Whistleblowers provide details of how banks were using cooperative banks to launder money
The Reserve Bank of India’s (RBI’s) repeated assertion that it has found no evidence of money laundering in its inspection of three private banks, even before its inspection report is complete, has caused outrage. However, what is not clear is whether this refers only to the three banks that were targeted by the Cobrapost sting or covers all the 30-odd banks and their tentacles into the poorly regulated cooperative banking sector all over India. One bank has claims that a forensic investigation has given it a clean chit. But numerous whistleblowers, hopeful that RBI is serious about unearthing dubious business practices, have been forwarding details to central bank inspectors.
At least two such messages have also been forwarded to Moneylife and we believe that RBI has launched an investigation into the linkages with cooperative banks only on the basis of such confidential information. The second discovery is the massive mis-selling of third-party financial products, including insurance, derivatives and portfolio management without formal approval from SEBI. This includes dumping expensive insurance policies on home loan seekers by making it mandatory. Here is some feedback obtained by Moneylife through whistleblowers and bankers.
Some cooperative banks are 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.
In one case, a whistleblower has shown us documentary proof of a dummy account (the account-holder is 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 Within days, the bank permitted large cheques of Rs15 lakh+, totalling up to Rs80 lakh, being deposited and withdrawn in cash within three days.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 don’t work and there is no way of knowing if banks monitor new accounts for six months.
Another whistleblower from Gujarat confirms 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 cooperative 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.
Cooperative 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. Cooperative banks also permit the purchase of insurance and other derivative products offered by large banks for which the payments are transferred through cooperative bank accounts opened with cash deposits.
Our whistleblower says, “You need to check the number of big-ticket insurance policies sold by banks, where the payment does not come from customer accounts at the bank, but in the form of DDs from tiny cooperative banks.” This routing operation is only for laundering the cash. Our source says that an easy way to connect the dots is to check whether the customer has a relationship manager (RM) at the private bank and whether the RM’s name is listed with the insurance company. Some of these policies are again pledged with the banks against property loans. Acceptance of third-party cheques by large banks also needs to be investigated, says our source.
The question is: Will RBI’s investigation bring out all these facts? And will it take corrective action or let the banks get away with a slap on the wrist? Sources say that RBI has, in fact, unearthed such a neat nexus between cooperative banks and large banks in most states, which are known for a high level of cash transactions—Delhi, Gujarat, Rajasthan, Andhra Pradesh and Maharashtra. With all this dirt being sifted, it is also ironic that RBI continues to talk about granting a banking licence to seven or eight new banks. We think, RBI needs to pause and work at making the banking system more accountable and safe for ordinary depositors, before unleashing fresh competition in the market.
The Opposition is demanding Prime Minister Manmohan Singh's resignation after Additional Solicitor General Harin P Raval wrote a letter to Attorney General GE Vahanvati accusing him of interfering with the CBI's case in the coal scam
The Supreme Court said that the suppression by the Central Bureau of Investigation (CBI) that it shared the coal scam status report with the law minister is not ordinary. The court came down heavily on the CBI and has told the agency not to take any instructions from its political masters.
The court questioned as to why it was kept in the dark about sharing of information with government officials in the coal scam. The Supreme Court has also said, “The CBI's independent position must be restored. Our first exercise will be to liberate CBI from political interference.”
The apex court has said that the details in the CBI affidavit on the coal scam are “very disturbing”. “There has been a massive breach of trust that has shaken our foundation,” the apex court said. The court said sharing information with the government has shaken the entire process.
Media reports indicate that changes were made in the status report on the coal scam after a meeting with law minister Ashwani Kumar. CBI sources said they will not hide anything from the Supreme Court, which was hearing the case and will decide whether the government tried to influence the CBI probe.
The political fall-out of the Supreme Court criticism of the law minister and CBI is severe. The Opposition is demanding prime minister Manmohan Singh's resignation after Additional Solicitor General Harin P Raval wrote a letter to Attorney General GE Vahanvati accusing him of interfering with the CBI's case in the scam.
The counsel of the Sahara Group said there was no case of wilful disobedience of the apex court order as the documents have been supplied to SEBI and on 5 December 2012, the issue of depositing money was also considered by the court
The Sahara group and its promoter Subrata Roy Monday told the Supreme Court that no case of contempt is made out against them as they have complied with its directions on the issue of supplying documents to SEBI and has started refunding Rs24,000 crore to its investors.
The Sahara group mentioned this before a bench headed by Justice KS Radhakrishnan and said they have filed affidavits relating to the contempt notice and need more time to file a response in relation to the application by the stock market regulator seeking civil arrest or detention of Roy and other directors.
The bench said it will consider its plea on 2nd May.
Sahara's plea was mentioned by senior advocate Ram Jethmalani and advocate Keshav Mohan.
Sahara and its promoters filed around 10 affidavits and two additional affidavits are likely to be filed soon.
The counsel said there was no case of wilful disobedience of the apex court order as the documents have been supplied to the Securities and Exchange Board of India (SEBI) and on 5 December 2012, the issue of depositing money was also considered by the court.
During the last hearing, the apex court had pulled up the Sahara Group and Roy for not refunding Rs24,000 crore to their investors and accused them of “manipulating courts” by approaching different forums for relief.
The court had also slammed the group and its chief for not filing a response on SEBI’s contempt plea against them. It had also issued a notice to them on the market regulator’s plea to detain Roy and the two male directors—Ashok Roy Choudhary and Ravi Shankar Dubey—to get investors” money back from them.
The bench, which at one time had asked Roy’s counsel to make a statement that he will not leave the country or it will pass directions, however refrained from doing so and granted one week’s time to him and his two companies to file their response.
The bench had also expressed its anguish when SEBI said Sahara India has filed a petition in the Allahabad High Court after the apex court had passed the order for attaching the properties of the group's two companies if they failed to deposit Rs24,000 with the market regulator.
SEBI had contended Roy was very much part of the order passed by the apex court which had also indicted Sahara India in its order on 31 August 2012.
It had submitted that the Sahara Group and its two companies—Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC)—have not followed the provision of Companies Act and details of investors given by them is vague.
The bench had then said SEBI was open to deposit money of untraced investors of Sahara with the Centre and that its 31st August order was clear that it was not for the market regulator to verify the addresses of untraced investors.
“If they (Sahara) don’t give the documents relating to investors, then you (SEBI) can keep the money which will go to the government. They will have to give you genuine information. You don’t have to search for documents,” the bench had told SEBI.
SEBI had also urged the court to allow it to “take measures for arrest and detention in civil prison of Subrata Roy, Ashok Roy Choudhary and Ravi Shankar Dubey after giving reasonable opportunity of hearing.”
The Sahara Group and SEBI are locked in legal dispute over the refunding of Rs24,000 crore by its two companies—SIREC and SHIC—to over three crore investors.
Earlier, the Supreme Court had dismissed its plea for more time to refund the amount.
SIREC and SHIC along Roy are facing contempt proceedings in the apex court which had on February 6 allowed SEBI to freeze accounts and seize properties of its two companies for defying court orders by not refunding the money to investors.