In black and white

A recent Cobrapost expose reveals the involvement of banks and insurance companies in a nationwide money-laundering racket, and the failure of the regulators to prevent it.

Aniruddha Bahal , editor-in-chief of Cobrapost. He says guilty bank officials have to be punished.

WHILE the discourse on black money in the anti-corruption movement has revolved around money stashed abroad illegally, a series of recent exposes have brought to the fore the shortcomings of the regulatory system that allow money-laundering practices to flourish within the country.

A May 6 report by the online portal Cobrapost alleges blatant corruption by 23 major public and private sector banks and insurance companies involved in a nationwide money-laundering racket. Several major players in the public sector, including State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank and the Life Insurance Corporation of India, find mention in the expose.

Titled Red Spider Part 2, the expose comes close on the heels of another one by Cobrapost on March 14 about three major private sector banks allegedly involved in money laundering. These exposes have raised concerns about the efficacy of the regulatory framework for banks and the involvement of officials and executives in positions of power in corrupt practices. They point to the existence of systemic corruption in the banking system and the non-implementation of laws to check money laundering under the Prevention of Money Laundering Act (PMLA), 2002.

Following the global financial crisis in 2008, there was a widespread emphasis on the need for adequate regulation in the financial sector so as to prevent speculation, money laundering and other illegal financial activities that pose a grave risk to the stability of financial systems and the economy in general. Against this backdrop, the Financial Action Task Force (FATF), an intergovernmental body, had come out with a set of 40 revised recommendations to provide governments with stronger tools against financial crimes. These included measures relating to money laundering, terrorist financing, transparency and beneficial ownership of legal persons. The facts that have emerged from the recent investigative reports have raised doubts about the safety and security of the banking system in India. At present, the Financial Intelligence Unit of the Finance Ministry takes actions in case of violations of the PMLA.

The Cobrapost expose has established the existence of money laundering as a common practice across public and private sector banks and not as just an aberration. Speaking to Frontline , Aniruddha Bahal, editor-in-chief of Cobrapost, said, “The issue of black money stashed abroad has been the focus of the anti-corruption movement. While chasing black money abroad has proved to be like following a red herring, the same excuse cannot be used when it comes to controlling money-laundering activities in India.”

The undercover operation conducted for more than half a year across many States, including Uttar Pradesh, Rajasthan, Delhi, Haryana, Andhra Pradesh and Karnataka, highlighted the widespread nature of the practice of money laundering. The expose revealed that money-laundering practices were part and parcel of banking and insurance business across the board and could be easily availed of by any customer to conceal unaccounted cash. Also, money laundering was being offered openly as a standard product.

In several of the episodes recorded in the expose, involving senior officials of banks, the proceeds of corruption and tax evasion were sought to be made legitimate. The Know Your Customer (KYC) norms were not followed with due diligence. The practice involved senior officials of the ranks of divisional manager, territory manager, assistant general manager and vice-president.

Systemic issues

Pooja Rangaprasad, a consultant with the Centre for Budget and Governance Accountability, highlighted the systemic issues brought out by the expose: “This expose shows that there is ample scope of flouting KYC norms and that due diligence was not followed by the banks. This brings to the fore the issue of beneficial ownership of accounts vis-a-vis legal ownership. There should be a public registry of beneficial owners of all accounts that is completely transparent and accessible so that the practice of money laundering can be prevented.”

The expose has cast a doubt on the role of the regulatory authorities in proactively reining in irregularities in the financial system and in plugging the loopholes in the existing framework that allow money laundering. Speaking at the Reserve Bank of India (RBI) central board meeting in Srinagar on May 9, Governor D. Subbarao said that there was no conclusive evidence of money laundering in the recent expose by Cobrapost regarding public sector banks and it was the responsibility of the tax authorities and the government to check money laundering.

The RBI had initially tried to downplay the allegations of the March 14 expose. RBI Deputy Governor K.C. Chakrabarty had given a clean chit to the private banks, saying that there were no illegal transactions. However, on May 3, Subbarao stated that the RBI had not yet given a clean chit to the three banks and that the probe was still on. He said that some specific transgressions on KYC norms had come to light.

The Ministry of Finance, on May 7, directed the chairmen-cum-managing directors (CMDs) of various public sector banks and the LIC to take immediate action. After the directive, 15 employees of various public sector banks were suspended.

Bahal, when asked if the problem was with the existing legislation, said, “The problem is one of implementation of PMLA, 2002. The banks have to be punished for their misdemeanour by the regulator.” “There should be custodial interrogation of bankers by the Enforcement Directorate, starting from the senior management,” He added. The other regulatory authority that has come into the spotlight is the Insurance Regulatory and Development Authority (IRDA). The expose has revealed the nexus between banks and insurance companies to design products that are tailor-made to convert black money into white. Speaking about the responsibility of the IRDA to check such practices, Bahal said, “The IRDA should ensure that the insurance products are sold in a standardised way from all branches so as to avoid a sinister relationship between banks and insurance companies which allows illegal activities such as money laundering.”

Pooja Rangaprasad, however, felt that the law was not adequate to deal with offences of money laundering: “Tax crimes are still not part of the scheduled offences in the Prevention of Money Laundering Act.”

IMPORTANCE OF kyc norms

A 2012 Central Board of Direct Taxes (CBDT) report on “Measures to Tackle Black Money in India and Abroad” had addressed the need for stricter implementation of KYC norms. The report stated, “The RBI could consider stricter implementation of KYC norms and limit number of accounts that can be introduced by a single person, the number of accounts that can be maintained in the same branch by any entity and alerts about same address being used for opening accounts in different names. Stricter adherence to, and enforcement of, KYC norms is needed for ensuring proper compliance by banks and financial institutions. The Government, as well as the RBI, also need to put a better regulatory framework in place and act promptly against errant persons/institutions.”

The expose points out to strategic tie-ups between banks and insurance companies where the banks advise customers who want to conceal their black money to invest in multiple insurance policies. Surprisingly, all these investments were accepted in cash.

The CBDT report on black money clearly points to the fact that the alarm bells about lack of adequate regulation of illegal financial activities had been sounded much before this expose came to light. This raises questions about the preparedness and foresight of the regulatory authorities to deal with the issue of financial crimes. Financial crimes that impact the banking system go well beyond individual acts of transgression by officials as they have a considerable impact on the stability of the financial system and the economy as a whole.

In February, the RBI issued guidelines for issuing a fresh round of banking licences. These guidelines allow big corporate houses, existing non-banking financial companies, Indian-owned private sector companies and public sector companies to apply for licences. With so many new entrants, the importance of due diligence by the regulatory authorities cannot be overemphasised. The purpose of banking as an instrument of financial inclusion and access to financial services will be wholly defeated if policy decisions and loopholes in law promote the illegal hoarding of wealth.