Trade fraud in commercial banks

When we heard the various discussions on Hallmark, Bismillah, Crescent frauds or scams that were taking place mostly in state-owned commercial banks, the conversations mostly focused on the moral aspect, political influence or corruption side of the scam. 

Only a few focused on what really went wrong as trade transactions, trade finance, letters of credit or trade documentations were concerned. From a humble trade practitioner's viewpoint, these were mostly about the way we handle local exports or join the local supply chain of international exports. 

It was about the way we handle documents with regard to local or inland bill discounting, verification of delivery receipts or truck receipts, proof of actual exports, and the integrity of the documents. It was also about how closely the local producers capacity matches against the delivery commitments it has undertaken, lodgment for maturity and payment settlement, monitoring of the accommodation bills where both importing and exporting entities are banking in the same branch or bank, overall trade documentation and so on. 

It also had something to do with the way we monitor and report banks' assets and liabilities, branch exposures, bank exposures and clearing proceeds. It had many things to do with how we ensure the overall integrity of a trade transaction sitting in our desks in trade operations or trade finance.
In the early 1990s, those of us from the corporate banking division at ANZ Grindlays Bank seriously pushed for a TCB (Trading Corporation of Bangladesh) letter of credit (L/C) for the import of cement. Ultimately the L/C worth $22 million was opened through us. 

When I wanted to share the good news with our country credit manager, he asked me three questions- 1) Have you opened the L/C? 2) Have you realised the L/C commission and required margin? and 3) what are the shipment terms? My replies were: 1) It was obvious that we have taken the required L/C margin from TCB and realised the commission, i.e. our earnings, 2) The shipment terms said there will be three shipments - 30 thousand tons each in two shipments, 40 thousand in another shipment, and 3) We have successfully routed the L/C to the foreign trade bank of the country through our Singapore branch. 

Illustration: TBS

The 'credit guru' smiled. 

When I wanted to know the reason, he replied - there won't be any shipment unless the goods are being loaded into the mother vessel in the outer anchorage through a 'lighterage' ship since the said East European port does not have enough depth in the harbour for a 30 thousand tons ship. If lighterage cost is added to the export price, the contracted exporter would no longer be the lowest cost exporter, he added. Believe me, there was no shipment. TCB had to trigger the performance bond issued and take the exporter via their local agent to the court. 

Most trade managers would know that trade starts from an invoice or sale offer or price quotation. The establishment of a letter of credit or contract based on internationally accepted trade rules or guidelines come after. Then, the payment settlement process is agreed, identified or arranged. After the payment is finalised, the goods are shipped along with the documents which may include truck receipts, bill of lading, airway bill and the contract. 
Fraud can happen at every one of the aforementioned stages - from price offer, letter of credit advising, shipment, entry of goods into the importing country, to final payment settlement. 

How do you or how can you avoid these or protect your banks' interest (as the bank deals in documents not in goods)? 

The answer would depend on how you ensure proper risk appraisal, delivery risk, counterparty risk, price fluctuation risk and payment risk. These are mostly the credit manager's or trade finance manager's job. 

Our banks and executives in such banks must ensure that they come up with an all-encompassing checklist that they and others in the bank can follow. The basis of the banking profession relies on generating trust and ensuring compliance. This checklist method is still missing in many of our banks currently.

But ensuring proper documentation, compliance with the stipulation of the contract and release of the ultimate payment depends a lot on the trade operation or processing managers. 

How diligently we can handle the trade documents, what due diligence we apply when opening a letter of credit, how we check the relevant documents or how we monitor transactions flows even within the branch or inter branches and even how we monitor and track transactions undertaken under 'bank risk'- all these are crucial here. 

All banks are different. They might not have lent to the same client or client groups, their asset quality may not be the same, and so are their capital base and profitability. Their management efficiency or level of automation to ensure transaction sanctity may also differ.

Our banks and executives in such banks must ensure that they come up with an all-encompassing checklist that they and others in the bank can follow. The basis of the banking profession relies on generating trust and ensuring compliance. This checklist method is still missing in many of our banks at the moment. 

It does not only provide a manager with some method to ensure compliance but an organisation-wide effort to ensure a standard operating procedure that makes such checklists mandatory. And this will make it easier to monitor and evaluate the performance of executives. Problems in implementation can be found out much earlier and can prove the difference in any situation.

Therefore, I would urge all our bank executives, especially the trade professionals to further review our existing trade undertaking, processing and settlement model, to integrate information technology delivery platform, risk management model and overall trade documentation model with this. 

Bangladesh is an emerging trading nation with a trading volume of $100 billion or so. However, our trade volume is bound to increase with our exports and imports going up with the possibility of Bangladesh becoming a trade hub. The entire global external trade regime is going through a transition.

With greater international trade taking place without letters of credit or fiercely competitive pricing or discounts, such challenges are bound to occur as well. More intermediaries joining the shipping or financing channels are a cause for concern. Global economic meltdowns at frequent intervals, and emerging challenges that come from the shipping industry also raise issues that need to be addressed. 

The climate crisis causes headaches as well: food production influenced by the impact of climate change and the energy crisis due to gap in demand and supply gap pose certain roadblocks. 

Finally, Bangladesh's lack of assertiveness in the international trade bodies ensures that such challenges are likely to come up in the near future as well.

Mamun Rashid is a financial service (FS) partner at PwC. He worked in senior roles for three global banks for more than two decades. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard