IN OUR continuing examination of the context within which the CLICO debacle occurred and the previous failure of other financial institutions, which hammered investors, the crux of the problem has been lax regulatory oversight.
As it was with CL Financial, in Trinidad and Tobago, and Trade Confirmers Limited, so was it with the controversial Bank of Credit and Commerce (BCCI), the international bank founded in 1972 by Pakistani financier Agha Hasan Abedi, which opened a branch here on November 11, 1983.
According to Wikipedia, a free online encyclopedia, BCCI was transformed by the head of Saudi intelligence into the “biggest clandestine money network in history”.
Registered in Luxembourg, at its peak, it operated in 78 countries, including Barbados and Jamaica, and had assets in excess of US$20 billion, making it the seventh largest private bank in the world by assets.
BCCI’s rapid growth, the encyclopedia said, alarmed the financial community, as well as regulators.
“When a bank grows rapidly, it is lending more and more money each year,” it pointed out. “BCCI contended that its growth was fuelled by the increasingly large number of deposits by oil-rich states that owned stock in the bank, as well as by sovereign developing nations. However, this claim failed to mollify the regulators. For example, the Bank of England ordered BCCI to cap its branch network in Britain at 45 branches.
“There was particular concern over BCCI’s loan portfolio because of its roots in areas where modern banking was still an alien concept. In many Third World countries, a person’s financial standing didn’t matter as much as his relationship with his banker.”
BCCI collapsed in 1991 leaving creditors and depositors in the lurch being owed about £10 billion.
In March 1993, the Mutual Bank of the Caribbean Inc. was set up, in a Central Bank-managed sale of the domestic operations of BCCI, with a loan portfolio comprised of the loans taken over from that bank which had been closed on the recommendations of the Bank of England.
Under an arrangement with the Central Bank and the National Insurance Scheme, interest was imputed on impaired assets in the BCCI portfolio, and paid on deposits maintained by these statutory bodies in the form of deferred interest, which was accumulated.
According to a 2005 IMF working paper – to which current Governor of the Central Bank, but then an IMF employee, Dr DeLisle Worrell contributed, “this meant that the bank was not required to establish a provision against the impaired loans taken over.
“By September 2003, the bank had collected or written off all outstanding monies due on this portfolio, as a result of active follow-up and legal proceedings. The main source of funds used to write off loans came from interest on deposits, realisation of security, and dividends paid by BCCI liquidator in Grand Cayman on deposits held there.
“At inception in 1993, the portfolio was valued in excess of $20 million but by September 2003 had been fully liquidated. In November 2003, the bank was sold to the Bank of Butterfield of Bermuda”.
The IMF paper concluded that the commercial banking system here was “well capitalised, profitable, and liquid, with a modest proportion of impaired assets, and banking services are accessible to a wide range of businesses and households”.
“Although there are only six banks, the risk of interbank contagion is mitigated by the fact that they are all foreign owned, three of them by large banks with headquarters in Canada and the United Kingdom.
“The financial sector forecast, derived from the Central Bank of Barbados’ medium-term economic forecast, indicates that it is probable that bank performance will continue to be favourable with adequate capitalisation, continuing profitability, and relatively high liquidity, although not much progress is forecast in reducing [non-performing loans].
“The banking system is resilient to feasible macroeconomic shocks of a size and type similar to those experienced in the past.”
The paper said the principal source of vulnerability may well be in the external economy, in the headquarters countries of the banks with major operations in Barbados, or other countries where these banks have major exposures.
“The collapse of BCCI,” it noted, “the consequences of which were managed so as to avoid losses to Barbadian depositors, is an illustration of this risk. Furthermore, the vulnerability analysis should be extended to cover insurance companies and superannuation funds, which may be large enough to have systemically important implications, and to analyse the financial condition of firms and households, which may affect their ability to service and sustain their obligations to banks.”
While, as stated previously, no one was prosecuted in the Trade Confirmers or BCCI crashes, Barbados’ Director of Public Prosecutions Charles Leacock seemed pleased that the presence of designated compliance officers in banks had become a standard operational procedure.
“The collapse of the Bank of Credit & Commerce International (BCCI) has led to innovative responses,” he wrote in a paper on Internationalisation Of Crime, reported in the NYU Journal Of International Law And Politics.
“In Barbados, the portfolio of this fraudulent institution has been acquired and a new banking operation has been commenced . . . .
“As a result of governmental action in postponing its demands, deposit holders have been protected and renewed confidence has been generated in the banking sector,” Leacock said.
“This positive response by Barbados to an international criminal syndicate is worthy of emulation. Increased vigilance and professionalism by auditors and fiduciaries in ensuring the observance of standard best practices in financial statements are encouraged.
“The prolific litigation resulting from BCCI’s collapse resonates well with accounting practitioners who prepare financial statements.
Clear standards of objectivity and independence are reinforced by the potential for misstatement liability based on negligence and the subsequent loss of reputation.
“The constant need to ensure due diligence, the audit trail, and authorisation for transactions has been brought to the forefront by the globalisation of crime,” Leacock said.
He noted that an area of vulnerability in small societies was the non-banking sector.
“The past decade has witnessed the development of cambios, money transfers, credit unions. Insurance companies, and a myriad of non-bank deposit taking institutions. Some offer attractive interest rates to unsuspecting customers.
“The collapse of Trade Confirmers Ltd in Barbados and the ensuing commission of enquiry did not result in the return of deposits to clients.
“The fact that interest rates were in excess of the statutory maximum led to illegality and non-repayment of the interest by borrowers.
“The increased supervision and regulation of the banking sector could result in the diversion of funds to this informal, under-regulated sector.
“Criminals are quick to exploit weaknesses in every system,” Leacock cautioned.
