Mumbai/New Delhi: The visits started earlier in December and covered eight branches of Axis Bank across India.

Income tax officers, alerted by the bank about suspicious transactions in around 50 accounts, arrived to inspect books, speak to executives and probe whether there had been any attempt to launder money.

The visits crowned a torrid fortnight for India’s third-largest private sector lender—it had to deal with similar visits by investigative agencies to other branches and scotch rumours that the Reserve Bank of India (RBI) had scrapped its banking licence or was thinking of doing so.

Axis may have been hit the hardest in the post-demonetisation clean-up, but other banks too have been (and continue to be) investigated for the alleged complicity of their officials in helping people launder money.

Since then, banks and bankers have rarely been out of the news.

ALSO READ | Axis Bank CEO Shikha Sharma says embarrassed over handful of employees

At first, they were lauded for working long hours and on holidays exchanging currency and helping people deposit the invalidated notes. In his first public rally after announcing demonetisation, Prime Minister Narendra Modi singled out bankers working over the first weekend for special praise.

Soon, though, they became villains in the public eye—for allegedly abetting the laundering of black money.

If the year began with talk of the role of banks and bankers in India’s big bad debt problem, it ended with talk of their role in money laundering.

At first, bank employees were lauded for working long hours to tackle demonetisation. Soon, though, they became villains in the public eye

The ecosystem

Every time a wave of white-collar graft has hit India, it has been due to something in the ecosystem which enables information arbitrage. Of course, the underlying driving force is plain greed.

The securities scam in 1992 was a story of individuals who gamed a system by monetizing the information gaps in an evolving financial securities trading system. Exploiting this would not have been possible without the help of key intermediaries—retail and investment bankers, securities traders and the ubiquitous all-purpose fixers.

Similarly, the scam involving the allocation of telecom spectrum and coal mines was made possible by the lack of a transparent and rules-based system. The minute the decisions became ad hoc, rentier income was guaranteed—and the rest is history.

In the case of demonetisation, for the first time, power devolved to the level of the local branch manager and even a teller.

Following the note ban, the role of a bank employee became more central to the process. And the opportunity for corruption went from wholesale to retail

The risk seemingly was very low, given that the trail could easily be obfuscated. Limited currency supplies meant the bank branch—otherwise disenfranchised by the spread of ATMs—overnight became a critical nodal point for the exchange of old currency notes for new.

Long lines—sometimes kilometres long—built up outside almost every bank branch in the days following demonetisation, making the role of an average bank employee even more central to the process. The opportunity for corruption had just gone from wholesale (where top-level bank management traded favours for loans to dubious corporates) to retail.

And the various flip flops in the demonetisation rules—with the authorities focused on staying a step ahead of the bad guys—made the role of a banker in the exchange of currencies that much more critical.

“In such a large operation, there are always going to be some mishaps. We have to ensure that people like this get caught and they are given due punishment, but it is unfair to paint the entire banking sector with the same brush," said the executive director of a large public sector bank, requesting anonymity as he is not allowed to talk to the media.

In such a large operation, there are always going to be some mishaps...but it is unfair to paint the entire banking sector with the same brush- Executive director of a large public sector bank

Bankers faced other problems too.

A senior official at a medium-sized private sector bank revealed that a large value customer with a substantive deposit threatened to go to another bank when pressured to reveal the source of the money being deposited.

“A branch manager’s effectiveness is also measured on how many large deposits he is able to generate and maintain. This gives the bank more opportunities to cross-sell other services. So, maintaining relationships is very important," the second banker added, requesting anonymity.

Even as bankers continue to defend branch staff, agencies such as the Enforcement Directorate (ED), income tax (IT) department and Central Bureau of Investigation (CBI) have conducted searches and visits at branches across India, resulting in several arrests.

The infractions

Axis Bank has suspended around 50 accounts with suspicious transactions and has ruled out any lapses in its KYC (know your customer) compliance. However, the bank has also shied away from clearing all its employees of any wrongdoing. It has already suspended 24 employees across branches where it has found evidence of suspicious transactions.

ALSO READ | Axis Bank suspends some suspicious accounts

Shikha Sharma, managing director and chief executive officer of the bank, sent a letter to customers on 18 December, stating that she was “embarrassed and upset" over the conduct of a handful of employees. In her letter, Sharma said that the bank had appointed KPMG consultancy to conduct a forensic audit and that it has also built additional safeguards to prevent a repeat.

Elsewhere, four employees, including a branch manager of HDFC Bank in Chandigarh, were sacked on 3 December for allegedly indulging in unauthorized exchange of demonetized currency notes. These bank officers helped convert banned currency for people they knew personally in exchange for a commission.

Following a directive from RBI, banks are also asking their branches to strictly maintain a record of the number of currency notes coming in and going out. The central bank put out a notification on its website on 13 December, asking banks to preserve footage recorded on CCTV cameras at their branches “to facilitate coordinated and effective action by the enforcement agencies in dealing with matters relating to illegal accumulation of new currency notes".

ALSO READ | Black money: Govt asks RBI for report on lapses at banks after demonetisation

“We have also been asked to conduct regular audits at branches to ensure that the numbers add up and there are no problems. We are conducting concurrent audits and internal audits wherever applicable," said the first banker quoted earlier.

But experts believe that the fear around bankers misusing their powers are highly exaggerated.

“In all these years of working with the Indian banking system, we are sure that things are rather clean. A good banker does not simply turn into a criminal just because there is demonetisation," said Saurabh Tripathi, senior partner and director, The Boston Consulting Group India.

Investigations

Then, what explains events at Axis, HDFC Bank, State Bank of Mysore (SBM), Oriental Bank of Commerce (OBC) and Syndicate Bank that have all reportedly seen visits by tax department officials at their branches across India? SBM, OBC and Syndicate Bank were unavailable for comment.

Even staffers at RBI are being investigated on charges of laundering black money. CBI arrested two RBI officials in Bengaluru for allegedly exchanging currencies beyond the stipulated margin of Rs4,000 per person per day for a commission.

“Irregularities have been found even at disbursals happening at post offices," said an income tax officer who asked not to be identified.

...We are sure that things are rather clean. A good banker does not simply turn into a criminal just because there is demonetisation- Saurabh Tripathi, senior partner and director, The Boston Consulting Group in India

Since 8 November, the income tax department has sent around 2,000 notices to bank account holders, seized cash worth Rs130 crore and detected around Rs1,500 crore of undisclosed income.

“The Enforcement Directorate has so far conducted inquiries at 50 select bank branches across the country, including in Ahmedabad, Bengaluru, New Delhi, Surat, Mumbai and Chennai, to check money laundering, and across private sector and public sector (banks)," said an ED officer based in Mumbai on condition of anonymity.

“Any attempt to convert black money into white, especially one involving cash, cannot happen without the aid of banking channel and bankers who are willing to make a quick buck," said a second income tax officer who did not wish to be identified.

So far, most cases where the department has seized stashes of cash involved a bank.

As per tax officials, three private banks in Bengaluru and Erode carried out cash transactions for converting unaccounted wealth to accounted wealth and have been issued notices.

Any attempt to convert black money into white, especially one involving cash, cannot happen without the aid of banking channel and bankers who are willing to make a quick buck- An income tax official, on condition of anonymity

“Details of the bank officials summoned and the banks being probed cannot be divulged yet as we are yet to make any arrests in the matter," said the first income tax officer.

“That’s the sad reality, where the drive to flush out of black money is being undermined by black money hoarders because they have a ‘guy’ in the bank," the second income tax officer said.

Modus operandi

According to several investigators from across various agencies involved in ongoing probes, the method deployed to conduct illegal exchanges and deposits are simple.

Those seeking to legitimize their illegal wealth approach conversion agents in the market. In exchange for a commission of around 20-30%, the agents approach bankers seeking a conversion. The bankers, in turn, effect this by compromising on due diligence and KYC norms. The money is either used for purchase of gold or circulated through a series of fake or shell companies. The bankers get a cut of the entire transaction as a fee.

In some cases, said the ED officer, “Bankers were aware of the fact that multiple salary accounts existed against a person’s name. That is legally not possible, because that means that the person is employed in more than one organization at the same time. Upon investigating the matter, it was found that they were bogus accounts which were being used to palm off black money."

Investigators say that there have also been instances where bankers have “forgotten" to check for fake IDs of those coming to deposit old currency notes.

“Banks need to be wary of when a person tries to open salary accounts, deposit salary cheques, open a new fixed deposit or liquidate an existing fixed deposit to immediately create another one, especially if the amount is large. All these moves must be cautiously monitored by banks. In some cases, t he slip-up happens on part of the banker who deals with the customer and that’s when money changes hands illegally," said a second ED official, based in New Delhi, who asked not to be identified.

Clearly, in a short span of six weeks, the Indian banker is now under public scrutiny.

A post on Twitter summed it up best. “Enough of this KYC stuff. Looking at the number of bank employees being exposed, what banks need to focus on first is KYE: Know Your Employees."

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