Remembering Pakistan’s Biggest and Baddest Fraud Scandal

In recent days, Pakistan has been rocked by revelations about the improprieties of Axact, a Karachi-based software company.

A May 17 New York Times report alleged that Axact has secretly run an Internet-driven fake diploma business. It describes how scores of unknowing victims–from accountants in the Middle East to bakery workers in Michigan–have been snookered by Axact’s scheme. A retired FBI agent investigating Axact is quoted in the Times story as saying that it probably represents, “hands down,” the biggest diploma mill operation he has ever seen.

Indeed, according to the Times, Axact’s mammoth scam targeted vulnerable customers across the world, featured at least 370 websites of bogus educational institutions, and netted tens of millions of dollars in annual revenues (according to a former Axact employee, one customer alone spent over $400,000 on fake degrees and certificates). Some Pakistanis worry that these revelations will deliver a body blow to Pakistan’s already-beleaguered global image. On May 20, Interior Minister Chaudhry Nisar Ali Khan admitted that the affair “raises questions” about Pakistan’s reputation.

Still, as big and bad as the Axact affair is, it is nowhere near as serious or damaging as another infamous fraud scandal that hit Pakistan more than 20 years ago.

A Very Bad Bank

In 1991, details emerged of astonishing levels of malfeasance at an institution called the Bank of Credit and Commerce International (BCCI). Founded in 1972 by a Pakistani named Agha Hasan Abedi (who served as director until 1990), the bank became synonymous with fraud on the most massive (and global) of scales. BCCI attracted all the wrong superlatives: Biggest corporate criminal enterprise, biggest Ponzi scheme, biggest bank fraud scandal. Many jokingly called it the Bank of Crooks and Criminals International.

BCCI, interestingly, was originally launched to provide an alternative to the global financial institutions of the West–a deeply corrupt precursor to today’s Asian Infrastructure Investment Bank (investigations of BCCI would later find that Abedi’s stated goal was “to fight the evil influence of the West”). Yet in the end, BCCI merely dragged unknowing banks in the West — and across the developing world–into its huge web of illicit and highly profitable transactions.

The extent of BCCI’s crimes, chronicled in detailed American and British investigations, is breathtaking. There was financial fraud gone wild: unrecorded deposits, phony payments, and illegal share-buying. The bank also specialized in improper loans; it reportedly disguised one bad loan to a British shipping company by using nearly 100 shell companies. So elaborate and expansive was BCCI’s subterfuge that it somehow managed to secretly control three major American banks.

And that is merely the more innocuous side of the story. A Time magazine exposé in July 1991 alleged that BCCI featured a clandestine division, based in Karachi and described internally as a “black network,” that served as a “global intelligence operation and a Mafia-like enforcement squad.” It allegedly engaged in spying, bribery, extortion, and kidnapping (later investigations, however, suggested this network, if it indeed existed, was not as vast as Time claimed).

At its height in the 1980s, BCCI had more than a million global depositors. They ranged from street sweepers and small business owners to central banks of developing countries. Many governments, including the United States, held accounts. Influential members of Washington’s political class–including lobbyists close to President George H.W. Bush–had ties to BCCI. This may explain why a young U.S. senator named John Kerry faced strong resistance from Washington–including from fellow senators–during his initial efforts to launch an investigation for the Senate Committee on Foreign Relations. He eventually succeeded, and published his findings in a landmark report in 1992.

BCCI built a $20 billion empire. It boasted shell companies, offshore facilities, and other affiliated entities in about 70 countries. It had about 400 bank branches worldwide. This wealth and influence was achieved by preying on the world’s vulnerable, but also by courting a rogues gallery of customers. BCCI worked with dictators such as Panama’s Manuel Noriega and Iraq’s Saddam Hussein. BCCI also worked with terrorists–including Osama Bin Laden. Years after the bank’s collapse in 1991, the CIA discovered that Bin Laden had an account with BCCI.

Pakistan’s Deep Footprint

BCCI was unabashedly global. It had offices around the world, including a headquarters in London. It was incorporated in Luxembourg, and many of its shareholders were in the Arab Gulf.

Still, according to the Time investigation: “BCCI was always a Pakistani bank, with its heart in Karachi.” Abedi, its founder and long-time director, was Pakistani, as were many of its middle managers and top officials. The bank was close to Pakistan’s political leadership, providing financial assistance to military leader Gen. Zia al-Haq and finding a job for his brother. According to Kerry’s report, BCCI also helped finance Pakistan’s nuclear weapons procurement. Much of the bank’s start-up capital came from wealthy Pakistan-based depositors. Overseas Pakistanis used the bank to send money home. Bank accounting ledgers were in the Urdu language. BCCI contraband shipments often passed through Karachi. And when investigators began honing in on the bank’s activities, BCCI officials from around the world fled to Pakistan.

Pakistan’s relationship with Washington (along with U.S. ties to BCCI) may help explain why the bank was able to carry out its criminal acts for so long, even after information started to circulate about BCCI’s illicit activities. Washington and Islamabad worked closely in the 1980s to fund and arm anti-Soviet mujahideen fighters in Afghanistan, and the United States may have concluded that confronting Pakistan about the bank would risk provoking Islamabad and jeopardize bilateral cooperation. There is actually evidence that Washington worked directly with BCCI to support anti-Soviet forces in Afghanistan; an internal BCCI memo from 1987 claimed that USAID asked the bank to purchase 1,000 mules for mujahideen fighters there.

Limited vs. Lasting Impacts

The Axact and BCCI scandals share several things in common. Many of their activities were Karachi-based, they arguably committed unprecedented levels of fraud, and their operations were highly global. Yet the similarities end there.

The damage from the Axact scandal will likely be relatively modest. Those directly and deleteriously affected will be restricted to the unfortunate souls duped into paying big money for fake degrees, and to Axact’s several thousand employees. Pakistan’s impressive IT sector–which features world-renowned innovators and award-winning software, and which Axact, by describing itself as a software firm, claims to be a part of–should emerge unscathed. Most Pakistanis regard Axact–a modest IT exporter–as more of an outlier than a formal member of the IT sector.

By contrast, the BCCI scandal produced a dramatic and widespread impact. The bank’s collapse, for example, robbed 40,000 Bangladeshi depositors–and many other working-class account holders–of their life savings. Central banks from poor countries with BCCI accounts feared major economic losses. It took 21 years, nearly $700 million, and more than 60 prosecutions to complete a legal settlement process.

Additionally, the scandal caused great embarrassment for governments around the world. According to Kerry’s report, BCCI had relationships “that ranged from the questionable, to the improper, to the fully corrupt” with officials in Pakistan and at least 31 other nations.

And then there is the issue of terrorist financing.

In the early 2000s, American and French intelligence officials discovered that companies previously affiliated with BCCI continued to work with Bin Laden (a one-time account holder) after the bank’s demise, and that Bin Laden’s financial network model was similar to the one used by BCCI in the 1980s. An American investigator of BCCI would describe the bank as “the mother and father of terrorist financing operations.”

This all makes a fake diploma scam, as reprehensible as it is, sound downright harmless by comparison.

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