The Hallmark Scandal

3588 Words May 24th, 2013 15 Pages
Introduction

Hallmark is the recent largest banking scam in Bangladesh, which occurred due to regulatory inefficiency of commercial banking sectors. It is a pointer to the fact that if you do not tighten the regulatory belt of the banks, serious problems could creep in. Source suggests, this particular business house is assumed to have resorted to fraudulent loan. A fraudulent loan is one in which the borrower is a business entity controlled by a dishonest bank officer or an accomplice; the “borrower” then declares bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank. This can also be seen as a component
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The solution to these problems is a Letter of Credit (LC). At the behest of a garments producer, a bank provides a fabric supplier with a LC that guarantees payment either at the time of delivery or at some later date. As shown in the figure below, Hallmark is accused of establishing fictitious companies, such as Anwara Spinning Mills, Max Spinning Mills, and Star Spinning Mills, which were shown as recipients of the LCs. These companies submitted falsified paperwork reporting deliveries of fabric to Hallmark, which were then paid for by the LCs from Sonali Bank’s Ruposhi Bangla branch. Because the fictitious companies and Hallmark had their accounts at the Ruposhi Bangla branch, on paper it looked like the branch’s assets and liabilities were balanced out.

Guarantee of Payment

Open LC Fake Documents

Partial Payment

Another financial practice, known as Inland Bill Purchases, was then used to spread some of the bad loans throughout the banking system. Because the still outstanding LCs was guaranteed by Sonali Bank, the fictitious textile companies were able to sell the LCs to other banks before maturity at a discounted price. As such, portions of the bad loans were passed on to twenty-seven other banks.

In
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