In June, the Reserve Bank of India (RBI) penalized three Indian private banks—Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd—for their failure in following transactional banking norms. More banks are likely to be penalized in the next few months even as the central bank is sending show-cause notices to them after conducting a scrutiny of millions of transactions. This followed allegations by Cobrapost, an online magazine, on these banks being involved in money laundering. In phases, since March, the website has released videos of its undercover sting operation that captured on camera bankers suggesting they could help clients avoid tax and convert black money into white.

These three banks were found to have violated RBI regulations in terms of their correspondent banking relationship with cooperative banks, certain aspects of the so-called know-your-customer (KYC) norms and anti-money laundering guidelines, among others, but on the face of it, the RBI investigation did not reveal any evidence of money laundering. According to the central bank, any conclusive inference can be drawn only by an end-to-end investigation of the transactions by tax and enforcement agencies.

It’s over a month now since the RBI made this statement, but we have not yet heard from India’s tax and enforcement agencies on their plans to take the investigation forward.

The law does not prohibit banks from selling gold and insurance policies without strictly following KYC norms when the buyers are not their existing customers, but they need to report if such transactions are of high value to the Financial Intelligence Unit (FIU), the central agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and its foreign counterparts.

Typically, for any cash transaction—like selling a demand draft—worth 20,000 and above, the banks insist on the PAN (permanent account number) if the customer does not have an existing relationship. For banks’ own customers, the cash transaction limit is 50,000. If somebody deposits 10 lakh a month, such transactions are reported to FIU. Similarly, cash transactions of 10 lakh a year and 2 lakh in a quarter are typically reported to the income-tax authorities. Even the high-value gold purchase ( 5 lakh) and credit card spending ( 2 lakh in one transaction) are reported to FIU and the income-tax department if they are not in sync with the financial profile of the customer. Such transactions can be part of banks’ filing of cash transaction reports (CTRs), or suspicious transaction reports (STRs), depending on the value of transactions and profile of the customers. This mechanism has been put in place under the norms of Prevention of Money Laundering Act, 2002. Section 12 of the Act stipulates this.

So, all the FIU and the income tax authorities need to do to track the tax evaders is assimilation of the data or deduping them. Dedupe, also called dupe combine, is a process that uses matching logic to eliminate file records that are duplicates.

The banks need to ask for PAN from their customers for high-value transactions. If they are not filing tax returns, banks insist on self-declaration from customers. This is done by filling in form 60 (for non-agricultural income) and 61 (agricultural income). The banks are also expected to undertake a KYC due diligence in the beginning of their relationship with customers, but it is not easy, considering the multiplicity of documentation. For instance, one can submit a fake driving licence. In developed markets, the social security number is a foolproof identity of a customer. The Unique Identification Authority of India’s Aadhaar project, which plans to cover 600 million in a nation of 1.2 billion by 2014, will come in handy for banks to know their customers better.

In a cash economy like ours, there will be cash transactions and the onus is on the banking system to keep a close vigil on such transactions, but while reporting, they must use discretion. For instance, a petrol pump owner in a small town will always deposit cash, and such a transaction is not suspicious. However, when a gems and jewellery trader or a real estate agent wants to deposit cash of big amount, the bank should enquire about the source of money and, if it is not satisfied, must report such transactions as suspicious.

I am told last year around 16,000 transactions were reported under STRs. This seems too small a number as the banking system processes billions of transactions a year. At the same time, banks need to be extremely careful about dealing with supposedly suspicious transactions. They cannot afford to be too intrusive and deny banking services in a nation where 40% of the adult population does not have access to formal banking services. The central bank and the government have been pushing hard for the so-called financial inclusion. In fact, after a decade, India is set to open up its banking sector for new entrants to expand banking services. So, RBI must keep a tab on whether the banks reporting the CTRs and STRs and the FIU and the income-tax department must do the rest of the job to unearth black money. Let’s not lose sight of the big picture. And the regulator and the government also need to change some of the existing norms to make them relevant. For instance, banks are expected to keep a close tab on transactions of politically exposed persons (PEPs), but only the foreign PEPs. What about the PEPs in India? It is high time we had guidelines on who would be covered under the definition of PEPs. A database of Indian PEPs must be created for the use of the banking system.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to

Banker’s Trust will appear fortnightly in June and July.