Commercial fraud in commercial banks

Fraud can occur at many stages – from quotation, letter of credit advice, shipment, entry of goods into the importing country, to settlement of final payment. How do you or can you protect the interests of your banks?

December 07, 2021, 10:15 a.m.

Last modification: December 07, 2021, 10:40 a.m.

Mamun Rashid/FS partner, PwC. Illustration: TBS

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Mamun Rashid/FS Partner, PwC. Illustration: TBS

When we heard the various discussions about Hallmark, Bismillah, Crescent frauds or scams that mostly took place in public commercial banks, the conversations mainly focused on the moral aspect, the political influence or the corruption side of the fraud.

Only a few have focused on what really went wrong with trade transactions, trade finance, letters of credit or trade documents. From the perspective of a humble practitioner of commerce, it was mainly about how we handle local exports or join the local supply chain of international exports.

These were how we handle documents regarding discounting of local or inland invoices, verification of delivery receipts or truck receipts, proof of actual exports, and document integrity. It was also about the extent to which the capacity of local producers corresponds to the delivery commitments they have made, the deposit when due and the settlement of payments, the monitoring of accommodation invoices when importing entities and exporting are banking in the same branch or bank, comprehensive trade documentation and soon.

It also had something to do with how we monitor and report bank assets and liabilities, branch exposures, bank exposures, and clearing products. It had a lot to do with how we ensure the overall integrity of a trade transaction that is in our offices in trade operations or trade finance.
In the early 1990s, those of us in the corporate banking division of ANZ Grindlays Bank seriously insisted on getting a letter of credit (L/C) from the TCB (Trading Corporation of Bangladesh) for importing cement. In the end, the letter of credit 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) Did you realize the L/C commission and margin required? and 3) what are the shipping terms? My answers were: 1) It was obvious that we had taken the required L/C margin from TCB and made the commission, i.e. our income, 2) The shipping terms stated that there would be three shipments – 30,000 tons each in two shipments, 40,000 in another shipment, and 3) We managed to route the letter of credit to the country’s foreign trade bank through our Singapore branch.

Illustration: TBS

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Illustration: TBS

Illustration: TBS

The “credit guru” smiled.

When I wanted to know the reason he replied – there will be no shipment unless the goods are loaded into the mothership in the outer anchorage by a ‘lightening’ vessel since said port Eastern Europe does not have enough depth in the harbor for a 30,000 ton ship. If the relief cost is added to the export price, the contracted exporter would no longer be the cheapest exporter, he added. Believe me, there was no shipping. TCB had to trigger the performance bond issued and take the exporter to court through its local agent.

Most trade managers know that trade starts from an invoice, a sales offer or a quote. Establishing a letter of credit or contract based on internationally accepted trade rules or guidelines comes next. Then, the payment settlement process is agreed, identified or organized. Once payment is finalized, the goods are shipped with documentation which may include truck receipts, bill of lading, air waybill and contract.
Fraud can occur at any of the above stages – from quotation, letter of credit advice, shipment, entry of goods into the importing country, to settlement of final payment.

How do you avoid them or how can you avoid them or protect the interests of your bank (since the bank deals with documents and not goods)?

The answer will depend on how you ensure proper risk assessment, delivery risk, counterparty risk, price fluctuation risk and payment risk. This is mainly the job of the credit manager or trade finance manager.

Our banks and the leaders of those banks need to make sure that they have a comprehensive checklist that they and other members of the bank can follow. The foundation of the banking profession rests on generating trust and ensuring compliance. This checklist method is still lacking in many of our banks today.

But ensuring proper documentation, adherence to contract stipulation and release of final payment is very much dependent on the business operation or processing managers.

How diligently can we handle business documents, what due diligence do we apply when opening a letter of credit, how do we check relevant documents or how do we monitor transaction flows even within the branch or between branches and even how we monitor and track transactions made under “bank risk” – all of these are crucial here.

All banks are different. They may not have lent to the same client or group of clients, the quality of their assets may not be the same, as may their capital base and profitability. Their management efficiency or level of automation to ensure the tamper-proofness of transactions may also differ.

Our banks and the leaders of those banks need to make sure that they have a comprehensive checklist that they and other members of the bank can follow. The foundation of the banking profession rests on generating trust and ensuring compliance. This checklist method is still lacking in many of our banks today.

It not only provides a manager with a method to ensure compliance, but an organization-wide effort to ensure a standard operating procedure that makes these checklists mandatory. And it will make it easier to track and evaluate the performance of leaders. Implementation issues can be discovered much earlier and can prove the difference in any situation.

Therefore, I urge all of our banking leaders, especially trade professionals, to further review our existing trade enterprise, processing and settlement model, to incorporate the IT delivery platform into it. information, the risk management model and the global commercial documentation model.

Bangladesh is an emerging trading nation with a trade volume of approximately $100 billion. However, our trade volume is set to increase with the increase in our exports and imports with the possibility of Bangladesh becoming a commercial hub. The entire global foreign trade regime is going through a period of transition.

With increased international trade without letters of credit or extremely competitive prices or discounts, such challenges are bound to arise as well. More intermediaries joining shipping or financing channels is cause for concern. Global economic meltdowns at frequent intervals and emerging challenges arising from the shipping industry also raise issues that need to be addressed.

The climate crisis also causes headaches: food production influenced by the impact of climate change and the energy crisis due to the gap between demand and supply pose certain obstacles.

Finally, Bangladesh’s lack of assertiveness in international trade forums ensures that such challenges are likely to arise in the near future as well.


Mamun Rachid is a Financial Services (FS) Partner at PwC. He has held executive positions for three global banks for more than two decades.


Warning: 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

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