Bank of Baroda, one of the largest commercial banks in India, was struggling due to decreasing profits and with an increase in non-performing assets. News articles reported of some fraud involving bill discounting schemes and money laundering at the Ahmedabad and New Delhi operations of the bank. It seemingly can be deduced that the bank violated its "know your client" and anti-money laundering standards. These alleged violations raised concerns and the new chief executive officer found the need to prove his value in the banking industry. He must manage the crisis and implement plans, programs, and strategies that would bring the bank's financial health to a more stabilized position.
Harvard Business Review (W16476-PDF-ENG)
August 05, 2016
Case questions answered:
- Describe the key components of the risk management system at the Bank of Baroda.
- Given the comprehensive policies and procedures at the bank, how was it possible for the fraud to take place?
- Identify the indicators of money laundering that were ignored by the bank?
- How do you assess the risk culture at BOB?
- Identify the interrelationships between the various risks faced by the bank.
- What are the consequences of poor risk management for the bank?
- What should the new CEO do?
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Case answers for Fraud at Bank of Baroda: Manage Risk or Manage Crisis
Executive Summary – Fraud at Bank of Baroda: Manage Risk or Manage Crisis
In our analysis of this case “Fraud at Bank of Baroda: Manage Risk or Manage Crisis”, we will examine methodically and in detail the fraudulent events that led to the crisis and compromised the risk management framework at the bank. We will identify the indicators of money laundering that were ignored, and the interrelationships between the various risks faced by the bank. We will also speculate about possible reasons why the fraud happened. Furthermore, we will analyze and present the consequences of BoB’s poor risk management, and its key components that failed.
We will then evaluate the risk culture at Bank of Baroda. More specifically, our analysis will attempt to offer insight and recommendations for the new managing director and CEO, P.S Jayakumar on a management action plan to follow. We will use and reference various outside sources for this analysis aside from this case, but will not conduct any investigations of our own to arrive at form theories, opinions, and suggestions.
Introduction and Overview
Bank of Baroda (BoB) was first established in 1908 in the city of Vadodara (earlier known as Baroda) in Gujarat, India. It currently services 25 countries with a network of 5,250 branches and 49,378 employees; hence adopting the title of “India’s International Bank”. (Dhamija, S., 2016). BoB offers personal, business, corporate, and international banking services around the world, holding the record as India’s second-largest bank.
This giant financial services company developed historically by first expanding domestically before World War II, and serving Indians overseas afterward by establishing branches in Kenya, Uganda, and Tanzania. BoB’s first biggest achievement was opening a branch in London in 1957 and making its first acquisition of Hindi Bank one year later. Throughout the decades following the 1960s, Bank of Baroda merged, acquired, and opened new branches in Fiji, Guyana, Dubai, Abu Dhabi, Brussels, New York, The Bahamas, Sydney, Hong Kong, Delhi, and many more.
Recently, BoB had been in the headlines for the wrong reasons: a bill discounting fraud of ₹3.5 billion in Ahmedabad, and an alleged money-laundering scam of ₹60 billion in New Delhi. The bank had identified irregularities in bill discounting transactions, and a few days later internal investigations revealed irregularities in remittances of foreign exchange at one of its branches at New Delhi (Dhamija, S., 2016).
State agencies such as the Central Bureau of Investigation (CBI) were pursuing the matter and had arrested six people in connection with the foreign exchange scam; including two senior officials. As a result, BoB’s stock plummeted over 3% and was downgraded by the FDIC from “outperformer” to “neutral”. Some changes must be made to the bank’s risk management structure, and the compliance of policies and guidelines from the board of directors and audit committee set forth by the Reserve Bank of India (RBI).
Assumptions and Methods
Bank of Baroda’s board of directors was responsible for upholding the bank’s risk management framework. Their responsibilities included defining the bank’s risk limits and establishing the policies and procedures for effective monitoring. BoB failed to adhere to risk management framework, and in turn became susceptible to money laundering within its branch banking business. During the bank’s day to day operations the bank staff ignored key controls to preventing and identifying money laundering that were already in place.
Due to the interconnected characteristics of money laundering and the risks posed to all banks. The Reserve Bank of India (RBI) established a set of detailed guidelines that included customer acceptance policy, customer identification procedure, and transaction monitoring.
The bank failed to identify key indicators of money laundering such as placement, layering, and integration. Placement involves placing, through deposits or other means, unlawful proceeds into the financial system (OCC, 2002). Layering involves the separation of proceeds of criminal activity from their origin through the use of layers of complex financial transactions (OCC, 2002). While integration is the act of using additional transactions to create the appearance of legality through the purchase of assets (OCC, 2002).
The bank identified irregularities involving bill discounting transactions in its Ahmedabad operations. The bank did not follow the proper procedure as this service is only offered to BoB’s best clients; which was not the case for the party involved in this incident. In order to prevent cases like this, banks traditionally avoid engaging in bill discounting services. The bank also failed to know its…