When the Citi slipped
The CITI never sleeps has been the punch line of one of the most famous international bank. But after taking a hit in the US sub prime crisis, Citibank has taken a punch in India, where one of its employees has ripped the bank in one of the biggest cons of the country.

It has been raining scams off late. We had the CWG, Adarsh housing, and the 2G scams as some of the most noteworthy ones. The New Year started with the newest in the block, the Citibank scam. The scheme worked in a very simple manner. Most private banks offer wealth management services to their high profile clients, means those who deposit high amount of money in their banks. It usually entails allotting some personnel who will take personal care of your money, advice you on investment options, and personally take charge of all these transactions. In most cases, the client ends up entrusting everything on the banker with themselves limited to signing in the columns that they are asked to. There is very high level of interpersonal trust involved in the whole process.

Shivraj Puri, the main protagonist of the Citibank fraud was one such bank professional who exploited this interpersonal trust for his own benefits. He had forged a SEBI document, which falsely stated that there was a new scheme of investment that gave monthly returns of 2-3% to the investor. The document also mentioned a specific account through which these investments were sanctioned. Puri would show this document to his clients who in return would write off cheques for the named account. The account, in the name of Premnath, was a false account, which Puri himself had opened (Premnath happens to be his grandfather). The money deposited in this account would then be immediately moved to three different accounts, all run by Puri in various names of his family members. Finally, the money would be moved out, till date traced to some brokerage account held by Puri with firms like Religare Securities Ltd, Bonanza Portfolio Ltd, India Infoline Ltd and Normans Martin Brokers Pvt. Ltd.

Puri used these huge amounts to speculate in the stock market. Current evidences suggest he played aggressively in the NIFTY Futures and Options. He started his devious scheme in late 2009, and by September 2010 had already reached giddying figures. Estimates quote figures around INR100-400 crores being laundered by him in just one year! This includes not only money from 30 High Net worth Individuals or HNIs (a recognised category in the financial circuit), but also did he manage to rope in unscrupulous Chief Financial Officer from Hero Group, who routed around INR29 crores from the company. The person in question, Sanjay Gupta, reportedly worked in collusion with Puri and channeled funds to two companies, G2S Management Consultants and BG Finance, both of which were surreptitiously owned by him. An investigation into the whole affair is still going on with the RBI and SEBI joining in the hunt, and greater details are expected to come out over time.

The Lessons
There are many lessons to be learned from the entire story. Firstly, the sheer simplicity of the entire scheme is an eye-opener. While it is true that most successful cons are successful because of their simplicity, as simplicity poses high vulnerability to the victims, and they can be duped easily. But, at the same time, this also explains the failures of an illusionary security that modern financial systems promise to deliver.

Indeed, the entire incident has put a question mark over the entire wealth management industry. HNI clients across banks are already redeeming their investments, asking for recorded conversations and actively questioning the services they have been availing. The trust factor, one of the most fundamental building blocks of any banking system, has clearly been ruptured very badly. If a customer does not trust that his/her money is safe with a particular bank, that bank would soon be well out of business. In that sense, the problem is not only with wealth management systems, but the entire banking procedure as it is.

This trust deficit in turn has started a whole new debate about who is really liable for these kinds of problems. On one hand, such a massive fraud should have been detected at some level, given the kind of regulations that are supposed to exist. Puri shifted funds from different accounts into Premnath’s account and then to 3 other accounts within the same bank. High value transactions are usually tracked even under automated electronic banking systems. The very fact that you or I get an instant SMS whenever any transaction of over INR5000 is done (the amount might vary across banks or accounts) is supposed to be such a checking system. How could it be that such huge sums being routed within the bank was not flagged by the system? May be Puri being an insider knew about it an operated with caution yet the million dollar question is, Did Puri only know about this guarded secret, or is it an open secret that anyone can exploit?

On the flipside, the gullibility of the individuals who were duped too must be highlighted. A monthly interest rate of 2-3% is too good to be true! Anyone with any basic knowledge of the financial market would immediately sense that. Moreover, here you have a letter from the SEBI, which says you have to invest this money through a certain individual’s (Premnath) account and not through some recognised or certified institution - which too would be far fetched, given that the SEBI is not in the business of endorsing any single entity! Just how gullible does one have to be to fall for something like that?

The biggest lesson that Puri has taught us is that there are indeed a whole lot of such gullibles, just waiting to be taken for a ride. It has always been assumed that HNIs are smart and sophisticated enough to understand the nitty gritties of the capital market. What Puri has shown is that having money may buy you good looks from some expensive beauty parlour, but cannot buy you brains. Greed can make the smartest man dumb. Add faith to it (something that your personal wealth manager is supposed to provide) and you have a sure shot formula.

The Citibank case is much like the classic ponzi schemes, the most recent being the one run by Bernard Madoff, the famous stockbroker who was awarded 150 years in prison in 2009 for a fraud of $65 trillion. Till date, such ponzi schemes have been a trademark of advanced capitalist systems, simply because such schemes take advantage of mechanisms and instruments that only the most sophisticated financial markets have to offer. In that sense, our own ponzi scheme is proof of the point that we have reached those high levels.

But the biggest point perhaps is that unlike the other scams that hit us, this one is not by the public sector, or the government, but by the private sector. All those who were cussing the corrupt political system of our country seriously need to rethink. Corruption is a malaise that cuts across all borders. It is endemic to our society. Greater liberalisation does not necessarily make things more transparent and hence trustworthy.

Financial sector thus requires strict monitoring and regulations. The US learned it the hard way. Europe is still coming to terms with it. It is the new mantra globally in today’s context, and Puri and Co has built a strong case for that in India.