Live Mint :A V Rajwade:13 march2013 Far from tools to hedge risks, derivatives have turned into instruments of wanton financial speculation
La Dolce Vita (The Sweet Life) is a classic Federico Fellini movie of 1960 vintage. I was reminded of it after the recent election in Italy, the euro zone’s third largest economy after Germany and France. One of the major actors in the hung parliament is the septuagenarian former prime minister Silvio Berlusconi who personifies La Dolce Vita. Italians obviously are broad-minded: despite reports about his famous Bunga Bunga sex parties, his alleged Mafia connections and corruption scandals, he remains a major political force—and could even become the next prime minister under a centre-right coalition. As part of his election manifesto, he has promised an amnesty for tax evaders (including, presumably, himself) and refund of a property tax imposed by the present government headed by an unelected technocrat.
Another major political leader is a former comedian who advocates that Italy would be better off exiting the single currency, rather than continue with the fiscal austerity, the unemployment (12%), the continuing recession closing down a thousand businesses a day, and the social pain and unrest. (Many voters from the left and the right seem to agree with the sentiment.) As the political deadlock continues three weeks after the election, it does seem that the crisis in the euro zone could once again become front-page news. (Italian bond yields have risen.)
One case which affected the election result is a derivatives scandal in Banca Monte dei Paschi di Siena SpA (MPS), Italy’s third largest and the world’s oldest (1472) bank. Its controlling shareholder (35%) is a foundation which runs hospitals, schools, etc., from the dividend income, and has strong connections with the centre-left party. The case goes back to December 2008 when MPS entered into large derivatives transactions —one with Deutsche Bank and another with Nomura (apparently, the contracts were kept locked in a safe and came to light only recently). The purpose was to hide or postpone losses under two earlier derivatives transactions. In turn, these had been undertaken to “augment capital” strained by a costly takeover but resulted in a loss of €367 million. The new transactions yielded an immediate gain to MPS—and bank margins of €60 million to the counterparty banks. It is strange that seasoned bankers should be paying that kind of margins to hide a loss—and take on further risks. The loss on the new derivatives is estimated at €700 million. The loss has led to MPS asking for a second rescue from the central bank. A new management is in place, and has sued members of the old management and the counterparty banks.
The earlier derivatives were linked to the acquisition of Antonveneta in 2007, another Italian bank, for €9 billion, an amount larger than the market capitalization of MPS itself. (MPS’ share has slumped from €4 before the acquisition to €0.21 now.) One interesting coincidence: I was adviser for India to the Amsterdam Rotterdam Bank for several years in the 1980s. It was then a dour, conservative Dutch Bank, which later merged with Algemene Bank Nederland. ABN Amro was acquired in 2007 by the Royal Bank of Scotland, the Fortis group of Belgium and Santander, a Spanish bank; the last, in turn, sold the Antonveneta unit to MPS. Curiously, RBS, Fortis and MPS have needed huge bailouts by their respective central banks. The superstitious may well believe that there is a curse on ABN Amro acquirers.
But to come back to derivatives, another ongoing case in Italy is equally interesting. This involves the City of Milan and a structured interest rate swap with a notional of €1.7 billion it had entered into to hedge the interest rate risk on its bonds. The contract, now deeply in the red, had a structuring margin of €101 million (Bloomberg), or 6% of the notional. No wonder, banks prefer to market so-called bespoke, structured products. Milan has sued the banks for mis-selling, and the court has ruled that the transaction was a fraud: the banks are appealing. Structured products clearly are “weapons of financial destruction” for the ignorant and unwary, as Warren Buffett described them once.
But to come back to Berlusconi, “beware of Greeks bearing gifts” is an old saying, following from the Trojan horse incident in Greek mythology. With the ongoing corruption scandal in India’s defence purchases, we can perhaps paraphrase it to “beware of Italians bringing arms to sell”—or promising to return undertrials released for voting. Berlusconi has defended the bribes apparently paid by Finmeccanica, openly arguing that bribes are unavoidable “when you are negotiating with third-world countries and regimes” (Financial Times, 15 February 2013). His authority on the subject can hardly be denied. The scandal reminds me of something I noticed in the 1970s. While the system of broker and middlemen was common in wholesale textile sales in those days (perhaps it still is), the brokerage used to be 0.25% to 0.5%. In the case of sales to the canteen stores department of the Armed Forces, however, it used to be 5% plus. Things have obviously not changed much.
A.V. Rajwade is a risk management consultant, columnist and author.
HDFC, Axis, ICICI Bank stocks plunge on money laundering allegations
Shares of private sector banks today declined in morning trade following a money laundering expose by journalist Anirudha Bahal.
Big private sector Indian banks including HDFC Bank, Axis Bank and ICICI appear to have been targetted in a sting operation with the purported objective of discovering money laundering.
“The brazen criminal activity by these banks is channelizing vast amounts of black money into the regular banking system as laundered white money,” said CobraPost, which conduced the sting spanning several months in various bank branches throughout the country.
Following the allegations, shares of all the three banks declined on the bourses after opening flat.
Of the three, Axis Bank was hit the most, down 2 percent at Rs 1319, while HDFC Bank is down 1.57 percent at Rs 625.15 and ICICI Bank down 0.82 percent at Rs 1077.
The BSE Sensex, on the other hand, was down 0.29 percent at 19372.
“A six-month long undercover investigation by Cobrapost, codenamed Operation Red Spider, found dozens of officials of HDFC Bank, one of the oldest and most prestigious private banks in India, willing to help convert black money into “white”,” says the expose.
While HDFC Bank said there was no basis for such allegations, ICICI Bank has constituted a high-level inquiry committee to investigate into the matter.
“ICICI Group conducts its business with the highest level of compliance to legal and regulatory requirements. All employees of the Group are trained and required to adhere strictly to the Group Code of Conduct, including AML and KYC norms. We have demonstrated our commitment to this by following a zero tolerance policy towards any violation. We are deeply concerned with the media reports.
We want to assure our customers and all our other stakeholders that we are committed towards adherence to the high standards of business conduct, which is expected of us.We have constituted a high level inquiry committee to investigate into the matter and submit its findings in 2 weeks.”
The sting operation shows that the banks have violated various sections of the Income Tax Act, FEMA, RBI and Anti-Money Laundering Act
FP StaffMar 14, 2013
ICICI Bank sets up committee to probe money laundering allegations
Following a sting operation conducted by online magazine Cobrapost across various branches of private financial institutions which revealed that bank employees are accepting black money from customers to convert it into white ICICI Bank said it has set up a high-level inquiry panel to probe the matter, the findings of which will be submitted in two weeks.
Deeply concerned by the reports, ICICI Bank said it follows a zero-tolerance policy towards violation of regulatory norms.
“ICICI Group conducts its business with the highest level of compliance to legal and regulatory requirements. All employees of the Group are trained and required to adhere strictly to the Group Code of Conduct, including AML and KYC norms. We are deeply concerned with the media reports. We want to assure our customers and all our other stakeholders that we are committed towards adherence to the high standards of business conduct, which is expected of us. We have constituted a high level inquiry committee to investigate into the matter and submit its findings in 2 weeks,” the bank said in a statement.
Cobrapost claims that the nationwide operation shows how private banking and insurance affiliates launder money as part of standard procedures.
The sting also shows that money laundering services are openly being offered to walk in customers who wish to launder their money.
A few big private sector Indian banks including HDFC Bank, Axis Bank and ICICI appear to have been targetted in a sting operation with the purported objective of discovering money laundering.
The details of the sting were disclosed by investigative journalist Aniruddha Bahl at a press conference in Delhi’s constitutional club.
Representational image: Reuters
At the time of writing Firstposthad no way of authenticating the validity of the sting but the allegations made seem to suggest that bank officials at various branches were more than willing to oblige the persons carrying out the sting, who pretended to be politicians.
The full scope of investigations as detailed by Cobrapost which conducted the operation can be found here.
HDFC Bank has denied the allegations, while ICICI has said that it will launch an investigation and submit a report in two weeks.
These are some of the allegations that are being tweeted from the Press conference
Here is how CobraPost alleges private banks laundered money
A sting operation carried out by online magazine Cobrapost across various branches of private banks has revealed that banks are involved in money laundering.
Apart from HDFC Bank, Cobrapost also names Axis Bank and ICICI. ( Read ICICI’s response here)
At the time of writing Firstpost had no way of authenticating the validity of the sting
Cobrapost alleges that banks launder black money in the following manner:
1. Accept cash and invest it in insurance products and gold.
2. Open an account to route the cash into various investment schemes of the bank.
Reuters
3. Do it even without the mandatory PAN card or adhering to the KYC norms laid down by RBI.
4. Split the money into tranches to get it into the banking system without being detected.
5. Use “benami” accounts to facilitate the conversion of black money.
6. Use accounts of other customers to channelize the black money into the system for a fee.
7. Get demand drafts made for the client either from their own banks or from other banks to facilitate investment without it showing up in the client’s account.
8. Keep the identity of the investor/depositor secret.
9. Open multiple accounts and close them at will to facilitate the investment of black money.
10. Invest black money in multiple instruments in the names of different individuals, not necessarily drawn from among the family.
11. Allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash.
12. Personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine.
13. Use provisions like Form 60 to deposit the illegitimate cash into the account to route it into investment.
14. Help the client to transfer black money abroad through NRE (Non-Resident External)/NRO (Non-Resident Ordinary) account; transfer the money telegraphically or through means other than regular banking procedures.
Cobrapost's Shocking Mega Expose: Major Indian Private Sector Banks, HDFC Bank, ICICI Bank and Axis Bank, Are Blatantly Running A Huge Nation-wide Money Laundering Racket
New Delhi: A Cobrapost pan-India undercover investigation spanning several months, unearths a vast, nation-wide money laundering racket being run by HDFC Bank, ICICI Bank and Axis Bank. The brazen criminal activity by these banks is channelizing vast amounts of black money into the regular banking system as laundered white money.
Our investigation, conducted across dozens and dozens of branches of these banks and their insurance affiliates, across all five zones of the country, revealed these shocking facts:
That these money laundering practices are part of a standard set of procedures within these banks; * These money laundering services are being openly offered to even walk-in customers who wish to launder their illicit money; * A variety of options for laundering ill-gotten cash are being offered brazenly;
* These money laundering services are being offered practically as a standard product across the country.
This huge money-laundering racket being run by these banks has been captured by Cobrapost, on video-tape, running into hundreds of hours. The evidence is graphic, crystal-clear and clinching.
The investigation finds the banks and their managements systematically and deliberately violating several provisions of the Income Tax Act, FEMA, RBI regulations, KYC norms, the Banking Act and Prevention of Money laundering Act (PMLA) with utter disregard to consequences, driven by their desire to boost cheap deposits and thereby increasing their profits.
It puts a big question mark on the legitimacy of these banks' deposits and therefore their profits. It also raises grave questions of the legitimacy and origins of funds being raised in their insurance and investment arms. It is also clear from our investigations that these banks have been indulging in these criminal practices for several years and have well-oiled processes for the same.
Covered in this investigation, codenamed Operation Red Spider, are three leading private sector banks, namely, HDFC Bank, ICICI Bank and Axis Bank.
What were Cobrapost's methods to unearth this scam?
It took just a cold call by the Cobrapost reporter to the branches of the banks, mentioned above, to put a grossly illegal proposition on the table: A politician wants to launder a huge sum of black money. The purpose: make it white. Would the bank officials help? And the lid came off the murky world of money laundering in the Indian banking sector, as the officials of these banks rolled out the red carpet for our Associate Editor Syed Masroor Hasan.
Taking an alias of Rajeev Sharma, Masroor visited dozens and dozens of branches across the length and breadth of the country, including many major cities and state capitals, across all five zones. Nowhere was he disappointed. Nowhere was he turned away. Almost every banker that he came across was willing to help launder the black money of the fictitious politician Masroor was supposedly working for. The discussions on how to launder the money went up the management hierarchy.
How these banks launder black money * The ways these major banks suggested to transform the black money into white were both imaginative in their range and brazen in their approach. This brought to the fore a modus operandi that is tailored to rake in vast amounts of black money in the form of illegal deposits, insurance and investment products, sold by these banks. All these creative means make the dirty money squeaky clean without the regulatory authorities ever getting a whiff of what they are doing. Here is a gist of what the various bankers suggested to help the politician launder his illegitimate money:
* Accept huge amounts of cash and invest it in insurance products and gold. * Open an account to route the cash into various investment schemes of the bank. * Do it even without the mandatory PAN card or adhering to the KYC norms laid down by RBI. * Split the money into tranches to get it into the banking system without being detected. * Use “benami” accounts to facilitate the conversion of black money. * Use accounts of other customers to channelize the black money into the system for a fee. * Get demand drafts made for the client either from their own banks or from other banks to facilitate investment without it showing up in the client’s account. * Keep the identity of the investor/depositor secret. * Open multiple accounts and close them at will to facilitate the investment of black money. * Invest black money in multiple instruments in the names of different individuals, not necessarily drawn from among the family. * Allot lockers for the safekeeping of the illegitimate cash, including special large size lockers to accommodate crores of hard cash. * Personally come to the residence of the client to take the black money deal forward and collect the cash, even bring along counting machine. * Use provisions like Form 60 to deposit the illegitimate cash into the account to route it into investment. * Help the client to transfer black money abroad through NRE (Non-Resident External)/NRO (Non-Resident Ordinary) account; transfer the money telegraphically or through means other than regular banking procedures.
Other than these, officials suggested further innovative methods unique to their banks. For instance, HDFC Bank's officials offer such convenient cash laundering services like the operation of lockers (with cash in them) outside regular banking hours to ensure the secrecy of these customers' identities and to mask the nature of the transactions. To stay one step ahead, ICICI Bank officials were ready to make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable. On the other hand, Axis Bank officials proved to be a notch above in inventing fraudulent means. Use “sundry” accounts of the bank, they suggested, to deposit all the illegal cash from where it is to be routed into investment. Either use accounts of other customers, for a fee, to transfer money abroad, or use some shell company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips. They would pamper you, offering you privilege banking or priority banking, pulling out all stops to make the deal happen.
Operation Red Spider exposes the alarmingly lax and ineffective regulation of our Banking and Insurance Industries
Operation Red Spider makes it clear that the agencies entrusted under law to have an oversight over the banks, namely, the RBI, the Income Tax Department, Directorate of Revenue Intelligence, the Enforcement Directorate and various economic offences wings, have been grossly inefficient in unearthing misconduct on the part of the banks. It took a single reporter equipped with a low-end hidden camera, to unearth these endemic money laundering practices in HDFC Bank, ICICI Bank and Axis Bank: by merely posing as a walk-in customer wanting to launder huge sums of cash for a politician.
The interactions between officials of the banks and the reporter clearly brings out the connivance of senior management of these banks in facilitating money laundering and other illegal transactions. Operation Red Spider clearly establishes that the senior management of these banks has compromised all standards of governance, and brazenly breaking the law by offering these money-laundering services practically as a nation-wide product. It becomes very clear through the Cobrapost investigation that all that matters to these banks' managements is to increase the bank’s access to cheap deposits, thereby boosting their profits vastly, even if the money thus accessed is criminal and shady.
Cobrapost has hundreds of hours of raw video footage pertaining to the reporter’s interactions with personnel from the above-mentioned three banks. Cobrapost is willing to hand over the footage to any authorized law enforcement agency that wants to look into the matter. Cobrapost has undertaken dozens of investigations (including Operation Duryodhana: the cash for questions scam which led to the dismissal of 11 Members of Parliament) over the past 10 years and has been submitting unedited tapes to authorities whenever asked for. No agency has ever raised any questions as to the genuineness of evidence presented by Cobrapost.
When confronted with irrefutable evidence, the PR spin machines of the banks are likely to go into over drive and claim that “these cases are aberrations and isolated”, or that “the tapes are doctored”, or that “we will look into the matter and take action”.
Let all parties be assured that nothing in Operation Red Spider is fabricated. The camera is a mechanical witness and it has captured the words and actions of the bankers with great clarity. These banks can be called criminal syndicates for what their managements are willing to do to improve the bank’s bottom line. The hundreds of hours of video footage clearly establish that these cases are not aberrations at all. In fact, to the contrary, they are the norm, across all five zones, major cities, spanning the length and breadth of a large country like India.
Furthermore, these managements themselves are complicit in these criminal activities, and hence, to allow them to investigate this scam will only result in the destruction of evidence and a cover up of their tracks. No fair investigation can happen with the same people sitting at the helm of affairs.
We further need to have the debate again whether private entities should be given banking licenses and whether those that have them deserve them or the country is better served with their licenses being cancelled. For, as things stand, as demonstrated by the conduct of HDFC Bank, ICICI Bank, and Axis Bank (the country’s leaders in banking), perhaps the country might be better served by private banks not being on the banking canvass.
Finally, Mr. Chidambaram, our Finance Minister, has been speaking extensively about the cancer of money laundering and tax evasion in our system. The onus is now on the government to act swiftly, and get its investigative and enforcement agencies, including the CBI, to launch an investigation without even a day’s delay. Any delay will result in evidence like incriminating emails being destroyed (there are bank officials who have been caught on tape, saying that they routinely email seniors for approval/information on these illegal transactions), and cash being removed from lockers, customer identities being altered, etc.
The whole country has been looking at the Swiss banks with suspicion as being the main repositories of black money belonging to Indian residents.
As this path-breaking Cobrapost investigation starkly reveals, it is our very own, home-grown Indian banks that are the primary culprits in this giant racket.
Like I haven’t for Ram Gopal Verma, size zero, cats and what the nation wants to know.
Until of course, one fine weekend, when the world was still nursing a dizzying hangover from women’s day discounts and free shots, Bhagat turned fairy godfather.
And just before we drowned ourselves in weight loss teas and confidence boosting air bras, Bhagat killed our inner Rihanna with the chop of a word.
A few words actually, specifically these: “Your success is what will finally make Indian men respect women. Play your part.”
The last time I had “I can be your hero” playing in my head before this, was when I was 14. Such immense, complete joy, I tell you, could only be replicated by the sight of Rekha feeding Kabir Bedi to the crocodiles in Khoon Bhari Maang. No, seriously.
If you, like me, had mistaken yourself for a somewhat sensible woman who pays her own bills, can shoulder as much responsibility at work as any male colleague and can also manage her finances pretty well by herself , here’s the bitter truth: You’re not at all what you think you are.
In his column called The Underage Optimist in the Times of India, Bhagat shows you the mirror.
“The first behaviour that needs to end is the constant desire to judge other women”
I agree. We Indian women should stop pretending like we live in a Gossip Girl blog. Calling each other ‘sluts’ if the other wears a short skirt, with a sense of discretion equal to that possessed by a cockroach and the morals of Cinderella’s step sisters, we should totally stop being mean. This might sound like a very mothballed stereotype, but face it, if Bhagat is saying it, that’s what we are!
‘Second, the faking needs to end’. Again, I agree.
Bhagat says. “What’s the point of collectively harping on equality, when as individuals, you are happy to lapse into being clueless eye flutterers, just to keep men happy?”
Well, totally. Tiring, isn’t it? We might be making PPTs, coding softwares, writing reports, attending meetings and subjecting ourselves to other such work-life banalities, but all we care about is fluttering our eyelashes at the male boss or the senior colleague. We don’t quite know better ways that the cumbersome eye exercise to get ahead in life.
And yeah, what a bunch of emotional fools we are, really. Bhagat says we are not serious about ‘standing up for (our) property rights’. So what if we manage our own finances, have separate bank accounts after marriage, make investments, save money, buy property ourselves, we are more keen on giving away land and houses as freebies to evil husbands, sons and brothers who have no qualms about taking away what is rightfully ours. We are actually soggy little Nirupa Roys deep within.
And yes, if you were convinced that a having a woman boss only gets a man’s goat – wake up, it doesn’t! ‘Success’ is the only way to earn a man’s respect, says Bhagat. “Women need to become more ambitious and dream bigger,” to quote him exactly.
We aren’t ambitious enough. We, who stay up nights to crack horrifying exams, troop to universities and corporate houses as much as men, know Miss India speeches are a lot of gas; actually don’t have enough fire in our bellies. I can’t think of what makes men more ambitious than us. But he must be right, he is Chetan Bhagat.
And as Bhagat puts it, a man’s respect is the new Bournville in your life sisters – there’s no easy way to earn it.
Finally, don’t take Karan Johar too seriously people. It is not about the family. It’s about you. Since Bhagat assumes that while you might be reading his column, you must also be living the life of the women seen in washing powder commercials, wake up and realise that ‘you have a life too’. The whole multi-tasking, super mom concept is just a bunch of lies.
And yes, we laugh unnecessarily at bad jokes. If you have been wondering why Santa Banta jokes survived till now, hear it from him: because we women never stop laughing at a bad joke to please the men folk of this world.
Thank you Mr Chetan Bhagat.
For telling me who I am and changing my life forever.
BS Reporter | Kolkata March 14, 2013 Last Updated at 00:36 IST
WBIDFC claims Rs 120 cr missing from UCO Bank a/c
WB's infrastructure financing arm had parked the money with Kolkata-based bank in two separate transactions
West Bengal Infrastructure Development Finance Corp (WBIDFC) today claimed that around Rs 120 crore was missing from its fixed deposit accounts with UCO Bank.
The infrastructure financing arm of the state government had parked the money with the Kolkata-based bank in two separate transactions.
“We have informed the state finance secretary, home secretary and police commissioner. We have already filed an FIR (first information report) with the local police,” Abhirup Sarkar, chairman of WBIDFC, told Business Standard.
In August 2012, WBIDFC opened a fixed deposit account with UCO Bank by transferring Rs 59 crore from its account with Bank of India.
In January 2013, the infrastructure financing company opened another fixed deposit account with UCO Bank by transferring Rs 61 crore from its account with Indian Bank. UCO Bank had issued fixed deposit receipts in favour of WBIDFC for both the transactions.
While reconciliation of its accounts with UCO Bank earlier this week, WBIDFC noticed the money was missing. “We found that in the bank’s books, the beneficiary of those fixed deposit accounts was a different company and not WBIDFC. We sensed some foul play and hence decided to lodge an FIR,” Sarkar said.
Most top executives at UCO Bank were not aware of this development. However, according to a senior official, the bank has started an internal probe.
“At this moment, I am not in a position to offer any comments,” S Chandrasekharan, executive director of UCO Bank, said.
Arun Kaul, chairman and managing director of the bank, was not immediately available for comments.
Sarkar said the bank was likely to send some of the senior executives to the WBIDFC office today to investigate their claim.
WBIDFC was promoted by the government of West Bengal to cater to the growing need of infrastructure facilities in the state.
It is under the administrative control of the state finance department and is also registered as a deposit-taking non-banking finance company with the Reserve Bank of India.
