by antiaristo » Sun May 22, 2005 1:33 pm
BCCI returns to haunt Bank of England <br><br>A court case looking at events in the 1980s could set a precedent for suing regulators <br><br>Simon Bowers<br>Saturday January 3, 2004<br>The Guardian <br><br>It was on the eve of the first creditors' meeting following the dramatic collapse of the Bank of Credit and Commerce International, with hundreds of furious and confused depositors expected to fill Wembley Arena baying for compensation, that the liquidators announced they had served writs against just about everyone connected with BCCI - including the Bank of England. <br>No one has successfully sued the Bank, which as the former regulator enjoys immunity against all claims save those alleging dishonesty. The liquidators were claiming the Bank of England had not only made a series of breath-taking errors and omissions in its supervision of BCCI, it had done so knowing full well that depositors' life savings might be in peril. <br><br>BCCI was finally shut down in 1991, amid a welter of fraud and corruption charges, with outstanding debts of $10bn. <br><br>To some, demands for £850m (in today's money) in compensation from the Bank may have looked like panicky sabre-rattling on the part of liquidators at Touche Ross, now Deloitte Touche Tohmatsu. Eleven years on, the claim is nevertheless being doggedly pursued, with the scene set for a marathon legal battle that is expected to occupy the same courtroom as the Hutton inquiry for about a year. <br><br>In two weeks' time, Gordon Pollock QC, counsel for the liquidators, will take to his feet in the high court and open the first of the 125 lever-arch files containing the hearing's core documents. His initial address is expected to take up to three months, during which time he will level countless accusations of malicious recklessness against 22 of those Bank officials who oversaw the supervision of BCCI. <br><br>Among the witnesses the Bank is expected to call in its defence will be former governors Sir Eddie George, Lord Kingsdown (formerly Robin Leigh-Pemberton) and Lord (Gordon) Richardson. <br><br>Other prominent names to take the stand include Brian Quinn, chairman of Celtic football club, and Peter Cooke, who headed the Bank's supervision department for much of the 1980s. Several other central players have died in the time it has taken for the case to be heard. <br><br>The central allegation facing the Bank is that it deliberately perpetuated the charade of BCCI as an overseas bank, allowing it to operate outside Bank of England full regulatory control throughout the 1980s. <br><br>The claim is among a series of allegations that go far beyond conclusions drawn by Lord Bingham's 1992 official report into BCCI's demise. <br><br>Lord Bingham, now Britain's most senior law lord, concluded that over-worked Bank of England regulators had made an innocent mistake when they designated BCCI a Luxembourg bank in 1980. <br><br>They had done so despite the fact that it was no secret that BCCI's Luxembourg holding company was a little more than a brass plate, with most meaningful operations run out of offices at 100 Leadenhall Street in the City - a stone's throw from the Bank of England. <br><br>Lord Bingham said: "In applying this new and unfamiliar statutory regime [the 1979 Banking Act], it was necessary for the Bank, first of all, to understand what was meant by 'principal place of business'. That was a legal question. <br><br><br>"Those who handled this matter in the Bank had many applications to process in a very limited time, and did not recognise this as a question to be asked. So no legal advice was sought ... The question was simply never addressed." <br><br>Mr Pollock will challenge this conclusion, pointing to internal Bank papers, seen by the Guardian, which appear to show senior banking supervision officials and lawyers had indeed, from the outset, raised the question of whether BCCI should be more appropriately classified as a British bank. <br><br>As early as February 1979 Frank Hall, a senior lawyer at the Bank, wrote an internal memo to colleagues concerning the imminent Banking Act. In it he said: "I should be grateful if you could let me know whether ... there are any companies which are not registered in the UK but which have their principal place of business or place of central management or control here ... but which we should not want to recognise." <br><br>Copies of the memo, which was circulated among senior department officials, show several hand-written annotations. "I can't think of any, can you?" says one, to which another official replies: "No." <br><br>"But for this - BCCI?" appears in the sidelines, written in the hand of Peter Cooke, the head of banking supervision. <br><br>Mr Pollock will argue this critical exchange fits into a catalogue of alarming internal reports on BCCI, each of which ended in the Bank wringing its hands behind closed doors but ultimately shirking its regulatory responsibilities. <br><br>He is likely to stop short of direct criticism of Lord Bingham, but his remarks may, at the very least, call into question the fullness of information supplied by the Bank to the Bingham inquiry. <br><br>A string of other internal memos make clear the Bank's state of panic. In 1982 BCCI was described as "on its way to becoming the financial equivalent of the SS Titanic!". <br><br>Another paper from the same year insists BCCI's status as a Luxembourg bank "has always been something of a fiction ... I believe it would be wrong for us to continue to allow a large international banking group to carry on business on a largely unsupervised basis". <br><br>The following year yet another Bank analyst wrote a report on BCCI entitled "Why action is now urgently required". It suggested the Bank was left with "two basic choices": to close BCCI down or to insist it be redesignated a UK bank, under full Bank of England supervision. <br><br>Later memos, Mr Pollock may suggest, show shades of cowardice behind the Bank's intransigence. "It is hard to see how we can to other than turn a blind eye ... since we have accepted [BCCI] up to now," wrote one Bank official as the charade of BCCI's Luxembourg status wore increasingly thin. <br><br>Mr Cooke himself even described the late BCCI chairman Agha Abedi as "the living personification of Uriah Heep". <br><br>In its defence, the Bank is expected to claim that such remarks, when read in context, do not amount to a call for BCCI to be shut down. It will accept that grave mistakes were made, but will insist there was no dishonesty involved. <br><br>The Bank is likely to concede there had been internal exchanges over whether to designate BCCI a British or an overseas bank, but will characterise such discussions as fleeting and academic, with little or no bearing on the final - albeit mistaken - decision to declare BCCI a Luxembourg bank. <br><br>If the high-profile case is likely to be damaging for the Bank of England's reputation, despite being stripped of its role as banking regulator since 1997, it may also prove awkward for Gordon Brown. As shadow chancellor following the collapse of BCCI, he was savage in his criticism of the Bank. <br><br>"The Bank of England's so-called 'light hand' has made it a soft touch for a crooked bank," he told the Commons in 1992. "Are we not paying a heavy price for the free-for-all of the 1980s which denied regulation its proper place in the management of our financial institutions?" He went on to ask if the then Conservative government had sought the resignation of the Bank's governor, Sir Eddie. <br><br>Since his move to the Treasury, however, the chancellor's indignation may well have cooled. Not least because of legal concerns over what precedent any payout by a state regulator might set. It is thought the BCCI case will be closely watched, for example, by Equitable Life policyholders, who may be considering building a similar case against the Financial Services Authority. <br><br>Deloitte has so far recouped 75% of depositors' losses, having won settlements from the likes of Ernst & Young, PricewaterhouseCoopers and the sheikh and government of Abu Dhabi, one of the United Arab Emirates. The liquidators are believed to have told the 6,500 BCCI creditors it represents in Britain that a win against the Bank could bring the recoup figure up to 87% or 88%, while costs involved in a loss would shave less than a percentage point off the existing 75%. <br><br><br><br> <p></p><i></i>
