The recent Standard Chartered Bank scam in US has sparked a rigorous scrutiny of offshoring back office works to India by global banks and accounting firms. The bank is accused of hiding illegal transactions worth $ 250 billion with Iran for over a decade exposing US system to terror financing and money laundering risks. Before moving to the discussion as whether the scam has anything to do with outsourcing, take a look on what the scam is all about.
Standard Chartered Bank Scam
UK based Standard Chartered bank (SCB) is accused of indulging in illegal transactions worth $ 250 billion with Iran which violated the US anti-money laundering laws and exposed the country to terror and other financial risks. According to the US financial regulators, SCB has been involved in about 60,000 transactions with Iranian clients between the periods of 2001-2007, reaping high profit in terms of transaction fees.
Financial transactions between Iran and US citizen or entities have been subjected to US sanctions since 1979. However, transactions known as U-turn were allowed with Iranian financial institutions. U-turn transaction means money cleared through US banks from non-Iranian foreign banks for Iranian clients. But by 2008, US regulators called back the U-Turn transaction as it suspected that Iran was using US clearing banks to finance nuclear weapons and terror activities.
Currently US Office of Foreign Assets Control (OFAC) deals with the U-turn laws. OFAC, the designated US agency, is vested with responsibility of preparing the list of entities with whom US entities and citizens are prohibited from entering into any business transaction. As per the law, all the entities are required to comply with OFAC sanctions.
The story of scam arises here. SCB and its subsidiary in US did not pay any heed on compliance and regulation requirements of OFAC and entered into financial transactions with Iranian clients eyeing the millions that they can make by means of transaction fees. They are held accountable for stripping wire transfer messages and for the illegal practice of removing data of the client details from the payment transfer gateway.
What the scam has to do with outsourcing to India?
Like other global banks such as JP Morgan and HSBC, SCB have also set up their captive unit in India. Captive unit is the arm of the financial institutions that carry out back office operations of its parent company ranging from basic data entry related activities to complex compliance regulatory activities. Generally cost saving happens to be the key driver in sending back-office related works to India, where the companies are required only to pay half of the salaries they pay for the employees in their home country.
However, the US regulators slammed SCB by quoting that offshoring of OFAC compliance system was mere trick to escape the US Treasury Department Oversight. According to the US treasury department offshoring of compliance system to bank’s captive unit in Chennai, India which employs 8500 people is one of the reasons for the failure of the bank.
The president of the New York States of Financial Services pin on that the workforce in India was deficient to track the illegal transactions that their parent company was involved with. According to them, the employees in India were not trained to detect whether the rules under US laws allowed any transactions with Iran or not.
On the other hand, outsourcing industry experts from India is of the opinion that the scam has nothing to do with outsourcing or BPO industry. According to them whether the work is done from India or US, the quality definitions, compliance to regulations and its successful implementation within the outsourcing organization is what matters the most. Whatever be the process, the companies should abide by the rules and procedures of the country in which they operate.
NASSCOM President, Som Mittal defended the allegations by saying that lack of training and process failure can be occurred anywhere, and it cannot be blamed as to be solely an Indian issue. Further he also stated that since the issue has been reported in company’s unit, it cannot be said to be the issue with outsourcing in India.
However, the scam in US has called in for tough scrutiny of offshoring such high complex back-office works to India. While, on the other hand, experts in India believes that the tightened scrutiny and scam will not have any effect on the BPO industry in India because of the trust, experience and efficiency it has built up over the period of years.