The following piece was published in the Indian Express (although abridged) on March 13, 2018

A common theme among the pundits these days on Television and in Newspaper articles is whether the country ought to privatize its banking system and that the government should get out of running public sector banks. The multi-billion fraud that allegedly has been committed on taxpayers by unscrupulous businessmen is nothing new. We have seen scams of this nature in the past; and you can be rest assured, there will be novel and more innovative techniques that enterprising thieves will employ to be beat the system in the future. No system is failsafe, especially now, with the pervasive nature of technology that affects even the smallest aspect of life.

Sadly, as usual, we seem to focus on the symptoms of the problem rather than its root cause. Whenever these incidents come to light, our first reaction, rightfully is to try and fix the problem. Unfortunately, instead of taking a systematic approach to triage the problem, understand its root-cause and implement fundamental changes, we get carried away by perfunctory cosmetic changes evangelized by the same people under whose nose the fraud occurred.

I speak from personal experience of having lived through this rigmarole for eight long years and in the process, learning a few things. Fraud of this scale is never the work of a few. In my case, selling medicines to treat HIV-AIDS which were nothing but chalk powder and worse to countries in Africa was not just the remit of a few mid-level managers. Everyone up and down the food-chain knew and consented to this sickening fraud. Even in a society such as ours, where hero-worship is the norm and investment in building sustaining institutions is the exception, no one person, or a small group could have pulled this off by themselves.

Which bring us to the current banking scandal.

Does anyone honestly believe that the managers of these public sector banks did not know that their core-banking system was not integrated with SWIFT? No one knew that the multiple approvals needed to execute a SWIFT transaction were all done by ONE person or a very small group of individuals? Are we to believe, as Debashis Basu points out, that three levels of audit, concurrent, internal & statutory, not to speak of the RBI oversight all conveniently did not notice these shenanigans over many years? Are we to believe that the six senior secretaries, two additional secretaries, two economic advisors and the deputy director general were all asleep at the Department of Financial Services? If you believe that, I have a bridge here to sell you.

We need to step back and ask ourselves a question: How do we build institutions that are independent of powerful people, vested business interests or political influence? Is getting the Parliament to enact a new law, like the Fugitive Economic Offenders Bill a panacea? Not likely. Every new law, however sound, in the end will be at the beck-and-call of the regulators and the administration. Remember, banking is the most regulated business in India. We have regulators on top of regulators; how well has that served us? All we do is to swap out who “the powerful” are. Instead of politically well-connected bankers, we will have well-connected bureaucrats. How does that prevent fraud?

We have to first accept that no system or process, however sound, will protect us from ill-meaning scoundrels. Crooks are always two steps ahead of the law. In order to understand their motives, we need to understand what incentivizes their behavior.

Effective governance to prevent fraudulent behavior is contingent on three key factors. Integrity of the people responsible for governance; effectiveness of the law and its implementation and, an independent check to keep the first two accountable.

The first of these three is straightforward. Until such time that we allow retiring bureaucrats plum positions on the Boards of these organizations and not hold those who currently staff such august bodies to account when public resources are pilfered from right under their noses, this will not change. Whether we have the political will to make this happen is anyone’s guess.

A tough and unforgiving rule of law implemented by a competent and proactive legal justice system is a good deterrent. But this is India. In a country like ours, where the legal-justice system seldom dispenses justice in a timely manner, to say nothing of the investigative agencies responsible for prosecution and their allegiance to political masters, putting all our eggs in this basket seems unwise.

The third, a more effective way is to incentivize integrity. Level the playing field. For every crook out there, there are ten honest people. Yes, there are those who will want to ride the gravy train and sell their soul for a shiny shilling. But in every organization, there are those whose conscience pricks at them when they see the public taken for a ride. The sad part is that more often than not, these people buy peace for their family and career by moving on or looking the other way without taking action. Why do they do this? Simple: our legal-justice system does not afford protection to those who speak the truth; it only punishes them – never rewards them. Those few brave who muster courage to stand-up for what is right are marked with a scarlet letter or worse, end up like Manjunath Shanmugham or Sateyndra Dubey. Notable others include Sanjiv Chaturvedi, Ashok Khemka, Rajan Nair, Satish Shetty, Narendra Kumar, Lalit Mehta…the list goes on.

Let me remind you, we had a part time finance minister for almost a year in the tenure of the current administration. Speaks to our priorities when it comes to safeguarding the public banking system, doesn’t it? Hindsight is 20/20, but how many of us raised this division of responsibility as a fundamental risk to the oversight of public resources? Only when the horses have bolted do we want to put a padlock on the stable door. Now imagine if insiders within the banking system raised this as a potential risk in a timely manner. Would we have been this indifferent?

What is the solution?

How about incentivizing whistleblowers with irrefutable evidence and well-developed legal cases to speak up in the interest of the society at large? What about incentivizing integrity?

We know this works and it has been done to great success in the United States. Under the modern American False Claims Act, whistleblower award programs protect those who choose to stand up for the truth, and they reward those who bring successful actions out of the proceeds of the victory. “Whistleblowers only get paid if they win, and they only get a small fraction of the sums recovered” by the government.

This law has been so effective that in the health care arena, the U.S. Government recovers $20 for every $1 spent investigating whistleblower complaints.

If we accept that our institutions are fragile, that our culture worships heroes rather than invest in building sustainable institutions and that our legal justice system has a long way to go, warts and all; then deterrence is only a partial threat to potential wrongdoing; one that can be bargained for the right price. Incentivizing integrity is the another tool we have to counter this abhorrent behavior.

Countries such as Australia and Italy are looking to model their own fraud fighting laws upon this 30-year old American law.

Sadly, our own Whistleblower’s Protection Act, passed by Parliament in 2014 is languishing; with the government showing no intention of promulgating rules to operationalize it. In fact, even before implementing the law, blatant attempts are being been made to water down its provisions through an amendment bill currently in the Rajya Sabha. Although narrower in scope than the U.S. law, proper implementation of the Whistleblower Protection Act and an inclusion of private right of action within the current law would be a giant step for India in fighting fraud. One does hope that the legal-justice system will address its own deficiencies and we wont see another display of public anguish from those who are tasked with dispensing justice in a timely manner.

The only question then is whether the current attention being paid to banking fraud is enough to tip India into the ranks of those moving to incentivize integrity and protecting whistleblowers?