$1.6bn vanishes from Social Islami Bank through rogue LCs

The bank allowed two companies – one without a renewed licence and the other with no bonded warehouse – to open back-to-back LCs for the import of goods for years

The Social Islami Bank Ltd is facing losses of about $1.6 billion after allowing two companies to import goods for years using letters of credit that turned rogue.

An investigation carried out by the Bangladesh Bank revealed that Gazipur Sharp Knitting and Dyeing Industries did not renew the licence for its bonded warehouse for years, yet it was allowed to open back-to-back LCs.

Gazipur Blithe Fashions Ltd opened 350 back-to-back LCs and imported $5.5 million in raw materials without having any bonded warehouse.

The companies did not export goods that were supposed to be produced with imported materials. Central bank officials did not find the goods, which can match the imports, in the firms’ warehouses during an inspection.

Now SIBL is liable to pay for the imports of goods worth around Tk 160 billion.

Exporters can import raw materials with back-to-back LCs issued by banks against export orders. The payments are adjusted when the company receives the export proceeds.

Banks charge a certain amount of money as security to issue an LC. The exporters can procure raw materials after paying nominal duty under this facility.

A company must have an authorised bonded warehouse to apply for such LCs. If for some reason the export is not possible, or the company wants to sell other raw materials in the local market, it has to pay regular duty.

Goods are exported within six months of importing raw materials. And customers are able to pay off the import costs within a year thanks to the relaxation of rules by the Bangladesh Bank. This facility becomes unavailable once the export is carried out.

If a company fails to export goods, the liability of the goods imported by using back-to-back LCs falls on the bank. The bank then creates a forced loan against the customer.

The payable outstanding amount of Sharp Knitting and Blithe Fashions stands at Tk 165.72 billion

The companies availed back-to-back LCs from SIBL’s headquarters in Motijheel, and Banani and Mirpur branches.

As the central bank is investigating the scam, Bangladesh Financial Intelligence Unit is working to trace the money – whether it was laundered abroad. The Customs Intelligence and Investigation Directorate was also in the loop.

Zafar Alam, managing director of SIBL, said the bank was considering filing a case against the customers and contemplating collecting the funds by selling off their properties.

SHARP KNITTING

The central bank found out that SIBL allowed Sharp Knitting, which has its factory in Tongi’s Pagar, to open 889 back-to-back LCs over a period of seven years. The company did not make any payment for the LCs.

The imported goods were nowhere to be found in the warehouse or the factory.

According to the National Board of Revenue’s rules, all export-oriented companies must renew their licence for a bonded warehouse by paying Tk 5,000 every two years. And products can be kept at the warehouse for 24 months after manufacturing, while more time is allowed in the case of special goods.

Sharp Knitting acquired the licence for a bonded warehouse in 2003. Although it changed hands several times since then, the licence was never renewed.

The central bank report said the company would not qualify for duty concessions under the bond due to licence expiry, yet, SIBL continued to deliver Sharp Knitting duty cuts on imports citing the bond along with back-to-back LCs.

The Bangladesh Bank report also pointed out that the company’s factory had been shut for the last three months with only seven to eight employees providing security.

BLITHE FASHIONS

Blithe Fashions, located at Gobindabari in Gazipur’s Bara Bhabanipur, opened 350 back-to-back LCs worth $5.5 million at SIBL’s headquarters and Mirpur branch from 2015 to 2018 without having any licence for a bonded warehouse.

It also brought in raw materials worth $6.74 million by using 123 LCs in that period, but no goods were exported against raw materials worth $842,663.

The team from Bangladesh Bank did not find any product while inspecting the warehouse and the factory of the company. The factory was shut during the visit with only security employees from a private company present there.

Brothers M Samsul Arefin and Shahriar Parvez own Blithe Fashions, which shut down in 2018. They are currently in the United States.

Kabir Ahmed, another brother of Shamsul and Shahriar, said: “I’m no longer with Blithe Fashions. Around 100-150 people worked there when I was with them.”

SIBL MD Zafar said the irregularities occurred before he took charge in December 2021.

“We’re completing the process of filing a case against the customer under the Negotiable Instruments Act. We have collateral against the liability which will be settled by selling off the assets of the company.”