Mumbai: With more instances of bank employees helping launder black money during the demonetisation drive surfacing, the finance ministry has sought a report from the Reserve Bank of India (RBI) on whether banks compromised on so-called know-your-customer norms, said two people directly familiar with the matter, including a finance ministry official.
The ministry’s move was prompted by investigations by the income-tax department, the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI) that prima facie established the involvement of some bank officials in such money laundering.
“While the investigative agencies are doing their bit, we are seeking a report from the central bank on whether there is a systemic concern or case of few ‘bad apples’," said the finance ministry official cited above, who asked not to be identified.
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Spokespersons for RBI and the finance ministry did not respond to emails seeking comment.
In the past 20 days, as many as eight banks have been investigated by various agencies. This includes Axis Bank Ltd and HDFC Bank Ltd.
Axis Bank has already commissioned a forensic audit of its systems by KPMG India and HDFC Bank has sacked four executives from its Chandigarh branch.
Axis Bank had, on 5 December, when two of its officials were arrested, issued a statement that said that the officials had been suspended. In a subsequent statement, the bank said that they had hired KPMG for the forensic audit.
HDFC Bank had said in a statement on 3 December that “services of the employees, posted with the Sector 15 branch here (Chandigarh), were terminated immediately after it was discovered that they were allegedly favouring a person known to one of them by exchanging his demonetized currency notes with new notes".
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The bank added that it was “an isolated" incident of “unauthorized" currency exchange involving its employees.
The modus operandi seems to have been to use dormant accounts—including those opened under the ambitious Jan Dhan financial inclusion scheme and those of students who have moved on—to convert black money into white, explained the second of the two people cited earlier, who also asked not to be identified.
The finance ministry is hoping RBI can shed light on the complicity of banks and, if so, how they can be penalized, this person added.
Interestingly, two RBI officials were themselves arrested in Bengaluru on 17 December by CBI for allegedly distributing Rs2,000 and Rs100 notes beyond the stipulated amount of Rs4,000 per person per day.
“Irregularities have been found even in disbursals at post offices," said the second of the people cited earlier.
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On 8 November, the government invalidated all old high-value banknotes. People rushed to deposit these notes. The government was expecting a significant portion of the Rs15.4 trillion of such currency in circulation would not be deposited because it was unaccounted income or black money. However, to date, around Rs13 trillion of old notes have been deposited. With instances of bank officials facilitating the laundering of money coming to light, a theory has gained ground that venal bankers have proven to be the weak link in a well-intentioned move.
Banks may have to strengthen their background checks of employees and customer due diligence processes, the second person said.
Usually, in matters concerning banks, RBI seeks reports from them if there are serious concerns and takes an independent decision on the course of action, including penal proceedings. It sends a report to the department of financial services under the finance ministry only if the concerns involve government-owned banks.