1

KNOW YOUR CUSTOMER

&
ANTI MONEY LAUNDERING
Contents
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 Background
 Legal Framework – India

 Know Your Customer guidelines

 Record Keeping

 Anti Money Laundering measures

 Money Laundering Risk Management

 Furnishing information to FIU- INDIA, New Delhi

 Background
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 Mid 1980s - Growing concern of international community
to deprive criminal elements of the proceeds of their
crimes

 1989 – Financial Action Taskforce (FATF) set up to ensure

global action to combat money laundering in Paris

 1995 - Egmont Group set up to stimulate international

cooperation amongst FIUs at Brussels. Best Practices for
exchange of information. our country has acquired its
membership in 2007

 1997- Asia/Pacific Group on money laundering (APG) set

up in Bangkok -to create awareness and encourage
adoption of AML measures
Financial Action Task Force (FATF) 4

 FATF is an inter-Govt. – Policy Making body

 Sets standards & develops/promotes policies to combat
money laundering & terrorist financing
 36 members – 34 countries + 2 Regional Org.
 More than 20 observers
 40 + 9 Recommendations – recognized by IMF and World Bank
as International Standards
Financial Action Task Force (FATF) 5
 40 Recommendations – Sets out basic framework for global
AML efforts

 Recommendations cover three areas - legal, financial and

regulatory, and law enforcement

 9 Special Recommendations on Terrorist Financing –

International standard for combating terrorist financing &
related interpretive notes
 6

WHO IS A CUSTOMER?
Who is a Customer 7
 A person or entity that maintains an account and / or has a
business relationship with the Bank;
 One on whose behalf the account is maintained
 Beneficiary of transactions conducted by professional
intermediaries, such as stock brokers, chartered accountants,
solicitors etc. as permitted under the law;
 Any person or entity connected with a financial transaction
which can pose significant reputation or other risks to the
bank, say, a wire transfer or issue of a high value demand
draft as a single transaction.
 Key elements of K Y C 8
Customer Acceptance - Ensure that you accept
only legitimate and bona fide customers

Customer Identification – Ensure that you properly

identify your customers to understand the risks they
may pose

Transactions Monitoring –Monitor customer accounts

and transactions to prevent or detect illegal activities

Risk Management – Implement processes to

effectively manage the risk posed by customers
trying to misuse facilities
Customer Acceptance 9
 Ensure that you accept only legitimate and bona
fide customers
 No account to be opened in anonymous or
fictitious names

 A check on the list of terrorists or banned entities

should be done before opening the account

 If customer does not cooperate or bank is unable to

apply a risk based due diligence do not to open an
account (You can also close an existing account in
case of non-cooperation as above)
Customer Identification 10
a. While establishing a banking relationship
b. Carrying out a financial transaction or
c. When the bank has a doubt about the veracity/ authenticity
or adequacy of the customer data/ documents available
For legal persons/entities the bank should also identify
- any person acting on behalf of the legal entity,
- the ownership and control structure and
- beneficial owners if any
d. Documents required to be based on risk perception and
PMLA prescription
Transactions Monitoring 11
 On-going monitoring of transactions for identifying
suspicious and high value cash transactions
 Higher risk accounts and customer relationships will
generally require more frequent or intensive monitoring.
For higher risk situations, the following should be
considered:
 On-going monitoring of transactions for identifying
suspicious and high value cash transactions
 Special attention to all complex, unusually large
transactions and all unusual patterns which have no
apparent economic or visible lawful purpose
 Prescription of threshold limits
 Review of risk classification
 Reporting to law enforcement authority
Risk Management 12

 Categorise each account into High / Medium / Low

Money Laundering Risk Category

 Branch/Bank should therefore prepare a profile for

each customer based on the risk categorization

 Implement processes to effectively manage the

risks posed by customers trying to misuse facilities

 Periodical Review of risk classification

Risk Categorization – Four Parameters 13

 Country – Place of Domicile

 Business Activity

 Type of Banking Services

 Turnover in the account

Risk Parameters-Customers connected with high-risk countries 14

 Geography

 Drug producing Nations

 Drug transshipment Countries
 Drug using Countries
 Countries with high degree of public corruption
 Countries linked to Terrorist financing
 Non Cooperative Countries and Territories
Risk parameters- Customers connected with high-risk 15
business activity
 Money Services Bureaus (money transmitters,
foreign exchange houses etc.)
 Arms, art and antique dealers
 Securities broker / dealers, solicitor firms, CAs, etc.
who are managing pooled accounts on behalf of
clients
 Travel agencies
 Jewel / Gem / Precious metal dealers
 Property dealers / builders
 Car / boat dealerships
Risk parameters –High Risk Banking Products 16
 Any product which allows a non-customer to readily
convert cash to a monetary instrument viz. Travellers /
Gift Cheque, DD below Rs. 50,000/-

 Any product or service which allows a customer to

readily move from one jurisdiction to another which
conceals the source of those funds viz. Credit Card

 Relevance of the products or services asked to the

nature of business/ account viz. Multi-city cheque
facility to a small retail shop

 Other Examples - Internet Banking

High Risk Accounts 17
 Accounts of Non-Resident Indian
 Accounts of Trusts, NGOs receiving donations.
 Accounts of closely held Companies
 Firms with sleeping partners
 Accounts of Politically Exposed Persons
 Non-Face-To-Face Transaction
 Accounts opened by professional intermediaries
 Fiduciary Accounts
Trusts 18
 Purpose and nature of the Trust

 Verify the identity of Trustees

 Verify the identity of settlers / grantors, protectors etc.

 Ascertain if there is beneficial ownership – establish the identity

 Keep close watch on sources and movement of funds

 Periodical review of the account

Companies/ firms 19
 Is the account used as “front” for individuals

 Management and control structure

 Sources and use of funds

 Relationship with sister concerns- financial

dealings

 Nature & location of business and business

profile
Politically exposed Persons (PEPs) 20

“Politically Exposed Persons”(PEPs) are individuals who are or

have been entrusted with prominent public functions in a
foreign country, for example Heads of State or of government,
senior politicians, senior government, judicial or military
officials, senior executives of state owned corporations,
important political party officials. Business relationships with
family members or close associates of PEPs involve
reputational risks similar to those with PEPs themselves. The
definition is not intended to cover middle ranking or more
junior individuals in the foregoing categories.”
Non-face to face relationship 21

 Accounts of NRIs/ non domestic account

 All KYC procedures to be observed
 Third party verification of documents through correspondents
who comply with KYC regime and are willing to share KYC
information on demand
 Verification of document during visit to India
 Payment through cheque and wire transfer
 Remittance through banking channels
KYC for Existing Accounts 22

 Revised guidelines to apply to all the existing customers

 Accounts should be subjected to risk classification, minimum

KYC and enhanced due diligence where required

 Transactions in existing accounts to be continuously

monitored for review of Customer Due Diligence measures
Financial inclusion – Simplified KYC Procedure 23
 Adherence to KYC norms should not result in denial of Banking
services to under-privileged
 Bank to rely on suitable declaration and introduction of a KYC
compliant account holder
 Balance not to exceed Rs.50,000/- at any point of time and
credit turnover not to exceed Rs.1,00,000/- per annum.
 In case above thresholds are exceeded – Regular KYC
Procedure to be followed
AML Measures 24
Money Laundering is the process by which illegal funds and
assets are converted into legitimate funds and assets.

Investment
s
Purchases

Layering: Use of multiple

Placement: Illegal funds or Integration: Laundered funds
accounts, banks,
assets are first brought into are made available as
intermediaries, corporations,
the financial system apparently legitimate funds.
trusts, countries to disguise
the origin.
Money Laundering is tax evasion in progress
 25
The Cost of Non-Compliance
Final 2 year period
‘The Price Riggs Bank Paid’
Fines and settlements totalling US$59 million.
Legal and consulting fees - US$35 million.

Final 8 months
An approx. 20% drop in share price and 18% drop in Business

Final 2 year period

CEO resigned.
Chief Legal Officer replaced.
COO and Executive Vice President (former MD , Europe) suspended.
Former chief bank examiner and EVP on paid leave.
Head of African and Caribbean division fired
and charged with 27 counts of money laundering to fraud!
Types of Money-Laundering Risks 26

What are the Money Laundering Risks to banks?

(i) Reputation risk

(ii) Operation risk
(iii) Legal / Compliance risk

All risks are inter-related and together have the potential of

causing serious threat to the survival of the bank
Reputation Risk – Financial 27

Penalties
Aug.2007 American Express US $ 65 mn

 Jan. 2007 Bank of America US $ 3 mn
 Jan. 2006 ABM AMRO US$ 80 mn
 Aug. 2005 Arab Bank US$ 24 mn
 Feb. 2005 City National Bank US$750,000
 Jan. 2005 Riggs Bank US$ 41 mn
 Oct. 2004 AmSouth Bank US$ 50 mn
 Sep. 2004 City Bank Japan Licence
cancelled
 May. 2004 Riggs Bank US$ 25 mn
 May 2004 UBS US$ 100 mn
Operation Risk 28
 Operation risk is the risk of direct or indirect loss resulting from
inadequate, or failed internal processes, people and systems,
or from external events

 With introduction of BASLE II norms, Bank needs to provide for

operational risk and ensure compliance of internal control, for
which KYC of each account is of utmost importance, so that
capital allocation against operational risk can be minimized
Legal/ Compliance Risk 29

 Risk of loss (financial or otherwise) due to any legal action the

Bank may have to face due to failure to comply with the Law.

 Hence, Bank should carry out KYC and Customer Due Diligence
exercises to mitigate Legal Risk
Customer Education 30

 Spread awareness on KYC - AML through

- literature / pamphlets

- Banks’ Websites

- Front line staff at Branches

Hiring & Training of staff 31

 Screening of employees at the time of hiring and

posting on sensitive positions

 Development of AML skills through appropriate

training

 Knowledge of regulatory & statutory prescription

 Sensitizing the employees on the need for proper

handling of customer queries

 No tipping off
Information to be furnished to FIU-
32
IND
 Cash Transaction Report (CTR):
 All cash transactions of the value of equal to or
more than rupees ten lakhs or its equivalent in
foreign currency
 All series of cash transactions integrally connected
to each other which have been valued below
rupees ten lakhs or its equivalent in foreign currency
where such series of transactions have taken place
within a calendar month aggregating to rupees ten
lakhs or more
 Suspicious Transactions Report (STR):

 All suspicious transactions whether or not made in

cash
 Suspicious Transactions
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 Suspicious transaction means a transaction whether
or not made in cash which, to a person acting in
good faith

 gives rise to a reasonable ground of suspicion that it may involve

the proceeds of crime; or
 appears to be made in circumstances of unusual or unjustified
complexity; or
 appears to have no economic rationale or bonafide purpose; or
 gives rise to a reasonable ground of suspicion that it may involve
financing of the activities relating to terrorism.(added by
amendment dated 24.05.07)
 Some of the Reasons for
Suspicion 34
 Identity of client
 False identification documents
 Identification documents which could not be
verified within reasonable time
 Accounts opened with names very close to other
established business entities

 Background of client
 Suspicious background or links with known criminals

 Multiple accounts
 Large number of accounts having a common
account holder, introducer or authorized signatory
with no rationale
 Unexplained transfers between multiple accounts
with no rationale
 Some of the Reasons for 35
Suspicion
 Activity in accounts
 Unusual activity compared with past transactions
 Sudden activity in dormant accounts
 Activity inconsistent with what would be expected from
declared business
 Nature of transactions
 Unusual or unjustified complexity
 No economic rationale or bonafide purpose
 Frequent purchases of drafts or other negotiable instruments with
cash
 Nature of transactions inconsistent with what would be
expected from declared business
 Value of transactions
 Value just under the reporting threshold amount in an apparent
attempt to avoid reporting
 Value inconsistent with the client’s apparent financial standing
Suspicious Transactions/Activity 36

 Sending or receiving frequent or large volumes of cross border

remittances;

 Receiving large TT/DD remittances from various centers and

remitting the consolidated amount to a different
account/centre on the same day leaving minimum balance
in the account;

 Corporate accounts where deposits and withdrawals by

cheque/TTs/foreign inward remittances/any other means are
received from/made to sources apparently unconnected
with the corporate business activity/dealings
Suspicious Transactions/Activity 37
 Corporate accounts where deposits or withdrawals
are primarily in cash rather than cheques;
 A single substantial cash deposit composed of
many high denomination notes;
 A customer who is reluctant to provide information
needed for a mandatory report or to proceed with
a transaction after being informed that the report
must be filed;
 Any individual or group that coerces/induces or
attempts to coerce/induce a bank employee to
not file any reports or any other forms
Suspicious Transactions /Activity 38

 An account where there are several cash

deposits/withdrawals below a specified threshold level
to avoid filing of reports by intentionally splitting the
transaction into smaller amounts for the purpose of
avoiding the threshold limit

 Multiple accounts under the same name

Case Study
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 One Mr. X opened a Sole Proprietorship account with one of the
Branches in Mumbai, giving copy of Pancard as identity proof and
copies of Electricity bill and Shop & Establishment license from
Mumbai Municipality for address proof
 Within one week, two high value DDs payable at Hyderabad drawn on
another Bank were deposited in Hyderabad branch and were cleared.
Money was withdrawn from a Branch in New Delhi
 When the original payee complained to the drawee Bank, the fraud
came to surface. Similar frauds were committed by the culprit by
opening accounts with other Banks also
 The culprit had managed to steal some DDs favouring an institution
(whose name was written on the DDs in acronym). He managed to
forge address proof documents in the name of that institution and
opened accounts with Banks as Sole Proprietor of that Institution
whose name was written on DDs in acronym. (Eg. Comptroller MSU –
)
Lessons learnt 40
 Check the genuineness of the KYC documents by physical /
telephonic verification

 Not to open accounts in Acronym

 To accept High Value instruments in newly opened accounts

only after proper inquiry. In case such instruments are deposited
at Non-base branch, inquiry should be carried out through Base
branch

 To closely monitor newly opened accounts at least for SIX

months
Q&A 41

 Q- What is money laundering ?

 Q- What are the three steps involved in Money Laundering?

Q&A 42

 Ans. Money Laundering is the process by which illegal funds

and assets are converted into legitimate funds and assets

 Ans.

A- PLACEMENT
B- LAYERING
C- INTEGRATION