Salvage the banking sector, unmask the kingpins

Published: 09 December 2022

That the bank and non-bank financial sector of Bangladesh has long been devilled by scandalous corruption in the form of deliberate loan default, swindling, and money laundering is now common knowledge. While the latest revelation of massive embezzlement at the Islami Bank, together with at least three other banks, may have shocked and awed observers, it is just the tip of the iceberg and only one of the numerous such dirty games of collusive fraud that have been allowed over the years to become a part of the country's bank loan culture.

Like the case of the Islami Bank, the ones involving the Social Islami Bank and First Security Islami Bank, the earlier scandals involving the Oriental Bank, Farmers Bank, Union Bank, BASIC Bank, Janata Bank, Rupali Bank, and non-bank financial institutions like International Leasing and Financial Services, People's Leasing and Financial Services, FAS Finance and Investment and Bangladesh Investment Finance Company have two things in common. One, none of the kingpins of the scandals has been brought to account, and two, in almost every scandal, the use of fake and anonymous entities has been the key enabler.

The masterminds involved in such corrupt activities operate by hiding behind secretive and fake companies and shadowy bank accounts to secure loans, make transfers, and launder money. Those who actually own, control, and benefit from such "shell companies," known as beneficial owners, act by hiding with deceitful paperwork in collusion with lawyers, accountants, nominee shareholders and, not least, the relevant bank officials often at the highest levels.

As a result of the game of secrecy of the real beneficiaries, those involved in banking sector corruption and money laundering have hardly been brought to justice. On the contrary, they have secured for themselves an ever-increasing lobby power, to hold the government and the central bank hostage to the extent of policy capture and extorting further concessions and even protection.

Even in cases where the relevant authorities like Bangladesh Financial Intelligence Unit (BFIU), Anti-Corruption Commission (ACC) and other law enforcement agencies attempted investigations, they couldn't go anywhere beyond small fries, because the big fish were protected partly by financial and political lobby power and partly by the veil of secrecy.

In the absence of any means to ensure beneficial ownership transparency (BOT) in the country, there is practically no means to control and prevent the banking sector scandals and other related crimes such as tax evasion and money laundering, which have extensively deepened and widened.

In the meantime, BOT has gained increasing global prominence as a powerful instrument to prevent and control large-scale corruption in the banking sector. Several years of research and advocacy by Transparency International have led to the global standard for BOT adopted by the Financial Action Task Force, which requires every country to set up a national beneficial ownership register and to disclose who ultimately owns, controls, and benefits from a company or other similar entities.

If there is necessary political will to salvage the banking sector and prevent further collapse, Bangladesh must create the legal and institutional structure to ensure beneficial ownership transparency without any delay. In the absence of BOT, the only way to identify and track company ownership is to rely on information available from banks, which are not only insufficient but also flawed, as years of scandals in the sector have shown.

Almost every such scandal of deliberate loan default and other forms of embezzlement of bank money has shown time and again that banks cannot be trusted to provide reliable information about beneficial owners, because in nearly all cases, banks themselves are colluders and facilitators of illicit transactions.

BOT, if accompanied by the adoption of the Common Reporting Standard (CRS) for automatic exchange of all national and international financial transactions, will open up advantages of multiple mechanisms to facilitate unveiling of the identities of beneficial owners.

Experience of countries that have set up public BOT registers and adopted CRS shows enormous opportunities to unveil the secrecy, based on which prevention and control of some of the worst forms of forgery, swindling, tax evasion, and money laundering are possible. It can lead to uncovering of conflicts of interest, expose high-level corruption, and track the processes of money laundering and illicitly earned wealth.

Information on real owners or persons behind companies and other business entities is also critical for promoting integrity in the financial sector in general and for the tax system in particular. It will help regulators and oversight institutions as well as credible banking authorities to specifically know the customer, and thereby prevent the operation of fake and anonymous entities. BOT can also facilitate tracking and scrutiny of the public procurement process.

It may be mentioned that, as part of accessing funds through the IMF Rapid Financing Instrument, Bangladesh committed in June 2020 to ensure beneficial ownership transparency. However, there is no evidence of any follow-up action. The government only reiterated to the international lender as of May 2022 that they "will seek to adopt reforms to allow publication of beneficial ownership of companies awarded public procurement contracts as soon as possible."

Notably, while the pledge to adopt reforms remains vague and open-ended without a deadline, it also indicates the self-defeating intention to limit the scope to public procurement only. While BOT in public procurement is highly important, such limited reforms, even if implemented, will remain far short of addressing the much bigger issue of banking sector scandals.

The government should urgently take a strategically designed initiative for beneficial ownership transparency – not merely because of a conditionality agreed on with the IMF but, more importantly, acting upon its own realisation of the critical importance of effectively confronting the challenges of banking scandals.

This would require the necessary legal reform to establish a central register of beneficial ownership information of all companies, which should be available in open data format as public information. Institutional capacity will have to be developed to create the register, and independent verification and cross-checking of information on the register with information available in other relevant sources (like the tax database) will be needed. The provision must be created such that the services of financial institutions, bankers, lawyers, and accountants are strictly conditional upon specific verification and disclosure of the true identity of the customer, be it the frontline owner, real owner, controller or a beneficiary hidden behind fake papers.

Whether or not such aspirational reforms will be possible in the abiding context will depend on the commitment and capacity of the political authority to prioritise public interest, independent of fear of or favour for the kingpins and beneficiaries of scandals in the banking sector, who have pushed it to the brink of collapse.

Dr Iftekharuzzaman is the executive director of Transparency International Bangladesh (TIB).

The Daily Star
09 December 2022