Corruption, cronyism and flawed supervision: banes of banking system

By: Samad Habibi, Mahdiyeh Mohammadi TEHRAN, Oct. 26 (MNA) –Tehran Prosecutor General has said strict supervision over banking activities would prevent unnoticed corruptions and shed some light to darker corners of the banking interactions. Abbas Jafari Dowlatabadi told a meeting of the inspecting bodies of private and public banking on Saturday that improved supervision and monitoring activities would prevent violations of the law, where the inspecting bodies should attend to their duties with much zeal and enthusiasm; “however, a lapse in such preventive activities brought banking corruptions to the headlines of mass media and other social networks, with news stories of arrest of high-ranking officials of banks, effectively depriving the public of their confidence to the financial system and casting doubts on the health of the banking at large,” he emphasized. “In all dossiers on corruption, banking sector has been directly and indirectly involved, inter alia, are Kerman’s Tejarat Bank, Sarmayeh, Dey, and other banks.” “Banking has been a safe haven in all such cases for corruption to incubate, with high-ranking management turning a blind eye on the corruption underway in inner organizational levels and or actively participating to gain their illicit interests,” he warned. Jafari Dowlatabadi also said that two high-ranking officials have been indicted in the case of Sarmayeh Bank. He ascribed the alleged corruption and the consequent circumlocution by the banks themselves of the cases to the culture of rentier economy and cronyism dominant in the financial system, where the system had been pliable vis-à-vis special privileges granted to individuals with contacts and affiliations to higher places to which banks felt indebted. “The case is further exacerbated when all these cronies file for insolvency and thus easily remaining exempt from further punishment; today, banks are centers of economic power, immense resources, which will definitely lead to corruption and other sorts of abuse. Money brings political power as well and where money-laundering is detected in drug trafficking and smuggle of goods, banks have a hand providing the bedrock for illicit activities under cover,” he emphasized. He called all healthy banks to distinguish themselves from the contaminated banking system and stand apart through effective supervision and monitoring which rules out the corruption and possibilities of abuse. “The majority of the resources received as loans from banks had been invested in projects other than that specified in the agreement. This squanders public money, frustrates production sector and fosters a culture of corruption. A lump sum is potentially a source and impetus for the corrupt customer to bribe others easily,” Jafari Dowlatabadi told the meeting. “The indictment process of many of these cases had been underway; but a tactic was effectively adopted, apart from filing for insolvency, is to claim, by the band debtors, that they should be dealt merely as bank debtors and should not be indicted in charges of corruption and abuse of public money; a second problem which contributes to the situation sinking to the lower priorities, is that banks would not accept as repayment of debts as physical assets,” he lamented. “11 banks had paid a sum of $ 2.5bn, with 1287 individuals filing for insolvency; the deadlock to be solved requires three fundamental approaches; the first remains with banks to adapt stricter roles and criteria for granting loans; the bank directors should be in the frontline of the fight for corruption; no run-of-the-mill entrepreneur should receive inordinate amounts without putting in stake enough guarantees; cronyism should be abolished and unqualified evidence should not be lent credence as individual’s credentials as receiving loans,” he recommended. “Access to public accounts should be restricted to few high-ranking officials and should remain confidential; only the owner of the account or a court order should find access to accounts; banks in dealing with this important issue should comply with rules, which posits that only individuals with serious charges and corruption should be subject to investigation of their accounts; providing access to bank accounts for personalities other than those specified in the law is strictly forbidden,” Dowlatabadi asserted. Prosecutor-general also called for more coordination of banks and the Bank and Monetary Court; “any report of financial corruption to banks’ inspection systems should be communicated through the Court; the Court has refrained from appointing a representative in banks out of fear of parallel structures with intermingled duties which would have negative effect on transparency; this however would not rule out the necessity to provide the Prosecutor’s office of cases of corruption; transparency should be the guiding principle in any activity, where the inspecting bodies would work with ease,” he said. Farshad Heidari, CBI's Deputy for Supervisory Affairs also addressed the meeting; “currently, more than 200,000 staff serve in more than 23,000 branches of banks and credit institutions, the majority of whom enjoy high degree of integrity and morality; the source of corruption comes from customers with contacts in high places in the power ladder, along with insufficient transparency and bad legislation; with banking interactions now using more sophisticated technologies, corruptions and swindle cases have declined significantly,” he told the meeting. He believed that covering of violations and avoiding report to higher echelons are major contributors to ever-increasing lawsuits to address the issue; “in fiscal year ending March 21, 2016, banking system carried out 35 billion transactions; the major pitfalls include engagement of corrupt and convicted individuals and individuals specifically referred to banks by people on high places and generally lacked the necessary credentials; there has been considerable amount of concert between public sector and private sector banks in reemploying of retired personnel, which is clear violation of the law stipulating that personnel should receive promotions according to prescribed rules, and that banks should report this to Central Bank,” he emphasized. The meeting where Tehran’s prosecutor-general addressed leaves still important matters of the independence of the Central Bank. This is the cornerstone of a healthy financial system where central bank acts independent of the government to regulate the system as the sole body capable of making critical decisions which would affect the lives of nation. In a free market economy, this is the invisible hand of the market and the forces inside the market that decides to where an economy should go and which decisions should be made. In Iranian setting however, much of the economy is unsupervised and as many observers believe, the hidden part or underground part of the economy is not regulated even by the government itself. In such a situation, Central Bank is merely one of the players in the economic terrain, wielding no significant role in bringing into order the economic movement and dynamics of the much of the economic sectors goes unnoticed by the CB. In a rentier economy, the privileges are granted to government- and power-affiliated people with little or absolutely no qualities to any economic activity which would be productive. Iran’s banking system is not an exception, and the mushrooming of the private banks and institutions provide testimony to this state of malady where unauthorized individuals enter economic activities with sole objective of making profits in environments lacking transparency and supervision; in such settings, the system lends itself to diverse sorts of corruption including money laundering. Jafarabadi’s lamentation that the banks are run without effective supervision are well grounded, to which the Central Bank should be alert; however, it has largely been an onlooker, only occasionally providing to the media statistics of illegally run banks and financial institutions which, assured of their unsurmountable place, mock the banking system and the workings of the CB. The ever-increasing number of banks and credit and financial institutions following the post-War years when the Construction era of Hashemi Rafsanjani’s 8-year incumbency had expanded the economic sector without necessary regulatory bodies monitoring these institutions and credit financers to which were channeled large amounts of money, earned legally or illicitly; Central Bank however did not retain its key position and became the governments’ wallet and a player among others. The situation has recently been addressed as the corruption surfaced in scales unheard of before and when a rentier economy, having enjoyed almost no regulatory supervision and thus evaded accountability, fostered cronyism. The internal mechanisms of the banking system should be self-sufficient in a transparent organizational setting in preventing corruption, and only in extreme cases should the judicial system interfere in the economics of the banking, to which Mr. Dowlati Jafarabadi clearly alludes in recommending the banking high management that they should pioneer efforts to restore health to the banking system.