§ 3.50 p.m.
§ Lord Bruce of Donington rose to ask Her Majesty's Government whether they will institute a public inquiry into the circumstances leading up to the closure of the Bank of Credit and Commerce International.
§ The noble Lord said: My Lords, it would be churlish of me if I failed to welcome the announcement that has been made by the Minister this afternoon in connection with the setting up of an investigation—the report of which is to be made public at a later stage—into the events leading up to the closure of BCCI. Two points arise from that announcement. First, my original request was for a public inquiry but the noble Lord felt unable to clarify that matter for the noble Lord, Lord Harris of Greenwich.
§ Secondly, when I listened to the Statement this afternoon I pondered whether it would be necessary to ask this Question. However, I was struck by the fact —other noble Lords mentioned this—that the Government had to some extent tended to prejudge the issue. Therefore the investigation, in whatever form it may take, should take account of a number of factors that were not specifically touched upon in the Statement.
§ We are discussing one of the biggest financial scandals that has taken place this century, if not before. The amount of money that is ultimately involved is not yet known. However, it is said to be between £1 billion and £2 billion. At the moment, however, no one has been prepared to give an estimate. What is certain is that the collapse of the bank has had a calamitous effect on customers, depositors and—this should not be forgiven—on the staff. The customers and depositors include a wide variety of people. They include large depositors, small shopkeepers and charities. I believe special regard should be paid to the position of charities who are involved in this matter. Local authorities have also been involved.
§ The announcement of the closure of the bank had widespread effects in Hong Kong where the authorities have been trying to contain a run on the banks. It has also had widespread effects in Peru, in the West Indies and in Pakistan. The effects of the closure have been considerable. However much one 432 may deplore this situation and however much one can do to remedy it, confidence in the banking and financial system has been quite severely shaken. Cargoes are trapped overseas as, abruptly, the letters of credit that sustained them became valueless. I am informed that thousands of tonnes of food are rotting as a consequence of this situation.
§ The question to which any inquiry should address itself is this: Could preventive action have been taken earlier? That is the nub of the matter. We have heard this afternoon from my noble friend Lord Hollick, who has experience in this field, that there has been gossip in the City for some years. Gossip means very little, but banks are notoriously sensitive to gossip and the banking community in the City of London meets socially very often. It meets informally and can soon begin to smell when there is anything wrong.
The point was put even better by the Financial Times on the 17th of this month, which said—and attention should be paid to this:
There is one aspect of the closure of Bank of Credit and Commerce International (BCCI) that strikes both expert and layman as downright odd. Everyone in financial circles has known for several years that BCCI was shaky. Yet the Bank of England, which is known to have been concerned over a long period, failed to act until late in the day. The impression, as with the Bank's earlier performance over Harrods Bank. is one of dilatory response in the face of overwhelming evidence of the need to act. How far is the Bank of England at fault? And what, if anything, should be done to tighten up the system?".
§ It is my submission to the House that attention could have been paid to the matter at an earlier stage and that that aspect in particular needs thorough investigation. It is, after all, one of the circumstances leading up to the closure that has occurred which should be taken into account.
§ There is also evidence—I use the word "evidence" in quotation marks because I, like so many other noble Lords, rely on reports which appear in the quality press as distinct from the tabloids—that there have been qualified reports by the auditors and discussions between the Bank and the auditors of BCCI ever since 1989. We learnt yesterday, and it was confirmed this morning, that as early as 13 months ago a warning was delivered to the Government by BCCI's former internal auditor. That was in June 1990. He wrote a letter to the Treasury, which forwarded it on to the Department of Employment, which forwarded it to the Department of Trade and Industry. There, mysteriously, it was lost. That is rather extraordinary and some inquiry should be made into the matter.
§ Moreover, there are reports—with what truth I do not know —in the quality press that American investigators complained that in connection with matters relating to BCCI they received a brush-off from the Bank of England when they made approaches to the Bank in 1989.
I now come to the attitude of the Government in regard to these matters. Their attitude is an important consideration for any investigation to bear in mind. In another place, in reply to a question by my right honourable friend the Leader of the Opposition on this point, on 16th July Mr. MacGregor, speaking for
the right honourable gentleman the Prime Minister who at that time was presiding over the G7 conference, said:
The point is that the Bank must act according to the Banking Act 1987. Actions under that Act are subject to appeal and the Bank must therefore have evidence that would stand up in court before it does anything"—
I underline the words "before it does anything"—
It cannot act on rumours; it must have good evidence before acting. In this case, it acted as soon as it had such evidence".
That is not so, as reference to the Banking Act will confirm. It is not true that the Bank can take no action. It is true that, in connection with the revocation of a bank authorisation or difficulties in connection with the granting of an authorisation or misconduct by people claiming erroneously that they are bankers, there is an appeal against such decisions under Section 27 of the Banking Act. However, those considerations do not apply to Section 41, which states:
If it appears to the Bank desirable to do so in the interests of the depositors or potential depositors of an authorised institution the Bank may appoint one or more competent persons to investigate and report to the Bank on … the nature, conduct or state of the institution's business or any particular aspect of it or … the ownership or control of the institution".
§ It provides that there should be written notice of that, but there is no appeal provided for at all. Once the Bank decides to do that under Section 41, that is that. It can be done.
I believe, although I am not certain, that later in the proceedings the Bank did institute such an investigation under Section 41. The question is whether it was too late. The words used in the Act are:
If it appears to the Bank".
§ It does not state, "If the Bank has evidence that".
On the assumption that the legal construction of that may be a little difficult, perhaps I may pass on to Section 42 of the Banking Act 1987, which states:
Where the Bank has reasonable grounds for suspecting that a person is guilty of contravening Section 3 or 35 above the Bank or any duly authorised officer, servant or agent of the Bank may by notice in writing require that or any other person",
to provide information, documents and so on. For purposes of clarification, when it refers back to Section 35, which is conditional for the application of Section 42, it should be noted that Section 35 deals with:
Any person who … makes a statement, promise or forecast which he knows to be misleading, false or deceptive, or dishonestly conceals any material facts; or … recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive".
§ Since, so we are informed, part of the auditors' anxiety in regard to BCCI, which they communicated to the bank, obviously rested on statements that had been made to them or information that had been given to them from within the bank itself, it would seem clear that, even on suspicion, Section 42 could have been applied.
§ It may well be that, had it been applied in a timely fashion, much of that trouble could have been avoided. It may well be that, if the Bank had suspicions in 1988–89, it could have invoked either or both of those sections. It could then have considered the position with the owners of the bank, who could 434 possibly have insisted on changes in personnel, could have assented to schemes of reconstruction financed by the owners in Abu Dhabi and could have done a whole range of things which might—I say "might—have avoided the ultimate closure of the bank which has resulted in such distress. Indeed, a hint of that is given by the advertisement put in today's Times and other newspapers by the Abu Dhabi Government, indicating that negotiations had been taking place with the Governor of the Bank of England concerning possible reconstruction and refinancing.
§ It is a matter of whether in all the circumstances action could have been taken earlier. From the "evidence" provided by the quality press it appears at least probable—I put it no higher—that action could have been taken earlier had there been a prompt response and more particularly if the letter from the BCCI's internal auditor had not mysteriously been lost some 13 months ago under peculiar circumstances in one or other of the Ministries.
§ There may be those who say that, notwithstanding that and the losses sustained by local authorities, individuals, customers, staff, charities and so on, the doctrine of caveat emptor (let the buyer look to himself) still applies. I do not have much sympathy with that view. Anybody who knew that the bank was an authorised bank and believed that it thereby carried the imprimatur of the Bank of England was entitled to presume that there would be reasonable security for any transactions undertaken.
§ This is a difficult situation. I do not place myself behind any of the allegations that have been made against the Bank of England. I merely articulate the doubts that have arisen. The Bank of England is the nation's bank. Although technically it belongs to the government of the day, it is still our bank and we should not willingly injure its reputation. The Bank of England is at the apex of financial institutions of this country. However, we should look askance at the Government's role in the matter on the basis that they may have prejudged the issues.
§ In those circumstances, although we are grateful to the noble Lord for his announcement that there will be an investigation, we want to be quite sure and indeed insist that such an investigation should be done in public (save for those parts which obviously require a degree of security) and that it should fully cover all the matters which I ventured to raise before your Lordships this afternoon.
§ In the event, the people of the country require to be reassured. Other bankers require to be reassured. Moreover, in the final result, if it be proved that somebody or some concern has been culpably negligent in these matters, those who have suffered losses ought to be in a position to obtain redress.
§ 4.8 p.m.
My Lords, I believe that the House must be grateful to the noble Lord, Lord Bruce of Donington, for having tabled this Unstarred Question. Its timeliness was most dramatically demonstrated earlier this afternoon when the Government made a Statement on this subject. It is important for this debate to take place not least in so 435 far as it can assist an inquiry. Moreover, I consider that this incident is the most serious banking matter for 125 years. Those noble Lords who are mathematically inclined will already have worked out the numbers to give the year 1866. I refer of course to the case of Overend v. Gurney. Among other effects, the impact of that banking crash gave rise to the formation of the modern joint stock bank. I suspect that such an event may happen again. In my humble opinion, there is certainly need for a very careful look at the regulatory procedure in the City of London.
Some background is important in understanding the case. As noble Lords are aware, there have been two recent banking Acts; namely, in 1979 and 1987. The first one followed the fringe bank crisis of 1973 and 1974. As noble Lords will recall the Bank of England kept a list of authorised banks —the top category was measured by capital adequacy and reserves—and licensed deposit takers. The lowest category, including the smallest institutions, was down to as small a figure as a capitalisation of £50,000.
At that time BCCI argued that on the grounds of size alone it was eligible to become an authorised bank. That is a matter of public record. The Bank refused to grant a full licence and made its reasons clearly known at the time. There were three very good reasons. First, the parent company, the Luxembourg hank, did not meet the criteria. Secondly, the parent was not prepared to guarantee the United Kingdom subsidiary. Thirdly, the chairman, Mr. Abedi, was not a banker. In other words, he was not a fit and proper person; and still is not. The Bank of England through the discount office, let it be known that BCCI would never be fully authorised until or unless it furnished full accounts for all its branches and subsidiaries worldwide.
The second banking Act in 1987 was preceded by a lengthy run-up period when the Bank of England's prudential supervisors visited every single licensed deposit-taking organisation and delisted those that were too small or did not fit the criteria of the day. Those, that could not fully meet all or any of the Bank's criteria were given ample time to wind down their deposit taking—that is, their banking activities —before the new Act became law.
The fundamental question to which I believe the inquiry has to find the answer is this. Given what the Bank of England already knew or suspected—that is the Clauses 41 and 42 point to which the noble Lord, Lord Bruce of Donington, referred—about BCCI not least with regard to fraud and the laundering of drugs money in the USA, Panama, Colombia, Nigeria, Pakistan and other places, and the invisibility of the Cayman operation, the Bank had ample grounds under the 1987 Act to refuse to grant BCCI a banking licence by virtue of that Act. The central question that the tribunal inquiry must ask is this. Why and when was there a change of heart by the Bank of England?
When BCCI opened its London branch, I think in about 1971, Bank of America owned 25 per cent. of the shares in the Luxembourg holding company and its subsidiaries including the Cayman Islands subsidiary. The other major shareholders were a man 436 called Ghaith Pharaon who was a controlling shareholder in a company called Financial General Bankshares USA; Kamal Adham, also a major shareholder in Edward Bates, which failed in 1974, and Abedi himself. Sheikh Zayed at that time had only a small shareholding. I think that it was less than 10 per cent.
BCCI was licensed in the United Arab Emirates by the UAE Currency Board. At that time Ronald Scott was managing director. He was seconded from the International Monetary Fund. Before that he was with the Bank of England.
In 1976–77 there was a very serious banking crisis in the United Arab Emirates. Several banks collapsed or had to be rescued. It was found that there had been a misapplication of funds on a gargantuan scale. According to data published at the time, 14 billion dollars had failed to show up in the UAE reserves, including unauthorised lending to the United Arab Emirates Currency Board. That alone amounted to 4 billion dollars. The source of that information is a matter of public record. I refer my noble friend to the International Currency Review of September 1977, vol. 9, No. 4.
At that time the Bank of England sent its then deputy governor, Kit McMahon, and a team to Abu Dhabi and Dubai to resolve the problem. Peter Edgely, who had previously been in Nigeria, was seconded to the team. Sheikh Zayed and a consortium of UEA-based international banks—that is the British Bank of the Middle East, Standard Chartered Bank, Citibank and others—formed a lifeboat. BCCI Emirates, which had more than 20 branches in the UAE, was saved. Sheikh Zayed increased his equity stake in BCCI as part of the rescue package initiated by the Bank of England and the UAE Bankers' Association.
In 1979 the Arab Monetary Fund was located in the same building in Abu Dhabi as the BCCI Emirates head office. Ghaith Pharaon's involvement with BCCI in the USA had been known to the bank since 1972 and possibly since 1970–75 when he gained control of the Bank of Commonwealth in Detroit and later the National Bank of Georgia.
In 1982 various bankers from Tennessee went to the Bank of England to discuss BCCI's 37 per cent. stake in Valley Fidelity Bank of Knoxville, Tennessee. They were told that there was no possibility that BCCI would ever become an authorised bank in the UK. The phrase used by the Bank of England was "over our dead body". Why was there such a change of heart?
These matters are of critical importance in the public interest. I sincerely hope that the inquiry will investigate them not least to resolve how they can be better controlled. I do not expect my noble friend to answer my questions today but I should be grateful if he would write to me. I should like to know more details about the nature of the international co-operation. For instance, if BCCI Luxembourg has a surplus of assets, will it be possible to utilise them to assist depositors in BCCI London?
In the course of repeating the Statement, my noble friend assured the House that everything that the 437 Government can do will be done to assist in particular the small depositors. I sincerely hope that the Government will consider carefully the possibility of keeping the dogs at bay; in other words, that the threats of penalty for the late payment of VAT and other taxation will be considered as an indirect means of assisting small businesses which have been harmed by this banking crisis.
The House should be grateful to the noble Lord, Lord Bruce of Donington, for raising the issue. Again, I thank him for doing so.
§ 4.19 p.m.
§ Lord Benson
My Lords, when a crisis of this kind afflicts this country it is the practice of the public and the press to make violent criticisms of everyone on the horizon. I have no wish to criticise anyone in relation to this matter because I do not know the facts. For that reason and because none of the public knows the facts an inquiry is necessary.
The inquiry is necessary for another reason; that is, to allay the anxieties of the public as to the future because the public will wish to be assured that, within the limits of human frailty, machinery is in existence which will prevent a similar situation arising again.
The best that I can do in this afternoon's debate is to indicate some of the areas in which inquiry and information for the public is specifically needed. Whenever a large group, whether industrial or banking, gets into a difficulty or is believed to be unstable the first essential action is that the red alert button should be pressed. As far as I know, that procedure already exists. However it is important that we know when that red alert button was pushed in relation to BCCI. I suspect that it was some years ago because it has been common knowledge in the City of London for a long time that BCCI was a high risk organisation.
Apart from the date on which the red alert button was first pushed, there is a subsidiary point of great importance. In the case of an international bank with widespread interests worldwide it is of crucial importance that it should be possible to find out the overall worldwide position of that undertaking. In this country we can always find out what is happening here, but it is the overall position which is of particular importance.
That is not as easy as it sounds. It is now so easy to move money around worldwide almost at the drop of a hat and in a couple of hours that if the board of directors is minded to do so, it can conceal with great ease the real situation of an international company. We should like to know what machinery exists to enable the full facts worldwide to be obtained when this sort of situation arises.
The third point is that once the red alert button has been pushed somebody must be appointed to grip the situation. By "gripping the situation" I mean that it should be watched very closely. It should be watched perhaps quarterly—and possibly more often. Sometimes a situation should be watched weekly or even daily. Somebody must watch the position in 438 order to be able to guide it, suggest that it be brought to an end or to carefully nurse it into a better state of health.
The Bank of England's reputation and practice in that respect has been very good. In the last recession, between 1975 and 1981, a great many industrial groups were on red alert but by careful husbandry, and with the help of the clearing banks and the advice of the Bank of England, the vast majority were nursed back to good health and are now prosperous.
The difficulty in a case like this is what was the location of the person who should have been gripping the situation, where was he designated and where did he conduct his business? As far as I can make out in this case the BCCI was domiciled in Luxembourg. The owners seem to be in the Middle East. I do not know from where the board of directors operated or where was the main seat of management. However, whoever was appointed to grip the situation should have been sitting very close to the administrative directorate in order to watch the daily position and know where and at what time he should either pull the plug or gently lead the company forward to better things.
The fourth point is that the moment the red alert button is pushed it is crucial to look at the management. That is the first step which should be taken. Who is managing the company? What is their competence? What is their record? What is their integrity? Are they capable of carrying the company forward or must changes be made? In the normal way of things, that practice works very well. Changes are unobtrusively made. Changes are forced upon companies which are not doing well but in the case of an international bank it is of particular importance to inquire into the management. The public are entitled to know what inquiries were made and what were the results of those inquiries.
The last point to which I wish to draw attention is that the public are entitled to know precisely why the company collapsed. It may have been due to improvident lending. If so, normally speaking once the red alert button has been pushed it may be possible to improve the situation by instituting more cautious policies; gradually taking the company out of its worst situation and leading it on to better things. If that is the case then we should be so informed.
What has disturbed me more than anything is what I read in the morning papers, which may or may not be correct. I read that massive fraud was suspected quite a long time ago. The moment massive collusive fraud is suspected it is easy to discover whether or not that suspicion has a basis in truth. That can be done very quickly. If it is found to be accurate, the normal practice is to bring the company to an end immediately. Fraud never goes away and it never diminishes; it multiplies month by month. Therefore it is important to stop the company trading immediately. Once that cancer is in the top management, nothing can save it.
The Government have already decided to appoint an inquiry and we must be grateful for that; but we need a full expos? of the reasons and an assurance for the future.
§ 4.26 p.m.
§ Lord Desai
My Lords, I join the noble Lord, Lord Morris, in thanking my noble friend Lord Bruce of Donington for initiating this debate by way of an Unstarred Question. Since the Statement was made in the House on Monday 8th July I have attended a number of meetings along with the noble Baroness, Lady Flather. BCCI is thought to be an Asian bank, we are thought to be Asian Peers and we were therefore asked to attend those meetings, which I gladly did.
Before I come on to what I wish to say I shall cover some of the points which the noble Baroness, Lady Flather, asked me to convey to the House and with which I concur. She cannot be present this evening. Many Asian merchant depositors have been caught by this affair. When I speak to them they say—I have no way of confirming what I hear—that they were happy with BCCI no matter what was going on at the top. They were happy because, given the nature of banking, they had little access to other banks. Sometimes they could secure loans only on personal recognition, family ties or other informal arrangements. They could obtain loans only from BCCI.
I comment on that only because it would seem that the rest of the clearing bank system is somehow failing to fill that market gap. I put it no higher than that. Due to that fact a number of local economies in some of our cities—Birmingham, Leicester and Bradford, for instance—are facing considerable difficulties caused by the multiplying factors of the non-availability of credit as a result of the BCCI affair. When it comes to saving depositors, if local authorities are to be bailed out for what they have lost, I hone that similar considerations will be given to other depositors as well. I shall return to that later.
I turn now to my more general remarks. I agree with: he noble Lord, Lord Morris, that this crisis, whether or not it is the largest in terms of money and in terms of what it tells us about the banking system, is perhaps as important as the crash of 1866, although very different. The problem is that for a long time we have thought of banking systems and regulations strictly in national terms.
Although London contains many foreign banks —offshore banks—we have been able to think of those banks as belonging to some other jurisdiction with which one could co-operate. Lately, through the 1980s and lot simply as regards this bank, due to deregulation and the financial revolution, we have a number of banks of no fixed abode. I put it no more strongly than that. They are multinational banks which have offices in one place and boards of directors in others and they carry on business. Perhaps the time has come once again to examine whether our techniques of regulation and our legislation are adequate to the task. If it is maintained that the Bank of England has done its duty and behaved promptly and correctly, given that this situation has arisen, the law should be changed. Alternatively, perhaps we lack the means of getting information in sufficient time, which is very important. Regulating banks in a 440 deregulated environment and in an international context may need measures which are different, better and quicker than we have now.
This banking crisis has European aspects, as the noble Lord, Lord Cockfield, pointed out. There are also international aspects as we are all aware. It may be that we have to look not only for European legislation but at the much wider consequences of the collapse.
One matter worries me. I am worried about what we have been told. We do not know the facts. We need to be told about the many efforts that were already afoot concerning restructuring the bank, given all the knowledge that the Bank of England had. If it is true that restructuring efforts were in progress and on the point of completion on the day the Bank of England ordered the shutdown, or even the day before, one wonders whether different parts of the Bank were acting on different information without co-ordination. It may be that one part of the Bank was looking into the fraud aspect and another into the question of restructuring. I do not know. I wish to know the facts. I hope that the inquiry will go into these aspects because they involve very important questions for the future of banking in this country.
I now turn to the question of relief. When the Statement was made, I asked the Government to think of some quicker interim relief measures that could be arranged. I recognise that there are legal obstacles to providing complete relief under the deposit protection fund. However, I still believe that something should have been done last week, or perhaps early this week, pending a legal settlement. Some way should have been found to give relief. If on Monday, as the newspapers report, an adjournment is obtained, deposit relief protection will be further delayed and people will be put to further trouble because the Bank will not be able to proceed on legal lines as before. We should think about that. Pending legal clearance, can we provide some form of immediate relief to people whose businesses are stymied by the non-availability of money? Perhaps this matter can be treated in the same way as we treat bad debts for VAT relief. It is the same kind of thing. It is similar to a bad debt if deposits cannot be taken out.
There is one other aspect which the inquiry should look into. It is a technical matter and I am speaking only because of a reasonable doubt. I refer to the auditors. Did they do their job properly? Are the auditors in the City at large doing their jobs properly? I do not know because I am not an auditor. But it seems to me that, if it is the duty of an auditor to raise questions, far too long a time had passed in that respect, from what we hear, before the whistle was blown. The whistle was blown not by the auditors but, as we gather, by someone who resigned from a highly responsible position in the bank. That raises considerable questions about auditing and the functions that it performs.
§ 4.34 p.m.
§ Lord Monk Bretton
My Lords, I was not entirely sure whether the noble Lord, Lord Bruce of Donington, was going to proceed with his Unstarred 441 Question despite my noble friend's statement. I am not sure that it is now as necessary as it was. Nevertheless, I should like to welcome his having put the question down because it gives me the chance to say a little more about the lessons from the BCCI collapse that I believe could be learnt from the closing of the British& Commonwealth Merchant Bank. That is something that I trust the Minister will bear in mind.
The trauma of BCCI will be a much more widespread matter. One must remember the consequences for small businesses and bank employees, many of them Asians. It is a very unfortunate story and I am sure that the sympathies of noble Lords on all sides of the House are with those people. It is important to do everything possible to mitigate the problems where possible. While on the subject of mitigating problems, I hope that the problems of the depositors in the British& Commonwealth Merchant Bank will not be entirely forgotten.
We have not had much serious banking trouble in this country since the important banking Act of 1842. Since then we have built a very strong banking system, of which we should be proud and of which a number of other countries are envious. We want to keep it that way. It is therefore quite probable that when our fire brigade comes out it does not come out very often —it may not work as well as we should like. Therefore we have to watch that fire brigade very carefully.
I return briefly to the question of the British& Commonwealth Merchant Bank, which closed during the summer of 1990. There were £300 million of deposits frozen at that time, and some of the bigger deposits were those of charities. There were three funds connected with Salisbury Cathedral which totalled £800,000. The Band of Hope, which is a temperance movement, also had £1.2 million deposited with the bank. One year later the £15,000 allowances had been paid off by the Depositors' Protection Board. The rest remains frozen. A payment of 40 per cent. of the rest is expected around September, but I believe it may well be later than this.
I understand that the liquidators spent many months trying to sell the bank as a going concern but have now decided—probably due to the difficulties of the present economic climate—to wind up the affairs of the bank. Therefore it looks as though depositors will have to wait another two or three years before receiving the rest of their money. Under these circumstances I wonder whether anything better could have happened. I am therefore very glad that there is to be an inquiry. I wonder whether our regulatory system is getting things right and whether the rules need further revision. They are supposed to provide some protection for depositors. In the case of the British& Commonwealth Merchant Bank, I cannot help feeling that the liquidators have been working on behalf of the creditors of the main holding company, British& Commonwealth, of which the bank was only a subsidiary. They have not worked in at all the same way for the depositors in the bank. What has happened to the depositors in this liquidation is an important matter. Is it the wish of Parliament that 442 they should come that far down the list? That question needs to be carefully considered. I wonder how the depositors will rank in the winding up of BCCI—dare I hope somewhat better?
§ 4.41 p.m.
§ Lord Harris of Greenwich
My Lords, I join other noble Lords in paying tribute to the noble Lord, Lord Bruce of Donington, for putting this issue on the Order Paper. It is not for me to speculate on whether the Chancellor of the Exchequer would have made a Statement at two-thirty this afternoon had it not been for this Unstarred Question. It is possible that it would have been made, but one suspects also that it is more likely that it would not have been made. For that alone the noble Lord, Lord Bruce, is to be congratulated.
As the noble Lord, Lord Bruce, said, we are discussing one of the most substantial banking scandals any of us has witnessed in this country. Thousands of people have had their lives destroyed as a result. Many small businesses are going bankrupt. Many public authorities and charities in this country are experiencing the most severe difficulties. I do not propose to discuss the issue of bankruptcies or the position of local authorities. My concern today, as it has been in the past, is the position of the Bank of England and the Treasury. When I mention the Treasury I am interested not only in its supervisory relationship with the Bank of England but in its direct responsibility for Her Majesty's Customs and Excise, a matter to which I shall come in a few moments.
As some noble Lords will recall, I initiated a debate on this issue on 23rd April last year. I did that following the conviction of subsidiaries of BCCI in the United States Federal Court in Tampa, Florida, when fines larger than any ever exacted on banks in the United States were imposed. In that debate, the Minister, the noble Lord, Lord Henley, who had had to pick up the brief at very short notice because of the absence of his noble friend Lord Caithness, sought to minimise the significance of what had happened in Florida. So, surprisingly, did the noble Lord, Lord Bruce, who, commenting on press reports on the proceedings at Tampa, said:I have been in Parliament long enough to know that just as trial by television is dangerous, so is trial by the press". —[Official Report, 23/4/90; col. 412.]The very reverse is true. If the press had followed up these matters with even greater vigour, it is possible that some of those who have now been ruined would not have been ruined. It is instructive to note that two local authorities decided, as a result of the publicity of the case in Tampa, to get their money out of BCCI. It is unusual in this House to pay tribute to the London Borough of Lambeth, but it did in fact take its money out of BCCI, as did the London Borough of Tower Hamlets.
I turn now to what the noble Lord, Lord Henley, said. I repeat that I am not making any direct references to him in a critical sense as he was acting as counsel for the Treasury. He said:It should also be borne in mind that there are substantial differences between the United States law of vicarious corporate liability and the English law of corporate liability.443In the United States, if an employee commits a crime in the course of his employment while exercising the authority, real or apparent, vested in him by a corporation and the criminal act was done, at least in part, to the benefit of the corporation, however small that benefit might be, the corporation is also guilty of the offence".There then followed an especially interesting sentence. He added:It is not a defence for the corporation that the employee acted outside the policies of the corporation". [Official Report, 23/4/90; col. 420.]But, as we know from events which have taken place since that time, many of these employees were not acting outside the policies of the corporation. It is quite clear that a number of significant figures in BCCI were using the bank to launder huge sums of money derived from the operations of drug dealers in Colombia, Panama, the United States and elsewhere. Indeed, we know that members of the management in London were urging employees of BCCI in Panama City to redouble their efforts in seeking out cocaine dealers in order to secure their accounts for BCCI.
It was implied in the Minister's Statement in the other place on Monday, which the noble Lord, Lord Bradazon of Tara, repeated in this House, that the money laundering charges were one thing and the present fraud allegations something wholly different. It seems to me quite extraordinary that the Treasury should use such an argument. I realise that the Treasury is not normally involved in criminal justice issues; but those who are involved in them know perfectly well that where you have large-scale money laundering you also have false accounting and fraud. In fact, the situation is quite clear; since the case in Tampa last year, every person who had knowledge of money laundering had no doubts whatever about what was happening. I believe that that should be stated very clearly.
During the last debate on the matter, the noble Lord, Lord Henley, said that it was for the Bank of England and not the Treasury to determine whether the bank's directors, controllers and managers were fit and proper persons under the terms of the Banking Act and whether they were conducting their business in a prudent manner with integrity and skill. We now know the answers to those questions. Unhappily, the Bank of England did not, until just three weeks ago.
The question before us, and the question to be decided by the inquiry which has just been announced, is why the Bank failed to take action earlier. We are told that it was only recently when it received the Price Waterhouse report that it secured prima facie evidence of widespread fraud in a number of jurisdictions stretching back over a number of years. I must say that I find that explanation impossible to accept. The hard evidence of the money laundering operations in the United States was available not just when the case came to trial in Tampa but also when the indictments were handed down and when the investigations took place two years before.
I believe that the Bank of England had every opportunity to secure the necessary information. Apart from anything else —this is the point I should like to put specifically to the noble Lord, Lord Brabazon of Tara—it could, through the Treasury, have obtained information from Customs and Excise 444 which was directly involved in the investigations surrounding the Tampa case. That was stated in the other place by the then Chancellor of the Exchequer, Mr. Major, who said that representatives of the Customs and Excise had been directly involved in those investigations. During the investigations, undercover Customs agents, posing as money launderers, were told at a meeting in London, which was taped, that there was an inner circle of highly placed officials inside the bank who could be trusted to launder the proceeds of cocaine sales.
Let me put this directly to the Minister: did the Bank of England ever ask for the detailed information which it knew was in the possession of Her Majesty's Customs and Excise? I repeat: many of those incidents occurred in 1988 or even earlier. I come now to the events of 1989. Mr. Robert Morgenthau, probably the leading attorney in the state of New York and a former United States Attorney, gave evidence to the Consumer and Regulatory Affairs Sub-Committee of the Banking Committee of the United States Senate on 23rd May this year. He said:In the summer of 1989, over the 4th July weekend, several members of my staff attended an international conference on money laundering in Cambridge, England. They learnt that BCCI had an international reputation for capital flight. tax fraud and money laundering that far exceeded the conduct charged in the Florida indictment".Let me put this to the Minister. Given the character of those in Cambridge discussing the issues—many representatives of regulatory agencies and others—can it be seriously maintained that the Bank of England was unaware of the evidence that then existed to which Mr. Morgenthau drew the attention of the sub-committee of the United States Senate?
We then come to the events of last year. First, we had the case in Tampa, Florida, to which I have referred; then we had the receipt by Mr. Howard, the Secretary of State for Employment, of a letter from BCCI employees, including one of their internal auditors—a point mentioned by the noble Lord, Lord Bruce of Donington—alleging embezzlement and corruption within the bank. Those are serious allegations. What happened?
We hear that a letter went from Mr. Wedgwood Benn to the Treasury. Someone in the Minister's correspondence section of the Treasury then sent the letter to Mr. Howard. Mr. Howard is the one Minister who clearly saw the letter—there is no evidence that any other Minister saw it—because he signed the letter which went to his colleague, Mr. Ridley, at the Department of Trade and Industry. I do not propose to go into that series of farcical episodes, which is a cross between John Cleese and Inspector Clouseau, but it is not a matter of mirth. Many people have been grievously damaged as a result of what was clearly negligence by someone.
Then there is the question of the auditor's report, received by the Bank last October which we heard about for the first time only on Tuesday of this week. The Bank of England says that the report contains details of what it describes as "inappropriate transactions" and which a senior partner in the Washington law firm of Patten, Bloggs & Bow, 445 representing the Abu Dhabi Government, says contained specific warnings of suspected massive fraud. The lawyer concerned said:My immediate reaction was that we are dealing with the biggest fraud in history".Yet still the Bank of England did not act. We are entitled to ask why that was so. I agree with the noble Lord, Lord Bruce of Donington, that the Bank of England may have some powerful evidence to provide. I hope very much that if such evidence exists, the Bank will give it to the inquiry. However, there is the other matter concerning Mr. Morgenthau. The Minister will recall that I raised this in the House on 8th July. Mr. Morgenthau made the complaint that he had asked for co-operation from the Bank of England but had not received it. On 8th July the noble Lord, Lord Brabazon, said at col. 1243 of Hansard: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".When Mr. Morgenthau spoke to the subcommittee of the United States Senate he was asked by Senator Dixon:To what extent do you believe that current bank confidentiality laws impede the effective prosecution of these financial crimes?Mr. Morgenthau replied:They seriously impede it because you have laws, particularly where you have a bank which has headquarters in the Caymans and Luxembourg and has its main offices in England, and when you try to get these records they invoke the secrecy law of all those jurisdictions. The main audit of BCCI was done by Price Waterhouse UK. They are not permitted under English law to disclose—at least they say that —the results of that audit without authorisation from the Bank of England. The Bank of England so far—we have met them both here and over there—have not given that permission".To avoid any misunderstanding Mr. Morgenthau repeated his complaints concerning the Bank of England on two separate occasions during his testimony to the sub-committee of the United States Senate. It is certainly true—I believe the noble Lord, Lord Brabazon, has said this—that the situation changed. Indeed it did. Yesterday Mr. Morgenthau added the following to what he had told the Senate sub-committee. He stated:For the past month the Bank of England have been co-operative. Before that it was not".That is the case the Government have to answer on behalf of the Bank of England. I still find it astonishing that co-operation was withheld. I hope the Minister will give an explanation.
If it is correct—as it clearly is—that the Bank withheld co-operation from Mr. Morgenthau who was conducting a detailed investigation into the affairs of BCCI, why was it right for the Bank to withhold co-operation for a substantial time, as Mr. Morgenthau said, and then suddenly change its position in the past three or four weeks? I should be immensely grateful if the noble Lord, Lord Brabazon, could help us on that matter.
I have spoken critically on this occasion of the Bank of England as, in my view, there is a significant prima facie case against it. But, as I said on the previous occasion, I believe it essential—I agree with 446 the noble Lord, Lord Bruce of Donington that the Bank's reputation for competence is maintained if London is to maintain its position as one of the world's leading financial centres. I believe all of us recognise that fact. That is why, if mistakes—possibly grave ones—have been made, it would be far better to own up to them now rather than to allow further, and possibly even more damaging, disclosures to come to light in the next few months.
I have indicated—as I believe is the case with all my noble friends—that I welcome the announcement by the noble Lord, Lord Brabazon, that there is to be an inquiry. But I must say that, first, we shall expect the terms of reference of the inquiry to include the behaviour of Ministers and officials in government departments. In my opinion there is no question of having an inquiry that is solely directed at the conduct of officials of the Bank of England.
The second point is that whoever conducts that inquiry must be given access to evidence from HM Customs and Excise about the Tampa case and related evidence associated with the case.
My last point is this. I remain deeply uneasy about the sentence in the Statement, which I quoted after the Minister had repeated the Chancellor's Statement earlier this afternoon, that,I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors".That may be wholly true but it is astonishing to announce the setting up of an inquiry and to make a judgment of that kind before anyone has inquired into the facts. It puts the person who is to conduct the inquiry in an exceptionally difficult position, because if he reaches a different conclusion, he will have to take on the Chancellor of the Exchequer in so doing.
That is why I return to the point which I put to the noble Lord, Lord Brabazon of Tara, and which was repeated by others. It is essential that someone wholly independent should conduct the inquiry. In my view it should be a senior member of the judiciary, and he should, whenever possible, take evidence in public.
§ 5 p.m.
§ Baroness Blackstone
My Lords, I, too, am most grateful to my noble friend Lord Bruce of Donington for putting down this Question. I now have reason to be even more grateful since pressure from the Opposition for a public inquiry has clearly forced the Government to act, as other noble Lords have already said. I was only sorry that the only time that could be found for the matter to be debated was as the last business on a Friday since the issues surrounding the collapse of BCCI raise the most serious questions about the competence of the Government to handle the regulation of the banking sector.
I am sure that many more Members of your Lordships' House would have wished to have taken part in this debate had it been held at a more convenient time. However, at the same time I am glad that we are debating the matter today since yesterday was marked by yet more revelations of the crass handling of this serious fraud and today we have had a major Statement from the Government on the matter. Although some of what we might have wished 447 to say has been overtaken by the Government Statement, which like other noble Lords I welcome, at the same time there are a number of important questions on which we need more information.
Before commenting on the events of today and yesterday perhaps I may go back a little in time. When the Government announced in a Statement 10 days ago that BCCI was to be shut down they attempted, very unconvincingly, to cover up the Bank of England's negligence in failing to investigate the activities of BCCI much earlier. Moreover, Ministers appeared either singularly ill-informed about the crucial question of when the Bank of England first became suspicious and had grounds to set in train an investigation or they were aware of when that was but were not willing to say. I mention that because I specifically asked the noble Earl, Lord Caithness, after he made the earlier Statement, when the Bank of England first became suspicious. He said that he did not know.
The inquiry will want to examine some of the history of this affair. This is the bank known in some quarters as the Bank of Crooks and Criminals International. This is the bank which last paid a dividend to its shareholders in 1980. This is the bank which refused to allow the Bank of America to inspect its books in certain countries, forcing the Bank of America to divest itself of its shareholding. This is the bank which repeatedly, throughout the 1980s, was sustaining large losses and covering them from deposits. This is the bank whose staff were arrested and charged with laundering 82 million dollars of drugs money in Florida in 1988 and later convicted for that offence. This is the bank which in 1989 had losses of nearly 500 million dollars and bad debt provisions of 600 million dollars. This is the bank which, in a confidential report for a large UK-based finance house, raised the possibility that it was laundering money that had been raised for Palestinian terrorists.
This is the bank about which the US authorities were so concerned that they decided to close branches in New York and California after finding strong evidence that it had secretly gained control of Washington's largest bank 10 years earlier and had been using that bank for its own purposes since then. This is the bank which was lying to its investors in telling them that they were covered by the investors' compensation scheme when the fact that IMRO did not grant a licence but only interim authorisation meant that they were not covered—a fact which emerged as long ago as April 1990.
Clearly, there was some anxiety on the part of the Bank of England as early as May 1987 when, along with the central banks of Luxembourg, Spain and Switzerland, it formed a college of regulators specifically to discuss BCCI's affairs. The noble Lord, Lord Morris, wanted to know more about that. My question is, why did not that group start an investigation after the arrest for drug laundering in 1988? A similar question was put by the noble Lord, Lord Harris of Greenwich. Why, moreover, did United States customs officials meet with nothing but 448 obstruction from United Kingdom authorities in their efforts to trace drug money transactions through BCCI?
I now turn to the events of 1990. In March, the auditors, Price Waterhouse, reported to the Bank of England that BCCI was in serious financial trouble. It found major gaps in the accounts. raising the possibility of misuse of funds. It found a large number of questionable loans outstanding, mainly to wealthy Arabs, with no evidence of repayment. It found lax internal controls. In May, amazingly in the light of this, Price Waterhouse signed BCCI's accounts as true and fair. In spite of a footnote about the Abu Dhabi Government's undertaking to BCCI to maintain the group's capital base while,reorganising and restructuring necessary for its continued development is undertaken".Yet it failed to issue a formal qualification of the accounts.
The next question is, why did the Bank of England agree to that restructuring by the Abu Dhabi Government? Was it not either lax or naive, or both, to assume that the Government would be able to sort out that mess? Clearly, subsequent events suggest that it was a serious error of judgment by the Bank of England.
As my noble friend Lord Bruce of Donington said, the failure to act becomes even more difficult to comprehend in the light of the revelations about letters which went to the Treasury, the Department of Employment and, apparently, the Department of Trade and Industry in June of last year. Why, when Tony Benn forwarded a letter to the Treasury from BCCI staff urging the authorities to investigate "all the dubious activities" of BCCI, referring to the catastrophe that would befall shareholders, investors and employees, if nothing was done?
We are now told that Treasury Ministers did not know about that letter. Ministers are responsible for the work of their departments. If they fail to convey the need for officials to inform them about potential banking catastrophes, they must carry the can. The Prime Minister was the Chancellor of the Exchequer at the time. He must ultimately be responsible. Why, when the letter was forwarded to the Bank of England, did it fail to instigate the necessary investigations which would certainly have uncovered the fraud earlier?
The second letter, to which other noble Lords referred, from a senior internal auditor at BCCI was even more explicit, referring to incompetence beingsurpassed only by the widespread corruption and nepotism within the organisation".Because it was also concerned with staff redundancies, the letter was apparently sent to the Department of Employment. Why did the Secretary of State send it to the DTI—the wrong department? Does he or his officials not know that this was a Treasury matter? Why and how did the DTI lose the letter? The Government must answer those questions and answer them now rather than wait for the outcome of the inquiry.
It simply will not do, in the light of these letters, to say that there was no evidence of fraud under Section 41 of the Banking Act. Perhaps there was no hard 449 evidence at that point, but in the light of everything known already about the bank and the further information from inside BCCI surely —as the noble Lord, Lord Benson, implied—alarm bells should have been ringing in the Treasury and the Bank of England and an immediate investigation should have been instigated.
The noble Lord, Lord Harris of Greenwich, drew our attention to the auditors' report. The report from Price Waterhouse to BCCI directors in October last year uncovered evidence of insider loans and non-performing loans, running to hundreds of millions of pounds, as well as prima facie evidence of fraudulent documentation. In December, a Lloyd's agency filed a civil racketeering suit against BCCI, alleging a long list of illegal acts including smuggling, arms dealing and customs violations. Yet apparently it took until January this year for the Bank of England to invite Price Waterhouse to act under Section 41 of the Banking Act and investigate malpractice. It was too little too late but I hope that the inquiry will uncover more about the strange delay.
There are now serious questions about the capacity of the regulatory system to deal with banking fraud. As the noble Lord, Lord Benson, said, public confidence must be restored. It has already been suggested that many depositors will now remove their money from the smaller banks and that could lead to serious problems, if not a crisis, for those organisations.
As I said at the beginning of my speech, I welcome the fact that the Government have belatedly accepted that it was wholly inadequate to shelter behind an internal Treasury inquiry to see what lessons could be drawn. It is not just a matter of fraud. It is a question of the supervision of unsound banking practice. That is what the inquiry must consider. It must examine not just what the Government and the Bank of England knew but what they should have tried to find out and when.
Perhaps I may suggest the other main areas that the Labour Party considers that the inquiry should examine. Let me also tell the House what we believe should be the terms of reference, since we have not yet heard them from the Government. I shall list some questions that should be answered immediately by Ministers. Beginning with the terms of reference, the true facts of the case ought to be established, including the role of Ministers, the dates and contents of auditors' reports and other information to which the Bank either had access or might have been expected to have secured access. Secondly, the inquiry should assess what steps should be taken to ensure so far as possible that there is no repetition of the persistent, unsound banking and the fraud revealed in this case.
I now turn to the areas of inquiry that should be covered. The inquiry should consider whether current regulatory procedures concerning both sound banking practice and fraud provide adequate protection for the consumer; whether there should be an independent supervisory body for the banking industry; whether banks should have a statutory responsibility themselves to insure customers' deposits and protect their 450 customers in that way; and whether this country should propose amendments to the European Community's first banking directive to establish more effective supervision within the single market. I believe that the noble Lord, Lord Cockfield—he is not in his seat —referred to that. Finally, it must consider the role played by BCCI's auditors in the light of their responsibility to present a true and fair view of the company's accounts and what changes should be made.
I turn to the questions that I hope the Minister will be willing to answer today. Will Ministers co-operate fully with the inquiry? Will the role of Ministers be a subject of the inquiry? Why have Ministers so far refused to tell us what they know and when they knew it? Since IMRO refused BCCI a licence on 28th April 1990 because it was not a fit and proper organisation, why did the Government not act? Did they not know about that refusal? If they did not know about it, why not? Finally, will the Government assure us that there will be an interim report which can clear up quickly matters of fact including the facts as to the role played by Ministers, including the Prime Minister when he was Chancellor of the Exchequer? Since the answers to those questions are crucial to re-establishing public confidence, I shall be grateful if the Minister will address them.
In conclusion, while buck-passing has taken place between the various government departments and the Bank of England, with letters being lost, the unfortunate depositors in BCCI have lost their money. Does the Minister agree that it was wrong of the Prime Minister to lay the blame on local authorities for being imprudent? Would it not have been better to await the results of a proper inquiry? I wait with interest to hear what the Minister will say.
It is a sorry saga. While there may always be greed which leads to illegal and irregular activities by financial institutions, it is the Government's job to do all they can to prevent that happening and to take urgent action to check it when it occurs. The Government on this occasion have singularly failed to act with the speed required or with the serious concern merited by a growing body of evidence of incompetence and malpractice. In failing to do so, they have jeopardised confidence in the system of regulating banks—a confidence that must be restored by getting to the bottom of this scandal.
§ 5.17 p.m.
§ Lord Brabazon of Tara
My Lords, a number of noble Lords have raised a variety of very serious matters in the course of the debate. I shall attempt to address as many of them as I can. If I cannot do so, I shall, where appropriate, write to noble Lords.
I shall begin if I may with the issue which I believe has to be the priority in the short term; namely, the extremely difficult circumstances that many individuals and businesses now face as a result of the action that was taken by the Bank of England and other international supervisory authorities on 5th July. A number of noble Lords have referred to those, in particular the noble Lord, Lord Desai, in relation to the Asian community.
451 None of those involved in the decision to take that action was under any illusions about its consequences. Thousands of customers, and others who had dealings with the bank, have faced confusion and uncertainty, and no one can make any promises about when those uncertainties will be removed. But I can assure the House that everything we can do to speed up the resolution of those difficulties, we are doing.
First, the Bank of England is putting a massive effort into getting the deposit protection scheme into action as soon as is humanly possible. As I said in my earlier Statement, I understand the Deposit Protection Board will be writing to depositors immediately inviting them to claim. Our latest estimate is that the UK branches at the bank have some 50,000 sterling accounts, but some customers may have more than one such account. The board will not legally be able to make any payments until after the winding up order has been granted, but the Bank has obtained an expecited hearing for this order, which is to take place on Monday. Thereafter, it and the liquidators will be putting a huge effort into verifying individuals' entitlements as soon as this can be done.
The noble Lord, Lord Desai, asked whether anything could be done in the interim. Unfortunately, there is nothing that can be done under the deposit protection scheme unless and until there is a winding-up order. That is the law under the Banking Act. We can only hope that the order goes ahead on Monday because it is in the interests of the small depositors.
The simple cases should not take more than a matter of weeks to resolve, although more complicated cases (for example, where customers have multiple accounts with the bank or are borrowers as well as depositors) may take a little longer. Nonetheless, the House, can be assured that the Bank of England is committed to carrying through this operation as speedily as it can and Treasury Ministers will be keeping in very close touch with the progress in processing claims.
I also entirely sympathise with the difficulties faced by small businesses which banked with BCCI, whose problems a number of noble Lords drew my attention to. As I reported earlier, the liquidators have been co-operating with the Bank of England and the main high street banks in putting in place arrangements to aid the banks in assessing applications by small businesses for alternative facilities. I emphasise that this is of course a commercial matter for the banks. But I am glad to hear that a number of the high street banks have set up special centres for dealing with applications from former BCCI customers and I hope very much that they will be able to respond sympathetically to these cases.
In addition of course, as I said last week, Touche Ross, the liquidator, has offered to provide free advice to any small businesses affected for a period of six weeks. I hope that that will be of some consolation to noble Lords because we all wish to see such people helped as much as possible.
My noble friend Lord Morris asked about Customs and Excise and the Inland Revenue. I am sure that 452 they will take into account these circumstances if tax payments are delayed because funds are frozen in BCCI accounts.
I turn to the situation of local authorities, which was referred to by the noble Lord, Lord Bruce of Donington, and by the noble Baroness, Lady Blackstone. One can sympathise with the predicament of local authorities and other players in the wholesale markets which have placed substantial sums of the order of millions of pounds with BCCI. However, the Government do not accept at all the suggestion that in any way these local authorities were actively encouraged by the Government to believe that the deposits were guaranteed. Much has been made of the Bank of England's list of authorised institutions and some have suggested that the presence of BCCI on it amounts to some kind of guarantee. That is of course not true, and that was explained to representatives of the local authorities at a meeting in the Treasury on 10th May. I understand that sections of the minutes of that meeting are being publicly quoted and have been quoted in newspapers. Perhaps I may in turn pick out some telling sentences:The Bank said that it was important to regard the list of authorised institutions as just that: a list of institutions authorised to take deposits at the date of the list".Further on the minutes state:The list did not say anything about the relative creditworthiness of the institutions or that they could not fail. That was an assessment the local authorities and other depositors had to make".The fact is that this is a sophisticated market in which those concerned took professional advice because they were running professional risks.
What all these, undoubtedly very hard, cases reveal only too clearly is the drastic consequences which follow when a bank of this kind is put into liquidation. This is an important counter-argument to the claims that the Bank of England should have acted sooner on the basis of suspicion, rumour or hearsay. The Bank of England has draconian powers which we have seen exercised decisively and effectively in recent weeks. But given the consequences of those actions, Parliament rightly insisted that the Bank of England's decisions should be subject to appeal, thus requiring it to satisfy itself before acting that it had sufficient evidence to support the use of its statutory powers.
In the case of this bank, there has certainly been a steady flow of rumour and suspicion in the press and the City during the past few years, as mentioned by the noble Lord, Lord Benson; and the Bank of England takes account of rumours that are expressed about authorised institutions, whatever their source, and looks into them if it believes that they merit investigation. The noble Lord, Lord Harris, today recalled anxieties which he expressed in a previous debate initiated by him in this House. I repeat now, retrospectively, the assurances that were given by the Government at the time; namely, that the anxieties raised by noble Lords were passed on by the Treasury to the Bank so that it could look into whether they called for further investigation.
As was explained to noble Lords at the time, the actions the Bank takes as a supervisor in respect of authorised institutions frequently cannot be explained 453 publicly, but I think it is obvious now that the Bank of England and its supervisory colleagues worldwide were actively engaged in a great deal of work behind the scenes and that they were looking into this bank very closely and taking steps to secure the interests of depositors. Elements of what has been done are publicly known; for example, it is no secret that the regulatory authorities actively encouraged the group's decision to appoint only one auditor for the whole group. Equally, the Bank of England was in the lead in encouraging the formation of an international college of supervisors to enable a better overview of its worldwide operations. Without these developments, the sophisticated fraud of the kind it emerged we are dealing with here would have been much harder to detect.
I hope noble Lords will appreciate that I cannot comment on the precise details of the evidence the Bank received this year as a result of Price Waterhouse's investigations since there may well be criminal prosecutions in the future and it would not be right to say anything that could prejudice them. No doubt all this ground will be covered thoroughly in the inquiry I have just announced. However, some details of the case have been revealed by the governor, and I repeat them here.
The reason that the Bank commissioned a special report under its Banking Act powers earlier this year was that it had been informed of substantial unrecorded deposits by an employee of the bank. The investigation which Price Waterhouse subsequently undertook provided evidence of those allegations and revealed in addition a variety of deceptive practices apparently used to conceal undisclosed losses on operations and loans granted with no expectation of repayment. The overall picture was of a widespread fraud going back over a period of years and in a number of jurisdictions.
Noble Lords have raised today a number of incidents or episodes in the past, some of which were discussed in this House in our earlier debates and some of which have been raised in the press in the wake of the action taken on 5th July. It has been suggested that one or other of these should have offered the clue to the fraud that has now been discovered and that the Bank was tardy in acting.
A number of noble Lords have mentioned specifically press rumours that previous audit reports in the spring or autumn of 1990 already offered sufficient evidence of this fraud. Naturally, neither I nor Treasury Ministers have seen those audit reports, and nor would we expect to. However, the Bank of England has given the Treasury an explicit assurance that, although previous audit reports showed evidence of poor banking standards and losses (which were tackled by injections of capital from the shareholders and management changes) those reports provided no evidence on which the Bank could act in respect of the widespread fraud subsequently uncovered in the Section 41 report. The only possible connection between the reports and the action now taken by the Bank is that it was the change in management 454 prompted by earlier audit reports which ultimately led to the supervisor's decision to close down the bank on 5th July.
Lord Bruce of Donington
My Lords, is the noble Lord aware that during the past five minutes he has been giving evidence on behalf of the Bank?
§ Lord Brabazon of Tara
My Lords, I am trying to respond to the noble Lord's Question by giving as much detail as will be helpful to the House. If he wishes to leave all those matters to the inquiry, I am happy to sit down and finish the debate now. I shall continue.
Noble Lords have recalled anxieties they expressed at the time about the involvement of BCCI employees in money laundering activities in the United States. The noble Lord, Lord Harris of Greenwich, was very interested in that matter. He asked whether it affected the suitability of BCCI for continuing authorisation in the UK. The Treasury passed on those anxieties to the Bank of England at the time, as noble Lords are aware, and they were investigated. But I understand that the Bank of England had already intensified its supervision and monitoring of BCCI in the light of the convictions. The fraud now discovered in BCCI is not connected with the earlier convictions in the United States. I am advised that those prosecutions related to the activities of particular individuals and were not sufficient grounds for action under the UK Banking Act. Fraud by an employee is not of itself a reason to close down a bank. In BCCI we are speaking of widespread and massive fraud getting to the heart of the business. Beyond those specific words and assurances, I hope that noble Lords will appreciate I am not in a position to speculate about the details of the fraud now discovered.
A number of noble Lords, notably the noble Lords, Lord Bruce of Donington and Lord Harris of Greenwich, and the noble Baroness, Lady Blackstone, raised the now famous Ambrose letter. The then Chancellor did not see the Ambrose correspondence. It was passed to the Department of Employment because that is to where the letter was addressed and it dealt mainly with employment matters. The correspondence also drew attention to losses made by BCCI. Those had already been published in audited accounts. The letter contained unsubstantiated allegations about corruption similar to those that had already been made. The Bank of England received a similar letter shortly after the Ambrose correspondence was replied to, to which reference has also been made. That was passed to Price Waterhouse. The Treasury heard a number of similar allegations and rumours over the period in the House and from other sources. Those allegations were passed on to the Bank of England.
I accept that the handling of the letter was unsatisfactory. But the Bank of England already had that information and therefore it made no difference in practice. The figures in the letter were published figures and the accusations of corruption were unsubstantiated.
The noble Lord, Lord Benson, made an extremely interesting speech and some perceptive comments.
455 They showed the deep knowledge of the subject possessed by the noble Lord, and I am sure that the Bank and the Treasury will want to consider all the matters that he raised, even though they may not be covered by the inquiry—though I hope they will be.
My noble friend Lord Monk Bretton mentioned the British& Commonwealth Bank, which is in administration. I understand that the bulk of the bank's deposit protection payments have been made. The B&C was an example where a solvent bank was brought down by problems elsewhere in the group. That case illustrated problems with supervising groups of a different type to the BCCI which the regulators are considering.
The noble Lord, Lord Harris, drew attention to the possible involvement of Customs and Excise. I assure the noble Lord that the Bank of England has direct contact with Customs and there are exchanges of information both after the Tampa convictions and at other times. The noble Lord referred to the Bank of England's co-operation with Mr. Morgenthau and the New York State authorities. The noble Lord made a good point when he asked how it was that the Bank had riot been able to provide information earlier. I can say that the Bank considered that there were legal difficulties in handing over information and that confirms the earlier comments. The Bank subsequently found a basis upon which they could co-operate—in other words, a specific gateway in the security provisions that were applicable—and have been co-operating since. I hope that that clarifies that point.
Finally, before concluding, the noble Baroness, Lady Blackstone, asked for an assurance that Ministers would co-operate with the inquiry. I am happy to give that assurance though under the Banking Act Ministers have no direct role in banking supervision. For the moment, there are a number of pressing priorities, notably for the liquidator, the Bank and the Deposit Protection Board to pursue the task of sorting out the affairs of those who have banking facilities and outstanding transactions with BCCI. Equally, the Serious Fraud Office have investigations to pursue, and I am sure that no one would wish to prejudice any possible prosecutions. That is not to say that the implications of what has happened will not be fully considered.
456 The Treasury will discuss with the Bank the full implications of the case and the lessons to be learnt. As noble Lords are aware this afternoon, I repeated the announcement regarding an independent inquiry. In addition, the Treasury and Civil Service Select Committee in another place called for the Governor of the Bank of England to see them next week, which will provide an additional opportunity for these matters to be taken up and for the Governor to report publicly on the latest developments.
I hope that noble Lords will feel that the matters raised this afternoon will be fully and properly investigated. As I said earlier, if I have not been able to answer any precise questions, I shall write where that is appropriate.
§ Baroness Blackstone
My Lords, before the noble Lord sits down, perhaps I may say how grateful I am to him for reassuring the House that there will be full ministerial co-operation with the inquiry. I am also glad that he admitted that the handling of letters sent to the Treasury and other government departments had been unsatisfactory. However, I find it difficult to accept that there would have been no difference in practice if Treasury Ministers, including the present Prime Minister, had taken proper notice of the letters, since all the allegations about corruption look as though they have some basis in fact.
Will the Minister answer my other questions? Specifically, will the role of Ministers be covered by the inquiry? After the IMRO decision not to grant a licence to BCCI, can he tell me why the Bank of England then failed to act and whether the Government knew about the position concerning IMRO at that time?
§ Lord Brabazon of Tara
My Lords, I cannot answer the last question about IMRO. As I said earlier, there may be certain things about which I shall have to write to the noble Baroness, and that is one of them. As regards ministerial co-operation, I have already said that Ministers will co-operate fully with the inquiry. If that means ministerial involvement, then that will be one of the matters. That is far as I can go on that.
§ House adjourned at twenty-four minutes before six o'clock.