Bingham Report on BCCI: 'A devastating surprise'

Key findings of the Bingham report include:

The Tampa case

The report discussed whether the Bank of England could have revoked BCCI's banking licence after a money laundering trial in Tampa, Florida, in 1990, in which BCCI pleaded guilty in return for cocaine trafficking charges being dropped.

The first criticism is of the Bank's legal approach, and it is a general criticism applicable at various points in this history.

On this occasion the Bank received internal legal advice which was in my view erroneous, but more generally I think it has considerably exaggerated the conditions to be met before it can act.

Roger Barnes

Between January and April 1990, Price Waterhouse met with Roger Barnes, head of the Bank of England's Banking Supervision Department, to alert the Bank to its concerns which arose while working on their audit of the 1989 accounts.

I find it surprising that this meeting made so little impression on Barnes. A reputable auditor does not voice doubts about the probity of his client to a regulator unless he has something fairly substantial to go on . . . Barnes' impassivity on receiving this message seems to me to show a rooted unwillingness to believe ill of BCCI.

On a March meeting with PW on the same subject:

(Barnes) gave the Board (of Banking Supervision) no hint of PW's communication. He judged it inappropriate to tell the Board of what were no more than suspicions. While respecting his motives, I consider this a misjudgement.

This was, after all, PW's second visit, and no one but he knew of the first. Even unsubstantiated suspicions from such a source are of significance.

The final phase A more vexed question is whether, on the material before it and the facts as they were understood to be, the course which the Bank followed in seeking the closure of BCCI was an appropriate one. There was no course open to the Bank which offered a quick and complete solution to all outstanding problems without loss, or the risk of loss. All the courses open were to a greater or lesser extent unattractive as liable to cause loss.

But the Bank had a statutory duty to protect the interests of UK depositors. Its judgement that those interests were best served, as matters stood, by closure was strongly supported by the Bank's Board of Banking Supervision. And while a judgement based on that ground alone might be open to criticism, (the Banking Act 1987 apart) as unacceptably chauvinistic, it was a judgement which commanded very wide assent among other supervisory authorities. It cannot be plausibly argued, in my opinion, that the course which the Bank took, was not an appropriate one, even though it was not the only possible course.

That, however, leaves unanswered an important question, whether PW's draft section 41 report should have come to the Bank as the devastating surprise it did.

In my opinion it certainly should not. It would not have done so if the Bank had been more alert in receiving and understanding the messages it was given, if those messages (received and understood) had been more consistently brought to the attention of the most senior echelons in the Bank and the Board of Banking Supervision and if the Bank had more actively pursued the leads it was given.

The draft report would not have come to the Bank as such a surprise either if PW, as the various elements of the fraud became apparent, had more plainly and directly, more consistently, more comprehensively and, if they felt their messages were not being received, more vigorously, brought them to the notice of the Bank. Nor would the surprise have been as great if the majority shareholders had made full disclosure to PW and the Bank of all the facts known to them when they became aware of them.

This history was, in its later stages, a tragedy of errors, misunderstandings and failures of communication . . . but the Bank was not party to the proceedings of the investigating committee and did not share the comprehensive view of the fraud which the majority shareholders and PW had acquired.

PW thought the Bank was broadly in the picture. The majority shareholders may well have thought as much. But the Bank had not been given all the pieces of the jigsaw. It had also failed to recognise some of the pieces it had been given.

. . . If, as I accept, closure of the bank was an appropriate course to follow, there yet remains the question whether the Bank was right to follow it without previous notice to the majority shareholders.

. . . There is no doubt that the decision to act without notice to the majority shareholders aroused deep anger and resentment.

. . . They read the decision as a direct reflection on their good faith, in their view the more unjustifiable since they had (with no obligation to do so) rescued the bank in April 1990 and thereafter continued to support it, most recently by making liquid funds available in May 1991.

. . . But I do not think the Bank's decision to give no effective advance notice to the majority shareholders can be criticised as wrong. There was, once again, a choice between unattractive courses, each with an imponderable potential for harm.

But the Bank's overriding duty was to the depositors of BCCI . . . the Bank could not properly allow diplomatic or personal considerations to override what it felt its duty to the depositors required.

. . . Public attention has naturally focused most closely on the last 15 months of BCCI's active existence, which was indeed a period of crucial significance. But the problems which then came to light, in large measure through the work of PW and the investigating team, had their roots deep in the past. Prime responsibility of course rests with those who devised, directed and implemented the frauds which were practised.

. . . The Bank did not pursue the truth about BCCI with the rigour which BCCI's market reputation justified. In the later stages the Bank came to rely to an excessive extent, in my opinion, on the auditors: under the British system of supervision the auditors have a crucial role to play but the duty to supervise is placed on the Bank and it is a duty which cannot be delegated.

It is the Bank, not the auditor, which is the supervisor. In these respects the Bank's supervisory approach to BCCI was in my opinion deficient.

How different the course of events would have been had these deficiencies not existed, one can only speculate.