After a series of reported violations, Paytm faces the possibility of losing its Payments Bank license, with concerns over money laundering and KYC breaches prompting the Reserve Bank of India (RBI) to alert the Directorate of Enforcement (ED).
These infractions, flagged by the banking regulator over recent years, have rightfully put the fintech services provider under scrutiny.
Moreover, according to sources, the Home Ministry has raised alarms with the Prime Minister’s Office regarding security apprehensions associated with the flow of funds to and from entities linked to China.
A person privy to the details highlighted, “Concerns regarding gross violations of anti-money laundering provisions and KYC norms have been brought to the attention of the ED.”
They added, “Large sums of money were being transferred between multiple accounts without proper KYC verification; hundreds of thousands of prepaid cards were issued without adequate KYC, facilitating the transfer of substantial funds.”
RBI’s investigations also revealed instances of data breaches, with information being exchanged between the payments bank and One 97 Communications.
In a directive issued on January 31, the RBI instructed Paytm Payments Bank to halt all basic payment services across various platforms and technological channels, including the Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Aadhaar-Enabled Payment System (AEPS), as well as bill payment transactions, effective from February 29.
The individual emphasized that the disregard for regulations is a grave matter, potentially leading to the cancellation of the entity’s banking license.
Unlike in the case of cooperatives, the RBI lacks the direct authority to supersede a payments bank, as such action would necessitate government approval. Similarly, the appointment of an administrator is unlikely to resolve the underlying issues, according to sources.
“Senior officials from Paytm held discussions with the regulator in January, during which they were instructed on the necessary course of action. The measures taken earlier this week serve as a warning to the company to rectify its conduct. Should there be no improvement, more severe actions may be considered,” another source noted.
It was asserted that RBI couldn’t afford to delay taking action due to the potentially severe consequences.
“The RBI’s intervention stemmed from the company’s inability to rectify certain deficiencies despite previous regulatory measures in March 2022,” stated the second source cited earlier.
In March 2022, the regulator prohibited the Noida-based company from enrolling new customers and mandated the appointment of an external auditor.
During a 2022 RBI inspection, it was discovered that many compliance reports submitted by the payments bank did not meet requirements, and in some instances, contained inaccurate information.
Allegedly, the banking regulator also uncovered violations of the Prevention of Money Laundering Act, resulting in the bank being restricted from accepting fresh deposits, as per the source.
Established in 2017, Paytm Payments Bank capitalized on its success following demonetization.
This recent regulatory intervention marks the third instance of action against Paytm. In 2018, the RBI instructed its payments bank to cease customer onboarding due to issues with its KYC procedures. The restriction was lifted in January 2019.
Breaches Accumulating Over Seven Years
The sudden and unexpected regulatory action that halted operations for Paytm Payments Bank (PPB) on January 31 had been brewing over the past seven years since its inception, as revealed by multiple sources.
Complaints regarding violations of banking compliance norms, including issues related to money laundering, conflicts of interest, maintaining independence from the parent company, weak processes leading to fraud, and breaches of licensing agreements, have allegedly been mounting over time.
“This isn’t a recent development because the bank has been repeatedly cautioned and urged to address its shortcomings for years, yet failed to do so,” stated an individual familiar with the situation. “It wasn’t just isolated incidents; there were numerous issues.”
According to the sources who requested anonymity, when the Reserve Bank of India (RBI) prohibited PPB from offering banking services such as accepting deposits and processing payments, it was accompanied by a lengthy list of accusations against the bank.
Among these alleged violations was the failure to comply with know your customer (KYC) norms, a fundamental requirement for any financial services firm.
Proper KYC checks were reportedly not conducted for hundreds of thousands of customers, and many accounts were operated by individuals who had faced penalties or legal actions from enforcement agencies.
In a particularly egregious case, it was discovered that an account associated with a single Permanent Account Number (PAN) was managing over 1,000 wallets, indicating a significant lack of oversight. While payment wallets are typically intended for small transactions, some contained balances totaling millions of rupees.
Furthermore, the bank was found to be in contravention of policies set forth by the Financial Action Task Force, an organization established by the G7 to combat money laundering and terrorism financing.
The bank’s procedures were also found to be in violation of the Prevention of Money Laundering Act.
Additionally, Paytm Payments Bank lacked adequate systems and processes for regularly submitting reports to the Financial Intelligence Unit, a routine practice expected of all financial institutions, especially banks, to detect and prevent money laundering.
In 2018, subsequent to inspections uncovering various violations, the RBI imposed business restrictions on Paytm Payments Bank as a cautionary measure, instructing it to establish systems to adhere to banking regulations.
During a regulatory inspection in 2022, inconsistencies were discovered in the compliance reports submitted by the bank. However, at that time, the regulator indicated that there was potential for resolving these issues.
Nevertheless, later that same year, the RBI prohibited the bank from enrolling new customers, and an external auditor was engaged to scrutinize its processes. External auditors identified deficiencies in compliance within the bank.
According to banking licensing standards, each bank is required to develop and manage its own technology systems independently from other entities within the group. However, in the case of Paytm Payments Bank, the parent company, One 97 Communications, served as the technology support provider.
“This seemingly resulted in a breach of data confidentiality, as banks are mandated to ensure that no external entity has access to their data,” remarked one individual. “There should be no resource-sharing, yet it appears they have done so.”
Furthermore, regulatory inspections revealed transactions between the bank and One 97 Communications, as well as exchanges of information that favored the publicly listed parent company at the expense of bank depositors.
The Viewpoint – SEBI Fails Each Time
The regulatory failures evidenced by instances like the Karvy Stock Broker scandal, the recent Paytm debacle, and the infamous Satyam Computers fiasco raise serious questions about the effectiveness and competence of SEBI as a regulatory body.
It seems that despite clear indications of violations and malpractices, SEBI has consistently failed to act decisively and in a timely manner.
One cannot help but wonder: where was SEBI while these violations were festering unchecked for years?
Were there no audits conducted on KYC procedures, or were they simply overlooked?
It appears that while fraudsters remain highly adept at exploiting every possible loophole, regulatory authorities like SEBI lag miles behind, leaving investors and the financial ecosystem vulnerable to exploitation.
The consequences of these oversights are dire, with substantial damage already inflicted on investors and the broader economy.
In the face of such systemic failures, one cannot help but question how the country’s economy manages to function amidst such rampant fraud and regulatory ineptitude.
