Sharif Essay

1903 words - 8 pages

Understanding the Hallmark-Sonali Bank Loan Scandal
By Daniel Sabet and Ahmed S. Ishtiaque
January 2013

Monthly Current Events Analysis Series
Purpose of the report
This month’s Current Events News Analysis takes up an issue that has been well documented and
discussed in a variety of news sources: the Hallmark-Sonali Bank loan scandal. As with other hot
topics, important information is scattered across a variety of different articles and sources. This
report seeks to provide readers with “all that they really need to know” about the scandal. The
analysis tries to provide clear, simple answer to the following questions:


What happened?
How did it happen?
Why wasn’t the ...view middle of the document...

The alleged scam exploited the Letter of Credit (LC)
1

system of financing trade.1 The Letter of Credit system is an important tool that addresses two
problems:

First, garment producers are often unable to pay for their inputs, such as the textile
fabric that they need for making garments, until after they have produced and sold their
final products.
Second, even when garments producers can pay on time, textile companies might be
anxious about delivering fabric without some guarantee of payment.

The solution to these problems is a Letter of Credit (LC). At the behest of a garments producer, a
bank provides a fabric supplier with a LC that guarantees payment either at the time of delivery or at
some later date. As shown in the figure below, Hallmark is accused of establishing fictitious
companies, such as Anwara Spinning Mills, Max Spinning Mills, Star Spinning Mills, which were
shown as recipients of the LCs. These companies submitted falsified paperwork reporting deliveries
of fabric to Hallmark, which were then paid for by the LCs from Sonali Bank’s Ruposhi Bangla branch.
Because the fictitious companies and Hallmark had their accounts at the Ruposhi Bangla branch, on
paper it looked like the branch’s assets and liabilities were balanced out.2

Another financial practice, known as Inland Bill Purchases, was then used to spread some of the bad
loans throughout the banking system. Because the still outstanding LCs were guaranteed by Sonali
Bank, the fictitious textile companies were able to sell the LCs to other banks before maturity at a
discounted price. As such, portions of the bad loans were passed on to twenty-seven other banks.3
Why wasn’t the malpractice prevented or discovered sooner?
The first line of defense to detect the scam should have been internal audits at Sonali Bank and
supervision by Sonali Bank’s top management. Most experts and commentators have concluded
that for a fraud of this scale to occur, the bank’s top management must have been involved in a
cover-up.4 Early media reports based on the account of a Sonali Bank whistleblower alleged
Sonali Bank’s Deputy Managing Director made extensive efforts to block audits of the Ruposhi
Bangla branch, and eventually transferred the persistent auditors to a branch outside Dhaka.5 A
probe by a parliamentary committee noted that the Ruposhi Bangla branch was certified as a
“low-risk” branch by the inspection and audit team of the bank despite violations of financial
rules between 2007 and 2011.6 In fact, an audit wing report went so far as to assert that the
accused manager of the branch was “managing the branch efficiently with his extraordinary
talent, foresight, and banking knowledge.”7
The second line of defense should have been the bank’s board of directors, whose members
claim to have had no knowledge of the malfeasance. External bankers and experts have also
regarded this claim with some skepticism, since the board of directors...

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