§ 4.26 p.m.
§ The Minister of State, Department of Transport (Lord Brabazon of Tara)
My Lords, with the leave of the House I shall now repeat a Statement on the Bank of Credit and Commerce International which is being made in another place by my right honourable friend the Economic Secretary to the Treasury. The Statement is as follows:
"The Bank of England, along with the authorities in a number of other jurisdictions, took action on Friday to secure control of the assets of the Bank of Credit and Commerce Group.
"The BCC group operated in this country through a Luxembourg incorporated company, BCCI SA, which had a number of branches in the United Kingdom, mostly in the London area. On 1235 Friday, the Directorate of the Luxembourg Monetary Institute took action under Luxembourg law to secure control of the assets of the company. This was done in consultation with other regulatory authorities concerned which have taken appropriate action against other subsidiaries and operations of the BCC Group. The effect of these actions was to place the assets and liabilities of the entities concerned under the protective control of the supervisory authorities, or of the courts as appropriate, of each country. In the United Kingdom, following a petition made by the Bank of England, the UK courts have appointed Touche Ross as provisional liquidator. The effect of this action is that deposits with the United Kingdom branches of BCCI SA are frozen.
"The action taken by the regulatory authorities resulted from prima facie evidence, contained in a report commissioned by the Bank of England and recently received, of widespread fraud in a number of jurisdictions stretching back over a number of years. The action was taken in order to safeguard the interests of depositors, other bona fide creditors and the shareholders of the BCC group. A copy of a press notice issued by the Bank explaining its action has been placed in the House Library.
"The principal supervisory authorities are seeking the co-operation of other authorities in other countries where BCCI has been in business, with a view to securing a run-down of the group. They are seeking co-operation in order to identify and take appropriate action against those responsible for any wrongdoing. Relevant papers have been passed to the Serious Fraud Office.
"Within the UK the immediate effect of the supervisors' action is that UK depositors cannot withdraw their funds. Sterling deposits in the UK branches are covered by the Deposit Protection Fund to the extent of 75 per cent. of deposits up to £20,000 (that is, up to £15,000 per depositor). The Bank of England has issued a notice explaining the position of UK depositors and the operation of the funds. A copy has been placed in the House Library.
"The Deposit Protection Fund will be activated as soon as a winding up order is made in the UK courts. Claims will be processed as quickly as possible.
"The Bank held a meeting with the main high street banks and the liquidator this morning. As a result arrangements are being set in place for the liquidators to aid the banks in their assessment of applications from small businesses for alternative facilities. While that assessment is a commercial matter for the banks, I hope they will respond as sympathetically as possible.
"The banks are also urgently discussing with the liquidators whether comparable arrangements can be made for small depositors who find themselves in immediate difficulties.
"In addition Touche Ross is willing for six weeks to give free advice to small businesses affected by the BCCI winding up.
1236 "Under the Banking Act 1987 the Bank of England has sole responsibility for authorising and supervising banks and the Government have no locus in their decisions. The Government were, however, kept fully informed of the proposed action, and it has our full support."
§ My Lords, that concludes the Statement.
§ 4.30 p.m.
§ Lord Peston
My Lords, I thank the noble Lord for reading the Statement. That is the only "Thank you" I can offer. The Statement seems to me—I am sure other noble Lords will agree—to be less than satisfactory. One has to ask the Government: what has been going on here? This is not a matter that has suddenly emerged. The Statement reads as if it has, but this is something that has been going on for some time. Noble Lords will confirm in due course that it has been raised previously in this House.
I have a number of questions and a number of points that I must draw to the Government's attention. The key issue to bear in mind is that this bank is part of the commercial banking system, and to have allowed this to happen is damaging to that system. One must ask whether due account has been given to the general damage that occurs within the City of London when this sort of thing happens. I must repeat my question: what has been going on? Will we actually be told what has been going on? In particular, at the level of ordinary questions, how much money is missing? Can we be told that?
As I understand the matter, there are three aspects of the problem to which we need to address ourselves, not one of which seems to me to have been dealt with in any detail in the Statement. First of all, as I understand it, there has been straightforward fraud. Can we be told about that aspect of the matter? Secondly—I have heard noble Lords raise the subject previously—there has been a great question of money laundering, not unconnected with drug smuggling and things of that sort. Not a word is said about that aspect of the matter in the Statement. Thirdly, there is the question of bankruptcy. That word does not appear at all in the Statement. Can we not therefore have a Statement that actually covers the questions in which one is interested?
There is a most serious question concerning the auditors. Can the noble Lord tell me whether I am right and that in 1989 the auditors actually certified the accounts of this bank as true and fair? If that is the case, again can we be told how it turned out that they were not only not true and fair but not remotely so? Again, I repeat the question: what has been going on?
I have to make the comment—and from reading the Statement it appears even more strongly—that it seems that the Bank of England has taken an unconscionable time to act. Other people seem to have been aware of the dangers for much longer than the Bank of England, but that is the regulatory authority. Can we be told why it took so long for the Bank of England to act? Is one being unduly cynical in assuming that the Bank of England was rather more concerned about the bank than about the bank's depositors? Are we asked to believe, in the case of the 1237 depositors in this bank, that caveat emptor is the only criterion or principle that the Government would apply, that the depositors ought to have known better and that they should not have left their funds in the bank up to the present time?
I have to admit to a degree of ignorance about the Deposit Protection Fund. I have to tell noble Lords that I was quite unaware of the details of the fund. I was under the impression that those of us who deposited our funds in commercial banks were taking no risk at all and that there was 100 per cent. protection. I should be interested to know why 75 per cent. protection is what is available. I admit my ignorance, but I am taken aback to discover that one is protected up to only 75 per cent. More to the point, I did lot know that that protection was available up to only £20,000. Can the Government comment on that aspect of the matter?
More generally, can the Government say something about their attitude to the small depositors involved? The Statement says,The Deposit Protection Fund will be activated as soon as a winding up order is made in the UK courts. Claims will be processed as quickly as possible.As a small depositor, one would not be looking for a bland statement of that nature. One would want to know exactly when that is going to happen. Are we talking' about these funds being available tomorrow, next Monday, or at any time in the future? Do not the Government feel that they have some responsibility in this matter?
Equally, I must ask about the effect on small businesses. As I understand it, the main small businesses affected are Asian owned. They are businesses owned by the Asian community who tend to be extremely hard working and energetic. I see that there is some suggestion that the commercial banks—the other joint stock banks—might take an interest in the matter. The Government say they hope that they will "respond as sympathetically as possible". Can the Government make a more positive statement than that they hope that they will "respond as sympathetically as possible?" Facilities ought to be made available, without any doubt whatever. The integrity of the commercial banking system is involved here. Cannot the Government at least say in terms that a rescue operation ought to be mounted, and mounted right away, and that in their view no enterprising small business should be made bankrupt in the next few days simply because of a liquidity or cash restraint?
This is a serious matter. It is so serious that we cannot simply discuss it on the basis of a Statement before your Lordships. The banking system of this country is of enormous importance. My own judgment is that we ought to ask more generally about the state of the banking system and about the regulation of the banking system. I know of general remarks about the usual channels and all that. I would ask the noble Lord whether, using the usual channels formula, we should not, as Members of your Lordships' House, examine regulation of the banking system much more seriously. In sum, I and many noble Lords are deeply concerned about what has 1238 been happening here. I hope for a rather more encouraging and reassuring statement from the Government.
§ Lord Harris of Greenwich
My Lords, I too thank the noble Lord, Lord Brabazon of Tara, for having repeated the Statement. What his right honourable friend has said in the House of Commons indicates that we are in the presence of a major banking scandal. I believe that the Statement raises far more questions than it answers.
May I first deal with the point about the powers of the Treasury and the Bank of England. The Government say that this is a matter entirely for the Bank of England and nothing to do with them. That is because of the provisions of the Banking Act. But Section 80 of that Act provides:The Treasury may, after consultation with the Bank [of England], by regulations impose on overseas institutions … such requirements as the Treasury consider appropriate".The power could hardly be wider. So there is no question in my view of Ministers shuffling this off on to the Bank of England. However, let us assume for the moment that the Government are absolutely right in what they say and that it is a matter exclusively for the Bank of England. That means of course that the Bank is in fact almost wholly unaccountable. Apparently it is not responsible to Ministers. It does not appear to be responsible to anybody else either. I shall come back in a moment to that question.
The first thing on which I should like to congratulate the Minister's right honourable friend is that he managed to make this Statement with no reference to the Florida prosecution of BCCI, an issue that was debated in this House on a Question that I initiated on 23rd April last year. Here was a bank, the BCCI, with more than 40 branches in the United Kingdom, convicted of money laundering in the United States on a massive scale, involving Noriega but also a number of other people involved in the cocaine business in America. The fine imposed on BCCI was around 15 million dollars, the largest fine ever imposed on a bank in the United States. In the course of that debate I asked what the Bank of England was going to do about it. I regret to say I received no positive answer to that question.
We turn next to the Senate investigation now taking place, of which the noble Lord, Lord Brabazon, will be aware. A committee under Senator Kerry has been looking at the affairs of BCCI and its massive misconduct in the United States. That committee heard a statement by Mr. Morgenthau, the district attorney for Manhattan and one of the most respected prosecutors in the United States, to the effect that he was most deeply disappointed by the lack of co-operation he had received from the Bank of England. That seems to me extremely serious. What does the noble Lord, Lord Brabazon, have to say about it?
Why did not the Bank of England act much earlier? It has known for a great deal longer than three years, as confirmed by the Statement, of very serious allegations concerning BCCI which was allowed to continue trading as usual. That decision was made by the Bank of England and it is now accountable. Why 1239 did the Bank of England not look at its powers under the "fit and proper person" formula in the Banking Act? It seems to me that it had considerable powers to take action but chose not to do so. Why was there not an immediate audit by independent auditors once the allegations came to the attention of the Bank of England?
The noble Lord, Lord Peston, rightly pointed out the rather strange situation involving Price Waterhouse. Given the allegations of which the Bank was aware, why did it not commission an independent audit to satisfy itself that the matter was being handled satisfactorily by the directors of BCCI? In the light of all that, why will there be no independent inquiry as to what the Bank of England has been up to? It may be that the Bank has an answer to these points, but it may also be that it does not. Not only are our banking institutions having serious questions raised about them; so is the Bank of England. I hope very much that we will have some specific answers from the noble Lord, Lord Brabazon.
The blunt question is: has the Bank of England been negligent? What did it know, and when? I hope we will receive answers to those central questions.
Thousands of small businessmen are now at risk of being driven out of business because of the misconduct of the fraudsters involved in the BCCI affair. There is no point in passing on the responsibility to the banks: the banks are themselves experiencing great difficulties at the moment. It would be wholly unrealistic to imagine that the banks are in a position to bail out thousands of small businesses in London and elsewhere. What are the Government proposing to do? The Government have rightly said that they have a high regard for the small business community. Now is an opportunity for them to demonstrate what action they are going to take.
§ Lord Brabazon of Tara
My Lords, I shall attempt to deal with the many questions raised by the noble Lords, Lord Peston and Lord Harris of Greenwich. The primary question asked was why the Bank of England had not acted sooner and whether or not it was fully responsible for that. The Banking Act 1987 deliberately places total responsibility for authorising and supervising banks on the Bank of England. Its decisions are subject to appeal to a tribunal but are not subject to public direction. The Bank took action as soon as it was satisfied that it had evidence which would support the use of its statutory powers. The Bank cannot act on suspicion alone. Its actions under the Act are subject to appeal. It must be sure before acting that it has evidence it can use in legal proceedings. The Bank has kept the Treasury informed from time to time about developments and in recent days has kept the Government fully informed of the actions it proposed.
Both noble Lords referred to the question of what had been going on in the BCCI with particular reference to money laundering. The information which the supervisors have suggests widespread fraud going back over a number of years but not directly connected with the money laundering offences in America. I cannot go beyond saying that the evidence 1240 suggests that serious crimes have been committed. I do not wish to say anything which may prejudice any convictions.
The noble Lord, Lord Peston, asked why the auditors had not spotted this before and said they should have noticed the fraud sooner. I understand that the information available to the supervisors suggests that the fraud was an extremely sophisticated one which was very hard to detect. As far as money laundering in the United States is concerned, the prosecutions related to the activities of particular individuals and were not of themselves sufficient grounds for action under the Banking Act.
The noble Lord, Lord Peston, asked about the Deposit Protection Scheme. That was a matter discussed at some length during the passage of the Banking Act 1987. The scheme protects 75 per cent. of deposits up to £20,000; in other words, a maximum payment of £15,000. It certainly does not cover 100 per cent. of people's deposits. I share with both noble Lords who have spoken the concern for small businesses which may be affected by this debacle. As I said in the Statement, the Bank held a meeting this morning with the main high street banks and the liquidators as a result of which arrangements are being set in place for the liquidators to aid the banks in their assessment of applications by small businesses for alternative facilities. That assessment is a commercial matter for the banks and I hope they will respond as sympathetically as possible. I cannot be more positive than that, but I believe that it is a hopeful sign.
BCCI was an international bank operating in 69 different countries. Less than one-third of its assets were in the United Kingdom; therefore, there can be no question of the United Kingdom Government rescuing such a bank.
The noble Lord, Lord Harris of Greenwich, referred to Section 80 of the Banking Act. That reflects, I believe, a misunderstanding of the provisions. The section refers to representative offices of overseas banks, not branches taking deposits in the United Kingdom. The section does not permit the Government to change the regulations of deposit-taking branches.
The noble Lord, Lord Harris, also said that there should be a proper inquiry. Of course, the first priority must be for the Bank, other regulators and the liquidators to bring about an orderly winding-up of BCCI so as to minimise losses to depositors and others who did business with that bank. But the Government and the Bank of England will certainly be reflecting on any lessons which may be learnt from this case for the framework of regulation, both at home and internationally. We shall certainly tell the House our conclusions, although there will be a limit to what can be published about a particular case because of Banking Act restrictions and the need not to prejudice any legal proceedings.
The noble Lord, Lord Peston, suggested that we should debate banking regulation. As the noble Lord himself said, that is a matter for the usual channels. I merely note that this is the second debate which has been called for in the last half-hour.
§ 4.50 p.m.
§ Lord Boyd-Carpenter
My Lords, my noble friend will be aware of press reports that an approach is being, made to the Arab ruler who, it is suggested, is the ultimate authority in the case of this bank. Can he confirm whether this is so, and, if it is, whether that approach is being made by Her Majesty's Government, the Bank of England or some third party? I am sure that he is aware of the enormous anxiety that this affair is causing to a number of people who have small businesses. If relief and support is sought in that direction, the more that is known about the matter the more they will be reassured. Can he clear up this matter?
§ Lord Brabazon of Tara
My Lords, I referred to small businesses just now. The Bank of England is in touch with the shareholders to seek their co-operation in achieving an orderly run-down with the minimum of loss to depositors. The shareholders have a very good record of supporting the bank and have already injected substantial sums. The Government are also in close touch with the authorities in Abu Dhabi.
Lord Bruce of Donington
My Lords, my noble friend Lord Peston asked the Minister about the positi DTI of the auditors in relation to this affair. Will the Minister confirm that on a number of occasions since 1988 the auditors found cause for considerable disquiet? I understand that, beyond their function as auditors and in accordance with their public duty, they informed the Bank of England on several occasions of their disquiet. If that is the case, why did the Bank of England not institute further and more detailed inquiries? The Minister said that they were suspicious but not satisfied. How can one be satisfied when one is suspicious? Is it not quite clear that the confidence that was generally felt after the investigation of the Johnson Matthey affair has now very largely gone?
Further, is it not the case that although the Banking Act 1987 transferred specific responsibility for supervision to the Bank of England, nevertheless the Government own the Bank of England and are still responsible for giving general directions under the unrepealed section of the original Act of 1946? Were the Government informed by the Bank of England that it had been even partially alerted by the auditors? If they were informed, what did they do about it? If they were not informed, why not?
§ Lord Brabazon of Tara
My Lords, I cannot comment on whether the auditors expressed disquiet at the activities of the BCCI. For some time the Government have been aware of concern about BCCI's operations. As I said before, the Bank has kept the Treasury informed about developments from time to time and in recent days has kept us fully informed of the action that it proposed to take.
The noble Lord asked whether the Government were content with the Bank of England's performance The Government have no doubt that the Bank took action, as I said before, as soon as it was satisfied that it had evidence which would support the use of its statutory powers and that it took the only possible 1242 action in the circumstances. Its action was part of a co-ordinated operation by banking supervisors in a number of countries. I repeat that point; namely, that this is a worldwide operation.
§ Lord Havers
My Lords, I understand that the protection afforded to depositors is to the depositor, even though, as a small business, he may have several accounts. If those accounts amount to quite a large sum of money, he will still only receive £15,000. I find that very worrying. Can the Minister confirm whether or not my understanding is right?
§ Lord Brabazon of Tara
My Lords, if an individual has multiple deposits with the United Kingdom branches, they are aggregated and treated as one for deposit protection purposes. So my noble and learned friend is right in that matter.
§ Lord Desai
My Lords, I must bring three issues to the attention of the House. Three years ago I took part in a television documentary on Channel 4 which pointed to serious doubts about the operations of BCCI. That was before the Florida injunctions. There has been drug laundering and recently there have been two different charges either of fraud or of bankruptcy. We need to know which of these various issues —or perhaps all of them—is true.
It may be, as the Minister said, that the Bank of England did not have sufficient legally tight evidence to close down the bank but did it not have powers to warn or rap the knuckles of those people and say, "We do not like what is going on. You are an international bank. Your misdemeanours may not fall in our territory but we still do not like what you are doing as an international bank. You must change if you are to continue operations at a retail level within the United Kingdom"? That is a very important point which must be addressed.
It may be the case that under the provisions of the depositor protection fund only 75 per cent. of up to £20,000 is guaranteed, but I wonder how many depositors in the United Kingdom in general know that fact. I do not know whether or not my bank has informed me of it—certainly the last questioner did not know. It is not a well known fact. That compares with the Federal Deposit Insurance Corporation, which publicly says that up to 100,000 dollars are guaranteed.
I urge the Minister to consider immediate relief pending the settlement of any legal actions of up to 75 per cent. of those people's deposits. It is not a matter of commercial assessment. It is a matter of simple documentary proof that they held the deposits. Commercial assessment and legal proceedings take a long time and these people, especially given the tightness of M0 up to M4, currently going on in the banking system, will be extremely short of money and could go bankrupt. One may go bankrupt by one's own fault but to go bankrupt because of other people's faults, as a result not simply of incompetence but of fraudulent behaviour, is unforgivable. I urge the Minister to consider immediate—that is, tomorrow—repayment of some money to the depositors.
§ Lord Brabazon of Tara
My Lords, I am afraid that there is nothing more that I can say to the noble Lord about the deposit scheme and the possibility of money being paid back quickly. I hope that it will be possible to pay it back quickly. I do not have the information here, but I believe that 15 days is required for a formal winding up to take place and then the deposit scheme can be brought into action. As I said in the original Statement, there will be lessons to be learnt from the collapse. The peculiar structure of BCCI made supervision difficult. Therefore the Bank of England took the lead in organising an international college of regulators, in securing a single auditor for the group and, in recent days, in co-ordinating international action to wind up the matter. Clearly this case has underlined the need for close co-operation of supervisors internationally. The Government and the Bank will certainly reflect on any lessons that the affair may have for the framework of regulation at home or internationally.
My Lords, is my noble friend aware that, unlike the noble Lord opposite whose understandable and righteous indignation has been aired, I believe that the Bank of England and Her Majesty's Government are to be congratulated? Reading between the lines it is clear that absolutely at the forefront of their thinking was the need to protect the depositors as much as possible. I cannot understand how noble Lords opposite do not live enough in the real world to realise that if the Bank of England had gone off at half cock without getting such an astonishing—indeed I believe unprecedented—degree of international co-operation in timing the moment at which they struck, in this day and age with modern telecommunications, BCCI would have removed all the funds outwith the jurisdiction of the United Kingdom so fast that it would not have been funny. Then where would the depositors have been? I am absolutely convinced that the Bank acted in a highly responsible manner despite the fact that it was almost certainly highly suspicious. On the contrary I believe that the future will show that the Bank of England and Her Majesty's Government have acted highly responsibly.
§ Lord Brabazon of Tara
My Lords, I am grateful to my noble friend for his remarks. He is right to say that it would not have been possible to warn the ordinary depositors of this matter. Any such warning would have prompted an immediate run on the bank. There would also have been a risk that assets might have been moved out of the United Kingdom and records destroyed. Therefore speed and total secrecy were essential.
§ Baroness Blackstone
My Lords, I disagree with the comments of the noble Lord, Lord Morris. They show a disdainful lack of concern for the small businessmen and small depositors who have funds in the bank.
First, I wish to repeat a question asked by my noble friend Lord Peston which the Minister has not answered. It concerns the timetable for helping small depositors who are in immediate difficulties. The 1244 House needs to know how long such people must wait for assistance. Many are suffering considerable difficulties as a result of the freezing of their assets.
Secondly, I return to a question which was asked by a number of noble Lords but was not answered satisfactorily. Can the Minister give the precise date on which the Bank of England first became suspicious about the activities of this bank? It would be helpful if the House could know that. My third question relates to a point raised by the noble Lord, Lord Harris, and my noble friend Lord Peston. Precisely what is the fraud that is involved in this business?
§ Lord Brabazon of Tara
My Lords, the noble Baroness has asked three questions, but I cannot add a great deal to what I have already said. As regards the timetable for the depositors' scheme, I must point out that under the Banking Act the fund cannot make payments until a formal winding-up order has been made against the institution. The Bank has applied for a winding-up order but there is a statutory minimum of 15 days before there can be a hearing. The Government and the Bank are pressing for an expedited hearing in less than 15 days. Once the order has been made the deposit protection fund will make payments as soon as possible. Secondly, the noble Baroness asked when the Bank became aware of the matter. I understand that the report was received by the Bank last week, but I must check the date and let the noble Baroness know. Thirdly, I cannot give a figure relating to the scale of the fraud.
§ Lord Harris of Greenwich
My Lords, the question which the noble Baroness asked was rather different, if I may say so on her behalf. She did not ask when the report was received by the Bank of England: she asked when the Bank of England had substantial suspicions of what was going on. All noble Lords would be immensely grateful if the Minister could answer that question.
Perhaps the noble Lord will also be good enough to answer two questions which no doubt inadvertently he has not answered as yet. First, will he comment on the statement made by the district attorney for Manhattan to the Senate Committee on Banking that the Bank of England had not co-operated with him in his investigation of BCCI? That is an extremely serious matter as I am sure the Minister will agree.
Secondly, I asked why the Bank of England did not commission independent auditors to review the circumstances of what was happening in BCCI. Apparently the Bank has had its suspicions for years, so why was that not done? It appears to be self-evident that it was desirable so to do.
Thirdly, I understand the position of the Minister and the Bank of England. He says that the Bank had suspicions, but no more, and that in those circumstances it could take no action. What does the Minister believe that the police do when they have suspicions? They investigate, so why was this matter not investigated? I fully understand that the Bank of England does not want any form of independent inquiry and if I were the Bank perhaps I should take the same view. However, in my view Parliament is right to demand just such an inquiry.
§ Lord Brabazon of Tara
My Lords, I am afraid that by repeating his questions the noble Lord will receive no better answers than I have already given. I have given all the answers that I can safely give in the hope that they are accurate. Of course I shall read in the Official Report what has been said. I understand that the Manhattan district attorney is now happy with the co-operation that he is receiving from the Bank of England, and therefore I believe that the noble Lord is wrong about that.
§ Lord Harris of Greenwich
My Lords, with great respect, the noble Lord is not wrong. The Manhattan district attorney complained about the lack of co-operation from the Bank of England. That is a serious matter. However, I welcome the fact that the Bank of England has now begun to co-operate.