The Impact of and Lessons Learned From the BCCI Fraud Case [Taipei, Ching-Chi Jih-Pao in Chinese, 31 Jul 91, p. 2]

The Bank of Credit and Commerce (BCCI), which ranked about 150th among world banks, was closed down a few days ago by countries such as Britain, the United States, France, and Germany. As this is a complex case involving a huge amount of money and dozens of countries, it is not only having an impact on financial circles, but is also shocking banking authorities in all countries. While the real extent of Taiwan's losses is yet to be investigated, this case of fraud is teaching valuable lessons to Taiwan's banking authorities, foreign exchange banks, and export manufacturers and business firms. The BCCI system was founded in 1983, with its general headquarters set up as an international bank in Luxembourg. After it was founded, it expanded very quickly, so that by the time it was shut down by the above-named countries, it had assets of more than $20 billion, ranked about 150th among the world's 500 biggest banks, and had branches in 70 countries throughout the world, and also in Taipei. While the details of this case have not yet been announced officially, the U.S. Federal Reserve Council announced on 28 July 1991 that it was fining BCCI $200 million and the New York Regional Prosecutor's Office has brought suit against BCCI's two founders on charges, such as money laundering, falsifying bank records, and bribing officials.

BCCI's Taiwan branches were responsible only for tasks such as making business contacts and collecting information, and certainly did not engage in international business, such as savings and loans. Thus, when BCCI was first closed down by various countries, as it had certainly not caused many direct losses in Taiwan, it did not arouse much concern. But when BCCI's Hong Kong operations were disciplined and suspended by the Hong Kong Government, which caused direct losses for Taiwanese manufacturers, business forms and certain banks, concerned Taiwanese departments, including the banking authorities, began to pay serious attention to BCCI.

It is reported that the direct losses sustained by Taiwanese manufacturers and business firms from the closing of BCCI involved about 400 savings accounts amounting to more than $50 million, while most of the indirect losses involved mortgages or remittances. As far as Taiwan's foreign exchange banks are concerned, except for the Hunan Bank that suffered more because of BCCI, other Taiwan banks sustained only slight loss in the areas of mortgages and remittances. As our central bank never had any foreign exchange reserves in BCCI, it suffered no direct losses.

Since the BCCI fraud case was exposed, and since the Hong Kong branch of BCCI was shut down in particular, the reactions by various parties have been varied. The Ministry of France's Banking Office has called on manufacturers and business firms to set up systems to determine the credit ratings of foreign manufacturers and business forms, when internationalizing their enterprise operations. The central bank has indicated that it would take advantage of the lessons learned from this case of fraud by more closely supervising the business operation of overseas branches of Taiwan banks and foreign bank branches in Taiwan. Certain foreign exchange banks have been shocked by the closing down of the world's 150th ranked bank. And many manufacturers and business firms have been even more alarmed by the possibility of collapsing accounts due to fraudulent credit certifications by such a world-class bank. But we think that the BCCI fraud case has really taught banking authorities, foreign exchange banks, and manufacturers and business firms, various lessons, the most noteworthy being as follows:

1. In addition to strengthening their control over both Taiwanese and foreign bank branches in Taiwan, the banking authorities should also strengthen their control over Taiwanese bank branches abroad. As the number of foreign bank branches in Taiwan and Taiwanese bank branches overseas have been increasing steadily in recent years, supervision of their operations must be strengthened. In particular, supervision and auditing must be enhanced for overseas branches of Taiwanese banks and international bank branches that conduct external banking operations in Taiwan.

2. Taiwanese foreign exchange banks have always over- emphasized size of operation, such as banks in the top 500 or top 100, in their selection of foreign banks with which to do business. While this method of selection may be simple and convenient, it is unable to distinguish quality. Even though BCCI was a large international bank that was ranked as one of the 150th biggest banks in the world, it was still shut down by the governments of many countries because of its flagrant crimes. When selecting foreign banks with which to do business, it is absolutely necessary to analyze their finances and operations and assess their credit ratings, instead of judging them simply by size.

3. When conducting foreign trade, manufacturers and business firms must not reply 100 percent on the credit certifications presented by foreign banks. Most Taiwanese export manufacturers and business firms rely too much on credit certifications, especially by considering credit certifications by international banks as absolutely reliable "payment guarantees." Even with credit certifications presented by banks, it is still necessary to investigate the credit ratings of overseas importers. Otherwise, it is hard to recoup goods payments when the certifying banks run into trouble. Even if there is no trouble with certifying banks, choosing foreign manufacturers and business firms with good credit ratings is still the key basis for steady business growth.

In light of today's conditions in which all parties are vigorously promoting banking liberalization and internationalization, even though the BCCI case is having a great impact on the banking authorities, foreign exchange banks, and export manufacturers and business firms, it is also teaching timely and very alarming lessons. It is deeply hoped that the banking authorities, foreign exchange banks, and export manufacturers and business firms will learn the lessons taught by this case of fraud by examining their respective operations. If deficiencies are found, quick improvements should be planned.