New Delhi: The Reserve Bank has widened its probe into the affairs of British banking giants HSBC and Standard Chartered to a host of other foreign banks for alleged breach of controls against money laundering and terror financing.

Besides, capital market regulator Sebi may also join the investigations, as there are concerns of funds from these banks being routed to the stock market through foreign investors and other entities, sources said.

Standard Chartered Bank (StanChart) is listed in the Indian stock market.

A senior regulatory authority official said the inspections are being conducted to ensure these banks' compliance to various fair banking norms in the wake of certain global events.

However, executives at some of the banks admitted that queries being raised by the regulators are serious in nature and particularly aimed at ensuring effective controls against money laundering and financing of terrorism, among others.

The investigations by Indian agencies follow developments in the US, where a host of European banks, besides StanChart and HSBC, are being investigated for their alleged role in exposing the American financial system to money laundering and terror financing risks.

Sources said Indian investigations would not be affected by the recent settlement reached by StanChart in the US, wherein it agreed to pay USD 340 million to settle charges that it entered into secret transactions involving USD 250 billion with Iran despite sanctions against that country.

The settlement has been reached only with respect to an investigation by the New York state banking regulator, the New York Department of Financial Services and does not cover the probes being conducted by the various federal regulators in the US, including the Treasury Department.

Last week, the Indian government informed the Parliament that Reserve Bank of India (RBI) is scrutinising the Anti- Money Laundering (AML) and Know Your Customer (KYC) systems of StanChart and HSBC.

Besides, Financial Intelligence Unit-India (FIU-IND) has also initiated a fact-finding exercise related to HSBC's operations in India and its compliance to AML and CFT (Counter Financing of Terrorism) regime.

RBI is also seeking details from British financial sector regulator FSA (Financial Services Authority) about the two UK-based global banking giants, who have significant presence in India and whose outsourcing of key oversight jobs to India has come under the US scanner in separate probes related to issues like money laundering and terror financing.

Both the matters have come to the fore within a month's time, raising serious concerns over the impact on the image of Indian outsourcing industry and possible implication on India's fight against money laundering and terror funding.

Indian agencies are gathering all possible details about the two banks, as also various other banks under scanner of the US regulators, for any possible lapse in their compliance to controls against money laundering and terror financing.

RBI and UK's FSA signed a new Memorandum of Understanding (MoU) last month for exchange of information and co-operation in surveillance operations.

The MoU provides for period discussions between RBI and FSA about matters like HSBC and StanChart, along with other supervisory developments and matters concerning banks having operations in India and the UK.

New York state's key banking regulator, the Department of Financial Services (DFS), had accused StanChart of hiding about 60,000 secret transactions with the Iranian government, involving a whopping USD 250 billion, and exposing the US financial system to terrorists, weapon dealers and drug kingpins.

HSBC's staff in India have also come under the scanner in a separate probe in the US for deficiencies in their role as "offshore reviewers" of the global banking giant's compliance to safety mechanism against money laundering and terrorist financing.

Stanchart was also charged of having deficient money laundering controls in its outsourcing of work to a captive unit in India.

Another probe found that an OCC (Office of Comptroller of the Currency, which is the primary federal regulator for banks in the US) visit to India in 2007 had revealed "weak monitoring procedures" in HSBC's internal control systems.

While HSBC has been charged with outsourcing these jobs mostly as cost saving measures, Stanchart has been accused of sending such important functions to offshore locations to escape "watchful eye" of the US regulators.

Besides seeking information from the UK regulator, the RBI is also waiting for inputs from the US regulators, including the US Federal Reserve, state regulators and other agencies, sources said.

RBI's main focus is on the banking operations of HSBC and Stanchart in India and therefore it is relying mostly on assistance from the UK, where these banks are headquartered.


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