BCCI: Was Bank afraid of 'racist' tag?

JUST when you thought it was all over, history's biggest corporate scandal has resurfaced. Almost 13 years after the £13 billion collapse of the Bank of Credit & Commerce International, the Bank of England is being dragged into court to defend its role in the drama.

On the face of it, the Old Lady of Threadneedle Street will need the spinning skills of an Alastair Campbell when hearings begin a week on Tuesday.

After all, an earlier inquiry by Lord Justice Bingham condemned the Bank's record as 'a tragedy of errors, misunderstandings and failures of communication'.

Given that BCCI was insolvent from 1975 - five years before its first UK licence - the Bank would certainly have had its work cut out to defend a charge of negligence.

But BCCI's liquidator, accountant Deloitte & Touche, cannot sue for negligence - Parliament granted the Old Lady immunity from such lawsuits. Instead, Deloitte has to prove

'misfeasance in public office', a much more serious matter usually reserved for a policeman who arrests an innocent person he dislikes, or similar abuses.

Deloitte claims the Bank licensed BCCI, founded in 1972 by Pakistani financier Agha Hasan Abedi, not because it was sound, but because it feared accusations of racial prejudice - most of its UK customers were from the Asian community - and upsetting BCCI's Middle Eastern friends at a time of oil shortages.

After this initial error, Deloitte will claim, the supervision department was unable to admit its mistake and proceeded dishonestly on the basis that it would be all right on the night.

An epic legal battle looms. Deloitte will field a team of five heavyweight QCs

while three former Bank governors, incensed by suggestions that their staff behaved in bad faith, are determined to give evidence.

Lord Richardson, who dates back to Edward Heath's premiership, Lord Kingsdown and the combative Sir Edward George will all testify.

The case is hugely important for the future running of Britain's financial services industry.

Should Deloitte succeed, a way will have been found round the Bank's immunity, exposing organisations such as the Financial Services Authority to court action every time a firm, such as Equitable Life, bites the dust.

Second, victory for Deloitte would mean

damages approaching £1 billion, to be paid by the Treasury, at a cost equivalent to nearly 0.5p on the basic tax rate.

Third, as Deloitte has to allege bad faith by the Bank's supervision department, victory would mean 22 named past and present employees being labelled as dishonest. The best-known are Brian Quinn, now chairman of Celtic football club, Peter Cooke, Rodney Galpin and Roger Barnes. All are effectively retired.

Deloitte argues that from 1980, when the Bank licensed BCCI, to July 1991, when it shut down BCCI, the true state of the 'Third World Bank' was well-known. BCCI had operated in Britain since 1972, before banks needed a licence.

Featuring in Deloitte's evidence are Bank papers, including one from Cooke describing Abedi as 'the living personification of Uriah Heep' along with a memo warning that, were the Bank to start regulating BCCI rigorously, it would be as dangerous as 'walking on a motorway'.

Bank of America, a BCCI shareholder, informed the Bank that 'we wouldn't lend the bugger [Abedi] a bob'.

These papers show the Bank was honest and conscientious in supervising BCCI, according to Threadneedle Street. Deloitte believes otherwise. BCCI, which operated in 69 countries, was out of control, linked with drug trafficking in Florida, sanctions-busting in Iran and widespread forgery and fraud.

Abedi died in 1995 in Pakistan, whose Prime Minister Benazir Bhutto refused repeated extradition requests.

But while the Bank admits its supervision of BCCI left a lot to be desired, it believes Deloitte cannot prove dishonesty on the part of its supervisory division, long since departed to the FSA.

And Bank insiders complain Deloitte has the real 'immunity', as its own half of the estimated £100 million court costs to date are met from creditors' funds, while the Bank has to pay its own way.

With the scale of such potential dirty washing about to be aired in the year-long trial, the Bank's new governor, Mervyn King, could be forgiven if he kept his distance.

But one Bank official said: 'You ought to hear Mervyn on the subject of Deloitte's cynicism in bringing this case.'

Like everyone else, it seems, King is determined to play this one to win.