The effect of Demonetization in India and the role for Anti-Money Laundering Systems

Written by Kapronasia || January 02 2017

The recent move by the Indian Government to ban the old Rupees 500 and 1000 notes has created turbulence far beyond what was imagined and planned for. The intent was laudable, as the Indian Prime Minister Narendra Modi sought to curb growing corruption in the economy. However, the lack of preparation on part of the central bank, the Reserve Bank of India (RBI), and the commercial banks has meant that the citizens have been left in the lurch.

After more than 50 days, queues at bank branches and ATMs are still common and the people are struggling to come to terms with the requirements. Against this backdrop, the Government has changed its tack and is now claiming that the move was not just meant to handicap corrupt individuals, but also to increase digitalization in the Indian economy. It has spoken about how there have been a slew of measures since February 2016 that have all worked towards improving the levels of automation in the Indian banking system and financial markets. While there is some truth in this claim, the fact remains that the demonetization process has been more like a crash landing as opposed to the smooth one that the Government is claiming it to be. More importantly, the act in itself does not guarantee the move to a digital economy. A lot more needs to be done for that to happen.

Our present focus is, however, on a related matter. The leading banks have protested that there has been pressure on them from the government and the central bank to ensure that any abuse of the banking system to launder money is caught. They have complained that they have enough on their hands and do not want to be burdened with policing the system as well. We accept that the pressure on banks in the current environment is quite unprecedented, even by global standards. Nevertheless, there remains a duty on their part to monitor the account transactions and report any suspicious activities to the Government.

In what is an increasingly computerized and automated environment, monitoring of banking transactions can be undertaken using some of the leading anti-money laundering (AML) software that is available today. There are several Indian and global vendors that cater to the requirements of banks in this regard and it is imperative that Indian banks, big and small, take this opportunity to bring their systems in line with the requirements of not just the Indian Government and the RBI, but those of a fast-growing and dynamic economy which is quite open to embracing new technology as a means of advancement and empowerment. Such AML systems would allow banks to automate their capabilities and create an audit trail that would help meet their regulatory and compliance requirements. They would also help the central bank in its regulatory role through faster access to data.

Small and medium-sized banks also have price-competitive choices available to them and do not need to fear any disruptions due to acquisition and implementation costs. In most cases, the new software or module would integrate seamlessly with the existing systems of the banks and hence can be adopted quickly.

In the course of the next few months, Kapronasia will produce research to cover offerings of the leading AML vendors serving the Indian and Asian banking space to help banks develop a better understanding of the various options on offer.