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Jan Dhan A/Cs vulnerable to fraud, can be misused by money mules: RBI

Reserve Bank deputy governor S S Mundra said banks should have a proper mechanism to monitor transactions in these accounts. “The newly opened accounts under the PMJDY (Pradhan Mantri Jan Dhan Yojana) could be very vulnerable to fraud practises. Banks need to clearly guard against misuse of these accounts from money muling,” Mundra said at an event here on Monday.

He said third parties can be used to launder the proceeds of fraud schemes (such as phishing and identity theft) by criminals who gain illegal access to deposit accounts by recruiting them as ‘money mules’.

Mundra highlighted a recent case where an idle account was used for receiving and transferring large funds without the knowledge of the accounts holder. “It was an account of a daily labourer in Punjab and the account was opened as a basic one where there is limitation on number of transactions. This amount of transaction was of Rs 1 crore,” he said. The case came to light when the income tax authority served the notice to the account holder.

“This episode highlights the failure of the banks system and processes for monitoring of newly opened accounts,” he said. “What we are observing of late is that while the standard and the vigour of Know your customer (KYC) has become quite good at the time of opening of the account, but the same is not observed in the continuous surveillance or continuous watch over the transactions in these accounts,” he said.

The deputy governor said at present though the banks have some alerts and exception transaction mechanism, it is mostly primitive and generally in effective. Banks should have robust system to monitor such accounts and the transactions being made therein for taking proactive actions which entails a better customer protection, he said. Mundra warned if banks fail to take proactive measures to stop such transactions, it could face some action from RBI as well as other enforcement agencies.

“Failure to guard against misuse of customer accounts, might result in banks incurring supervisory sanctions and enforcement action from the RBI. It can have the money laundering angles and there could be action from the various enforcement agencies as well,” he added. Moreover, the Reserve Bank is examining limiting a customer’s liability in banking frauds and will soon put in place a framework for the same, Deputy Governor said.

“RBI is already examining whether to issue regulatory direction with regard to limiting the liability of customers on fraudulent transactions arising out of frauds and electronic banking transactions,” Mundra said at an event organised by the Banking Codes and Standards Board of India (BCSBI) here. The objective of BCSBI is to plan, evolve, prepare, develop, promote and publish comprehensive codes and standards for banks and provide fair treatment to customers.

“The idea is that the liability for the customer should not go beyond a point,” he made it clear. The discussion, according to the deputy governor, centred on fixing the limit is on and a framework will be announced soon. “We are discussing this and once we finalise, the limit will be announced. We expect to finalise it very shortly,” he later told reporters.

Mundra said that with the increase in online transactions, there has been a rise in complaints related to electronic banking transactions, unauthorised fund transfers, fraudulent withdrawals from ATMs using duplicate cards and phising e-mails, among others.

“It is imperative to have a robust mechanism to prevent incidents of frauds in mobile net banking and the electronic fund transfer so as to retain customers’ confidence in these delivery channels,” he said.
The deputy governor highlighted benefits of such channels from the banks’ perspective faced with the challenge of competition and the need to improve customer base. But at the same time, raising customer awareness for safe usage of these channels should be an important item on the agenda of the banks, he emphasised.

“... if customers don’t get confidence in the channels and decide to abstain from them, then it can have only two outcome - either customer would migrate or customer would come back to the traditional channel which would mean higher operating cost for the banking system,” he reasoned.

RBI is also concerned about the mis-selling of products by banks. “There has been an increasingly large number of cases of mis-selling of third-party products to customers by the banks, particularly insurance products, including bundling of third-party products with loans,” he said. Mundra further said the RBI has undertaken study on mis- selling of third-party products by banks in semi-urban and rural areas and the results are very startling. He slammed banks for totally ignoring or rather knowingly violating the ‘Right to Suitability’ enshrined in the RBI’s Charter of Customer Rights in an attempt to mis-sell products to customers.

Under the Rights to Suitability Charter, the products offered by the banks should be appropriate to the needs of the customer and based on an assessment of their financial circumstances and understanding.

“RBI is seized of this issue and may take a strict action, including heavy penalties, if the banking industry continues to follow such unethical and unaccepted practices of mis-selling of third-party products,” Mundra warned. He advised banks to put in place a system of periodic inspections of the sale of third-party products by either own staffs or by direct selling agents (DSAs). The deputy governor said the RBI has recently undertaken a survey of 4,000 ATMs of various banks in the country and found the results to be not so comforting. 
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