INDIAN INSTITUTE OF BANKING & FINANCE

Anti-Money
Laundering & Know
Your Customer

LEARNING TREE
ANTI-MONEY LAUNDERING & KNOW YOUR CUSTOMER
 INTRODUCTION

Banks and financial institutions, since they deal in public money and provide a variety of financial services
and instruments, are most vulnerable to receiving criminal money disguised in the form of genuine
business proceeds. Globalization in banking, coupled with technological advancement in payment
systems, has widened the scope for concealing criminal money and increased its mobility across borders.
Absence of any preventive mechanism would expose these institutions to reputation risk, which is one
of their most valuable assets.

Prevalence of money laundering also enhances the risk of frauds and economic crimes, impacting the
soundness and stability of the financial system of a country.

The process of laundering money typically involves three steps: placement, layering and integration.
Through ‘Placement’, the illegitimate funds are brought into the financial system. ‘Layering’ conceals the
source of the funds through a series of transactions and book-keeping tricks. In the final step,
‘integration’, the laundered money is turned into apparently legitimate proceeds through the Banking
channel.

To prevent this, the Banks are to report any suspicious transaction to the relevant authorities as per
Prevention of Money Laundering Act (PMLA), 2002. This is in line with the recommendations of the
Financial Action Task Force (FATF), an intergovernmental task force established to combat money
laundering. Banks are also required to put in place their own Customer Acceptance Policy (CAP) & to
complete a detailed Customer Due Diligence (CDD) procedure before opening any account- Savings or
Current. They are required to obtain a list of ‘Officially Valid Documents’ (OVD) from their clients to
ensure adherence with KYC norms.

KYC means ‘Know Your Customer’ and sometimes ‘Know Your Client’ & is today a significant element in
the fight against financial crime and money laundering. KYC or KYC check is the mandatory process of
identifying and verifying the client's identity when opening an account and periodically over time. In
other words, banks must make sure that their clients are genuinely who they claim to be. Banks may
refuse to open an account or halt a business relationship if the client fails to meet minimum KYC
requirements.
Mrs. Joseph visited the Bank for an
account opening. She saw a banner put
up on the Bank’s wall “Help us prevent
Money Laundering. Submit your
documents. She was scanning through
the list of required documents when
she heard a familiar voice.