Bank of Baroda’s officials in their Ashok Vihar (Delhi) branch seem to be doing something really shady. More than 6,000 cr. was found to have been transferred abroad, into shady accounts, from that tiny little branch, and here’s what LiveMint had to report:

In total, between 1 August 2014, when the irregular remittances to foreign accounts first began, till 31 July this year, an amount of Rs.6,172.92 crore was transferred, the report shows.

In its statement to the stock exchanges, the bank claimed that around Rs.3,500 crore was remitted through 38 accounts to nearly 400 entities in Hong Kong and the UAE. It admitted that the Ashok Vihar branch did not follow Foreign Exchange Management Act rules.

And now, six people have been arrested, including two senior officials of BoB and one from HDFC bank.

In essence, adding from an Indian Express report:

  • Some businessmen created dummy companies in Hong Kong and India
  • They exported overvalued products and generated fake bills, and received import remittances from those countries
  • They claimed a “duty drawback” from the government (which pays back the duties paid as inputs, when you have exported the output)
  • Then they paid for “imports” back from these locations, so the money would go back out. Since they didn’t actually import anything, this was paid as an advance.
  • The advance payment for imports is usually not okay, unless the amount is small, so they kept such payments at less than $100,000
  • They paid into these accounts in cash, thus laundering black money as well.
  • Some of these guys had genuine exports too, like Gurcharan Singh Dhawan, a garment exporter, who also inflated exports to build in that duty drawback
  • Kamal Kalra, an HDFC bank employee, facilitated part of the transfer and earned 30 to 50 paise commission per dollar.

Think about it: You generate money in cash. You put it into a bank account. You transfer money out to some Hong Kong entity for advance imports, below the number required to show that actual imports are happening. Then you tell the bank you exported SOOO much and receive a remittance from a Hong Kong entity. The exports then have a duty drawback from the government which you earn separately. You basically turned your own money around, showed the imports as an expense and got the duty drawback, plus your black money in cash got converted to white with little tax paid.

This seems to have evidence of fraud, of money laundering and of connivance with bank officials.

Our View: Fix Banking

This may have been a fraud at a branch. But why did the banking systems not catch it? The bank has seen banking transactions in cash of small amounts continuously added in. Some say this is because garment importers tend to sell in cash so they deposit cash often, and it cannot be curtailed. But at least it should have triggered an investigation.

Secondly, the transfers as “advance imports” should have been tracked at the central level. Why are so many payments being made, all in small quantities, from the same branch? Why aren’t they proactively investigating and finding this stuff for themselves instead of waiting till it became Rs. 6,000 cr?

At some level, RBI needs to be a strong regulator and fine the bank a massive amount – say Rs. 500 cr. or more – for the transgressions. This will hit the bank where it hurts (capital) and the officials who were caught napping will have to be sacked. The problem in public sector banks is of non accountability, but when you sack people, you get their attention.

In general, the banking system is not unaware of money laundering and my personal belief is that bankers will be more than happy to lend a helping hand. If we have to fix banking, we have to make an example, and now is a good time to start.

Now, tell them about it: