How slush money creeps into banks

French author Francois de la Rochefoucauld once said: “The only thing that should surprise us is that there are still some things that can surprise us”.

Thus, in a nation where scams and scandals scarcely raise an eyebrow any more, it was still surprising when a sting operation by an online agency revealed that a number of private banks are indulging in money-laundering.

The banks charged with providing conversion routes for black money have gone into damage control mode and acted along expected lines — suspending a few employees guilty of the offence, ordering a forensic audit and issuing defensive and protective statements.

The investigation suggests the banks stuck to tried and tested methods — opening accounts in multiple names, accepting long-term investments that would not attract too much attention and taking demand drafts from cooperative banks or lesser-known banks, also to stay under the radar.

RBI Circular

It is not the case that banks have no regulations in place to expose money-laundering activities. The Reserve Bank of India (RBI) has been on top of this for some time now.

Earlier this financial year, the RBI issued an important circular that covers Know Your Customer (KYC) norms, Anti-Money Laundering (AML) standards, Combating of Financing of Terrorism (CFT), and Obligation of Banks under PMLA (Prevention of Money Laundering Act), 2002.

The Circular (RBI/2012-13/45 DBOD. AML. BC. No. 11/14.01.001/2012-13) states that banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activities of the customer, so that they can immediately identify transactions that fall outside the regular pattern of activity.

However, the extent of monitoring will depend on the risk-sensitivity of the account.

Banks should pay special attention to all complex, unusually large transactions and all unusual patterns that have no apparent economic or visible lawful purpose.

Banks may prescribe threshold limits for a specific category of accounts and pay particular attention to the transactions which exceed these limits.

Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the bank’s attention. A very high account turnover, inconsistent with the size of the balance maintained, may indicate that funds are being ‘washed’ through the account. High-risk accounts have to be subjected to more intensive monitoring.

Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, type of transactions involved and other risk factors.

High risk associated with the bank accounts of bullion dealers (including sub-dealers) and jewellers should be taken into account by banks to identify suspicious transactions that may warrant the filing of Suspicious Transaction Reports (STRs) to the country’s Financial Intelligence Unit (FIU)

Banks should put in place a system of periodical review of risk categorisation of accounts and the need to apply enhanced due diligence measures. Such review of risk categorisation of customers should be carried out at least once every six months.

Suspicious Transaction

In addition to the above, the central bank mandates that banks must generate a Suspicious Transaction Report (STR). Suspicions transaction means a transaction, including an attempted transaction, whether or not made in cash which, to a person acting in good faith,

(a) gives rise to a reasonable ground of suspicion that it may involve proceeds of an offence specified in the Schedule to the Act, regardless of the value involved; or (b) appears to be made in circumstances of unusual or unjustified complexity; or

(c) appears to have no economic rationale or bonafide purpose; or

(d) gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism.

Exception Reporting

Banks in India have internal controls, internal audit and supervisory departments.

The latest expose reveals that the custodians at the gate — supervisors at the banks — may not have been carrying out their policeman’s role effectively.

Their task can be simplified and boiled down to the good old auditing technique of exception reporting — raise a red flag on anything that is out of the ordinary.

Probably the lack of a historical precedent — wherein the harshest form of punishment has been meted out to persons involved in money laundering — has made some of these custodians complacent. The latest episode should hopefully be the beginning of a new alertness and better monitoring.

(The author is Director, Finance, Ellucian. blfeedback@thehindu.co.in)

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