As in other developed and developing countries, financial crime is a growing concern for the policy makers, banks and other stakeholders of the financial sector of Bangladesh. A recent study by Bangladesh Institute of Bank Management (BIBM) showed that about 65 per cent banks of Bangladeshi banks faced one or more financial crime incidents in their banks during the period from 2014 to 2016. Of the different types, cheque-related and online frauds are relatively more common. Cheque frauds are most common in the economies of other countries of the world also. However, money laundering has possibly become the most serious problem of the banking industry all over the world.
It is surprising to note that around 35 per cent of the Bangladeshi banks did not face any financial crime during the study period, 2014-2016. Though it looks very good that the banks did not experience any loss due to financial crimes, it is not unlikely that the banks were shy to disclose information about crime incidents. Moreover, some credit-related malpractices are yet to be regarded as financial crimes by the banks of the country.
The growing fraudulent activities are causing huge costs. The growing financial crimes in the global context imposed considerable burden in the form of huge compliance requirements on the banks. Incidents of trade-based money-laundering are a growing concern for policy makers and central banks throughout the globe. Though the sets of anti-money laundering (AML) rules followed in Bangladesh are in line with globally accepted standards, still there is scope to improve their enforcements. Banks need to be more serious regarding legal compliance and identifying right prices for the exportable and importable products. Compliance is already a serious concern for the banks, and they should be ready for the cost implications of such developments. Compliance of AML rules should be a collective concern. In several cases, failure to meet the compliance requirements resulted in hefty financial penalties. Alongside a good number of banks in the world, Sonali Bank Ltd of Bangladesh was fined by the UK supervisory authority for its failure to conform to the AML-related compliance requirements. In recent times, most of the banks of Bangladesh also faced cancellation of correspondent banking relationship in response to the development. It has brought new challenges to the facilitation of trade services. Though, most of the local banks found alternatives to support their clients in trades, the changes result in increase in cost and risk on the part of banks.
As regards to IT-related fraud, lack of knowledge and awareness regarding IT security amongst clients and a section of bankers are exposed in several instances in recent times. It has been found that a number of online-related frauds occurred just because of lack of proper knowledge regarding banking information security. It is also true that external crime groups are showing unprecedented smartness in accomplishing financial crimes in the area.
It is well known that non-performing loan (NPL) is a critical challenge for the banking sector of Bangladesh, and some banks are really struggling to address the problem. It is indeed essential now to draw a line between loan default for genuine reasons and willful defaults. The provision of loan classification norms of the country does not make distinction between willful and other forms of defaults; and there is no requirement to report to the central bank about willful defaulters. Other than the credit-related scams, credit default is hardly considered as a criminal offence. Incidents of malpractices in international trades due to the non-performance of the traders are not uncommon in the banking sector of the country. These cases of non-performance are also not considered as frauds. In the context of Bangladesh, money laundering cases are mainly trade-based. For obvious reasons, these incidents are not reported by the banks, rather unearthed by the regulatory agency.
Most of the major financial crimes associated with the banking sector in Bangladesh are revealed as scams not by the internal control system of the banks. Failures of credit-related internal controls and internal audits have become main concerns of the banking sector. Our legal system allows banks to take the defaulters to the court, but in most instances the legal process of recovering loan is perceived as complex and lengthy. As such, huge amounts of defaulted loans are waiting for recovery in the legal process. The outcomes of these legal proceedings are generally not inspiring for the plaintiff, and thus discouraging for the banks. In fact, our system has failed to create due legal and institutional pressure on the loan defaulters.
Due diligence is probably the most critical institutional challenge to address financial crime in the banking industry. In response to global development, especially related to money laundering and terrorist financing, regulators demand stringent KYC on the part of banks. The Know Your Customers (KYC) requirement for the clients of international trades should even be more rigorous. It is not only about regular assessment of the client alone, it is now also about the client's client i.e. KYCC. Till date the KYC issue did not get adequate attention from the local banks of the country.
Involvement of employees or committing financial crimes in association with the external crime groups by the internal actors are serious concerns for the banking industry of the country. The changing situation demands monitoring arrangement of the activities of the employees alongside the clients. Growing involvement of internal actors necessitates installation of the formal system of Know Your Employee (KYE).
There is no doubt that other than material impacts and financial losses, the incidents of financial crimes and frequencies of such crimes damage trust and reputation of banks and affect employee morale. Alongside other technical initiatives, bank leadership must ensure uninterrupted vigilance with respect to customers to detect transactions that are likely to be associated with financial crime. Developing ethical corporate culture and due motivation of employees are amongst the keys to address financial crimes.
Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).