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Hall-Mark fraud: Lessons for the banking system

Mohammed Farashuddin
Many wonder if, but not all agree that the failure of Sonali Bank, Ruposhi Bangla Branch to prevent the fraudulent misappropriation of Tk.3,607 crores by Hallmark Group (Tk.2,668 crores) and others is the biggest scandal in the banking industry. In recent times, several such frauds — (a) misappropriation of Tk.622 coroes by one Nurunnabi in Chittagong in 2007 through a false local letter of credit, (b) embezzlement of Tk.596 crores withdrawn without cheque from Oriental Bank in 2006 (alleged Hawa Bhaban connection), and (c) transfer of Tk.300 crores by forgery from five banks by one Om Prokash in 2002 — were not as heinous as bank defrauding. Perhaps more damaging has been the transfer in their personal accounts of more than Tk.4,500 crores by the powers that be from the mother account of the infamous Destiny Group before the eyes of the banking authorities several months into the first sighting of the alleged fraudulent and illegal deposit taking from the members of the public.
One cannot but be shocked as to why conclusive, exemplary and drastic punishment could not be meted out to the culprits whose guilt was proven and whose actions could grievously hurt the banking system. Luckily, members of the public still retain their confidence in the banking system as the custodian of deposit known as amanat, the symbol of highest trust. If the political masters and the society as a whole, including the civil society, the media (objective and unified voice) and the judiciary, do not shrug off the complacence and bring major reforms in the banking management, the people may have to face anarchy.
Several other related incidents need to be recalled as rude reminders of indifference to serious matters. The writing off of bank loans and interest charges of the defaulters against hundred percent provisioning makes the default rate lower but definitely gives rise to moral hazard in addition to encouraging further default by the mighty. Most alarming has been the abandonment in 2009 of the time honoured and most effective practice of promoting the Deputy Managers (DGM) of the NCBs and DFIs through competitive selection process led by Bangladesh Bank. Thus, the Bangladesh Bank exercise of an independent committee preparing unified fit list for promotion to General Manager's position has been replaced by a parochial, particular bank based, promotion by the respective Board of Directors of an NCB or DFI. A proliferation of the positions of Deputy Managing Directors (some banks even have five) without properly defined TORs and accountability has also hurt the banking management. Recent debacle in the capital market, which hopefully will not perpetuate, has to be primarily traced to the banking system's failure to regulate and control rampant "investment" of commercial bank resources meant for industrial loan and SME credits to the secondary market. This results in bonanza of dividend for the equity holders of the suddenly profit making commercial banks. Certainly a golden opportunity was lost in 2007-2008 when the NCBs were merely "incorporated" into limited companies in name only without causing a transfer of at least 50% of shares to the members of the public for breaking the monopoly ownerships of the government which continued to "appoint" 100% of the Board of Directors and MDs, DMDs of the NCBs and DFIs. The resultant asymmetry in the jurisdiction of the central bank's authority over the NCBs as it has over the Private Commercial Banks (PCB) may be a cause of misgovernance in the NCBs as manifested in recent times. There is an ongoing debate as to which of the concerned organs of the state, the government, Bangladesh Bank or Sonali Bank, is mainly responsible for the Hall-Mark scandal. It would be fair to say that if the government decides to tighten the screws and tie the loose ends transparently and effectively run the banking system through an accountable apparatus, the ills will be minimised in a long term perspective. But an immediate need is replacing reactivity to the crises by a proactive strategy of anticipating and guarding against the loopholes and an agile system of inspection by Bangladesh Bank. The cardinal principle of acting on the inspection report recommendations on the day of inspection must replace drawering these at home or office soonest. It may also be wise to review the frequency of traveling aboard by the senior executives of the central bank.
The forgery of the Hall Mark Group in the Ruposhi Bangla Branch of Sonali Bank was going on for two years now and the illegalities were first detected in three branches by a GM in January 2012. The recommended inspection although orally approved by the MD in January could not be started until April allegedly due to resistance of a DMD. The manager of Ruposhi Bangla branch was to be transferred in the normal process two years ago but stayed on until recently to perhaps facilitate the Hall-Mark Group forgery; his extension could not have been without the explicit consent of the top management of Sonali Bank. Whatever plea may be cited, top management of Sonali Bank is primarily and mainly responsible for the HallMark Fraud. If it was under duress from its Board or the powerful politicians, an MD or DMD worth her / his salt should have handled it firmly within the framework of law unless she / he was a party to the loot. On paper, the Board of the bank is responsible for policy formulation and the management headed by the MD is responsible for managing the affairs of the bank under the law, rules, regulations and policy decided upon by the Board. Thus the Board's liability is of secondary order.
Why has the Bangladesh Bank recommended dissolution of the Sonali Bank Board for the Hall-Mark scam only two weeks before its expiry! BB was perfectly within its right to make such a recommendation under Article 46 of the Banking Company Act as amended. But it is very difficult to understand why BB's own inspection network could not trace the illegalities earlier and why the initial recommendation spared the mainly responsible organ, the top management of Sonali Bank.
Whatever the stance the government may be taking it is well nigh impossible to accept that such a fraud could take place without the connivance and blessings of some powerful political bosses. In the interest of long term and the approaching general election, government would do well to dissociate itself with the corrupt and bring them to book after due process of law.
In the backdrop of one of the worst banking scandals, the following steps may be considered:
1. Those who are in charge of economic management may adopt the golden rule of "speak less do more" and "if talk do it in one voice;"
2. Significant reforms are necessary in financial and banking management which, have been long overdue. A finance and banking reforms commission may be set up;
3. Bangladesh Bank's capacity for effective, objective, transparent and accountable bank supervision may be enhanced, including enlargement of professional staff, extension of its authority over the NCBs and adoption of a separate pay scale;
4. The policy of scapegoat suspension must be changed to keeping the suspects in position for a specified period under strict instruction to recover the defrauded money or at least to arrange credible collateral of substance;
5. The society may discourage media trial in favour of prompt and effective inspection to point out the guilty;
6. In appointing the NCB and DFI Boards, there may be a reservation of 40% quota for non-political professionals.
7. Duties, responsibilities and powers of the Board and the management of a bank must be clearly delineated and enforced.
The writer is a former Governor of Bangladesh Bank.