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Case Studies
Bribery for loan extension
A corporate client held a loan at a bank. He ran into cash flow problem and could not meet the loan repayment. The client then asked the senior bank manager to secure extension of his due date a couple of times. The client promised to reward the senior bank manager latter. The senior bank manager agreed. He then endorsed the extension when it was within his authority or made favourable recommendations to the bank when out of his authority. The bank granted extension as recommended. The client gave expensive gifts such as watch, cigars, etc. and cash to the senior bank manager as promised.
Case Analysis
Under Section 9(1) of the Prevention of Bribery Ordinance (POBO), it might be an offence for the senior bank manager (i.e. an agent, as an employee of the bank), without the permission of his principal (i.e. the bank), to accept advantages (i.e. expensive gifts offered by the client) as rewards for assisting the client to secure extension of loan repayment. The client might also violate Section 9(2) of POBO for offering bribes.
The senior bank manager might have also contravened Section 124 of the Banking Ordinance which prohibits any employee of an authorized institution to receive any gift, commission, advantage etc. for his own personal benefit, for procuring or endeavouring to procure for any person any advance, loan, financial guarantee or credit facility from that institution.
For efficiency purpose, bank managers are often delegated with authorities to endorse certain loan-related applications up to certain limits. The risk of corruption is in proportion to the discretion which bank managers are allowed to exercise. The greater the discretion, the higher the corruption risk.
The restructuring of distressed loans is a corruption-prone area which is easily overlooked. A desperate debtor could entice the bank manager to secure favourable credit terms, e.g. extension of credit facilities.
Corruption in the lending function will result in an increase in bad loans, affecting the bank’s business and profitability. When a customer is willing to bribe for favour in credit approval, it reflects both the underlying financial problems of his business and his poor integrity. His chance of defaulting repayment will be high. An internal review of the case will unearth the impropriety and corruption dealing. With a stringent control mechanism of a bank and a whistle-blowing mechanism, there is a good chance that the corrupt dealings will be detected.