Challenges in implementing KYC norms effectively
Guest post by
Harshil Dave, Senior Associate Consultant, Infosys
Close to 22 Indian banks were fined a total of Rs. 49.5 Cr. by the banking regulation authority Reserve Bank of India (RBI). These banks were found in violation of Know Your Customer (KYC) norms laid by RBI. The KYC norms that were violated were the ones aimed at preventing money laundering activities. KYC has 2 components Identity and Address, while Identity remains a constant, the address of customer might change over a period and hence banks are required to periodically update their records. Under KYC norms, all customers of the bank are expected to submit the PAN card details, address proof details and proof of identity issued by a government authority such as Passport authority etc. From recent events it seems to appear that these KYC norms have not been implemented and followed by several banks.
Recent allegations of money laundering and breach of KYC norms brings forth few key questions. In one of the most populous nations in the world, is it possible to effectively implement KYC norms across all bank branches? How can RBI effectively implement all its KYC norms for people who don't hold pan card and other address proofs? Are banks fully equipped to trace money laundering activities if a fully KYC compliant customer engages in such dubious activities?
Few may argue that just because PAN card details were not submitted during account opening, does not testify that these accounts engaged in malicious money laundering transactions. To reduce money laundering transactions in India, RBI can direct banks to automate the transaction chain monitoring. In order to effectively monitor the entire chain of transactions and to identify suspicious transactions, a better integration among all the banks and their branches is of pivotal importance.
I'm of the opinion that considering that since Indian Banking Industry is riding on Finance transformation driven by Information Technology; RBI should have a monitoring mechanism by way of periodic reports on dubious transactions submitted by banks. RBI should also encourage banks for a far deeper IT integration to share transaction chain data ensure that the chain of such suspicious transaction does not get lost because of policies or lack of integration of IT between banks.
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