A May 2013 article by Solomon Teague in Euromoney has this to say “On pain of fines and imprisonment, banks from India to the US are looking to beef up their data reporting procedures and customer information standards to comply with know your customer, a due diligence activity to address financial fraud.”
Many banks have signed consent orders related to addressing anti-money-laundering and know-your-customer gaps. Given this environment, there is an ongoing challenge between “Simplifying things for customer” vs. “Ensuring Compliance”. The recent RBI norms on “Address proof simplification” and the Union Budget – declaration two days back on the intention to have common KYC norms across the financial sector is a movement towards simplification. Concomitantly, do the compliance risks increase or remain the same?
Address proof simplification
The RBI (the Apex Bank in India) move allows Bank Accounts to be opened with one Address Proof, which can be either permanent or local. For the local address, customer’s declaration of the postal address is to be sufficient. The address may be verified by the bank through ‘positive confirmation’ such as acknowledgment of receipt of letter, cheque books, ATM cards, telephonic conversation or visits. Since 2013, Aaadhar has been accepted as an address proof for getting your PAN card, Passport, IRCTC, Insurance Policy, Demat etc. Aaadhar cards may contain address that is not current. They may also be printed in local language which makes it hard for the Back office to verify.
Compliance challenges – Local and Global
Further, in order to stay compliant Banks need to provide single view of customers across all multiple channels, business units, products and markets. Banks in India are further faced with a prospect of complying with “Foreign Account Tax Compliance Act “ – where they would need to identify reportable accounts (US taxpayers holding accounts in India and above a certain balance) and give information to the IRS. The USA PATRIOT Act dictates that institutions “shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts
There has been enough talk about having uniform KYC norms across the financial sector for easing processes and making life simpler for the investor while encouraging wider participation in financial markets. At the same time, the relaxation in address proof – while enabling a large number of Bank accounts to be opened – leaves a door open for possible fraud.
Address verification – Establishing Norms and Processes
The Banks would need to put in place processes to identify the local Address. This would require both investment in technology and manpower to ensure verification and validation. Further a sharing of data across Banks and across the financial industry would be truly beneficial – to determine any conflicting patterns and get timely alerts.
A third party service providing standardized services for verification and address validation will become a requirement.
Going forward the following questions demand attention:
What is the mid-path for FI’s between meeting KYC challenges and making life better for investors? Would local investors while wanting simplification, want a process that helps transaction consolidation? How will financial inclusion increase without ‘increasing’ risk? Would the proposed “National Identity – for citizens only” be a safer option than Aadhar especially if no local address proof is being taken? How can address proofs be strengthened?