Clients across India have been
deluging private banks in India with requests for checks on their
accounts after an alleged scam totalling as much as INR4bn ($56m)
at a branch of Citibank in the country.
In an initial move by regulators,
the Reserve Bank of India (RBI) has requested banks share details
of their wealth management businesses following the alleged
embezzlement.
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The banking regulator’s move
suggests the Indian government’s appetite to expand India’s booming
wealth industry could be cooling.
The government-run RBI has also
asked selected banks to clarify their wealth management policies,
procedures and the size of their businesses.
The inquiry follows news that Citi
relationship manager, Shivraj Puri, allegedly duped a number of
high net worth clients into entering a fraudulent investment
scheme. He has been arrested by police, amid a widespread
investigation by authorities.
So far police have received nearly
40 complaints from individuals and companies caught in the scheme,
which took place at the Citibank branch in Gurgaon, a city in the
state of Haryana.
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By GlobalDataThe Securities and Exchange Board
of India (SEBI) has been conducting detailed questioning of the two
accused arrested in the case, Puri and Sanjay Gupta. Gupta is the
chief financial officer of Hero Corporate Services.
The alleged scam by Puri and
associates centred on a forged letter purporting to be from
SEBI.
Investors were offered returns of
up to 36%. SEBI itself said it is studying whether it can force the
parties involved in the suspected fraud to pay back investors that
lost money.
Suspicious
transactions
At Citi India, a spokesman said it
had initiated an investigation into a certain set of suspicious
transactions based on documents forged by an employee involving a
few accounts in the Gurgaon branch.
“We immediately reported the matter
to all the relevant regulatory and law enforcement authorities,”
the spokesman said.
“Identified suspicious transactions
have been isolated and we are providing full assistance to the
authorities in their investigations.”
The suspected fraud threatens to
shape up as the worst setback for Citi’s private banking efforts in
Asia since 2004, when the bank was forced into an apology in Japan
after the Tokyo authorities suspended its wealth operations for
lack of money laundering safeguards and other violations.
Other private banks have been
carrying out internal checks, often at the prompting of clients, in
order to determine that their business had not been
contaminated.
Investments originating with Citi
are undergoing particular scrutiny, bankers said, requesting
anonymity.
India is the largest wealth market
in Asia after Japan and is increasingly the target for both foreign
and domestic wealth managers seeking to build their business in the
country.
India will likely have a $1trn
market in assets under management for wealth management providers
by 2012, with a target market size of 42m households.
A study by Bank Sarasin forecast
that the country’s consumption and capital expenditure will remain
key drivers for growth in 2011 for both Asia and the world.
Sarasin’s report warned that the
upswing in India could lose its momentum as it may not escape the
global economic downturn expected this year. Continuing robust
domestic growth could cushion the Indian economy from weaker
exports, however.
India public sector banks
wary
A number of Indian banks, such as
the State Bank of India (SBI), are readying their entry into wealth
management and may now undergo tougher investigations by regulators
to ensure that they have robust systems and compliance measures in
place to guard against internal fraud.
SBI is considering creating a
separate company for private banking to manage the wealth of the
mass affluent segment in India.
Union Bank of India is looking for
a partner to help it launch a wealth business while Bank of India
similarly is readying its own private banking venture.
Meanwhile, the Indian Income Tax Department may conduct an
inquiry of its own into the Citi affair to ascertain if black
market money was involved.
