Kick Your Customer (KYC) Harder

The Supreme Court's black-money SIT has suggested an expansion of KYC which will cause further hardship for the honest tax-payer

India's indefatigable Know (actually, Kick) Your Customer (KYC) industry, one of the prime examples of mistaking repeated activity with actual achievement, has just received a massive shot in the arm, this time from the Special Investigative Team (SIT) on black money appointed by the Supreme Court. According to news reports, the SIT has recommended the setting up of a centralised KYC registry which should subsume the myriad KYC activities being carried out by a variety of organisations like banks, mutual funds, and others.

The idea behind a central KYC is that currently, people are identified in different types of transactions or activities by different set of documents. These include passports, election cards, aadhar numbers, PAN numbers, ration cards and many others. It isn't possible to link non-overlapping sets of identifying documents and this forms a weak point in discovering if the ultimate beneficiary in different activities is actually the same. Therefore, the new idea is that there should be a central registry which can link people across all possible forms of identification so that there can be certainty that, for example, someone owning X property is the same as the one who has Y passport and Z PAN number.

At first sight, this sounds great, a perfect solution to the problem of black money. Or at least it must be sounding great to those whose role is to demand that KYC be done by all. However, if you are one of those who has been at the receiving end of this KYC business, then you would have read this news with alarm. Over the last few years, financial services providers like banks and mutual funds have regularly KYCed and Re-KYCed their customers, without any explanation and generally at great inconvenience to the customers.

Based on past experience, an exercise which seeks to combine information for all possible identifying documents that you might possess is absolutely certain to be a hellish experience for customers. Like all such exercises, it will effectively end up punishing honest, law-abiding citizens while being no more than a minor inconvenience for those engaged in serious money laundering. One of the most hostile characteristics of all KYC and reKYC exercises that I have personally witnessed (including my own, my family members, and of people I know) that they are never done proactively, but forced at the last possible moment by blocking the customers' transactions. You have a fixed deposit or a mutual fund investment and you try to redeem it, you are told that you need to be reKYCed because some KYC-related regulation has changed. Already, most customers of financial service providers have been KYCed twice or thrice. This new central KYC is certain to be yet another round, only far more difficult for customers because that is the goal of the exercise, more or less.

An even worse side effect of this KYC rigmarole has been that it has effectively worked as a financial 'exclusion' tool, often deliberately. The less moneyed an individual is, the more difficult it is for her or him to satisfy KYC requirements. In the theory believed by those who make KYC rules and regulations, this shouldn't happen, but as a practical matter, it inevitably does. This fits in nicely with many financial service providers' unstated goal of focussing only on richer customers. They--and the biggest culprits here are private banks--have long used KYC requirements as one of the tools to keep out less prosperous customers.

The main problem with KYC is that when you see it in the context of the actual contours of India's black money problem, much of this activity is useless. While a large mass of people may have small amounts of unaccounted money, there is a strong form of the Pareto principle at work here. There are a relatively small number of people who have a lot of unaccounted money who have the means to work their way around it. A more draconian KYC process just imposes an unproductive cost on a large mass of people. Treating everyone as a potential thief while doing nothing about real estate--which is the main form of investing and growing black money--is unconscionable.