New CEO Jayakumar’s challenge at Bank of Baroda

Like many others, I am curious to know what does P.S. Jayakumar want to do on his first day in office. The former managing director and chief executive officer (CEO) of VBHC Value Homes Pvt. Ltd, Jayakumar took over as managing director (MD) and CEO of Bank of Baroda (BoB), India’s second-largest lender by assets, on Tuesday. Jayakumar, 53, is one of the two bosses of state-owned banks hired from the private sector, the other being Rakesh Sharma of Lakshmi Vilas Bank who took over as MD and CEO of Canara Bank in September.

A week ago, BoB unearthed a Rs.350 crore bill discounting scam; it discounted the bills but never got the payment. Even before the probe is complete, over the weekend, the Central Bureau of Investigation (CBI) and the Enforcement Directorate raided quite a few branches of BoB and residences of the bank’s assistant general manager S.K. Garg and Jainish Dubey, a foreign exchange dealer. The raids were in connection with alleged illegal remittance of around Rs.6,172 crore to Hong Kong between 1 August 2014 and 12 August 2015, purportedly for importing dry fruits, rice and pulses.

At the epicentre of the close to $1 billion fraud is a BoB branch at Ashok Vihar, a residential neighbourhood in the north west part of Delhi, situated along the Ring Road. This is an authorized foreign exchange branch. This means other branches of BoB and even other banks too may have transferred the money to this designated branch for remittance and the entire amount remitted did not have to be necessarily deposited at this branch.

Going by media reports quoting BoB officials, 90% of the funds came from 30 other banks and only 10% were received as cash at this branch. Investigative agencies have alleged that the money was deposited in 59 accounts in cash in this branch as advance for import. Bank’s lone executive director B.B. Joshi acknowledged a text message sent to him, but said he would talk on this later.

The bank has terminated the services of the concurrent auditor and suspended two officers—the branch head and another executive who was dealing in foreign exchange.

The modus operandi of the fraud is pretty simple. A string of current accounts were opened in the Ashok Vihar branch. Since the accounts were used to remit money for importing dry fruits, rice and pulses, cash transactions did not raise any eyebrow as typically such businesses are mostly transacted in cash. The fraudsters also used a loophole that allows up to $100,000 remittance for imports without a bill of entry. Such bills are issued by the customs and give details of the exporter, quantity of goods, place of origin, etc. Any remittance for imports also needs the support of a bill of lading, issued by a carrier detailing the shipment of merchandise.

At this point, it is not clear whether BoB officials chose to ignore the requirement of bill of entry and bill of lading besides bills or receipts of the exporter as an evidence of purchase despite the abnormal volume of remittances, or fake documents were issued.

Clearly, the branch officials did not appreciate the necessity to file exceptional transaction reports or ETR and suspicious transaction reports or STR to the Reserve Bank of India (RBI), which they are required to in such cases. Banks are required to report to the regulator when a series of high-volume cash transactions happen in one particular account or many related accounts. They also need to file STRs if they suspect some foul play in certain transactions. Finally, all cash transactions valued at more than Rs.10 lakh need to be reported to the financial intelligence unit or FIU of the ministry of finance under the Prevention of Money Laundering Act, 2002.

Clearly, all these norms were overlooked in this case by the branch. Going by the RBI norms, the transaction monitoring team of each bank should be responsible for monitoring various types of transactions, especially monitoring of potential fraud areas, by means of which, early alarms can be triggered. This unit should have the expertise to analyse transactions to detect fraud trends and should work in conjunction with the data warehousing and analytics team for data extraction, filtering, and sanitization for transaction analysis to determine fraud trends. All banks are required to put in place automated systems for detection of frauds based on advanced statistical algorithms and fraud detection techniques. I don’t know whether BoB has put in place such a system.

BoB has Rs.7.5 trillion assets and employs at least 49,000 people spread over 5,207 branches. It has 8,291 ATMs. Such a large bank has been operating without a chief for 15 months since its last chairman S.S. Mundra took over as a deputy governor of RBI. Since the retirement of Ranjan Dhawan, the senior most executive director and MD and CEO-incharge, on 30 September, Joshi has been the only executive director.

Frauds are not something unheard of in state-owned banks. They reported at least 2,100 fraud cases involving Rs.11,022 crore between April and December 2014. The banks are required to report all fraud cases involving at least Rs.1 lakh to the RBI. In fiscal year 2013-14, there were 2,593 such cases involving Rs.7,542 crore. Punjab National Bank topped the list with 123 cases of fraud, totalling Rs.2,036 crore, followed by Central Bank of India with 147 cases involving Rs.1,783 crore.

To put things in perspective, some of the private sector banks, too, in the recent past, were found to be violating RBI norms for cash deposits even though no remittance was involved. A 2014 investigation by RBI into alleged money laundering by private banks found large-scale violations, ranging from high-value cash deposits without PAN (permanent account number) to dummy numbers. The investigation also found that the anti-money laundering systems of a few private banks were not comprehensive, and banks were not reporting all suspect transactions to the FIU. However, such instances are no consolation for Jayakumar. He will have to put his house in order. BoB, “India’s international bank”, does not have too much of time.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck.