TAXMANN® was a major international bank founded in 1972 151 MAJOR CORPORATE CORPORATE MAJOR FAILURES GOVERNANCE

CHAPTER OUTLINE

problems in Corporate Failures Common Governance services ltd. (india) satyam Computer scam Harshad Mehta sher airlines Kingfi (us) andersen Worldwide vivendi (France) enron (us) (us) WorldCom international (uK) Bank of Credit and Commerce Maxwell Communications (uK) 11

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Bank of Credit and Commerce International (UK) 1991 International and Commerce Credit Bank of

poorly regulated. reality was not refl ected in BCCi’s accounts because the losses were concealed concealed were losses the because accounts BCCi’s in ected refl not was reality regulated. poorly numerous fi nancial regulators and intelligence agencies in the 1980s due to concerns that it was nancial numerous fi fering an alarming level of bad debts due to reckless lending. BCCi came under the scrutiny of fering an alarming level of bad debts due to reckless lending. although BCCi’s published results showed ever-rising profi ts, by the late 1970s the bank was suf- although BCCi’s published results showed ever-rising profi Forced Closure of the Bank of Closure Forced

expanded rapidly and by 1991 it had 420 offi ces around the world and a presence in 70 countries. ces around the world expanded rapidly and by 1991 it had 420 offi BCCi was reported to have assets of over $4 billion with over 150 branches in 46 countries. BCCi BCCi was reported to have assets of over $4 billion with over 150 banks awarded a license to operate in the Chinese special economic Zone of shenzhen. By 1980, banks awarded a license to operate in the Chinese special economic Bank of Credit and Commerce international (BCCi) rst foreign BCCi was among the fi entered the african markets in 1979, and asia in the early 1980s. are also discussed to highlight the need for reform in the governance of companies. are also discussed to highlight the BCCi through acquisitions. parallel banks also acquired in the 1970s. BCCi expanded rapidly BCCi scams in different parts of the globe. the issues of corporate governance involved in the debacles parts of the globe. scams in different result a as producers. oil arab by deposits huge to led 1973-74 in prices oil of quadrupling the ents. corporations or affi liates. this chapter presents the major corporate collapses arising out of the liates. this chapter presents corporations or affi primarily focused on serving Muslim and third-world cli- ces in Karachi and london. the bank offi or underreporting the existence of liabilities, sometimes with the cooperation of offi cials in other of liabilities, sometimes with the cooperation of offi or underreporting the existence the BCCi was incorporated in luxembourg with head nancier. by agha Hassan abedi, a pakistani fi ing funds, overstating revenues, understating expenses, overstating the value of corporate assets understating expenses, overstating the value of corporate assets ing funds, overstating revenues, public corporations. such misdeeds typically involve complex methods for misusing or misdirect- public corporations. such misdeeds Corporate scams or scandals arise with the disclosure of misdeeds by trusted executives of large with the disclosure of misdeeds by trusted executives of large Corporate scams or scandals arise taxmann® (vii) poortreasuryandrecord-keepingpractices (vi) untenableloansandacquisitionstrategies (v) (iv) (iii) (ii) laxCorporateGovernance (i) depositors were: reports since1991,theprimaryreasonsleadingtolossesbankstakeholdersparticularlysmall Although itisdifficulttosumupthecausesofBCCIscandaldespitevariousinvestigationsand the trial. by depositorsofaround$2billion.AbediwasindictedintheUSbuthedied1995beforefacing of AbuDhabi.Eventuallysmalldepositorsrecovered75percenttheirclaims,leavingafinalloss the worldscramblingtorecoverlostmoney.ThebiggestloserofallwasAbedi’sbacker,Sheikh The BCCIscandalwasthebiggestbankfraudinhistory.tsclosureleft150,000depositorsaround reimburse depositorswhohadlosttheirfundswhenthebankshutdown. and the Cayman to seizeandtakeoverthebank’sbranchesinUK,US,France,Spain,witzerland,Luxembourg in 1991.EventuallyonJuly5,1991customsandbankregulatorssevencountriesmovedquickly Uncovering ofBCCI’sfraudandillegaloperationsinthe1991probeledtoamassiveregulatorybattle unrecorded depositliabilities,fictitiousprofitsandconcealmentoflosses. report indicatedmassivemanipulationofnon-performingloans,fictitioustransactionsandcharges, and otherfinancialcrimes,illegallygainedcontrollinginterestinamajorAmericanbank.The code named‘SandstormReport’revealedthatBCCIwasinvolvedinmassivemoneylaundering the inquiryreportinJune1991forBCCIbyPriceWaterhouse atthebehestofBankEngland branch actedasmoney-laundererforLatinAmerica’sdrugbarons.Subsequentinvestigationsand Desperately inneedofnewsourcesdepositsandrevenue,fromtheearly1980sBCCI’sPanama bank onlykeptgoingbyfraudulentaccountingandmassivemisappropriationsofdepositors’funds. keeping thebankafloat.Hetried‘proprietarytrading’,butresultswerefurtherhugelosses.The regulatory scrutiny. in aCaymanIslandssubsidiary,bankwithinknowninternallyas‘thedustbin’,safefrom 152 Flaws inCorporate Governance

(1) (2) Complex structureofBCCIleadingtonumerousregulatoryviolationsand legal liabilities. Failure offundamentalriskmanagementstructures General fraud Manipulation bybankofficerswiththeirownpersonalagendas the lossesforyears. those straightforwardly onitsbooks.Thebankcreatedamatrix offalseaccountsthathid huge lossesforBCCI.tcoveredupthisproblembytakinginnewdeposits andnotrecording strategy, whichrancountertocommonsenseand allprinciplesofgoodlending,rackedup these loanswentbad,thebankhadnolegalrecourse, andwasforcedtoabsorbthelosses.This concentrations ofcreditrisk,butwereoftennot properlydocumentedormonitored.When companies andindividualswithoutproperlysecuring them.Theloansrepresentedmassive Poor RiskManagement-The flaw in operationsof BCC I had been thatit made large loans to companies to escaperegulationsand indulgeindubiouslending, fraudulentrecord-keeping to them.Theyhaddeveloped anintricateinternational weboffinancial institutionsandshell managers and generalmanagersof thebankatdifferent locationswere reportingdirectly tent as the company (the bank)wasmanagedby its founder Non-existent BoardofDirectors -TheBoardofDirectorsIwasvirtuallynon-exis BCC- Islands. BCCs assets were ultimately liquidated, and a pool was established to As the losses mounted Major Corporate Governance Failures Abedi resorted to more and more desperate ways of Abedi and the CEONaqvi.248 taxmann® 153 United he audit also revealed also audit The ce Failures Governan Corporate Major .F. Collier encyclopedias; and the Robert Maxwell Group which was Collier .F. rice Waterhouse signed BCCI’s 1989 annual report signed problems, Price Waterhouse these American. Despite I secretly (and illegally) owned numerous irregularities. The audit also confirmed that BCC First in the interest of the bank survival. and money laundering. Certain senior bank executives manipulated gaps in the bank’s risk risk the bank’s gaps in manipulated executives bank senior Certain laundering. money and structure. management country a way that no single in such - BCCI was structured Regulatory Supervision Lack of - were based inLuxem companies it. Its two holding over regulatory supervision had overall notoriously regulation was where banking jurisdictions two Islands— Cayman the and bourg U.S. in the Investigators had a central bank. by a country that not regulated weak. It was also regulatory deliberately to avoid centralized BCCI had been “set up and the UK revealed that - were extraordinari jurisdictions. Its affairs extensively in bank secrecy review, and operated whose apparent objective sophisticated international bankers ly complex. Its officers were a massive scale, and to avoid detection.” secret, to commit fraud on affairs was to keep their of BCCI with the bank transparency in the activities fragmented regulation obscured Weak such as money to disreputable clients laundering and funneling illegal indulging in money groups. arms dealers and terrorist dictators, insurgents, - annual auditing system. While Price Water - BCCI had an unusual Audit System Ineffective - audited BCCI and BCCI Hold rnst & Young for BCCI Overseas, E house was the accountants Other companies (such as KIFCO and ICIC) were audited ings (London and Luxembourg). and unified regulation and auditing of complex by neither. There was a need for independent audit of BCCI revealed an unaccountable Price Waterhouse financial conglomerates. In 1990, a The bank approached Sheikh Zayed, who made good loss of hundreds of millions of dollars. cent. per 78 of shareholding increased an for exchange in loss the

(3) (4)

Maxwell Communications Corporation and Mirror Group Newspaper (UK) 1991 Newspaper Group Communications Corporation and Mirror Maxwell

about shocking financial maneuvers. Investigations revealed that Maxwell’s group companies owed death of Maxwell, the global empire of publishing and other businesses collapsed amidst scandal amidst collapsed businesses other publishing and empire of global the Maxwell, of death floating beside his luxury yacht near the Canary Islands. In a matter of weeks of the mysterious In November 1991, chairman of the group companies Robert Maxwell, 68, was found drowned Official Airline Guides and P Maxwell of Debacle , the flagship company which controlled such concerns as Macmillan books, the Communication, the flagship company which controlled such concerns as Macmillan Maxwell the Daily Record, the Sunday Mail and Racing Times, as well as the Mirror newspapers; the Mirror Group, which published organized into three clusters. The two publicly listed companies: included the Oxford privately held and owned 100 per cent by the family whose operations By the end of the 1980s the Maxwell Empire, comprising more than 400 companies was loosely Official Airline Guide later that year. Science Research Associates and the he company acquired Macmillan Publishers, a large US publisher, in 1988 and in October 1987. The company acquired Macmillan rinting & Communications Corporation and to Maxwell Communications Corporation to British Printing & Communications Corporation n 1982 he secured full control over the company and changed the name of the Company per cent. In 1982 he secured full control over obert Maxwell launched a dawn raid on the company acquiring a stake of 29 Group. In July 1981 Robert Maxwell launched a dawn other family-controlled enterprises. n 1967 it acquired a majority stake in Haymarket In 1967 it acquired a majority stake lished in 1964 as the British Printing Corporation. linked to dozens of and Kenya. All the three holding companies were also directly and indirectly - of the FTSE 100 Index. The company was estab London Stock Exchange and was a constituent Israel, Hungary Football Club and publications like the European, as well as stakes in newspapers in Maxwell Communications Corporation was a leading British media company. It was listed on the Maxwell Communications Corporation

taxmann® Kingdom andaChapter11bankruptcyintheUnitedStates. ambiguous structuregaverisetoadouble-headedproceeding:anadministrationintheUnited its principalassetswereintheUnitedStatesformofvariouslargeoperatingcompanies.T his and nearlyallofitsfinancialaffairs (especiallyloansandthegrantofsecurity)weremanaged,but empire ofMaxwellwasanunusualonewithitstrue“seat”inLondon,whereitadministered The Maxwellcasewasoneofthemostimportanttransnationalinsolvenciesmoderntimes. York, inpart,becausebulkof itsrevenueandoperatingprofitwasgeneratedintheUnitedStates. of thegiantU.SbookpublisherMacmillanalsofiledChapter11bankruptcypetitioninNew sold tovariousmediacompanies.TheLondonbasedMaxwellCommunicationCorporation-parent The CompanywentintoadministrationfollowingthedeathofRobertMaxwell.Itspropertieswere desperate attempttopropuptheailingMaxwellCommunication. had paidintopensionfundstotallingmanymillionsofpounds,whichMaxwell‘borrowed’ina of MirrorGroupNewspaperswasdiscovered.Thethousandsemployeesthe scandal of all time came to light when £530 million hole inthe pension funds of 16,000 employees empire together,butwereunabletopreventitscollapse.Furthermore,themostfamousUKpension frantically callingin their massive loans.His two youngsons Kevin and Ian struggled toholdthe £2.8 billiontoitsbankers.Maxwell’suntimelydeathtriggeredafloodofinstabilitywithbanks 154 Reasons of theDebacle

(1) (2) (3) lateral forvariousloans. under hiscontrol.ItwasdiscoveredlaterthatMaxwellhadpledgedthesameassetsascol- and German newspapers. He piled debt upon debt by pledging the assets of the companies wanted to buy everything from lion in1988tobuytheUSpublishersMacmillanandOfficialAirlinesGuide.Infact,Maxwell The borrowingswerepersonalaswelloncompanyaccounts.borrowed$3bil- Acquisitions throughHeavyDebts.Maxwellwasindeepdebtsfollowinglargeacquisitions. the DailyNewsfromT brand Deloitte. however, hewasabletopassannualauditsbyleading EuropeanaccountantsCoopers&Ly- with declining cashflow and debilitating debt payments. Despite hiseroding financial condition, schedule. WiththeAmericanandEuropeaneconomiesstartingtosour,Maxwellwasfaced from hisyacht,therewasagrowingfearthathehavingtroublemeetingrepayment propriating pensioners’funds,andrelentlessdeal-making.MonthsbeforeMaxwellvanished only keptafloatbyshiftingfundsaroundhismazeofinter-lockingprivatecompanies,misap- comprising morethan400companies,wasexperiencingacutefinancialdifficultiesand Financial DifficultiesandDiversionofFunds.Bytheend1980sMaxwellempire, as apubliccompany.Butitwastoolate. 1991, desperateformoney,MaxwellsoldPergamonandfloatedMirrorGroup Newspapers based aroundMaxwellCommunications Corporation. the lenders and creditors which ultimately led to the collapse of the empire of as collateralforloans.TheuntimelydeathofMaxwell triggeredawaveofuncertaintyamongst Maxwell’s creditors,sincemostofthefamily’s68 percentstakeinthecompanywaspledged April 1991,andfurtherdroppedto$0.63.Thedeclineinstockvaluewasofspecialconcern to to $2.18on5November1991,(thedayMaxwelldisappeared)from ahighof$4.28sharein Uncertainties followingtheDeathofMaxwell.ThestockMaxwellCommunicationplunged That enabled Maxwell to add on more debt in March 1991 when hepurchased Major Corporate Governance Failures ribune Co.byassumingasmuch$35million inobligations.In American book publishers to British soccer teamstoIsraeli obert Maxwell Robert Maxwell taxmann® 155 Ethical and he panel found lack of objectivity in dealing in objectivity of lack found panel The ce Failures Governan Corporate Major o make the matters worse the auditors of the company failed to pick o make the matters worse the auditors of the company failed to here was hardly any transparency of the financial activities of Maxwell. of activities financial the of transparency any hardly was There he shareholders as well as the creditors were unaware of the corporate structure and web of web and corporate structure the of were unaware creditors the as well as shareholders The incorporated had tycoon. Maxwell the by together woven companies interlocking hundreds of disclosure rules are virtually non-existent. family trusts in Liechtenstein, where tax laws and aware of the companies and were not members even Maxwell family It was later learnt that by Robert Maxwell. trusts managed single-handedly Flaws in the Audit - T scheme, even though up the transfers Maxwell was making from the Mirror Group pension England & Wales they were in a position to do so. The Institute of Chartered Accountants in (ICAEW) asked the Joint Disciplinary Scheme (JDS) to investigate 35 complaints against the - Maxwell auditors, Coopers & Lybrand (now part of PricewaterhouseCoopers), and 24 com of Newspapers and other plaints against four individual partners, in relation to Mirror Group 1991. to 1988 period the for companies Maxwell professional standards be it governance of company or governance of pension funds were professional standards be it governance commercial advantages and empire building. relegated to the background for Maxwell Communication board, all Board - The non-executive directors on the Ineffective their responsibilities. Unrestricted movement of fundsreputed persons, did little in discharging company, for another funds raise to company a of shares pledging companies, group across of the board. It appeared that the board was the nose under excessive borrowings took place life personality of Robert Maxwell. helpless in the face of larger than assets which belong to the em- - Assets of the company and pension Transparency of Lack mixed. were ployees with Mr. Maxwell and his companies. The audit firm also admitted 59 errors of judgment. Maxwell was a physically imposing and domineering individual who ran Domineering CEO - Maxwell was a physically imposing acting as both chairman and chief executive. He had his companies as his personal fiefdom, of his empire. Maxwell personally controlled move- a complete control over the companies of companies. hundreds of of web empire consisting funds around his of ment of pounds from his companies’ pension funds to shore up the shares of his Group and to save Group and to the shares of his to shore up pension funds from his companies’ of pounds from bankruptcy. his companies money from investment funds were replenished with ventually, the pension dence crashed. E This replen- British government. Lehman and GoldmanSachs, as well as the banks Shearson theft of pension funds million was waived. Maxwell’s The rest of the £100 ishment was limited. in general, pensioners The result was that, repaid from public funds. was, therefore, partly entitlement. per cent of their company pension received about 50 for conspiracy to defraud, former directors went on trial Ian and two other sons Kevin and acquitted by the jury. but were unanimously

(1) millions of hundreds used had Maxwell authorisation, prior adequate without that, emerged it (2) - employees confi market as occupational pension through the sent shockwaves the scandal (3) debts of £400 million. In 1995 Maxwell’s Kevin was declared bankrupt with the son of Maxwell, (4) (2) (3) (1)

Enron (2001) Enron It was revealed in October 2001. The Enron scandal is one of the largest in the US corporate history.

Flaws in Corporate Governance Flaws in Corporate

Aftermath