Tighten KYC norms to enhance due-diligence on P-Notes: Hala Bou Alwan

In the wake of the signing of an amended taxation treaty between the governments of India and Mauritius, Hala Bou Alwan, head of risk market development at Thomson Reuters, the multinational mass media and information agency, has some additional suggestions. Edited excerpts of a talk with Rajesh Bhayani:

India has seen a good amount of investment in the securities market through participatory notes (P-Notes), where transparency about ownership has always been an issue. Globally, how are such issues addressed?

The answer to this is in the definition of  Namely, financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. The question here is to what extent we know about this non-registered investor.With the global regulatory pressure and massive increase of laws, treaties and other regulatory enforcements, some countries are taking steps to address this menace. It differs from region to region, depending on the enforcement they have in place. However, Know Your Customer (KYC) norms need to be tightened and India should consider setting clear guidelines and processes to enable enhanced due-diligence on such investments, due to their nature.

A KYCC — Know Your Customers’ Customers — trend is also emerging; also, know your customers’ businesses and suppliers. These would provide more in the direction of finding the ultimate beneficiary owners (UBOs) in that business.

Cases of wilful defaults (on bank loans) are rising in India? How big a problem is this globally and how are authorities handling it?

Globally, there are many cases where companies were found to have set up parallel companies elsewhere as a back-up offshore establishment. If anything goes wrong in their domestic operations, their business can be handled from that offshore company, an escape plan. Also, sometimes we see onshore shell companies as the main business image, a fake operation to cover the real and illegitimate one, despite all documentations being legal, such as trade licence, board resolutions, etc. The authorities need to check the commonalities in such companies, whether shareholders or owners are common or have links. They should try to get Ultimate Beneficiary Owners’ detailed processes.

Globally, there should be collaborative efforts to identify wilful defaulters or those found engaged in money laundering, bribery & corruption, dealings with illegitimate funds & the set-ups of back-up companies in regions where local laws support this with secrecy, as with Switzerland, Virgin Islands and so on. Of late, domestic regulators have started checking with international ones and investigating agencies about commonalities in ownership of such defaulters having companies elsewhere. However, that type of regulatory co-ordination is in too early a stage.

Doing business from tax havens is not new. Still, the recent Panama Papers exposure has thrown open a risk area. How serious a turn could this issue take?

The Panama Papers case stressed again on the importance of identifying the UBO. The Panama Papers confirmed the risk of using offshore companies, activities and other layers to hide the ultimate beneficial owners of companies and funds for the purpose of tax evasion, bribery, money laundering and many other illegitimate activities. It should be taken as a lesson learnt, to be pro-active and not, as in many cases, where firms fail because of a too-late reactive attitude.

Cases and complains about funding to terrorist organisations are rising. Is there a mechanism to check that?

As a general overview, the UN, EU, OFAC, FATF and many others sources have identified certain types of activities as of a high-risk nature, needing additional monitoring and enhanced due-diligence. Charities, donations for religious organisations, public good causes, precious gemstones, gold and diamonds and such other activities always require extra monitoring processes. Apart from that, activities of PEPS (politically exposed persons) are also carefully scrutinised, as they can potentially influence business decisions. In addition, there are bans in many cases on dealings with certain jurisdictions and entities.

In many terrorist funding activities, banking channels are used heavily. What needs to be watched are the layers being created to hide where the fund is finally flowing. All these mechanisms are about proper due-diligence and not passive ones to only satisfy a regulatory requirement. Regulators and regulated entities, both, should have the common belief that monitoring programmes, plans and diligence processes are for the better of the organisation and for the nation itself, as once reputation is damaged, it’s very hard to repair.