Analysing India’s KYC Framework: Can We Do Things Better?

55 Pages Posted: 8 Feb 2021

See all articles by Rishab Bailey

Rishab Bailey

National Institute of Public Finance and Policy

Trishee Goyal

National Institute of Public Finance and Policy

Renuka Sane

National Institute of Public Finance and Policy

Ridhi Varma

National Institute of Public Finance and Policy

Date Written: January 22, 2021

Abstract

International norms mandate customer identification as an essential step in accessing the formal finance. However, poor design of identification processes can lead to unwanted outcomes such as promoting exclusions from financial markets. In this context, this paper examines the ``know your customer'' (KYC) processes established under the Prevention of Money Laundering Act and allied laws, to understand if the Indian framework goes beyond the obligations imposed by the Financial Action Task Force (FATF). The paper compares the implementation of FATF recommendations in India with various foreign jurisdictions, and finds that Indian KYC norms are excessively prescriptive in nature. Requirements to verify address and the penalty provisions in Indian law go beyond the obligations under the FATF framework. This imposes high costs on financial entities and promotes conservative behavior, which can lead to exclusions of various sections of society from the formal financial sector. Accordingly, the paper recommends liberalizing and standardizing norms pertaining to address proof. It also points to the need to re-evaluate the design and range of enforcement actions.

Keywords: KYC, FATF, Financial Inclusion, PMLA, Identity

JEL Classification: K00

Suggested Citation

Bailey, Rishab and Goyal, Trishee and Sane, Renuka and Varma, Ridhi, Analysing India’s KYC Framework: Can We Do Things Better? (January 22, 2021). Available at SSRN: https://ssrn.com/abstract=3776008 or http://dx.doi.org/10.2139/ssrn.3776008

Rishab Bailey (Contact Author)

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

Trishee Goyal

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

Renuka Sane

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

Ridhi Varma

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

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