Is KYC & AML guidelines effective in control of banking frauds in India- specific

reference to Zoom Developers fraud with PNB as Lead bank .

Mumbai-based Zoom Developers is a project development company with majority of its projects
overseas, particularly in the Europe and the UAE . The majority of Zoom’s projects are abroad,
particularly in Europe and the UAE. It undertakes business and project development work,
involving process plants, industrial and engineering projects, and energy, environment and
infrastructure ones. Zoom Developers is one of the largest non-performing loans for Indian
lenders in recent years and the loan turned sticky in late 2009.

As per the latest scam reported in Indian banking sector, nearly 27 banks including Canara bank,
Syndicate bank, Andhra bank, Union bank, UCO bank, Federal bank, Yes bank etc. have lent
close to Rs 2,700 crore to it. This debt has been admitted in the corporate debt restructuring cell.
All the banks have filed case with Corporate Debt Restructuring (CDR). The banks have
classified the account as an NPA as the outstanding due to invocation was more than 90 days.
Banks had appointed specialised firms like SBI Caps to look into the process of CDR.

While SBI Caps' mandate is restructuring the firm, Mott MacDonald, a managing engineering
and development consultancy firm, was appointed to do a survey of the sites the company was
working on and find a case for recovering dues.

The Central Bureau of Investigation has started investigating into the largest banking scam in
India. A complaint has been filed to the CBI, RBI, Finance Ministry, Prime Minister’s Office
and other agencies suspecting a fraud in Zoom Developers.

Punjab National Bank is the lead banker with about Rs 450 crore of exposure of which nearly Rs
300 crore has been considered as a non-performing asset by the bank in the first quarter of fiscal
year 2011.Rs 250 crore of the exposure is covered by insurance. The bank had taken insurance
cover from Export Credit Guarantee Corporation of India Ltd. As for the defaults, all relevant
departments, including vigilance and audit, are looking into the matter.

KEY CONCERNS:

• There are questions being raised as to why so many guarantees were given by banks
because of the Rs 2,700 crore, Rs 2,500 crore were bank guarantees. And, in the kind of
business that Zoom undertakes there is no need for such guarantees. These Rs 2,500
crore bank guarantees have been evoked.
• Where this trail of Rs 2,700 crore has gone because the company has not incurred any
substantial losses.
• Connivance of some bank officials of the lending banks
Latest updates on the issue:

As of 6th April 2011, lenders to Zoom Developers, who among them lent close to Rs 3,000 crore
to the little-known company, have decided to stop their plans to restructure the debt and will
instead initiate recovery proceedings. The decision was taken on March 25 at the behest of
Punjab National Bank, the lead lender, after the company sought more funds to keep its business
of providing engineering, project development and management services running.

KYC & AML guidelines effective in control of banking frauds in India???

The lending banks did not follow the KYC & AML guidelines strictly in this process which can
be justified from the following points.

• The company went into losses in 2009 September when it made losses of Rs.300croes
out of which Rs.146crores was FOREX loss. During the entire melt down period the
company became cash deficient due to which the payments to lenders were delayed.
Debtors’ realization cycle rose to 150 days which was 35-45 days earlier. Company sold
some of its properties to pay salaries to employees and interest to lenders.
• Majority of its projects are in abroad, particularly in Europe and the UAE. This could
have also been considered carefully.
• Promoters blamed the 2008 financial crisis for delayed payments from clients and said
unfavorable currency movements took its toll on the business which was not a case
among its competitors.
• Connivance of some bank officials without which scam of such a magnitude would not
have been possible.

So regulations have to be even more stringent with utmost priority for its successful
implementation. Then only frauds like this can be prevented from happening.

REGARDS,

GROUP 10