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Who will bell the big banking cats?

The manner in which currency derivative contracts were structured, marketed and the conditions that enabled their marketing in the first place across continents points out to a larger design of some international banks.

As pointed out in the first two parts of this series, SMEs lost over $500 billion on currency derivatives contracts that they entered into with banks. Interestingly, in these contracts, banks never lost. If it was sheer coincidence, it was remarkable coincidence, no doubt. I am reminded of my high school teacher who often used to tell us that coincidence is the word we use when we can't see the levers and the pulleys.

Naturally, evidence available with us points out to the need for a complete investigation. And in such a diffused scenario, let us not forget, absence of evidence does not point to the evidence of its absence.

But who will bell the cat, especially those large global banks? National regulators, especially Central Banks, are not designed to carry out such investigations across continents.

Similarly, federal investigating agencies in most countries are structurally incapable of unearthing frauds, if any, of such magnitude. Further, laws in several countries are based on the theory that one is innocent till proven guilty.

And in this catch-22 situation, global banks continue to carry out their operations without any let or fear of even being investigated, forget being penalized.

In the absence of any detailed investigations any patterns would at-best 'indicate' the possibility of a global conspiracy but may not actually stand the scrutiny of courts, which in criminal cases does not rely on preponderance of probabilities but only on hard facts and unimpeachable evidence.

Nevertheless, in a path-breaking decision in early 2010, the Orissa high court on a Public Interest Litigation has ordered for an investigation by the Central Bureau of Investigation in India.

This is despite the fact that the order was based on a preliminary enquiry conducted by the CBI which came to a tentative conclusion that it could not "definitively establish a criminal conspiracy" by banks.

The high court obviously felt that a detailed probe by a statutory agency, even if it is unable to unearth the global dimensions, has to be carried out in the first place before coming to any definitive conclusions.

What makes the matter far more intriguing is that the banks have rushed to the Supreme Court seeking a stay on such investigations by the CBI. While the Supreme Court has indeed granted an interim stay, the matter is expected to come for hearing in January 2011. And the world of finance is awaiting the decision of the Supreme Court with bated breath.

After all, it will be the first instance where some federal investigating agency would investigate whether the banks in India had contracted such derivative contracts from their international counterparts in bulk and retailed it to hapless SMEs in India in retail.

Simultaneously, they would also explore whether there was a criminal conspiracy by banks in selling such "products" to SMEs in India.

Similarly, it could also throw how the banks had violated the guidelines of the Reserve Bank of India made under the Foreign Exchange Management Act with such impunity.


Last modified on Sunday, 07 July 2013 07:36

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