term paper

on

“Unethical practice of Sonali Bank Ltd”

Submission Date: 30-11-2013

Letter of Transmittal

November 30, 2011
To
Dr. A. R. Khan
Professor
Department of Banking
Faculty of Business Studies
University of Dhaka

Subject: Submission of Term Paper on Social Responsibility & Business Ethics.

Dear Sir,

As instructed and part of our academic program under EMBA, I do hereby submit my report on ‘Unethical practice of Sonali Bank Ltd.’ for your kind review and necessary reference. While preparing this report, I tried my best to follow the guidelines you have given and also have gathered some practical experience. I hope that this report will meet your expectation.

I have engaged our intense efforts to bring out this study report with the target of achieving perfection but we are in a little doubt how far I have attained it.

It was a great pleasure for me to work on this report. I shall be glad to furnish you with any explanation, if necessary.

I shall be highly obliged if you kindly accept my report.

Sincerely yours,

Abu Sadat Md. Salim

I.D No: 51221026

21st Batch

Acknowledgement

It gives me much pleasure to recall with cordial reverence and deepest of gratitude the indispensable guidance, constant encouragement and unparallel stimulation that influenced untiring efforts. Sympathetic advice and invaluable suggestions of our respectable teacher Dr. A. R. Khan, Professor, Department of Banking, Faculty of Business Studies, University of Dhaka, from whom I was highly benefited throughout the progress of this study work.

I also acknowledge my gratefulness to the Sonali Bank Ltd, Head Office, Dhaka for their kind information’s, suggestions and supports received from them.

What is Ethics?

Some years ago, sociologist Raymond Baumhart asked business people, "What does ethics mean to you?" Among their replies were the following:
"Ethics has to do with what my feelings tell me is right or wrong."
"Ethics has to do with my religious beliefs."
"Being ethical is doing what the law requires."
"Ethics consists of the standards of behavior our society accepts."
"I don't know what the word means."
These replies might be typical of our own. The meaning of "ethics" is hard to pin down, and the views many people have about ethics are shaky.
Like Baumhart's first respondent, many people tend to equate ethics with their feelings. But being ethical is clearly not a matter of following one's feelings. A person following his or her feelings may recoil from doing what is right. In fact, feelings frequently deviate from what is ethical.
Nor should one identify ethics with religion. Most religions, of course, advocate high ethical standards. Yet if ethics were confined to religion, then ethics would apply only to religious people. But ethics applies as much to the behavior of the atheist as to that of the devout religious person. Religion can set high ethical standards and can provide intense motivations for ethical behavior. Ethics, however, cannot be confined to religion nor is it the same as religion.
Being ethical is also not the same as following the law. The law often incorporates ethical standards to which most citizens subscribe. But laws, like feelings, can deviate from what is ethical. Our own pre-Civil War slavery laws and the old apartheid laws of present-day South Africa are grotesquely obvious examples of laws that deviate from what is ethical.
Finally, being ethical is not the same as doing "whatever society accepts." In any society, most people accept standards that are, in fact, ethical. But standards of behavior in society can deviate from what is ethical. An entire society can become ethically corrupt. Nazi Germany is a good example of a morally corrupt society.
Moreover, if being ethical were doing "whatever society accepts," then to find out what is ethical, one would have to find out what society accepts. To decide what I should think about abortion, for example, I would have to take a survey of American society and then conform my beliefs to whatever society accepts. But no one ever tries to decide an ethical issue by doing a survey. Further, the lack of social consensus on many issues makes it impossible to equate ethics with whatever society accepts. Some people accept abortion but many others do not. If being ethical were doing whatever society accepts, one would have to find an agreement on issues which does not, in fact, exist.
What, then, is ethics? Ethics is two things. First, ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics, for example, refers to those standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin virtues of honesty, compassion, and loyalty. And, ethical standards include standards relating to rights, such as the right to life, the right to freedom from injury, and the right to privacy. Such standards are adequate standards of ethics because they are supported by consistent and well-founded reasons.
Secondly, ethics refers to the study and development of one's ethical standards. As mentioned above, feelings, laws, and social norms can deviate from what is ethical. So it is necessary to constantly examine one's standards to ensure that they are reasonable and well-founded. Ethics also means, then, the continuous effort of studying our own moral beliefs and our moral conduct, and striving to ensure that we, and the institutions we help to shape, live up to standards that are reasonable and solidly-based.

What are Business Ethics?

Ethics are a set of moral standards that are relied upon to reach conclusions and make decisions. In a business environment, ethics are a key factor in responsible decision making. Maintaining a high ethical standpoint when operating your business can provide benefits to both the internal and external stakeholders of your business.Your personal set of ethics are developed as you grow up and are influenced by the people and environment around you. Some ethical viewpoints are considered universal and apply to people around the world, whereas others are of a personal nature and may only apply to you. Your ethical viewpoints continue to evolve and change over time as you interact with different people and are exposed to different situations and environments.
The business case for ethics is based on the positive benefits that it can provide your business. The reasons behind maintaining high ethical standards include: • Improved employee and organizational morale • Increased ability to attract new customers • Improved customer loyalty • Reduced risk of negative exposure and public backlash caused by poor ethics • Attraction of new stakeholders • Making a positive impact on the community
Business ethics are important for managing a sustainable business mainly because of the serious consequences that can result from decisions made with a lack of regard to ethics. Even if you believe that good business ethics don't contribute to profit levels, you should be able to recognize that poor ethics can have a detrimental effect on your bottom line in the long term. Poor ethical standards can result in business managers making misinformed, misguided or bad decisions. The future effects of their actions could be significant and wide reaching, particularly if they cause injury or financial loss to other people or businesses. Poor ethics are the basis of many legal cases where people seek compensation for the losses they have suffered as a direct or indirect result of the decisions of business people not following basic ethical standards. In a sustainable business, employees at every level should be committed to the ethical standards of the business. As a business manager, it is important that you are able to clearly define and communicate to your employees what factors and ethical standards you expect them to adhere to and what the consequences are for failing to meet those expectations.

Importance of Business Ethics

Ethics in business are not only common sense, but business sense as well, no matter if you run a huge corporation or a little home business from your garage. Some people raise hell when they get bad service or are overcharged for a product. But the vast majority of people are too busy or too tired to make a scene or write letters of complaint. This majority of customers just make a quiet mental note of what a useless business you have, and vow to never go back there, and they usually don’t. These days of online shopping and delivery to your doorstep services, it’s really easy to find an alternative supplier.
So honesty and respect really do pay in the business world, especially in the long term. Many hot shot whizz kids have made their fortune by partially ignoring business ethics and honesty, and this was one of the main contributing factors to the latest recession we are presently enduring. Bad ethics and dishonesty, greed and rudeness do not help a business at all, and the business will collapse when the customers all go elsewhere, or when the whizz kid crookedness is found out and punished.
It doesn’t take a rocket scientist to work these simple principles out. So why do highly educated professionals and seasoned businessmen and entrepreneurs make the mistake of forgetting business ethics? It requires the courage of your convictions and a good moral base in the individuals. Dishonesty does give you cash in the short term, much like sawing off the branch that you are sitting on gives you timber for a short time. So it will always be a temptation to those with weak morals coupled with financial pressure. In many cases it takes raw courage to be honest, but out of the troubles that businesses go through, its reputation grows, and businesses with good reputations are successful businesses. Naturally, you still need a good business plan and a hungry market, as well as ethics, to be successful. But good ethics are vital to keeping you successful.
Business ethics that are important are:
1. Charge the customer a fair price. Don’t be greedy.
2. Treat the customer with respect, as though he is better than you.
3. Do not purposely sell the customer defective items or advice, or anything that is harmful or unsafe.
4. Always tell the customer the truth.
5. Treat your staffs like you treat yourself, or better. Be kind and generous to your staff.
6. Pay your suppliers promptly.
Ethics do take courage, and hard work. But they are worth it. And they are good business sense too.
Commercial aspirations have never accepted any constraints and so are about the corporate. Money spinning is something that is more about the reward than the ethics. Yet somewhere there has to be a balance between the two. It is this very juncture where the critical negative of capitalism lies. The challenge can be how to incorporate social responsibility with lucrative demeanor. Though a company is committed to the highest standards of social and business practices, it takes an effort to establish and to maintain them. The delivery of success to the clientele results from the efforts of an organization’s people – it is their resourcefulness, professionalism and dedication that give the company its leading edge as one of the forerunners in the respective industry. Just to ensure all this, the directors and employees are expected to observe the highest standards of integrity in the conduct of business.
Coming back to the topic to be discussed, ethics is not the same as self-interest however entrepreneurs often want to ensure that it is the same. They want to ascertain that “one can do well by doing well,” meaning that one can succeed in business by being ethical. There is no denying that one can often do well by doing good. A company with a code of business ethics is more likely to build a good reputation, which is more likely to bring financial rewards over a period but good behavior cannot be grounded in tangible reward alone. People who are interested only in reward will conduct business ethically when it suits their purpose but they will go astray whenever the incentives diminish. There is a profound confusion here too. To look to ethics for motivation is to misunderstand what ethics is all about. It is like studying finance to find a reason to make money.
Finance does not teach one to want to be rich. It teaches one how to be rich, assuming one wants to be rich. So it is with ethics. Ethics teaches one how to be good, assuming one wants to be good. It is important to know that one can normally do well by doing well. Otherwise ethical people could go into business only with a high risk of failure. Business ethics, however, addresses the opposite question: how can one do well by doing well? It begins with the premise that enterprises want to do something good with their lives and investigates how to accomplish this through business. In other words, it treats profit and business success as means to a greater end, while in the hind side making the world a little better. Ethics are a set of moral principles which are recognized in respect to a particular class of human actions or a particular group, for instance the medical ethics, legal ethics, teaching ethics that brings together people of the same profession.
These principles deal with values relating to human conduct with respect to concepts such as being good or bad, noble or ignoble, right or wrong etc. These values guide members of a group to act in a manner that is consistent with the values and standards as established. Business ethics are those virtues that business people apply when making business decisions. They are the standards expected within the business world, even if they are not written down and which business people ought to adopt. For instance business people are expected to afflict least suffering to their customers, being fair in their dealings and nurturing an enduring virtuous corporate character in totality.
Business ethics are important because they keep business people to operate within a moral and legal pedestal which not only leaves them satisfied internally but also increases sales because most people like dealing or doing business with honest businessmen. Also if the public or your potential customers perceive you to be engaging in improper business deals, they will shun you. Good business ethics should be embraced by all businessmen because engaging in unethical practices, which may include breaking the law, may lead to heavy fines or lack of trust by members of the public. Some of the business ethics include the following:
1. being trustful by recognizing that customer is the king. Customers want to do business with companies they trust and which they perceive to be showing them respect. When a business entity is trusted, it creates a loyal clientele.
2. Business people should be ready to meet the obligations of their customers and business partners regardless of anything else. Business people should offer their end of the bargain at all cost because this is the only way to cement customer and business partner’s loyalty.
3. Engaging in fair trading practices like guaranteeing a safe workplace for your employees, fair pricing for your products, that will at least cover the cost of production and treating you customers well among others will guarantee a high business turnover.
4. Every businessman wakes up every day with the intent to make profit. When a business operates within ethical realms, there will always be clear indications for growth. Equally, a business needs to make profit so as to meet its ethical obligations to the company, its employees, the authorities and customers.
5. In essence, being ethical as a business person builds the image of reliability and establishes reputation with your customers, the two things that are very important to a business.
Most business people do not take a keen interest in implementing business ethics. Most of them think that making profit is the most important thing but as they realize later, no matter how hard they try, they do not achieve their objectives.
Scope for Unethical practice in Banking
The data for these findings include confidential and sensitive material elicited by TIB from retired public officials and managers. These so called "diagnostic reports" contain inside information and anecdotal evidence and give us insight into the nature and mechanism of corruption. A survey of consumers carried out by the TIB in 1998 provides corroborating evidence for the types of corruption suggested by the diagnostic reports. Of 620 households in the TIB survey of corruption in Bangladesh, 53 had taken out a bank loan and 30 of them used bribery or influence to secure the loan.
This study makes use of TIB's repository of publicly available information on corruption. TIB Internal reports generated by the research staff support the general nature of our findings. Research methods used by the staff include field interviews with public officials and the media and the construction and analysis of a database of newspaper articles on corruption in Bangladesh.
All forms of corruption involve the abuse of a public office for personal gain. These episodes may be either transactional or non-transactional. Transactional corruption involves a transaction between a public sector entity and a private sector entity. The act of corruption subverts this transaction for personal gain by one or both parties either in cash or in kind at the expense of society at large. Power vested in public officials is abused in subverting the transaction. Either party may initiate the subversion of the transaction. The transaction may be for a service that is withheld to extort bribes or for extra-legal considerations.
In non-transactional corruption public officials abuse the power of their office or the access to public resources available through their office for private gain. Non-transactional corruption may be either collusive or non-collusive. Non-collusive corruption is a form of embezzlement. The public official, alone or in concert with other public agencies, diverts public wealth to personal wealth. In the collusive form the public official, as a partner or shareholder, allows a private sector enterprise to raid public resources.
Bribery and influence are complementary and may be applied in tandem; the greater the influence the lower the bribery amount. In the limit, influence prevails without bribery and payments and gifts are given as tips and not as bribes. Influence is gained by way of political party affiliations, positions of power in the public or private sector, through friends and relatives in high places, or by virtue of sustained and mutually beneficial bribery relationships.
Non-cash bribes to bankers have included entertainment and gifts, all expense paid vacations for the family, payment of club bills, high-paying positions in the borrower's firm for the bankers or their family members, allotment of plots in housing development projects, houses or apartments, shares of the borrower's corporation, and offer of admission in schools or universities along with scholarships. A continuation of small gift-giving may be necessary for relationship maintenance and these may include color televisions, refrigerators, jewelry, and dinner parties. In general the acceptance of the gift implies the acceptance of the deal and it creates an expectation on the part of the giver and an obligation on the part of the taker.
Bribery may be driven both by the demand for bribes by government bureaucrats and by the supply of bribes provided primarily by large defaulting business conglomerates. Evidence in TIB diagnostic studies suggests that the supply side plays a significant role in bank corruption. Public officials involved in corruption may include bank managers, the MOF, the Prime Minister's Office (PMO), officials of BB, and members of the Standing Committee of Parliament on the Ministry of Finance. Private sector businesses including banks are the providers of bribes.
It should be noted that in our theoretical construction, insider loans by private banks to their own directors and NCB loans to failing state owned enterprises ordered by the MOF are imperfections in the financial infrastructure but not corruption. Numerous banking irregularities of this nature in Bangladesh underscore the need for banking reform. To this end anti-corruption measures are necessary but not sufficient.
Using our working definition we are able to identify distinct areas of corruption in the banking industry in Bangladesh. They are inferred from operating and financial data and supported by interviews with managers and a survey of consumers. They are described as: 1. Dictation loans 2. Fictitious loans 3. Insider loans to government officials 4. Diversion of interest payments 5. Captive government deposits in government banks 6. Use of bribery to facilitate loans 7. Use of bribery or influence to subvert the loan approval process 8. Labor union intervention in loans, procurement, and recruitment 9. Sale of a forgivable loan 10. Use of bribery or influence to obtain a "sick industry" classification 11. Use of bribery or influence to re-schedule loans 12. Use of influence to waive regulatory restrictions 13. Use of influence or political power to forestall action on defaulted loans 14. Bribe demanded by bank officials to release funds 15. Bribery of external auditors by bank managers 16. Bribery of BB officials by PCB managers 17. Technical loopholes in bank regulation 18. Diversion lf loans

Dictation Loans
In what has been termed a "dictation loan" the normal loan application review process is completely bypassed. Managers of the NCB and the DFI are simply ordered by MOF or higher authorities to make the loan. The amount of the loan is typically more than 100 million BDT. The loan applicant is typically financially powerful and politically well connected and possibly active in the hierarchy of the political party currently in power. Bangladesh law forbids the NCB from acting on behalf of the government but recognizes the power of the government to act on behalf of the NCB.
It is normally assumed by all parties involved that a dictation loan will not be repaid. These cases are described as "willful defaults". In willful defaults no portion of the principal or accrued interest is ever paid and the loans are typically not invested in productive assets. Some may even be converted to hard currency and moved overseas. More than a quarter of the loan defaults of the SOB fall in this category.
The bad loans may be shown on the books as performing assets by recognizing uncollected "interest due" as income and by repeated rescheduling. In some cases the accrued interest and even the principal amount may be forgiven and written off under laws that were designed to assist the private sector in specific cases of economic hardship.
This form of corruption occurs at the highest levels of government. The corrupt officials taking part include Ministers, members of parliament, and leaders of political parties. These officials are accessible only to a very powerful elite. The defaulters are able to maintain their position in the political hierarchy and remain immune to recourse by banks even after committing brazen acts of loan default.
Fictitious Loans
The fictitious loan scam is a form of embezzlement. Managers of state owned banks collude with other government officials to give loans to non-existent entities and then cause these loans to go into default. The GOB creates these opportunities when it sanctions loan disbursement targets for certain sectors. For example, BKB managers in collusion with the Hand Loom Board may invent weaver loans when disbursements for weaver loans falls short of the amount allocated by the GOB.
Insider Loans to Government Officials
Ministers, members of parliament, and other high-ranking government officials are able to take out default-able loans without scrutiny and with impunity from state owned banks by virtue of their position. Donors and not the GOB have been proactive in bank reform because government bureaucrats and elected officials along with their friends are themselves the defaulters. There is a collusive arrangement between them and a "defaulters' lobby" in Parliament.
Captive Deposits
Deposits of SOE and of government agencies such as WASA and DIT are held exclusively by state owned banks by an informal arrangement. These deposits fund corrupt loans that enrich government bureaucrats. Branch managers make substantial "gifts" to the official who holds the fund in order to attract these deposits. In this unusual form of corruption we actually have bribes being paid by one government official to another.
Diversion of Interest Payments
Not all the interest earned by government deposits in government banks is paid to the government agency that made the deposit. The government official in charge of making these deposits conspires with the bank manager to divert interest payments to personal accounts.
Use Of Bribery To Facilitate Loans
For commercial loans a payment of 1-5% of the loan amount to officials of the NCB or DFI can smooth the progress of loan approvals. A portion of the payment may be made at the time of application and the remainder is expected from the first installment of the loan. Bank managers have developed a sophisticated clearance and settlement system for exchange of bribery funds in cases where a manager is transferred before a bribery deal is consummated. The new manager collects the bribes but forwards a percentage to the originator and these cross payments are netted out and a single payment changes hands to close out the transfer accounting.
Even an ideal applicant with good credit and collateral and normal business financing needs but without connections may find it necessary to make a bribery payment. On the supply side the applicant may initiate the bribery transaction to expedite loan processing and to gain extra assurance of its speedy approval. On the demand side bank officials may place barriers to loan processing activities, find faults with the application material, or otherwise resist loan processing until a bribe is paid. The bribery amount in these cases is on the low end of the scale.
Bribery amounts vary in inverse proportion to political influence and the degree of creditworthiness. Minor flaws in the loan application or defects in valuation of collateral or in the credit worthiness of the applicant will normally increase the bribery amount. Specific bribery strategies may apply in extreme cases of non-compliance and these are described under a separate heading. The bribery amount may be decreased by developing a good relationship with the branch manager or by the use of political influence applied at a higher level.
The bribery amount for agricultural loans varies from 2-20%. The larger variation results from a greater cross-section of borrowers. Larger percentages are extorted from uneducated rural applicants. Also, the amount of the bribe for agricultural loans is generally higher than that for commercial loans because the bribe is usually shared with government officials that may be involved in the loan review process. They include the Thana Fisheries Officer, the Thana Livestock Officer, and the Thana BSCIC Officer. Bribes received by Thana level officers percolate up to District and higher levels and neutralize the monitoring function of the administrative hierarchy. ("BSCIC" is a government corporation that provides assistance to cottage industries.)
Use Of Bribery or Influence to Subvert the Loan Review Process
Specific defects in the loan application may be overcome with corresponding bribery strategies. For example, if collateral is insufficient bribery may be used to inflate collateral valuation. Over-invoicing for import financing and valuation of goods according to selling price instead of cost are common applications of this method. Bribery may facilitate the acceptance of uninsured assets as collateral where insurance is required or of photocopies of land title deeds in lieu of the original. In extreme cases, and for equally higher bribe amounts, the bribed banker accepts falsified collateral documents even when no collateral actually exists or accepts cheap imitations when jewelry is pledged.
Bribery also makes it possible for the borrower to use the same physical asset repeatedly as collateral for loans from several NCB. It is said that the same warehouse of goods with "four doors" is sufficient collateral for four loans against the entire warehouse of goods.
Bribery may be applied to falsify credit reports or to otherwise remove unfavorable information from the loan application. In the Lending Risk Analysis (LRA) procedure implemented by the FSRP bribery may be used to alter the input data to create a satisfactory credit rating of the borrower. Conversely, bank managers may alter LRA data to weaken a good credit rating and extort bribes. The LRA, which was introduced as an instrument of transparency, is potentially an efficient tool for bribery.
The bribery transaction normally takes place between the bank manager and the borrower. Influence with higher officials, when available, increases the probability of a successful deal and decreases the bribery amount.
Labor Union Intervention
Labor union leaders, in collusion with the ruling political party, have sufficient power to extort loans from bank managers. Their extortion power is available for sale. Labor leaders may be bribed to influence loan approval. Union leaders use their political power to intervene in other areas of managerial decisions. These include procurement, recruitment, retention, transfers, and promotion.
Sale of a Forgivable Loan
It is reported that rural branch managers of state owned banks charge as much as 50% of agricultural loans in exchange for a promise that the loan will eventually be forgiven by the government. No such forgiveness is actually offered in most cases but a special audit of Agricultural Credit by BB revealed more than 1.6 billion BDT of unauthorized remission of interest payments by branch managers. A local "corruption syndicate" is usually formed to perpetrate the scam. The syndicate may involve the Union Council Chairman, the police, and other local officials.
In a similar scam the farmer's signature or fingerprint is obtained on a loan by telling him that he has been selected for a government grant for an amount that is about 20% of the loan. The loan is quickly approved and the managers of the SOB remove the entire loan amount from the bank and release 20% of it to the farmer who will eventually be asked to repay the entire loan with interest against which he may have unwittingly pledged his assets as collateral.
"Sick Industry" Classification
The MOF and the Ministry of Industries cooperate to provide debt relief and other financing assistance to bail out failing firms in a specific industry that has been identified by the government as a "sick industry". Assistance may include waiver of interest, reduction in principal, repeated rescheduling of overdue loans, or combinations of these. A "sick industry" classification may be purchased with a suitable bribe to the appropriate ministry. Ministries, the PMO, and the Standing Committee of Parliament on Finance may be lobbied and bribed to obtain such a classification. Billions of BDT of NCB loans are written down using this technique.
Loan Re-Scheduling
When a loan becomes classified as a bad loan, all principal and accrued interest may be "paid off" with a new and larger loan if the defaulter deposits a "down payment" which is normally less than 10%. Once "re-scheduled" in this manner the loan is removed from its "classified" status since technically it has been repaid. The new loan made to the same borrower is considered to be a "performing asset", that is, a good and collectable loan generating a steady stream of payments. The transaction helps both defaulter and bank manager. The banker can report a larger portfolio of performing loans and possibly earn an incentive bonus and the borrower gains a temporary reprieve from default.
The defaulter initiates a re-scheduling by paying bribes to NCB managers or by applying influence at a higher level. The influence level and bribe amount are proportional to the amount in default, the number of prior rescheduling episodes, and whether BB is involved. BB does not allow defaulters to re-schedule more than twice. The bribery amount or influence needed for subsequent re-scheduling rises proportionately. There is at least one famous example of a re-scheduling against BB regulations that was made possible with influence from a parliamentary standing committee.
Re-scheduling of insider loans at private banks are internally handled and do not normally involve corruption of public officials unless BB is drawn into the process in a regulatory role. In that case the private bankers may need to make a suitable arrangement with BB officials. Alternately they may apply influence at the MOF to override the applicable BB rules.
Relaxation of Regulatory Restrictions
Many BB rules carry trivial fines and are therefore either not pursued or not contested. In all other cases influence with the MOF, the PMO, or the parliamentary standing committee on finance may be used to waive regulatory restrictions of BB. Cases where corruption is most likely to occur are those that involve restrictions on issuing new loans, classification and re-scheduling of existing loans, provisions for loan losses, bank capital and liquidity requirements, restrictions on insider loans at private banks, and the identification of problem banks by BB inspectors.
A typical case of this nature is initiated when BB proposes punitive action or prohibits new loans or loan rescheduling to a prominent defaulter. The defaulter then lobbies the management of the NCB, the MOF and even the parliamentary standing committee. If the appeal is successful a cease and desist order is sent to BB. The applicable regulations are waived and the matter is settled in favor of the defaulter. In some cases the defaulter is unable to garner universal support and the four government institutions involved, the NCB, the MOF, BB, and the parliamentary standing committee may take opposing sides in the issue. Funds Withheld
In what appears to be a purely demand side phenomenon, bank managers delay the release of installments on a loan that has already been approved until a satisfactory bribe arrangement has been made.
Bribery of External Auditors and Bank Inspectors
Bank managers may bribe external auditors to hide irregularities in the record and to ensure a favorable audit report. Altering entries for loan classification and the provision for loan losses may hide loan defaults. Bank performance may be exaggerated by showing interest income flowing from defaulted loans or by hiding expenses. Job security, promotion, and incentive bonuses for managers depend on good audit reports.
BB inspectors may be coerced not to question the data submitted to them by the internal bank inspectors or influence may be applied to ensure favorable inspection reports. State owned banks are inspected but are protected from "problem bank" classification by informal policy. However, the punitive action taken by BB in cases of non-compliance is insufficient in most cases to present significant corruption opportunities.
Bribery of BB Officials by PCB Managers
PCB managers may coerce the cooperation of senior officials of the MOF and BB with gifts, bribes, and the offer of lucrative private sector jobs. This method may be used to gain regulatory forbearance with respect to required liquidity, bank capital, loan classification, provision for loan losses, accounting standards, guidelines for insider loans, and exposure of the loan portfolio due to non-diversification.
Technical Loopholes in Bank Regulation
BB guidelines that limit single borrower exposure and insider loans have loopholes. For example, a single borrower loan of ten billion taka may be shown as a diversified portfolio of ten loans of one billion each to firms that exist only on paper and only for the purpose of processing the loan. The technique of loan fragmentation may also be used to get around loan approval limits at each managerial level. Directors of different PCB may "exchange" ownership of insider loans to circumvent restrictions on insider loans.
Diversion of Loans
Willful defaults are related to a well-organized loan diversion scam. NCB managers, the MOF, members of parliament, and even parliamentary standing committees may become party to the conspiracy in exchange for an appropriate payoff or gift. A term loan is taken against what appears to be a legitimate project but is actually a worthless shell. The proceeds from the loan are diverted to overseas banks or to illegal business activities such as smuggling. The project itself is a loser by design. The borrower defaults on the loan and gives up the assets of the dummy project to the bank, which is able to recover only a small portion of the amount in default. Ironically, the actual investment made in the smuggling business with the bank’s funds may be very profitable but these profits are well beyond the reach of the bank.

History

Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order, through the amalgamation and nationalisation of the branches of National Bank of Pakistan, Bank of Bhowalpur and Premier Bank branches located in East Pakistan until the 1971 Bangladesh Liberation War. When it was established, Sonali Bank had a paid up capital of 30 million taka. In 2001, its authorised and paid up capital were Tk 10 billion and Tk 3.272 billion respectively. Presently, its authorised and paid up capital is Tk 10

Sonali Bank Limited

Soon after independence of the country Sonali Bank emerged as the largest and leading Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order 1972 (Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank and Bank of Bhwalpur. As a fully state owned institution, the bank had been discharging its nation-building responsibilities by undertaking government entrusted different socio-economic schemes as well as money market activities of its own volition, covering all spheres of the economy.
The bank has been converted to a Public Limited Company with 100% ownership of the government and started functioning as Sonali Bank Limited from November 15 2007 taking over all assets, liabilities and business of Sonali Bank. After corporatization, the management of the bank has been given required autonomy to make the bank competitive & to run its business effectively.
Sonali Bank Limited is governed by a Board of Directors consisting of 11(Eleven) members. The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-known Banker and a reputed professional. The corporate head quarter of the bank is located at Motijheel, Dhaka, Bangladesh, the main commercial center of the capital.
Some notable features of the Bank are as follows:

| |
| |
|Capital Structure: |
|Authorised Capital |:|Tk. 2000.00 Core. |
|Paid up Capital |:|Tk. 1125.00 Core |
| |
| |
|Branches & Subsidiaries: |
|1 | | | | |
|Total No of Branches | | | | |
|1203 | | | | |
| | | | | |
| | | | | |
|a. | | | | |
|No of Foreign branches | | | | |
|2 | | | | |
| | | | | |
| | | | | |
|b. | | | | |
|No of Local branches | | | | |
|1199 | | | | |
| | | | | |
| | | | | |
| | | | | |
|i) | | | | |
|No of Rural Branches | | | | |
|857 | | | | |
| | | | | |
| | | | | |
| | | | | |
|ii) | | | | |
|No of Urban Branches | | | | |
|342 | | | | |
| | | | | |
|2 | | | | |
|No of Regional Offices | | | | |
|19 | | | | |
| | | | | |
|3 | | | | |
|No of Principal Offices | | | | |
|42 | | | | |
| | | | | |
|4 | | | | |
|No of G.M. Offices | | | | |
|10 | | | | |
| | | | | |
|Subsidiaries |:|1. |Sonali Bank (UK) Limited having 6 (six) branches in UK. |
| | |2. |Sonali Exchange Company Incorporated (SECI) having 09 (nine) branches in USA. |
| | |3. |Sonali Investment Limited (Merchant Banking) having 4 (four) branches at Motijheel,Paltan,Uttara,Mirpur in |
| | | |Dhaka, Bangladesh. |
|Representative Office |:|1(one) in Jeddah, KSA; 1 (one) in Riyadh, KSA and 1 (one) in Kuwait. |
|Correspondent |:|631 |

| |
|Our Vision |
|Socially committed leading banking institution with global presence. |
|Our Mission |
|Dedicated to extend a whole range of quality products that support divergent needs of people aiming at enriching their lives, creating value for|
|the stakeholders and contributing towards socio-economic development of the country. |
| |
|Our Slogan |
|Your trusted partner in innovating banking. |
|Core business of bank |
|Sonali Bank Limited operates the following services |
|Corporate Banking |
|Project Finance |
|SME Finance |
|Consumer Credit |
|International Trade |
|Trade Finance |
|Loan Syndication |
|Foreign Exchange Dealing |
|Rural and Micro credit |
|NGO-Linkage Loan |
|Investment |
|Government Treasury Function |
|Money Market Operation |
|Capital Market Operation |
|Remittance |

Credit Rating Report on Sonali Bank Limited
As per Bangladesh Bank’s mandatory requirement vide BRPD Circular No.06 dated 05 July, 2006, credit rating of Sonali Bank Limited was done by the Credit Rating Information and Services Ltd. (CRISL) on the audited Balance Sheet as on 31-12-2011 and other related information. The rating of the report is as under. Credit Rating Report( Serveillance Rating)
|Surveillance Rating-2011 |Long Term |Short Term |
|As Government Supported Entity |AAA |ST-1 |
|As Private Commercial Bank |A- |ST-2 |
|0utlook |Stable |
|Date of Rating |16 October, 2012 |

CRISL’s Definition of Rating :
|Rating |Definition |
|AAA |Banks rated in this category are adjudged to be of best quality, offer highest safety and have highest credit quality. Risk |
|Triple-A |factors are negligible and risk free, nearest to risk free Government bonds and securities.Changing economic circumstances |
|( Highest |are unlikely to have any serious impact on this category of banks. |
|Safety) | |
|ST-I |Highest certainty of timely payment. Short-term liquidity including internal fund generation is very strong and access to |
| |alternative sources of funds is outstanding, Safety is almost like risk free Government short-term obligations. |
|A- |Banks rated in this category are adjudged to offer adequate safety for timely repayment of financial obligations. This level |
|Single-A |of rating indicates a corporate entity with an adequate credit profile. Risk factors are more variable and greater in periods|
|(Adequate |of economic stress than those rated in the higher categories. |
|safety) | |
|ST-2 |High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk |
| |factors are very small. |
| |
|Evaluation & Comments of World Bank |
| | |
|A project titled Enterprise Growth and Bank Modernization Project (EGBMP) has been undertaken by the Government of Bangladesh (GoB) in July, 2004 |
|under the guidance of and financed by World Bank. This project was designed with the aim to enhance the capacity building of the entrepreneurial skill|
|of the industry and trade related sector and modernize the bank management through a program of reforms of the Nationalized Commercial Banks (NCBs). |
| | |
|A. |A World Bank Mission (Implementation Support Mission) visited Bangladesh over the period June 7 to 18, 2009 to follow up with the Government of|
| |Bangladesh on the progress of the banking component under the Enterprise Growth and Bank Modernization Project. |
| | |
|The mission comprised the Local Specialists / Analysts of World Bank, Dhaka Office as well as Foreign Specialists of Washington Office. The mission |
|discussed the banking reforms with Ministry of Finance, the Bangladesh Bank (Central Bank of Bangladesh) and the Management of Sonali Bank Limited. |
|The mission submitted the Aide Memoire which contained the following on Sonali Bank Limited (SBL) performance: |
| | |
|1.1 |Cash recoveries from NPA This is one of the most notable achievements made by Sonali Bank Ltd. in the overall performance indicators. The |
| |reduction in actual NPL level is attributed to various methods used for cash recoveries of NPL including write-offs, out of court settlements, |
| |rescheduling and appointment of private collection agents as well as bank-wide efforts and introduction of an incentive scheme to reward |
| |employees for recovering non-performing loans. Against the recovery target of Tk. 500 crore in 2008, SBL realized Tk. 496 crore which |
| |represents almost 100% of the target and is the highest amongst SCBs in terms of amount recovered in cash. All these contributed to reduction |
| |of NPL level as a share of gross loans from 47 percent in 2007 to 33 percent in 2008. Despite the remarkable progress in 2008, the NPL level of|
| |Sonali Bank is still the highest among the three state-owned commercial banks (SCBs) and needs further reduction, including realization of |
| |loans from State-owned Enterprises (SOEs). |
| | |
|1.2 |The result for Business and revenue growth indicators and non-funded income is encouraging. Revenue targets were met with "good loan" portfolio|
| |having a robust growth of 46% in 2008. Meanwhile, conversion of Bangladesh Petroleum Corporation (BPC) loan into government bond and increased |
| |market competition has seriously affected Sonali Bank's net interest income and some of the operating efficiency indicators due to the larger |
| |share of BPC loan in the bank's portfolio relative to other SCBs. Although net interest income is still negative, increased business activity |
| |from remittances, letter of credit facilities, other fees and commissions contributed to 29% growth in non-funded income in 2008, surpassing |
| |the target. Strong inflow of remittances has helped increase deposits compared to 2007. Nonetheless, the Bank performed comparatively better |
| |under this category with all indicators meeting the target, but narrowly missing (69% in place of 70%) the target for low cost deposit as |
| |percentage of total deposit. |
| | |
|1.3 |Operating efficiency indicators Sonali Bank Limited (SBL) has achieved the net spread & net interest margin targets. But it could be better |
| |enough which is missed because of its larger share of low-yielding BPC bonds and concessional interest rates and this position is indicating |
| |that banking sector is becoming more competitive. The target for net operating income to total assets and cost to income ratio have not been |
| |achieved largely due to increased operating expenses on amortization of intangible assets by Tk. 350 crore and salary. Recent interest controls|
| |imposed by Bangladesh Bank will reduce the net spread in the banking sector, but Sonali Bank would have to make extra efforts to enhance its |
| |revenue generation ability in the face of escalating competition in the banking sector. SBL has the scope to enhance its revenue generation by |
| |improving the Advance-Deposit ratio (AD ratio). |
| | |
|1.4 |Profitability As per audited financial statements, SBL made net income before provision and tax of Tk.161.6 crore in 2008, compared to Tk.424.6|
| |crore in 2007. This decline in profit has been caused mainly by increase in operating expenses (e.g., salary and allowances increased by more |
| |than double in a year and amortization of intangible assets by Tk.350 crore in 2008). Though this reduction in net profit before tax had |
| |affected its ROA, it has improved to 0.47 percent in 2008 from a negative 6.17 percent in 2007. |
| | |
|1.5 |Staffing The target set for staff rationalization could not be materialized due to delays in implementation of VRS scheme. Staff cost as |
| |percentage of total operating cost reduced to 52.7% in 2008 from 75.6%o in 2007. Income per staff has also improved from 0.11 to 0.12 in 2008. |
| |However, staff expenses to total income has increased due to increase in staff benefits. Current figures may further deteriorate when Sonali |
| |Bank adopts a new pay scale without any adjustments in the total number of staff via a VRS scheme. The number of staff has been reduced by 703 |
| |in 2008, as a result of natural attrition and this trend will continue. |
| | |
|1.6 |The Net Worth of the bank continued to improve under the review period. Given the systematic importance of Sonali bank as the largest |
| |state-owned commercial bank, the capital position needs to be further strengthened. The amount of actual provisioning for loan losses remained |
| |higher than required provisioning in 2008. |
| | |
|1.7 |Computerization Target on computerization of branches has been met with 56% of deposits and 74% of loans procedures automated as of end 2008. |
| | |
|1.8 |Disclosure requirements have been met with financial statements both for annual statement and quarterly provisional (within one month) |
| |completed within the prescribed time frame. |
| | |
|B. |Performance Indicators for Sonali Bank Limited |
|The Implementation Support Mission of the World Bank visited the Bank recently on 16 November, 2009 and review the overall progress of implementation |
|of the project with particular focus on the sustainability of banking reforms and placed its comment as follows: |
| | |
|A significant achievement under this project has been the improvement in the financial condition largely due to the Management Team that have been |
|hired under this project. The Management Team have not only turned the bank into operationally profitable organization, but have also: improved |
|customer services; introduced new products; developed policies and manuals for effective and efficient operations of the bank; revised the |
|organizational structure of the bank; embarked on a comprehensive training program for staff; introduced incentives for better staff performance; and |
|are going ahead with the computerization of the banks operation. The bank has maintained an increasing trend in deposits, loans, income, operating |
|profits and net worth. Remarkable achievements have been made in recovering bad and doubtful loans and reducing the ratio of non-performing loans to |
|total loans. Moreover, the Management Team is successfully meeting most of the Key Performance Indicators (KPIs) agreed for the bank. |

Hallmark scam: Cracks in management and monitoring systems of banks

For the last few days we have been witnessing a furore caused by Tk.3,547 crore loan scam in a branch of the Sonali Bank where a little-known company named Hallmark had alone siphoned off Tk.2,500 crore. This is unprecedented in the history of our banking sector because the borrower is neither a well-known nor a well-established company. It is in the air that this huge amount of money has been given to the company by Sonali Bank, Ruposhi Bangla branch, in completely irregular way which has been misused by the company. This is alarming news for our banking as well as the financial sector as a whole.
Usually, banks collect money from depositors and provide loan to business entities and other borrowers. After this huge Sonali Bank scam common people might lose their trust in the banks. They will not find it secure to keep their money in the banks. Many of them may even be tempted to withdraw their deposits in fear of a collapse of the banking sector like the share market collapse. If common people shy away from the banks this may cause shortfall of money in our banking sector as well as other financial sectors like investment, trade and commerce. If people withdraw money from banks then entrepreneurs would not get money from banks to invest in productive sectors. Since banks are very important institutions in financial intermediation in economic activities, the lack of trust in banks has a pervasive effect on the whole economy.
Now, let us see as to how a scam of this magnitude could be possible. I think this has been possible because of weakness in the management of the bank, weakness in internal oversight and control and, most of all, due to collusion of some insiders in the bank and outsiders. I see the situation also reflects the lack of governance and overall control of the Banks Board of Directors, because they should have exercised their supervision and control over such a huge amount of loan. Usually, banks conduct audit of a branch once a year, sometimes twice. So here it is important to look into how the Board of Directors as well as the management led by the managing director supervised the process of providing such a huge amount to a single company.
Generally, 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. If proper audit had been conducted in this case why did the management (managing director and the staff below that) and the Board of Directors not examine the audit report? And if they did, then why had they not expressed their opinion or take action against the perpetrators? If audit reports were not placed before the Board, why the Board did not take action at the right time? 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.
Bangladesh Bank has recommended reconstituting the Board of the Sonali Bank. As a former governor of the Bangladesh Bank I welcome this step. On the other hand, I do not think that the finance minister's initial comment on Bangladesh Bank's authority to recommend the change is justified. Though, later, he accepted Bangladesh Bank's step, but we are yet to see quick and firm action from the government. According to the Articles 45 and 46 of the Bank Company Act, Bangladesh Bank is well within its rights to make such recommendation. But in a sub-clause of Article 46 this power has been curtailed in the case of the state owned banks. This is not good for regulating and supervising the banks by the central bank. I think that this law should be changed to remove the limitation of the central bank. Then the central bank would be fully responsible for the monitoring, control and discipline of all the banks.
People who have experiences in finance, economics, management of financial institutions and people who are not involved directly in politics, not loan defaulters, and people with honesty and integrity, should be nominated to the Boards of all the state owned banks as well as in the private banks. In some cases directors are appointed under political consideration disregarding these requirements. Due to such political appointments such scams may occur in the future too. However, this scam should be investigated immediately and the culprits should be brought to book. Suspension of officials from their jobs and dissolution of the Board will not be enough for the perpetrators; they should be given exemplary punishment so that no one will dare to do it again in the future. In many countries exemplary punishment was given to the perpetrators, even the accused politicians were not spared.
The regular audit teams, special audit teams, and supervision teams of all the government, non-government and specialised banks should be trained to be better skilled. Banks should hire independent external auditors to get better insights into the state of affairs of all the banks in Bangladesh. We have to carry out these steps at the earliest possible time so that perpetrators cannot escape and others can learn a lesson. The control and monitoring system of the Bangladesh Bank should be further strengthened and coordinated, and timely action without fear of any political and external influence should be taken. The Ministry of Finance, specifically the Banking Division, must take proper action immediately in tandem with the actions of the Bangladesh Bank. If these measures are taken at the earliest possible time the banking sector could be protected from any future disaster.
The Hallmark, hitherto an unknown textile company, has successfully shown all its charisma in grabbing at least Tk 26.86 billion from a branch of Sonali Bank. The mark made on gold or silver articles at goldsmith’s hall to show their genuineness is known as hall-mark. Our state-run banks, particularly Sonali, Janata and Agrani, appear to have become the victim of hallucination and opened up their vaults for the Hallmark Group without testing its hallmark.

The critics of the banks, however, say that the banks were the active partners in committing financial crimes helping embezzlement of crores of depositors’ money. A Bangladesh Bank (BB) inspection report has revealed that Sonali Bank Ruposhi Bangla Hotel branch, Janata’s corporate branch and its local office in the city and the principal branch of Agrani Bank worked in league with officials of Hallmark in committing the crime.

Hallmark Fashion Ltd and its interest-linked company opened local LCs with the Sonali Bank Ruposhi Bangla Hotel branch in favour of Anawara Spinning Mills and Max Spinning Mills to import yarn locally. Janata Bank purchased the bills of Anawara Mills on June 16, 2011, and of Max Spinning Millls on June 26, against LCs. The BB found the branch purchased bills of Anawara Spinning Mills worth Tk 37.60 crore and of Max Spinning Mills worth Tk 46.08 crore breaching credit rules as some of the bills of the two companies were overdue.

The Janata Bank corporate branch sent the bills to the Sonali Bank Ruposhi Bangla Hotel branch and having their acceptance, the Janata Bank corporate branch bought the bills and the money was credited into the accounts of Anawara Spinning Mills and Max Spinning Mills. But the branch did not inspect whether the two companies existed before providing such a huge amount of loan facilities. The BB inspection team opined that officials of Sonali Bank and Janata Bank and the two companies had worked in connivance and embezzled a huge amount of money by making up accommodation bills. Actually, the money was embezzled by the Hallmark Group.

The BB also carried out a special inspection on the activities of the principal branch of Agrani Bank Ltd. It found that the principal branch had abused its power and purchased local bills worth about Tk 156.04 crore of the companies such as BTL, Mahin Textile and Pinnacle Textile. The branch bought 105 local bills worth Tk 108.45 crore of the three companies following the bills’ acceptance by the Sonali Bank Ruposhi Bangla Hotel branch to supply products to Hallmark Group, Paragon, Nakshi and some other companies. Of them, 45 bills worth Tk 42.18 crore have been overdue.

While inspecting the factories of the company in Gazipur, the BB team did not find any spinning machine that could produce yarn from cotton. As a result, they did not come by any answer as to how yarn had been delivered without any yarn-producing machine. The BB team reached the conclusion that Sonali Bank Ruposhi Bangla Hotel branch, Agrani Bank principal branch and clients’ companies embezzled a huge amount of money by creating accommodation bills through illegal means.

According to media reports, the BB investigation in May 2012 revealed massive irregularities in sanctioning and disbursing loans worth Tk 3,547 crore, mostly to little-known Hallmark Group, by the Sonali Bank’s Ruposhi Bangla Hotel branch. The BB also instructed the Sonali Bank management on several occasions to take drastic action against the officials involved in the scam — but the bank had remained mysteriously silent.

The BB Governor Atiur Rahman in a letter on August 27 requested Finance Minister AMA Muhith to restructure the board of directors of the state-owned Sonali Bank, saying it failed totally to deal with the Tk 3,547 crore loan scam. However, a day after the governor’s letter, the finance minister questioned the BB’s jurisdiction of dissolving the Sonali Bank’s board to be expired next month after a three-year full term.

The board of directors of Sonali Bank has claimed that they were not guilty of a recent loan scam involving more than Tk 3,606 crore and passed the responsibility of the scam on to the officers and ‘their collaborators’, although the circumstantial evidences clearly suggest that such a huge amount of money has been embezzled through irregularities in consent of the higher authorities or in connivance with them.The Sonali Bank authorities have already suspended 17 officials from those 32 persons in line with the central bank’s instruction. Besides, the bank management has made a general manager OSD.

Surely, this is the biggest banking scam in the country involving three state-run commercial banks. But only 17 mid-level officials of Sonali Bank have been suspended for the scam, whereas the initial reports by the BB and the ACC clearly suggest that such a huge amount of money has been embezzled through irregularities in consent of the higher authorities or in connivance with them. Given the gravity of the scam, the popular demand is that a high powered enquiry committee must be formed immediately with banking experts so that they can identify the real culprits and also the loopholes in the system.

Poor banking standard coupled with poor loan recovery had started to afflict the state-run banks. As a result, the World Bank and IMF applied pressure to induce the government to reform the banking sector in order to strengthen internal bank management and credit discipline. A number of reforms were also carried out over the years, some of which were praised by the WB and IMF. But the unveiling of Hallmark scam in three state-run banks has put the focus back again on corruption in the state-run banks.

Hall-Mark fraud in banking system

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 Hall-Mark 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.

Probe report submitted

The Anti-Corruption Commission (ACC) inquiry committee investigating the much-talked-about Hallmark scam has finally submitted probe report of 11 cases to the ACC.Led by Meer Zainal Abedin Shibly, the inquiry team submitted the report to the ACC on Thursday.Meanwhile, sources at the ACC said the names of Prime Minister`s Health Adviser Syed Modasser Ali, former Sonali Bank director Saimum Sarwar Komol, BASIC Bank Ltd and Karmasangsthan Bank Ltd`s MDs were not mentioned in the report though they were questioned during the investigation period.ACC Commissioner Md Shahabuddin told risingbd.com that the ACC is yet to receive the report though the probe team has submitted it. The probe team submitted the report to the ACC director general Md Ziauddin Ahmed.When asked how many persons would be chargesheeted, he said, "We`ll be able to tell the details after receiving the probe report on Sunday."

The sources said the chargesheet in 11 cases would be submitted to the court next week after approval of the ACC. The report has recommended to file chargesheet against 26 people including the Hallmark scam`s mastermind Tanveer Mahmud.A total of 27 people were implicated in 11 cases filed with the city`s Ramna Police Station on October 4 last year. Of them, the names of five people were dropped from the probe report, while the names of four new persons have been included in the report.Those who have been dropped from the report are: Sonali Bank GM ANM Mashrurul Huda Siraji, DGM (currently OSD) Bhagabati Mazumder, former GM Sabita Siraj, DGM Kanij Fatema Chowdhury and AGM Md Khurshid Alam.

The rest 22 accused are: Hallmark Group managing director Tanveer Mahmud, Group`s chairman and Tanveer`s wife Jesmin Islam, Hallmark`s GM (Commercial) Tushar Ahmed, former MD of Sonali Bank umayun Kabir, Sonali Bank Ruposhi Bangla Hotel branch manager and DGM AKM Azizur Rahman, GM (currently OSD) Nani Gopal Nath, GM (now OSD) Mir Mohidur Rahman, AGM (suspended) Md Saiful Hasan, executive officer (suspended) Mohammad Abdul Matin, SEO (Dhanmondi Branch) Meherunnisa Mary, senior officer (retd) Md Wahiduzzaman, DMD (currently OSD) Md Mainul Huq, DMD (currently OSD) Md Atiqur Rahman, DGM (now OSD) Sheikh Altaf Hossain, DGM (suspended) Md Shafizuddin Ahmed, AGM (suspended) Md Kamrul Hossain Khan, AGM (suspended) Ashraf Ali Patwary, AGM Md Abul Hasan, Anwara Spinning Mills` proprietor Md Jahangir Alam, Max Spinning Mills` proprietor Meer Zakaria, Century International`s proprietor Md Ziaur Rahman and Apparel International`s proprietor Md Shahidul Islam.

Among the accused, seven are now in jail. They are: Hallmark Group managing director Tanveer Mahmud alias Tafsir, chairman and Tanveer`s wife Jesmin Islam, GM (Commercial) Tushar Ahmed, Sonali Bank Ruposhi Bangla Hotel branch manager (suspended) AKM Azizur Rahman, GM (now OSD) Mir Mohidur Rahman, two DGMs Sheikh Altaf Hossain and Shafizuddin Ahmed.

Eleven cases were filed in connection with embezzling Tk 1,568 crore of Sonali Bank`s Ruposhi Bangla Hotel branch.The ACC sources said the anti-graft watchdog would launch an investigation into embezzling non-funded Tk 1,000 crore by Hallmark soon.At the same time, investigation into 27 cases filed in connection with embezzling Tk 372 crore by five companies will also be initiated soon.A seven-member ACC team led by Senior Deputy Director Meer Md Zainul Abedin investigated all the 11 cases.Other members of the team were Deputy Director SMM Akhtar Hamid Bhuiyan, Assistant Director Md Najmus Sadayet, Md Mashiur Rahman, Deputy Assistant Director Md Mujibur Rahman, Muhammad Zainal Abedin and Selina Aktar Moni.
| |

ACC presses charges against 25 Hallmark, Sonali officials

The Anti-Corruption Commission on Monday submitted charge sheets in 11 cases against 25 people over the Hallmark-Sonali Bank scam, the country’s biggest ever banking fraud, to a magistrate court in Dhaka.A seven-member investigation team of the commission submitted the long-awaited charges 20 days after its approval, the ACC deputy director Mir Joynul Abdin Shibly said.The commission on September 16 approved the 11 charge sheets against the 25 people for embezzlement of Tk 1,568.39 crore from Sonali Bank’s Ruposhi Bangla Hotel branch by the Hallmark Group.On October 4, 2012, the commission filed 11 cases against seven executives of Hallmark Group and 20 officials of Sonali Bank.Six officials of the commission filed the cases with the Ramna police for their alleged involvement in swindling over Tk 1,568.39 crore out of about Tk 2,686 crore embezzled from the Sonali Bank’s Ruposhi Bangla Hotel branch.The commission framed charges against 12 Hallmark Group executives and its associates, including its managing director Tanvir Mahmud, his wife Jesmin Islam, also chairman of the group, and general manager Tushar Ahmed, and 13 Sonali Bank senior officials, including its former managing director Humayun Kabir.

Other accused of the Hallmark Group are its sister concern Anwar Spinning Mills managing director Zahangir Alam, Century International Limited managing director Ziaur Rahman, Max Spinning Mills managing director Mir Zakaria, Apparel Enterprise managing director Shahidul Islam, Star Spinning Mills owner M Jahangir Alam, T and Brothers’director Taslim Hasan, Paragon Group’s managing director Saiful Islam Raza, and Nakshi Knit and Composite Limited’s managing director Abdul Malek.
Charges were also framed against officials of Sonali Bank Ruposhi Bangla hotel branch, including former assistant general manager AKM Azizur Rahman, suspended assistant general manager Saiful Hasan, suspended executive officer Abdul Matin and senior executive officer Mehrunnisa Meri.
Officials of Sonali Bank head office against whom charges were framed are former managing director Humayun Kabir, deputy managing directors Mainul Haque and Atiqur Rahman, general managers (OSD) Nani Gopal Nath and Mir Mohidur Rahman, deputy general managers Sheikh Altaf Hossain and M Safiz Uddin Ahmed, and assistant general managers Kamrul Hossain Khan and Ejaz Ahmed.
The commission also framed charge against Tetuljhara union parishad chairman Jamal Uddin Sarkar as he issued the trade licences in the name of fake organisations of the Hallmark Group.
Sonali Bank deputy general manager (OSD) Bhagabati Majumder, assistant general manager Abul Hasan, Ruposhi Bangla branch’s former senior officer Wahiduzzaman, general manager ANM Mashrurul Huda Siraji of the bank’s head office, former general manager Sabita Siraz, deputy general manager Kaniz Fatema Chowdhury and assistant general managers M Khurshed Alam and Ashraf Ali Patwari were excluded from the cases.

During the investigation, the commission also interrogated the prime minister’s health affairs adviser Syed Modasser Ali along with 100 more people but finally the probe team did not find any involvement of Modasser in the scam, its official said.
About Modasser’s suspected involvement, ACC commissioner M Shahabuddin said, ‘It is true Modasser Ali has a social relation with Hallmark Group, but he was not involved in the scam.’
The ACC commissioner also said that the board of directors of Sonali Bank was not also involved in the scam. ‘If the embezzled money had been taken as loan, they [board of directors] would have known it, but since it was a case of forgery, they were not aware of it,’ Shahabuddin said.
About the probe report of a parliamentary sub-committee, he said that the committee had failed to mention specifically if Modasser Ali was involved.‘We have reviewed the report but the parliamentary sub-committee failed to find his [Modasser Ali] involvement,’ he said.On November 7, 2012, a parliamentary probe committee found that adviser Modasser had frequented the Sonali Bank branch at Ruposhi Bangla Hotel, which was ‘quite unusual’.It is quite unusual and unbecoming of an adviser holding the rank of a cabinet minister to visit a bank branch frequently, said the committee members.The ACC, after receiving a letter from Bangladesh Bank on July 15, 2011 formed the six-member inquiry team headed by its deputy director Mir Joynal Abedin Shibly.Hallmark managing director Tanvir was a petty grocer at Brahmanbaria, who committed the biggest fraud in the history of the country’s banking sector with the help of some bank officials in 2009-2011 through fake back-to-back letters of credit, ACC officials said.billion and Tk 9 billion respectively The bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion on 30 June 2000.

Board of directors asks BB to take measure against corruption in banking sector

The board of directors of Bangladesh Bank has asked the central bank to take measures to prevent corruption and embezzlement in the banking sector in the wake of misappropriation of Tk 3,547 crore from Sonali Bank by little-known Hallmark Group. The board’s directives came from a meeting at the central bank headquarters in the capital on Wednesday. Hannana Begum, a director of BB, told reporters after the meeting that officials of the central bank had informed about the Hallmark scam in details at the board meeting.She said the board of directors suggested to the central bank to improve its monitoring and supervision of the country’s banking sector. Besides, the board of directors also suggested that BB should increase its manpower so that such type of incidents could be tackled in future.
Briefing journalists, general manager of the governor’s secretariat AFM Azaduzzaman said directors were also informed about the justification of sending letter to the finance minister by Bangladesh Bank with a request for recasting the board of directors of Sonali Bank.The BB governor Atiur Rahman presided over the board meeting.

COMBATING CORRUPTION STRATEGIES

Combating corruption is not easy task. Still no one denies the need to check corruption effectively. It may not be possible to eradicate corruption completely but then vigorous and determined actions will go a long way to minimize it. It also requires courage and long-term commitment by a variety of anti-corruption actors. Political Leaders, champions amongst public servants, civil society, media, academics, the private sector and international organizations all play important roles in addressing corruption (World Bank group-2001). To reduce the corrosive impact of corruption in a sustainable way, it is important to go beyond the symptoms to tackle the causes of corruption. Since1996, the World Bank has supported more than 600 anti-corruption programs and governance initiatives developed by its member countries.

We believe that an effective anti-corruption strategy builds on five key elements:

1. Increasing Political Accountability

2. Strengthening Civil Society Participation

3. Creating a Competitive Private Sector

4. Institutional Restraints on Power

5. Improving Public Sector Management

1. Increasing Political Accountability

Political accountability refers to the constraints placed on the behavior of public officials by organizations and constituencies with the power to apply sanctions on them. As political accountability increases, the costs to public officials of taking decisions that benefit their private interests at the expense deferent/disincentive to corrupt practices. Ensuring political accountability the following steps should be taken

Political Competition

Effective sanctions on politicians can be enhanced most effectively through a meaningful degree of political competition in the electoral process. Such competition increases the likelihood that alternative candidates and parties will seek to expose corruption in government of hold politicians accountable for the poor performance associated with high levels of corruption. Historically, anti-corruption and accountability measures were a by-product of these political struggles.While perceived corruption of a particular party of candidate has shown to influence voters’ decisions considerably and therefore exposure of cases of political corruption is an effective deterrent to corrupt behavior, there are limits to the benefits of political competition. Excessive political competition can become a destabilizing factor if it undermines the legitimacy of existing state institutions. Excessive political competition can undermine state can undermine state capacity and thus create conditions especially conducive to administrative corruption.

Political competition is most effective in promoting accountability when it is channeled through organizations that provide broad constituencies with vehicles such as mass-based political leaders. Political parties than lack broad-based support are more likely to be dependent on powerful firms and financial interests for sources of financing and no electoral tactics such as vote-rigging, intimidation, and acquiring a monopoly over election coverage by the media. It is thus imperative that political parties be held to high standards of accountability.

Political Party Financing

Many Countries have established partial public funding, recognizing that political parties play a public interest role; they make an essential contribution to political contestability and the decentralized expression of divers values and interests. Public funding reduces the scope for private interests to "buy influence" and can also help reinforce limits on spending, because of the electorate's resistance to excessive public expenditure.Ensure oversight. Set up an authoritative and independent Electoral Commission of Court to be responsible for the integrity of all issues regarding party finance and electoral rules, Such commissions have been set up in Canada, India, and South Africa.

Transparency

Transparency via public scrutiny has proven to be one of the most powerful forms of monitoring public officials. Such transparency can be fostered by a number of measures, including: opening sessions of the parliament, government, and the courts to the public; registering lobbying activities; and publishing the voting records of parliamentarians, annual reports of government bodies, trial records, an the decisions of judges.A free and vibrant media is another important factor in making transparency work for the general public.

Rules and Legal Instruments

There is a range of legal instruments as well as agency-specific rules which can be effective in deterring corrupt behavior. Ethics codes, regulations on lobbying disciplinary committees, prohibitions on and disclosure of conflict of interest, including the receipt of gifts and other benefits received form private resources, asset declaration laws, procurement laws and party financing laws are amongst the most prominent ones. Freedom of information laws, whereby citizens can demand the disclosure of information regarding government activities and a whistle-blower protection law in order to encourage the reporting of corruption cases can further reinforce the impact of increased transparency on accountability.

2. Strengthening Civil Society Participation

As stakeholders in good governance and institution mediating between the state and the public, the organizations that comprise "civil society"- citizen groups, non- governmental organizations, trade unions, business associations, think tanks, academia,religious organizations and last media- can have an important role to play in constraining corruption. This is true at the country level as well as internationally. Civil Society Organizations (CSO), with Transparency International spearheading the fight against corruption is the most prominent example of what an international civil society organization can achieve in awareness- raising, pressuring government as well as international organizations for change and pressuring governments as well as international organizations for change and working with various sectors to implement innovative anti-corruption reforms.Civil society as a third sector in a new governance structure can play a vital role in limiting corruption but they also have their limits. Without being elected democratically they lack formal legitimacy of political parties as well as accountability measures - a potential entry point for various civil society groups with questionable motives. A high degree of public scrutiny is thus important to hold civil society groups to the same accountability standards as the following steps:

Civil Society's Role in Fighting Corruption

Since most cases of corruption involve public officials and private companies, Civil Society as an independent actor representing the interests of the general public is uniquely positioned to investigate and bring to light cases of corruption. This is achieved through various functions:

(a) Creating public awareness about corruption

(b) Formulating and promoting action plans to fight corruption

(c) Monitoring government’s actions and decisions in an effort to reduce corruption.

The Role of the Media

A free and open media help expose levels of corruption by uncovering and shedding light on abuses. In transition economies on Eastern on Eastern and central Europe, greater openness felt by the media since the rail of communism has brought with it a plethora of stories of fraud, corruption, and criminal activity, making the media perhaps the most persistent institution in the fight against corruption. The Internet provides unprecedented opportunities of disseminating knowledge and increasing transparency across national borders in a timely fashion at low cost.

Empowering civil society:

For Civil society to realize its full potential it requires an appropriate legal and regulatory framework, including basic human rights such as the freedom of expression, association and the freedom to establish non-governmental entities. Requirements for registering should be reasonable and not constitute a serious hindrance in setting up a new CSO.In addition to the necessary breathing space, CSOs must further have the opportunity to mobilize funding. Tax exemption for donations is one way in effectiveness of CSOS is a function of access to information and knowledge as well as the ability to attract talent. Capacity constraints such as a lack of well-educated and highly motivated people can severely compromise the positive role civil society can play in combating corruption.

A Word of Caution: Accountability and Legitimacy Issues

Civil Society Organizations (CSOS are not democratically elected. It should be in the interest of CSO to adhere to high standards of accountability, transparency and democratic management structures. The increasing availability if donor funding for CSO but it can also set wrong incentives. Some CSO are founded to attract donor funding for the personal benefit of founders and stuff. It would further be naive to assume that CSOs are immune to corruption. If co-opted by businesses of powerful elite’s they can be part of the problem, too.

3. Creating a Competitive Private Sector

The degree to which powerful elite's influence decisions and policy-making of the state (state capture) constraints the implementation of a fair, competitive, honest and transparent private sector and thus hinders broad-based economic development. The ability of powerful economic interest to capture the state can be constrained by:

Economic Policy Liberalization

Deregulation of process of other aspects of production of trade are important steps toward reducing opportunities for corruption. Implicit price subsidies, in the form of tax and utility arrears, provide politicians and bureaucrats with discretionary power that is highly subject to abuse. Liberalization can help to reduce this discretionary power, but only if reform is undertaken in a transparent and non-discriminatory power, but only if reform is undertaken in a transparent and non-discriminatory way; otherwise there is a risk that the reform process itself will be corrupted.

Enhancing greater competition

Enhancing competition, especially in concentrated sectors, by lowering barriers to entry, requiring competitive restructuring and clarifying ownership structures are important elements toward creating a vibrant and corruption free private sector. Competition can also be strengthened by introducing greater transparency in the ownership structure and operations of firms and banks, through requirements of financialdisclosure and arm's-length relationships, efficient registries, and better supervision of their operations by independent regularly bodies.

Regulatory Reform

Proper regulation of utility companies and other industries in which competition remains. Imperfect is important to reducing corruption. The establishment of independent regulator agencies, both at the central and at the local level where regulatory capture is most pronounced, can be effective in promoting efficiency and limiting opportunities for corruption, as long as such institutions operate with transparency (public hearings), simplicity (well defined, rules-based principles), and accountability (election regulators or term limitations). Similar practices for regulating more routine aspects of business operations, such as registration (one-stop registration) and workplace safety (simple and clear rules for site inspections), are crucial limiting harassment of businesses by bureaucrats and promoting new entry and growth. For all types of regulation, firms should be provided with low-cost methods of disputing administrative decisions.

Good Corporate governance

Weak institutions for corporate governance not only result in inefficiency they encourage corruption. Poorly governed managers often use their positions to extract favors from the state which they can later expropriate, rather than reinvest into restructuring their own firms, to avoid sharing their gains with other stakeholders. Corrupt behavior is often difficult to detect, especially in countries where transactions are obscured through the use of barter and other money surrogates as the means of payment. A wide array of corporate governance reforms have proven directive in curbing both incentives and opportunities for corruption, including: public disclosure of share ownership and cross-holdings; strong penalties for insider trading and pyramid schemes; the appointment of outsiders to boards of directors; the introduction of regular published independent audits of financial accounts based on standardized rules; the establishment of an effective legal framework for the exercise of creditors rights; and the strong enforcement of ethical standards.

4.Institutional Restraints on power

The Institutional design of the state can be an important mechanism in checking corruption. Of particular importance is the effective development of institutional restraints within the state, which is most effectively achieved through some degree of separation of powers and establishment of crosscutting oversight responsibilities among state institutions. Effective constraints by state institutions on each other can diminish opportunities for the abuse of power and penalize abuses if they occur. For ensuring institutional restraints on power the following steps should be taken:

Independent & Effective Judiciary

Corruption has a devastating effect on the legal system. It distorts law making, court ruling and law enforcement and in the end, erodes the rule of law. This has devastating consequences for the society as well as economic activity. The legal system is one of the fundamental Polaris of a market economy whose role as arbiter of the law encompasses both the formulation and implementation of public policy. In addition to deciding criminal cases the courts are responsible for upholding property rights enforcing coruscates, and settling disputes. Failure of any of these roles is costly, reducing incentives to invest or forcing firms to resort to more costly private means of contract enforcement and protection. In addition to these direct economic costs, a corrupt legal system has a wider impact, undermining the credibility of the state and making the implementation of public policy more difficult.

Anti-Corruption Legislation

While a well-functioning, competent and clean judiciary is key in upholding the rule of law on a day-to-day basis, anti-corruption laws turn out to be an effective means prosecute of an anti-corruption strategy. Anti-corruption laws work to deter corrupt actions, prosecute and resurrect a sense of justice, which has become a rare commodity in endemically corrupt countries. Legislation supporting the transition towards a corruption free society includes a freedom of information law, whereby citizens can demand the disclosure of information regarding government activities; a whistle-blower protection law in order to encourage the reporting of corruption cases; conflict of interest law, procurement laws and party financing laws. Anti-money laundering regulations also contribute towards curbing fraudulent practices.

Independent prosecution and Enforcement

Independent prosecution remains a crucial challenge for many developing countries. Often the legal framework for anti-corrupt acts is often difficult to obtain, many countries have criminalized activities that are often associated with corruption, such as laundering proceeds from corruption and other crimes.

Audit Organizations

Audit organizations can also have an important role. For full effectiveness, State Audit Offices should be backed by parliamentary committees that review and follow up on their reports. By contrast, watchdog enforcement agencies have a mixed record and have too often been subject to capture themselves. A condition for their effectiveness is the prior establishment of a core of strong, independent and credible professionals in the judicial, prosecutorial, and police arms of the state.

Transparency and Recourse in Administrative Decision making

A frequent complaint is favoritism of the state in cases brought by citizens. Government decisions are less prone to corruption when they are predictable, transparent, and accountable. Administrative procedure law provides the legal foundation for sound government decisions providing rules for the way government bodies behave. These procedures protect the rights of citizens by guaranteeing participation in government decisions by interested parties, openness and transparency of decisions, adequate responses to public inquires, and the availability of recourse. Mechanisms of recourse include appeal within government bodies, judicial scrutiny and ombudsmen.

5 Improving Public Sector Management

A fifth building block of an anti- corruption strategy consists of reforms in the internal management of public resources and administration to reduce opportunities and incentives for corruption. Reforming public sector management and public finance requires. standards, institutional values, and memory in the public sector. This opens the way to conflict of interest, misprocurement, and theft of public funds. The short-term and uncertain nature of many political appointments also decreases the time horizons of public sector workers, creating incentives for predatory behavior.

A meritoric civil service with magnetized, adequate pay:

A first step in reforming public sector management is to eliminate patronage by institution meritocratic system for appointment, promotion, and evaluation and where feasible, establishing an independent civil service oversight body. In parallel it will be important to increase salaries, relate then to skill and responsibility, and regularize the extensive non-salary benefit that provide broad scope for discretion and corruption.

Enhancing transparency and accountability in budget management:

To improve transparency and accountability in fiscal management it is crucial to ensure full budget coverage and control. This can be achieved by reducing the diversion of resources into off-budget accounts that typically lack oversight and transparency. These off-budget accounts that typically lack oversight and transparency. These of-budget transactions take different forms, from extra-budgetary funds to lack of integration of investment planning and external financing into the budget. A further challenge is the significant magnitude of contingent liabilities stemming from nontransparent off-budget commitments.

The effectiveness of external audit entities varies greatly. To be effective in reducing corruption, external audit must be independent and equipped with strong auditing and diagnostic skills, moving beyond individual faults to target systemic weaknesses. Internet audit also needs to be developed further parliamentary and public oversight needs to be strengthened, with public dissemination of audit findings and scrutiny by Parliamentary Audit committees, which too often do not exist.

Enhancing transparency and accountability in tax and customs:

Corruption in customs and tax administration lowers state revenues, creates a distorted private sector environment and is often linked with smuggling and organized crime.

Reforms to simplify tax policy and eliminate discretionary exemptions help, as does professional staff, standardization of forms and procedures, and transparent systems such as the use of computerized risk analysis at the borders. It is important to eliminate one- on-one contact between taxpayers and officials and ensure that operating and management systems are efficient and easily monitored, including through periodic taxpayer surveys.

Policy reforms in sectoral service delivery:

Finally, administrative corruption can be profoundly damaging to the level and quality of service delivery across key sectors. It is often deeply rooted in distorted policies, as illustrated in the energy and health sectors. Corruption, for instance, plagues the interface with customers and lies behind the low collection rates reported by many electricity, gas, and district heating companies. In Azerbaijan, the state-owned Baku Electricity Company reports a household collection rate of 12 percent despite employing 1,000 payment despite employing 1,000 payment collectors. Sale of the Distribution Company of privatization/management contracts can help, as long as tendering and contracting processes are transparent and contract execution can be monitored. Reducing non-cash transactions including barter and arrears offsets can also reduce private rent seeking, as non-cash exchange at artificially inflated rates is a standard method of extracting private gains.

Decentralization with Accountability:

Decentralization of service delivery can in principle makes the state more responsive to the needs of the people and improves service delivery. However, in countries where the accountability and capacity of sub-national governments is weak and where there are few safeguards against the manipulation of municipal assets and enterprises for the private gain of local officials, decentralization can actually increase corruption, bias resource allocation, and adversely affect access and quality in basic social services. Improving accountability at the local level for local expenditures and to the central government in cases where expenditures are only administered by the local level (de-concentration) is a necessary first step. Reform efforts should strongly focus on creating regional/local capacity in financial management and auditing, before (or while) the decentralization process gets underway.

Concluding remarks

Corruption is a complex multi-faceted social phenomenon with innumerable manifestations. It takes place as an outcome of deficiencies in the existing public administration apparatuses and systems as well as cultural, economic, political and social factors. Differences of opinion still exist as to the meaning of the term corruption. This is primarily because individuals look at corruption from their own vantage points influenced by surrounding environment. But what is heartening is that in recent years corruption is viewed from a much broader perspective rather than looking at it from moral and functional angles only. The causes of corruption are as varied as the phenomenon itself. Corruption results from the presence of a number of factors. There are many forms of corruption. To understand the dynamics of so many types of corruption attempts have been made to classify different forms of corruption into broad categories. What transpires from such a categorization is that outsiders can sponsor corruption resultant of political scandal, institutionalized and administrative malfeasance. The government needs a well-coordinated, well-understood overall strategy that limits opportunities for abuse of public office, increases the likelihood that individuals will be able to profit from corrupt acts, whether they are giving and receiving bribes. Moreover, the civil societies of the country should come forward to establish the right of the people and to ensure the rule of law in Bangladesh. The professionals, the intellectuals through meetings and sittings, attending and participating the seminars and symposium and writing and contributing to the media can raise a general awareness to build up a corruption-free prosperous Bangladesh in future.

End

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Submitted To:

Dr. A.R. Khan

Professor

Department of Banking

University of Dhaka

Submitted By:

Abu Sadat Md. Salim

EMBA (21st Batch)

ID No: 51221026

Department of Banking