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Corporate KYC and Threats of money laundering

5 min read

In the world of corporate banking, Financial institution’s understanding of customers takes on a whole new dimension. The financial landscape is no stranger to the ever-present threat of money laundering, and this menace poses significant challenges to corporations and financial institutions alike. India, in particular, faces a heightened risk of money laundering, necessitating a robust and vigilant approach to Know Your Customer (KYC) practices.

This article delves into the realm of KYC for corporates and explores the persistent spectre of money laundering that continues to loom large.

The Global Scale of Money Laundering

Money laundering is a global phenomenon, and its implications are far-reaching. The United Nations Office on Drugs and Crime (UNODC) estimates that the annual amount of money laundered worldwide falls within the range of 2% to 5% of the global Gross Domestic Product (GDP). To put this into perspective, it translates to an astonishing $800 billion to $2 trillion in current US dollars each year, as reported by Times of India.

The situation is particularly dire within the corporate banking sector in India. Recent statistics reveal a troubling surge in money laundering cases, painting a grim picture of the financial landscape for businesses. In the fiscal year 2020-21, there were 981 cases of money laundering recorded under the Prevention of Money Laundering Act (PMLA). In the subsequent year, this number swelled to 1,180 cases, reflecting a disconcerting trend within corporate banking. The surge continued into 2022-23, with 949 recorded cases, bringing the cumulative total of money laundering cases in corporate banking to a staggering 3,110 over these three years.

This surge in money laundering cases within corporate banking underscores the need for robust anti-money laundering measures and comprehensive Know Your Business (KYB) solutions. The corporate banking sector must remain vigilant in addressing this growing threat to protect businesses and maintain the integrity of the financial system.

 The Imperative of Know Your Business (KYB) Solutions

This escalating surge in financial malfeasance underscores the critical importance of deploying effective Know Your Business (KYB) solutions in the corporate banking sector. The Reserve Bank of India (RBI) has recognized the gravity of the situation and has underscored the need for comprehensive KYB measures. This recognition stems from the growing sophistication of money laundering techniques and the myriad challenges they pose to banks and financial institutions.

RBI strongly foots in for KYB solution in India

The RBI serves as India’s primary financial regulator, responsible for safeguarding the country’s monetary stability and overseeing financial institutions. In this capacity, it sets forth guidelines and regulations to combat financial crimes, with a particular emphasis on anti-money laundering (AML) and countering the financing of terrorism (CFT).

1.Compliance with Global Standards: India, as a member of the Financial Action Task Force (FATF), aligns its AML/CFT policies with FATF’s 40 recommendations. These recommendations provide a comprehensive framework for countries to combat money laundering, terrorist financing, and the proliferation of weapons of mass destruction.

2.KYC/AML/CFT Guidelines: RBI has issued specific guidelines on Know Your Customer (KYC) norms and AML/CFT standards for banks and financial institutions. These guidelines are aimed at preventing financial institutions from being used by criminal elements for illicit activities, including money laundering and terrorist financing.

Four Key Elements: Banks are required to establish KYC/AML policies that encompass four critical elements:

a) Customer Acceptance Policy: Banks must have a clear policy for accepting customers, categorizing them by risk level. Importantly, the policy should not unfairly deny banking services to those who may be financially or socially disadvantaged.

b) Customer Identification Procedures
: Rigorous customer identification is necessary, including verifying identity through reliable sources. Regular updates of customer identification data are also mandated.

c) Monitoring Transactions:
Banks are required to pay close attention to complex or unusually large transactions, as well as patterns with no apparent lawful purpose. High-risk accounts should undergo enhanced monitoring, and regular risk reviews are essential.

d) Risk Management:
The bank’s board of directors is responsible for ensuring the effective implementation of the KYC program. This involves oversight, systems, controls, training, and audits to assess adherence to KYC policies and procedures.

e) Additional Controls: In addition to these elements, banks must adopt a risk-based approach to AML/CFT threats,

  • integrate KYC and other customer due diligence measures,
  • screen for adverse media, international sanctions,
  • politically exposed persons (PEPs),
  • file Suspicious Transaction Reports (STR)
  • cash Transaction Reports (CTR), maintain thorough documentation and records,
  • appoint a designated AML compliance officer to oversee the program.

Regardless of stringent policies by RBI for  KYB solution in India. There are still loopholes that are caused by human error.

The current scenario of KYC (Know Your Customer) and KYB (Know Your Business) solutions in India, reveals several critical issues and gaps that need to be addressed:

  1. KYC vs. KYB Disparity:
    The primary issue is the disproportionate focus on KYC solutions designed for individual identity verification, while KYB solutions tailored to verify and validate business and organizational details remain limited.
  2. Lack of KYB Real-time Data:
    Many existing KYB solutions lack real-time data access, which is essential for promptly verifying the details of organizations, particularly in dynamic business environments.
  3. Global vs. Local Solutions:
    Some available KYB solutions are global in scope and may not have the depth or accuracy required to understand the nuances of the Indian business landscape.
  4. Heavy Dependency on Static Data:
    KYB solutions often heavily rely on publicly available data, and this data may not be updated regularly. This dependency on static data can result in outdated or inaccurate information.

Challenges Caused by Data Dependency

The heavy reliance on static data in KYB solutions, leads to several challenges:

  1. Outdated Information:
    KYB solutions may not reflect real-time changes in company status, company names, directors’ information, or addresses. This limitation can lead to ineffective due diligence and compliance efforts.
  2. Increased Vulnerability:
    Fraudulent entities can exploit the time lag in data updates, posing significant risks to businesses and consumers. In the case study, these predatory loan apps thrived by exploiting these vulnerabilities.
  3. Regulatory Non-compliance:
    Inaccurate or outdated data can result in non-compliance with regulatory requirements, which may attract legal and financial penalties for organizations.

Solving the Data Dependency Issue

To bridge the gap and address the challenges posed by data dependency in KYB solutions, several strategies and solutions can be employed:

  1. Real-time Data Access: KYB solutions should prioritize real-time data access to ensure that information is up-to-date and accurate, enabling businesses to make informed decisions promptly.
  2. Source Verification and Auditing:
    Implement verification and auditing processes at the source of data to enhance accuracy and reliability, reducing the risk of fraudulent or outdated information.
  3. Advanced Technology Integration:
    Leverage advanced technologies like artificial intelligence (AI) to enhance KYB solutions. AI can provide more accurate results, help identify anomalies, and ensure compliance with regulatory requirements.
  4. Perpetual Monitoring:
    Move away from periodic manual checks and adopt perpetual monitoring of business entities. This approach enables businesses to stay constantly aware of changes and vulnerabilities.
  5. Faster Onboarding:
    Implement workflows that allow for faster onboarding of corporate customers while maintaining stringent identity checks. This can significantly reduce the time-to-first revenue for businesses.

Key Takeaway:

Underscore the need for continuous adaptation and innovation in KYB solutions to enhance the ability, to detect and prevent fraudulent activities effectively. By aligning with these directives, banks can play a pivotal role in fortifying the financial sector against the insidious threat of money laundering.


Corporate KYC and Threats of money laundering


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