KYC Norms Full Project

KYC (Know Your Customer) Norms

1. HISTORY

Worldwide Impact:

The main purpose of KYC norms was to restrict money laundering

and terrorist financing when it was introduced in late the 1990s in the

United States. The US government turned very strict after 9/11 and all

regulations were finalized before 2002 for KYC.

The US has made changes in its major legislations -- Bank Secrecy

Act, USA Patriot Act -- to make KYC norms really effective for the

banking sector.

Taking a leaf out of the US book, the Reserve Bank of India too

directed all banks to implement KYC guidelines for all new accounts in

the 2nd half of 2002.

For existing accounts, imposing KYC norms was a little difficult,

so the RBI issued guidelines for the same at the end of 2004.

Background:

The Reserve Bank of India (RBI) had issued a directive that banks

should draw up a time bound action plan for obtaining customer

identification documents under new KYC norms in respect of all the old

accounts and complete the entire exercise by 31.12.2004. Accordingly,

the Zones/Branches had been advised to comply with the RBI directive as

per the action plan. All the Zones had confirmed compliance of the KYC

norms for all the accounts based on branch confirmations and the final

certificate was furnished by the Bank to the RBI in April, 2005.

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RBI Follow-up:

1. We have, thereafter, been time and again reiterating the importance of

extremely careful compliance of KYC guidelines.

2. In spite of these instructions and compliance certificates, instances of

non-compliance of KYC norms have been pointed out by the RBI

Auditors and Internal/Concurrent Auditors.

3. At every quarterly meeting, the RBI has been expressing serious

concern over the continue instances of non-compliance of KYC

guidelines.

4. They had categorically advised that the Bank should adopt zero

tolerance policy in respect of deviation from adherence to KYC norms

in all accounts including existing accounts and confirm compliance to

them.

KYC Test Checks:

In the above scenario, as per the directions of the Top

Management, Inspection & Audit Department has carried out test

checks at select Branches in each Zone to check the extent of

implementation of KYC norms.

The Auditors were advised to select all types of accounts over a

period and submit their findings.

It means that the Branches are not complying with the KYC

guidelines extremely careful and the requirement of KYC

compliance is not being taken seriously by some branches.

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KYC Compliance Measures:

The primary objective of KYC guidelines is to prevent banks from

being used by criminal elements for money laundering and terrorist

activities and avert occurrence of frauds.

KYC procedures also enable banks to understand their customers

and their financial dealings better and thereby facilitating

prudential management of risks.

Following are measure for achieving full KYC compliance in all

the existing accounts as per the RBI directives:

Public Notice in News Papers:

RBI then published a general notice in newspapers in English and

Hindi at the national level inviting the customers’ attention to the need to

urgently comply with the KYC requirements. In order to ensure that all

the territories are covered, RBI also arranged to publish the notice in local

newspapers of different States. Branches should display this Notice

prominently in the Branch premises and confirm to their respective Zonal

Offices of having done so.

Identification of KYC Non-compliant Accounts:

The task of identifying accounts requiring KYC compliance at each

Branch shall be carried out by the Zones on priority. In order to ensure

that the exercise is done diligently, the scrutiny of accounts to identify the

KYC non-compliant accounts at a Branch shall be done by Officer/s

deputed from a different Branch.

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Subsequent verification of KYC compliance of the accounts is

completed within one month from the date of this Circular. (Now days

it takes 8 to 9 days). The deputed Officers should verify all types of

accounts at the Branches.

The documents are required to be obtained for all customers in case

of every individual, every Proprietor, each Joint account holder/ Partner/

Director/ Trustee/ HUF Member, each other Authorized signatory if any.

Upon completion of the task, the Officers should hand over a copy of the

Report to the Branch Head with a copy to the respective Zonal Office.

Branch Notice to KYC Non-compliant Customers:

Once the accounts are identified for KYC non-compliance and the

nature of deficiency is established, Branches shall address a suitable

communication to each such identified account holder requesting for

submission of the necessary documents for compliance of the KYC

requirements.

The Branch should ensure that any change of address

communicated by the customer is properly recorded and the notice is sent

to the correct address.

The customers may be given seven days time for complying with

the Bank’s requirements. In case the KYC norms are not complied within

the period stipulated therein, the account/s shall be frozen.

The Notice should be sent by Registered Post A.D. and if it

undelivered then the Branches should make efforts to contact the

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customers and send fresh Notices to them at the correct address so as to

provide a fair opportunity to each customer for compliance with KYC

norms, before freezing the accounts.

Reporting of KYC Non-compliant Accounts by

Branches/Zones:

After the expiry of the notice period, the Branches shall submit

their reports to the Zonal Offices within seven days. The Zonal Offices

will consolidate the reports of all the Branches in their zones and submit

their report to RBI within seven days in the same format.

Final Public Notice in News Papers:

Upon receipt of confirmation from all the Zones regarding

completion of the KYC exercise mentioned above, RBI published a

Second and Final Notice in the newspapers, drawing the customers’

attention to the earlier newspaper notice as well as the individual notice

sent by the Branches and their failure to comply with the KYC guidelines

despite the said notices.

The Notice shall give a definite deadline of seven days to the

customers for fulfilling the KYC documentation and notify to them that

transactions in their accounts shall be ceased and accounts frozen after

expiry of the deadline, if KYC compliance is not fulfilled by that date.

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On receipt of intimation of publishing this notice, Branches should

display the notice in the Branch premises so to draw the attention of the

customers to the urgency in the matter.

Freezing of KYC Non-compliant Accounts:

Accounts which remain non - compliant despite all the above process

and even after expiry of the deadline shall be frozen.

Situations may arise whereby in respect of accounts which are

frozen, cheques may be presented across the counter/in clearing for

payment by third parties. Branches may, on case to case basis, allow

payment of such instruments by unfreezing the status.

Care should be taken to re-freeze the account after each such

transaction. The act of unfreezing and re-freezing shall be permitted only

by the Branch Head. Such arrangement may be allowed only for a period

of one month from the date of the first freezing.

Each time an account is unfrozen for permitting operation, the

respective customer should be made aware of the urgent need to

become KYC compliant without which continuing operations would not

be permitted and that Bank’s action of allowing operations should not be

construed by the customer as permission for any subsequent transactions.

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Activation of Accounts on KYC Compliance:

After following the above process, all KYC non-compliant

accounts shall remain frozen. Such accounts will be activated any

time thereafter only upon fulfillment of KYC procedures, with the

approval of the Branch Head.

Let's check other aspects of KYC.

To prevent the possible misuse of banking activities for anti-

national or illegal activities, the RBI has given various directives to

banks:

Before giving any finance at branch level, making sure that the

person has no links with notified terrorist entities and reporting any such

'suspect;' accounts to the government.

Regular 'Internal Audit' by internal and concurrent auditors to

check if the KYC guidelines are being properly adhered to or not by

banks.

Most important, banks must keep an eye out for all banking

transactions and identify suspicious ones. Such transactions will be

immediately reported to the bank's head office and authorities and norms

shall also be laid down for freezing of such accounts.

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The RBI had also directed all banks to make a policy for

implementing 'Know Your Customer' and anti-money laundering

measures and remain fully compliant with given guidelines before

December 31, 2005.

But there have been instances of lapses in the implementation

of KYC guidelines by several banks. That resulted into the infamous

IPO scam. Since January 2006, the RBI has slapped penalties on

several leading banks. Till date we have not come across any case of

money laundering, terrorist financing or transfer of funds for anti-

national activities, but in case of any more lapses in the 'Know Your

Customer' guidelines, the threat of the misuse of the banking

channels for anti-national activities always lurks around the corner.

2. INTRODUCTION:

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http://in.rediff.com/money/iposcam06.html


2.1 Know Your Customer (KYC) Norms/Anti-Money Laundering

(AML) Measures/Combating of Financing of Terrorism

(CFT)/Obligations of banks under PMLA, 2002

The objective of KYC/AML/CFT guidelines is to prevent banks

from being used, intentionally or unintentionally, by criminal elements

for money laundering or terrorist financing activities. KYC procedures

also enable banks to know/understand their customers and their financial

dealings better which in turn help them manage their risks prudently.

2.2 What is KYC?

KYC is an acronym for “Know your Customer” a term used for

Customer identification process. It involves making reasonable efforts to

determine, the true identity and beneficial ownership of accounts, source

of funds, the nature of customer’s business, reasonableness of operations

in the account in relation to the customer’s business, etc which in turn

helps the banks to manage their risks prudently.

The objective of the KYC guidelines is to prevent banks being

used, intentionally or unintentionally by criminal elements for money

laundering.

2.3 Who is a Customer?

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For the purpose of KYC policy, a ‘Customer’ is defined as:

• 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 (i.e. the beneficial

owner);

• Beneficiaries of transactions conducted by professional

intermediaries, such as Stock Brokers, Chartered Accountants,

Solicitors etc. as permitted under the law, and

• Any person or entity connected with a financial transaction which

can pose significant reputational or other risks to the bank, say, a

wire transfer or issue of a high value demand draft as a single

transaction.

3. GUIDELINE:

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3.1 General:

I) Banks should keep in mind that the information collected from the

customer for the purpose of opening of account is to be treated as

confidential and details thereof are not to make known for cross selling or

any other like purposes. Banks should, therefore, ensure that information

sought from the customer is relevant to the perceived risk, is not

intrusive, and is in conformity with the guidelines issued in this regard.

Any other information from the customer should be sought separately

with his/her consent and after opening the account.

II) Banks should ensure that the provisions of Foreign Contribution

(Regulation) Act, 1976 as amended from time to time, wherever

applicable are strictly adhered to.

3.2 KYC Policy:

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Banks should frame their KYC policies incorporating the following four

key elements:

Customer Acceptance Policy;

Customer Identification Procedures;

Monitoring of Transactions; and

Risk Management.

3.3 Customer Acceptance Policy (CAP):

a) Every bank should develop a clear Customer Acceptance Policy laying

down explicit criteria for acceptance of customers. The Customer

Acceptance Policy must ensure that explicit guidelines are in place on the

following aspects of customer relationship in the bank.

(i) No account is opened in anonymous or fictitious/benami name(s);

(ii) Parameters of risk perception are clearly defined in terms of the

nature of business activity, location of customer and his clients, mode of

payments, volume of turnover, social and financial status etc.

(iii) Documentation requirements and other information to be collected in

respect of different categories of customers depending on perceived risk

and keeping in mind the requirements of PML Act, 2002 and

instructions/guidelines issued by Reserve Bank from time to time;

(iv) Not to open an account or close an existing account where the bank is

unable to apply appropriate customer due diligence measures i.e. bank is

unable to verify the identity and /or obtain documents required as per the

risk categorisation due to non cooperation of the customer or non

reliability of the data/information furnished to the bank. It is,

v) Circumstances, in which a customer is permitted to act on behalf of

another person/entity, should be clearly spelt out in conformity with the

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established law and practice of banking as there could be occasions when

an account is operated by a mandate holder or where an account is

opened by an intermediary in fiduciary capacity.

b) Banks should prepare a profile for each new customer based on risk

categorisation. The customer profile may contain information relating to

customer’s identity, social/financial status, nature of business activity,

information about his clients’ business and their location etc.

c) It is important to bear in mind that the adoption of customer acceptance

policy and its implementation should not become too restrictive and must

not result in denial of banking services to general public, especially to

those, who are financially or socially disadvantaged.

3.4 Customer Identification Procedure (CIP):

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a) Customer identification means identifying the customer and verifying

his/her identity by using reliable, independent source documents, data or

information. Banks need to obtain sufficient information necessary to

establish, to their satisfaction, the identity of each new customer, whether

regular or occasional, and the purpose of the intended nature of banking

relationship.

For customers that are natural persons, the banks should obtain

sufficient identification data to verify the identity of the customer, his

address/location and also his recent photograph.

For customers that are legal persons or entities, the bank should

(i) Verify the legal status of the legal person/entity through proper and

relevant documents.

(ii) Verify that any person supporting to act on behalf of the legal

person/entity is so authorized and identify and verify the identity of that

person.

(iii) Understand the ownership and control structure of the customer.

Banks may, however, frame their own internal guidelines based on their

experience of dealing with such persons/entities.

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Banks can use any supplementary evidence such as a letter

received through post for further verification of the address. While

issuing operational instructions to the branches on the subject, banks

should keep in mind the spirit of instructions issued by the Reserve Bank

and avoid undue hardships to individuals who are, otherwise, classified as

low risk customers.

b) Banks should introduce a system of periodical updation of customer

identification data (including photograph/s) after the account is opened.

c) An indicative list of the nature and type of documents/information that

may be may be relied upon for customer identification is given in Annex-

II.

3.5 Customer Identification Requirements – Indicative Guidelines:

i) Trust/Nominee or Fiduciary Accounts:

Banks should determine whether the customer is acting on behalf

of another person as trustee/nominee or any other intermediary. If so,

banks should insist on receipt of satisfactory evidence of the identity of

the intermediaries and of the persons on whose behalf they are acting, as

also obtain details of the nature of the trust or other arrangements in

place. While opening an account for a trust, banks should take reasonable

precautions to verify the identity of the trustees and the settlers of trust

(including any person settling assets into the trust), grantors, protectors,

beneficiaries and signatories.

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ii) Accounts of companies and firms:

Banks should examine the control structure of the entity, determine

the source of funds and identify the natural persons who have a

controlling interest and who comprise the management. These

requirements may be moderated according to the risk perception e.g. in

the case of a public company it will not be necessary to identify all the

shareholders.

iii) Client accounts opened by professional intermediaries:

When the bank has knowledge or reason to believe that the client

account opened by a professional intermediary is on behalf of a single

client, that client must be identified. Banks may hold 'pooled' accounts

managed by professional intermediaries on behalf of entities like mutual

funds, pension funds or other types of funds. Where funds held by the

intermediaries there are 'sub-accounts', each of them attributable to a

beneficial owner, all the beneficial owners must be identified. Where

such funds are co-mingled at the bank, the bank should still look through

to the beneficial owners. Where the banks rely on the 'customer due

diligence' (CDD) done by an intermediary, they should satisfy themselves

that the intermediary is regulated and supervised and has adequate

systems in place to comply with the KYC requirements. It should be

understood that the ultimate responsibility for knowing the customer lies

with the bank.

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iv) Accounts of Politically Exposed Persons (PEPs) resident outside

India:

Politically exposed persons are individuals, who are or have been

entrusted with prominent public functions in a foreign country.

e.g., Heads of States or of Governments, senior politicians, senior

government/judicial/military officers, senior executives of state-owned

corporations, important political party officials, etc. Banks should gather

sufficient information on any person/customer of this category intending

to establish a relationship and check all the information available on the

person in the public domain. Banks should verify the identity of the

person and seek information about the sources of funds before accepting

the PEP as a customer.

v) Accounts of non-face-to-face customers:

With the introduction of telephone and electronic banking,

increasingly accounts are being opened by banks for customers without

the need for the customer to visit the bank branch. In the case of non-

face-to-face customers, apart from applying the usual customer

identification procedures, there must be specific and adequate procedures

to mitigate the higher risk involved. Certification of all the documents

presented should be insisted upon and, if necessary, additional documents

may be called for.

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3.6 Small Deposit Accounts:

(i) Although flexibility in the requirements of documents of identity and

proof of address has been provided in the above mentioned KYC

guidelines, it has been observed that a large number of persons,

especially, those belonging to low income group both in urban and rural

areas are not able to produce such documents to satisfy the bank about

their identity and address. This would lead to their inability to access the

banking services and result in their financial exclusion.

Accordingly, the KYC procedure also provides for opening

accounts for those persons who intend to keep balances not exceeding

Rupees Fifty Thousand (`.50,000/-) in all their accounts taken together

and the total credit in all the accounts taken together is not expected to

exceed Rupees One Lakh (`. 1,00,000/-) in a year. In such cases, if a

person who wants to open an account and is not able to produce

documents mentioned in Annex II banks should open an account for him,

subject to: Introduction from another account holder who has been

subjected to full KYC procedure. The introducer’s account with the bank

should be at least six months old and should show satisfactory

transactions. Photograph of the customer who proposes to open the

account and also his address needs to be certified by the introducer, or

any other evidence as to the identity and address of the customer to the

satisfaction of the bank.

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3.7 Monitoring of Transactions:

Ongoing monitoring is an essential element of effective KYC

procedures. Banks can effectively control and reduce their risk only if

they have an understanding of the normal and reasonable activity of the

customer so that they have the means of identifying transactions that fall

outside the regular pattern of activity. However, the extent of monitoring

will depend on the risk sensitivity of the account. Banks should pay

special attention to all complex, unusually large transactions and all

unusual patterns which have no apparent economic or visible lawful

purpose. Banks may prescribe threshold limits for a particular category of

accounts and pay particular attention to the transactions which exceed

these limits.

Every bank should set key indicators for such accounts, taking note

of the background of the customer, such as the country of origin, sources

of funds, the type of transactions involved and other risk factors. Banks

should put in place a system of periodical review of risk categorization of

accounts and the need for applying enhanced due diligence measures.

Such review of risk categorisation of customers should be carried out at a

periodicity of not less than once in six months.

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3.8 Closure of accounts:

Where the bank is unable to apply appropriate KYC measures due

to non-furnishing of information and /or non-cooperation by the

customer, the bank should consider closing the account or terminating the

banking/business relationship after issuing due notice to the customer

explaining the reasons for taking such a decision. Such decisions need to

be taken at a reasonably senior level.

3.9 Types of risks involved in KYC.

There are five types of risks that an effective KYC policy can help to mitigate:

• Reputational

• Operational

• Legal

• Financial

• Concentration.

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Reputational risk: The reputation of a business is usually at the

core of its success. The ability to attract good employees,

customers, funding and business is dependent on reputation. Even

if a business is otherwise doing all the right things, if customers are

permitted to undertake illegal transactions through that business, its

reputation could be irreparably damaged. A strong KYC policy

helps to prevent a business from being used as a vehicle for illegal

activities.

Operational risk: This is the risk of direct or indirect loss from

faulty or failed internal processes, management and systems. In

today's competitive environment, operational excellence is critical

for competitive advantage. If a KYC policy is faulty or poorly

implemented, then operational resources are wasted, there is an

increased chance of being used by criminals for illegal purposes,

time and money is then spent on legal and investigative actions and

the business will be viewed as operationally unsound.

Legal risk: If a business is used as a vehicle for illegal activity by

customers, it faces the risk of fines, penalties, injunctions and even

forced discontinuance of operations. Apart from regulatory risk,

involvement in illegal activities could lead to third-party judgments

and unenforceable contracts.

Due to the nature of business, these risks can never entirely be

eliminated. However, if a business does not have an effective KYC

policy, it will be inviting legal risk. By strictly implementing and

following a KYC policy, a business can mitigate legal risk to itself

and its staff.

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Financial risk: If a business does not adequately identify and

verify customers, it may run the risk of unwittingly allowing a

customer to pose as someone they are not. The consequences of

this may be far reaching. If a business does not know the true

identity of its customers, it will also be difficult to retrieve any

money that the customer owes.

Concentration risk: This type of risk occurs on the assets side of a

business if there is too much exposure to one customer or a group

of related customers. It also occurs on the liabilities side if the

business holds large concentrations of funds from one customer or

group (in which case it faces liquidity risk if these funds are

suddenly withdrawn).

3.10 Risk Management:

a) The Board of Directors of the bank should ensure that an effective

KYC programme is put in place by establishing appropriate procedures

and ensuring their effective implementation. It should cover proper

management oversight, systems and controls, segregation of duties,

training and other related matters. Responsibility should be explicitly

allocated within the bank for ensuring that the bank’s policies and

procedures are implemented effectively. Banks should, in consultation

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with their boards, devise procedures for creating risk profiles of their

existing and new customers and apply various anti money laundering

measures keeping in view the risks involved in a transaction, account or

banking/business relationship.

b) Banks’ internal audit and compliance functions have an important role

in evaluating and ensuring adherence to the KYC policies and

procedures. As a general rule, the compliance function should provide an

independent evaluation of the bank’s own policies and procedures,

including legal and regulatory requirements. Banks should ensure that

their audit machinery is staffed adequately with individuals who are well-

versed in such policies and procedures. Concurrent/ Internal Auditors

should specifically check and verify the application of KYC procedures at

the branches and comment on the lapses observed in this regard. The

compliance in this regard should be put up before the Audit Committee of

the Board on quarterly intervals.

By implementing an effective KYC policy, a business can identify the

entire scope of the asset and liability risk faced in relation to each

customer and group of customers.

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4. INTRODUCTION OF NEW TECHNOLOGIES -

CREDIT CARDS/DEBIT CARDS/ SMART CARDS/GIFT

CARDS:

Banks should pay special attention to any money laundering threats

that may arise from new or developing technologies including internet

banking that might favour anonymity, and take measures, if needed, to

prevent their use in money laundering schemes. Many banks are engaged

in the business of issuing a variety of Electronic Cards that are used by

customers for buying goods and services, drawing cash from ATMs, and

can be used for electronic transfer of funds. Banks are required to ensure

full compliance with all KYC/AML/CFT guidelines issued from time to

time, in respect of add-on/ supplementary cardholders also. Further,

marketing of credit cards is generally done through the services of agents.

Banks should ensure that appropriate KYC procedures are duly applied

before issuing the cards to the customers. It is also desirable that agents

are also subjected to KYC measures.

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4.1 With effect from 1st July 2011:

If any customer forgot his ATM card in ATM machine then he

should file case or inform to bank within 7days.Accordingly bank

have to see into matter to overcome the problem as early as

possible. In such case if bank fails to overcome the problem then

that particular bank is liable to pay fine up to rs.100/- for each day

to customer till the problem exists in nature.

Earlier for each transaction we need not to provide pin code for

each transaction. But now days it has made compulsory to provide

pin code for each withdrawals.

We never know what will happen with us, suppose we went to

ATM for withdraw money and while transaction someone came

and pointing out gun towards us ask to withdraw cash as much he

want! Then in such case if we need to re-enter are pin code from

end to start (e.g. pin code is 1234, so we should enter it like

4321).Then it will work like helpline and one call will go to near

police station.

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4.2 GLOBAL EFFECT:

The global banking sector is continually battling against fraudulent

gangs and individuals, from online banking to credit and debit card fraud.

In 2008 UK bank fraud losses totaled £53 million. As with card

fraud, UK online banking customers are not liable for fraud losses as all

banks have published online guarantees that state, providing a customer

does not breach their terms and conditions, they will not be held liable for

any losses. Recently it was reported that UK credit and debit card fraud

losses totaled £440m in 2009.

Official figures from the trade body UK Payments

Association indicate that online banking fraud increased to £59.7 million

in 2009. This was an 18 per cent increase on the year before and more

than a doubling since 2007 when there were £22.6 million of losses

It is imperative for banks to confirm the identity of all their

customers (Know Your Customer-KYC) and employees (Know Your

Employees-KYE); this not only ensures legal/regulatory compliance but

reduces business risk.

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5. CORRESPONDENT BANKING:

5.1 Correspondent banking is the provision of banking services by one

bank (the “correspondent bank”) to another bank (the “respondent

bank”):

These services may include cash/funds management, international

wire transfers, drawing arrangements for demand drafts and mail

transfers, payable-through-accounts, cheques clearing etc. Banks should

gather sufficient information to understand fully the nature of the

business of the correspondent/respondent bank. Information on the other

bank’s management, major business activities, level of AML/CFT

compliance, purpose of opening the account, identity of any third party

entities that will use the correspondent banking services, and

regulatory/supervisory framework in the correspondent's/respondent’s

country may be of special relevance. Similarly, banks should try to

ascertain from publicly available information whether the other bank has

been subject to any money laundering or terrorist financing investigation

or regulatory action.

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While it is desirable that such relationships should be established

only with the approval of the Board, in case the Boards of some banks

wish to delegate the power to an administrative authority, they may

delegate the power to a committee headed by the Chairman/CEO of the

bank while laying down clear parameters for approving such

relationships. Proposals approved by the Committee should invariably be

put up to the Board at its next meeting for post facto approval. The

responsibilities of each bank with whom correspondent banking

relationship is established should be clearly documented. In the case of

payable-through-accounts, the correspondent bank should be satisfied that

the respondent bank has verified the identity of the customers having

direct access to the accounts and is undertaking ongoing 'due diligence'

on them. The correspondent bank should also ensure that the respondent

bank is able to provide the relevant customer identification data

immediately on request.

5.2 Correspondent relationship with a “Shell Bank”:

Banks should refuse to enter into a correspondent relationship with

a “shell bank” (i.e. a bank which is incorporated in a country where it has

no physical presence and is unaffiliated to any regulated financial group).

Shell banks are not permitted to operate in India. Banks should also guard

against establishing relationships with respondent foreign financial

institutions that permit their accounts to be used by shell banks. Banks

should be extremely cautious while continuing relationships with

respondent banks located in countries with poor KYC standards and

countries identified as 'non-cooperative' in the fight against money

laundering and terrorist financing.

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Banks should ensure that their respondent banks have anti money

laundering policies and procedures in place and apply enhanced 'due

diligence' procedures for transactions carried out through the

correspondent accounts.

5.3 Applicability to branches and subsidiaries outside India

The guidelines contained in this master circular shall apply to the

branches and majority owned subsidiaries located abroad, especially, in

countries which do not or insufficiently apply the FATF

Recommendations, to the extent local laws permit. When local applicable

laws and regulations prohibit implementation of these guidelines, the

same should be brought to the notice of Reserve Bank. In case there is a

variance in KYC/AML standards prescribed by the Reserve Bank and the

host country regulators, branches/overseas subsidiaries of banks are

required to adopt the more stringent regulation of the two.

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6. WIRE TRANSFER:

Banks use wire transfers as an expeditious method for transferring

funds between bank accounts. Wire transfers include transactions

occurring within the national boundaries of a country or from one country

to another. As wire transfers do not involve actual movement of currency,

they are considered as a rapid and secure method for transferring value

from one location to another.

6.1 The salient features of a wire transfer transaction are as under:

a) Wire transfer is a transaction carried out on behalf of an originator

person (both natural and legal) through a bank by electronic means

with a view to making an amount of money available to a

beneficiary person at a bank. The originator and the beneficiary

may be the same person.

b) Cross-border transfer means any wire transfer where the originator

and the beneficiary bank or financial institutions are located in

different countries. It may include any chain of wire transfers that

has at least one cross-border element.

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c) Domestic wire transfer means any wire transfer where the

originator and receiver are located in the same country. It may also

include a chain of wire transfers that takes place entirely within the

borders of a single country even though the system used to effect

the wire transfer may be located in another country.

d) The originator is the account holder, or where there is no account,

the person (natural or legal) that places the order with the bank to

perform the wire transfer.

6.2 Prevention of AML:

Wire transfer is an instantaneous and most preferred route for

transfer of funds across the globe and hence, there is a need for

preventing terrorists and other criminals from having unfettered access to

wire transfers for moving their funds and for detecting any misuse when

it occurs. This can be achieved if basic information on the originator of

wire transfers is immediately available to appropriate law enforcement

and/or prosecutorial authorities in order to assist them in detecting,

investigating, prosecuting terrorists or other criminals and tracing their

assets. The information can be used by Financial Intelligence Unit - India

(FIU-IND) for analyzing suspicious or unusual activity and disseminating

it as necessary. The originator information can also be put to use by the

beneficiary bank to facilitate identification and reporting of suspicious

transactions to FIU-IND.

Owing to the potential terrorist financing threat posed by small

wire transfers, the objective is to be in a position to trace all wire transfers

with minimum threshold limits. Accordingly, banks must ensure that all

wire transfers are accompanied by the following information:

31


(A) Cross-border wire transfers:

i) All cross-border wire transfers must be accompanied by accurate and

meaningful originator information.

ii) Information accompanying cross-border wire transfers must contain

the name and address of the originator and where an account exists, the

number of that account. In the absence of an account, a unique reference

number, as prevalent in the country concerned, must be included.

(B) Domestic wire transfers:

i) Information accompanying all domestic wire transfers of `.50000/-

(Rupees Fifty Thousand) and above must include complete originator

information i.e. name; address and account number etc., unless full

originator information can be made available to the beneficiary bank by

other means.

ii) If a bank has reason to believe that a customer is intentionally

structuring wire transfer to below `. 50000/- (Rupees Fifty Thousand) to

several beneficiaries in order to avoid reporting or monitoring, the bank

must insist on complete customer identification before effecting the

transfer. In case of non-cooperation from the customer, efforts should be

made to establish his identity and Suspicious Transaction Report (STR)

should be made to FIU-IND.

iii) When a credit or debit card is used to effect money transfer, necessary

information as (i) above should be included in the message.

6.3 Exemptions:

Interbank transfers and settlements where both the originator and

beneficiary are banks or financial institutions would be exempted from

the above requirements.

32


6.4 Role of Ordering, Intermediary and Beneficiary banks:

(a) Ordering Bank:

An ordering bank is the one that originates a wire transfer as per

the order placed by its customer. The ordering bank must ensure that

qualifying wire transfers contain complete originator information. The

bank must also verify and preserve the information at least for a period of

ten years.

(b) Intermediary bank:

For both cross-border and domestic wire transfers, a bank

processing an intermediary element of a chain of wire transfers must

ensure that all originator information accompanying a wire transfer is

retained with the transfer. Where technical limitations prevent full

originator information accompanying a cross-border wire transfer from

remaining with a related domestic wire transfer, a record must be kept at

least for ten years (as required under Prevention of Money Laundering

Act, 2002) by the receiving intermediary bank of all the information

received from the ordering bank.

(c) Beneficiary bank

A beneficiary bank should have effective risk-based procedures in

place to identify wire transfers lacking complete originator information.

The lack of complete originator information may be considered as a

factor in assessing whether a wire transfer or related transactions are

suspicious and whether they should be reported to the Financial

Intelligence Unit-India.

33


7. PRINCIPAL OFFICER:

a) Banks should appoint a senior management officer to be designated

as Principal Officer. Principal Officer shall be located at the

head/corporate office of the bank and shall be responsible for

monitoring and reporting of all transactions and sharing of information

as required under the law. He will maintain close liaison with

enforcement agencies, banks and any other institution which are

involved in the fight against money laundering and combating

financing of terrorism.

b) The Principal Officer will be responsible for timely submission of

CTR, STR and reporting of counterfeit notes to FIU-IND.

34


8. MAINTENANCE OF RECORDS: PART: A:

8.1 Maintenance of records of transactions/Information to be

preserved/Maintenance and preservation of records/Cash and

Suspicious transactions reporting to Financial Intelligence Unit-

India (FIU-IND):

Government of India, Ministry of Finance, Department of

Revenue, vide its notification dated July 1, 2005 in the Gazette of India,

has notified the Rules under the Prevention of Money Laundering Act

(PMLA), 2002. In terms of the said Rules, the provisions of PMLA, 2002

came into effect from July 1, 2005. Section 12 of the PMLA, 2002 casts

certain obligations on the banking companies in regard to preservation

and reporting of customer account information. Banks are, therefore,

advised to go through the provisions of PMLA, 2002.

35


Maintenance of records of transactions:

Banks should introduce a system of maintaining proper record of

transactions prescribed under Rule 3, as mentioned below:

a) All cash transactions of the value of more than Rupees Ten Lakh or its

equivalent in foreign currency;

b) All series of cash transactions integrally connected to each other which

have been valued below Rupees Ten Lakh or its equivalent in foreign

currency where such series of transactions have taken place within a

month and the aggregate value of such transactions exceed Rupees Ten

Lakh;

The following transactions have taken place in a NBFC during the month

of April,

2008:

Date Mode Dr.(`) Cr.(`)

02/04/2008 Cash 5,00,000.00 3,00,000.00

07/04/2008 Cash 40,000.00 2,00,000.00

08/04/2008 Cash 4,70,000.00 1,00,000.00

Monthly

summation

10,10,000.00 6,00,000.00

i) As per above clarification, the debit transactions in the above example

are integrally connected cash transactions because total cash debits during

36


the calendar month exceeds `.10 Lakh. However, the NBFC should

report only the debit transaction taken place on 02/04 & 08/04/2008. The

debit transaction dated 07/04/2008 should not be separately reported by

the NBFC, which is less than `.50, 000/-.

ii) All the credit transactions in the above example would not be treated

as integrally connected, as the sum total of the credit transactions during

the month does not exceed `.10 Lakh and hence credit transaction dated

02, 07 & 08/04/2008 should not be reported by NBFC.

c)All cash transactions where forged or counterfeit currency notes or

bank notes have been used as genuine and where any forgery of a

valuable security or a document has taken place facilitating the

transaction and

d) All suspicious transactions whether or not made in cash and by way of

as mentioned in the Rules.

e) As per above clarification, the debit transactions in the above example

are integrally connected cash transactions because total cash debits

during the calendar month exceeds `. 10 Lakh. However, the bank

should report only the debit transaction taken place on 02/04 &

08/04/2008. The debit transaction dated 07/04/2008 should not be

separately reported by the bank, which is less than `.50, 000/-.

f) All the credit transactions in the above example would not be treated

as integrally connected, as the sum total of the credit transactions during

the month does not exceed `.10 Lakh and hence credit transaction dated

02, 07 & 08/04/2008 should not be reported by banks.

37


(ii) Information to be preserved:

Banks are required to maintain the following information in respect of

transactions referred to in Rule 3:

a) The nature of the transactions;

b) The amount of the transaction and the currency in which it was

denominated;

c) The date on which the transaction was conducted; and

d) The parties to the transaction

(iii) Maintenance and Preservation of record:

Banks are required to maintain the records containing information

in respect of transactions referred to in Rule 3 above.

Banks should take appropriate steps to evolve a system for proper

maintenance and preservation of account information in a manner

that allows data to be retrieved easily and quickly whenever

required or when requested by the competent authorities.

Banks should maintain for at least ten years from the date of

transaction between the bank and the client, all necessary records

of transactions, both domestic and international.

Banks should ensure that records pertaining to the identification of

the customer and his address (e.g. copies of documents like

passports, identity cards, driving licenses, PAN card, utility bills

etc.) obtained while opening the account and during the course of

business relationship.

Banks have been advised to pay special attention to all complex,

unusual large transactions and all unusual patterns of transactions.

38


It is further clarified that the background including all

documents/office records/memorandums pertaining to such

transactions and purpose thereof should, as far as possible, be

examined and the findings at branch as well as Principal Officer

Level should be properly recorded. Such records and related

documents should be made available to help auditors in their day-

to-day work relating to scrutiny of transactions and also to Reserve

Bank/other relevant authorities. These records are required to be

preserved for ten years as is required under PMLA, 2002.

(iv) Reporting to Financial Intelligence Unit – India:

a) In terms of the PMLA rules, banks are required to report information

relating to cash and suspicious transactions to the Director, Financial

Intelligence Unit-India (FIU-IND) in respect of transactions referred to in

Rule 3 at the following address:

Director, FIU-IND,

Financial Intelligence Unit-India,

6th Floor, Hotel Samrat,

Chanakyapuri, New Delhi-110021. Website - http://fiuindia.gov.in/

b) Banks should carefully go through all the reporting formats.viz.

i) Cash Transactions Report (CTR);

39


ii) Summary of CTR

iii) Electronic File Structure-CTR;

iv) Suspicious Transactions Report (STR);

v) Electronic File Structure-STR;

vi) Counterfeit Currency Report (CCR);

vii) Summary of CCR and

viii) Electronic File Structure-CCR. The reporting formats contain

detailed guidelines on the compilation and manner/procedure of

submission of the reports to FIU-IND. The related hardware and technical

requirement for preparing reports in an electronic format, the related data

files and data structures thereof are furnished in the instructions part of

the concerned formats.

c) FIU-IND have placed on their website editable electronic utilities to

enable banks to file electronic CTR/STR who are yet to install/adopt

suitable technological tools for extracting CTR/STR from their live

transaction data base. It is, therefore, advised that in cases of banks,

where all the branches are not fully computerized, the Principal Officer

of the bank should cull out the transaction details from branches which

are not yet computerized and suitably arrange to feed the data into an

electronic file with the help of the editable electronic utilities of

CTR/STR as have been made available by FIU-IND in their website

http://fiuindia.gov.in.

MAINTENANCE OF RECORDS: PART: B

CASH AND SUSPICIOUS TRANSACTION REPORTS:

40


8.2 Cash Transaction Report (CTR):

While detailed instructions for filing all types of reports are given

in the instructions part of the related formats, banks should scrupulously

adhere to the following:

i) The Cash Transaction Report (CTR) for each month should be

submitted to FIU-IND by 15th of the succeeding month. Cash transaction

reporting by branches to their controlling offices should, therefore,

invariably be submitted on monthly basis (not on fortnightly (weekly)

basis) and banks should ensure to submit CTR for every month to FIU-

IND within the prescribed time schedule.

ii) All cash transactions, where forged or counterfeit Indian currency

notes have been used as genuine should be reported by the Principal

Officer to FIU-IND immediately in the specified format (Counterfeit

Currency Report – CCR). These cash transactions should also include

transactions where forgery of valuable security or documents has taken

place and may be reported to FIU-IND in plain text form.

iii) While filing CTR, details of individual transactions below Rupees

Fifty thousand need not be furnished.

41


iv) CTR should contain only the transactions carried out by the bank on

behalf of their clients/customers excluding transactions between the

internal accounts of the bank.

v) A summary of cash transaction report for the bank as a whole should

be compiled by the Principal Officer of the bank every month in physical

form as per the format specified. The summary should be signed by the

Principal Officer and submitted to FIU-India.

vi) In case of Cash Transaction Reports (CTR) compiled centrally by

banks for the branches having Core Banking Solution (CBS) at their

central data centre level, banks may generate centralised Cash

Transaction Reports (CTR) in respect of branches under core banking

solution at one point for onward transmission to FIU-IND, provided:

a) The CTR is generated in the format prescribed by Reserve Bank in

Para 8.1(iv) (b). (KYC) norms /Anti-Money Laundering (AML)

standards/ Combating of Financing of Terrorism (CFT)/Obligation of

banks under PMLA, 2002 dated July 01, 2009;

b) A copy of the monthly CTR submitted on its behalf to FIU-India is

available at the concerned branch for production to auditors/inspectors,

when asked for; and

c) The instruction on ‘Maintenance of records of transactions’;

‘Information to be preserved’ and ‘Maintenance and Preservation of

records’ as contained above in Para 8.1 (i), (ii) and (iii) respectively are

scrupulously followed by the branch.

However, in respect of branches not under CBS, the monthly CTR

should continue to be compiled and forwarded by the branch to the

Principal Officer for onward transmission to FIU-IND.

42


8.3 Suspicious Transaction Reports (STR):

i) While determining suspicious transactions, banks should be guided by

definition of suspicious transaction contained in PMLA Rules as

amended from time to time.

ii) It is likely that in some cases transactions are aborted by customers on

being asked to give some details or to provide documents. It is clarified

that banks should report all such attempted transactions in STRs, even if

not completed by customers, irrespective of the amount of the

transaction.

iii) Banks should make STRs if they have reasonable ground to believe

that the transaction involve proceeds of crime generally irrespective of

the amount of transaction and/or the threshold limit envisaged for

predicate offences in part B of Schedule of PMLA, 2002 .

iv) The Suspicious Transaction Report (STR) should be furnished within

7 days of arriving at a conclusion that any transaction, whether cash or

non-cash, or a series of transactions integrally connected are of

suspicious nature. The Principal Officer should record his reasons for

treating any transaction or a series of transactions as suspicious. Such

report should be made available to the competent authorities on request.

9. RBI probes gold loan financiers on KYC adherence:

43


The RBI is probing the books of some gold financing companies to

assess the implication of concentration risk that could make the non-

banking sector shaky in the event of a sharp fall in gold prices, as it

happened with silver recently. The banking regulator may also probe

whether these companies follow the know-your-customer (KYC) norms,

said two people familiar with the development.

“We are examining the books of select non-banking finance

companies (NBFCs) involved in gold financing,” an RBI spokesperson

said, confirming the development. Muthoot Finance and Manappuram

General Finance & Leasing are the largest gold financiers that are listed

on the Bombay Stock Exchange.

10. KYC FOR MUTUAL FUNDS:

44

http://economictimes.indiatimes.com/muthoot-finance-ltd/stocks/companyid-33218.cms


With effect from January 1, 2011, all categories of investors

irrespective of amount of investment in Mutual Funds are required to

comply with KYC norms under the Prevention of Money Laundering Act

2002 (PMLA) for carrying out the transactions such as new/ additional

purchase, switch transactions, new SIP/ STP/ DTP registrations received

from effective date i.e. January 1, 2011.

Thus, with effect from 1st January 2011, any investor (all

applicants in a folio) investing into mutual funds through the Investment

Services Account would be required to be KYC compliant with

CVL(CDSL Ventures Ltd) without which the transactions may be liable

to be rejected by the respective mutual fund houses.

DOCUMENTS AND INFORMATION TO BE PROVIDED BY

INVESTORS:

Investors in mutual fund schemes have to provide:

(1) Proof of Identity ; (3)PAN Card

(2) Proof of Address ; (4)Photograph

10.1 MF investor’s line up for KYC compliance:

45


Mumbai: Huge rush in complying with Know your Customer

(KYC) norms for the mutual funds industry is leading to an increase in its

processing time. The KYC process which earlier used to take a day

earlier now takes up to 8-10 days.

CDSL Venture (CVL), a subsidiary of CDSL (Central Depository

Services), is carrying out the process of KYC and is receiving over

20,000-25,000 KYC applications on a daily basis. Earlier, it used to be

800-1,000 applications. Association of Mutual Funds in India (AMFI)

had directed all the fund houses to comply with KYC norms with effect

from January 1, 2011.

As per rules, all fresh MF investments have to comply with KYC

norms from this year. And with 50 Lakh mutual fund investors in the

country, MFs are facing the challenge of bringing everyone under the

KYC ambit. In urban cities it is taking one-two days to process KYC...

procedures, while in semi-urban and rural areas they are taking as long as

8 days.

“We are losing out many investors due to delay in completing the

KYC norms. Usually, this is the time, retail investors start investing into

equity linked saving scheme (ELSS) funds for gaining tax advantages,”

said a leading distributor on condition of anonymity. Waqar Naqvi, CEO

of Taurus MF said, “Due to compulsory KYC, the application volumes

have gone up in the last few days”. He however added that the sudden

rush might have led to some technical glitches, which could be ironed out

over a period of time.

10.2 FEW QUESTIONS ABOUT KYC RELATED TO MUTUAL

FUNDS:

46


1. What are the KYC requirements for a Mutual Fund Investor?

Answer-Individual investors will have to produce a Proof of identity

(Photo PAN card copy or PAN card copy and copy of the passport,

driving license, etc.) and Proof of Address (any valid documents listed in

section B of the KYC Application Form for Individuals). Non -

Individual Investors will have to produce certain documents pertaining to

its constitution/registration to fulfill the KYC process. A list of

Mandatory Certified Documents to be submitted can be found in section

C of the KYC application form for Non - Individual Investors.

2. Where and how does one get to be KYC Compliant? Does the

investor have to repeat the KYC process with every Mutual Fund?

Answer-The Association of Mutual Funds of India (AMFI) has

facilitated a centralised platform through CDSL Ventures Limited

(CDSL), a wholly owned subsidiary of Central Depository Services

(India) Limited, to carry out the KYC procedure on behalf of all Mutual

Funds. Once the KYC is duly completed in all regards, the investor needs

to produce a copy of the acknowledgement when investing for the first

time with a Mutual Fund. There is no need to repeat the KYC process

individually for each mutual fund.

3. What is a KYC Application Form? Should the investor visit

personally to obtain KYC Compliance?

47


Answer-A KYC Application Form has been designed for Individual and

Non-Individual Investors separately. These forms are available on the

website of mutual funds, AMFI and Central Depository Services (India)

Limited (CDSL). If the investor is not in a position to visit personally, the

KYC Application Form along with the necessary documents (including

originals if the copies are not attested) can be sent through the distributor

or representative.

4. To who is KYC applicable? Is there any exemption?

Answer-Currently, all investors (Individuals or Non-Individuals) who

wish to make an investment in a mutual fund scheme irrespective of

amount will be required to complete the KYC process. This would also

apply to new Systematic Investment Plan (SIP) registrations on or after

01 January 2011, irrespective of amount.

Joint Holders: Joint holders (including first, second and third if any, are

required) to be individually KYC compliant before they can invest with

any Mutual Fund and copies of each holder's KYC Acknowledgement

must be attached to the investment application form with any Mutual

Fund.

Minors: In case of investments in respect of a Minor, the Guardian

should be KYC compliant and attach their KYC Acknowledgement while

investing in the name of the minor. The minor, upon attaining majority,

should immediately apply for KYC compliance in his/her own capacity

and intimate the concerned Mutual Fund(s), in order to be able to

transact, furthering his/her own capacity.

For transmission (in case of death of the unite holder): If the deceased

is the sole applicant, the claimant should submit his/her KYC

48


Acknowledgement in the request along with the other relevant documents

to effect the transmission in his/her favors.

5. How does the investor transact in Mutual Fund after completing

the KYC process?

Answer-Investors must attach their KYC Acknowledgement along with

the Investment Application Form(s)/Transaction Slip(s) while investing

for the first time in a mutual fund. Application Forms/Transaction Slips

not accompanied by KYC Acknowledgement are liable to be rejected by

the Mutual Fund. If you do not obtain a KYC Acknowledgement, you

will not be able to invest in a mutual fund.

6. Once an account is opened with a Mutual Fund by the 1st, 2nd and

3rd holder after completing the necessary formalities and the

investor's return to make a fresh investment, do they need to furnish

the necessary documents again?

Answer-Investors must attach their KYC Acknowledgement along with

the Investment Application Form(s)/Transaction Slip(s) while investing

for the first time in a Mutual Fund.

7. What are the consequences of KYC cancellation/rejection?

Answer-In the event of any KYC Application Form being found deficient

for lack of information/insufficiency of mandatory documentation, further

investments will not be permitted.

8. Does the KYC Acknowledgement have an expiry date?

49


Answer-No. Once the KYC Acknowledgement is obtained and informed

to a Mutual Fund, it will be registered against the folio and quoted in all

future account statements. The same will exist in perpetuity, unless

cancelled by CVL.

9. Are there any special requirements for an NRI? Is there any

special requirement for a PIO (Person of Indian Origin)?

Answer-Yes. In addition to the certified true copy of the passport, a

certified true copy of the overseas address and permanent address will

also be required. If any of the documents (including

attestations/certifications) towards proof of identity or address is in a

foreign language, they have to be translated to English for submission.

The requirements applicable to an NRI will also apply to a PIO. However

additionally, he will need to submit a certified true copy of the PIO Card.

10. Why does investor need to give his/her income details? How can

they be sure that it will not be misused?

Answer-As per PMLA, it is mandatory for Mutual Funds to obtain

financial status details from its investors. It is for this reason that the

income details are sought. Please note that no proof/income documents

are required. The information given in the KYC Application form will be

treated in a confidential manner and used for regulatory purposes, if

called for.

50


11. CUSTOMER EDUCATION/ EMPLOYEE'S

TRAINING/ EMPLOYEE'S HIRING:

Customer Education:

Implementation of KYC procedures requires banks to demand

certain information from customers which may be of personal nature or

which have never been called for. This can sometimes lead to a lot of

questioning by the customer as to the motive and purpose of collecting

such information. There is, therefore, a need for banks to prepare specific

literature/ pamphlets etc. so as to educate the customer of the objectives

of the KYC programme. The front desk staff needs to be specially trained

to handle such situations while dealing with customers.

Employee's Training:

Banks must have an ongoing employee training programme so that

the members of the staff are adequately trained in KYC procedures.

Training requirements should have different focuses for frontline staff,

compliance staff and staff dealing with new customers. It is crucial that

all those concerned fully understand the rationale behind the KYC

policies and implement them consistently.

51


Hiring of Employees:

It may be appreciated that KYC norms/AML standards/CFT

measures have been prescribed to ensure that criminals are not allowed to

misuse the banking channels. It would, therefore, be necessary that

adequate screening mechanism is put in place by banks as an integral part

of their recruitment/hiring process of personnel.

Purpose

1. Main purpose for doing so is to prevent future malpractice and

financial frauds.

2. Collection of appropriate data before transaction is must to have

idea about concern customer.

3. To aware customer time to time there must be need for training of

employee.

4. Employee training is an important function that will keep all staff

member’s current about policies, procedures and the technology

used in the department.

52


12. ARE KYC NORMS CROSSING THE LIMITS?

Mumbai, July 17

Too much of anything is not good, or so the adage goes. This is

true in the case of banks enforcing Know Your Customer (KYC) norms.

With the Reserve Bank of India penalising several banks for violating

KYC norms, most banks are now applying them with zeal, even at the

cost of losing customers sometimes.

The mandatory details required under KYC norms are proof of

residence such as ration card, letter from employer or the housing society

and proof of identity, which could be any photo identity such as passport,

voter ID card, PAN card, and driving licence. But customers often face

banks asking for other personal details.

Recently, a local Mumbai branch of Indian Overseas Bank asked

customers for information about their blood group, along with other

details such as PAN number and proof of residence, as part of KYC. But

such personal details are optional and it is not binding on the customer to

provide them, said an official from the bank.

KYC norms deter rural clients:

Another reason is Know Your Client (KYC) norms where every

account holder has to disclose relevant detail like photo identity, address

proof, PAN card above a certain amount, etc. For rural people it is very

difficult to provide these details as a number of them are not literate

especially not in English and documents are generally maintained in

English.

53


If a rural person does not have his own residence, it is a tedious

job to prove his address. In that case, the person prefers not to come to

the bank and goes to the local moneylender who does not ask for such

documentation. How can an old single woman arrange a PAN card to go

for a minimum fixed deposit?

Compliance Risk:

"But it is for the general good. There is a law and there is need to

follow a certain process. World over compliance risk is the biggest risk,"

he said.

Bank officials point out that all application forms are divided into

two parts mandatory information and optional information.

The mandatory information includes the ISA verification - Identity,

Signature and Address, said Mr. Ghotgalkar, Corporate Head, Retail

Banking, IDBI Ltd.

Other information, such as previous credit history and details about

the customers' assets are usually part of optional information, which the

customer need not reveal.

54


13. KYC IS NOW `A MODERN DAY INTELLIGENCE

ART FORM:

A question that the Big B may not ask on KBC is:

What does KYC stand for?

a) Kaun Yaar Crorepati

b) Kentucky Yummy Chicken

c) Know Your Customer

d) Kieler Yacht Club?

No prize for the right answer. But penalty is huge if you don't

`know your customer', especially in the world of finance.

Which is why, the Indian Banks' Association (IBA) organized a

`focused briefing' on `Compliance to KYC norms'. IBA's letter about the

programme exudes urgency: "With Financial Intelligence Unit (FIU)

formed in India, in tune with FATF (Financial Action Task Force)

guidelines, and RBI (Reserve Bank of India) stepping up KYC

compliance pressures...

55


KYC is not a one-time effort while signing up a new customer,

points out the IBA. "It involves continuous monitoring of customer

behavior as reflected through his transactions with the bank. It is here that

AML technology finds its use."

Even if a financial institution takes all reasonable steps to

determine the veracity of a potential customer, it may still be held

responsible if that customer is subsequently determined to be engaged in

criminal or other illegal activities,"

The banker would have to know the source of funds, nature of

customer's business, what constitutes reasonable account activity, and

who the customer's customers are!

56


14. IS THERE ANY SOFTWARE FOR KYC?

Yes there is software called 3C KYC. 3C KYC provides a single,

consolidated view of all KYC (Know Your Client) cases being managed;

and automates the processes, rules and activities required to ensure fast

and secure compliance to avoid penalties while gaining visibility and

control of their compliance operation.

14.1 3C KYC:

Offers you a data information centre which can be accessed by your

compliance team or other members of your company with built in

granular security levels. 3C KYC is designed to store all the compliance

information you require to satisfy both the regulator and your board.

14.2 KYC Task Checker:

The KYC Task Checker can be used to log extra information about the

client or ensure that compliance staff has taken the correct steps during

the clients relationship with the company. The Task Checker is fully

customisable by the Compliance Officer so that any task can be

monitored in line with business requirements.

57


14.3 Regulatory Information:

Contact history with regulatory bodies is also stored with a full audit

trail. Regulatory relationships are easily accessible. Store regulatory

public notices, new sanctions and warnings

14.4 Client Information:

3C KYC - offers your compliance team a 360 view of your client details,

including notes, correspondence and KYC activities. STR’s, Complaints

and Court Orders can also be logged against the client details. The client

note area allows you to store and share information about your client.

14.5 Key Personnel Information:

Key Personnel Directorships and responsibilities can cross referenced

against your client details. Staff KYC training can also be logged.

14.6 KYC Checking:

3C KYC provides you with a central data hub to import your watch list

information. The diary area is customisable enabling you to store and

monitor Compliance related activities.

14.7 End to End Compliance:

3C KYC offers you an optional integration service to your watch list

solutions, giving you the benefit of on-going due diligence

58


14.8 Data Storage & Creation:

Centralize all documentation including, professional indemnity and

auditors reports. Standardise compliance documentation with the built in

3C word processor using your standard letter templates.

14.9 Mail Merge:

3C KYC - has a built in Mail Merge system for use with POI & POA

requests the merge is automatically filed against your client data.

14.10 Scanning:

Scan all your KYC documents, watch list findings and regulatory

documentation straight into your client and regulatory data areas.

14.11 E-mail Management 3C KYC has a built in e-mail management

system which automatically files.

59


15. KYC NORMS: DOES OUR GOVERNMENT KNOW

ITS CLIENT, CUSTOMER, COUNTERPART,

CONTEMPORARY, CHANDLER OR CONTRACTOR?

For the common man, a KYC (know your customer) process is

needed for every small transaction. For corporates, these norms are more

stringent, in issues concerning security and taxation. But the government

ignores all KYC requirements for large and international corporates, and

seems to be happy to do business with ghosts hiding behind tax havens

and opaque corporate structures.

Today, we are in the amazing position of not knowing who the real

beneficiary owners in India are for the following corporates operating

freely in India, happily hiding behind their tax havens and client/attorney

privileges, changing despondent ownerships like other people change

cloths. They all know who or what the president of India is, can sue or

take action against the government if required, but themselves hide

behind their opaque curtains.

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These include:

1. The largest foreign banks, payment processors, investment

banks, stock market investors and others with the financial strings of our

country in their hands.

2. The largest private security providers, huge empires in their own

rights, carrying out all sorts of activities all over India with access to

everything including our borders, ports and defense posts.

3. The largest info-tech companies, including a few “ghosts”, who

ostensibly appear to be from certain developed countries, but are actually

not from there.

The thing is our government increasingly does not know who

or what they are doing business with. That they have not the faintest

clue or wish to try to impose even pretence of a KYC norm on these

large corporate and entities.

There needs to be something done about this, and soon. It is

absolutely incredible and criminal to have a situation where large

corporate working in India are not subject to at the very least the same

KYC fundamentals that the citizens of India are subject to. And it is also

important to try and find out how things came to this pass.

If our government is selling our country, then we should know,

at least, who are they selling it to?

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Appendix- I

CASE STUDIES

1.

Reserve Bank of India has fined Rs 5 lakh fine on Citigroup's

Indian banking unit, for flouting the central bank's `Know Your

Customer' (KYC) norms, with regard to not verifying the background

of an account holder. This is the first time that RBI has imposed a fine on

any bank for not meeting the KYC norms.

As per the guidelines on KYC, banks are required to carry out due

diligence of customers before opening any deposit account. This is a step

taken by the apex bank to combat money laundering and financing of

terrorism in the country.

In August 2002, RBI advised banks to complete an appropriate

KYC procedure for establishing identity by means of suitable documents

and to ensure that adoption of such a procedure does not lead to denial of

access to banking services for the general public.

Further, in December 2002, banks were advised to review the

accounts opened prior to August 2002, for compliance with the KYC

norms and take necessary steps to complete the work in respect of all

accounts in a phased manner by December 2004.

2. HDFC BANK:

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IPO scam: HDFC Bank, 2 others fined

Mumbai, Feb. 27.2011

The Reserve Bank of India on Monday fined HDFC Bank, IDBI

and ING Vysya Bank for violation of Know Your Customer norms and

other irregularities in relation to the recent IPO scam.

HDFC Bank has been slapped with the highest penalty of

`25 Lakh; ING Vysya Bank - ` 10 Lakh and IDBI Ltd ` 5 Lakh.

This is the second time HDFC Bank has been fined for violation of

KYC norms. In January, the bank was imposed a penalty of `5 Lakh.

According to an RBI release, these banks have been fined, "for

violation of regulations on KYC norms, for breach of prudent banking

practices and for not adhering to its directives/guidelines relating to loans

against shares/ IPO."

Appendix-II

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Features to be verified and documents that may be obtained from

customers

Features Documents

Accounts of individuals

- Legal name and any other names

used

- Correct permanent address

(i) Passport

ii) PAN card

(iii) Voter’s Identity Card

(iv) Driving licence

(v) Identity card (subject to the

bank’s satisfaction)

(vi) Letter from a recognized public

authority or public servant verifying

the identity and residence of the

customer to the satisfaction of bank.

(i) Telephone bill

(ii) Bank account statement

(iii) Letter from any recognized

public authority

(iv) Electricity bill (v) Ration card

(vi) Letter from employer

Accounts of companies (i) Certificate of incorporation and

Memorandum & Articles of

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- Name of the company

- Principal place of business

- Mailing address of the company

- Telephone/Fax Number

Association

(ii) Resolution of the Board of

Directors to open an account and

identification of those who have

authority to operate the account

(iii) Power of Attorney granted to

its managers, officers or employees

to transact business on its behalf

(iv) Copy of PAN allotment letter

(v) Copy of the telephone bill

Accounts of partnership firms

- Legal name

- Address

- Names of all partners and their

addresses

-Telephone numbers of the firm

and partners

(i) Registration certificate, if

registered

(ii) Partnership deed

(iii) Power of Attorney granted to a

partner or an employee of the firm

to transact business on its behalf

(iv) Any officially valid document

identifying the partners and the

persons holding the Power of

Attorney and their addresses

(v) Telephone bill in the name of

firm/partners

Accounts of trusts & foundations

- Names of trustees, settlers,

(i) Certificate of registration, if

registered

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beneficiaries and signatories

- Names and addresses of the

founder, the managers/directors

and the beneficiaries

- Telephone/fax numbers

(ii) Power of Attorney granted to

transact business on its behalf

(iii) Any officially valid document

to identify the trustees, settlors,

beneficiaries and those holding

Power of Attorney,

founders/managers/ directors and

their addresses

(iv) Resolution of the managing

body of the foundation/association

(v) Telephone bill

Appendix-III

ABRIVATIONS

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1. KYC NORMS- KNOW YOUR CUSTOMER NORMS

2. KYE-KNOW YOUR EMPLOYEE

3. RBI-RESERVE BANK OF INDIA

4. AML-ANTI MONEY LAUNDERING

5. CFT-COMBATING OF FINANCING OF TERRORISM

6. PMLA-PREVENTION OF MONEY LAUNDERING ACT,2002

7. CAP-CUSTOMER ACCEPTANCE POLICY

8. PEPS-POLITICALLY EXPOSED PERSONS

9. CIP-CUSTOMER IDENTIFICATION PROCEDURE

10. FATF-FINANCIAL ACTION TASK FORCE

11. FIU-IND-FINANCIAL INTELLIGENCE UNIT-INDIA

12. NBFC-NON-BANKING FINANCIAL COMPANY

13. CTR-CASH TRANSACTION REPORTS

14. STR-SUSPICIOUS TRANSACTION REPORTS

15.CDSL-CENTRAL DEPOSITORY SERVICE(INDIA) LIMITED

16. CVL-CDSL VENTURE LIMITED

17.AMFI- ASSOCIATION OF MUTUAL FUNDS OF INDIA

18. PAN CARD- PERSONAL ACCOUNT NUMBER

Appendix-IV

Questionnaires

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1. Sir, How much KYC (Know Your Customer) Norms are important?

Bank Manager- KYC for banks is as an important factor just like

breathing is important to live a life.

2. Sir, Does it really help to overcome future financial problems?

Bank Manager-Yes, it does but up to some extent. We do take all

precaution as not to have default in future but after all problems are

uncertain and we never know what will happen in next moment.

3. Sir, Does customer provide co-operation?

Bank Manager- Yes and they have to. Sometime it does take time for all

documentation but then too customer provides all information and

required data.

4. Sir, Are you losing your customer because of KYC?

Bank Manager- Not at all. As I said before, we do not harres any

customer to provide unnecessary information.RBI has issued some

guideline towards KYC and accordingly all banks have to follow it. We

do take care of our customer

5. Sir, Any fraud up till now?

Bank Manager-I cannot say fraud but customer make default but that too

5 out of 100 customers. And as I know in the history of State of Bank of

in India there is not any big fraud happened.

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6. Sir, anything you want to say about today’s scenario?

Bank Manager-KYC Norms are now days became key factor for each

bank. There are lots of fraud happening every day and to overcome this

problem all bank have to keep an eye on each transaction.

Our Government doesn’t even bother about happening of

malpractices of anti-money laundering which take place every single day.

There are lots of rules and regulations to overcome financial problems but

then too frauds happen. We can just take care by following RBI’s rules.

Appendix-V

BANK CERTICICATE

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20. CONCLUSION:

Positive part:

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KYC (know Your Customer) do provide protection against Anti-

Money Laundering (AML) Measures/Combating of Financing of

Terrorism (CFT).

It helps banks and financial institution by providing security measure to

prevent future defaults.

Negative part:

In place of KYC it has become H2HYC (How to Harres Your

Customer).

Even with all these the people who want to do all these things they

get away with everything, but only innocent people getting harassed by

the banks with these policy. For simple customers all these ruling are

there. But for the big fish all these rules are getting by passed that is the

reason even after putting all these condition they are able to manage the

show. This is the reason for all malpractice going on all over the world.

IF POSSIBLE GOVERNMENT SHOULD LOOK SERIOUSLY.

21. BIBLIOGRAPHY:

WEBSITE

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http://www.rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx

http://fiuindia.gov.in/identity-knowcustomer.htm

http://www.thehindubusinessline.in/2006/07/18/stories/

2006071800690600.htm

http://www.thehindubusinessline.in/2006/07/18/stories/

2006071800690600.htm

NEWS PAPERS:

1. BUSINESS LINE-DATED: FEB 28TH 2006-IPO SCAM

2. BUSINESS LINE-DATED: Apr 13th 2006- FRIENDLY CHAT

3. BUSINESS LINE –DATED: JUL 18TH 2006 –KYC NORMS CROSSING LIMITS

4. THE ECONOMIC TIMES – DATED: JAN 16TH 2011- CITY BANK FRAUD

5. THE ECONOMICS TIMES-DATED:JUN 3RD 2011-GOLD FINANCE

MAGAZINE:

-August 01, 2011

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http://www.thehindubusinessline.in/2006/07/18/stories/2006071800690600.htm




http://fiuindia.gov.in/identity-knowcustomer.htm

http://www.rbi.org.in/scripts/BS_ViewMasterCirculardetails.aspx