The Financial Conduct Authority of the UK has banned the sale of a set of ‘risky’ investments to all but the super rich. When will Indian regulators act?
Ponzi and collective investment schemes (CIS) thrive all over the world because of powerful political backers. But a post-2008 shift in regulatory focus from caveat emptor (buyer beware) to vetting and restricting the sale of potentially harmful or toxic products is now turning the heat on these dubious schemes as well. The Financial Conduct Authority of the UK has banned the sale of a set of ‘risky’ investments to all but the super rich—people with an annual income of over £100,000 or investible funds of £250,000—from January 2014. The UK regulator classifies these as sophisticated investors who ought to understand the risks involved.
Interestingly, the CIS targeted by the regulator are investment in overseas property, fine wines and traded-life settlements. Investors in the UK had invested over £4 billion in such unregulated schemes and their losses run into millions of pounds. Interestingly, it turns out that UK investors were still being sold teak farms and bamboo plantations.
Unfortunately, the Indian situation is worse. Lakhs of people throughout India lost over Rs10,000 crore to plantation scams in the mid-1990s. Since then, there has been a string of high-profile failures, such as Citi Limouzine, SpeakAsia and Stock Guru, which raised Rs1,000 crore in a matter of months. Yet, our regulators and politicians refuse to initiate tough action. Dodgy companies, such as QNet and MMM India, are still luring the educated, but financially gullible, youngsters. More criminal is the refusal to rein in chain-marketing schemes, such as Saradha, MPS Greenery and Rose Valley, which have wreaked financial havoc among the low-income group in West Bengal and nearby states leading to 18 suicides so far. All these companies have enjoyed the patronage of powerful regional politicians.
Last week, former Union secretary EAS Sarma wrote to the ministry of corporate affairs (MCA) exhorting it to work with the financial regulator to evolve a way of tracking shell companies which are used to launder black money through a complex web of entities. He pointed out that every major scam in India uses a network of shell companies to evade detection. But this, too, has gone on for decades. The most famous of these were the shell companies of the Reliance group, exposed by the Indian Express in the mid-1980s—a decade before India embarked on its economic liberalisation programme. Using layers of shell companies to launder money through overseas tax havens and back into the Indian stock market has increased exponentially since then.
Consequently, we have no clear regulation, or legislation, to protect people from harmful and unregulated products. Only a few large CIS manage to attract the attention of the market regulator.
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Will the honest bankers caught in Cobrapost sting operation help soften the RBI blow on erring banks?
A third set of revelations by the Cobrapost sting operation on how bankers help to launder ill-gotten cash now covers HSBC India and Standard Chartered Bank as well. What has, however, made bold headlines is its revelation that a set of honest, upright bankers had flatly refused to bend the rules and launder unaccounted money. Cobrapost showcased five such bankers: Balasubramaniam of Axis Bank (Hyderabad), SK Garg of Bank of Baroda, Anurag Prakash of Canara Bank, Ashish Agarwal and Akash U of HSBC India. Anurag Prakash even points out that the “RBI is very strict about these things.” However, for Cobrapost, there may be a twist to the heart-warming tale.
We don’t know whether the five have been felicitated by their respective banks or not; but these five upright bankers may have saved their employers from strong action by the Reserve Bank of India (RBI). So far, RBI has fined three private banks for various irregularities detected during its inspection. We learn that as many as 15 show-cause notices have been issued by the regulator. But, now, the banks can use these honest bankers to forcefully argue that they do not encourage employees to break the rules, much less launder black money. In effect, banks would expect everyone to believe that the willingness to launder black money is not a reflection of institutional tolerance (or encouragement) but an employee fraud.
The HSBC case is especially ironical. In December 2012, it paid nearly $2 billion to settle charges brought by US authorities that it had helped Mexican drug cartels launder funds through the US financial system, and that it worked closely with Saudi Arabian banks linked to terrorist organisations. The settlement was considered a sweetheart deal that let the Bank off without prosecution or criminal charges. And this from a country that ruthlessly jails individuals for violating drug laws and has not hesitated to put a string of celebrities behind bars. Yet, in India, HSBC can claim, with some credibility, that it has a “zero-tolerance policy for breaches of law and regulation” and will take “appropriate action, including dismissal” if an employee is found to have breached its policy. RBI, which is already rather soft on banks, will find its hands further tied by India’s delicate foreign exchange balances.