It shows the absence of a strong centralised fraud detection mechanism even in large banks

There is an interesting coincidence in the whole Bank of Baroda remittance scam - the amount of money that is said to have gone out of the country (Rs 6,000 crore) is bigger than the illegal money that the government has claimed to have recovered from foreign soil during the 90-day black money compliance window (Rs 4,147 crore).

According to investigators, perpetrators transferred large amount of funds abroad by splitting into small sums through several thousands transactions using names of non-existent entities to avoid taxmen.

The case is currently being probed by the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED). According to reports, the purview of investigation has now been expanded to other banks too, including HDFC Bank.

The more worrying part of the BoB episode is this:

Perpetrators have been using the country’s banking channels for transactions on trades that never happened over a period of time and one wouldn’t know how many more banks have been subjected to similar frauds. It is quite possible that more skeletons would tumble out of the closet as the investigations progress.

Until now, in most cases, unaccounted cash or black money has changed hands through hawala channels. But, rampant use of formal banking channels in this scale is unheard of in the recent past. It indeed raises serious concerns.

The modus operandi in the BoB case is interesting. The perpetrators opened some 59 accounts in BoB’s Ashok Vihar branch under the names of various companies and initiated multiple remittance transactions in these accounts. Finally, the bank was asked to transfer this amount to certain companies abroad as advance remittance for imports.

Since several accounts were opened and the funds were split into small units, the transactions probably didn’t come to the notice of the Reserve Bank of India (RBI) or agencies like the Financial Intelligence Unit (FIU), which typically filters large transactions. According to the investigators, no transaction exceeded $1 lakh to avoid automatic detection tools.

Investigators have found that many company addresses used to open accounts that didn’t actually exist. According to ED, transactions were initiated for fake imports and exports, meaning no real movement of goods happened.

True, in the BoB case, the bank’s auditors themselves had detected the fraud and reported to CBI and ED. But, the question is why it took so long for BoB to detect the chain of transactions. Also, going by the findings of investigators, the bank has clearly failed to do its KYC due diligence with respect to both end of its customers in this particular series of transactions — importers and the foreign exporters.

This couldn’t have been done without the connivance of the bank officials.

One reason why the bank acted late could be that it didn’t have to incur any losses in these particular transactions.

To be sure, this isn’t the first time that Indian banks are falling prey to fraudulent activities. In 2010, the CBI unearthed a corporate loan racket in Mumbai, where officials of various state-run banks and middlemen were arrested for sanctioning loans to certain corporations violating prudential norms.

Similarly, in 2010, Citibank detected a fraud in its Gurgaon branch committed by one of its employees. In another instance, early this year, investigating agencies had initiated preliminary enquiries against officials of several financial institutions, including Dena Bank and Oriental Bank of Commerce, in connection with a fixed deposit fraud involving Rs 700 crore.

Financial institutions, for that matter any company, is prone to fraudsters and conmen but, vulnerability of large banking institutions to organised money laundering activities is worrying.

In the BoB episode, the amount of money involved in the laundering activity is huge and the modus operandi (splitting the money into several small accounts and sending across the border) is carefully schemed.

The RBI, in the past, has cautioned about fraudsters using several small account transactions known as smurfing to conduct hawala-like dealings.

Clearly, there are serious lapses on the part of the bank for not properly doing its due diligence on several suspicious transactions that ultimately amounted to a huge amount. As mentioned earlier, it shows the absence of a strong centralised fraud detection mechanism even in large banks. It’s highly critical to address both issues, at least now.