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 Within days, the bank permitted large cheques of Rs15 lakh+, totalling up to Rs80 lakh, being deposited and withdrawn in cash within three days.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.