The Enforcement Directorate (ED) has been probing for the last one year the alleged FEMA violations in the Sahara Group’s purchase of Grosvenor Hotel in the UK. Sahara had acquired the posh London hotel in December 2010 for £470 million.
The main issue is that the money for this acquisition was remitted by Sahara India Real Estate Corporation Ltd and Sahara India Commercial Corporation Ltd.
Both these Sahara group companies were banned by the Securities and Exchange Board of India (SEBI) from large-scale collection of money from the public through issue (or through the so called private placement) of OFCDs (Optionally Fully Convertible Debentures) without filing any DRHP with SEBI for public issue of securities as required under DIP (Disclosure and Investor Protection) Guidelines. Hence, remittance of monies abroad by these Sahara group companies appeared to be in violation of FEMA (Foreign Exchange Management Act).
In the thick of possible foreign exchange violations committed in the above transaction is Axis Bank, one of India’s largest private sector banks.
The ED alleges that Axis Bank did no due diligence before remitting Rs 3,525 crore on behalf of the above mentioned companies of Sahara Group.
The Directorate is of the view that KYC (Know Your Customer) procedures were also not carried out properly by Axis Bank.
All this have led ED to write to RBI suggesting that the licence of Axis Bank, Mumbai branch, which remitted the money on behalf of Sahara companies, be suspended.
KYC Norms
The Prevention of Money-laundering Act, 2002, and the rules thereunder require every banking company, financial institution and intermediary, to furnish to Financial Intelligence Unit-India (FIU-IND) information relating to:
All cash transactions of the value of more than Rs 10 lakh or its equivalent
All suspicious transactions whether or not made in cash.
In addition to the above statutory requirement of providing information regarding suspicious transactions to the government, banks are also expected to comply with “Know Your Customer (KYC) Norms” and act as first-level regulators in the financial system.
While bank managements are directing all their resources to prop up growth in CASA (Current Account, Saving Account) deposits, loan books and profits, the required investments in upgrading the systems and compliance teams to focus on KYC norms, preventing of suspicious transactions and money laundering, is lacking.
Benami Accounts
Several banks turn a blind eye to opening of benami accounts or effecting suspicious remittances abroad by corporates, high net worth individuals (HNI) and VIPs. Madhu Koda, former chief minister of Jharkhand, who reportedly amassed a fortune of Rs 4,000 crore, may have had more than 1,800 bank accounts all over the world, going by reports.
In the recent case of alleged illegal mining by Gali Janardhan Reddy, his Obulapuram Mining Company (OMC) is suspected to have a few dozen accounts in benami names.
There are instances where banks knowingly open and negotiate letters of credit (LCs) against fictitious contracts and fictitious sale documents, which are popularly known as “Accommodation LCs”. Such “Accommodation LCs” are opened and negotiated to help certain corporate clients to ever-green the bad loans or to help them tide over a financial crisis.
Huge Cash Withdrawals
Many real-estate and construction companies open scores or hundreds of bank accounts in the names of related entities or fictitious sub-contractors.
The main company issues and deposits cheques in such bank accounts of related entities/ fictitious sub-contractors and immediately withdraws the cash from all such benami accounts on the same day. All this happens routinely, in front of the eyes of the concerned bank officials.
Prevention is better than cure. Hopefully, banks will be more conscious and careful in future in dissuading and preventing such suspicious transactions, to help build a transparent financial system.
(The author is a finance professional. The views are personal.)