AML / CFT & Financial Inclusion

The Financial Action Task Force (FATF—an international institution committed to financial inclusion) opines that financial inclusion and financial integrity are “mutually reinforcing” or “synergetic.” Applying enabling measures that facilitate individuals and businesses (particularly the ones having lower level income, belonging to unserved and or underserved groups) to subscribe to and utilise regulated financial services augments the reach and the efficacy of anti-money laundering / countering the financing of terrorism (AML / CFT) regimens.

With these sections of the population using regulated and monitored routes of monies, consumer protection augments and fraud reduces, whilst also taming financial abuse and exploitation. Transaction traceability, detection, reporting and investigation of doubtful transactions becomes possible, leading to a considerable reduction in money laundering (ML) and terrorist financing (TF) risks. To design AML / CFT measures meeting the goal of financial inclusion, FATF embraced the Guidance on AML/CFT Measures and Financial Inclusion in February 2013.

The Cases of India

1. On July 1 2013, the Reserve Bank of India (RBI) released the Master Circular – Know Your Customer (KYC) norms / Anti-Money Laundering standards / Combating of Financing of Terrorism / Obligation of banks under Prevention of Money Laundering Act (PMLA), 2002. This Master Circular was issued as a consolidation of the instructions on KYC/AML obligation of banks under the PMLA, 2002 issued till June 30, 2013. This was done in adherence to the Recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision.

2. The e-KYC process of identification in India of individuals (by iris scan and fingerprint) with the UIDAI (Unique Identification Authority of India) based Aadhaar database is a promising initiative by the Government of India to authenticate identities for opening bank accounts. As a result, greater volume of financial inclusion can take place with a great level of legitimacy.

3. In India, the introduction of “Small Accounts” is also a welcome sign to ensure fulfilment of “simplified due diligence” (SDD) requirements for individuals not having any identity or address proof. These accounts require a physical presence of the client at the bank with a photograph attested by self and affixed with a signature or thumb print, in front of a bank official certifying the signature of the future customer. Valid for a duration of 12 months (with a possibility of extension for another 12 months upon the account holder submitting a documentary proof of applying to the officially valid document / Aadhaar Number / Permanent Account Number).

4. Also in the case of India, the FATF classifies the “Basic Bank Accounts” in the country as those financial inclusion products that have a lower or low ML / TF risk primarily due to the presence of a regulatory framework that is based on a simplified Customer Due Diligence framework. These measures are designed to balance financial inclusion objectives with the mitigation of risks posed by AML / CFT activities.

5. Last but not the least, so as to fulfil the needs of financial inclusion and the AML / CFT requirements, and eliminating the problems faced in complying with the KYC requirement by small value policy holders and for also penetrating the advent of insurance into rural and low income sectors (micro-insurance), the IRDA has offered exemption up to a total annual premium of Rs. 10,000/- (approximately US$200) on life insurance policies held by a single individual from the mandatory submission of recent photograph and proof of residence.