The Reserve Bank of India on Monday imposed a penalty of 25 lakh on Citibank for violation of anti money laundering (AML) and know your customer norms that led to a 400-crore fraud at one of its branches in Gurgaon.

"The failure in following the KYC/AML guidelines while opening accounts led to the perpetration of a fraud at its Gurgaon branch," said RBI in a statement.

In December 2010, a Citibank employee, Shivraj Puri, was accused of luring 40 high net-worth individuals and corporate entities to invest in bogus investment schemes, promising returns beyond normal securities available in the market while diverting funds to wagering in the stock market.

Puri, who perpetrated the 400-crore fraud, not only duped a string of wealthy individuals, but also duped the Munjals-controlled Hero group to invest close to 200 crore in the sham investment scheme that promised a high rate of return.

A case was filed against the Citi employee in Gurgaon and the police had arrested Puri and Sanjay Gupta, the chief financial officer of Hero Corporate Services, which is a part of the Hero Group. Currently, the case is subjudice and under investigation.

The central bank had issued a show cause notice to the bank on April 21, 2011, with a possible penalty of 50 lakh, in response to which the bank submitted a written reply dated May 6, 2011.

The bank also had a personal hearing on June 7 with RBI, following which it came to the conclusion that violations were substantiated and warranted imposition of the penalty. Post the meeting, RBI cut the monetary penalty, a person familiar with the matter said.

The wealth management business of banks has been under the regulatory scanner. Most recently, Standard Chartered Bank is said to have sold securities worth up to 200 crore to its private banking and wealth management clients with a commitment to buy them back.

However, under current regulations, the buyback option is not allowed. Recently, RBI asked banks to disclose information on policy, procedures and size of the business they handle of wealthy individuals. The rules are being made under the aegis of Financial Stability and Development Council (FSDC), set up by the Indian government in December 2010. FSDC is chaired by finance minister Pranab Mukherjee.

Wealth management, often used loosely with private banking, a similar service for lower amounts, was introduced by foreign banks when the local financial services was dominated by the public sector banks that were not sophisticated. (ET)