Mumbai: So why exactly is private sector lender Axis Bank at the centre of a money laundering investigation?

On Thursday, income-tax officials unearthed Rs60 crore worth of deposits in 20 fake accounts at an Axis Bank branch in Noida, a Press Trust of India report said.

Over the past few weeks, amid reports of suspicious goings-on at various Axis Bank branches in the wake of demonetization, the Enforcement Directorate (ED) and the tax department have visited eight of the bank’s branches. The ED, the tax department and the bank itself are reviewing 50 accounts. In the same period, the ED has arrested a few Axis Bank employees. In between, Axis and the central bank have had to scotch rumours about the bank’s licence being cancelled.

Axis has already suspended 24 of its employees and appointed KPMG to conduct an audit of suspicious transactions. It has made it mandatory for customers to submit income proof when they make large deposits, irrespective of the kind of account they have.

In a call on Thursday, Axis Bank executive directors Rajesh Dahiya and Rajiv Anand clarified that of the 50 accounts are under investigation, 30 are at the Noida branch. The bank has temporarily suspended transactions in these accounts. According to Dahiya and Anand, the accounts at the Noida branch are all compliant with know-your-customer (KYC) norms and were reported for suspicious transactions by the bank itself to the Financial Intelligence Unit (FIU).

The bank has been transparent in talking about the status of the investigations and the actions that it has taken. It has also maintained that there is nothing wrong with its compliance systems.

Dahiya and Anand claim the bank has not found any KYC violation in the accounts under investigation, adding that they are mostly one to three years old. “One thing needs to be made clear that just because these accounts were flagged under the STR (suspicious transaction reports) mechanism does not mean that they are being operated by fraudsters. That has to be established through an investigation," Dahiya said.

He added that 1,500 STRs were registered in the past five weeks; before Prime Minister Narendra Modi’s announcement on 8 November withdrawing all old Rs500 and Rs1,000 notes, the bank normally witnessed 200-300 STRs in a similar time period.

Experts say events such as this help open up a discussion around the vulnerabilities in the anti-money laundering systems employed by banks.

“Nobody predicted that something like demonetization would happen and suddenly the system would have to deal with large deposits in a matter of five weeks. The vulnerabilities are not limited to one bank; it is a system-wide issue which cannot be ignored," said Reshmi Khurana, managing director, Kroll Associates (India) Pvt. Ltd. That would mean similar issues in other banks that haven’t come to light yet.

Axis Bank has seen significant growth over the past five years and has continued to maintain its position as the third largest private sector lender in India. According to data collated by Mint, its total assets have risen to Rs5.25 trillion as on 31 March, at a compound annual growth rate (CAGR) of 16.7% over the past five fiscal years. In the same period, HDFC Bank reported total assets worth Rs7 trillion, showing a CAGR of 20.6%, while ICICI Bank reported total assets worth Rs7.24 trillion, showing a CAGR of 12.2%.

“Typically, such situations arise due to two reasons," said Hemindra Hazari, an independent banking analyst. “One is if there is a top-down strategy implemented by the senior management focusing on earning a higher fee income and retaining high-value clients by any means possible. The second is where low-level employees are bribed."

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