Governance failings and appointment of politically linked people to the boards of public banks have been contributing to default on large loans, frequent scams and poor recovery of stolen money.
These open the door for corruption, money laundering, and financial crime risks, according to the Mutual Evaluation Report (MER) of the Asia/Pacific Group on Money Laundering (APG).
In the report, the Australia-based inter-governmental body fighting money laundering, said better government steps were needed to freeze assets early on during investigation and to bring back the money that had been laundered.
Default loans stood at Tk 111,347 crore as of April this year, said Finance Minister AMA Muhith in parliament on Monday. Just before the Awami League-led alliance assumed power in early 2009, the amount was Tk 35,000 crore.
Since 2009, the government had appointed politically linked people to the boards of public banks, much to the dismay of the central bank.
The recent APG report, prepared after its mission to Bangladesh late last year, referred to the $467 million loan scam of Sonali Bank (discovered in 2012), fraud involving $337 million of BASIC Bank between 2010 and 2012, and the embezzlement of $51 million from Janata Bank.
It said, “Significant involvement of politically exposed persons in the board and management [of state banks] and failings of internal controls and governance were common factors … .”
The report said politically exposed persons were present as beneficial owners or directors/managers of banks, securities firms and other businesses.
Abdul Hye Bachchu, the former BASIC Bank chairman, was blamed for damaging the bank through large-scale irregularities. Until 2009, BASIC was one of the best-run banks in the country.
Despite Bangladesh Bank's reservations, the government had appointed him for a second-term.
A year before the APG's mission to Bangladesh in 2016, the Anti-Corruption Commission had filed 56 cases in connection with the BASIC Bank scam but Bachchu was not accused in any of the cases.
"To date, no assets have been attached or frozen. Despite the BFIU [Bangladesh Financial Intelligence Unit] efforts to investigate, no monies have yet been uncovered in bank accounts that were able to be frozen under the BFIU powers," said the APG.
But in January this year Finance Minister AMA Muhith told The Daily Star, “I don't think that he [Bachchu] will escape the due process of law.”
Bachchu cannot go abroad without an approval of the authorities, Muhith added.
In 2015, the finance minister also expressed frustration. “Despite my efforts, I could not take a particular culprit to jail as people like him enjoy support from our [party] men. And that is why, I am extremely disappointed,” the Prothom Alo quoted him as saying on June 30, 2015.
Speaking about a loan scandal at Rupali Bank in November last year, Muhith said there was a time when we used to place people in the board on political considerations. But this has stopped.
“Not that we are always successful, as bad hats also make their way into the boards,” he added.
About the BASIC Bank's case, the APG said it was evidence of the authorities' poor use of formal and informal channels when large amounts of proceeds of crime were being taken out of Bangladesh.
“ … the authorities were aware of a significant amount of monies being sent to Malaysia, but no formal requests for assistance had been made at the time.”
The money laundering risks did not appear to have been well assessed in the country's national and scrotal risk assessment exercises, the report noted.
The APG, however, appreciated that Bangladesh had made significant progress since its last evaluation in 2009, reflecting political commitment and leadership on anti-money laundering and countering terror financing.
It said the inter-agency work to assess terror financing risks showed strength but more work was needed to assess foreign terror finance threats.
The APG praised the Bangladesh Financial Intelligence Unit (BFIU) of the central bank for seeking and receiving cooperation from its Malaysian counterparts regarding money flowing out of Bangladesh and sharing the results with the relevant law enforcement agencies.
The APG said Bangladesh should increase its use of mutual legal assistance (MLA) and extradition systems to make international requests for information and evidence.
MLA is a method of cooperation between states for obtaining assistance in the investigation or prosecution of criminal offences.
The report said Bangladesh Bank's supervision of a branch of Sonali Bank in 2012 identified evidence of corruption-related fraud by Sonali Bank's client, Hallmark Group, and its related fictitious companies.
Supported by the BFIU, the ACC investigated actions of companies, including Hallmark Group, over the allegation of embezzlement of about $454 million.
The APG, however, said the ACC did not pursue asset tracing and provisional measures during the enquiry. The BFIU did freeze 258 bank accounts, worth $4.2 million, whilst the ACC investigated.
During the investigation stage, the High Court division passed an order restricting the sale or transfer of all assets of the group.
The APG said the court order came in response to an application made by an interested advocate of the High Court division, not the ACC.
Bangladesh had four money laundering convictions and one acquittal until late 2016. Three of the four convictions were made in absentia, according to the APG.
At least 214 more money laundering cases were under trial, it said.
"Resource constraints and process challenges with the courts and trials lead to very lengthy legal processes and hinder effective money laundering investigations and prosecutions," observed the report.
Overall levels of confiscation were low, said the APG, adding that the law enforcement agencies generally did not effectively trace, restrain and manage proceeds of crime at an early stage in the investigations, which led to a limited ability to recover the money.
Ibrahim Khaled, a former deputy governor of Bangladesh Bank, said loans given through corrupt practices could be laundered abroad but it was tough to trace the money as it is mostly laundered through illegal channels.
He also touched upon the example of BASIC Bank, saying, “The money of BASIC Bank has been looted.”
Zaid Bakht, chairman of state-owned Agrani Bank, said there were incidents of loan money being taken out of the country.
“This is mainly done through over-invoicing. In a case of over-invoicing, a borrower opens a letter of credit involving money that is much higher than the amount needed for the import.”
He said loans approved through corruption and bowing to political pressure were difficult to recover.
In the current fiscal year, the government has set aside Tk 2,000 crore to recapitalise the scam-hit state-owned banks. With this money, the total bailout amount is Tk 13,655 crore in the last eight years.
Bangladesh is due to take over the APG co-chair role for 2018-2020 and would host an annual meeting during its two-year term.
Our reporter Md Fazlur Rahman contributed to this story.