10 things that the CobraPost sting tells us about banks
by Vivek Kaul ( From First Post )
Stings in India have till now been carried out to expose politicians or bureaucrats. Today’s CobraPost sting has brought into the public domain the doubtful way in which the big Indian private banks operate. The sting, if it holds up to judicial scrutiny, brings out in the open other uncomfortable truths as well.
#1. Finance Minister P Chidambaram, in his recent budget speech, had said: “There are 42,800 persons—let me repeat, only 42,800 persons—who admitted to a taxable income exceeding Rs 1 crore per year.” Of course, no one took that number seriously. We now know why. The Cobrapost sting clearly shows us that there are many more people with a taxable income of more than Rs 1 crore. The straightforward and more than helpful way in which the banks were ready to help invest the black money of the ‘supposed’ politician that the Cobrapost reporter was fronting for can only tell us one thing: Banks seem to be doing this regularly.
The second thing that the sting tells us is that those who have black money do not keep all of it under their mattresses. AFP
And given this we can only conclude that there are many people out there with taxable incomes of more than Rs 1 crore, who don’t pay tax, than the 42,800 who do. While it’s an obvious conclusion that did not need this visual evidence, but it is still an important conclusion.
#2. The second thing that the sting tells us is that those who have black money do not keep all of it under their mattresses. A lot of it, as we know, goes into buying real estate (largely benami). But the holders of black money seem to like to diversify their hoarded “wealth”. As the CobraPost press release points out, “(Banks) accept huge amounts of cash and invest it in insurance products and gold.” The money invested in insurance products is in turn invested in stocks, government securities and financial securities issued by corporations. So hoarders of black money do seem to be following the age old investing principle of “don’t put all your eggs in one basket”. They seem to be buying everything. From gold. To real estate. To stocks. And even have money in fixed deposits with banks. This means a lot of black money is circulating right inside the banking system.
#3. By investing in gold and fixed deposits, hoarders of black money also show us that they like to have some liquidity in the assets that they own. Real estate is not terribly liquid and neither are insurance policies.
#4. The sting also shows our love for gold which goes with the large amount of black money in this country. Very small amounts of gold can be used to store a large amount of black money as wealth. It is claimed that India has lot of gold because Indians love the metal; but India also has a lot of gold because there is an awful lot of black money floating around.
#5. The good bit is that instead of just lying under mattresses, some of the black money is coming into the financial system. When people buy insurance policies which, in turn, buy either debt securities issued by the government or the private sector, or invest in shares issued by a company getting listed on the stock exchange, they are in some way financing someone who needs the money. That is the ultimate job of any financial system. To move money from those who have it to those who need it. Now what proportion of the total black money comes into the financial system no one has any clue of. But its better than people just channelising all their black money into land and other forms of real estate. Also, as more of this money comes into the financial system, the greater are its chances of being detected.
#6. The other interesting thing is that banks are helping channelise black money into insurance and not mutual funds. The main reason for this is the fact that insurance companies pay a much higher commission than mutual funds do, even though mutual funds remain a much superior mode of investing. It also goes with the cross-selling that banks tend to do these days given that almost all of them own insurance companies. So if you have ever wondered why the moment you enter a bank they try to sell you all kind of insurance policies and not attend to the need you really went there for, you now know the answer.
#7. Another major reason for banks selling insurance and not mutual funds to this set of clientèle which wants to put its black money to work is the fact that the know your customer (KYC) norms for mutual funds are much stronger than those required to invest in insurance. This is clearly an anomaly that needs to be done away with. Either mutual fund KYC norms need to be weakened or insurance KYC norms need to be strengthened. If it was not for these KYC norms, mutual funds remain a better way of hoarding black money given that they are very liquid.
You can buy a mutual fund today and sell out tomorrow (unless you are buying a tax saving mutual fund, that comes with a lock-in of three years). The same is not possible in case of insurance which comes in with a minimum lock-in of five years. Hence, mutual funds also need to be provided equal access to black money as insurance has. Also someone who has a lot of black money and is wealthy, doesn’t really need to pay for the “pure” insurance that compulsorily comes with the investment oriented insurance plans.
#8. The sting also tells us that banks have double standards. If you are ready to deposit/invest a lot of money with/through them, then they are more than ready to lay out the red carpet for you. If you are not, then try changing your address once and wait for all the proofs they want. Or try asking for a locker, and wait for the bank clerk/relationship manager to tell you that you will also have to open a fixed deposit of a few lakhs to get a locker. Meanwhile, as the CobraPost press release points out, banks “ allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash.”
Try depositing money and the bank clerk will give you a nasty look for having to count the total amount of money you are depositing. Whereas if you have black money, the bank will come to your residence to collect it. As the CobraPost press release points out, the bank will “personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along a counting machine.” Wow.
#9. What the sting also tells us is how simple it is to create a fake identity in this country. The rapist Bitti Mohanty could do it. So can you if you have black money. And the banks will help you with it. As Cobrapost notes: “ICICI Bank officials were ready to make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable. On the other hand, Axis Bank officials proved to be a notch above in inventing fraudulent means. Use “sundry” accounts of the bank, they suggested, to deposit all the illegal cash from where it is to be routed into investment. Either use accounts of other customers, for a fee, to transfer money abroad, or use some shell company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips.”
#10. And to conclude, what the sting clearly tells us is that everybody who pays income tax in this country is basically an idiot who is being taken for a royal ride. If you have a lot of black money and you are not paying tax on it, chances are somebody out there is waiting for you with a red carpet.
Five things you need to know about money laundering
A couple of big private sector Indian banks including HDFC Bank, Axis Bank and ICICI appear to have been targeted in a sting operation conducted by digital magazine CobraPost with the purported objective of discovering money laundering. Read the whole storyhere. But if you are not sure what money laundering is all about, here are five things everyone should know.
What is money laundering: Investopedia defines money laundering as, “The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.” Simply put, it is washing (laundering) illegal back money by showing it as legitimate gains by moving it into financial system to make the money white.
“Placement” refers to the physical disposal of bulk cash proceeds derived from illegal activity. Reuters
What’s the general modus operandi: Broadly there are three steps to money laundering activity as per the Reserve Bank of India.
1) Placement: “Placement” refers to the physical disposal of bulk cash proceeds derived from illegal activity.
2) Layering: “Layering” refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail and provides anonymity.
3) Integration: “Integration” refers to the re-injection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.
So, simply put, the money is taken from the source and then put into the financial system, via small deposits or demand drafts and like. Then these funds are moved into a number of accounts across several banks across different locations. There are numerous layers of transactions to disguise the original source of money. Then this money is use to buy real assets like property, gold and the gains are made on these assets. At times, black money is also used to create on-paper companies and money is moved via them by making fake bills and invoices.
Steps to prevent money laundering: There are a number of steps that financial institutions are suppose to take, like fulfilling the Know Your Customers (KYC) norms and asking for PAN on compulsory basis for financial transactions. Financial institutions also are supposed to check the source of funds, monitor the activities on accounts, and track irregular transactions. Like it or not, money laundering usually happens when an employee of the financial institution is involved, and thus makes process of layering mentioned above easier.
What can you do as a consumer: Dormant accounts can be easily used for conducting money laundering activities. If you have dormant accounts, it’s best you close them as soon as possible. Do not share your bank account number with people who ask you to help them transfer money from foreign locations to India, by offering a commission for using your bank account. Inadvertently you will become a part of money laundering activity.
Consequence to you: Even if you are not directly involved, if your dormant account is used or you allow your bank account to be used for money laundering activities inadvertently, you may suffer penalties which also includes imprisonment.
Evidence against banks is too strong: Aniruddha Bahal
New Delhi: Aniruddha Bahal has not slept for five straight days. Many in the media call him ‘King of Stings‘ and, true to this monicker, he has been editing perhaps one of the biggest stings of his journalistic career for these last five days, without a break.
Bahal was so tired this morning that he declined to even move away from the annexe of New Delhi’s Constitution Club for a coffee with us, saying he needs to be available at the venue for any more questions people may have for him. He says some of the stuff in this sting operation is coming “hot off the FCP machines” as we speak.
Code named ‘Operation Red Spider’, the sting was conducted by CobraPost’s associate editor Syed Masroor Hasan and alleges a nationwide money laundering scam
Short on sleep but high on adrenalin, Bahal told Firstpost in an exclusive chat that he used only a single reporter to uncover the unholy nexus between India’s top three private banks and politicians. He said he decided to do the sting because instances of money laundering were not aberrations but were endemic to our system. ( Read all about the sting here)
Code named ‘Operation Red Spider’, the sting was conducted by CobraPost’s associate editor Syed Masroor Hasan and alleges a nationwide money laundering scam involving three of the country’s largest private sector banks.
Excerpts from the chat:
FP: When did the idea of doing this sting first occur to you?
Bahal: This issue has been in the public domain for the last two years but we received some information about it five to six months back. It was obviously credible, we decided to check it out. That’s how the entire sting operation idea happened.
FP: Was it a journalist who tipped you off? How do you know the information was credible?
Bahal: We don’t disclose our sources. Anyway, the information we have presented today was obtained through cold calls. People tipped us off that this is happening and we decided to do this in the top three banks, top 20 cities nationwide.
FP: So how did the reporter begin?
Bahal: As I said, just making cold calls got us on to it. These (money laundering transactions) are obviously not aberrations, they are endemic. You will be surprised to know the reporter was offered masala dosa, chai/coffee when he went to these banks.
FP: What do you hope to achieve with this sting?
Bahal: My job is to be a journalist. We are not activists, our aim is to do stories and push them in the public domain…..a small organisation like us is all it takes to do such a sting. See for yourself, chairmen of these banks are on juries giving awards to journalists.
FP: Did the police or anyone from the Government get in touch with you to get this information?
Bahal: It is too early
FP: Do you anticipate a rash of defamation cases, legal issues now?
Bahal: The evidence we have is too strong. It will be foolish if people file defamation cases against us with this kind of information.
FP: We know one political party has been raising the issue of black money very often. Did any political party get in touch with you for this sting?
Bahal: No politician, no corporate house has been in touch with us
CobraPost sting: Of eager-to-please bank officials and black money hoarders
New Delhi: As kids, we were never sure on what ‘black’ money really looked like. I remember once asking my mom if ‘black’ money actually meant currency notes which were painted black. By the time I grew up, another set of words could be heard: Number 1 ka paisaand Number 2 ka paisa.
After the CobraPost expose on money laundering shown this morning, it becomes amply clear that, as far as the country’s top private banks are concerned, there is really no stigma or any fear when their wealthy clients come to them seeking conversion of ‘black’ money into ‘white’. (Read they key takeouts of the expose here)
Unless the Government actually goes after the hoarders of black money, their claims of tackling money laundering would continue to sound hollow.
The sting operation, code named ‘Operation Red Spider’, alleges that the three banks, ICICI, HDFC and Axis Bank, offer easy ways of laundering black money and introducing it into the banking system as ‘white’ money and that this facility is being “openly offered to even walk in customers”.
A CobraPost press release makes several other allegations as well:
• That these money laundering practices are part of a standard set of procedures within these banks
• A variety of options for laundering ill-gotten cash is being offered brazenly
• These money laundering services are being offered practically as a standard product across the country
• That these money laundering practices are part of a standard set of procedures within these banks
• A variety of options for laundering ill-gotten cash is being offered brazenly
• These money laundering services are being offered practically as a standard product across the country
The most often used route to launder money appears to be investment of large amounts of unaccounted cash in insurance products or gold and the most brazen service offered by banks to launder money is collection of cash from home where bank officials even bring along a counting machine to help the client.
Comparing his bank to a ‘johari bazar’ or the jewellery market, N. Gupta, Portfolio Relationship Manager/Deputy Manager HDFC Bank, Jaipur, Rajasthan, tells the undercover reporter of CobraPost it is easy to slip huge amounts of black money into the system without tax authorities getting even a hint.
“That sure happens here. Sir, we won’t divulge the names. When we are sitting in johari bazaar, then you can understand what it means. HDFC Bank and johari bazaar are like that only.”
CobraPost’s Aniruddha Bahal told Firstpost earlier today that the expose was not tough to conduct since banks were willing to offer laundering services even if someone were to just walk into a branch and speak of large amounts of cash. (Read the full interview here.)
Officials in different branches of these banks showed neither surprise nor fear in helping moneyed clients who wanted to legitimize cash, acting like real pros.
He said the CobraPost reporter was even offered snacks, tea/coffee while conducting money laundering transactions with these big banks. “It took a small organisation like us to do this”.
The CobraPost press release says officials of these banks had several ready solutions available to facilitate laundering transactions such as opening multiple ‘benami’ accounts to route cash into various investment schemes of the bank, without the mandatory PAN card or adhering to the KYC norms laid down by RBI.
The eager-to-please officials themselves got demand drafts made for the client without it showing up in the client’s account and kept the identity of the investor a complete secret. In some cases, lockers were allotted for the safekeeping of illegitimate cash, including special large size lockers to accommodate crores of hard cash.
Now that the expose reveals names of many high ranking officials of the three private banks, working in their branches across the country, does Bahal expect a rash of legal cases and defamation suits? “The evidence is too strong and it will be foolish if people file defamation cases”. But the chairmen of these banks are hardly likely to take such damaging allegations lying down.
Till now, no one from the Finance Ministry or the law enforcement agencies has come forward to ask Bahal and his team for the footage of this sting operation or quiz them over the sordid details. Unless the Government actually goes after the hoarders of black money, their claims of tackling money laundering would continue to sound hollow.
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