Banking Sector Scams, possible solutions: Incentivising integrity, strong whistleblower law

One does hope that the legal system will address its own deficiencies and we wont see another display of public anguish from those who are tasked with dispensing justice in a timely manner.

Written by Dinesh S Thakur | Updated: March 13, 2018 2:46:53 am
Banking Sector Scams, Indian banks, whistleblower law, PNB fraud, Nirav Modi, what is SWIFT transaction, banking laws, RBI, bank NPA We have seen scams of this nature in the past and rest assured, there will be more innovative techniques that thieves will employ to beat the system in the future.

A common talking point among media pundits these days is whether the country ought to privatise its banking system and if the government should get out of running public sector banks.

The multi-billion fraud that allegedly has been committed on taxpayers by unscrupulous businessmen is nothing new. We have seen scams of this nature in the past and rest assured, there will be more innovative techniques that thieves will employ to beat the system in the future. No system is fail-safe, especially now, with the pervasive nature of technology.

Sadly, we seem to focus more on the symptoms than the root cause. Instead of taking a systematic approach to understand the problem and to implement fundamental changes, we get carried away by perfunctory cosmetic changes evangelised by the same people under whose nose the fraud occurred.

Which brings us to the current banking scandal.

Does anyone honestly believe that the managers of these public banks did not know that their core-banking system was not integrated with SWIFT? No one knew that the multiple approvals needed to execute a SWIFT transaction were all done by one person or a very small group of individuals?

We need to step back and ask ourselves a question: How do we build institutions that are independent of powerful people, vested interests or political influence? Is getting Parliament to enact a new law, like the Fugitive Economic Offenders Bill a panacea? Not likely. Every new law, however sound, in the end will be at the beck-and-call of the regulators and the administration. Remember, banking is the most regulated business in India.

Effective governance to prevent fraudulent behavior is contingent on three key factors. Integrity of the responsible people; effectiveness of the law and its implementation and, an independent check to keep the first two accountable.

The first of these three is straightforward. Until such time that we allow retiring bureaucrats plum positions on the Boards of these organisations and not hold those who currently staff such august bodies to account when public resources are pilfered from right under their noses, this will not change.

A tough and unforgiving rule of law implemented by a competent and proactive legal justice system is a good deterrent. But in a country like ours, where the legal system seldom dispenses justice in a timely manner, putting all our eggs in this basket seems unwise.

The third, a more effective way is to incentivise integrity. For every crook out there, there are ten honest people. Yes, there are those who will want to ride the gravy train and sell their soul for a shiny shilling. But in every organisation, there are those whose conscience pricks at them when they see the public taken for a ride. The sad part is that usually these people buy peace for their family and career by looking the other way. Why do they do this? Simple: Our legal system does not afford protection to those who speak the truth. It only punishes them, never rewards them.

Let me remind you, we had a part time finance minister for almost a year in the tenure of the current administration. Speaks to our priorities when it comes to safeguarding the public banking system, doesn’t it? Hindsight is 20/20, but how many of us raised this division of responsibility as a fundamental risk to the oversight of public resources? Only when the horses have bolted do we want to put a padlock on the stable door. Now imagine if insiders within the banking system raised this as a potential risk in a timely manner. Would we have been this indifferent?

What is the solution?

How about incentivising whistleblowers with irrefutable evidence and well-developed legal cases to speak up in the interest of the society at large?

We know this works and it has been done to great success in the US. Under the modern American False Claims Act, whistleblower award programmes protect those who choose to stand up for the truth, and they reward those who bring successful actions out of the proceeds of the victory. “Whistleblowers only get paid if they win, and they only get a small fraction of the sums recovered” by the government.

This law has been so effective that in the healthcare arena, the US government recovers $20 for every $1 spent investigating whistleblower complaints.

If we accept that our institutions are fragile, that our culture worships heroes rather than invest in sustainable institutions and that our legal system has a long way to go, then deterrence is only a partial threat to potential wrongdoing. One that can be bargained for the right price. Incentivising integrity is the tool we have to counter this abhorrent behavior.

Sadly, our own Whistleblowers Protection Act, passed by Parliament in 2014 is still languishing. The government is showing no intention of promulgating rules to operationalise it. In fact, even before implementing the law, blatant attempts are being been made to water down its provisions through an amendment Bill currently in the Rajya Sabha. Although narrower in scope than the US law, proper implementation of the Act and an inclusion of private right of action within the current law would be a giant step for India in fighting fraud.

One does hope that the legal system will address its own deficiencies and we wont see another display of public anguish from those who are tasked with dispensing justice in a timely manner.

The only question then is whether the current attention being paid to banking fraud is enough to tip India into the ranks of those moving to incentivise integrity and protecting whistleblowers?

Thakur is a public health activist and was the whistleblower in the case against Ranbaxy Laboratories

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