Cobrapost sting: Did bankers promise jumping AML rules?

After the Cobrapost sting operation, a friend said he was happy mis-selling and false promises weren't restricted to the common man alone; these also took a toll on the mantriji and his ill-gotten wealth.

Another friend said, "You are interested only because it concerns the banking industry. If the sting was on small-time politicians who promised illegal favours in return for money, would you have made the effort to locate and watch the tapes?" That set me thinking!

If banking and financial systems aren't used to circulate black money, the profitability of any illegal trade would be reduced. So, strict anti-money-laundering regulations should be implemented, as these act as brakes on illegal trade. Let's take a look at what the Cobrapost tapes reveal:

1) Clearly, the tapes show the extent to which bank officials are keen to sell pension products. They make tall promises until the time they realise a 'client' doesn't need such promises; then, they switch gears.

2) Nowhere in the tapes (I watched only about 20) was the client promised the bank would bypass its anti-money-laundering (AML) practices. The client was promised the officials would facilitate ways in which he could use 'existing' loopholes to launder money and use transaction limits to escape the AML documentation requirement. The bank officials reassured the client that though the bank would report his cash deposit in the account (to be opened with the bank), it would be lost in the huge pile of information the bank sent to the tax department. Here, the only visible personal benefit for the officials seemed to be meeting insurance product sales targets. The bank officials might not have fallen over each other unless the 'client' had shown interest in buying insurance products.

3) It is not too difficult to see why this happened. Banks have an incentive to increase fee income (the best source for this is insurance plans), as this income has higher weight compared to interest income.

To maximise fee income, banks work under very high pressure. They also reward good performance with incentives and promotions. This is acceptable in moderation; at extreme levels, the lower management is prone to achieving targets by any means. The top management denies being aware of this and points to circulars and instructions that reiterate the need to follow guidelines. And, action against staff is allowed on a few occasions - only when it comes to the attention of the senior management. As far as the regulator is concerned, the distribution of insurance products by banks falls in the rainshadow region, with each regulator feeling it is another's problem.

Also, banks know even if they are hauled up for any transgression, they can get away with a rap and a small fine.

The bad news is that this is likely to be treated as yet another case of mis-selling. The fact that such mis-selling promotes the circumvention of AML norms at a retail level is likely to be ignored. However, a substantial cure is possible if there is a credible threat of levying huge fines for such acts. Regulators in India have had issues with levying large fines because of ability, as well as intent. Ability: Regulations written ages ago levy penalties that wouldn't even deter kirana stores. Intent: Traditionally, regulators see themselves as an industry's protectors and, therefore, loathe levying large fines.

An active movement supported by grassroots organisations could force a decision on such issues. This would stop promotion of AML circumvention techniques, at least at the retail level, and substantially reduce the rampant mis-selling and false promises.

The write is CEO, Apnapaisa.com