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Corruption in the Banking Sector of Bangladesh

Discipline in the banking sector is apparently under strain. At the same time criminal activities in banks
have increased. In the absence of good governance, many banks have indulged in irregular activities and
corruption. Sensational stories are emerging from the banking sector. As a result, customers are losing
confidence. As no firm action has been taken against those responsible, these events are multiplying.
Apart from Sonali Bank scandal, the central bank has found cases of cheque forgery, Cyber Crime,
investment fraud and irregularities in some other banks.

BASIC Bank Case:

Bangladesh Bank, for example, has detected irregularities in disbursement of loan by BASIC Bank. This
bank has disbursed loans of Tk 60 billion (Tk 6,000 crores) in three years out of which Tk 30 billion (Tk
3,000 crores) was advanced in irregular manner. Loans of Tk 25 billion (Tk 2,500 crores) were given from
three branches. These loans were given without any proper system. Names of the loan recipients have
been published in a newspaper. Names of the branches are Gulshan, Santinagar and Dilkusha. These loans
have become a burden for the BASIC Bank. The officials responsible for such loans were not taken to task
rather they were promoted.

Swindling of Bismillah Group

Bismillah Group, a terry towel producer, allegedly swindled Tk 1,100 crore from five commercial banks
showing fake documents. Earlier,Anti-Corruption Commission (ACC)asked Bismillah Group chairman
Nowrin Hasib and its managing director Khaja Sulaiman Anwar to be present at the ACC head office to
face grilling on May 8, 2013. But, they did not appear before the commission as they were said to have
fled the country. As the two top officials of Bismillah Group went into hiding, the probe report will be
prepared without questioning them, the ACC inquary officer said, on February 26, the anti-graft body
formed a five-member inquiry team to probe the alleged plundering of about Tk 1,100 crore from five
banks. According to a Bangladesh Bank report, Bismillah Group swindled about Tk 1,100 crore from state-
run Janata Bank and four private commercial banks—Prime Bank, Shahjalal Bank, Jamuna Bank and
Premier Bank—showing fake export documents, taking government’s cash incentive to open business
firms abroad and with accommodated bills through Letters of Credit (LCs). The business group swindled
Tk 392.57 crore from Janata Bank, Tk 306.22 crore from Prime Bank, Tk 163.69 crore from Jamuna Bank,
Tk 148.69 crore from Shahjalal Bank and Tk 62.97 from Premier Bank.
The following pie chart shows the percentage of loan swindled by Bismillah Group:

6%
14%
37% Janata Bank
15% Prime Bank
Jamuna Bank
28% Shahjalal Bank
Premier Bank

Reason behind the Fraud:

The Role of Bank’s Official Regarding Fraud

Before preparing the probe report, the inquiry committee examined documents of all the five banks and
quizzed around 70 of their officials. The controversial group swindled the money with the help of bank
officials between June 2011 and July last year mostly through LTR (loan against trust receipt) using names
of fake foreign buyers and forged documents, the enquiry revealed.

Borrowers usually do not need to put their property as collateral to get loans from banks through LTR as
such loans are given on trust provided that some documents are submitted, said ACC investigators. But
Bismillah Group along with its several sister concerns -- Shaharish Composite Factory Ltd, Alpha Composite
Towel Ltd, Shaharish KT Ltd, HindulWali Ltd and Bismillah Towel Ltd resorted to embezzlement.

Action against Bismillah Group

The Anti-Corruption Commission (ACC) has filed 12 cases against Bismillah Group for allegedly embezzling
Tk 11 billion from five banks. The anti-graft watchdog has found evidence of money-laundering to the
tune of Tk 11.74 billion from the banks using fake documents. The anti-graft watchdog has found evidence
of money-laundering to the tune of Tk 11.74 billion from the banks using fake documents. The banks
involved are Janata Bank, Prime Bank, Premier Bank, JamunaBank and ShahjalalIslami Bank.

Anatomy of the Hall-Mark incidence

The recently unearthed incidence of financial irregularities at the Ruposhi Bangla branch of Sonali Bank
Limited reveals that as on 31 May 2012 total outstanding loans and advances related to international
trade was Tk. 3,699.53 crore, of which funded and non-funded unauthorized loans and advances was Tk.
3,606.48 crore. These unauthorized bank loan facilities were given by the General Manager and Assistant
Manager of the branch to Hall-Mark Group (Tk. 2,667.45 crore), T and Brothers Group (Tk. 685.63 crore),
Paragon Group (Tk. 144.44 crore), DN Sports Group (Tk. 28.54 crore), Nakshi Knit Group(Tk. 65.3 crore),
and others (Tk. 15.12 crore). These loans and advances were given by disregarding the rules and
regulations of the bank. Besides branch officials did not maintain relevant documentation properly on
purpose. A significant fund was misappropriated through the inland bills trading. The branch opened
inland letters of credit (L/Cs) in favour of three fictitious spinning mills which were customers of the said
branch on account of another company, a concern of the Hall-Mark Group. The branch transferred the
money to the accounts of the three companies which after a few days advised the bank to transfer the
money to the account of Hall-Mark Group. The Branch Manager resorted to a number of unauthorized
ways to disburse huge amount of money to Hall-Mark Group and other customers. Some of these are as
follows:

 Provided credit facilities without any sanction;


 Allowed credit facilities after the expiry of sanctioned period;
 Illegally opened local back-to-back L/Cs and provided acceptance to documents raised by different
banks in favour of non-existent spinning and textile mills on account ofHall-Mark Group, T and
Brothers Group, Paragon Group, DN Sports Group and Nakshi Knit Group;
 Illegally opened local back-to-back L/Cs and provided acceptance to documents raised by
inter/intra branch customers namely Star Spinning Mills, Max Spinning Mills, Anwara Spinning
Mills and Master Cotton Yarn Ltd. on account of Hall-Mark Group and T and Brothers Group;
 Created unauthorized fresh loans to adjust unauthorized overdue loans;
 Provided loan against fake export documents of Hall-Mark Group, T and Brothers Group, Paragon
Knit Composite Ltd. and Nakshi Knit Composite Ltd.;
 Provided excess pre-shipment credits (PSC) over approved limit;
 Allowed PSC without L/Cs;
 Allowed PSC after shipment date;
 Opened cash L/Cs without customer’s existing liabilities and limits;
 Opened cash L/Cs for capital machinery at zero margin without the approval of the Head Office
of the bank;
 Foreign Currency Management Division (FCMD) debited Head Office NOSTRO account without
obtaining reimbursement from the branch;
 Reported irregular Payment against Documents loans as regular in classified loan report;
 Opened foreign back-to-back L/Cs without office note and realizing commission;
 Transferred fund illegally by debiting sundry deposit accounts;
 Purchased export bills before completion of exports;
 Applied incorrect exchange rates for purchasing deferred payment export bills;
 Overdue export bills were not reported to the central bank; and
 Allowed temporary overdraft illegally against cash incentives.
Magnitude of the Hall-Mark Scam

Tk. 3,606.48 crore is equivalent to:

 320.6 per cent of Sonali Bank’s paid up capital!


 6.6 per cent of Annual Development Programme (ADP) of FY2012-13
 15.9 per cent of allocation for social safety net programme in FY2012-13
 38.6 per cent of allocation for health in FY2012-13
 16.8 per cent of allocation for education in FY2012-13
 0.3 per cent of projected GDP of FY2012-13
 15.0 per cent of the finance requirement of the Padma Bridge
 42.9 per cent of the envisaged support by the World Bank for the Padma Bridge

Cyber-crime scenario in banking sector of Bangladesh:

Cyber and technology related crime is gradually increasing in Bangladesh. The advancement of e-banking
technology has made banking transactions very convenient. But the misuse of information technology has
brought undesirable consequences in the form of diverse cybercrimes, basic cybercrimes occurred in
banks and financial sector- namely Automated Teller Machine (ATM) frauds, E-Money Laundering etc.

ATM frauds, E-money Laundering and Credit Card Frauds are the most witnessed cybercrimes in the
banking sector. In general, all the frauds are executed with the goal of accessing user's bank account,
stealing funds and transferring it to some other bank account. In some cases the cyber criminals uses the
banking identifications i.e. passwords, e-PIN, certificates, etc. to access client's accounts; whereas in other
cases they may want to steal and transfer money the funds into another accounts illegally. The intention
of cybercriminals sometimes is just to harm the image of the banking firm. In the last few years, the baking
sector was the victim of several security breaches:

 On January 06, 2013, Islamic Bank Bangladesh site was hacked by Human Mind Cracker.
 In 2015, bank accounts of a private bank were hacked and money was withdrawn from them.
 On December 2, 2015, Hackers breached the network security of Sonali Bank and took control of
its website for a couple of hours. The programmer distinguished himself as a 'Muslim Hacker'.
 In February, 2016, skimming attacks in six ATM booths of three commercial banks.
 And the largest e-money laundering in the history of banking occurred in February
 2016, when hackers stole $101 million from the Bangladesh bank's account with the Federal
Reserve Bank of New York.

ATM card skimming

The initial shock came after the revelation and complaints recorded because of abuse of ATM machines
fitting in with some banks and withdrawal from various private accounts of a lot of cash without approval
of the record holders.14 persons were arrested by the police on 4 March, 2016. It included 12 foreign
nationals who were individuals from worldwide cyber-crime fraud-gang. They had deceitfully utilized
online networking media furthermore hacked information of individual clients.

Skimming is a procedure utilized by digital lawbreakers to duplicate individual information from the
magnetic strip on an ATM card. The criminal fits a skimming device in the card slot of ATM booth. Once a
card is swiped through a skimmer, individual data contained on the magnetic strip is perused and put
away on the gadget or transmitted remotely to the criminals.

With the card information, they can lead value- based misrepresentation, make new cards with the stolen
character and individual data, or offer the cardholder information on the underground market.
Bangladesh Bank Heist

In February 2016, the stealing of $101 million from the reserves of the Bangladesh Bank has raised
question on the exposure of financial institutions to cyber-crime groups. This incident have challenged
the ability of existing mechanisms in preventing such incidents. Besides, this theft signified the need for
strengthening the international co-operation in tackling cyber-crime.

The hackers retrieved the central bank's transfer codes and sent payment transfer requests worth $1
billion to the Federal Reserve Bank of New York. They requested the funds of Bangladesh be transferred
to a bank in the Philippines. From there, the cash was transferred to at least three Philipino casinos: At
the casinos, someone converted the cash into chips for betting and then reconverted the chips into cash.
This money was then sent to bank accounts in Hong Kong. An additional fund of about US$ 21 million was
also transferred illegally to a third party in Sri Lanka.

The attempt could not be fulfilled in totality following a typing error that alerted one of the routing banks
and transaction was stopped. Instead of "foundation" the hackers had spelt it as "fandation". This
prompted a routing Bank- Deutsche Bank to seek clarification from the Bangladesh Bank, which stopped
the transaction. Spelling mistake prevented the illegal shifting of money. But the hackers were successful
in siphoning $81 million in the initial four transactions.

The theft of such a large amount from national reserves astonished many in Bangladesh and abroad.
Doubts are being expressed about the country's readiness to protect its financial infrastructure, which is
undergoing digitization. Different investigations are being carried by various enquiry commissions like FBI,
Bangladesh Banks appointed committee & CID officials of Bangladesh. Bangladesh investigators have
identified at least 20 foreign nationals who they claimed were involved in the cyber heist till date. They
installed malware inside the bank's Dhaka headquarters that hid traces of their attack in a bid to delay
discovery so they could access the funds, according to police and private security firms.
Lessons learnt and Recommendations

The recent financial scam is an eye-opening incident for all associated with banking sector as well as the
policy makers exposing the inherent weaknesses of the banking sector of the country. In view of the recent
irregularities, appropriate measures ought to be undertaken in the short to the medium-term towards
improved performance of the sector. This should range from proper investigation and punishment of
involved persons to improvement of the monitoring and governance of the SCBs. Specific
recommendations are the followings:

Absence of Risk Management Policy

Absence of a comprehensive risk management policy in many banks makes it difficult to handle fraud
and other extraordinary cases. Bangladesh Bank has identified six core risks and asked banks to formulate
and implement appropriate guidelines on those. These core risks include the following:

 Credit Risk Management;


 Foreign Exchange Risk Management;
 Asset-Liability Risk Management;
 Internal Control and Compliance Risk Management;
 Money Laundering Prevention Risk Management; and
 Guidelines on Information and Communication Technology.
Needless to say, these guidelines are hardly followed by most of the banks, especially the SCBs. The
manual for loans and advances containing policies, procedures, processing and reporting transactions,
review of security and collateral and responsibilities at different levels is not followed by many banks due
to which it becomes difficult for them to handle and manage clients with various levels of exposures.

Lack of Internal Control

The Internal Control Department which ought to be the most critically important department of any bank
is weak in the SCBs. This is mainly due to incentive failure which prevents hiring of qualified persons for
this department. As the nature of the job involves patient scrutiny of compliance, people are reluctant to
work here, and those who do, are often in a way dumped in this department. Absence of information
technology (IT) makes their work even more boring. Bangladesh Bank guidelines on internal control
require that if there is any incidence of a loss equivalent to Tk. 1 crore the Board of Directors of Banks
should be informed immediately. Besides, any major irregularities, fraud and embezzlement have to be
presented through a report during the monthly assessment of banks. In the case of Hall-Mark scam it
seems that the bank management was hiding the illegal activities in the said branch for a prolonged
period.

Political Baggage of the Board of Directors

The tradition and practice of appointing Directors of the Board of the SCBs based on the political loyalty
and affiliation have to be changed. Members of the Board of the SCBs should be independent, qualified,
efficient and socially acceptable persons with unquestionable integrity. Bangladesh Bank Guidelines
2010 for the Directors of banks spelt out the ‘Fit and Proper Test Criteria’ for the nomination of Directors
along with their responsibilities and power. These criteria are yet to be implemented fully. Due to political
baggage, Directors of SCBs cannot perform their duties independently and remain morally obliged to listen
to political instructions of the government. This results in weak corporate governance.

Inappropriate Appointment of CEOs and Senior Officials

The scam has also exposed total failure of the CEO and responsible senior managers of the bank in
discharging their duties. In the SCBs, preoccupation of most CEOs is to keep the Board in good humour
and sing the songs the way the Board likes to hear so that their position is well-secured under any
circumstances. It is difficult to find any instance where the CEO has been asked to leave the job because
of bad performance. One may argue that in a setting where the Board is constituted of political candidates,
the CEO is handicapped in taking any decision guided purely by banking ethics, norms and perceived risks.
This however, is not a saleable point. Good business plan, effective people management programme,
regulatory compliance practice, effort towards clients’ satisfaction and high work ethics of any CEO of a
bank are bound to be endorsed by a Board, no matter how political it may be. Performance of CEOs should
be evaluated from time to time by the Board based on the Key Performance Indicators (KPI). The Board
can only guide and support the CEO to achieve the targets that are of benefit to the bank.
Shortcomings of Human Resource Policy

Human resource (HR) development has been a neglected issue in the SCBs. World Bank supported reforms
of 2007 recommended a number of measures for the improvement of skills and performance of the
officials in the SCBs. However, the HR Department of the SCBs remains weak and powerless to take
decisions on recruitment and promotion, partly due to lack of capacity, and partly due to external
influence. In the modern day business, banks have to provide value added products and services to
customers in addition to traditional banking functions. However, the SCBs suffer from skilled and qualified
human resources for undertaking such operations. The HR policy of banks should not only arrange for
appropriate training, but also should include reward and punishment practices in the banks.

Inertia for Automation and Management Information System (MIS)

An issue related to the HR development is the automation and Management Information System (MIS) in
banks. It is apprehended by experts with fair amount of certainty that there may be many more Hall-Mark
cases that wait to be uncovered in other banks. Unless these are dug out through transparent and
automated banking practices with the help of IT, the mess may get piled up and reach an unmanageable
stage.

Dualism in the Regulatory Mechanism and Regulator’s Oversight

It is no secret that there exists a strained relationship between Bangladesh Bank and the MoF over the
supervisory and regulatory role on SCBs. Though Bangladesh Bank can exercise its full authority in
supervising the PCBs and FCBs, the MoF oversees the SCBs to some extent. The MoF appoints the Directors
of the Board, CEOs, DMDs and GMs of the SCBs. However, due to less articulated mandate, Bangladesh
Bank faces problems in implementing recommendations of audits and ensuring overall governance of the
SCBs.

Ensuring Cyber Security Governance:

Bangladesh Bank recommending to all Banks and financial institutions to ensure cyber-security
governance i.e.:

 Taking measures for ascertaining existing technical gap assessment and vulnerability through a
comprehensive cyber security risk study.
 Treating cyber security as a collective responsibility by all financial institutions.
 Installing Anti-skimming devices to the ATM booths.
 Use of EMV (Europay, Mastercard & Visa) Standard card to avoid skimming.

Such measures were recommended by the Bangladesh Bank because such cyber-attacks were seen as
being capable of causing financial loss and creating a reputational risk. They should also emphasize on:

 Provide IT related training for skill development


 Monitoring over the IT related issues
 Testing hazard incident
 Mandatory adoption of IT related precaution to avoid such incidents.
 Creating customer awareness

Need for a Commission for the Financial Sector

In view of the recent shocks in the banking sector and emerging challenges a Commission for the financial
sector should be formed which will scrutinize the overall performance of the sector, assess the need of
customers and the economy, identify the current problems and emerging challenges, and suggest
concrete recommendations for prudential banking to be implemented in the short to medium terms.
Considering the emerging need and in order to build up more transparent and responsible banking sector

Conclusion

These incidents are not only a case of financial loss, but also a deep dent on the confidence and trust of
the customers of the banks. It is also not the loss of good will of the particular bank only, but of the total
banking industry. Such an erosion of reputation of banks could have multiple chain effect including
reduction of deposit in the concerned bank and fall of share prices of the whole banking sector. This can
also constrain the role of the banking sector in catalysing the growth of the economy. Without radical
changes in the banking practices in the country such expectations may remain largely unfulfilled. During
the run-up to attaining the ambition of being a middle-income country, there is a need to significantly
strengthen the banking industry if goals are to be realized. Bangladesh Bank has to bring back discipline
in the banking system. The government will have to cooperate in the process otherwise nothing will
happen. Only professional people may be inducted in the boards of directors. Sincerity of the government
is crucially important. Good governance in the commercial banks is the need of the hour. It is alleged that
loan default is not being properly reflected in bank accounts. This is a serious lapse and an example of
corrupt practice.

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