Money & Banking
‘Wilful Blind Eyes’ are a threat to banks and financial institutions
Wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. Wilful blind eyes cause the collapse of big institutions confining them to the pages of history for case studies
“Wilful Blind Eyes” are those who wilfully turn blind eyes to any wrongdoing happening, even when they see it happening all around them. It is this conscious, deliberate blindness that nurtures corruption, dishonesty and lack of transparency.
These wilfully blind eyes operate hands-in-glove with the shoddy characters. They deliberately ignore the obvious and allow them to do their job freely. These wrongdoings could be money laundering, terror financing, insider trading, fraudulent activities and many other such similar criminal acts. If these wilfully blind eyes happen to be employees of a bank or a financial institution, they will be subjecting their organisation to embarrassingly huge compliance, legal and reputation risks and also cause its demise. Institutions can also be wilful blind eyes. BCCI instantly comes to mind as everyone in the bank—right from the top to bottom was engaged in fraudulent activities that mostly related to drug money. 
Enron, an American company, is another example that went bust more than 10 years back after it came to light that it had been growing by fudging its numbers and doing some funny accounting. Jeffrey Skilling and Kenneth Lay, the CEO and chairman of Enron, pleaded that they just did not know what was going on in the company and hence could not be held responsible for it. The court asserted that “Skilling and Lay could have known, and had the opportunity to know, just how rotten their company was. Their claim not to know was no excuse under the law. Since they could have known, they were responsible…The law does not care why you remain ignorant, only that you do.”
The rogue trader Nick Lesson’s unchecked risk-taking transactions caused the collapse of Barings Bank. Was it deliberate or was someone behind? Peter Baring himself didn’t ask the question but merely stated: “This was deliberate”.
It was the wilful blind eyes that caused the collapse of these big institutions confining them to the pages of history for case studies purposes. Back home there are chain of cases, prominent among them securities scam perpetrated by the wilfully blind eyes.
These cases demonstrate that wilful blinds can cause irreparable loss to the organisation leading to their collapse but they also highlight that employees are integral to the success of the organisation.
How these wilful blind eyes emerge can be explained as under:
  • A weak-willed employee gets entangled into a difficult financial situation and finds it difficult to extricate himself/herself out of the mess, or an employee looking for a “get rich quick” way to lead lavish lifestyle can be an easy target for recruitment by a money launderer to help in running a money laundering scheme
  • Another  telltale sign of a possible “bad apple” (wilful blind eye) employee is when he becomes sympathetic to a certain political, ethnic or religious  group, and is known  to be  advocate of that political cause, or perhaps is an inside operative or a ‘mole’, taking care of/facilitating their financings at the organisation.
These two (illustrative) high-risk-employee scenarios could become the “wilful blind eyes” at the institution, dragging the institution into unpleasant situations. 
Organisations must have a robust KYE (know your employee) system capable of uncovering the past criminal misdeeds and unethical performance/conduct. New hires must be subjected to detailed background checks, beyond that of educational credentials and work experiences. Good pre-employment screening reduces the risk of employees committing fraud, ensuring that, in the words of Hitesh Patel (of The Risk advisory Croup), “there are no skeletons in the cupboard”. Screening existing employees where a change in responsibilities may give them a greater opportunity to commit fraud or to cover their tracks. Suppliers of temporary staff or contractors need proper screening processes, too.
Second, the institution must have an ongoing and regular review of conduct to detect any possible changes in the employees’ lifestyle, orientation, etc, especially employees who deal directly with the clients or who have decision making authorities over cash or other financial transactions.
Third, the organisation must have an annual employee rotation plan for relationship managers, tellers, key staff and branch personnel. A branch manager should not spend more than two to three years managing a branch; tellers can easily rotate in different distribution points. Transactions, such as deposits, wire transfers and cash withdrawals that follow an employee from one location to the other should immediately raise a red flag. Prevention is better and more urgent than detection.
It should not be so difficult to detect an employee’s possible involvement in a money laundering scheme or in any fraudulent activity by being “a wilful blind eye”. A few of indicative abnormal employee behaviour patterns are:
  • Quick and sudden change of an employee’s lifestyle quality, for example owning a high-priced sports car
  • Reluctance  of the employee to go on a vacation for a long time
  • Employee’s spending habits become noticeably unrealistic in line with his/her known income levels
  • Employee getting too close to a certain client or group of clients
  • Employee refusing or avoiding getting transferred from a certain branch or function
  • Senior management overridden
  • Certain customers or suppliers dealt with exclusively by one employee and guarded jealously
  • Certain apparently mundane tasks retained when they could be delegated
  • Entering into unnecessarily confusing or complex transactions
  • Transactions or structures created with no clear purpose
  • Workaholics
  • Evasive or excessively complicated answers to routine queries
  • Success out of proportion with competence or equally able colleagues
  • Employee becoming too protective and defensive of a client’s relationship details
  • Employee’s sacrificing raises and promotion for the sake of keeping the same position/work location.
These are some of the behaviour patterns better described as “red flags”. If any of the above situations take place at the organisation, action must be initiated to deal with the issue swiftly and steadfastly. The compliance chief must be informed. The suspected ‘mole’ must be placed under intense scrutiny, and if the suspicion gets stronger and is established, he or she has to be taken off his/her duty and investigated. And if enough evidence of malpractices is found, the organisation should consider reporting him/her to the local authorities for further action/prosecution.
Employees know the organisation system very well and are supposed to have been well trained in anti-money laundering compliance and in dealing with money laundering cases and situations. If their performance is not well monitored regularly, they could become a lot more dangerous and riskier than the money launderer himself... For banks and financial institutions, KYE is as important as: Know Your Customer, popularly known as KYC. To Fight Laundering, Know Your Employees Along with Your Customer. Work on a “trust but verify” basis.
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker's Academy in New York.)


Asian Paints net sales jumps 12% but net profit hurt by rupee

Despite difficult economic times, Asian Paints managed to record a 12.58% jump in net sales. However, its operating and net profit were hurt by the depreciating rupee

Asian Paints, for the quarter ended 30 June 2013, saw its net profit increase by 3.4% year-on-year (y-o-y), from Rs274.6 crore to Rs283.9 crore. The profit was affected by the rupee depreciation. Net sales increased 12.58% y-o-y and stood at Rs2,300.80 crore for the quarter ended 30 June 2013 when compared to Rs2,043.97 crore for the corresponding quarter last year. We had recommended the stock in our Long Term portfolio at Rs4,573. Currently the stock is quoting at Rs5,076 on Bombay Stock Exchange (BSE).

According to Moneylife analysis, the company has performed well on the revenues side. Its net sales growth rate matched its three-quarter y-o-y average growth of 13%. While its operating profit increased by just 4% to Rs419.20 crore, the second successive quarter of single-digit y-o-y growth. Net profit, while disappointing, was better than the previous quarter which saw profit shrink by 2.06% y-o-y (over March 2012).The company currently commands a whopping premium in the market. Its market capitalisation is nearly 30 times its operating profit while return on equity (RoE) is an impressive 35%.

“The decorative paints business in India did well considering the challenging and uncertain macro environment. Paints volume grew in double digits. Raw material prices were by and large stable with a softening bias, but were affected by the depreciation of rupee,” said KBS Anand, managing director and CEO. “Industrial paints segment continues to be affected by the economic slowdown. Automotive coatings growth was subdued due to lower demand in the auto sector. International business registered good growth. Middle East and Asia have done well even though some countries continued to be affected by political events and macro-economic uncertainty,” he added.

The company paid a final dividend of Rs36.50 per equity share for the financial year 2012-2013.


Prime Securities exposes pathetic SEBI’s regulations once again

Prime Securities is a stockbroking company in which ‘promoters’ have no shares! It is running a PMS where investors stand to lose money because SEBI’s mulish attempt to keep PMS performance hidden. How much worse can it get?

Prime Securities, a Mumbai-based brokerage, promoted by former Citibank investment banker N Jayakumar, and listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), does not have a single ‘promoter’ holding and is owned ‘public’ i.e. non-institutions hold a whopping 98% of the company. Prime Securities has been in the news recently in connection with market manipulation of shares of Gitanjali Gems. It continues to run its portfolio management services (PMS) whose performance remains hidden from the public, thanks to SEBI’s (Securities and Exchange Board of India) lax enforcement. According to our information, Prime’s portfolios were used for price rigging operations in Gitanjali and other shady small-cap stocks in connivance with the promoters. But while SEBI and the stock exchanges have banned promoters of Prime, Gitanjali Gems and 24 others from the market temporarily, Prime’s PMS remains outside regulatory scrutiny as yet.

PMS is one of the shadiest areas of the capital markets. Mis-selling is rife, performance is patchy and disclosure is non-existent. SEBI had issued a circular to all PMS companies to put up a disclosure document online so that clients can do their homework and make an informed decision BEFORE investing. The SEBI circular IMD/DF/16/2010, dated 2 November 2010, clearly says, “To ensure compliance with Regulation 14(2)(b)(iv) of SEBI (Portfolio Managers) Regulations, 1993, portfolio managers shall disclose the performance of portfolios grouped by investment category for the past three years as per the enclosed prescribed tabular format. Portfolio managers shall also ensure that the disclosure document is given to all clients along with the account opening form at least two days in advance of signing the agreement. In order to ensure that the clients have access to updated information about the portfolio manager, portfolio managers shall place the latest disclosure document on their website, wherever possible.”

However, Prime Securities has not put up its disclosure document on its website which is violation of Regulation 14(2)(b)(iv) of SEBI (Portfolio Managers) Regulations, 1993. This means prospective clients have little idea how it has fared. However, the disclosure document will be given only AFTER you become a client.

In other words, you will need to enroll as a client with a company that has no ‘promoters’, only then you will know whether you made the right decision or not.

Earlier, Prime Securities was hawking a PMS with an indicative return of 12%. We had written an exclusive story here.

This isn’t the first time we’ve written about PMS companies not giving data. We had covered it earlier here.  SEBI is has been completely unconcerned about regulating and forcing minimum disclosure of PMS operations. In fact, after getting complaints of widespread losses and massive mis-selling, Moneylife has been consistently attempting to urge the regulator to oversee the PMS but our success has been slow and extremely hard-fought.

Will SEBI at least stir itself now to act in connection with the price rigging operations of Gitanjali Gems and take a peek at what Prime’s PMS has been up to?




3 years ago

it is most unfortunate that banks like Deutsche bank too got connivance with such broking houses and loot the customer, I am committed to expose this bank in India,

E Venu Gopal

3 years ago

i agree 100% with u,that SEBI shud be more vigilant & ensure strict regulations on PMS services,PRIME securities issue once again shows,Govt in general & Finance Ministrys irresponsible attitude towards investor greivances,already people are afraid of mkts if clean up act is not done there wont be much difference what initiatives govt.makes for capital mkts growth in the country,i hope we got Oxford educated finance minister & govt of india shud give him more powers to set things in order otherwise it will take long time for investors to have faith in capital mkts.we shud do some thing like china,HANG corrupt people who ever they may be unless something like these drastis measures not done nobody in the world will believe INDIA growth story.Mr.PM,Mr.FM r u listening this is not my personal opinion these are feelings of people from capital mkts. Thank U.

Anil Agashe

3 years ago

Any company promoted by an Ex Investment Banker and that too from Citi cannot be trusted. Period. And who are these equity investors?

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