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Don’t Know Your Customer


This is an archive for an article I wrote for Pragati, Feb 2013.

Opening a bank account, investing in a mutual fund, opening a brokerage account or buying insurance can be extremely painful if you’re not among the urban rich of the country. Much in common with all these transactions is the Know Your Customer (KYC) requirement, which requires service providers to have documentary evidence that your customer is a real human being and lives in a real address. That means an “Identity” proof such as a PAN card, a driving license or a passport, and an “address proof”, such as a gas connection, a telephone bill or similar documents.

This is, supposedly, to curb the menace of money laundering, through the benami route, where the person doesn’t really exist. But this is a classic case of throwing the baby out with the bathwater.

In Frederick Forsyth’s Day of the Jackal, the main character obtains a fake British passport by using a dead baby’s name to apply. This was a loophole in Britain as recently as 2003. If this can be done in a developed country that has fairly good tracking systems, we can imagine how much easier it is to do in India. For a really determined person, obtaining a fake identity and address document is not difficult — a fake PAN card is obtainable for a fee; a gas connection with a fake name is just as easy for an address proof. I’ve heard of phone bills being printed with changed addresses and names. Essentially the bar for passing through the ‘onerous’ KYC requirements is so low that nearly everyone with a single cunning brain cell and enough money can qualify.

But here’s the problem: the KYC requirements disqualify too many of those that desperately need banking or financial services. The car driver, the household help, the paper delivery guy – these are all examples of people doing legitimate business in most of our cities, and they find it very difficult to get a bank account because they lack enough documentation for the KYC requirements. They don’t easily get gas connections; they might find it difficult to get a driving license or other forms of ID or address proof.

For banks, even while the RBI has relaxed the restriction on such documentation for the poor, banks continue to demand detailed documents; and why shouldn’t they? RBI hits banks with hefty fineswhen they violate KYC norms, while the benefit of having a KYC isn’t exactly very clear. How many financial crimes have been solved because we had his address proof?

The Aadhar card (UID) might help solve this problem, but it is yet another document among the many that can be needed. Though the Aadhar can serve as an ID proof, it may not be sufficient for address proof. For instance, if you live in a rented house and move out, then there will be a need of a fresh proof of address.

If we really intend to solve the problem – of terrorism or money laundering – we can’t have a “get past the gate” solution- where it’s tough for you to pass through the gate after which there are no security checks.

A possible solution is to relax KYC norms in general, but to step up surveillance for potential money laundering or fraud. For small accounts, stated addresses should work, with an Aadhar or other ID card. That will give the urban poor – who are the real victim of KYC requirements – a way to keep their savings in the banking system and also give them eventual access to credit; after all, one of the few things banks do with the KYC details is to have someone call you if you have idle money lying in any account.

Further, the system is inefficient in that you have to do the same KYC at multiple places, and the documents that one provider accepts (such as a bank) are not acceptable elsewhere (like a mutual fund, even one that is owned by the same bank). This makes no sense whatsoever. It’s best to allow anyone to invest, and then track investments instead. If you want to buy a mutual fund, all you should need is your PAN card or Aadhar number — any KYC that has been done at any financial institution should be valid elsewhere. You will then need to do your KYC only once.

Then how do you get to black money? As I have said, black money has many easy ways to circumvent our current processes that are hopelessly inadequate in actually catching criminals. They only harass the good people. The solution should be to investigate further only when there is a trigger for a fraud – a large transfer, a major deviation from a pattern, or a large deposit or withdrawal of cash should prompt the institution to collect additional documentation, but not much else.

There is much more value in the system for people who are currently stopped by unnecessary (and useless) KYC requirements than the false sense of security created. It is better for us to acknowledge that we are unsafe and find other methods to address the money laundering problem.


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