In the dock: the Bank of England

Long before Enron, there was the BCCI scandal. Now a court case reveals the shameful role played by

About the only line that wasn't shocking in the reports of how Abdul Qadeer Khan, Pakistan's foremost nuclear scientist, had sold nuclear technology to Iran, Libya and North Korea was the line which said that he had once used the Bank of Credit and Commerce International (BCCI) to funnel payments from the buyers to the suppliers of weapons of mass destruction. To anyone familiar with the history of fraud, nothing could be more natural. Obviously, the bank of the Palestinian terrorist Abu Nidal, the Panamanian dictator General Manuel Noriega, and assorted heavies from Colombian drug cartels would also be the bank of choice for men prepared to contemplate the extermination of hundreds of thousands of people. If it was good enough for the CIA when it was funding the Islamist maniacs in Afghanistan who were to turn into al-Qaeda, and for Ronald Reagan when he and Ayatollah Khomeini were arming the Contras in Nicaragua, it would be good enough for Khan. There was scarcely a conspiracy in the 1980s that did not involve BCCI. Its presence at a crime scene was close to a given.

The bank that touted for the business of criminals was itself a criminal conspiracy against its 1.4 million honest customers around the world, whose number included local councils from the Hebrides to Westminster and thousands of British Asians. BCCI collapsed in 1991 with outstanding debts of £9bn and the loss of 14,000 jobs. Until the bankrupting of Enron in 2001 and WorldCom in 2002, it was the greatest fraud ever.

The old scandal is being relived at the same court where Lord Hutton's inquiry heard evidence - Court 73 at the Royal Courts of Justice in London. But while the Hutton inquiry was so packed with hacks that an overflow marquee had to be erected in a nearby quadrangle, the BCCI case is being ignored by all but a handful of business reporters. The media indifference is a pity, and not only because many people are still suffering from the bank's collapse. There is a wider issue behind the attempt of the BCCI liquidators to claim £850m in damages from the Bank of England for the splendidly named crime of "misfeasance in public office". Along with the collapse of Robert Maxwell's crooked empire, the fall of BCCI symbolised the disasters brought by the casino capitalism of the 1980s. The Bank of England stood by while a manifestly fraudulent bank fleeced its depositors.

One might have expected lessons to have been learnt from the experience. Not a bit of it. New Labour succeeded the old Conservatives and stood back as the greatest bubble market in the history of capitalism inflated in the City. The millennium crash ravaged the endowments and pensions of millions. For all that, the ending of "light-touch" regulation of financial capital is as far from the agenda of the political class today as taxing the rich. The BCCI trial raises the question: what will it take to make our rulers clamp down on speculators? An uprising by cozened pension-holders? A second Great Depression?

In Court 73, Gordon Pollock QC has been dissecting the consequences of the Bank of England's light-touch regulation with wit and contempt. He is a showman barrister of the old school, and it is a pleasure to watch him in action. (And so it bloody well should be, as he's being paid £3m for a case expected to last between a year and 18 months, plus £2,000-a-day "refreshers".)

The bank, he explains, was created by Agha Hasan Abedi, a Pakistani financier, in 1972, and relied on huge backing from Sheikh Zayed bin Sultan al-Nahyan, the ruler of Abu Dhabi. It was meant to be the first great developing world bank. But Abedi wasn't choosy; he'd take business crooked or straight from anywhere on the planet. Pollock described him well. Abedi "was about as corrupt as they come", he told the court. "He was a mad monk, a Rasputin . . . If you told him you wanted little girls, you got little girls. Ditto little boys."

Characteristically, for a modern conman, Abedi covered his thefts with New Age gobbledegook. The best document the liquidators have forced the Bank of England officials to disclose described how Abedi had assured them he was improving the running of the business by encouraging managers to compel each member of staff to devote 20 "human energy psyche units" to marketing. The staid officials of the Bank of England swallowed this drivel, but were a tad concerned. Peter Cooke, the Bank's senior official responsible for monitoring BCCI, described Abedi as "the living personification of Uriah Heep". In 1988, a federal grand jury in Tampa, Florida, went further and indicted BCCI and ten of its officials on charges of laundering drug money. This was too hasty for the Bank of England. It continued to allow BCCI to trade from its offices in the City until 1991.

By that time, BCCI was a machine for conning its depositors. They thought they were making an investment; instead, they were being tricked into keeping up respectable appearances for a bankrupt operation. Over the previous 15 years, BCCI had lost a fortune on speculative deals on the money markets and in loans to a worthless Gulf shipping company. To cover its losses and enrich its thieving managers, it robbed the accounts of its bona fide customers.

Perhaps fortunately, given its conduct of monetary policy in the 20th century, the Bank of England is exempt from actions for negligence. Pollock must therefore prove the far graver misfeasance charge. For it to succeed, he must show that when Bank of England officials turned a blind eye to fraud, they were being not only useless and stupid but dishonest and reckless.

To date, Pollock has claimed: that Barclays and other high street banks warned the Bank of England that they wouldn't touch BCCI with a bargepole; that the Bank of England knew that BCCI's assurances that it was regulated by the authorities in Luxembourg were "something of a fiction"; and that senior Bank of England staff "simply lied" to Lord Bingham's 1992 official inquiry into the BCCI collapse.

The Bank of England is appalled that it and its officials are coming so close to being accused of criminality. It says it will respond vigorously, and we will have to wait until 2005 to find out whether its defence is successful. But one point against Pollock has already struck observers. If he wins, the £850m compensation for depositors won't come from old Bank of England officials or bent BCCI managers, but from public funds. Why should the taxpayer cough up? A good answer would be that maybe only a stunning verdict can shake the British authorities out of a complacency that allows the robbery of the public on a far grander scale than Abedi dared imagine.

The BCCI scandal is linked to today's fleecing of investors by two common themes: the benefit of clergy given to auditors; and the refusal of regulators to investigate white-collar fraud.

BCCI's auditors are notable by their absence from Court 73. A 1992 US inquiry into the BCCI scandal, led by the then obscure Senator John Kerry, found that there were "serious questions" about how Price Waterhouse partners in the Cayman Islands had accepted "payments and possibly housing from BCCI or its affiliates". There were also "possible sexual favours provided by BCCI officials to certain persons affiliated with the firm". By 1987, Price Waterhouse (UK) had heard plenty of warning bells. Its decision to pass BCCI accounts "had the consequence of misleading depositors, regulators, investigators and other financial institutions as to BCCI's true financial position".

When the auditing profes-sion was established in the 19th century, its purpose was to warn investors of fraud. The big four firms that dominate accounting - PricewaterhouseCoopers, Ernst & Young, Deloitte Touche Tohmatsu and KPMG - nearly always fail to live up to their profession's founding principle. If BCCI wasn't enough, the examples of Enron and WorldCom, where the auditor, Arthur Andersen, was so complicit in the fraud that it was driven into bankruptcy, should have clinched the case for reform. Yet it is the Bank of England that is facing the music in Court 73. BCCI's accoun-tants, Price Waterhouse - now a part of PricewaterhouseCoopers - and what was the Ernst & Whinney partnership, agreed to pay a £75m out-of-court settlement in 1998 to extricate themselves from the legal action.This is small change for the accountancy giants, and a long way from the £850m the public may be expected to stump up.

Despite BCCI and Enron, successive governments have insisted that auditors owe no duty of care to the investors, employees and suppliers who are swindled by bent companies. As I have previously reported in the New Statesman, the dotcom crash has led to the ludicrous position where George W Bush's Republican administration is placing tougher requirements on auditors than Tony Blair's Labour government. Until the profession is tackled and the incentives for auditors to protect rotten managers removed, fraud will flourish in Britain.

Meanwhile, the failure of regulators to investigate is as great now as it was in the 1980s. One reason why the extraordinary step of a misfeasance action has had to be taken is that the Bank of England hushed up reports that would have enabled innocent bank depositors to secure redress from the auditors. It did conduct an inquiry - named the "Sandstorm" report - but refused to release its findings to the public or, indeed, to Senator Kerry's inquest. The only public investigation in the UK was the Bingham inquiry. As with Hutton, the terms of reference were very tightly drawn and excluded a look at the behaviour of auditors.

A decade later, the Financial Services Authority, which has taken over regulation of the City from the Bank of England, refused to send the police into City banks that pumped and dumped dotcom shares on a gullible public. It did not matter that the US authorities had sent in the cops and found the same banks on Wall Street guilty of cozening customers into buying worthless shares. Britain's light-touch regulation meant that no one's collar was felt.

Without proper investigation or punishment, fraud is to be expected in Britain. About £11bn was lost in the pensions scandal; about £30bn was lost in the endowment scandal.

If Pollock wins, the public will pay, but the public is paying anyway at an extortionate rate. If it costs £850m to force the regulators to realise they are required to act in the public interest, it will be a price worth paying.