Project: KYC, Banking Sector and National Security - A Study

KYC, Banking Sector and National Security – a study
PROJECT

Course: Legal Aspects of Banking
PGDBRM
TERM III
Date: 03-09-2016
Submitted by, Submitted to,

Manraj SinghChadhaDr. S. N. Ghosh
Ruth Susan Babu
Sanal. P
Sandra. N
SarathThamban. T. V
Utkarsh Dubey
Legal Aspects of Banking 1

ACKNOWLEDGEMENT
We are highly indebted to Dr.S.N.Ghosh for his guidance and constant supervision as well as for
providing necessary information regarding the project & also for their support in completing the
project.
Many people, especially our team members itself, have made valuable comment suggestions on
this proposal which gave us an inspiration to improve our assignment. We thank all the people
for their help directly and indirectly to complete our assignment.

Contents
1) SYNOPSIS..........................................................................................................................................4
2) INTRODUCTION...............................................................................................................................4
(2.1) What is Know Your Customer (KYC)?[3]......................................................................................5
(2.2)The Importance of KYC (Know Your Customer) Norms[2]............................................................5
(2.3)The Uses and Misuses of KYC Norms.............................................................................................5
(2.4)know Your Customer (KYC) Normsof banks under PMLA, 2002..................................................6
(2.5) Definition of Customer...................................................................................................................6
3) LITERATURE REVIEW........................................................................................................................7
4) RESEARCH METHODOLOGY.........................................................................................................9
SCOPE OF THE STUDY........................................................................................................................9
5) GUIDELINES[1]..................................................................................................................................10
(5.1) General..........................................................................................................................................10
(5.2) KYC Policy...................................................................................................................................10
(5.3) Customer Acceptance Policy (CAP).............................................................................................10
(5.4) Customer Identification Procedure (CIP)......................................................................................11
(5.5) Customer Identification Requirements[1].....................................................................................14
(5.6) Bank No Longer Knows the True Identity....................................................................................15
(5.7) Monitoring of Transactions...........................................................................................................15
(5.8) Argument-How Risk can be Management?..................................................................................16
6) Cash and Suspicious Transaction Reports.............................................................................................17
7) Consequences of money laundering[4]..............................................................................................19
8) Combating Financing of Terrorism.......................................................................................................20
(8.1) Reporting to Financial Intelligence Unit - India............................................................................21
(8.2) Closure of accounts.......................................................................................................................22
CONCLUSION.........................................................................................................................................22
REFRENCES............................................................................................................................................22

1) SYNOPSIS
This Project works contains the information about the KYC and its importance in Banking and
its relevance towards the national security. As we know that with the fast changing world and the
changing mode of transactions all across the world it has become very important for all the
countries and their banking structure to have very good control over the transactions which are
taking place on day to day basis. To have a better control and also securing the security measures
bank has started the KYC norms. KYC basically means knowyour customer, it also means
authenticates the identity of the person and establish trust on them and any breach should led
them towards the criminal offence.To establish the proper identity Bank asks their customer to
furnish some documents and these documents are –Voter Id card, Aadhar Card, Pan Card,
Driving License, Passport, Photograph. These documents help in knowing about the customer
and their address. It also helps the bank in finding those persons who are involved in fraudulent
banking practices and also help the bank to take legal action against them. If the KYC is done
properly then it also help in help security because now a day’s lot of money come from many
countries and other sourcesto fund terrorist activities and to promote them, here the KYC plays a
very crucial role in detecting such funds and finding such people who all are involved in this. So
we can say that the KYC is a very useful tool in detecting the person’s identity and also help in
establish a better national security.
2) INTRODUCTION
World is reminded of the power of organized crime again and again, by the happenings of
September 11, 2001, in the USA and continuing terrorist attacks across the world. Money
laundering has a close nexus with not only organized crime, such as drug trafficking, arms
dealing etc., but also with terrorists’ outfits. Money launderers with their huge cash booty
amassed through such organized crime come to banks to conceal their ill-gotten wealth and also
to transfer their funds across the globe for carrying out their nefarious activities. With the
increasing sophistication of financial sector, banks in India are equally vulnerable to the menace.
RBI has issued series of circulars for the guidance of the banks functioning in India. According
to RBI guidelines, KYC procedure should be key principle for identification of an
individual/corporate opening an account. The customer identification should be entailed
verification through an introductory reference from an existing account holder/ a person known
to bank.

(2.1) What is Know Your Customer (KYC)?[3]
KYC Stands for “Know Your Customer”. Know your customer (KYC) policy is an important
step developed globally to prevent identity theft, financial fraud, money laundering and terrorist
financing. The objective of KYC is to enable banks to know and understand their customers
better and help them manage their risks prudently.
KYC is a regulatory and legal requirement and KYC policies are framed by respective banks
incorporating the key elements following the Reserve Bank of India’s directive in 2004 such as
Customer Acceptance Policy, Customer Identification Procedures, Monitoring of Transactions
and Risk management
The process of KYC entails identifying the customer and verifying the identity by using reliable
and independent documents or information. While opening different accounts, the Bank collects
documents to identify and verify the customer as required under the existing laws to demonstrate
that it has performed the existing KYC procedures.
(2.2)The Importance of KYC (Know Your Customer) Norms[2]
Follow the Money Trail
In recent months, there has been a spate of disclosures around the world about how banks are
compromising on customer identification procedures and are indulging in money laundering and
other unsavoury activities. From the US to India and the shadow banking system around the
world including China, regulators have realized that unless they rein in the shady practices of
banking, the result would be chaos and disorder. This is the reason why the regulators around the
world have started clamping down on banks and asking them to full proof their procedures. An
important step in this direction is the directive to the banks to follow the KYC or the Know Your
Customer norms and procedures through which the customers and their details can be recorded
and stored so that in case of any wrongdoing, the law enforcers and the regulators would have
the money trail leading to the individuals or entities. The key aspect about banking is that one
must follow the money or in other words, investigate the money trail to see where it starts and
where it ends. Once the money trail is established, it is easy to track down the culprits and this is
the reason that banks must have accurate, reliable, and updated KYC norms in place for all
customers.
(2.3)The Uses and Misuses of KYC Norms
Having said that, it must be remembered that most banks use the KYC norms as an excuse to
harass genuine customers and at the same time, indulge in unofficial activities. Therefore, the

approach to following KYC norms is to insist on the same for all customers and especially those
who have large sums on deposit as the scope for money laundering increases with these
customers. On the other hand, they must not harass small depositors who anyway maintain less
balance and whose activities can be monitored for suspicious transactions. The point here is that
KYC norms should be used in conjunction with the monitoring of all accounts and the key
principle that must be applied is that the norms are sacrosanct and at the same time, flexible
enough to separate the genuine investors from the dubious ones. Further, banks must ensure that
high value transactions are monitored and insist on proper identification when customers deposit
or withdraw huge sums of money. This is where proper KYC norms become useful as the
contact information provided in the KYC database can be used by law enforcers and the
regulators to track down the source and the destination of the money trail. Apart from this, the
money transfer or the funds transfer between banks that involve high denominations must
similarly be monitored through KYC norms and procedures.
(2.4)know Your Customer (KYC) Normsof banks under PMLA, 2002
The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally
or unintentionally, by criminal elements for money laundering or terrorist financing activities.
KYC procedures also enable banks to know/understand their customers and their financial
dealings better which in turn help them manage their risks prudently.
(2.5) Definition of Customer
For the purpose of KYC policy, a ‘Customer’ is defined as:
 a person or entity that maintains an account and/or has a business relationship with the
bank;
 One on whose behalf the account is maintained (i.e. the beneficial owner).
 beneficiaries of transactions conducted by professional intermediaries, such as Stock

Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
 Any person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft
as a single transaction.

3) LITERATURE REVIEW
As per the study done by various persons and according to my understanding, In today’s world,
KYC guidelines are very important and are laid down to prevent banks from being used,
intentionally or unintentionally, by criminal elements for money laundering or terrorist financing
activities. RBI also simplified various KYC norms to minimize frauds and risks and protect
banks reputation. RBI has also accepted e-KYC through Aadhar to reduce document risk and
frauds and reduce cost. Banking Regulation Act was amended and gave extra powers to RBI to
impose a penalty for single violation. Elements of KYC policy are customer acceptance and
customer severance, customer identification procedures, monitoring of transaction and risk
management.
KYC procedures also enable banks to know / understand their customers and their financial
dealing better which in turn help them manage their risks prudently.
Main Objectives of KYC norms are-
1. To prevent banks from being used, by unscrupulous or criminal elements for their criminal
activities including money laundering.
2. To minimize frauds and risks and protect banks reputation.
3. To avoid opening of accounts with fictitious name and address.
4. To weed out bad customers and protect good ones.
RBI announced simplified KYC norms for low risk customers before the launch of the Prime
Minister’s JanDhanYojana. Under the new norms low risk customers can provide KYC
documents within six months of opening the account.
RBI had clarified that there is no requirement of submitting two separate documents for proof
ofidentity proof of address. If the officially valid document submitted for opening a bank account
has both, identity and address of the person, there is no need for submitting any other
documentary proof.Officially valid document for KYC purpose include: ID card, PAN card,
Aadhaar letter issued by UIDAI and job card issued by NREGA signed by a state government
official.
Basel Committee on Banking Regulations and Supervisory Practices has also recommended that
the Basel Statement of Principles on the prevention of criminal use of the banking system was a
significant breakthrough on the financial front to have some controlling mechanism for money-
laundering on the international level. The Statement of Principles does not restrict itself to drug-
related money laundering but extends to all aspects of laundering through the banking system,
i.e. the deposit, transfer and/or concealment of money derived from illicit activities whether
robbery, terrorism, fraud or drugs. It seeks to deny the banking system to those involved in
money laundering by the application of the four basic principles:
1. Know Your Customer (KYC) - This mandates the bank to take reasonable efforts to determine
their customer’s true identity, and have effective procedures for verifying the bonafides of a new
customer.
2. Compliance with Laws – Bank management should ensure high ethical standards in
complying with laws and regulation and keep a vigil to not provide services when any money-
laundering activity is suspected.
3. Cooperation with Law Enforcement Agencies
4. Adherence to the Statement.
From studies and in reality we also come to know that The India has very good KYC Norms in
place in both money market and capital markets.But, these KYC Norm don’t desist the Hawala
transactions, as RBI cannot regulate them. Further, KYC Norms become a mockery because of
indifference shown by the implementing authorities. KYC norms are followed in letters but the
requirement is to follow it in spirits. Increased competition in the market requires and gives
motivation to the banks to lower their guards. Specifically, the franchisees of banks are
authorized to open accounts.

4) RESEARCH METHODOLOGY
AIM OF THE STUDY To know about the importance of the KYC in

banking sector and its impact on the national
security and how it helps in finding the
irregular financing activities and the measures
to stop it.
AREA OF STUDY Banking sector and monetary transactions
happening within and outside the country.
RESEARCH TYPE Secondary
DATA COLLECTION METHOD Data is collected from various journals,
newspapers, websites such as RBI and various
researches done by various persons.
SCOPE OF THE STUDY
This project help us to know about the importance of the KYC and how the bank should apply to
get the best results and what kind of results one get by applying proper KYC.
1- Helps in categorizing the customers depending upon their risk profile.
2- Detecting the fraudulent activities.
3- Finding the sources of black money.
4- Mitigating risk.
5- Helps in dealing with Anti- Money Laundering.
6- Its impact on the National Security.

5) GUIDELINES[1]
(5.1) 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
iii. With effect from April 1, 2012, banks should not make payment of cheques/drafts/pay
orders/banker’s cheques bearing that date or any subsequent date, if they are presented beyond
the period of three months from the date of such instrument.
iv. Banks should ensure that the provisions of Foreign Contribution (Regulation) Act, 2010,
wherever applicable, are strictly adhered to.
(5.2) KYC Policy
Banks should frame their KYC policies incorporating the following four key elements:
a. Customer Acceptance Policy;
b. Customer Identification Procedures;
c. Monitoring of Transactions; and
d. Risk Management.
(5.3) Customer Acceptance Policy (CAP)
a) Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria
for acceptance of customers. The Customer Acceptance Policy must ensure that explicit
guidelines are in place on the following aspects of customer relationship in the bank.

i. Parameters of risk perception are clearly defined in terms of the nature of business
activity, location of customer and his clients, mode of payments, volume of turnover, social and
financial status etc. to enable categorization of customers into low, medium and high risk (banks
may choose any suitable nomenclature viz. level I, level II and level III). Customers requiring
very high level of monitoring, e.g. Politically Exposed Persons (PEPs) may, if considered
necessary, be categorized even higher;
ii. Documentation requirements and other information to be collected in respect of different

categories of customers depending on perceived risk and keeping in mind the requirements of
PML Act, 2002 and instructions/guidelines issued by Reserve Bank from time to time;
iii. No account is opened in anonymous or fictitious/benami name.
iv. 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
b) Banks should prepare a profile for each new customer based on risk categorization. The
customer profile may contain information relating to customer’s identity, social/financial status,
nature of business activity, information about his clients’ business and their location etc.
c) For the purpose of risk categorization, 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
d) Customers that are likely to pose a higher than average risk to the bank should be categorized
as medium or high risk depending on customer's background, nature and location of activity,
country of origin, sources of funds and his client profile, etc. Banks should 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
e) It is important to bear in mind that the adoption of customer acceptance policy and its
implementation should not become too restrictive and must not result in denial of banking
services to general public, especially to those, who are financially or socially disadvantaged.
(5.4) Customer Identification Procedure (CIP)
a) 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. 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. 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: 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 authorized 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.
b) The increasing complexity and volume of financial transactions necessitate that customers do
not have multiple identities within a bank, across the banking system and across the financial
system. This can be achieved by introducing a unique identification code for each customer. The
Unique Customer Identification Code (UCIC) will help banks to identify customers, track the
facilities availed, monitor financial transactions in a holistic manner and enable banks to have a
better approach to risk profiling of customers. It would also smooth the banking operations for
the customers. While some banks already use UCIC for their customers by providing them a
relationship number, etc., other banks have not adopted this practice. Banks are, therefore,
advised to initiate steps for allotting UCIC to all their customers while entering into any new
relationships for individual customers to begin with. Similarly, existing individual customers
may also be allotted UCIC by end-May 2013.
c) Whenever there is suspicion of money laundering or terrorist financing or when other factors
give rise to a belief that the customer does not, in fact, pose a low risk, banks should carry out
full scale customer due diligence (CDD) before opening an account
d) When there are suspicions of money laundering or financing of the activities relating to
terrorism or where there are doubts about the adequacy or veracity of previously obtained
customer identification data, banks should review the due diligence measures including
verifying again the identity of the client and obtaining information on the purpose and intended
nature of the business relationship.
e) It has been observed that some close relatives, e.g. wife, son, 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.
f) Banks should 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. Such verification should be done
irrespective of whether the account has been transferred from one branch to another and banks
are required to also maintain records of transactions as prescribed.
Benefits of Know Your Customer Requirements-
Cash is strictly an anonymous medium of exchange, however, these changes when cash is
deposited into a bank and then this electronic money is moved. The whole idea behind Money
Laundering is to move money in any which way you can so that bad money (money earned from
illegal or undeclared means) is turned into legal (or 'white') money.There are many ways of
doing this, and equally many ways of getting caught.
When AML software is used for profiling people and detecting patterns or finding linkages
between transactions, identity is one of the most important aspects. Hence Knowing Your
Customer is extremely crucial.
Questions which are answered with the help of KYC are-
 Is the Customer genuine?
 Has the Customer's identity been stolen?
 Does the Customer know (willingly) that their ID has been stolen and is being used for
money laundering?
 Is the Customer a victim in money laundering?
 Is the Customer a wilful player in laundering money?

 Is the Customer oblivious to the transactions that are involved in laundering of money?
 Do the Customer credentials match with records elsewhere?
 How confident is the on-boarding FI/Bank on the KYC of the Customer?
 How confident is the off-boarding FI/Bank on the KYC of the Customer that initiated the
transaction?
(5.5) Customer Identification Requirements[1]
Features Documents
Accounts of individuals
Legal name and any other (i) Passport (ii) PAN card (iii) Voter’s Identity Card
names used (iv)Driving license
(v) *Job Card issued by NREGA duly signed by an officer
of the State Govt. (vi) The letter issued by the Unique
Identification Authority of India ( UIDAI) containing
details of name, address and Aadhaar number (vii) Identity
card (subject to the bank’s satisfaction) (viii) Letter from a
recognized public authority or public servant verifying the
identity and residence of the customer to the satisfaction of
bank
*[Please also see Para 2.7.B]
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 (i) Certificate of incorporation and Memorandum &
Articles of Association (ii) Resolution of the Board of
Name of the company Directors to open an account and identification of those
Principal place of business who have authority to operate the account (iii) Power of
Mailing address of the company Attorney granted to its managers, officers or employees to
transact business on its behalf (iv) Copy of PAN allotment

Telephone/Fax Number letter (v) Copy of the telephone bill
Accounts of partnership firms (i) Registration certificate, if registered

(ii) Partnership deed (iii) Power of Attorney granted to a
Legal name partner or an employee of the firm to transact business on
Address its behalf (iv) Any officially valid document identifying
Names of all partners and their the partners and the persons holding the Power of Attorney
addresses and their addresses (v) Telephone bill in the name of
Telephone numbers of the firm firm/partners
and partners
Accounts of trusts & foundations (i) Certificate of registration, if registered (ii) Power of
Attorney granted to transact business on its behalf (iii)
Names of trustees, settlers, Any officially valid document to identify the trustees,
beneficiaries and signatories settlers, beneficiaries and those holding Power of
Names and addresses of the Attorney, founders/managers/ directors and their
founder, the managers/directors and the addresses
beneficiaries (iv) Resolution of the managing body of the
Telephone/fax numbers foundation/association
(v) Telephone bill
Accounts of Proprietorship Concerns Registration certificate (in the case of a registered
Proof of the name, address and activity of the concern)
concern Certificate/license issued by the Municipal
authorities under Shop & Establishment Act,
Sales and income tax returns
CST/VAT certificate
Certificate/registration document issued by Sales
Tax/Service Tax/Professional Tax authorities
License issued by the Registering authority like
Certificate of Practice issued by Institute of Chartered
Accountants of India, Institute of Cost Accountants of
India, Institute of Company Secretaries of India, Indian
Medical Council, Food and Drug Control Authorities,
registration/licensing document issued in the name of the
proprietary concern by the Central Government or State
Government Authority/ Department, etc. Banks may also
accept IEC (Importer Exporter Code) issued to the
proprietary concern by the office of DGFT as an identity
document for opening of the bank account etc.
The complete Income Tax return (not just the
acknowledgement) in the name of the sole proprietor
where the firm's income is reflected duly authenticated/
acknowledged by the Income Tax Authorities.
Utility bills such as electricity, water, and
landline telephone bills in the name of the proprietary
concern.

Any two of the above documents would suffice. These

documents should be in the name of the proprietary
concern.
(5.6) Bank No Longer Knows the True Identity
In the circumstances when a bank believes that it would no longer be satisfied that it knows the
true identity of the account holder, the bank should also file an STR with FIU-IND.
(5.7) Monitoring of Transactions
a) On-going monitoring is an essential element of effective KYC procedures. Banks can

effectively control and reduce their risk only if they have an understanding of the normal and
reasonable activity of the customer so that they have the means of identifying transactions that
fall outside the regular pattern of activity. However, the extent of monitoring will depend on the
risk sensitivity of the account. Banks may prescribe threshold limits for a particular category of
accounts and pay particular attention to the transactions which exceed these limits. Transactions
that involve large amounts of cash inconsistent with the normal and expected activity of the
customer should particularly attract the attention of the bank.
b) Very high account turnover inconsistent with the size of the balance maintained may indicate
that funds are being 'washed' through the account. High-risk accounts have to be subjected to
intensify monitoring. Every bank should set key indicators for such accounts, taking note of the
background of the customer, such as the country of origin, sources of funds, the type of
transactions involved and other risk factors. High risk associated with accounts of bullion dealers
(including sub-dealers) &jewellers should be taken into account by banks to identify suspicious
transactions for filing Suspicious Transaction Reports (STRs) to Financial Intelligence Unit-
India (FIU-IND) Banks should put in place a system of periodical review of risk categorization
of accounts and the need for applying enhanced due diligence measures. Such review of risk
categorization of customers should be carried out at a periodicity of not less than once in six
months.
c) Banks should exercise on-going due diligence with respect to the business relationship with
every client and closely examine the transactions in order to ensure that they are consistent with
their knowledge of the client, his business and risk profile and where necessary, the source of
funds

d) The risk categorization of customers as also compilation and periodic updation of customer
profiles and monitoring and closure of alerts in accounts by banks are extremely important for
effective implementation of KYC measures.
(5.8) Argument-How Risk can be Management?
INFERENCE:
a) The Board of Directors of the bank should ensure that an effective KYC programme is put in
place by establishing appropriate procedures and ensuring their effective implementation. It
should cover proper management oversight, systems and controls, segregation of duties, training
and other related matters. Responsibility should be explicitly allocated within the bank for
ensuring that the bank’s policies and procedures are implemented effectively. Banks should, in
consultation with their boards, devise procedures for creating risk profiles of their existing and
new customers, assess risk in dealing with various countries, geographical areas and also the risk
of various products, services, transactions, delivery channels, etc. Banks’ policies should address
effectively managing and mitigating these risks adopting a risk-based approach
b) Banks’ internal audit and compliance functions have an important role in evaluating and
ensuring adherence to the KYC policies and procedures. As a general rule, the compliance
function should provide an independent evaluation of the bank’s own policies and procedures,
including legal and regulatory requirements. Banks should ensure that their audit machinery is
staffed adequately with individuals who are well-versed in such policies and procedures.
Concurrent/ Internal Auditors should specifically check and verify the application of KYC
procedures at the branches and comment on the lapses observed in this regard. The compliance
in this regard should be put up before the Audit Committee of the Board on quarterly intervals.
(i) Maintenance of records of transactions
Banks should introduce a system of maintaining proper record of transactions prescribed under
Rule 3 of PML Rules, 2005, as mentioned below:
a. all cash transactions of the value of more than Rupees Ten Lakh or its equivalent in
foreign currency
b. all series of cash transactions integrally connected to each other which have been valued
below Rupees Ten Lakh or its equivalent in foreign currency where such series of transactions
have taken place within a month and the aggregate value of such transactions exceeds Rupees
Ten Lakh
c. all transactions involving receipts by non-profit organizations of value more than rupees
ten lakh or its equivalent in foreign currency
d. all cash transactions were forged or counterfeit currency notes or bank notes have been
used as genuine and where any forgery of a valuable security or a document has taken place
facilitating the transaction
(ii) Information to be preserved
Banks are required to maintain all necessary information in respect of transactions referred to in
Rule 3 to permit reconstruction of individual transaction, including the following information:
a. the nature of the transactions
b. the amount of the transaction and the currency in which it was denominated
c. the date on which the transaction was conducted
d. the parties to the transaction
6) Cash and Suspicious Transaction Reports
a) Cash Transaction Report (CTR)
While detailed instructions for filing all types of reports are given in the instructions part of the
related formats, banks should scrupulously adhere to the following:
i) The Cash Transaction Report (CTR) for each month should be submitted to FIU-IND by 15th
of the succeeding month. Cash transaction reporting by branches to their controlling offices
should, therefore, invariably be submitted on monthly basis (not on fortnightly basis) and banks
should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule.
ii) All cash transactions, where forged or counterfeit Indian currency notes have been used as
genuine should be reported by the Principal Officer to FIU-IND in the specified format not later
than seven working days from the date of occurrence of such transactions (Counterfeit Currency
Report – CCR). These cash transactions should also include transactions where forgery of
valuable security or documents has taken place and may be reported to FIU-IND in plain text
form.
iii) While filing CTR, details of individual transactions below Rupees Fifty thousand need not be
furnished.

iv) CTR should contain only the transactions carried out by the bank on behalf of their
clients/customers excluding transactions between the internal accounts of the bank.
v) A summary of cash transaction report for the bank as a whole should be compiled by the
Principal Officer of the bank every month in physical form as per the format specified. The
summary should be signed by the Principal Officer and submitted to FIU-India.
vi)In case of Cash Transaction Reports (CTR) compiled centrally by banks for the branches
having Core Banking Solution (CBS) at their central data centre level, banks may generate
centralised Cash Transaction Reports (CTR) in respect of branches under core banking solution
at one point for onward transmission to FIU-IND, provided:
a) The CTR is generated in the format prescribed by Reserve Bank of India’s Master Circular;
b) A copy of the monthly CTR submitted on its behalf to FIU-India is available at the concerned
branch for production to auditors/inspectors, when asked for; and
c) The instruction on ‘Maintenance of records of transactions’; ‘Information to be preserved’

and ‘Maintenance and Preservation of records’ as contained in the Master Circular to be
followed by the branch.
However, in respect of branches not under CBS, the monthly CTR should continue to be
compiled and forwarded by the branch to the Principal Officer for onward transmission to FIU-
IND.
b) Suspicious Transaction Reports (STR)
i) While determining suspicious transactions, banks should be guided by definition of suspicious

transaction contained in PMLA Rules as amended from time to time.
ii) It is likely that in some cases transactions are abandoned/aborted by customers on being asked
to give some details or to provide documents. It is clarified that banks should report all such
attempted transactions in STRs, even if not completed by customers, irrespective of the amount
of the transaction.
iii) Banks should make STRs if they have reasonable ground to believe that the transaction
involve proceeds of crime generally irrespective of the amount of transaction and/or the
threshold limit envisaged for predicate offences in part B of Schedule of PMLA, 2002.

iv)The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a
conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally
connected are of suspicious nature. The Principal Officer should record his reasons for treating
any transaction or a series of transactions as suspicious. 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. Such report should be made available to the competent authorities
on request.
v) In the context of creating KYC/AML awareness among the staff and for generating alerts for
suspicious transactions, banks may consider the indicative list of suspicious activities contained
in Annex-E of the 'IBA's Guidance Note for Banks, January 2012'.
vi)Banks should not put any restrictions on operations in the accounts where an STR has been
made. Banks and their employees should keep the fact of furnishing of STR strictly confidential,
as required under PML Rules. It should be ensured that there is no tipping off to the customer at
any level.
7) Consequences of money laundering[4]
In response to the mounting concerns about money laundering, the financial Action Task Force
(FATF), Paris, was established as an inter-governmental body by the G-7 group of seven major
industrial countries, at its summit that was held in Paris in 1989. India has been accorded observer
status in this international AML body. FATF generates the necessary political will to bring about
national legislation and regulatory reform to combat money laundering and terrorist financing.
At the national level, money laundering disrupts the macro management of markets, increasing the
volatility and financial stability. Left unchecked, money laundering may the lead to high inflation
rates and undermining of the interests and exchange rates. It may result in the weakening of the
government control over the economy. It not only diminishes government tax revenue but also
deprives the developing nations of their valuable foreign exchange. It provides terrorists with funds
to carry out their diabolic activities and Integration thereby posing threat to national security. Thus,
money laundering has very serious ramifications to our nation’s economy and consequently to the
whole of global economy and humanity. The negative impact is also more pronounced in
developing economies compared to transitional and developed economies, as per an IMF Study
(2000) which puts the estimated shadowy economy as a percentage of GDP by country group as
follows:
Country group Percentage of GDP

Developing 35-44
Transitional Economics 21-30

Developed(OECD) 14-16
FATF issued 40 recommendations in 1990 followed by 9 more in 2003, which are considered as
bed rock on which current money laundering standards are built upon by various countries. Apart
from FATF efforts, Basel Committee for Banking Supervision (BCBS), Interpol, International
Organization Security Industry regulators (IOSCO), Offshore Group of Banking Supervisors,
World Customs Organization, and several other international bodies collaborate and fight money
laundering crime globally.
8) Combating Financing of Terrorism
a) In terms of PMLA Rules, suspicious transaction should include, inter alia, transactions,

which give rise to a reasonable ground of suspicion that these may involve financing of the
activities relating to terrorism. Banks are, therefore, advised to develop suitable mechanism
through appropriate policy framework for enhanced monitoring of accounts suspected of having
terrorist links and swift identification of the transactions and making suitable reports to FIU-Ind
on priority.
b) As and when list of individuals and entities, approved by Security Council Committee
established pursuant to various United Nations' Security Council Resolutions (UNSCRs), are
received from Government of India, Reserve Bank circulates these to all banks and financial
institutions. Banks/Financial Institutions should ensure to update the lists of individuals and
entities as circulated by Reserve Bank. The UN Security Council has adopted Resolutions 1988
(2011) and 1989 (2011) which have resulted in splitting of the 1267 Committee's Consolidated
List into two separate lists, namely:
(i) “Al-Qaida Sanctions List”, which is maintained by the 1267 / 1989 Committee. This list
shall include only the names of those individuals, groups, undertakings and entities associated
with Al-Qaida. The Updated Al-Qaida Sanctions List is available
at http://www.un.org/sc/committees/1267/aq_sanctions_list.shtml
(ii) “1988 Sanctions List”, which is maintained by the 1988 Committee. This list consists of
names previously included in Sections A (“Individuals associated with the Taliban”) and B
(“Entities and other groups and undertakings associated with the Taliban”) of the Consolidated
List. The Updated 1988 Sanctions list is available at http://www.un.org/sc/committees/
1988/list.shtml

It may be noted that both “Al-Qaida Sanctions List” and “1988 Sanctions List” are to be taken
into account for the purpose of implementation of Section 51A of the Unlawful Activities
(Prevention) Act, 1967.
Banks are advised that before opening any new account it should be ensured that the name/s of
the proposed customer does not appear in the lists. Further, banks should scan all existing
accounts to ensure that no account is held by or linked to any of the entities or individuals
included in the list. Full details of accounts bearing resemblance with any of the
individuals/entities in the list should immediately be intimated to RBI and FIU-IND.
(8.1) Reporting to Financial Intelligence Unit - India
a) In terms of the PMLA Rules, banks are required to report information relating to cash and
suspicious transactions and all transactions involving receipts by non-profit organizations of
value more than rupees ten lakh or its equivalent in foreign currency to the Director, Financial
Intelligence Unit-India (FIU-IND) in respect of transactions
b) FIU-IND have placed on their website editable electronic utilities to enable banks to file
electronic CTR/STR who are yet to install/adopt suitable technological tools for extracting
CTR/STR from their live transaction data base. It is, therefore, advised that in cases of banks,
where all the branches are not fully computerized, the Principal Officer of the bank should cull
out the transaction details from branches which are not yet computerized and suitably arrange to
feed the data into an electronic file with the help of the editable electronic utilities of CTR/STR
as have been made available by FIU-IND in their websitehttp://fiuindia.gov.in
(8.2) Closure of accounts
Where the bank is unable to apply appropriate KYC measures due to non-furnishing of
information and /or non-cooperation by the customer, the bank should consider closing the
account or terminating the banking/business relationship after issuing due notice to the customer
explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably
senior level.
CONCLUSION
Banker’s role in combating money laundering would be very crucial and it revolves around
board level policy, KYC norm, detailed anti money laundering manual and internal control
procedures, appointment of principle officer for compliance, continuous monitoring down the
line, and training of all the staff members and getting them sensitized for the task. The bank have
to, in short, identify the customer, know their customer, monitor their account through due

diligence practices keeping records and report suspicion at the same time not advising the
customer of their suspicion. With this type of concerted efforts from all concerned. We hope to
check the menace of money laundering. So we can say that KYC, Banking sector and National
security all are related and a better done KYC leads to a better a national security and also help
the bank to lessen down the number of fraudulent activities and also help the banks in finding the
persons who are involved in such type of activities. It also helps the banks to block such funds
and inform the desired departments to take the legal action. So After going through the detailed
description of KYC we can say that KYC has emerged as a very powerful tool for the bank, for
the country and also for all the economies of the world to protect their country from many
fraudulent activities and terrorist activities which are done with the help of funding coming from
known sources/unknown sources. Online KYC has also make the task easier and it also helped in
identifying the black money which is rotating in the economy.
REFRENCES
1. https://rbi.org.in/scripts/NotificationUser.aspx?Id=7361&Mode=0#cetg
2. https://www.managementstudyguide.com/importance-of-know-your-customer-norms-
and-procedures-in-banking.htm
3. http://www.itsallaboutmoney.com/did-you-know/what-is-kyc-what-documents-are-
required-2/
4. http://cab.org.in/CAB%20Calling%20Content/RISK%20-%20Management%20in
%20Agriculture/AML%20and%20KYC-Indian%20Banks%20Role.pdf

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KYC, Banking Sector and National Security – a study

KYC, Banking Sector and National Security – a study

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Legal Aspects of Banking 1

Legal Aspects of Banking 2

Legal Aspects of Banking 3

Legal Aspects of Banking 4

(2.1) What is Know Your Customer (KYC)?[3]

(2.2)The Importance of KYC (Know Your Customer) Norms[2]

Follow the Money Trail

(2.3)The Uses and Misuses of KYC Norms

Legal Aspects of Banking 5

(2.4)know Your Customer (KYC) Normsof banks under PMLA, 2002

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

 beneficiaries of transactions conducted by professional intermediaries, such as Stock

Legal Aspects of Banking 6

Main Objectives of KYC norms are-

2. To minimize frauds and risks and protect banks reputation.

3. To avoid opening of accounts with fictitious name and address.

4. To weed out bad customers and protect good ones.

3. Cooperation with Law Enforcement Agencies

4. Adherence to the Statement.

Legal Aspects of Banking 8

AIM OF THE STUDY To know about the importance of the KYC in

SCOPE OF THE STUDY

1- Helps in categorizing the customers depending upon their risk profile.

2- Detecting the fraudulent activities.

3- Finding the sources of black money.

5- Helps in dealing with Anti- Money Laundering.

6- Its impact on the National Security.

Legal Aspects of Banking 9

a. Customer Acceptance Policy;

b. Customer Identification Procedures;

c. Monitoring of Transactions; and

(5.3) Customer Acceptance Policy (CAP)

Legal Aspects of Banking 10

ii. Documentation requirements and other information to be collected in respect of different

iii. No account is opened in anonymous or fictitious/benami name.

iv. Circumstances, in which a customer is permitted to act on behalf of another person/entity,

(5.4) Customer Identification Procedure (CIP)

Legal Aspects of Banking 11

Legal Aspects of Banking 12

f) Banks should introduce a system of periodical updation of customer identification data

Benefits of Know Your Customer Requirements-

Questions which are answered with the help of KYC are-

 Is the Customer genuine?

 Has the Customer's identity been stolen?

 Is the Customer a victim in money laundering?

 Is the Customer a wilful player in laundering money?

Legal Aspects of Banking 13

 Do the Customer credentials match with records elsewhere?

 How confident is the on-boarding FI/Bank on the KYC of the Customer?

(5.5) Customer Identification Requirements[1]

Legal Aspects of Banking 14

Telephone/Fax Number letter (v) Copy of the telephone bill

Accounts of partnership firms (i) Registration certificate, if registered

Legal Aspects of Banking 15

Any two of the above documents would suffice. These

(5.6) Bank No Longer Knows the True Identity

a) On-going monitoring is an essential element of effective KYC procedures. Banks can

Legal Aspects of Banking 16

(5.8) Argument-How Risk can be Management?