PRESS NOTICE

BCCI – PRICE WATERHOUSE

 

·                    Former UK firm Price Waterhouse (now part of PwC), the coordinating firm for the audits of BCCI, admits Complaints relating to the last three completed BCCI audits.

·                    Tribunal imposes fine and costs totalling £975,000.

 

Attached hereto is a Background Note containing further information; in order to access the Report of the Joint Disciplinary Tribunal, please click onto “Tribunal Report”.

 

 

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BACKGROUND NOTE

BCCI

Introduction

The attached Report by an Accountants’ Joint Disciplinary Tribunal is published on 20 April 2006.  The Report considers a “Carecraft” agreement entered into between the parties, emphasises that the duty to make an appropriate order is that of the Tribunal alone, and in the circumstances accepts the recommended penalties and imposes them.  The Complaints and a Summary of Facts are appended to the Report.

 

Price Waterhouse (now part of PwC) became auditor of the whole BCCI Group in June 1987.  The Cayman Office of the Price Waterhouse North Caribbean firm had audited BCCI (Overseas) since 1975.

 

There follow some questions and answers which you may find of assistance.

 

In a nutshell, what happened at BCCI?

 

BCCI was founded in the early 1970s, and backed with Middle Eastern money.  Legally headquartered in Luxembourg, it had two principal subsidiaries: BCCI SA was a Luxembourg-based bank with branches in the UK and many other Western countries; and BCCI Overseas was based in the Cayman Islands and owned subsidiaries in many Third World countries.  The legal structure did not represent the reality: for most of its existence BCCI was run from London. 

 

Importantly, another entity, the ICIC Group was also based in the Cayman Islands.  In fact the ICIC Group was closely related to BCCI, which controlled it. 

 

Three matters led to BCCI’s collapse. 

 

First, BCCI effectively owned itself, partly through shareholders who had been “lent” money to buy shares, which they then held as nominees; and partly through shares owned by the ICIC Group, which BCCI controlled.  For much of the time there was therefore no outside shareholder involvement.  In such circumstances the audit of the annual accounts was of particular importance.

 

Secondly between 1983 and early 1986, through a mixture of incompetence and fraud, BCCI lost hundreds of millions of dollars in the London commodity options markets.

                  

Finally, BCCI lent enormous sums of money to borrowers who were either unable or unwilling to repay it.  The largest such borrower was Abbas Gokal’s Gulf Group; it became apparent to BCCI in the late 1970s that if the Gulf Group defaulted on its loans, it would bring BCCI down with it.  An elaborate fraud was therefore devised whereby BCCI laundered money through apparently unconnected off-shore companies, from where the money found its way to borrowers such as the Gulf Group.  This money was then used to pay interest on the borrowers’ loans and make it appear that these were performing.  The fraud depended on getting in ever more new funds, and these were encouraged by offering very high rates of interest (eg the deposits made by the Western Isles Council).  Substantial funds belonging to the Ruler of Abu Dhabi, which had been deposited with the ICIC Group for investment and management, were also stolen to this end.

 

As losses escalated beyond the ability to cover them up, the Government of Abu Dhabi, which became, in 1990, the majority shareholder in BCCI and was already supporting it, considered a rescue plan.  In the event, and with criminal prosecution in the United States looming, regulators including the Bank of England decided to put BCCI into liquidation to preserve what was left for creditors.

 

What was the rôle of Price Waterhouse?

As auditor, Price Waterhouse was required, each year, to state whether the BCCI accounts showed a true and fair view.  This required the audit team to investigate, inter alia, the relationship between BCCI and the ICIC Group.  Price Waterhouse failed to ensure the disclosure of the relationship between the two in each of the three years 1987, 1988 and 1989.

 

Price Waterhouse was also required to satisfy itself about the amounts of lending to large borrowers, including the Gulf Group, and the adequacy of the loan loss provisions made.  Price Waterhouse failed to do this properly in 1987 and 1988.  In 1989, when the Government of Abu Dhabi had advised the directors of BCCI of its intention to maintain BCCI’s capital base (which should have provided for losses on the loans), Price Waterhouse failed to obtain sufficient written evidence of Abu Dhabi’s intention.

 

In performing the audits of the 1987, 1988 and 1989 accounts, Price Waterhouse fell below the standard reasonably to be expected of a Member Firm in good standing in the normal conduct of its profession.

 

These matters took place in the 1980s – why has the case taken so long?

When the case was first referred to the JDS under a previous Scheme, Price Waterhouse was the defendant in a very large civil action for negligence brought by the Liquidators of BCCI.  It was also assisting the SFO with its criminal investigation.  The firm applied to the High Court to stay the JDS investigation, and on 21 December 1993, a stay was ordered by the Court of Appeal.  The civil action was settled at the end of 1998, and in 1999, the stay was lifted.  It was agreed between Price Waterhouse and the JDS that the Executive Counsel would take over the investigation under the current Scheme.  Even then, Price Waterhouse could not provide all relevant documentation, firstly because of commercial secrecy restrictions backed by the criminal law in the Cayman Islands; and secondly, when that first hurdle had been overcome, because of secrecy restrictions backed by criminal sanctions imposed by the Banking Act 1987.  When in 2002 this second hurdle was eventually overcome, a JDS team moved very quickly to assimilate a mass of documentation, conduct interviews with those involved, and assemble the evidence on which the Complaints and Summary of Facts are based.   

 

Has anybody been punished for the fraud?

Six individuals (former BCCI executives and customers) were prosecuted and convicted in the UK by the Serious Fraud Office.  One, Abbas Gokal, received the longest sentence (14 years, later increased to 17 years) ever imposed for fraud.  BCCI’s founder and Chairman, Agha Hasan Abedi, died in Pakistan in 1995; all requests for his extradition were refused.  BCCI’s former Chief Executive, Swaleh Naqvi, was prosecuted in both Abu Dhabi and the United States, where he received a lengthy sentence.  Further prosecutions took place in those two countries, and in other countries world-wide. 

 

What penalties have been imposed on Price Waterhouse?

Price Waterhouse has been fined £150,000 and ordered to pay costs of £825,000.

 

Why is the fine of this amount?

Under the Scheme as it operated in the 1980s, there was no power to fine a firm (as opposed to an individual) for the work done on the 1987 and 1988 audits.  The power to fine firms was introduced in time to cover Price Waterhouse’s work on the 1989 audit; the amount of the fine reflects a lesser degree of culpability than in the previous two years.

 

What has happened to BCCI and to those who lost money?

The bank has been closed down, leaving admitted creditors’ claims of about $8.4 billion.  The liquidators have been gathering in funds for creditors.  Much of this has come from some very successful litigation against those who damaged BCCI.  The liquidators have now distributed to creditors 81 cents on each dollar lost.  Depositors in the UK recovered 75% of their deposits up to £20,000 from the Depositors’ Protection Scheme.

 

The Report refers to “Carecraft procedure” - what is this?

This is a procedure which was first developed in company directors disqualification cases (“Carecraft Construction Co Limited” was the name of the case in which the principles were first laid down).  What happens is that the Executive Counsel and the Member Firm agree Complaints which the Member Firm will admit, together with, normally, a Summary of Facts.   The penalties and costs are recommended to the Tribunal by the parties – but it is entirely a matter for the Tribunal whether or not to accept those recommendations.

 

In this, as in any case where the “Carecraft procedure” is adopted, the considerable costs of a contested hearing were avoided.

 

What is the JDS?

The rôle of the JDS is to promote the highest possible standards of professional and business conduct, efficiency and competence by chartered accountants.

 

The JDS conducts independent investigations into the work and conduct of chartered accountants where this has given rise to public concern.  The sponsors of the Scheme are the Institute of Chartered Accountants in England and Wales (“ICAEW”) and the Institute of Chartered Accountants of Scotland.

 

Cases are investigated by the Executive Counsel, Christopher Dickson, a barrister employed by the Scheme.  Where he finds that work or conduct appears to have fallen below acceptable standards, he lays Complaints before a Tribunal headed by a QC or a retired judge.  It is for the Tribunal to decide, on the basis of the evidence presented, whether the Complaints have been substantiated; and if so, what penalty should be imposed.  Appointments to Tribunals are made by the Executive Committee, the governing body of the JDS, acting independently of the Executive Counsel.

 

Who were the Members of the Tribunal?

Mr Adrian Brunner QC, the Chairman, is a Member of the Bar of England and Wales in independent practice.  Mr Ian McNeil MBE FCA is a former President of the ICAEW, a former Deputy Chairman of the Financial Reporting Council, a former member of the Takeover Panel and a former partner in Moores Rowland.  Mr F E (Jock) Worsley OBE FCA is also a former President of the ICAEW; he is Chairman of Lloyd’s Members Agency Services Ltd and a director of Brewin Dolphin Holdings Plc.