Report on Anti Money Laundering and KYC Guidelines by RBI

Topics Covered under this report:

1. What is money laundering and how it is conducted by criminals

2. Master circular by RBI on KYC to prevent money laundering
3. Maintenance and preservation of KYC documents under PML act, 2002

What is money laundering: Presenting proceeds of crime as legitimate sourced income

There are 3 stages of involved in money laundering:

 Placement
 Layering
 Integration

1. Placement (Filtering)
This is a movement of cash from its source. This stage represents initial entry of proceeds of crime into
the financial system. In this stage criminal relieves himself from his cash hoards and place it into the
financial system. This is the most vulnerable stage for criminal because of high chances of being caught
as placing a large sum of money to legitimate source may raise suspicions to official.
Some source of placement:
 Cash business: Adding the proceeds of crime to legitimate takings. This works best for businesses
with little variable cost and high cash income, such as car wash, restaurants, casinos etc.
 False invoicing: Putting dummy invoices and showing proceed as money received against settlement
of these invoices.
 Smurfing: Lodging small amount of money into the bank account below the threshold of AML
reporting

2. Layering (Structuring/ Camouflage)

Layering is placement and extraction over and over again to make tracing the source as hard as
possible. During this stage launderers may begin by moving funds electronically from one country to
another, one account to another and invest the money in different financial options, each time taking
advantage of loopholes in legislation.
Some Examples of layering:
 Buying and selling securities through numerous accounts
 Using online banking for moving the money
 Using offshore accounts and offshore companies to transmit the fund

3. Integration (Extraction)
In this stage laundered money is reintegrated into legitimate economy. The prime objective of this stage
is to reunite the money to launderer in a manner that does not draw attention of official and appear to
result from a legitimate source.
Some examples of integration:
Purchase of property, jewellery, artwork, high end automobile
 Placement Hide Conversion, transfer or filter
Layering Move Conceal or disguise
Integration Invest Acquisition, possession or use

Journey of laundered money in a case study:

Money launderer hired a student

Student opened a bank account in financial institution

Money launderer creates front travel agency one incorporated in Greece and other in Portugal

In following months launderer sent his drug money in student's bank account from travel agencies

Once money received student transferred money to 3 other students' bank account opened in other financial institutions

Using this money students wrote cheques, prepaid debit cards and mailed them to travel agencies
Students also overpaid for their tuition fees and books to university and received refunds from university
University fund mingled with other fund

This fund then utilised to pay for living expenses, buy luxury items, advertisement expenses and investment to look travel
agencies as legitimate business

1.
Master Circular on Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating
Financing of Terrorism (CFT)/Obligation of banks and financial institutions under Prevention of Money Laundering
Act, (PMLA), 2002.

KYC Policy:

Banks/FIs should frame their KYC policies incorporating the following four key elements:

1. Customer Acceptance Policy

2. Customer Identification Procedures
3. Monitoring of Transactions and
4. Risk Management.

1. Customer Acceptance Policy

Following aspects shall be kept in mind while developing customer acceptance policies
 No account is opened in anonymous or fictitious/benami name
 Categorizing the customers into low, medium and high risk ones based on well defined parameters
 All the documents to be collected as required by PML Act, 2002 and instructions/guidelines issued by RBI
 2. Customer Identification Procedures
Customer Identification Procedure to be carried out at different stages
 while establishing a banking relationship
 while carrying out a financial transaction
 when the bank/FI has a doubt about the authenticity of customer
 when banks sell third party products as agents
 While banks’ carrying a transaction for more than Rs. 50,000/-.
 when a bank has reason to believe that a customer is intentionally structuring a transaction into a series of
transactions below the threshold of Rs. 50,000/-

3. Monitoring of Transactions
Banks should closely examine the transactions to ensure that they are consistent with the customer’s profile and
source of funds. It may be based on the following principles:

 Risk category - High risk accounts must be subjected to intensified monitoring

 Large and complex transactions, transactions with unusual patterns
 Transactions which exceed the thresholds prescribed
 Periodical review of risk categorization at least once in six months

4. Risk Management
 Banks should closely examine the transactions in order to ensure that they are consistent with their
knowledge about the clients, their business and risk profile and source of funds
 An effective AML/CFT programme should be in place and it should cover proper management oversight,
systems and controls, segregation of duties, training of staff etc.
 Independent evaluation of the compliance functions of bank should be conducted
 Concurrent/internal audit should be conducted to verify the compliance

Maintenance of KYC documents and Preservation period under PML act 2002:

Banks should introduce a system of maintaining proper record of transactions as mentioned below:

 Cash transactions of the value of more than rupees ten lakh

 Series of integrally connected transactions individually valued below rupees ten lakh, within a month and
monthly aggregate exceeds rupees ten lakh
 Receipts by non-profit organisations of value more than rupees ten lakh
 Transactions where forged or counterfeit currency notes have been used as genuine and where any forgery
of a valuable security or a document has taken place facilitating the transaction
 All suspicious transactions, whether or not in cash
 Cross border wire transfers of the value exceeding Rs.5 lakh
 Purchase and sale of immovable property valued at Rs.50 lakh or more

Note: All such records shall be maintained for a minimum period of 5 years