Bank of England

The Bank of England is the central bank of the United Kingdom, established by Royal Charter in 1694 and located on Threadneedle Street in the City of London. It serves as the UK's monetary authority (setting interest rates and managing the money supply), as the government's banker, and as the prudential supervisor of UK banks - the supervisory role it held over the Bank of Credit and Commerce International (BCCI) until BCCI's 1991 collapse, which became the defining regulatory failure of its supervisory history.¹

BCCI Supervision and Failure

The Bank of Credit and Commerce International was registered in Luxembourg and incorporated in the Cayman Islands, but its primary operations and management were based in London. The Bank of England, as UK banking supervisor, was responsible for overseeing BCCI's British operations - its 65 branches and the London-based senior management.

Multiple warnings about BCCI's fraudulent operations reached the Bank of England before the July 1991 closure. The Price Waterhouse audit firm, which had discovered systematic fraud in its 1990-1991 review of BCCI accounts, disclosed its findings to the Bank of England under a provision of the Banking Act 1987. The Bank of England was also in receipt of intelligence from U.S. authorities, including the CIA, about BCCI's criminal operations from at least 1985. Despite these inputs, the Bank of England did not close BCCI but instead pursued a secret plan - agreed with Abu Dhabi's Sheikh Zayed - to reorganize the bank under Abu Dhabi ownership.

The Bank coordinated the international seizure of BCCI on July 5, 1991, when regulators in 66 countries simultaneously closed the bank. The abrupt closure exposed approximately 120,000 UK depositors and caused the largest retail banking collapse in British history.²

Bingham Report

The Bingham Report - formally the Report of Inquiry into the Supervision of the Bank of Credit and Commerce International, submitted to the Chancellor of the Exchequer by Lord Justice Bingham in October 1992 - examined the Bank of England's supervisory failures in detail. The Report found that the Bank had received numerous indicators of BCCI's problems over the years and had failed to investigate them adequately. It attributed the failures to the Bank's culture of giving the benefit of the doubt to those it regulated, its limited enforcement powers, and the deliberate complexity of BCCI's corporate structure.²

The Kerry-Brown Senate investigation in the United States was more critical, suggesting that intelligence about BCCI's criminal nature had been available and suppressed for reasons that included the bank's CIA utility. The Senate report documented the Bank of England's awareness of intelligence assessments from the CIA and others that went beyond mere supervisory information.¹

Role in Broader Financial Oversight

The Bank of England is also referenced in this vault through its historical role in overseeing the City of London's offshore financial markets, which provided the regulatory architecture within which Eurodollar markets and offshore bond markets developed. These markets were used extensively by the arms-brokering and intelligence-connected financial flows documented in subjects including Iran-Contra Affair and the BNL scandal.¹

The Kerry-Brown Findings

The Kerry-Brown Senate Report recorded that the Bank considered BCCI "the most difficult bank we have to deal with" as far back as the 1970s, and set out its conduct in a list of findings. In 1988 and 1989 the Bank learned of BCCI's involvement in financing terrorism and laundering drug money. In the spring of 1990 Price Waterhouse told it of substantial loan losses, poor banking practices and evidence of fraud, and its response "was not to close BCCI down, but to find ways to prop up BCCI and prevent its collapse," which meant "keeping secret the very serious nature of BCCI's problems from its creditors and one million depositors." In April 1990 the Bank reached an agreement with BCCI, Abu Dhabi and Price Waterhouse under which Abu Dhabi guaranteed BCCI's losses and Price Waterhouse certified its books. The Bank withheld information from the Federal Reserve in the spring of 1990 about BCCI's lending on the shares of First American's holding company, which "delayed the opening of a full investigation by the Federal Reserve for approximately eight months." In late 1990 and early 1991 it tentatively agreed to let BCCI restructure as three separate banks in London, Abu Dhabi and Hong Kong, a decision the report said "demonstrated extraordinarily poor judgment," before deciding abruptly in late June 1991 to close it. Its decision of April 1990 to let BCCI move its headquarters, officers and records to Abu Dhabi "constituted a costly, and likely irretrievable, error."³ Robin Leigh-Pemberton told the House of Commons Treasury and Civil Service Committee that on receipt of the Price Waterhouse reports of April and October 1990 the Bank had been "alerted to [fraud and deceit]," but that "our view was that even if this added up to individual acts of fraudulent conduct it did not give evidence of a system of fraud throughout the Bank which was wide enough to justify closure. I hope it does not shock you too much, it is only a matter of realism that we do have occasions of fraud in banks... if we close down a bank every time we find an individual act or two of fraud we would have rather fewer banks than we do at the moment." On warning depositors he said: "A hint from the Bank of England that somebody on our list may not be quite pukka would be the kiss of death to the future of a bank."³

The Price Waterhouse draft report to the Bank dated June 22, 1991, code-named "Sandstorm," found evidence of "widespread fraud and manipulation" and was, in the words of the Senate report, "the final evidence that lead to the shutdown of BCCI globally on July 5, 1991." The Senate subcommittee received it only "in a heavily censured form" at the insistence of the Bank of England.⁴

Three Rivers

BCCI's liquidators, Deloitte Touche Tohmatsu, sued the Bank for 850 million pounds (1.78 billion dollars), the first such suit brought against it; because the Bank was protected from negligence claims, the liquidators alleged that 22 of its officials were guilty of "misfeasance," acting dishonestly or in bad faith. The trial, Three Rivers District Council v. Bank of England, began in January 2004, with opening speeches of 119 days for the Bank and 80 days for Deloitte. On November 2, 2005, Deloitte dropped the case after the Chancellor of the High Court said that continuing was no longer in the creditors' interests; the Bank called it "unconditional surrender," and its counsel, Nicholas Stadlen, "the most remarkable and humiliating climb down in the history of English litigation."⁵