The real money laundering
This week Reserve Bank of India will take a call on cutting rates and a day before, the finance minister will meet chiefs of public sector banks as their largest shareholder to decide the course they should follow in 2013-14. Overshadowing both the meetings will be the scare of a money laundering racket in commercial banks. While a scare scenario is the default option within the media, how realistic is it?
Laundering is a risk that financial sector globally has become painfully aware of in the last decade with its cancerous connection with drug running and even worse, terror financing. This is why India has prided itself on becoming a member of the global covenant against it—the Financial Action Task Force, in 2010.
The membership carries with a huge due diligence to stamp out any channel that even remotely fuels such funding. This is at the base of the detailed know your customer (KYC) guidelines that banks and all other regulated financial entities have built up in India.
As the supposed expose of last week in three banks showed while the systems are in place, the rush to find moneyed customers does encourage bank managers to play footsie with it. The reassuring part of the whole drama is that despite the loose talk none of them were able to break the security system to set up any accounts. In this context since public sector banks carry a far larger set of inactive accounts, the chances of mischief could be relatively higher.
The worry is whether banks are reading the riot act to their staff against such attempts. From actions taken by all the three banks, it is obvious they have done so. Also, the reporting system for large value transactions has indeed become stringent enough to make it impossible for those to dip under the radar. (Witness the persisting demand for gold as an alternative, despite the punitive levels of tax being imposed on it).