Soon, you may be able to buy mutual fund units, shares, insurance policies, bank deposits and other such financial products with a single Know Your Customer (KYC) compliance.
Financial Intelligence Unit-India (FIU-Ind), the national agency monitoring suspect financial transactions, has initiated discussions with different financial sector regulators to build a common database, which could be utilised by all financial services agencies.
On the sidelines of a conference, P K Tiwari, director, FIU-India, said: “The recent move by the capital market regulator, providing a common KYC for all securities market products, is a good initiative. It should be expanded across all other segments of the market.”
At present, each sectoral regulators — the Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority, the Reserve Bank of India, Pension Funds Regulatory and Development Authority and the Forward Markets Commission have different KYC requirements. This means users are now required to fill in numerous columns in multiple forms every time they buy a new product.
“How many cards am I supposed to carry? In countries like Hong Kong, there is only one. It serves all the different purposes. But here we have PAN, TIN and UID. Each agency wants to promote its own product as the valid proof, creating duplication. If this could be avoided, it is welcome,” said a chief compliance officer of a public sector bank.
Also, the data is collected and stored separately, thereby not giving a complete picture of a client’s financial history to the intermediaries. This affects the quality of suspicious transactions’ reports sent by these entities to the FIU.
“If there is a common repository, the principal officers would be able to access and check the client’s transactions in other regulatory domains. This will enable us to form and relay a more informed opinion to FIU,” said John Mathews, senior vice-president and head of client services, HDFC AMC. He said the system introduced by Sebi, to take effect from January 1, would be a good model.
In July, Sebi said the initial KYC would be undertaken only once for capital market products like mutual funds, shares, etc. It proposed a mechanism wherein one or more regulated KYC Registration Agency (KRA) would undertake a KYC exercise at the stage of account opening for all clients.
The benefits of a KRA system include the execution of a single and uniform KYC procedure across the securities market, saving of record-keeping space, a centralised storage and dissemination of data. Specific criteria and rules to identify ‘beneficial ownership’ is being worked out jointly by Sebi and a committee set up by the finance ministry.
It will also help in saving time and burden of procedures for clients, by undertaking the KYC procedure of identification only once, subject to periodic update.
This common KYC database will help the different regulators and intermediaries monitor suspicious transactions and terrorist financing more efficiently, experts said. However, there are some practical difficulties. Vikas Tandon, director-anti money laundering, South Asia, Citibank, said the financial inclusion objective of the government should also be kept in mind. “In capital markets, the PAN (income tax identification) has been accepted as the universal proof and made mandatory. However, in other areas this may not be possible. For example, banks have the obligation of financial inclusion. Such differences need to be addressed.”
Indian financial institutions are expected to spend $1 billion (Rs 4,900 crore) in the next few years to strengthen the systems and processes for anti-money laundering measures. According to a study by the United Nations Office on Drugs and Crime, the estimated money laundering flow globally is close to $1.6 trillion, about 2.7 per cent of global GDP.
Though there is no specific data available for India, experts estimate the amount of money laundering to be one to two per cent of domestic GDP. “There are high levels of suspicious transactions. India is now doing what Singapore and Malaysia had done a few years before in implementing strong AML measures,” said Mr Ian Selbie, solutions programme director for the Asia-Pacific at Unisys, a firm specialising in anti-money laundering and anti-fraud measures.
The financial industry will have to spend close to $100 million in installing the necessary software and together with training and other process, the required expenditure will be at least $1 billion.