If any common man had been caught on phone or tape professing to do money laundering activities, can you imagine what might have happened to him? He would immediately be put into the jail and suffered 100% capital erosion
Twenty-three major Indian banks, both public and private, and insurance companies, are running a nation-wide money laundering racket, blatantly violating the laws of the land. And the culprits being exposed this time are Life Insurance Corp of India (LIC), State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), Canara Bank, Indian Bank, IDBI Bank, Yes Bank, Federal Bank, Reliance Capital, Birla Sunlife and many others, who together manage assets worth thousands of crores of rupees and have equally staggering deposits at their disposal, says Cobrapost.
Cobrapost said in the course of its undercover investigation, it came face to face with some shocking, stark realities about the functioning of the entire banking and insurance industry of the country. “Our interaction with all officials, some with the ranks of divisional manager, territory manager, assistant general manager and vice presidents, with scores of branches under their charge, bears it out clearly that they are conducting their questionable business with nonchalance that only crooks show when they find they are above law or when they find the powerful are on their side,” it said.
“In some cases, we came across certain bankers who were plain crooks in the mould of bankers. For instance, we have a senior manager of Federal Bank who without blinking an eye says, ‘Uske liye to hawala kar deta hoon (I can have a hawala [transaction] done for that),’ when we seek his help to send England some of the crores to some of the relatives of ‘our minister’s’ wife,” Cobrapost added.
In one particular case, Cobrapost found out how S Sake, a minister from Andhra Pradesh, provided guarantee for the safety of black money investment in a real estate project. “In his zeal to net client with deep pockets as our to-be-found-nowhere minister who could put on his table Rs25 crore of unaccounted cash, Manohar (R Manohar, assistant general manager of Indian Bank at South Delhi branch) guided Cobrapost investigative journalist, Syed Masroor Hasan, to Dr H Prasad, an orthopedic surgeon from Tirupati who wanted our minister to invest his crores of black money in his real estate project”.
“We are invited to Hyderabad where we meet Vasu, a hawala operator, who claims to be a former Andhra cop. He would help us deliver Rs 25 crore to Dr Prasad at Tirupati for his project through is racket. Our next port of call is S Sake, who is Minister of Primary Education with the Andhra Pradesh government, with nine other departments under his charge, which shows the power he wields. Sake stands guarantor for the safety of our black money investment in Dr Prasad’s real estate project. This helps us uncover a nexus between the banker and the hawala kingpin who are running their racket without any fear of law, with active patronage of our political masters,” Cobrapost said.
The Nexus between banks and insurance companies:
Another fact that comes to the fore, from the Cobrapost investigation is a nexus between the banks and the insurance companies. If the banks do not have their own insurance companies, they have joint ventures with private insurers. “Yes Bank, for instance, has a tie-up with Bajaj Allianz, which would question an investor only when the investment crosses Rs1 crore, as we came to know from a Yes Bank official. And such investments can be done in cash. Whenever we went about proposing to bankers, public or private, that we wanted to invest our black money in insurance, they immediately called the managers of the their insurance associates to our presence or sought their advice on phone, making it amply clear that banks and insurance companies are hand in glove,” it said.
Operation Red Spider 2 (from Cobrapost) establishes that money laundering is not confined to private banks, and is not an aberration, as is being made out in certain quarters in the wake of the first expose on 14 March 2013 in which HDFC Bank, ICICI Bank and Axis Bank were shown involved in money laundering. The scale is vast and unfathomable and the joke is that “In money laundering, there can be NO KYC done at all!” says Cobrapost.
Cobrapost’s observations on this common practice are as follows:
• Money laundering practices are part and parcel of banking and insurance business across the board;
• Even a walk-in customer can avail of such services that help him launder all his unaccounted cash;
• Money laundering services are being offered openly as a standard product across the board.
According to Cobrapost, the defensive argument from the Reserve Bank of India (RBI), the Finance Ministry and the banks themselves has been that “there were only violation of KYC norms” and as such “no money laundering took place because no transaction took place”.
Knowing the woes of ordinary customers on KYC, Cobrapost asks, “If any common man had been caught on phone or tape professing to do these things (money laundering activities), can you imagine what might have happened to him?” Our answer is that the man may have even gone to jail and suffered 100% capital erosion.
The Cobrapost press release concludes that in addition, these transactions are not confined to a few low-level front-office staff members as is being made out in all the so-called ‘inquiries’. Interactions with all officials, some with the ranks of divisional manager, territory manager, assistant general manager and vice presidents, with scores of branches under their charge, bear it out clearly that they are parties to and facilitators for these transactions and are conducting their questionable business with nonchalance that only crooks show when they find they are above law or when they find the powerful are on their side.
Cobrapost is critical of the Finance Minister as well, in spite of his warning to money launderers and tax evaders that “we are watching you and will come after you.” Till date, no investigative agency has launched any investigation into the heaps of evidence submitted by Cobrapost, says the press release.
The growth of non-banking financial companies-NBFCs in India has piggybacked on using the priority sector norms of banks, through the securitisation route. If securitisation becomes difficult or costly, as is likely, it will affect the profits and growth of NBFCs. Are there options?
With the Lok Sabha passing the Finance Bill without rolling back the securitisation tax proposals contained in Sections 115TA, 115TB and 115TC, the massive amount of money sitting in securitisation SPVs (special purpose vehicles), with the banking system being the largest stakeholder, faces a tough choice: finding escape routes, or just falling in line. All this needs to be done shortly, over the next less than 30 days, as the new distribution tax sets into effect from 1 June 2013.
From 1st June, SPVs distributing income to the investors will have to pay distribution tax, which means, all distributions done on or after 1 June 2013 will come for the distribution tax. This means:
Neither option is easy, and, in fact, the whole exercise needs to be completed briskly enough to escape the distribution tax. As one always does with tax provisions, one may always rummage through the tax provisions and see if it is possible to escape the Sections. Escaping the Section will not mean escaping tax questions—in fact, the very genesis of Sections 115TA to 115TC is the tax uncertainty created by some tax officers proposing to tax securitisation SPVs as representative assessees. Hence, escaping Sections 115TA – 115TC would mean going back to that uncertainty.
This, luckily, is possible, with required amount of intellectual play. For instance, Section 115TC defines a special purpose vehicle as one which is defined in a regulated under the Reserve Bank of India’s (RBI) guidelines for securitisation of performing assets. In addition, the SPV has to satisfy such conditions as may be prescribed. Prescription is commonly done by way of rules. The rules will be framed and notified only after the Act comes into force: hence, that is opaque as of now. But what if the SPV does not satisfy one such condition? Obviously, the entire chapter, that is, Sections 115TA-115TC shall be inapplicable in such a case.
The securities of the SPV as referred to as “debt securities”. The 2006 guidelines of the RBI loosely referred to pass through certificates as debt securities. Pass through certificates can no way be said to be debt securities.
Section 115TC of the Income Tax Act is limited to an SPV being a trust. However, SPVs do not have to be trusts. In fact, corporate or LLP forms of SPVs are quite common in many countries. Para 8 of the 2006 Securitisation Guidelines clearly permits SPVs to be partnership, trusts or companies. This author has quite often contended that the trust form is not necessarily the best form for organising SPVs, as trusts have unlimited liabilities, while companies have limited liability.
Charting future course of action
We have elaborately written and spoken on the fact that securitisation is not just a way of investing in India—it is the way banks build their priority-sector assets. Most securitisation in India revolves around the priority sector qualification. For the last two years, there has been no mutual fund investment in securitisation transactions: the entire securitised assets have been picked by banks, and all of it is supposedly priority-sector-lending compliant. So, going forward, that need still remains. The simpler option one may think of is to revert to direct assignments. Direct assignment route was the product of the 2006 RBI guidelines; 2012 Guidelines forced stakeholders to look back at the ‘securitisation”’ option. Now, the market may have to look back at direct assignments. Compared to structured finance principles applying to ‘securitisation’, direct assignment is primitive. Originator credit enhancements are ruled out by the RBI, and third-party enhancers currently do not exist.
Given this, the cost of a direct assignment is much higher than that of securitisation. In addition, direct assignment requires loan-by-loan due diligence, and loan-based accounting, which, for many investors, is a difficult option.
If securitisation option becomes difficult, it is a serious issue for the banks. However, it is almost an existential issue for transport finance companies. To a very large extent, the growth of NBFCs in India has piggy-backed on the priority sector norms, through the securitisation route. One single transport finance company supplied more than one-third of the total securitisation volume in 2012-13. If securitisation becomes difficult or costly, the costs are obviously passed on to the originators. And this has a direct impact on the profits and growth of NBFCs.
(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance.)
1 Housing finance companies’ data is not included above.
2 There already are some tax rulings holding securitisation vehicles to be AOPs.
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