While countries that are part of the global Financial Action Task Force (FATF) network continue to make their financial systems safe and secure against money laundering and terrorist financing, the policy makers need to be mindful that their measures are not overzealous and do not stifle legitimate activities and investments, said RBI Governor Sanjay Malhotra.
“You would all appreciate that multiple laws and regulations, each with their own level of granularity, cause a very high level of burden on the regulated financial system providers. This is relevant in the context of AML (anti-money laundering) and CFT (combating the financing of terrorism) 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,” Mahotra said in his address at the FATF-Private Sector Collaborative Forum.
Similarly, while making (AML/CFT) policies, it is important to have very precise and balanced regulations. The Governor emphasised that it is equally important that while we are implementing them, the policy makers keep the impact that they are going to have on the person and the businesses in mind.
In this regard, Malhotra recommended a risk-based approach. He asked the policy makers to keep in mind that there is only one step forward in the direction of reducing compliance burden — by being able to pinpoint the suspicious and the dishonest.
“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 and make them more robust,” he said.
While making improvements in the risk assessment models, policy makers need to improve two things — quality of the data they get and ablility 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 screening of transactions and detection of suspicious activities, thereby reducing errors, false positives, false negatives.,” the RBI Chief said.
Malhotra observed that considering the evolving landscape in the area of money laundering, resulting from changing customer behavior and evolving products and services, policy makers 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.
He underscored that the focus has also to 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 preemptive action.
“With the adoption of new technology, tools and models, I am sure that the AML-CFT risk assessments can be further fine-tuned and refined,” the Governor said.
