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

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