waterhouse expressed their position,
BCCI had deceived them through colluding with shareholders and
borrowers to create false documentation that mislead them:
The auditor's responsibility is to design and execute an
audit so as to have reasonable expectation of detecting
material misstatement in the financial statements whether
due to fraud, irregularity, or error. However, common sense
dictates, and it is accepted internationally, that even the
best planned and executed audit will not necessarily
discover a sophisticated fraud, especially one where there
is collusion at the highest level of management and with
third parties. Under such circumstances, it is reasonable
to expect that it may take a number of annual audits before
accumulating concerns change to suspicions and ultimately
lead to the identification of fraud; in fact, this is what
happened in our audit of BCCI.(5)
Price Waterhouse found that BCCI Treasury losses had been
concealed and its profits manufactured through BCCI's failure to
record deposits and other liabilities; the creation of fictitious
loan accounts; the use of funds from ICIC which were controlled
by BCCI; use of third party funds which BCCI was managing;
circular routing of funds using various BCCI affiliates; the
purchase and repurchase of BCCI's own shares through nominees
with buy-back arrangements; and the collusion between BCCI and
major customers in supplying false confirmations to the external
auditors, among other techniques.(6)
In fact, many aspects of BCCI's relationship to its
auditors, especially Price Waterhouse's partnerships outside the
United States, were sufficiently unusual to provide evidence for
both the positions expressed by Rahman and by Price Waterhouse.
Over BCCI's nineteen year existence, BCCI lent at least two
Price Waterhouse partnership's funds for business projects, while
those partnerships were auditing BCCI; had an affiliate make
substantial payments to at least one key former Price Waterhouse
official after he had had handled audits of BCCI; allegedly "took
care" of Price Waterhouse partners through providing benefits to
them such as the use in the Grand Caymans of a villa; according
to federal regulators, made use of BCCI-Hong Kong to handle its
routine banking needs in the Far East; and according to one BCCI
official, may even have been compromised by mid-level BCCI
employees who allegedly provided them with sexual favors for that
Moreover, when Price Waterhouse (UK) discovered massive
losses at BCCI in 1985 which the bank falsely characterized as
commodities trading losses, Price Waterhouse (UK) accepted BCCI's
explanation and did not undertake the kind of comprehensive
review of BCCI's Treasury operations in the Grand Caymans which
should, even then, according to statements by various BCCI
officials, have demonstrated BCCI's fraud.
After 1985, Price Waterhouse (UK) made note of and reported
to BCCI's directors and officers exceptionally poor practices by
many BCCI entities year after year, including BCCI's failure to
keep adequate records. Nevertheless, Price Waterhouse (UK) did
not inform regulators of this or other problems at BCCI until
April, 1990, and continued through 1990 to sign off on BCCI's
annual statements that its consolidated audits "give a true and
fair view of the financial position of the group."
Moreover, Price Waterhouse (UK) according to its own audit
reports was told by BCCI officials in years prior to 1990 that
they had violated U.S. law in failing to inform the Federal
Reserve of changes in ownership by shareholders of CCAH/First
American, and in various practices relating to CCAH/First
American. Yet the firm took no action to advise any regulator,
let alone the Federal Reserve, of what they had knew -- or,
alternatively, to resign their position as BCCI's auditors.
In defense of the auditors, it should be noted that BCCI's
top officials, key major shareholders and some principal
borrowers did seek to deceive them through creating false records
and documents. The full nature and extent of the fraud would
indeed have been difficult to penetrate, given BCCI's far-flung
empire and structural complexity, and the bank's decision for its
first 15 years of operation to divide responsibility for its
audits between Price Waterhouse and Ernst & Whinney, thus
ensuring that no one auditor had an overall view of its
activities. It is also true that once Price Waterhouse recognized
that the hole in BCCI's books had grown so significant that it
threatened the solvency of the institution in early 1990, they
brought the matter to the attention of the Bank of England. As a
result, from that date forward, the Bank of England shared in
whatever blame might be attached to Price Waterhouse's decisions
following that date, and prior to its final certification of
BCCI's books in April, 1990.
A full understanding of what took place between BCCI and its
auditors has been severely impeded by the inability to obtain
documents and testimony from BCCI's principal auditors,
especially Price Waterhouse. While Price Waterhouse's US
partnership provided full cooperation regarding its audits of
BCCI activities in the United States, it took the position that
it had neither any knowledge of, or responsibility for, BCCI's
overall auditing, which was handled solely by their affiliated
partnership in the United Kingdom, Price Waterhouse (UK).
Price Waterhouse (UK), which handled the consolidated audit
of BCCI world-wide from 1987 on, and which previously was
responsible for over 15 years for the audits of one of BCCI's two
flag banks, BCCI Overseas (Grand Cayman), where a substantial
portion of the frauds took place, refused to provide the
Subcommittee with any of its voluminous audit reports pertaining
to BCCI in response to the subpoena of the Committee on Foreign
Relations. Price Waterhouse (UK) argued that provision of such
material was precluded by British law, and that the British
partnership of Price Waterhouse did not do business in the United
States and could not be reached by any subpoena.
Price Waterhouse (US), which said it did not possess any
documents pertaining to BCCI operations outside the United
States, explained its relationship with other Price Waterhouse
partnerships in other countries as one of a loose affiliation of
independent partnerships linked together by a set of agreed-upon
standards for audit work, but entirely separate from one another
in legal responsibilities. As set forth in a Price Waterhouse
(US) letter to Subcommittee staff on October 17, 1991:
[T]he 26 Price Waterhouse firms practice, directly or
through affiliated Price Waterhouse firms, in more than 90
countries throughout the world. Price Waterhouse firms are
separate and independent legal entities whose activities are
subject to the laws and professional obligations of the
country in which they practice. . .
PW-US, like other Price Waterhouse firms throughout the
world, is a separate and distinct partnership. For your
immediate purposes, it is appropriate to note that no
partner of PW-US is a partner of the Price Waterhouse firm
in the United Kingdom; each firm elects its own senior
partner; neither firm controls the other; each firm
separately determines to hire and terminate its own
professional and administrative staff. . . each firm has its
own clients; the firms do not share in each other's revenues
or assets; and each separately maintains possession, custody
and control over its own books and records, including work
papers. The same independent and autonomous relationship
exists between PW-US and the Price Waterhouse firms which
practice in Luxembourg and Grand Cayman.(7)
As Price Waterhouse (US) partners explained to the
Subcommittee, when Price Waterhouse, or any auditing firm, signs
off on an audit and certifies that its audit represents a true
and accurate picture of a company's books, the certification is
not made by Price Waterhouse as a single entity, as would be true
in a corporate structure. Rather, the certification is made by,
and binds only the members of the partnership of the accounting
firm in the country in which they themselves are certified as
In the case of BCCI, Price Waterhouse (UK), relying on work
performed by its affiliates in a number of locations around the
world, conducted the consolidated audit of BCCI from 1987 through
1992. During that time, many other Price Waterhouse partnerships,
including Price Waterhouse (US), provided Price Waterhouse (UK)
with written summaries of BCCI's financial condition locally, in
accordance with their audit instructions from Price Waterhouse
(UK), which were then incorporated into the consolidated accounts
of the group. Questions about BCCI's activities in the Grand
Caymans or Panama or Colombia could be answered only by Price
Waterhouse (UK), in connection with its consolidated audits, or
by the local partnerships of Price Waterhouse in those countries.
Thus, under the partnership system that all the
international accounting firms use, Price Waterhouse (US) has
maintained that it has no knowledge of, or responsibility for, a
consolidated audit certified by any of its partnerships in other
countries, including those done pertaining to BCCI. Accordingly,
in response to the Committee subpoena to Price Waterhouse, Price
Waterhouse (US), provided complete documentation of its work on
behalf of BCCI in the United States, but no documents regarding
Price Waterhouse's work on behalf of BCCI elsewhere, including
its reports to BCCI's board of directors, and the background to
its annual certifications of BCCI's books and records. On these
critical issues, Price Waterhouse (US) referred all questions to
Price Waterhouse (UK), which in turn took the position that it
was legally precluded by British bank confidentiality and privacy
laws from providing any of the documents subpoenaed by the
Committee. In lieu of testimony or documents, Price Waterhouse
(UK)'s attorney provided the Subcommittee a copy of the firm's
written answers to questions from a Committee of the British
House of Commons.(8)
It is worth noting, for the record, Masihur Rahman's view
that for years, Price Waterhouse has held themselves out to be a
global firm with uniform standards and one single responsibility.
According to Rahman, Price Waterhouse brochures were submitted to
BCCI repeatedly emphasizing Price Waterhouse's global integration
as a critical strength of the firm.
Due to Price Waterhouse (UK)'s refusal to respond to the
subpoena, the Committee has been unable to obtain a complete set
of Price Waterhouse's audit reports concerning BCCI, and has had
to rely on fragments of such reports obtained from the Federal
Reserve and other sources amounting to a small percentage of the
total work. As a result, for some years, no audit reports of any
kind have been obtained. For other years, the audit reports
obtained are limited to fragments of the whole. These fragments
do provide some important information about Price Waterhouse's
concerns about BCCI from the early 1980's on; unfortunately, the
fragments exclude other critical information necessary to
evaluate the history of Price Waterhouse's handling of these
In reaching its conclusions, the Subcommittee has sought to
make use of all available information, including the answers
provided by the auditors to questions from the British House of
Commons. However, given the incomplete state of the information
the Subcommittee has been able to obtain, it is possible that
additional documents from the auditors concerning BCCI could have
changed the conclusions reached by the Subcommittee on some of
these matters. It is therefore especially unfortunate that the
foreign auditors refused to honor the Committee's subpoena.
As noted above, reaching conclusions concerning the
responsibility of the auditors in connection with BCCI's
maintenance of its deceptions until July, 1991 have been hampered
by the inability to obtain full documentation and any interviews
from any of BCCI's foreign auditors. Nevertheless, the
information and testimony gathered by the Subcommittee is
adequate to find:
** BCCI's decision to divide its operations between two
auditors, neither of whom had the right to audit all BCCI
operations, was a significant mechanism by which BCCI was able to
hide its frauds during its early years. For more than a decade,
neither of BCCI's auditors objected to this practice.
** BCCI provided loans and financial benefits to some of its
auditors, whose acceptance of these benefits creates an
appearance of impropriety, based on the possibility that such
benefits could in theory affect the independent judgment of the
auditors involved. These benefits included loans to two Price
Waterhouse partnerships in the Caribbean. In addition, there are
serious questions concerning the acceptance of payments and
possibly housing from BCCI or its affiliates by Price Waterhouse
partners in the Grand Caymans, and possible acceptance of sexual
favors provided by BCCI officials to certain persons affiliated
with the firm.
** Regardless of BCCI's attempts to hide its frauds from its
outside auditors, there were numerous warning bells visible to
the auditors from the early years of the bank's activities, and
BCCI's auditors could have and should have done more to respond
** By the end of 1987, given Price Waterhouse (UK)'s
knowledge about the inadequacies of BCCI's records, it had ample
reason to recognize that there could be no adequate basis for
certifying that it had examined BCCI's books and records and that
its picture of those records were indeed a "true and fair view"
of BCCI's financial state of affairs.
** The certifications by BCCI's auditors that its picture of
BCCI's books were "true and fair" from December 31, 1987 forward,
had the consequence of assisting BCCI in misleading depositors,
regulators, investigators, and other financial institutions as to
BCCI's true financial condition.
** Prior to 1990, Price Waterhouse (UK) knew of gross
irregularities in BCCI's handling of loans to CCAH/First American
and was told of violations of U.S. banking laws by BCCI and its
borrowers in connection with CCAH/First American, and failed to
advise the partners of its U.S. affiliate or any U.S. regulator.
** There is no evidence that Price Waterhouse (UK) has to
this day notified Price Waterhouse (US) of the extent of the
problems it found at BCCI, or of BCCI's secret ownership of
CCAH/First American. Given the lack of information provided Price
Waterhouse (US) by its United Kingdom affiliate, the U.S. firm
performed its auditing of BCCI's U.S. branches in a manner that
was professional and diligent, albeit unilluminating, concerning
BCCI's true activities in the United States.
** Price Waterhouse's certification of BCCI's books and
records in April, 1990 was explicitly conditioned by Price
Waterhouse (UK) on the proposition that Abu Dhabi would bail BCCI
out of its financial losses, and that the Bank of England, Abu
Dhabi and BCCI would work with the auditors to restructure the
bank and avoid its collapse. Price Waterhouse would not have made
the certification but for the assurances it received from the
Bank of England that its continued certification of BCCI's books
was appropriate, and indeed, necessary for the bank's survival.
** The April 1990 agreement among Price Waterhouse (UK), Abu
Dhabi, BCCI, and the Bank of England described above, resulted in
Price Waterhouse (UK) certifying the financial picture presented
in its audit of BCCI as "true and fair," with a single footnote
material to the huge losses still to be dealt with, failed
adequately to describe their serious nature. As a consequence,
the certification was materially misleading to anyone who relied
on it ignorant of the facts then mutually known to BCCI, Abu
Dhabi, Price Waterhouse and the Bank of England.
** The decision by Abu Dhabi, Price Waterhouse (UK), BCCI
and the Bank of England to reorganize BCCI over the duration of
1990 and 1991, rather than to advise the public of what they
knew, caused substantial injury to innocent depositors and
customers of BCCI who continued to do business with an
institution which each of the above parties knew had engaged in
** From at least April, 1990 through November, 1990, the
Government of Abu Dhabi had knowledge of BCCI's criminality and
frauds which it apparently withheld from BCCI's outside auditors,
contributing to the delay in the ultimate closure of the bank,
and causing further injury to the bank's innocent depositors and
As specified in the chapter of BCCI's criminal activity,
BCCI was from its earliest days made up of multiplying layers of
entities, related to one another through an impenetrable series
of holding companies, affiliates, subsidiaries, banks-within-banks, insider dealings and nominee relationships. By fracturing
corporate structure, record keeping, regulatory review, and
audits, the complex BCCI family of entities created by Abedi was
able to evade ordinary legal restrictions on the movement of
capital and goods as a matter of daily practice and routine. As a
result, the records of BCCI's criminal activity were buried
beneath a layering that substantially impeded anyone's ability to
make sense of them.
Yet, this problem was not something which developed slowly,
near the end of BCCI's existence in 1991, but rather, a structure
which BCCI's head, Abedi, created from the earliest days of the
bank, and which was accepted for over a decade by both of BCCI's
principal auditors, Price Waterhouse and Ernst & Whinney.
According to Masihur Rahman, he recognized the potential for
abuse in the system developed by Abedi from the beginning, and
insisted on retaining top accounting firms for BCCI as a
mechanism to counter Abedi's complexities. As Rahman explained
Soon after formation of the bank, it started as BCCI S.A.
which was the Luxembourg Bank, but within a couple of years,
Mr. Abedi decided to restructure it, and the holding company
was produced. It was called BCCI Holdings. And the bank
underneath it, BCC S.A. was split into two parts, one bank
was left with its head office in Luxembourg called BCCI
S.A., and another bank was created with its head office in
Grand Cayman. The BCC S.A. bank was mostly with European and
Middle East locations, and BCC Overseas Bank was mostly
Third World countries. . . .
Well, the more number of entities there are in any
organization, obviously the more isolation you can put each
section to. And if you do an intercompany position, then
unless you know both companies' position, you could get half
a picture. So there was that situation also . . .
Because I realized the danger of this evolving structure and
the management style, I insisted that we had the best and
biggest auditors. And so we from the early days had two of
the biggest audit firms, Ernst & Whinney which became Ernst
& Young, and Price Waterhouse.(9)
Initially, both the holding company and all BCCI's other
banks other than its Grand Cayman's banking unit, BCCI Overseas,
was handled by Ernst & Whinney, with BCCI Overseas in Grand
Caymans as a "flag-ship" bank, handled by Price Waterhouse from
its formation in 1975. According to Rahman, in an effort to deal
with BCCI's "free-wheeling structure," both firms were instructed
by him to notify him, as BCCI's chief financial officer, of any
abnormalities they encountered at the local level in the course
of their audits, as they found them, and not to wait until the
end-of-the-year audit to report them. Moreover, controls were
placed on BCCI's Treasury operations requiring the Treasury
department of BCCI to maintain 90 percent of its deposits in a
liquid form -- such as placements with prime banks and U.S. and
European government securities -- and permitting the Treasury to
engage in trading on no more than a maximum of 10 percent of
BCCI's dollar surpluses, which would limit the exposure to about
$100 million in all.
The earliest audit for which the Subcommittee has been able
to obtain any records consists of a few sample pages of audit
findings and recommendations from Price Waterhouse Grand Caymans
to BCCI dated December 31, 1983, prepared by Price Waterhouse
Grand Cayman personnel Richard W. Harris and Richard D. Fear. As
of the end of 1983, the auditors found that BCCI's loan portfolio
a relatively high concentration of risk to a number of
prominent clients. The inherent risk associated with these
major exposures is significant in the context of the capital
base of the Bank particularly in cases were advances have
been made on an unsecured basis.(10)
Accordingly, the auditors recommended that BCCI consider
limiting the maximum loan exposure to individual clients or
groups, and increasing its loan loss provisions. The pages
provided the Subcommittee do include references to other problems
with the bank, but the full explanation of those problems was
apparently set forth on pages not obtained by the Subcommittee.
Excerpts from a report prepared in 1984 by Price Waterhouse
provides a fuller account of the nature of the problems Price
Waterhouse had previously found. While again the documents
provided are fragmentary, they contain the following:
Although there have been marked improvements in the quality
of the credit files maintained at Head Office [Grand
Cayman's] we have again noted instances where the files
contain inadequate financial information such that the
credit worthiness of the borrow cannot be readily
Portions of an internal control report prepared by Price
Waterhouse dated April 26, 1986 concerning BCCI's Grand Caymans
office described numerous additional problems pertaining to
BCCI's lending practices and documentation:
We noted instances where funds had been disbursed . . .
prior to the perfection of the security arrangements
required . . .
Instances were noted in which items of security were not supported by independent valuations . . .
We have noted some instances where the documentation
received by the Bank to create a charge or pledge over
security had been accepted without any evidence of
consideration having been given to its legal enforceability
in the jurisdiction in which the enforcement would be made
. . .
We noted instances where exposure exceeded authorized
limits, occasionally by significant amounts, and also that
in many such cases such excesses were caused by the accrual
of interest. . .
During the course of our audit we had several requests from
local auditors to review loans for which documentation was
not available locally . . .
No regular reporting procedures exist at Head Office whereby
senior management, the Central Credit Committee or the Board
of Directors are notified of non-compliance with the terms
and conditions of borrowing, particularly in relation to the
non-payment of principal and interest . . .
We noted instances whereby the interest rate being applied
to an account differed from that quoted . . .
We noted instances, where for general reasons of
confidentiality, certain borrowers were designated with a
numbered account reference rather than the account being
entitled with the full name of the borrower. Whilst we have
no particular objection to this practice, we found that in
most instances none of the officers of the Grand Caymans
office were able to correctly identify either the name of
the borrower or the credit officer responsible for
monitoring the account at other locations. . .(emphasis
We noted instances of errors occurring in the accounting
records at Head Office accounting to ensure their
completeness and accuracy. . .
We have noted during the past few years that the level and
number of staff loans booked at Head Office has steadily
increased but that regular monitoring is not carried out to
ensure that the terms and conditions of such loan are being
Asterisks adjacent to a number of these concerns were placed
by the auditors to indicate issues which they had previously
raised with BCCI, in some cases for several years. Many of the
concerns taken independently might not be cause for unusual
concern. But taken together, they demonstrate at minimum that as
early 1986, BCCI's auditors knew of a significant number of
exceptionally poor practices at BCCI concerning its record
keeping, treatment of interest to borrowers, handling of numbered
accounts, and handling of accounts where customers were failing
to pay interest or principal or both.
While Price Waterhouse may have considered BCCI's poor
banking practices to be a demonstration of a lack of
sophistication or professionalism on the part of BCCI, in fact,
these practices, taken together, were essential mechanisms by
which BCCI maintained its global frauds.
For example, BCCI's practice of simply tacking on interest
to principal in cases in which loans were non-performing was
necessitated by its practice of using nominees to disguise
transactions in which BCCI was the real party at interest, such
as BCCI's secret ownership of First American. The nominees
understood from the beginning that they were not responsible for
paying interest, and that BCCI would take care of it. The
simplest means for BCCI to take care of it, was, so long as the
auditors permitted it, to just add the interest to the principal.
Then, when BCCI was ready, it would proceed against the borrower,
its nominee, and "acquire" the property secured by these loans.
Accordingly, BCCI often would not want any independent valuation
of the secured property, because its intention from the beginning
was to own or control the secured property -- such as First
American -- rather than to sell the property if its "borrower"
did not pay BCCI back its "loan."
Similarly, the practice of BCCI officials not being able to
identify the borrower behind a numbered account, or the BCCI
officer responsible for monitoring the account at other
locations, would have been a logical means of compartmentalizing
knowledge about accounts in order to limit the possible criminal
exposure of the officials and the bank for irregular loans or
drug money laundering. To the extent that an official monitoring
a numbered account cannot identify a customer, he cannot very
well know the quality of his credit or the source of the
customer's funds. To the extent that the official cannot identify
the other bank officials involved in monitoring the account, they
can each claim that they are not responsible for the recovery of
this loan, or in a drug-related case, did not possess adequate
knowledge to recognize that the funds they were moving were
Without speculating on the possible reasons for these deficiencies, or expressing any concerns that these deficiencies might not be inadvertent on the part of BCCI, the auditors made a number of recommendations to BCCI in 1986 on how to correct them:
We recommend that efforts be made to obtain current
financial and other supporting information in respect to all
borrowers. . .
We recommend that, except in the most exceptional
circumstances, funds should not be disbursed prior to the
perfection of any required security arrangements. . .
We recommend that independent valuations be obtained on a
regular periodic basis to enable the adequacy of security to
be properly monitored. . .
We recommend that all charge or pledge documentation be
approved by the legal department before funds are disbursed
. . .
We recommend that loans should not be allowed to be drawn
down in excess of approved limits prior to increased
facilities being sanctioned in writing. . .
We again recommend that, in accordance with the group
policy, interest on loans against which there is a specific
loan loss provision is always created to reserve and not to
income . . .
We again recommend that the Central Credit Division take
positive steps to ensure that branch managers throughout the
Bank are fully aware that they are responsible locally for
maintaining complete credit files for all loans. . .
We recommend that procedures be introduced to enable
management to readily identify non-performing loans. . .
We recommend that all credit files contain written
authorization to support the interest rate being applied to
an account. . .
We recommend that the Head Office manager maintain a private
register of borrowers using numbered accounts. . .
We again recommend that procedures be introduced to monitor
and control staff loans and advances.(13)
These recommendations, if followed by BCCI, and if insisted
upon by Price Waterhouse, backed up by the threat of qualifying
the accounts, or by the threat of resignation, would have limited
BCCI's ability to continue to engage in many of the deceptions
that were essential for its continued survival -- including the
use of nominees to own BCCI's secretly-held subsidiaries, such as
First American and the Independence Bank. In practice, BCCI
continued over its remaining five years of life to abide by few
of these recommendations, with the result that the auditors
repeated them year after year, with ever greater specificity,
while continuing to sign off year after year on BCCI's accounts,
concluding that their audit reports represented a "fair and true"
picture of BCCI's actual financial status when in fact they did
In 1985, BCCI and its auditors faced the first major crisis
of the bank. The crisis came in one of BCCI's flag-ship
operations -- BCCI Overseas (Grand Caymans), which had been
audited from its inception by Price Waterhouse. The crisis was
acute and involved BCCI's Central Treasury. It required the
recognition of a loss of approximately $500 million, the
equivalent of the bank's entire capitalization. BCCI
characterized the loss as due to as trading losses in the
securities and commodities markets, ostensibly brought about
through unauthorized trades by a junior BCCI officer, Ziauddin
Akbar, who had been placed to run the Treasury Department by BCCI
By the account of BCCI chief financial officer Rahman, Abedi
and Naqvi had permitted Akbar to take "very, very large
exposures," in securities and commodities trading, in what was
actually a Ponzi scheme, in which front-end commissions received,
representing offsets against liabilities under open futures
contracts, were treated as profits rather than as offsets, and
actual losses were hidden through BCCI taking ever-larger futures
positions in securities and commodities trades to create offsets
against the past losses; plus additional "profit" as and when
required; until by the autumn of 1985 the forward exposures had
become $11 billion against a board approved limit of $1 billion.
According to Rahman:
This was done by not more than two or three of the executives in the treasury division directly under Mr. Naqvi.(14)
These huge losses imperiled BCCI on several accounts. First,
they had nearly wiped out the capital of the bank, and BCCI would
have to find ways to recapitalize. Second, they suggested
recklessness on the part of BCCI's top officials, and made many
wonder what had prompted the recklessness. But most dangerous of
all, these losses could have prompted a thorough review of all
BCCI's books and records from the beginning by BCCI's auditors, a
review which would have brought down the bank if the auditors had
discovered the frauds involved.
As Ziauddin Akbar later told associates, the truth was that
the losses had taken place over a number of years and were in
fact not really losses at all, but falsified bookkeeping
instituted by Abedi and Naqvi to inflate BCCI's books and show
phony profits. According to Akbar, he agreed to be the scapegoat
for the losses in an effort to avoid a situation in which the
auditors would conclude that there been systematic fraud at BCCI,
conducted at the top. In fact, the auditors wrongly concluded
that the losses had taken place over a short period, and that did
not force the further review of BCCI documents which would likely
have revealed the years of systematic and massive fraud in the
Instead, Price Waterhouse, working closely with Abedi and
Naqvi, agreed to the shift of $150 million from the ICIC Staff
Foundation/Trust to meet part of this loss, and then splitting
the balance of the loss into three years on technical grounds.
Akbar was fired, and BCCI was saved.
Nevertheless, recognition of the losses was costly for BCCI.
The losses became a significant factor in the decision soon
thereafter of BCCI's regulators in Luxembourg, the Institut
Monetaire Luxembourgeois (IML) to notify BCCI's other regulators
that the Luxembourg authority was unhappy with its responsibility
for monitoring BCCI while BCCI actually was headquartered in
London. Moreover, it brought about a crisis among the auditors
According to Ernst & Whinney, the Treasury losses had caused
it to doubt whether the auditors could trust BCCI and Naqvi,
although Price Waterhouse's confidence in Naqvi remained
unshaken. As Ernst & Whinney told the British House of Commons:
PW say that "Until Price Waterhouse exposed him [in 1990],
Naqvi enjoyed the respect and engendered the confidence of
all those who met him". E&W's confidence in Mr Naqvi was
shaken when it was told for the first time on 13 February
1986 of the problems in the Treasury Division of BCCI
Overseas and of his involvement therein.(16)
In May 1986, Ernst & Whinney advised BCCI that unless they
were permitted to assume responsibility for the whole audit and
BCCI's management style were changed and its record keeping
systems were improved, they would resign from their commission as
auditors for BCCI. In addition to the Treasury losses, Ernst &
Whinney were concerned about "a marked reluctance by both Mr.
Abedi and the board of BCCI Holdings to take prompt action to
disclose these [Treasury losses] to the regulators, to disclose
them in the group accounts in a manner satisfactory to E&W and to
discipline those responsible." Finally, Ernst & Whinney had
advised BCCI that if it were to continue to act as the bank's
auditors, BCCI needed to achieve "a marked improvement in the
financial and managerial controls exercised throughout the
Over the following several months, BCCI, Ernst & Whinney and
Price Waterhouse had extensive discussions about the changes
which needed to be implemented, and had mutually agreed about the
nature of the changes to be put into effect.(18) Nevertheless, for
reasons which Ernst & Whinney has declined to specify, it
resigned from further work auditing for BCCI, leaving Price
Waterhouse for the first time in the position of being BCCI's
sole global, consolidated auditor. At the time of Ernst &
Whinney's withdrawal, it was auditor to 12 of BCCI's various
subsidiaries and affiliates, and Price Waterhouse was auditor for
the remaining 19.(19)
Year after year, BCCI's auditors continued to find evidence
of poor banking practices and imprudent lending on issues
unrelated to the massive Treasury losses. In its end of year
report for 1987, Price Waterhouse noted numerous concerns on
accounts involving close to $1 billion of exposure to BCCI
involving many of the accounts which regulators would later
conclude involved front-men. Yet no action was taken by Price
Waterhouse, by BCCI's directors, or by regulators who later
received these reports, to require any concrete action by BCCI,
backed up by sanctions for any failure to comply, to correct the
obvious banking irregularities.
For example, in its 1987 audit of accounts pertaining to the
Gokal brothers and their shipping empire, the Gulf Group, Price
Waterhouse found that exposure to the group amounted to $318
million -- or 23 percent of BCCI's capital base, with exposure
rising every year, repayment performance "below expectations,"
security held against the lending likely unenforceable, and
financial information regarding the loans "inadequate." Three
years later, Price Waterhouse would conclude that on many of the
Gokal related loans, the financial information was not merely
"inadequate" but non-existent. Price Waterhouse also found that
"cash allocations to [some Gokal] accounts appear to be arbitrary
and, as a result of this and the lack of formal repayment
schedules, it is difficult to assess the underlying performance
of each account."(20)
In the same set of audits, Price Waterhouse found that BCCI
faced exposure on loans to former Saudi intelligence chief Kamal
Adham of over $200 million, involving large, unsecured exposures,
"poor interest repayment performance," "no evidence of long term
repayment schedule," "other related exposures with BCCI/ICIC,"
and that bank documents showed little evidence of regular contact
between BCCI and Adham.(21) Worse, Price Waterhouse found that many
of the shares Adham had in the First American Bank, CCAH, were
pledge as security for loans BCCI had made to other BCCI
borrowers. Nevertheless, Price Waterhouse did not require that
the loans to Adham -- or to the Gokal brothers -- be classified
or that BCCI make "provision" against them, so long as BCCI
promised to correct the problems in the account in the future,
which BCCI of course did not do.
The audit of the Adham accounts mirrored that of the audit
of the accounts of his successor at Saudi intelligence, Abdul
Raouf Khalil. In its end of the year audit for 1987, Price
Waterhouse described the situation in the following terms:
AR Khalil is a Saudi Arabian national who has had facilities
with the bank for a number of years. In the past the bank
operated a large investment trading portfolio on his behalf,
however this ceased in 1985 and he now channels his trading
activities into Capcom Financial Services Limited, an
independently managed investment house with a paid up
capital of f25m of which he owns 20%.
Little is known publicly about Khalil, however he is the
owner of a substantial museum of Arabian artifacts in Jeddah
reputed to be worth some $350m. This value is inherently
subjective, but it is understood that he is attempting to
arrange the sale of the museum to the Saudi Arabian
- Lack of documented evidence of contact with borrower for 1987
- Balance confirmation outstanding
-Lack of evidence of long term repayment schedule
-Lack of formal documentation to secure CCAH shares . . .(22)
Price Waterhouse expressed its anxieties about the Khalil
account, but once again, decided that it would not force BCCI to
classify any of the loans to Khalil as doubtful or bad, or
require BCCI to make provision in a manner that would be
reflected in its public audit, again so long as BCCI promised to
clean up the problems in the future:
We remain concerned about his account however no provision
will be required for 1987 providing:
- the account balance is confirmed to us by the borrower
- interest for 1987 is fully repaid
For the future we require:
- full loan files to be maintained to include all details of correspondence, meetings and other pertinent evidence of the monitoring the account
- adherence to an agreed repayment schedule
- formalization of security arrangements.(23)
In the months that followed, BCCI did not undertake any of
the promised reforms, but Price Waterhouse took no action to
force BCCI's hand for another two years.
The Subcommittee was not able to obtain any of Price
Waterhouse (UK)'s reports to BCCI covering the period between
December, 1987 through December, 1988, which includes the date of
the indictment of BCCI and seven of its officers on drug money
laundering charges by the U.S. Attorney in Tampa in October 1988,
following a "sting" by the Customs Service.
Audit reports to BCCI from Price Waterhouse dated November
17, 1989, demonstrate that BCCI had made very little progress in
responding to any of Price Waterhouse's expressed concerns, but
that relations between Price Waterhouse and BCCI had remained
cordial and cooperative, and that Price Waterhouse felt at the
time that BCCI was actually "performing reasonably."
The audit report begins with the following sanguine
Overall the bank has performed reasonably over the past year
considering the significant repercussions that could have
resulted from the US indictment. The Group has continued to
remain relatively liquid and also attract some new
While over the course of the report, Price Waterhouse
reiterated several of the concerns it had previously expressed in
various other audit reports taking place over the previous six
years, its overall tone was of an auditor reporting that
outstanding issues were in the process of being resolved. While
not free of all warnings and caveats, this 1989 interim report
did indeed, consistent with Masihur Rahman's testimony, imply
that no obvious major problems existed.
The Subcommittee does not have any coherent account of why,
suddenly, Price Waterhouse began in the spring of 1990 to shift
from its previous position of politely making recommendations to
BCCI to change its behavior, to aggressive criticism of practices
at the bank that for the most part it had already been aware of
for years. However, the consequences for both Price Waterhouse
and BCCI were obvious. Under British law, Price Waterhouse in
finding gross irregularities at BCCI, would now be able to report
these findings to the Bank of England, and thereby share any
responsibility for BCCI's future.
In the April 1990 audit report, Price Waterhouse found that
all the previous practices it had condemned and recommended be
corrected, had instead persisted and worsened. Among Price
Waterhouse's findings was the recognition that BCCI's lending in
connection was among serious problems facing BCCI. As Price
** BCCI faced more than $850 billion of exposure in
connection with lending for First American (CCAH). BCCI's
practices regarding these loans were atrocious. The number of
shares pledged by some borrowers had been changing from year to
year. BCCI held blank transfer deeds and powers of attorney on
the shares that allowed it to transfer them at will, against
lending that had been for First American itself, or any other
lending to First American's shareholders. Worse, BCCI's were
giving conflicting stories about whether BCCI itself owned First
American or not. In past years, Price Waterhouse stated, they had
been told that BCCI held all the shares of First American, and
not simply those pledged as security on lending. This year, they
were saying the reverse.(25)
** Many of the loans for First American had never been
reduced to writing with loan agreements involving the
shareholders, so there was no real way to determine what the
terms of the lending were supposed to be, or whether the
shareholders had actually authorized them.
** The files maintained by the bank concerning the $850
billion in lending against First American were sparse, with
little evidence of customers acknowledging decisions concerning
their "investments," let alone directing them.
** Interest was not being serviced on loans for First
American. And the interest charges BCCI was crediting on the
First American loans were substantial, without evidence that the
shareholders had agreed to the interest charges.
** Audits of two companies, Midgulf and Rubstone, who had
secured loans from BCCI against their ownership of stock in First
American, had been certified by representatives of BCCI
shareholder Mohammed Hammoud, yet now BCCI was stating that
Hammoud did not own those companies, and it was not clear who, if
** In the past, management had told the auditors that they
had not reported all the changes in share holdings in First
American to federal regulators as required by law.
Price Waterhouse thus acknowledged for the first time that
there were serious questions as to who owned First American, and
that it had known from past representations by BCCI management
that the bank was violating U.S. laws in failing to tell
regulators about changes in ownership when they occurred.
Other findings of the new audit reports by Price Waterhouse
were equally damning. Price Waterhouse found that there had been
little or no direct contact with Saudi intelligence figure A. R.
Khalil since 1985. Yet Khalil had still somehow purchased an
additional 57,748 shares of BCCI in April 1989 in a rights
offering, with money loaned by BCCI. Price Waterhouse found this
disturbing, given "an apparent breakdown in the relationship
between the borrower and the bank," and the fact that Khalil had
not made any interest payments in five years on previous
borrowing from BCCI. Price Waterhouse also found that
documentation to support Khalil's borrowings from BCCI was
absent, and representations by various BCCI officers about his
relationship with the bank were "inconsistent." Price Waterhouse
found it impossible to determine whether Khalil still owned the
13,250 shares of First American/CCAH attributed to him, which
BCCI held as security against $120 million it had ostensibly lent
The new Price Waterhouse reports on BCCI's relationship with
the Gokal brothers and their Gulf shipping group, who together
owed BCCI over $400 million, were similarly dismal. Price
Waterhouse noted in addition to the kind of problems described
above, violations of Indian and Pakistani exchange control
violations in connection with loans to the Gokals, and statements
by BCCI management that the auditors should look to the
relationship of trust between the Gokals and BCCI's top officials
rather than to any documents in determining BCCI's ability to
recover its lending to the Gokals.(27)
Concerning BCCI's banking arm in Kuwait, the Kuwait
International Finance Company (KIFCO), Price Waterhouse found
that placements recorded by BCCI with KIFCO were inconsistent
with Kifco's financial statements regarding the same
transactions. Price Waterhouse noted that the principal mechanism
for repaying Kifco's loans from BCCI was a mysterious Kuwaiti
entity called "the IZ company for Exchange," and that "we now
have suspicions as to the propriety of the transactions." Price
Waterhouse noted that it had requested access to KIFCO's records
which had been denied.(28)
Concerning BCCI's relationship with its Swiss banking
representative (and secretly held subsidiary) Banque de Commerce
et de Placements SA (BCP), Price Waterhouse stated "Swiss secrecy
laws have prevented us from being provided with information
relating to customer accounts by the incumbent auditors," and
described a number of transactions involving BCCI, its
affiliates, and BCP, which Price Waterhouse could not
Concerning BCCI front-man Mohammed Hammoud, Price Waterhouse
noted that it had no evidence that Hammoud owned any of the
companies to which BCCI and its Grand Caymans affiliate ICIC had
lent some $110 million. Worse, various companies which had BCCI
officials had previously said were owned by Hammoud were now
being claimed by BCCI officials not be owned by Hammoud, but by
others, who in turn reiterated that Hammoud did own the
companies. Finally, Hammoud supposedly now owned 2.6 million
shares of BCCI itself, but there were no records backing up this
Concerning the Saigol family, who now owed BCCI $44 million,
Price Waterhouse found that there was no evidence that loans or
interest on loans were being repaid. Worse, BCCI had lied about
the Saigol accounts to the auditors in the past:
Representations previously given about the beneficial
ownership of companies to which new loans were extended in
Bahrain in 1989 have been false. The loans have been given,
in part, to repay delinquent loans in other locations.(31)
The reporting on lending to other prominent BCCI
shareholders such as Ghaith Pharaon, the bin Mahfouz family, and
members of the Abu Dhabi royal family raised similarly serious
In total, the new audit reports by Price Waterhouse -- the
first of which reached BCCI acting head Swaleh Naqvi in February,
1990 -- were devastating, and raised fundamental questions as to
whether the bank could -- or should -- survive. And yet the
information in the audits was different from previous audit
reports largely in tone and detail rather than in substance. All
but one or two of the issues identified had been raised by the
auditors before, and reasons for the sudden shift in attitude
Price Waterhouse's own account of the sudden change is
unilluminating. As it told a committee of the British House of
Commons in February, 1992:
Our 1987 and 1988 audits revealed imprudent lending: during
the 1989 audit we identified that, contrary to management's
previous assurances, further lending had been permitted on
the major customer accounts where the credit risk was
already heavily concentrated. Additionally, around this
time, Price Waterhouse identified certain loan transactions
in a number of locations for which senior management were
unable to provide adequate explanation. Price Waterhouse
communicated concerns about these matters and their
implications on the credibility of management to the Bank of
England early in 1990.(32)
What appears to have happened is that the auditors had spent
many years detailing record keeping, documentation, and other
problems with BCCI's lending practices, without having had any
appreciable impact on change those practices, while each year
receiving approximately $5 million for their audit work. By early
1990, it was becoming increasingly clear that the lending
problems were so severe that the auditors themselves might be
held at risk if they did not alert authorities. What is striking
is Price Waterhouse's decision to notify the Bank of England
"early in 1990," before it notified BCCI's own board of directors
of the problems, and without telling BCCI it had reached out to
the regulators. As the visible financial hole at the heart of
BCCI grew ever larger, the relationship between BCCI and Price
Waterhouse had finally snapped.
BCCI chief financial officer Rahman testified that he was
shocked by the sudden change in attitude by Price Waterhouse, as
well as by some of the information provided to him by them in
their new reports, which he received on March 14, 1990:
In the usual process, the whole world audit was completed in
the month of February, 1990. . .my wife and family were
planning to go on holiday the later part of March, April.
And when I received a call on a weekend from Price
Waterhouse saying that they wanted to meet me, the partners,
and -- I was a bit hesitant because I had been seeing all
the partners throughout the last few months and I did not
know what it was that they wanted to bring up. Anyway, I
went to their office and they produced for me a whole list
of what they thought was irregularities, illegalities, and
misuse of funds.(33)
According to Rahman, the problem cases identified were
exactly those Price Waterhouse had identified for years, but this
time the attitude of the auditors was completely different.
Senator Kerry: Now, the irregularities and problems that
they put forward to you had been in existence for several
prior years, had they not?
Mr. Rahman: Yes. All the names that they listed were names
which had appeared in prior years. . .
Senator Kerry: Some were fronts?
Mr. Rahman: Some were fronts, obviously. . . . They
presented this list of huge problems whose potential loss
could be $1 billion, plus. . . . They said the only thing
before we go to the regulator . . . is that we can allow you
to have an inquiry of your own from all our findings, and
come up with your interpretation and facts.(34)
Price Waterhouse was now taking the hard line with BCCI that
it had no choice but to notify the regulators, when in fact, they
had already been notified. All that BCCI could do was supplement
Price Waterhouse's reporting with its own analysis, which Price
Waterhouse urged Rahman to undertake as head of a BCCI interim
Rahman testified that as chief financial officer of a $22
billion concern, he had previously been relying year after year
on the auditors reports in preparing BCCI's overall books, and
had never been permitted to look at the underlying documentation
himself. Now, as he began for the first time reviewing the
underlying documentation on the loans, he was shocked at what he
found. On the one hand, Price Waterhouse's criticisms of BCCI's
operations were valid. On the other hand, from Rahman's point of
view, these obvious frauds and illegal acts should have been
brought to his attention years previously, and the auditors
should not have permitted the practices to go on so long.
The Task Force report prepared by Rahman and three other
BCCI officers during March 1990, began by acknowledging BCCI's
failures, but criticized Price Waterhouse for taking so long in
alerting management to how bad the problem was:
The Task Force after many hours of interviews with the
concerned Accounts Executives . . . and reviewing many files
and documents made available to it (most of which were of
very poor quality) . . . confirms the 'concern' of PW in
many of the referred cases . . . The Task Force
simultaneously expresses considerable surprise and
disappointment at such obvious flaws in basic banking
procedures and documentation. The Task Force feels that the
annual audit thereof should have easily detected and
corrected such haphazard transaction several years ago.
The Task Force concludes that there is little doubt from the
sparse records available and inadequate explanations given
by the Accounts Executives/Officers that there must be some
'interlocking' arrangements between the shareholders of both
BCCI Holdings (Lux) SA and CCAH whereby in several cases
'nominee' routes may have been taken to front each others
investment in these two banking groups with corresponding
loans being drawn from BCCI (& ICIC) to fund such 'interim'
holdings. . .
It took the Task Force only a few days to note that nearly each of these cases had common patterns of initiation, activity, fund flow, weak documentation and vague explanations from the concerned account officers which any reasonable audit process should have tracked down, identified and stopped forthwith. That is extended over so many years is a great disappointment to the Task Force -- particularly since their initiations was all rom the same source in Grand Caymans (and London).(35)
Thus, as of April, 1990, both Price Waterhouse and BCCI's
senior financial official, Rahman, had explicitly recognized, in
writing, BCCI's dire financial condition, its poor lending
practices, and its frauds in connection with First American and
other matters. Ironically, in the weeks to come, it would be
Rahman who would voluntarily resign his commission and leave
BCCI, and the auditors who would stay and try to find a way to
save the bank.
On April 18, 1990, Price Waterhouse provided a report to the
Bank of England which stated that a number of financial
transactions at BCCI booked in its Grand Caymans affiliates and
other offshore banks were "false and deceitful," and that it was
impossible at the present time to determine just how far the
fraud reached. Thus, a critical decision had to be made. Either
BCCI had to be closed down now, or the Bank of England itself had
to give its assent to keeping it open in some new form as a means
of avoiding losses to BCCI's million or more depositors. New
management needed to be installed. New financing had to be found,
and the holes in BCCI's books had to be plugged.
The obvious solution was to ask Sheikh Zayed and the
government of Abu Dhabi to take over the bank. As Zayed and the
Al Nayhan family who ruled Abu Dhabi had been major depositors of
BCCI, and had long had billions in family finances handled by
BCCI, they stood to lose as much as anyone if the bank collapsed.
Accordingly, Abu Dhabi would have to be told the truth about
BCCI's perilous condition, and asked to commit funds to keeping
the bank solvent.
A series of urgent meetings were held in Abu Dhabi and
Luxembourg, beginning in March, 1990, in which Naqvi confessed
his errors and resigned from his position as CEO at BCCI. A new
management team was brought in. Unfortunately, rather than
constituting a strong group of banking professionals, the new
team was headed by a long-time Abu Dhabi insider from BCCI
itself, Zafar Iqbal, the former head of BCCI's branch in the
United Arab Emirates, the Bank of Credit and Commerce Emirates,
or BCCE, who had long had a close personal relationship with
important members of the royal family of Abu Dhabi arising out of
his provision of intimate personal services for them in Pakistan
and elsewhere. Within the bank, Iqbal was not considered to be an
expert on much besides pleasing the Abu Dhabi royal family. BCCI
junior officers knew him as the man who had for years provided
"singing and dancing girls" to the royal family, and related
personal services.(36) BCCI operations were moved, with the
apparent approval of the Bank of England, to Abu Dhabi, along
with all of BCCI's most important records. And assurances were
given to Price Waterhouse that Abu Dhabi would back BCCI all the
These assurances were needed because Price Waterhouse was
threatening to refuse to sign-off once again on BCCI's books with
an unqualified audit report, and relations between the auditors
and BCCI had deteriorated substantially after BCCI's directors
had criticized the auditors for providing their audit reports to
the Bank of England. On April 20, a meeting was held in
Luxembourg with the shareholders in which Price Waterhouse made a
dire presentation, and during which Abu Dhabi representatives
advised Price Waterhouse that Abu Dhabi would make an open-ended
financial commitment to bail out BCCI. As Price Waterhouse stated
to the chairman of the Abu Dhabi Finance Department on April 25,
Your representative, HE G Al Mazrui, has confirmed to use
that you are fully aware of the nature and magnitude of the
uncertainties and prepared to provide the necessary
financial support in the event that losses arise from
realisation of these loans.(37)
In return for Abu Dhabi bankrolling BCCI's restructuring,
Price Waterhouse would agree to certify BCCI's books, subject to
a single caveat -- that the basis of the preparation of the
certification was Abu Dhabi's intention to maintain BCCI's
capital base while it reorganized and restructured. Instead of
telling the world the truth -- that the consolidated accounts
reported by Price Waterhouse in April 1990 did not in fact give a
"true and fair view of the financial position of the group at
December 31, 1989," Price Waterhouse contends that it did, using
the Abu Dhabi commitment as its justification for so doing.
In justification of this decision, Price Waterhouse stated
The circumstances existing in the last week of April 1990,
when Price Waterhouse had to decide on the form of report on
the accounts of BCCI for the year ended 31 December 1989,
were extremely complex as there was material uncertainty
about the recoverability of significant loans and advances
shown in the balance sheet. Significant matters taken into
account including the following:
-- The Abu Dhabi Government had given a commitment to
indemnify BCCI against loss either by taking over balances
at no loss to BCCI or by contributing equivalent funds to
make good any losses incurred on the loans and advances in
-- the Government of Abu Dhabi and related institutions had
taken a controlling (over 77 per cent) interest in BCCI and
stated their intention to make further share acquisitions
and to reorganize and restructure BCCI;
-- the Bank of England the Institut Monetaire Luxembourgeois
had been informed of all the uncertainties known to Price
Waterhouse and of the financial support commitment by the
Government of Abu Dhabi and had decided to allow BCCI to
continue to operate;
-- whilst evidence of certain false and deceitful
transactions had been discovered we believed the extent of
these transactions to be limited to a small number of
-- the individuals in management who were thought to have
been responsible were to be removed.(38)
Accordingly, after receiving these sign-offs from everyone
else involved, including most importantly the Bank of England,
Price Waterhouse signed off once again on BCCI's books stating:
In our opinion, the consolidated accounts give a true and
fair view of the financial position of the group at December
31, 1989 and the results of its operations and changes in
financial position for the year ended in accordance with
International Accounting Standards.(39)
The certification was subject to a small footnote, listed as
Note 1 in BCCI's annual report, which cited that the "Basis of
Preparation" for the Price Waterhouse report was the fact that
"the Government of Abu Dhabi has subscribed US$400 million for
new shares and acquiring a major holding from an existing
shareholder such that together with related institutions they now
hold over 77 per cent of the share capital of the holding
company. They have advised the directors of their intention to
maintain the group's capital base whilst the reorganization and
restructuring necessary for its continued development is
undertaken." Price Waterhouse also charged off a loan loss for
BCCI of $600 million, a loss for the year of nearly $500 million,
and a reduction in shareholders equity of approximately 50 per
cent, from $886 million to $424 million. In so doing, Price
Waterhouse for the first time recognized losses that had in
actuality, taken place over many preceding years.
By agreement, Price Waterhouse, Abu Dhabi, BCCI, and the Bank of England had in effect agreed upon a plan in which they would each keep the true state of affairs at BCCI secret in return for cooperation with one another in trying to restructure the bank to avoid a catastrophic multi-billion dollar collapse. Thus to some extent, from April 1990 forward, BCCI's British auditors, Abu Dhabi owners, and British regulators, had now become BCCI's partners, not in crime, but in cover-up. The goal was not to ignore BCCI's wrongdoing, but to prevent disclosure of the wrongdoing from closing the bank. Rather than permitting ordinary depositors to find out for themselves the true state of BCCI's finances, the Bank of England, Price Waterhouse, Abu Dhabi and BCCI had together colluded to deprive the public of the information necessary for them to reach any reasonable judgment on the matter, because the alternative would have been BCCI's collapse.
For its part, in June, 1990, Price Waterhouse was actually to file another report with the Bank of England, known as a Section 39 report, finding that BCCI's systems and controls were satisfactory -- findings that Price Waterhouse would have to entirely abandon just five months later.
In April, 1990, Naqvi and the other chief officers who
resigned with him from their positions in BCCI were placed under
house arrest in Abu Dhabi, as Abu Dhabi took formal control of
BCCI. Unfortunately, as it did so, it did not disclose to Price
Waterhouse certain information that it now had about the extent
of the fraud at BCCI, and it took positions that had the clear
intention of seeking to sweep the true nature of BCCI's problems
under the rug, and to avoid the disclosure to BCCI's regulators
of what had really taken place. Essentially, Abu Dhabi was now
seeking to make certain that the money it was spending on BCCI
would suffice to keep secret the relationship between Abu Dhabi
and other Arab shareholders in BCCI, even, as necessary, from
Price Waterhouse, the outside auditors for the bank it now owned.
In September, 1990, Price Waterhouse learned that BCCI had
concealed further lending of over $500 million to its major
customs by "parking" that lending with a Middle Eastern bank,
namely, the National Commercial Bank of Saudi Arabia controlled
by Khalid bin Mahfouz, the most powerful banker in the Middle
East, who was later indicted in the United States in connection
with his activities pertaining to BCCI and First American. This
was bad enough, but was worse was the fact that since Naqvi's
removal, the practice had continued, "with the knowledge and
approval of the Board representative of the controlling
shareholders" -- the government of Abu Dhabi. The auditors had
begun to realize that Abu Dhabi was now colluding with BCCI in
continuing fraudulent practices, and in hiding them from Price
According to Price Waterhouse, worse was to come. Since
March or April, 1990, Naqvi, who had personally handled many of
BCCI's frauds, had been living under house arrest in Abu Dhabi.
Incredibly, Abu Dhabi had decided to retain Naqvi as a consultant
to advise them on BCCI, and were giving him access to BCCI's
documents. Even more incredibly, Naqvi was said to be maintaining
some 6,000 files personally in Abu Dhabi, whose very existence
had still never been disclosed to the auditors. For months, as
Price Waterhouse continued its efforts to review BCCI's books, it
had been lied to by BCCI and it was finding, by Abu Dhabi, kept
in ignorance of some of the bank's most vital records, and only
stumbling onto the fact of their existence in November, 1990.
As Price Waterhouse described it, when they confronted Abu
Dhabi with their concerns about Naqvi, and a request to review
the files he controlled, they were told by Abu Dhabi authorities
that the auditors could not have access to them, and that they
would remain under the control of the discredited Naqvi:
Price Waterhouse's report to the directors of 3 October 1990
revealed that management may have colluded with some of
BCCI's major customers to misstate or disguise the
underlying purpose of significant transactions. Following
this, the controlling shareholders of BCCI [Abu Dhabi],
under pressure from Price Waterhouse, agreed to a full
investigation of the problem accounts and to enforce the
resignations of Abedi and Naqvi as directors.
An Investigative Committee comprising representatives from Price Waterhouse, E&W Middle East Firm (who were auditors of the Abu Dhabi Government interests), two firms of lawyers and the Abu Dhabi Government was established in November 1990 to supervisor the investigation into the problem accounts. Price Waterhouse were advised by senior BCCI management that Naqvi had been retained as an "advisor" to provide explanations to the Abu Dhabi Government and that they could not have access to files being used by him. Price Waterhouse made clear to the controlling shareholders that without access to Naqvi and the files he was using there could be no investigation.
Ultimately access was granted and we were shocked to find that Naqvi was holding around 6,000 files. After initial steps to secure the files, a preliminary review revealed that amongst them were details of transactions and agreements not previously disclosed to us despite management's prior assurances that they had provided all relevant information to Price Waterhouse.(40)
For reasons the auditors could not fathom, Abu Dhabi had
placed Naqvi, a principal architect of BCCI's frauds, in charge
of BCCI's most important and secret records without telling them.
For the past eight months, Naqvi and Abu Dhabi had maintained
exclusive control of those records, with essentially unlimited
opportunities to destroy them or falsify them throughout that
time. By the time Price Waterhouse finally obtained access to
these records in November and December, 1990, it found massive
fraud in the materials that still existed. But the auditors had
no way of determining the extent to which those documents were
already cleansed of any material damaging to the new owners of
BCCI, along with any other material which Abu Dhabi or Naqvi
wanted hidden forever.
Throughout the remainder of 1990, and the spring of 1991,
BCCI, Abu Dhabi, and the Bank of England continued to work on a
restructuring of BCCI as a means of saving the bank, with the
intention of collapsing its dozens of entities into three banks,
to be based in London, Abu Dhabi, and Hong Kong. At the same
time, Price Waterhouse continued to provide each of them with the
information that the fraud at BCCI was massive, and that the
losses associated with the fraud were mounting into the billions.
All the while, BCCI, Abu Dhabi, the Bank of England, and Price
Waterhouse worked together to keep what they knew about BCCI
secret. The secrecy had become critical now that they all knew
about the ongoing criminal investigation into BCCI taking place
in New York City by the District Attorney. Each made a strenuous
effort to prevent the District Attorney from obtaining the Price
Waterhouse audit reports which contained the information that if
known would destroy BCCI. But by late 1990, the District
Attorney, after months of effort, had obtained some of the audit
reports, and appeared to be narrowing in on an indictment of
Oddly enough, Price Waterhouse continued to resist finding
that fraud had taken place for many months after the information
available to it provided ample basis for such a conclusion. As
late as its October, 1990 report to the Bank of England, the
auditors avoided concluding that BCCI was involved in fraud, and
suggested that they believed that the restructuring and remedial
efforts being taken would be adequate to solve the bank's
During December, 1990, at the very time that the New York
District Attorney had obtained some of the most critical of its
earlier audit reports, Price Waterhouse completed its initial
review of the formally hidden Naqvi files. In that review, Price
Waterhouse found evidence of phony loans and hidden deposits
amounting to hundreds of millions of dollars, nominee
arrangements, hold harmless agreements relieving borrowers of any
obligation to repay loans, and other, similarly criminal
practices at the bank. Again, to Price Waterhouse's shock, Abu
Dhabi had known of these practices since at least April, 1990,
and never disclosed them to the auditors.(41)
The implications of these findings for BCCI's future were
devastating. If there were in fact deposits that had been made to
BCCI amounting to hundreds of millions that had never been
recorded at the bank, how was anyone to ever determine what
claims by BCCI depositors might be real, and what claims might be
phony? Price Waterhouse decided that it dare not put this
information in writing, and would confine itself to reporting it
orally to the Bank of England, which it did in January 1991. In
response, Abu Dhabi again agreed to make good any losses in
connection with these unrecorded deposits.
In the months that followed, Price Waterhouse began tracing
the circuitous routing of funds between BCCI and its Grand
Caymans affiliate, ICIC, and found additional fraudulent activity
amounting to as much as $1 billion through this mechanism alone.
In March, the Bank of England commissioned it formally to
investigate BCCI under Section 41 of the UK's Banking Act.
Finally, on June 22, 1991, Price Waterhouse delivered a draft
report to the Bank of England, known under British law as a
Section 41 report, demonstrating that "fraud on a significant
scale had been committed and that it had involved a significant
number of people both inside and outside the bank."(42) Nine days
later, at the direction of the Bank of England, BCCI's offices
around the world were closed down and BCCI ceased to exist.
Given the limited extent of BCCI's official activities in
the United States, which were limited to state-licensed local
branches and representative offices, and not licensed to accept
deposits in the United States, the audit activities of BCCI's
United States outside auditors, Price Waterhouse (US), were
extremely narrow in scope. As noted above, Price Waterhouse (US)
responded to a subpoena by the Committee by providing all
requested documents and full cooperation regarding any materials
it possessed regarding BCCI in the United States.
These documents demonstrate that over the course of that
audit relationship, Price Waterhouse (US) did find that BCCI's
U.S. offices maintained inadequate documentation on many of their
loans, and engaged in other sloppy banking practices. But the
documents provided by Price Waterhouse (US) to the Subcommittee
also confirmed that Price Waterhouse (US) handled its auditing of
BCCI's U.S. activities professionally and diligently, albeit
within the narrow confines of its commission from its UK
Such a finding might be odd, given BCCI's extensive
involvement in this period in laundering funds from Latin America
and the Caribbean. But until the spring of 1989, the Price
Waterhouse (US) audits were designed to look only at lending
practices and overall bookkeeping issues, rather than the issue
of whether BCCI might be laundering funds from abroad. Moreover,
given Price Waterhouse (US)'s ignorance of BCCI's true
relationships with First American, the Independence Bank, and
other entities, there would have been any number of improper
activities by BCCI in the United States in the aggregate that
would fall outside the ordinary purview of auditors.
In early 1989, after BCCI had been indicted on money
laundering charges in Tampa, Price Waterhouse (US) was selected
by BCCI to create a compliance program under which BCCI would
submit to extremely rigorous standards for the handling of
transactions from abroad which were designed to trace and stop
money laundering. The compliance program was put into place under
a June 1989 Memoranda of Understanding with the Federal Reserve,
which permitted BCCI to stay open in the United States only if it
developed policies to insure its compliance with Bank Security
Act and anti-money laundering regulations.
The Price Waterhouse compliance program, designed to be
state-of-the-art, for the first time established a comprehensive
anti-money laundering regime at BCCI, and forced BCCI's U.S.
offices to become ever more careful in handling funds from
foreigners. Its implementation was effective, and its results
positive in terms of compliance with U.S. law for BCCI's U.S.
branches, but very negative in terms of BCCI's U.S. cash-flow. As
Price Waterhouse (UK) noted in November, 1989:
We understand there has been a noticeable drop in the funds
transferred from other BCCI locations to the US agencies
because of this onerous requirement to obtain the necessary
details from their customers. Most of their US dollar
transactions formerly with the US agencies are being routed
to third party banks. Management are investigating this
matter to satisfy themselves that there is nothing untoward
in such transactions.(43)
By insisting the BCCI's offices in the US document where
their funds were coming from, Price Waterhouse had ended the
ability of the U.S. offices to engage in profitable activity.
BCCI's business dried up, demonstrating the degree to which the
US operations had been functioning largely to launder dirty money
from other countries in the first place.
However, there were substantial limitations the
effectiveness of the compliance effort undertaken by Price
Waterhouse, which were built into its design by BCCI. Originally,
Price Waterhouse (US) had proposed to BCCI the establishment of a
very broad global review of the bank's procedures to insure that
the bank was able to stop laundering money world-wide, and turn
BCCI into bank that rigorously honored the laws of every country
in which it did business. On February 1, 1989, Price Waterhouse
(US) wrote Robert Altman to propose to:
Work with BCCI officials on an immediate to medium term plan
to regularize the bank's regulatory and supervisory status
on a global consolidated basis. This would necessitate
visiting key supervisors around the world and learn of their
concerns and expectations and provide the framework to
enable BCCI to meet these expectations.(44)
The naive approach by Price Waterhouse (US) was of course,
incompatible with BCCI's survival. BCCI could tolerate such a
program in any case. But by 1989, the UK auditors already knew of
dozens of problems that BCCI was supposed to have cleaned up and
had failed to rectify. That failure was because the practices
were ones which BCCI relied upon for its continued survival. If
BCCI had agreed to permit Price Waterhouse (US) to undertake this
court, Price Waterhouse (US) would have swiftly learned of these
practices, and possibly have been forced to tell U.S. regulators
about them. But there was an even more direct problem. The
information already contained in Price Waterhouse (UK)'s audits,
that there had been massive lending by BCCI on CCAH shares and
securing those shares, contained the great secret that BCCI
effectively owned controlled First in violation of U.S. laws.
Such a confrontation with reality was obviously not in BCCI's
interests, or in the interest of Altman himself. The terms of
engagement were swiftly narrowed to include only an anti-money
laundering compliance program focused on the particular BCCI
entities that had been implicated in the C-Chase sting in Tampa.
The narrower engagement was signed by Price Waterhouse and sent
to Altman, as BCCI's attorney, on March 9, 1989.(45) For this
engagement, together with its regular audits of BCCI branches,
Price Waterhouse (US) received approximately $4.5 million per
Thus, before hiring the Price Waterhouse (US), BCCI and
Altman narrowed the framework for their efforts, with the result
that they were sufficiently narrow to preclude Price Waterhouse
(US) from learning of problems at BCCI in the United States
already known to Price Waterhouse (UK), but apparently never
communicated to their US affiliated partnership.
One especially troubling aspect of BCCI's relationship to
its accountants was its practice of providing them with loans.
While the Subcommittee has not been able to determine the
complete extent of this practice, the Subcommittee has received
documentation of at least two such instances -- the first
involving a 1987 loan of BDS $587,000 to Price Waterhouse's
partners in Barbados, the second involving a loan of $17,000 to
Price Waterhouse's partners in Panama in 1984, increased to
$50,000 a year later.(47)
Even within BCCI, this practice was controversial. When
Price Waterhouse applied for the Panama loan, BCCI official A. M.
Akbar wrote Amjad Awan, then head of BCCI's Panama branch, to
express his concern about the propriety of lending money to one's
The firm is our auditors and we do not consider it proper to
sanction or enhance the limit of USDLR 50,000.00 to our own
auditor. However, we shall re-exam the matter on receipt of
your justification as well as your confirmation that local
laws does not prohibit loans & advances to the company's
In response, Awan advised Akbar that "there are no
restrictions about advances to company auditors [which] may be
allowed" and the lending was approved.
Separately, regulatory reviews of the books and records of
Capcom Financial Services Ltd., BCCI's commodities trading
affiliate, showed payments of $100,000 by Capcom to former Price
Waterhouse Grand Caymans partner Richard Fear in the three years
since he left Price Waterhouse in 1986. Fear had previously
handled audits of the books of BCCI in the Grand Caymans, the
location of many of the worst frauds at BCCI.
Both Capcom's head, Ziauddin Akbar, and former Price
Waterhouse partner Fear, had been held at fault in connection
with BCCI's massive trading losses in 1985, described above,
which were discovered in 1986. At the time, Akbar was the head of
BCCI's Treasury, and therefore held responsible for the losses,
and Fear was the principal person responsible for insuring the
propriety of BCCI Grand Cayman's books and records.
In late June, 1992, at the behest of the Serious Fraud
Office of the United Kingdom, Royal Cayman Islands police
conducted dawn raids of Price Waterhouse officers in the Grand
Caymans, as well as the home of Fear and a second Price
Waterhouse partner there, as well as the office of Price
Waterhouse's local Grand Caymans attorney, conducting searches
In late February, the Subcommittee requested copies of any reports or memoranda created by Price Waterhouse concerning Fear and BCCI, and related documents. Price Waterhouse refused to provide the documents requested, stating that in its view it was "inappropriate to produce the work product of its lawyers for examination by any governmental or private third-party," and that in any case, "Mr. Fear's participation [in PW's investigation] was predicated upon implicit understandings of confidentiality." However, despite the "implicit understandings of confidentiality" Price Waterhouse reached with Fear, Price Waterhouse did advise the Subcommittee that it had concluded Fear was innocent of wrongdoing in accepting funds from BCCI's affiliate, Capcom. According to Price Waterhouse (UK):
Richard Fear left the employment of PW-UK in July,
1986. . . PW-UK first became aware of the payments to Mr.
Fear mentioned in the Wall Street Journal article, in
Upon learning of the payments, PW-UK obtained Richard
Fear's agreement to cooperate in an inquiry by lawyers
acting for PW-UK. Counsel for PW-UK had discussions on the
subject with Richard Fear and ascertained from looking at
various records which he showed to them that the payments
were indeed made in two installments in July and August 1988
by Capcom Financial Services Limited ("Capcom"). The
payments, which totalled $100,000, were stated to be for
referral to Capcom of potential clients requiring brokerage
or investment services.
We understand that the United Kingdom Serious Fraud
Office ("SFO") has investigated the circumstances in which
the payments were made and has interviewed Mr. Fear. We
further understand that the SFO has concluded its
investigation with respect to Mr. Fear and the matter is not
Based on all the above, PW-UK concluded that these
payments by Capcom to Richard Fear, which were made two
years after he had ceased to be employed by PW-UK, were
unconnected with any work that he did on the audit of BCCI
or while at PW-UK.(49)
According to press accounts, Fear's alleged receipt of funds
from Capcom remains under investigation by the British Serious
In sworn testimony before the Subcommittee on July 30, 1992,
Akbar Bilgrami, formerly head of BCCI's Latin American and
Caribbean region and convicted in the Tampa money laundering
case, stated that he had been informed by other BCCI officials
that Price Waterhouse in the Grand Caymans had been "taken care
of." Bilgrami said he did not have details as to how the auditors
had been taken care of, other than that it was his understanding
that BCCI had provided one or more of them with the use of a
Robert Bench, a partner in Price Waterhouse (US), had
minimal involvement in any BCCI affair while at Price Waterhouse,
becoming responsible for some assistance to BCCI in early 1989 in
connection with the compliance program instituted by Price
Waterhouse for BCCI as part of BCCI's first consent decree with
the Federal Reserve following its indictment on money laundering
charges in October, 1988.
However, in his previous positions as a senior official of
the U.S. Comptroller of the Currency during the late 1970's to
the mid 1980's, Bench was exposed on two occasions to important
information regarding BCCI which, taken together, raise questions
as to Bench's handling of BCCI affairs as a partner at Price
First, in 1978, as Associate Deputy Comptroller for
International Banking, Bench was provided with information about
a variety of shoddy banking practices at BCCI, including BCCI's
use of nominees, by an OCC bank examiner working under him,
Joseph Vaez. The memorandum prepared by Vaez and provided to
Bench was a clear warning signal to OCC, as well as the Bank of
America, which still had an ownership interest in BCCI, that BCCI
was a danger to anyone involved with it. As the Vaez memorandum
noted, if the Bank of America did not sever its relationship with
BCCI, the OCC might well classify its entire investment in
Second, in 1985, Bench was provided a report by the CIA
concerning BCCI that detailed BCCI's plans for the United States.
This memorandum, described in detail in the chapter on BCCI's
ties to the intelligence community, contained striking
information, including the fact that BCCI secretly owned First
Bench testified that he had only a very limited memory of
the 1985 report:
I do recall reviewing a classified piece of information that
dealt with BCCI. . . it was somewhere in the middle of the
'82 to '87 period. I feel comfortable about that. . . I
recall receiving a document from the CIA that dealt with
BCCI. To the best of my recollection it didn't deal with
First American and it didn't deal with anything in the
United States. There is an action step that I took within
the office on that information . . . which was to look at
this information in terms of LCD [Lesser Developed Country]
In staff interviews prior to this testimony, Bench
emphasized that he had no memory whatsoever of having ever been
advised that BCCI held interests in any financial institution in
the United States, let alone First American.(53)
In fact, the memorandum provided Bench by the CIA focused
significantly on BCCI's plans in the United States, including its
ownership of a Washington, D.C., based, multistate bank holding
company that Bench would have surely known was First American.
Obviously, this was information that the Federal Reserve
should have had and did not have at the time that Bench was
participating in BCCI's compliance program in connection with its
consent decree with the Federal Reserve following its money-laundering indictment.
Bench testified that he had no memory of the 1978 memorandum
prepared by Joseph Vaez for him at OCC, and that his memory of
the 1985 memorandum was almost equally dim.(54) According to Bench,
based on his lack of memory of either memorandum, there was no
reason for him to have connected any of the information in them
to his ongoing work on BCCI compliance years later at Price
During that compliance work, Bench travelled to London twice
to meet with BCCI officials in London, including Abedi and Naqvi,
and provided technical assistance to BCCI in the United Kingdom
and the U.S. in anti-money laundering matters, "under the
direction of Robert Altman."(55) At the time, Altman was not only
BCCI's attorney, but the President of First American. Yet
according to Bench, it never occurred to him that there might be
a relationship between the two institutions that needed to be
understood to determine whether BCCI was truly complying with the
Federal Reserve's requirements.
According to Bench, the reason for this was that the focus
of the compliance effort solely focused on money laundering. As
Senator, to the best of my recollection, there was no
linkage whatsoever, in any of the work we did or any of the
discussions we had, with First American . . . I don't recall
any First American issues . . . it was very clear that in
this exercise Mr. Altman and Mr. Clifford were lawyer for
At the time Bench met with BCCI officials and Price
Waterhouse (UK) partners in London, both the BCCI officials and
the British accountants knew that BCCI has massive loans on First
American secured by First American's shares. Bench himself had
been told by the CIA that BCCI owned First American back in 1985.
Thus, Bench's personal obliviousness to this issue as a partner
of Price Waterhouse (US) raises obvious questions. If Bench had
remembered, recognized, or understood the information that was
available to him from his days at the OCC, or reviewed any of the
recent audit reports at Price Waterhouse (UK) to BCCI's
directors, Bench would have had the truth in front of him
concerning BCCI's secret ownership of First American. Price
Waterhouse (US) and BCCI would have been ethically required to
tell the Federal Reserve the truth. And the Federal Reserve would
have learned about BCCI's ownership of First American as of the
spring of 1989 -- almost two years earlier than the time it
actually learned of the relationship.
Instead, according to Bench's testimony, he never focused his attention on the BCCI-First American relationship in any respect, and so confined himself to advising BCCI on how to improve its practices to avoid being used to launder drug money. Bench's approach was narrow and incurious at best.
From the beginning, BCCI's fractured system of banking,
involving a multiplicity of entities spanning the globe, posed an
obvious challenge to auditors responsible for providing a base-line of protection to those relying on its annual certifications
of BCCI, which the auditors failed to meet.
The auditors' options in responding to this problem were
quite clear. First, they could respond by highlighting problems,
and working with BCCI to solve them, an approach applied through
the first 15 years of BCCI's existence. Second, when BCCI failed
to respond to their recommendations, the auditors could respond
by resigning, an option adopted by Ernst & Whinney in 1986. Price
Waterhouse, for reasons that are not clear, but which may relate
to the $5 million a year being generated by BCCI-related work,
remained with BCCI, and signed off on BCCI's books year after
year until early 1990. At that time, recognizing that the
financial hole inside the bank required emergency action, Price
Waterhouse sought to avoid the risk of being destroyed together
with BCCI by taking the information it had developed to the
British regulators, and seeking further guidance from them.
The auditors' role also created special problems for those
investigating BCCI. BCCI's consolidated audits were based on the
work product from auditors around the world. Yet those
investigating BCCI in the U.S. found that the local partnership
of the auditing firm involved possessed none of the information
it requires, and contended it had no power to obtain any of the
information it requires.
This problem raises squarely the question of whether remedial legislation is necessary to require international accounting firms to include as a condition of their relationship with foreign affiliated partnerships, that these foreign partnerships agree to provide information in response to valid subpoenas in the United States on cases affecting the United States.
Additional institutional issues arose regarding the
auditors' role in BCCI's failure in the UK. In the UK, the issue
is whether external auditors have responsibilities to depositors,
customers, and the general public independent of their duty to a
When an external auditor certifies the financial statement
of a business, it is simultaneously providing different services
to different audiences.
For the shareholders of the institution it is certifying, it
is providing what is supposed to be a clear, full, and fair
description of the actual performance of the business to assist
the shareholder in determining the value of his investment, the
performance of the company, and the strength of the company's
management, as well as assurances that the company has no
untoward risks from violations of law or regulatory compliance.
To anyone else, an annual certification represents what may
be the principal means by which an outsider can evaluate the
safety of entering into a transaction with a business. An annual
report tells a would-be depositor in a bank about the health of
the bank and its business, its level of capital, its past returns
on investment, its areas of difficulty. In reviewing such a
report's audit certification, an outsider is assuming the
reputation for expertise of the auditor, and focusing not on the
quality of the audit, but on the information the ostensible
neutral and complete audit is providing.
Thus, true and accurate financial statements, certified by
reputable accounting firms, are at the heart of the self-regulatory process of financial markets throughout the world. In
the United States, this seldom has significant implications
because first, depositors are insured by the federal government
and therefore need not worry about a bank's solvency, so long as
they maintain less than $100,000 per account; and second, the
United States conducts independent bank examinations by seasoned
examiners employed by bank regulators. Outside the United States,
however, bank deposits remain largely uninsured, and outside
auditors, rather than bank examiners, are relied upon to insure
that reliable financial information is provided to the markets.
Unfortunately, the accounting profession generally has
regarded its primary responsibilities as being to shareholders of
a company, rather than to potential customers, creditors, or
others who might have an interest in obtaining accurate
information concerning a company. In the case of a bank, this
approach is potentially quite dangerous for uninsured depositors,
as it leaves them in the position of having to rely on the work
of auditors whose principal duties are not to them, but to those
who have placed capital in the bank. This result is especially
unfortunate as depositors provide the preponderance of funds used
by banks -- typically 90 to 95 percent -- while working capital
tends to be limited to 10 percent of a bank's assets or less.
In the case of BCCI, the duty Price Waterhouse viewed itself
to owe was to BCCI's shareholders -- a small number of Middle
Eastern sheikhs most of whom were in fact not real shareholders
at all, but nominees, who were not even paying interest to BCCI
on its lending to them in their capacity as nominees. Thus, Price
Waterhouse in fact wound up owing a duty principally to the
people who were deceiving it.
Moreover, even apart from the nominee issue, because BCCI
was a bank, the vast preponderance of its funds came not from
capital contributions for stock, but from its one million or more
depositors, to whom it surely also had a duty. As Professor
Richard Dale of the University of Southampton has noted, this
problem was inherent in the system of regulation in the United
BCCI's 1989 accounts were not qualified, even though the
auditors were aware of serious problems the nature of which
had been reported to the bank's majority shareholders. In
explaining the decision not to qualify, the auditors have
argued that in general terms a bank's accounts cannot be
qualified without risking a collapse in confidence and a
potentially calamitous withdrawal of deposits. While this
approach may be consistent with an auditor's established
legal obligation to shareholders, it is not necessarily in
the interests of existing depositors, cannot be in the
interests of prospective depositors and is difficult to
justify on public policy grounds. . . For the banking system
as a whole the absence of credible financial information is
likely to mean an increased incidence of destablising bank
Thus, under the system as it stood in 1990 and 1991, Price
Waterhouse (UK) was in the unenviable position of having to try
to keep BCCI open, even as it uncovered ever more information
demonstrating that the only fit conclusion to BCCI's existence
was its swift termination. Only a few choices presented
themselves. Once again, Price Waterhouse could have resigned its
commission as BCCI's auditors, a choice available to it from the
beginning. Or it could do as it belatedly did, and make use of a
provision of British law that enabled it to advise the regulators
of its findings of improper banking practices in early 1990, and
seek the regulators' advice on how to proceed further. When it
chose the latter course, it obtained the comfort of knowing that
its every action was being reviewed contemporaneously by
regulators at the Bank of England who would share ultimate
responsibility for whatever happened.
The BCCI case raises the issue of whether the current
structure for accounting firms as independent partnerships, with
authority and liability limited to the nation in which they are
licensed, is appropriate and adequate to meet the challenges
posed by an international financial marketplace.
One of the great difficulties in uncovering BCCI's fraud for
regulators and investigators was the fact that its frauds were
carried out through diverse and widespread jurisdictions spanning
the globe, while its activities were audited by local accounting
Arguably, the current system by which one partnership of an
accounting firm sets out audit instructions to all of its global
affiliated partnerships in other countries, for them to carry out
its instructions, should be adequate to maintain the standards of
an audit that would be carried out within the borders of one
country. But in cases where something goes wrong, as in BCCI, the
structure leaves those injured in countries other than that in
which the accounting firm is licensed, in a difficult situation.
The firm responsible for the consolidated audit may be located in
a jurisdiction with strong financial confidentiality and privacy
laws that preclude disclosure of essential information. It may,
as Price Waterhouse (UK) did, contend that it does not do
business in a jurisdiction in which people have been injured by
its handling of audits, and may even refuse, as Price Waterhouse
(UK) did, to honor subpoenas issued to it. Such a result is
against public policy, and new structures for international
accounting firms need to be considered to avoid a recurrence.
One efficient approach that could be adopted unilaterally by
the United States, would be to require accounting partnerships,
as a condition of being licensed in the United States, or as a
condition of being permitted to have their certifications relied
upon by any government agency, to reach agreements with its
foreign affiliated entities insuring that they will respond to
authorized subpoenas in the United States, and provide
information as required by U.S. law.
A second approach would rely on the major accounting firms
to modify their partnership agreements without being explicitly
required by government to do so, as a matter of self-regulation,
to insure the availability of documents from their affiliates in
accord with the domestic law of the countries in which they are
licensed. Thus, a firm such as Price Waterhouse (US) would seek
to amend the Memorandum of Association and Bye-Laws of Price
Waterhouse World Firm Limited (PWWF) to reach a new binding
understanding among it and its affiliates. Under that new binding
understanding, if Price Waterhouse (US) received a legal subpoena
in the United States concerning documents possessed by any of its
affiliates, the affiliates would have to provide that information
to U.S. authorities, subject to the requirements of the laws of
their jurisdictions. While such a change would not solve all
problems in countries which retain strict financial secrecy laws,
it would provide a mechanism by which lawful U.S. subpoenas could
be cooperatively enforced in many cases.
A third approach would be legislation prohibiting the use or reliance by any federal agency on an audit prepared by any accounting firm not licensed in the United States. This approach would dramatically reduce the risk to the United States from certifications by foreign accounting firms who do not view themselves to be subject to U.S. subpoenas, such as Price Waterhouse (UK). On the other hand, it could well impose some substantial additional costs on firms, especially foreign firms, whose consolidated audits are prepared by non-U.S. auditors, and further hearings and comments on the proposal would be appropriate.
1. Affidavit of John Bartlett, Bank of England, July 5, 1991.
2. S. Hrg. 102-350 Pt. 1 p. 498 and 500.
3. S. Hrg. 102-350 Pt. 1 p. 516.
4. Commentary, Massihur Rahman, Price Waterhouse Section 41 Report to the Bank of England, June, 1991.
5. Memorandum submitted by Price Waterhouse in response to questions from the British Treasury and Civil Service Committee of the House of Commons; provided to the Subcommittee by counsel to Price Waterhouse (UK), February 5, 1992, Answer 1.
6. Section 41 Report, Price Waterhouse, Bank of England, June 1991.
7. Letter, Gilbert Simonetti, Jr., Price Waterhouse, to Jonathan Winer, Subcommittee staff, October 17, 1991.
8. For the record, Price Waterhouse (UK) did offer to provide the Subcommittee with the opportunity to interview Price Waterhouse (UK) partners in London without the provision of the subpoenaed documents, an offer precluded by Subcommittee rules regarding staff travel, and which, in the absence of the provision of the subpoenaed documents would have been of marginal utility in any case.
9. S. Hrg. 102-350 Pt. 1 p. 496.
10. Price Waterhouse Grand Caymans papers dated December 31, 1983.
11. "Commentary on the Independent Examination of the Accounts of Bank of Credit and Commerce International (Overseas) Ltd. for the year ended 31 December 1984," Price Waterhouse Grand Caymans.
12. "Internal Control Report," 28 April 1986, Bank of Credit and Commerce International (Overseas) Ltd., S. Hrg. 102-350 Pt. 4. pp. 152-155.
13. Price Waterhouse report to BCCI, id, S. Hrg. 102-350 Pt. 4 pp. 152-155.
14. S. Hrg. 102-350 Pt. 1 p. 500.
15. Staff interviews, Akbar Bilgrami and Amjad Awan, July 20-30, 1992.
16. Memorandum submitted by Ernst & Young in reply to Questions from the Treasury and Civil Service Committee, February 21, 1992, p. 102.
17. Memorandum submitted by Ernst & Young in reply to Questions of House of Commons Committee on Treasury and Civil Service, February 21, 1991, p. 101, Fourth Report, Banking Supervision and BCCI.
19. Memorandum submitted by Ernst & Young in reply to Questions from the Treasury and Civil Service Committee of the House of Commons, February 21, 1992.
20. Price Waterhouse Audit Report, "Our Large Exposures," December, 1987, BCCI, Subcommittee document.
22. Id, re "AR Khalil."
24. S. Hrg. 102-350 Pt 1 p. 264.
25. S. Hrg. 102-350 Pt. 1 p. 307.
26. S. Hrg. 102-350 Pt. 1 pp. 314-316.
27. S. Hrg. 102-350 Pt. 1 pp. 317-324, 332-343.
28. S. Hrg. 102-350 Pt. 1 p. 352.
29. S. Hrg. 102-350 Pt. 1 p. 353.
30. S. Hrg. 102-350 Pt. 1 pp. 356-358.
31. S. Hrg. 102-350 Pt. 1 p. 360.
32. Memorandum submitted by Price Waterhouse in reply to Questions from the Committee on Treasury and Civil Service, February 5, 1992.
33. S. Hrg. 102-350 Pt. 1 p. 518.
34. S. Hrg. 102-350 Pt. 1 pp. 518-520.
35. S. Hrg. 102-350 Pt. 1 pp. 450-458.
36. Staff interviews, Nazir Chinoy, Abdur Sakhia, Akbar Bilgrami.
37. S. Hrg. 102-350 Pt. 1 p. 481.
38. Memorandum submitted by Price Waterhouse in reply to Questions from the House of Commons Committee on Treasury and Civil Service, February 5, 1992.
39. BCCI Annual Report For the Year 1989, dated April 1990.
40. Memorandum submitted by Price Waterhouse in reply to Questions from the House of Commons Committee on Treasury and Civil Service, February 5, 1991.
41. Memorandum submitted by Price Waterhouse in reply to Questions from the House of Commons Committee on Treasury and Civil Service, February 5, 1991.
42. Id. Price Waterhouse's findings of the Section 41 report are reviewed in some detail in the chapter concerning BCCI's criminality.
43. S. Hrg. 102-350 Pt. 1 p. 279.
44. S. Hrg. 102-350 Pt. 4 p. 50.
45. S. Hrg. 102-350 Pt. 4 p. 53.
46. S. Hrg. 102-350 Pt. 4 p. 92.
47. BCCI Loan documents obtained by Subcommittee; some reprinted in S. Hrg. 102-350 Pt. 2 pp. 624-629.
48. BCCI Documents, Federal Reserve, Miami, obtained pursuant to Committee subpoena.
49. Letter, James E. Tolan to Jonathan Winer, March 4, 1992.
50. Bilgrami testimony, S. Hrg. 102-350 Pt. 6, July 30, 1992, and staff interviews, July 20-29, 1992.
51. S. Hrg. 102-350 Pt. 4 pp. 15-23.
52. Testimony Bench, S. Hrg. 102-350 Pt. 4 pp. 36-37.
53. Staff interview, Bench, February 14, 1992.
54. S. Hrg. 102-350 Pt. 4 pp. 36, 85.
55. S. Hrg. 102- 350 Pt. 4 p. 86.
56. S. Hrg. 102-350 Pt. 4 p. 89-91.
57. Professor Richard Dale, Minutes of Evidence Taken Before the
Treasury and Civil Service Committee, id, January 15, 1992, p. 4.