Tue, Mar 19 2013. 07 55 PM IST

In which the trappers get entrapped

It’d be a pity if the RBI continues to turn a blind eye to the decay in the bank branching system.
Monika Halan

Shyamal Banerjee/Mint
Until recently, bank branches were known anecdotally for trapping people into toxic insurance products. In a strange twist, employees at some bank outlets have themselves got trapped in the process of doing more than selling such products. If the expose by online magazine Cobrapost.com, which showed people it claimed were officials in Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd across 20 cities offering to launder money, is correct, the crime moves up several notches—from mere mis-selling products to middle-class Indians to using the banks and insurance companies to turn black money into white.
The Cobrapost investigation shows a reporter pretending to be a front for a minister (mantriji and his wife Vandana) who has three main wealth management needs. One, how to turn `50 lakh in cash into white. Two, how to stash the `7-8 crore that is accruing in `500 bills soon to the mantriji. Three, how to get Vandana, Mrs. Mantriji, who visits Eng-laand very often, to carry this money there. Of course, this must be done so that the income-tax authority does not get alerted, nor does any other law enforcement body, nor are taxes paid. The bank officials caught on tape are eager to help and seem not to be surprised at this black-to-white request. They offer innovative ways to meet customer needs and suggest two main ways to make this black-white conversion. One, use a life insurance policy from the bank’s bancassurance partner. Two, buy gold. Mutual funds are not the preferred route to launder the money since their “know-your-customer” norms are stringent. Most bankers offer the life insurance policy route since cash inflows of less than `50,000 need no Permanent Account Number and the undercover journalist is advised to make investments in many tranches of `49,990. A tax loophole is then used to leave no trace of the black money. Since tax records are kept for seven years, the bankers offer a plan that sees inflows of seven years and then a quiet period of eight years and voila, after 15 years, the insurance policy spits back triple the money. In white. And section 10 10(D) of the Income-tax Act means that no tax will be paid on the proceeds of this policy at maturity. It is suggested by most branches that the London money transfer can be done through travel cards that can be topped up here and then cashed out abroad. Lockers are offered at once to store the `7-8 crore in `500 notes that is about to be received by the mantriji. The lady showing the locker room giggles and says that’s what people keep here. The helpful bank officials, some of them women, counsel the Cobrapost reporter: Don’t take any tension, we’ll take care of all this.
I used my entire Sunday to watch the videos and went from disbelief to anger to a deep sense of loss. The first two are easy to explain. The last one stems from looking at the faces of the bank officials. They look like average service-class people. They may even live next door. We probably know some of them. We may even be banking in the same branches. If the tapes are authenticated, then it shows that these people, who look like people like us and are not high-flying helicopter brokers, have turned into criminals. Did these people personally gain from offering to launder money? No video showed that they did. No video showed any personal gratification in the form of a bribe or a percentage going to the individual. The money on the transaction was to be made by the bank. If there was no direct individual benefit, then the arrow of suspicion falls on the bank. The bank officials caught on tape were doing this to meet their branch targets around deposit, life insurance and gold sales. Targets are set by senior people and not frontline staff. My sense of loss stems from a belief that our system is now so rotten that there is institutional pressure to be dishonest.
But back to the tapes. It would be a waste of a great opportunity for the banks if they end the story with firing some frontline people and not look at cleansing their incentive systems. It would be a pity if the Reserve Bank of India (RBI) were to continue turning a blind eye to the decay in the bank branching system in India that has turned them into customer traps. The off-the-record view of the top people in RBI has been: this is not our problem. Well, it does look like it is your problem now, RBI. The inquiry into the Cobrapost tapes should not stop at either the banks in the sting or just the current issue. The insurance regulator would have the data—pull out the records to examine how many policies with a premium of between `48,000 and `49,999 have been issued. Track them back to the owners. Find out how much gold has been sold and to whom. Follow the money trail if you’re serious about where the black money comes from. And make the top management responsible for such events to get some real change on the ground.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com