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Tuesday, April 23, 2013

RBI for lower commission to curb KYC abuse like money laundering

The Reserve Bank may push private sector lenders to rationalise the commission they pay to wealth and relationship managers, as it tries to check dubious transactions and flouting of know-your-customer norms.

An online portal had alleged last month that some banks were involved in money laundering and were not complying with know-your-customer (KYC) norms. According to an RBI official, a probe by the central bank has indicated that the policy of some banks to reward employees with high commissions leads to staff overlooking KYC norms.

"It has been observed that various incentive schemes and commission structures were the foremost reasons for lower- and mid-level bank staff disregarding KYC Norms," the official, who did not wish to be named, said, adding that the RBI may ask private sector banks to rationalise the commission they pay to wealth and relationship managers.

In 2012, the central bank had issued guidelines that restricted bank staff's variable pay to 70% of fixed pay in a year. Further, private and foreign banks were directed to obtain prior approval from the RBI for remuneration of CEOs and full-time directors.

"In this case, there cannot be an overarching guideline from RBI. The banks themselves have to put caps over such commissions and ensure that all such incentivised employees have met all regulatory norms," the official said.

The issue may soon be taken up with other banks, the official added.

The central bank had initiated a probe after online portal Cobra Post alleged that the country's three largest private banks-ICICI Bank, HDFC Bank and Axis Bank-were indulging in money laundering. The three banks have denied the allegations, saying none of the conversations led to any transaction.

Private banks offer incentives to relationship and wealth managers mostly in the form of commissions and foreign travel. Banks also set steep targets for their staff to get business through insurance and other high-commission paying financial instruments.

"These structures need to be defined or more cautiously regulated," the official said. Financial services secretary Rajiv Takru had said last week that the RBI audit report had found certain "aberrations" in its probe into allegations of money laundering, but no risk of systemic failure was discovered.

"There is no risk of systemic failure. There are certain aberrations that we have discovered in the audit report. These would be addressed," Takru had said, adding that the RBI will take whatever action needs to be taken.

RBI deputy governor HR Khan had said that the central bank would initiate action against the erring banks. "Scrutiny has been done. Action is being taken both in respect of systemic level and at the individual banks," he had said.

But private sector banks say it will be imprudent to cap commissions. "Incentives are a part of all employment. Just because some may have not conformed to the norms does not mean all employees are violating them," said a senior executive with a private sector bank.

Source: Economictimes


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