ISLAMABAD, PAKISTAN -- Many of the Pakistani bankers who helped found and build the failed Bank of Commerce and Credit International trace their roots to the decadence of the lost subcontinental kingdom of Mahmudabad. But BCCI's banking culture also was shaped by Pakistan's modern economy, where drug trafficking, gun-running, smuggling and fraud are commonplace; where cash flows freely, prosecutions are rare, and corruption generally is regarded as an ordinary part of commerce.

Pakistan today possesses one of the world's most vigorous illicit economies, estimated by Western specialists at between 5 percent and 10 percent of the country's gross domestic product, or between $2 billion and $3 billion annually.

Its staples are heroin and hashish production, but it also includes the theft and resale of weapons, some from the covert arms pipeline that was funded by the United States and Saudi Arabia to support Pakistan-based Afghan rebels during the 1980s.

The illicit economy has produced a financial system in which any single "dirty" bank would have to compete vigorously for illegal trade. But diplomats and other sources here said they have no evidence of special BCCI links to Pakistani drug or gun-running traffic.

Last year, investigators in a drug-trafficking case stumbled onto the bank accounts of a Pakistani suspected of masterminding large-scale heroin and hashish operations. They found a small financial empire -- about two dozen accounts spread among at least four different institutions, including two state-owned Pakistani banks and a local branch of BCCI.

In that and about six other cases where the financial holdings of suspected Pakistani heroin traffickers have been identified, no Pakistani bank seems to have turned away drug money.

"It's across the board," said an investigator. "Since Pakistan, almost as a matter of policy, will not do anything about heroin manufacturers in the tribal areas, this wealth is free in the broadest sense of the word."

So was the money that Saudi intelligence operatives sent regularly to the Pakistani border town of Peshawar, the staging ground for Afghan rebels. According to diplomatic sources, Saudi intelligence chief, Prince Turki bin Faisal -- working with Pakistan's main intelligence agency -- distributed over $1 billion in cash to Afghan guerrillas during the late 1980s. The sources said they are not sure where all the money went, although they assume most of it was spent on weapons.

What role, if any, BCCI may have played in Pakistan's maelstrom of drugs, guns and money has been the subject of considerable speculation during the last several weeks. Several U.S. senators and a congressional investigator have charged that BCCI may have helped Pakistani army officers steal weapons from the U.S. covert pipeline to Afghan rebels or that the bank may have helped Pakistani officers launder heroin profits.

But diplomatic sources here said they saw no evidence of involvement by BCCI in systematic theft of weapons from the U.S. covert pipeline or in large-scale laundering of heroin profits in Pakistan. At the same time, some diplomats acknowledged that audits and controls on the covert Afghan pipeline were uncertain at best.

The sources said the U.S. portion of the Afghan covert aid was almost exclusively weapons and war materiel, whereas the Saudis provided only cash. "A lot of that {Saudi} money went to the Pakistani {military}. They controlled a lot of that," a diplomat said.

The financial transactions were handled principally between Saudi intelligence and Pakistan's Inter-Services Intelligence agency (ISI), the main liaison between the United States, Saudi Arabia and the Afghan guerrillas, the sources said.

On the U.S. side of the covert pipeline, the sources said the CIA used several methods to keep track of U.S. supplies intended for Afghan rebels. Contracts for shipping weapons from the United States, Egypt and other ports into Pakistan were let from Washington, generally to U.S. companies, they said.

The serial numbers of U.S.-supplied weapons, particularly of sophisticated weapons such as the Stinger anti-aircraft missile, were filed and inventoried by the CIA station in Islamabad, they said. Once shipments reached Pakistan, the CIA generally relied on informants within the Afghan resistance to confirm that weapons had reached their destination.

"People in whose loyalty we have confidence tell us that they got {the weapons}," said a source. While some thefts were inevitable, the source continued, "we were not born yesterday. We maintain an observation on what's going on so we know there's no wholesale diversion."

As for drug trafficking, the sources acknowledged that Pakistan's ISI routinely condoned heroin manufacture and sales by some Afghan guerrilla groups. But they said there were also occasions when ISI cooperated with U.S. government efforts to eradicate poppy fields in Afghanistan.

"ISI was running the war, and to run the war you need money," a diplomat said. "I think without question they turned a blind eye to poppy growing and transport and manufacture {of heroin}. Where the line can be drawn between turning a blind eye and participation, I don't know.

"We would have long conversations, saying we need ISI support to get rid of {heroin} labs on the Afghan side of the border," the diplomat continued. "They said, 'We can't do that and run the war at the same time. We'll get it done after the war.' "

There are other signs that BCCI's involvement in Pakistan's black economy may not have been much greater than other Pakistani banks. BCCI's three branches in Pakistan generated only $15 million in reported pre-tax profits during the first nine months of 1989, according to the bank's auditor, Price Waterhouse.

Pakistan branch records from 1984, obtained independently, show relatively small deposits and limited loan activity. However, the biggest deposits were made by BCCI affiliate companies, including $100 million by Kuwait Investment Finance Co. Regulators have said Kuwait Investment and other BCCI affiliates were often used as fronts by the bank to disguise fraud or other wrongdoing.

BCCI did have a close relationship with Pakistan's government through a foundation managed by BCCI officers, according to documents and former bank employees. The bank donated millions of dollars to a science foundation headed by Pakistan's president, according to public foundation records.

Separately, BCCI founder Agha Hasan Abedi paid stipends to Pakistani politicians and others, according to politicians, bank employees and diplomats. Branch records from 1984 show deposits from, and letters of credit issued to, the Pakistan army, although not in large amounts.

But the shape of Pakistan's illicit economy during the 1980s, including the way the covert Afghan program was run, appears to have made it unnecessary for anyone to seek out a single "dirty" bank to finance gun thefts or heroin trade. With many transactions conducted in cash, and with regulation, taxation and law enforcement at a minimum, Pakistani heroin traffickers and gun smugglers could choose from a smorgasboard of options in the management of their illicit finances.