How the IDFC First Bank scam unfolded: From employees in dock for ₹590 crore fraud, timeline of events to what’s ahead

IDFC First Bank has suspended four employees from a branch in Chandigarh on suspicion of their involvement in a scam worth Rs 590 crore”> ₹590 crore scam targeting bank accounts linked to the Haryana state government. In a filing filed with the stock exchanges on Saturday, the bank said its internal assessment found that some employees engaged in fraudulent activities with the potential involvement of other individuals or entities.

PTI on Sunday reported that the Finance Department of the Haryana government had issued a circular informing that the powers of IDFC First Bank and AU Small Finance Bank have been revoked with immediate effect until further notice for all government business such as holding funds (savings), deposits, investments or transactions.

On the same day, AU Small Finance Bank issued a statement saying it had “initiated an internal investigation” into the matter but noted that 14 transactions worth Rs 47 crore had taken place. ₹47 crore from the government account to the customer account was carried out in the “ordinary course of business”.

In light of the emerging information and disclosures, we trace the timeline of events (starting with the employees in the dock). ₹590 crore fraud ₹47 crore fund transfer, steps taken so far, going forward.

How the IDFC First Bank scam came to light – a timeline

• According to IDFC First Bank, a request was received from the Haryana government department to close its account and transfer the funds to another bank, during which “certain discrepancies were observed in the balance in the account and the stated amount”.
• AU Small Finance Bank stated in its application that it closed a government account on January 15 based on the instructions of the relevant department and the outstanding balance. ₹25 crore was transferred back to the original large private sector bank along with accrued interest.

• Later, a letter dated February 16 came from the ministry, requesting account opening and transaction details for a particular account.
• IDFC First Bank added that other Haryana government agencies that had engaged with the bank regarding their accounts from February 18 onwards observed discrepancies “between the balances in the account and the balances stated by the said government agencies”.
• It conducted a preliminary internal review which determined that “the matter was limited to a specific set of government-related accounts operated within the government of Haryana through the said branch in Chandigarh and did not extend to other customers.”

• Approximately by bank ₹590 crore is “under reconciliation between identified accounts” and the impact will be determined based on further information, verification of claims and any recovery.
• Four suspected officials were suspended from duty pending investigation. The bank said it would “take strict disciplinary, civil and criminal action against employees and other responsible external persons in accordance with applicable laws.”
• AU Small Finance Bank added that it received a separate communication from the ministry on February 18 seeking information regarding suspected unauthorized transactions between the government account and a customer account at the bank.
• On the same day, according to a PTI report, the Finance Department of the Haryana government informed the bank about its suspension for government affairs in the state.

• On February 20, IDFC First Bank said that a meeting of the Special Committee of the Board of Directors for Monitoring and Tracking Fraud Cases (SCBMF) was called and the matter was forwarded to the Committee.
• A meeting was held on February 21 to inform the Audit Committee and the Board of Directors about the issue.
• In the call, IDFC First emphasized that it had met with employees on February 22, but that the bank was “in full control”. He added that it was a traditional scam, but “this is about individuals, not the banking system.”

Police report filed, audit initiated – what’s next?

IDFC First noted in its filing that its regulator (Reserve Bank of India) was informed about the matter and a complaint was lodged with the police. It is also in the process of filing further complaints with appropriate law enforcement and reporting to relevant authorities, he added. He added that “full cooperation” would be extended to investigative agencies.

On Feb. 23, bank management said in a conference call that the board had taken the matter into account and was acting in accordance with regulatory instructions. It appointed KPMG as the independent external body to conduct an independent forensic audit into the matter. The review will verify facts, determine liability and assess intent and is expected to last four to five weeks.

On February 23, RBI Governor Sanjay Malhotra told reporters after the regulator’s Central Board meeting that he was “monitoring the development” and assured that “there is no systemic problem”, according to the PTI report.

Answering questions after the meeting, Union Finance Minister Nirmala Sitharaman reiterated that there was no “systemic problem” with IDFC First Bank and as per policy, the government does not comment on individual companies.

What does the dismissal of the Haryana government mean for banks?

According to PTI, the Haryana government circular dated February 18 states that henceforth no government funds should be parked, deposited, invested or transacted through IDFC First or AU Small Finance banks.

He instructed all relevant departments/organizations to take immediate action to transfer and close the balance of accounts held with these banks.

It also issued instructions to all departments, companies, boards and public sector undertakings (PSUs) to: ensure that fixed deposits (FDs) are deposited strictly in accordance with the approved terms and conditions; Completion of all aspects of the process by March 31.

A compliance report duly approved by the competent authority must be submitted to the Finance Department by April 4.