Prepared by: Rahim Diyar COMSATS WAH MBA -3B

(This case is based on reports in the print and electronic media. The case is meant for academic purpose
only. There is no intention to criticize any Corporate/Bank or the executives)

__________________________Case Study____________________________

Bank of Punjab Scam of 17 Billion

BANK OF PUNAB HISTORICAL BACKGROUND

Established in 1989, in pursuance of The Bank of Punjab Act 1989 and was given the
status of scheduled bank in 1994. The Bank of Punjab is working as a scheduled
commercial bank with its network of 273 branches at all major business centers in the
country. The Bank provides all types of banking services such as Deposit in Local
Currency, Client Deposit in Foreign Currency, Remittances, and Advances to Business,
Trade, Industry and Agriculture A wholly owned subsidiary of BOP was established in
1992 and is being managed by Punjab Modaraba Services (Pvt) Ltd.

First Punjab Modaraba (FPM) was established in the year 1992 and is being managed
by Punjab Modaraba Services (Pvt) Ltd, a wholly owed subsidiary of The Bank of Punjab
.Lending under Islamic mode of finance, main vehicles are Morabaha, Ijarah &
Musharika to encompass requirements of corporate, commercial and individual
customers.

Liability generation through COMs (Certificate of Musharika) offers attractive returns to

individuals and institutional depositors for fixed tenure instruments. FPM is working to
introduce new and innovative products to enhance its range of services.

Banking in Pakistan: An overview

The trend of loan advances on political consideration and practices of professional

dishonesty were at their height during 1980-90. Although the five nationalized
commercial banks showed some progress in the early years of privatization because
merger of small banks into a single entity and the expansion in bank operations for the

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 benefit of the people living in the remote and rural areas of the country, yet the expansion
in banking network proved counter productive later on as the branches operating in
smaller areas started showing losses during 1970-80. The Pakistan Banking Council
which was supposed to monitor banking sector decided to close down the operations of
the bank branches running in losses which ultimately affected growth of the banking
sector in 1980s as compared to the growth achieved in 70s.

It is worth mentioning that after privatization, the banking sector continued to experience
the ups and downs and failed to achieve a sustainable growth rate due to excessive
politicization in the financial sector.

From 1974, which was the year of privatization, and 1977 the size of the bank deposits
were doubled, however this pace of growth became stagnant during 1977-80. The next
five year from 1980 to '85 showed some improvement but again suffered a slow growth
rate from 1985 to 1988.

A quantum jump in the oil income of the Middle Eastern countries was however an
outstanding feature of the banking sector in Pakistan. As a result of that oil sector growth
in the Middle East, a large number of banks were established in those countries where
majority of the staff hailed from Pakistan. These banks established their branches in
Pakistan also. Since majority of the staff working in these banks were Pakistanis having
acquaintances with the high ups and the clientele of the upper class, they gave a tough
time to Pakistani banks both at home and abroad. Due to comparatively better facilities
and exclusive services provided by these banks to the clientele of the higher strata they
successfully attracted huge deposits from Pakistani as well as Middle Eastern countries.
Prominent among these banks were including BCCI, Middle East Bank, Bank of Oman
now called Bank AlMashriq, Emirate Bank and Doha Bank and two other banks opened
during that time by Bangladesh in Pakistan.

It was in 1990 when the wheel of banking sector started in reverse direction when Nawaz
Sharif government privatized two public sector banks. First of them was Muslim
Commercial Bank (MCB) which was handed over to Mian Mansha of Lahore
comparatively at a lower bid. After privatization of MCB, Hussain Lawai, a thorough
professional was assigned the task as the chief executive of that bank. Unfortunately,
Hussain Lawai, who had started his career from MCB, tried to have close association
with the top ranking politicians in the country and allegedly pleased them by offering
undue advances and violated prudential banking rules. His association with politicians of
a particular party brought a stigma on his professional expertise as he was found guilty
when the caretaker government came into power. Hussain Lawai somehow or the other
managed to leave Pakistan.

After his leaving of the country, Mian Mansha, who was the chairman of the bank, also
took over charge of the Chief Executive of the bank.

The other bank privatized by Nawaz Sharif government was the Allied Bank. It was sold
to the employees and the executives of that bank. This exercise created some problems in

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 the bank and the names of two chief executives of the Allied Bank started appearing in
the newspapers off and on. They had to face some legal issues and litigations.

According to current situation, National Bank is moving towards the status of first
position instead of the Habib Bank. The government in order to improve situation at
Habib Bank has appointed a professional from Citibank as the president of Habib Bank.
On the other hand, the United Bank which always showed remarkable profits, had to
suffer losses during 1995 for the first time in its history.

The facts and figures stated above indicate that the privatized banks have shown better
performance as compared to rest of the three banks running in the public sector. The
better performance shown by the privatized banks are attributed to their aggressive
marketing and banking policies. However some professionals are expressing doubts
about sustainability of their banking operations. The patriots are of the view that the
remaining banks in the public sector will not be handed over to the foreigners as a result
of privatization process being carried out by the government.

The government has recently privatized the Habib Credit and Exchange Bank formerly a
part of BCCI to the Al-Nayhan group of United Arab Emirates. Pakistanis have no
surprise or regret over this deal. Because there were heavy stakes of Shaikh Zaid Bin
Nayhan, President of UAE in the former BCCI. He tried to rescue the sinking bank when
it was falling.

CORPORATE GOVERNANCE AND BANKS:

Corporate Governance addresses results from the ownership and control, from this
perspective corporate governance focus on some structures and mechanisms that would
ensure the proper internal structure and rules of the board of directors, creation of
independent committees, rules for disclosure of information to shareholders and creditors,
transparency of operations and an impeccable process of decision making, and control of
management.

Banks, in broad sense are the institutions whose business is handling others people
money. Commercial Banks are those banks that deal directly with the general public, as
opposed to the merchant banks and other institutions more concerned with trade and
industry.

Banks are thus critical component of any economy, they provide financing for
commercial enterprises, basic financial services to a broad segment of the population and
access to payment system, and in addition some banks are expected to make credit and
liquidity available in difficult market conditions. Protecting the interest of depositors
becomes a matter of paramount importance to banks.

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 Bank of Punjab Billions Scam/

Fake Entity Behind The Scene: Haris Steel Mills

The recent scandal of Bank of Punjab (BoP), a unique fraud that involves billions of
rupees. The Central of Pakistan (SBP) regulates and monitors all the banking sector of
Pakistan has expressed its great concern over the system and controls in the internal
environment of the bank, while the internal audit of the Bank has repeatedly cautioned
the management on the huge facilities offered to certain companies.

Huge loans were issued to those entities that were not in real existed, and HARIS STEEL
was one them. The main accused involved in the Haris Steel scam has a long history of
committing bank frauds.
Before plundering billion of rupees from the Bank of Punjab, it was Faysal Bank and
Allied Bank that have been robbed by these people identified as the main culprits in the
Harris Steel Mill scam by both the NAB and the internal audit of the BoP. Who is who of
the main characters involved in this scam are as below.
Haris is the son of Sheikh Afzal. He alone owns about 130 luxury houses in the big
cities of the Punjab, mostly in the posh areas of Lahore. The net worth of these houses is
worth billion of rupees, according to the NAB findings. But the bureau is not sure where
the rest of the money obtained from the Punjab bank in the name of Haris industry, has
gone. The NAB findings also revealed that owners of this fake Harris Steel Mill invested
about Rs 4 billion in the real estate business.
Sheikh Afzal is the owner of Haris Steel, named after his son Haris (mentioned above). It
is note worthy here that on ground there is no such thing as Haris Steel Industries.
Afzals brother Seth Yaqoob, before this scam, had got loans worth over Rs 270 million
from Faysal Bank in the name of Sadia Ghee Mills and Iram Ghee Mills which were fake
in real.

A report submitted by the General Manager Audit to the Bank President on

May 25th,2010 that the Bank, instead of listening to earlier warnings, released more
money to such companies with which it was supposed to be careful in its future deals.

The GM Audit Muhammad Hanif wirtes, This is a third consccutive report in the series
of Audits conducted for the business deals with this group and its allied names ie Haris
Steel Milla etc. Given the serious, risk intensive irregularities pointed out in the aforesaid
Audits on November 7, 2006/ December 1, 2006 and February 2, 2007 in different
branches. The overall conduct for this relationship, in fact, warranted a more cautious
note for the Bank in the future deals with them. It is however, observed that Banks
exposure has instead increased in multiple during March and April 2010.

Bank sources said that irregularities worth Rs 6-8 billion were committed at the two of
the above three branches of the bank alone. These sources also claim that some

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 influential people were involved in what is dubbed by these sources was rip-off of
ordinary peoples money.

The bank management is, however, reluctant to talk on the issue. Despite repeated
efforts, no one was ready to offer the banks version on the story. The bank president was
said to be abroad. The presidents mobile and residence numbers were dialed but there
was no response.

The MD of the Bank, Haroon Aziz, was also contacted at his office number but he did
not return the call. The same was the case with Banks country head corporate credit
Khalid Qayyum.

The GM Audit, Muhammad Hanif, when contacted, confirmed the report. When this
correspondent read out selected contents of his report, he said that irregularities were a
routine in the banking sector.

In his report, a copy of which is available with this correspondent, Hanif said that
facilities being availed by Harris Steel and its Allied Accounts were intensely audited and
the irregularities observed were highlighted as per audit reports of November 7, 2006 and
December 1, 2006 to address audit comments like bills discounted under BOP L/Cs, by
BOP branches; bills discounted under other bank L/Cs, without seeking FIRMU
(financial institutional risk management units) allocation; and bills discounted against
third party (Allied Group Accounts) acceptances, etc.

But, the GM Audit pointed out that the Credit Risk Management Division (CRMD) of the
Bank issued Credit Bulletin No 035 (Revision I) on December 05, 2006, which was in
particular supportive to the fore stated customer, whose negotiation/discounting of
documents under BOP L/C by another branch was allowed and FIRMU approval
requirement was done away, irrespective of the size of exposure. However, FIRMU
approval for documents belonging to Allied Group accounts was prerequisite for
approval by CCC (Central Credit Committee).

To benefit from above change, several Proprietorship Accounts were opened at Tufail
Road, Corporate and Main Branch, Lahore, which on sample based scrutiny have been
found short to meet KYC (know your customer) requirement. Audit feels that a
maximum exposure limit must have been prescribed in the aforesaid circular instead of
an open end permission....

The audit report also revealed that the ID Cards submitted against borrowing accounts
with RF (running finance) facility upto Rs 20 million and L/C limit upto to Rs 15 million
were fake. The report said that Nadra had confirmed that these ID cards were fake. This
also reflects sheer negligence on the part of the branches and credit processing levels to
be sure that the persons whose accounts were opened or who were being given direct
funded facilities and indirect facilities were genuine and realistic.

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 The report added that two ID cards carrying the same name, the same fathers name and
the same signature were found having different photographs at Tufail Road Branch,
Lahore. The report asked: Why such irregularities were ignored and the accounts were
still opened, is a deplorable and serious question?

Referring to some of the overdue liabilities in Main Branch, Lahore, the report pointed
out i) Overdue acceptances of Rs 18,400 & mark-up Rs 3,661,982.95 of M/S Harris &
Haider Steel; O/S (outstanding) acceptances of Rs 1,462,519,500 & Rs 921,137,000 of
M/S Harris Steel & Haider Steel; Overdue RF facility of Rs 249.917 million of M/S
Harris Steel along with mark up Rs 10.120 million since 31-03-2007. According to a
source, the total securities pledged against these facilities are not even 30-40% of the
total money disbursed/advanced.

The report also identified the properties offered as collateral security and mentioned as
commercial/industrial land in the name of various individuals. According to a source, all
the pledged properties are actually agriculture lands and over evaluated. The report,
however, admitted that the properties were owned by persons who were either
guarantor/mortgagor or proprietor/partner in other group firms.

While referring to different cases of fake ID cards and the respective companies, the
report said, Out of the above-mentioned parties, inland traders were previously dealing
with Saudi Pak Bank, but no confidential report from the previous bankers of these
parties were called for and made a part of their Credit Proposals initiated from the
branch. This is said to be a serious violation of the State Bank rules.

On the basis of his analysis of the Bank record, the audit report revealed that, at least,
seven persons had been running two proprietorship concerns, against which they were
availing credit facilities, simultaneously. The outstanding liabilities against these persons,
it is pointed out, stands around Rs 5.43 billion.

The GM audit observed that Credit Bulletin No 35 (revised) provides open permission to
discount/negotiate document under BOP L/C. Such sanction should have been restricted
to a maximum exposure. Despite that the exposure under IDBPs rose to the extent of Rs
5.439 billion, it did not attract a notice at any level of Risk Management, the report
wondered.

The sources said that this was in violation of the State Banks prudential regulations that
restrict a bank from offering facilities to a certain limit. According to a source, a person,
Afzal, through his connections with the top bank management opened 16 companies
accounts in Davis Road and Tufail Road branches and was able to get credit line worth
billions of rupees.

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 Is this A Corporate Governance issue?

From all known resources and issues of providing huge loans to fake entities, in spite of
Auditor warnings, the main culprit now behind the bars that is the President of Bank was
involved in fraud cases like this for many years. Here the governance issue is not
negligible, and is big issue of corporate governance, Banks are the institution where the
depositors and public moneys is included, and these kind of personal frauds discourages
the depositors as well as the other corporate to do business with the banks.

What the corporate governance is concerned to protect the shareholders value, to

maximize their wealth through proper channels. To minimize the conflict between the
principal and agent, but in this case we blame the Central Bank, who is the regulator of
all the Banking sector in Pakistan, Why if for many years the culprits were using illegal
ways in the utilization of depositors funds , where was the Central Bank? Where were
external auditors? Where is the proof that SBP was regulating this Bank for decades
through proper channel? Where were the shareholders? Why they were unaware of theses
activities? Why complaints of the Internal Auditors were not considered?

These are the questions which required to be answered, in order to avoid such fraud cases
in the future.

Keywords:

COMs, privatization, Quantum Jump, commercial Banks,, Fake entities, CCC, mortgagor.

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 8

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 References and Notes Readings

Bank of Punjab website/History

Business Recorder

Business Week

The Daily Dawn

The News

Jhang News

Article by Nosheen Malik

Banking System in Pakistan by Shamshad Akhter

Geo News

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