Sonali Bank Scam: Investigating Accounting Fraud in Bangladesh

This case study investigates the Hallmark-Sonali Bank scam of 2012, a significant accounting fraud that shook Bangladesh's financial sector. The report details the overview of Sonali Bank Limited, its mission, vision, and financial history, followed by an in-depth analysis of the Hallmark scam, including the illegal distribution of loans amounting to Tk36.48 billion. It examines the impact of the scam on the economy, leading to money scarcity, a potential collapse in the banking sector, and insufficient investment. Furthermore, the case study highlights the problems within Bangladesh's financial sector, such as low asset quality, lack of good governance, accountability, transparency, and inadequacy of effective risk management systems. The document concludes by discussing the consequences and implications of the scam, offering a comprehensive understanding of the accounting fraud and its wide-ranging effects. Desklib provides access to this and other solved assignments for students.

ounting Fraud T e all ar onaliAcc : h H m k – S
an aB k Sc m 2012
a ul uda Ma u darBy N zm H j m 27 Fa le abbij R 37 a ia ultana brit, P p S A y47 e nu a Tabassu, R h m m
unuJh 93 and Far ana Mu taj k 107

ntrodu tion1.0. I c
Finan ial s ste is ost i ortant art of an e ono T is finan ial s ste o rises ban sc y m m mp p y c my. h c y m c mp k
and non ban finan ial institutions F s ot ban s and finan ial institutions are engaged in- k c (NB I ). B h k c
obili ing fund fro sur lus unit to defi it unit of t e e ono Finan ial institutions arem z m p c h c my. c
engaged in finan ial inter ediation e anging finan ial assets on o n be alf and onc m , xch c w h
usto ers be alf assisting in reation of finan ial assets ro iding in est ent ad i e andc m h , c c p v v m v c
anaging ortfolio of t e arti i antsm p h p c p .
T e finan ial se tor of anglades is generall s all and unde elo ed T is se tor onsists of ah c c B h y m v p . h c c
ban ing seg ent and an e erging but still ro ising a ital ar et seg ent T e ban ingk m m p m c p m k m . h k
seg ent in t e ountr is relati el ore de elo ed t an t e e uit ar et seg ent e enm h c y v y m v p h h q y m k m , v
t oug bot are uite underde elo ed in international o arison T e root auses ofh h h q v p c mp . h c
anglades i finan ial se tor roble s are t e la of ar et dis i line due to la ofB h c c p m h ck m k c p ck
o etition in t e ban ing industr essi e go ern ent inter ention and oliti alc mp h k y. Exc v v m v p c
onne tion e ono i and oliti al orru tions o erational and anagerial ineffi ien andc c c m c p c c p , p m c cy
ineffe ti eness result in i ious ir le t at in ibits e ono i de elo ent industriali ation andc v v c c c h h c m c v pm , z
so ial rogresses in oor and de elo ing ountries in general and in anglades in arti ularc p p v p c B h p c .
T e finan ial se tor is a ital art of an e ono be ause of t e role it la s in inter ediatingh c c v p c my c h p y m
sa ings of t e ri ate and ubli se tor to rodu ti e a ti ities in luding in est ent angladesv h p v p c c p c v c v c v m B h
finan ial s ste is do inated b t e ban ing se tor i funda entall de ends on s ortc y m m y h k c , wh ch m y p h -
ter and ediu ter de osits for finan ing t eir lending ortfolios T is li its a ailabilit ofm m m- m p c h p . h m v y
funds t at ould be re uired for long ter in est ents li e infrastru ture and ousingh w q - m v m k c h .
anglades as a a ital ar et it its no n diffi ulties and t ere is no ibrant se ondarB h h c p m k , w h k w c , h v c y
ar et for bonds i li its t e a ailabilit of resour es for infrastru ture finan ingm k , wh ch m h v y c c c .

er ie of t e Co an onali an i ited2.0 Ov v w h mp y (S B k L m )
Mission2.1
 tending a ole range of ualit rodu tsEx wh q y p c .
 su orting di ergent needs of eo le ai ing at enri ing t eir li espp v p p m ch h v .
 Creating alue for t e sta e oldersv h k h .
 ontributing to ards so io e ono i de elo ent of t e ountrc w c - c m c v pm h c y.
ision2.2 V
 o iall o itted leading ban ing institution it global resen eS c y c mm k w h p c .
Finan ial istor of onali an2.3 c H y S B k
onali an as establis ed in under t e anglades an s ationalisation rderS B k w h 1972 h B h B k (N ) O ,
t roug t e a alga ation and nationalisation of t e bran es of ational an of a istanh h h m m h ch N B k P k
an of a a al ur and re ier an bran es lo ated in ast a istan until t eB k B h w p P m B k ch c E P k h 1971
anglades iberation ar en it as establis ed onali an ad a aid u a ital ofB h L W . Wh w h . S B k h p p c p 30
illion ta a n its aut orised and aid u a ital ere T billion and T billionm k . I 2001, h p p c p w k 10 k 3.272
res e ti el resentl its aut orised and aid u a ital is T billion and billionp c v y, P y, h p p c p k 10 10
res e ti el T e ban s reser e funds ere T illion in and T billion onp c v y h k' v w k 60 m 1979 k 2.050 30
une n as stolen fro t e an C ber ri inals using t e iftJ 2000. I 2013, $250,000 w m h h k hy y c m h Sw
nternational a ents net or n t e an signed an Me orandu of nderstandingI p ym w k. I 2016 h B k m m U
it a alw h P yP .
b e ti es of onali an2.4 O j c v S B k
onali an belie es t at it ill be o e a leading ban in t e go ern ent se tor T e belie eS B k v h w c m k h v m c . h y v
t at t eir ai s and ob e ti es an onl be reali ed full and sustained o erti e b fait fulnessh h m j c v c y z y v m y h
to et i s t at annot al a s be built into sets of rules and regulations n t is belief in et i sh c h c w y . I h h c
t at oti ates t e ban in its dealings it usto er regulators e lo ees a or ob e ti esh m v h k w h c m , mp y . m j j c v
of t is ban are o it ent to lients of t e ban ersonal ban ing rural redit i ro redith k c mm m c h k, p k , c , m c c ,
international ban ing i ort and e ort finan e industrial finan ing so ial ser i es etk , mp xp c , c , c v c c.

T e all ar onali an a3.1 h H m k-S B k Sc m
T e onali an is not onl t e largest nationali ed ban in anglades but also t e biggesth S B k y h z k B h, h
o er ial ban in t is se tor a ing t e res onsibilit to erfor t e treasur fun tion of t ec mm c k h c h v h p y p m h y c h
entral ban in la es ere anglades an does not a e its bran es in e t e liberationc k p c , wh B h B k h v ch . S c h
of t e ountr onali an as been fun tioning it full onfiden e of t e eo le and t eh c y. S B k h c w h c c h p p h
nation as a ole T e all ar sea as not onl t ro n t e onali an in a "bla ole" butwh . h H m k m h y h w h S B k ck h ,
also ruined t e trust and onfiden e of t e eo le in t e entire ban ing se torh c c h p p h k c .
Ma a re ort fro t e anglades an re ealed t at t e u os i angla otel ran ofy 2012, p m h B h B k v h h R p h B H B ch
t e state o ned onali an anglades s largest o er ial ban illegall distributedh - w S B k. B h' c mm c k. y
T billion illion in loans bet een and T e largest s are of Tk36.48 (US$460 m ) w 2010 2012. h h , k
billion illion ent to t e no infa ous all ar rou26.86 (US$340 m ), w h w m H m k G p.
T e ban s board a ro es riting off total bans of T rore ro ided to its lients T eh k' pp v w k2,086 c p v 23 c h
state o ned o ali an as ritten off t e loans e be led b t e all ar rou as t ere- w S m B k h w h m zz y h H m k G p, h
is no o e of getting t e one ba T e e e uti e o ittee of onali an a ro ed ah p h m y ck. h x c v c mm S B k pp v
ro osal to rite off a T rore loan in fa our of lients in luding t e s a itp p w k2.086 c v 23 c , c h c m-h
all ar art fro all ar t e o ittee as also ritten off t e bad loans of ot erH m k. Ap m H m k, h c mm h w h 13 h
lients fro arious bran es of t e ban f t e loan a ount around T rore as beenc m v ch h k. O h m , k 1.700 c h
ritten off against t e loans of t e all ar rou fro t e u os i angla otel bran andw h h H m k G p m h R p h B H ch,
ot er lients fro ot er bran es T e a ro al a e at t e t C eeting of onali an13 h c m h ch . h pp v c m h 35 h E m S B k.
T e board ade t e de ision at a ti e en t e ban is running it a a ital s ortfall of Th m h c m wh h k w h c p h k
rore394 c .
ressing on ern o er t e large loan rite off anglades an as underta en a o e toExp c c v h w . B h B k h k m v
e et er t e re uired ro isions ere follo ed before riting off t e loansch ck wh h h q p v w w w h .
ater on onali an filed ases against all ar rou as it failed to get bu ers for t eL S B k c H m k G p y h
ortgaged assets of t e o an T e ban fell into a ital s ortfall ile t e large loansm h c mp y. h k c p h , wh h ,
ta en t roug irregularities ent into default T en t e go ern ent in e ted around Tk h h , w . h h v m j c k2,000

rore in and T rore in for t e sur i al of t e ban o e er des ite largec 2013, k710 c 2014, h v v h k. H w v , p
loans being ritten off t e ban s o ed ig rofits in n fa t t e ban bagged anw , h k h w h h p 2014. I c , h k
o erating rofit of T rore and net rofit of T rore T e a tual rofits of t e banp p k855 c p k492 c . h c p h k
ould be as ertained ust after t e isit of t e anglades an in estigation tea said ac c j h v h B h B k v m. BB
re ie re ort on onali anv w p S B k.
T e ban also s o ed t at a ital s ortfall as redu ed to T rore last ear after t eh k h w h c p h w c k394 c y , h
re a italisation of large a ounts b t e go ern ent fro T rore in but t is figurec p m y h v m , m k895 c 2013, h
ig t be ig er t an t e ban s lai after t e in estigation as arried out b t e entralm h h h h h k' c m h v w c y h c
ban said t e re ort onali an as ritten off loans ort T rore during t e lastk, h BB p . S B k h w w h k2,946 c h
ear and res eduled loans of total T rore in and T e ban s default loany ch k2,756 c 2013 2014. h k'
rate a e do n to last e e ber due to t e res eduling and riting off of large loansc m w 28.54% D c m h ch w .
t ould a e e en rossed ad t ere been no res eduling and riting off saidI c h v v c 40% h h ch w ,
anglades an in its re ie re ortB h B k v w p .
T e osition of t e state o ned ban sli ed to fi e fro its re ious arginal le el of four inh p h - w k pp v m p v m v .
its C M rating during last ear as t e ban s finan ial ealt as onsidered unsatisfa torA ELS y h k' c h h w c c y.
ile t e fo us as understandabl been on all ar ot er o anies also arti i ated in t eWh h c h y H m k, h c mp p c p h
fraud in luding, c :
 T and rot ers T billionB h , k 6.10
 aragon rou T billionP G p, k 1.47
 a s i nit T illionN k h K , k 660 m
 orts T illionON Sp , K 330 m
 an a an li T illionKh j h A , k 50 m
T is is onsidered to be t e ountr s largest ban ing s andal t d arfs re ious fraud asesh c h c y' k c . I w p v c ,
su as a T billion etter of Credit fraud in C ittagong in a T billion fraudulentch k 6.2 L h 2007, k 5.95
it dra al fro riental an in and a T billion forger s andal inw h w m O B k 2006, k 3 y c 2002.
a t of all ar s a on e ono3.2 Imp c h m k c m c my

ortfall of one
1) Sh
m y: Mone s ar it is t e eno enon of insuffi ient li uidit in t ey c c y h ph m c q y h
e ono to finan e all ossible trades fter onali ban s s a if o on eo le s a ac my c p . A S k' c m c mm p p hy w y
fro t e ban s t is a ause s ortfall of one in ban ing se tor as ell as ot er finan ialm h k h m y c h m y k c w h c
se tors li e in est ent trade and o er e T is results in de ressed e ono i sc k v m c mm c . h p c m c .
Colla se in ban ing se tor
2) p k c : suall ban s olle t one fro de ositors and ro ide loan toU y, k c c m y m p p v
business entities and ot er borro ers fter t is uge onali an s a o on eo le ig th w . A h h S B k c m c mm p p m h
lose t eir trust in t e ban s T e ill not find it se ure to ee t eir one in t e ban s Manh h k . h y w c k p h m y h k y
of t e a e en be te ted to it dra t eir de osits in fear of a olla se of t e ban ingh m m y v mp w h w h p c p h k
se tor li e t e s are ar et olla se T is results in negati e i a t on e onoc k h h m k c p . h v mp c c my.
Cause insuffi ient in est ent
3)
c v m : in e ban s are er i ortant institution in finan ialS c k v y mp c
inter ediation in e ono i a ti ities t e la of trust in ban s as a er asi e effe t on t em c m c c v , h ck k h p v v c h
ole e ono s a result a great insuffi ient o urs in in est ent se torwh c my. A , c cc v m c .
a t of all ar s a on o an3.4 Imp c h m k c m c mp y
fter t e all ar s a onali an see s to be sin ing into a uag ire follo ing relentlessA h H m k c m, S B k m k q m w
oliti al troubles T e ban is fa ing roble s asso iated it its o eration Moreo er t ep c . h k c p m c w h p . v , h
ban is suffering fro an i age risis due to t e all ar loan s a T e ole situationk m m c h H m k c m. h wh
aused a uge do nturn in t e onali an s o erall onditions t ad de reased t e re enuec h w h S B k' v c . I h c h v
as ell as in reased t e o erall osts n t e ot er and it ad a great effe t on t e ban ingw c h v c . O h h h , h c h k
industr and in estors as elly v w .
T e in o e fro i ort as been in reased fro to but t e onali an adh c m m mp h c m 2010 2012 h S B k h
e erien ed a s ar de rease in e enues fro finan ing i orts de lined to Txp c h p c 2013. R v m c mp c k 1552
illion in fro T illion in and t is ad o urred due to t e re eal of all arm 2013 m k 2556 m 2012 h h cc h v h m k
s ac m.

roble s of finan ial se tor in anglades4.1. P m c c B ho ualit of asset
1. L w q y : n our ban ing se tor t ere are se eral roble s related to t e boI k c h v p m h w
ualit of assets i ban s are using da b da T e reser e re uire ent for our ar ingq y wh ch k y y y. h v q m h k
se tor is ere tatutor i uidit atio is in luding t e Cas eser e atioc 19.5% wh S y L q y R (SLR) 19.5% c h h R v R
C f an ban aintain ore one t an t eir re uired reser e it ill be no n or( RR) 6.5%. I y k m m m y h h q v w k w
stated as e ess reser e T e ade ua of t e re uired reser e of t e bar is er i ortant forxc v . h q cy h q v h k v y mp
an ountr s e ono be ause if an ban olds an e ess reser e t e one t at t e arey c y' c my c y k h y xc v h m y h h y
olding in t eir olts or ot er se tors ill be stated as idle one i brings no returnh h v h c w m y wh ch .
n our ban ing se tor t e rate of on erfor ing oan or is ontinuousl in reasing and itI k c h N -P m L NPL c y c
as been rea ed to t e a ount of illion in t e end of ont of e te ber f eh ch h m 567 B h m h S p m , 2013. I w
see t e data of t e of t e ear ill s o us t at fro t e end of ont e e berh h NPL h y 2012 w h w h m h m h D c m ,
to fro t e end of ont e te ber t e a ount of as in reased o er2012 m h m h S p m , 2013 h m NPL h c v 33
er ent during t ese fe ont sp c h w m h .a of good go ernan e a ountabilit and trans aren
2. L ck
v c , cc
y
p cy: T e bar ing industr of ourh k y
ountr as ontinuousl ade onsiderable rogress but des ite t is situation t e foreignc y h c y m c p p h h
ountries are onsidering our ban ing s ste or bar ing industr a ti ities as uestionable T isc c k y m k y c v q . h
o urs be ause re ent ne s about ban dire tors and air en s in ol e ent in oliti alcc c c w k c ch m ' v v m p c
arties " o t ere as been ossibilit to un and ban s i ortant deals it using t e ban sp . S h h p y h k' mp w h h k'
good ill i ill uestion t e fa tor t at is our ban ing industr and is o erations arew wh ch w q h c h k y p
inde endent reliable e ause of t e la of good go ernan e ate er t e ban s arep & ? B c h ck v c wh v h k
ublis ing in t eir annual re orts and regulator a er or s and t e data t e are utting inp h h p y p p w k' h h y p
t ose a ers are t e reliable or a tuall orre t re t ose a ers a e been ro erlh p p h y c y c c ? A h p p h v p p y
audited re ent ears t e gro t of redit is also de lining be ause of t e onse uti e? c y h w h c c c h c c v
onetar oli of anglades ar oliti al unrest un ertaint in our ountr and ost of allm y p cy B h B k, p c c y c y m
a of infrastru ture fa ilities and businessh ck c c .nade ua of effe ti e ris anage ent s ste
3. I q cy c v k m m y m: T e ris anage ent s ste is ah k m m y m
o bination of so e ter s i in ludes asset ualit a ital ade ua non erfor ingc m m m wh ch c q y, c p q cy, -p m
ban e enditure in o e ratio return on sset return on uit f e first tal, xp c m , A (ROA). & Eq y (ROE). I w k
about t e a ital ade ua e ust a e to sa t at t is is a us ion for a ban t at re entsh c p q cy w m h v y h h c h k h p v
ban failure Ca ital ade ua is easured b t e a ital to is eig ted sset T ek . p q cy m y h c p R k W h A . h
regulation fro t e entral ban is a o er ial ban as to aintain of ris eig tedm h c k c mm c k h m 10% k w h
asset or t i e er is ig er as t e ban s ini u re uired a ital(RWA) k.200 wh ch v h h h k m m m q c p
f t e ban s annot aintain or old t eir re uired a ount of a ital t en a situation a e uI h k c m h h q m c p h c m p
t is is referred to as " ortfall of Ca ital" esides t is ban ing se tor fa es t e follo ing se ereh Sh p . B h k c c h w v
roble sp m
o redit gro t1. L w c w h
n reasing trend of non erfor ing buns resulting to ig er ro isioning re uire ents2 I c -p m h h p v q m

nd sur lus li uidit3. A p q y
uggestions4.2 S
n t e ba dro of one of t e ban ing s andals t e follo ing ste s a be onsideredI h ck p h k c , h w p m y c :
1. T e onitoring s ste of anglades an s ould be strengt ened furt er and its audith m y m B h B k h h h
and ins e tion tea s s ould be e o ered to or inde endentlp c m h mp w w k p y.
2. eo le o a e e erien es in finan e e ono i s anage ent of finan ialP p wh h v xp c c , c m c , m m c
institutions not lean defaulters and eo le it onest and integrit s ould be, , p p w h h y y h
no inated to t e oards of all t e state o ned ban s as ell as in t e ri ate ban sm h B h w k w h p v k .
3. ignifi ant refor s are ne essar in finan ial and ban ing anage ent i a e beenS c m c y c k m m wh ch h v
long o erdue finan e and ban ing refor s o ission a be set u angladesv . A c k m c mm m y p: B h
an s a a it for effe ti e ob e ti e trans arent and a ountable ban su er isionB k' c p c y c v , j c v , p cc k p v
a be en an ed in luding enlarge ent of rofessional staff and e tension of itsm y h c , c m p , x
aut orit o er t e C sh y v h N B .
4. n a ointing t e C and F oards t ere a be a reser ation of so e uota forI pp h N B D I B , h m y v m q
non oliti al rofessionals-p c p .
5. uties res onsibilities and o ers of t e oard and t e anage ent of a ban ust beD , p p w h B h m m k m
learl delineated and enfor edc y c .

Con lusion5.1 c
ealt and sound finan ial se tor is needed for su essful i le entation of onetarA h hy c c cc mp m m y
oli i ensure ro er annelling of funds t us sti ulate t e gro t of t e e ono utp cy wh ch p p ch h m h w h h c my. B
re ent risis in t is se tor is in reasing t e o a it of t e finan ial s ste i finan ial sea sc c h c c h p c y h c y m. S x c m
a e ta en la e o er t e last se en ears in t e ountr total of al ost T rore ash v k p c v h v y h c y. A m k 30,000 c w
e be led in t e s a s ad a ridge ould a e been built it t at a ount of onem zz h c m . A P m B c h v w h h m m y.
f ate risis in t e ban ing se tor as ade t e finan ial se tor in anglades orst a ongO h c h k c h m h c c B h w m
t e e erging sian ountries refle ting t e oor ris anage ent abilit of anglades anh m A c c h p k m m y B h B k.
T e running risis in t e ban ing se tor ainl due to in rease in default loan refle ts t eh c h k c m y c c h
institutional ea ness of t e finan ial s ste in t e ountr e ent onse uti e eists inw k h c y m h c y. R c c c v h
ban ing se tor again s a e t e finan ial s ste as ell as t e e ono Continuous defaultk c h k h c y m w h c my.
loans s a s and eist ause in reased ost of find and s ortfall in a ital in t e ban s, c m , h c c c h c p h k .
o ern ent re a itali es t e s ortfall it ta a er s one instead of orre ting t e faults ofG v m c p z h h w h xp y ' m y c c h
t e institution i not onl in reases t e burden on ta a ers but also auses a loss to t eh , wh ch y c h xp y c h
e onoc my.