The Financial Express

Discrimination in the name of corporate governance, due diligence, compliance

| Updated: October 24, 2017 00:43:06

Discrimination in the name of corporate governance, due diligence, compliance

Few months back, one of the largest exporters in the USA had been struggling hard to realise undertaking from their bank to negotiate a LC issued by a commercial bank in Bangladesh. This is not any stray incident, rather a very common practice that LCs issued by the banks of many developing countries, including Bangladesh, are not accepted by the developed world unless 'add' confirmation is provided by any bank of the developed country. I have had opportunity to meet many bankers in Toronto and New York who are directly involved with international trade. Whenever an opportunity comes I ask some questions in respect of acceptability of financial instruments of our country's banks and on most occasions I do not get any satisfactory reply. One day, in reply to a question why 'add' confirmation is required for the LCs issued by the banks of our country, two bankers said that our country was small country and so credit risk (ability to pay in foreign currency) is very high. I pointed that when foreign exchange reserve of our country was only one billion US dollar, add confirmation was possibly necessary for the LCs issued by the banks of our country. But now this reserve has exceeded 25 billion US dollar, why is such requirement of add confirmation needed?
There is a common perception among the bankers and business community of our country that add confirmation is the demand of the importers which is not always true. The importers do not care about confirmed LC or unconfirmed LC. But importers' bank do not want to handle unconfirmed LCs and therefore they request add confirmation as part of their banks' requirement.
At a conference on the present and future strategy of international trade that I attended, most of the speakers stressed the need for add confirmation as a tool of mitigating credit risk to which the banks in developing countries are exposed. Some speakers moved one step ahead recommending retention of cash as collateral security (retaining US dollar in the account under lien) so that negotiating bank's risk can be mitigated well. In reply to my query, all the speakers and some participants flatly said that banks in developing countries are very small and their credit risk is abnormally high. I persisted and asked the discussion board to cite any instance of closure or bankruptcy of any bank in our country. However, closure and bankruptcy of banks and business entities is a very common phenomenon in the developed world particularly in the North American markets. Even there is no single instance of non-payment of LC by banks of our country due to their credit risk. Of course, there may have some instances of non-payment against LC but those are solely due to operational issues which might have arise over the discrepancy of the LCs which are very common practice in international trade. These non-payment is no way related to the respective bank's credit risk i.e. ability to pay in foreign currency. Nevertheless, add confirmation to our country's LCs is imposed as a requirement by the banks in the developed world.
During the last two decades, some ambiguous terminologies are being used in the financial industry and these are Corporate Governance, Due Diligence, KYC (Know Your Customer), Compliance. To speak the truth, whenever the world economy has taken the shift from British Economy to American Economy, these words has come to be used. These words or phrases have many advantages because these are not properly defined and resultantly the users may have immense opportunity to easily manoeuvre those terms to bring the situation in their favour. If anybody asks for the specific procedures to be followed in order to ensure corporate governance, hardly anybody will be able to mention the specific steps for ensuring corporate governance. Of course, there are innumerable essays, books and discussions on corporate governance but there is no written-down specific steps to ensure its practice in the business world.
CORPORATE GOVERNANCE: Paul Acheitmer, Chairman of Deutsche Bank, had brought a renowned lawyer, Georg Thoma, in the board as director. Acheitmer and Thoma have worked together more than two decades in developing corporate culture in Germany. In 2013 when Deutsche Bank desperately needed legal expertise to settle billion-dollar legal issues, Thoma was included as member of the board. As Thoma started investigating into the allegations, his relationship with the members of the Board of Directors (BoD) members got bitter. Even Deputy Chairman, Alfred Herling, openly criticised him saying that he was going too far and spending too much for proving any violation. Conflicts between Acheitmer and Thoma came into open and at a certain point, they clashed in the presence of supervisory board members.
This affair was covered by news media but I have not heard that any bank in an international financial market has taken any precautionary measures in dealing with Deutsche Bank. Their rating has not been downgraded. Their counterparty limits have not been reduced at all. Even no bank in the developed world has dared to ask for add confirmation for the LCs to be issued by this bank.
Corporate weakness in the operation of BoD is not the only case of Deutsche Bank alone; rather this is a very common phenomenon in the corporate culture of developed world. Last march, a group of activist investors, (Investors, usually hedge-fund who hold considerable amount of shares and influence the board to take decision in their favour) threatened the CEO of the Yahoo, Marissa Mayer, to remove her and entire board if the company did not sell itself first. After having been pressurized by the activist investors, Marissa Mayer finally came up with compromising proposal by offering them four seats in the Board of Yahoo. Corporate governance weakness is very common in the companies of developed world but very few are reported. Whenever some extreme cases like those of Deutsche Bank and Yahoo are exposed, people can know about  them but these are mostly ignored because they are too big to fail.
Now, an example of discriminatory treatment of corporate governance is from Brazil. The country now suffers from political uncertainties which have no direct link with the banking system, yet most internationally reputed banks have substantially limited transaction with Brazilian banks.
DUE DILIGENCE AND COMPLIANCE: Due Diligence and Compliance are two ambiguous terms which provide a wide scope of discriminatory use in evaluating performance of different companies. In 2015 Deutsche Bank AG agreed to pay 2.5 billion US dollar fines to US and UK authorities to settle the charges brought against this bank for its employees' involvement in LIBOR manipulation. Even this bank paid or set aside more than EUR 12 billion (USD 13.6 billion) to cover fines and lawsuits related to violation of various rules and regulations during the period from 2012 to 2015. Not only Deutsche Bank alone, many large internationally reputed banks, including BNP Paribas and HSBC, have paid billion-dollar fines but no bank's compliance has been questioned.
While no bank in our country has paid fine or penalty of a single dollar to US or UK authorities for any violation of rules and regulations, still poor compliance is the common allegation brought against our banks by banks and business communities of the developed countries.
 In fact, there is no hard and fast set procedures which can ensure due diligence and compliance. Whenever transaction is executed well without any wrongdoing, it is said satisfactory compliance and due diligence; alternatively, whenever any wrongdoing is detected, it is said compliance failure and unsatisfactory due diligence. Therefore, these financial ambiguous terms are being discriminately used to keep the banks of developing countries at a very low rating level and banks of our country have become the worst victim. In order to get rid of this situation, our banks need extensive overhauling. In addition, strengthening of regional trade and settlement, and reducing dependence on currencies of developed countries are required.

Nironjan Roy, CPA, CMA is a banker based in Toronto, Canada.

author's email address: nironjankumar_roy@yahoo.com


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