RBI to take action over ‘money laundering’ by private banks

The Reserve Bank of India (RBI) will take action against the three private banks - ICICI Bank, HDFC Bank and Axis Bank – after a sting operation carried out by a news website found that money laundering was being carried out virtually over the counter by employees of these banks.

This will be the first major action by the central bank following the passing of the Banking Regulation Amendment Act, which empowers the central bank to impose penalties up to Rs25 lakh per offence.

Speaking to newspersons in Delhi, RBI deputy governor H R Khan said, "Scrutiny has been done, action is being taken both in respect of systemic level and at the individual banks.

"I will not be able to tell you the details but action is being taken," he said on the sidelines of an event organised by National Housing Bank here. "I can't give you a time frame, but it will be soon," he added.

According to banking sources, the standard operating procedure of the regulator once it identifies a violation is to issue a show-cause notice. Senior executives of the bank concerned are given a hearing, and subsequently RBI decides on the penalty.

RBI regularly issues new regulations on the incentives and sales process followed by banks in distribution of third party products such as insurance and gold.

Cobrapost.com, the online news portal, had sent undercover reporters to branches of HDFC Bank, ICICI Bank and Axis Bank – the country's three largest private banks – where the reporters pretended that they wished to launder cash running into crores of rupees belonging to a politician.

Cobrapost alleged that some bank officials had offered to launder unaccounted money by investing it in insurance schemes.

Earlier, RBI could impose a maximum penalty of Rs5 lakh per offence. With the Banking Regulation Amendment Act, RBI can impose penalties up to Rs25 lakh.

Two years ago, the central bank imposed penalties on 19 commercial banks, including SBI, HDFC Bank, ICICI Bank and Citibank, for violating derivative norms.

The violations included failure to carry out due diligence in regard to suitability of products and selling derivatives products to users not having risk management policies. Along with penalties, the central bank had also come out with new guidelines on derivatives to prevent similar situations in future.

Soon after the exposes, RBI Governor Duruvvi Subbarao had said some corrective steps would be taken to strengthen the banking system.