Trust Bank story twisted

Interbank foreign exchange trading that caused big losses to at least eight banks about six years back has suddenly been twisted and wrongly labelled as 'money laundering', although the Bangladesh Bank had resolved them as transactional losses.
The false notion arose when an attempt was made on Saturday to file a case against Anti-corruption Commission (ACC) chief Hasan Mashhud Chowdhury. Efforts were made to implicate that Mashhud had laundered money from Trust Bank, of which he was the ex-officio chairman as the erstwhile army chief. The allegation was based on the fact that the bank had lost about Tk 22.41 crore in interbank foreign exchange dealings.
The Daily Star reinvestigated the issue, although it had reported the transactions years ago when a number of both private and state-owned banks had faced a few hundred crore taka loss through cross currency dealings.
For the sake of public accountability and for the fact that Mashhud holds a key post in the fight against corruption, this newspaper once again looked into the case, talked to a number of people ranging from central bank officials to chartered accountants to private bankers.
The Daily Star findings confirm that the accusations, as were mentioned in a Bangla daily Amar Desh and levelled against the ACC chief, are incorrect.
The losses that Trust Bank incurred, as did other banks such as AB Bank, Shahjalal Bank, and Sonali Bank, were purely transactional losses. The money was not laundered, nor did any one personally benefit from the deals.
Shahjalal faced a loss of Tk 110 crore, AB Tk 65 crore, and Sonali Tk 86 crore.
"Such deals are done worldwide," said a top central bank official. "These are not illegal, not money laundering."
CASE OF TRUST BANK
Trust Bank lost about Tk 22.41 crore in 2002 and 2003 when it ventured into interbank foreign exchange deals. It was purely the bank's management decision to delve into such transactions and the board had nothing to do with such day to day affairs.
When the first dealing started in January 2002, General Harunur Rashid was the chairman of the bank as the then army chief. Hasan Mashhud became its chairman in June 2002.
A short time later, Bangladesh Bank auditors first traced a huge amount of unreconciled money in many of the private sector banks including Trust Bank. Later, the money was traced back to foreign exchange deal losses.
When the matter came to Mashhud's notice, he took several quick actions including forming an inquiry committee appointed by the board. After the probe report, the board held three persons responsible -- the erstwhile managing director Zsahid Hossain Chowdhury, international division head Sabbir Ahmed, and dealer Mozammel Hossain.
All three lost their jobs and criminal cases were filed against them, moreover, money suits were filed against seven persons including the managing director.
The bank also decided to block disbursement of dividends as earlier calculations had been based on erroneous figures. But that decision ultimately lowered the bank's losses to Tk 14 crore in 2002. The next year the bank's loss decreased further to Tk 5.66 crore.
The now defunct Bureau of Anti-corruption (Bac) asked Trust Bank in 2004 to hand over all documents relating to the transactions and losses. The investigation apparently did not find any wrong doing.
The Daily Star contacted Hoda Vasi Chowdhury and Co, the chartered accountant firm that audited Trust Bank. A company spokesperson said what happened to Trust Bank and many others was basically business transactions, and the loss was just part of the deals as profit would have been. Such deals are not money laundering, otherwise no foreign exchange deals would have occurred globally. None of the directors of the banks could have personally benefited from the transactions as any loss or profit would have been reflected on the balance sheet.
RISE AND FALL OF BANGLADESH'S INTERBANK FOREIGN EXCHANGE MARKET
Before 1993, practically there was no interbank market. The banks used to buy and sell foreign currency from the Bangladesh Bank to cover their clients' requirements.
As there was no interbank market, the banks would not have any transaction among themselves. As a result the market was highly illiquid and devoid of any supply and demand mechanism.
When taka was declared current account convertible in 1993, the situation started to change. The Bangladesh Bank stopped providing the foreign currency window and encouraged the banks to trade among themselves, sparking a rapid growth of an interbank market.
Banks found that the development of interbank foreign exchange market was helping them in providing their customers with market based foreign exchange (FX) rates. That created competition among the banks, which in turn generated tangible financial benefits for the clients. This development also provided the banks with a new way of generating revenue. Earlier, the banks were dependent upon the interest income from loans and deposits as major sources of revenue.
Such operations obviously should have been backed by risk management and internal control processes for foreign exchange operations. Global foreign exchange market is a 24-hour trading and can even be very volatile. To protect the foreign exchange operation of a bank from such volatility the foreign exchange and money market activities of the bank need to be centralised under an independent treasury.
The treasury would carry out the transactions. The settlement of these transactions would have to be done by a separate independent unit called 'Treasury Operations' or 'Treasury Back Office'. The back office would not only settle the transactions, but also monitor whether the dealers are complying with various limits imposed by internal risk management and external regulators like the Bangladesh Bank.
There has to be strict adherence to the rules to counter party risk limit, dealer's individual limit, stop-loss limit, net open position limit and many others. The internal auditor of the bank should regularly review the process as well as the actual transactions to make sure that all foreign exchange activities are being done in accordance with the bank's declared policies and rules and regulations of the Bangladesh Bank. Not only the internal auditor but also the external auditors should verify those.
What actually happened in the early part of 2000 was that some of the banks were trading in cross currencies with an expectation that the market would move favourably. However, the market moved against their expectations, and their positions went bad.
To make the matter worse, the banks did not have sufficient control (both internal and external) mechanism to prevent the dealers from holding these positions for a prolonged period. As a result, the losses mounted up and severely damaged the capital of the banks.
The unfolding of these events reflects problems at various levels. The banks did not have sufficient internal control to thwart the potential risk involved in such trading activities.
This also means that banks engaged in such activities without a proper understanding about the risk involved. The external controllers of the banks, like the auditors and various regulatory bodies, also failed to identify the problem and to give cautionary signals.
All these things lead to a major finding -- absence of clear understanding among dealers, internal and external auditors, and regulators.
"Typical reaction to such crisis has been to vilify the trading activities and portray it as gambling, which is completely wrong," says banker Mamun Rashid. "Trading is like any other revenue generating activities of a commercial bank which involves taking a certain amount of risk. Just as by giving a loan to a client the bank takes risk, similarly by engaging in trading activities the bank also takes risk."
"The important issue is how to manage the risk. To manage the risk, the banks should have proper risk mitigating and internal control processes in place," he added.
The central bank later formulated a core risk guideline to reduce various risks of banks including that of foreign currency trading. The central bank also started annual auditing of dealers' rooms to detect any reckless transaction, and the dealers have been capped with limits of transactions.