Have they learnt any lessons? Bank of Baroda's (BoB) money laundering case has once again shown the cracks in the banking system. Curiously, both Cobrapost and BoB are not cases of loan fraud but restricted to liabilities (current and savings deposits) and investments. The Cobrapost expose saw the banking system being used to converting black money or unaccounted cash into white. Similarly, the BoB case shows how some are using the banking system for money laundering.
Let's look at the facts in the BoB money laundering case, which is hogging the limelight and could engulf many other banks in the days to come.
There were as many as 51 current accounts opened at a single branch of BoB in the capital city from where foreign exchange remittance of over Rs 3,500 crore was made to some 400 parties overseas. There was no bank money involved, but the customer brought the funds as advance for imports.
First, the state-owned bank itself noticed the fraud. It carried out an internal investigation immediately and also escalated the matter to enforcement agencies like Central Bureau of Investigation (CBI), Enforcement Directorate (ED), to its owner, the government or the Ministry of Finance, and also to the banking regulator, the Reserve Bank of India (RBI).
At the heart of the issue are the KYC (know your client) violations. Many a time, frauds are committed by furnishing forged documents or doing fictitious transactions. BoB failed to notice real-time when a series of transactions took place .The bankers hardly make any effort to understand a customer in the real sense or make a deep dive into customer's business. There is no intelligence gathering to find out the intentions behind a large abnormal transaction. In both Cobrapost and BoB, the fraud had its origin in the bank's branch and the employees were also hand-in-glove with the perpetrators.
What is more worrisome is the lack of real-time monitoring or detection of abnormal activities at the headquarters level. There is an urgent need for a centralised surveillance system as a branch normally doesn't have the wherewithal or manpower to monitor such fictitious transactions taking place at different branches or locations.
There is also a need for inter-bank coordination or information sharing. In the case of BoB, the state-owned bank received 90 per cent of the funds remitted from 30 other banks through RTGS/ NEFT transfers. Clearly, there is a failure on the part of the banking system to catch a perpetrator who was using the banking system to launder money.
That also brings us to the next question of a larger money laundering activity where the fictitious imports route was used to remit money abroad. In fact, the ED is already investigating other banks' roles in the money laundering.
Some question how the Financial Intelligence Unit ( FIU), which is a central agency to analyse foreign exchange transactions, failed to detect the fraud. Currently, banks are required to report all foreign exchange of more than Rs 10 lakh or a series of transactions of Rs 10 lakh connected to each other.
The banks or RBI are also to be blamed. They have been investing a lot in data analytics and data mining when it comes to asset acquisition or cross-selling a credit card or an insurance policy, but when it comes to analysing its own data on the liabilities side, they have been found wanting. In fact, the entire focus of the bank machinery is to avoid any fraud on the credit or loan front. This is something RBI has to impress upon banks or the boards of the bank.