Treasure Islands - Nicholas Shaxson [82]
But the most interesting thing about BCCI was its offshore structure.
Abedi split his bank between jurisdictions, registering holding companies in Luxembourg and in the Caymans, so that no regulator could see the whole thing. Different auditors were used for different parts of the bank too.5 Yet he also wanted the credibility of being in a world-famous financial center, though it would need to be lax enough to ask few questions. That meant only one place: the City of London. In 1972 BCCI set up its headquarters in luxury offices in Leadenhall Street, at the heart of the City, and began making generous contributions to Britain’s Conservative Party.6
A rule of thumb was that banks should lend no more than 10 percent of their equity capital to a single borrower—but BCCI was making loans to some clients worth three times its capital or thirty times the accepted ratio. In 1977 the Bank of England tightened these rules further. To get around this, Abedi dumped shaky loans in the Cayman Islands, where, as a BCCI official noted at the time, there was “obviously more flexibility in record-keeping” and which bank officials called “The Dustbin.”7 Neither the British regulators, nor those in Luxembourg or the Caymans, assumed responsibility.
BCCI also constructed an audacious but simple offshore trick: to manufacture equity capital—the foundation and safety buffer of any bank—out of thin air. The Luxembourg bank would lend money to a BCCI stockholder—one of Abedi’s friends—who would then invest this money in the Caymans bank, building up its capital there. Likewise, the Caymans bank lent money to a stockholder who would use it to create capital in the Luxembourg bank. From just $2.5 million in equity capital at the beginning, BCCI had raised nearly $850 million by 1990, with the help of this offshore bootstrap.8 Abedi also wrote off his friends’ debts but kept expanding by operating a Ponzi scheme: milking the staff pension fund and taking in more deposits simply to pay its outgoings. Many of its eighty thousand depositors were relatively poor people from the developing world who had no idea that this apparently London-based bank, backed by wealthy Arab Sheikhs, was a fiction piled on a fiction.
“There is no way to learn banking from books: it is bullshit,” said Blum, highlighting the make-believe possibilities that emerge in the liberated offshore environment. “Nothing tells you how money-laundering generates products.”
When Morgenthau tried to probe the bank, the Caymans authorities refused to cooperate. “We subpoenaed BCCI Overseas—they told us, ‘Sorry: the laws of Cayman don’t permit us to do this,’” he said, expressing particular irritation with the attorney general, a “crotchety British guy” named Alan Scott.9 “We tried again. Finally, they said we had to go through the (U.S.-Cayman tax information exchange) treaty. We went through the treaty. Then they said, ‘The treaty doesn’t include local District Attorneys: go through the Justice Department. We can’t show this to you.’ The Justice department wasn’t overly cooperative either.”10 Morgenthau and his deputy John Moscow went to the Bank of England. “We had no cooperation from the Bank of England,” Morgenthau said. “We tried to get financial records out of London; they didn’t provide us with anything.”
With the help of Senator John Kerry, Morgenthau threatened to raise a public storm if the Bank of England did not act. Only then, finally, the Bank agreed to shut BCCI down.
In the British parliament, the scandal caused an uproar. The