Basel Committee

The Basel Committee on Banking Supervision
(BCBS)
M A Islam, CDCS, CSDG, CAMS Compliance Route
BCBS
Central bank governors of the G-10 countries
Promotes sound supervisory standards

worldwide
Bank for International Settlements in Basel,

Switzerland.

The Basel Committee on Banking Supervision
Function
Primary global standard-setter for the prudential

regulation of banks
Provides a forum for cooperation on banking

supervisory matters.

Membership
28 jurisdictions / 45 institutions
The Basel Committee comprises 45 members from 28

jurisdictions, consisting of central banks and authorities with
formal responsibility for the supervision of banking business.
Additionally, the Committee has nine observers

including central banks, supervisory groups,
international organizations and other bodies.
The Committee expanded its membership in 2009 and

again in 2014.

Basel Committee on Banking
Supervision (Basel Committee)
Definition
The Basel Committee was established by the G-10’s central bank of

governors in 1974 to promote sound supervisory standards worldwide. Its
secretariat is appointed by the Bank for International Settlements in
Basel, Switzerland. It has issued, among others, papers on customer due
diligence for banks, consolidated KYC risk management, transparency in
payment messages, due diligence and transparency regarding cover
payment messages related to cross-border wire transfers, and sharing of
financial records among jurisdictions in connection with the fight against
terrorist financing.
Basel Committee on Banking Supervision
(Basel Committee)
CDD for banks
Consolidated KYC risk management
Transparency in payment messages
Due diligence and transparency regarding cover payment

messages related to cross-border wire transfers
Sharing of financial records among jurisdictions in

connection with the fight against terrorist financing

Banking supervisors
Banking supervisors are generally not responsible for the

NO criminal prosecution of ML in their countries.
Banking supervisors have an important role in ensuring that

banks have procedures in place, including strict AML
policies, to avoid involvement with drug traders and other
criminals, as well as in the general promotion of high ethical
and professional standards in the financial sector.

Q. The bank for International Settlements provides the secretariat for
which organization?
A The Egmont Group
B FATF
C The Wolfsberg Group
D The Basel Committee

Q. Which one of the following statements is true?
The Basel Committee levies fines on the member

A
countries for non-compliance with AML laws..
B The Wolfsberg Group membership comprises central bank

governors of the G10.
C The European Union recommends legislation to be passed

in the member countries.
D The Egmont Group membership comprises national FIUs.

Basel Committee on Banking Supervision
Publication
In 1988, “Prevention of Criminal Use of the Banking System for the
Purpose of ML”
In 1997 “Core Principles for Effective Banking Supervision,”
In 1999 “Core Principles Methodology”,
In 2001 “ Customer due diligence for banks”
In 2004, “Consolidated KYC Risk Management”
In 2016, Sound Management of Risks Related to ML and TF

In 1988, the Basel Committee issued a Statement of Principles called,
“Prevention of Criminal Use of the Banking System for the Purpose of ML”
in recognition of the vulnerability of the financial sector to misuse by criminals.
The statement set out principles with respect to:
1 Customer identification.
2 Compliance with laws.
3 Conformity with high ethical standards and local laws and regulations.
4 Full cooperation with national law enforcement to the extent

permitted without breaching customer confidentiality.
5 Staff training.
6 Record-keeping and audits.
In 1988, the Basel Committee issued a Statement of Principles called,
“Prevention of Criminal Use of the Banking System for the Purpose of ML”
in recognition of the vulnerability of the financial sector to misuse by criminals.
These principles led AML legislation regarding
Disclosure of client information to enforcement

agencies
Protection from civil suits brought by clients for

breach of client confidentiality (safe Harbour)
These principles stressed co-operation within the restrictions of

confidentiality.
Q. What are The principles set forth in the Basel Committee’s Statement of
Principles called “Prevention of Criminal Use of the Banking System for the
Purpose of Money Laundering”? Choose Three
A Customer identification
B Compliance with FIU’S Central Forum
C Conformity with high ethical standards and local laws and

regulations
D Full cooperation with national law enforcement to the extent

permitted by breaching customer Confidentiality
E Staff training

In 1997, the Basel Committee issued its,
“Core Principles for Effective Banking Supervision,”
a basic reference for authorities worldwide.
It stated that,
“Banking supervisors must determine that
Banks have adequate policies, practices and procedures in
place, including strict ‘KYC’ rules, that
Promote high ethical and professional standards
in the financial sector
Prevent the bank being used by criminal
elements.”
It also urged nations to adopt FATF’s 40 R.

Q. What did the Basel paper published in 1997 covering Core Principles
for Effective Banking Supervision, recommend?
A Controls over private banking, correspondent banking, pay

able through accounts, and shell banks
B Capital assessment, liquidity conversion, monitoring and

reporting requirements
C Strong KYC, high ethical standards, adoption of the FATF

recommendations
D None of the above

In October 1999. the Committee developed the
“Core Principles Methodology”,
to facilitate implementation and assessment,
These developments made it necessary to update the Core

Principles and the associated assessment methodology.
Based on the findings of an internal survey of cross-border

banking conducted in 1999, the Committee identified deficiencies
in a large number of countries’ KYC policies. “KYC policies in
some countries have significant gaps and in others they are non-
existent. Even among countries with well-developed financial
markets, the extent of KYC robustness varies,”

Customer due diligence for banks
October 2001
The paper addresses:
1. Importance of KYC standards for supervisors and banks.
2. Essential elements of KYC standards.
3. The role of supervisors.
4. Implementation of KYC standards in a cross-border context.

October 2001
Without due diligence, banks can be subject to
Reputational Risk
Operational Risk
Legal Risk
Concentration Risk

October 2001
Sound KYC Policies and Procedures are critical to protecting
A The safety and soundness of banks
B The integrity of banking systems.

October 2001
Specific issues emphasized in the paper include:
The 4 key elements of a KYC program are:
1 Customer identification.
2 Risk Management.
3 Customer Acceptance
4 Monitoring

CDD for banks October 2001
Identity & monitor Professional intermediaries
Numbered A/C
Non-face-to-face”
Higher-risk customers Employee training
CAP Internal auditors &

compliance officials
Private banking Continued monitoring

CDD for banks October 2001
Bank regulators

October 2001
Banks should establish the identity of their customers and

monitor account activity
“To ensure that records remain relevant, there is a

need for banks to undertake regular reviews of
existing records. An appropriate time to do so is
A. when a transaction of significance takes place

B. when customer doc. standards change Substantially
C. when there is a material change in the way that the
account is operated.

October 2001
Numbered A/C should not be prohibited but be subjected to exactly the

same KYC procedures as other customer A/C. KYC tests may be carried
out by select staff, but the identity of customers must be known to an
adequate number of staff if the bank is to be sufficiently diligent. “Such A/C
should in no circumstances be used to hide the customer identity from a
bank’s compliance function or from the supervisors.”

October 2001
Specific customer identification issues related to higher-risk customers such as:
1 Trust, nominee and fiduciary A/C.

2 Corporate vehicles, particularly -nominee shareholders / bearer form.
3 Introduced businesses.
4 Client A/C opened by professional intermediaries
5 PEPs.
6 Non-face-to-face customers
7 Correspondent banking.
October 2001
Customer Acceptance Policies
Banks should develop customer acceptance policies (CAP)

and procedures describing the customer’s background, country
of origin, business activities and other risk indicators,
Banks should develop clear and concise descriptions of who

is an acceptable customer.

October 2001
Private banking A/C should “under no circumstances” be

allowed to escape KYC policies.
Banks should make every effort to know the identity of

corporations that operate A/C and when professional
intermediaries are involved, should verify the exact relationship
between the owners and intermediary.
Banks should use standard identification procedures when dealing

with “non-face-to-face” customers and should never agree to
open an account for persons who are inflexible about secrecy.

Non-face-to-face Customer
In accepting business from non-face-to-face customers :
Banks should apply equally effective customer

identification procedures for non face-to-face
customers as for those available for interview.
There must be specific and adequate measures to

mitigate the higher risk.

Non-face-to-face Customer
Examples of measures to mitigate risk include:
 Certification of documents presented
 Requisition of additional documents to complement those which are

required for face-to-face customers
 Independent contact with the customer by the bank
 Third party introduction
 Requiring the first payment to be carried out through an account in the

customer’s name with another bank subject to similar CDD standards

October 2001
Periodic bank-wide employee training should be provided that

explains the importance of the KYC policies and AML requirements.
Internal auditors and compliance officials should regularly monitor

staff performance and adherence to KYC procedures.
Continued monitoring of high-risk A/C by compliance personnel

should be conducted to obtain a greater understanding of the
customers’ “normal activities” and to enable the updating of
identification papers and the detection of suspicious transaction
patterns.
October 2001
Bank regulators should ensure that bank staff follow KYC procedures,
review customer files and emphasize that they will take “appropriate
action” against officers who fail to follow KYC procedures.

Q. Which were the Basel Committee’s two main motivations to
encourage strong Know Your Customer programs in its paper
“Customer Due Diligence for Banks”?
A Mirror FATF’s KYC Recommendations.
B Meet European Union guidelines.
C Protect the safety and soundness of banks.
D Protect the integrity of banking systems.

Q. What is an essential element of Know Your Customer (KYC)
standards according to the Basel Committee’s Customer Due
Diligence for Banks paper?
A Annual staff training
B A customer acceptance policy
C The same KYC requirements must be applied in all cases
D All completed KYC documents must be reviewed by a senior

manager not involved in the account opening process

Q. What are the key elements of Know Your Customer (KYC) as identified in
the Basel Committee’s October 2001 paper called “Customer Due Diligence
for Banks?” Choose three
A Customer identification
B Customer’s Senior management
C Customer acceptance
D Training
E Monitoring

Q. What is one recommendation of the Basel Committee’s 2001 paper
Customer Due Diligence for Banks”?
A Numbered accounts should not be allowed
Certain types of private banking can be exempt from KYC

B procedures
Banks should develop dear descriptions of acceptable

C
customers
Politically Exposed Persons (PEPs) should not be accepted as

D
customers

Q. The Basel Committee on Banking Supervision issued a paper in
October 2001 in which it presented a Know Your Customer framework
and recommended standards applicable to
A Offshore banking supervisors.
B Financial Intelligence Units.
C Banks in all countries.
D European Financial Institutions.

Identify the specific customer identification issues as identified in the
Q. Basel Committee’s October 2001 paper called “Customer Due
Diligence for Banks.” Choose three
A Companies with nominee shareholders or entities with

shares in bearer form
B Money Service Businesses
C Pooled” accounts managed by professional intermediaries on

behalf of entities
D Face-to-face customers
E Correspondent Banking

Q. What is the appropriate compliance control for identifying politically
exposed persons (PEPs) according to the Basel Committee’s paper
on Customer Due Diligence for Banks?
A Determining that a local figure is a PEP
B Reviewing when a relationship is established
Reviewing relationships at account opening and on a periodic

C
basis
D Requiring that the customer discloses that they are a PEP or

an associate of a PEP

Q. According to the Basel paper published in 2001 covering Customer
Due Diligence For Banks, what are the four key elements of KYC?
A Identification, transaction profile, monitoring, reporting
B Risk management, identification, monitoring, acceptance
C Risk-based controls, identification, monitoring, acceptance
D Identification, transaction profile, source of funds, monitoring

In October 2004, the Committee released another important
publication on KYC: “Consolidated KYC Risk Management” as a
complement to its CDD for Banks issued in October 2001.
For banks to adopt a global approach and to apply the elements

necessary for a sound KYC program to both the parent bank or
head office and all of its branches and subsidiaries.

CONSOLIDATED CUSTOMER DUE DILIGENCE
Where the minimum CDD standards of the home and host countries differ,
Offices in host jurisdictions should apply the higher

standard of the two
Where this appears not to be possible
the institution should confer with its home office and

attorneys to implement appropriate and effective CDD
standards.

CONSOLIDATED CUSTOMER DUE DILIGENCE
CCDD
CDD standards differ
Home country Host country
Host country
Offices in host jurisdictions should apply the higher

standard of the two.
Offices in host jurisdictions should confer with its home

office and attorneys
to implement appropriate and effective CDD standards.
Q. When the minimum CDD standards of the home and host
countries differ, the offices in the host countries should follow
which requirements?
A Local rules and regulations
B The minimum required
C The higher standard of the two
D The CDD standards required by the home country

Sound Management of Risks Related to ML and TF
2016

Sound Management of Risks Related to ML and TF
2016
1 Risk Analysis and Governance:
2 Three Lines of Defence
3 CDD and Acceptance:
4 Transaction Monitoring Systems and Ongoing Monitoring:
5 Management of Information
6 Reporting of Suspicious Transactions and Asset Freezing:

Risk Analysis
Managing ML risks
to identify and analyse the risks appropriate controls
Analysis should include appropriate inherent

and residual risks at the country, sectoral, bank
and business relationship level.
The assessment of risk should be documented and made available to

authorities, such as supervisors. This assessment is also useful in
scheduling discussions with other parties in the bank to help them see
the risks and design the appropriate controls to mitigate them

Maintaining an AML/CFT Risk Model
Assessing AML/CFT Risk
Inherent and Residual risks
A risk-based analysis should include appropriate inherent and residual risks at

the country, sectoral, legal entity and business relationship level, among others.
As a result of this analysis, the financial institution should develop a thorough
understanding of the inherent risks in its customer base, products, delivery
channels and services offered (including proposed new services) and the
jurisdictions within which it or its customers do business.
Governance
Proper governance arrangements
which create a culture of compliance with a

strong tone from the top.
Board of directors
Senior management
Chief AML officer

CAMLCO

Governance
Board of directors
Should approve and oversee policies for risk, risk management and
compliance.
Should have a clear understanding of the ML risks, including timely, complete

and accurate information related to the risk assessment to make informed
decisions.
Should appoint a qualified chief AML officer

CAMLCO
Should provide sufficient resources to execute his/her responsibilities to

oversee compliance with the bank’s AML program.

Governance
Chief AML officer

CAMLCO
Overall responsibility for the AML function
Board’s proxy for driving the day-to-day success of the

CAMLCO bank’s AML efforts

Three lines of defence in the bank’s AML efforts
First, the line of business
Second, compliance and internal control functions

CAMLCO
Third, internal audit

First, the line of business
The Line of Business is responsible for creating, implementing

and maintaining policies and procedures, as well as communication
of these to all personnel .
They must also establish processes for screening employees to
ensure high ethical and professional standards and deliver
appropriate training on AML policies and procedures based on roles
and functions performed so employees aware of their
responsibilities
To facilitate this, employees should be trained as soon as possible

after being hired, with refresher training as appropriate.
1.. M A Islam, CDCS, CSDG, CAMS Compliance Route

.
Second, compliance and internal control functions

CAMLCO
The AML Compliance Function, as well as the larger compliance function,

human resources and technology departments, are the second line of defence.
AML Officer
responsible for Ongoing monitoring for AML compliance
responsible for Sample testing and review of exception reports
to enable the escalation of identified non-compliance or other

issues to SMT and, where appropriate, the board
CAMLCO
Should be the contact point for all AML issues for internal and
external authorities
Second, Compliance and internal control functions

CAMLCO
The AML Compliance Function, as well as the larger compliance function,

human resources and technology departments, are the second line of defence.
AML Officer
Should have the responsibility for STR.
Must have sufficient independence from the business lines

to prevent conflicts of interest and unbiased advice and
counsel
CAMLCO
Should not be entrusted with the responsibilities of data
protection or internal audit.

Third, Internal audit

The Audit Function
Independently evaluate the risk management and controls of the

bank through periodic assessments
Adequacy of the bank’s controls to mitigate the identified risks
Effectiveness of the bank’s staff’s execution of the controls
Effectiveness of the compliance oversight and quality controls
Effectiveness of the training
Report to the audit committee of the board of directors (or similar oversight body)

Customer Acceptance Policy
Banks should develop a Customer Acceptance Policy
To identify the customers that are likely to pose a higher ML risk
(e.g., PEPs)
To identify relationships that the bank will not accept
(e.g., shell banks or those prohibited under economic

sanctions, such as those imposed by the US OFAC).

CDD
High risk - EDD

customers
Low risk - Simplified DD
Banks CDD policies should address customer and BO

identification, verification and risk profiling.

Where the Bank is unable to comply CDD
Open the account
Commence business relations
Perform the transaction
Terminate the business relationship
Consider making a STR in relation to the

customer.

 Allow anonymous A/C
Conditional
 Allows numbered A/C
these should not be allowed to serve as anonymous A/C;.
sufficient personnel should have full access to the

information to ensure appropriate CDD on and oversight
over these A/C

Banks must have adequate and appropriate monitoring systems
OK
IT monitoring system
It should document the rationale for
why it does not need one.
Cover all A/C and transactions of the bank’s customers
Enable a trend analysis of activity
Identify unusual business relationships and transactions

particularly with regard to changes in the tr.
profile of customers.
Transaction monitoring system
Ongoing
building on the information from risk

assessments and customer profiles

One of the primary purposes of AML rules is to create records that enable law
enforcement to trace financial transactions back to the people who conduct
them, banks should retain records.
Banks should both record the documents it is provided when

verifying customer/BO identity, whether a photocopy of the
document or by recording information from the document or non-
documentary source, and enter all CDD information into its IT
system.
The CDD information should be kept up to date and accurate,

which will mean periodically assessing the information, generally on
a risk-based frequency.

STR
Banks should also document decisions related to investigations
of unusual activity, whether a decision is made to file a report of
suspicious activity or not.
Banks should maintain all of these records as required by law,

for at least five years after closure of the account. If an
ongoing investigation is occurring, relevant CDD records should
not be destroyed merely because the record retention period
has expired.

Ongoing monitoring of accounts and transactions
identify unusual activity
Internal review – the activity
Eliminate false positives
Report suspicious activity in a timely and confidential manner

Where suspicious activity has been reported
the bank should take appropriate action regarding the

customer
Raising the risk rating of the customer
Deciding whether to retain the relationship

(either the account or the entire relationship)

Banks should screen new customers against applicable

sanctions lists and the existing portfolio against changes
to the sanctions list to identify relationships that may
need to be frozen.
Banks should have a means of properly freezing any

assets identified as part of this process.

Q. What are six principles set forth in the Basel Committee’s
Statement of Principles called “Prevention of Criminal Use of the
Banking System for the Purpose of Money Laundering”?
Q. Identify the seven specific customer identification issues as

identified in the Basel Committee’s October 2001 paper called
“Customer Due Diligence for Banks.”
Q. What are the four key elements of Know Your Customer (KYC)
as identified in the Basel Committee’s October 2001 paper called
“Customer Due Diligence for Banks?”

Describe the elements that should be addressed in a global
approach to KYC identified in the Basel Committee’s October 2004
paper called “Consolidated KYC Risk Management.”
Does the Basel Committee prohibit the use of numbered accounts?
According to the Basel Committee on Banking Supervision’s paper

entitled “Compliance and the compliance function in banks,” what
are the responsibilities of the board of directors for compliance?
According to the Basel Committee on Banking Supervision’s paper

entitled “Customer Due Diligence for Banks,” how are sound KYC
procedures relevant to the safety and soundness of banks?

Muhammad Ashraful Islam
CDCS CSDG CAMS MBA

Basel Committee

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The Basel Committee on Banking Supervision

Central bank governors of the G-10 countries

Promotes sound supervisory standards

Bank for International Settlements in Basel,

M A Islam, CDCS, CSDG, CAMS Compliance Route

Primary global standard-setter for the prudential

Provides a forum for cooperation on banking

M A Islam, CDCS, CSDG, CAMS Compliance Route

The Basel Committee comprises 45 members from 28

Additionally, the Committee has nine observers

The Committee expanded its membership in 2009 and

M A Islam, CDCS, CSDG, CAMS Compliance Route

The Basel Committee was established by the G-10’s central bank of

CDD for banks

Consolidated KYC risk management

Transparency in payment messages

Due diligence and transparency regarding cover payment

Sharing of financial records among jurisdictions in

M A Islam, CDCS, CSDG, CAMS Compliance Route

Banking supervisors are generally not responsible for the

Banking supervisors have an important role in ensuring that

M A Islam, CDCS, CSDG, CAMS Compliance Route

A The Egmont Group

C The Wolfsberg Group

D The Basel Committee

M A Islam, CDCS, CSDG, CAMS Compliance Route

The Basel Committee levies fines on the member

B The Wolfsberg Group membership comprises central bank

C The European Union recommends legislation to be passed

D The Egmont Group membership comprises national FIUs.

M A Islam, CDCS, CSDG, CAMS Compliance Route

In 1997 “Core Principles for Effective Banking Supervision,”

In 1999 “Core Principles Methodology”,

In 2001 “ Customer due diligence for banks”

In 2004, “Consolidated KYC Risk Management”

In 2016, Sound Management of Risks Related to ML and TF

The statement set out principles with respect to:

4 Full cooperation with national law enforcement to the extent

These principles led AML legislation regarding

Disclosure of client information to enforcement

Protection from civil suits brought by clients for

These principles stressed co-operation within the restrictions of

B Compliance with FIU’S Central Forum

C Conformity with high ethical standards and local laws and

D Full cooperation with national law enforcement to the extent

M A Islam, CDCS, CSDG, CAMS Compliance Route

It also urged nations to adopt FATF’s 40 R.

M A Islam, CDCS, CSDG, CAMS Compliance Route

A Controls over private banking, correspondent banking, pay

B Capital assessment, liquidity conversion, monitoring and

C Strong KYC, high ethical standards, adoption of the FATF

D None of the above

M A Islam, CDCS, CSDG, CAMS Compliance Route

These developments made it necessary to update the Core

Based on the findings of an internal survey of cross-border

M A Islam, CDCS, CSDG, CAMS Compliance Route

The paper addresses:

1. Importance of KYC standards for supervisors and banks.

2. Essential elements of KYC standards.

3. The role of supervisors.

4. Implementation of KYC standards in a cross-border context.

M A Islam, CDCS, CSDG, CAMS Compliance Route

M A Islam, CDCS, CSDG, CAMS Compliance Route