y ho Concept of Cash Credit, Overdraft, and Term Loans Foundation Course on Banking, Financial & Economic Awareness - Bank Exams 2023 Cen er eedAnti- Money Laundering (PMLA Act 2002) The offence of money laundering has been defined in Section 3 of the Prevention of Money Laundering Act,2002 (PMLA) Prevention of Money Laundering Act, 2002 was enacted to fight against the criminal offence of legalizing the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds. + The first stage is when the money derived through crime is introduced into the formal financial system called ‘placement’. + In the second stage, the money so introduced into the system is layered and spread over various transactions with a view to clear the tainted origin of the money and is called ‘layering’. + Inthe third and the final stage, the money enters the financial system in such a way that original association with the crime is sought to be cleared so that the money can then be used by the offender or person receiving it as clean money and this is called ‘integration’.1. PLACEMENT Dirty Money integrates Collection of Dirty Money into the Financial System 2. LAYERING Payment by “Y" of False invoice ‘to Company “x” 3. INTEGRATION Purchase of Luxury Assets Financial Investments Loan to Commercial/Industrial ‘Company “Y" InvestmentsThe Enforcement Directorate in the Department of Revenue, Ministry of Finance, the Government of India is responsible for investigating the offences of money laundering under the PMLA. Financial Intelligence Unit — India (FIU-IND) under the Department of Revenue, Ministry of Finance is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND is the central national agency responsible for receiving, processing, analysing, and disseminating the information relating to suspect financial transactions. Penalties under PMLA Various actions can be initiated against persons found to be guilty of money laundering, such as: + Freezing or seizing of property and records, and/or attachment of property obtained through crime proceeds. + Money laundering is punishable with: ¥ Rigorous imprisonment for a minimum of 3 years and a maximum of 7 years. Y Fine, + If the crime of money laundering is involved with the Narcotic Drugs and Psychotropic ‘Substances Act, 1985, the punishment can go up to 10 years, along with fine.The act was amended in the year 2005, 2009 and 2012. Section 45 of the PMLA Act, 2002, provides that no person can be granted bail for any offence under the Act unless the public prosecutor, appointed by the government, gets a chance to oppose his bail. And should the public prosecutor choose to oppose bail, the court has to be convinced that the accused was not guilty of the crime and additionally that he/she was not likely to commit any offence while out on bail- a tall order by any count.) (It observed that the provision violates Articles 14 and 21 of the Indian Constitution) Section 43 of Prevention of Money Laundering Act, 2002 (PMLA) says that the Central Government, in consultation with the Chief Justice of the High Court, shall, for trial of offence punishable under Section 4, by notification, designate one or more Courts of Session as Special Court or Special Courts for such area or areas or for such case or class orSection 12 of PMLA 2002 casts the following reporting obligation of banking companies to the Director, Financial intelligence Unit- India (FIU-IND), besides obligations of record keeping and preservation of information Cash Transaction Report (CTR) All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign currency. All series of cash transactions integrally connected to each other, which have been valued below Rs 10 lakhs 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 Rs 10 lakhs. All cash transaction where forged or counterfeit currency notes or banknotes have been used as genuine and where any forgery of a valuable security has taken place. However, individual transactions for below Rs 50000 are not to be included in CTR. Suspicious Transactions Report (STR) If there are reasonable grounds to believe that the transaction involves proceeds of crime. 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.Know your Customer + KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer's business, reasonableness of operations in the account in relation to the customer's business, etc which in turn helps the banks to manage their risks prudently. + The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering. + Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rule: 2005.Know Your Customer (KYC)/Anti-Money Laundering (AML) / Combating of Financing of Terrorism (CFT) In terms of the provisions of Prevention of Money-Laundering Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, Regulated Entities (REs) are required to follow certain customer identification procedure while undertaking a transaction either by establishing an account based relationship or otherwise and monitor their transactions. KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by the banks while opening accounts. Banks are also required to periodically update their customers’ KYC details. ReypélLAUNDERING Payment SCHEME ly Loan to Sempany Commerciavindustial investments, INTEGRATION ¢ mn ead PLACEMENT LAYERING oS Fae ATYPICAL — .eumacrtKnow What you should know? True identity of the customer and beneficial ownership of the accounts Permanent address, registered & administrative address Your Who should know? Branch manager, audit officer, monitoring officials, Cc USTOMER Who is customer? One who maintains an account, establishes business relationship, on who's behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction(Walk-in Customer).Customer Acceptance Ensure that only legitimate and bona fide customers are accepted. Customer Identification- Ensure that customers are properly identified to understand the risks they may pose. Transactions Monitoring Monitor customers accounts and transactions to prevent or detect illegal activities. Risk Management Implement processes to effectively manage the risks posed by customers trying to misuse facilities.> Know your customer Policy issued by RBI has defined mandatory formalities to open an account with any bank. > Submission of Proof of Identity (POI) and Proof of Address (POA) together with a recent photograph. > POA & POL are Officially valid documents (OVD)v Documents > “Officially Valid Document” (OVD) means the passport, the driving licence, proof of possession of Aadhaar number, the Voter's Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government and letter issued by the National Population Register containing details of name and address. If anyone is having POI & POA both on same ID than no need to submit two different OVDs. > E-KYC is also done which is linked to Aadhar card. Kapil KerthFor Sole Proprietary firms For opening an account in the name of a sole proprietary firm, CDD of the individual (proprietor) shall be carried out. In addition to the above, any two of the following documents or the equivalent e-documents there of as a proof of business/ activity in the name of the proprietary firm shall also be obtained: Registration certificate Certificate/licence issued by the municipal authorities under Shop and Establishment Act. Sales and income tax returns. CST/VAT/ GST certificate (provisional/final). Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities. IEC (Importer Exporter Code) issued to the proprietary concem by the office of DGFT or Licence/certificate of practice issued in the name of the proprietary concem by any professional body incorporated under a statute. + Complete Income Tax Retum (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, landline telephone bills, etc. KapilFor opening an account of a company, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained: a.Certificate of incorporation b.Memorandum and Articles of Association c.Permanent Account Number of the company d.A resolution from the Board of Directors and power of attorney granted to its managers, officers or employees to transact on its behalf e.Documents, as specified in Section 16, relating to beneficial owner, the managers, officers or employees, as the case may be, holding an attorney to transact on the company's behalf For opening an account of a partnership firm, the certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained: a.Registration certificate b.Partnership deed c.Permanent Account Number of the partnership firm and d.Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalfFor opening an account of a trust, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained: a Registration certificate b.Trust deed ¢.Permanent Account Number or Form No.60 of the trust d.Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf For opening an account of an unincorporated association or a body of individuals, certified copies of each of the following documents or the equivalent e-documents thereof shall be obtained: a.Resolution of the managing body of such association or body of individuals b.Permanent Account Number or Form No. 60 of the unincorporated association or a body of individuals c.Power of attomey granted to transact on its behalf d.Documents, as specified in Section 16, relating to beneficial owner, managers, officers or employees, as the case may be, holding an attorney to transact on its behalf and e.Such information as may be required by the RE to collectively establish the legal existence of such an association or body of individuals. Unregistered trusts/partnership firms shall be included under the term ‘unincorporated association’.Category(C1) Low Risk i.e. all salaried class, small and petty businessmen, pensioners, persons falling under Basic Saving Bank Deposit Account/Small account category, beneficiaries of Govt. Scheme loans etc. Category(C2) Medium Risk i.e. Professionals & highly paid employees Category(C3) High Risk i.e. High net worth individuals / non residents Category(C4) Very High Risk i.e. PEPs and Persons of dubious reputationic updation shall be carried out at least once in every two years for high risk customers, once in every eight years for medium risk customers. and once in every ten years for low risk customersQuoting of PAN Permanent account number (PAN) of customers shall be obtained and verified while undertaking transactions as per the provisions of Income Tax Rule 114B applicable to banks, as amended from time to time. Form 60 shall be obtained from persons who do not have PAN.Threshold limit means the annual credits expected in the account. It should not be confused with turnover i.e. total of credits and debits in the account. Threshold limit is to be based on the customer profile and the economic activity the person/ entity is engaged to ensure that the customer accounts are put to use for only for transactions related to his confirmed line of activity. On the basis of the background of the customers such as the country of origin, sources of funds, type of transactions involved, risk factors i.e. on the basis of information gathered and compiled in customer profile, indicators need to be set for such type of accounts i.e. threshold limits should be fixed for monitoring transactions in such accounts.Central KYC Records Registry (CKYCR) Government of India has authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), to act as, and to perform the functions of the CKYCR Scheduled Commercial Banks (SCBs) shall invariably upload the KYC data pertaining to all new individual accounts opened on or after January 1, 2017 with CERSAI in terms of the provisions of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. SCBs are, however, allowed time upto February 1, 2017 for uploading date in respect of accounts opened during January 2017. REs other than SCBs shall upload the KYC data pertaining to all new individual accounts opened on or after from April 1, 2017 with CERSAI in terms of the provisions of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. KapélForeign Account Tax Compliance Act + FATCA came into being to combat tax evasion and to ensure strict adherence to tax rules. Its main objective is to identify and prevent offshore tax avoidance by US citizens or residents. In short, an attempt to track US persons earning from overseas investments and stash assets in other countries. + FATCA enables financial institutions to withhold tax if the US persons refuse to meet the documentation requirements. For this, all financial institutions registered under this Act should immediately notify the US tax department when they come across US persons attempting to evade tax. Hence, all FATCA-registered banks report such account holders (with the available information) immediately. This Act has a direct and profound impact on US multinationals and Foreign Financial Institutions. + From January 2016, they made it mandatory for all Indian and NRI investors (existing and new) to file a FATCA self-declaration ReypilThe following steps shall be taken regarding maintenance, preservation and reporting of customer account information, with reference to provisions of PML Act and Rules. REs shall, (a) maintain all necessary records of transactions between the RE and the customer, both domestic and international, for at least five years from the date of transaction; (b) preserve the records pertaining to the identification of the customers and their addresses obtained while opening the account and during the course of business relationship, for at least five years after the business relationship is ended; (c) make available the identification records and transaction data to the competent authorities upon request; (d) introduce a system of maintaining proper record of transactions prescribed under Rule 3 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PML Rules, 2005); RepilFund Based Facility Non-Fund Based Facility Cash Credit Account Bank Guarantees \ \ Overdraft Account — Letter of Credit \ Term Loan AccountCash Credit Account > Funds borrowed for meeting the working! capital requirement for running the day| today activities of the business. » Drawing power is assigned to the borrower| on the basis of Stock and Debtors held.Vv Vv You are running a business of Mobile Shop and have 10 mobiles for sale purpose @ Rs.10,000/- You sold them to 10 persons- 5 persons on credit and 5 persons on cash You are now Rs. 50,000 short of funds, either you will invest again from the pocket or you will arrange funds from anywhere. Also you have to pay for day today expenses like electricity, salary rent etc. to keep shop running. So here is a facility come that is known as Working capital finance to cover your shortage of funds or Working capital Gap. That facility is Cash Credit Account.Overdraft Account >Funds borrowed for meeting contingencies or personal needs of the borrower. > Drawing power is assigned to the borrower on the basis of the personal income and _ securities provided. > For Individual borrower.