Transcript Session 2 Deloitte - BCCI

Michael Mackey and John Richards
Discussant - Joe Pasquariello
Laurence Crowley
The Story
The Lessons
- Timing/Level of Scheme
Payouts
- Reimbursement factors
- International dimension
2
Background
• Founded 1972
• 5th largest privately owned bank
• 15-20,000 employees
• 80,000+ deposits/claims
• 400 branches, subsidiaries and affiliates
• 73 countries
3
Balance Sheet
Assets
US$m
Liabilities
US$m
Consolidated
Balance Sheet
December 31, 1989
23,000
22,000
Latest Management
Information preclosure
17,000
17,000
4
Group Structure
Government of Abu Dhabi
(Majority Shareholder) and others
BCCI Holdings
Luxembourg
BCCI SA
Luxembourg
BCCI OVERSEAS
Cayman Islands
47 Branches
in 13 Countries
63 Branches
in 28 countries
OTHER SUBSIDIARIES
& AFFILIATES
260 Entities
in 30 Countries
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Causes of failure
• Losses in treasury operations and poor lending
• Frauds
• Ineffective regulation
• Bank of Choice for Criminals
6
Crisis Response
•
July 1991 worldwide co-ordinated closure
•
Interim legal processes – urgent control of
assets/records
- investigation
- rescue
- restructure/sale
•
Abu Dhabi
•
US criminal charges
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Abu Dhabi
• Financial interest as majority shareholder and depositor
• Location of head office and records
• Potential cross claims - proprietary claim?
- complicity in management/frauds?
• Ad hoc depositor funding
• Resolution
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United States
• Ring fenced
• Assets of US$1 billion seized
• Criminal indictment with increasing fines – US$40 billion!!
• Investigations pursued against related parties
• Plea Agreement
9
1992 – Formal Liquidation
BCCI Holdings
Luxembourg
(3 local officeholders)
BCCI SA
Luxembourg
(1 Deloitte, 2 local officeholders)
BCCI Overseas
Cayman Islands
(3 Deloitte officeholders)
Branches in England
(3 Deloitte officeholders)
All worldwide branches/subsidiaries/affiliates
invited to join Pool
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Key features and agreements
•
Pooling
• Abu Dhabi
•
United States
•
Asset recovery
•
Claims processing and dividends
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Pooling
• Theory
- Branches of legal entity (2 approaches)
- legal entities within group (1 approach)
• Branch pooling
• Legal entity pooling
• Rationale -
business inextricably mixed
costs of competing for assets
costs of fighting inter-entity claims
costs through economy of scales
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Asset Recovery
• Majority Shareholder contribution
• Loan recoveries
• Legal claims against fraudsters and others
- Adham (US$165m)
- Mahfouz (US$253m)
- Pharaon (US$175m)
- Khalil (US$1bn judgment)
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Claims Processing and Dividends
• Temporary procedures and formal liquidation hiatus
• Non standard pooling claim forms
• State of records and systems
• Global customer dealings
• Creditor apathy
• Conflicts between jurisdictions – the set off problem
• Anti-Money Laundering Regulations
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The lessons for deposit insurers
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Timing/Level of Scheme Payouts
• Streamline the liquidation and insurance claims process
• Consider paying small creditors in full
• Perils of rapid payment - the set off problem
• Establish risk line between liquidation and insurer
16
The set off problem
• UK branch sterling deposit January 1992
£20,000
• Insurance compensation paid June 1992
£15,000
• German branch DM loan discovered
January 1998
• Net credit/(debt)
£(25,000)
£(5,000)
• UK set off results in no dividend payable
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Factors affecting reimbursement
• Currency of compensation and dividend
• Deposit claim and the liquidation claim differ
• Repayment sources different from deposits protected
18
UK Scheme Example
UK branch sterling deposit
£20,000
Japan branch Yen deposit
£10,000
______________________________________________________________
Liquidation claim value
£30,000
Insurance claim value
£20,000
______________________________________________________________
Insurance Compensation
£15,000
(75% x £20,000)
Liquidation dividend @ 40%
(40% x £30,000)
£12,000
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Special Cases – Joint Account
A&B
£20,000
Liquidation dividend paid jointly to A&B
A claims B doesn’t
Alternative Scheme Rules
“For the purposes of …. they shall be treated as”
as having separate deposits of £10,000 each
V
Statutory split of account for all purposes
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Loopholes
Scheme Rules – 75% of £20,000 deposit
___________________________________________________
Depositor - £100,000
Insurance claim - £15,000
___________________________________________________
Depositor assigns 4 x £20,000
Insurance claim – 5 x £15,000 - £75,000
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International Dimension
• Judicial/officeholder co-operation
• Review effectiveness of regulation for cross border bank
• Lobby for harmonised global insolvency initiatives
- UNCITRAL
- European Insolvency Regulation
- COMI
• Lobby for harmonised global anti-money laundering requirements?
• USA
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Michael Mackey
Laurence Crowley
Telephone: +1 416 775 7200
Email:
[email protected]
Telephone: +44 (0) 20 7296 2000
Email:
[email protected]
John Richards
Telephone: +44 (0) 20 7429 3402
Email:
[email protected]
Discussant - Joe Pasquariello
Telephone: +1 416 597 4216
Email:
[email protected]
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