RBI heat on bank honchos after expose of money laundering
Mahua Venkatesh, Hindustan Times
New Delhi, May 19, 2013
New Delhi, May 19, 2013
May 13, 2013, 03.16 PM IST
The Reserve Bank of India (RBI) has moved to hold senior banking officials directly accountable for violations of supervision lapses under their nose that lead to money laundering and other wrongdoings. In a move reminiscent of the corporate laws put in place after the Enron scandal in the US,the RBI is likely to to review the “fit and proper” criteria and banks will now be mandated to formally declare that its senior officers have done the due diligence required in dealing with shady customers.
A final decision on the issue, however, would be taken after due deliberations, said sources
A recent sting operation by investigative website Cobrapost alleged unfair practices at three private sector lenders — ICICI Bank, HDFC Bank and Axis Bank.
According to the RBI, the process of due diligence should be undertaken by private sector banks at the time of appointment or even renewal of appointment.
The RBI could also come out with stricter guidelines on the same and companies seeking new licenses could face stiffer compliance issues, sources told HT.
“This issue may be looked at by the central bank, though a final decision is yet to be taken and there could be tightening of norms which would also be applicable to those which apply for fresh banking licenses,” an official source, who did not wish to be identified, said.
“This issue may be looked at by the central bank, though a final decision is yet to be taken and there could be tightening of norms which would also be applicable to those which apply for fresh banking licenses,” an official source, who did not wish to be identified, said.
Cobrapost: NABARD chief gives clean chit to co-operative banks-The Hindu 19th May 2013
Amid allegations of co-operative banks being used as conduits for money laundering, NABARD, which jointly regulates such lenders, has said that it has found no shortcoming pointing towards any such activity.
“Every year we do an inspection and we have not found anything like that,” National Bank for Agriculture and Rural Development’s (NABARD) chairman Prakash Bakshi told PTI over the weekend, when asked about the recent controversy over money laundering.
A probe launched by Reserve Bank of India following allegations of non-compliance with anti-money laundering measures and know your customer (KYC) norms by top private banks has reportedly found that cooperative banks are used as conduits.
Not having the entire bouquet of service offerings, the cooperative banks tie-up with scheduled commercial banks to expand their reach. Co-operative banks can accept cash under Rs 50,000 from customers (the limit at which reporting to tax authorities sets in). They usually earn commission from larger banks for providing services.
When asked about the misuse of the system and if this amounts to regulatory arbitrage, Mr. Bakshi said, “It is the same regulation for everybody. Banking Regulation Act is same for everybody.”
Online portal Cobrapost had in March made public a sting operation purportedly showing some executives at three top private banks -- ICICI Bank, HDFC Bank and Axis Bank -- allegedly agreeing to receive unverified sums of cash and put them in their investment schemes and benami accounts in violation of anti-money laundering laws.
Earlier this month, it had followed up with a similar operation, showing executives at over 20 financial institutions, including State Bank of India and Life Insurance Corporation of India, offering similar services.
The Reserve Bank has maintained that no transaction has happened while the sting also does not point to “money laundering“.
RBI Governor D.Subbarao has also said: “RBI is not directly involved... even banks are not directly responsible. They are not expected to inquire about the source of income. It is for government and tax authorities to check money laundering.”
Mr. Bakshi said Nabard, which disbursed a refinance of Rs 65,000 crore on short-term agri loans last fiscal, is targeting to take the same number up to Rs 80,000 crore in the current fiscal.
Meanwhile, in a first, NABARD, in association with the National Payments Corporation of India, launched the maiden Kisan Credit Card (KCC) Debit Card for the customers of the Raigad District Cooperative Bank in the district headquarters of Alibaug over the weekend.
Under the scheme, the maximum loan amount for which a beneficiary farmer is eligible will be loaded on the card and he can withdraw the money as per his requirements. Interest applicable thereof, will have to be serviced.
RBI probes Cobrapost report, reveals violations by banks- moneycontrol.com
The Reserve Bank of India is probing the Cobrapost sting operation on alleged money laundering by top banks. The RBI report has revealed major irregularities in top banks.
The report shows string of violations on several counts. Sources say the RBI report reveals dummy PANs, unknown NRO IDs, unauthorised gold sale, rampant non-compliance of KYC norms and irregular staff trips.
Sources say the RBI probe into ICICI Bank reveals cash transactions over Rs 10 lakh from unknown sources in non-resident accounts. There are close to 1,000 cases of customers with multiple IDs in 14 ICICI Bank branches. It reveals cash above Rs 50,000 accepted without a PAN number.
Also read: RBI doing its bit to ease interest rates, what about banks?
The report on HDFC Bank reveals violaton of KYC norms. Up to Rs 5 lakh cash was accepted forgold per day per customer, say sources.
The RBI report on Axis Bank shows transactions over Rs 4,500 crore without a PAN number. It shows branch officials accessed internal accounts to park funds.Cobrapost had revealed that 23 banks and insurance companies have been engaged in money laundering. Among the 23 banks involved are mostly PSU banks including some big names like the State Bank of India , Bank of Baroda , Punjab National Bank , Canara Bank , IDBI , Oriental Bank and Dena Bank .
Cobrapost editor Aniruddha Bahal claimed that both banks and the insurance companies flouted the Foreign Exchange Management Act (FEMA) rules, Reserve Bank of India (RBI) guidelines and KYC norms. The website alleged that banks accepted unaccounted cash and invested in insurance products thereby hinting at a two-way street between the two.
The sting operation also alleged that splitting of transactions among banks happened to avoid detection. Earlier this year, Cobrapost across various branches of private financial institutions had revealed how bank employees were accepting black money from customers to convert them into white money. Cobrapost claimed that the nationwide operation shows how private banking and insurance affiliates launder money as part of standard procedures.
The sting also showed that money laundering services were openly being offered even to walk in customers who wished to launder their money and a variety of options were being offered.
What I FEEL
When majority of successful bankers use illegal means to acquire deposit and get promotion , how it can be expected these senior officers will honestly punish the real culprit. At best they will take action against a few officers whose face and name has figured in Video camera and in sting operation carried out by Cobrapost.
When majority of officers are birds of same feather, real action cannot be taken against real culprit who has propagated wrong business model and who have vitiated work culture.In fact a bank officer cannot get success in his life and cannot get promotion even in decades if he or she sticks to set rules and laws .
The bad culture is so deep rooted in the blood of so called successful bank executives that an officer is tempted to resort to accept even bad money to achieve the target and to grow in his or her career path. In fact all those officers who are sitting at key posts have resorted to bad means for mobilisation of deposits. It is undeniable bitter truth of banking at all level.
When majority of officers are birds of same feather, real action cannot be taken against real culprit who has propagated wrong business model and who have vitiated work culture.In fact a bank officer cannot get success in his life and cannot get promotion even in decades if he or she sticks to set rules and laws .
The bad culture is so deep rooted in the blood of so called successful bank executives that an officer is tempted to resort to accept even bad money to achieve the target and to grow in his or her career path. In fact all those officers who are sitting at key posts have resorted to bad means for mobilisation of deposits. It is undeniable bitter truth of banking at all level.
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If bank boards aren't capable, nothing much can be done: K C Chakrabarty---Business Standard
Q&A with RBI deputy governor
Reserve Bank of India Deputy Governor K C Chakrabarty says the central bank has not found any evidence of illegal or irregular transactions by banks, as alleged by Cobrapost. In an interview with Manojit Saha, he also said banks may have indulged in “traffic rule violations” but “no accident has taken place”. Edited excerpts.
Irrespective of what Cobrapost has alleged, do you think the more basic issue is mis-selling of financial products by banks?
Whenever there is selling, there will be some mis-selling. We need to have adequate guidelines on what is mis-selling. There is no mis-selling of banking products in this case. The other regulators have to create their own guidelines in this regard. In banking, the only thing that could be mis-sold is loan. If banks mis-sell loan, only they will suffer.
But won’t the reputation risk of banks will be at stake if their branches indulge in something like that?
So far as reputation is concerned, the board and the management of the bank is the first line of defence. If they don’t bother for their reputation, who else can? Also, reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? What we need in such cases is systemic change. We need to frame guidelines to prevent mis-selling. We also need to educate the customer. The customer should understand why he/she is buying the product. We can disallow banks from selling such products, but that will be the last step.
My basic question is why should banks take so much commission in selling insurance/mutual fund products. What is the extra cost that the bank is incurring? The full benefit of the commission/reduction in cost, if any, should go to the customer. Only then, the penetration of such products would happen.
Banks selling para-banking products is a serious concern from the customer protection point of view and not from bank’s reputation point of view. What we feel is that the customer’s interest is being sacrificed. We also have serious concern about banks selling gold coins. It reduces the deposit growth. If deposits don’t grow, banks increase the lending rate. That creates more problem…monetary transmission gets affected. We have raised all these issues and also expressed our concern to banks.
Is RBI thinking of putting some restrictions on banks selling gold coins?
Personally, I am very clear that banks should not sell gold coins, though that may not be the stated policy at present. The banks have already been advised to exercise restraint in selling gold coins.
RBI had initiated a probe following the Cobrapost allegations. What are the conclusions?
There are some traffic rule violations but no accident has taken place. As of now, we have no evidence of any illegal or irregular transaction.
How do you react to the criticism that Indian regulators are reactive, and not proactive?
Around the globe, regulators have been reactive only. But there are enough guidelines on what banks need to consider while introducing a new product. When the system is evolving, the guidelines have to change with time. Sometimes, we may not able to keep pace. At the same time, if we become too proactive, we will kill innovation and if we are slow in taking action, then we will be encouraging violation. There is a thin line between what is innovation and what is violation. The challenge before any regulator is to maintain a balance between them.
How far have you succeeded in maintaining the balance?
We may say that we have succeeded as no major accident has taken place but someone may also say no progress has taken place as our insurance and banking penetration is very low. These are all different ways of looking at the same issue.
The other criticism that RBI faces is that Indian financial sector is over regulated but under supervised
In a country, if everybody violates the law, you cannot say supervision is wrong. There may be something wrong in the rule/structure. There cannot be over-regulation and under- supervision. There may be under-regulation and over-supervision. So far as banking supervision is concerned, in my view, there is no lapse in supervision. But, our supervision needs to keep pace with time and with the changes that are happening in the market place. On a more general note, regulation and supervision are found to be lax across the world. That is why the financial crisis happened. World over, there is an effort to strengthen regulation and supervision.
In some of your speeches, you have mentioned that the corporate debt restructuring mechanism has been misused. How do you plan to address the problem?
Restructuring is a perfect commercial phenomenon practised across the world. It is like a medicine, but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer.
You had also raised the issue that when a chairman of a public sector bank retires, NPAs rise. Is there any plan on how to tackle this issue?
Why blame the chairman only? He is not the only one who finalises the balance sheet. What is the board doing? Representatives from Finance Ministry and RBI are also there on the board. Why don’t we take action against the entire board? Earlier, we had no power. But now that the Banking Regulation Act has been amended, we have more power. Now, we can remove members of the board, including our own people. That is why I am advocating that our people should not be on bank boards. But this would need amendment in the Bank Nationalisation /SBI Act. In a bank, the board is the first line of defence, for proper corporate governance. If the board is not capable, nothing can be done.
So you are saying there is concern with the banks’ boards?
Yes, definitely. We need to see how the selection and appointment of board members is done? Are they Fit and Proper? There are many issues encompassing the entire gamut of governance of bank boards.
Do these concerns extend to private bank boards also?
We don’t differentiate on the basis of public or private ownership. In banking, performance is ownership-neutral. For us, all banks are same. What is important is the quality of management and quality of the boards.
In India, most public sector banks are driven by the chairman. RBI is also a part of the selection process. So, if a chairman cannot deliver, are you saying RBI also has to take responsibility?
Personally, I agree. That is why I have said, RBI should not be a party to the selection process. However, this again would require amendment to the Bank Nationalisation Act/SBI Act.
In this falling interest rate scenario, banks and home loans companies have seen asking customers to pay fee to shift to lower interest rate. Since those are floating loan rates, should they not automatically come down when the benchmark rate falls?
We are telling banks to disclose the Annual Percentage Rate (APR). Whatever one time charge and other charges you levy on the customer, take into account all that and arrive at an annual interest rate, which should include all the charges. Disclosing APR is regarded as a global best practice. We have already suggested this. The Indian Banks' Association has to work it out. Each bank has to do their part and work out a methodology. We are telling the banks to advertise their APRs and not interest rate, in newspapers/publicity materials.
When overall interest rate goes up, all banks are happy to increase their lending rate. But in a falling interest rate scenario, they only extend the benefit to new customers.
Existing customers can seek redress under the banking ombudsman scheme of RBI if they think they are not being treated on par with the new customers. We have already said that discriminating between old and the new customers in the matter of pricing is a wrong practice.
Why isn’t monetary transmission taking place?
Monetary transmission is not taking place anywhere in the globe because of the financial crisis. There is lack of confidence on what is going to happen tomorrow. Even in the developed markets like the UK and Europe, interest rates are very low but SMEs/other consumers are not getting loans. People don't believe what the central bank says or what the market says. The entire LIBOR scandal is a reflection of that. It is not only happening in this country, it is happening everywhere.
Indian banks say that their cost of funds is not coming down.
I have a counter-question. How are banks’ margins going up or remaining the same even while NPAs are going up? In September, 2008, the repo rate was 9%, CRR was 9%, and BPLR was 13.75-14%. After four and a half years, CRR has come down to 4%, repo is 7.25%. But the BPLR of most banks today continues to be above 14%! Assuming 20% of customers still on BPLR, why is there no transmission for them. Further, who is responsible for the high cost of funds?
Why then RBI isn’t invoking the sunset clause on BPLR so that all customers shift to base rate? Banks have been demanding that for a long time.
Why aren’t banks invoking that themselves? No one has prohibited them from invoking the sunset clause. If RBI does it, we would be accused of micromanaging
Irrespective of what Cobrapost has alleged, do you think the more basic issue is mis-selling of financial products by banks?
Whenever there is selling, there will be some mis-selling. We need to have adequate guidelines on what is mis-selling. There is no mis-selling of banking products in this case. The other regulators have to create their own guidelines in this regard. In banking, the only thing that could be mis-sold is loan. If banks mis-sell loan, only they will suffer.
But won’t the reputation risk of banks will be at stake if their branches indulge in something like that?
So far as reputation is concerned, the board and the management of the bank is the first line of defence. If they don’t bother for their reputation, who else can? Also, reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? What we need in such cases is systemic change. We need to frame guidelines to prevent mis-selling. We also need to educate the customer. The customer should understand why he/she is buying the product. We can disallow banks from selling such products, but that will be the last step.
My basic question is why should banks take so much commission in selling insurance/mutual fund products. What is the extra cost that the bank is incurring? The full benefit of the commission/reduction in cost, if any, should go to the customer. Only then, the penetration of such products would happen.
Banks selling para-banking products is a serious concern from the customer protection point of view and not from bank’s reputation point of view. What we feel is that the customer’s interest is being sacrificed. We also have serious concern about banks selling gold coins. It reduces the deposit growth. If deposits don’t grow, banks increase the lending rate. That creates more problem…monetary transmission gets affected. We have raised all these issues and also expressed our concern to banks.
Is RBI thinking of putting some restrictions on banks selling gold coins?
Personally, I am very clear that banks should not sell gold coins, though that may not be the stated policy at present. The banks have already been advised to exercise restraint in selling gold coins.
RBI had initiated a probe following the Cobrapost allegations. What are the conclusions?
There are some traffic rule violations but no accident has taken place. As of now, we have no evidence of any illegal or irregular transaction.
How do you react to the criticism that Indian regulators are reactive, and not proactive?
Around the globe, regulators have been reactive only. But there are enough guidelines on what banks need to consider while introducing a new product. When the system is evolving, the guidelines have to change with time. Sometimes, we may not able to keep pace. At the same time, if we become too proactive, we will kill innovation and if we are slow in taking action, then we will be encouraging violation. There is a thin line between what is innovation and what is violation. The challenge before any regulator is to maintain a balance between them.
How far have you succeeded in maintaining the balance?
We may say that we have succeeded as no major accident has taken place but someone may also say no progress has taken place as our insurance and banking penetration is very low. These are all different ways of looking at the same issue.
The other criticism that RBI faces is that Indian financial sector is over regulated but under supervised
In a country, if everybody violates the law, you cannot say supervision is wrong. There may be something wrong in the rule/structure. There cannot be over-regulation and under- supervision. There may be under-regulation and over-supervision. So far as banking supervision is concerned, in my view, there is no lapse in supervision. But, our supervision needs to keep pace with time and with the changes that are happening in the market place. On a more general note, regulation and supervision are found to be lax across the world. That is why the financial crisis happened. World over, there is an effort to strengthen regulation and supervision.
In some of your speeches, you have mentioned that the corporate debt restructuring mechanism has been misused. How do you plan to address the problem?
Restructuring is a perfect commercial phenomenon practised across the world. It is like a medicine, but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer.
You had also raised the issue that when a chairman of a public sector bank retires, NPAs rise. Is there any plan on how to tackle this issue?
Why blame the chairman only? He is not the only one who finalises the balance sheet. What is the board doing? Representatives from Finance Ministry and RBI are also there on the board. Why don’t we take action against the entire board? Earlier, we had no power. But now that the Banking Regulation Act has been amended, we have more power. Now, we can remove members of the board, including our own people. That is why I am advocating that our people should not be on bank boards. But this would need amendment in the Bank Nationalisation /SBI Act. In a bank, the board is the first line of defence, for proper corporate governance. If the board is not capable, nothing can be done.
So you are saying there is concern with the banks’ boards?
Yes, definitely. We need to see how the selection and appointment of board members is done? Are they Fit and Proper? There are many issues encompassing the entire gamut of governance of bank boards.
Do these concerns extend to private bank boards also?
We don’t differentiate on the basis of public or private ownership. In banking, performance is ownership-neutral. For us, all banks are same. What is important is the quality of management and quality of the boards.
In India, most public sector banks are driven by the chairman. RBI is also a part of the selection process. So, if a chairman cannot deliver, are you saying RBI also has to take responsibility?
Personally, I agree. That is why I have said, RBI should not be a party to the selection process. However, this again would require amendment to the Bank Nationalisation Act/SBI Act.
In this falling interest rate scenario, banks and home loans companies have seen asking customers to pay fee to shift to lower interest rate. Since those are floating loan rates, should they not automatically come down when the benchmark rate falls?
We are telling banks to disclose the Annual Percentage Rate (APR). Whatever one time charge and other charges you levy on the customer, take into account all that and arrive at an annual interest rate, which should include all the charges. Disclosing APR is regarded as a global best practice. We have already suggested this. The Indian Banks' Association has to work it out. Each bank has to do their part and work out a methodology. We are telling the banks to advertise their APRs and not interest rate, in newspapers/publicity materials.
When overall interest rate goes up, all banks are happy to increase their lending rate. But in a falling interest rate scenario, they only extend the benefit to new customers.
Existing customers can seek redress under the banking ombudsman scheme of RBI if they think they are not being treated on par with the new customers. We have already said that discriminating between old and the new customers in the matter of pricing is a wrong practice.
Why isn’t monetary transmission taking place?
Monetary transmission is not taking place anywhere in the globe because of the financial crisis. There is lack of confidence on what is going to happen tomorrow. Even in the developed markets like the UK and Europe, interest rates are very low but SMEs/other consumers are not getting loans. People don't believe what the central bank says or what the market says. The entire LIBOR scandal is a reflection of that. It is not only happening in this country, it is happening everywhere.
Indian banks say that their cost of funds is not coming down.
I have a counter-question. How are banks’ margins going up or remaining the same even while NPAs are going up? In September, 2008, the repo rate was 9%, CRR was 9%, and BPLR was 13.75-14%. After four and a half years, CRR has come down to 4%, repo is 7.25%. But the BPLR of most banks today continues to be above 14%! Assuming 20% of customers still on BPLR, why is there no transmission for them. Further, who is responsible for the high cost of funds?
Why then RBI isn’t invoking the sunset clause on BPLR so that all customers shift to base rate? Banks have been demanding that for a long time.
Why aren’t banks invoking that themselves? No one has prohibited them from invoking the sunset clause. If RBI does it, we would be accused of micromanaging
http://www.business-standard.com/article/economy-policy/if-bank-boards-aren-t-capable-nothing-much-can-be-done-k-c-chakrabarty-113051300674_1.html
An investigation by the ReserveBank of India (RBI) into allegations of money laundering by private banks has found large-scale violations ranging from huge cash deposits without PAN to dummy numbers.
The probe report, a copy of which is available with TOI, shows that three private players — HDFC Bank, ICICI Bank and Axis Bank — had also hugely suppressed alerts generated by their system on suspected transactions. The three lenders were the first to be named in a sting operation carried out by an investigative website, which later released videos showing alleged irregularities in over two dozen banks and insurance companies.
At the heart of the problem is perverse incentive structure that encourages bank executives to sell insurance and other financial products to clients.
The report comes against a virtual clean chit given by some RBI executives, including deputy governor K C Chakraborty.
The RBI probe found that there were several instances of cash deposits below Rs 10 lakh to avoid being reported as CTR (cash transaction report), and it found that banks were accepting Rs 50,000 and above without PAN or "there were multiple and large value transactions in Form 60 accounts in some cases".
The inquiry also found that the customers were splitting deposits of over Rs 50,000 into smaller amounts to avoid providing PAN.
In the 43 branches inspected by the RBI, of which 37 were exposed by the website, investigators found that there were 49,495 cash receipt/deposit transactions of amounts more than Rs 25 lakh during a six-month period — between October 1, 2012, and March 23, 2013.
Of them 39,168 were with PAN and added up to Rs 26,586 crore and Rs 1,045 crore worth 2,658 transactions using Form 60 (used by those who do not have PAN cards).
In contrast, the investigators also found that 7,569 transactions worth Rs 4,575 crore was without both PAN and Form 60. "It can be seen from the above statistics that there was pre-dominance of high value of cash transaction without PAN. Moreover, in many cases where PAN was provided it was dummy PAN," the investigators have reported. In certain cases, the same PAN was assigned to different accounts.
Significantly, in 3,820 cases of high net-worth individuals (HNIs), who were in the "high risk category", dummy PAN cards were used.
Agreeing with the website's claim that there was a nexus between cooperative banks and private banks to channelize huge amounts of cash into the banking channel, RBI investigators said there was a practice of "cooperative banks opening current accounts with commercial banks on which they used a large number of cheques payable "at par" to their customers including walk-in customers for various purposes".
The "present arrangements between commercial banks and cooperative banks reveal a number of serious systemic and supervisory concerns as the risks from weak KYC/AML (anti-money laundering) compliances by cooperative banks are transmitted to the commercial banks". The cooperatives banks, for various reasons, "may be an easier conduit for facilitating substantial amount of cash entering the banking system."
The investigation also found that the anti-money laundering systems of the three private banks were not comprehensive, and several instances of non-reporting of integrally connected transactions were detected. The banks reported under 1% of the suspect transactions to the government's Financial Intelligence Unit (FIU).
In 2011-12, ICICI Bank system generated 5.4 lakh alerts about suspicious transactions, but only 3,677 were reported to FIU. In HDFC Bank, there were 11 lakh suspected transactions, with 932 reported to the anti-money laundering agency. Similarly, Axis Bank system generated 29.6 lakh alerts, but only 764 were reported to FIU during the same period.
The investigators found that ICICI Bank could not provide any internal guidelines for resolutionof anti-money laundering alerts generated by the software.
The RBI investigation has also found serious problems with the wealth management services. In a number of cases people with the same name purchased gold from the same branch repeatedly - and all on the same day with each transaction below Rs 49,999. The banks also allowed credit cards to be used for purchase of gold. Both were violations of RBI guidelines on gold.
On the insurance front too, the investigators found serious breaches. There was a very perverse incentive structure in the banks that were responsible for many of the transactions without adequate verifications. Some 2,164 employees of HDFC Bank were given foreign trips by HDFCStandard Life Insurance Company and HDFC Ergo General Insurance. "The foreign trips accepted by the bank employees were over and above the commission offered by the insurance companies, which was restricted by IRDA (insurance regulatory and development authority)," the report said.
"This arrangement (of insurance companies providing freebies to bank employees) raises serious doubts on the 'arms length' relationship, the entities are required to maintain with their group entities," it said. The RBI should review all banking licences to ensure that 'fit and proper' criteria' of licences, so as to avoid perverse interconnectedness among entities off the same group, it said.
In case of NRO (non-resident ordinary rupee) accounts too the investigators found several violations. The investigators also found inappropriate risk categorisation of customers. For example, all three banks had categorised HNIs, jewellers and non-banking financial institutions (NBFCs) as "low risk". The banks were also allowing single customers to have multiple customer IDs in violation of the norms to have unique customer IDs.
Banks suppressing alerts on suspect dealings: RBI probe
The probe report, a copy of which is available with TOI, shows that three private players — HDFC Bank, ICICI Bank and Axis Bank — had also hugely suppressed alerts generated by their system on suspected transactions. The three lenders were the first to be named in a sting operation carried out by an investigative website, which later released videos showing alleged irregularities in over two dozen banks and insurance companies.
At the heart of the problem is perverse incentive structure that encourages bank executives to sell insurance and other financial products to clients.
The report comes against a virtual clean chit given by some RBI executives, including deputy governor K C Chakraborty.
The RBI probe found that there were several instances of cash deposits below Rs 10 lakh to avoid being reported as CTR (cash transaction report), and it found that banks were accepting Rs 50,000 and above without PAN or "there were multiple and large value transactions in Form 60 accounts in some cases".
The inquiry also found that the customers were splitting deposits of over Rs 50,000 into smaller amounts to avoid providing PAN.
In the 43 branches inspected by the RBI, of which 37 were exposed by the website, investigators found that there were 49,495 cash receipt/deposit transactions of amounts more than Rs 25 lakh during a six-month period — between October 1, 2012, and March 23, 2013.
Of them 39,168 were with PAN and added up to Rs 26,586 crore and Rs 1,045 crore worth 2,658 transactions using Form 60 (used by those who do not have PAN cards).
In contrast, the investigators also found that 7,569 transactions worth Rs 4,575 crore was without both PAN and Form 60. "It can be seen from the above statistics that there was pre-dominance of high value of cash transaction without PAN. Moreover, in many cases where PAN was provided it was dummy PAN," the investigators have reported. In certain cases, the same PAN was assigned to different accounts.
Significantly, in 3,820 cases of high net-worth individuals (HNIs), who were in the "high risk category", dummy PAN cards were used.
Agreeing with the website's claim that there was a nexus between cooperative banks and private banks to channelize huge amounts of cash into the banking channel, RBI investigators said there was a practice of "cooperative banks opening current accounts with commercial banks on which they used a large number of cheques payable "at par" to their customers including walk-in customers for various purposes".
The "present arrangements between commercial banks and cooperative banks reveal a number of serious systemic and supervisory concerns as the risks from weak KYC/AML (anti-money laundering) compliances by cooperative banks are transmitted to the commercial banks". The cooperatives banks, for various reasons, "may be an easier conduit for facilitating substantial amount of cash entering the banking system."
The investigation also found that the anti-money laundering systems of the three private banks were not comprehensive, and several instances of non-reporting of integrally connected transactions were detected. The banks reported under 1% of the suspect transactions to the government's Financial Intelligence Unit (FIU).
In 2011-12, ICICI Bank system generated 5.4 lakh alerts about suspicious transactions, but only 3,677 were reported to FIU. In HDFC Bank, there were 11 lakh suspected transactions, with 932 reported to the anti-money laundering agency. Similarly, Axis Bank system generated 29.6 lakh alerts, but only 764 were reported to FIU during the same period.
The investigators found that ICICI Bank could not provide any internal guidelines for resolutionof anti-money laundering alerts generated by the software.
The RBI investigation has also found serious problems with the wealth management services. In a number of cases people with the same name purchased gold from the same branch repeatedly - and all on the same day with each transaction below Rs 49,999. The banks also allowed credit cards to be used for purchase of gold. Both were violations of RBI guidelines on gold.
On the insurance front too, the investigators found serious breaches. There was a very perverse incentive structure in the banks that were responsible for many of the transactions without adequate verifications. Some 2,164 employees of HDFC Bank were given foreign trips by HDFCStandard Life Insurance Company and HDFC Ergo General Insurance. "The foreign trips accepted by the bank employees were over and above the commission offered by the insurance companies, which was restricted by IRDA (insurance regulatory and development authority)," the report said.
"This arrangement (of insurance companies providing freebies to bank employees) raises serious doubts on the 'arms length' relationship, the entities are required to maintain with their group entities," it said. The RBI should review all banking licences to ensure that 'fit and proper' criteria' of licences, so as to avoid perverse interconnectedness among entities off the same group, it said.
In case of NRO (non-resident ordinary rupee) accounts too the investigators found several violations. The investigators also found inappropriate risk categorisation of customers. For example, all three banks had categorised HNIs, jewellers and non-banking financial institutions (NBFCs) as "low risk". The banks were also allowing single customers to have multiple customer IDs in violation of the norms to have unique customer IDs.
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