Banks suppressing alerts on suspect dealings: RBI probe

May 14, 2013,NEW DELHI:-



An investigation by the Reserve Bank 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 resolution of 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 HDFC Standard 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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