Scam story of Hallmark

Financial market is a process where financial institutions, communication network, and relevant
rules and regulations are established and activated so as to enable funds to flow from saving-
surplus units to saving – deficit unit.

But what happens when governance is poor and rule setting bodies are ailing. Financial scams
are not new, especially in Bangladesh where corruption and loan defaulting practice is a
commonplace.Such is an example of Hallmark that left people shocked and worried whether to
trust the very trustedgovernment owned Sonali bank.

Looting through bank lending practice:

It all happened in Ruposhi Bangla branch of Sonali Bank.Tanvir Mahmud, Managing director of
Hall-Mark group used Sonali Bank’s guaranteed LC to loot money from other banks.

How it was done

Letter of Credit (LC):

 LC is the guarantee banks give to exporter to pay on behalf of the importer. In trade, an
exporter may not trust an importer to pay bills upon receipt of the goods ordered. He asks
for advance payment. On the other hand, an importer don’t want to pay advance payment.
Let’s use this concept to understand what happened in this case.
In our country often, garment producers (let’s assume they are importers) are unable to
pay for inputs of making fabric until after they have produced and sold their final
products. On the other hand, suppliers of inputs (exporter) won’t deliver supplies without
advance payment or some guarantee of payment.
 This is where LC comes in to play solving problems for both the parties where a bank
guarantees payment on behalf of the Garment producer. In our case it is Sonali bank.
 Upon receiving a LC (the guarantee of payment) from the bank, the exporter delivers the
goods. He then submits all relevant documents showing proper delivery of goods, as
required in the LC terms. The bank confirms the authenticity of the documents and makes
payment to the exporter and later collects the amount (often with interest) from the
importer.
  Sometimes, depending on the LC type the bank pays the exporter after three to six
months. If the exporter needs money immediately he can sell this LC to other lending
institute at a discounted rate.
 Banks buys the LC at discounted rate because they are going to get a good amount on
maturity and exporter sells it because he needs the money immediately and can invest it
in other lucrative project.
 In Hallmark sonali bank case things went awry because both the importer and exporter
companies were fictitious entities.
 TanvirMahmud opened local LCs worth Tk 5 billion at the Ruposhi Bangla branch of the
Sonali Bank to buy yarn from Anwara Spinning Mills, Max Spinning Mills and Star
Spinning Mills. The three spinning mills were also fictitious. Thus there were no actual
delivery of goods and the supply documents submitted at the Ruposhi Bangla Branch,
were also fabricated. But the Bank paid them money which was transferred to Tanvir
Mahmud’s account by the three mills. When it was time for Hallmark to repay the loan to
Sonali Bank it defaulted.
 Since both the accounts of the importer and the fictitious exporter were in the same
branch of the bank, in the books asset (loan taken by Hall-Mark) and liability (deposit of
money in the accounts of the three spinning mills) appeared to net off. However, in
reality it never netted off.
 The scam came into limelight after the duped banks demanded money against the LCs
and Sonali bank’s failed to pay them.
The Impact
 Events like this are dangerous becausethese institutions are part of financial market
erosion peoples’ trust, brings down the share price which in turn disrupts the flow of
deposits in bank. Bank loses its lending capacity which negatively impacts the growth
and employment of the country.
 Let’s see the problem through capital asset pricing model (CAPM) and value of
investment.
 CAPM’s general idea is investor should be compensated in two ways time value of
money and risk incurred.
To make up for risk of corruption, an inv estor expects a premium above the normal
returns from an investment. If these returns R f (Risk-free return) and R m (Return
from a market portfolio) are higher, the Capital Asset Pricing Model (CAPM)
forecasts higher required returns (R j ) for an investment.

We know value of an investment is the present value of future cash-flow earnings

from an asset. And there is an inverse relationship between Net Present Value
(NPV) and Cost of Capital (K).

Hence, a financial market having corruption will have a high K which will
automatically lower the NPV from investments and investors will not be interested
to invest.

.
Scam Story of Basic Bank

The government-run BASIC Bank has also suffered a big swindling of around Tk 4,500 crore
over the past several years in yet another big banking scandal as it become public in recent time.

In BASIC Bank, its board of directors approved the money in different loan cases to different
vested interest groups or business houses in fictitious loans or business accounts. The Board of
Directors acted in complicity with dishonest business houses which produced loan request under
different projects or import financing bills and the money was disbursed to parties accordingly.

The board approval was reportedly given to loan seekers ignoring the alert of the bank branch
officials and also bypassing the cautions against such loans by the central bank authorities.
The fake and fictitious loan cases were also discovered in central bank inspections and the
branch offices of the bank also informed the central bank of the complicities in approving the
loan by the board of directors. But no follow up action was taken and the loan scams
continued to such a huge extent. The swindling was taking place over the past few years. The
amount was Tk 3,500 crore in the year of 2013 and the Anti-Corruption Commission launched
an inquiry into the alleged embezzlement of that money.

The 18 cases filed by the Anti-Corruption Commission (ACC) did not charge Sheikh Abdul Hye
Bacchu for the irregularities involving loans worth Tk 35 billion. At least 27 bankers,
who served the state-run-Basic Bank in different sectors and 56 organizations have been
found involved in the Bank's loan scam according to an audit report.

The ACC began investigating after the scam with regard to massive loans granted by the
state-owned bank’s Gulshan, Dilkusha, and Shantinagar branches between 2009 and 2012.

On July 14, 2014, Bangladesh Bank sent a report on the BASIC Bank scam to the ACC,
detailing how borrowers embezzled money from the bank through fake companies and
suspected accounts.

The report mentioned that Dilkusha branch doled out Tk 683 crore in loans to 16 borrowers,
all of whom took the money through illegal means. In Gulshan branch, 12 clients took out Tk
297 crore through pay orders or in cash. The report also contained a list of 40 pay orders that
were transferred from a number of loan accounts at Shantinagar branch to suspected accounts
in the same branch in 2012. Each pay order transferred funds between Tk 50 lakh and Tk 1
crore.

Involved Organizations in the Scam:

More than three organization names were come out after investigation but we showed only three
organizations’ scam scenario in below:

 1. M/S SPN Enterprise: The owner of M/S SPN Enterprise withdrawn 55 crore taka of their
loan money on the date of 9th October 2012 by submitting fake Company information as well as
residence address.

 2. A. B Trade Link: The owner of A.B Trade link Mr. ABM Russell also withdrawn 45 crore
taka of their loan by submitting fake information as well as the mortgage documents. The
Company name does not exist in that place which was mentioned in their documents.

 3. B Alam shipping: B Alam shipping line who withdrawn 13 crore taka, but the case was
showed somewhat unnatural to us because they applied for the loan on 20 May 2013 within the
next 2 days they had withdrawn 10 crore cash, where the Chairman of the board of Basic Bank
went to abroad. Without the Chairman permission bank has no authority to allow withdrawing
more than 1 crore.
Impact on the Balance Sheet of Basic Bank:

Profit and Loss (Million Taka)

2010 2011 2012 2013 2014

Interest Income 4337.04 7099 11020.88 14808.95 12,070.32

Interest on deposit and borrowings 3033.56 4911.66 8544.6 13108 13,466.23
Net interest income 1303.48 2187.34 2476.27 1700.95 -1,395.91
Commission, exchange and brokerage 642.57 785.34 693.13 737.2 658.52
Other operating income 476.67 189.23 129.09 119.73 125.61
Total operating income 3074.25 3913.55 4857.67 4230.79 1647.33
Salaries, Allowances etc 877.12 993.57 1160.05 1767.83 1,855.36
Depreciation and other non-cash expense 67.56 79.68 109.4 152.69 181.71
Other operating expenses 236.37 270.01 615.82 349.02 240.96
Total operating expenses 1357.2 1565.03 2247.58 2760.59 2771.71
Profit before provision 1717.05 2348.52 2610.09 1470.2 -1,124.38
Provision for loan & Advances 326.27 404.34 1561.18 1338.52
Profit before tax 1325.17 1999.99 1075.88 118.49 -1,115.24
Provision for tax 723.27 1038.97 1079.19 732.12 45.34
Net income 660.93 976.11 27.89 -531.53 -1,100.16
Earnings per share (Taka) 33.64 41.4 0.95 -18.04 -37.33

Other Impacts:

1. Liquidity Crisis: As the bank gave a large amount of money as loan and the bank could not
able to recover that amount therefore the bank and the overall money market suffers from
liquidity crisis.

2. Interest rates: As the lending interest rate at that time was low near about 9% to 9.5%.
Therefore different companies are interested to take loans from that bank. When the bank is not
able to recover that amount there is big push on the banks’ capital as well as in the money
market. Therefore the lending interest rate are increased which is now 11 to 12.5%. The deposit
interest rate decreased 9% to 4%. Now people are less interested to deposit in the bank.

3. Inflation: