Shadow of KYC-led money laundering falls over Paytm Payments Bank

Payments bank says it has upheld compliance with supervisory instructions

Large-scale violations of know your customer (KYC) norms, leading to money laundering concerns, have prompted the Reserve Bank of India (RBI) to clamp down on Vijay Shekhar Sharma-led Paytm Payments Bank earlier this week, sources in the know said.
 

There were other concerns too, such as not maintaining arm’s length with promoter group One97 Communications Ltd (OCL), not disclosing payments to promoters, false sub­­m­i­ssion of compliance, and an overall sense of complete disregard for compliance and transparency.
 

On Wednesday, the RBI had barred the payments bank from most operations, including taking deposits and fund transfers with effect from March 1, 2024. Earlier, in March 2022, the RBI had directed Paytm Payments Bank to stop on-boarding new customers over KYC violations and appoint an audit firm. Sources pointed out that no serious action was visible on the part of the bank even after the audit report.
 

According to sources close to the development, major irregularities were found in the KYC process which potentially put customers, including depositors, at risk. There was absence of KYC in a large number of accounts running into lakhs, PAN validation failures in lakhs of accounts, and there were thousands of cases where a single PAN was linked to over 100 customers, and in some cases more than thousand customers.
   

Total value of these transactions was estimated to be worth crores of rupees.

In addition, there were transactions in minimum KYC pre-paid instruments which were beyond the regulatory limits. That raised money laundering concerns, sources said.
 

Unusually high numbers of dormant accounts, which could have been used as mule accounts, too was a reason for concern. Deficiencies in the KYC process and lack of transaction monitoring system added to the money laundering concerns. Accounts and wallets running into lakhs were frozen by law enforcement authorities, allegedly due to committing digital frauds.
 

On not maintaining arm’s length, sources said that Paytm PB’s financial and non-financial businesses were co-mingled with the promoter group companies in violation of licensing conditions. It was observed that the payments bank was totally dependent on OCL’s IT infrastructure and there was no operational segregation. Many transactions were routed through OCL-owned applications, triggering concerns around data privacy and data sharing.
 

There were instances when compliance submitted by the bank was found to be false when verified by external auditors of regulatory supervisors, sources said.
 

Paytm PB was also found to be not disclosing intra-group and related party transactions in the financial statements.

Sources said the actions of the company indicated complete disregard for regulatory standards and compliance requirements, raising serious concern over the group’s commitment to principles of transparency.
 

While responding to a Business Standard query on the above concerns, a Paytm Payments Bank spokesperson said: “The recent direction from RBI is a part of the ongoing supervisory engagement and compliance process. The bank always upheld compliance with supervisory instructions in its interactions with regulator from time to time. We therefore request you to be guided by the press release of RBI dated January 31 and refrain from any further speculation.”
 

Paytm PB, which received its licence in January 2017, started operations in May of the same year. Within a year of commencing operations, they were found in breach of norms regarding end of the day balances in customer accounts, apart from non-compliance with KYC norms and non-maintenance of arm’s length in business transactions with its group entities. The RBI imposed restrictions in opening accounts in June 2018 and then lifted in December 2018 based on compliance undertaking by the bank.
 

However, towards the end of 2021, the RBI again found KYC-related  violations. Those deficiencies continued despite the regulatory engagement with the bank. As a result, in March 2022, RBI imposed supervisory restriction on Paytm PB to stop on-boarding new customers. The latest missive from the RBI earlier this week meant closure of almost all operations for the bank.

WHAT PROMPTED ACTION

• Major irregularities in KYC, exposing customers to serious risk

• Absence of KYC for very large number of customers

• PAN validation failures in numerous accounts

• Single PAN used for multiple customers

• Unusually high number of dormant accounts, prone to be used as mule

• Lack of transaction monitoring system

• Compliance submitted found false upon verification

TROUBLED JOURNEY
 

• Paytm Payments Bank receives licence in Jan 2017; ops start in May 2017

• Within a year, found non-compliant with end of day balance in customer accounts

• KYC violations, not maintaining arm’s length with parent observed in first year

• In June 2018, RBI bars it from opening new accounts; lifts curbs in Dec 2018

• In 2021, KYC anti-money laundering violations observed

• In March 2022, RBI stops onboarding new customers

• In September 2022, ED raids in Paytm Payments Bank, Cashfree, Razorpay as part of an ongoing probe in connection with the Chinese instant loan app case

• In January 2024, NHAI arm bars Paytm Payments Bank from issuing fresh FASTags and taking up new toll plazas due to non-compliance with certain norms