SOUND MIND SET LEADS TO GROWTH AND PROSPERITY

KYC Re-visitingMoney Laundering Re-visitingBanks That have faced penaltiesCase StudiesKYC AML Changes and eKYCTransaction wise KYC-AML impact on a typical bank Closing

Know Your Customer Re-visiting

KYC to Bank is not a new concept.Traditionally the accounts were opened only with the introduction of existing clients. Next phase, KYC is done on a combination of Paper work and introduction, the later taking a very small percentageKnow Your Customer framework for banks enables us to know / understand the customers and their financial dealings to be able to serve them better.

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

The guidelines given by RBI take into consideration the recommendations of FATF RecommendationsEU AML & Terrorist Financing LegislationBank Secrecy Act Local AML Legislation (Notice 626)USA Patriot ActSarbanes Oxley Act; Section 49 in Indian contextBasel II RBI has also advised Banks that they should be fully compliant with the provisions of the circular.

KYC is carried out on:Opening a new accountIn respect of accounts where documents as per current KYC standards have not been submitted while opening the initial accountOpening a Locker Facility where these documents are not available with the Bank for all the Locker facility holdersWhen the Bank feels it necessary to obtain additional information from existing customers based on conduct of accountWhen there are changes to signatories, mandate holders, beneficial owners etc.For non-account holders approaching the Bank for high value one-off transactions like Drafts, Remittances etc.StaffVendors of the bank

To lay down policy framework for abiding by the KYC AML Standards set out by RBITo 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

A person \ entity that has an a\c & or banking relationshipOn 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)

Customer Acceptance Policy (CAP)Customer Identification Procedure (CIP)Monitoring of Transactions Risk Management

No account should be opened in the name of anonymous \ fictitious \ benami namesBank 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.

A profile for each new customer based on risk categorization shall be prepared. This is a confidential documentDocuments 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.

The Bank should 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

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)

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

When establishing relationship When carrying out a transaction When the Bank has a doubt on particular transactionWhen Previous Identity data is inadequateWhen Bank feels it necessary based on conduct or behavior of account

The Account holderBeneficial OwnersAuthorized Signatories to an accountIntermediate Parties

Document proving the ID Document proving addressLatest PhotographDocument for verifying signatureRoute of transaction and legality

Verify the Legal status thru Proper and relevant documentsIs the Person who is purporting to act on behalf of the entity is actually authorised to act? Then verify his IDUnderstand the ownership and control structures Who ultimately control the entity?

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 accountThis will be dealt extensively in AML session

Bank should set up independent AML Cell, headed by a Principal OfficerThere should be AML Software The Risk Management Committee shall review AML \ KYC StandardsAudit dept. will inform concurrent \Internal auditors to cross verify and Comment on lapsesHRD\ Sales Team will conduct training for sensitising staff. Focus will vary depending upon the group. The Rationale should be understood.

Basic Check by Sourcing OfficialAlso by Branch Officials for all A\csBranch Head will also sign off atleast Medium & High Risk A\csFor all new Business borrowing Customers, Branch Head shall be responsible for KYC verification & MonitoringCompleteness of AOF will be ensured by branch/CPU/RPU

Implementation of KYC requires Bank to seek certain info. which are personal and not hitherto called for.This may lead to discomfort..Bank Recognizes the need to spread awareness and educate on the rationale.

Bank will have to ensure that appropriate KYC procedures are duly applied for new technology driven products such as Smart CardsCredit CardsGift CardsTravel Cards

Banks should apply KYC to existing clients based on Materiality and RiskRBI suggested that all accounts of Cos., Firms, Trusts, Charities, Religious Organisations shall be subjected to KYCIf Bank is unable to apply appropriate KYC Measures for existing accounts, Banks may consider closing these accounts.

Individuals other than High Net-worth IndividualsGovernment Depts., Governtment owned Companies, Regulatory and Statutory bodiesAll Other categories not discussed anywhere

Non ResidentsHigh Net worth Individuals

Trusts, Charities, NGOs and Organizations receiving donationsCompanies having close family share holding or beneficial ownershipPartnership FirmsPolitically Exposed PersonsNon Face to face Customers

Residential StatusOccupationPurpose of A\c openingName of EmployerNature of Self employmentSources of IncomeAnnual IncomeTransaction Profile (Transaction Thruput)Branches \ AssociatesForeign CollaborationResidence (owned \ rented)

Purpose of OpeningNature of BusinessDate of IncorporationType of OrganizationRegistered AddressAnnual Turnover (Proof)Associates \ allied concernsTransaction Profile (Volume Thruput)Names and addresses of ClientsDetails and nature of Foreign Collaboration

Concepts re-visiting on Money Laundering and Combating Terrorism Finance

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 machinesa way to efficiently transform giant volumes of coins into easily movable currency.Another business so employed was laundries. Thus the term "laundering" emerged.

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

Illegally sourced money fromConvertingDrugs / Arms TraffickingTerrorismExtortionAppears to originate from legitimateSource at the time when it passed through bankingCriminal Activity

'Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources'. In other words, it is the process used by criminals through which they make dirty money appear clean

Drugs Trafficking Terrorism including Naxal ActivityExtortion moneyTax Evasion and hiding incomeCorruptionAll Crimes including Betting, human trafficking

Investment in Emerging Overseas marketsMoney Exchange BureauCar \ Boats \ AnticsPrecious MetalsReal EstatesTravel outletsCash Intensive BusinessFriends & Relatives used as a intermediaryHawala ring

Placement - Large volumes of small denominationsLayering - Moving funds to obscure paper trailIntegration - Reinvestment in legitimate business

Offshore/Indigenous Banks that have weak controlsInvoicing onlyCompany Formation AgentsTrustsProfessionalsTrade related activities

Absence of legislationEvasion of taxWeak Implementation of legislations- lawlessnessIncrease in profits just a book entry SatyamTo make black money appear white money through the several individualsLimiting risks of exposure

Complexity of transactions, layers, organizations wideLack of Commercial RelativenessAccounts handled by some one else than the beneficial owner

Source: Compliance alert

One who directly or indirectly attempts to indulge or knowingly provides assistance or knowingly becomes a party or gets actually involved in the process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of Money LaunderingThe definition is very vast yet controls are weak in actual operationsThere are several who remains as a part of this for return considerations and their lively hood is solely dependent on this money used under their name belonging to someone else

Source: Compliance alert

If found guilty the person may be penalized for his money laundering act in Indian Penal Code and PMLA act as RI of 3 to 7 YearsFine upto 5 LacsNarcotic OffencesRI upto 10 Years

Maintaining Record of transactions in prescribed mannerFurnishing Information of Transactions to respective authoritiesVerifying and Maintaining the Identity of Clients, proof of transactionsPreserving the above records for 10 Years

If the FIU authorities, found that a bank or any of its official if 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 upon each case of failureRBI finds violations of guidelines of KYC-AML: the bank is levied with fine

List of Banks that have been penalized in this financial year

Case study

Mr. Shankar, has sold his land received 30 lac in return. He will receive 60% amount in cash and 40% by cheque. Of course the agreement was for 40% of consideration. Mr. Aman employee of SD Bank knows about the deal. Approached customer. He told customer about deposit schemes and offered the customer bulk deposit product with higher ROI; customer agreed to keep 22 lacs as funds with the bank. He will deposit 10 lac in cash and 12 lac a white amount. He also requested Aman to allot share of the bank so that the TDS will not be deducted. Bank obtained KYC as AADHHAR card, photograph, and form 60 in lieu of PAN card which he does not have.Let us discuss KYC completeness.

Mr. Ashwin Chawala a chairman of an educational trust of that city. The trust runs 4 educational institutes with 2500 student strength and 100 employee. As a marketing campaign your bank approaches the chairman as a marketing attempt. Your staff told them a unique banking to the trust and would include fee collection, salary management, and loan in future growth plan. Trust chairman opened trusts account, all employee accounts in weeks time. A month after chairman came with a proposal that he will invest deposit in cash to all employee accounts 2 lac each. The cash would be deposited in respective accounts. The bank deposit grew by 2 crores.Let us discuss position of bank in KYC AML context

Mr. Dinesh Misra, opened savings account with your bank, starts operating it. He is KYC compliant account. His source of lively hood is salary from AKASH DEVELOPERS P LTD. He started depositing cash 4,5 lac regularly each month 4.5 lac and followed by remittance to his native place. In a year he transacted 54 lacs.Let us discuss banks position under monitoring of accounts guidelines

A small businessman Mr. Jamil Pasha has account in your bank. His business place is rental but he stays in the area since his childhood. His income would be merely 12 lacs per annum and has been filing a return around 2.5 lac. His current account has a normal operations having average balance 3thousand. His account started receiving RTGS in four continuous months. In reciprocation the amounts were further forwarded in small amounts to various names in Ranchi and Hyderabad. The total credit turnover done was 55 lacs and debit 54.50 lacs. Let us discuss banks position in the wake of Terror funding

A friendly customer having a savings account that has total turnover around 3 to 4 lacs in a year. One day he dropped in a bank and asked information with assistant manager about the consequences upon he depositing 3 crores worth cash in his savings account. The customer did not do the transactionWhat should a banker do with this case

M/S S P Impex P ltd. has been new customer of a bank for last 3 months. He is a regular exporter for laptops to African countries. You have tie-up arrangements with a bigger bank to deal in foreign exchange of your customer. The fifth transaction done was invoice raised with higher value per laptop on Bosco Tradings Nigeria. What way bank to deal with the transaction.

Source IBA booklet

Source IBA Book let

Source IBA booklet

Mr. Yogesh Nambiar resident of Pen opened account at your recently opened Pen branch. He applied for a personal loan of 4 lac. Branch has visited place of residence and forwarded the proposal for sanction. He is deploma engineer in electronics. He is working in Anuj Technologies Ltd. Upon calling confirmation letter he submitted a letter form the office. Upon verification the letter was found fraudulent. The bank rejected loan. Is this a only activity bank need to do?

Source IBA Booklet

A normal CC account holder with limit of 20 lacs, sales turnover of 87 lac, has account turnover 3.57 crores only the current year. Almost tendency of the account of cash deposition. However the business is of mobiles trading so cash transaction ratio has to be high.What is banks action

Updating in KYC Concepts a bank wide perspective

It is to reduce risk of Identity fraudulent Forgery of documents submittedLeads toPaperless KYC verificationOfficial valid authentication of KYC

The Process route is Customer walks into customer service point (branches and business correspondents)AADHHAR number is entered along with biometricsGoes to central identity data repositoryReaches to AADHHAR server for verification Verification reaches back to CSP CSP opens account

The flexible KYC requirements are suggested However the monitoring requirement is critical. It is for 50000 worth balance account or 100000 total credit in the account. Bank to trigger and inform customer when the threshold limit is crossing over 40000 balance in account and or 80000 total credit in the account

Periodic ReturnsCTRSTRCounterfeit Notes reportingAlert generation system on ground zero

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 monthThen the software has to be supportive of collecting such information and notifying it when occur

Transactions with Forged\counterfeit NotesTransactions where Forgery of security took placeAll 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 .

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

Banking transactions and mapping with KYC and Risk management

Type of transactionDefaultPossible lossHow to mitigateAccount opening all activitiesIn KYCMonitory lossReputation RiskLegal Risk and compliance riskSound KYC policy and applications, with control alertsStaff trainingCash Clearing money transfersIn KYC +MonitoringAs aboveSoftware support to identify risk transactions and reportingCredit decisionDefault in KYC and MonitoringCredit RiskCompliance RiskReputation riskSound credit mechanism with added KYC features, monitoring alerts, staff training

Type of transactionDefaultPossible lossHow to mitigateThird party productsDefault in KYCReputation riskCompliance riskFull adhering to IRDA, SEBI regulations to do the businessStaffDefault in KYC and monitoringHe ,She is risk prone to fraud transactionsPowerful HR, Constant touch with staff and their living standardsVendorsDefault in KYCDelay in projectsLoss of moneyLow quality Reputation riskTo have adequate vendors KYC in place

Tips to follow

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 .

A credit of Rs. 3 L appears in an A\c with average salary of 20thousands?A customer deposits cash & takes DD in different names everyday? Though within the stipulated guidelines?A customer deposits cash < Rs. 50thousands daily and transfer the same immediately?A customer gets regular remittances & withdraws them in cash?A customer gets credits from various locations of India?A customer withdraws cash of upto 90% of the deposited (he/she/legal entity ?)A customer does regular/ occassional cash transactions from Rs. 9.50 to Rs.9.90L?A Savings client gets regular credit into his account from other various banking centers?

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

Reputation Risk : We always need the confidence of Depositors and the MarketOperational Risk : Loss on account of failed process \ people \ systems \ external eventsLegal Risk: Loss due to any legal action against the bank and its staff.Compliance Risk: Loss due to failure of compliance

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