ANTI MONEY LAUNDERING AND KNOW YOUR CUSTOMERS

Meaning and Objective Money Laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of criminal activities. If successful, the money can lose its criminal identity and appear legitimate. Illegal arms sales, smuggling, and the activities of organized crime, including for example, drug trafficking and prostitution, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to "legitimize" the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. In summary, the money launderer wants to:1. place this money in the financial system, without arousing suspicion; 2. move the money around, often in a series of complex transactions crossing multiple jurisdictions, so it becomes difficult to identify its original source; and 3. then move the money back into the financial and business system, so that it appears as legitimate funds or assets. Reasons to launder money - There are several reasons why criminals would want to launder money. These are: Hiding wealth: criminals can hide illegally accumulated wealth to avoid its seizure by authorities Avoiding prosecution: criminals can avoid prosecution by distancing themselves from the illegal funds Evading taxes: criminals can evade taxes that would be imposed on earnings from the funds Increasing profits: criminals can increase profits by reinvesting the illegal funds in businesses

 Becoming legitimate: criminals can use the laundered funds to build up a business and provide legitimacy to this business. Economic and Social Impacts of Money Laundering - There are severe social and economic consequences of money laundering. These are: Undermining Financial Systems: money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency Expanding crime: money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds 'Criminalizing' society: criminals can increase profits by reinvesting the illegal funds in businesses Reducing revenue and control: money laundering diminishes government tax revenue and weakens government control over the economy Process of Money Laundering I) Placement - is the first stage of the money laundering process and is the stage during with the subsequent two stages: layering, and integration. which money is most vulnerable to detection and seizure. Placement may occur by itself or concurrently Goal: To introduce the unlawful proceeds, aka "dirty money", into the financial system or the retail economy without attracting the attention of financial institutions or law enforcement. Techniques: Placement techniques often include structuring currency deposits into amounts to evade reporting requirements or commingling the deposits of both legal and illegal enterprises. Examples: * Dividing large amounts of currency into less conspicuous smaller sums that are deposited directly into a bank account. * Depositing a refund check from a canceled vacation package or insurance policy; or, cashing such an item and then purchasing monetary instruments or wiring the funds. * Purchasing a series of monetary instruments that are then collected and deposited into accounts at other financial institutions.

II)

Layering - is the second stage of the money laundering process. It is the process by which

the proceeds of illegal activities, i.e. the "dirty money", is separated from its origins. It may be performed independently or in conjunction with the other two stages: Placement, and Integration. Goal: Separate illegally obtained money from its source. Protect criminals involved in the criminal activities that generated the money by making it difficult to follow the money trail back to the source crimes and participants. Enable subsequent use of the money by the criminals for lawful purposes by removing all ties to the underlying criminal activities. Techniques: Move funds around the financial system through a series of transactions. Create confusion and complicate the audit trail by making numerous transactions; these transactions may reasonably appear to have a legitimate purpose or may appear to have no reasonable, lawful purpose. Examples: * Exchanging monetary instruments for larger or smaller amounts. * Cashing monetary instruments from one or more sources and wiring the funds to one or more recipients. * Transferring funds back and forth between one or more financial institutions through a series of transactions involving cash, checks, money orders, cashiers checks and wire transfers. III) Integration - is the third step of the money laundering process. It may be performed

individually or in conjunction with the Placement and Layering stages. Goal: The goal of this stage is to move the illicit money into a seemingly legitimate form. This is where the criminals actually benefit from their criminal activities in the above ground economy. They can now use the illegal funds for whatever legal purposes they desire - after all, the funds now appear to be "clean" and derived from a legitimate, lawful source. Techniques: Once the funds are in the financial system and have been insulated through the layering stage, additional transactions can be used to create the appearance of legality. Such transactions further shield the criminal from a recorded connection to the funds by providing a plausible explanation for the source of the funds.

Examples: * Purchase and resale of businesses or interests in businesses. * Purchase and resale of real estate, investment securities, foreign trusts. * Sham loans or false import/export documents. * Purchase of automobiles or other assets.

Typologies or Laundering Techniques: Banking Sector As they have been historically, banks remain an important mechanism for the disposal of criminal proceeds. The experts reported a number of patterns of activity indicative of laundering in the banking sector. One such pattern is the use of accounts in false names, or in the name of persons or interests operating on behalf of other beneficiaries. The latter category includes a class of money laundering agents such as solicitors, attorneys and accountants. It also includes shell or front companies. In all cases, the accounts are utilized to facilitate the deposit or transfer of illicit funds. Often, there are complex layers of transactions involving multiple accounts in the names of multiple persons, businesses or shell companies. The experts noted several characteristics probative of laundering through such accounts. For example, transaction activity in the accounts often occurs in amounts greater than that which ordinarily would be expected given the purported nature of the account holders business. In addition, documentation offered to support transactions, such as loan agreements, guarantees, purchase or sale contracts, and letters of credit, often appears false or legally deficient. If the account holder is a business, the business frequently has been incorporated or registered with the local chamber of commerce for only a short period of time. And in many cases, the parties on both sides of the transactions appear to be related. Indeed, the parties may even be the same.

Another trend identified by some delegations is the use of representative offices of foreign banks to dispose of criminal proceeds. Representative offices may offer an important advantage to money launderers. In some countries, though not all, representative offices can accept deposits and then transfer the funds to their own accounts with a local bank, without disclosing the identities of the depositors and beneficiaries. In addition to the typologies outlined above, other familiar laundering techniques continue to figure prominently in the banking sector. Wire transfers remain a primary tool at all stages of the laundering process. Transactions are still structured, even when there are no large cash reporting requirements. Know 2002 The objective of KYC/AML/CFT guidelines, provided by Reserve Bank of India 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. Section 3 of the Prevention of Money Laundering Act, 2002 defines offence of money laundering as under: 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." The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish Your Customer (KYC) Norms/Anti-Money Laundering (AML)

Measures/Combating of Financing of Terrorism (CFT)/Obligations of banks under PMLA,

information of transactions referred to in clause (a) to the Director within such time as may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department. The provisions of the Act are frequently reviewed and various amendments have been passed from time to time. The recent activity in money laundering in India is through political parties, corporate companies and share market. It is investigated by the Indian Income Tax Department. Bank accountant must record all the transactions whose amount will be more than Rs. 10 Lakhs. Bank accountant must maintain these records for 10 years. Banks will also make cash transaction report (CTR) and Suspicious transactions report whose amount is more than RS.10 Lakhs within 7 days of doubt. This report will be submitted to enforcement directorate and income tax department. Prevention of Money Laundering Act The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005. Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act. The PMLA and rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime. Punishment of money laundering: Whoever commits the offence of money laundering shall be punishable with rigorous imprisonment of a term which shall not be less than three years but which may extend to seven years (for some crimes 10 years) and shall also be liable to fine which may extend to five lakh rupees.

Obligations of Banking institutes, financial institutes and intermediaries: 1. Every banking institutes, financial institutes and intermediaries shall Maintain a record of all transactions, the nature and the value of which may be prescribed, whether such a transaction comprises of a single transaction or multiple transaction integrally connected to each other, and where such series of transactions take place within a month. Furnish information of transaction to the director within such time as may be prescribed. Verify and maintain the records of the identity of all its clients in such a manner as may be prescribed. 2. Records shall be maintained for the period of ten years from the date of cessations of the transaction between clients and banks or institutes or intermediaries. Powers of Directors to impose fine: 1. The Director may, either of his own motion or on an application made by any authority, call for records. 2. If the Director, in case of any inquiry, finds that banking company, financial institutes or intermediaries or any of its officer has failed to comply with provision contained in the section, without prejudice to any other action that may be taken under any provision of this act, he may, bye an order, levy a fine on such a banking company or financial institute for rupees ten thousand or can be extended up to one lakh rupees. Director shall forward a copy of the order to every banking company and financial institute and intermediary who is party to the proceedings.

FINANCING TERRORISM: A. Introduction Terrorism involves the participation of people and the use of logistical support to advance their beliefs, ideologies or dreams whether they are cultural, economic, philosophical or religious. Ostensibly, to maintain the subsistence of its members and acquisition of logistics necessary to enhance the perpetration of the terrorists unlawful activities, terrorist organizations require financial resources.

At the international level, the United Nations has taken measures to coordinate, and as much as possible synchronize, the actions taken at the domestic level by propagating necessary international instruments. (i) The thirteen universal legal instruments including the Convention for the Suppression of Terrorist Financing 1998 (ii) The FATF Forty Recommendations on Money Laundering (iii) The FATF Nine Special Recommendations for Financing Terrorism (iv) The Security Council Resolution 1267 (v) The Security Council Resolution 1373 Especially, Security Council Resolution 1373 calls for all Member States to take drastic measures to curtail the sources of funding and any opportunities that may present itself as an avenue of abuse to generate funding for terrorist related activities. In respect of financing of terrorism the general framework entrenched in the Nine Special Recommendations of the FATF/GAFI provide the basic guidelines for all Member States to follow in their efforts to establish a vibrant domestic democratic legal regime against the financing of terrorism. The Nine Special recommendations call for: Criminalization of acts of financing terrorism Effective sanctions for legal persons for the acts of financing terrorism Freezing and Confiscating terrorist assets Obligations of suspicious transactions reporting involving terrorist acts or organizations International cooperation for investigations, inquiries, and proceedings related to the financing of terrorism Other important preventive and detective measures Control of alternative remittance Control of wire transfers Control of non-profit organizations Control of cash couriers

 Inter-agency coordination among relevant agencies (e.g. FIU, Law Enforcement, Intelligence) in the investigation of terrorist financing offences. Governments, legislators and agencies tasked with the responsibility of establishing a legal regime against terrorism must be strongly urged to adhere to the Nine Special Recommendations of the FATF/GAFI. B. Definition Terrorism has not been accorded a specific definition under international law. In retrospect, the international community cannot stand aside and await such definition to be formulated first before taking measures to criminalize all the actions that constitute the crime of financing of terrorism. Essentially, because within the realm of criminal law, whether domestic or international, the various acts perceived to constitute an act of terrorism are commonly agreed upon even without a definition. This in our view provides the platform on which respective countries can proceed to establish a competent legal regime to deal with the menace in its entirety. This is made possible by the notion that the thirteen United Nations instruments that relate to terrorism promulgate the various acts that constitute the offences of terrorism. More so, the International Convention for Suppression of the Financing of Terrorism states that financing of terrorism refers to: 1. Any conduct by any person that directly or indirectly, whether lawfully or unlawfully and willfully provide or collect funds with the intention that they should be used, or in the knowledge that they should be used, to carry out an act that constitutes an offence under any one of the thirteen United Nations Conventions. 2. It also relates to any act intended to cause death or serious bodily injury to a civilian, or to any other person not actively involved in a situation of armed conflict, when the purpose of such act is to intimidate a population, or to compel a government or an international organization to either do or abstain from doing a specific act. Moreover it also includes the act of attempting to participate, organize, contribute or directing the provision or collections of such funds.

3. It is not necessary that the funds are actually used to commit an offence. C. Distinguishing Money Laundering and Financing of Terrorism The financing of terrorism takes many forms. It epitomizes an economic arrangement which reflects many, if not all, of the same traits of an international organized crime. It is undeniable that terrorist organizations to some extent do engage in money laundering and other general criminal activities to supplement their source of finance. The crucial distinction between financing of terrorism and organized crime, particularly money laundering, is that in contrast, organized crime syndicates launder proceeds of crime as a covert technique to legalize the proceeds and create a false impression of the legitimacy of its sources. More so for monetary profit, while terrorist organizations are more interested in the disbursement of the money and at the most, some if not all of the sources of these funds are legitimate. US$400 Billion is circulated worldwide annually in money laundering activities. However, money laundering is quite a different sphere of crime to that of financing of terrorism. It deals with revenue derived from an act of crime. In contrast, financing of terrorism relates to activities undertaken to facilitate funding of the commission of a crime of terrorism. In this regard, financing terrorism relates to actions undertaken prior to the commission of the principal offence of terrorism. They fall into the category of direct financing, conspiracy, perpetration, aiding, averting and/or incitement to contribute to the raising of funds to enable the commission of the principal offence of terrorism. Irrespectively, analysis of the economics of terrorism demonstrates to a certain extent that international organized crime syndicates generally have a motive quite different from those of terrorist organizations. In this respect, terrorism related organized crime is believed to constitute a small and difficult to detect portion of millions of dollars in the global formal established financial systems. Hence, it is necessary to make the distinction so that the legal regimes that are established are able to deal with both types of crimes adequately. That they are not confused into being the same or similar criminal acts which may result in the establishment of a domestic legal regime that is unable to deal with either offence or their associate offences comprehensively.

D. Measures against Financing Terrorism In line with the Security Council Resolution 1373, domestic measures taken against the financing of terrorism must encompass actions to prevent and suppress the financing of terrorist acts by criminalization in domestic laws and regulations and with penal provisions that duly reflect the seriousness of terrorist acts such as the willful provision or collection, by any means, directly or indirectly, of funds by their nationals or in their territories with the intention that the funds should be used, or in the knowledge that they are to be used, in order to carry out terrorist acts. In addition be flexible enough to freeze, without delay, the funds and other financial assets or economic resources of persons who commit, or attempt to commit, terrorist acts or participate in or facilitate the commission of terrorist acts, of entities owned or controlled directly or indirectly by such persons; and of persons and entities acting on behalf of, or at the direction of such persons and entities, including funds derived or generated from property owned or controlled directly or indirectly by such persons and associated persons and entities. Not least prohibit their nationals or any persons and entities within their territories from making any funds, financial assets or economic resources or financial or other related services available, directly or indirectly, for the benefit of persons who commit or attempt to commit or facilitate or participate in the commission of terrorist acts, of entities owned or controlled, directly or indirectly, by such persons and of persons and entities acting on behalf of or at the direction of such persons. E. Generation of Finance The inflow of financial resources of a terrorist organization more or less derives from legitimate sources, illegal revenue and criminal activities. (i) Legitimate sources include activities which are not considered illegal such as formal business enterprises and donations from charity and private individuals. Such businesses and charity organizations or individuals must be regulated by law. (ii) Illegal revenues originate from the diversion of legal funds and at times covert aid from foreign governments. On the other hand criminal sources, to name some, range from theft, fraud, money laundering and extortion. Hence, it is of paramount importance that within the framework of achieving the objectives of countering terrorism, as set forth in the international instruments,

the efforts at both domestic and international fronts must be absolutely comprehensive by way of legislation and enforcement of law and order, and must be consistent and continuous. It is also important to note that any action to criminalize such actions must comprehend not only the means currently used or abused but any means that promote any possibility of being used or abused to further such criminal activities. F. Method of Transfer Wire transfers pose a major problem and therefore comprehensive action is necessary by way of new legislation or amendments to existing laws to regulate their use. In addition, informal money transfer systems known by different names around the world such as hawala in the Middle East, hundi in India, phoei in Thailand, fei chien in Hong Kong, padala in the Philippines, in common request very little information from users. Other possible mediums of money transfers include the gate keepers such as law firms, accounting firms, real estate agents, insurance brokers and doctors whose records are protected by stringent privacy laws. To comprehensively deal with all financial transfer actions, such institutions must also be regulated and required by law to also implement know your customer policies and report suspicious transactions to their FIU. Needless to say, domestic legal regimes must be implemented to regulate privacy policies in the interest of enhancing public safety standards. Development of possible alternative methods of transfer by sale of individual bank accounts must be regulated. More so the use of mobile, email and other internet facilities to make such transfers must be regulated.

Indias progress on Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) 1. The Financial Action Task Force (FATF) is an intergovernmental policy making body, comprised of over 30 countries, that has a ministerial mandate to establish international standards for combating money laundering and terrorist financing. Over 180 jurisdictions have joined the FATF or a FATFstyle regional body, and committed at the ministerial level to implementing the

FATF standards and having their antimoney laundering (AML)/counterterrorist financing (CFT) systems assessed. 2. The FATF sets international standards to combat money laundering and terrorist financing. It assesses and monitors compliance with the FATF standards, conducts typologies studies of money laundering and terrorist financing methods, trends and techniques and responds to new and emerging threats, such as proliferation financing. 3. India became FATFs 34th Member in June 2010. As per the FATF procedure, every country has to give an Action Plan to bring their AML/CFT regime close to the compliance zone of the FATF. India also gave an Action Plan in June 2010 and followed up with Action Taken Report in October 2010 and in February 2011. 4. The 2nd review of Indias Action Taken Report was discussed by the FATF Plenary on 23rd February in Paris. The FATF Plenary appreciated the strong commitment demonstrated by India to the international drive against money laundering and financing of terrorism. 5. During the meeting, India reiterated its commitments to adopt, enforce and contribute to international best practices in AML and CFT. India also highlighted the implementation of the 2010-11 budget announcement relating to the establishment of a Financial Stability and Development Council that would interalia review the effective implementation of Indias multilateral commitments including FATF priorities. In addition, India informed the plenary of the steps taken for the fulfillment of another budget announcement of 2010-11 relating to the creation of the high powered Financial Sector Legislative Reforms Commission to look at all the financial sector legislations, regulations and rules with a view to making them synchronous with each other; that would also help India implement its FATF action plan more effectively. 6. During the plenary, it was observed that India is on track on fulfilling its commitment and it was recognized that India is taking all efforts in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups.

7. The Union Finance Minister, Shri. Pranab Mukherjee, approved India taking over as the cochair of the Asia Pacific Regional Review Group of the FATF. It is one of the four FATF International Co-operation Review Groups. The others are: Europe/Eurasia, Americas, Middle East / Africa. India replaces Australia and the other co-chair is Macau. Through this position, India would send an important signal of its interest in and commitment to countering money laundering and financing of terror both in the region, as well as in terms of the nations overall membership of FATF. 8. The Asia Pacific Regional Review Group of FATF is tasked with the responsibility of reviewing the compliance and actions taken by countries in this region to meet FATF standards.

KNOW YOUR CUSTOMER For the purpose of KYC, 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. 1. Objectives of KYC Norms Banking operations are susceptible to the risks of money laundering and terrorist financing. In order to arrest money laundering, where banks are mostly used in the process, it is imperative that they know their customers well.

On combating financing of terrorism, RBI has specified certain standards based on which

our Bank has formulated a policy on identification and acceptance of customers to have a business relationship with us. Our branches are required to prepare and maintain documentation on their customer relationships and transactions to meet the provisions of the Prevention of Money Laundering Act and other laws and regulations. RBI has issued the KYC guidelines under Section 35 (A) of the Banking Regulation Act, 1949 and 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. The due diligence expected under KYC involves going into the purpose and reasons for opening an account, anticipated turnover in the account, sources of wealth (net worth) of the person opening the account and sources of funds flowing into the account.

To achieve the objectives of KYC guidelines, the following four key elements have been made as the basis: 1. Customer Acceptance Policy 2. Customer Identification procedures 3. Monitoring of transactions 4. Risk Management 2. Customer Acceptance Before commencing a business relationship with a prospective customer, the Bank has to ensure that such a relationship does not, in any way, go against its Customer Acceptance principles viz., a.
b.

No account is opened in anonymous or fictitious/ benami name(s) and Customers are categorized based on risk perceptions 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.

A Customer Profile (in the prescribed format) containing information relating to the

customer's social/ financial status, nature of business activity, information about his clients' business and their location, Sources of funds, Annual Income, etc. shall be obtained from/prepared for all the applicants for opening SB/CA/ Term deposits accounts.

The customer profile shall be updated, on a periodical basis, as under:

For low risk customers Once in three years For medium risk customers Every year For high risk customers Every year Note: However, these periodicities are only indicative and wherever warranted, the updating exercise may be done even at lesser frequencies taking into account the activities, conduct of operations, etc. 3. Customer identification

Customer identification means identifying the customer and verifying his/her/its identity Customer Identification is carried out at different stages i.e., while establishing a banking

by using reliable, independent source documents, data or information. relationship, carrying out a financial transaction or when the branch has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data.

For opening an account, normally, the customer should come to the Bank in person. An

account shall not, normally, be opened without a meeting between the bank official and the customer. Branches need to obtain sufficient information to their satisfaction, to establish the identity of each new customer, whether regular or occasional and the purpose of the intended nature of banking relationship. The process of enquiry/verification of the documents shall be a thorough one by having a dialogue with the prospective depositor, introducer, borrower and guarantor and confirmation through other channels, if necessary. Wherever it is necessary, a discreet verification shall also be made about the credentials of the parties, their business potential etc.

The process of verifying a customer's identity and his/her credentials is not a faultfinding

exercise but to create a better customer relationship that may safeguard the mutual interests of the Bank as well as the customer. 4. Identification Documents to be submitted by customers for opening of accounts Branches shall ask for documents to verify

the identity of the customer, his/her address, location and his/her recent photograph.

For accounts of Individuals under Low Risk Category, the following documents are

accepted: Passport alone where the address on the passport is the same as the address on the account opening form (OR) Any one document (latest/recent) from each of the lists given below, for a photo identity and a proof of residence/address Towards Name proof Photo Identification Towards address proof 1. 2. 3. 4. 5. 6.
7.

Passport where the address differs Telephone Bill Voters Identity Card Bank account statement PAN Card Income/Wealth tax assessment order Driving License Credit Card Statement Govt. /Defense ID card Electricity Bill ID cards of reputed employers Ration Card

8.
9.

10. 11. 12.

13.

Letter from a recognized public authority or public servant verifying the identity and Letter from employer

residence of the customer

14.

Note: Original should be produced for verification and copy, duly attested by the verifying official, shall be kept along with the account opening form.
In case of joint accounts, applicants are required to independently establish their identity and

address. `Care of .' or incomplete address should not be accepted.

In respect of Medium/High risk customers, besides the normal documents prescribed above for

low risk customers, branches shall call for additional information and documentary evidence as under: Type of Customers/accounts Additional Information/Documents i. For opening Non-Resident accounts Introduction in the form of passport and/or by another bank/Indian Embassy/ Notary Public/ Person known to the account opening branch. ii. For opening accounts of other than NRIs under Medium and High Risk categories iii. For current accounts in all risk categories iv. For accounts of other than individuals in all risk: Introduction by an existing account holder or by a person known to the Bank For customers who are legal persons or entities (i.e., other than individuals), branches shall verify the legal status of the legal person/entity through proper and relevant documents a. verify that any person(s) purporting to act on behalf of the legal person/entity is duly authorized and such person(s) is/are properly identified by calling for documents (as listed above for individual low risk customers) and verify the identity of that person(s) b. understands the ownership and control structure of the customer and determines those natural persons who ultimately control the legal person. 5. Quoting of PAN

As per clause (C) of rule 114B of the Income Tax Rules 1962, it is mandatory for the

customers to quote the PAN (Permanent Account Number) or GIR (General Index Register)

Number, in the account opening forms pertaining to Term deposits exceeding Rs.50,000 and for opening an account of all other types.

In case PAN or GIR Number has not been allotted or the person is not an Income Tax

assessee, a declaration in Form No.60 or 61, as the case may be, should be given to the Bank. 6. Furnishing of Photographs

While tendering applications for opening SB/Current accounts in the names of

Individuals/Sole Proprietary concerns, two copies of latest passport size photographs should be furnished.

In case of joint accounts, Accounts of Partnerships, Limited Companies, Clubs,

Associations, Societies, Trust, Institutions, etc. the photographs of person(s)/official(s) who are authorized to operate the account and in case of HUF, the photograph of the Karta should be provided.

In case of Term Deposits, one copy of photograph shall be obtained provided the The above provisions cover all categories of depositors including non-residents.

depositor does not have a Savings or Current account with the branch.

7. Introduction of accounts to the Bank

It is essential that the introducer should know fully well the prospective account holder

whom he/she is introducing for a sufficiently long time. The introducer should be in a position to identify or be able to give more particulars about the account holder from his personal knowledge, when there arises any occasion at a later date.

A dialogue or enquiry with the introducer is had so that he/she could be informed of his In respect of accounts introduced by employees of other branches or where the introducer

responsibility and the implications of introducing an account. was not present while introducing the customer at the time of opening the account, no cheque/draft shall be collected till a confirmation of being introduced the account is received.

8. Rejection of applications for opening accounts

Where the Bank is unable to apply appropriate customer due diligence measures i.e.

unable to verify the identity and/or obtain documents required as per the risk categorization due to non-cooperation of the customer or the data/information furnished to the bank is not reliable, it may take a decision not to open the account. 9. Relaxed KYC Procedure

Relaxed KYC procedure refers to acceptance of an introduction in lieu of full KYC This relaxation is applicable for Low Income Group customers, individuals falling under Low Income group customers are those who keep balances not exceeding Rs.50000/- in

procedure subject to certain conditions prescribed. the 'No frill' category, persons affected by natural calamities like floods, cyclone, tsunami, etc. all their accounts (FDR/CA/SB) taken together and the total credit summation in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs.100000/-) in a year. For these customers, branches are permitted to open accounts subject to the following conditions:
1.

An introduction (in lieu of the KYC documents) from another account holder who has The introducer's account with the Bank should be at least six month's old and should The photograph of the customer who proposes to open the account and his address need

been subjected to full KYC procedure should be given.

2.

show satisfactory transactions.

3.

to be certified by the introducer.

When, at any point of time, the total balance in all his/her accounts (FDR/SB/CA) with

the Bank taken together exceeds Rupees Fifty thousands (Rs.50000/-) or total credit summation in all the accounts exceeds Rupees one lakh (Rs.100000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed. 10. KYC norms for Remittances within India

Issue and payment of travellers cheques, demand drafts, mail transfers, telegraphic

transfers, electronic funds transfers and other remittances of Rs.50,000 and above could be made only by debit/credit to customers' accounts or against cheques and not against cash.

Further, the applicants (whether customers or not) for the above transactions for amount

of Rs.50,000 and above should furnish PAN (Permanent Account Number allotted by Income Tax Authorities) on the applications. 11. Closure of accounts on account of non-cooperation from the customer

If the Bank is not able to adhere to the KYC norms in a particular account due to non co-

operation by the customer or non-reliability of the data/ information furnished to the Bank, it may close the account, after giving due notice to the customer explaining the reasons for such a decision.

Compliances for customer identification: Individual

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. It has been observed that some close relatives, e.g. wife, son, daughter and 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. 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.

Following are the features to be verified and documents that may be obtained from individual customers: Features Legal names and any other names used Documents (i) Passport (ii) PAN card (iii) Voters Identity Card (iv) Driving licence(v) Identity card (subject to the banks satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction Correct Permanent Address of bank (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 )

Trust/Nominee or Fiduciary Accounts

There exists the possibility that trust/nominee or fiduciary accounts can be used to circumvent the customer identification procedures. Banks should determine whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary. If so, banks should insist on receipt of satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are acting, as also obtain details of the nature of the trust or other arrangements in place. While opening an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and the settlors of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries should be identified when they are defined. In the case of a 'foundation', steps should be taken to verify the founder managers/ directors and the beneficiaries, if defined.

Features Documents Names of trustees, settlers, beneficiaries and (i) Certificate of registration, if registered (ii) signatories Power of Attorney granted to transact Names and addresses of the founder, the business on its behalf (iii) Any officially managers/directors and the beneficiaries valid document to identify the trustees, Telephone/fax numbers settlors, beneficiaries and those holding Power of of Attorney, managing founders/managers/ body of the directors and their addresses(iv) Resolution the foundation/association(v) Telephone bill

Accounts of companies and firms

Banks need to be vigilant against business entities being used by individuals as a front for maintaining accounts with banks. Banks should examine the control structure of the entity, determine the source of funds and identify the natural persons who have a controlling interest and who comprise the management. These requirements may be moderated according to the risk perception e.g. in the case of a public company it will not be necessary to identify all the shareholders. Certain firms posing as Multi Level Marketing (MLM) agencies for consumer goods and services have been mobilizing large deposits from the public (with promise of high return) by opening accounts at various bank branches. These funds running into crores of rupees, were being pooled at the principal accounts of the MLM Firms and were eventually flowing out of the accounts for purpose appearing illegal or higly risky. Accordingly, while opening agency accounts in the name of a proprietary concern the following documents need to be obtained and verified. Identity as also the address proof of the proprietor, such as passport, PAN card, Voter ID card, Driving Licence, Ration Card with photo, etc. any one of the document is obtained.

Proof of the name, address and activity of the concern, like registration certificate(in the case of a registered concern)), certificate /licence issued by the Municipal authorities under Shop and Establishment act, sales and income tax returns, CST / VAT certificate, Licence issued by the registering authority like Certificate of Practice issued by the Institute of Chartered Accountants of India, Institute of Companies Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, any certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities, etc. any two of the documents are to be obtained. These documents should be in the name of the proprietary concern. Accounts of Companies Features Name of the company Principal place of business Mailing address of the company Telephone/Fax Number Documents (i) Certificate

of

incorporation

and

Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill

Accounts of Partnership Firms Features Documents Legal name (i) Registration certificate, if registered(ii) Address Partnership deed (iii) Power of Attorney Names of all partners and their granted to a partner or an employee of the addresses Telephone numbers of the firm and firm to transact business on its behalf (iv) partners Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone

bill in the name of firm/partners

Client accounts opened by professional intermediaries

When the bank has knowledge or reason to believe that the client account opened by a professional intermediary is on behalf of a single client, that client must be identified. Banks may hold 'pooled' accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds or other types of funds. Banks also maintain 'pooled' accounts managed by lawyers/chartered accountants or stockbrokers for funds held 'on deposit' or 'in escrow' for a range of clients. Accounts of Politically Exposed Persons (PEPs) resident outside India

Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc. Banks should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. Banks should verify the identity of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for PEP should be taken at a senior level which should be clearly spelt out in Customer Acceptance Policy. Accounts of non-face-to-face customers

With the introduction of telephone and electronic banking, increasingly accounts are being opened by banks for customers without the need for the customer to visit the bank branch. In the case of non-face-to-face customers, apart from applying the usual customer identification procedures, there must be specific and adequate procedures to mitigate the higher risk involved. Certification of all the documents presented should be insisted upon and, if necessary, additional documents may be called for. In such cases, banks may also require the first payment to be effected through the customer's account with another bank which, in turn, adheres to similar KYC standards. In the case of cross-border customers, there is the additional difficulty of

matching the customer with the documentation and the bank may have to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a regulated and supervised entity and has adequate KYC systems in place. Opening of bank accounts Salaried Employees

It has been brought to our notice that for opening bank accounts of salaried employees some banks rely on a certificate / letter issued by the employer as the only KYC document for the purposes of certification of identity as well as address proof. Such a practice is open to misuse and fraught with risk. It is, therefore, clarified that with a view to containing the risk of fraud, banks need to rely on such certification only from corporates and other entities of repute and should be aware of the competent authority designated by the concerned employer to issue such certificate/letter. Further, in addition to the certificate from employer, banks should insist on at least one of the officially valid documents as provided in the Prevention of Money Laundering Rules (viz. passport, driving licence, PAN Card, Voters Identity card etc.) or utility bills for KYC purposes for opening bank account of salaried employees of corporates and other entities. Small Deposit Accounts

Although flexibility in the requirements of documents of identity and proof of address has been provided in the above mentioned KYC guidelines, it has been observed that a large number of persons, especially, those belonging to low income group both in urban and rural areas are not able to produce such documents to satisfy the bank about their identity and address. This would lead to their inability to access the banking services and result in their financial exclusion. Accordingly, the KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases, if a person who wants to open an account and is not able to produce documents mentioned above, banks should open an account for him, subject to: Introduction from another account holder who has been subjected to full KYC procedure. The introducers account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the

account bank.

and

also

his

address

needs

to

be

certified

by

the

introducer,

or any other evidence as to the identity and address of the customer to the satisfaction of the

While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the bank must notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped. Further, banks were advised to open accounts with reduced KYC standards in respect of persons affected by floods to enable them to credit the grant received from the Government. These accounts shall also be treated at par with the accounts opened as per above instructions. However, the maximum balance in such accounts may be permitted as the amount of grant received from the Government or Rs. 50,000 whichever is more and the initial credit of the grant amount shall not be counted towards the total credit. The officially valid documents for the same are Officially Valid Documents a) The Notification has also expanded the definition of 'officially valid document' as contained in clause (d) of Rule 2(1) of the PML Rules to include job card issued by NREGA duly signed by an officer of the State Government or the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number. b) It is further advised that where a bank has relied exclusively on any of these two documents, viz. NREGA job card or Aadhaar letter, as complete KYC document for opening of an account (ref. paragraph 2.4 (f) of this Master circular) the bank account so opened will also be subjected to all conditions and limitations prescribed for small account in the Notification.

c) Accordingly, all accounts opened in terms of procedure prescribed in Rule 2A of the Notification dated December 16, 2010 referred to above and all other accounts opened ONLY on the basis of NREGA card or Aadhaar letter should be treated as "small accounts" and be subject to the conditions stipulated in clause (i) to (v) of the sub-rule (2A) of Rule 9. Maintenance of records of transactions under PMLA,2002: All Cash transactions Of value more than rupees 10Lacs/equi. in foreign currency. 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; Where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place. All suspicious transactions Whether or not made in cash and in manner as mentioned in the Rules framed by Government of India under the PMLA, 2002. Deposits and credits by third party cheques, travelers cheques, pay orders, demand drafts, etc. Transfer from one account to another within same bank including N/Vostro accounts. Cr or Dr. from non monetary a/c Money transfer or remittances in favor of own/non-clients within India or from abroad Loans, advances, contingent liability by way of subscription to CP, CD, debentures, etc. LC, BG, Foreign exchange contracts, derivative contracts, etc.

Maintenance and Preservation of records In a manner that allows data to be retrieved easily and quickly whenever required or when requested by the competent authorities.

The identification records and transaction data should be maintained for at least ten years from the date of cessation of transaction between the NBFCs and the client.

Procedure for maintaining Information: As prescribed by RBI or SEBI from time to time. (i) The nature of the transactions; (ii) the amount of the transaction and the currency in which it was denominated; (iii) the date on which the transaction was conducted; and (iv)the parties to the transaction. Reporting to Financial Intelligence Unit-India NBFCs are advised to adopt the format prescribed for banks with suitable modifications. CTR for each month should be submitted to FIU-IND by 15th of the succeeding month. (While filing CTR, individual transactions below Rs 50,000 may not be included) STR should be furnished within 7 days of arriving at a conclusion that any trans., whether cash or non-cash, or a series of trans. integrally connected are of suspicious nature. The Principal Officer will be responsible for timely submission of CTR and STR to FIUIND and utmost confidentiality should be maintained in filing of same. It should be ensured that the reports for all the branches are filed in one mode i.e. electronic or manual