Global Opinions & Expected Actions

There is a tsunami of global opinions that is getting formed against bribery, corruption, money laundering and tax havens, around the world. This is not only led by the regulators of developed nations but also the global journalists’ syndicates such as The International Consortium of Investigative Journalists and independent investigative journalists of the Cobrapost’s genre.

It is highly likely that soon Indian courts are likely to take note of this rot in the system and pass strictures to the regulators and government of the day to make the financial sector comply with Prevention of Money Laundering Act in letter and spirit. Globally, countries such as the USA and the UK could even go to the extent of launching their independent investigations on overseas operations of these Indian financial institutions, penalizing them heavily and subsequently black listing them entirely.

Way Forward for Indian Financial Institutions

Enough has been written, spoken and fingers pointed at, surrounding the above episodes. It may be a good time to explore if we can find practical solutions in the short run, while long term systemic changes are brought about in India by RBI, IRDA and the Government.

This time round, it would certainly be a mistake to conclude that these issues would be swept under the carpet and things would return to business as usual. It may be good time for the senior management of financial institutions in India to think of ways to protect their institutions’ and their own reputation from this onslaught of white-collar crime that is taking place right at their doorsteps.

They ought to put KYC+AML+CFT systems and processes in place, which would ensure proper onboarding of customers and detection of potential money laundering activities even before these transactions occur. Their existing transaction monitoring and anti-money laundering systems that are dependent and tightly integrated to their core banking or insurance solutions are outdated and can detect money laundering only after such transactions have occurred. These systems are important to detect larger and fairly apparent money laundering schemes orchestrated by a single or group of individuals in a financial institution.

But the existing reactive monitoring systems need proactive newer technologies that would streamline the processes right from the junior most branch staff to, relationship managers, branch managers, compliance team, senior management and all the way up to the CEO of a financial institution. This institution wide technology driven processes can only be effective, if these are open to access from anywhere and from any device by the supervising managers under the constant oversight of senior management on the constant move, between offices, airports and international economic event venues. In today’s times these technologies ought to be cost effective, so that their deployment does not cost a financial institution its own fortune.

Cloud Cover as Part of the Solution

The proactive newer technology options therefore worth considering by a financial institution are Cloud based KYC Software-as-a-Service (SaaS) applications. Among these Cloud based SaaS applications, the ones suited would be those that offer open enough architecture to be able to easily integrate with the existing customer facing applications, and existing core and transaction monitoring AML systems. Such an integrated hybrid technology platform of datacenter housed core banking or insurance solutions lightly integrated with Cloud based KYC SaaS Software could be an answer to the current ill-defined process linked problems faced by Indian financial institutions.

Gap # 1: Non-adherence to Know Your Customer/Know Your Client (KYC) norms for walk-in customers for bank’s own and third-party products

This is clearly a Customer Onboarding compliance issue that the headquartered compliance department of a bank or a financial institution may be crystal clear on. But it does get hazy by the time it reaches branch operations level, due to lack of disciplined and automated KYC compliance processes. To begin with, you may like to explore the specific answers to Customer Onboarding issues.

Collecting and just keeping away the ID and Address Proofs in files, by the banks or financial institutions is as bad as not collecting these at all. Further, not being able to identify their customers and without proper verifications, banks and financial institutions run the risks of dealing with money launderers, crime syndicates and terrorist networks. Additionally, foreign and domestic Politically Exposed Persons (PEPs), among the new and existing customers, need to be clearly identified. Finally, each of the ID and Address Proofs such as PAN, Aadhar Cards etc. collected, needs to be independently verified, ideally from their issuing authorities.
Banks and Financial Institutions would have to go beyond their transaction monitoring Anti-Money Laundering (AML) applications, to establish robust and automated Know Your Customer/Know Your Client (KYC) processes, which extend all the way to the remotest of their branch operations. To be able to undertake the above tasks, cost effective integrated tools similar to the following, which if made available to users across the entire branch network, would possibly fill the gaps that RBI has identified:

Gap # 2: Lack of following Customer Identification Program (CIP) of proper collection, capture and verification of ID proofs such as PAN Cards

Screening Against Sanctions, Watchlists & Embargo Lists
Politically Exposed Person (PEP) Search
Identity and Address Verification

Gap # 3: Inability to risk categorize customers and periodic review of risk profiling of account holders

Incidentally, implementing Risk Based Approach (RBA) by the banks and financial institutions also happens to be the # 1 recommendation, among the FATF’s 40 revised recommendations, published in February, 2012.

In my opinion, rough categorization of customers into high, medium and low money laundering and terrorism financing risk categories is open to human error and too cumbersome to periodically review, in order to ascertain updated risk profile of every customer. Between such periodic reviews, if some of the customers have moved into higher risk categories involving international dimensions, bank or a financial institution is likely get itself saddled with the burden of associated high risks, until the next periodic review.

Know Your Customer/Know Your Client (KYC), Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) compliance risks that your bank or financial institution faces from your own customers is therefore worth monitoring on an ongoing basis. To be able to do that, you may like to explore Risk Assessment tool.

Gap # 4: Inadequate profiling of high-risk accounts including Non-Resident Accounts (NRO)

And finally, RBI had observed that in case of high-risk customers such as non-residents, banks have failed to designate their associated accounts as NRO. Enhanced due diligence (EDD) is required to be undertaken for high-risk customers and their associated accounts, to establish sources of funds and wealth. In case of legal entities, trusts and special purpose vehicles with complex ownerships, beneficial owners are required to be determined. Many of such relationships would require senior management approvals.
To manage such an array of complex tasks, workflows, permissions and approvals extending to the very top of a bank or a financial institution, and do it in a disciplined manner every time, technology tools such as Customer Due Diligence & Enhanced Due Diligence tool tend to become an absolute necessity.

As the RBI investigation casts a wider net across other private, public-sector banks and financial institutions, many more KYC compliance gaps are likely to be identified. Instead of waiting until the regulator knocks the door, proactive banks and financial institutions in India ought to quickly plug the holes sighted above. While on this exercise, they may like to use the opportunity to build a competitive advantage by establishing smoother business processes funneling their customers’ big data.

Given below are 3 important steps that cooperative banks in India could undertake to be Know Your Customer (KYC) compliant as per RBI norms, outlined in recent circulars. These straight forward steps could be easily undertaken by the banks, every time a new account opening is initiated:

1. Customer Onboarding: Firstly, capture as much of customer profile data as it is feasible either through new account opening forms or ideally online. Along with it, upload the scanned images of ID and Address proofs, after verifying these manually with their originals. This is a crucial first step, wherein Know Your Customer (KYC) data and documents are gathered. It is also a step, where an online software application could help in generating RBI recommended Unique Customer Identification Code (UCIC), with or without even having a Core Banking Solution.
2. Screening against Watchlists: Secondly you need to ensure that terrorists as well as individuals associated with terrorism outfits do not become your customers in the first place and continue to remain there, while carrying out terrorism financing activities. As per RBI’s Combating Financing of Terrorism (CFT) circulars-based recommendations, along with mandatory requirements of Unlawful Activities Prevention Act (UAPA) and its amendments, your bank needs to screen your existing and new customers against constantly updating United Nations Sanctions as well as Designated lists. RBI’s prepared lists of loan defaulters, whose most updated versions are maintained by CIBIL, would be other lists that you should screen your new and existing customers against.
3. Politically Exposed Person Search: Final of 3 crucial steps of Know Your Customer (KYC) requires that you determine if any of your new or existing customer is a Politically Exposed Person (PEP). Family members, close relatives and business associates of PEP too classify as PEPs and therefore must be identified. These are high risk customers, whose sources of wealth and funds needs to be established, prior to account opening and approval of the senior management. Ongoing monitoring of their transactions is required and has been emphasized in different circulars, including the master circular, published by RBI.

Cobrapost’s exposes’, CBI’s revelations and RBI ongoing investigations should be reasons enough for cooperative banks to tighten their Know Your Customer (KYC) compliance process, by undertaking above mentioned 3 definitive steps. Cloud based KYC compliance tools adoption could easily ensure RBI mandated regulatory compliance, without any capital expenditure in hardware or software. Unlike larger financial institutions, cloud-based compliance solutions are ideally suited for India’s cooperative banks, since only cost that such smaller banks need to incur is highly affordable pay-as-you-go subscription fee.