1

Malpractices in International Banking: Bangladesh Perspective

Introduction
It is well-known that as part of international banking practices
1
banks facilitate trade payment,
trade finance and foreign exchange. Malpractices in international banking broadly take the form
of irregularities or non-compliance of regulation and fraudulent activities that may affect banks
remarkably. Though the malpractices especially fraudulent activities! in international banking
are not very fre"uent however these could prove to be very costly for banks and the concerned
parties. The malpractices could be particularly detrimental for banks that are widely perceived to
be more fragile than other firms. To detect non-compliance and fraudulent activities, commonly
used techni"ue is the transaction monitoring system at the level of the banks and supervisors.
#on-compliance of regulations may be detected in performing regular monitoring of the
transactions by the concerned parties and thus banks may have ade"uate time to handle the
issues. $owever, frauds in international banking commonly results considerable cost for the
banks as detected. %uch fraud detection, alert and case management practices are still too often
viewed as separate activities &hang '(11!.
)ross-border activities commonly regulated and guided by both domestic and international
regulations. Most of these are related to trade payment and financing activities. *ecause of the
potentially strong and broad negative externalities associated with bank failures and the
widespread fear they ignite, bank safety is a ma+or public policy concern that appears amenable
to be pursued through strong domestic regulation. The rules and regulations of international
banking are in line with a country,s cross-border trade and investment policies. -doption of
international rules and guidelines are particularly relevant for facilitation of cross border banking
services for harmoni.ing banking regulations among countries. /egulations and their
enforcement are particular crucial for the prevention of the malpractices. 0roactive measures and
strict enforcement of regulation help avoiding or mitigating fraud.
In *angladesh, facilitation of trade payment and financing to the traders is at the heart of
international banking. More specifically, documentary credit or letter of credit 1)! is at the
nucleus of the international banking transactions in *angladesh. 2oreign exchange transactions
1
International banking practices are cross-county and cross-currency transactions of banks.
2
of banks, as market participants of the foreign exchange market involve very limited activities
and as a whole foreign exchange market is tiny and shallow in the country. 3ther international
banking activities of banks in *angladesh include facilitation of remittance, transfer of funds,
maintenance of foreign currency accounts and international credit card services. There are
alleged occurrences of non-compliance of regulations and a few instances of fraudulent practices
in international banking in the country. The paper attempts to examine the issues of malpractices
in international banking in the context of *angladesh. The paper also has discussed relevant
regulations and reviewed pertinent literature to create the backdrop of the study. 0ublished data
are the ma+or source of information for the paper. *I*M studies on the trade services of banks
are among the ma+or source of secondary information. - few cases are prepared based on
primary information to attain the ob+ective of the study.
II. Malpractices in Cross-Country and Cross-Currency Banking Transactions-
Literature Review
$istory of fraud in international cross-border transaction is very old. Malpractices in cross-
border transactions developed hand in hand with the increase in trade and cross-border
transactions among nations. I)) 1456! notes, as the definition of letter of credit 1)! expanded
since 1'th century and its use increased, so too did the incidents of malpractices. Till many
years, such malpractices remained both local in origin and effect, however, now trade has
expanded worldwide, and the trade patterns have shifted, the problems and incidents of fraud
have also become more complex and international in nature, the I)) publication adds. The
phenomenon of malpractices is timeless and universal, and is found both in the 7ast and 8est
&hang '(11!. The expansion of cross-border transaction becomes a channel of criminal activity
and money laundering. -ccording to the 2-T2 '((5!, trade finance represents an important
channel of criminal activity and given the growth in world trade, it has increased money
laundering and terrorist financing vulnerability. Moreover, as the standards applied to other
money laundering techni"ues become increasingly effective, the use of trade-based money
laundering can be expected to become increasingly attractive.
In facilitating cross-border trade and financing, banks encounter two types of fraud9 one,
presentation of genuine documents but with subse"uent fraudulent action by a third party with
3
respect to the goods9 and two, presentation of fraudulent documents for inferior goods or non-
existent goods I)) 1456!. In both cases, the documents could be presented either under
documentary credit or documentary collection. 8hen documents are presented under a
documentary credit, neither it is possible for banks nor it is re"uired under :niform )ustoms
and 0ractice for ;ocumentary )redit :)0;)! to check the genuineness of the documents.
-rticle <= of the current version of :)0 >(( reflects the standing of the rules and I)). :nder
;ocumentary )ollection, banks handle documents at the instruction of the principal or exporter
and are therefore not responsible for investigating the integrity of the beneficiaries. I)) 1456!
notes, to avoid fraud, ade"uate in"uiry should be made before entering into a purchase-sale
agreement. -ccording to the :#)T-; '((<! report, four kinds of 1) frauds have been
popular? one, where the cargo is non-existent, the documents are falsified by the beneficiary in
order to obtain payment from the bank9 two, where the goods are of inferior "uality or "uantity9
three, where the same goods are sold to two or more parties9 and four, where bills of lading are
issued twice for the same goods.
;uring the mid-145(s, documentary fraud in the shipping of goods was overwhelming, and
technological developments which were intended to facilitate ordinary commercial transactions,
at the same time provide fraudsters advantageous opportunities to commit fraud ;emir--rt.
'(('!. The study added, 1) fraud is not only widespread, but it is a big business too, and its
tentacles have spread throughout the world. There are several experiences of frauds under
documentary credit in different countries that has resulted in remarkable costs of the different
concerned parties. It has been seen that in the most common 1) fraud scheme, the victims are
the buyers &hang '(11!. *arnes and *yrne 144>! reported that in the :%- losses due to 1)
fraud reached (.6 billion :% dollars in 1446. The loss as a result of fraud was '.= billion $ong
@ong dollars around (.< billion :% dollars! in 1445, 1.1 billon $ong @ong dollars around (.16
billion :% dollars! in 144A and '1 cases were related to 1) frauds Bu and #i '((6!. %ince the
:)0 was accepted in the mainland of )hina, the 1) has been widely used in )hina,s foreign
trade. %everal 1) fraud cases have astonished the world in recent years, and the amount involved
has become greater than in the past. %omeone even predicted that the amount of losses in 1)
fraud cases in mainland )hina is astronomical &hang '(11!. %imilarly, %outh -frica has also
suffered from various fraudulent 1) transactions Bolding 144A!.
4
Bo-!: "raud under #ocu$entary Credit
In 1451, an 7gyptian importer arranged a 1) for ;M <6(,((( in favour of a Berman exporter,
who had a registered company in 1iechtenstein. The 1iechtenstein company had an account at a
%wiss bank. 3nly two documents C a clean *1 and an invoice were re"uired under the 1). The
Berman exporter obtained a *1, on which the /ed Med 1ines )ompany seemed to be the carrier,
but who had in actual fact li"uidated about nine months before. 3n the date when the *1 was
signed, the ship $elga 8ehr was unloading cargo in 1isbon instead of loading cargo in $amburg
as was written on the *1. The Berman exporter obtained the payment under 1) from the %wiss
*ank in &urich, by presenting the forged *1 and invoice. The importer started to suspect the
fraud several months later when the cargo did not arrive as expected9 and soon found that the
Berman exporter was untraceable. )learly the crime happened in &urich9 the forged *1 was
presented so that the Berman exporter fraudulently could obtain the payment under 1), but the
%wiss bank was reluctant to involve a criminal complaint because it had been reimbursed by the
Issuing bank in 7gypt. The 1iechtenstein company was administered by a lawyer who withheld
the information of the name of the true owner of the company under the protection of %wiss law.
%ource? @uo-7llen '(('.
The most significant reason for why 1) fraud takes place is argued to be the exclusive use of
documents in international 1) transactions )hen and 1iu '((A!. 1) by its nature is based on a
system of documents. There is nothing else besides documents for the banks to consider when
examining the presented documents and deciding to pay or not. The heart of such a documentary
system is that when the beneficiary submits documents that conform to the stipulated
re"uirements in the 1), the bank is obligated to pay9 this documentary character makes the 1)
easy to be abused by the unscrupulous fraudsters &hang '(11!. In the eyes of the fraudsters, the
documents are as e"ual as money. It is not difficult to fabricate or forge these re"uired
documents, especially with the advanced technology now available ;emir--rt. '(('!.
Money laundering is another critical area that boomed with the expansion of cross-border trading
and financing activities. The 2-T2 '((5! indicates that criminal organi.ations and terrorist
groups are exploiting vulnerabilities in the international trade system to move value for illegal
purposes. - number of specific money laundering cases were identified which involved the
proceeds from various types of predicate offences which includes illicit trafficking in narcotic
drugs, illicit trafficking in stolen or other goods, corruption and bribery, fraud, counterfeiting or
piracy of products and smuggling. The most basic schemes involve fraudulent trade practices
such as? over-invoicing and under-invoicing of goods and services, multiple invoicing of goods
5
and services, over-shipments and under-shipments of goods and services and falsely describing
goods and services 2-T2 '((5!.
%ome foreign exchange transactions of banks could prove to be very risky. 7specially, when
banks are involved in derivative trading, then involvement in speculative trading could prove to
be very costly. The derivative trading is not as easy as perceived. The chain of events which led
to the collapse of *arings, *ritainDs oldest merchant bank, is a demonstration of how to miss-
manage a derivative operation. 0ractically, banking regulators in all countries and supervisors
commonly issue foreign exchange risk management guidelines and restrictions to have controls
over foreign exchange transactions of banks. The irregularities in the foreign exchange
transactions by banks could be dangerous. %ome countries have separate authority alongside
central bank to regulate foreign exchange transactions. 2or example, recently The %tate
-dministration of 2oreign 7xchange %-27!, )hinaDs foreign exchange regulator, said
8ednesday that 1> banks have been found to have committed irregularities in their foreign
exchange transactions. The regulator has handed out penalties to these banks, involving A4 of
their branches, including fines, suspension of some foreign exchange business and punishment of
some senior managers The )hina ;aily '(1'!.
*anks offer international credit card facilities to the clients. Today international credit card is
widely in use and malpractices in the area are also widespread. %ome recent studies Information
%ecurity Media Broup '(119 %3% Blobal 2orum '(11! have identified that the most common
type of frauds faced by the banking institutions are related to payment card and -TM. )ard
frauds exceeds money laundering frauds considerably. The category of credit and debit card
frauds of financial services is among the fastest-growing and best-known means of criminal
profit. %ome >.5 million -mericans were victimi.ed by card frauds in '((A, according to Eavelin
research, and such fraud on existing accounts, accounted for more than :%; < billion in losses in
'((A, according to the -merican *ankers -ssociation as noted in 2ederal /eserve *ank of
Minneapolis '(11!.
In each and every year malpractices are directly responsible for either the buyers or the banks in
transactions losing huge amounts of money. In addition, fraud threatens international trade and
battens on trust. Trust in the institutions of commerce and for their integrity and efficiency is
6
fundamental to the function of any economic system. 2ormulating right regulations, monitoring
and enforcement have no alternative to have control over irregularities. Farious mitigation
techni"ues include internal controls and procedures, transaction screening and risk management
approach and risk mitigation services by financial institutions. 8hen designing a strategy to
manage fraud risk, enterprises must take both aspects into account. 0revention begins with
effective internal controls, which help in reducing exposure to financial risks and builds systems
for detecting frauds -I)0- '((4!. 0roactive fraud prevention has to be conducted, and it
covers good division of responsibilities, supervision of staff, monitoring work performance and
all those measures intended to ensure dishonest people cannot access the system, or even if the
system is accessed that a proper control is in place )3%3 '((=!. 2urther factors that help to
prevent fraud can be anti-fraud policies, procedures, training and fraud awareness )oburn
'((>!. Bovernments and regulatory agencies have strict and unyielding expectations regarding
the "uality and completeness of anti-money laundering -M1! programs within the financial
services community. *anks are expected to design and implement effective -M1 compliance
programs that address organi.ational needs, policies and procedures, transaction monitoring,
independent testing of controls, filing of suspicious activity reports and ongoing training of
employees -1-% '(11!.
III. International Banking %ctivities and Regulatory &nviron$ent o' International
Banking in Bangladesh
International Banking %ctivities o' Banks in Bangladesh
Trade services i.e. facilitation of trade payment and offering trade financing facilities are the
ma+or international banking activities in *angladesh. 3ther than these, banks offer remittance
services and perform very limited foreign exchange services.
Facilitation of Trade Payment Services by Banks: *roadly four categories of trade payment
methods are in use to facilitate and receive payments? cash in advance, open account,
documentary collection and documentary credit. *ecause of some regulatory compulsion,
documentary credit is the most commonly used method in making import payment from
*angladesh. In export receipt, mainly documentary collection is in use alongside documentary
credit. $owever, whatever may be the method of payment the very first step is the contract
7
between exporter and importer. In the cases of cash in advance, open account and documentary
collection, salesGpurchase contract is the guiding document. 0ractically, for these three methods,
banking system needs a standard format for purchaseGsale agreement, considering the risks to
protect the interests of the clients in a better manner. In case of 1), the contract may be
considered as relatively less important as the terms and conditions of the contract are expected to
be in the 1) itself. In *angladesh, the use of standard salesGpurchase contract is not so prominent
which may be due to the widespread use of documentary credit. There is no doubt that terms and
conditions of purchaseGsale contract would vary for different products, modes of payment or
even sources of imports. *efore getting into a purchase or sale agreement with a foreign
counterpart, licensing or registration is a very common re"uirement for the traders. In the context
of *angladesh, importers are to obtain I/) to import from any sources and exporters are to get
7/). In practice, importers and exporters are to submit a diverse set of documents to the ))IH7
of the Ministry of )ommerce. It is to be mentioned that government ministries do not re"uire
I/) for importation. )ommonly used documents in international trade payment transactions
include commercial invoice, transport documents, insurance documents, bill of exchange, etc.
The re"uirements and nature of documents depends upon purchaseGsale agreement. In case of
1), these documentary re"uirements are noted in the 1) itself and compliance is a precondition
to obtain payment by the exporter. 2or selecting right documents, the trading parties should
consider both domestic and international regulations carefully.
Trade Finance Services by Banks: 0acking )redit, the most popular form of pre-shipment credit
in *angladesh, is extended against transport documents evidencing transportation of goods. This
type of credit is sanctioned for a transitional period starting from the dispatch of the goods up to
the negotiation of the export documents. *ack-to-*ack 1etter of )redit is a financing
arrangement between bank and exporter commonly to import raw materials for preparing
exportable by the garments exporters in the country. :nder this arrangement, the bank finances
export by opening a letter of credit on behalf of the exporter who has received a letter of credit
from the overseas buyer. The bankDs credit related to back-to-back 1G) is reali.ed subse"uently
from export proceeds. 7xporter obtains 7xport ;evelopment 2und 7;2! facilities to meet
foreign currency re"uirements mainly to import raw materials under back-to-back arrangement.
This has been helping *angladeshi exporters to comply with the re"uirements of sight back-to-
back 1). *anks in *angladesh extend post-shipment credit to the exports through #egotiation of
8
documents under 1), 0urchase of ;0 ;ocuments against 0ayment! and ;- ;ocuments against
-cceptance! bills and -dvance against 7xport *ills surrendered for collection. In such a
circumstance, the exporter may obtain an advance from the bank against the security of export
bills. In addition to the export bills, banks may ask for collateral security like a guarantee by a
third party or an e"uitableGregistered mortgage of property. 2or importation, banks have been
offering credit facilities to the importers both at the pre-import and post import stage. 1) is a
financing techni"ue for importers under which banks offer undertaking to make payment on
behalf of importers. In *angladesh the popular post-shipment import financing techni"ues are
termed as 0-;, 1IM and 1T/. -nother recent innovative financing techni"ue to offer post-
shipment credit to the exporter or financing to the importer is popularly known as :sance 0ay at
%ight )redit 1) :0-% 1)!. This is a new feature in the 1) process in response to the demands
for immediate payment by the exporter and applicant,s re"uest for deferred payment. There are a
few instances of offering or using %tandby and ;emand Buarantee services by banks to support
traders.
Foreign Exchange and Remittance Services of Banks: The banks in *angladesh through their
treasuries have been facilitating foreign exchange transactions on behalf of their clients as
intermediaries or sometimes they are directly participating in foreign exchange transactions. The
dealing rooms, operating under treasuries basically participate in various transactions which are
classified as merchant transactions and propriterial transactions. In *angladesh, banks may
participate in both spot and forward transactions in retail as well as wholesale markets. 2oreign
exchange swaps are also very fre"uent in our domestic foreign exchange market set up. To take
part in transactions entailing foreign exchange derivatives such as options central bank
permission is re"uired. 3fficial remittances flow into *angladesh mainly through banks. In this
process, the foreign counterparts are mainly the exchange houses with which the banks have
arrangements. -longside, using I)T tools and mobile technologies, banks have started using the
networks of each other or branches more extensively. *angladesh *ank has allowed banks to use
the services of M2Is in distributing the remitted fund in the remote areas of *angladesh and,
accordingly, some banks have usefully engaged the branch networks of micro-finance
institutions. -s per B27T of *angladesh *ank, -;s are opening different types of foreign
currency accounts? 0rivate 2oreign )urrency -ccounts9 #on-/esident 2oreign )urrency ;eposit
#2);! -ccounts9 /esident 2oreign )urrency ;eposit /2);! -ccounts.
9
Regulatory &nviron$ent o' International Banking in Bangladesh
In facilitating cross-country and cross currency transactions, banks are re"uired to follow a set of
domestic regulations and some international rulesGguidelines. In this connection, our exchange
control regulation i.e., 2oreign 7xchange /egulations -ct 14=A 27/- 14=A! is the key
domestic regulation in regulating international banking transactions. *anks are also re"uired to
follow the trade policies issued by the Ministry of )ommerce of *angladesh. -mong the
international rules and guidelines, International )hamber of )ommerce I))! publications
:niform )ustoms and 0ractice for ;ocumentary )redits :)0 >((!9 :niform /ules for
)ollections :/) 6''!9 :niform /ules for *ank-to-*ank /eimbursements under ;ocumentary
)redits :// A'6!9 Incoterms '(1( are the most relevant. 3ther than the above mentioned key
rulesGguidelines, some other domestic regulationsGacts like )ustoms -ct 14>4, 0res-shipment
Inspection -ct, '((' are indirectly related.
Foreign Exchange Regulation Act !"#: In *angladesh, 2oreign 7xchange /egulations -ct,
14=A I27/-, 14=AJ is the most important domestic regulation in the area of international
banking. 27/-, 14=A has empowered *angladesh *ank to regulate all kinds of cross-country
and cross-currency dealings in *angladesh. 7mpowered by the -ct, *angladesh *ank issues
K-uthori.ed ;ealer, licenses to the bank branches for conducting trade payments, financing and
other international banking operations. 2ollowing the provisions of the -ct, *angladesh *ank
issues circularsGguidelines from time to time to regulate trade payment, financing, remittance
services, maintenance of foreign currency accounts etc. activities to be followed by the banks.
These guidelines should complement the I)) guidelines for smooth operations of international
trade payment and financing activities.
BB $uidelines on Foreign Exchange %$FET& '((!): 2or ensuring smooth operations as well as
efficient risk management, *angladesh *ank has not only been drafting prudent regulations to
govern, monitor, supervise and managing risks in foreign exchange transactions but also the
regulatory framework is being updated "uite fre"uently to accommodate the time-befitting
changes. In that regard, *angladesh *ank has got a compilation named as B27T containing all
the 27 circulars, which basically provides the fundamental backdrop for foreign exchange
10
transactions. -s well as, a framework is being circulated by *angladesh *ank for managing
foreign exchange risks. In B27T, there are directives for accommodating various foreign
exchange transactions such as maintenance of foreign currency accounts by the -;s, sale and
purchase as well as borrowing and lending in foreign currencies by the -;s, central bank,s
transactions in foreign currencies with the -;s, forward dealings in foreign exchange, hedging
the price risk of commodities, in and outward remittance arrangements, maintenance of different
sorts of 2) accounts for clients, imports and exports, 70& transactions, foreign currency
denominated loans, overdrafts and guarantees, insurance and payments through international
cards. 8ithin the foreign exchange risk management framework, policy issues such as fixation
of dealing limits, reconciliation of both position and #ostro accounts, timeframe for dealings,
stop-loss limits, valuation, internal audit etc. are covered. -long with these, the framework also
contains discussion on the organi.ational framework of the treasury as well dealing process.
BB $uidelines on Trade Services %$FET& '((!): -uthori.ed ;ealers are re"uired to follow
2oreign 7xchange 27! circulars issued by the *angladesh *ank being empowered by 27/-
14=A. In this process, one cannot by-pass the policy decisions and directives of the government
in the form of 7xport 0olicy and Import 0olicy 3rder issued by the )hief )ontroller of 7xport
and Import of the Ministry of )ommerce of the country as empowered by the Imports and
7xports )ontrol! -ct, 146(. *angladesh *ank compiled all the 27 circulars in the guideline
titled B27T. The current Isecond 7ditionJ issue of B27T '((4 covers regulations up to May <1,
'((4. The first volume offers the directives regarding the procedural modalities and the second
one contains the details of monthly reporting of 27 transactions. 2rom operational banking point
of view, the importance of the B27T is imperative and the officials working at different desks of
trade services departments in -; branches must know these rules well.
*m+ort and Ex+ort Policies: The existing Import 0olicy 3rder, '((4-'(1', has been formulated,
keeping in mind the market economy ideology for making the easy availability of the
commodities to consumers at fair prices through removing the barriers to movement of goods
internationally. It is the restriction of the Import 0olicy of the country because of which 1) is the
most commonly used method of trade payment in *angladesh. The import policy has allowed
opening of 1) for importing capital machinery even without I/) and other flexible measures to
11
keep up with the momentum of rapid industriali.ation through ensuring re"uired imports. 7xport
0olicy '((4-1' primarily aims at encouraging production of exportable commodities and
promoting new exporters and helping the existing exporters.
,ustoms Act !-! and Pre.shi+ment *ns+ection Rules '((': )ustoms -ct 14>4 has
consolidated the law relating to customs the levy and collection of customs duties! and to
provide for other allied matters. The -ct has covered some issues connected with bill of entry
and pre-shipment inspection that are related to trade services by banks. Bovernment of
*angladesh circulated a set of rules of pre-shipment inspection known as 0re-shipment
Inspection /ules '((' under the )ustoms -ct 14>4. These rules assigned specific
responsibilities to the importers and the banks related to pre-shipment inspection.
/niform ,ustoms and Practice for 0ocumentary ,redits %/,P -((): :)0 >((, the current
version of :)0;), is the collection of rules governing the issuance and execution of letters of
credit in the cross border exportation and importation in the global economy. :)0, the popular
title of :)0;), compiles the best documentary credit practices that came into effect from Euly
(1, '((A and is the sixth revision of the rules since they were first promulgated in 14<<. The <4
articles of :)0 >(( mainly cover the liabilities and responsibilities of different parties engaged
in the process of 1) which is meant for traders and bankers. The universal acceptance of the
:)0 by practitioners in countries with widely divergent economic and +udicial systems is a
testament to the rulesD success. In *angladesh, 1) can only be opened and received within the
framework of :)0 >(( since Euly '((A.
/niform Rules for Bank.to.Bank Reimbursements under 0ocumentary ,redits %/RR #'1): In
most cases under 1), reimbursement by the issuing bank is made using the service of a third
bank known as K/eimbursing *ank,. -nd the process of making reimbursement using the service
of the /eimbursing *ank is known as *ank-to-*ank /eimbursement -rrangement. ://
suggests two ways of making reimbursements? one, simply by authori.ing /eimbursing *ank to
make reimbursement to the )laiming *ank9 and two, by authori.ing /eimbursing *ank to issue
a reimbursement undertaking to the #ominated *ank. /eimbursement undertaking offers greater
security to reimbursement to the #ominated *ank and thus to the exporter. The rules of ://
12
assign liabilities and responsibilities of different parties involved in the process of
reimbursement. :sing the service of K/eimbursing *ank, to make or receive reimbursement by
the banks of *angladesh is very common.
/niform Rules for ,ollections %/R, 1''): :niform /ules or )ollection of I)) contains the set
of rules to guide collection process through banks, which is known as K;ocumentary )ollection,.
The I)) :niform /ules for )ollections are a practical set of /ules to aid bankers, buyers, and
sellers in the collections process. :/) 6'' underlines the need for the principal andGor the
remitting bank to attach a separate document and the collection instruction to every collection
sub+ect to the rules that came into effect in 1446. It makes it very clear that banks will not
examine documents, and addresses problems banks experience in respect of documents against
acceptance ;G-! and documents against payment ;G0!. The document clearly indicates that
banks have no obligation to store and insure goods when instructed.
*ncoterms '((: )ame into effect from the 1st Eanuary '(11, the International )ommercial Terms
'(1( is the eighth revision containing 1< terms. The introduction to the new '(1( terms stresses
the need to use the terms appropriate to the goods, to the chosen means of transport and to
whether or not the parties intend to impose additional obligations on the seller or buyer. In
addition, there are Buidance #otes and a diagram! at the front of each Incoterms /ule
containing information to assist in making a choice on which /ule to use. The new /ules have
been separated into two classes? /ules for use in relation to any mode or modes of transport9 and
/ules for sea and inland waterway transport, where the point of delivery and the place to which
the goods are carried to the buyer are both ports.
02,0E3 Rules and *,, Arbitration: ;3);7L /ules are about a service known as
K;ocumentary Instruments ;ispute 7xpertise, that are provided in connection with any dispute
related to I)) regulationsGguidelines and their applications that are made available by the I))
through its International )entre for expertise. The purpose of the I)) ;3);7L /ules is to
provide parties with a specific dispute resolution procedure that leads to an independent,
impartial and prompt expert decision for settling disputes involving the :)0, :/;B, :// and
:/). The I)) )ourt is the leading international arbitration institution in the world. The
13
arbitration process starts with a written re"uest for arbitration to the I)) )ourt. I)) and
)ommittee Maritime International )MI! offer separate arbitration rules to meet the special
re"uirements of maritime users.
I(. Malpractices in International Banking Practices in Bangladesh
Malpractices in the international banking activities are mostly related to the trade payment and
financing activities considering the fact that these are the ma+or activities of international
banking in *angladesh. Most of the cases of malpractices are related to non-compliance of
regulation or guidelines. %ome of these are intentional, and many of these are due to knowledge
gap of the service providers. -longside in other international banking activities, there are
instances of non-compliance of the re"uirements of *angladesh *ank. 2re"uency of malpractices
in the form of fraud is insignificant. %ome of malpractices covering both irregularities and frauds
are narrated bellow?
Malpractices in Trade Pay$ent and "inancing )y Banks in Bangladesh
In 1) operations, late payment has been found to be a common practice by the trade
service providing banks in a number of instances. It is observed that, in spite of receiving
compliant documents under sight 1)s, the payments have been lingered. This practice is
more prevalent amongst the %)*s which do not only harm their institutional reputation
but also the country,s image. )ases have been found where, in spite of compliant
documents, the applicants re"uested the banks to lodge discrepancy notices to halt the
payments momentarily on the grounds such as goods had not arrived or goods were of
inferior "uality. In few cases, it has been observed that in spite of the arrival of the
consignment, the applicants approached issuing banks to linger payment through issuing
discrepancy notices. *anks are also cooperating with them in some instances. These
practices also inflate the confirmation charges of the 1)s issued from *angladesh.
$igher rate of document re+ection has become apparent following current economic crisis
and fall in commodity prices. There is intense scrutiny of documents by some banks,
eventually leading to higher rates of re+ection on the basis of trifling and ignorable
discrepancies. /e+ection +ust to delay payment or for harassing exporters are departures
from the spirit of :)0 framework. In the context of *angladesh, there are instances
14
where banks re+ect documents +ust for re+ection and charges for the discrepancies as their
foreign counterparts do. These are clear departures from the :)0 morals. %uch practices
can simply make the tradable costlier and burdensome to the consumers.
There are trends of creating forced loan, rescheduling, and converting non-funded
liability into funded liability in response to the crisis in *angladesh. %udden price
decrease in response to global recession causes non-performance by the buyers. In a
number of instances, issuing banks have to make payment and create forced loan in
favour of the importer. Thus, there has been considerable increase in funded liability
Iconverting non-funded liability into funded liabilityJ. In some instances, banks also
delayed payment to protect their interests which is undesirable under :)0 rules.
2or making the payments under local *ack to *ack 1)s denominated in foreign
currency! there are two alternatives for banks. 7ither they can use the #ostro accounts
using swift MT '('! or they can use the 2) )learing -ccounts maintained with
*angladesh *ank, which is also preferred by the central bank. It is observed that a lot of
banks are utili.ing the services of foreign correspondents abroad as the payments are
affected through the #ostro accounts which are maintained with them which results in
foreign currency outflow in form of charges from the country. The reason behind these
sorts of practice is simply to gain in business with the correspondent agents resulting in
higher revenue in form of charges.
%ome instruments of international trade like 1)s or guarantees are used for fraudulent or
unethical practices in performing local trading activities. The issue of accommodation
bill payment without genuine consignment! related with shipment under local 1)s is a
huge concern for the entire banking sector. /ecently, a case of huge forgery in regard to
accommodation bill has been surfaced and stirred the entire banking industry.
2or domestically transferred transferable 1)s, most of the local banks %)*s and few
0)*s! transfer through endorsement on the back of the master 1)s. It basically raises the
scopes for fraudulent practices and forgery. 3f late, few cases of forgeries have been
15
revealed which is a concern for future as transferred and transferable 1)s are used in
large numbers here.
-ccording to the ** Buidelines on 2oreign 7xchange Transactions '((4!, for opening
an 1), -;s should obtain confidential reports on foreign exporters for satisfying
themselves regarding the standing of the exporters through consulting the existing books
of reference issued by international credit agencies in all cases where the amount exceeds
*;T 6 lac against proforma invoices issued directly by foreign suppliers and *;T 1( lac
against indents issued by local agents of suppliers. Issuance of 1) without credit report is
a sheer violation of the B27T and basically raises the risks of both the issuing bank and
the importer. $owever, in many cases, banks are issuing 1)s without obtaining credit
reports only incorporating credit report clauses.
/ecently, in "uite a few instances it is found that to retain the clients in this competitive
market, the banks are sometimes undertaking undue risks even bypassing the regulatory
framework. )ases such as financing by the -;s to the exporters through opening back to
back 1)s deferred by 15( days! under open account trade could be extremely risky if the
foreign buyers default or don,t make payment. -s the concerned -;s are endorsing the
transport documents title to the goods! to the foreign buyers directly, it could prove to be
very risky.
*ankers have mentioned about some malpractices regarding endorsement of transport
documents. -s per the B27T chapter 5 of Buidelines for 2oreign 7xchange
Transactions, '((4!, other than the cases such as -dvance TT received by the domestic
exporter or for 70& exporters, the shipping lines are not permitted to issue %traight *G1s
directly consigned to the foreign buyers! without the #3) from the local -.;. the
nominatedGnegotiatingGremitting bank!. It is also a vital condition for the shipping lines to
obtain license from *angladesh *ank. *ut "uite a few banks have complained that some
shipping lines have violated that as well as there had been cases where although the copy
of the 2)/s were issued in the name of local -;s but surprisingly the 3riginal Master
*G1s were directly endorsed in the favour of the foreign buyers. This is clear violation of
**,s regulation.
16
In *angladesh, insurance coverage is supposed to be offered by the importers. *anks are
supposed to ensure minimum insurance coverage of 11( percent of importable at the time
of opening of 1). $owever, in a number of cases 1)s are opened ensuring only 1((
percent of the importable. )ontravention of *angladesh *ank rules is very apparent in
this case.
In case of importing restricted items that re"uire permission from the appropriate
authority! issuing banks are suppose to incorporate the documents as well as certain
conditions. Benerally documents are asked for however conditions are not incorporated.
In certain cases, though very limited in number, some banks have made payments as per
the re"uirement of 1), however, goods never arrived, and banks were in trouble. %uch
instances are found where sight 1)s is issued with TT reimbursement clause by a
*angladeshi bank.
There are several cases of non-reali.ation of export proceeds. This may not be very
unusual. $owever, -;s or banks are expected to behave responsibly and report to
*angladesh *ank in timely manner. $owever, there are instances where -;s did not
report to the *angladesh *ank and moreover banks did cooperate with the exporters in
fraudulent activities box-', box-< and box-=!.
17
Bo *: +on-Repatriation o' &port Proceeds and Irregularities )y a Bank
- local trader had several contracts for exporting vegetables. The exporter arranged various
consignments locally produced vegetables! to different destinations through airway mode. *ut
in a number of cases, the export proceeds worth :%; 4>((( under the sales purchase contracts
were not reali.ed. The exporter explained that, due to shipment schedule problems the shipments
could not take place in a timely manner. There was delay and perhaps the consignments were not
preserved properly. %o, by the time the vegetables reached the importing countries were rotten.
%o, the importerGs did not pay. ** has pointed out how come so many consignments 1(< export
bills! of the same party could remain non-repatriated for a long period of time, along with that
neither the respective -; nor the exporter informedGreported to ** of the matters. -s well as the
explanation given by the exporter and the -; was neither satisfactory nor they could produce
strong documentary evidence to support their clarification. %o, ** has raised fingers against both
the clients as well as the respective banks for non compliance of GF!"
#o$rce% &ase' on the (nformation from &&
Bo-,: +on-Repatriation o' &port Proceeds- Money Laundering and .ross Irregularities
#on reali.ation of export proceeds worth :%;'>.41lac by a /MB manufacturing unit. The
/MB manufacturing unit basically exported against sales purchase contracts to few specific
foreign buyers and several export bills have remained unpaid. ** accused the respective -;s
for not proper reporting of non repatriated export proceeds to ** as per the B27T. -long with
that the -;s repeatedly provided forced loan facilities to the client for settling the back to back
1)s opened against the contracts, in spite of the fact, that huge amount of export proceeds were
not reali.ed . 1ater it was detected that the foreign buyers as well as the suppliers were linked
with the owner of the /MB manufacturing unit. %o, it has been basically a complicated case
involving a lot of issues like non reali.ation of export proceeds, violation of B27T, miss
utili.ation of cash incentive facilities of Bovernment of *angladesh, money laundering both to
and from the country bringing in illegal money in the name of export proceedsGremittanceGwage
earner,s fund to *angladesh for availing '6 percent cash benefits and then again remitting these
outside in form of over invoiced import payment!. The -;s were also found to be involved in
arranging financing facilities to the /MB manufacturing unit without properly adhering to the
standard norms and documentation. The irregularities by the involved banks in facilitating the
transactions for the client can be listed as C #o timely reporting was done to ** regarding non-
repatriated export proceeds9 Irregularities in financingGforced loan creation back to back 1)
payments!9 3ver invoicing9 Money laundering9 Miss utili.ation of cash incentive benefits etc.
%ource? *ased on the Information from **
18
Bo-/: Massive Irregularities in "acilitating Pay$ent and "inancing 0ervices
Massive irregularities and violations of banking rules, regulations, norms and practices
committed for a client of a bank branch of a %)* of *angladesh located in ;ubai, :-7. %ome of
those are depicted below? one- a company in :-7 was registered but the date of registration
could not be found in the memorandum and articles of association, so "uestion could be raised
regarding the genuineness of the incorporation of the company with the regulatory authority of
:-7, but in spite of that, a bank of *angladesh facilitated the client9 two, 7ven prior to the
registration with the appropriate authority in '(1( and opening a ); account with the branch,
the company issued an 1) through the branch in '((49 three- 1) was issued using the );
account and most of the 1)s 1A out of total '1 1)s! of the company of :-7 remained
unutili.ed or were not executed. "ive- Most of the 1)s was issued in big amounts exceeding the
business delegation power of the branch manager9 si- without any reasonable grounds within
only one year, the *oard of ;irectors of the bank "uadrupled the limit for 1) transactions based
on the false certification made by the branch management9 seven- the company availed import
financing facilities forced loans! from the bank and in spite of the opportunities the bank did not
ad+ust those over dues 0-; liabilities! from the export proceeds9 eight- it submitted fake
shipping documents against export 1)s and asked the branch to accept those documents. The
officials from the branch were involved in these foul games.
%ource? *ased on the Information from **
Malpractices in "oreign &change Transactions
-lthough in respect of foreign exchange market transactions, as per the directives of **,
the banks are absolutely prohibited from engaging themselves in transactions with
speculative motives but there are instances of these. $ere, each and every foreign
exchange transaction should be backed up by an underlying transaction. Transactions on
option re"uire case by case approval from the central bank. *ut, it has been detected that
some treasuries hedge the risks of the clients through options and do not report to evade
the possible difficulties. 7arning profit and collection of charges are the main ob+ectives
behind these malpractices.

Re$ittance 0ervices and Maintenance o' "oreign Currency %ccounts
There are cases where banks do not renew the guarantee re"uirement for continuing with
inward remittance services. There had been cases of malpractices in mobili.ing inward
remittance through exchange houses, for which *angladesh *ank has duly penali.ed a
few banks. In maintaining foreign currency accounts, some irregularities are there mainly
due to the knowledge gap of the bankers.
19
Malpractices in Reporting to Bangladesh Bank
Timely reporting on cross-border transactions is a crucial re"uirement of regulatory
compliance of the central bank. In many cases, banks do not report to the central bank in
time. There are instances of penali.ing certain -;s for such delays.
(. Concluding Re$arks
There is no doubt that malpractices, especially frauds may result in remarkable costs for the
concerned parties. It has been observed that in a considerable number of cases, importers and
issuing banks were affected when payments were effected under documentary credits. -s most
of the payments from the country are made through documentary credits, banks and importers
should take utmost care in handling and opening 1)s. There must be ade"uate in"uiry on the
part of importers about the exporters before involving in any kind of cross-border transactions.
Issuing banks are also re"uired to get sufficient information about the credibility of the supplier.
In case of documentary credit, banks and clients must also be aware and well informed about the
provisions of local laws, :)0 and other related international rules. In case of other forms of
payment methods, provisions of the purchaseGsale agreement and associated risks must be
understood and evaluated by the contracting parties. -bout the other areas of international
banking, things are clearly in control considering the fact that our international banking means
practically the trade payment and financing. It is to be noted that in many cases, irregularities
arise because of the knowledge gap of the bankers and other concerned parties. %tringent internal
control and more extensive monitoring of international banking activities are re"uired for
avoiding malpractices in the area.
20
Re'erences
-I)0- '((4!, KThe *asics of 2raud /isk Management,, Business Brief, Fo1. 1, =, available at
h ttp?GGfmcertre.aicpa.orgG#/GrdonlyresG<<76656>-1-=1-=;('-**-5-
);6*61A'=7=)G(G2raudM/iskM ManagementM*usinessM*rief.pdf.
-nti-Money laundering -dvisory %ervices '(11!, 2inancial %ervices, 7rnst H Noung, #ew
Nork.
'' *arnes, Eames B. H *yrne, Eames 7. 144>!, K1etter of )redit? 1446 )ase,, The Business
Lawyer, Fol. 61, -ugust.
)oburn, #iall 2. '((>!, K)orporate Investigations,, Journal of Financial Crime, Fol. 1<, #o. <.
)hen, Nan H 1iu, 1ing '((A!, UCP 600 and LC Essentials, 0eking? :niversity of International
*usiness and 7conomics 0ress, p. >'
)houdhury, Toufic - and %hah Md. -hsan $abib '((>!, K Moving into the #ew :)0, keynote
paper presented in the seminar organi.ed by I)), *angladesh on Eanuary (6,'((>.
)houdhury, Toufic -, %hah Md. -hsan $abib and /ahman, Mahmood-ur- '(1(!, K:)0;)
>((? Implementation ;ifficulties, research workshop paper presented in *I*M in '(1(.
;emirC-ra., Neli. '(('!, KInternational Trade, Maritime 2raud and ;ocumentary )redits,,
International Trade Law & e!ulation, 5=!, 1'5-1<6.
2ederal /eserve *ank of Minneapolis '(11!, '(1( 0ayments 2raud %urvey, 2ederal /eserve
*ank of Minneapolis, 0ayments Information and 3utreach 3ffice, -pril 1', '(11, :%-J.
Bolding, $enry 144A!, K/eport K)hanges in %outh -frica $ave $ad their Impact on 1G)s,,,
"CI
#ICC$, 8inter, Fol. <, #o. 1, p. 1>.
Bu, Liaorong H #i, /uiping 7ds.! '((6!, esearch on Internationali%ation of Puniti&e
e!ulations on Financial Crimes, 0eking? 1aw 0ress )hina, 1st ed. In )hinese language!.
$abib, %. M. -hsan, /ahman, Mahmood-ur-. $o"ue, -.T.M. #esarul, $ossain , #. and &areen.
-. '(11!, K/eview of Trade %ervices of *anks in *angladesh-'(11, a review workshop paper
presented in *I*M in '(1'.
I)) 1446! Buide to the 0revention of International Trade 2raud, I)) 0ublishing % -, 2rance.
Information %ecurity Media Broup '(11!, The 2aces of 2raud-2ighting *ack, 0rinceton, :%-.
@uo-7llen, 1in %. '(('a!, K2raud in ;ocumentary )redit Transactions,, Journal of 'oney
Launderin! Control9 8inter9 Fol. 6, #o. <.
/ahman, Mahmood-ur- and &areen. -. '(11!, K-n -ssessment of the 3perations of Trade
0ayment Methods in *angladesh , research workshop paper presented in *I*M in '(11.
21
%3% Blobal 2orum '(11! ;7T7)TI#B -#; 0/7F7#TI#B 2/-:; I# 2I#-#)I-1
I#%TIT:TI3#%, %-% Institute Inc. )ary, #), :%-.
The )ommittee of %ponsoring 3rgani.ations of the Treadway )ommission )3%3! '((=!,
Enter(rise is) 'ana!ement * Inte!rated Framewor)+ ,((lication Techni-ues, #E? )3%3.
The 2inancial -ction Task 2orce 2-T2! '((5! *est 0ractices on Trade *ased Money
1aundering, 2-T2 %ecretariat, 2rance.
The 2inancial -ction Task 2orce 2-T2! '((5! *est 0ractices on Trade *ased Money, 2-T2
%ecretariat, 2rance.
The )hina ;aily '(1'!, %aturday, 1> banks commit irregularities in forex transactions, ;ec '',
'(1' http?GGwww.chinadaily.com.cnGbi.chinaG'(1(-1'G<(GcontentM11AA6>(>.htm
&hang, Nanan '(11! K-pproaching to /esolving the international ;ocumentary 1etter of )redit
2raud Issue,, ;issertation #o-16, :niversity of 7astern 2inland.
:#)T-; report '((<! K- 0rimer on #ew Techni"ues :sed by the %ophisticated 2inancial
2raudsters with %pecial /eference to )ommodity Market Instruments,
:#)T-;G;IT)G)3MG<4!, :#)T-; secretariat.