MUMBAI: Reserve Bank governor Sanjay Malhotra has called for risk-based regulations along with increased technology adoption to preventing money laundering and terror financing.
Delivering his keynote address at the first-ever meeting of the Financial Action Task Force (FATF) here on Wednesday, the governor said, India is determined to further strengthen our financial system to deter and combat illicit financial activities, taking into consideration the recommendations made during the evaluation.
Given the evolving AML (anti-money laundering) and CFT (counter terror financing) framework, financial inclusion and humanitarian channels, a risk-based approach to supervision, digitisation and information sharing, beneficial ownership, countering of proliferation financing, is the need of the hour, he said.
“Risk-based approach is recommended in this regard. We all try to follow a risk-based approach to be able to balance this. But let's keep in mind that this is only one step forward in this direction of reducing compliance burden by being able to pinpoint the suspicious and the dishonest,” the governor said.
“While we continue to make our financial systems safe and secure against money laundering and terrorist financing, we as policymakers need to be mindful that our measures are not overzealous and do not stifle legitimate activities and investments. Multiple laws and regulations, each with their level of granularity, are at a very high level of burden on the regulated financial system providers. This is relevant in the context of AML and CFT too."
“Therefore, we need to have laws and regulations, which with surgical precision, target only the illegitimate and the illicit, rather than use very broad and blunt tools, which unintentionally hurt even the honest. Similarly, while making the policy, it's important to have very precise and balanced regulations. It's equally important that while we are implementing them, we keep the impact that they are going to have on the persons and the businesses in mind,” Malhotra highlighted.
"Let us appreciate that this is not the ultimate, this is not perfect, because it will always yield some false positives and false negatives. So we need, as implementers in the private sector and in the government sector, to continuously refine and improve our risk assessment models, to improve them, to make them more robust," he said, adding while making these improvements, two things need to be improved. One is the quality of the data that is received, the other is to be able to harness the evolving technologies that are coming in, whether it is artificial intelligence or blockchain technology or machine learning.
"This will help us in improving the screening of transactions and detection of suspicious activities, thereby reducing errors, false positives, false negatives. Considering the evolving landscape in the area of money laundering, resulting from changing customer behavior and evolving products and services, we will need to continuously augment the AML risk assessment framework and make appropriate system enhancements on a regular basis after assessing the impact of the money laundering and other risks," the governor said.