Bank of Baroda, which settled a legal battle involving healthcare companies founded by Abu Dhabi-based businessman BR Shetty for $600 million in July, had received internal alerts about alleged “roundtripping” of funds by the group as early as in 2016.
However, even after the bank’s own anti-money laundering (AML) unit sent at least three alerts to its Abu Dhabi branch, the state-owned lender sanctioned fresh loans to the NMC Group, according to emails and court documents reviewed by Mint.
Bankers said the cost of not acting on an AML alert is high and such failures could lead to massive implications for lenders.
“The regulator has an extremely low bar for such failures. If a bank does not act on an alert that specifically points to a circular transaction, it could raise questions on the accountability of bank staff,” said the director at a large bank who asked not to be identified.
Shetty, the 84-year-old founder of the NMC Group, came under fire after short seller Muddy Waters Research raised “serious doubts” about NMC Health’s “financial statements” in December 2019. It alleged that NMC “manipulated its balance sheet to understate debt.”
NMC Health was placed under administration by a UK court in April 2020. Bank of Baroda then moved a sessions court in Bengaluru the following month to restrain Shetty from selling or transferring certain assets.
Bank of Baroda’s recent settlement came after the joint administrators of NMC Group sued Shetty, former chief executive officer of NMC health Prasanth Manghat, and Bank of Baroda before the Abu Dhabi Global Market courts, alleging they were responsible for losses suffered by the company. The bank’s executives said later that the settlement only resolves a legal overhang and that loan recovery efforts will continue.
Transaction alerts
Documents now show that the bank was not completely in the dark about the alleged roundtripping (when money is sent out and then returned, creating the false impression of business activity) or diversion of funds. The AML compliance team of Bank of Baroda sent an email to the bank’s branch in Abu Dhabi on 8 September 2016 with a list of bank accounts, asking it to “analyse the transactions from AML angle, (and) assess the purpose for such transactions.” It pointed out roundtripping in these accounts related to NMC.
“There are roundtripping transactions in the account as the major debits and credits are going to NMC group a/cs (accounts) only i.e., funds coming from one group account of NMC which is remitted to another group account of NMC,” it said.
The AML team asked the branch to seek proper justification from the company for these transactions and submit the responses to the team for its perusal.
“While doing so, please do not give (a) regular reply like ‘fund management’... in view of high turnover in these accounts,” it said.
Following this email, the AML team sent two reminders to the branch: one on 20 November 2016 and another nine days later. It could not be immediately ascertained whether the branch responded to the alerts.
However, submissions by the bank in the sessions court in Bengaluru in 2020 showed that it sanctioned fresh loans and bank guarantees to the NMC Group in the period from September 2017 to June 2019, after the internal red flags were raised.
The AML team also raised the alleged roundtripping of funds during internal meetings, said a person aware of one such meeting in early 2016. The person said the alerts were passed on to the official concerned with the respective branch through text messages as well.
Forensic audit
Bank of Baroda informed the Reserve Bank of India (RBI) on 28 December 2020 of an alleged fraud committed by Shetty in the loan account of group company UAE Exchange Centre and said it had started a forensic audit after “adverse media reports on the BR Shetty Group accounts.” The account was tagged as fraud in December 2020, after it received the audit report in September 2020.
The bank also told the RBI that a deputy general manager was tasked with investigating staff accountability and suspected fraud. However, the bank said the exact nature of the action taken against the staff was “not known.”
The forensic audit and the classification of fraud came over four years after the bank’s own internal systems flagged accounts of the BR Shetty Group. The court documents showed that Shetty and his companies owed the bank ₹2,077 crore as of May 2020. The settlement in the case—$600 million ( ₹5,736 crore—cost the bank almost thrice its dues.
Emails sent to Bank of Baroda and Shetty’s lawyers remained unanswered. Shetty did not respond to a call and a text message seeking comments.
Debadatta Chand, chief executive officer of Bank of Baroda, told reporters on 24 July that the recovery process against the principal individual would continue. On staff accountability, he said that “every bank has its own process… either the process has been taken or will be initiated.”
Shetty told Mint in July that if the bank had not done anything wrong, why should it be paying even $1? While Shetty has always denied allegations of wrongdoing, Bank of Baroda said that the “settlement resolves all claims between the parties without any admission of liability or wrongdoing.”
AML systems
Experts said AML systems are designed to trigger alerts when there is a major variation in a range of financial transaction scenarios. A transaction of ₹2 lakh in an account with previous entries typically within ₹50,000 will indicate that something might be off.
“Banks are expected to refine the scenarios on a regular basis,” said Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat. When these alerts are generated, they need to be resolved. Banks, said Iyer, have an AML team which generates the alerts and sends them to the respective branches.
“If the bank then finds out that these are suspicious transactions, it prepares a suspicious transaction report and sends it to the Financial Intelligence Unit,” he said.