Saturday, January 15, 2011


A major fraud has recently been unearthed, wherein as per allegations reported in the press one of the senior employees of Citi Bank persuaded various high net-worth investors and top corporates to invest large sums of money with a minimum assured return up to 18% per annum. It is further reported that this money was diverted to capital market unauthorized. This scam is similar to Harshad Mehta scam in 1992 and it is surprising that the banks have still not learnt adequate lessons. Some important questions which will require investigation include -

  • Whether the cheques were received in the name of Citi Bank or in the name of some other entities?
  • In case the cheques were paid by the Investers in favour of Citi Bank, how these were diverted to certain unauthorized accounts. The Reserve Bank of India instructions are fairly clear that the cheques drawn in favour of bank should also have written instructions of the issuer regarding beneficiary of the proceeds. It is important to understand the need for a detailed internal control procedure and risk management techniques to be implemented by the bank and other entities dealing in large sums of money. RBI and other regulators should prescribe a detailed mandatory compliance audit by a independent chartered accountant firm of all public sector, private sector and foreign banks to ensure that various RBI guidelines, internal control procedure prescribed by the Board of Directors of the concerned banks and various other requirements of the regulators have been complied with by the banks and its functionaries. The problems are recurring more in case of foreign banks, public sector banks as they have freedom to appoint their own auditors subject to approval of Reserve Bank of India and there are no detailed guidelines or procedures to verify as to whether internal control procedure and risk management practices have been duly adhered to by them. The regulators definitely need to ensure that various regulatory guidelines, circulars and other provisions are strictly adhered to by the banks and other institutions dealing with public money. This may also include insurance companies, mutual funds, portfolio managers, besides banks.


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