Tightening noose around money laundering: RBI orders demand drafts must have name of purchaser from 15 September

That the Modi government has been tough on black money is conceded, albeit grudgingly, even by its detractors. The Reserve Bank of India (RBI) too has thrown its weight behind these efforts with the latest one being making demand draft (DD) fool-proof insofar as money laundering is concerned.  Come 15 September 2018, a purchaser of DD (be it DD simpliciter or its variants banker’s cheque and pay order) should furnish his name which presumably would include his address and Aadhaar or any other identifying number as well.

A buyer of DD is untrammeled by any requirement so much so that often a person walks into a bank and buys a DD for say Rs 1 lakh by depositing cash with the bank not losing sleep over it on the smug ground that it is, after all, getting its fees.

As it is too, the DD bears the name of the payee alone.  From 15 September 2018, the purchaser’s name too would figure on it with his address and identity details being relegated for preservation in branch’s records.

Indeed, DD has been a fecund mode of money laundering. Long ago in 1995, the Delhi High Court was petrified in Sofia Investments case to find as many as 35,000 demand drafts issued by a branch located in a remote location all consecutively numbered in favor of a company as a subscription to its initial public offer (IPO).

In those days, Know Your Customer (KYC) norms were practically non-existent which made promoters smirk and convert their black money into white with singular nonchalance through the DD route.  IPOs lent themselves as an excellent opportunity for this stratagem.  But even larger DDs are made thanks to their easy and untrammeled access with the sole aim of laundering black money.

 Tightening noose around money laundering: RBI orders demand drafts must have name of purchaser from 15 September

Representational image. Reuters.

A bank's indifference was rooted in a simple logic---after all, it has already received the consideration and it is the bank which is from now on responsible to the payee who should be indifferent as to who the ultimate purchaser is.  Such indifference or banking apathy has to go now.

It is likely that the detailed circular would require banks to not only mention the name of the purchaser of the DD on its face but also to mandate production of Aadhaar or another identity document as a precondition for being eligible for purchasing it.  Banks would presumably be required to preserve the identity details of the purchasers just in case.

Of course, any crackdown also catches innocent in the crossfire.  Therefore, even a housewife who goes to get say a DD made in favor of the college where her ward is studying will have to be armed with her Aadhaar card.  It would be so much easier for both her and the bank if she shops for DD with the branch she has her KYC compliant account with because the bank, in that case, can easily link the purchaser with her account wherefrom it can mine all her identity details in a crunch situation.

To the government’s and the RBI’s credit, they have been harping upon digital payments that are conducive to ease of making payments any day.  For example, the housewife in our example can instead of hot-footing to her bank branch for the DD can make a NEFT (electronic payment) to the college if it is agreeable.

Electronic payments are not only convenient for both the payer and the payee but more importantly also leave a permanent and more durable trail.  Crooks fight shy of digital or electronic payments precisely for this reason.

It is strange that while anyone depositing cash in excess of Rs 50,000 into a savings account has to mention his permanent account number (PAN), purchase of DD for even staggering amounts is unhampered by any such safeguard. What is more, DDs can be made by crooks in multiple names not only to get maximum allotments in IPOs under the retail category but also to split the unaccounted money in multiple names to avoid income tax and tax sleuths.

The taxman and the RBI would perhaps soon come up with software that flag DDs of high magnitude either singly or in multiple names made by a single person or from a single address.  That would provide useful grist to the taxman’s mill.

(The author is a senior columnist and tweets @smurlidharan)

Updated Date: Jul 13, 2018 12:39:43 IST