Certificate Course
on
Concurrent Audit of
Banks

Contents:
1. Legal and Regulatory Frame work

2. KYC norms & Obligation of banks under

Prevention of Money Laundering Act (PMLA
2002)

Compiled by:
CA. Nayan R. Kothari

 
  

CA. Nay
yan R. K
Kothari
M. Com., FCA,
F NET ((UGC)
 
+91 9824433445 
hari@icai.orgg | nayan.r.kkothari@gmail.com 
nayan.r.koth
nayankothari.blogspot.ccom | twitter: @kotharinnayan | facebook.com/ko
othari.nayan
n  
 
• CA. Nayan R. Kothari is a posst graduate e of comme erce from M S Universsity of Baro oda and a Fellow
F
Member of ICAI. He e has also completed p post qualificcation certiificate courrse of Forennsic Auditin
ng and
Fraud De etection of ICAI.
• Presentlly his is a managing
m paartner of MM/s. Parag Patel
P & Asssociates, Chhartered Acccountants (Estd.
1994) an nd in full timme practice e at Baroda.
• His area as of practiice include e Internal Audits
A of SMMEs and Co orporate, consultancy
c y in the are eas of
Fraud In nvestigation n and foren nsic auditinng, businesss restructu uring and corporate
c finance
f pla
anning
(debt an nd equity). He is also o doing con nsultancy in
i the area as of Project Finance and taxattion &
companyy law matte ers.
• He is Ma anaging Com mmittee m member of Baroda
B Branch of WIR RC of ICAI since
s 6 yeaars and presently
Vice-Cha airman of Baroda
B Brannch of WIRC C of ICAI annd Chairman n of Barodaa Branch of WICASA. He H had
been con nvener of Baroda
B CPE Study Circlle for the ye ear 2010-111.
• He has worked
w as lecturer
l at Faculty of Commerce e of MSU Ba aroda and taught
t subjects like FMM and
Taxation n.
• He was also
a a visiting faculty a at Faculty oof Law, MSUU Baroda an nd was teacching Taxattion at PGDT TP
• He is reggularly delivvering lectu ures at stud
dy circle annd seminarss of Baroda Branch & other
o branches of
ICAI andd various other professsional bodie es. He has given
g lecturre on “Howw to do busiiness in India” to
a Srilankkan delegattion who had visited India for th heir Study Tour.
T He had also pre esented paper in
International Semin nar organizeed jointly bby Faculty of
o LAW, MSU U and Canadian Studie es Centre
• He is a visiting
v facu ulty at Natioonal Academ my of Custo oms Excise and Narcottics (NACEN) at Baroda a.
• He is thee regular fa aculty at Ceertificate Coourse on Cooncurrent B Bank Branchh of ICAI.
• He is vissiting facullty at vario ous institutees and B-Scchools and HR Schoolls. (Facultyy of Manage ement
Studies and Facultyy of Social Works of T The M S Un niversity off Baroda, Charotar
C Un
niversity, Changa
Campus;; to name a few)
• He has given lectture in Te eleconferen nce organissed by ICA AI and which was broadcasted
b d Live
Nationw wide on Doorr Darshan’ss Gyan Darsh han Channe el.
• He is a regular
r spea aker at various branch hes and stud dy circles of
o ICAI on su ubjects relaated to Audditing,
Taxation n and Manag gement etcc.
• He is reggular facultty since last 33 batche es at Orienttation programme for IPCC stude ents organizzed by
Baroda Branch of WIRC W of IC
CAI and tea aching techhnical subje ects and also subjectss related to o soft
skills. Hee is also an n invited fa
aculty at GM MCS (ICAI Program for CA Final Students) att Surat bran nch of
ICAI.
• He is reggularly delivvering lectu ures to studdents in varrious prograammes orga anized by WICASA
W –Barroda.
• He is also a facultty of Caree er Counselin ng programmmes organized by WIICASA at va arious schoools of
Baorda
• He is Conducting Co orporate Trraining Proggrammes fo or various coorporate annd organizattions.
• He is reggularly cont tributing arrticles in ne
ewsletter of
f Baroda braanch.
• He is deeeply intere ested in Music and Gujjarati Litera ature and his
h other ho obbies are photograph hy and
travellin
ng.
 Legal & Regulatory Framework

__________________________________
CA. Nayan R. Kothari
M. Com., FCA, NET (UGC)
nayan.r.kothari@icai.org | nayan.r.kothari@gmail.com
nayankothari.blogspot.com | twitter: @kotharinayan |
facebook.com/kothari.nayan

CA. Nayan R. Kothari 1

LEGAL Framework 
• Banking Regulation Act, 1949
• 10 Parts – 56 sections and 5 Schedules
• Law relating to banking and provide for nature of
transaction carried out by banks in India.
• Provision
P ii off P
Power off RBI to
t control
t l advances
d ,
accounts, audit
• Restriction as to minimum paid up capital &
reserves, payment of dividend
• Validation of license
• Power of suspension of business and winding up

Banking Regulation Act, 1949
• Definition of banking & banking company

• Licensing

• Permitted business

• Prohibited business

• RBI’s powers

• Control over management

1
• Banking means
“ accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise,
and withdrawal by cheque, draft, order or otherwise” {Section
5(b)}

• Banking company
“means any company which transacts the business of banking in
India”
Explanation excludes manufacturing and trading company
{Section 5 (c)}

Use of the word “bank”, ”banker”, “banking” or “banking

company” - Section 7

Permitted Business
• Can carry on business permitted u/s 6
o Borrowing, lending, bill discounting, etc.
• Buying, selling and dealing in bullion
• Buying and selling of foreign exchange
• Traveller’s cheques
• Letters of credit
• Underwriting and dealing in shares, debentures, etc.
• Safe deposit
• Collecting and transmitting of money and securities
• Undertaking/ executing trusts
o Activities that are incidental/ conducive to the promotion/ advancement
of its business
o Central Govt. empowered to notify permitted business

• Act overrides memorandum, articles, etc.

Prohibited business
• Trading prohibited vide Sec 6

• Non-banking assets – Sec 9

o Immoveable property can only be held for own use
o Other – disposed within 7 years
• RBI can give additional 5 year extension

• Restriction on nature of subsidiary companies – Sec

19
o Permitted business u/s 6
o Carrying on banking outside India
o Credit information business
o Other business with RBI and CG approval

2
 Licensing
• RBI empowered to issue & cancel licences
o Section 22 criteria
• Solvency
• Affairs/ management not detrimental to depositor and public interest
• Adequate capital structure and capital prospects
• Public interest will be served
• Grant of licence not prejudicial to operation and consolidation of
banking system
• Foreign banks – home country does not discriminate against Indian
banks
• Other conditions specified by RBI

o New bank licencing requirements

• Branch licencing u/s 23

Returns
• Section 24
o Monthly return of assets in India
o DTL on reporting Friday
• Section 25
o Quarterly return of assets and liabilities at the close of business on the last
Friday of every quarter
• Section 27
o Monthly return on Asset & Liability position as on last Friday
o RBI empowered to direct banks to furnish information within a specified
time frame
o RRBs also need to submit a copy to NABARD
• Section 26
o Return of unclaimed deposits
• Section 31
o Three copies of annual returns to be submitted to RBI

Inspection
• Section 35
o Inspect books
• Also on direction of
CG
• Copy of report to be
given to bank
• Empowers RBI
Inspecting officer to
examine bank
officials under oath
o Also empowers RBI to
carry out a scrutiny

3
 Powers of RBI

• Sec 35A – Power to give directions

• Sec 35B – Prior RBI approval required for
appointment of Chairman, MD, CEO or director
• Sec 36 – Further powers and functions of RBI
o Caution/ give advice regarding certain transaction/ class of transactions
o Call for meeting of directors, depute its officer to board meeting, appoint
observer, etc
o Report on Trend and Progress in Banking in the country

Powers of RBI –
Powers of RBI – Control 
over management

• Sec 36AA – Power to remove managerial and other

persons from office
o Appeal lies with Central Government

• Sec 35B – Power to appoint additional directors

Other important 
provisions
• Sec 14 – Prohibition of charge on unpaid capital
• Sec 15 – Prohibition on payment of dividend unless
intangible assets written off
• Sec 17 – Creation of reserve fund
• Sec 18 – Maintenance of cash reserve ratio (CRR)
• Sec 20 – Restrictions on loans and advances
• Sec 24 – SLR

4
 Applicability of BR  Act
• Nationalised Banks
o Banking Companies (Acquisition and Transfer of Undertakings)
Act,1970/1980;
o Section 51 of BR Act makes specific sections applicable

• Regional Rural Banks

o Regional Rural Banks Act, 1976
o Section 51 of the BR Act

• Cooperative Banks
o Cooperative Societies Act. 1912 or the respective Co-operative
Societies Act of the state concerned
o Part V of the B R Act – BR (AACS) Act

Some important RBI instructions in 
context of BR  Act
• Master Circular
o Loans & Advances – Statutory and other
restrictions
o Branch authorisation
o Cash Reserve Ratio and Statutory Reserve Ratio

• Others
o Restriction on drawdown of reserves
o Guidelines on declaration of dividend

LEGAL Framework
• Banking Companies ( Acquisition and Transfer of
Undertaking ) Act, 1970----1980
• 5 Chapters – 3 schedules – 21 sections

• Provision for acquisition and transfer of the

undertakings of banking companies regard
to size , resources , coverage .

5
 LEGAL Framework
• State Bank of India Act, 1955 :
• 8 Chapters -53 sections- 4 schedules
• Act that constitute SBI and transferred to it
the undertaking of Imperial Bank of India
• To extend banking facilities on a large scale
• To reach out to rural and semi-urban areas
• To mobilize public deposit and advance to
needy people .

Legal Framework
• State Bank of India ( subsidiary Banks) Act,
1959 : For formation of certain Govt. Or
Govt. associated banks as subsidiaries of SBI

• Regional Rural Banks Act, 1976 : For

incorporation , regulation and winding up of
RRBs.- To develop rural economy by
providing loans for agriculture , trade,
commerce .- To small and marginal farmers ,
artisans

Legal Framework
• Companies Act , 1956 : Sec. 2 of
BR Act , 1949 – provisions of BR Act
shall be in addition to , and not,
save as hereinafter expressly
provided , in derogation of
Companies Act.
• BR Act is to be read as
supplemental to Companies Act.

6
 Legal Framework
• Co-operative Societies Act , 1912 : To
facilitate the formation of Co-op
societies for the promotion of rural
economy of India.
India
• Relevant State Co-op Societies Act :
To help and support to the small self-
employed persons of limited means.

Legal Framework
• Information technology Act, 2000 : This act provides
legal back to e-transactions.

• The Indian Penal Code , Indian Evidence Act (1872),

RBI Act ( 1934) are also amended to cover
electronic transactions .

Legal Framework
• Prevention of Money Laundering Act, 2002 :
As per PMLA every banking company ,
financial institution………have to maintain a
record of all transactions : Nature and Value
is prescribed in Rules under PMLA.
• Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act, 2002. (SARFAESI): To regulate
securitisation and reconstruction of financial
assets .

7
 Legal Framework 
• Service Tax ( Chapter V of Finance Act ,
1994) : Introduced in India in 1994. CBEC ,
Dept. of Revenue , MOF deals with service
tax.
• Service Tax rates as per Financial Bill

Legal Framework 
• Income Tax Act , 1961 : Specific
Provisions for banking companies.
• Section 43D
• Section 145
• Section 36(1)(viia)
• Deduction of Tax at Source
• E. filling of TDS quarterly returns
• Tax Audit Report be referred .

KYC Policies under 
PMLA 
• Section 3 of PMLA –Offence of money
Laundering .

• Terrorist Financing – It is a reverse procedure

of Money Laundering. Money earned from
legal sources is used for illegal activities.

• KYC Policies : It is to ensure that the bank

system is not used by malafide intention.

8
 KYC, AML & CFT Norms

CA. Nayan R. Kothari

November 25, 2013 TC Baroda 1

Contents

ƒ Background
ƒ Legal Framework – India
ƒ Know Your Customer guidelines
ƒ Record Keeping
ƒ Anti Money Laundering measures

ƒ CFT Norms
ƒ Money Laundering Risk Management
ƒ Furnishing information to FIU- INDIA, New Delhi

Background

™ Mid 1980s - Growing concern of international community

to deprive criminal elements of the proceeds of their
crimes

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

global action to combat money laundering in Paris

™ 1995 - Egmont Group set up to stimulate international

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

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

up in Bangkok -to create awareness and encourage
adoption of AML measures
3

1
 Financial Action Task Force (FATF)

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

™ Sets standards & develops/promotes policies
to combat money laundering & terrorist
financing
™ 36 members – 34 countries + 2 Regional Org.
™ More than 20 observers
™ 40 + 9 Recommendations – recognized by IMF
and World Bank as International Standards

Financial Action Task Force (FATF)

™ 40 Recommendations – Sets out basic

framework for global AML efforts

™ Recommendations cover three areas - legal,

financial
a c al and
a d regulatory,
egulato y, and
a d law
enforcement

™ 9 Special Recommendations on Terrorist

Financing – International standard for
combating terrorist financing & related
interpretive notes
5

CFT
COMBATING MEANS FIGHTING

™The Financial Action Task Force (FATF) is the global standard

setting body for anti-money laundering and combating the
financing of terrorism (AML/CFT). In order to protect the
international financial system from ML/FT risks and to
encourage greater compliance
li with
i h the
h AML/CFT standards,
d d
the FATF identified jurisdictions that have strategic
deficiencies and works with them to address those deficiencies
that pose a risk to the international financial system.

™THEREFORE, STRESS HAE BEEN GIVEN FOR INDENTIFICATION

OF CUSTOMER FOR CARRYING OUT BANKING TRANSACTIONS

2
™WHO IS A
CUSTOMER?

Who is a Customer

™ A person or entity that maintains an account

and / or has a business relationship with the
Bank;

™O
One on whose
h b h lf
behalf th
the accountt i
is
maintained

™ Beneficiary of transactions conducted by

professional intermediaries, such as stock
brokers, chartered accountants, solicitors
etc. as permitted under the law;
8

Objective

™ The objective of the policy is to prevent

criminal elements from using the Bank for
money laundering activities by enabling the
Bank to know/ understand the customer and
their financial dealings better, which, in turn,
would help the Bank to manage risks prudently
and to put in place appropriate controls for
detection and reporting of suspicious activities
in accordance with the laid down procedures
so as to comply with applicable statutory
guidelines.
9

3
 Key elements of K Y C
Customer Acceptance - Ensure that you accept only
legitimate and bona fide
customers
Customer Identification – Ensure that you properly identify
your customers to understand the
risks they may pose
Transactions Monitoring –Monitor customer accounts and
transactions to prevent or detect
illegal activities
Risk Management – Implement processes to effectively
manage the risk posed by customers
trying to misuse facilities

10

Customer Acceptance
ƒ Ensure that you accept only legitimate and bona fide
customers

ƒ No account to be opened in anonymous or fictitious

names

ƒ A check on the list of terrorists or banned entities

should be done before opening the account

ƒ If customer does not cooperate or bank is unable to

apply a risk based due diligence do not to open an
account (You can also close an existing account in
case of non-cooperation as above) - KYC is a
regular monitoring activity. 11

Customer Identification

a. While establishing a banking relationship

b. Carrying out a financial transaction or
c. When the bank has a doubt about the veracity/
authenticity or adequacy of the customer data/
documents available
For legal persons/entities the bank should also identify
• any person acting on behalf of the legal entity,
• the ownership and control structure and
• beneficial owners if any
d. Documents required to be based on risk
perception and PMLA prescription

12

4
 DOCUMENTS TO VERIFY THE NAME\
IDENTIFY OF THE CUSTOMER:
™ Passport
™ PAN card
™ Voter Identify Card
™ Driving License with photograph
™ Identity Card
™ Letter from a recognized public authority verifying
the identity and residence of the customer to the
satisfaction of the branch official authorized to
open account
™ Confirmation/ letter from employer/other
bank(subject to satisfactions of the branch official
authorized to open the account) 13

DOCUMENTS TO VERIFY
THE ADDRESS ARE:

™ Telephone Bill
™ Bank Account Statement
™ Electricity Bill
™ Ration Card
™ Letter from employer to the satisfaction of the
bank

14

OBTAINING PROPER INTRODUCTION:

™ Introducer must know and identify the customer &
his profession; he himself should have
satisfactorily operated account for at least 6
months and in his account, KYC norms must have
been fulfilled
™ Photograph:
Ph t h A sett off ttwo photographs
h t h should
h ld bbe
obtained from customer
™ Wherever applicable, information on the nature of
business activity, location, mode of payment,
volume of turnover, social and financial etc. will
be collected for completing the profile of the
customer
15

5
 Transactions Monitoring

™ On-going monitoring of transactions for identifying

suspicious and high value cash transactions
™ Higher risk accounts and customer relationships will
generally require more frequent or intensive monitoring.
For higher risk situations, the following should be
considered:
™ On-going monitoring of transactions for identifying
suspicious and high value cash transactions
™ Special attention to all complex, unusually large
transactions and all unusual patterns which have no
apparent economic or visible lawful purpose
™ Prescription of threshold limits
™ Review of risk classification
™ Reporting to law enforcement authority
16

Risk Management
ƒ Categorise each account into High /
Medium / Low Money Laundering Risk
Category

ƒ Branch should therefore prepare a profile

for each customer based on the risk
categorization

ƒ Implement processes to effectively manage

the risks posed by customers trying to
misuse facilities

ƒ Periodical Review of risk classification

17

Risk Categorisation – Four Parameters

™ Country – Place of Domicile

™ Business Activity

™ Type of Banking Services

™ Turnover in the account

18

6
 Risk Parameters- Customers connected
with high-risk countries.
™ Geography
1) Drug producing Nations
2) Drug transshipment Countries
3) Drug using Countries
4)) Countries with high
g degree
g of ppublic corruption
p
5) Countries linked to Terrorist financing
6) Non Cooperative Countries and Territories

19

Risk parameters- Customers connected

with high-risk business activity
™ Money Services Bureaus (money transmitters,
foreign exchange houses etc.)
™ Arms, art and antique dealers
™ Securities broker / dealers, solicitor firms, CAs, etc.
who are managingg g pooled
p accounts on behalf of
clients
™ Travel agencies
™ Jewel / Gem / Precious metal dealers
™ Property dealers / builders
™ Car / boat dealerships

20

Risk parameters – High Risk Banking Products

™ Any product which allows a non-customer to readily

convert cash to a monetary instrument viz. Travellers
/ Gift Cheque, DD below Rs. 50,000/-

™ Any product or service which allows a customer to

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

™ Relevance of the products or services asked to the

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

™ Other Examples - Internet Banking

21

7
 High Risk Accounts

™ Accounts of Non-Resident Indian

™ Accounts of Trusts, NGOs receiving
donations.
™ Accounts of closely held Companies
™ Firms with sleeping partners
™ Accounts of Politically Exposed Persons
™ Non-Face-To-Face Transaction
™ Accounts opened by professional
intermediaries
™ Fiduciary Accounts
22

Trusts (High Risk)

™ Purpose and nature of the Trust

™ Verify the identity of Trustees

™ Verify the identity of settlers / grantors, protectors

etc.

™ Ascertain if there is beneficial ownership –

establish the identity

™ Keep close watch on sources and movement of

funds

™ Periodical review of the account

23

Companies/ Firms (High Risk)

™ Is the account used as “front” for

individuals

™ Management and control structure

™ Sources and use of funds

™ Relationship with sister concerns- financial

dealings

™ Nature & location of business and business

profile 24

8
 Politically exposed Persons (PEPs)
(High Risk)
“Politically Exposed Persons”(PEPs) are
individuals who are or have been entrusted
with prominent public functions in a foreign
country, for example Heads of State or of
government, senior politicians, senior
government, judicial or military officials,
senior executives of state owned corporations,
corporations
important political party officials. Business
relationships with family members or close
associates of PEPs involve reputational risks
similar to those with PEPs themselves. The
definition is not intended to cover middle
ranking or more junior individuals in the
foregoing categories.”
25

Non-face to face relationship (High Risk)

™ Accounts of NRIs/ non domestic account

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

26

MEDIUM RISK CATEGORY

™ Medium Risk Country (nationality is irrelevant);

Current Account customers where credit or debit
summations exceed ` 50 Lakh per annum in their
accounts but they do not provide sufficient
documentary proof and other deposit account
customers where credit or debit summations
exceed ` 10 Lakh per annum in their accounts but
they do not provide sufficient documentary proof.

27

9
 LOW RISK CATEGORY

™ All customers not falling under the category of

High/medium Risks are to be classified under Low
Risk category. All borrowal customers, where due
diligence is exercised at the time of granting the
credit facilities

28

NEGLIGIBLE RISK CATEGORY OR APPLICABILITY

OF REDUCED KYC PROCEDURE

™ Where a customer intends to keep balance not

exceeding ` 50,000/- in all his/her accounts taken
together in the bank and total credit in all the
accounts taken together not expecting to exceed
Rs 1lakh in a year of total transaction(Debit and
Rs.
Credit) do not exceed 2.00lac in year. More so, he
is not in a position to produce documents for the
purpose of opening of account.

29

MONITORING OF TRANSACTIONS
™ Monitoring of transactions will be conducted taking
into consideration the risk profile of the account.
Special attention will be paid to all complex, unusually
large transactions and all unusual patterns, which have
no apparent logical or visible lawful purpose.
g amounts of cash
Transaction that involve large
inconsistent with the normal and expected activity of
the customer will be subjected to detailed scrutiny
™ After due diligence at the appropriate level in the
bank, transactions of suspicious nature and/or any
other type of transaction notified under PML Act, 2002
will be reported to the appropriate authority and a
record of such transaction will be preserved and
maintained for a period as prescribed in the Act. 30

10
 MONITORING OF TRANSACTIONS
™ Branches would be maintaining a close watch on
cash transactions (whether deposits or
withdrawals) of Rs,.10 lakh and above in all
deposit and loan accounts and recording the same
separately in the prescribed register.
™ In
I new accounts, t withdrawal
ithd l off R
Rs. 25
25,000/-
000/ and
d
above be allowed after concurrence from
Incumbent Incharge. A stamp of “New Account” be
affixed on all leaves of 1st Cheque book issued to
the new customer

31

KYC for Existing Accounts

™ Revised guidelines to apply to all the existing

customers

™ Accounts should be subjected to risk

classification,
l ifi ti minimum
i i KYC and
d enhanced
h d
due diligence where required

™ Transactions in existing accounts to be

continuously monitored for review of
Customer Due Diligence measures

32

PERIODICAL UPDATION OF CUSTOMER IDENTIFICATION DATA

AND REVIEW OF RISK CLASSIFICATION

™ In terms of I &AD, Cir No. 12/08 dt 3.3.2008,

Customer Identification Data should once in a
period of 5 year in case of Low Risk Customer and
once in a period of 2 year in Medium and High Risk
Customers.
Customers
™ RBI has advised banks to review the Risk
Classification of High Risk Customers not less than
once in six months

33

11
 34

I want to keep a fixed deposit in a bank.

Is KYC - applicable to me?

™ Yes. KYC is applicable to customers of the bank. For the purpose

of KYC following are the ‘Customers of the bank.
1) a person or entity that maintains an account and/or has a business
relationship with the bank;
2) one on whose behalf the account is maintained (i.e. the beneficial
owner);
3) beneficiaries of transactions conducted by professional
intermediaries, such as Stock Brokers, Chartered Accountants,
Solicitors etc. as permitted under the law, and
4) any person or entity connected with a financial transaction which
can pose significant reputational or other risks to the bank, say, a
wire transfer or issue of a high value demand draft as a single
transaction.

35

Once KYC requirements are complied with while opening the account,
whether the bank can again ask for KYC compliance from me?

™ Yes. To ensure that the latest details about the customer are
available, banks have been advised to periodically update the
customer identification data based upon the risk category of
the customers.
™ Banks create a customer profile based on details about the
customer like social/financial status, nature of business
activity information about his clients
activity, clients’ business and their
location, the purpose and reason for opening the account, the
expected origin of the funds to be used within the relationship
and details of occupation/employment, sources of wealth or
income, expected monthly remittance, expected monthly
withdrawals etc. When the transactions in the account are
observed not consistent with the profile, bank may ask for any
additional details / documents as required. This is just to
confirm that the account is not being used for any Money
Laundering/Terrorist/Criminal activities. 36

12
Can my wife who is not having any address proof in her name,
open an account with the bank?

™ Yes. In such cases where the utility bills required for

address verification are not in the name of the person
who wants to open an account ( close relatives, e.g.
wife, son, daughter and daughter and parents etc. who
live with their husband, father/mother and son, as the
case mayy be)) , an identityy document and a utilityy 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 is acceptable. As supplementary evidence
bank may ask for a letter received through post for
further confirmation.
37

I am a daily wage earner without any document to satisfy the

bank about identity and address. Can I open a bank account?

™ address, can open bank account with an introduction

from another account holder who has been subjected
to full KYC procedure provided that the balance in all
his accounts taken together is not expected to exceed
Rupees Fifty Thousand (Rs. 50,000/-) and the total
g
credit in all the accounts taken together is not
expected to exceed Rupees One Lakh (Rs. 1,00,000/-)
in a year. The introducer’s account with the bank
should be at least six months old and should show
satisfactory transactions. Photograph of the customer
who proposes to open the account and also his address
needs to be certified by the introducer,
™ or
38

™ or
™ any other evidence as to the identity and address of the customer
to the satisfaction of the bank.
™ If at any point of time, the balance in all his/her accounts with
the bank (taken together) exceeds Rupees Fifty Thousand (Rs.
50,000/-) or total credit in the account exceeds Rupees One Lakh
(Rs. 1,00,000/
1,00,000/-)) in a year, no further transactions will be
permitted until the full KYC procedure is completed.
™ In order not to inconvenience the customer, the bank will notify
the customer when the balance reaches Rupees Forty Thousand
(Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty
thousand (Rs. 80,000/-) that appropriate documents for
conducting the KYC must be submitted otherwise operations in
the account will be stopped.

39

13
 Whether a certificate from my employer is sufficient as
identity as well as address proof for opening an account?

™ Banks rely on such certification only from

corporate and other entities of repute provided
that they are aware of the competent authority
designated by the concerned employer to issue
such certificate. In addition, banks also require at
least one of the valid documents indicated above
viz. Passport, Driving Licence, PAN Card, Voter's
Identity Card etc. or utility bills for KYC purposes
for opening bank account of salaried employees of
corporate and other entities.

40

Whether the information given by me to the

bank under KYC is treated as confidential?

™ Yes. The information collected from the

customer for the purpose of opening of account
is treated as confidential and details thereof are
not divulged for cross selling or any other
similar purposes.

41

Whether KYC is applicable for Credit

Cards/Debit Cards/Smart Cards?

™ Yes. Application of full KYC procedure is

necessary before issuing Credit Cards/Debit
Cards/Smart Cards and also in respect of add-on/
supplementary cards.

42

14
 If I refuse to give information on KYC asked for by the bank,
what action the bank can take against me?

™ 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 can 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.

43

RBI warns banks to strictly follow KYC norms

PTI New Delhi Last Updated: July 12, 2013

44

Foreign students studying in India – KYC

procedure for opening of bank accounts
™ RBI/2013-14/272 RPCD.RRB.RCB.AML.BC.No. 37 /07.51.018/2013-14
September 18, 2013
™ Regional Rural Banks and State / Central Cooperative Banks authorized
to open / maintain NRE/NRO accounts, may open a Non Resident
Ordinary (NRO) bank account of a foreign student on the basis of his/her
passport (with appropriate visa & immigration endorsement) which
contains the proof of identity and address in the home country along with
a photograph and a letter offering admission from the educational
institution
™ Within a period of 30 days of opening the account, the foreign student
should submit to the branch where the account is opened, a valid address
proof giving local address, in the form of a rent agreement or a letter
from the educational institution as a proof of living in a facility provided
by the educational institution. Banks should not insist on the landlord
visiting the branch for verification of rent documents and alternative
means of verification of local address may be adopted by banks.

45

15
 ™ c) During the 30 days period, the account should be operated with
a condition of allowing foreign remittances not exceeding USD
1,000 into the account and a cap of monthly withdrawal to Rs.
50,000/-, pending verification of address.
™ d) On submission of the proof of current address, the account
would be treated as a normal NRO account, and will be operated
in terms of instructions contained in RBI's
RBI s Master Circular on Non
Non-
Resident Ordinary Rupee (NRO) Account No. RBI/2013-14/2 Master
Circular No. 2/2013-14 dated July 1, 2013, and the provisions of
Schedule 3 of FEMA Notification 5/2000 RB dated May 3, 2000 may
also be kept in view.
™ e) Students with Pakistani nationality will need prior approval of
the Reserve Bank for opening the account.

46

ूेस ूकाशनी PRESS RELEASE

DEPARTMENT OF COMMUNICATION, Central Office, S.B.S.Marg, Mumbai-
भारतीय रर ज़व बक RESERVE BANK OF INDIA
March 18, 2013
RBI initiates Scrutiny of Three Banks for Alleged Violation of KYC Guidelines The
Reserve Bank of India has initiated the process of carrying out comprehensive scrutinies
covering both, Head Office and branches of three private sector banks, namely, ICICI
Bank, HDFC Bank and Axis Bank. Apart from this, the Reserve Bank has also
undertaken a thematic study in respect of banks that are active in selling gold coins /
wealth management products to examine whether there are systemic issues and to plug
deficiencies and legal loop-holes, if any.
The scrutinies have been initiated after an online media firm called Cobrapost.com, on
the basis of its sting operations across some branches of these banks alleged violation of
several provisions of the Reserve Bank of India Regulations, Foreign Exchange
Management Act guidelines, etc. The media firm had uploaded some videos on the
internet relating to these banks as well as ICICI Prudential Life Insurance and HDFC
Life Insurance.
The final reports on all the three banks will be completed by March 31, 2013 and
thereafter further course of action as necessary will be initiated.
Alpana Killawala 47
Chief General Manager

RBI/2012-13/420 UBD CO PCB

Cir.No.37/14.01.062/2012-13 February 25, 2013

™ With a view to ensuring that the banking channels are

not used for unlawful / illegal activities, it is
reiterated that all UCBs may put in place a system of
periodic review of risk categorization of customers
and updation of customer identification data to ensure
strict adherence to the KYC / AML / CFT guidelines
issued by Reserve Bank from time to time. As
already advised vide our circular dated September 13,
2012 ibid, Primary (Urban) Co-operative banks are
once again advised to complete the process of risk
categorization and compiling/updating profiles of all
their existing customers by end- March 2013.

48

16
 RBI/2012-13/431 UBD.BPD (PCB) Cir.
No.39/14.01.062/2012-13 March 7, 201
Shifting of bank accounts to another centre – Proof of address:
™ Primary (Urban) Co-operative Banks (UCBs) were advised vide
circular UBD.BPD (PCB) Cir. No.3/14.01.062/2012-13 dated July
10, 2012 that KYC once done by one branch of the bank should be
valid for transfer of the account within the bank as long as full
KYC procedure had been done for the concerned account. The
customer should be allowed to transfer his account from one
branch to another branch without restrictions. In order to comply
with KYC requirements of correct address of the person, fresh
address proof has to be obtained from him/her upon such transfer
by the transferee branch. However, a large number of customers
with transferable jobs or those who migrate for jobs are unable to
produce a utility bill or other documents in their name as address
proof immediately after relocating. In view of this, it has been
decided that:

49

™ (a) UCBs may transfer existing accounts at the

transferor branch to the transferee branch without
insisting on fresh proof of address and on the basis of a
self-declaration from the account holder about his/her
current address, subject to submitting proof of address
within a pperiod of six months.
™ (b) UCBs may also accept rent agreement duly
registered with State Government or similar
registration authority indicating the address of the
customer, in addition to other documents listed as
proof of address in Annex I of our Master Circular on
KYC/AML/CFT dated July 2, 2012.

50

51

17
 AML Measures
Money Laundering is the process by which illegal funds and
assets are converted into legitimate funds and assets.

Investments
Purchases

Placement: Illegal funds or assets Layering: Use of multiple Integration: Laundered funds are
are first brought into the financial accounts, banks, intermediaries, made available as apparently
system corporations, trusts, countries to legitimate funds.
disguise the origin.
Money Laundering is tax evasion in progress
52

The Cost of Non-Compliance

‘The Price Riggs Bank Paid’
Final 2 year period

Fines and settlements totalling US$59 million.

Legal and consulting fees - US$35 million.

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

Final 2 year period

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

53

Types of Money
Laundering Risks
What are the Money Laundering Risks to banks?

(i) Reputation risk

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

All risks are inter-related and together

have the potential of causing serious threat
to the survival of the bank

54

18
 Reputation Risk – Financial Penalties

™ Aug.2007 American Express US $ 65 mn

™ Jan. 2007 Bank of America US $ 3 mn
™ Jan. 2006 ABM AMRO US$ 80 mn
™ Aug. 2005 Arab Bank US$ 24 mn
™ Feb. 2005 City National Bank US$750,000
™ Jan. 2005 Riggs Bank US$ 41 mn
™ Oct. 2004 AmSouth Bank US$ 50 mn
™ Sep. 2004 City Bank Japan Licence
cancelled
™ May. 2004 Riggs Bank US$ 25 mn
™ May 2004 UBS US$ 100 mn
55

Operation Risk

™ Operation risk is the risk of direct or indirect

loss resulting from inadequate, or failed
internal processes, people and systems, or
from external events

™ With introduction of BASLE II norms, Bank

needs to provide for operational risk and
ensure compliance of internal control, for
which KYC of each account is of utmost
importance, so that capital allocation against
operational risk can be minimized

56

Legal/ Compliance Risk

™ Risk of loss (financial or otherwise) due to any legal

action the Bank may have to face due to failure to
comply with the Law. – Recent IPO scam

™ Hence, Bank should carry out KYC and Customer

Due Diligence exercises to mitigate Legal Risk

57

19
 The inadequacy or absence of KYC standards can subject
the Bank to serious customer and counter-party risk
1. Reputational Risk: Risk of loss due to severe impact on the
Bank’s reputation. This may be of particular concern given
the nature of the Bank’s business which requires the
confidence of depositors, creditors and the general market
place.
l
2. Compliance Risk: Risk of loss due to failure of compliance
with key regulations governing the Bank’s operation
3. Legal Risk: Legal risk is the possibility of lawsuits, adverse
judgments or contract resulting from failure to observe
mandatory KYC standards or form the failure to practise
due diligence. Consequently, the bank can suffer fines,
criminal liabilities and special penalties imposed by
supervisor. 58

Customer Education

™ Spread awareness on KYC - AML through

- literature / pamphlets

- Banks’ Websites

- Front line staff at Branches

59

Hiring & Training of staff

™ Screening of employees at the time of hiring and

posting on sensitive positions

™ Development of AML skills through appropriate training

™ Knowledge of regulatory & statutory prescription

™ Sensitizing the employees on the need for proper

handling of customer queries

™ No tipping off

60

20
 Information to be furnished
™ Cash Transactions
™ All cash transactions of the value of equal to or more
than rupees ten lakhs or its equivalent in foreign
currency
™ All series of cash transactions integrally connected to
each other which have been valued below rupees ten
lakhs or its equivalent in foreign currency where such
series of transactions have taken place within a
calendar month aggregating to rupees ten lakhs or
more
™ Suspicious Transactions
™ All suspicious transactions whether or not made in
cash
61

Suspicious Transactions

™ Suspicious transaction means a transaction whether or

not made in cash which, to a person acting in good faith

1) gives rise to a reasonable ground of suspicion that it

may involve the proceeds of crime; or
2) appears to be made in circumstances of unusual or
unjustified complexity; or
3) appears to have no economic rationale or bonafide
purpose; or
4) gives rise to a reasonable ground of suspicion that it
may involve financing of the activities relating to
terrorism.(added by amendment dated 24.05.07)
62

Some of the Reasons for Suspicion

™ Identity of client
1) False identification documents
2) Identification documents which could not be verified
within reasonable time
3) Accounts opened with names very close to other
established business entities

™ Background of client
1) Suspicious background or links with known criminals

™ Multiple accounts
1) Large number of accounts having a common account
holder, introducer or authorized signatory with no
rationale
2) Unexplained transfers between multiple accounts with
no rationale
63

21
 Some of the Reasons for Suspicion
™ Activity in accounts
1) Unusual activity compared with past transactions
2) Sudden activity in dormant accounts
3) Activity inconsistent with what would be expected from
declared business
™ Nature of transactions
1)) Unusual or unjustified
j complexity
p y
2) No economic rationale or bonafide purpose
3) Frequent purchases of drafts or other negotiable instruments
with cash
4) Nature of transactions inconsistent with what would be
expected from declared business
™ Value of transactions
1) Value just under the reporting threshold amount in an apparent
attempt to avoid reporting
2) Value inconsistent with the client’s apparent financial standing
64

Suspicious Transactions/Activity
™ Sending or receiving frequent or large volumes of cross
border remittances;

™ Receiving large TT/DD remittances from various

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

™ Corporate accounts where deposits and withdrawals by

cheque/TTs/foreign inward remittances/any other
means are received from/made to sources apparently
unconnected with the corporate business
activity/dealings
65

Suspicious Transactions/Activity

™ Corporate accounts where deposits or withdrawals are

primarily in cash rather than cheques;
™ A single substantial cash deposit composed of many
high denomination notes;
™ A customer who is reluctant to provide information
needed for a mandatory report or to proceed with a
transaction after being informed that the report must
be filed;
™ Any individual or group that coerces/induces or
attempts to coerce/induce a bank employee to not file
any reports or any other forms

66

22
 Suspicious Transactions /Activity

™ An account where there are several cash

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

™ Multiple accounts under the same name

67

68

Case Study

™ One Mr. X opened a Sole Proprietorship account with one of BOI

Branch in Mumbai, giving copy of PAN card as identity proof and
copies of Electricity bill and Shop & Establishment license from
Mumbai Municipality for address proof
™ With in one week, two high value DDs payable at Hyderabad
drawn on another Bank were deposited in BOI Hyderabad branch
and were cleared. Money was withdrawn from a Branch in New
Delhi
™ When the original payee complained to the drawee Bank, the
fraud came to surface. Similar frauds were committed by the
culprit by opening accounts with other Banks also
™ The culprit had managed to steal some DDs favouring an
institution (whose name was written on the DDs in acronym). He
managed to forge address proof documents in the name of that
institution and opened accounts with Banks as Sole Proprietor of
that Institution whose name was written on DDs in acronym. (Eg.
Comptroller MSU – Maharaja Sayajirao University)

69

23
 Lessons learnt

™ Check the genuineness of the KYC documents by

physical / telephonic verification
™ Not to open accounts in Acronym
™ To accept High Value instruments in newly
opened accounts only after proper inquiry. In
case such instruments are deposited at Non-base
branch, inquiry should be carried out through
Base branch
™ To closely monitor newly opened accounts at
least for SIX months
70

Case-study

™ Mr. Ram opened SB A/c. on 26/09/2012 at BOB, Baroda

Main branch. His account was credited with
Rs.2,44,00,000/- on 29/12/2012 by transfer entry from
A/c of Mr. Rahim which was opened on 21/09/2012 at
BOB, Alkapuri Branch
™ The SB A/c. of Mr. Rahim received credit of Rs.
, 3,96,000
2,43,96,000/- from
o BOB,
O , Old Padra
ad a Road
oad b
branch
a c oon
28/12/2012 against cheque deposited on 27/12/2012
presented and passed in clearing
™ The above transactions were carried out at Old Padra
Branch under Inter-sol by a third party
™ The entire amount i.e. Rs 2,44,00,000/- was withdrawn
from A/c. of Mr. Ram from Baroda Main branch in
clearing on 31/12/2012 against cheque presented by
Baroda Urban Co-Operative Bank
71

How you will monitor

™ Old Padra Road Branch should inquire these high

value deposit of cheques and other transactions in
this newly opened account by a third party and also
contact the base branch for ascertaining details of
transactions from the account holder
™ Before passing cheque / making payment of Cheque
in question on 31/12/2012 Baroda Main branch
should have contacted Mr. Ram to ascertain the
details about such a high value credit and debit in
his newly opened SB A/c.
™ Alkapuri branch should have made inquiry about
sudden increase in S/B deposit on a particular day

72

24
™ IPL spot-fixing: Enforcement Directorate to probe
whether there was money laundering

™ CWG pprobe: Enforcement Directorate questions

q
Suresh Kalmadi in money laundering case
™ Kanpur Police files closure report in money
laundering case against Amar Singh

73

Dallas Lawyer Sentenced for Money

Laundering
™ On September 26, 2013, in Dallas, Texas, Patrick Robert Simon was
sentenced to 24 months in prison. Simon pleaded guilty in January 2013
to money laundering charges. According to court documents, during Fall
2009, Simon met with an individual to discuss putting aside proceeds
from the individual’s drug trafficking activities for his family’s use while
he was in prison for drug trafficking. After numerous meetings, on March
16, 2010, the individual met with Simon at Simon’s law office to transfer
the cash. Simon stated his scheme was that the individual was g going
g to
hire Simon’s firm to handle the appeal of his drug trafficking conviction.
Simon stated that he would then use his attorney trust fund to write a
check every month to the individual’s designee. Simon explained that
because it was a legal transaction, he would not have to report it. It was
agreed that the checks would be written for $7,500, unless a different
amount was specified later. The individual gave $110,000 in cash to
Simon. Simon accepted the cash and during the time Simon was counting
the cash, the three repeatedly discussed the individual’s participation in
the drug trade and that the money being counted was from his drug
trafficking activities. Simon also instructed the individual on a code to
use in all future communications to discuss the scheme. 74

Q&A

™ Q1- What is the name of Policy Making body which

sets standards & develops/promotes policies to
combat money laundering & terrorist financing ?

™ Q2- What are the four key elements of KYC ?

75

25
 Q&A

™ Ans. 1. FATF ( Financial Action Task Force)

™ Ans. 2. A- Customer Acceptance

B- Customer Identification
C- Transactions Monitoring
D- Risk Management

76

Q&A

™ Q3- What is money laundering ?

™ Q4- What are the three steps involved in Money

Laundering?

77

Q&A

™ Ans. 3. Money Laundering is the process by

which illegal funds and assets are converted
into legitimate funds and assets

™ Ans. 4.

A- LAYERING
B- INTEGRATION
C- PLACEMENT
78

26
 nayankothari.blogspot.com
nayan.r.kothari@gmail.com

kothari.nayan @kotharinayan
CA. Nayan R. Kothari
M.Com, FCA, NET (UGC)

Partner
Parag Patel & Associates
Chartered Accountants, Vadodara

Vice-Chairman,
Baroda Branch of WIRC of ICAI

Chairman,
Baroda Branch of WICASA 79

27