Non-Adherence to Operational Risk Management Guidelines under Basel Committee on Banking Supervision Norms

Abstract

India has a daunting challenge of keeping its financial system intact from the emerging signs of impending global crisis. When it comes to the BFSI domain (banking, financial services, insurance), the coordination between regulatory and independent bodies in sharing the financial intelligence is crucial. FIU-IND is an independent body under Finance Minister which work in close cooperation with Reserve Bank of India. This paper pertains to a case related to Axis Bank Ltd, India’s third largest private sector bank wherein heavy penalties were imposed on it on account of the deficiencies in the operational processes followed by the bank. The role of FIU-IND is laudable where the authority has highlighted the irresponsible behaviour of the bank and set a benchmark for others for complying the provisions as per Basel III. Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision due to the emergence of financial crisis during the 2007-09 period. Basel III norms play a crucial role in strengthening the regulation, supervision and risk management of banks at a global level. Banks and financial institutions (FIs) in India need to comply with defined processes for customer identification while establishing a relationship like opening of accounts and for keeping a regular watch on the transactions which are of suspicious nature. These are known as KYC (Know Your Customer) guidelines. Reserve Bank of India through its Master Circular on Know Your Customer (KYC) norms dated July 1,2015 under PMLA (Prevention of Money Laundering Act), 2002 has revisited KYC guidelines. The term "Officially Valid Documents" (OVD) has been introduced which can be a passport, the driving license, the Permanent Account Number (PAN) Card, the Voter's Identity Card issued by the Election Commission of India, Job card issued by NREGA. All these documents are photo identity proofs and have been introduced as part of KYC in order to keep a check on money laundering transactions.