RBI Governor Malhotra warns against ‘overzealous’ anti-terror financing measures stifling legitimate investment

“While we all continue to make our financial systems safe and secure against money laundering and terror financing, we as policy makers need to be mindful that our measures are not over-zealous and do not stifle legitimate activities and investments,” Malhotra said.

In order to effectively counter these threats, he highlighted the need to continue the close cooperation among various stakeholders —government agencies, financial entities in both the public and private sectors, civil society, and others.

The governor laid emphaisis on improving data quality and harnessing emerging technologies, which will help in better screening of transactions and detection of suspicious activities thereby reducing false positives and false negatives.

With the evolving landscape in the area of money laundering resulting from changing customer behaviour and evolving products and services, there was a need to continuously augment anti-money laundering (AML) risk assessment framework and make appropriate system enhancements on a regular basis after assessing the impact of money laundering and other risks.

“The focus should be on understanding the latest trends and developments in the financial world that can be exploited by criminals and accordingly develop tools and enabling frameworks that will allow us to detect suspicious transactions and activities early and take pre-emptive action,” Malhotra stated.

Multiple laws and rules, each with their own level of granularity, cast a high level of burden of compliance on the regulated financial service providers, he said.

“We need to have laws and regulations which, with surgical precision, target only the illegitimate and illicit, rather than use them as blunt tools which unintentionally hurt even the honest,” the RBI governor added.

Speaking on financial inclusion, Malhotra said India has made remarkable progress in the field but there was a need to widen and deepen it further.

“It must be ensured that regulations do not create unintended barriers to financial inclusion. We need to be mindful of customer rights and convenience while fulfilling the due diligence requirements,” he said.

Malhotra said in recent years digitalisation has been increasingly applied to customer on-boarding and customer due diligence (CDD) processes, where India has made huge strides. Digital KYC (know your customer) and video KYC are shining examples of this.

The Central KYC Record Registry (CKYCR), with more than 1 billion records, is another example. It has the potential to usher in a new era of customer on-boarding by making it easier and seamless not only for customers but also for regulated entities to perform customer identification and due diligence.