Professional Documents
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KYC & AML Booklet - July 2009
KYC & AML Booklet - July 2009
And
Anti-Money Laundering (AML) Standards
July 2009
FOREWORD
Indian Banks' Association brought out the first edition of "Know Your
Customer (KYC) Standards and Anti-Money Laundering (AML) Measures -
IBA Guidance Notes for Banks" in October 2005. This was meant to give
broad outlines of policy frame work based on international practices to
serve as a reference guide to banks in complying with the provisions of
the Reserve Bank of India guidelines on "Know Your Customer Guidelines
and Anti-Money Laundering Standards" and also to meet the obligations of
banks under the Prevention of Money Laundering Act (PMLA) 2002. The
IBA Guidance Notes were seen as useful in ensuring uniformity of approach
among the banks in implementing the KYC Norms and AML Standards.
The task of revising the Guidance Notes was assigned to a Working Group
formed with Senior Executives of member banks overseeing KYC / AML
measures. The hard work of going through relevant rules, regulations and
guidelines both national and international and redrafting the document
was taken up by a Core Group of members drawn from State Bank of India,
ICICI Bank Ltd., Standard Chartered Bank and HSBC. The Core Group met
on a number of occasions and deliberated on minute details to be
incorporated in the draft document before presenting to the Working Group.
I understand that the contents of the guidance notes were shared with
Reserve Bank of India and Financial Intelligence Unit-India (FIU-IND), New
Delhi and their informal but valuable suggestions incorporated in the
document. Financial Intelligence Unit - India (FIU-IND) had complimented
the efforts made by IBA for preparing comprehensive Guidance Notes for
the Industry. FIU-IND also mentioned that the document would be found
useful by banks and their employees and improve compliance to the
Prevention of Money Laundering Act (PMLA) 2002.
KYC & AML Guidance Notes For Banks
I am sure that the Guidance Notes will create awareness on the legal and
regulatory framework for AML / CFT requirements and systems across the
banking sector. It would help banks to interpret the obligations under the
PMLA and other relevant regulations and how they might be implemented
in practice. Also, it would facilitate banks to align their operations with
good international industry practices in AML / CFT procedures through an
appropriate risk based approach and provide a framework for banks to
design and implement the systems and controls necessary to mitigate the
risks of the bank being used in connection with money laundering and
terrorist financing.
Mumbai M. V. NAIR
July 30, 2009 Chairman
INDIAN BANKS' ASSOCIATION
KYC & AML Guidance Notes For Banks
CONVENER
Mr. K Unnikrishnan
Deputy Chief Executive
Indian Banks' Association
MEMBERS
IBA SECRETARIAT
Mr. K Unnikrishnan
Deputy Chief Executive
Indian Banks' Association
MEMBERS
IBA SECRETARIAT
Mr. Tushar A Shah
Manager
KYC & AML Guidance Notes For Banks
PREFACE
* Preamble 1
* Purpose 2
* Scope 2
CHAPTERS
6. Transaction Monitoring 38
ANNEXURES
PREFACE
Preamble
In India, there had been laws and regulations for quite some time to address
certain aspects of money laundering prevention, like Criminal Law Amendment
Ordinance 1944 for attachment of proceeds of certain crimes or Reserve
Bank of India (RBI) instructions regarding identification requirements for
opening of the bank accounts. However, a consolidated anti-money
laundering specific legislation, Prevention of Money Laundering Act, 2002
(PMLA), came in to effect with the Government of India Gazette notification
on 1st July 2005. The Financial Intelligence Unit-India (FIU-IND) constituted
by Government of India on 18th November 2004 as a nodal agency for the
anti-money laundering measures also got statutory recognition on 1st July
2005.
In October, 2005 Indian Banks' Association (IBA) issued the "Know Your
Customer (KYC) Standards and Anti-Money Laundering (AML) - Guidance
Notes for Banks", basically for giving broad outlines of policy frame work
based on international practices to serve as a reference guide to the banks
in complying with the provisions of the RBI Circular dated 29th November
2004 on "Know Your Customer (KYC) Guidance - Anti-Money Laundering
Standards" and also to meet the obligations of banks under the PMLA. The
Guidance Notes helped in ensuring uniformity of approach among the banks
in implementing the KYC Standards and AML measures.
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KYC & AML Guidance Notes For Banks
Purpose
• Create awareness to the legal and regulatory frame work for AML/CFT
requirements and systems across the banking sector,
• Interpret the obligations under the PMLA and other relevant regulations and
how they may be implemented in practice,
• Help banks to align their operations with good international industry practice
in AML/CFT procedures through a proportionate risk based approach, and
• Provide a framework for banks to design and implement the systems and
controls necessary to mitigate the risks of the bank being used in connection
with money laundering and terrorist financing.
Scope
The scope of these Guidance Notes covers all member banks of IBA. Although
these Guidance Notes are designed primarily to cover the activities of banks, the
contents are generally applicable to other financial institutions and intermediaries
covered under the PMLA and are required to adopt KYC Standards.
It should be noted that these Guidance Notes issued by IBA are voluntary and
recommendatory in nature. Failure to comply with these Guidance Notes does
not mean that a Bank has automatically breached the Rules under PMLA or any
of the Guidelines issued by RBI. They do, however, provide an indication of what
the supervisors/ regulators may take into account as being expected of banks.
When tailored by a bank to its own risk management architecture and business
processes, these Guidelines provide a safety net in respect of Rules and Regulations
pertaining to AML.
It may please be noted that these Guidance Notes is an IBA document and the
information contained therein is only for the guidance of the industry and ease of
understanding of the legal provisions, and for legal purposes the provisions
contained in the PMLA and rules there under and instructions issued by RBI from
time to time would be applicable.
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KYC & AML Guidance Notes For Banks
Chapter 1
OVERVIEW AND REGULATORY FRAME WORK
Terrorists use similar methods as Money Launderers for moving their funds.
Some of the terrorist groups also indulge in criminal activities for generating
funds for their activities and some of them are even known to have
strong relationships with criminal gangs. The two major differences between
terrorist financing and money laundering are:
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KYC & AML Guidance Notes For Banks
Other financial crimes such as Fraud and market abuse (insider trading)
are closely related to money laundering and terrorist financing and most
often the measures described in these guidelines for preventing money
laundering and terrorist financing may help financial institutions in preventing
fraud and other financial crimes, as well.
Over the years more members were admitted to the FATF and the current
membership is 34, including 32 member states and 2 regional organizations,
European Union and Gulf Development Council. India and Republic of Korea
are currently countries with observer status aspiring to be full members.
Forty Recommendations
(http://www.fatfgafi.org/document/28
0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html)
While most of the recommendations are meant for the countries to establish
an AML Infrastructure by criminalizing money laundering, making provisions
for confiscating assets of the money launderers, establishing Financial
Intelligence Unit, transparency of legal persons and arrangements,
international co-operation, mutual legal assistance and extradition, etc.
the following recommendations relate to measures to be taken by financial
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KYC & AML Guidance Notes For Banks
(http://www.fatf.org/dataoecd/43/46/38960576.pdf)
This guidelines on the high level principles and procedures in risk based
approach in combating money laundering and terrorist financing was
prepared by FATF in close consultation with representatives of the
international banking and securities sector and was adopted by FATF at
its Plenary in June, 2007.
1.4.2 UN Security Council Resolutions 1267 (1999), 1373 (2001) and 1390
(2002)
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KYC & AML Guidance Notes For Banks
India was evaluated for its compliance on AML/CFT with 40+9 FATF
recommendations by APG in 2005. Following were the recommendations
and Comments of the APG in its Mutual Evaluation Report (APGMER) 2005
in regard to FATF recommendation 21 about dealing with countries with
insufficient FATF standards:
Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI),
Insurance Regulatory and Development Authority (IRDA) and FIU-IND are
the bodies mainly responsible for the anti-money laundering efforts for
financial institutions in India. RBI as the lead regulator for banks and other
financial institutions issue regulations on the subject. FIU-IND is an
independent body reporting directly to the Economic Intelligence Council
(EIC) headed by the Finance Minister of India and is responsible for
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KYC & AML Guidance Notes For Banks
The first step in the anti-money laundering legislation in India was the
introduction of the Prevention of Money Laundering Bill 1998 in the
Parliament in August 1998. Since the Lok Sabha was dissolved in April
1999, this bill could not be passed. Prevention of Money Laundering Bill
1999 was introduced in the Parliament in October 1999. This bill was
passed by the Parliament in 2002 and received President's assent in January
2003 and PMLA, 2002 was enacted. This law came to effect on 01 July
2005 after an amendment.
The act criminalises money laundering and also provides for freezing and
confiscation of assets concerned in money laundering. Appointment of
various authorities including Financial Intelligence Unit is also covered in
its provisions. The Act also lays down obligations of banks in maintaining
records of certain prescribed transactions and reporting such transactions
to FIU-IND. This also lists out the prescriptive offences, which will come
under the purview of the Act.
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KYC & AML Guidance Notes For Banks
1.5.2 Know Your Customer (KYC) Guidelines -Anti Money Laundering (AML)
Standards - RBI Circular dated November 29, 2004
This was the major step in the banking industry in India towards money
laundering prevention. Though RBI had historically issued guidelines to
banks for conducting due diligence of customers including taking
photographs, this was the first comprehensive anti-money laundering
initiative by RBI. The Guidelines required the banks in India to follow the
following steps towards preventing money laundering :
• Customer Acceptance Policy
• Customer identification Procedures
• Monitoring of Transactions, and
• Risk Management
By this circular RBI has instructed the Banks to apply limited due diligence
to people belonging to low income group who are unable to produce CDD
documents as prescribed in RBI's KYC Guidelines for opening the accounts.
Limits are prescribed for aggregate credits and balance in these accounts.
SEBI issued these guidelines to all the SEBI regulated entities for complying
with the requirements of PMLA, like CDD on customers, maintaining records
of prescriptive transactions, reporting of suspicious activities, etc.
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KYC & AML Guidance Notes For Banks
RBI vide this circular has given specific instructions regarding furnishing of
originators name and address/ account details in the cross border and
domestic wire transfers.
1.5.8 Know Your Customer (KYC) Norms/Anti-Money Laundering (AML)
Standards /Combating of Financing of Terrorism (CFT) - RBI Circular
dated February 18, 2008
This circular clarifies certain points regarding CDD documentation as required
in the KYC Guidelines and AML Standards and also on risk categorization
review of accounts, periodic KYC updation and screening of names against
lists of entities contained in the UN Security Council resolutions in their
anti money laundering and terrorist financing measures.
1.5.9 Prevention of Money Laundering Act, (PMLA) 2002 - Obligation of
banks in terms of Rules notified there under - RBI Circular dated
May 22, 2008
This circular clarifies on the reporting obligations under the PMLA, especially
on what constitute integrally connected cash transactions and also on
reporting requirements irrespective of the threshold applicable for certain
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in the AML/CFT regime of six countries namely Sao Tome and Principe,
Turkmenistan, Iran, Northern Part of Uzbekistan and Pakistan.
Accordingly, banks and financial institutions may place these countries in
a higher risk category, and put in place a framework to monitor the cross
border transactions involving these countries.
1.6 Extra-territorial Applicability of the Indian Anti-Money Laundering
Laws and Regulations
As per the provisions of PMLA, Central Government of India may enter in
to reciprocator agreement with other countries for implementation of all
or some of the provisions of the Act in that country.
The RBI regulations are applicable to all the branches of subsidiaries of
Indian banks functioning in other countries and for these institutions where
the host country regulations are more onerous; the host country regulation
will prevail.
1.7 Implications of International Regulations - UN / US / EU Sanctions
International bodies such as the United Nations (UN) and other regulators
belonging to the United States (US) and European Union (EU) periodically
release information on the various sanction programmes imposed at country
and individual / entity level with regards to AML/ CFT measures. Member
nations of the UN need to comply with the resolutions passed at the UN.
Banks are advised by RBI for complying with the same.
Where the Bank has a US listing, or has activities in, or linked to, the USA,
whether through a branch, subsidiary, associated company or
correspondent bank relationship, there could be application of US AML/
CTF and financial sanctions regimes to the non-US activities of the firm,
e.g. US Dollar transactions cleared through US. It essentially means that
though a particular US AML / CTF or financial sanction may not be applicable
directly to a transaction if done in India, it may become applicable if it is
carried out in US dollar or any 'US person' like a US based bank or branch
is involved in the transaction. Banks may take appropriate advice on the
extent to which the firm's activities may be covered in this way.
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KYC & AML Guidance Notes For Banks
Chapter 2
INTERNAL CONTROLS AND STRUCTURE IN BANKS
2.1 What are the roles and responsibilities of Board of Directors and
Senior Management
The Board of Directors and the senior management of the bank have the
responsibility to ensure that the bank's control processes and procedures
are appropriately designed and implemented, and are effectively operated
to reduce the risk of the Bank being used in connection with money
laundering or terrorist financing.
Appointment of Principal Officer
It is the responsibility of the Board of Directors to appoint the Principal
Officer (PO). It is recommended that the PO has a sufficient level of seniority
within the bank and has sufficient resources, including sufficient time and (if
necessary) support staff. The level of resources should reflect the size,
complexity and geographical spread of the bank's customer/product base
and should include arrangements to apply in the event of the temporary
absence of the PO.
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KYC & AML Guidance Notes For Banks
The Bank can however make normal enquiries to learn more about the
transaction or instruction to determine whether the activities of the
customer arouse suspicion.
Where it is known or suspected that a STR has already been made internally
or externally, and it then becomes necessary to make further enquiries,
care must be taken to ensure that the suspicion is not disclosed either to
the client or to any other third party. Subject to internal procedures, such
enquiries should normally/only be made as directed by the Principal Officer
(PO).
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KYC & AML Guidance Notes For Banks
of people between the person with the suspicion and the PO. This ensures
speed, confidentiality and accessibility to the PO. All procedures should
be documented in an appropriate manual or handbook and job descriptions
drawn up. All suspicions reported to the PO should be documented (in
urgent cases this may follow an initial discussion by telephone).
All internal enquiries made in relation to the report, and the reason behind
whether or not to submit the report to the FIU-IND, should be documented.
This information may be required to supplement the initial report or as
evidence of good practice and best endeavors if, at some future date,
there is an investigation and the suspicions are confirmed.
2.2 What are the roles and responsibilities of the staff
2.2.1 Keeping abreast with AML information relevant to their role
The communication of a Bank's policies and procedures to its staff to
prevent money laundering, and the training in how to apply those
procedures, is the key to the success of anti-money laundering strategies.
The staff that are interacting with customers or handling customer
transactions/instructions will be a Bank's strongest defense against money
laundering or its weakest link. The means by which their obligations are
communicated to them, and the effectiveness of the associated training,
will therefore determine the success of the bank's anti-money laundering
efforts. Therefore, as much as it is important for the Bank to communicate
the policies and procedures to its staff, it is equally important for the
staff to keep themselves abreast with the policies and procedures relevant
to their role.
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2.5 What are the roles and responsibilities of the Business Groups
Banks may consider appointing business groups, who are usually the heads
of the respective businesses/functions within the bank. The responsibilities
of the business groups would be as follows:
a. Assist line management in their responsibility for complying with all
relevant AML regulations and standards;
b. Cascade AML related information and requirements to department
staff and to ensure AML related requirements are incorporated into
operating procedures;
c. Monitor adherence to AML procedures and controls. In particular, to
monitor changes to business practices and products to ensure that
AML procedures and controls are adequate to cover them;
d. Assist in the provision of anti-money laundering training, where
necessary;
e. Report all material and significant breaches or potential breaches of
AML requirements to the PO.
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Chapter 3
CUSTOMER RISK CATEGORIZATION (CRC)
3.1 What is Customer Risk: 'Customer risk ' in the present context refers to
the money laundering risk associated with a particular customer from a
bank's perspective. This risk is based on the risk perceptions associated
with the parameters comprising a customer's profile, and the level of risk
associated with the product and channels being used by him.
3.2 Need for Customer Risk Categorization: The RBI master circular dated
July 01, 2009 on Know Your Customer (KYC) Norms/Anti Money Laundering
Standards, which consolidates all guidelines issued on the subject, requires
the banks to categorise customers into low, medium, & high risk categories
and have differential due diligence and monitoring standards based on the
risk assessment.
The guidelines further require the banks to carry out a review of risk
categorization of customers at a periodicity of not less than once in six
months. It is therefore, now mandatory for banks in India to introduce a
system of CRC for their customers.
3.3 Risk based approach: RBI guidelines also reiterate that Banks should
follow a 'risk based approach' on KYC/AML standards to avoid
disproportionate costs and a burdensome regime for the customers.
Categorising customers into different risk buckets can serve as a platform
to adopt such approach.
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KYC & AML Guidance Notes For Banks
Each bank may develop its own model for customer risk categorization
based on available product/customer information, risk perception, and
other factors such as available technology, etc. A profile of the customer
may be created in the system using available information based on which
the risk should be assigned. The following broad approach may be adopted
for risk categorisaton:
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KYC & AML Guidance Notes For Banks
3.5 Use of Software for risk categorization: Banks may (if required by their
approach to risk categorization), deploy suitable software for purpose of
risk categorisaton. Such software can be used to extract customer data
from the banking software and assign risk rating based on the scoring model
selected by the bank. If a bank chooses and if its core banking application
permits, CRC maybe done in the core banking software as well.
3.6 CRC and Transaction Monitoring: A risk based approach on AML requires
the CRC to be linked to transaction monitoring process, with a high risk
account requiring a more enhanced monitoring by way of lower thresholds
and periodical reviews, as compared to a low risk account.
3.7 Periodic review of CRC: RBI guidelines mandated that a review of risk
categorization of customers should be carried out at a periodicity of not
less than once in six months. Since CRC is an on going process, a 'risk
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3.9 Conclusion:
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Chapter 4
KNOW YOUR CUSTOMER (KYC)
4.1 Customer defined: The RBI Master Circular dated July 1, 2009 on Know
Your Customer (KYC) Norms & Anti Money Laundering Standards, which
consolidates all guidelines issued on the subject, defines 'Customer' as:
Banks need to frame policies, which will enable the identification of the
customer. The KYC policy of a bank should incorporate the following four
elements:
d) Risk Management
4.2 Customer Acceptance Policy (CAP): 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:
ii. The customers are categorized as per their risk perception based on
their profile (See Chapter 3 - Customer Risk Categorization)
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KYC & AML Guidance Notes For Banks
iv. Not to open an account or close an existing account where the bank
is unable to apply appropriate customer due diligence measures. (Please
see below for a detailed note on CDD).
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 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.
vi. Necessary checks before opening a new account so as to ensure
that the identity of the customer does not match with any person
with known criminal background or with banned entities such as
individual terrorists or terrorist organisations etc. (See Chapter 7 -
Name Screening Process)
What is Identity?
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KYC & AML Guidance Notes For Banks
Addresses / location and nationality and other such identifiers may serve
as secondary identifiers' as they help further refine the identity though
they may not directly help uniquely identify a natural or legal person.
4.5 What is Customer Due Diligence?: Customer Due Diligence (CDD) can
be defined as any measure undertaken by a financial institution to collect
and verify information and positively establish the identity of a customer.
The base of CDD would be the board approved Customer Acceptance
Policy of a bank. Based on Customer Acceptance Policy, the Customer
Identification Procedures needs to be drawn.
4.6 When should a bank apply CDD?: CDD should be conducted as a part of
the Customer Identification Procedures. A bank should apply Customer
Due Diligence measures when it:
i. establishes a business relationship;
ii. carries out an occasional transaction;
iii. suspects money laundering or terrorist financing; or
iv. doubts the veracity of documents, data or information previously
obtained for the purpose of identification or verification
4.7 When a Bank is unable to apply Customer Due Diligence measures, it:
ii. should not carry out a transaction with or for the customer through a
bank account;
iii. should terminate all existing business relationship with the customer;
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4.8 Types of CDD: There are three types of CDD that can be used by a bank
in accordance with the risk category of the customer. These are listed as
follows:
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EDD can also be built in the account opening processes at the product
level or customer type level, where the high risk customers are easily
identifiable (e.g. NRIs, Trust accounts, Correspondent banking). Other
EDD measures like enhanced level of transaction monitoring for high-risk
customers can be undertaken for customers who fall in the high-risk
category post the exercise of customer risk categorisation. EDD on
existing accounts may also be conducted if required when AML alerts
are generated as a part of the transaction monitoring process.
ii. High Risk Countries: Customers who live in countries that are
considered High Risk or deficient in respect of implementation of KYC
and Anti Money Laundering measures should be classified by a bank as
high risk. Each Bank should draw its own list of high risk countries for
monitoring of such customers. The list can be based on parameters
such as FATF membership, advisories issued by FATF/UN on certain
countries, etc. A country risk rating can be further integrated into the
customer risk emanating from the country of their residence.
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iv. Trust accounts: Would require strict documentation and due diligence
to be exercised as given in the KYC documentation table below.
Trusts are popular vehicles for criminals wishing to avoid the
identification procedures and mask the origin of the criminal money
they wish to launder. The principal objective for money laundering
prevention via trusts is to verify the identity of the provider of funds/
those who have control over the funds, i.e. the grantors, settlers &
trustees.
vi. Non face-to-face customers: Customers with whom the bank has
not had direct interaction at the time of opening the account would
require stricter documentation as the Bank may specify. e.g.
Certification by independent authority such as notary, foreign resident
banks, correspondent banking partners, embassy officials; insisting
on additional documentation to establish identity and address etc.
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KYC UPDATION
4.15 Need for KYC updation: RBI guidelines require banks in India to "introduce
a system of periodical updation of customer identification data (including
photograph/s) after the account is opened. The periodicity of such updation
should not be less than once in five years in case of low risk category
customers and not less than once in two years in case of high and
medium risk categories."
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4.16 Basis for KYC updation: Since the KYC updation is to be carried out
based on the risk category of the customer; it becomes essential that all
customers of the bank have been given a risk category before proceeding
for KYC updation.
4.17 Approach for KYC updation: Before developing their own approach for
KYC updation, banks need to assess the following:
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Note : Identity of the customer does not change over the lifetime of the
customer. The identity verification needs to be done only to confirm
his current existence, and validity of the identity document.
Software & channel capabilities: Banks would need to determine its software
and channel requirement for this exercise. If a bank wants to store scanned
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4.19 Making customer responsible for KYC updation: The customer may
be informed about his obligation to fulfill the RBI requirements of KYC
updation. This can be done by incorporating appropriate clause in the
Account Opening Form (AOF), by way of periodic reminders in the
communication sent out to him, or through customer education campaigns.
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Chapter 5
REPORTING OBLIGATION UNDER PMLA ACT
5.1 In terms of the Rules notified under Prevention of Money Laundering Act,
2002 (PMLA) certain obligations were cast on banking companies with
regard to reporting of certain transactions. The RBI has issued circular No
DBOD.NO.AML.BC.63 /14.01.001/2005-06 dated February 15, 2006 and
DBOD.AML.BC. No. 85/ 14.01.001 / 2007-08 dated May 22, 2008, detailing
the obligation of banks in terms of the Rules notified under PMLA.
Accordingly, Banks are required to make the following reports to the FIU-
IND.
As per the PMLA rules, Bank is required to submit the details of:
All cash transactions of the value of more than rupees ten lakh or its
equivalent in foreign currency.
RBI vide circular dated May 22, 2008 has clarified that Cash transaction
reporting by branches to their controlling offices should be submitted on
monthly basis and not on fortnightly basis.
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While the circular provides both manual as well as electronic formats for
submission of CTR, banks have been advised to initiate urgent steps to
ensure electronic filing of CTR.
In case of Banks who have implemented software solutions for AML, CTR
generation module forms part of the standard suite of the software.
Some Banks who have not availed of AML software may require their
technology departments to institute suitable procedures for extraction of
data and arranging the same in form of text files in specified format every
month.
Banks on CBS find it relatively easier to report the CTR. However other
banks would have to ensure that the generation of CTR is a centralised
activity and therefore their processes have to facilitate timely collation of
data across all branches at one location so that reporting can be done.
Banks are required to incorporate the BSR code in the Branch file of the
CTR and this is also necessary as part of the format to be incorporated in
the CBAACC, CBAINP and CBALPE for cross-referencing. In case BSR is
not available in case of new branches, banks may use a unique code
other than BSR for the branch so that it is possible to identify records
across the CTR files.
The PMLA Rule 3(1)(C) read with rule 8 requires the reporting of all cash
transactions where forged or counterfeit Indian currency notes have been
used as genuine. The RBI vide circular dated May 22, 2008 provided the
format in which the CCR needs to be reported to the FIU-IND. The said
report is required to be filed not later than seven working days from the
date of occurrence of such transactions.
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KYC & AML Guidance Notes For Banks
For enabling CCR reporting banks would need to put in place a mechanism
such that information on counterfeit currency flows to a central location
for onward submission to FIU-IND through the principal officer.
RBI vide circular dated May 22, 2008 provides that 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.
The PMLA Rule 3(1)(D) read with rule 8 requires the reporting of all
suspicious transactions whether or not made in cash.
RBI circular dated February 15, 2006 requires that the Suspicious
Transaction Report (STR) should be furnished within 7 days of arriving at
a conclusion that any transaction, is of suspicious nature. The Principal
Officer should record his reasons for treating any transaction or a series
of transactions as suspicious. It should be ensured that there is no undue
delay in arriving at such a conclusion once a suspicious transaction report
is received from a branch or any other office. The said circular also
provides the format of the STR.
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STR is the 'Soul' of the STR as it answers the essential question of why
the STR is being filed. Therefore the GOS have to be accurate and
complete. The grounds of suspicion should express fully 'why' the
transaction or activity is unusual, unjustified, does not have economic
rationale, or bonafide purpose keeping in mind the banking business and
services offered by the Bank. The GOS could also explain the relationship
between persons (natural & legal), accounts and transactions that are
being reported as part of the STR. Correct reason for suspicion needs to
be identified as it signifies the character of suspicious activity. GOS need
to be in form of a detailed paragraph justifying why the transactions are
considered to be suspicious. Specific reference requires to be drawn to
the customers profile, apparent financial standing, past activity in account,
rationale/purpose behind the transactions, business profile and general
transaction pattern etc. These grounds are indicative in nature and may
vary from case to case. Findings of any other due diligence may also be
mentioned in the GOS.
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Chapter 6
TRANSACTION MONITORING
6.1 What is Transaction Monitoring?
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KYC & AML Guidance Notes For Banks
iii) AML Software: Banks may have an AML software to generate alerts
/ exceptions and then channel these alerts for suitable due diligence
and reporting. Alerts concluded to be suspicious might be reported to
the FIU-IND through the principal officer. RBI vide its circular dated
May 22, 2008, as a part of transaction monitoring mechanism, requires
banks to put in place an appropriate software application to throw
alerts when the transactions are inconsistent with risk categorization
and updated profile of customers.
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KYC & AML Guidance Notes For Banks
a. Customer location
b. Financial status
c. Nature of business
d. Purpose of transaction
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KYC & AML Guidance Notes For Banks
Banks may as per their internal policy in this regard and based on their
assessment of risk use following types of rules based on threshold limits
or patterns for generation of exception reports/alerts :
1. Pure thresholds:
2. Pattern checks:
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KYC & AML Guidance Notes For Banks
In case one STR has already been filed for a particular account and fresh
alerts pertaining to the same account are observed, the Bank needs to
exercise judgment as to whether it requires to be reported considering
following factors :
• Has any additional ground of suspicion which has not been reported
earlier, been discovered.
In case the STR is repeatedly reported, banks may consider closing the
account. However customer should not be tipped off.
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KYC & AML Guidance Notes For Banks
The RBI circular dated May 22, 2008 requires banks to have suitable
software to throw alerts for transaction monitoring. Thus it is an important
requirement for robust transaction monitoring system, especially in view
of the high number of transactions that the banks handle everyday, which
is making it increasingly difficult to monitor these through manual methods.
An AML software solution provides the interface wherein data from Core
banking system is uploaded into it on a periodical basis. Based on this
information the software generates alerts, which need to be investigated
by the Bank.
6.13 What are the features that should be available while selecting AML
software?
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KYC & AML Guidance Notes For Banks
Besides above any software should be compatible with the core banking
system and scalable and up gradable to meet the changing face of banking.
6.15 How can bank carry out due diligence without tipping off the
customer?
As a general practice Banks are advised by RBI not to put any restrictions
on operations in the accounts where an STR has been made. However, in
case any restrictions are placed it should be ensured that there is no
tipping off to the customer at any level.
Although the definition of tipping off has not been specified, tipping off
would mean informing/communicating to the customer that his account
has been or would be reported for suspicious activity to the regulators/
FIU-IND.
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KYC & AML Guidance Notes For Banks
most customers are well aware of the statute on money laundering and
legal provisions involving obligations of banks thereon.
4. The conclusion that has been arrived at after making the necessary
enquiries should not be revealed to the customer.
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KYC & AML Guidance Notes For Banks
Chapter 7
NAME SCREENING PROCESS
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KYC & AML Guidance Notes For Banks
As per extant RBI guidelines, banks are required to ensure that before
opening any new accounts, proposed customers do not appear in the
United Nations' List under Security Council Resolutions (mainly 1267 and
such others as may be specified by RBI from time to time) and the terrorist
lists circulated by RBI. All the UN resolutions published by RBI should be
made available at the branches or the relevant processing centres where
the account opening takes place.
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KYC & AML Guidance Notes For Banks
b. volume of transactions
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KYC & AML Guidance Notes For Banks
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KYC & AML Guidance Notes For Banks
the nearness of the match, the algorithm would arrive at the score of the
match. Minimum value of the match score is 1 and 100 is the maximum
score. A match score of 100 indicates an exact match.
System can be configured to ignore matches below a certain threshold.
Loose or tight matching logic can also be applied to arrive at the right
balance of false positives as per Bank's own judgment. The process of
fixing the threshold or matching logic should be done after detailed tests
and should be controlled at the Principal Officer level.
Due to the negative correlation and probable risks, systems and processes
should be designed to eliminate 'false positives' but not at the cost of
'false negatives'.
The following grid can be used to determine a 'true' or 'false' match:
Details Criteria
Date of Birth
Place of Birth Any two details to match with name
City (listed name or alias)
Nationality
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KYC & AML Guidance Notes For Banks
In addition to the details of the matched entity, the account opening and
customer identification documents also need to be forwarded to the Principal
Officer.
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KYC & AML Guidance Notes For Banks
Chapter 8
WIRE TRANSFERS - FATF SR VII COMPLIANCE
8.1 Banks use wire transfers as an expeditious method for transferring funds
between bank accounts. The wire transfer could be domestic or cross
border. The beneficiary and originator could also be the same person.
8.2 Domestic wire transfer means any wire transfer where the originator
and beneficiary are located within the same country. A transaction involving
a chain of wire transfers that take place within the borders of a single
country is domestic wire transfer even though the system used for effecting
the transaction is located outside the country.
8.3 Cross-border transfer means any wire transfer where the originator and
the beneficiary bank or financial institution 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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KYC & AML Guidance Notes For Banks
(c) When a credit or debit card is used to effect money transfer, necessary
information as (a) above should be included in the message.
(c) Where several individual transfers from a single originator are bundled
in a batch file for transmission to beneficiaries in another country,
they may be exempted from including full originator information,
provided they include the originator's account number or unique
reference number as at (b) above.
8.7 Inter-bank transfers and settlements where both the originator and
beneficiary are banks or financial institutions are exempted from the above
requirements.
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.
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KYC & AML Guidance Notes For Banks
8.9 While the information as required above will enable banks to furnish the
details to authorities in an expeditious manner for investigation or
prosecution of money laundering or terrorist financing cases, the beneficiary
banks also should analyse the data to find out any unusual/ suspicious
activities which they may consider reporting to the FIU-IND India.
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KYC & AML Guidance Notes For Banks
Chapter 9
STAFF AND CUSTOMER AWARENESS
One of the most important controls over the prevention and detection of
money laundering is to have staff members who are alert to the risks of
money laundering/terrorist financing and well trained in the identification
of unusual activities or transactions, which may prove to be suspicious.
The effective application of even the best-designed control systems can
be quickly compromised if the staff members applying the systems are not
adequately trained. The effectiveness of the training will therefore be
important to the success of the bank's AML/CFT strategy.
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KYC & AML Guidance Notes For Banks
b. The legal requirements contained in the PMLA and the rules and
regulations framed there under.
c. KYC/AML guidelines issued by the RBI from time to time.
Banks are required to take reasonable steps to ensure that staffs who
handle or are responsible for the handling of transactions which may
involve money laundering, are aware of:
d. the potential effect on the bank, on its employees and its customers,
of any breach of law.
All relevant staff should be made aware of the importance of the KYC
requirements for money laundering prevention purposes. The creation of
awareness and training of staff in this respect should cover:
Records of training
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KYC & AML Guidance Notes For Banks
In order to have an adequate control over AML, it is critical that key AML
controls, such as KYC checks, have the support of industry and customers.
Customers should see the KYC checks process as a sensible contribution
to the fight against crime and terrorism and not as a burdensome and
deliberate barrier to the access to banking. To promote this understanding,
KYC checks should to be done in a customer-friendly way and Banks'
procedures and staff training should be designed accordingly.
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KYC & AML Guidance Notes For Banks
Chapter 10
PRESERVATION OF RECORDS
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KYC & AML Guidance Notes For Banks
The term 'cessation' would broadly mean the time of closure of account.
However, there may be certain exceptions to this, for example:
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KYC & AML Guidance Notes For Banks
Annexure A
Residential Address
Landmark :
City : Pincode : State :
Office Address :
Landmark :
City : Pincode : State :
Res Tel No. Office Tel No. Extn. :
STD Code STD Code
Mobile No.
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KYC & AML Guidance Notes For Banks
Nationality :
If yes 1. Details of the Ward / Circle Range where the last return of income
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KYC & AML Guidance Notes For Banks
was filed
Residential Address
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KYC & AML Guidance Notes For Banks
(If applicable)
Customer Benefits :
1st Holder :
2nd Holder :
Internet banking
E-statements: Yes No
If yes, email address must be provided on page 1
Nomination :
Form DA1 Nomination under Section 45ZA of the Banking Regulation Act 1949
and Rule 2(1) of the Banking Companies (Nomination) Rule 1985 in respect of
Bank deposits.
I/We nominate the following person to whom in the event of my/our/ minor's
death, the amount of the deposit in the account, particulars, whereof are given
below, may be returned by
Bank Branch Deposit/Account:
Nature of Deposit
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KYC & AML Guidance Notes For Banks
Distinguishing No.
Guardian's Address :
to receive the amount of the deposit on behalf of the nominee in the event of
my/our minor's* death during the minority of the nominee.
If the account is in more than 2 names, do not complete this nomination form but
complete the nomination form in the supplementary account opening form.
Signature*** Signature***
Address Address
Date Date
* where the deposit is made in the name of a minor the nomination must be
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KYC & AML Guidance Notes For Banks
signed by a person lawfully entitled to act on behalf of the minor. **Strike out if
not a minor *** Thumb impressions must be attested by two witnesses.
Customer Instructions
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KYC & AML Guidance Notes For Banks
Annexure B
Please fill the form in CAPITAL LETTERS. Please additionally complete the
supplementary form in case of more than 2 applicants. Please do not staple this
form.
Product Choice
Nationality :
Mailing Address
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KYC & AML Guidance Notes For Banks
Mailing Address
Residence Office Mailing
Landmark : City :
Pincode : State : Country
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KYC & AML Guidance Notes For Banks
Landmark : City :
Pincode : State : Country
Res Tel No. Office Tel No. Extn. :
STD Code STD Code
Mobile No. Email
Mailing Address
Residence
(If applicable)
(If applicable)
Customer Benefits :
1st Holder :
2nd Holder :
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KYC & AML Guidance Notes For Banks
Customer Benefits
Nomination Form DA1 Nomination under Section 45ZA of the Banking Regulation
Act 1949 and Rule 2(1) of the Banking Companies (Nomination) Rule 1985 in
respect of Bank deposits.
I/We nominate the following person to whom in the event of my/our/ minor's
death, the amount of the deposit in the account, particulars, where of are given
below, may be returned by
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KYC & AML Guidance Notes For Banks
to receive the amount of the deposit on behalf of the nominee in the event of
my/our minor's* death during the minority of the nominee.
If the account is in more than 2 names, do not complete this nomination form but
complete the nomination form in the supplementary account opening form.
Signature*** Signature***
Address Address
Date Date
* where the deposit is made in the name of a minor the nomination must be
signed by a person lawfully entitled to act on behalf of the minor. **Strike out if
not a minor *** Thumb impressions must be attested by two witnesses.
Customer Instructions
Please note all Cheques should be Crossed and in favour of A/C (Your Name)
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KYC & AML Guidance Notes For Banks
It is my/our responsibility to obtain the terms and conditions from your bank and
read the same. I/We confirm that all information given in this application form is
true, correct, complete and upto date in all respects and I/We have not withheld
any information. I/We shall be held responsible for the same at all times if it is
incorrect. I/We confirm having read and understood the Rules and Regulations of
the Bank including Bank's tariff regarding the conduct of the account/deposits
and pertaining to Phone Banking, ATM, Debit Card, Internet Banking and Electronic
Banking facilities (collectively called "the said banking facilities") and agree to be
bound and abide by them/any other rules that may be in force from time to time.
I/We confirm being persons of Indian origin not residing in India. I/We understand
that the above account/deposit will be opened on the basis of statements made
by me/ us. I/we also confirm that my/ our residential status as per Indian Income
Tax Act 1962, in Non Resident Indian and I/ we agree and undertake to inform
the Bank in writing of any change in residential status. I/We undertake to strictly
operate and use the account/deposit and the said banking facilities in accordance
with the Exchange Control Regulations as laid down by RBI from time to time.
Declaration under Section 10 (5) of FEMA 1999: I/We hereby declare that all
foreign exchange transactions as may be entrusted by us to the Bank from time
to time do not involve and are not designed for the purpose of any contravention
or evasion of the provisions of the aforesaid Act or of any rule, regulation,
notification, direction or order made thereunder. I/We also hereby agree undertake
to give such information/documents as will reasonably satisfy you about the
transaction in terms of the above declaration. I/We also understand that if I/We
refuse to comply with any such requirement or make only unsatisfactory compliant
therewith the Bank shall refuse in writing to undertake the transaction and shall
if it has reason to believe that any contravention/evasion is contemplated by
me/us report the matter to RBI.
# Signature # Signature
Name Name
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KYC & AML Guidance Notes For Banks
# If the signature above does not tally with that on the ID Document please
confirm that you want the signature to be recorded as per above by signing as
per the identity document.
# #
Date
Please submit a passport size photo for all holders signed on the face/reverse
with the documents.
******
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KYC & AML Guidance Notes For Banks
Annexure C
Customer regularly issues large value cheques without balance and then
deposits cash.
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KYC & AML Guidance Notes For Banks
Annexure D
(i) A customer having a large number of accounts with the same bank, with
frequent transfers between different accounts;
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KYC & AML Guidance Notes For Banks
(iv) Accounts with large volume of credits through DD/TT/PO whereas the
nature of business does not justify such credits.
(v) Retail deposit of many cheques but rare withdrawals for daily operations.
Unusual Activities
(i) An account of a customer who does not reside/have office near the
branch even though there are bank branches near his residence/office.
(ii) A customer who often visits the safe deposit area immediately before
making cash deposits, especially deposits just under the threshold level.
(iii) Funds coming from the list of countries/centers, which are known for
money laundering.
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KYC & AML Guidance Notes For Banks
(iii) A customer who has no record of past or present employment but makes
frequent large transactions.
(ii) Receiving large TT/DD remittances from various centers and remitting the
consolidated amount to a different account/center on the same day leaving
minimum balance in the account.
Placing funds in term Deposits and using them as security for more loans
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KYC & AML Guidance Notes For Banks
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Banking Companies
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KYC & AML Guidance Notes For Banks
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KYC & AML Guidance Notes For Banks
Financial Institutions
24 Doubtful source Substantial premium paid by cash/demand
of insurance draft in premium multiple insurance policies
without valid explanation.
Substantial premium paid by multiple
demand drafts of amounts below Rs.50,000.
Insurance premium much beyond declared
sources of income.
25 Doubtful source Substantial amount paid in cash / demand draft
of loan foreclosure for foreclosure of loan account. No valid
explanation provided.
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KYC & AML Guidance Notes For Banks
Intermediaries
31 Doubtful source Substantial investment in multiple folios in short
of investment in span. Form 60/61 provided for substantial
mutual funds investment. No valid explanation provided.
32 Doubtful ownership Large investment in mutual fund using third
of investment in party cheques. No valid explanation provided.
mutual funds
33 Suspicious off Off-market transfer of shares from multiple demat
market accounts to one demat account. No valid
transactions in explanation provided. Suspected share price
demat accounts manipulation by bulk off-market transactions.
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KYC & AML Guidance Notes For Banks
Annexure E
Mercury Leather Impex Pvt Ltd. deals in manufacture and export of rexin goods,
as per the documents provided. Transactions in the account were normal with
no inward or outward remittances. Customer receives an inward remittance of
INR 5.5m and issues cheques for smaller amounts to various persons. Customer
explains the transaction as proceeds of an export of wrist watches to Dubai. No
proof shown regarding trading in wrist watches and no explanation given for the
pay outs. Unusual transaction. Activity not in line with the known business/
source of funds - an apt case for raising a SAR.
Key Message
Continuously look out for transactions not in line with the customer's known
business activity.
Case Study 2
ABC Tours & Travels is a customer. Manager of this company introduced a person
for opening a current account. AR, the person introduced claims to have business
in Canada and intending to start property business in the country. KS, the Asstt.
Manager approves opening of the account on the basis of National Identity Card
and Certificate of Registration of business issued by govt. Within a few days of
opening of account, address changed. Initial address same as that of ABC Tours
& Travels. Within a month of opening of account, 4 remittances from Canada
totaling TBD 21M (USD 210K) received in the account. Followed by cash
withdrawals. Most of the transactions were approved and/or were in the knowledge
of the Asstt Branch Manager and the Branch Manager. Subsequent information
revealed that the money was proceeds of a fraud perpetrated on the remitting
bank. The owner of ABC Tours & Travels was arrested a few years back for
suspected association with a terrorist group operating in the country. He was let
off without framing any charges. This fact was known to the branch personnel.
Inadequate KYC information about the new business. No enquiries/ verification
regarding the claim of business in Canada. Large inward remittances in newly
opened account followed by immediate withdrawals in cash - clear indicators to
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KYC & AML Guidance Notes For Banks
raise suspicion. Change of address soon after opening account, another indicator
for suspicion. Above indicators coupled with the information about the suspected
involvement of the owner of ABC Travels & Tours Ltd. with a terrorist organisation
should have raised suspicion at some stage.
Key Message
Do not let your judgment be influenced by extraneous matters like the introduction
by a known person or tall claims of business activities else where. Always look
for evidence to support the claims.
Case Study 3
RD Group, a well known group in city KK has non-borrowal relationship with the
bank. Operated three main accounts, one a private limited co. and two partnership
firms. Mr. RD is MD in the pvt. Ltd. co. and partner in others. Around 15 other
accounts of the group where about 10 persons, believed to be employees of the
group, operated the accounts as proprietors or partners in various combinations.
Large cash deposits and very frequent inter-account transfers. I.T. made enquiries
about operations in some of the accounts. During verification, it was found that
addresses in some of the accounts were non-existent. Group explained that
they sell goods to retailers and that generate cash and they are also in real
estate business. Multiple accounts are maintained for efficient tax management.
Since the transactions lacked transparency and verifications were negative,
decided to exit relationship. Some of the existing accounts in the group were not
KYC compliant. It was known to the staff in KK that all the 15 odd accounts were
being operated as a group. They should have questioned the necessity of all
these accounts and the transactions going through these accounts. SARs should
have been raised, if proper explanation was not forthcoming on the transactions.
Key Message
Do not compromise compliance for revenue. Apply caution in case of regular inter
group transfers with no apparent economic sense.
Case Study 4
Between May 2004 and October 2004 MA opens 12 accounts, seven individual
accounts and 5 business accounts (MA as proprietor). Transactions large deposit
of cash and withdrawals through ATMs or by cheque. Multiple accounts caused
suspicion and SAR filed by one branch in November, 2004. On 2/12/04, BDD 2.8M
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KYC & AML Guidance Notes For Banks
(USD 40K) deposited in to five of the accounts. The amount deposited came
from cash withdrawal from another individual's account (SRC). The whole amount
withdrawn in cash from all the accounts through various branches, the next day.
Subsequently, it came to light that the amount was transferred to SRC account
from a corporate account through fraudulent means. Lack of application of mind
and caution while multiple accounts were opened. Nobody made enough enquiries
to know the details of the business of the account holder or the necessity of his
maintaining so many accounts. TR sourcing multiple accounts without really
knowing the customers business and need for the accounts was not prudent.
While allowing the cash withdrawal from the account of SRC and depositing this
amount in the five accounts of MA, the concerned staff did not make enough
enquiries regarding the purpose of the transactions but merely accepted some
perfunctory explanations given. The officer allowing the above transaction should
have gone through the transaction details in SRC account ( a newly opened
account) and probed the large credit in to this account
Key Message
Always look for the real purpose while opening multiple accounts and be careful
about inter group transfers.
Case Study 5
GI was issued a credit card in January 2002 with credit limit INR 30,000. Some
small transactions and payment through third party cheque drawn in favour of the
card holder. Since April, 2004, payments through demand drafts issued in .Africa,
etc. drawn in favour of various persons with endorsements authorising payment to
GI's credit card account. Number of withdrawals in cash through ATMs and branches,
high value purchases from jewelers, electronic shops, etc. Account continuously
remained in credit. Fraud Control got alert due to high value transactions. Verified
with customer who confirmed the transactions. Complaint from one of the
beneficiaries of the draft led to the discovery that about 30 drafts for approx. INR
950,000 were fraudulently collected through the credit card account. Subsequent
investigation revealed airline staff pilfered drafts from mail bags. The drafts should
not have been credited in the account, as the endorsements were not valid.
Authorisation while making the verification should have gone through the pattern
of transactions in the account. There were indications such as large purchases
from Jewelers, electronic goods shop and cash withdrawals that would have given
suspicion about the transactions. The large credit balance and the odd figures of
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KYC & AML Guidance Notes For Banks
Key Message
While investigating an unusual or suspicious activity, go into all aspects and get
satisfied before giving a go ahead. Do not simply rely on explanations / clarifications
unless there are grounds to believe them.
Case Study 6
Money Transfers
The police arrested suspect A, the leader of an Iranian drug trafficking group, for
possessing stimulants and other kinds of drugs. The subsequent investigation
revealed that the suspect had remitted part of his illegal proceeds abroad. A
total of US$450,000 was remitted via three banks to an account on behalf of
suspect as older brother B at the head office of an international bank in Dubai.
Transfers were made on five occasions during a two-month period in amounts
ranging from US$50,000 to US$150,000. Another individual, suspect C, actually
remitted the funds and later returned to Iran. On each occasion C took the funds
in cash to the bank, exchanged them for dollars, and then had the funds
transferred. Each of the transactions took about one hour to conduct, and the
stated purpose for the remittances was to cover "living expenses". Suspect A
was initially charged with violating provisions of the anti-narcotics trafficking
law. The money transfers revealed during the investigation led to additional
charges under the anti-money laundering law.
Key Message
This case represents a classic example of a simple money laundering scheme and
is also a good example of a case derived, not just from suspicious transaction
reporting, but also as a follow-up to traditional investigative activity.
Case Study 7
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KYC & AML Guidance Notes For Banks
transaction was soon followed by four more similar transactions. After several
weeks, the total had already attained US$618,000. After a break of six months,
the exchange transactions resumed. Over a four-month period, the intermediary
appeared with large amounts in pesetas to be converted into dollars. The total
amount of the transactions described in reports to the FIU amounted to more
than US$1.3mn.
The information obtained from law enforcement demonstrated that the individual
had no criminal record in Country A. Given that the case involved large amounts
for which there existed no apparently legitimate economic justification, the FIU
pursued the investigation. Several foreign FIU were queried. One of them was
able to provide useful information: the individual was known as a member of a
group of drug traffickers who performed the same type of transactions in the
country involved. Investigation of the members of this group was already in
progress in this latter country. Secondly, it appeared that the address provided
during the first contact with the financial institution was false. On the basis of
these elements, the FIU decided to turn over the case file to the prosecutorial
authority. The subsequent investigation showed that the individual had not been
acting alone. For a number of years she had played a dominant role in money
laundering transactions involving a total amount of around US$11.5mn.
The individual was arrested in the company of one of her accomplices and in
possession of a large sum in US dollars. She acknowledged the retail foreign
exchange transactions, as well as the illicit origin of the funds. According to her
account, they were derived from illegal diamond trafficking. She was sentenced
to four years in prison (two of which were suspended) and a fine of nearly
US$1mn. The funds seized were confiscated, as well as the amounts exchanged;
her accomplices were each sentenced to two years in prison (one of which was
suspended).
Key Message
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KYC & AML Guidance Notes For Banks
Case Study 8
Key Message
This scheme illustrates how criminals put additional measures into place further
to distance the money from the narcotics trafficking operation. Cash is collected
from the drug dealer; the collector passes the funds to the launderer; the
launderer then passes them to the recruited business professional, who then
transfers the funds abroad for further processing. The money continues to move,
and the trail becomes more complex. The use of professionals can establish a
'break' in the trail, and so thwart financial investigators.
Case Study 9
Use of bank safety deposit boxes
A law enforcement investigation centred on the suspicious behaviour of a bank
customer who appeared to be exchanging old, outdated banknotes for a new
series of banknotes. The suspect appeared to be storing the old banknotes in
one of the bank's safety deposit boxes.
The suspect received social security payments and had no other identifiable
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KYC & AML Guidance Notes For Banks
legitimate income.
Further enquiries revealed that the suspect had an extensive criminal history
and had recently purchased a motor vehicle with a large amount of cash and
owned a number of high value real estate properties.
The investigation established that the suspect was involved in drug cultivation
in the houses that he had purchased using the proceeds of his drug trafficking
activities. The suspect was using the bank's safety deposit facilities to store
cash obtained from the sale of the illegal drugs and also to store jewellery
purchased with the same proceeds.
Key Message
Case Study 10
Use of a bureau de change and bank accounts under false names
A drug trafficking investigation established that cash collected from the sale of
drugs was taken to a bureau de change at the border, where large sums of
money in small denominations were exchanged into denominations of a foreign
currency. This money was then moved in bags of cash across the border and
abroad to purchase a further supply of drugs.
Further investigation identified a scheme in which illegally obtained funds were
deposited under a false name into a holding account within the bureau de change,
which was controlled by the money launderer. During a search of the premises, it
was also established that the bureau de change did not maintain detailed records
of cash transactions.
Three individuals were charged with money laundering in this investigation.
Key Message
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KYC & AML Guidance Notes For Banks
Case Study 11
Over a four year period, Mr. A and his uncle operated a money remittance service
known as Company S and conducted their business as an agent of a larger
money remitting business that was suspected of being used to finance terrorism.
Later, an investigation was initiated in relation to Company S based on a suspicious
transaction report.
The investigation showed that over the four year period, Mr. A's business had
received over US$4 million in cash from individuals wishing to transmit money to
various countries. When Mr. A's business received the cash from customers, it
was deposited into multiple accounts at various branches of banks in country X.
In order to avoid reporting requirements in place in Country X, Mr. A and others
always deposited the cash with the banks in sums of less than US$10,000,
sometimes making multiple deposits of less than US$10,000 in a single day.
Key Message
This case underlines the need to have mechanisms in place to monitor and link
transactions (especially cash deposits) made by the same individual or entity
through different branches of the same bank, or through different banks.
Case Study 12
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KYC & AML Guidance Notes For Banks
X and Y were arrested, prosecuted and convicted for drug trafficking offences
and received sentences of six and two years imprisonment respectively. A
confiscation order for the equivalent of US$6mn was made against X. Z was
convicted of drug money laundering involving US$1.3mn, and was sentenced to
21 months' imprisonment.
Key Message
Case Study 13
Bureaux de change
At the point when exchange offices became regulated, and it became subject to
obligations to prevent money laundering, one bureau ("The Counter") had been
doing business in a small town near the German border for a number of years.
The Counter often had a surplus of bank notes with a high denomination, and the
owner (Peter) knew that these notes were not popular and so exchanged them
into smaller denomination notes at a nearby bank. Prior to the new legislation
taking effect, persons acting on behalf of The Counter regularly exchanged
amounts in excess of the equivalent to US$50,000, but immediately after the
legislation took effect, the transactions were reduced to amounts between
US$15,000 and US$30,000 per transaction. The employees of the bank branch
soon noticed the dubious nature of the exchanges did not have any sound
economic reason, and the transactions were reported.
Peter had a record with the police relating to fencing and dealing in soft drugs,
and because of this he transferred the ownership of The Counter to a new owner
with no police record (Andre). Andre applied to register The Counter to the
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Central Bank as an exchange office and was accepted on a temporary basis. The
financial intelligence unit consulted various police files and established that the
police had been observing this exchange office for some time. The suspect's
transactions were passed on to the crime squad in the town where The Counter
has its office, and it started an investigation. A few months later, the crime
squad arrested Andre, house searches are made, expensive objects and an
amount equivalent to more than US$250,000 in cash were seized. The records of
The Counter showed that many transactions were kept out of its official books
and records. For example, over a period of thirteen months The Counter changed
the equivalent of more than US$50mn at a foreign bank without registering these
exchange transactions in its official books and records. The investigation showed
that The Counter and its owners were working with a group of drug traffickers,
who used the exchange office to launder their proceeds, and this formed a
substantial part of the turnover of the business.
The drug traffickers were prosecuted and convicted and are now serving long
prison sentences. Andre was sentenced to six years in prison for laundering the
proceeds of crime and forgery. Peter moved abroad with his family. A separate
legal action is still pending to take away Andre's profits, the confiscated objects
and the cash found. The Counter has been closed and its registration as an
exchange office rescinded.
Key Message
This case shows the need for banks and large, legitimate bureaux de change to
pay attention to their business relations with smaller bureaux, particularly when
supplying or exchanging currency with them.
Case Study 14
The largest remittance service among those investigated, 'Servicio Uno', was an
incorporated company and had an annual turnover in excess of US$3.3mn. It
accepted money from individual customers and also received funds from smaller
remittance services locally and regionally. These smaller services channelled
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Cash was received from customers and sub-agents; a proportion of these funds
was deposited in a bank, and some was kept on hand.
There was also evidence of substantial amounts of money flowing from Country
A back to Servicio Uno. A fax was sent from Country A to Servicio Uno instructing
it to provide a specific amount of money to an individual in Servicio Unos country
or to pay the funds into a particular bank account there. No funds were actually
transferred from Country A. Instead, a method was used whereby the remittance
services at either end of the operation paid off each others liability with their
own assets.
Key Message
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using this channel to move funds, and by the indirect settlement methods
sometimes employed.
Case Study 15
Cash from the sale of narcotics was brought to shops and bureaux de change
(controlled by a single organisation) in a town located in an overseas territory of
Country P. The shops provided specially validated coupons in return for the
deposits. These coupons were then used as bearer instruments that permitted
the holder to obtain funds to purchase more drugs or to make investments. The
controlling organisation also owned several real estate agencies.
The laundering network converted currency from other countries through middlemen
that were paid a commission for the use of their identities in the depositing of
these currencies at financial institutions. An employee at one of these institutions
was also involved in the scheme. Other funds processed through this system
originated in the local black market in consumer goods intended for smuggling
operations into the neighbouring jurisdiction.
The law enforcement investigation of this case brought about charges against
73 persons, and the seizure of 10 tonnes of narcotics, 11 boats and US$4.7mn in
foreign currency. Suspicious transactions submitted by local financial institutions
during the scheme reported transactions totalling more than US$400mn.
Key Message
Case Study 16
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Key Message
Had the exporter's bank been alert to the source of funds for payment of the
exported goods, suspicions would have been raised that payment was being
made from two different sources in respect of one transaction.
Case Study 17
The suspect and the manager of one branch were arrested. A number of properties
were searched throughout Country N. A forfeiture notice amounting to
approximately US$350,000 was issued against the suspect and around US$140,000
in cash was confiscated in preparation for forfeiture. The suspect and the manager
were sentenced for human trafficking and the accused voluntarily renounced his
claim to the confiscated cash.
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Key Message
This is a classic case where KYC information relating to the size of the business
activities of the account holder demonstrated that the legitimate business activity
could not possibly generate the funds available to the owner of the business.
Case Study 18
The derivatives market: a typology
In the following example of how funds could be laundered using the derivatives
market, the broker must be willing to allocate genuinely losing trades to the
account in which criminal proceeds are deposited. Instead of relying on misleading
or false documentation, the broker allocates genuine loss-making documentation
to the detriment of the 'dirty money' account holder.
As an example, a broker uses two accounts, one called 'A' into which the client
regularly deposits money which needs laundering, and one called 'B' which is
intended to receive the laundered funds. The broker enters the trading market
and 'goes long' (purchases) 100 derivative contracts of a commodity, trading at
an offer price of $85.02, with a tick size of $25. At the same time he 'goes short'
(sells) 100 contracts of the same commodity at the bid price of $85.00. At that
moment, he has two legitimate contracts which have been cleared through the
floor of the exchange.
Later in the trading day, the contract price has altered to $84.72 bid and $84.74
offered. The broker returns to the market, closing both open positions at the
prevailing prices. Now, the broker, in his own books assigns the original purchase
at $85.02 and the subsequent sale at $84.72 to account A. The percentage
difference between the two prices is 30 points or ticks (the difference between
$84.72 and $85.02). To calculate the loss on this contract, the tick size of $25 is
multiplied by the number of contracts, 100, multiplied by the price movement,
30. Thus: $25 x 100 x 30 = $75,000 (loss).
The other trades are allocated to the B account, which following the same
calculation theory results in a profit as follows: $25 x 100 x 26 = $65,000
(profit). The account containing the money to be laundered has just paid out
$75,000 for the privilege of receiving a profit of $65,000 on the other side. In
other words, the launderer has paid $10,000 for the privilege of successfully
laundering $75,000. Such a sum is well within the premium professional launderers
are prepared to pay for the privilege of cleaning up such money. As a transaction,
it is perfectly lawful from the point of view of the broker. He has not taken the
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Case Study 19
This case involved the theft of approximately US$384mn from a bank in country
T over a ten-year period. Initial investigations revealed that the money was sent
to country G and laundered through a serious of 550 bank accounts in the names
of 80 companies. Much of the money was invested in the property and stock
markets in Country G and ultimately used at will by the four principal thieves. At
one time during the fraud, one of the thieves was reported as being the largest
margin stock investor in the Country G market, with a huge turnover in stocks
and shares through some of Country G companies, as well as enjoying dividends
from long term investments. Initial investigations appear to indicate that the
majority of funds stolen in Country T occurred towards the end of the ten-year
period, when a regional economic downturn adversely affected the local property
and stock markets.
Case Study 20
Shell corporations
The accused pleaded guilty and an order of forfeiture was granted. The property,
which was part of the money laundering scheme, was disposed of by the
authorities.
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Key Message
This case illustrates the need to trace the ownership history of a property
carefully, in order to identify possible links between owners, and any suspicious
transfers that may indicate attempts to co-mingle assets. There is also a need
for law enforcement agencies to be familiar with the general rules and practice
regarding the purchase of property in relevant jurisdictions, and the need to be
aware that transfers involving nominal amounts can be easily structured in some
jurisdictions.
Case Study 21
Shell companies and Corporate Service Providers
During a two-year period, financial institutions in a European country made suspicious
transaction reports to the relevant financial intelligence unit. The reports identified
large cash deposits made to the banks, which were exchanged for bank drafts
made payable to a shell corporation based and operated from an Asian jurisdiction.
The reports identified transfers totally approximately US$1.6mn to an account
held by the shell corporation at a financial institution in the Asian jurisdiction.
At the same time, police had been investigating a group in that country which
was involved in importing drugs. The following year, police arrested several persons
in the group, including the principal, who controlled the company in the Asian
jurisdiction. They were charged with conspiring to import a large amount of
cannabis. A financial investigation showed that the principal had made sizeable
profits, and a large percentage of this was traced and restrained. A total of
approximately US$2mn was sent from the European country to the Asian
jurisdiction, and subsequently transferred back to bank accounts in Europe,
where it was restrained.
Two methods were used to launder the money. The principal purchased a shell
company in the Asian jurisdiction, which was operated there, by a secretarial
company on his instruction. The shell company opened a bank account, which
was used to receive cashiers' orders and bank drafts, which had been purchased
for, cash in the country of origin. The principal was also assisted by another
person who controlled (through the same secretarial company) several companies,
which were operated for both legitimate reasons and otherwise. This person
laundered part of the proceeds by selling the funds on to several other
jurisdictions, and used non face-to-face banking (computer instructions from
the original country) to do so.
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Seven persons including the principal were put on trial in the European country
on charges of drug trafficking, and the principal and three other persons faced
money laundering charges.
Key Message
This example shows how attractive and easy it is for criminals (even if not part
of international organised crime) to use corporate entities in other jurisdictions,
and to transfer illegal proceeds through several other jurisdictions in the hope of
disguising the origin of the money.
It demonstrates the ease with which company incorporation services can be
obtained, and shows that many of the companies, which sell shell companies, as
well as the secretarial companies, which operate them, are not likely to be
concerned about the purpose for which the shell company is used.
It highlights the need for financial institutions to have a system, which identifies
suspicious transactions not just at the front counter, but also for non face-to-
face transactions, such as occurred in this case.
It can take some time to conduct international financial investigations and to
trace the proceeds of crime transferred through several jurisdictions, and there
is a consequent risk that, during the investigation, funds will be dissipated.
Case Study 22
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This activity appeared to show that the funds had been used to pay the insurance
premiums on Mr. H's life and to acquire stakes in investment funds (also for Mr. H)
amounting to another US$210,840. There were also other related transactions in
the accounts of the two companies and Mr. H's personal account. Cash or
cheque transactions for amounts between US$14,000 and US$70,000 were among
the related transactions. In one instance, a cheque was drawn on the Sam Ltd
account for US$63,300 on the day following the deposit of US$70,280 in cheques
into Mr. Ks account.
Checks into the backgrounds of Mr. H and Mr. K revealed that Mr. H was suspected
of being involved in cocaine trafficking in Latin America. Mr. K had some minor
violations (uttering bad cheques etc.); however, he had no serious criminal
background. The business activities and backgrounds of Sam Ltd and Dim Ltd
were looked at. In each instance, the companies had been incorporated with a
stock capital of US$36,400 in which Mr. H and Mr. K had a 50% interest and were
joint directors. Queries made at the "Balance of Payments Office" as to foreign
collection and payment, revealed a total absence of operations in the previous
two financial years.
It appeared that Mr. K was being used as the front man for Mr. H's efforts to
move funds out of his country of residence. For greater security of the scheme,
firms under their control, that did not perform any corporate or commercial
activity, were established. Mr. H received the funds deposited into Mr. K's account
through the single premium insurance policies and shares in investment funds
that had been paid for by that account, as well as through indirect income from
the companies mentioned. In this case, the FIU believed there to be sufficient
signs of money laundering and therefore passed the matter on to prosecutorial
authorities.
Key Message
This operation shows that payment instruments or third party involvement, having
no apparent economic relationship to the transaction, are often a key indicator
of suspicious activity. It is worth noting that, so as to minimise suspicion, Mr K
was obviously selected based on his lack of prior criminal record and his nationality.
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The activities of the front companies were also conducted in such a way as to
give the appearance of transactions from corporate activities. The case also
highlights the potential value of suspicious transaction reporting by insurance
companies.
Case Study 23
Front companies
The FIU analysis showed that the income of the West African companies concerned
was grossly disproportionate to reported sales. In fact, the account transactions
seemed to have little to do with industrial fishing (i.e. foreign currency sales,
transfers from the bank accounts of European residents, transfers between the
personal account of the West African businessman and his businesses, transfers
between these businesses and those of Europe-based partners).
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Key Message
Given the unusual account transactions and the lack of a clear economic purpose
or connection for some of the business activities, the operations described in
this example very likely constitute a money laundering scheme to conceal the
illegal sources of proceeds derived from various criminal activities. This case
gives further support to the need for analysis of information from a variety of
sources (suspicious transaction reports, financial institutions, company registries,
police records etc.) in order to gain a full picture of a complex laundering scheme.
Case Study 24
Fifteen suspects were arrested for criminal conspiracy aimed at money laundering
and smuggling, and four suspects were charged with money laundering offences.
The total amount of funds involved was US$101mn with the consequent evasion
of export duties amounting to US$72mn, VAT evasion totalling US$37mn and the
laundering of over US$31mn.
Key Message
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ownership of companies that are formed in offshore jurisdictions with lax corporate
registration requirements. The source of the economic activity that created the
funds for transfer should be established. Where the sale of precious metals is
involved, checks should be made that the goods exist and that excise duty and
VAT has been paid.
Case Study 25
Key Message
Suspicious transactions reports will not always bring immediate results and where
a series of suspicion reports has been made justifying significant concern, it may
be necessary to freeze the account voluntarily, pending an investigation.
Confidential discussions with the local FIU will normally confirm when a criminal
who is known to the FIU is involved.
Case Study 26
It was later established that S, a businessman in the building sector, had bought
the building intended to house the place of worship and had renovated it using
funds from one of his companies. He then transferred the ownership of this
building, for a large profit, to Group Y belonging to the wealthy foreigners
mentioned above. This place of worship, intended for the local community, in
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Soon after the work was completed, it was noticed that the place of worship
was receiving large donations (millions of dollars) from other wealthy foreign
businessmen. Moreover, a Group Y worker was said to have convinced his employers
that a "foundation" would be more suitable for collecting and using large funds
without attracting the attention of the local authorities. A foundation was thus
reportedly established for this purpose.
Even though a formal link was not able to be incontrovertibly established between
the (more or less) legal activities of the various parties in Country C and abroad
and the financing of terrorist activities carried out under the authority of a
specific terrorist network, the investigators suspect that at least part of the
proceeds from these activities have been used for this purpose.
Key Message
The scale and complexity of the corporate and business arrangements, and the
amounts involved, should not deter proper checks and monitoring.
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Case Study 27
The financial intelligence unit (FIU) of Country E forwarded to the judicial authorities
ten files in relation to money laundering derived from terrorism. In general, the files
dealt with instances in which simple operations had been performed (retail foreign
exchange operations and international transfer of funds), revealing links with other
countries. Some of the customers had criminal records, particularly for trafficking
in narcotics and weapons, and were linked with foreign terrorist groups.
In one of the files submitted by the FIU in relation with terrorism, the customer
was the holder of a current account and of a savings account with the reporting
financial institution. Moreover, he purchased securities, and a single premium life
insurance contract, in the same institution. He executed several transfers from
his current account to beneficiaries in different countries. The suspicions of the
bank arose from the fact that a name similar to that of the customer appeared
on the consolidated list of persons and/or entities included in the UN Security
Council Committee on Afghanistan (S/RES/1333(2000)) and Regulation 1354/
2001 of the European Commission).
The suspicion of the bank was strengthened by the fact that the customer had
been progressively withdrawing funds he held at this bank since the end of April
2001. He successively cleared out his savings account, sold the securities he
had purchased (before their maturity date), surrendered his life insurance policy
and finally transferred his remaining funds to the European country where he
resided. The last operation he performed occurred at the end of August 2001,
that is, about two weeks before the attacks in the United States on September
11th 2001.
The bank has had no more contact with this customer since August 2001.
Key Message
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Case Study 28
Key Message
Case Study 29
Rather than providing the requested documents to the bank, Company Q simply
closed its account.
Key Message
Sometimes there is a need to look through the correspondent. Due diligence can
reveal situations shown by this case that warrant reporting to the relevant authorities.
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Case Study 30
Key Message
Case Study 31
A bank observes large value cash transactions executed through its accounts
almost on a daily basis by a trading concern, X Enterprises. The deposits are
always below the reporting threshold of Rs. 10 lakh. These deposits are done
using multiple tellers at the same branch. The value of each cash transaction
hovers between Rs. 8 to 9.5 lakhs. The customer is in the business of garments.
The pattern observed is deposit of cash followed by simultaneous transfer to
other accounts within the bank or issue of cheques. On investigation into the
profile of other accounts it is observed that these accounts are of entities of
varied industries like chemicals, plastic, metals, food grains & packaging. The
turnover in each of these accounts amounts to crores of Rupees. On scrutiny it
is observed that many of these entities are related by virtue of same partners,
same address, same telephone. They have different PAN numbers. Most of these
entities are in near vicinity of each other. These entities have availed no credit
facilities from the banks.
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The Branch manager decides to visit some of these entities and discretely finds
that none of these entities have infrastructure to support the activities as per
their profile. Many are not open during business hours. It is found that these
entities are into business of converting cash into cheques and vice versa for
persons across a spectrum of businesses. This type of business is colloquially
called 'entry business'. An STR is raised for these accounts.
Key Message:
This is a classic example of money laundering in Indian Context. Enhanced Due
diligence helped reveal that transactions are not in line with the profile of the
customer and indeed suspicious.
Case Study 32
The branch manager comes across a large value transaction for purchase of
property in Mr. A's savings account worth Rs. 30 crores in month of October. A
closer analysis of the account statement for last 3 months reveals about 50
transfer transactions from 10 different accounts in names of customers having
similar or different family names. On further perusing through account statements
of these customers, it is observed that cash has been deposited therein and this
is followed by transfer to Mr. A's Account. The Branch manager also finds that all
these accounts were opened on same day. An STR is filed for these accounts.
Key Message:
While analyzing the trigger for an unusual transaction one should examine
transactions, which precede as well as following the unusual transactions. This
may enable the Bank to confirm suspicion.
Case Study 33
Mr. B is a wealthy customer staying in a plush locality New Delhi. The branch
manager observes that on a particular day in February the turnover in his account
crosses 25 transactions. On analyzing the account for the day it is observed that
the customer has deposited 20 demand drafts of Rs 45,000 each. Customer refuses
to divulge the reason for these transactions and hurriedly hangs up the telephone.
On a closer look at account statement an account transfer is seen in January to
his wife's account. On analyzing the account of the spouse of the customer,
similar pattern in the month of January is observed. An STR is filed for these
accounts.
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Key Message:
Case Study 34
A Bank officer processing foreign currency cheques observes that an Non Resident
customer receives three to four foreign currency cheques in a day for clearing.
There are also credits from on line site aggregators. Each credit is between 3000
to 4000 USD. These credits come from different countries. On checking with the
customer's mandate holder, he states that these are payments received by way
of commission in the business of internet marketing. On conducting a search
over the internet it is also revealed that the customer is running a site which
invites people to subscribe to his services. The content of the site is perfectly
educational and legal. However this conflicts with the version of the mandate
holder. The customer has not made a single withdrawal from the account over a
period of one year that he has an account with the bank and the total balance in
the account is very high. An STR is filed for the customer.
Key Message:
In respect of certain customers a desktop due diligence in form of Internet
searches may reveal details of the customer activity and help gather evidence
for reporting a suspicious transaction.
Case Study 35
An NRI customer from Europe receives remittances worth crores of Rupees into
his account. The proceeds are invested into various capital market instruments
covering mutual funds, shares and securities. On checking the remitter details it
is observed that funds are being received from his account in Europe. The bank
officer checks the remittances received from this remitter across the Bank and
finds that similar large value amounts are transferred into accounts of un related
persons over last six months whose accounts have since gone dormant. The
amount has been withdrawn in cash and currently there is no balance in these
accounts. These accounts are reported as an STR
Key Message:
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Case Study 36
Key Message:
Case Study 37
The Branch manager during his analysis of AML exception reports for May finds
some accounts where cash is being deposited through multiple branches and
withdrawn on same day. One such account holder is Mr Y. who ensures that he
does not maintain balance over a period of one or two days. Deposits are in form
of third party walk ins. The amounts deposited are between Rs 2500 to 3000. The
manager directs the teller to inform him the next time any person other than the
account holder approaches to deposit cash in the account. Five days later the
manager is alerted by teller and immediately asks the depositor reason for depositing
cash in this account who informs him that he has been instructed to do so by one
Mr T who has promised him a lottery winning of Rs 10 lakhs provided he deposits Rs
3000 as processing fee. Manager immediately files an STR for same.
Manager comes across another such account in name of Mr. O. Unlike Mr. T the
amounts are received by him though ATM cash deposits. No person physically
visits branch to deposit the amount. The transaction pattern is similar to that of
account of Mr. Y. An STR is filed by the manager. One month later the manager
receives a letter from the Narcotic Control Bureau asking him further information
in relation to Mr. O. It has now come to light that O was a drug peddler was using
bank's channels to receive cash from his customers who were couriered drugs.
Key Message:
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Case Study 38
Mr. D is holding a credit card of the bank with a Rs 1 Lakh limit. He deposits large
value of cash to repay his card dues. His spends are on all airline company web
sites. The total value of spends per month is approximately 15 lakhs. All repayments
are made in cash. On investigation into the KYC documents it is observed that
he is working in a travel agency. It can thus be deduced that he takes cash from
customers and uses his credit card to book tickets from them and repays same
into his card account after one month.
Key Message:
Case Study 39
A person spends approximately five lakhs every month on his credit card. The
spends are on only one particular merchant establishment. On closer analysis
the merchant establishment is a on line gambling site in a foreign country. It is
suspected that the customer may be transferring value by way of credits into
account of some other person holding account with the site.
Key Message:
Case Study 40
A savings account of Mr. ABC (a telephone booth operator) is held with a banks
branch in a small town for about one year. It is observed that in recent times
persons other than the depositors or his family members frequent the branch for
making withdrawals. The teller informs the branch manager about this unusual
activity. On checking with the customer discretely he informs that he has allowed
certain persons to use his account for conducting transactions. The Branch
manager immediately reports this as a STR.
Key Message:
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Case Study 41
A friendly customer having a savings bank account asks the cashier at the
branch as to what the bank would do if he deposits Rs. 2 crore in cash from him.
The total turnover in the customer's account has thus far been in range of Rs. 3
lakhs in a year. However the customer never carries out this transaction. The
branch files a STR in the matter for an attempted suspicious activity.
Key Message:
Although the transaction has not taken place as required by RBI regulations
attempted suspicious transactions should also be reported.
Case Study 42
M/s. ABC Electronics P Ltd, a new customer lodges an export bill for collection
with the Bank. The customer has submitted an invoice and bill of lading worth $
20,00,000 for sale of 300 laptops. The invoice is raised on M/s PQR trading,
Nigeria. The Bank Officer on scrutiny of the bill finds that the value of a laptop as
per this invoice is highly overvalued and files an STR for the same. On investigation
it is revealed that M/s PQR, the front for a criminal wanted to send an amount of
$ 10,00,000 to India. M/s ABC electronics P Ltd was a front for the hawala
operator who through over invoicing achieved this through the official channel.
Key Message:
Tranactions that do not make economic sense should be identified for reporting
suspicious transactions.
******
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Annexure F
ABC Enterprises has a current account with you. ABC Enterprises is a dealer of
house hold appliances. Normal transactions in the account are daily cash deposits
of about INR 100,000 and deposit of cheque and credit card charge slips for
about 100,000. Payments to various distributors are through cheques. There are
some cash withdrawals especially in the beginning of the month for salary
payments. During the last 15 days, you have noticed that the cash deposits are
in the range of INR 150,000 to INR 200,000 and there have been some increase
in the deposits by cheques and charge slips as well.
Solution
Mere increase in the cash deposit does not necessarily mean a suspicious activity.
Here in this case, there has been an increase in the cheque/ charge slips deposit
as well. There could be some reason for the increase in sale, like a festival
season. Make enquiry about a reason for the increased sale and also check the
payment part to see whether the money is going anywhere other than the usual
suppliers. File a SAR only if you are not convinced about the reason for the
increase in cash deposit.
Situation 2
DEF Traders maintains a current account with you for the last three months. The
account was opened with a deposit of INR 25,000. While opening the account,
the business declared is Commission agents and he mentioned that he is getting
distribution agency for some well-known cosmetic and detergent products. The
expected transaction volume declared was monthly credit of INR 1 million and an
average balance of INR 50,000. There were no transactions in the account for 2
months. For the last one month, the volume of transactions suddenly increased
and at present there is a daily deposit of approximately INR 200K and the average
balance is around 25,000. The withdrawals are through pay orders and most of
the time favouring different firms and the pay orders are paid in clearing through
banks in various cities. You met the customer and enquired about the business
and he mentioned that he did not take the distributorship of the cosmetic and
detergent products as he did not want to restrict his product range and he is
now purchasing from various distributors and supplying to small businesses in the
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area and the business was very good. Your enquiry revealed that the customer
did not have any separate office or godown and the business address given in
the AOF is his residence address.
Solution
Though the explanation of the customer could account for the large cash deposits
(sale to small traders) and payments to different firms, absence of any godown
or distribution set up give sufficient reasons to suspect the bonafides of the
customer. An SAR should be filed.
Situation 3
ABC, a walk in customer approaches you. She wanted to open a savings account
with you. On your request, she produced a Voter's ID Card and ration card for
identity verification and address verification. While taking further details of activity
profile, you realize that the customer would be getting a monthly pension credited
to her account and she would be withdrawing most of the amounts for her
expenses. You tell her the Bank's rule of maintaining minimum balance in the
account and she expresses her inability to do so. Hence, you decline to open the
account.
Solution
The refusal to open the account was not due to any suspicion. It was because
the customer was not able to met your banking requirement of maintaining the
minimum balance in the account. No SAR to be filed.
Situation 4
LKG Corporation is a SME customer for about 2 years. They are in the import
export business and use the bank for their international trades on a regular
basis. So far the business had been some export bill collections and some payments
against the import documents. They did not have any import LC facility but has
an OD facility for INR 2 million. Now the customer has approached you for
opening an LC for USD 100,000 for import palm oil. The beneficiary of the LC is in
Dubai and the shipment will be made from Malaysia to Mumbai. The customer is
offering security of term deposits held in the names of his close relatives.
Solution
We have a fairly good knowledge of the customer. There is nothing apparently
suspicious about the transaction on a money laundering point of view.
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Situation 5
ABC Enterprises is a partnership firm. The firm opened a current account with
your branch in January 2004. The proprietor was identified through his driving
license and his address verified through a utility bill. The business address was
verified through the agreement with the landlord. Initially there were some cash
deposits and cheque deposits and some remittances to Hongkong against import
documents, which included Bill of Entry with Customs stamp and invoice. The
remittances were small and on all the occasions the goods imported were "halogen
lamps". Around June, 2004, the proprietor opened another account in the name
of DEF Traders, a partnership firm with him and his wife as partners. He also
opened a third account in the name of GHI Agencies, another partnership firm
with his wife and another person as the partners. In all these accounts, there
have been similar transactions, i.e. deposits through cash and cheques and
foreign remittance against the import documents. Of late, the frequency of the
transactions increased so much so that the daily deposits in these accounts are
just below INR 1 million (There is a reporting requirement for all cash transactions
above INR 1million) and the remittances takes place in every three days.
Solution
Definitely, the activities are suspicious. SAR has to be raised.
Situation 6
XYZ Infotech Pvt Ltd. opened an account with your branch about three months
back. The company has declared its business as software development. For the
first two months there were very few transactions, some low value cash
transactions and cheque deposits and withdrawals by clearing. During the last
one month, the transactions have increased and there had been some large
value inward remittances ranging from USD 25,000 to USD 75,000 and payments
by cheques to various firms in different cities in India. Your initial enquiries
revealed that the company has its office at the residence of its Managing Director
and only have two people working in there. During one of your casual talks with
the MD, he mentioned that he had some good contacts abroad and they canvass
business and he gets the work done through some of the smaller software
companies. You do not feel that most of the beneficiaries of the payments from
the account are software companies.
Solution
There are reasons to suspect the activities. The claim of the customer may be
true but needs verification through an investigation. SAR should be filed.
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Situation 7
MNO Corporation, a partnership firm opened an account with you branch about
three months back. AB and his wife are the partners of the firm. AB was working
in US as a software engineer and he returned to India recently and started this
firm. The declared business of the firm is software development. Initially, there
were a few large foreign inward remittances from AB's own account in US and
there were payments to various people. These payments could be connected to
purchase and development of office premises. During the last one-month, there
had been a few large foreign inward remittances and payments to two firms, one
in Hyderabad and one in Bangalore. Your casual talks with AB revealed that he
has employed about 20 employees in office and as he was not able to cop up
with the work he was getting from US, he has sub-contracted the work to two
firms, one in Hyderabad and one in Bangalore.
Solution
Though prima facie it appears that the customer is doing a genuine business, it
will be prudent to make some enquiries regarding the firms in Hyderabad and
Bangalore and an SAR need be raised only if your findings are not conforming to
the versions of AB.
Situation 8
FM is one of your savings bank account holder. The account was opened about 5
years ago. As per the KYC profile, FM is working as a journalist for a small
newspaper and the transactions in the account had been mostly deposit of
salary and withdrawals by cash or cheques in small amounts. For the last three
months, he had been receiving foreign inward remittances of approximately USD
5000 from an individual DK in London every month. The customer withdraws the
amount in cash in two or three withdrawals. When you enquired with the customer
about the purpose of the remittance, he mentioned that he was helping DK in a
project regarding tribals in India and the payments are in this respect. He mentioned
that he continued to work with the news paper. You do not find any credit for
salary in his account for the last few months and a telephone call to the
newspaper office confirmed that FM had left the newspaper.
Solution
The transactions are suspicious and should be reported as a SAR.
Situation 9
ABC Charities is a charity trust registered with the charity commissioner. The
trust also has necessary government approval for getting donations from abroad
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for its charity works. ABC Charities had opened an account with your branch
about four years ago with all the necessary documentation. The transactions in
the account were mostly cash deposits and cheque deposits for small amounts
and there were cash withdrawals mostly to meet the expenses of a home for
aged and destitute run by the trust. There were also some foreign inward
remittances for amounts varying from USD 50 to USD 100. During the last three
months, there had been 10 remittances from one organization from a country
that has no strict AML laws or regulations. The amounts of these remittances
were between USD 5000 and USD 9000. The total amount received is USD
80,000. Since the starting of these inward remittances, there had been some
changes in the withdrawal pattern. Pay orders/demand drafts favouring some
individuals and organisations were taken and these were paid through banks
situated in locations known for terrorist activity.
Solution
There are enough reasons to suspect the activities. SAR has to be filed.
Situation 10
ABC Corporation is a partnership firm with AB and CD and their wives as partners.
About six months ago, ABC Corporation opened a current account with your
branch. While opening the account, the firm has shown its business as multi layer
marketing and the expected volume of transactions in the account was shown as
deposits of INR 2,000.000 and withdrawals of INR 2,000,000. For the first two
months of operation, there were very few transactions in the account. Now, there
are daily cash deposits of about INR 400,000 through different branches. You
have noticed that different people come to the branch for depositing amounts
ranging from INR 10,000 to INR 30,000. The withdrawals are by way of clearing
cheques or by purchase of demand drafts or pay orders.
Solution
Definitely, the transactions are unusual and need to be investigated. There should be a
discreet talk with the customer to clarify as to who are the people who were making
deposits to the account and what is the source of these funds. It may also be
ascertained as to who are the beneficiaries of the payments from the account. From
the explanation, if you get satisfied that the money is from a genuine business and the
payments are going for meeting the business related expenses, no SAR be raised. If the
customer is evasive or refuses to answer your queries or the explanation does not
satisfy you, you have to raise a SAR.
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Situation 11
Solution
The situation definitely needs further probe. First of all, it has to be seen how
the current account was funded for the earlier pre-closure. If these were through
cash deposits or other deposits that cannot be connected to his business or
personal finance, then you have to file an SAR. If the funding is through genuine
business receipts or transparent personal financial transactions, you may seek
further clarifications from the customer through normal queries like the purpose
of taking the loan, how he intends to repay, etc. and if you are satisfied with the
responses, go ahead with the transaction in the usual course of business.
Situation 12
Solution
The situation is open to suspicion. The important point to be seen is the source
of funds to pre-close the account. If the money has come from genuine sources
like, loan taken from another financial institution, sale of some assets, etc., then
there is no cause for concern but if the source of funds is not clear or suspicious,
SAR has to be filed.
******
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ANNEXURE G
RBI/2009-10/73
DBOD. AML. BC. No. 2/14 .01.001/2009-10
Dear Sir,
Yours faithfully,
(Vinay Baijal)
Chief General Manager
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Purpose
Banks were advised to follow certain customer identification procedure for opening
of accounts and monitoring transactions of a suspicious nature for the purpose
of reporting it to appropriate authority. These 'Know Your Customer' guidelines
have been revisited in the context of the Recommendations made by the Financial
Action Task Force (FATF) on Anti Money Laundering (AML) standards and on
Combating Financing of Terrorism (CFT). Detailed guidelines based on the
Recommendations of the Financial Action Task Force and the paper issued on
Customer Due Diligence (CDD) for banks by the Basel Committee on Banking
Supervision, with indicative suggestions wherever considered necessary, have
been issued. Banks have been advised to ensure that a proper policy framework
on 'Know Your Customer' and Anti-Money Laundering measures with the approval
of the Board is formulated and put in place.
Previous instructions
Application
ii) These guidelines are issued under Section 35A of the Banking Regulation
Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of
Records of the Nature and Value of Transactions, the Procedure and
Manner of Maintaining and Time for Furnishing Information and Verification
and Maintenance of Records of the Identity of the Clients of the Banking
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iii) This Master Circular consolidates all the circulars issued on the subject up
to June 30, 2009.
Structure
1 Introduction
1.1 KYC/AML/CFT
2 Guidelines
2.1 General
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3 Annex
1 Introduction
1. 2 Definition of Customer
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2. Guidelines
2.1 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 be divulged 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 any remittance of funds by way of demand
draft, mail/telegraphic transfer or any other mode and issue of
travellers' cheques for value of Rupees fifty thousand and above is
effected by debit to the customer's account or against cheques and
not against cash payment.
Banks should frame their KYC policies incorporating the following four key
elements:
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d) Risk Management.
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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. The nature and extent of due diligence will depend on the risk
perceived by the bank. However, while preparing customer profile
banks should take care to seek only such information from the
customer, which is relevant to the risk category and is not intrusive.
The customer profile is a confidential document and details contained
therein should not be divulged for cross selling or any other purposes.
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a) The policy approved by the Board of banks should clearly spell out
the Customer Identification Procedure to be carried out at different
stages i.e. while establishing a banking relationship; carrying out a
financial transaction or when the bank has a doubt about the
authenticity/veracity or the adequacy of the previously obtained
customer identification data. 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. Being satisfied means that the bank must be able to
satisfy the competent authorities that due diligence was observed
based on the risk profile of the customer in compliance with the
extant guidelines in place. Such risk based approach is considered
necessary to avoid disproportionate cost to banks and a burdensome
regime for the customers. Besides risk perception, the nature of
information/documents required would also depend on the type of
customer (individual, corporate etc.). 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,
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the bank should (i) verify the legal status of the legal person/entity
through proper and relevant documents; (ii) verify that any person
purporting to act on behalf of the legal person/entity is so authorised
and identify and verify the identity of that person; (iii) understand
the ownership and control structure of the customer and determine
who are the natural persons who ultimately control the legal person.
Customer identification requirements in respect of a few typical cases,
especially, legal persons requiring an extra element of caution are
given in paragraph 2.5 below for guidance of banks. Banks may,
however, frame their own internal guidelines based on their experience
of dealing with such persons/entities, normal bankers' prudence and
the legal requirements as per established practices. If the bank decides
to accept such accounts in terms of the Customer Acceptance Policy,
the bank should take reasonable measures to identify the beneficial
owner(s) and verify his/her/their identity in a manner so that it is
satisfied that it knows who the beneficial owner(s) is/are.
b) It has been observed that some close relatives, e.g. wife, son, daughter
and daughter and parents etc. who live with their husband, father/
mother and son, as the case may be, are finding it difficult to open
account in some banks as the utility bills required for address verification
are not in their name. It is clarified, that in such cases, banks can
obtain an identity document and a utility bill of the relative with whom
the prospective customer is living along with a declaration from the
relative that the said person (prospective customer) wanting to open
an account is a relative and is staying with him/her. 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.
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e) It has been brought to our notice that the said indicative list furnished
in Annex -I, is being treated by some banks as an exhaustive list as a
result of which a section of public is being denied access to banking
services. Banks are, therefore, advised to take a review of their
extant internal instructions in this regard.
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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. Banks also maintain
'pooled' accounts managed by lawyers/chartered accountants or
stockbrokers for funds held 'on deposit' or 'in escrow' for a range of
clients. Where funds held by the intermediaries are not co-mingled at
the bank and 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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or
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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.
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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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c) Banks are also advised to take into account risks arising from the
deficiencies in AML/CFT regime of certain jurisdictions viz. Iran,
Uzbekistan, Pakistan, Turkmenistan and Sao Tome and Principe, as
identified in FATF Statement of February 25, 2009 circulated to banks
vide our circular letter DBOD.AML. No.20716/14.01.027/2008-09 dated
June 03, 2009.
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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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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.
ii) 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 analysing 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
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limits. Accordingly, banks must ensure that all wire transfers are
accompanied by the following information:
(iii) Exemptions
Interbank transfers and settlements where both the originator and
beneficiary are banks or financial institutions would be exempted from the
above requirements.
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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.
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banks and any other institution which are involved in the fight against
money laundering and combating financing of terrorism.
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a) Customer Education
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b) Employee's Training
c) Hiring of Employees
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Annex- I
Features Documents
Accounts of individuals
- Legal name and any other (i) Passport
names used (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.
- Correct permanent address (i) Telephone bill
(ii) Bank account statement
(iii) Letter from any recognized public
authority
(iv) Electricity bill
(v) Ration card
(vi) Letter from employer (subject to
satisfaction of the bank) (any one
document which provides
customer information to the
satisfaction of the bank will suffice)
Accounts of companies
- Name of the company (i) Correct permanent address
- Principal place of business Memorandum & Articles of
- Mailing address of the Association
company (ii) Resolution of the Board of
- Telephone/Fax Number Directors to open an account and
identification of those who have
authority to operate the account
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Features Documents
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Annex - II
2. Summary of CTR
7. Summary of CCR
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Annex - III
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