Overzealous measures stifle legitimate investments, warns RBI governor

Reserve Bank of India (RBI) governor Sanjay Malhotra on Wednesday said that policymakers need to be mindful that their measures are not overzealous and do not stifle legitimate activities and investments.

Malhotra said this during his address at the Private Sector Collaborative Forum of the Financial Action Task Force (FATF) in Mumbai.

“You would appreciate that multiple laws and rules, each with their own level of granularity cast a high level of burden of compliance on the regulated financial service providers,” Malhotra said, adding that this is relevant in the context of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT).

“Therefore, we need to have laws and regulations which, with surgical precision, target only the illegitimate and illicit, rather than use them as blunt tools which unintentionally hurt even the honest,” said the RBI governor.

Similarly, even while implementing the legal framework and regulations, policymakers need to keep in mind the impact on persons and businesses, said the RBI chief. “Risk-based approach is recommended in this regard. But let us keep in mind that this is only a step forward in reducing compliance burden. Let us appreciate that it is not the ultimate solution, as any risk-based approach is not perfect; it would have false positives and false negatives. We need to continuously refine and improve our risk assessment models to make them robust,” he said.

Malhotra said India needs to improve the quality of data and harness emerging technologies. “This will help improve screening of transactions and detection of suspicious activities thereby reducing false positives and false negatives. Considering the evolving landscape in the area of money laundering resulting from changing customer behaviour and evolving products and services, we need to continuously augment AML risk assessment framework and make appropriate system enhancements on a regular basis after assessing the impact of ML and other risks,” the RBI governor said.

“The focus has to also be on understanding the latest trends and developments in the financial world that can be exploited by criminals and accordingly develop tools and enabling frameworks that will allow us to detect suspicious transactions and activities early and take pre-emptive action. With the adoption of new technological tools and models, I am sure that AML-CFT risk assessments can be further fine-tuned. I would urge you all to discuss and share best practices in identification, mitigation and supervision of AML-CFT risks. This will not only help to reduce compliance burden on the Regulated Entities but also result in optimal allocation of supervisory resources,” added Malhotra.

In his conclusion, the RBI governor stressed on the need to build financial systems that not only thwart the attempts of money laundering, terror financing and proliferation financing, but also support financial inclusion, encourage innovation, and facilitate economic growth.