RBI money-laundering probe shows cooperative banks as the key facilitator of shady deals
The Reserve Bank of India’s investigation into tainted private banks which were caught in a Cobrapost sting operation, has now spread to cooperative banks which appear to be the main conduit for the private sector banks to launder money
While the banking secretary announced last evening that action will be taken against the three private sector banks that were caught laundering money in the Cobrapost sting operation, Moneylife has learnt from banking sources that the trail of the money laundering investigation is leading up to a large number of cooperative banks across the country, who first accept cash and introduce it into the banking system.
Banking sources tell us that scores of cooperative banks have been found literally acting as a back-office for initiating the conversion from black money to white money. They happily accept fake PAN cards and dodge detection by opening hundreds of accounts without proper KYC with each deposit carefully under Rs50,000. The money is then transferred to the larger private banks, through a prior arrangement, allowing these ‘successful’ Indian private banks to maintain a clean image.
It is not surprising that cooperative banks are in the thick of dirty banking operations. They have been in the heart of every major scam over the past two decades. In the 1992 securities scam Mercantile Cooperative and Bank of Karad were found to be involved in issuing false securities and had to be closed down. Then too, multi-national banks such as Standard Chartered systematically ensured that fake Banking Receipts (BRs) were passed through the smaller banks, in order to protect themselves. However, they were caught when the multi-disciplinary Janakiraman Committee began to investigate their actions with a fine-tooth comb. Again in the scam of 2000, Ketan Parekh was found to have used Madhavpura Cooperative Bank as his own personal property in diverting cash Rs800 crore to support his speculative positions. The bank has collapsed causing losses to tens of thousand ordinary depositors and other banks. Cooperative banks were at the centre of the Home Trade scam too in 2001 Rs600 crore were found to have been swindled from more than 25 cooperative banks —13 of them in Maharashtra and 12 in Gujarat.
The reason cooperative banks have repeatedly been at the centre of scams is the shady system of dual regulation, under which both Registrar of Cooperative Societies (RoCS) and the RBI are supposed to be regulating them. RoCS officials say that the RBI does not look closely at these banks, while the RBI says it waits for government recommendations to act as the State's Cooperatives Department has its auditors on the boards of the banks. The primary reason for this poor scrutiny is that most cooperative banks are set up and controlled by powerful politicians.
Banking sources in several banks, other than the three private banks which were part of the Cobrapost money laundering sting, tell us that the RBI has been asking detailed questions. They estimate that nearly two dozen banks may be under the RBI scanner, based on the questions they have been asked to answer. However, the banking secretary has so far spoken of an RBI report that only covers the three banks—Axis Bank, HDFC Bank and ICICI Bank. We also learn that the banking regulator has already found large instances of systematic mis-selling of financial products, dubious gratification of sales agents and evidence of the money laundering unearthed by the sting operation.
Moneylife has consistently pointed out that driven by high commissions, an army of bank relationship managers are systematically targeting vulnerable segments such as women and senior citizens through misrepresentation and deceit. The latest example of this is the cheating by IndusInd bankers of a 79-year old man in India with an ailing wife, which Moneylife exposed a few days ago, (Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory). A strong Moneylife campaign of naming and shaming has finally borne fruit and last night the bank officials went to the senior citizen’s house and returned his money. The RBI is aware of this menace and hopefully it will do something about this, too.
Moneylife has also been categorical that dubious KYC practices are not limited to three banks—an investigation would reveal that most foreign banks, private banks and even large public sector banks have been indulging in gross mis-selling at one end and dodgy practices to help powerful politicians launder black money at the other end. At the heart of the fake KYC racket is the proliferation and easy availability of fake PAN numbers. The Income Tax department, riddled with corruption is a part of this mischief. The Aadhar Card, which is already proven to be full of holes has now been added to the array of dubious and easily faked documents that allow people to exploit the system. On the other hand, honest taxpayers continue to be harassed and exploited.
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