India’s second largest state-owned lender, Bank of Baroda, is in trouble.
In the last week, the bank has found itself at the centre of a Rs6,000 crore illegal foreign exchange transaction scam. It has fired two senior officials and investigating agencies have arrested at least four more people.
The investigation, which began at the bank’s Ashok Vihar branch in New Delhi, seems to have now developed into a larger black money fraud, potentially entrapping a number of other big banks in Asia’s third largest economy.
Bank of Baroda, in a statement (pdf) on Oct. 12 to the BSE, said that it has suffered no losses because of the laundering. It did not respond to an email sent by Quartz asking for further details.
Where it all began?
Between May 13, 2014 and June 20, 2015, the Ashok Vihar branch opened 59 current accounts through which large foreign exchange remittance transactions were undertaken, Bank of Baroda said in its statement to the stock exchange. Up to August 2015, a total of 5,853 outward foreign remittance transactions worth $546.1 million (Rs3,500 crore) were made.
The purpose of these transactions was stated as “an advance payment for imports”. The money was transferred to around 400 overseas parties—most of them based in Hong Kong and one in the UAE. For all these transactions, the branch did not follow any Foreign Exchange Management Act (FEMA) guidelines. The FEMA governs all foreign exchange-related transactions in India.
Bank of Baroda noticed these dubious transactions in July 2015, and subsequently ordered an internal investigation. The bank’s internal audit department began a detailed investigation on Sept. 22. It also reported the matter to the Central Bureau of Investigation (CBI), Enforcement Directorate and the finance ministry on Sept. 24. Two days later, it also informed the Reserve Bank of India (RBI).
The bank was waiting for the completion of the investigations before taking any further action, it said. However, some sources leaked the probe details to the media even before the examination was completed.
The fraud
During the weekend of Oct. 10-11, the CBI conducted searches at over 50 locations of various companies who were allegedly involved in the transfer of funds. The search revealed that most of the addresses given by these firms were either false or the companies did not exist at all.
On Oct. 11, the CBI said in a statement that most of the accused persons had been identified. Two days later, an assistant general manager and another officer—both working at the Ashok Vihar branch of Bank of Baroda—were arrested.
“There was allegedly overseas remittance of foreign exchange of approximately Rs6,000 crore,” the CBI added.
The CBI statement also said that the amount of each transaction was less than $100,000. Most of these transactions were carried out through newly opened current accounts, with heavy cash receipts, but the branch did not generate any exceptional transaction report (ERT) or monitor the transactions, the CBI said. Banks need to file an ERT with the RBI.
Further, each firm typically made between four and five transfers to the same exporter in a day, the Mint newspaper reported. The bank failed to ask for any documents related to the said imports and no details regarding the imported shipments were obtained.
Now, more banks might be at risk.
Already, an HDFC Bank employee has been arrested by the investigators. The bank subsequently suspended him, it said in a statement (pdf) on Oct. 14.
The black money fight
These dodgy transactions are emerging at a time when India is trying to clamp down on black money stashed in foreign banks.
The special investigating team on black money has asked investigators to take strict action against fake firms who use banks to illegally move money. Earlier this month, finance minister Arun Jaitley said that those who don’t declare foreign money will be punished under the black money law.
On Oct. 16, RBI governor Raghuram Rajan said that the investigations into the Bank of Baroda fraud will be carried on to the ultimate conclusion by both the central bank and the investigating agencies.
“We have created a whole new system for fraud alerts, fraud awareness amongst the banks,” Rajan told reporters after the RBI board meeting in Aizwal, Mizoram. “If they are not pursued quickly and pursued to their logical conclusion, it creates an atmosphere of impunity, which then breeds more such practices.”