Sucheta Dalal :Ponzi Scheme: Is RBI Passing the Buck?
Sucheta Dalal

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Ponzi Scheme: Is RBI Passing the Buck?  

August 10, 2009

Astrange deposit scheme that is proliferating in the states of Orissa, Chhattisgarh, Karnataka and Maharashtra has already collected almost Rs1,000 crore and is expanding virtually unchecked. The scam has elements of money-laundering and possibly the use of fake and forged currency as well; however, the banking regulator would like to pass off the investigation to the respective state governments for investigation under the antiquated Prize Chits and Money Circulation Schemes (Banning) Act.

The scam is an utterly simple deposit scheme: a person is enticed into depositing Rs10,000 in a designated bank account on the promise of receiving Rs1,000 per month as interest and a further bonanza in the form of the original investment being returned after a year. Like all pyramid schemes, this too is spreading through the word of people who enjoy high public trust, namely, teachers, bank officials and even police constables.

Apart from the sheer size, there is a disturbing twist to the tale. When ICICI Bank filed a police complaint in July 2009, it did this based on the fact that unusually large numbers of people, from in and around the backward Balasore district, were depositing significant amounts of cash in certain accounts or through the accounts of ‘agents’. The Bank smelt a rat when some of them made inquiries about payouts and facilities that were allegedly offered by ICICI Bank. It soon learnt that these agents were falsely claiming that ICICI Bank was a channel partner in their get-rich scheme.

The Bank also learnt that some of the original depositors were actually receiving Rs1,000 every month. However, this is exactly how Ponzi schemes and confidence tricksters work. They build a large base by actually paying fancy returns until the numbers are large enough for the fraudsters, at which point they vanish with the loot. However, in this case, when the police ordered the Bank to freeze some core accounts, they expected an outcry from depositors who stopped receiving their monthly cheques of Rs1,000. Nothing of that sort happened. It is with great difficulty that the police found even one complainant. On checking with the depositors, the police learnt that they were told there was a temporary difficulty with the Bank and they were being paid in cash. This ought to have rung more alarm bells. Where is all this cash coming from? Is this a money-laundering operation? Is the currency fake or genuine? After all, the villages in Balasore are close to the Bangladesh border and very susceptible to fake currency operations. 

What should also alarm the banking regulator is that the scamsters are making full use of modern banking, electronic transfers, easy debits and customer-friendly facilities such as printing of cheques. It started with the misuse of ICICI Bank and Axis Bank to collect deposits through agents who are spread across places such as Balasore, Sambalpur and Sundergarh in Orissa, Latur in Maharashtra, Bengaluru, Kanpur, Jaipur and Indore.

At the time of writing, the police in Orissa had frozen several core bank accounts and had filed five first information reports (FIRs). The numbers involved are frighteningly large. We learn that one account in remote Balasore had garnered a whopping Rs65 crore. These funds were quickly transferred to other core accounts and rapidly transferred out of the state. According to informed sources in government, the money from many of the accounts was being moved to seven or eight accounts in larger cities. For instance, an account of Fine India Sales Pvt Limited in Kanpur, Uttar Pradesh, had a hefty Rs600 crore. What makes the job of the police tough is the lack of complaints from depositors even after the accounts are frozen. ICICI Bank is understood to have informed the RBI and the Financial Intelligence Unit (FIU). It has also filed a suspicious transactions report as well as a cash transactions report with the banking regulator and government agencies. Regional offices of the RBI, especially in Orissa, have also warned banks about such accounts, with the result that the scam may have moved to Karnataka or Uttar Pradesh.

On the face of it, this smacks of money-laundering, not just multi-level marketing, but the government seems in no hurry to escalate the investigation. Moneylife has written to the RBI for details, but our sources tell us that the RBI does not want to take the responsibility. It wants to push it to the state governments for investigation under the Prize Chits and Money Circulation Act. In fact, the RBI ought to be leading this investigation. After all, as I wrote earlier, fake currency had infiltrated into the heart of the Reserve Bank’s currency distribution operations and was found in its own currency chest (at Hyderabad) and was detected by ICICI Bank which received the currency from RBI.

Unless quashed quickly, this scam will spread rapidly throughout the country. Is the RBI aware of this but unwilling to act? Its July warning to the people not to fall for fake international lottery wins, inheritance scams (mainly emanating from Nigeria) and pyramid schemes suggest it is so. The RBI release acknowledges that scamsters build fake credibility by claiming to have permissions or hold deposits with the central bank; and that the fraudsters have also been impersonating senior bank officials, have opened bank accounts to deposit money and are issuing fake certificates, letters and circulars on letterheads that look like those of RBI. It also says that fraudsters have opened accounts in Indian banks where people are asked to deposit money that is quickly cleaned out. But is RBI really doing enough to warn depositors or to protect them? 

-- Sucheta Dalal