With penalties, restrictions, RBI turns up heat on lax KYC

RBI has been imposing penalties and restrictions on lenders and regulated entities for non-compliance with KYC guidelines. Recent instances include restrictions on Paytm Payments Bank and business payment solutions providers. Lack of strong KYC implementation is the common thread in these actions.
RBI has been imposing penalties and restrictions on lenders and regulated entities for non-compliance with KYC guidelines. Recent instances include restrictions on Paytm Payments Bank and business payment solutions providers. Lack of strong KYC implementation is the common thread in these actions.

Summary

  • KYC is a critical weapon in the battle against money laundering and financial fraud

Mumbai: The Reserve Bank of India (RBI) has been focused on plugging gaps in implementing know-your-customer (KYC) checks by lenders and other regulated entities, chastising them through monetary penalties and even imposing business restrictions.

Some of the recent instances include restrictions on Paytm Payments Bank, and most recently, on business payment solutions providers (BPSPs, typically fintech companies). Even in October, RBI had fined the payments bank 5.39 crore for non-compliance with some provisions of KYC guidelines, cybersecurity framework, etc.

Others have not been spared either. Through the past year, the regulator has pulled up larger lenders like Axis Bank and Standard Chartered Bank, apart from a clutch of cooperative banks.

KYC guidelines act as a vital safeguard against money laundering, by mapping each account to a bona fide customer. It mandates banks and other lenders to ask for proof of address and identity from customers before opening bank accounts or even while availing loans.

People aware of the development said that the common thread tying RBI’s action against Paytm Payments Bank and asking Visa to stop businesses from paying each other via credit cards is lack of strong KYC implementation.

Businesses tend to pay their vendors by bank transfers or commercial credit cards, sometimes with a fintech managing these payments. These fintechs are called business payment service providers.

Industry officials said that the restrictions imposed on BPSPs also stem from KYC concerns where many people accepting payments routed through these fintechs were not onboarded as merchants.

Meanwhile, Mint reported 3 February that Paytm Payments Bank did not have KYC for a significant section of its customers and instances include a single PAN (permanent account number)—an identity document issued by the income tax department—being linked to over 100 or even 1,000 customers.

“I think some fintechs may have registered themselves as merchants with payment gateways and conducted the business of a payment gateway or aggregator without taking a licence," said a senior fintech industry executive who spoke on condition of anonymity.

The executive said that their names would appear in the credit card statement, instead of the ultimate supplier or the actual beneficiary of the payment made by a business. “This presents KYC challenges," the executive added.

Experts said that since KYC is one of the critical components in the battle against money laundering and for preventing fraud, compliance with these guidelines is not optional.

They said that KYC measures prevent perpetrators from opening fictitious accounts and also help in identifying the sender of the funds and the recipient of such funds, thereby creating a trail for tracking down criminal activities.

“It is a legal obligation and, to that end, RBI is taking stringent measures against persistent non-compliances. It is a clear signal from the regulator that regulated entities need to ensure compliance with KYC requirements failing which action will be taken," said Natasha Treasurywala, a partner at law firm Desai & Diwanji.

Others said that lax KYC could have wider ramifications for the broader financial system. “A lack of proper KYC would result in various systemic risks such as loss of trust in the banking system, thereby resulting in financial instability and impacting the entire economy of the country," said Kinjal Champaneria, a partner at law firm Solomon & Co Advocates and Solicitors.

Meanwhile, the regulator has been ramping up its supervisory systems over the past few years. In fact, as a step to enhance the effectiveness of supervisory frameworks, RBI also uses several analytical tools.

In June 2023, then deputy governor M.K. Jain said in a speech that such tools include an early warning system, stress testing models, targeted evaluations of compliance with KYC and AML (anti-money laundering) norms, besides others.

“Additionally, the Reserve Bank is in the process of adopting advanced analytics, artificial intelligence, and machine learning into supervisory data, while taking necessary safeguards, to gain even deeper insights into the operations of supervised entities," said Jain.

shayan.g@livemint.com

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