Scandal puts Iranian banks on the defensive
It is hard to find an Iranian today who is not suspicious of the government and the ruling clerics. Rumors about corrupt officials have been circulating in the country since mid-1980s, and today the public is obsessed with high level corruptions revealed by the media. This report by Financial Times about the largest banking scandal in the history of the country, $2.8 billion, reveals the enormity of the corruption problem in Iran today. Of course, sanctions have created an underground economy that thrives on using the country's resources without any supervision or accountability.
Financial Times
December 7, 2011 3:18 pm
Scandal puts Iranian banks on the defensive
By Najmeh Bozorgmehr in Tehran
Iran’s weary bankers, the target of renewed sanctions by the US, Britain and the European Union, appear unsurprised by a financial scandal that is gripping the country. Instead, they see the alleged $2.8bn fraud as rooted in a poor regulatory and supervisory framework and widespread corruption.
“It would be surprising if no corruption happens in the existing banking system,” Hassan Sobhani-Nia, a banking analyst and former parliamentarian, told local media. The cynicism is not surprising.
Iran’s central bank tries to enforce recommendations envisaged in the first two pillars of the Basel accord on capital requirements, and, two years ago, the government of Mahmoud Ahmadi-Nejad, Iran’s president, announced it was embarking on banking reform as part of an economic recovery package. But the authorities have not moved to upgrade the country’s Islamic financial system and any revamping of banking rules to meet international standards has been slow, bankers say.
The need for stronger banking regulation has been raised in recent months following the disclosure of an alleged $2.8bn fraud that centres on Mah-Afarid Khosravi, a little-known businessman.
Mr Khosravi allegedly forged letters of credit from Bank Saderat, a partially state-owned bank, and gave the fake documents to seven other banks including Bank Melli, Iran’s largest state-owned institution.
The credit allegedly helped Mr Khosravi fund about 40 companies while he tried to buy a large state-owned steel factory with the support of the president under a privatisation plan. Mr Khosravi is reportedly in jail while his assets are frozen. His office has refused to comment on the case.
Banking analysts blame the absence of efficient regulatory and supervisory mechanisms and a scarcity of well-trained auditors for the alleged fraud. Iran’s banking system also suffers from low minimum capital adequacy requirements and minimal provisioning, they say. Non-performing loans amount to about a quarter of the total loan portfolio, according to bankers.
“There are more cases similar to Mr Khosravi’s, probably with lesser amounts, but the regime thinks more disclosures would further defame it in public eyes,” says one banker.
Shamsoddin Hosseini, Iran’s economy minister, admitted recently that fraud happened because of “inefficiencies of the banks’ supervisory regulations” that allowed “one group to fraudulently hold an enormous volume of banking resources for months”.
Another former senior banker says the accounting systems between bank headquarters and branches, and between banks, are not updated regularly and are not detailed enough.
“It may take one month or even one year for one branch of a bank to realise how much money it has borrowed from or lent to other branches of the same bank,” he adds. “The same is true between banks.”
This perhaps explains how the managers of Bank Saderat, as they have claimed, could not easily detect the allegedly forged letters of credit that amounted to 20 per cent more than the bank’s capital. Nor did Bank Melli notice it had paid over about two-thirds of the $2.8bn based on apparently fake documents.
Meanwhile, Iranian bankers seem obsessed with opening many branches, a trend that makes auditing difficult. Iran’s 28 banks have 20,000 branches, which means every bank has on average 714 across the country. Neighbouring Turkey has 49 banks with 6,000 branches, lranian analysts point out.
“Managing directors of state-owned and private-owned banks compete over opening more branches instead of trying to develop internet banking or strengthen profitability,” says a senior banker.
For now, solvency and profitability are not on the agenda; rather, banks seem keen to show they are closing loopholes to prevent fraud following the dismissal or departure of four managing directors at the banks involved in the alleged scandal.
Bank Saderat blocked up to 3m accounts last month because of “wrong” and “contradictory” information provided by depositors. There are also reports that many banks have tightened procedures and are reluctant to open letters of credits for the business community.
Many Iranians see such steps as too little too late, and consider the alleged Khosravi fraud as the tip of widespread corruption in the country.
Iranian judges investigating the affair have claimed senior government officials recommended Mr Khosravi to banks. Mr Ahamdi-Nejad has denied any such involvement and has countered by threatening to disclose alleged corruption on the part of his opponents.
This may be why Mr Ahmadi-Nejad’s opponents have toned down their attacks in recent weeks despite promises by the judiciary that the indictment will be released soon and anyone guilty will be punished.
Many Iranians believe fraud is carried out by those with political backing.
“They are cashing it out in banks. They cannot hide the money in their pillows,” a business consultant says.
Financial Times
December 7, 2011 3:18 pm
Scandal puts Iranian banks on the defensive
By Najmeh Bozorgmehr in Tehran
Iran’s weary bankers, the target of renewed sanctions by the US, Britain and the European Union, appear unsurprised by a financial scandal that is gripping the country. Instead, they see the alleged $2.8bn fraud as rooted in a poor regulatory and supervisory framework and widespread corruption.
“It would be surprising if no corruption happens in the existing banking system,” Hassan Sobhani-Nia, a banking analyst and former parliamentarian, told local media. The cynicism is not surprising.
Iran’s central bank tries to enforce recommendations envisaged in the first two pillars of the Basel accord on capital requirements, and, two years ago, the government of Mahmoud Ahmadi-Nejad, Iran’s president, announced it was embarking on banking reform as part of an economic recovery package. But the authorities have not moved to upgrade the country’s Islamic financial system and any revamping of banking rules to meet international standards has been slow, bankers say.
The need for stronger banking regulation has been raised in recent months following the disclosure of an alleged $2.8bn fraud that centres on Mah-Afarid Khosravi, a little-known businessman.
Mr Khosravi allegedly forged letters of credit from Bank Saderat, a partially state-owned bank, and gave the fake documents to seven other banks including Bank Melli, Iran’s largest state-owned institution.
The credit allegedly helped Mr Khosravi fund about 40 companies while he tried to buy a large state-owned steel factory with the support of the president under a privatisation plan. Mr Khosravi is reportedly in jail while his assets are frozen. His office has refused to comment on the case.
Banking analysts blame the absence of efficient regulatory and supervisory mechanisms and a scarcity of well-trained auditors for the alleged fraud. Iran’s banking system also suffers from low minimum capital adequacy requirements and minimal provisioning, they say. Non-performing loans amount to about a quarter of the total loan portfolio, according to bankers.
“There are more cases similar to Mr Khosravi’s, probably with lesser amounts, but the regime thinks more disclosures would further defame it in public eyes,” says one banker.
Shamsoddin Hosseini, Iran’s economy minister, admitted recently that fraud happened because of “inefficiencies of the banks’ supervisory regulations” that allowed “one group to fraudulently hold an enormous volume of banking resources for months”.
Another former senior banker says the accounting systems between bank headquarters and branches, and between banks, are not updated regularly and are not detailed enough.
“It may take one month or even one year for one branch of a bank to realise how much money it has borrowed from or lent to other branches of the same bank,” he adds. “The same is true between banks.”
This perhaps explains how the managers of Bank Saderat, as they have claimed, could not easily detect the allegedly forged letters of credit that amounted to 20 per cent more than the bank’s capital. Nor did Bank Melli notice it had paid over about two-thirds of the $2.8bn based on apparently fake documents.
Meanwhile, Iranian bankers seem obsessed with opening many branches, a trend that makes auditing difficult. Iran’s 28 banks have 20,000 branches, which means every bank has on average 714 across the country. Neighbouring Turkey has 49 banks with 6,000 branches, lranian analysts point out.
“Managing directors of state-owned and private-owned banks compete over opening more branches instead of trying to develop internet banking or strengthen profitability,” says a senior banker.
For now, solvency and profitability are not on the agenda; rather, banks seem keen to show they are closing loopholes to prevent fraud following the dismissal or departure of four managing directors at the banks involved in the alleged scandal.
Bank Saderat blocked up to 3m accounts last month because of “wrong” and “contradictory” information provided by depositors. There are also reports that many banks have tightened procedures and are reluctant to open letters of credits for the business community.
Many Iranians see such steps as too little too late, and consider the alleged Khosravi fraud as the tip of widespread corruption in the country.
Iranian judges investigating the affair have claimed senior government officials recommended Mr Khosravi to banks. Mr Ahamdi-Nejad has denied any such involvement and has countered by threatening to disclose alleged corruption on the part of his opponents.
This may be why Mr Ahmadi-Nejad’s opponents have toned down their attacks in recent weeks despite promises by the judiciary that the indictment will be released soon and anyone guilty will be punished.
Many Iranians believe fraud is carried out by those with political backing.
“They are cashing it out in banks. They cannot hide the money in their pillows,” a business consultant says.
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