The central bank seems convinced that no scam has taken place in India’s top three private sector banks, which are currently under its scanner after an online magazine levelled money-laundering allegations against them.
An indication to this effect came when, at the sidelines of an event on risk-based supervision, K. C. Chakrabarty, Deputy Governor, Reserve Bank of India, said “no scam has happened.”
In a sensational undercover operation across the country, online magazine cobrapost.com caught officials at some of the branches of ICICI Bank, HDFC Bank and Axis Bank on camera allegedly offering to convert tax-evaded money into legitimate money.
Chakrabarty said, “Allegations don’t mean know-your-customer (KYC) norms have been flouted. There is not a single transaction (relating to money laundering as alleged by cobrapost) which has taken place…These are transactional issues, which have nothing to do with money laundering.”
DISGUISING ASSETS
Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them.
Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.
The RBI Deputy Governor observed that people may not be paying tax and some money flows into the system (banking). However, there are clear instructions to banks on how to prevent such monies from entering the banking system. “I am not saying there is no problem. Even without the sting operation, I know there is a problem in the system,” said Chakrabarty.
The central bank has initiated the process of carrying out comprehensive scrutiny covering both head-office and branches of ICICI Bank, HDFC Bank and Axis Bank.
This apart, the Reserve Bank has also undertaken a thematic study in respect of banks that are active in selling gold coins/wealth management products to examine whether there are systemic issues and to plug deficiencies and legal loopholes, if any.
The final reports on all the three banks will be completed by March 31, 2013, and thereafter further course of action as necessary will be initiated by the RBI. Chakrabarty said if the scrutiny shows that there is a need to further strengthen any guidelines, then the RBI will do so.
FINANCIAL INCLUSION
However, the RBI Deputy Governor observed that if KYC is made too stringent at a time when the banking system is going all out on the financial inclusion front, then opening bank accounts for the financially excluded may become a tough task.
On the possibility of taking action against the three private sector banks, Chakrabarty said: “We cannot take action based only on allegations. We go by evidence...If we find something is wrong, we will take action.”
Official clears Indian banks of money-laundering
MUMBAI: A senior Indian central bank official cleared three private banks of money-laundering on Thursday after an undercover media investigation led to the suspension of dozens of their employees.
The Reserve Bank of India announced that it would investigate the three banks -- ICICI, HDFC and Axis -- following an apparent sting by a reporter who had posed as a customer and sought advice on how to invest cash by circumventing existing banking laws designed to safeguard against money-laundering.
Although the RBI's investigation is not scheduled to issue its final report until the end of the month, the central bank's deputy governor told reporters that there was no evidence of any wrongdoing.
"There is not a single transaction which has taken place," said K.C. Chakrabarty, speaking in Mumbai.
"There is no scam (that) has happened ... as no transaction has taken place," Chakrabarty added.
"It has nothing to do with money-laundering."
The RBI investigation was launched after a reporter for the online Cobrapost news outlet used a hidden camera to record dozens of conversations with bank employees, which were then posted on its website.
The video shows some executives from the banks agreeing to help him with his investment plans, but no money actually exchanged hands.
Evasive action
A banking scandal highlights the problem of black money in India
THE videos were set to the James Bond theme tune and labelled as a “shocking mega-exposé”. They were released by an investigative website called Cobrapost on March 13th, and have hit the share prices of India’s biggest private-sector banks. The sting consisted of a journalist with a secret camera walking into bank branches, where he claimed to be linked to an unnamed politician whose house could no longer contain his cash. Staff in many branches were only too willing to help launder the money, usually by fiddling the rules for setting up accounts and insurance policies. “Yes, yes, don’t worry, sir, all people do this,” replied one bank official.
The lenders and their regulator are looking into the allegations. Even if they are bogus, they tap into a well of mistrust. A 2009 e-mail claimed that Indians held more money in Swiss banks than people from all other countries combined. It was a hoax, but still went viral.
Gauging the scale of the problem is hard. A 2010 World Bank study of 151 countries concluded that India’s shadow economy, defined as legal activity concealed from the authorities, was equivalent to a fifth of official GDP (confusing matters, it is unclear to what extent India’s official GDP already captures the black economy). That is roughly double the level of the best rich countries, but below the global average and most other emerging nations. The last vaguely official study was in 1985 and had a similar answer—19-21% of official GDP.
Both estimates look too low, especially if all types of dodgy activity are included. About 85% of jobs are in the informal sector, which is typically cash-based. Corruption is common—both “retail” small bribes and “wholesale” scams involving powerful politicians. It seems likely that things have deteriorated since the mid-1980s. True, the tax code has been improved, and the effective tax rate big firms pay has risen. But the boom of the past two decades is seen by many as a gilded age to rival 19th-century America’s, with a cast of chancers and robber barons to match.
Take tax. Only 42,800 people declare income of over 10m rupees ($184,000) a year. India’s finance minister, Palaniappan Chidambaram, says this figure is “laughable”. It is not just the rich that play fast and loose. Only 2.5% of Indians pay income tax. Surjit Bhalla of Oxus Investments, a research firm, reckons the actual income-tax take is two-thirds lower than it should be.
The asset classes in which black money is stored provide another clue to the scale of the black economy. Property and land transactions probably amount to tens of billions of dollars a year. Mumbai has a huge stock of empty apartments held as investments, their owners unwilling to sell for fear that the proceeds might enter the formal economy and be taxed.
Gold is another currency of choice. This is partly because the rate on bank deposits barely beats inflation, but also because it is hard to keep tabs on the shiny stuff. Gross gold imports are running at 2-3% of GDP. Household savings have drifted back towards more opaque asset classes. Savings in physical assets—such as bullion and housing—are running at 14% of GDP a year. Formal financial savings such as bank deposits, which tend to be cleaner, have declined to just 8%, from 12% in 2009.
A final indicator is the offshore-finance system. Much foreign investment into the country flows via Mauritius, with which India has a tax agreement. Supporters say it allows investors to avoid red tape and unfair capital-gains levies. Critics argue that Mauritius is a conduit through which Indians send and bring back black money (the island’s government denies this).
At least the cash-strapped government appears to be taking the issue of the shadow economy more seriously. It plans to cross-check bank and credit-card records with tax submissions. It has commissioned a series of studies into black money that are due in the next few months. If they are credible and made public they might help dispel a widespread view—that politicians are among the biggest beneficiaries of India’s black-money culture.
Evasive action
A banking scandal highlights the problem of black money in India
THE videos were set to the James Bond theme tune and labelled as a “shocking mega-exposé”. They were released by an investigative website called Cobrapost on March 13th, and have hit the share prices of India’s biggest private-sector banks. The sting consisted of a journalist with a secret camera walking into bank branches, where he claimed to be linked to an unnamed politician whose house could no longer contain his cash. Staff in many branches were only too willing to help launder the money, usually by fiddling the rules for setting up accounts and insurance policies. “Yes, yes, don’t worry, sir, all people do this,” replied one bank official.
The lenders and their regulator are looking into the allegations. Even if they are bogus, they tap into a well of mistrust. A 2009 e-mail claimed that Indians held more money in Swiss banks than people from all other countries combined. It was a hoax, but still went viral.
Gauging the scale of the problem is hard. A 2010 World Bank study of 151 countries concluded that India’s shadow economy, defined as legal activity concealed from the authorities, was equivalent to a fifth of official GDP (confusing matters, it is unclear to what extent India’s official GDP already captures the black economy). That is roughly double the level of the best rich countries, but below the global average and most other emerging nations. The last vaguely official study was in 1985 and had a similar answer—19-21% of official GDP.
Both estimates look too low, especially if all types of dodgy activity are included. About 85% of jobs are in the informal sector, which is typically cash-based. Corruption is common—both “retail” small bribes and “wholesale” scams involving powerful politicians. It seems likely that things have deteriorated since the mid-1980s. True, the tax code has been improved, and the effective tax rate big firms pay has risen. But the boom of the past two decades is seen by many as a gilded age to rival 19th-century America’s, with a cast of chancers and robber barons to match.
Take tax. Only 42,800 people declare income of over 10m rupees ($184,000) a year. India’s finance minister, Palaniappan Chidambaram, says this figure is “laughable”. It is not just the rich that play fast and loose. Only 2.5% of Indians pay income tax. Surjit Bhalla of Oxus Investments, a research firm, reckons the actual income-tax take is two-thirds lower than it should be.
The asset classes in which black money is stored provide another clue to the scale of the black economy. Property and land transactions probably amount to tens of billions of dollars a year. Mumbai has a huge stock of empty apartments held as investments, their owners unwilling to sell for fear that the proceeds might enter the formal economy and be taxed.
Gold is another currency of choice. This is partly because the rate on bank deposits barely beats inflation, but also because it is hard to keep tabs on the shiny stuff. Gross gold imports are running at 2-3% of GDP. Household savings have drifted back towards more opaque asset classes. Savings in physical assets—such as bullion and housing—are running at 14% of GDP a year. Formal financial savings such as bank deposits, which tend to be cleaner, have declined to just 8%, from 12% in 2009.
A final indicator is the offshore-finance system. Much foreign investment into the country flows via Mauritius, with which India has a tax agreement. Supporters say it allows investors to avoid red tape and unfair capital-gains levies. Critics argue that Mauritius is a conduit through which Indians send and bring back black money (the island’s government denies this).
At least the cash-strapped government appears to be taking the issue of the shadow economy more seriously. It plans to cross-check bank and credit-card records with tax submissions. It has commissioned a series of studies into black money that are due in the next few months. If they are credible and made public they might help dispel a widespread view—that politicians are among the biggest beneficiaries of India’s black-money culture.
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