The Financial Intelligence Unit (FIU) has slapped a Rs 54 lakh fine on Union Bank of India for not adequately reporting suspicious transaction reports (STR) and failing to conduct necessary due diligence in compliance with anti-money laundering (AML) laws. The breach occurred at one of its branches in Mumbai, involving certain accounts linked to a non-banking financial company (NBFC) and associated entities.
FIU Investigation Reveals Critical Lapses
The penalty notice was issued on October 1 under Section 13 of the Prevention of Money Laundering Act (PMLA) after the FIU conducted a detailed review of the Bank’s compliance practices. The federal agency’s investigation, initiated after an observation by the FIU, uncovered several irregularities in the Bank’s KYC (know your customer) and AML procedures. Written and oral submissions made by Union Bank of India were considered, but the charges against the Bank were substantiated, according to the FIU’s order.
The investigation revealed that a set of current accounts maintained at Union Bank’s Hill Road Branch in Mumbai were involved in suspicious fund transfers. These accounts belonged to an NBFC and its associated entities, which were engaged in large-scale circular fund transfers. These transfers involved entities that shared a common registered address and identical beneficial owners. Despite having authorized capital of just Rs 1 lakh, these entities exhibited credit turnovers that far exceeded their declared business operations, raising red flags.
In particular, significant RTGS (Real-Time Gross Settlement) inflows were detected from the NBFC’s accounts, which were then quickly moved to other group entities under the same control. These transfers were identified as potential money laundering activities, yet Union Bank of India’s response was deemed insufficient by the FIU.
Insufficient Reporting and Due Diligence
One of the most critical findings from the FIU’s investigation was the failure of Union Bank to file an adequate number of Suspicious Transaction Reports (STRs). Despite the high volume of transactions and multiple alerts generated from the concerned accounts, the Bank only filed a single STR. According to the FIU, this lack of sufficient reporting highlights a serious shortcoming in the Bank’s monitoring and reporting mechanisms.
The agency also criticized the Bank for failing to conduct proper due diligence on existing clients, based on risk and materiality, and for not evolving an effective internal mechanism to detect suspicious activities. Union Bank was directed to undertake a comprehensive review of its due diligence processes to prevent such incidents in the future.
The FIU emphasized that enhanced diligence must be exercised, particularly in cases where newly opened accounts exhibit transaction volumes and velocities that are inconsistent with the declared business activities and turnover. The Bank was also urged to reassess its internal mechanisms and improve its transaction monitoring, particularly when a large number of alerts are generated but closed without thorough investigation.
Impact on Union Bank Customers and Broader Implications
The financial penalty and the FIU’s findings are expected to have a ripple effect on Union Bank’s customers, especially those who hold accounts in the Hill Road branch. The failure to detect suspicious transactions raises concerns about the Bank’s ability to safeguard customer accounts against potential fraud or misuse. Account holders may question the security measures in place and the effectiveness of the Bank’s internal compliance procedures. In light of these issues, customers may demand greater transparency and assurances from the Bank to restore their confidence.
For Union Bank of India, which reported a 34% growth in its net profit at Rs 4,720 crore for the second quarter ending in September 2024, this fine could tarnish its reputation. The Bank is a designated reporting entity under the PMLA and is required to submit timely reports to the FIU, as per anti-money laundering laws. The recent findings could lead to increased scrutiny from regulatory bodies and a more rigorous examination of its KYC and AML procedures in the future.
 Rising Cases of Bank Fraud: What’s Driving the Surge?
The case involving Union Bank is just one of many recent instances of bank fraud and regulatory breaches surfacing across India’s financial landscape. Over the past few years, there has been a noticeable increase in financial irregularities, money laundering cases, and non-compliance issues within banks. Several factors could be contributing to this trend.
Firstly, the rapid growth of digital banking and financial technologies has made it easier for fraudsters to exploit system vulnerabilities. While banks have implemented digital safeguards, their systems may still lack the robustness needed to detect sophisticated schemes, especially those involving layered and circular transactions.
Secondly, there is often inadequate oversight or monitoring of high-risk accounts, such as those held by NBFCs and other entities that handle large volumes of transactions. This, coupled with the complexity of modern banking operations, can make it difficult for banks to spot suspicious patterns in real-time.
Lastly, regulatory lapses, such as insufficient due diligence and the failure to promptly report STRs, highlight weaknesses in internal compliance mechanisms. As the FIU’s investigation into Union Bank demonstrates, failure to act on red flags can lead to significant penalties and damage to the bank’s credibility.
The rising frequency of such cases signals an urgent need for stronger regulatory frameworks and tighter enforcement of existing rules. For banks, ensuring robust compliance mechanisms and investing in advanced monitoring technologies will be critical to staying ahead of potential frauds and safeguarding the integrity of the financial system.