Regulatory Compliance by Private Banks

Regulatory mechanism are in place to deal with non-compliance with directions on “Know Your Customer/Anti-Money Laundering Norms” (KYC/AML norms) and on reporting of frauds by lenders and banks, and deficiencies in regulatory compliance by lenders.

In this regard, Reserve Bank of India (RBI) has informed that with a view to developing a sound framework and process for enforcement action, a separate Enforcement Department (EFD) has been established within RBI with effect from 3.4.2017 as a centralised department to speed up regulatory compliance. RBI has further informed that instances of regulatory deficiencies, including non-compliance with KYC/AML norms by private sector lenders and banks, are flagged in RBI’s inspection reports and pursued for compliance by RBI’s supervisory department. Some of the deficiencies and instances of non-compliance are taken up for enforcement action (in the nature of imposing a monetary penalty) by EFD in accordance with policy framed in this regard based on, inter alia, materiality of the violation. Since the creation of EFD, monetary penalty amounting to ₹ 148.91 crore has been imposed on 43 private lenders and banks for regulatory deficiencies, out of which penalty of ₹ 8.30 crore has been imposed on nine private lenders and banks for non-compliance with directions on KYC/AML norms.

Further, as per inputs received from the Department of Revenue, the Director, Financial Intelligence Unit - India (FIU-IND), based on inquiry initiated under the Prevention of Money Laundering Act, 2002 (PMLA), is empowered to take suitable actions against erring entities for non-compliance of legal obligations under PMLA. Director, FIU-IND has imposed penalty against 10 private sector banks where non-compliance of the provision of Chapter IV of PMLA and the Prevention of Money Laundering Rules, 2005 had been reported or detected.

RBI has also issued Master Directions on Frauds ? Classification and Reporting, which require banks to report frauds beyond a threshold amount to law enforcement agencies, monitoring and follow-up of cases by a special committee, quarterly placement of information before the Audit Committee of bank Board concerned, and annual review of frauds by the bank concerned. These cover, inter alia, preventive measures, fraud detection systems, systemic lacunae, remedial action, monitoring of progress of investigation and recovery, and staff accountability.

This was stated by Shri Anurag Singh Thakur, Minister of State for Finance & Corporate Affairs in a written reply to a question in Lok Sabha today.

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KYC/AML enforcement strengthens accountability; penalties and FIU actions follow reporting frameworks with RBI oversight. Regulatory enforcement for KYC/AML non compliance operates through RBI inspections and centralized monetary penalties by the Enforcement Department, with FIU IND empowered to impose penalties under PMLA following inquiries. Material deficiencies flagged in supervisory reports may be escalated to EFD for penalty imposition. Concurrently, RBI Master Directions require banks to report significant frauds to law enforcement, maintain special monitoring committees, provide quarterly reports to the board Audit Committee, and conduct annual fraud reviews, covering prevention, detection, remedial action, investigation monitoring, recovery and staff accountability.