Mumbai: The Reserve Bank of India, or RBI, has asked commercial banks to be vigilant while dealing with non-profit organizations, to ensure that banks are not used as conduits for either money laundering or terrorist finance.
This means that banks will have to strictly apply the “know your customers”, or KYC, guidelines while dealing with non-profits. Banks the world over use KYC norms to get a clear idea about the activities of their clients.
In the case of non-profits, banks operating in India are being asked to be vigilant about the nature of their work and sources of funds while operating deposit accounts.
“We have received a letter from RBI asking us to strictly follow the KYC norms for non-profit organizations. These organizations have always been categorized as high-risk customers, requiring higher due diligence, as their source of funds are not clear. Often, they receive donations from overseas,” said the chief executive officer of a private sector bank who did not want to be identified. “Only non-profit organizations promoted by the United Nations and its agencies are classified as low-risk customers.”
The RBI note is dated 18 September.
In a 30 June circular on KYC norms and anti-money laundering standards, RBI said banks should apply enhanced due diligence measures based on risk assessment, and conduct intensive due diligence for higher-risk customers, especially those for whom the sources of funds are not clear. This is to combat financing of terrorism.
“I am aware of the RBI note being sent to banks,” said Rajesh Tandon, chairperson of Voluntary Action Network India, an apex body of Indian non-profit organizations. “There is no unified data on registered non-profit organizations in the public domain, which makes monitoring of these institutions very difficult,” Tandon pointed out.
There are around 1.7 million non-profit organizations, including educational and health and sports institutions, but the number of such organizations involved in developmental work is relatively low in India.
Commercial banks’ credit to non-profit bodies, trusts and groups in March 2008 stood at Rs119 crore spread over 24,253 loan accounts. The latest data on banks’ exposure to such bodies is not available. Also, how much money non-profit organizations are keeping with the banking system is not known.
Tandon does not share the popular perception that non-profit organizations receive money from anonymous sources. “It is a myth that non-profit bodies receive money from anonymous sources. The donors are identified, except for donations that come to temples or mosques or other religious institutions (which) could come from anonymous sources.”
According to the June RBI circular, the customers requiring higher due diligence include non-resident customers, high networth individuals, trusts, charities, non-profit bodies and organizations receiving donations, firms having close family shareholding or beneficial ownership, firms with “sleeping partners”, politically exposed persons of foreign origin, and those with dubious reputation as per the available public information.
“I think it is a part of due diligence done by banks to open any bank account. One should not feel that if banks are conducting due diligence on NGOs (non-governmental organizations), it will go against them,” said Haleem Khan, director general of Council for Advancement of People’s Action and Rural Technology, or Capart. An autonomous body under the aegis of the ministry of rural development, Capart is the nodal agency for coordinating the emerging partnership between voluntary bodies and the government for sustainable development in rural areas.
“The NGO partnership portal was set up last year. NGOs are expected to register and apply for government grants through this portal. This is done with an aim to bring transparency in the system,” Khan said. Capart has so far blacklisted 293 voluntary organizations. “In most of the cases, other government departments and ministries blacklist NGOs if they don’t work as per the agreed terms. They also send their names to us. We carry out an independent scrutiny.”
Another official from an NGO, who did not want to be named as he is not its official spokesman, said: “The source of funds may not be clear in organizations that are largely dependent on foreign funding. International funding hovers in the range of 7-10% of sources of funds.”