Retired civil servant Prakash Shrestha had deposited Rs200,000 in a fixed deposit account and Rs100,000 in a savings account at Gautam Shree Cooperative, Kuleshwar 15 months ago, hoping to build up a little nest egg.

When the fixed deposit matured, Shrestha walked expectantly into the cooperative, only to be told that they couldn't give him his money because of a liquidity crisis.

“They gave me only Rs15,000. I think that’s the interest,” said Shrestha. “They won't let me withdraw my money. How fair is that?”

Shrestha says that the cooperative has around 3,000 depositors, and they have all been barred from withdrawing their money. Now he has been making the rounds of government offices for help to get his money back.

In 2016, Balbodh Mandal borrowed Rs2 million from Shanti Multipurpose Cooperative at 16 percent interest per annum. He had put up 4.5 anna of land at Chobhar as collateral.

Mandal has paid around Rs1.4 million in interest, but the cooperative is threatening to auction his land if he doesn't pay another Rs4 million, which includes compound interest.

Chapter 7 of the Cooperative Act 2017 states, "The interest to be charged on credit disbursed by a Cooperative Organisation shall not be charged having capitalised the interest in the main credit amount."

Insiders say Gautam Shree Cooperative and Shanti Multipurpose Cooperative are but a few examples of the massive fraud taking place in the cooperative sector which they liken to a Ponzi scheme.

The absence of a regulatory body and clear legal framework has made cooperatives a risky place for people to deposit their savings which have accumulated to billions, they say.

According to Kathmandu Metropolitan City, more than 2,000 victims have filed complaints against 123 cooperatives that owe their customers more than Rs960 million to date.

The city claims to have resolved 57 cases and forwarded the rest to the police for further investigation.

Khimananda Acharya, deputy registrar of the cooperatives department at Kathmandu Metropolitan City, said cases of cooperatives defaulting have grown after the Covid-19 pandemic.

“We receive 10 to 20 complaints daily from savers who have made deposits ranging from Rs10,000 to Rs40 million,” said Acharya.

According to the department, there are more than 30,000 registered cooperatives across the country.

“We have frozen the assets of cooperatives against which complaints have been received from depositors,” said Acharya. He suspects that apart from cooperatives not returning deposits, there may be cases of black money.

"Some cooperatives have no legitimate sources of income," said Acharya.

The federal government has devolved authority to register and monitor cooperatives to the local and provincial governments, but the employees don't have the capacity to understand the legal and technical aspects of cooperatives; and this has provided opportunities for fraud, industry insiders say.

Mitra Raj Dawadi, co-chairman of the National Cooperatives Development Board, said the objective of the board was to provide awareness and training regarding cooperatives to the public, but the government has not allocated any budget for the last two fiscal years.

Along with government officials, the general public, too, doesn’t have much knowledge about the functioning of cooperatives.

“People say that problems arose after Covid-19, but that is not correct,” said Dawadi. “The main problem lies in the foundation.”

By law, cooperatives are a self-regulatory body. They are answerable to no one except their shareholders, insiders say.

But control is not allocated evenly as some individuals hold a large chunk of the shares, and they have control over the entire operation. This leaves the rest of the shareholders without any access to the balance sheet or other crucial information, they say.

“The cooperatives have formed a pseudo-banking system going against the spirit of cooperatives,” said Dawadi. “Many cooperatives registered in Kathmandu are operating extension counters in other cities and collecting deposits from non-shareholders. Who will regulate them?”

According to the Cooperatives Act 2017, a cooperative organisation may accept savings only from its members, to mobilise such savings and disperse credit only to its members.

Similarly, a cooperative organisation cannot use the savings in the purchase of immovable assets, infrastructure construction, investment in transactions, in firms and companies or in the share of any bank (other than a cooperative bank).

According to Dawadi, profiteers turned to cooperatives after the central bank tightened its grip on banks and financial institutions following the 2010-11 banking crisis.

He also accused the promoters of deliberately giving windfall interest offers to lure the public and plunder their assets.

“When I have no intention to return the money, I can promise as much interest as I wish,” said Dawadi. “These 100 cooperatives are deliberately doing it which has affected the goodwill of the entire cooperative sector.”

The government promoted cooperatives as the third pillar of the national economy complementing the private and public sectors to alleviate poverty and promote socialism in the country.

“But these cooperatives are instead making the people poorer intentionally,” said Dawadi. “If Ichchha Raj Tamang can manage Civil Bank transparently and systematically, why can't he do the same with Civil Cooperatives?”

He also accused cooperatives of being a smokescreen for black money transactions.

“When I have Rs500 million, why would I need to get involved with cooperatives which are for micro enterprises?” asked Dawadi. “The involvement of some high profile individuals in these cooperatives has made things complex, and it is difficult to understand what is going on.”

The Department of Money Laundering Investigation agrees with the accusations made by Dawadi.

“Every deceit needs the help of a financial institution to whitewash the black money at some stage of the cycle," said Rishiram Pokharel, information officer at the Department of Money Laundering Investigation.

“Cooperatives are the trending entry point for black money in the system recently due to the absence of a regulatory body.”

The department has placed the cooperatives in the red zone under its annual national risk assessment.

“We have recently concluded a case related to Civil Cooperatives,” said Pokharel. “Around five to six cases of cooperatives are still under investigation for money laundering.”

The department stated that it targets high-level political individuals who attempt to whitewash their illicit money earned through other primary crimes at the recommendation of the police and other investigators.

“The only way to prevent this is to enhance the capacity of offices and employees assigned to monitor their activity,” added Pokharel. “If the local bodies report promptly, we can prevent a lot of crimes.”

However, due to the absence of an adequate legal framework, offenders are able to dodge even the primary police investigation.

“When we investigate an accused, we don’t have a definite law to prosecute them,” said Kamal Thapa, spokesperson for the Central Investigation Bureau.

“We have to take help from laws related to acts of a similar nature, this at times weakens the case when we go to court. Because of this, many victims are unwilling to proceed with the trial due to the fear of losing their assets forever,” added Thapa.

According to the bureau, in a majority of cases related to default, the promoters have collected deposits with promises of high return and invested the money in unproductive sectors like real estate. This made real estate prices shoot up and caused liquidity to freeze up.

When the depositors went to get their money back, they couldn’t return it. In some instances, they have even transferred the assets to the spouse’s name and subsequently got a divorce to break the legal linkage and keep the money forever, according to the bureau.

Chitra Subba, general manager of the National Cooperatives Federation, says the current problem in the cooperative sector is the result of a national economic meltdown.

“During the liquidity crisis, banks raised their interest rate, due to which depositors rushed to transfer their deposits in cooperatives to banks,” said Subba. “But a cooperative has very little cash in hand and it's invested in other sectors, so they couldn’t return their money.”

According to her, due to the mismanagement of a few cooperatives, a trust issue has arisen among the public against the entire cooperative sector.

“This can be solved by encouraging ethics and risk assessment in the management of cooperatives,” stated Subba. "Not all of them are bad. A few are deliberately cheating, and it's the responsibility of the government to punish them.”