A report on the People’s Leasing and Financial Services (PLFS) – submitted to the High Court by the Bangladesh Bank in July this year with the appeal to liquidate the company – has revealed hundreds of cases of financial corruption.
The liquidation will be the first ever in the history of Bangladesh’s financial sector.
The audit report was conducted by external auditor Hoda Vasi Chowdhury in 2015 after a detailed investigation, which found substantial manipulation in the company’s financial statements between 2009 and 2015.
The corruption was committed through misrepresentation of financial figures, misclassification, overstatement and understatement in the financial reporting, which reflected how directors exploited the company mercilessly.
As an example, the PLFS had lent Tk5 crore to two borrowers named Euro Trading and Symphony Trading in 2010. Both borrowers are connected to the company’s ex-director Arafin Shamsul Alamin.
When the auditor asked for documents related to these loans, the company could not provide anything in this regard. Absence of necessary documents created significant doubt regarding the existence of such assets.
In another case, the PLFS paid Tk7 crore to buy 128,295 E-Security shares in 2014. The company paid Tk545.45 for each share against face value of Tk100. So, premium payment for each share is amounting to Tk445.45, reaching a total amount of Tk5.71 crore.
Former PLFS chairman Moazzam Hossain holds 45 percent share of E-Securities, while independent director Ehsan-E-Moazzam holds 10 percent.
The auditor could not calculate net asset value to confirm whether the premium is justified, as the PLFS did not provide any audited financial statement of the E-Securities, or any valuation of the shares to justify the price.
Moreover, shares of these E-Securities have not been transferred to the PLFS even after payment was completed.
Siphoning off money
Between 2009 and 2015, the board basically used the company as a vehicle for siphoning money through various means such as margin loans, loans taken in the names of other people, purchase of properties through related party transactions, issuance of bonus shares by showing false profit through deliberate manipulation of books of account.
The auditor found overstatement in assets of Tk309 crore and understatement of liabilities amounting to Tk887 crore to inflate profit of the company.
The company paid high taxes amounting to Tk68.46 crore during 2010-2014, despite not making any profit.
For instance, in 2010, the company declared highest 75 percent stock dividends on fictitious profit of Tk103 crore. That year the company paid taxes of around Tk17 crore on the profit.
In the investigation, the auditor found that ex-directors of the company owed Tk531 crore to the PLFS, which was 35 percent of the total loans as of September 2015. Most of the loans are long outstanding.
The majority of such loans were classified, but some of them were not classified properly.
In many cases, the loans were not classified as per the guideline. During investigation, 33 loans were found misclassified, out of which 13 were connected to the ex-directors of the company.
The auditor also found that risk assessments of individual borrowers were not properly carried out and securities were not taken for most of the loans.
Of the total default loan of Tk924 crore, more than 58 percent or Tk538 crore was found unsecured as of September 2015. Loans without security had put the company into huge risk and hurdles.
The auditor also found that the company paid Tk3 crore to GMG Airlines via the cheque of a private bank to buy its placement shares. However, the bank statement of that private bank showed a different cheque number was used to transfer the balance of Tk3 crore.
The company could not give any satisfactory explanation about the mismatch between the two cheques.
The company sold a motor vehicle for Tk5.36 lakh to former managing director Dalil-ul-Haque in 2014. But the company did not receive any cash against the sale of the asset, causing money loss for the firm.
Riddled with irregularities
During investigation, the auditor found that the PLFS showed Tk191 crore as advance against lease finance. But the company could not produce any documents in favour of the asset.
Later, the auditor found that a fictitious figure was created to match assets and liabilities and to overstate the profit.
This reflects substantial manipulation of financial statements, the auditor stated in the report. It also found that the term loans from other banks and financial institutions were understated by an amount of Tk206.28 crore.
In the financial statements as of September 2015, the total balance of term loans was disclosed at Tk233.10 crore, but the audit confirmed it as Tk439.4 crore through bank statements. The understatement of liabilities led to understatement of expense and overstatement of profit.
According to Financial Institutions Act, 1993, the person responsible for submitting false information in any statement is punishable with a fine of Tk10 lakh or with imprisonment for a term of three years or both.
The company understated deposits of Tk477 crore received from individuals and financial institutions. The management of the company disclosed term deposits of Tk1,110.8 crore whereas the auditor in its scrutiny found deposits of Tk1,587.8 crore.
The understatement of liabilities leads to understatement of expense and overstatement of profit accordingly. Detailed investigation found that the company totally omitted treasury loan amounting to Tk25 crore, which led to an understatement of expense.
The auditor also found significant understatement amounting to Tk74 crore. The company has shown balance of Tk65.86 crore for call loans and overdrafts, whereas the auditor found Tk88 crore for call loans and Tk51.86 crore for overdraft.
Overdraft allows the account holder to continue withdrawing money even when the account has no funds or has insufficient funds to cover the amount of the withdrawal.
These deliberate misstatements prove that little internal control measures were taken against manipulation, said the audit statement.
While going through details in interest income from loans, the auditor found that the company overstated Tk72 crore.
The company showed interest income amounting to Tk96.4 crore from different heads of loans, but the auditor confirmed Tk24.6 crore only based on related documents.
This deliberate overstatement reflects the window dressing of the company’s performance. The overstatement of income had also created unnecessary tax burden on fictitious profit.
Income expense of deposit and borrowing was understated by Tk111 crore to inflate profit. The company showed interest expense amounting to Tk90 crore in different heads of deposits and borrowings whereas the auditor’s scrutiny revealed Tk210 crore interest expense.
Illegal cash payment
The company paid Tk6.50 crore from 2009 to 2015 to buy gifts for its valued clients. But the auditor was not provided with any documents in relation to this expenditure.
The investigation later found that the amount was spent for the board meeting purposes in the name of expenditure for valued clients. This illegal cash payment indicates lack of corporate governance and threat to the existence of the company in the long run, the audit statement opined.
The auditor found that the company does not maintain fixed assets register with adequate information. Due to the absence of asset identification number, the company has inadequate control over its fixed assets.