Money laundering by banks: Will govt, RBI punish the guilty?

Who is better than the government at covering up scandals and scams? And who is a master at shrugging off accountability? The answer to both questions is an easy guess -- Private sector chief executive officers and boards of directors.

Actions of managements of three large private sector banks and regulators following revelations of money laundering at branches have thus far been very predictable.

Bank managements have suspended the employees who were on camera in the sting operation. Staff has been asked not to report to duty till internal investigations are completed. The regulators – Reserve Bank of India, the finance ministry and the Income Tax officials have all launched simultaneous investigations. Pink newspapers have stunningly been silent and have relegated reports on the banks to back pages. For any stakeholder, especially customers of the banks, to be optimistic that there will be a cleanup will require triumph of hope over experience.

The Anti-Money Laundering Act of 2002 makes money laundering a criminal activity in India. Had the finance ministry undertaken a visible and high profile investigation against the multinational bank HSBC when allegations of money laundering surfaced against it last year, it would have sent a strong signal to everyone involved in slush money about the serious intentions of Indian government to end this menace.

Instead, the regulators and the finance ministry looked the other way. HSBC paid a record Rs 10,500 crore fine to avoid prosecution on charges of money laundering in the United States. However in India, it denied the allegations and moved on with business as usual. It was a travesty when the renowned lobbying organisation, Federation of Indian Chambers of Commerce and Industry (FICCI), appointed the CEO of tainted HSBC as its president.

From the expose of sting operation, it looks like the top three Indian private sectors banks have been indulging in money laundering for quite some time. Their employees were adept in the methods and schemes of conversion. The banks offered the reporters who were posing as customers a variety of channels to launder black money into the system and in due course a conversion to white money. They proposed a plethora of instruments and products including insurance plans, benami accounts and lockers to stash away ill-gotten cash. In the process, the banks were not only willingly violating the provisions of Anti-Money Laundering Act but also many of RBI guidelines, KYC norms, FEMA regulations and Combating of Finance Terrorism rules.

Nefarious activities

Indulgence in such nefarious activities is indeed sufficient for these CEOs to lose their jobs. As the expose proves it was not an isolated incident but was rampant across branches all over India. If the management knowingly looked the other way, the CEOs should take moral responsibility and resign. More damaging will be lack of awareness of money laundering activity going on in branches without their knowledge. Under such circumstances the Board of Directors will well be within their right to sack these CEO’s. Unfortunately, in our country despite the existence of independent directors on company boards, it is a chummy club and thus no action can be expected due to poor corporate governance that prevails in companies.

The reaction of the stock market to these allegations was a strong signal that regulators and finance ministry will treat this incident with a kid glove. Stock prices barely moved on the day of the revelations and even went on an uptrend in the following days. If the prevailing regulatory environment was strong and enforcing stringent penalties for criminal behaviour, the markets would have punished the banks in form of lower stock prices which can set off a chain reaction that can lead to accountability in professionally managed companies. Unfortunately that has never been the case in India where weak regulatory regime is the norm and the market participants are fully aware of this fact.

Black money is indeed a serious threat to Indian economy as well as to government finances. It manifests in many areas and finds its way seamlessly into political campaigns, real estate transactions, movie financing, stock market manipulation schemes and of late terrorism funding. It is the last that has bothered governments worldwide and has led to the expansion of the Financial Action Task Force (FATF), a watchdog and an inter-governmental body to tackle money laundering, of which India became a full-fledged member in 2010. It allows exchange of vital financial information between member-countries in the group. Unfortunately as the sting operation proves, there is much our government has to do at home to fully deal with the scourge before going after money stashed abroad. 

Approach to combat black money in our country has been lackadaisical. Government of India should seize this opportunity and start cleansing the system by making an example of the three private sector banks. The regulator must impose stringent punishment including a threat to cancel the banking licence on reoccurrence of such activities. Large fines must be meted out to the banks that will be a deterrent in future and employees found guilty of aiding and abetting criminal activities must face severe penalties including possible jail term. Only such strong action will send the right signal to people of the country, Indian corporates, bureaucrats and to the international business community that the Indian government is extremely serious about tackling ill gotten wealth and slush money.