5:16 pm - Monday May 24, 1176

The all other banking scams in BD

On Feb. 4, $101 million dollars of Bangladesh’s foreign exchange reserves were stolen from its account at the Federal Reserve in New York. Only about $20 million have been recovered so far, and it still isn’t known who took the money or where it ended up. The heist is being described as one of the biggest bank robberies in history.

But it’s hardly the first time tens of millions of dollars have vanished from Bangladesh’s banks. The high-flying cyberscam at the Federal Reserve pales in comparison with the routine plunder of Bangladesh’s financial system, including by some of its purported guardians.

The country’s six state-owned commercial banks (SOCBs) control around one-quarter of all bank assets in the country but have on outsize influence on the economy thanks to their connections to the government. For example, SOCBs have “extremely high” rates of bbnonperforming loans, according to the I.M.F., and the average for the entire banking industry is “very high”: about 11 percent, compared with about 4 percent in advanced economies.

Part of the explanation for this is poor governance by the banks’ boards, but the main culprit is the country’s culture of patronage.

One of the most notorious of Bangladesh’s banking scandals involves the country’s largest SOCB, Sonali Bank. Between 2010 and 2012, one branch of Sonali Bank alone illegally gave out $454 million in loans, including nearly $344 million to Hallmark Group, a textile business, according to the Dhaka Tribune. Tanvir Mahmud, Hallmark’s managing director, connived with a branch manager to issue fraudulent letters of credit to fictitious companies.

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Even after the scam was uncovered, Sonali Bank continued to operate with an extremely high nonperforming loan ratio: reportedly more than 37 percent in the fall of 2014. And the bank, along with Bangladesh’s other five SOCBs, are regularly recapitalized by the government — to the tune of about $640 million for fiscal year 2014 and, it is expected, more than $700 million for fiscal year 2015.

These banks’ irresponsible lending practices — and the state’s irresponsible efforts to systematically bail them out — are partly the result of collusion between business and political elites.

Fahmida Khatun, the research director at the Center for Policy Dialogue, in Dhaka, was a board member of the SOCB Janata Bank in 2008-11, after being appointed by the military caretaker government that ran the country in 2007-8. In an interview in Dhaka in 2014 she told me that since Bangladesh’s return to civilian rule after the 2008 election, loan portfolios have typically been assessed not according to their business potential, but with an eye toward “the influence or the connections of the person” asking for credit.

Notably, Ms. Khatun added, the loans that are approved by bank directors with connections to the party that happens to be in power are “the ones that get defaulted, invariably.”

Here’s an example: Salman F. Rahman, one of Bangladesh’s wealthiest individuals and a co-founder of Beximco, a major business group that specializes in exports of pharmaceuticals and garments. A 2007 cable from the United States ambassador in Dhaka subsequently disclosed by WikiLeaks called Mr. Rahman “allegedly one of Bangladesh’s biggest bank loan defaulters.” He was imprisoned for fraud in 2007-8, under the caretaker government.

In an interview in his Dhaka office early last year, Mr. Rahman told me he owed about $800 million to state-owned banks. He blamed the previous government, led by the Bangladesh Nationalist Party — a staunch rival of the Awami League, which is in power today — for not servicing his debts. By the time we met, though, Mr. Rahman had become an adviser to Sheikh Hasina, the prime minister of Bangladesh and the president of the Awami League. And the Bangladesh Bank was now “restructuring” his debts, he said.

Mr. Rahman is no exception. Some $565 million in assets are said to have been looted from the state-owned BASIC Bank between 2009 and 2012, yet the scam’s suspected mastermind, a former chairman of the bank, wasn’t troubled by the anticorruption commission investigating the fraud, reportedly thanks to his political connections. Banking in Bangladesh is beholden to the politicians.

This is largely because state institutions are underfunded and weak. Technocrats, auditors, courts — all those traditional safeguards don’t have enough authority or muscle in Bangladesh to keep the politicians in check.

This, in turn, is due to the fact that Bangladesh has one of the smallest tax-to-G.D.P. ratios in the world, at less than 10 percent. Lack of infrastructure prevents the collection of income taxes. There are myriad taxes on corporations, but it’s easy enough to bribe one’s way out of paying them. Partly as a result, imports are subject to exorbitant fees — which only gives importers an incentive to finagle a way to avoid them.

Then there’s capital flight. If you loot state resources in a country like Bangladesh, you don’t want to risk losing it to someone else’s scams or to seizure by the government. And so you take the money abroad, far from the prying eyes of local tax collectors, preferably to a low-tax, low-transparency jurisdiction.

About $9.7 billion worth of illicit capital left Bangladesh in 2013 alone, up from $3.3 billion in 2004, according to the N.G.O. Global Financial Integrity. That’s the equivalent of more than 6 percent of G.D.P. that year, and more than 3.5 times what Bangladesh received in foreign development aid.

That money should have been taxed in Bangladesh. If it had been taxed, there would probably have been less bank fraud, and less illicit money to be stashed abroad.

This is one reason offshore tax havens must be made to operate more transparently. Bangladesh, for its part, must stem the outflow of illicit capital and rethink its taxation system in order to collect more on income and earnings.

Such changes would mean major reform, of course — of the tax authorities, of the legal system, of the Bangladesh Bank — and the elites who benefit from the current situation have little incentive to undertake it. But Bangladesh needs a proper state bureaucracy if it is to curb its venal politicians.

By Joseph Allchin, a freelance journalist formerly based in Dhaka.

Courtesy: The New York Times