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Four hundred-sixty,
Park Avenue is a typical office in midtown Manhattan. The only difference
is that the second and third floors are also the offices of the main State
Bank of India (SBI) branch in the US. It is a fiscal hub-average daily
transactions top $1 billion-to the little India that spawns the US. But
life at SBI, may never be the same after November 14.
The Federal Reserve Board (FRB), the US banking regulator, has slapped
a $7.5-million fine on India's premier commercial bank. Their crime? In
FRB's cryptic language: engagement in unsafe and unsound practices relating
to SBI's failure to establish and maintain procedures that comply with
the Bank Secrecy Act; violation of the Federal Deposit Insurance Corporation's
rules relating to the Bank Secrecy Act; and failure to keep correct records
as per the law.
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CRIME AND PUNISHMENT
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SBI has been accused of engagement in unsound practices relating
to its failure to maintain established procedures; violation of
the Federal Deposit Insurance Corporation's regulations relating
to Bank Secrecy Act; failure to maintain correct records as per
the New York state law.
FRB has imposed conditions on all money transfers and made it
mandatory for the bank to submit within 30 days an independent audit
report on its operations.
SBI has been asked to reorder its management structure. Instead
of reporting to its Mumbai headquarters, it has been asked to set
up a corporate hub in the US itself.
From what can be inferred from the order, the penalty came after
it was observed that the US branches of SBI had failed to comply
with established procedures while operating the nostro and escrow
accounts.
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The censure is the most severe in recent times imposed on a foreign bank.
The question that arises now is: did the FRB over react? Or is there something
that far more than meets the eye?
Close on the heels of the fine, FRB also imposed conditions on all money
transfers and made it mandatory for the bank to submit within 30 days
an independent audit report. It also asked SBI to reorder its structure.
Instead of reporting to its Mumbai headquarters, it has been asked to
set up a corporate hub in the US itself.
The independent audit review of SBI's operations will focus on internal
controls, risk management, internal audit functions, customer due diligence
and reports of suspicious activity. While the 27-page order has details
on how SBI has to put its house in order, it has little to explain the
exact nature of the misdemeanour. Officials at FRB, however were not forthcoming
on the subject. "Whatever we have to say is in the order. There are
no more details to share," was the reply.
Meanwhile, the bank's chairman Janaki Ballabh, who visited the US along
with a three-member Reserve Bank of India team and SBI top brass, says,
"There is not a single instance of wrongdoing cited in the order.
We have been following the same procedures year after year and these have
stood the test of previous examinations." Shesh Iyengar, executive
vice-president, New York branch, also says the same, "There has been
no knowing violation of the banking laws of this country. Neither has
any money laundering taken place, nor have we been accused of aiding money
laundering."
With SBI officials groping for reasons, only inferences can be drawn
from the probe. From what can be pieced together, it does appear that
the US authorities have over the last two years been going over SBI's
functioning with a tooth comb to see whether any of the transactions was
out of line. Initial suspicions were that SBI continued to carry out transactions
for Indian institutions that had been blacklisted in the wake of the US
sanctions after India went nuclear. Another line of investigation focused
on transactions that took place when India raised external funds under
the Resurgent India Bonds and the Millennium Bonds. Presumably, that too
drew a blank.
From all indications, the penalty came after it was observed that the
US SBI branches failed to comply with established procedures while operating
the nostro accounts-inter-bank dollar accounts of Indian banks which are
maintained with SBI branches in the US. Similarly, some of the escrow-money
held in trust by a third party to be turned over to the grantee only upon
fulfilment of a condition-accounts held at SBI's New York branch were
also put under the microscope. The inference is that the regulator could
have been on the look out for dirty money which could have unwittingly
been laundered through Indian bank branches in the US.
The fine is not expected to dent the bank's financial operations but
the damage, as insiders admit, will be more in terms of loss of brand
value in the US. What is intriguing is the SBI's decision not to contest
the charges to clear its reputation. Ballabh argues, "We did have
an option to go for litigation but our view was that in the current scenario
it is better to comply with what FRB has to say and avoid unnecessary
litigation. We have not admitted to any wrongdoing and even FRB says so
in its order."
In the final analysis, there seems to be more questions than answers.
If only SBI or FRB decided to shed some more light.
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CURRENT
ISSUE NOV 26, 2001
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