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US Fed clamps down on SBI's US operations

Tamal Bandyopadhyay

The US Federal Reserve has issued a "cease and desist" order to the State Bank of India on its US operations and imposed a monetary penalty, suspecting that the bank did not comply with local regulations, which may have led to money laundering.

A cease and desist order is a severe stricture but does not necessarily mean that the bank will have to shut its US operations. But the implications of this move are enormous-SBI accounts for 35 per cent of the country's total foreign exchange business and the bulk of dollar remittances and payments are routed through the bank's New York office.

SBI has five offices in the US besides a local subsidiary-SBI California-with three branches. SBI has two offices in New York, one in Chicago, one on the West Coast, besides a representative office in Washington DC.

Since SBI cannot afford to close its US operations, it has little option but to pay the penalty and give an undertaking by signing a memorandum of understanding with the US regulators to fully comply with local laws.

The bank may be required to appoint a new auditor in place of Deloitte & Touche, revamp its systems and procedures, by putting in electronic filters to ensure full compliance with the local Bank Secrecy Act.

SBI cannot challenge the Fed move at an international arbitration forum. However, it can move the courts in New York against the Fed and seek legal remedy. However, it seems that the bank is keen on settling the issue, instead of challenging it in court.

When contacted, SBI chairman Janaki Ballabh refused to comment on the development. Sources familiar with the issue said that the US Fed had taken this drastic step on the basis of apprehensions and not on concrete proof. By pulling up SBI for lack of compliance in regard to certain dollar accounts, the US regulator is, in effect, confronting the Reserve Bank of India in whose jurisdiction these accounts fall.

A high-level RBI delegation led by deputy governor GP Muniappan discussed the issue with the local regulators last week but made no headway. RBI executive director (former chief general manager in charge of exchange control) KJ Udeshi and CGM, department of banking operations and development, MR Srinivasan, too were part of the team.

The genesis of the move is the US department of commerce's annual examination of SBI's books which started in September 2000. It investigated in detail the transactions through SBI of the "listed entities".

There were over 200 "listed entities," including some of the large Indian public sector undertakings to which no export was allowed from the US without a valid licence in the wake of the US sanctions on India following the Pokhran blast. Although the commerce department raided the SBI branches, carted away documents and summoned bank employees, no violation of norms was found.

Subsequently, the US Fed clamped down on escrow accounts related to Indo-Russian trade, export earners' foreign currency accounts and returning foreign currency accounts.

The US regulators are accusing SBI of not following the crucial "know your customer" rule and due diligence while maintaining these accounts even though they are in conformity with RBI rules.

For instance, the escrow accounts on Indo-Russian bilateral trade are run by the Indian branches of SBI (opened after seeking RBI permission) and mirror accounts are kept at the New York branch for settlement purposes.

Similarly, the EEFC accounts are held in India and the concerned branches in turn opened nostro accounts in respective currencies to facilitate dollar or pound sterling transactions. In the same fashion, RFC mirror accounts are kept abroad (depending on the currency) as up to seven years after returning to the country non-resident Indians (technically, resident not ordinary) are allowed tax break on these accounts.

The US regulators are demanding total compliance with local laws on these three accounts even though they come under the purview of the RBI. Some analysts feel that this will spill over to other Indian banks that have US operations. Bank of India has two branches in the US, while Bank of Baroda has one.

Indian banks operating in the US are subject to regulation by three organisations or bodies: the banking law of the concerned state where it is licensed to operate (state banking department), the Federal Reserve and the Federal Deposit Insurance Corporation.

In 1997, the Securities & Exchange Commission challenged the floatation of Resurgent India Bonds in the US and threatened to impose a penalty on SBI for violation of norms.

However, things got sorted out as SBI convinced the regulator that the instrument was a deposit and not a bond. Subsequently, SBI raised $5.2 billion through India Millennium Deposits at the height of the sanctions, keeping the US out of its ambit.

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