Sandstorm Report

The Sandstorm Report was the draft report of Price Waterhouse, the auditors of the Bank of Credit and Commerce International (BCCI), delivered to the Bank of England on June 22, 1991, under Section 41 of the Banking Act. In the report's own code, BCCI was "Sandstorm" and its Cayman affiliate ICIC was "Fork." The Kerry-Brown Senate Report called it "the final evidence that lead to the shutdown of BCCI globally on July 5, 1991."¹

Commission

Through late 1990 and the spring of 1991, according to the Senate report, BCCI, the government of Abu Dhabi, the Bank of England and Price Waterhouse "worked together to keep what they knew about BCCI secret," while planning to reopen the bank as three institutions based in London, Abu Dhabi and Hong Kong, and each tried to keep the Price Waterhouse audit reports from the Manhattan District Attorney, Robert Morgenthau. As information reached the Bank of England from Price Waterhouse and from former BCCI officials such as Masihur Rahman, it concluded that the restructuring might not be possible, and in March 1991 formally commissioned Price Waterhouse to investigate BCCI under Section 41.²

Findings

The draft, based on banking records from several countries and interviews through the spring of 1991, found "widespread fraud and manipulation," reflecting "the general scale and complexity of the deceptions which have undoubtedly taken place over many years," and concluded that "fraud on a significant scale had been committed and that it had involved a significant number of people both inside and outside the bank." It arose from an investigation of some 600 million dollars in BCCI deposits not recorded in its books, with further losses in ICIC, BCCI's Swiss subsidiary the Banque de Commerce et de Placements, and the Kuwaiti Investment Finance Company (KIFCO), which the Senate report described as "a secret BCCI subsidiary ostensibly owned by a BCCI nominee."¹² Among the techniques it described were "account manipulation of non-performing loans, fictitious profits and concealed losses, fictitious loans set up in connection with repurchases of shares, misappropriation of deposits," unrecorded deposit liabilities, nominee arrangements "to create false capitalization," the "parking" of loans to avoid recognizing losses, off-book transactions, "falsified audit confirmations, and the drafting of fraudulent agreements." It described the misappropriation of "external funds deposited under trust with Sandstorm [BCCI] and Fork [ICIC] to be managed on behalf of a few prominent people who are also shareholders of [BCCI] Holdings," and the creation of loans "in the names of people without their knowledge."¹

The report attributed the fraud to BCCI's lack of a lender of last resort and the hostility of the international banking community, which led Agha Hasan Abedi and Swaleh Naqvi to believe "it was essential to declare profitability every year" and to guarantee rates of return to principal Middle Eastern shareholders, falsifying the accounts to pay them. The Senate report remarked that it described the fraud "rather kindly," having been prepared for BCCI's final management, which was brought in to find a way for the bank to survive as a wholly owned subsidiary of Abu Dhabi. Revisiting the treasury losses it had found in 1986 and then attributed to incompetence, Price Waterhouse wrote that "with the benefit of hindsight, it appears more sinister in that it now seems to have been a deliberate way to fictitiously inflate income."¹

Closure

"One week later," the Senate report recorded, "the Bank of England alerted the UK's Serious Fraud Office to begin an investigation of BCCI. Four days later, on July 5, 1991, BCCI was closed internationally in an action initiated by the Bank of England." The report added that the Bank "had reason to know that the New York District Attorney was only a few weeks away from indicting BCCI for massive fraud," and concluded that "but for Morgenthau's investigation, the Bank of England might well have proceeded with BCCI's restructuring regardless of the new revelations about fraud, and simply hoped for the best."²

Censorship

The Senate subcommittee received the report only "in a heavily censured form by the Federal Reserve at the insistence of the Bank of England, which forbid the Federal Reserve from providing a clean copy of the report to the Congress on the ostensible ground that to do so would violate British bank secrecy and confidentiality laws," with "hundreds of items and almost every identifiable name" removed.¹ The UK inquiry into the Bank's supervision of BCCI, the Bingham Report, found that the report "came as a surprise to the Bank" but that it should not have.³