Why Unregistered Associations Are Able to Open Bank Accounts — and Why RBI or Government Authorities Are Not Acting?

Unregistered apartment owners’ associations—particularly those formed without registration and without provision of law under the Karnataka Apartment Ownership Act (KAOA), have no juristic status, yet several banks still allow them to open accounts. This practice directly violates the RBI Master Direction – Know Your Customer (KYC) requirements, which mandate strict verification of the legal existence and authorization of any “non-individual customer.” But sadly RBI/ED and other authorities are silent? The Master Directions are confusing and mostly none of the Bank managers are knowing the RBI Master Directions. Under the RBI Master Direction – KYC, updated periodically, but they have ignored it in the name of encouraging economy without knowing that any economy founded on corrupt practices can not sustain for long time. It seems the leaders are under wrong notion that there is a real estate boom not knowing it is the bad money landing in construction industry. RERA 2016 was brought in to monitor and control this industry. The industry has grown so big that  RERA 2016 seems inadequate for controlling this industry. India has plenty of laws likewise RBI also has issued directions but failed to implement it as usual. As per that RBI KYC Master Directions mandate that the banks must obtain:

• Registration certificate
• Constitution documents (bye-laws, memorandum, rules)
• List of office-bearers
• Proof of authority to operate the account (resolution)
• Documents to establish the legal existence of such an association.

Banks are required to deny accounts with defective/inadequate documents. Knowling well there is a fraud , banks close their eyes like Ostrich and sometime defend these illegal accounts knowing well that they will not be punished or punishment will be inconsequential. RBI prescribes a zero-tolerance standard-“No account shall be opened unless the bank is satisfied that the entity legally exists.”. Yet, banks ignore this when opening accounts for unregistered apartment associations. Banks Are Opening These Accounts Illegally relying on the following

• Self-declared letters from Resident Welfare Associations (RWAs),
• Unauthenticated minutes,
• Google-group membership lists,
• Society letters without registration numbers,
• Katha extract copies,
• Builder handover letters,
• Deed of Declaration documents

None of these are recognised as constitutive documents under the KYC Master Directions. Banks Allow it improve business in view of the pressure to retain deposits from large apartment complexes. Sometime they are unaware and misunderstand the legal requirement—bank staff assume an “association” is automatically valid. There is absolutely no fear of penalty for violators because the enforcement is very very weak. Banks treat associations as private clubs, not real entities—completely wrong in law. This results in fake entities controlling crores of rupees, signing maintenance contracts, and acting as if they are legally empowered bodies. RBI Acts Only Through Written Complaints With Evidence. RBI’s Banking Regulation Department takes action only when a complainant provides for account numbers, details of KYC violation, and copies of documents used to open account. Most complaints sent to RBI are general, not specific. But in this case specific complaints have been submitted. RBI Depends on Banks’ Self-Certification. Under the KYC Master Directions, the banks audit themselves and record everything to be correct to avoid loss of Customer. Moreover those who audit these accounts don’t even know the Directions and the law to identify the violations. RBI rarely undertakes customer-specific KYC investigations to support the banks under the political pressure and sleep over the violation even if they know. RBI and other departments working under the political bosses don’t use their enforcement capacity effectively supporting the illegality to go on till the catastrophe strike. With thousands of branches and millions of accounts, RBI only conducts sample audits and thematic inspections. This Becomes a Serious Governance Issue with Illegal / unregistered associations because they:

• Collect maintenance without legal authority. It lacks financial transparency.
• Enter into contracts worth crores without capacity to contract under law
• Operate bank accounts in violation of RBI norms,
• Suppress legitimate associations registered under RERA( Like Coop Societies)

• Property rights and governance
• Not being the consumers, they cannot protect the Consumer rights.

Yet no authority is currently stepping in. The Core Reason for Inaction, in summary, RBI and government authorities do not act because:

1. It is suspected that these accounts are funding sources for the political bosses.
2. Banks open accounts using defective documents but certify KYC compliance internally.
3. RBI depends on banks’ internal audits, not independent verification.
4. Regulatory gaps exist—no circular defines KYC requirements for RWAs/AOAs.
5. No coordinated enforcement mechanism exists for apartment governance.

Thus, illegal entities flourish, collect money, and operate bank accounts unchecked.

(This article is written in public interest to educate the people to take necessary precautions if required.)