No need for more exposures as of now. What the common man is waiting for is a change that would reduce corrupt practices and infuse a semblance of ethical behaviour, on the part of individuals and organisations handling public funds, on which, in reality, they have only trusteeship rights
The portal on 6th
May came out with a second instalment of exposure
, which gave details about its continuing undercover operation, spanning months. The portal accused as many as 23 public and private sector banks and insurance companies of “running a nation-wide money laundering racket, blatantly violating the law of the land”. Based on ‘action’ captured on video-tapes, Cobrapost explained how employees of banks and life insurers are helping customers launder unaccounted cash, bypassing know your customer (KYC) norms. They had allegedly offered to invest unaccounted cash in products that form part of the regular financial system and help launder the unaccounted money.
Though the exposures fell short of any evidence about “concluded deals”, they gave enough indication that the systems in place to prevent money laundering are not working as efficiently as they should. The officials approached by the representatives of the portal as part of its sting operation were all willing to help their prospective clients through all the three main stages of money laundering process. These three stages are:
(i) Placement, where the money launderer (the person who holds money generated from criminal activities—in this case money from undisclosed sources—introduces illegal funds into the financial system. This can be done by dividing large sums into smaller ones and deposited in different accounts.
(ii) Layering, where the launderer converts or moves funds fast to hide the true origin of such funds and to distance the converted funds from the original source.
(iii) Integration. The money travels back to the financial system with legitimacy gained.
Those named in the exposés include two Kerala-based banks (Federal Bank and Dhanalaxmi Bank), State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Indian Bank, Indian Overseas Bank, Oriental bank of Commerce, Allahabad Bank, Central Bank of India, Dena Bank, Corporation Bank, IDBI Bank, Yes bank, DCB Bank, Life Insurance Corporation of India (LIC), Tata AIA, Reliance Life, Birla Sunlife, and many others.
Some of the banks facing allegation have started fire-fighting operations to restore image. Some banks including SBI India have initiated internal inquiries. Indian Overseas Bank stated that the bank is inquiring two lower level officials identified in the exposure, but adding that “action can be taken once we identify any wrongdoings”. Federal Bank for instance has come out with a statement which says “As a responsible bank, we conduct our business with strict adherence to extant regulatory guidelines, including specific focus on know your customer, and anti-money laundering norms” and has confirmed that the bank has initiated investigations into the matter. Meanwhile, the government said action had been taken against 31 employees as on 7th May. Fifteen officers/employees of various public sector banks (PSBs) had been suspended, 10 officers had been divested of their work and six had been asked to proceed on leave. Regulators including the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA) also have swung into action. Besides, the finance ministry has asked public sector banks and LIC to take action against employees “appear to be advising” customers on ways of violating know-your-customer (KYC) and other regulatory norms.
Following his own approach of denial on the earlier occasion, RBI deputy governor Dr KC Chakrabarty was quick to refute money laundering charges levelled against various banks and claimed that all exposures by Cobrapost.com were connected to KYC norms
. His casually observed: “There are certain differences in reporting of KYC norms. We are seeing how banks are following up. Based on this, we will issue show-cause notices and action will be taken. We need to strengthen KYC guidelines and respective departments have to take action.” It looks as if this was not taken very seriously, even by his own men. On the earlier occasion Dr Chakrabarty had taken shelter under “financial illiteracy” saying that “it is not money laundering… it is your financial illiteracy!”
Last week, in an interview given to a mainstream financial newspaper, the same deputy governor lamented that “If bank boards aren’t capable, nothing much can be done”.
In the given situation, where some exposure or the other reminds us everyday that we are going through a phase of continuous violations of legal norms and ethical behaviour (in the financial sector these get easily ‘quantified’!) the deputy governor may not have ready answers to all the questions posed. But the positions taken by him on the following issues are not professional and a layman’s view is not what one expects from the regulator:
• “If bank boards are not capable, nothing much can be done”: If Dr Chakrabarty means what he says, RBI and GOI should take responsibility and take immediate steps to put in place “boards which are capable”.
• “Banks might have indulged in ‘traffic rule violations’ but ‘no accident has taken place’:” Cobrapost’s exposure hovers around allegations that bank officials were liberal in offering to violate traffic rules. The position that “no accident has taken place” is a “legal denial”. ‘Accidents’ are taking place and it is for the regulator, supervisor and other authorities including the finance ministry to find out how many of them are ‘caused’ by ‘traffic rule violations’.
• “Reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? My question is why banks should take so much commission in selling insurance/mutual fund products”: If the regulator starts asking questions like this, where does the customer go when he has a grievance? The position that “If everyone indulges in this, where is the question of reputation?” though goes well with the stand political parties take these days, brings down the image of the institution (RBI) Dr Chakrabarty serves today.
• “Restructuring is a perfect commercial phenomenon, practiced across the world. It is like a medicine but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer”: Very true. But when banks ‘suffer’, the real loss is passed on to the depositor and the tax-payer. The government and RBI are duty-bound to protect public interest, in such situations.
Interestingly, the RBI governor did not take the risk of defending the banks or the regulators on the issue. Dr D Subbarao made the following observations on the subject:
“RBI is not directly involved... Even banks are not directly responsible. They are not expected to inquire about the source of income. It is for government and tax authorities to check money laundering,” he said while addressing students and academicians as part of the Platinum Jubilee celebrations of Jammu & Kashmir Bank on 8th May, adding that “there was no conclusive evidence of money laundering in the expose of Cobrapost”.
Ironically, most part of the exposure talks about how bank officials were “very helpful” in circumventing norms and rules. Here, it would be appropriate to recall some of the provisions of the Prevention of Money Laundering Act, 2002 (PMLA).
PMLA which came into force with effect from 1 July 2005 and was last amended effective 15 February 2013, forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from 1 July 2005. Director, Financial Intelligence Unit-India (FIU-I), which is the body responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign financial units, and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act.
The PMLA and rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-I. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.
Clause (2) of Section 9 of PMLA relating to verification of the records of the identity of clients reads asunder:
“ Where the client is an individual, he shall for the purpose of sub-rule (1), submit to the banking company, financial institution and intermediary, as the case may be, one certified copy of an ‘officially valid document’ containing details of his identity and address, one recent photograph and such other documents including in respect of the nature of business and financial status of the client as may be required by the banking company or the financial institution or the intermediary, as the case may be.”
The purpose of quoting the above provisions of PMLA is to emphasize that the allegation hovers around non-compliance with the requirements under the Act. The portal has alleged that many bank officials were more than eager to help the prospective client to do things hush-hush and in some cases had offered to create non-existent documents to enable opening of accounts. Some bank officials allegedly offered to accept huge amounts of cash running into tens of lakhs of rupees (first to be deposited in large lockers which will be later credited to accounts to be opened) as deposits. The bank officials were lured by the promise of further deposits of crores of rupees.
Let us leave the story, the legal position and the follow up here.
The question arises, in 2013, do we need a Cobrapost, a Tehelka, Wiki-leaks or a new TV channel struggling to improve its own TRP to tell us that all is not well in the goings on in India, when it comes to handling public funds (“public funds” comprise money collected from public which includes bank/company deposits and other funds with private organisations)? After all, this much has been told to us by the highest court (Supreme Court of India), Comptroller and Auditor General, Election Commission and several other “usually reliable” government and private bodies, from time to time in recent years. Most of the political parties also have endorsed this view during their bickering among them. What the common man is waiting for is a change which will reduce corrupt practices and infuse a semblance of ethical behaviour, on the part of individuals and organisations handling public funds, on which, in reality, they have only trusteeship rights.
While delivering the Second Annual Lecture at Transparency International in Delhi on 19 February 2011, Dr Bimal Jalan, ex-governor, Reserve Bank of India made the following observation:
“Thus, taken as a whole, corruption is undoubtedly an important cause for rising disparity, persistence of high incidence of poverty, and enormous delays and low productivity of public investments in India.”
On an earlier occasion (Seventh Nurul Matin Memorial Lecture, Bangladesh Institute of Bank Management, Dhaka, 2007) speaking on “Ethics in Banking” Dr Jalan had this to say: “Adherence to the ‘Rule of Law’ in a democratic society is an essential minimum requirement of ethical behaviour” He agreed with Professor Nurul Islam who had observed on the same dais that “…..ethics in banking, economic transactions and in society in general, are all interrelated. The solution needs to cover all related areas, including the systematic political factors.”
Remembered the above, in the context that deterioration in ethical behaviour is not confined to financial sector alone. I genuinely feel, we need all voices which bring to surface unethical practices including corrupt behaviour on the part of “public servants”. More importantly, media should help citizens to follow up such cases until the guilty meet with exemplary punishment.
is former general manager, Reserve Bank of India, Mumbai, and is a regular contributor for Moneylife