Know Your CustomerKnow Your Customer &

Anti Money Laundering

KYC - Preamble• KYC to Bank is not a

new concept.• Traditionally accounts

were opened only with the introduction of existing clients.

• Now KYC is done on a combination of ‘Paper work’ and introduction, the later taking a very small percentage

KYC - Preamble • Technological development, mobility of bankable population, multi channel delivery, Anywhere banking made it necessary for banks to revise KYC norms to ensure control over Client acquisition process and to safeguard the interest of the bank

KYC - Preamble• RBI has formulated a new set

of guidelines- Know Your Customer – Anti Money Laundering Standards vide their circular dated 29th November 2004.

• RBI has advised the Banks to formulate a policy and put it in place, duly approved by the Board.

KYC - Preamble• The KYC guidelines

have been revised by RBI based on the recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards Combating Financing of Terrorism (CFT).

KYC - Preamble • The guidelines given by RBI take into consideration the recommendations of

• FATF Recommendations• EU AML & Terrorist

Financing Legislation• Bank Secrecy Act • Local AML Legislation

(Notice 626)• USA Patriot Act• Sarbanes Oxley Act• Basel II

RBI has also advised Banks that they should be fully compliant with the provisions of the circular.

KYC - Preamble • Central Government in consultation with the RBI has also issued a notification on July 1, 2005 for

• Maintenance of records• Nature & value of transactions• Procedure & manner of

maintaining• Time for furnishing of

information• Verification of records of the

identity of the clients

Objective of the Policy

• To lay down policy framework for abiding by the KYC – AML Standards set out by RBI

• To prevent banks from being used by criminal elements for money laundering activities

• To put in place appropriate controls for detection and reporting of suspicious activities

• To comply with applicable laws & regulatory guidelines • To take necessary steps to ensure that the relevant staff

are adequately trained

Who is a Who is a Customer?Customer?

• A person \ entity that has an a\c & or banking relationship

• On whose behalf the account is maintained (beneficial owner)

• Beneficiaries of transactions conducted by prof. intermediaries (Stock Brokers, Solicitors, CA etc.)

• any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank(Issue of HV DD \ Wire transfer as a single Transaction)

KYC – Policy Guidelines • Customer

Acceptance Policy (CAP)

• Customer Identification Procedure (CIP)

• Monitoring of Transactions and

• Risk Management

CAP Guidelines• No account should be opened in the

name of anonymous \ fictitious \ benami names

• Bank shall classify customers into various risk categories based on risk perception decide on acceptance criteria for each customer category.

• Accept customers after verifying their identity as laid down in customer identification procedures

• For the purpose of risk categorisation , Bank shall obtain the relevant information from customer at the time of account opening.

CAP Guidelines • A profile for each new customer based on risk categorization shall be prepared. This is a confidential document

• Documents and other information shall be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of PML Act, 2002 and guidelines issued by RBI from time to time. The documentation may be reviewed periodically based on emerging business needs.

CAP Guidelines• The Bank shall not open an

account if it is unable to apply appropriate customer due diligence measures due to

• non cooperation of the customer

• non reliability of the data/information furnished.

• The Bank shall also close an existing account in case it is unable to apply appropriate customer due diligence measures

CAP Guidelines • Necessary checks wherever possible, shall be conducted before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc. (Lists are periodically circulated by HO)

Customer Identification Process (CIP)

• Means identifying the customer and verifying identity by using reliable, independent source documents, data and information

CIP – When to be done?• When establishing relationship

(or)• When carrying out a transaction

(or)• When the Bank has a doubt (or)• When Previous Identity data is

inadequate• When Bank feels it necessary

based on conduct or behaviour of account

CIP – To be done for Whom

• The Named Account holder \ s

• Beneficial Owners• Signatories to an

account• Intermediate Parties

CIP – Natural Persons – What are needed?

• Document proving the ID

• Document proving address

• Latest Photograph• Document for verifying

signature

CIP – Entities – What are needed?

• Verify the Legal status thru Proper and relevant documents

• Is the Person who is purporting to act on behalf of the entity is actually authorised to act?

• Then verify his ID• Understand the ownership

and control structures – Who ultimately control the entity?

Monitoring of Transactions• Ongoing Monitoring is

essential element of effective KYC as this gives ‘Signals’ on the account.

• The monitoring should be proportionate to the risk sensitivity in the account

• This will be dealt extensively in AML session

Risk Management • Bank should set up independent AML Cell, headed by a Principal Officer

• There should be AML Software • The Risk Management Committee

shall review AML \ KYC Standards• Audit dept. will inform concurrent \

Internal auditors to cross verify and Comment on lapses

• HRD\ Sales Team will conduct training for sensitising staff. Focus will vary depending upon the group. The Rationale should be understood.

Roles and Responsibilities – KYC Verification

• Basic Check by Sourcing Official• Also by Branch Ops Manager for

all A\cs• BH will also sign off Medium &

High Risk A\cs• For all new BB Customers, BH

shall be responsible for KYC verification & Monitoring

• Completeness of AOF will be ensured by CPU \ RPU

Customer Awareness

• Implementation of KYC requires Bank to seek certain info. which are personal and not hiterto called for.

• This may lead to discomfort..• Bank Recognises the need to

spread awareness and educate on the rationale.

KYC - Tech Products • Bank will ensure that

appropriate KYC procedures are duly applied for new technology driven products such as

• Smart Cards• Credit Cards• Gift Cards• Travel Cards

KYC – Existing Accounts

• Banks should apply KYC to existing clients based on Materiality and Risk

• RBI suggested that all accounts of Cos., Firms, Trusts, Charities, Religious Organisations shall be subjected to KYC

• If Bank is unable to apply appropriate KYC Measures for existing accounts, Banks may consider closing these accounts.

• Individuals other than High Networth Individuals

• Government Depts., Govertment owned Companies, Regulatory and Statutory bodies

• All Other categories not discussed anywhere

Risk Profiling – Low Risk

• Non Residents• High Networth

Individuals

Risk Profiling – Medium Risk

Risk Profiling – High Risk

• Trusts, Charities, NGOs and Organisations receiving donations

• Companies having close family share holding or beneficial ownership

• Partnership Firms• Politically Exposed Persons• Non Face to face Customers

Profile Sheet - Individuals • Residential Status

• Occupation• Purpose of A\c opening• Name of Employer• Nature of Self employment• Sources of Income• Annual Income• Transaction Profile

(Transaction Thruput)• Branches \ Associates• Foreign Collaboration• Residence (owned \ rented)

Profile Sheet – Non Individuals

• Purpose of Opening• Nature of Business• Date of Incorporation• Type of Organisation• Registered Address• Annual Turnover (Proof)• Associates \ allied concerns• Transaction Profile (Volume

Thruput)• Names and addresses of

Clients• Details and nature of Foreign

Collaboration

What is Money Laundering?

• The term “Money Laundering" is said to have evolved from the Prohibition era in the United States.

• Many methods were devised to disguise the origins of money generated by the sale of then-illegal alcoholic beverages.

• One method was legal gambling via slot machines—a way to efficiently transform giant volumes of coins into easily movable currency.

• Another business so employed was laundries. Thus the term "laundering" emerged.

Money Laundering - Definition

• “The process by which the proceeds of crime are converted into assets which appear to have a legitimate origin”

What is Crime Money?

• Drugs• Terrorism• Tax Evasion• All Crimes

Where this Money is Placed?

• Investment in Emerging Overseas markets

• Money Exchange Burueau• Car \ Boats \ Antics• Precious Metals• Estates• Travel• Cash Intensive Business• Friends & Relatives

Money Laundering ProcessMoney Laundering Process

• Placement - Large volumes of small denominations

• Layering - Moving funds to obscure paper trail

• Integration - Reinvestment in legitimate business

SmurfingPizza trick

Casino

Etc.

Small denominations

€20 €50

No Paper Trail

How this money is ‘Layered’?

• Offshore Banks that have weak controls

• Shell \ Brass Plate Banks• Company Formation

Agents• Trusts• Professionals• Trade related activities

What are the Characteristics of this money?

• Utter Complexity• Lack of Commercial

Rationale• Nominee Accounts

How is this money ‘Integrated’?

• Clean to Dirty – This is the Starting Point

• Dirty to Clean – This will be very difficult to identify

• Into Legitimate Economy: Create an income generating asset.

Financial ImpactFinancial Impact

Dec 2003 Abbey National $ 3.5 m

Jan 2004 Bank of Scotland $ 2.2 m

Mar 2004 Hudson United Bank $ 5 m

Apr 2004 Raiffeisen Zentralbank $ 0.3 m

May 2004 Riggs Bank $ 25 m

UBS $ 100 m

Jul 2004 Morgan Stanley $ 2.2 m

Sep 2004 Bank of Ireland $0.67 m

Who is Guilty of Money Laundering?

• Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or acticvity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of Money Laundering

Punishment for Money Laundering

• RI of 3 to 7 Years• Fine upto 5 Lacs

Narcotic Offences• RI upto 10 Years

Obligations of the bank

• Maintaining Record of presecribed transactions

• Furnishing Information of Prescribed Transactions

• Verifiying and Maintaining the ID of Clients

• Preserving the above records for 10 Years

Penalties for Bank

• If the Director ( ML ) , finds that a bank or any of its officer has failed to comply with the provisions of section 12, without prejudice to any other action that may be taken under the Act , he may , by an order , levy a fine which shall not be less than Rs.10000/- & extending up to Rs 1.00 lacs for each failure

Transactions to be Reported - CTR

• All Cash Transactions of Rs.10 Lacs and above

• All Series of Cash Transactions of Rs.10 Lacs and above that happen in an account over a period of one month

Transactions to be Reported - STR

• Transactions with Forged\counterfeit Notes

• Transactions where Forgery of security took place

• All suspicious transactions (cash, Cheques, TCs, Transfers , credits or debits into or from any non-monetry accounts ( shares , dmat accounts ), money transfer or remittance , loans and advances , collection services .

Time Period for Submission

• All Reports are Submitted to Financial Intelligence Unit (FIU)

• Monthly Reports should be submitted by 7th of Next Month. This relates to CTR. This is done by HO

• Suspected Transaction Report (STR) should be submitted within 3 days of its occurrence. To be done by Branch.

Who is a Prudent Banker?

• As prudent banker we should be aware of source of the credits coming in to customers account. If an abnormal credit is coming in to an account banker should call for confirmation of source from the Customer .

Do your Eyebrows raise

when • A credit of Rs. 3 L appears in an A\c with average salary of 25K?

• A customer deposits cash & takes DD in different names everyday?

• A customer deposits cash < Rs. 50K daily and transfer the same?

• A customer gets regular remittances & taking them in cash?

• A customer gets credits from various locations?

• A customer withdraws cash of upto 90% of the deposits?

• A customer does cash transactions from Rs. 9.50 to Rs.9.90L?

• A Savings client gets regular credit into his account from other centers?

Do you ask these questions?

• Do we understand ML risks in each jurisdiction we operate in?• Are our policies & procedures sufficient to address these risks and future

developments?• What will regulators say about our AML program?• Is there sufficient awareness of AML requirements in our Staff & Clients?• Does the left hand know what right hand is doing across all of our

product and business lines?• Do we assess & focus our efforts on those who fit a high-risk profile?• Do we need to address specific risks in existing customers and historical

data?• Are we using all available data to mitigate risks in the most efficient

manner

Do You Know what risks do we take if we do not adhere to KYC - AML ? • Reputation Risk : We always

need the confidence of Depositors and the Market

• Operational Risk : Loss on account of failed process \ people \ systems \ external events

• Legal Risk: Loss due to any legal action against the bank and its staff.

• Compliance Risk: Loss due to failure of compliance

Thank You