KYC (Know Your Customer) is a framework for banks
which enables them to know / understand the
customers and their financial dealings to be able to
serve them better.

Banking operations are susceptible to the risks of
money laundering and terrorist financing.

Therefore, banks are advised to follow certain
customer identification procedure for opening of
accounts and monitoring transactions of a suspicious
nature for the purpose of reporting it to appropriate
authority

Reserve Bank of India has advised banks to make the
Know Your Customer (KYC) procedures mandatory
while opening and operating the accounts and has
issued the KYC guidelines under Section 35 (A) of
the Banking Regulation Act, 1949.

Any contravention of the same will attract penalties
under the relevant provisions of the Act. Thus, the
Bank has to be fully compliant with the provisions of
the KYC procedures.

 Customer? One who maintains an account. audit officer. beneficiary of accounts maintained by intermediaries. establishes business relationship. monitoring officials. nature of customers’ business etc.Know? What you should know? True identity and beneficial ownership of the accounts permanent address. PO. and one who carries potential risk through one off transaction  . on who’s behalf account is maintained. registered & administrative address. sources of funds.  Your? Who should know? Branch manager.

When there are changes to signatories. Remittances etc.      Opening a new account. In respect of accounts where documents as per current KYC standards have not been submitted while opening the initial account. beneficial owners etc. For non-account holders approaching the Bank for high value one-off transactions like Drafts. When the Bank feels it necessary to obtain additional information from existing customers based on conduct of account. . Opening a Locker Facility where these documents are not available with the Bank for all the Locker facility holders.

by criminal elements for money laundering activities .  To prevent banks from being used.  3) Monitoring of Transactions.  2) Customer Identification Procedures. and  4) Risk management . 4 key elements of KYC policies  1) Customer Acceptance Policy. intentionally or unintentionally. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

No account is opened in anonymous Parameters of risk perception are clearly defined. in which a customer is permitted to act on behalf of another person/entity. Circumstances. Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence .The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank. should be clearly spelt out Necessary checks before opening a new account . Documentation requirements and other information to be collected.

while establishing a banking relationship. . i. The policy approved by the Board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages i.e.e. while establishing a banking relationship. data or information. 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.  Identifying the customer and verifying his/ her identity by using reliable. independent source documents.

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the extent of monitoring will depend on the risk sensitivity of the account  The bank may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. . However. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer –to identify transactions that fall outside the regular pattern of activity.

introduction of new technologies.  Apart from the key elements the other things that a bank should look into customer education. . applicability to branches outside India and appointment of principal officer. 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.  Responsibility should be explicitly allocated within the bank for ensuring that the bank’s policies and procedures are implemented effectively.

They provide an essential part of sound risk management system (basis for identifying. Sound KYC procedures have particular relevance to the safety and soundness of banks. They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage. 2. limiting and controlling risk exposures in assets & liabilities . in that: 1.

Illegal / Black Money Conversion Legal / white Money Definition: 'Money Laundering' is the process by which illegal funds and assets are converted into legitimate funds and assets. .

Money Laundering as per section 3 of the Prevention Money Laundering Act:“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering.” .Committee on Narcotics and Terrorism of US Senate Foreign Relations Committee:“Money Laundering is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins.” As per Sub .

Robbery. people. goods) Terrorist Act Counterfeiting & Forgery . Cheating Smuggling (arms.Money Laundering generally refers to ‘washing’ of the proceeds or profits generated from: Kidnapping Extortion Black marketing Drug Trafficking Criminal Activities Bribery & Corruption Gambling.

people and systems & technology) (iv) Concentration risk (either side of balance sheet). All risks are inter-related and together have the potential of causing serious threat to the survival of the bank .Money Laundering Risks: What are the risks to banks? (i) Reputational risk (ii) Legal risk (iii) Operational risk (failed internal processes.

 Banks vulnerable to Reputational Risk as they can easily become a vehicle for or a victim of customers’ illegal activities. .  Reputational Risk : a major threat to banks as confidence of depositors.Reputational Risk:  The potential that adverse publicity regarding a bank’s business practices. creditors and general market place to be maintained. whether accurate or not. will cause a loss of confidence in the integrity of the institution.

Operational Risk: The risk of direct or indirect loss resulting from inadequate or failed internal processes. . people and systems or from external events. ineffective control procedures and failure to practice due diligence. Weaknesses in implementation of banks’ programs.

criminal liabilities and special penalties imposed by supervisors. adverse judgments or contracts that turn out to be unenforceable can disrupt or adversely affect the operations or condition of a bank.  Banks can suffer fines.  Banks may become subject to lawsuits resulting from the failure to observe mandatory KYC standards or from the failure to practice due diligence. .Legal Risk:  The possibility that lawsuits.

On liabilities side: Risk of early and sudden withdrawal of funds by large depositorsdamages to liquidity. setting prudential limits to restrict banks’ exposures to single borrowers or groups of related borrowers. .Concentration Risk: Mostly applies on the assets side of the balance sheet: Information systems to identify credit concentrations.

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if cash is converted into a bank deposit. illegal funds or assets are first brought into the financial system. Money launderers place illegal funds using a variety of techniques. This ‘placement’ makes the funds more liquid.At this stage. For example. it becomes easier to transfer and manipulate. which include depositing cash into bank accounts and using cash to purchase assets. .

.  In some communities this form of money transfer is commonly known as hawala. hundi. chuyen tien. or pera padala. Generally such services accept cash. cheques or monetary instruments in one location and pay an equivalent amount to a beneficiary in another location.Alternative remittance  ‘Alternative remittance’ refers to funds transfer services usually provided within ethnic community groups and known by names particular to each culture. yok song geum.

money launderers use many different techniques to layer the funds. dispersed and disguised i. These include using multiple banks and accounts. At this stage. Layering.e. companies and countries in order to disguise their origins. Funds may be shuttled through a web of many accounts. . the funds must be moved.To conceal the illegal origin of the placed funds and thereby make them more useful. having professionals act as intermediaries and transacting through corporations and trusts.

It should be noted that not all money laundering transactions go through this three-stage process. . the illegal money has achieved the appearance of legitimacy. Transactions designed to launder funds can also be effected in one or two stages. depending on the money laundering technique being used. At this stage. or spent to promote the criminal's lifestyle.  Laundered funds are made available for activities such as investment in legitimate or illegitimate businesses.

making them available for investment. . saving or expenditure.Integration is the third stage of the money laundering process. Integration techniques include:  credit and debit cards  consultants  corporate financing  asset sales and purchases  business recycling  import/export transactions. in which the illegal funds or assets are successfully cleansed and appear legitimate in the financial system.

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INTEGRATION • The last stage in the laundering process. . Predicate Crimes •Corruption and Bribery •Fraud •Organized crime •Drug and human trafficking •Environmental crime •Terrorism •Other serious crimes… 4. 2. • Occurs when the laundered proceeds are distributed back to the criminal.Money Laundering Cycle: 1. • Creates appearance of legitimate wealth. LAYERING • Involves distancing the money from its criminal source: • movements of $ into different accounts • movements of money to different countries • Increasingly difficult to detect. PLACEMENT • • Initial introduction of criminal proceeds into the stream of commerce Most vulnerable stage of money laundering process 3.

Some of the Popular Places from where Money is laundered through…  Stock Markets  Agricultural Products (as there is no income tax and mostly the transactions are on cash basis)  Property Market  Creating Bogus Companies  Showing Loans  False Export Import Invoices .

 Systems and controls to identify. assess & manage the money laundering risks. their application and risk profiles.  Appointment a senior executive as principal officer with adequate authority and resources at his command. .  Appropriate documentation of risk management policies.Measures to deter money laundering:  Board and management oversight of AML risks.  Make a report to the Board on the operation and effectiveness of systems and control.

 Screening of employees before hiring and of those who have access to sensitive information. . development of new financial products. and timely reporting of suspicious transactions.  Appropriate  Quick quality training to staff. establishing new business relationships and changes in the customer profile.Measures to deter money laundering:  Appropriate measures to ensure that ML risks are taken into account in daily operations.

or • appears to be made in circumstances of unusual or unjustified complexity. or • appears to have no economic rationale or bonafide purpose. to a person acting in good faith – • gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime.SUSPICIOUS TRANACTION:  Suspicious transaction means a transaction whether or not made in cash which. .

 Employees leading lavish lifestyles that do not match their known income sources.  Large cash withdrawals from: a dormant or inactive account or account with unexpected large credit from abroad.  Sudden increase in cash deposits of an individual with no justification.SUSPICIOUS TRANACTION:  Providing misleading information / information not easily verifiable while opening an Account. .

 Appropriate documentation of risk management policies. assess & manage the money laundering risks.  Appointment a senior executive as principal officer with adequate authority and resources at his command.  Systems and controls to identify. .Measures to deter money laundering:  Board and management oversight of AML risks. their application and risk profiles.  Make a report to the Board on the operation and effectiveness of systems and control.

establishing new business relationships and changes in the customer profile.Measures to deter money laundering:  Appropriate measures to ensure that ML risks are taken into account in daily operations.  Appropriate  Quick quality training to staff.  Screening of employees before hiring and of those who have access to sensitive information. . development of new financial products. and timely reporting of suspicious transactions.

or • appears to have no economic rationale or bonafide purpose. to a person acting in good faith – • gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime.SUSPICIOUS TRANACTION:  Suspicious transaction means a transaction whether or not made in cash which. . or • appears to be made in circumstances of unusual or unjustified complexity.

THANK YOU .