Regulators slept while crooks emptied a finance company

TBS flow chart

A fact-finding committee has revealed how the Bangladesh Bank's supervision department failed to detect the scams that emptied the Bangladesh Industrial Finance Company Ltd (BIFC) in 10 years followed by collapse of a number of lease financing companies.      

Between 2005 and 2014, the then BFIC chairman Major (Rtd.) Abdul Mannan embezzled more than Tk 500 crore from the company through taking loans against his business entities breaching banking law and regulations.

BIFC was taken over by two shell companies formed by fugitive top loan-scammer Prashanta Kumar Halder also known as PK Halder who was later found involved in swindling four non-bank finance companies of over a thousand crore taka.

But the central bank's regular annual inspections failed to detect those anomalies and a special investigation carried out later seemed to have favoured the real culprits, the fact-finding committee said in its report submitted to the central bank.

Even two other regulators, RJSC (Register of Joint Stock Companies and Firms) and Bangladesh Securities and Exchange Commission (BSEC) could not detect manipulated financial statements and fake companies that got BIFC loans, it said.

The committee also found external auditors helping BIFC to inflate financial statements by making fake disclosures and concealing classified loans during the period.

Moreover, different state-owned banks lent money to BIFC without collateral and did not review the financial situation of the company despite having no return against those investments for years.

If these anomalies and irregularities committed over a span of 10 years could be identified and checked early, the finance company's collapse could have been prevented protecting the depositors' money, the committee said while describing the gross failure of multiple regulators leading to loan scams in BFIC and other finance companies like Peoples Leasing and Financial Services, International Leasing and Financial Services and First Finance.

In February last year, the central bank formed a fact-finding committee consisting of five members led by Bangladesh Bank Deputy Governor AKM Sajedur Rahman Khan to look into the scams at NBFIs.

The committee was formed following the confessional statements given by at least two scamsters in court that two high officials of the central bank had assisted the swindlers in exchange for bribes.

During the investigations, the central bank withdrew its Executive Director Shah Alam in charge of monitoring NBFIs, whose name surfaced in the confessional statements.

The failure of Bangladesh Bank

According to a fact finding committee report, Bangladesh Bank's Department of Financial Institutions and Markets did nothing except conducting a 'detailed inspection' into BIFC every year until 2015. "The detailed field-level inspections were conducted every year at BIFC with utter negligence and only for maintaining formalities," the committee said.

Since 2005, collateral-free loans were approved against relatives of BIFC directors hiding their real identities and classified loans were shown as unclassified. But none of these anomalies were detected by the central bank during that 10 year period.

The fact-finding committee interrogated officials involved with the relevant department during this period and found that top managers of the supervision department never encouraged the inspection team to deeply scrutinise BFIC activities. "Rather, it seemed that an ambiance was created and mindset   developed not to dig deep into financial irregularities and illegal activities which can cause collapse of the institution and spread panic among depositors," it said in the report.

Even then, whatever anomalies of the previous year were detected, were not followed up properly, it pointed out.  

Had the inspection team detected the irregularities from the beginning and instantly taken steps to prevent those, the company would not have turned insolvent and unable to repay huge amounts to banks, it said, stating that the very objective of onsite supervision department of Bangladesh Bank had completely failed.

The Bangladesh Bank finally initiated a special inspection into BIFC in the year 2015 which was also questionable, said the fact finding committee in its report.

It was questionable because the inspection decision was taken reviewing the financial health of nine NBFIs including Peoples Leasing and Financial Services, International Leasing and Financial Services, and First Finance. The Bangladesh Bank has chosen only BIFC for special inspection when the financial health of Peoples Leasing and Financial Services, International Leasing and Financial Services and FAS Finance was similarly vulnerable, according to the fact finding committee report.

The special investigation report found that most of the money was embezzled during 2008 to 2012 when Mahmood Malik was managing director of BIFC.

Mahmood resigned from BIFC in March 2012 and joined Infrastructure Development Company Limited (IDCOL) as its Executive Director and CEO in August that year.

After a special inspection in 2015, the Bangladesh Bank removed the then managing director Enamur Rahman but did not take any action against Mahmood. Mahmood's name did not come up anywhere, according to the fact finding committee report.

Meanwhile, when the special inspection was being conducted by the Bangladesh Bank, Mahmood was working with Prashanta Kumar Halder or PK Halder, the biggest loan scammer in the financial sector, for forming two companies Sukuja Venture and Kanchi Venture Limited through which BIFC was taken over.

In just a decade, PK Halder used four companies – International Leasing and Financial Services, People's Leasing and Financial Services, FAS Finance, and Reliance Finance – to raise Tk11,000 crore.

After the special investigation, Bangladesh Bank, in the name of taking action, handed over control of BIFC to PK Halder's company Sukuja Venture and Kanchi Venture but none of the companies were ever in operation, according to the fact finding committee report.

As per financial institution act, the central bank was supposed to remove all directors of BIFC and appoint an administrator. A proposal of appointing administrator was made but the then general manager of the respective department of Bangladesh Bank did not do it.

The GM rather appointed an observer. Later, some directors were removed and some were forced to leave from BIFC gradually in the year 2015 and 2016.

After the special investigation, the Bangladesh Bank asked BIFC to send the names of shareholder directors who had clean image and were not related in any way with its then chairman Mannan to restructure the board.

BIFC sent names of officials of two shell companies; Sukuja Venture and Kanchi Venture owned by PK Halder, who was already a known loan scammer.  PK Halder later applied to the Bangladesh Bank for liquidation of BIFC.

It appeared that Bangladesh Bank officials concerned showed extreme levels of inefficiency and entirely failed to prevent financial irregularities and illegal activities, opined the fact finding committee.   
 
Failure of Offsite supervision department of Bangladesh Bank

One of the main objectives of the offsite supervision department of the Bangladesh Bank is to examine whether borrowers used the loan appropriately, but it was not done. If it was scrutinised properly from the beginning, then the loan irregularities would have been detected. Of the total deposits of Tk 900 crore of BIFC, Tk 552 crore was collected from different banks which were not paid back for years. Had offsite supervision detected the cause of not paying back the banks, the situation of inability to get back money for banks would not be created, said the fact finding report. The fact finding made the comment in its report after taking opinion from then responsible officers of the offsite supervision department including then deputy governor SK Sur Chowdhury.

The fact finding committee found every officer from the inspection team to the top management level responsible for the failure of BIFC.
 
How RJSC and BSEC failed to detect fake companies:

The fact finding committee found that the much discussed loan scammer PK Halder is the main beneficiary of Sukuja Venture and Kanchi Venture. The committee, in their investigation, did not find the existence of these two companies. There is no information with the Registrar of Joint Stock Companies if the addresses used during the registration of these two companies were correct, or if they held annual general meetings after registration. However, the RJSC continued to update share transfer information till the year 2018.

According to Companies Act 1994, registration of such unknown companies is revocable but RJSC did not do it. Rather, RJSC created opportunities for such fake companies to transfer shares involving them in other irregularities and illegal activities, said the report.

The then chairman of BIFC Mannan formed the board with his own people for years. Specially, independent directors were related to Mannan which was against the rule. The BSEC was supposed to monitor this but it was not done. Moreover, the company, year after year, prepared inflated balance sheets and declared dividends showing fictitious profit for shareholders but BSEC did not detect the irregularities, said the report.

How external auditors helped scammer

Three audit firms named A. Wahab & Co, J. R. Chowdhury & Co and Malek Siddiqui Wali, audited the financial statements of BIFC in different periods during the year 2003 to 2012. All audit firms prepared audit reports without any objection to showing classified loans as unclassified, inflated accounts, false disclosures and lending to business entities related to the directors, said the fact finding committee report.

Bangladesh Bank also accepted those reports without any review and analysis, said the report. If external auditors properly prepare the audit reports, scammers could not embezzle money for years, the report opined.
 
Reaction of Bangladesh Bank officials to the fact finding report

The Business Standard talked with the Bangladesh Bank for their reactions over the fact finding committee report. They showed dissatisfaction over the report saying that the fact finding committee was influenced by the main accused persons. It is because the committee listed around 200 officials of the Bangladesh Bank who worked with relevant departments. They see this as an attempt to give a safe exit to the main culprit. They, on condition of anonymity, questioned the finding that all officers were corrupt. They pointed out that other strong financial institutions are operating under the same regulations and same officers. They pointed out that gross irregularities were done during the tenure of Mahmood Malik, despite that he was appointed at IDCOL. They also pointed out that the committee also made BSEC and RJSC responsible for failing to detect irregularities in BIFC but these officials were not listed.