Bank of Potemkin goes belly-up?

The Economist reports this week on litigation in New York over the collapse of the Bahrain-based but Saudi-controlled International Bank Corporation [TIBC], which collapsed in 2002. It refers to an investigation of TIBC by Ernst & Young, submitted to the Central Bank of Bahrain last July. The report makes for surreal reading.

According to Ernst & Young's findings, TIBC was a bank whose chairman and executive directors never appeared at board meetings (although the minutes carried their signatures anyway) and whose staff never interacted with its supposed borrowers. It made loans, rolled them over and increased them, to people who deny ever taking them, the report says.

Fans of financial black humour and governance weirdness will apparently find more, much more -

Ernst & Young found that the desktop computer of Glenn Stewart, TIBC's boss until the default, could be accessed from afar, using "pcAnywhere" software. Mr Stewart was supposed to log in and authorise the bank’s electronic payments. But according to Ernst & Young, these authorisations were made by remote control from outside Bahrain.

The alleged impostures were not confined to the digital realm. The bank's former chairman, Sulaiman al-Gosaibi, was purported to have signed its annual report on February 12th 2009, even though he was in an intensive-care unit in Zurich at the time. The investigators mention a report by Audrey Giles, a forensic scientist, who examined documents given to her by AHAB. She identified at least 200 forged signatures, The Economist has learned. In many cases the signature was photocopied or printed, then traced over with a felt-tip pen.

The Economist goes on to report that -

The investigators found little evidence that any of the Saudi borrowers in TIBC's $2.2 billion loan-book were genuine. The bank's staff never interacted with them directly. Letters of reference from the borrowers' banks "could have been forged", the investigators write (although they could not say for sure). They note that Deloitte, which AHAB had appointed as a consultant, made "drive-by" visits to the borrowers' addresses, discovering that "the premises were not occupied by the borrowers or used for trade purposes".

A population of phantoms might be consistent with claims - as yet, just claims, rather than proven to a US court's satisfaction - that a former TIBC director "siphoned" money out of the group by various means and "misappropriated" a mere US$9.2bn.

If Ernst & Young's suspicions are correct, TIBC appears to have been a Potemkin bank. Its executive directors paid it no heed, and the borrowers on its books never asked for loans and did not receive them. The victims of this alleged fraud, the Gosaibi family, seemed blithely confident that the financial arm of their business empire would run smoothly without their intervention or oversight.

The US litigation reference is Mashreqbank PSC vs. Ahmed Hamad Al Gosaibi & Brothers Company (Supreme Court of the State of New York, County of New York) index number 601650/2009.

The E&Y report is an 88pp exhibit [number 10] as part of a 374pp filing on 5 February 2010. It was originally a 29 July 2009 report for the Central Bank of Bahrain on an investigation into TIBC.

As with this blog post it is not a judicial finding of guilt, innocence or negligence. Anyone interested in the dispute and in broader questions of finance sector regulation, banking practice, corporate governance in emerging economies where guanxi is important should conduct their own research before drawing any conclusions.

Overall the report is fascinating reading, and worth the pain of digging around among the e-filed documents on the NYSC site.