Executive Summary

Executive Summary The report is basically concentrated to the Hallmark scandal of Sonali
Bank Limited. We have found out the scandal through researching this topic on newspaper,
financial magazines and internet.
Firstly, there is a brief review on the academic resources regarding our auditing course and
then we move on directly to the case background. Then the report put light on the fraud
mechanism and discovery regarding Hallmark scandal.
It also focuses on the letter of credit issue as well. This scandal did not take place without the
help of members of Sonali bank. The amount of Hallmark scandal is so big that it is easy to
assign the contribution and involvement of managers and auditors. Then the report finishes
screening the after effects and present situation of the bank regarding the Hallmark scandal
case. There are lots of consequences of this scandal to thin bank and this report shows these
in a very serious concern.

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1.1. Origin of the Report

This report is prepared as an assignment for our Auditing Course (F-310) . While preparing
the report, we gave our best effort to incorporate the theoretical aspect of the subject while

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emphasizing on the practical implementation of the various strategic valuation model that we
learned in our course.

1.2. Objective of the report

The Objective of our report are

To fulfill the partial requirement of our course of Auditing

To achieve the deep knowledge about the Auditing.
To gain practical knowledge of the Audit methodology

1.3. Scope of the Report

The scope of the audit included an examination of all activities and its sub-components,
including the management control framework.

1.4. Methodology
In accordance with the audit objectives Internal Audit Standards, the audit was carried out in
three phases: the planning phase, the conduct phase, and the reporting phase. During the
planning phase, the auditors proceeded with a thorough review of documents provided by the
department, to gain an understanding of the overall policy framework, as well as the
processes relevant to the audit scope. The purpose of the planning phase was to develop a
Risk-Based Audit Program that provides a basis for the orderly, efficient, and cost effective
conduct of the audit as well as a criteria base for assessment. During the conduct phase, the
audit team visited, as per the scope of the audit. From these visits, the audit team selected
documents; conducted interviews, performed project file reviews, and debriefed management
on preliminary findings.

1.4. Limitations of the study

The limitations are

Lack of Experience

Lack of knowledge
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Time management

Lack of information

Page 4 of 42

2.0

Company
Limited.)

Overview

(Sonali

2.1 Mission

Extending a whole range of quality products.

supporting divergent needs of people aiming at enriching their lives.
Creating value for the stakeholders.
Page 5 of 42

Bank

contributing towards socio-economic development of the country.

2.2 Vision
Socially committed leading banking institution with global presence.

2.3 Financial History of Sonali Bank

Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order,
through the amalgamation and nationalisation of the branches of National Bank of Pakistan
Bank of Bahawalpur and Premier Bank branches located in East Pakistan until the 1971
Bangladesh Liberation War. When it was established, Sonali Bank had a paid up capital of 30
million taka. In 2001, its authorised and paid up capital were Tk 10 billion and Tk 3.272
billion respectively. Presently, its authorised and paid up capital is Tk 10 billion and Tk 9
billion respectively The bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion
on 30 June 2000. In 2013, $250,000 was stolen from the bank by Cyber criminals using the
Swift International payments network. In 2016 the Bank signed an Memorandum of
Understanding with PayPal.

2.4 Objectives of Sonali Bank

Sonali Bank believes that it will become a leading bank in the government sector. They
believe that their aims and objectives can only be realized fully and sustained overtime by
faithfulness to ethics that cannot always be built into sets of rules and regulations. In this
belief in ethics that motivates the bank in its dealings with customer, regulators & employees,
major objectives of this bank are commitment to clients of the bank, personal banking, rural
credit, micro credit, international banking, import and export finance, industrial financing,
social services etc.

2.5 Major Achievements

Cash recoveries from NPA This is one of the most notable achievements made by

Sonali Bank Ltd. in the overall performance indicators. The reduction in actual NPL level is
attributed to various methods used for cash recoveries of NPL including write-offs, out of
court settlements, rescheduling and appointment of private collection agents as well as bankwide efforts and introduction of an incentive scheme to reward employees for recovering
non-performing loans. Against the recovery target of Tk. 500 crore in 2008, SBL realized Tk.
Page 6 of 42

496 crore which represents almost 100% of the target and is the highest amongst SCBs in
terms of amount recovered in cash. All these contributed to reduction of NPL level as a share
of gross loans from 47 percent in 2007 to 33 percent in 2008. Despite the remarkable
progress in 2008, the NPL level of Sonali Bank is still the highest among the three stateowned commercial banks (SCBs) and needs further reduction, including realization of loans
from State-owned Enterprises (SOEs).

Business and revenue growth indicators and non-funded income is encouraging.

Revenue targets were met with "good loan" portfolio having a robust growth of 46% in 2008.
Meanwhile, conversion of Bangladesh Petroleum Corporation (BPC) loan into government
bond and increased market competition has seriously affected Sonali Bank's net interest
income and some of the operating efficiency indicators due to the larger share of BPC loan in
the bank's portfolio relative to other SCBs. Although net interest income is still negative,
increased business activity from remittances, letter of credit facilities, other fees and
commissions contributed to 29% growth in non-funded income in 2008, surpassing the target.
Strong inflow of remittances has helped increase deposits compared to 2007. Nonetheless, the
Bank performed comparatively better under this category with all indicators meeting the
target, but narrowly missing (69% in place of 70%) the target for low cost deposit as
percentage of total deposit.

Operating efficiency indicators Sonali Bank Limited (SBL) has achieved the net

spread & net interest margin targets. But it could be better enough which is missed because of
its larger share of low-yielding BPC bonds and concessional interest rates and this position is
indicating that banking sector is becoming more competitive. The target for net operating
income to total assets and cost to income ratio have not been achieved largely due to
increased operating expenses on amortization of intangible assets by Tk. 350 crore and salary.
Recent interest controls imposed by Bangladesh Bank will reduce the net spread in the
banking sector, but Sonali Bank would have to make extra efforts to enhance its revenue
generation ability in the face of escalating competition in the banking sector. SBL has the
scope to enhance its revenue generation by improving the Advance-Deposit ratio (AD ratio).

Profitability As per audited financial statements, SBL made net income before

provision and tax of Tk.161.6 crore in 2008, compared to Tk.424.6 crore in 2007. This
decline in profit has been caused mainly by increase in operating expenses (e.g., salary and
allowances increased by more than double in a year and amortization of intangible assets by
Page 7 of 42

Tk.350 crore in 2008). Though this reduction in net profit before tax had affected its ROA, it
has improved to 0.47 percent in 2008 from a negative 6.17 percent in 2007.

Staffing The target set for staff rationalization could not be materialized due to delays

in implementation of VRS scheme. Staff cost as percentage of total operating cost reduced to
52.7% in 2008 from 75.6%o in 2007. Income per staff has also improved from 0.11 to 0.12 in
2008. However, staff expenses to total income has increased due to increase in staff benefits.
Current figures may further deteriorate when Sonali Bank adopts a new pay scale without any
adjustments in the total number of staff via a VRS scheme. The number of staff has been
reduced by 703 in 2008, as a result of natural attrition and this trend will continue.

The Net Worth of the bank continued to improve under the review period. Given the

systematic importance of Sonali bank as the largest state-owned commercial bank, the capital
position needs to be further strengthened. The amount of actual provisioning for loan losses
remained higher than required provisioning in 2008.

Computerization Target on computerization of branches has been met with 56% of

deposits and 74% of loans procedures automated as of end 2008.

Disclosure requirements have been met with financial statements both for annual

statement and quarterly provisional (within one month) completed within the prescribed time
frame.

2.6 Performance Indicators for Sonali Bank Limited

The Implementation Support Mission of the World Bank visited the Bank recently on 16
November, 2009 and review the overall progress of implementation of the project with
particular focus on the sustainability of banking reforms and placed its comment as follows:A
significant achievement under this project has been the improvement in the financial
condition largely due to the Management Team that have been hired under this project. The
Management Team have not only turned the bank into operationally profitable organization,
but have also: improved customer services; introduced new products; developed policies and
manuals for effective and efficient operations of the bank; revised the organizational structure
of the bank; embarked on a comprehensive training program for staff; introduced incentives
for better staff performance; and are going ahead with the computerization of the banks
operation. The bank has maintained an increasing trend in deposits, loans, income, operating

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profits and net worth. Remarkable achievements have been made in recovering bad and
doubtful loans and reducing the ratio of non-performing loans to total loans. Moreover, the
Management Team is successfully meeting most of the Key Performance Indicators (KPIs)
agreed for the bank.

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3.1 Involved Branch:

The Ruposhi Bangla branch.
It found proof of massive irregularities in lending by state-owned Sonali Bank's Ruposhi
Bangla Hotel branch from 2010 to May this year. The officials of the bank's Ruposhi Bangla
Hotel branch breached the bank rules by giving loans beyond their permitted limits.

3.2 Involved Parties:

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There are some involved parties directly involved with this embezzlement is given below
Sonali Bank high-ups, including a deputy managing director, a general manager and
the branch manager, were directly involved in the scam.
The BB investigation found that Sonali Bank's Ruposhi Bangla Hotel branch lent
Hallmark Group and five other companies Tk 3,547 crore between 2010 and May this
year on fake documents. The businesses embezzled the whole amount that belongs to
depositors

in

collusion

with

some

bank

officials.

Of Tk 3,547 crore, Hallmark Group alone took away Tk 2,686.14 crore, T and
Brothers Tk 609.69 crore, Paragon Group Tk 146.60 crore, Nakshi Knit Tk 66.36
crore, DN Sports Tk 33.25 crore and Khanjahan Ali Tk 4.96 crore.
Of the six borrowers, Hallmark has been found to be the biggest fraudster.

3.3 The Process Of Misappropriation

Hallmark Group, has embezzled around Tk 1,492 crore from Ruposhi Bangla Hotel branch of
Sonali Bank by creating 804 letters of credit in a single day, according to Anti-Corruption
Commission

probe

findings.

The commission investigators said that the Hallmark Group in liaison with bank officials
opened 2.3 LCs a minute, as usually it needs minimum 1.3 to 2 hours for creating a new LC.
They said that the probe team found that it was a lone example in the countrys history that so
many

LCs

were

opened

in

day.

The officials said they collected a banks total LC opened in all branches statistic for a day
but have no instance of such record of 804 LCs opened in a single day.
The officials said that the team found that the Hallmark Group opened 804 LCs on December
29, 2011 worth Tk 1,492,15,25,477.80 while the Group embezzled Tk 1,568.39 crore creating
LCs out of total swindled money of about Tk 2,686 crore from 2010 to 2012.
The commission also found that the Sonali Bank Ruposhi Bangla Hotel branch on March 29,
2012 accepted Tk 450.34 crore Inland Bill Purchase from Hallmark Group while the Banks
head office issued an order on February 29, 2012 to all its branches as if any branch manager
are deputy general manager he/she will allow maximum Tk 30 crore IBP and if he /she are
assistant

general

manager

maximum

Tk

10

crore

IBP

in

year.

But the then branch manager AKM Azizur Rahman, who also was a deputy general manager,

Page 11 of 42

gave acceptance of Tk 450.34 crores IBP to the Hallmark Group violating the rules, ACC
said.
The Hallmark Group sister concern Max Spinning Mills and Anwar Spinning took the
acceptance from the Bank while the companies were already defaulters of around Tk 150
crore

loan,

ACC

findings

said.

Bank undertake obligation

Special oder given
Open 804 L.C. in a single day
Bank accepted inland bill
Branch manager give acceptance
This is the process how the fund transferred by the Sonali Bank. Here we have seen it takes
short time to do the fraud, even the embezzlement takes within a short period. The matter
help other concerned parties to find that fault.

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4.0 Role of Management

Nepotism or favoritism of any responsible authority is considered corruption. The stuffs of
Sonali Bank with association of one of influential bureaucrats from government held the
capital market into a huge liquidity crisis through this scam.

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Top management of Sonali Bank is primarily and mainly responsible for the Hall-Mark
Fraud. Sonali Bank Ltd suspended 17 of its officials for their alleged involvement in the loan
scam. The officials have been held responsible for unethical disbursement of loans to the
textile company Hallmark Group and some other firms, according to an investigation by the
central bank. Earlier, Sonali Bank suspended three of its officials accused in the fraud. They
are general manager of Ruposhi Bangla Hotel branch AKM Azizur Rahman, assistant general
manager Saiful Hasan and executive officer Abdul Matin.
The Anti-Corruption Commission investigated state-run Sonali bank's illegal lending of Tk
3,547 crore to little-known Hallmark Group and five other companies and the people
involved in the scam. A central bank probe found that Sonali Bank high-ups, including a
deputy managing director, a general manager and the branch manager, were directly involved
in the scam. The BB report said a general manager responsible for monitoring the branch's
activities completely failed to carry out his duties. The report also found involvement of Md
Mainul Haque, deputy managing director (international business), in the scam.

Involvement of management in Sonali Bank Scam:

Bangladesh Bank found proof of massive irregularities in lending by state-owned Sonali
Bank's Ruposhi Bangla Hotel branch from 2010 to May 2012.
1. Breaching rules and regulations:
According to bankers, a bank has to follow certain procedures before giving a loan to
businesses or individuals.
The bank did not follow the rules in giving the loans. But common people have too much
hassle while borrowing only Tk 50,000.The loan was disbursed even though none of the
borrowers put their signatures yet.
This is unprecedented in the history of our banking sector because the borrower is neither a
well-known nor a well-established company. It is in the air that this huge amount of money
has been given to the company by Sonali Bank, Ruposhi Bangla branch, in completely
irregular way which has been misused by the company.
2. Fake documentation:

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Before rendering credit facilities bank has to create charge over the securities through a
number of agreements, papers etc. which are called documents. The documents should
correctly be taken and examined by the bank in order to create required charges on the
securities in favour of the bank. The proper and correct documentation is essential from the
point of view of the safety of the banks interest.
Managing director of Sonali Bank said that dishonest officials of the bank disbursed the loans
without proper documentation. They did not verify the documents properly but lent Hallmark
Group and five other companies Tk 3,547 crore between 2010 and May 2012 on fake
documents.
3. Letter of credit:
There is an obligation of having minimum 10% margin of the total Letter of Credit (LC)
amount. If the client is unknown to the bank then cash margin should be 100%. In case of
LC, banks deal with papers not goods. So banks need to verify those documents. When the
documents of LC come to the bank, it must pay the LC amount to the exporter on account of
the client/importer.
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. On March 28 2012,
Hallmark opened local letters of credit worth Tk 500 crore in favour of 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 Banks Ruposhi Bangla branch.
Because the fictitious companies and Hallmark had their accounts at the Ruposhi Bangla
branch, on paper it looked like the branchs assets and liabilities were balanced out.
It means that Sonali Bank guaranteed LCs of three fictitious companies and also made
payments to them which reflect the fraudulent activities of the bank officials.

4. Lending beyond limits:

Page 15 of 42

The officials of the bank's Ruposhi Bangla Hotel branch breached the bank rules by giving
loans beyond their permitted limits.
According to the bank's rules, a deputy general manager can buy a maximum of Tk 30 crore
as acceptance bill from a group or organisation. But branch Manager AKM Azizur Rahman
bought acceptance bill worth Tk 500 crore that was given to Hallmark Group on a single day.
According to sources, under tremendous pressure from influential quarters, the Hotel Rupashi
Bangla branch of Sonali bank violated the central bank rules and approved and paid out loans
amounting to four times higher (multiplied to) than the actual deposits (security/mortgage)
submitted by Hallmark Group. High-ups of the Sonali Bank collaborated in approving the
loans.
5. Inadequate mortgage:
While lending depositors money, there should be guarantee of returning the funds.
Bank should exercises the lending function only when it is safe and that the risk factor
is adequately mitigated and covered. Safety depends uponi.

The mortgage offered by the borrower; and

ii.

The repaying capacity and willingness of the debtor to repay the loan with
interest.

Even though there were also not adequate mortgages offered by Hall-Mark and T and
Brothers, Sonali Bank accepted the loan proposals and disbursed the amount to them..
The Hall-Mark mortgaged 24.81 acre land while taking the loans of 2686.14 Crores between
2010 and 2012 and another 21.77 acre after the scam was detected in May. Similarly, T and
Brothers took nearly Tk 673 crore by mortgaging only 192.40-decimal land. After the scam
was detected, it mortgaged another 502.88 decimal.
6. Lack of governance and overall control
This fraud reflects the lack of governance and overall control of the Banks Board of
Directors, because they should have exercised their supervision and control over such a huge
amount of loan. It is important to look into how the Board of Directors as well as the

Page 16 of 42

management led by the managing director supervised the process of providing such a huge
amount to a single company.
Generally, the monitoring and control by the bank's Board of Directors and its Audit
Committee and the Asset Liability Management Committee (ALCO) are imperative in such a
big transaction. These activities were absence in this case. This is an instance of an amazing
combination of lack of supervision, control, unwillingness to take action, failure of policy
direction, greed, forgery and corruption.

Page 17 of 42

5.0 Role of Auditors

Page 18 of 42

Several inspections had been conducted to see which parties like the management or the
auditors are responsible for this forgery. Most of the inspection revealed that the management
of the Sonali Bank was mostly responsible for hallmark scandal. There was no evidence
about the involvement of auditors with this forgery. During the period between 2010 to 2012 two
audit firms were appointed as auditors for the Sonali Bank and they were-

Syful Shamsul Alam & Co.

Hoda Vasi Chowdhury & Co.

In 2011 and 2012, the auditors had given qualified opinion about the Sonali Bank's financial
statements becauseIn 2011, the basis for qualified opinion was1. Loans and Advances aggregating to Tk. 2,880 million have been identified as Nonperforming. Had provision been made on such non-performing loans and advances,
profit for the year would have been decreased by Tk. 2,405 million (Tk. 2,275 million
on account of additional provision and Tk. 130 million on account of transfer of
interest income to interest suspense account).
2. Interest receivable from Government against the exemption of loan is aggregated to
BDT 5,375 million. Neither any provision has been kept nor has any amount so far
received from the Government since 1994- 95.
In 2012, the basis for qualified opinion was1. Loans and Advances amounting to Tk. 9,383 million were found to be nonperforming as per Bangladesh Bank guidelines. In addition the base for provision was
found to be understated by overvaluing the collateral security of some bad loss parties
amounting to Tk. 2,169 million. Had provision been made on such non-performing
loans & advances, and the base for the provision were properly calculated the loss for
the year would have been increased by Tk. 7,886 million. (Tk. 5,414 million on
account of additional provision, Tk. 303 million on account of transfer of interest
income to interest suspense, Tk. 2,169 million on account of additional provision for
the understated base for provision).
2. Interest receivable from Government against loan exemption under jute sector reform
project 94-95 is aggregated to Tk. 5,362 million. Neither any provision has been kept
nor has any amount so far received from the government since 1994-95.

Page 19 of 42

There are some other issues to be considered which are

According to the functional audit report prepared by Syful Shamsul Alam and Co, a
chartered accountant and consultancy firm, in 2010, May, an amount of Tk 3,547
crore was disbursed as loans to Hallmark Group and other entities from the banks
Ruposhi Bangla Hotel branch.

In the functional audit report, it was stated that a mysterious delay in starting the
internal probe into a loan scam of the state-owned Sonali Bank had created a scope
for the bank to unethically disburse Tk 3547 crore as loan.

On the other hand, "Syful Shamsul Alam & Co." and "Hoda Vasi Chowdhury & Co." are two
reputed audit firms in Bangladesh because

More than two decades of the Firms operations, "Syful Shamsul Alam & Co." has
maintained successfully its reputation for professional competence, excellence in
assisting its clients and upholding professional standards and ethics in Bangladesh.
According to Bangladesh Bank listed Chartered Accountancy firms based on their
parameters this firm has been awarded the 2nd position in its latest ranking published
on 31/12/2013 based on our strengths.

Hoda Vasi Chowdhury (HVC) is one of the leading and oldest professional services
firms in Bangladesh. For about 50 years, HVChas provided high-quality financial,
taxation and management services to a diverse and successful client base operating
across various industry and business segment.

So, it can be said that, the auditors are not directly related to the forgery of the Sonali Bank's
hallmark scam. But Despite the violations of financial rules between 2007 and 2011, a probe
by the parliamentary committee noted that the Ruposhi Bangla branch was certified as a
low-risk branch by the inspection and audit team.

Page 20 of 42

6.1 Impact of hallmark scam on general

investors
Page 21 of 42

All banks collect money from investors or depositors and provide loan to business entities
and other borrowers. After this huge amount of money was taken out of Sonali Bank common
people might lose their trust in the banks. The general people will not find it secure to keep
their money in the banks. Maximum people of our country may even be tempted to withdraw
their deposits in fear of a collapse of the banking sector like the share market collapse. If
common people shy away from the banks this may cause a shortfall of money in our banking
sector as well as other financial sectors like investment, trade and commerce. If people
withdraw money from banks, then entrepreneurs would not get money from banks to invest
in productive sectors. As a result banks have fallen into a liquidity crisis and in the future
banks will be facing a lot of problems. Banks are the final destination of the investors and
depositors.

Since banks are very important institutions in financial intermediation in

economic activities, the lack of trust in banks has a prevailing effect on the whole economy.
Now we will see how Sonali Bank scam affects general investors to invest in the bank and
how it affects this banks investment in different sources also.
Impacts on companys deposits:
In the following table we can see Sonali Banks deposits of two years before and after the
fraud was revealed in 2012. Here we can see over the years the deposit has increased. But
their growth rate fluctuates. After the disclosure of the massive fraud of Hallmark in 2012 we
can see that the deposit growth rates have increased but at a rate which is below the rate
prevailing in the year 2010 (before the fraud occurred). It means before the fraud companys
deposits increased at 17.72% in 2010 and after the fraud this rate had reduced to 13.44%.
This is the result of investors reduced faith in this bank.
Name of Bank

Sonali Bank
2010

2011

2012

2013

2014

478134
17.72%

533,123
11.50%

599208
12.34%

685,755
14.44%

777,947
13.44%

Total Deposits
(TK in Millions)
Growth rates

Table : Deposits and its growth rates of Sonali Bank

Here we can see the negative impact of the fraud of the scam in graphical manner. It clearly
shows the drop of peoples investments in the bank.

Page 22 of 42

Deposit Growth rate

21.00%
17.72%
18.00%
14.44%

15.00%
11.50%

12.00%
Percentage

12.40%

13.44%

9.00%
6.00%
3.00%
0.00%
2010

2011

2012

2013

2014

Figure : Deposits growth rates of Sonali Bank

Impacts on companys loans and advances:

In the following table we can see Sonali Banks loans and advances of two years before and
after the fraud was revealed in 2012. Here we can see over the years the deposit has shown
drastic fluctuations. After the disclosure of the massive fraud of Hallmark in 2012 we can see
that the growth rate of loans and advances had decreased sharply from 9.36% to -9.17%.This
means Sonali Banks investment had decreased due to financial shortfalls resulted from the
scandal. In 2014 Sonali bank was able to reduce its negative growth rate but could not even
able to increase it at a positive rate.
Table : Loans and advances and its growth rates of Sonali Bank
Name of Bank

Sonali Bank

Total loans and advances

2010
286098

2011
348,091

2012
380,670

2013
345768

2014
339766

(TK in Millions)
Growth rates

23.83%

21.67%

9.36%

-9.17%

-1.74%

Page 23 of 42

Here we can see the negative impact of the fraud of the scam on the growth of loans and
advances given by the bank in graphical manner. It clearly shows the drop of the banks
capability to give loan which is a prime function of any bank.

Growth rate of Loans & Advances

30.00%
23.83%
25.00%
20.00%

21.67%

15.00%
Percentage

10.00%

9.36%

5.00%
0.00%
2010
-5.00%

-1.74%
2011

2012

2013
-9.17%

2014

-10.00%
-15.00%

Figure : Deposits growth rates of Sonali Bank

Sonali Bank confronted serious financial and leadership challenges after the fraud. It had to
cancel a Tk. 800 million loan in fall due to financial shortfalls, and it has had to borrow
heavily from other banks to stay afloat. Meanwhile, the Sonali Bank suffered from fund
crunch and could not finance the import payments of those already the bank taken
responsibility.
This type of mismanagement hampered the scopes for real businessmen to have loan and
impact negatively overall production.

6.2 Impact of hallmark scam on

company

Page 24 of 42

After the Hallmark scam, Sonali Bank seems to be sinking into a quagmire following
relentless political troubles. The bank is facing problems associated with its operation.
Moreover, the bank is suffering from an image crisis due to the Hallmark loan scam. The
whole situation caused a huge downturn in the Sonali Bank's overall conditions. It had
decreased the revenue as well as increased the overall costs. On the other hand, it had a great
effect on the banking industry and investors as well. The consequences of fraudulent on the
Sonali Bank Limited is given below-

Income from import:

From table 1, we can see that the income from import has been increased from 2010 to 2012
but the Sonali Bank had experienced a sharp decrease in 2013. Revenues from financing
imports declined to Tk 1552 million in 2013 from Tk 2556 million in 2012 and this had
occurred due to the reveal of hallmark scam.
Year

Income from import

2010

1,436,254,869

2011

2,861,559,542

2012

2,556,964,601

2013

1,524,260,175

2014

1,17 4,530,294
Table- 1 Income from import

The chart showing the trend of income from import is given below-

Page 25 of 42

Income from Import (million)

3500

2861

3000

2556

2500
2000
1436
1500

Income from Import

1524
1174

1000
500
0
2010

2011

2012

2013

2014

In 2011, the bank had the highest income from import, but there had been a huge decline in
2013 The bank was still trying to recover from that situation, but due to this unfavorable
situation and political turmoil the income was decreased further from that of 2013 which was
around 1174 million.

Operating income:
In the table 2, we can see the operating profits over the years from 2010 to 2014. In 2010 and
2011 the growth of operating profit is quite stable. But a drastic change in the operating profit
can be seen between 2012 and 2013. In 2013, the bank's operating profit had been a sharp
declined by -32.90% from the previous year.
Year

Operating profit

2010

20,588,351,730

2011

23,714,984,019

2012

22,620,415,897

2013

15,177,625,068

2014

21,723,612992
Table- 2 Operating Income

The chart showing the trend of operating income is given below-

Page 26 of 42

Operating Income (billion)

23.7

25
20.5
20

21.7

22.6
15.2

Operating Income

15
10
5
0
2010

2011

2012

2013

2014

Despite the sharp decline in the operating profit, Sonali Bank was succeeded to recover their
loss by the year 2014 and the operating income was increased by around 6.5 billion.

Total expenditure:
In table 3 it can be seen that though the expenditure was higher in 2010, it was lower in 2011
and 2012. But due to hallmark loan scam, the total expenditure was increased by 5.17% than
2012.
Year

Expenditure

2010

14,962,361,986

2011

11,237,253,965

2012

11,556,897,345

2013

12,154,359,104

2014

13,1121853,735
Table- 3 Total Expenditure

The chart showing the trend of total expenditure is given below-

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Total Expenditure (billion)

14.9
16
13.2
14
12.1
11.2 11.5
12
10
Expenditure 8
6
4
2
0
2010 2011 2012 2013 2014

Total Expenditure

The company was trying to recover from this situation by 2014, but it was not in favor of the
bank because the total expenditure had been increased by 7.90%.

Investment:
There had been a great impact on the investments of Sonali Bank. Because of the scandal, the
investment was also negatively affected. Although the investment by the government was
increased over the years, investment in other sectors was decreased drastically because of the
unfavorable situation occurred in 2012. The table showing the investment in other sectors
from 2010-2014 is given below-

Year

Investment by
government

Investment in other sectors

Total investment

2010

96,838,566,107

14,906,529,354

132,089,167,727

2011

119,359,837,845

12,729,329,882

147,018,999,055

2012

129,999,474,754

17,019,524,301

270,411,184,260

2013

253,779,613,829

16,631,570,431

270,411,184,260

2014

300,525,808,400
22,497,636,773
Table- 4 Total Investment

323,023,445,173

The chart showing the trend of total investment is given below-

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Total Investments (billion)

12
10

22
17
16

814
12
6
Government

25
20
15
10 Other Sectors

Other Sectors
Investment in government

By this chart, we can see that, the situation of 2012 did not affected the investment in
government and though the investment in other sectors affected, it was recovered by the year
2014.

LC (Letter of Credit)
Because of the hallmark scam, the banks income from opening LCs (letter of credits) came
down as the import activities of the Hotel Sheraton branch decreased. This is because a lot of
foreign banks refused to accept LCs issued by Sonali Bank.

Earnings per share

From table 5 it can be seen, the EPS was greatly affected by the hallmark loan scam and for
that reason the EPS for the year 2012 showed a huge negative value.
Year

EPS

2010

30.42

2011

108.65

2012

(222.04)

2013

30.64

2014

31.72
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The chart showing the trend of earnings per share is given below-

Earnings per Share

150

108.65

100
30.42
50
EPS

0
2010
-50

2011

2012

30.64

31.72

2013

2014

EPS

-100
-150
-200

-222.04

-250

Though the EPS showed a negative balance in the year 2012, in 2013 and 2014 it recovered
from drastic decline and showed the positive balances of 30.64 and 31.72 respectively.

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6.3 Impact of hallmark scam on economy

Shortfall of
money

Collapse in
banking
sector

Cause
insufficient
investment

1) Shortfall of money: Money scarcity is the phenomenon of insufficient liquidity in the

economy to finance all possible trades. After sonali banks scam ,if common people shy
away from the banks this may cause shortfall of money in banking sector as well as other
financial sectors like investment ,trade and commerce. This results in depressed economies.
2) Collapse in banking sector: Usually, banks collect money from depositors and provide
loan to business entities and other borrowers. After this huge Sonali Bank scam common
people might lose their trust in the banks. They will not find it secure to keep their money in
the banks. Many of them may even be tempted to withdraw their deposits in fear of a collapse
of the banking sector like the share market collapse. This results in negative impact on
economy.
3) Cause insufficient investment: Since banks are very important institution in financial
intermediation in economic activities, the lack of trust in banks has a pervasive effect on the
whole economy. As a result , a great insufficient occurs in investment sector.

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7.0 Changes in Regulations due to hallmark scam:

Changes in Regulations due to hallmark scam are
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a) Tax is implied over local LC after Hallmark scam.

b) Most of the commercial banks are now maintaining a cautious policy in purchasing in
c)
d)
e)
f)
g)
h)

land bills.
They are putting emphasis on enforced regulation
Now a days one banking staff must inspect the inventory of the applicant company.
Internal audit has been increased.
Documentation has increased
Regulation has been made to transfer each employee after certain period.
Inspection of Bangladesh Bank has increased.

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The state-owned Sonali Bank has written off the loans embezzled by the Hallmark Group, as
there is no hope of getting the money back.
The executive committee of Sonali Bank recently approved a proposal to write off a Tk2,086
crore loan in favour of 23 clients, including the scam-hit Hallmark.

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Apart from Hallmark, the committee has also written off the bad loans of 13 other clients
from various branches of the bank.
Of the loan amount, around Tk1,700 crore has been written off against the loans of the
Hallmark Group from the Ruposhi Bangla Hotel branch, and 13 other clients from other
branches.
The approval came at the 35th EC meeting of Sonali Bank. The board made the decision at a
time when the bank is running with a capital shortfall of Tk394 crore.
Expressing concern over the large loan write off, Bangladesh Bank has undertaken a move to
check whether the required provisions were followed before writing off the loans.
The BB investigation had earlier found that Sonali Bank's Ruposhi Bangla Hotel branch lent
the Hallmark Group and five other companies Tk3,547 crore between 2010 and 2012, using
fake documents.
Of the Tk3,547 crore, the Hallmark Group alone swindled Tk2,686.14 crore.
Later on, Sonali Bank filed cases against Hallmark Group as it failed to get buyers for the
mortgaged assets of the company.
The bank fell into capital shortfall, while the large loans, taken through irregularities, went
into default. Then, the government injected around Tk2,000 crore in 2013, and Tk710 crore in
2014, for the survival of the bank.
However, despite large loans being written off, the bank showed high profits in 2014. In fact,
the bank bagged an operating profit of Tk855 crore and net profit of Tk492 crore.
The actual profits of the bank could be ascertained just after the visit of the Bangladesh Bank
investigation team, said a BB review report on Sonali Bank.
The bank also showed that capital shortfall was reduced to Tk394 crore last year, after the
recapitalisation of large amounts by the government, from Tk895 crore in 2013, but this
figure might be higher than the bank's claim after the investigation was carried out by the
central bank, said the BB report.
Sonali Bank has written off loans worth Tk2,946 crore during the last year and rescheduled
loans of total Tk2,756 crore in 2013 and 2014.
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The bank's default loan rate came down to 28.54% last December due to the rescheduling and
writing off of large loans. It could have even crossed 40% had there been no rescheduling and
writing off, said Bangladesh Bank in its review report.
The position of the state-owned bank slipped to five from its previous marginal level of four,
in its CAMELS rating during last year as the bank's financial health was considered
unsatisfactory.

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9.0 Suggestions
In the backdrop of one of the banking scandals, the following steps may be considered:
1

The monitoring system of Bangladesh Bank should be strengthened further and its

audit and inspection teams should be empowered to work independently.

People who have experiences in finance, economics, management of financial
institutions, not loan defaulters, and people with honesty and integrity should be
nominated to the Boards of all the state owned banks as well as in the private banks.
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Significant reforms are necessary in financial and banking management which, have

been long overdue. A finance and banking reforms commission may be set up;
Bangladesh Bank's capacity for effective, objective, transparent and accountable bank
supervision may be enhanced, including enlargement of professional staff, and

extension of its authority over the NCBs.

In appointing the NCB and DFI Boards, there may be a reservation of some quota for

non-political professionals.
Duties, responsibilities and powers of the Board and the management of a bank must
be clearly delineated and enforced.

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10.0 Conclusion
Conclusion Sonali bank is a renowned name in the banking industry for a long time. It has
witnessed so much succession project during the past years. But it also confronts scandal
regarding Hallmark in recent years which is very crucial for the banking industry. The
scandal resulted from collusion between officials of Hallmark and Sonali Bank, in particular
between Tanvir Mahmud, Managing Director of Hallmark Group, and Azuzur Rahman,
Manager of Sonali Banks Ruposhi Bangla branch. Hallmark management exploited the
Letter of Credit (LC) system of financing trade. Hallmark is accused of establishing fictitious
companies, such as Anwara Spinning Mills, Max Spinning Mills, 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
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Banks Ruposhi Bangla branch. Because the fictitious companies and Hallmark had their
accounts at the Ruposhi Bangla branch, on paper it looked like the branchs assets and
liabilities were balanced out. Inland Bill Purchases was then used to spread some of the bad
loans throughout the banking system. Because the still outstanding LCs were 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 twentyseven other banks. The Hall-Mark had massively forged papers when taking out loan from
the bank. The banks officials are alleged to have colluded with this fraud. Bangladesh Bank's
investigation team identified the bank scams as a major crime. Bangladesh Bank found
massive corruption at Sonali Bank in 2010. At that time the BB did not take major steps
against Sonali Bank. The BB should demand fair probe into the Sonali Bank scam and
exemplary punishment to those involved in the scandal in the Sonali Bank. The BB knew that
something had happened like fraudulence in Sonali Bank, a state-owned bank. It reveals the
weakness in bank management and audit. The consequences of such a massive scandal are
very disastrous for the whole banking sector of the country. Sonali Bank confronted serious
financial and leadership challenges for this issue. It had to cancel a Tk. 800 million loan in
Fall due to financial shortfalls, and it has had to borrow heavily from other banks to stay
afloat. We may conclude the report by providing recommendations in respect of this situation.

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11.0 Bibliography
http://print.thefinancialexpressbd.com/old/index.php?
ref=MjBfMTJfMjNfMTJfMF8xODBfMTU0MDA3&feature=c3BlY2lhbHNOZXdz&na=Q
W5uaXZlcnNhcnkgSXNzdWUgMjAxMiAoUGFydCBUd28
https://www.google.com.bd/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjM37Xl4LR
AhVFa7wKHRTxBUsQFgghMAA&url=http%3A%2F%2Ffraudresearchcenter.org%2Fwpcontent%2Fuploads%2F2014%2F06%2FThe-True-Impact-of-Fraud-Proceedingshttp://www.assignmentpoint.com/business/financial-performance-analysis-of-sonali-banklimited.html

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http://archive.dhakatribune.com/bangladesh/2014/oct/29/%E2%80%98state-owned-banksplace-false-anti-fraud-control-measures%E2%80%99
http://www.sonalibank.com.bd/PDF_file/financialreport/2014/SBL-Fin&AdtRep-2014.pdf
ttp://www.sonalibank.com.bd/PDF_file/financialreport

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