Statements to the Congress - statement by J. Virgil Mattingly, Jr. William Taylor, and E. Gerald Corrigan to the House Committee on Banking, Finance and Urban Affairs - Transcript

Federal Reserve Bulletin, Nov, 1991

Moreover, the U.S. Attorney in Tampa incorporated this cease and desist order into the plea agreement reached with BCCI regarding its illegal money laundering activities. Thus, compliance with the Federal Reserve's order was made a condition of BCCI's probation. This arrangement was a unique one, which enhanced the Federal Reserve's ability to enforce its corrective cease and desist order.

The indictment for money laundering in the United States further weakened BCCI's already fragile reputation in the world financial community. In the period after the indictment, Federal Reserve staff was advised that BCCI was experiencing some outflow of deposits in London and was encountering difficulty in finding counter-parties for its banking transactions. In these circumstances and in the face of large losses being discovered in the bank in early 1990, the government and ruling family of Abu Dhabi provided new capital of nearly 400 million to BCCI, increasing their ownership of BCCI from 30 percent to about 77 percent.

BCCI's problems, however, continued to worsen significantly. On October 3, 1990, Price Waterhouse delivered a secret report to BCCI's board of directors that identified massive additional problem loans. This report gave rise to an intensification of discussions among BCCI management, BCCI's principal shareholder, and European banking authorities concerning possible approaches to a broad-based restructuring of the bank. These discussions continued into 1991.

On March 4, 1991, the Board issued a second cease and desist order against BCCI, in part, to address concerns about the funding of its U.S. agencies. The order required that BCCI have sufficient liquid assets to cover liabilities in its U.S. agencies. A corollary action by the Federal Reserve Bank of Richmond required that First American terminate any residual business with BCCI.

Because of actions taken by the Federal Reserve and state supervisory authorities, BCCI's U.S. operations had been substantially curtailed by the time of its seizure. Four of the six agencies were closed by January 1991, and the representative offices were closed by August 1990. Under the Federal Reserve's March 4 order, operations at BCCI's two remaining agencies-in Los Angeles and New York-were scaled back, and the company was also ordered to terminate its activities in the United States by year-end 1991.

The Seizure of BCCI on July 5

By early 1991, information received by the Bank of England about BCCI's financial condition and integrity prompted the Bank of England to commission Price Waterhouse to undertake a special audit under the provisions of British banking law. The resulting so-called section 41 report was made available to the Bank of England on June 22, 1991. The Bank of England's filings in British courts indicate that the report disclosed evidence of a complex and massive fraud at BCCI, including substantial loan and treasury account losses, misappropriation of funds, unrecorded deposits, the creation and manipulation of fictitious accounts to conceal bank losses, and concealment from regulatory authorities of BCCI's mismanagement and true financial position.