No sooner had our banking industry tackled ATM fraud than the Bangladesh Bank (BB), the guardian of the country's banking sector, itself received a big blow of hacking money from its reserve account maintained with the Federal Reserve Bank of New York.
This is really a very alarming incident not only for our country's central bank but also for the world financial industry. The actual picture of the incident - how about US$ 100 million was hacked - is yet to be known because the matter is still under investigation.
The Finance Minister has threatened to sue the Federal Reserve Bank if the stolen money is not recovered through negotiations.
However, legal action is always the last resort which is applied when all available alternatives fail to produce fruitful result. Before taking legal action, there are many avenues to approach and get remedy thereby. In this connection, we will have to thoroughly investigate, collect evidence and substantially prove that the crime took place because of negligence of the Federal Reserve. Otherwise, the allegation against the Fed without substantial evidence will negatively impact its image for which it may come up with countermeasures. Reserve is not, however, required to go for filing counter legal action; instead their mere decision of not handling Bangladesh Bank's account may cause irreparable loss to our trade, commerce, economy and the country as a whole. Fed's such punitive tool is very effective and financial institutions all over the world are very scared of this action.
During the last couple of years, many European large banks including BNP Paribas were heavily fined by Federal Reserve on charges of regulatory violation and compliance issues and those financial institutions were not happy over the Fed decision. They initially decided to contest the Fed decision in the court but subsequently realised that if they lose in the court and in consequence, Fed comes up with their decision of suspending operation of their US dollar account, those financial institutions will be in severe crisis because about 70 per cent to 80 per cent international trade and transactions are denominated in US dollar. Apprehending such negative implications, those large financial institutions did not confront Fed, rather settled their issue out of court after paying billions of dollar fines.
However, it does not necessarily mean that Bangladesh will not go for legal action, but before initiating any legal action and making any derogatory comment involving Federal Reserve, Bangladesh will have to make sure with substantial evidence that our country has been aggrieved due to negligence of Fed. Even prior to initiating any legal action, some other measures like approaching higher authorities including Fed Chairman and the Congressional committee responsible for Federal Reserve System will have to be performed. America upholds the rule of law and every aggrieved party has a legitimate right to get fair justice in the eye of law.
We believe that the problem will be resolved before going to the court because recalling money wrongly sent out, compensation and reimbursement of fund misappropriated are a very common practice in North American financial industry.
ROLE OF BANGLADESH BANK: As soon as Bangladesh Bank noticed this fraudulent transfer of money from its reserve account with Fed, it took some measures with a view to recovering the stolen money. They have so far been able to identify the location of fund and the amount remitted to Sri Lanka has already been recovered. However, it maintained confidentiality which, we believe, was necessary. There are some unique situations, especially involving monetary transactions with international financial institutions where strict confidentiality is inevitable. Therefore when Deutsche Bank was referred to the matter for their comment, they refrained from making any comment while Federal Reserve Bank has simply said they are investigating and working with Bangladesh Bank. We believe Bangladesh Bank has so far moved in the right direction and has been handling the matter professionally. Bangladesh Bank has network link like FSB (Financial Service Board, a global group of regulators), BIS (Bank of International Settlement), FIU (Financial Intelligence Unit), World Bank, International Fund (IMF) and many other bodies and organisations whose cooperation and assistance will hopefully enable it to recover this money.
The BB needs some time and support from people to peacefully work for the recovery of this stolen money. Too much pressure from the media, talk shows, policymakers and above all, from the government may distract it from the right direction resulting in taking wrong decisions which will eventually jeopardise the whole measures so far undertaken.
HACKING OF SERVER AND MONEY SIPHONED OF: Hacking is very common in the era of Internet Technology (IT). The use of technology has come with the threat of hacking and no system in the world can be made so foolproof that can be kept out of hackers' reach. From pentagon to CRA (Canadian Revenue Agency) and many large North American banks which are believed to have established most secured system have been miserably the victim of hacking. So hacking is very common computer glitz and no appropriate security or firewall can be developed to protect the system from hacking threat.
However, hacking is mostly done for stealing confidential and personalised information from the main server of the system. The report of stealing money through hacking has not been heard that much. Because there are many control parameters in place for which human action is required at different tiers for final execution of the transaction and this control mechanism has so far prevented hackers from directly stealing money from the system. What they do is the collection of necessary information so that they can use this information for carrying out fraudulent activities.
Nevertheless, the possibility of hacking money from the BB reserve account with Federal Reserve Bank cannot be ruled out. But a question arises whether the system of Federal Reserve or that of Bangladesh Bank has been hacked. If Bangladesh Bank's system is hacked, then Federal Reserve cannot be held responsible. So, the hacking incident has to be established first through proper facts and documents and accordingly appropriate measures will have to be taken.
FEDERAL RESERVE & ITS WIRE TRANSFER PROCESS: Federal Reserve Bank of New York is one of the largest State establishments of US Federal Reserve System. This institution is not only the central bank of US but also the custodian of world financial assets particularly foreign currency, mostly in US dollars. About 250 official account holders maintain approximately US$ 3.0 three trillion- denominated assets in the custody of Federal Reserve Bank of New York which represents about half of the world's official US dollar reserves. Because of being the custodian of US dollar owned by foreign banks and counties, they have to process enormous fund transfer request and for this purpose Fed has established a high standard and secured Fed Wire Fund Service system whereby every participant is entitled to use real time gross settlement system to send and receive payment for its own account. This Fedwire Funds Service is known as pioneer wire transfer service, which banks rely on to send and receive same-day payment. Through using Fedwire Fund Service, the sender authorises Federal Reserve Bank to debit its master account for the amount specified in the message and credit it to the receiver's master account. Each payment order sent through Fedwire Fund Service is processed individually only when received through a highly secured network. Two secured systems are commonly used to receive transfer order and these are ABA (American Bankers Association) Routing number and SWIFT message. ABA Routing number is exclusively used to transfer fund among the banks in America and Canada. Those American and Canadian-domiciled banks which are members of ABA are provided with some specific code what is called ABA Routing number and this number is used to transfer fund through Fedwire Fund Service. All other banks outside of US and Canada as well as non-member banks of ABA must have to send transfer message through SWIFT. Besides, there is additional confidential code which is known as IBAN number and this code is inevitably required to remit fund in third currency, i.e., other than US dollar. Although Federal Reserve Bank has service option to physically transfer US dollar to third country but this kind of action is hardly exercised. In general fund remains in US and more importantly under the custody of Federal Reserve Board, only the account transfer takes place. So when fund transfer takes place among North American Bank, particularly ABA members, and non-ABA banks or outside US-Canada banks, then Federal Reserve Bank is required to simultaneously use both ABA Routing number and SWIFT code. Payment instruction is received though SWIFT but credited through ABA Routing number or vice versa. In the present situation, Federal Reserve Bank might have used both the systems to process these fraudulently transmitted payment orders.
Nironjan Roy, CPA, CMA is a Toronto-based banker.