BANASTHALI

VIDYAPITH

ASSINGMENT OF RETAIL BANKING I

Topic Name
acceptance
review

:- KYC and AML a Barometer for

Of customer a detailed

Class

:- MBA 3rd Sem.

Roll no.

:- 12190

Submitted To,
Submitted By,
Dr. Bal Gopal Singh

Chandni Agarwal
(Assistant professor)

WBMBA15005
Know Your Customer

The Objective of the KYC:The objective of the KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures enable
banks to know/understand their customers and their financial dealings better which in turn
help
them manage their risks prudently. The revised KYC policy of the bank incorporates the
following
four elements:
i. Customer Acceptance Policy (CAP)
ii. Customer Identification Procedures (CIP)
iii. Monitoring of Transactions; and
iv. Risk Management
b) A customer for the purpose of KYC Policy is defined as:
A person or entity that maintains an account and/or has a business relationship with the
bank
One on whose behalf the account is maintained (i.e., the beneficial owner)
Beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers,
Chartered Accountants, Solicitors, etc as permitted under the law
Any person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank, say, a wire transfer or issue of high value demand
draft as a single transaction.
2. Customer Acceptance Policy (CAP)
a) The following Customer Acceptance Policy indicating the criteria for acceptance of
customers shall
be followed in the bank. The branches shall accept customer strictly in accordance with the
said
policy:
i. No account shall be opened in anonymous or fictitious/benami name(s)
ii. Parameters of risk perception shall be clearly defined in terms of the nature of business
activity, location of customer and his clients, mode of payments, volume of turnover,
social and financial status etc., to enable categorization of customers into low, medium
and high risk called Level I, Level II and Level III respectively; Customers requiring very
high level of monitoring e.g., Politically Exposed Persons (PEPs) may be categorized as
Level IV.
iii. The branches shall collect documents and other information from the customer
depending
on perceived risk and keeping in mind the requirements of AML Act, 2002 and guidelines

issued by RBI from time to time

iv. The branches shall close an existing account or shall not open a new account where it is
unable to apply appropriate customer due diligence measures i.e., branch is unable to
verify the identity and/or obtain documents required as per the risk categorization due to
non cooperation of the customer or non reliability of data/information furnished to the
branch. The branches shall, however, ensure that these measures do not lead to the
harassment of the customer. However, in case the account is required to be closed on this
ground, the branches shall do so only after permission of J/DGM (I&V) of their concerned
Zonal Offices is obtained. Further, the customer should be given a prior notice of at least
20 days wherein reasons for closure of his account should also be mentioned.
v. The Updated Manual of Instructions (Chapter 2 Volume I) provides detailed guidelines as
to the mode of operations of different types of accounts and the circumstances in which a
customer is permitted to act on behalf of another person/entity. The branches are
advised to strictly follow these instructions.
vi. The branches shall make 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 organizations,
etc. RBI has been circulating lists of terrorist entities notified by the Government of India
so that banks exercise caution against any transaction detected with such entities. The
branches shall invariably consult such lists to ensure that prospective person/s or
organizations desirous to establish relationship with the bank are not in any way involved
in any unlawful activity and that they do not appear in such lists.
b) The branches shall prepare a profile for each new customer based on risk categorization.
The
bank has devised a revised Composite Account Opening Form for recording and maintaining
the
profile of each new customer. Revised form is separate for Individuals, Partnership Firms,
Joint
Customers, Corporates and other legal entities or special accounts e.g., account in the name
of
brand names, domain names, etc. The nature and extent of due diligence shall depend on
the
risk perceived by the branch. The branches should continue to follow strictly the instructions
issued by the bank regarding secrecy of customer information. The branches should bear in
mind
that the adoption of customer acceptance policy and its implementation does not become
too
restrictive and should not result in denial of banking services to general public, especially to
those, who are financially or socially disadvantaged.

c) The risk to the customer shall be assigned on the following basis:

i. Low Risk (Level I):
Individuals (other than High Net Worth) and entities whose identities and sources of wealth
can
be easily identified and transactions in whose accounts by and large conform to the known
profile
may be categorized as low risk. The illustrative examples of low risk customers could be
salaried
employees whose salary structures are well defined, people belonging to lower economic
strata of
the society whose accounts show small balances and low turnover, Government
Departments and
Government owned companies, regulators and statutory bodies etc. In such cases, only the
basic
requirements of verifying the identity and location of the customer shall be met.
ii. Medium Risk (Level II):

Customers those are likely to pose a higher than average risk to the bank may be
categorized as
medium or high risk depending on customers background, nature and location of activity,
country
of origin, sources of funds and his client profile etc; such as:
a) Persons in business/industry or trading activity where the area of his residence or place of
business has a scope or history of unlawful trading/business activity.
b) Where the client profile of the person/s opening the account, according to the perception
of
the branch is uncertain and/or doubtful/dubious .
iii. High Risk (Level III):
The branches may apply enhanced due diligence measures based on the risk assessment,
thereby
requiring intensive due diligence for higher risk customers, especially those for whom the
sources of funds are not clear. The examples of customers requiring higher due diligence
may
Include
a) Non Resident Customers,
b) High Net worth individuals
c) Trusts, charities, NGOs and organizations receiving donations,
d) Companies having close family shareholding or beneficial ownership
e) Firms with sleeping partners
f) Politically Exposed Persons (PEPs) of foreign origin
g) Non-face to face customers, and
h) Those with dubious reputation as per public information available, etc.
The persons requiring very high level of monitoring may be categorized as Level IV.

3. Customer Identification Procedure (CIP)

Customer identification means identifying the person and verifying his/her identity by using
reliable, independent source documents, data or information. The branches 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 branch is able to satisfy the competent
authorities
that due diligence was observed based on the risk profile of the customer in compliance of
the
extant guidelines in place. 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.
.b) If the branch decides to accept such accounts in terms of the Customer Acceptance
Policy, the
branch shall 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. An
indicative list of the nature and type of documents/information that may be relied upon for
customer identification is given in Annexure II.

4. Monitoring of Transactions
Continuous monitoring is an essential ingredient of effective KYC procedures and the
extent of
monitoring should be according to the risk sensitivity of the account. Branches shall pay
special
attention to all complex, unusually large transactions and all unusual patterns which have no
apparent economic or visible lawful purpose. Transactions that involve large amount of cash

inconsistent with the size of the balance maintained may indicate that the funds are being
washed through the account.

5. Risk Management

a) The banks KYC policies and procedures covers management oversight, systems and
controls,
Segregation of duties, training and other related matters. For ensuring effective
implementation
of the banks KYC policies and procedures, the Branch Managers shall explicitly allocate
responsibilities within the branch. The Branch Manager shall authorize the opening of all new
accounts. However, in case of branches with business of Rs.50 crore or above, where there
is
usually another senior Officer next below the Branch Manager heading the Accounts
Department
may authorize the opening of new accounts. The branches shall prepare risk profiles of all
their
existing and new customers and apply Anti Money Laundering measures keeping in view the
risks
involved in a transaction, account or banking/business relationship.
b) Training encompassing applicable money laundering laws and recent trends in money
laundering
activity as well as the banks policies and procedures to combat money laundering shall be
provided to all the staff members of the bank periodically in phases. The HRD Department,
Corporate Headquarters shall determine the frequency of training and identify personnel to
be
trained at each branch.
c) The General Manager, Planning & Accounts Department shall be empowered to prescribe
threshold limits for a particular group of accounts and the branches shall pay particular
attention
to the transactions which exceed these limits. The threshold limits shall be reviewed
annually and
changes, if any, conveyed to branches for monitoring.
d) The banks internal audit and compliance functions have an important role in evaluating
and
ensuring adherence to the KYC policies and procedures. The compliance function shall
provide an
independent evaluation of the banks own policies and procedures, including legal and
regulatory
requirements. The bank shall ensure that the audit machinery of the bank is staffed
adequately
with individuals who are well versed in such policies and procedures. Concurrent/Internal
Auditors
shall specifically check and verify the application of KYC procedures at the branches and
comment
on the lapses observed in this regard. The compliance in this regard shall be put up before
the
Audit Committee of the Board on quarterly intervals.

6. Customer Education
Implementation of KYC procedures requires branches to demand certain information from
the
customers that may be of personal in nature or which have hitherto never been called for.
This can
sometimes lead to a lot of questioning by the customer as to the motive and purpose of
collecting
such information. Therefore, the front desk staff needs to handle such situations tactfully
while

dealing with customers and educate the customer of the objectives of the KYC programme.
The
branches shall also be provided specific literature/pamphlets to educate customers in this
regard.

7. New Technologies

The KYC procedures shall invariably be applied to new technologies including JK Bank Global
Access
Debit Card products and/or JK Bank Credit Card products, including Internet banking/Mobile
banking facility or such other product which may be introduced by the bank in future that
might
favour anonymity, and take measures, if needed to prevent their use in money laundering
schemes.
Branches should ensure that appropriate KYC procedures are duly applied before issuing the
cards to
the customers. It is also desirable that if at any point of time bank appoints/engages agents
for
marketing of these cards / products are also subjected to KYC measures.

8. KYC for the Existing Accounts

As per extant RBI guidelines, the branches were required to obtain Composite Account
Opening
Form .
transactions in existing accountsshall be continuously monitored and any unusual pattern in
the operation of the account should trigger a review of the Customer Due Diligence (CDD)
measures. It has however to be ensured that
all the existing accounts of companies, firm, trusts, charitable, religious organizations and
other
institutions are subjected to minimum KYC standards which would establish the identity of
the
natural/legal person and those of the beneficial owners. The term/recurring deposit
accounts
or accounts of similar nature shall be treated as new accounts at the time of
renewal and
shall be subjected to revised KYC procedures.

9. Appointment of Principal Officer

To ensure compliance, monitoring and report compliance of Anti Money Laundering policy of
the
bank, Senior Executive heading the I&V Department of the bank at Corporate Headquarters
shall act
as Principal Officer. He shall be responsible to monitor and report transactions and share
information
on Anti Money Laundering as required under the law. The Principal Officer shall maintain
close liaison
with enforcement agencies, banks and any other institutions that are involved in the fight
against
money laundering and combating financing of terrorism. The Principal Officer shall furnish a
compliance certificate to the Board on quarterly basis certifying that Revised Anti Money
laundering
Policy is being strictly followed by all the branches of the bank.

Anti Money Laundering (AML)

Money laundering in India is an emerging problem. India has consistently maintained a
robust Anti-Money Laundering (AML) system. Historically, the countrys strict foreign-

exchange laws and transaction reporting requirements, together with the banking industrys
Know Your Customer (KYC) policy, make it difficult for criminals to use banks or other
financial institutions to launder money. Large portions of illegal proceeds are accordingly
laundered through the alternative remittance system called "hawala" or "hundi."
Under the hawala system, individuals transfer value from one location to another, often
without the actual movement of currency. Key features of the hawala system are that it
transfers value without actually moving funds. When accounts need to be balanced between
hawaladars, a number of techniques are used, including cash and bank transfers. But
historically and culturally, trade is the most common vehicle to provide "counter valuation."
This is often accomplished through invoice manipulation such as over and under valuation.
Any commodity can be used in hawala value transfer, but gold remains most popular. The
hawala system provides anonymity and security to transacting individuals. The Government
of India (GOI) neither regulates hawala dealers nor requires them to register with the
government. The Reserve Bank of India (RBI), the countrys Central Bank, argues that the
widespread hawala dealers operate illegally and therefore cannot be registered and are
beyond the reach of regulation. Reportedly, the RBI does intend to increase its regulation of
non-bank money transfer operations by entities such as currency exchange kiosks and wire
transfer services.
On November 27, 2002, the lower house of Parliament passed the Prevention of Money
Laundering Act (PMLA), which had first been introduced in 1998. The bill was amended in
August 2002 by the upper house to include terrorist financing provisions. Indias President
signed the law in January 2003. This legislation criminalizes money laundering, establishes
fines and sentences for money laundering offenses, imposes reporting and recordkeeping
requirements on financial institutions, provides for the seizure and confiscation of criminal
proceeds, and provides for the creation of a Financial Intelligence Unit (FIU).
The term Money Laundering is used for cleaning dirty money. It is the disguising or
concealing of illicit income in order to make it appear legitimate.
Money Laundering is being employed by launderers worldwide to conceal criminal activity
associated with it such as drugs / arms trafficking, terrorism and extortion.
Article 1 of EC Directive on Prevention of the use of the Financial System for the Purpose of
Money Laundering, 1991 defines the term 'money laundering' as "the conversion of
property, knowing that such property is derived from serious crime, for the purpose of
concealing or disguising the illicit origin of the property or of assisting any person who is
involved in committing such an offence or offences to evade the legal consequences of his
action, and the concealment or disguise of the true nature, source, location, disposition,
movement, rights with respect to, or ownership of property, knowing that such property is
derived from serious crime".
The Financial Action Task Force on Money Laundering (FATF) an intergovernmental body
established by the G-7 Summit in Paris in 1989 and responsible for setting global standards
on anti-money laundering and combating financing of terrorism defines money laundering as
the processing of criminal proceeds to disguise their illegal origin in order to "legitimize" the
ill-gotten gains of crime."

India became the 34th country member of the Financial Action Task Force in 2010 . India is
also a signatory to various United Nations Conventions which deal with anti money
laundering and countering financing of terrorism.
India has criminalised money laundering under both the Prevention of Money Laundering
Act, 2002 (PMLA), as amended in 2005 and 2009, and the Narcotic Drugs and Psychotropic
Substances Act, 1985 (NDPS Act), as amended in 2001.
In India, before the enactment of the Prevention of Money Laundering Act 2002, a number of
statutes addressed scantily the issue in question. These statutes were The Conservation of
Foreign Exchange and Prevention of Smuggling Activities Act, 1974,The Income Tax Act,
1961,The Benami Transactions (Prohibition) Act, 1988,The Indian Penal Code and Code of
Criminal Procedure, 1973,The Narcotic Drugs and Psychotropic Substances Act, 1985, The
Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988.
The Prevention of Money Laundering Act 2002 is sought to be further amended by the The
Prevention of Money Laundering (Amendment) Bill, 2011 hereinafter referred to as the 'Bill',
which has been introduced by the Minister of Finance, Mr. Pranab Mukherjee in the Lok
Sabha on December 27, 2011.
The Bill proposes to introduce the concept of 'corresponding law' to link the provisions of
Indian law with the laws of foreign countries. It also adds the concept of 'reporting entity'
which would include a banking company, financial institution, intermediary or a person
carrying on a designated business or profession. The Bill expands the definition of offence
under money laundering to include activities like concealment, acquisition, possession and
use of proceeds of crime.
The Prevention of Money Laundering Act, 2002 levies a fine up to Rupees five lakhs. The Bill
proposes to remove this upper limit of fine.
The Bill seeks to provide for provisional attachment and confiscation of property of any
person for a period not exceeding 180 days if the authority has reason to believe that the
offense of money laundering has taken place. The Bill proposes to confer powers upon the
Director to call for records of transactions or any additional information that may be required
for the purposes of investigation. The Director may also make inquiries for non-compliance
of the obligations of the reporting entities. The Bill seeks to make the reporting entity, its
designated directors on the Board and employees responsible for omissions or commissions
in relation to the reporting obligations. The Bill states that in the proceedings relating to
money laundering, the funds shall be presumed to be involved in the offence, unless proven
otherwise. The Bill proposes to provide for appeal against the orders of the Appellate
Tribunal directly to the Supreme Court within 60 days from the communication of the
decision or order of the Appellate Tribunal. The Bill seeks to provide for the process of
transfer of cases of the Scheduled offences pending in a court which had taken cognizance
of the offence to the Special Court for trial. In addition, on receiving such cases, the Special
Court shall proceed to deal with it from the stage at which it was committed. The Bill also
proposes to bring all the offences mentioned under Part A of its Schedule to ensure that the
monetary thresholds do not apply to the offence of money laundering.

Money Laundering is a global menace that cannot be contained by any nation alone. The
Prevention of Money Laundering (Amendment) Bill 2011 was necessitated in view of India
being an important member of the Financial Action Task Force and to bring prevention of
money laundering legislation on par with global norms. The said Bill is still pending for
approval in the Parliament.

Methods and Stages of Money Laundering

There are three stages involved in money laundering; placement, layering and integration.

Placement This is the movement of cash from its source. On occasion the source can be
easily disguised or misrepresented. This is followed by placing it into circulation through
financial institutions, casinos, shops, bureau de change and other businesses, both local and
abroad. The process of placement can be carried out through many processes including:
1. Currency Smuggling This is the physical illegal movement of currency and
monetary instruments out of a country. The various methods of transport do not
leave a discernible audit trail.
2. Bank Complicity This is when a financial institution, such as banks, is owned or
controlled by unscrupulous individuals suspected of conniving with drug dealers and
other organized crime groups. This makes the process easy for launderers. The
complete liberalization of the financial sector without adequate checks also provides
leeway for laundering.
3. Currency Exchanges In a number of transitional economies the liberalization of
foreign exchange markets provides room for currency movements and as such
laundering schemes can benefit from such policies.
4. Securities Brokers Brokers can facilitate the process of money laundering through
structuring large deposits of cash in a way that disguises the original source of the
funds.
5. Blending of Funds The best place to hide cash is with a lot of other cash. Therefore,
financial institutions may be vehicles for laundering. The alternative is to use the
money from illicit activities to set up front companies. This enables the funds from
illicit activities to be obscured in legal transactions.
6. Asset Purchase The purchase of assets with cash is a classic money laundering
method. The major purpose is to change the form of the proceeds from conspicuous
bulk cash to some equally valuable but less conspicuous form.

Layering The purpose of this stage is to make it more difficult to detect and uncover a
laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law
enforcement agencies. The known methods are:
1. Cash converted into Monetary Instruments Once the placement is successful within
the financial system by way of a bank or financial institution, the proceeds can then
be converted into monetary instruments. This involves the use of bankers drafts and
money orders.

2. Material assets bought with cash then sold Assets that are bought through illicit
funds can be resold locally or abroad and in such a case the assets become more
difficult to trace and thus seize.

Integration This is the movement of previously laundered money into the economy
mainly through the banking system and thus such monies appear to be normal business
earnings. This is dissimilar to layering, for in the integration process detection and
identification of laundered funds is provided through informants. The known methods used
are:
1. Property Dealing The sale of property to integrate laundered money back into the
economy is a common practice amongst criminals. For instance, many criminal
groups use shell companies to buy property; hence proceeds from the sale would be
considered legitimate.
2. Front Companies and False Loans Front companies that are incorporated in
countries with corporate secrecy laws, in which criminals lend themselves their own
laundered proceeds in an apparently legitimate transaction.
3. Foreign Bank Complicity Money laundering using known foreign banks represents a
higher order of sophistication and presents a very difficult target for law enforcement.
The willing assistance of the foreign banks is frequently protected against law
enforcement scrutiny. This is not only through criminals, but also by banking laws and
regulations of other sovereign countries.
4. False Import/Export Invoices The use of false invoices by import/export companies
has proven to be a very effective way of integrating illicit proceeds back into the
economy. This involves the overvaluation of entry documents to justify the funds later
deposited in domestic banks and/or the value of funds received from exports.