Private banking frauds

Posted on September 5, 2006
Filed Under >Bilal Zuberi, Economy & Development, Law & Justice
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014co1.jpgBilal Zuberi

It seems that the SECP (Securities and Exchange Commission of Pakistan) has finally decided to take strong action against CSIBL (Crescent Standard Investment Bank Limited) (See related ATP post on SECP and economic governance here). It is reported that the entire Board of Directors of CSIBL has been suspended, and its Chief Executive Officer (CEO), Anjum Saleem, has been restrained from officiating as CEO of the Bank, with immediate effect, by the Securities and Exchange Commission of Pakistan (SECP). In addition, the press release from SECP also stated that Badr-ud-Din Khan, a veteran international banker, has been installed as the Administrator.

This news has been long coming. CSIBL, and other subsidiaries of the Crescent Group, have been in the news for quite some time now for suspected fraud and irregular accounting. The fate of CSIBL, the largest private investment bank in Pakistan, was clear when on August 26 an “un-approved and un-audited” annual accounts for the year ended December 31, 2005 were published that showed a loss of Rs 2,118,546,000, or a loss per share of Rs 16.85. To the dismay of the shareholders, this meant the entire equity was eroded and the share value was thrown to a negative valuation of Rs 6.85 per share. (Source)

This episode is yet another painful reminder of the weakness of the financial regulatory and enforcement bodies in Pakistan. The scars of the Mehran bank scandal are not healed yet, and while CSIBL is now in the news, I suspect there are other institutions still operating that warrant an equally detailed investigation by SECP. This is only a symptom of a larger systemic problem.

In the boom of privatization of the finance sector, several private banks were created in the mid 1990s without setting up of adequate regulatory procedures. These banks were often established by successful Pakistani businessmen (sometimes with help from foreign funds) but a few mafiosos among them used the sudden availability of their ‘own’ banks to intimately tie up public money into complex financial agreements within large holding companies.

It wasn’t long before defaults on loans crept up and debt errors mounted into billions of dollars. In the case of CSIBL, external auditors had predicted a missing amount of over 6 billion rupees due to double book keeping and suspicious agreements with real estate and offshore companies. It is fascinating to note that CSIBL scandal was brewing along, just as the bank advertised that it was transforming itself into an all-Islamic finance bank. Additionally, it is disappointing that investigative agencies, which started their work months ago on the report of external auditors Ms A.F. Ferguson that irregularities worth billions of dollars were suspected, could only conclude with definitive action when the coffers were fully emptied out by the perpetrators.

The SECP press release said that the action had been taken after months of exhaustive investigations into the bank’s affairs, which revealed “severe and deliberate violations of legal requirements and serious financial irregularities, including but not limited to illegal maintenance of parallel accounts, concealment of bank assets, unauthorised massive funding of group companies, unlawful investments in real estate and stock market, etc”. (Source)

The SECP has directed CSIBL to cease extending financial facilities to its holding subsidiary or associated companies, which included the following: Shakarganj Mills Limited, Crescent Leasing Corporation Limited, Crescent Standard Modaraba, Safeway Mutual Funds Limited, Asian Stock Funds Limited, International Housing Finance Limited, Crescent Commercial Bank Limited, Picic Commercial Bank Limited, crescent.jpgPakistan Industrial Credit & Investment Corporation Limited, Crescent Standard Business Management (Pvt) Limited, Magrib Development Corporation (Pvt) Limited, Crescent Standard Aviation (Pvt) Limited, Crescent Brokage & Investment Services Limited, Crescent Capital Management (Pvt) Limited, Crescent Standard Business Management (Pvt) Limited, Crescent Ujala Limited, Crescent Standard Telecommunications Limited, Crescent Steel & Allied Products Limited, Crescent Modaraba Management Company Limited, Altern Energy Limited, Crescent Bahuman Energy Limited, Crescent Bahuman Limited, Crescent Sugar Mills & Distillery Limited, Crescent Textile Mills Limited, Crescent Knitwear Limited, Crescent Industrial Chemicals Limited, Crescent Group Engineering (Pvt) Limited, and Crescent Jute Products Limited.

This is not the last that we have heard of this story. It is rumored that a powerful federal minister with significant stake in the Crescent Group is also involved in this mess, whose influence in Islamabad almost led to the National Bank of Pakistan infusing Rs 2 billion into CSIBL to protect it (despite adverse reports from SECP and A.F. Ferguson). Thankfully that never materialized. This is interesting and we are watching. Will the SECP finally get some teeth?

10 responses to “Private banking frauds”

  1. mr x says:

    its now in the hands of other investors ho have done vat fraud in the uk look at igb uk

  2. Muntazar Bashir Ahmed says:

    So far the only good that seems to have happened is that CSIBL was sold and apparently no depositor lost their money.
    Sadly no fraudster was punished , the Crescent Group members are still in positions they held prior to the discovery of the fraud e.g. ERRA chairman was not changed.
    Until there is accountability there can be no progress- our economy is tottering on the brink of collapse precisely for this reason.

  3. Humair Qadri says:

    Thank you for highlighting this problem. It is becoming aserious issue and I know people who are in serious money management crises.

  4. Kazim says:

    Could you please provide an update on this case. Who got caught? Who went free?

  5. Mobin says:

    Mr. Bilal Zubari
    Quite intresting.
    But I am intrested to know, wether or not the report of auditors (M/s A. Ferguson & Co)was made to public or not, or published in any publication sated to have been handed over to SECP consisted upon 177 pages in february 2006.
    Secondly the bank was offering interest with a range of 22-55% which is unbelieveable. could you name any institution who invested on such high rates.
    I wellcome if you give me somne information directely to me at mobin

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