Stung into action

The Reserve Bank of India’s move to impose fines of nearly Rs 50 crore on 22 banks for not complying with its instructions on anti-money laundering and KYC (know-your-customer) norms is unusual not only for its timing but also for the nature of the offences for which these banks are sought to be punished. On the issue of money laundering, the RBI itself admits that its investigation “did not reveal any prima facie evidence of money laundering”. In the event, it is rather unusual for the RBI to be asking banks to pay a fine for a transgression that had not been established in the first place. Since the regulatory initiative is being undertaken in the name of preserving public confidence in the banking system, the people would be justified in wanting to know the percentage of the Rs 50-crore fine that banks are made to cough up for the as yet unproven allegations on money laundering.

As regards violations of KYC norms laid down by the RBI, the issue here isn’t whether or not there were such violations. They may well have been. Indeed, as the IPO scam of 2007 demonstrated, shares were allotted to fictitious beneficiaries, something that would not have been possible without bank accounts having been opened under such names in the first place. Moreover, given the structure of employee compensation, especially among the private sector bank staff and the overall pressure on them to mobilise deposits, there is every incentive for the latter to accommodate customer requests even if they are in violation of KYC norms. But this is precisely what a regulator is expected to prevent, by framing rules that can be practically complied with and ensuring their strict enforcement. In this case, given the sheer number of banks — be it private, foreign or state-owned — found to have indulged in violations, it is natural to assume that these had been going on for quite some time.

The question that arises, therefore, is: Why has the RBI seemingly woken up only now and gone on to impose fines on 22 banks (in addition to three others in June)? Has all this come about only because of a ‘sting operation’ by an online news portal, apparently showing officials from three banks willing to accept large amounts of unaccounted cash and deploy these in suitable investment schemes? The fact that the RBI scrutiny happened just a month after the news portal’s expose does indicate so. Given the compulsions that banking staff face to keep deposits flowing, it would be a folly on the part of the RBI to count on their good behaviour alone as the basis for compliance with KYC norms. Its own enforcement machinery is ill-equipped to prevent each and every transgression. A fundamental reform of the regulatory architecture that relies more on automated internal systems rather than on any human instinct for self-preservation is the need of the hour.

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