PAPER ON

“Bank scams in Bangladesh”

Submitted By:

TITANS

Name ID
Ahnaf Akif 2022018630
Farhan Sheikh 2111164630
Labiba Binte Ferdous 2121238630
Tahdina Moin Hridita 2121369630
Maymuna Islam Purnota 2132026630

Date of Submission: 22/11/2023

 1

INTRODUCTION
Bangladesh’s banking sector has been scattered with a series of scams in recent years. These

scams have culminated in significant losses for our banks and eroded the public confidence in

them. One of the most notorious scams has involved the Hallmark group, where billions of

dollars were scammed from multiple banks from 2010-2012. The scammers used multiple

methods to deceive the banks which included but were not limited to, forging documents, and

exploiting government cash incentives.

The Hallmark incident is just one of the financial scandals that has rocked the Bangladesh

banking system but also rocked the country’s economy. These scandals raised a serious sense of

doubt about the inadequacies of the regulatory system in place. To address these concerns, a

number of steps were taken to reform the banking sector by the Bangladeshi Government. These

included strengthening regulatory oversight, improving risk management practices, and

increasing transparency. It remains to be found whether these changes had any meaningful effect

but they have been the right step taken to reinstate the public’s confidence in the banking sector

and protect the country’s economy.

Objectives & Limitations of the paper:

This paper seeks to establish a general idea of the scams in the past regarding the Bangladeshi

banking sector and give deeper insight into why and how they happened. However, it is limited

in the way that the findings are based on secondary research and there is only so much

information that can be found in that methodology. It fails to give greater insight than what is

available already in the online sphere.

 2

METHODOLOGY

Data Collection Techniques:

The research relies on a combination of primary and secondary data. Primary data is obtained

through interviews available on the internet of key stakeholders such as bank officials, regulatory

authorities, and victims of bank scams. Secondary data is collected from published reports,

academic articles, newspapers and magazines related to banking fraud in Bangladesh.

Sources of Data Collection:

Primary data is sourced through videotaped interviews and surveys conducted with relevant

parties involved in the banking sector. Secondary data is gathered from reputable sources such as

the Bangladesh Bank website, financial newspapers, academic publications, and related PDFs

from the internet.

Tools and Techniques of Analysis:

For analyzing the data Microsoft Office Word and Excel program has been used.
 3

FINDINGS

General Causes of Corruption in the Banking Sector of Bangladesh:

Borrower Selection Criteria:

Certain banks have trouble choosing which people or businesses to lend to. The entire lending

process will fall apart if the borrower is improperly chosen. Those individuals or institutions that

meet both the financial and mental requirements for borrowing should be chosen as borrowers.

Banks will confront larger categorized loans and eventually fail if they choose fraudulent

borrowers who have no intention of repaying the loan. Therefore, when choosing the appropriate

borrower, the bank needs to be informed about the borrower's correct KYC (Know Your

Customer) information.

Political Influence:

There is a sense that there is intense political pressure around this matter, despite the officials'

assurances that politics has no say in the lending decision-making process. Decisions that are

politically biased push loans into default and put the banking industry in jeopardy. The fraud

borrowers are extremely crafty, weaving webs for those involved in lending, auditing, and

reporting procedures. Individuals with political clout exert pressure on the financial industry on

behalf of both themselves and their minor offspring. For instance, it was discovered in the Basic

Bank records that the investment department had sent a negative proposition to the head office,

but that the higher authority had changed it to a positive and authorized the loan in the client's
 4

favor. The investment department and branch manager rejected the proposition because they

believed the client could be bad for the bank.

Management Influence:

The lending process is influenced by bank management, just like it is by political influence.

Higher classed and default loans are the result of management's impact on the credit decision-

making process. The Chairman, the board of directors, the managing director, and other senior

personnel have significant control over the lending process. They occasionally act nepotistic

toward their loved ones. Even though the branch managers' ability to obtain loans is not

particularly profitable for the bank, they occasionally give them orders and instructions to draft

attractive proposals on behalf of their preferred clientele. Occasionally, the management will

approve loans at a discounted rate despite incomplete documentation or insufficient collateral.

Corrupt Bank Officials:

Financial fraud and fraud are largely the result of corrupt bankers. They establish connections

with the clients and are linked to these fraudulent undertakings. Since they are well-versed in

banking policies and procedures, they figure out how to commit fraud by giving the bank their

index finger up.

 5

Specific Cases of Corruption in the Banking Sector of Bangladesh:

Bangladesh Bank cyber-heist:

Through the SWIFT network, orders to steal US$951 million from Bangladesh Bank, the

country's national bank, were sent in February 2016. Five successful hacker-issued transactions

totaling $101 million were taken out of a Bangladesh Bank account at the Federal Reserve Bank

of New York. Of those transactions, $20 million was found to be in Sri Lanka (which has since

been recovered) and $81 million was found to be in the Philippines (of which around $18 million

was recovered). At Bangladesh Bank's request, the Federal Reserve Bank of NY stopped the

final thirty transactions, totaling $850 million. Later on, it was discovered that the attack was

carried out by Dried malware. (Balu, 2020)

Hallmark-Sonali Bank Loan Scandal:

The largest financial scandal in the nation is regarded as the Hallmark-Sonali Bank Loan

Scandal. According to a May 2012 investigation by the Bangladesh Bank, between 2010 and

2012, the largest commercial bank in Bangladesh, Sonali Bank, which is owned by the

government, illegally disbursed Tk. 36.48 billion (US$460 million) in loans through its Ruposhi

Bangla Hotel Branch. (Sultana, 2022) The reasons behind the scandal surrounding the loan from

Hallmark-Sonali Bank are:

1. The alleged fraud took advantage of the trade financing system known as Letters of

Credit (LC).

2. Some of the substandard loans were then dispersed across the banking system through the

use of an additional financial technique called inland bill purchases.

 6

Impact of Banking sector scam in the economy of Bangladesh:

Shortfall of Money:

The condition of the economy having inadequate liquidity to support all potential trades is

known as money scarcity. Following those bank frauds, the general public may avoid banks,

which could lead to a shortage of funds in the banking industry as well as other financial sectors

including trade, investment, and commerce. This leads to weak economies.

Collapse in the Banking Sector:

Generally speaking, banks take deposits from customers and lend money to other borrowers and

businesses. The general public may no longer have faith in banks following those massive

financial crimes. Keeping their money in banks won't feel safe for them. Even more of them are

afraid that the banking industry will collapse like the stock market and be tempted to take their

deposits out and collide. The economy suffers as a result of this.

Reason Insufficient investment:

The economy as a whole is greatly impacted by a lack of faith in banks, given their significant

role in financial intermediation in economic activities. As a result, the investment industry

experiences a severe shortage.

Growth in GDP:

The Bangladesh Bank Scam has a significant effect on GDP expansion. As of June 30, 2017,

Bangladesh's economic growth accelerated to 7.28%, while the country's per capita income
 7

increased from $1,602 to $1,610, according to the Ministry of Planning. In the meantime, the per

capita income was $1,465 and the growth rate was 7.11% in FY2016, according to figures from

the Bangladesh Bureau of Statistics (BBS). (Balu, 2020)

RECOMMENDATIONS

There are some recommendations to prevent bank scams:

1. Customer Education: Inform clients on a regular basis about phishing techniques and fraud

protection strategies. Give them precise instructions on how to identify and report suspicious

activities.

2. Employee Training: Train bank employees to recognize such scams and how to handle them

by emphasizing the value of customer verification and due diligence. Creating overall fraud

awareness.

3. Secure & Digitalized Communication Methods: Including encrypted emails or secure

messaging apps when exchanging sensitive information.

4. Fraud Detection Systems: Implement advanced fraud detection systems that analyze patterns

and spot anomalies using machine learning and artificial intelligence.

5. Transaction Limits and Restrictions: To reduce possible losses, set transaction limits and

restrictions according to risk profiles and customer behavior.

Based on the evolving nature of scams and the unique difficulties facing the banking industry in

Bangladesh, banks should modify their strategy.

 8

CONCLUSION

The number of bank failures is increasing in Bangladesh. The industry is facing a crisis with

serious challenges threatening the sector. Banks are running out of money due to fraud, scams,

heists, and other wrongdoings. The confidence of investors in bank investments is eroding. This

sector may fail due to deteriorating conditions, making the economy and economic growth

vulnerable to collapse. Over the past seven years, the nation has experienced six financial scams.

Bangladesh's financial system is now the weakest in Asia due to the recent banking crisis, which

is a reflection of Bangladesh Bank's inadequate risk management capabilities. The ongoing

banking crisis, which is mainly the result of a rise in default loans, is a reflection of the

institutional weakness of the nation’s financial system. This problem is getting worse due to a

lack of good management, poor surveillance of the bank, political instability, and abuse of

political power in this sector. Scams are increasing day by day and it creates a harmful long-term

effect on Bangladesh's GDP, investment, employment, remittances, revenue, and overall

economy. So, proper steps should be taken by the government to minimize scams in the banking

sector. Now it’s the time to reform the banking rules and regulations, security system, and its

autonomy to protect the total economy.

 i

REFERENCES
Balu, R. (2020). Bangladesh Bank Cyber Heist: Incident Analysis.

BAT Bangladesh. (n.d.). Retrieved from

https://www.batbangladesh.com/group/sites/BAT_9T5FQ2.nsf/vwPagesWebLive/DOB

W4K3G.

Sultana, I. (2022). Hallmark Scandal: How Sonali Bank Lost 3550 Crore Taka? Dhaka:

businessinspection.The Business Standard. (2023, 10 23). Retrieved from TBS report:

https://www.tbsnews.net/economy/stocks/british-american-tobacco-invest-tk61cr-

capacity-expansion-630202