Chalabi opened Petra Bank in 1978 and the bank expanded rapidly making loans that other financial institutions were unwilling to undertake. Chalabi is quoted as saying all the loans were properly collateralised and legal. Financial problems reached a crisis in 1989 when the Swiss Banking Commission revoked the licence held by the Geneva branch of Mebco Bank, an affiliate of Petra Bank. The group's Geneva-based investment banking subsidiary Socofi entered bankruptcy proceedings and liquidators are still trying to recover $130 million owed to Socofi creditors, the Wall Street Journal reports. Mebco Bank in Beirut was subsequently closed by the Lebanese banking authorities.

The closures adversely affected Petra Bank's ability to meet obligations and the Jordanian government took control of the bank on 3 August 1989. The Wall Street Journal reports that Chalabi fled to Syria by car on the morning of 7 August. Petra Bank was declared insolvent later in 1989. A three-member court operating under Jordan's martial law regulations convicted Chalabi on 48 counts in 1992 and sentenced him to 22 years in prison. A further 16 officials of the bank were also convicted in absentia.

Chalabi has dismissed the conviction as wrong and the work of the military court as meaningless. The Wall Street Journal reports him as saying he has no plans to return to Jordan.