Sunday, April 2, 2017 http://dailyasianage.com/news/54255/sonali-bank-scandal-and-bangladesh-bank
Sonali Bank scandal and Bangladesh Bank M S Siddiqui
 
The Bangladesh Bank (BB) was established by the Bangladesh Bank Order (1972) and initially functioned like a government department but this changed gradually over time. It has given limited authority in very slow phase since 1989 although BB is not yet independent. The much talked independence of BB surfaced again due to Sonali Bank (Hallmark) debacle. There is a debate on role of BB, Board of Directors and management of Sonali Bank (SB). It is observed that the Government appointed Management of BB has lack of sincerity; negligence and limitation to stop such occurrences and BOD of SB are responsible for loan debacle. The control of such incidences may be controlled with the full autonomy of central bank.
The BB investigators have found 143 paper-based fake companies of Hall-Mark Group involved in money laundering activities and illegal transaction. The group has used those companies and their bank accounts for drawing loans from the SB and embezzled the money by transferring the fund to other companies. The investigators have found clear evidence of irregularities and violation of bank rules in cases of loan sanctions, accounts opening and transfer of huge funds from one company account to other companies of the group. SB has not followed proper rules to prevent money laundering activities in case of bank account opening and transfer of funds to other accounts. The SB branch has not preserved the account opening form and transaction details for five years of those accounts, which are treated as money laundering as per bank rules. Other rules to avert money laundering were also not followed in operating the accounts of Hall-Mark Group's sister companies. Sonali Bank's United Kingdom branch as guarantor of its L/Cs for importing goods from abroad and the SB's UK branch was forced to pay Tk 65 crore to creditors even after revelation of the scam for the sake of its reputation. But the group did not import any goods against the LCs, rather illegally transferred the fund abroad, according to BB findings. So far the ACC investigators have found 54 accounts of Hall-Mark's various companies at the Ruposhi Bangla branch. Al least 34 of the SB accounts were operated by Hall-Mark garments companies for exports. In many cases, those accounts were opened without any introducers, and also without following proper bank procedures. The Know your customer (KYC) forms were not preserved against those accounts, which is mandatory for banks to prevent money laundering activities. SB had purchased internal bills from 69 branches of 26 banks without following proper rules and scrutiny. Of those, Hall-Mark Group had direct links with those bills operated under 16 of its named company accounts while others were fake accounts allegedly used by the group with support of Bank. It had lent Hall-Mark Group and five other companies Tk 3,547 crore between 2010 and May this year on forged documents and the companies had embezzled the huge amount. Hall-Mark has done wrong by diverting short-term loans into project loans. SB had given shortterm loans for up to 120 days, but invested the money in setting up factories. This is a longterm investment in nature and the lender extended cooperation to all these irregularities. Hallmark consider the loan sanction process very long and utilized the working capital for longterm investments in fixed capitals like machinery and building. The projects are in Hemayetpur and built on a 100-acre land, a large portion of which was bought with Sonali Bank loan. Hallmark claimed that no siphon off the money; it rather invested in setting up more factories and creating jobs. According to Hall-Mark, its net liabilities to SB stand at Tk 2,268 crore. Of the sum, Tk 1,567 crore has been taken in cash. The remaining amount is non-funded loan, mostly in the form of guarantee against letter of credits (LCs). All of the Hall-Mark loans were against IBP, which is a short-term credit facility utilized as working capital. But the hitherto little-known company used these loans for buying land and building factories. "It's a violation of banking norms and rules. According to rule bank cannot disburse more than Tk 300 crore loan to an institution. SB ignored the principles of sound lending procedures and factors in their bank channels. In the case of Hall-Mark Group, the lending policy has been violated and the managers were reluctant towards their responsibilities and duties in nursing, processing, and operating the loan case. Insufficient, sluggish and raw credit analysis was done favoring the Hallmark Group. Project appraisal, investigation, valuation, authentication, demarcation, original ownership of land and building and other assets of Hallmark Group were not properly investigated and did not maintained the records. The loan disbursement and utilization were not at all monitored
and supervised by the management. The monitoring and control by the bank's Board of Directors and its Audit Committee and the Asset Liability Management Committee (ALCO) are imperative in such a big transaction. The internal audit also did not seem proper and the management is not aware of any irregularity. This is an instance of an amazing combination of abject lack of supervision, control, unwillingness to take action, failure of policy direction, greed, forgery and corruption. The role of central Bank and its authority and responsibilities came under discussion although nation is advocating more on arrest and punishment of executives of Hallmark. In developing countries Central Bank is a subject to a great degree of fiscal and political influence. The Finance Ministry in Bangladesh has Banking Control Department headed by Secretary level official. The political high up love to have control over fiscal policy and control and bureaucrats very happy to support government to share the power and authority over Central and Commercial Banks. Central Bank is not independent in following monetary policy, to choose its monetary instruments; and finally and not free to regulate the banking policy. The acid test of independence of Central Bank is 'power of to refuse or provide credit to the government'. Such autonomy can be only achieved by giving supreme power along various dimensions such as budgeting, policymaking, and the tenure of the governor or chief executive officer. The Hall-mark type scam is encouraged by less control of Central Bank and political control of financial sectors. Bangladesh Bank is not a statutory organization but under the supervision of the Ministry of Finance it enjoys partial autonomy. This autonomy is limited in both the areas i.e., administrative and operational autonomy. It is very difficult for the Central Bank to use its power for refusing the government to finance budget deficit. bank should be fully autonomous in all its functional and decisional activities. It should enjoy full autonomy to play roles for gaining long-term economic development through formulating and implementing appropriate monetary policy and supervising the financial institutions. It is very common that while a central bank work under the control of such political government and bureaucrats, it cannot work properly because mission, objectives and interest of these political parties cannot be same as the interest of the central bank. The political governments of all the time try to use the bank to meet their political commitments. Therefore government always tries to influence over the monetary policy of bank to gain only short-run political benefits. Government still have control over the Bank for the determination of interest rate, government borrowing, appointment of governor and the bank officials, right of issuing bank's own instruments etc. Consequently Bangladesh Bank is enjoying only a partial or limited autonomy. A widely discussed autonomy of central bank does not ignore the relation with the government. There should have a co-operative relation between the independent Central Bank and the government. Fully autonomous Central Bank should set its objectives with the government. However this cooperation should be for further development of the economic activities but never for the fulfillment of any political interest of the party in power. Central Bank needs independent board of directors for independent functioning. In case of functional or operational autonomy, Bangladesh Bank also has a limited power in practice such as the bank enjoys limited freedom to pursue policy leading to price stability. Traditionally Bangladesh government formulates the fiscal policy and the central bank formulates the monetary policy. In the formulation of the fiscal policy sometime central bank helps the government only through providing some suggestions. BB depends more on the government for
formulating and implementing monetary policy. In respect of monetary instruments Bangladesh Bank enjoys partial autonomy. Bangladesh Bank has liberalized the interest rate policy but Ministry of Finance tries to influence or advice Bangladesh Bank to change interest rate. BB should be converted to a statutory authority by act and have governor and Board of Directors appointed by Parliament for a definite period of 5 years and termination of service should be with Parliament. The Members of the Board of Directors should not any representative of government from politicians and bureaucrats. There should be legal protection in the event of a conflict with the government. BB should be given their due authority and accountability to handle crisis in Financial sector. It is well said that prevention is better than cure. The writer is a legal economist. He can be reached at: mssiddiqui2035@gmail.com