Apparently, even the combined veracity provided by an Aadhaar number, a PAN number and a bank account do not carry enough weight to completely satisfy the Government of India that a mutual fund investor is not a fake identity that is being used to launder money. You could have the first two, and on top of that you’d be investing and redeeming through a bank account, and even then you are permitted to invest only Rs. 50,000 in a year.
That’s what the new eKYC norms announced by Sebi say. e-KYC means that a ‘Know Your Customer’ exercise is conducted remotely through the internet, using an Aadhaar interface provided by the UIDAI and a PAN card interface provided by the Income Tax Department. If you have identified yourself through an e-KYC and wish to break through the Rs. 50,000 limit then you must go through an ‘in person KYC’. And what is an inperson KYC? It entails someone -either from your fund distributor or the registrar -being given the self-attested copy of your PAN card, your identity and address proofs. Sometimes, they glance over the originals.
Once this is done, the Rs. 50,000 limit is gone and you can invest any amount.
Just think about what is going on here. What’s the ‘threat model’ that this process is protecting against? It protects against money laundering by someone who has the wherewithal to get a fake Aadhaar identity set up (with the iris scan and biometric database and all), get a PAN card made for this fake identity and is able to get a bank account opened for it. Having done all this, this resourceful and accomplished fraudster then proceeds to commit what dire crime?
Why invest in a mutual fund, where all investments must be made and redeemed through a bank account, and are therefore traceable! Smooth and all-digital registration of KYC is one of the key facilitators of the wide expansion of investments. In fact, it is one of the key inputs to encouraging the shift from physical to financial assets. And yet, this is the best that the rulemakers are willing to do to make the process smoother. One thing should be clear from what I’ve pointed out. The tradeoff here is not with actually preventing money laundering. Instead, it’s with pretending to do so. This whole in-person KYC is an example of a mindless bureaucratic procedure which has no real impact on actually achieving its purported goal.
There’s this term ‘security theatre’, which was coined by the American security expert Bruce Schneier to describe the huge increase in meaningless security rituals since 911. Similarly, this KYC business has become a kind of regulatory theatre.
Aadhaar was supposed to be a universal KYC for all residents of India. The government has already made schemes involving tens of thousands of crores on it. However, now, it turns out that Aadhaar cannot be trusted for any except low value investments, even when combined with PAN numbers and a bank account.
As I’ve written earlier, more dif ficult KYC processes act as a deliberate filter for keeping away low-value customers. This is effectively a tool of financial exclusion. KYC seems easily done for an affluent investor or a government officer, but for the saver on the margin, it creates enough friction that for a certain number, the investment never gets done.
At a time when financial inclusion has rightly been identified by the government as a major area of ocus, the e-KYC limitations appear to be a needless obstruction.
On top of the problem of new savers, an all-digital KYC will also be a huge convenience for existing investors when they are asked to go through one of the periodic re-KYC exercises that have now become routine.