Measures to check money laundering, terror financing must not stifle legitimate activities, says RBI governor

Mumbai: Policymakers should ensure that their measures are not overzealous and do not stifle legitimate activities and investments as they try to protect financial systems against money laundering and terror financing, according to Reserve Bank of India (RBI) governor Sanjay Malhotra.

Multiple laws and rules cast a high level of burden of compliance on regulated financial service providers—something that is also relevant in the case of anti-money laundering (AML) and countering the financing of terrorism (CFT), he said.

“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,” Malhotra said, adding that even while implementing legal framework and regulations, the impact on persons and businesses need to be kept in mind for which a “risk-based approach” is recommended.

With respect to financial inclusion, regulations need to be mindful of customer rights and convenience while fulfilling the due diligence requirements, Malhotra said, adding that “it must be ensured that regulations do not create unintended barriers to financial inclusion.”

Malhotra was speaking at the Private Sector Collaborative Forum of the Financial Action Task Force (FATF) on Wednesday. Established in 1989, the FATF is the standard-setting body for illicit financing with 40 members, and standards developed by the body are used by over 200 jurisdictions to combat money laundering, terrorism financing and proliferation financing.

Malhotra also highlighted the strides made in digitalization of financial services, citing the example of digital and video KYC and the Central KYC Records Registry, which has more than 1 billion records.

These developments have the “potential of ushering in a new era of customer onboarding by making it easier and seamless not only for customers but also for regulated entities to perform customer identification and due diligence,” he said, adding that exchange of experiences from different jurisdictions will help in better implementing data protection and digital privacy laws in India.

Malhotra highlighted that the private sector plays a vital role in keeping financial systems secure through their role in implementing due diligence procedures, conducting robust risk assessments, monitoring transactions, and reporting suspicious activities—all of which is critical to prevent the abuse of the financial system.

“They identify suspicious activities and help government agencies in destroying illicit financial networks,” he said, adding that strong public-private partnerships form the bedrock for safeguarding the integrity of the financial system.

Even so, threats from money laundering and terror financing to the national and global financial systems are continuously evolving and becoming more sophisticated, primarily due to technological advancements. To effectively counter these threats, Malhotra called for close cooperation among various stakeholders—government agencies, financial entities in both the public and private sectors, civil society and others.

“To make these improvements, we need to improve the quality of our data and harness emerging technologies. This will help improve screening of transactions and detection of suspicious activities thereby reducing false positives and false negatives,” he said, adding that there is also a need to continuously augment anti-money laundering risk assessment framework and make appropriate system enhancements on a regular basis after assessing the impact and other risks.

“With the adoption of new technological tools and models, I am sure that AML-CFT risk assessments can be further fine-tuned,” he concluded, saying this will not only help to reduce compliance burden on the regulated entities but also result in optimal allocation of supervisory resources.