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Sonali Bank scandal and Bangladesh Bank

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 short-
term loans for up to 120 days, but invested the money in setting up factories. This is a long-term
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 long-term
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