What do India's Swiss banks do?

A good number of companies are into illegal money raising

In a recent reply to Parliament, minister of state for corporate affairs Sachin Pilot said his ministry had shared with the Reserve Bank of India (RBI) the particulars of around 34,000 companies with the objective of carrying on financial business. “RBI has taken up verification of such companies,” he said.

These companies are not registered with RBI or the Securities and Exchange Board of India (Sebi), the key agencies regulating the financial markets. A good number of these are into illegal money raising. Business Standard itself has brought to the  fore the case with close to a dozen such companies over the past couple of years. They use instruments such as debentures, membership coupons, online currency and even registration papers of plots of land.

One of the narratives that have emerged is of the companies being crooked and the investors being small, uneducated and innocent. Slowly, this narrative is changing. What if the investor was equally cunning?

What does our neighbourhood revenue official do with all the bribes he takes? Where does our brake inspector who takes home thousands every day hide his haul? Our highways contractor, our film star, our politician and our cricket hero…

Laundering comes later. There are more immediate problems. Where do you even park this booty? Buy a house. Buy a second one… third. All done, money still keeps coming, now what? Swiss banks are too high-profile. There must be other options, our neighbourhood guy is wondering.

Enter our agent from one of our mushrooming finance shops, our own Swiss bank.  The agent sells an investment scheme. Our neighbourhood guy says he cannot transact in cheques or other traceable instruments.

Our agent says, “No problem, Sir.” If your investment is in a few lakhs, the agent offers to open multiple accounts in your name; the money you invest is split into several deposits. It is done in such a way that the maturity amount is less than the RBI-prescribed cash limit of Rs 20,000. For example, a sum of Rs 2 lakh is split into 20 deposits of Rs 10,000 each; at the end of 15 years, you get back cash of Rs 15,000 per deposit and so on. The agent gets his cut, the company gets its cash flow and our neighbourhood guy gets his own Swiss bank. He is least bothered about the returns, nor is he worried about inflation. His problem is different: He needs a place to park.  

The second level in this game starts when the money is so big that it will not disappear into multiple accounts in a single name. The agent and the company now generate a list of names. The sum is then distributed among these names and deposited into the company. Only the agent and the branch manager recognise, which group of names belong to which neighbourhood guy and so on. This is why the agent is key. And, this is why regulators are often not able to trace the investor. But, company officials do so in no time.

Also, the instruments, receipts which are serially numbered, play a part. Whoever produces it gets the money, as in some Swiss banks. There might be some real investors but the big numbers do not come from them. Hope RBI completes its verification soon.