Weak internal control system blamed for fraud at H&B Bank
KATHMANDU, Dec 16: Weak internal control system was the main reason that led to financial misappropriation at Kuleshwar branch of H&B Development Bank, banking experts have said.
Their statement comes at a time when the financial sector is still reeling under Thursday´s revelation of involvement of Niraj Nepal, H&B Kuleshwor branch manager, in check fraud case, which is likely to wipe away millions of rupees from the institution.
“The branch manager may not have been able to embezzle millions of rupees had the bank distributed administrative functions among different employees,” one of the leading bankers told Republica on condition of anonymity. His statement was backed by high-ranking officials of Nepal Rastra Bank (NRB), the banking regulator, which is also investigating the case.
Commercial banks, for instance, do not give authority to one person to complete a task. “Involvement of two or more people in a task reduces the risk of fraud, as it adds layers to decision-making process, raising chances of at least one person turning into whistle-blower,” the banker said.
But in the fraud case of H&B, Nepal was given too much of authority, which gave him the leeway to manipulate the bank´s system, according to preliminary investigation.
As per bits and pieces of information that are coming out, Nepal and at least three others - Manoj Chaurasia, Jay Kumar Yadav and Surendra Kumar Pradhan, who had accounts in H&B - are suspected to have laid the plot. It is said the three, along with Nepal, lured individuals - some of whom had accounts in H&B - into transferring the money to their accounts.
“The three - Chaurasia, Yadav and Pradhan - were successful in persuading individuals to transfer millions of rupees as they must have pledged high interest rates. They must have also said the transfers were for a short period of time, which made the offer even more attractive,” said the source, whose comment smacked of the devious technique used by groups that create fake bank transaction reports for individuals applying for visas of some developed countries.
Based on the amount deposited in the name of Chaurasia, Yadav and Pradhan, H&B, with direct involvement of Nepal, then issued good for payment checks, the source said. Since these checks are issued against deposits of accountholders and are considered as good as cash, financial institutions and people, who had extended loans to the three, readily accepted the checks. It is said some financial institutions even extended loans to the three against the checks, which goes against the norms set by the central bank.
But problems started cropping up after individuals and financial institutions that were handed the check could not convert them into cash, as H&B - once again with direct involvement of Nepal - had already removed the amount from the accounts of Chaurasia, Yadav and Pradhan.
As per normal banking practice, banks and financial institutions that issue good for payment checks freeze the amount equivalent to that mentioned in such checks and hold them until the checks are cashed. But Nepal, despite being at the helm of H&B´s Kuleshwar branch, did not heed the practice and released the amount before the checks were converted into cash, leaving bearers of such checks high and dry.
“Yes, many have held internal control system of the bank responsible for the fraud case. But this also calls the integrity of the manager into question, who instead of protecting bank´s interest went ahead and manipulated its system,” H&B CEO Jasoda Sainju told Republica.
Although the bank is quite certain about Nepal´s direct involvement in the fraud case, it is yet to determine damage caused by this episode.
“We are still taking stock of damage,” Sainju said. “Since last Thursday we have received many verbal complaints from individuals and financial institutions. We have asked them to come with a copy of the instrument (check) to ascertain the complaints are genuine.”
Sainju also said the bank has also almost completed checking personal accounts of depositors at Kuleshwar branch to ensure their cash was not embezzled. “We will come up with a report soon,” she said without elaborating. She, however, clarified that the bank will extend compensation to people who were issued good for payment checks. “They might have to wait until the investigation is complete but they will be paid,” she said