If KYC is good, then more KYC must be better, right? | Value Research Triggered by FATCA and CRS requirements, a new and expanded KYC requirement is on its way
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If KYC is good, then more KYC must be better, right?

Triggered by FATCA and CRS requirements, a new and expanded KYC requirement is on its way

Last week, I wrote about the inability of Indian mutual funds to offer quick all-digital onboarding of new customers. New investors have to compulsorily go through a KYC (Know Your Customer) physical verification, which takes several days. This is the case even if the customer is investing from an Aadhaar-linked bank account and the bank account has a proper KYC.

However, things are going to get worse, even for existing customers who have have already gotten their KYC done. Investors are going to fill in more forms with their personal and financial information. What's worse (and different from current KYC) is that each fund company that you have invested through will do this separately. What's even worse--to the extent of being farcical--that the same information will also have to be given to banks and insurance companies that you are a customer of. While the government has put into place the law and the regulations to obtain this additional information, it has--as one has come to expect--done so in a way to maximise the inconvenience caused to citizens by ensuring that a lot of useless, duplicate activity has to be carried out.

The starting point of this problem is the notorious American FATCA (Foreign Account Tax Compliance Act) law.FATCA makes it effectively compulsory for all almost financial institutions in the world to report to the US Government comprehensive details of all transactions involving it calls 'US persons'. Legally, the US Government has no authority to enforce this but if a financial business doesn't collect and report this data to the US government, then it or its connected (group) businesses would find it impossible to operate in USA, or even transact with any US entity. 30 per cent of any US assets may also be confiscated. Practically speaking, this makes the whole world an unpaid tax collector for America. India has signed a pact with the US to facilitate this data collection, as have dozens of other countries

As is evident from the additional KYC forms being sent out by Indian financial companies, FATCA is not the whole story. There's also what's called the Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI), under which the G20 and the OECD countries have agreed to exchange information on taxpayers. In the FATCA and CRS section of these forms, those who have any foreign tax liability, will have to fill out those details. Of course, the vast majority of Indians won't have anything like this but they too will have to certify that they don't.

However, in these forms that you will have to fill out, there's a mandatory section in addition to the FATCA and CRS sections, which is called 'Additional KYC Details'. This section is home grown and not imported like FATCA and CRS. It seeks to know the occupation, the net worth and whether you are a PEP (politically exposed person), or related to a PEP. This has to be done even if you have no foreign tax exposure.

Of course, this goes way beyond mutual funds. If the legal requirements are followed to the letter, then every bank account holder, mutual fund investor, equity investor, insurance policy holder, Tier 2 NPS member and many others will have to be subjected to this exercise. Many will be exempt for some reason, but that will have to be verified by a process done with due diligence.

This will be a massive exercise. Of course, one can't argue with the stated goals of this exercise. Higher tax compliance and global cooperation between tax collectors should be a good thing. However, it's quite clear from what is happening so far is that The process makes no allowances for optimising the effort that citizens have to make. All FATCA-CRS-KYC forms that you will fill in will have identical information, but you will still have to fill in one for each financial institution you are a customer of. This is the same problem that took close to a decade to solve in the case of the original KYC triggered by the money laundering act. Now, it will start all over again.


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