Cobra expose: FinMin to seek explanation from banks for KYC violation

The country’s three largest private sector banks- ICICI, HDFC and Axis Bank- which were last month named by online portal Cobrapost for indulging in money laundering, are likely to face strict action as the Reserve Bank of India’s investigation into the matter has revealed that large cash transactions in insurance and mutual funds has given rise to a systematic risk of money laundering.

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Sources within RBI and the finance ministry told CNBC-TV18 that serious Know Your Customer (KYC) violations have been found, and although there were no actual transactions that took place, there is evidence to suggest that the banks were advising clients to evade taxes and that they were advising clients to split this unaccounted money into tranches and send it to non-resident Indian (NRI) accounts abroad.

The banks are likely to be penalised for failure to verify customer IDs, failure to carry out an enhanced due diligence and risk categorisation, reported CNBC-TV18 today.

The finance ministry will now send a notice to all the banks seeking an explanation, based on the RBI report.

Meanwhile, perverse incentive schemes offered to the bank employees which lures them to sell insurance and mutual fund products has been identified as the root of the problem by the RBI, due to which the probe has now been extended to 34 major banks in the country which sells such products, reported Business Standard today .

Sources in the RBI also told CNBC-TV18 that the central bank has proposed to evolve a new system for banks to assist tax authorities in detecting tax evasion after several issues concerning market conduct of financial institutions were brought to its notice.In certain cases, RBI report found that there was a lack of supervision and coordination when it comes to tackling tax evasion attempts through the formal banking system. Therefore the central bank will come up with a new system along with Income Tax Authorities to deal with such tax evasion attempts.

Interconnectedness in banks with respect to insurance, mutual funds etc can give rise to a systematic risk in the background of recent money laundering allegations, the report said.

The RBI will make a judgement call after due deliberations, the sources told the channel.

The RBI is currently discussing methods with tax authorities on the need to check responsibility of banks with respect to sales of gold coins, third party insurance products and wealth management which could result in tax evasion.

Last week, Reserve Bank Deputy Governor HR Khan had said the central bank is initiating action against the three banks, named in the Cobrapost sting. The sting operation conducted by the portal alleged that some bank officials had offered to launder unaccounted money by investing in insurance schemes.

“Actions are on the way. Scrutiny has been done, actions is being taken both in respect of systemic level and at the individual banks,” he had said.

Soon after the expose, Reserve Bank Governor D Subbarao had said some corrective steps will be taken to strengthen the banking system.