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In recent months, there has been a spate of disclosures around the world about how banks are compromising on customer identification procedures and are indulging in money laundering and other unsavory activities.
From the US to India and the shadow banking system around the world including China, regulators have realized that unless they rein in the shady practices of banking, the result would be chaos and disorder. This is the reason why the regulators around the world have started clamping down on banks and asking them to foolproof their procedures.
An important step in this direction is the directive to the banks to follow the KYC or the Know Your Customer norms and procedures through which the customers and their details can be recorded and stored so that in case of any wrongdoing, the law enforcers and the regulators would have the money trail leading to the individuals or entities.
The key aspect about banking is that one must follow the money or in other words, investigate the money trail to see where it starts and where it ends. Once the money trail is established, it is easy to track down the culprits and this is the reason that banks must have accurate, reliable, and updated KYC norms in place for all customers.
Having said that, it must be remembered that most banks use the KYC norms as an excuse to harass genuine customers and at the same time, indulge in unofficial activities. Therefore, the approach to following KYC norms is to insist on the same for all customers and especially those who have large sums on deposit as the scope for money laundering increases with these customers.
On the other hand, they must not harass small depositors who anyway maintain less balance and whose activities can be monitored for suspicious transactions.
The point here is that KYC norms should be used in conjunction with the monitoring of all accounts and the key principle that must be applied is that the norms are sacrosanct and at the same time, flexible enough to separate the genuine investors from the dubious ones.
Further, banks must ensure that high value transactions are monitored and insist on proper identification when customers deposit or withdraw huge sums of money. This is where proper KYC norms become useful as the contact information provided in the KYC database can be used by law enforcers and the regulators to track down the source and the destination of the money trail.
Apart from this, the money transfer or the funds transfer between banks that involve high denominations must similarly be monitored through KYC norms and procedures.
The reason why proper KYC norms can help is that if a particular customer or entity is in the red list or the black list being monitored, they can help spot and track transactions made by these entities. This means that proper identification of customers lead to better compliance and better monitoring.
Further, KYC norms help banks and customers alike as the transactions carried out between the bank and the customers provide details of both so that any legal dispute arising out of such transactions can be resolved through documentation and data which would pinpoint the source of the dispute and help the arbitrators decide on who is guilty.
Finally, banks in recent times have embraced IT and systems to an extent that were not the case before and therefore, proper KYC norms complement and supplement the IT systems that the banks have and ensure compliance with the rules.
In conclusion, it is clear more than ever that banks have to clean up their act and the regulators cannot overlook the transgressions anymore. This is the reason why well-maintained KYC norms help all stakeholders.
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