Banks are not strictly following RBI's KYC norms. Several co-operative banks freely permit significant cash deposits and withdrawals without reporting to the FIU. Moreover, when there still is no infrastructure in place to authenticate biometrics of an Aadhaar holder, how does the RBI think this can be used to verify card transactions?
Reserve Bank of India (RBI), the country’s banking regulator, seems to be keen on pressing the ‘unregulated’ and illegitimate (as it is yet to be sanctioned by Parliament), the Aadhaar or unique identification (UID) to authenticate card present transactions and other related issues. This is when bankers are still not strictly complying with the RBI’s know your customer (KYC) norms. Some lenders, especially co-operative banks are even using ‘gold route’ to facilitate money laundering for builders and developers.
As Moneylife pointed out, a whistleblower from Gujarat confirmed the issue of demand drafts based on cash deposits in a laundering move initiated by a large private bank. The same bank apparently gave loans to builders against the security of gold deposits, knowing fully well that the gold bars were purchased with cash payments by benami fronts of the builder or DDs from small co-operative banks.
This is a double benefit for the private banks, which sell gold at higher than market price and then accept it back as collateral. Our source seems confident that the income tax department does not know about the gold offered as collateral by builders and is an easy way to launder money.
Co-operative banks are notorious for opening accounts without careful verification of PAN or photographs. This is because it is fully understood that such accounts will be closed within a couple of months, once the money is transferred to larger banks. While it is a fairly common practice to evade regulatory scrutiny by accepting deposits of just under Rs50,000, many really tiny banks are brazenly unconcerned about hiding their trail. Co-operative banks also permit the purchase of insurance and other derivative products offered by large banks for which the payments are transferred through co-operative bank accounts opened with cash deposits.
Some co-operative banks are even freely permitting significant cash deposits and withdrawals, which are probably not being reported to the financial intelligence unit (FIU) in the finance ministry, as required under money laundering rules. Or if they are reported in a perfunctory manner, there is no evidence that the FIU either notices or acts on the information.
As Moneylife pointed out, a whistleblower has shown us documentary proof of a dummy account (the account-holder was a drunkard who apparently lent his name for a small price and even signed blank cheques to permit withdrawal of cash) opened with a cash deposit of Rs5,000. Within days, the bank permitted large cheques of Rs15 lakh+, totalling up to Rs80 lakh, being deposited and withdrawn in cash within hours. All this happened in just four days. This instantly converts the cash deposit into a legitimate sum and can be invested in another bank.
If the bank was able to successfully explain this hectic activity in a new account, it clearly means that the rules and processes put in place to detect money laundering simply do not work and there is no way of knowing if banks monitor new accounts for six months.
While the regulator acknowledges the issue, there is no action. Last week, Dr KC Chakrabarty, deputy governor of the RBI said, “Our enquiries have revealed that there were transactional and market conduct issues which need immediate redressal. At the transactional level, instances of bank staff facilitating splitting of deposit transactions by customers for avoiding their reporting as CTRs/STRs to the investigative agencies were also noticed. If these are not unfair and unethical practices then what is? These transactions may be beneficial to individuals but, eventually, they manifest in the form of societal cost.”
Coming back to the issue of using Aadhaar or UID for authentication card present transactions, it looks good only on paper. As per the latest census, 58.7% households were availing banking services in 2011 as compared with 35.5% in 2001. Notwithstanding these efforts by the RBI and the financial sector, the challenges are enormous. Providing banking coverage to a population of 120 crore and ensuring transactions in these accounts is a daunting task.
According to National Payments Corporation of India (NPCI), at the end of October, there were over 1.04 lakh ATMs in the country. State Bank of India (SBI) and its five units had installed 61,500 ATMs, while private sector and foreign banks put together have about 41,800 ATMs. Co-operative banks and regional rural banks have 1,150 machines. All the banks put together have plans to install additionally about one lakh ATMs over a period of next two years, the NPCI said, noting that this will take up the average to 170 ATMs per million of population from the current 85.
While, the government and the RBI have asked banks to accept the Aadhaar number as one of the identification proofs for opening an account, the lenders are not sure about the authentication and verification of these numbers for the payment system. The RBI itself was not confident about Aadhaar as it felt that the UID project is not ready for handling secure payment transactions.
Just last year, Dr Chakrabarty criticised the Aadhaar enrolment process, one of the issues plaguing the UID project. In a report, he stated, “Aadhaar was to give ID to people without cards, but it is giving to those who don’t need one. Even if it signs up 500 million people in the next five to six years, and they are all people like you and me, it will not serve any purpose.”
In addition, several experts have pointed out that using Aadhaar for identification is completely different than using it for authentication. Especially, when it comes to using biometric data of Aadhaar for payment transactions, the facts are not too encouraging. Several poor people like housemaids and construction labourers, are finding it difficult even to enrol for Aadhaar due to lack of a clean fingerprint sample. Some could not even submit sample of their iris due to cataract. So in such cases, how will the Aadhaar help in authenticating the card present transaction?
Bengaluru-based Col (Retd) Mathew Thomas of Citizens’ Action Forum says it is ridiculous to hope that cash for subsidies could be transferred using the UID biometric database. “Why is a biometric database required for cash transfer of subsidies? Hasn’t the US been crediting unemployment dole into SSN accounts, which have no biometrics, for over 70 years? UID is for all residents. Subsidies are for citizens. How would a government agency disbursing subsidies or a bank know whether a person with a UID number is a citizen or not? ” he said.
Following one of the recommendations of the Working Group on securing card present transactions, the RBI has set up another Working Group under the chairmanship of Pulak Kumar Sinha to study the feasibility of Aadhaar as an additional factor for authentication of card present transactions and other related issues. The Working Group is expected to submit its report by end-June 2013.
“At this stage any direction for handing over investigation to the CBI would be premature,” the affidavit submitted by the state government before a division bench of the Calcutta High Court claimed
The West Bengal government on Friday opposed a prayer for Central Bureau of Investigation (CBI) investigation into the multi-crore chit fund scam, claiming in an affidavit to the Calcutta High Court that at this stage credibility of the investigation by the state police cannot be doubted.
“At this stage any direction for handing over investigation to the Central Bureau of Investigation (CBI) would be premature,” the affidavit, submitted before a division bench comprising Chief Justice Arun Mishra and Justice Joymalyo Bagchi, claimed.
“The police authorities have acted with promptitude commensurate to the urgency of the situation. There has been no laxity on the part of the state respondents in the matter of investigation,” it said.
“The main accused persons have been arrested. At this stage credibility of the investigation cannot be doubted,” the state asserted in its affidavit.
Sudipto Sen, the chairman of Saradha Group, was arrested along with two associates from a hotel at Sonamarg in Kashmir and were at present in the custody of the Bidhannagar Police, which is investigating the matter.
Opposing the petition, the state claimed that it was politically motivated and therefore not maintainable.
The police authority is interrogating the arrested persons and taking necessary action to unearth the entire scheme and modus operandi, it was claimed.
Pointing out that apart from Saradha Group, there were more players in the field and a comprehensive strategy was to be taken to cover all such cases, it said that the government has constituted a four-member commission of inquiry headed by Justice (retd) Shyamal Kumar Sen.
A special investigation team, headed by the director general of West Bengal Police, has also been formed, it was stated in the report.
“The state government has so far undertaken no covert or overt action to shield anybody,” it said denying allegations by the petitioner that efforts are on to shield influential people allegedly involved in the matter.
Vijay Singla is accused of accepting the money in return for ensuring that Mahesh Kumar, who had been the general manager of Western Railway, would be appointed to the Railway Board—which the ministry announced on May 2
The Central Bureau of Investigation (CBI) on Friday arrested Vijay Singla, nephew of railway minister Pawan Kumar Bansal, for allegedly accepting a portion of a R.90 lakh bribe to ensure the appointment of a Railway Board member.
The agency also registered a case against three other people—including the accused member (staff) Mahesh Kumar who had taken up his position on the board only a day earlier—after conducting raids in several cities.
Singla, son of Bansal’s sister and one of the leading businessmen in the region, was picked up by a CBI team from New Delhi on Friday evening. He was at his residence at Panchkula, near Chandigarh at the time.
Sources from the agency said the Delhi team did not inform their Chandigarh counterparts about the operation before carrying out the arrest.
Singla is accused of accepting the money in return for ensuring that Kumar, a 1975 graduate from University of Roorkee who had been the general manager of Western Railway, would be appointed to the Railway Board—which the ministry announced on May 2.
A Guinness Book of World records holder for “Largest Route Relay Interlocking”, Kumar had spent nearly four decades in the Indian Railways before being embroiled in this alleged corruption scam.
The CBI also named Sandip Goyal and Manjunath, as well as unnamed persons in the corruption case. The agency also carried out raids in Mumbai after learning about the alleged bribes, which apparently gave them sufficient basis to take action against Singla—whose close contacts with the railway minister are certain to be a part of the CBI’s investigation.
The agency has detained both Goyal and Manjunath, and are interrogating the two in the hope of gaining more information about the alleged conspiracy to secure a place on the Railway Board, sources said.