Transcript IPO Scam Lessons for banks Presentation by LALIT SRIVASTAVA General Manager Reserve Bank of India.

IPO Scam
Lessons for banks
Presentation by
LALIT SRIVASTAVA
General Manager
Reserve Bank of India
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Money Laundering
Understanding Process & Objectives
Money Laundering is called what it is because that
perfectly describes what takes place – illegal, or
dirty money is put through a cycle of transactions
or washed, so that it comes out of the other end as
legal, or clean, money. In other words, the source
of illegally obtained funds is obscured through a
succession of transfers and deals in order that those
same funds can eventually be made to appear as
legitimate income.
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Stages of Money Laundering
Money Laundering consists of a three stage process:
Placement
The first stage involves the Placement of proceeds
derived from illegal activities – the movement of
proceeds, frequently currency, from the scene of
the crime to a place, or into a form, less suspicious
and more convenient for the criminal.
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Stages of Money Laundering
Layering
The second stage is called Layering. It involves
the separation of proceeds from illegal source
through the use of complex transactions designed
to obscure the audit trail and hide the proceeds.
The criminals frequently use shell corporations,
offshore banks or countries with loose regulation
and secrecy laws for this purpose.
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Stages of Money Laundering
Integration
The third stage is called Integration. It represents
the conversion of illegal proceeds into apparently
legitimate business earnings through normal
financial or commercial operations. Integration
creates the illusion of a legitimate source for
criminally derived funds and involves techniques
as numerous and creative as those used by
legitimate businesses. For example, false invoices
for goods exported, domestic loan against a foreign
deposit, purchasing of property and co-mingling of
money in bank accounts.
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Salient features of IPO scam
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Modus operandi
Current account opened in the name of multiple
companies on the same date in the same branch of
a bank
Sole person authorised to operate all these
accounts who was also a Director in all the
companies
Identity disguised by using different spelling for
the same name in different companies
Multiple accounts opened in different banks by the
same group of joint account holders
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Salient features of IPO scam
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Huge funds transferred from companies accounts
to the individual’s account which was invested in
IPO’s
Loans/ overdrafts got sanctioned in multiple names
to bypass limit imposed by RBI
Loans sanctioned to brokers violating guidelines
Multiple DP accounts opened to facilitate
investment in IPO
Large number of cheques for the same value issued
from a single account on the same day
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Salient features of IPO scam
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Multiple large value credits received by way of
transfer from other banks
Several accounts opened for funding the IPO on
the request of brokers, some were in fictitious
names
Refunds received got credited in brokers a/cs
Margin money provided by brokers through single
cheque
Nexus between merchant banker, brokers and
banks suspected
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Operational deficiencies
Factors that facilitated the scam
 Photographs not obtained
 Proper introductions not obtained
 Signatures not taken in the presence of bank
official
 Failure to independently verify the identity and
address of all joint account holders
 Directors identity/ address not verified
 Customer Due Diligence done by a subsidiary
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Operational Deficiencies
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Objective of large number of jt. account holders
opening account not ascertained
Purpose of relationship not clearly established
Customer profiling based on risk classification not
done
Poor monitoring and reporting system due to
inadequate appreciation of ML issues
Absence of investigation about use and sources of
funds
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Operational Deficiencies
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Unsatisfactory training of personnel
No system of fixing accountability of bank
officials responsible for opening of accounts and
complying with KYC procedures
Ineffective monitoring and control
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Measures to prevent scams
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An analysis of IPO scam clearly brings out the
laxity on the part of banks to scrupulously
implement the KYC/AML guidelines issued from
time to time. It also raises serious concerns about
the integrity of the systems & systemic risks.
While scams may still happen despite best of
preventive measures, it should not undermine the
efforts being made to insulate the financial sector
from money laundering. It is going to be a long
fight with constant need to improve and innovate
new strategies.
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Measures to prevent scams
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It is important to understand that the risks banks
run as a result of non-compliance with regulatory
and statutory guidelines can cause severe
reputational and financial damage to individual
banks and the Indian banking system as a whole
Need for comprehensive operational framework
implementing important aspects of KYC
instructions e.g.
Documentation procedure for opening of all
types of customer accounts;
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Measures to prevent scams
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Clarity in understanding of risk classification of
accounts and proper customer profiling
Ongoing monitoring of medium and high risk
accounts
Enhanced due diligence in respect of accounts
with beneficial ownership, non-face to face
transactions, group companies, high risk
businesses and wire transfers etc.
Prompt reporting of cash and suspicious
transactions to Principal Officer by branches
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Measures to prevent scams
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An effective audit machinery
Good understanding of regulatory and statutory
prescriptions in letter and spirit
Clear demarcation of duties and responsibilities
Violations to be dealt with sternly
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Are penalties a deterrent
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(d)
(e)
Impact of penalties
Quantum of penalties not important in the initial
stages
Signal sent by Regulator is more important
Discussion with top management precedes
imposition of penalty
Continued non-compliance may affect other
approvals
Banks international business dealings may get
affected
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Role of DSA
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Of late banks have been increasingly resorting to
outsourcing of certain types of banking services.
However, the PMLA, 2002 and guidelines on KYC
norms clearly put the responsibility of verifying
basic customer information at the time of
establishing a business relationship on banks. The
draft guidelines on outsourcing of services also
stipulate that DSA’s cannot be used for complying
with KYC procedures. Reporting of unusual and
suspicious transactions to Principal Officer/MLRO
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Thank You
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