How to rob an Indian bank
Figures being mentioned over the past few weeks defy the imagination: Rs 11,400 crore is not a number that most are familiar with. For the average person, the high-level of documentation and supporting evidence required from banks for mundane car and motorcycle loans can seem like a mountain of paperwork - PAN, Aadhaar, voter ID, employment contract and six months of banks statements, just to begin with.
Burden of loans and fraud cases
To make matters worse, a bank in Kolkata will not (for example) accept Aadhaar, PAN or voter ID’s registered outside of West Bengal, almost as if the rest of India is a foreign land. If the applicant has overcome those hurdles, the bank will most likely ask you to apply at your branch, the branch where you opened your account. If you happened to open it in Mumbai, but now live and work in Delhi, you need to take a few days off work to go home and try your luck at that branch.
It is, therefore, unfathomable that one individual could have borrowed thousands of crores, and the wide angle picture provides some insight into this. An RTI filed with all public sector banks by a news agency, prior to the Modi eruption, has shown that the Punjab National Bank has 389 fraud cases with a total value of Rs 65.6 billion, while the Bank of Baroda has 389 cases totalling Rs 44.7 billion and the Bank of India with 231 cases totalling Rs 40.7 billion, and that’s just in the past five years.
Meanwhile, the State Bank of India has 1,069 cases in the same period, but refused to disclose the value in monetary terms. These are just four out of over 20 Public Sector Banks and the figures do not include fraud cases of Rs 1 lakh and below, which most banks have not yet computed. The Nirav Modi investigation has found that the Rs 11,400 crore was taken from a single branch of a single bank. None of the above numbers account for private sector banks - the scale of the loan fraud challenge is, as yet, unknown. Banking policy gurus call these "non-performing assets", what they are is outright suspect. Nobody has taken responsibility for these failures; there have been no dismissals, transfers or resignations.
The accomplice
How could this be possible when these banks have extremely challenging competitive entrance exams, requiring the candidate to be pre-qualified before taking their chances with the exams? Where are the oversight agencies? Has the RBI been an adversary or accomplice to such wide-scale fraud? The answer lies in a complete absence of oversight and deep-rooted corruption at all levels.
The tools required for the average banker are PAN, Aadhaar and voter ID. To properly equip yourself for large scale bank fraud, a small investment of about Rs 10 lakh is enough to get the operation underway. The key to the swindle is a very good chartered accountant, an expert in what is known in the financial world as "jama kharcha" - the ability to show non-existent transactions, or, as the Hindi phrase goes "idhar ka paisa udhar, udhar ka paisa idhar".
The CA will get started by registering the first of many (the Enforcement Directorate is investigating up to 200 companies linked to Nirav Modi) companies with the Ministry of Corporate Affairs, all of which is done online without any human to ask awkward questions. If there is a hurry, the CA will magically produce a "shelf company" - one that the CA has pre-registered, ready to go with directors, articles of association, bank accounts, PAN, professional tax registration, everything you need to start trading fictitiously within a few weeks.
Starting from scratch involves getting the applicant a "director’s number" or "DIN", a hi-tech "digital signature" and then registering a company, which is most suitable for your choice of fraud will be advised by the CA.
A "shelf company" exercise begins by getting a DIN, applying to join the board of directors, the board then mysteriously evaporating by all directors resigning and the new director taking control, re-writing the articles, taking control of the bank accounts and updating the ministry through their online portal.
The downside of a new company is that it has no history, a shelf company will have supporting financial activity - transactions of which depend on how much money you are willing to spend, everything from a few hundred rupees per year up to lakhs are available depending on your requirement. It is worth noting that all of this is perfectly legal.
Step two involves finding someone you trust implicitly - a willing spouse or relative are the first choice, if that fails, find someone who won’t ask any questions, usually domestic staff, drivers, guards and so forth. The CA will then take them through the same steps in creating another company, shelf or fresh. This second step can be repeated as many times as necessary until you have all the companies you need to run your operation or grow as you go.
The uncomfortable truth here is that the steps and activities laid out above are all done under the glare of the Ministry of Corporate Affairs, all documents will be submitted to them online at every stage, and none of which ever attracts closer scrutiny.
The fraud chain
The last step is key - finding a pliable banker. Depending on how much a) advance he is paid; and b) the level of commission he is assured, the banker will sign off on your loan applications and cooperate well beyond the scope of the law - in the Nirav Modi instance, CBI sources have said the bankers gave Modi’s staff unfettered access to the bank’s software systems.
The banker will need quotations for your loan and this is where your spouse’s company comes into play - for example, if you wish to build an apartment block, you will need various materials such as cement, sand, windows, tiles. The quotations for these will be provided by your spouse’s company, at exaggerated rates. Ideally, you will get exaggerated quotations for each item required from each of your companies, ensuring you make a handsome margin on every item. An applicant usually needs to deposit 10 per cent of the value of the loan, so you are still within your Rs 10 lakh budget. Don’t panic, there is no oversight here thanks to the laws of free trade, each company can sell their product at a price they choose, they are legally free to do so.
If the price of a kilo of sand is Rs 20 but your driver’s company is quoting Rs 200, nobody will ask questions. Our banking system is also weak enough to accommodate greed. In the event that your domestic maid has worked out that her details are being misused and demands payment, that too will be paid for by the banker - her company’s quotation rates will be "revised".
The CA will ensure that inbound payments are similarly distributed. After having sold the sand to your company, your driver’s company will keep enough money in their account to begin a fresh chain of frauds in the future. In the short term, the sand company might buy a car that you use, while your spouse’s company will give you credit cards, the bills of which they will submit as business expenses.
The spider at the centre of this web sits quietly, a humble individual earning less than the first slab for income tax, but yet drives around in a new BMW with the sand company director as his chauffer so that all paperwork for the vehicle can be accounted for. If, by some miscalculation by your CA, you have a cash flow that starts rising, just give some of it to your spouse - tax free - even though that’s the director of one of your companies you have nothing to worry about, our financial regulation systems aren’t smart enough, nor staffed sufficiently, to connect the dots.
Banking on the unbankable
The import/export scam resulting in the loss of at least (the number seems to be growing by the day) Rs 11,400 crore requires manipulation of an international fund transfer mechanism called "SWIFT" - Society for Worldwide Interbank Financial Telecommunications, which is a high-security, coded, messaging system. SWIFT itself is not to blame here, but it is independent of our banking systems.
Theoretically, a crooked bank manager could authorise the transfer of funds via SWIFT that you don’t actually have in your bank account. The Reserve Bank of India did attempt to close this gap by asking all banks to join a process called the "core banking solution (CBS)", which would have tallied all inter-linked accounts with SWIFT, therefore making disproportionate transfers impossible and raising the alarm.
The failure of banks to integrate the CBS indicates possible complicity by the RBI, and higher, in turning a blind eye to such forex scams – why has this not been made mandatory?
Similar multiple-quote companies and systems exist for government tenders, education, NGOs and, as in the Nirav Modi investigation, import and export business.
The failing system
Weak government oversight, under staffed and under paid tax department officials, greed and rampant corruption leads to lakhs of crores lost in the Indian domestic black market money laundering network. Had there been stronger oversight, the exposure would have caused a "run" on the banks, panic withdrawals by customers and investors, leading to the collapse of the bank or even the entire banking system.
The Indian bank’s corruption reach is too high, compromising oversight capability and leading to foreign companies who wish to do business with India and Indians having to set up slush funds declared in their accounts as "facilitation funds", an acknowledgement that in order to do business in India, bribes must be paid as a matter of course.