Perspectives from ISB

This article was first published in Moneylife on September 20th, 2012; Co-Author: Khemchand H Sakaldeepi, Centre for Investment, ISB

First the Gandhian, Anna Hazare and then the yoga guru, turned social activist, Baba Ramdev; India has witnessed two major voices against corruption in the last year. While Anna and his team’s movement primarily focused on bringing a strong Lokpal Bill, Baba Ramdev has been crusading to bring back the black money stashed away in Swiss banks, to India.

Corruption has assumed unprecedented proportions with the Coalgate allocation scam running into billions of dollars and everyone from the erstwhile Bhartiya Janta Party government (now the main opposition party), led by Atal Bihari Vajpayee to the current United Progressive Alliance (UPA) government, led by Dr. Manmohan Singh, being under the scanner. The Indian parliament hardly worked in the monsoon session, with the ruling party and the opposition at loggerheads with each other.

A ray of hope, in the midst of the political circus, seems to be the Indian banking system, that has been resilient in the past, conservative and cautious. The recent cases of laxity in vigilance and violation of regulations at the HSBC and the Standard Chartered banks, have resulted in trillions of illicit money gaining access to the US markets. This raises questions about the steps taken towards the prevention of money laundering by countries across the globe.

India became a full-fledged member of the Financial Action Task Force (FATF), an inter-governmental body which works towards combating money laundering and terrorist financing in the year 2010. Since then, India has been co-operating with the other member nations in sharing information regarding suspicious, money laundering and terrorist financing activities.

According to FATF, “corruption has the potential to bring catastrophic harm to economic development, the fight against organized crime, and respect for the law and effective governance”. Early this month, both NSE and BSE, the leading stock exchanges of the nation, urged the investors to exercise caution in dealing with entities linked to Iran, following warnings from FATF.

The question is, being a member of FATF and at the same time struggling with corruption at home, is India doing enough to combat money laundering? A survey on Anti Money Laundering by KPMG in India (2012) revealed that about 11 percent of the respondents find that more than 25 percent of their SWIFT messages have incomplete originator information. The survey also finds that more that majority of respondents found the client screening, handling of filter hits and maintenance of sanction lists was either moderately challenging or challenging. And less than 50 percent use either internal or external sophisticated IT systems to identify potential money laundering cases.

In the US there exists a list of Specially Designated Nationals and a list of Countries identified which should be screened for identifying potential risky transactions, better known as OFAC (Office of the Foreign Asset Control) List. US people and companies are banned from dealing with entities in this list.

In India too, Financial Intelligence Unit – India (FIU-India) along with the RBI, has been working towards making the screening system more rigorous. If the processes are implemented in letter as well as spirit, financial companies like Banks, NBFCs and Insurance companies, who collectively control the flow of money in the economy can
directly hinder the plans of rogue elements by making their financial life miserable.

Also, there exists Know Your Customers (KYC) and Customer Due Diligence (CDD) guidelines in India, which can be easily flouted due to the multiple ways in which one can fulfill these requirements. India still does not have a single identity for its citizens, on the lines of the US Social Security Number. Same person can have multiple address and identity proofs in the form of state issued passport, driving license, ration card, or the most recent being the Aadhar card.

Going by the KPMG report, while India is taking baby steps in the right direction, there are major milestones to be covered in terms of training, reporting and technology to be able to use some of the most sophisticated algorithms involving abnormality detection, predictive models and social network analysis. In fact, it is said that if Facebook was a country then it would be the 3rd biggest in the world. The combination of data from social network and technology can help us create sophisticated bad behavior detection tools.

The recent technological advances have helped many institutions to harness the power of large datasets. The companies can process and collect data at close to real-time and with the help of certain algorithms, classify and detect malicious behavior instantly. This is like any other antivirus system found on computers, but different in terms of target units i.e. money laundering and terrorist financing.

The existing systems in India have clearly not prevented black money and the proceeds of corruption from leaving the country. Hopefully the next generation revolutionaries can actually use technology to bring about the change we want to see instead of relying on the old fashioned political rhetoric. Next time when someone says “Hum bahar ka paisa vapas layenge” (Read: Baba Ramdev claiming to bring back the black money stashed in Swiss banks) then we must ask “What’s your analytics quotient?”