Today's Times of India newspaper, Mumbai, published an article "Common KYC for all financial products" .
I share my thoughts about the need for KYC Bureaus in India.
Need for KYC Bureaus in India
L.S.Subramanian
Summary:
This article justifies the immediate need for Centralized National KYC Bureaus in India and proposes an outline for their operations and regulations and deliverable. It also recommends that the Government of India bring KYC Bureaus into operation through The Reserve Bank of India by allowing the existing four licensed credit Bureaus namely CIBIL, Experian Credit Information Co. of India Pvt. Ltd, Equifax Credit Information Services Pvt. Ltd and High Mark Credit Information Services Pvt. Ltd. to also operate as Centralized and Automated National KYC Bureaus. It is also proposed to mandate use of two fingerprints for Biometric identification.
Background to KYC:Knowing your customer – KYC- has become a strong focus of attention in recent years within the Banking and Financial services space, as the Indian Government and Financial organization being to view KYC as a critical, proactive measure against financial crime rather than just another compliance burden.
KYC compliance regulation has been proactive in making it mandatory for KYC norms for various financial transactions including Banking, Insurance, Mutual Funds, Depositories, Stock Market Intermediaries, Pension Fund Managers and host of other Financial Institutions.
Why KYC:
The various terrorist attacks in India and elsewhere in the world has revealed that there are sinister forces at work and that terrorist activities are funded with laundered money, the proceeds of illicit activities such as narcotics and human trafficking ,fraud and organized crime. The combating of terrorist financing has become a priority of Indian and rest of the world. Hence the financial services provider “Knowing your customer” was no longer a suggested course of action since Know Your Customer (KYC) compliance mandates were created by the Indian Government to combat money laundering and the funding of terrorist activities.
What is KYC?
Know Your Customer or KYC refers to the regulatory compliance mandate imposed on financial service providers to implement a Customer Identification Program and perform due diligence checks before doing business with a person or entity. KYC fulfills a risk mitigation function and one of its key requirements are checking that a prospective customer is not listed on any government lists for wanted money launders known fraudsters or terrorists.
Beyond customer identification checks, the ongoing monitoring of transfers and financial transactions against a range of risk variables forms an integral part of the KYC mandate.
Origins of KYC Compliance:
The arrival of the new millennium was marred by a spate of terrorist attacks and corporate scandals that unmasked the darker features of globalization. These events highlighted the role of money laundering in cross-border crime and terrorism, and underlined the need to clamp down on the exploitation of financial systems worldwide.
KYC legislation was principally not absent prior to this era, regulated financial service providers for a long time have been required to conduct due diligence and customer identification checks in order to mitigate their own operation risks, and to ensure a consistent and acceptable level of service.
In essence, the new KYC Laws are not so much a radical departure from self regulated industry practices as it was a firmer and more rigorous regulation of a greater range of financial services providers, and expanded the authority of the law enforcement agencies and regulators in the fighting of terrorism and other anti social activities in India and globally.
KYC Compliance and Cost Implications for Business:
The KYC compliance mandate, for all its positive outcomes, has burdened companies and organizations with a substantial administrative obligation. Additionally, KYC compliance increasingly entails the creation of auditable proof of due diligence activities, in additionto the need for customer identification.
In order to meet KYC compliance requirements, financial institutions must:
1. Verify that customers are not or have not been involved in illegal activities such as fraud, money laundering or organized crime.
2. Verify a prospective client’s identity.
3. Maintain proof of the steps taken to identify their identity.
4. Establish whether a prospective customer is listed on any sanctions lists in connection with suspected terrorist activities, money laundering, fraud or other crimes.
The KYC verification rules place a big financial burden on Banks, Insurance Companies, Mutual Funds due to costs involved on doing a KYC Verification. The centralized KYC Bureau will reduce the transactional costs for the KYC verification.
Stricter customer due diligence laws have forced financial institutions to increase compliance efforts in this area - leading to escalating compliance expenses at a time when the sector can least afford these additional costs.
There is a business need for Centralized and Automated National KYC Bureaus with current information technology that can drive cost savings while ensuring best practice . We are confident that the Finance Ministry of the Government of India will take the lead in ensuring that these KYC Bureaus are operational at the Earliest. The KYC Bureau will also be effective in preventing identity theft fraud, money laundering and terrorist financing.
Approach:
The setting up of a KYC Bureau will allow a customer to be registered and screened by the KYC Bureau only once, thus reducing the burden on the customer to go through the KYC Process multiple times.
Validation of the norms can be done once in five years after registration unless there is a change in the customer like death, migration, address change, change in marital status, and change of income, change of employer or any criminal charges.
Process:
Once the KYC Bureau has a customer registered it will give the customer a unique Customer Identification Number (CIN) and also a KYC Smart Card with his name, address and other key details like date of Birth and biometric details in the smart card. The detail profile of the customer can be accessed by the participating bank/financial services company with access to data for the KYC verification required by its regulator.
The KYC Bureaus will conduct the KYC verification and will also retain the personal data of the customer including biometric information. The KYC Bureau will maintain all ensure data required by various regulators of the Banking Sector, Financial Services Sector like Insurance, Financial Markets Mutual Funds and Pension Funds are addressed at the time of collecting Customer Data.
Participating companies can pay the Bureau on a transaction based model or fixed cost model for verifying the KYC requirements of the customer, the tariffs can be decided by the Regulator.
Information Technology in a Centralized National Credit Bureaus
Financial institutions of all sizes are seeking these features in their efforts to hold down the resource-consuming processes entailed in KYC - from Customer Identification Programs (CIP) to ongoing Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) which are all required to make KYC effective.
Many institutions are still bogged down with manual and error-prone processes, while large firms face inefficiencies caused by the sheer volume of searches required, incompatible software in different lines of business, and redundant or duplicative tasks. Today’s Information Technology driven solutions will help in overcoming these hurdles for cost effective, reliable and secure KYC verification. This will translate into saving time and improving risk controls.KYC process driven by Information technology solutions will allow innovation and streamline in regulatory risk to help financial institutions improve productivity and protect hundreds of millions of customer accounts from money laundering, terrorist financing, and other financial crimes
The challenges to complying with KYC are numerous:
Multiple data sources are needed for the solution, including internal and external information that is both structured and unstructured. Both automated and manual methods of collection of information are required. Potentially complex risk scoring algorithms must be highly customizable
KYC requirements change frequently, due both to internal policy changes and external mandates.
Filing Suspicious Activity Reports (SAR) is one of the most difficult, complex compliance responsibilities financial institutions have. A KYC Bureau will be able to deal with this in a more effective and efficient manner and provide unbiased and independent reports.
A technology solution to these identified problems is a single centralized national system that stores all biometric and associated biographic data that is needed for customer identification. Biometric data and associated biographic data are used by the KYC Bureau to conduct background checks, facilitate smart card production, and accurately identify individuals.
The systems will capture biometric data from individuals to facilitate three key operational functions: Creating a “for life: unique bio-identification number; Conducting fingerprint-based background checks; Verifying an individual’s identity; and Producing identity cards/documents.
The centralized national KYC bureau will operate a secure data center which will offer centralized storage and management area for customer information provided by various financial institutions and governmental agencies. The KYC bureau will host customer information including but not limited to customer fingerprints, photos and KYC information. In certain instances data concerning financial institutions and customer lending amounts will also be stored. Information relating to suspicious individuals will be accumulated centrally and then shared across the financial platform as batch info to banks and real-time identification information to Banks and other related lending institutions and credit bureaus.
Information in this system will be safeguarded in accordance with applicable laws and policies, including the information technology Act security policies. All records are will be protected from unauthorized access through appropriate administrative, physical, and technical safeguards. These safeguards will include restricting access to only authorized personnel who have a need-to-know, using locks, and password protection features. The system will be protected through a multi-layer security approach.
The protective strategies will be physical, technical, administrative and environmental in nature, which provide access control to sensitive data, physical access control to the storage facilities, confidentiality of communications, authentication of sending parties, and personnel screening to ensure that all personnel with access to data are screened through background investigations commensurate with the level of access required to perform their duties.
The KYC bureaus will possess a comprehensive and complete system, including hardware and software as well as a complete team of system experts to manage and assist in populating the database. A management transactional fee is applicable for every transaction been performed and is negotiable on a n end user specific basis as authorized by the Regulator.
KYC Bureaus will also provide the current count of participants in the Indian Financial Markets because of the unique Customer Identification Number as against the multiple counting done today by the industry of the same customer.
KYC Bureaus will be an excellent Repository of Customer and with the right data mining tools it will assist Regulators and Law Enforcers by providing a unified view of various participants in the financial markets.
Sanction and Deployment of the KYC Bureau will have a positive impact on the India’s Country Rating by Global Rating Agencies, thus giving the country an opportunity to raise funds at lower costs.
The Biometric identity in the Smart Card will help the financial services business user to quickly verify the customers KYC status and also review the audit log of financial transactions if required.
KYC Bureaus will be cost effective solution for Businesses to Comply with the various Government and Industry Regulatory Requirements..
KYC Bureaus will reduce the risk and opportunities of fraud and money laundering
Improved efficiency and speed of KYC verification will be delivered via automation
Decreased cost of KYC compliance will allow Businesses to focus on their Core Competence.
The time is now for India to launch a KYC Bureau and make life easier for its citizens.
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