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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    COMMENTS

    CA PRADEEP AGARWAL

    6 years ago

    As told before My Dear All are hand in glove, even higher authorities, so nobody bothers about any inspection/audit reports/guidelines.

    Dayananda Kamath k

    6 years ago

    in ahmedabad in a nationalised bank in gold banking. gold used to be delivered against the pay order of the coperative bank.which was issued by the bank people of coperative bank in the nationalised bank itself. without any money being paid to the co perative bank. since it will come in clearing after 2 days the money used to be arranged by then to honour the payorder. by the sale proceeds of the gold presumably. this was being done in violation of internal guielines of the nationalised bank. it was reported under internal inspection report. but no action was initiated. rather the persons involved are promoted. what is rbi inspector doing when inspecting the bank.are they not supposed to go through these reports.

    REPLY

    CA PRADEEP AGARWAL

    In Reply to Dayananda Kamath k 6 years ago

    As told before My Dear All are hand in glove, even higher authorities, so nobody bothers about any inspection/audit reports/guidelines. Actually all are rotten eggs. If you look at it minutely.

    T PARAMASIVAN

    In Reply to Dayananda Kamath k 6 years ago

    RBI Inspectors are a class of their own. Many of them are busy buying things cheap at low cost / no cost whenever they go for Inspection. They must have been busy buying Gold at no / low cost through the Branch

    ashwin bahl

    6 years ago

    We can add to Arun Mehta's'
    You are clean till you caught, and if you are caught you are innocent til proven guilty, and that happens once in a while. That is the mantra of today everywhere in the country !

    REPLY

    CA PRADEEP AGARWAL

    In Reply to ashwin bahl 6 years ago

    I ought to agree!
    There is a saying rishwat lete pakro jaao rishwat de kar chute. What Ashwin has said is correct hitting the nail in the head-let the case linger on in the courts

    S BHASKARA NARAYANA

    6 years ago

    I pose a question to the reader of this comment. If you are really an honest Tax payer and being crushed by the ramificatons of the abovesaid scams, why do'nt you support common good cause done by the money life by expressing your views, thus in large number by the viewers.

    REPLY

    CA PRADEEP AGARWAL

    In Reply to S BHASKARA NARAYANA 6 years ago

    There are not one several thousand readers I feel, and every body says they support common good, down by MLF, but I feel expression is one thing which is desired of them, can say, it but will not jot it down.

    Arun Mehta

    6 years ago

    All these are "Below the line activities(Ad agency jargon) for the three Banks.All these and several other Bankers believe in the maxim-"You are clean till you caught in such activities,with a valid evidence"

    Ravindra

    6 years ago

    It was an open secret. Only RBI discovered it so late.

    Rati Kriya

    6 years ago

    Unrealistic Targets to the marketing team has let the system down. There is an instance of one of these 3 banks in whose branch, accounts of hapless demat account holders were opened with PAN cards procured through dubious duplicate application. The unsuspecting brokers based on the diktat of acceptance of bank pass book as proof of address opened online trading account, took a bank cheque as proof of existent bank account - the cheque passed; then funds were transferred to this acccount out of sale proceeds of the shares. What an operation - demat account holder and broker suffered; when the bank came to know of the activity they suspended the marketing executive - reportedly. No one complained against them and they are touching dizzying heights.

    REPLY

    CA PRADEEP AGARWAL

    In Reply to Rati Kriya 6 years ago

    Actually everybody has increased their expenditure to unrealistic levels and they have to cover those by income hence again targets raised to such proportions that they ultimately becomes a problem, so doing all types of business to meet the targets and seniors are keeping their eyes and ears closed

    CA PRADEEP AGARWAL

    6 years ago

    Actually, whole system is stinking like a rotten fish. Only due to some intelligent and true people we are surviving or survived.

    CA PRADEEP AGARWAL

    6 years ago

    yeah, agreed because cooperative bank's are basically governed by politicians so any thing can happen there

    manoharlalsharma

    6 years ago

    RBI,SEBI,IRDA,CAG are doing good service to AAM AADMI but I do not understanding why no reguletor for HOUSING SOCIETIES?
    Litigations depend on JTR and there after only concerned state minister who listens only after intervenning throgh HC/COURT and than on the bargain of the parties concerned who pay more attrects order of the minister and again to court.Like marry go around

    REPLY

    Dayananda Kamath k

    In Reply to manoharlalsharma 6 years ago

    do you want one more regulator so that they can pass the buck.when they want to protect some one.and pounce alltogether when somebody want to be booked. in the sarda case itself you can see how many agencies have suddenly become active.

    CA PRADEEP AGARWAL

    In Reply to manoharlalsharma 6 years ago

    They are a bundle of one of the biggest corruption in real estate.

    Sandeep Consul

    6 years ago

    Don't ever expect "prudent financial advise" from the bankers. I have hundreds of ex-students working for various Banks. Whenever I meet them their common complaint during our candid conservation as to how they are doing in their job, is that we are nothing more than "salesman". One of the Vice Presidents of a Foreign Bank said that his job is that of an insurance agent. They are given very aggressive targets which have to be fulfilled by hook or crook so that Banks can put up a good show on the quarterly results day. Foreign/Priavate Banks enter in to tie ups at National Level with various MF/PE/Realty/structured products/Insurance for fat margin products and these are aggressively pushed through various branches. Some of my ex students come to sell these products without having even 5% knowledge of the product features. They say we are just asked to cram the glossy one pager and anyways we are spendig 95% of time in sales so how do you expect us to know the nitty grittys or the financial soundness of the product. On being curious as to how they are able to sell these High Margin(Bank Friendly-Customer Unfriendly) products, they say their targets are the neo richs who are invited for the cocktails/dinners/other programmes by the banks. They are superficially explained fancy schemes with fancy return projections accompanied with fancy brochures. Most of them end up signing on blank forms without really undersatnding the product. In next few months about 10% end up complaining about the product/regular deduction from their account out of which the noisiest 2-3% end up being refunded their money(if possible)/(otherwise)compensated in some form. Rest is all Bank's gain.

    We will see in next few months that nothing much will come out of Cobrapost's sting also. At the most RBI will warn the Banks / fine them few lakhs (peanuts for Banks with hundreds of Crores of Profits), Banks will go slow on this mode and find some other channel to fool gullible people and make thousands of Crores for next few years till some other sting operation. All the data is out there to see how much Banks have made in selling third party products in last few years, literally thousands of crores. The fine they will pay after years of misselling will not be even 0.1 % of what they made in the last decade.

    Just to give an idea of the amount of Commission paid to these Banks- AMFI site lists commission paid for FY 11-12 for Mutual Funds -
    CITIBANK - 12,901 Crore
    HDFC BANK- 13,057 Crore
    HSBC BANK - 15,398 Crore

    If you include Insurance Commission also (which will be many times more than this) you can get clear idea as to why Banks are more interested in being third party sellers rather than traditional Bankers.

    With high profile people at the helm of these Banks who are on various channels and on covers of financial newspapers on a daily basis RBI is in no position to take any meaningful action at all and will close the enquiry with smartly drafted (carefully worded) report with cosmetic penalties.

    Talking to RM of a Bank will reveal much more than years of useless/superficial audit by SEBI/RBI about misselling of financial products/flouting of all the prudent Banking Norms.

    REPLY

    CA PRADEEP AGARWAL

    In Reply to Sandeep Consul 6 years ago

    Do not understand where is banking industry going?

    ashwin bahl

    6 years ago

    Ab kya hoga ? Time for cover up and files will go missing? Board Of Directors kahan hai ?

    REPLY

    CA PRADEEP AGARWAL

    In Reply to ashwin bahl 6 years ago

    Sab ghar main baith kar note gin rahe hain.

    ram

    6 years ago

    The whole system of co-operative banking system should be scrapped. If RBI has laid down stringent conditions for issue of new bank licences it is surprising that co-operative banks are being allowed to be opened and flourish with the ownership controlled by politicians. Is this not a blot on the banking system in India. What has the FSLRC mentioned about this in their huge report.

    REPLY

    CA PRADEEP AGARWAL

    In Reply to ram 6 years ago

    Who is RBI? Finance Ministry is calling the shots on instructions

    CA PRADEEP AGARWAL

    In Reply to CA PRADEEP AGARWAL 6 years ago

    Further, whatever little powers RBI has they want to prune it.

    nagesh kini

    6 years ago

    Business Line 19/4 headline screams - Cobrapost expose:Audit report finds "aberrations" GOI Finances Services Secretary echos the statement of RBI Dy. Gov HR Khan.
    FS Secretary Rajiv Takru -
    "Issues will be fixed at local level and action taken at individual level."
    How does this match with DG Dr. Chakrabarty's - "These are transcational issues which have nothing to do with money laundering."
    Both these mumbo-jumbo appear to be Greek and Cypriot (in the present context better than 'Greek and Latin')even to hard core finance professionals!
    Can some one more knowledgible please clarify as to what they seek to convey in layman's language?

    REPLY

    T PARAMASIVAN

    In Reply to nagesh kini 6 years ago

    Nothing but cover up. This DG is the worst of the lot. Has no idea about money or Banking. He shoots his mouth off unnecessarily. Someone should ask him to google the word money laundering and then he will know. People like him have been promoted only to do cover up operations.

    Arun Mehta

    In Reply to nagesh kini 6 years ago

    This three Banks which have the honor of being singled out by RBI for the act of "Aberrations" have also won several awards for being "Ethical" Banks/or "Bank' of the Year Awards from several 'known' and' Not so Known' organizations.When a 'sports person' is found positive on 'dope testing' much later after winning an award,he or she is morally forced to return the award .Can we expect like wise some ethical action here too.

    T PARAMASIVAN

    6 years ago

    RBI is aware of these shady accounts in Co Op Banks. Has RBI taken any action ? Until the rot sets in, it will keep mum and one day cancel the license. RBI does not want to take on the powerful politicians who are behind most of the Co Op Banks. In Bangalore, RBI is aware that everyday 100s of cheques issued by LIC are purchased by Brokers and these third party cheques are collected through co op Banks. No wonder we see PANCARD ads in almost all the trees . It is so easily available . Rate depends upon the address proof availability. Corruption rules the contry

    REPLY

    ashwin bahl

    In Reply to T PARAMASIVAN 6 years ago

    spot on !

    Arun Mehta

    In Reply to T PARAMASIVAN 6 years ago

    Perhaps ,it's time Co-Op banks particularly the ones owned by political heavy weights to have separate division called "Personal" Banking to consolidate such activities.

    Arun Mehta

    In Reply to T PARAMASIVAN 6 years ago

    Perhaps ,it's time Co-Op banks particularly the ones owned by political heavy weights to have separate division called "Personal" Banking to consolidate such activities.

    Supreme Court stays its order on appointment of Information Commissioners

    While staying its own judgment in the appointments of information commissioners, the apex court directed that all vacancies to be immediately filled up in all the information commissions in accordance with the RTI Act

    The Supreme Court has granted a stay on its own order asking the Information Commissions to work in benches of two members with one of the members having a judicial background. The apex court has also directed all vacancies to be immediately filled up in all the information commissions in accordance with the Right to Information (RTI) Act.

     

    According to RTI activists, this judgement would bring some relief to the operation of the RTI Act. They expect the Supreme Court should stay these parts finally and agree to spell out a transparent process for selection of Information Commissioners.

     

    In its order issued on Tuesday, the Supreme Court said, “We make it clear that subject to orders that may be finally passed after hearing the review petitions, the competent authority will continue to fill up the vacant posts of Information Commissioners in accordance with the Act and in accordance with the judgment in WP (C) No210 of 2012 except sub-paras 108.8 and 108.9 which we have stayed. This is to ensure that functioning of the Information Commissioners in accordance with the Act and the judgment is not affected during the pendency of the review petitions.”

     

    Earlier, the Supreme Court entertained petitioner Namit Sharma’s stand against the Government of India for the need of Chief Information Commissioners to have judicial background, which would require the RTI Act be amended. The Supreme Court, in its controversial judgment on 13 September 2012, stated that, “Information Commissions at respective levels shall henceforth work in benches of two members each. One of them being a ‘judicial member’, while the other an ‘expert member’.”

     

    The Government of India filed for a review of this judgement, since it was also perceived as encroaching on the domain of Parliament. Two interventions were filed by civil society. Aruna Roy, member of the National Advisory Committee (NAC) and Shailesh Gandhi, former Central Information Commissioner, represented by Prashant Bhushan, filed one and another was filed by CHRI, which does a lot of work in RTI.

     

    This was heard by the Supreme Court over five days for about seven hours. On 10 December 2012, the judgement was reserved. However, on 20 December one of the judges who had heard the original petition and the review retired. The matter was therefore in a limbo.

     

    Then Ms Roy and Mr Gandhi filed for a stay of the judgement pointing out that the judgement was causing difficulties in the functioning of RTI. While they agreed with the court about the need for a transparent process for selecting Information Commissioners and suggested a method, they pointed out the requirement of two-person benches and retired judges being appointed had caused a stoppage in the work of the Information Commissions in Rajasthan, Madhya Pradesh, Goa, Jharkhand and Manipur. (Noted RTI activists Shailesh Gandhi and Aruna Roy file Intervention Petition in the Supreme Court)

     

    They also pointed out to the apex court that due to the uncertainty caused by the absence of a judgement in the review, in many states Information Commissioners were not being appointed.

     

    The Supreme Court appreciated the issues and on 16 April 2013 ordered a stay of the parts, which were impeding the working of the Information Commissions. The court stayed the judgement partially and ruled as follows:

     

    We have heard learned counsel for the parties and we are not inclined to stay the operation of the entire judgment in Namit Sharma Vs Union of India but we direct that the following directions in sub-paras 108.8 and 108.9 quoted here-in-below shall remain stayed during the pendency of the Review Petition (C) No. 2309 of 2012.

     

    108.8 The Information Commissions at the respective levels shall henceforth work in Benches of two members each.

    One of them being a ‘judicial member’, while the other an ‘expert member’. The judicial member should be a person possessing a degree in law, having judicially trained mind and experience in performing judicial functions. A law officer or a lawyer may also be eligible provided he is a person who has practiced law at least for a period of twenty years as on the date of the advertisement. Such lawyer should also have experience in social work. We are of the considered view that the competent authority should prefer person who is or has been a judge of the high court for appointment as Information Commissioners. Chief Information Commissioner at the Centre or state level shall only be a person who is or has been a chief justice of the high court or a judge of the Supreme Court of India.

     

    108.9 The appointment of the judicial members to any of these posts shall be made ‘in consultation’ with the Chief Justice of India and chief justices of the high courts of the respective states, as the case may be”.

     

    We further direct that wherever Chief Information Commissioner is of the opinion that intricate questions of law will have to be decided in a matter coming before the Information Commissioners, he will ensure that the matter is heard by a bench of which at least one member has knowledge and experience in the field of Law.

     

    We make it clear that subject to orders that may be finally passed after hearing the review petitions, the competent authority will continue to fill up the vacant posts of Information Commissioners in accordance with the Act and in accordance with the judgment in W.P.(C) No. 210 of 2012 except sub-paras 108.8 and 108.9 which we have stayed. This is to ensure that functioning of the Information Commissioners in accordance with the Act and the judgment is not affected during the pendency of the review petitions.

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    Having failed in its disinvestment efforts, is the govt enforcing its failure-prone ideas on PSU ETFs, too?

    The Department of Disinvestment wants mutual funds to spend a minimum Rs15 crore towards marketing and advertising expenses for the NFO for public sector ETFs. The regular practice is to spend a little over Rs5 crore, that too only in a rising market

    The Disinvestment of Department (DoD) of the Union government is hell-bent on failing in yet another another effort at disinvestment after its botched up efforts in the 2010-13 period. The new idea is to launch an Exchange Traded Fund (ETF) for Public Sector Units (PSUs). For this, asset management companies (AMCs) that run mutual funds, have been asked to bid for creating the ETFs and market them to the investors. However, the know-all and imperious DoD wants AMCs to commit themselves to a minimum of Rs15 crore towards marketing and advertising expenses.

     

    Typically, an AMC, during the heydays, spent about 5% of the fund cost towards marketing and advertising. For higher sums collected the percentage goes down. While the AMCs spend a little over Rs5 crore for marketing a new fund offering (NFO) of an equity-oriented scheme, for ETFs the expenses are less than Rs3 crore. And this too, when the markets are on the rise.

     

    At present, the markets are down and yet the DoD’s insistence has left no option for many AMCs but to opt out from the race. According to a report from the Business Standard, of the six AMCs that have shown interest in launching the CPSE ETF, only two—Goldman Sachs AMC and UTI Mutual Fund—made presentations before the inter-ministerial group. The other four, which had planned to join the race, were DSP BlackRock, Kotak MF, Reliance MF and SBI MF, the report says.

     

    The government’s efforts to disinvest its stake in PSUs has failed miserably over the past three years because the babus who have overseen them had only one objective: maximise the cash collected from disinvestment at the expense of investors. This meant that the officials have consistently ignored the views of capital market professionals and have ended with trying to disinvest the shares of wrong companies, at the wrong time and at the wrong prices.

     

    The same attitude continues. The DoD in its request for proposals (RFP) says, “The selected AMC/ETF provider shall incur marketing/advertising expenses to the extent of at least Rs15 crore, under NFO expenses, for the CPSE ETF. The AMC/ETF provider may incur marketing expenses under NFO expenses, over and above this stipulated amount. The key expenditure heads and the item-wise amounts to be spent under this head shall be finalized and approved by the government, in consultation with the AMC and the advisor. It may be noted that these expenses shall be devoted only towards marketing activities and are in addition to the expenses which shall be borne by the AMC.”

     

    This is excluding the payments or incentives the AMC would have to pay to distributors and brokers. In addition, the selected AMC will pay statutory expenses or fees as applicable, payments to depository, cost for creation and maintenance of index and any other cost for creating and launching the ETF.

     

    The proposed CPSE ETF will serve as an additional mechanism for the government to monetize its shareholdings in listed CPSEs that eventually would form part of the ETF basket. ICICI Securities is advising the DoD in launching the CPSE ETF.

     

    For FY13, the government had fixed Rs30,000 crore as disinvestment target. Till February 2013, it was able to realise Rs21,504 crore through stake sale in five companies including NBCC, Hindustan Copper, NMDC and NTPC.

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