Banks Face Shift in Risk Dynamics as Mule Accounts and Money Laundering Rise

As banks in India grapple with the evolving nature of digital fraud, they are encountering a significant shift in risk dynamics. Gone are the days when loan accounts were considered the primary risk factor; today, operational concerns surrounding deposit accounts are mounting, driven by the proliferation of mule accounts and money laundering. This has prompted banks to intensify their know-your-customer (KYC) processes and focus on stringent due diligence when opening deposit accounts.

Key Takeaways:

• Over 850,000 mule accounts were identified across more than 700 branches nationwide by the Central Bureau of Investigation (CBI) in late June, indicating a surge in cybercriminal activity.
• Banks are now relying on robust KYC verification, early transaction monitoring, and continuous vigilance to mitigate risks associated with deposit accounts.
• The due diligence required for opening deposit accounts has become significantly more stringent compared to previous years, with banks competing to attract customers amidst a low-interest-rate environment.
• Senior bank officials note that competition from the mutual fund industry and pressure to meet deposit mobilisation targets make the task of identifying and eliminating mule accounts more challenging.
• Banks have started reviewing real-time transactions to detect unusual patterns and are training staff to recognise suspicious behaviour as part of efforts to counter mule account activity.
• The Reserve Bank of India has directed banks to participate in its MuleHunter.AI initiative, aimed at identifying and eliminating accounts exploited for financial fraud.

Statistics:

• 850,000 mule accounts identified across more than 700 branches nationwide by the Central Bureau of Investigation (CBI) in late June.
• Banks are considering deposit accounts a higher operational risk than loan accounts, with opening a deposit account now deemed riskier than opening a loan account.
• The Reserve Bank of India has directed banks to participate in its MuleHunter.AI initiative, aimed at identifying and eliminating accounts exploited for financial fraud, in December 2024.

Sources:

• State Bank of India chairman CS Setty's statement at a banking event in Mumbai
• Sanjay Mudaliar, executive director, Bank of Baroda, statement to ET
• Central Bureau of Investigation (CBI) data on mule accounts
• Reserve Bank of India directive to banks to participate in MuleHunter.AI initiative
• Times of India report on the surge in mule accounts and money laundering