Know Your Customer

 The know your customer or know your client (KYC) guidelines in financial services require that
professionals make an effort to verify the identity, suitability, and risks involved with
maintaining a business relationship.
 The procedures fit within the broader scope of a bank's anti-money laundering (AML) policy.
 KYC processes are also employed by companies of all sizes for the purpose of ensuring their
proposed customers, agents, consultants, or distributors are anti-bribery compliant, and are
actually who they claim to be.
 Banks, insurers, export creditors, and other financial institutions are increasingly demanding
that customers provide detailed due diligence information.
 Initially, these regulations were imposed only on the financial institutions but now the non-
financial industry, fintech, virtual assets dealers, and even non-profit organizations are liable to
oblige.

KYC STEPS
1. Customer Identification Process (CIP)
o To ensure a customer is who they claim to be, the bank should collect basic customer
information and authenticate it.
o Banks do this by cross-checking with authentic and independent identification documents.
o Customer identification is first carried out during the account opening.
o Basic requirements are name, date of birth, address, signature, photo and identification
number.
o The bank may also carry out CIP on suspicion that a customer's account activity is fraudulent,
and verify a customer's identity before every transaction.
o This prevents losses that result from impersonation (forging identity)
o If your student: college id, letter from college on official letter head
o Business: GST.TIN, registration docs, any licenses, partnership deed.
o Salaried employee: company Id, pay slip, offer letter

2. Customer Acceptance Process (CAP)

 Banks should outline the requirements for the admission of a customer (e.g admission criteria
for college). They should not allow anonymous or third party opening the accounts.
 They should also put risk parameters in place.
 These help to determine the risk profile of a customer.
 Furthermore, banks should outline all the documents they need for account opening
3. Customer Due Diligence ( CDD) / risk rating

 Customer due diligence (CDD) is the act of performing background checks and other screening
on the customer to ensure that they are properly risk-assessed before being on boarded.
 CDD is at the heart of Anti-Money Laundering (AML) and Know Your Customer (KYC) initiatives
 The bank risk rates the customer based on how much of risk the customer is in using the bank as
a front to launder money or finance a terrorist activity. HSBC after the fine was asked to do this
for all its clients globally which was a massive task.
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o a/c reviewed every 5 yrs.- Low/Simple: given to students, housewives, salaried, people
o a/c reviewed every 3 yrs. -Medium/Standard: Any business
o a/c reviewed every 2 yrs.-High/Enhanced: given to any govt employees, politicians,
NGO/Charities, politically exposed people(PEP) {anyone related to Politicians who can be
used as Smurfing}, any foreign nationals, Non-residents of a country, any foreign
businesses, HNI all would fall under EDD.
o After risk rating the account, the account is monitored for any suspicious activity.

Red Flags
 Change in geographical location - if a transaction party is located in geographic areas that have a
high rate of money laundering activity such as Cayman Islands, or are in sanctioned countries
like Iran.
 Change in volume of transactions - irregular, unusual or uncommon transaction patterns
 Changes in trading volumes – Previously only Equities, now lot of Commodities transactions.
 Change in the name of the board of director.
 If person's name/business pops up on Office of Foreign Asset and Control (OFAC) list or FIU
watch list.
 OFAC part of the US government.
 If person’s name/business pops up on OFAC Specially Designated National (SDN) or Blocked
Person List
https://sanctionssearch.ofac.treas.gov

Trading Permission
Client Database Permission KYC completed
RIL Good to trade Yes
INFY Good to trade Yes
AURUM SHIP MANAGEMENT FZC Do not trade No

Settlement Permission
AML client Payment
Payment (Y/N) Pay (Y/N) AML Ops Review status Match type
Citi paying to Sharp FZC pvt ltd Yes No False Hit Complete Partial match
Citi paying to Keaton
constructions No Yes Not applicable Complete No match
Citi paying to AURUM SHIP
MANAGEMENT FZC Yes No Genuine Hit Cancelled Perfect match
What would you do if you find a customer suspicious of ML/FT?
 Let’s say you are part of client screening team and reviewing an account- you find some
transactions that look suspicious.
 You would highlight these suspicious transactions and create a Suspicious Activity Report (SAR).
This report is submitted to someone called as the Money Laundering Reporting Officer(MLRO)
 MLRO will go through the report and if he agrees the transactions are suspicious, the trading
activity would be immediately banned and he will submit SAR to FIU.
 FIU will investigate the person who you find suspicious of either ML or FT to identify if the
person is involved in any illegal activity.
 After FIU investigate, If this turns out to be false alarm, you won’t be penalised as you have done
your due diligence and you would lift the trading ban on that client.
 You won’t disclose this to client, else the client can get alert and get opportunity to cover up if it
is genuine. If it is false alarm you stand chance to lose the client if you disclose.

Sanctions - are political and economic decision that are part of the diplomatic efforts by countries
international organizations to protect national interests or international law or to defend against threats
to international peace and security.
- If a country, business or person is involved in ML.
- If a country, business or person is involved in Financing terrorist activities.
- To improve the morale of a country.

Sanctioned countries – Any Financial transaction is prohibited.

1. Afghanistan 2.Algeria 3.Angola 4.Bosnia and Herzegovina 5.Democratic People's Republic of Korea
6.Guyana 7.Iran 8.Iraq 9.Lao People's Democratic Republic 10.Myanmar 11.Panama 12.Papua New
Guinea 13.Syria 14.Uganda 15.Yemen 16.Russia

Find any 3 different sanctions imposed on above sanctioned countries?

How do banks ensure adherence to AML procedures and avoidance of fines?

 Annual AML training - Providing relevant training to the employees.

 Risk Control Self Assessment (RCSA) - Assessing companies risks periodically to ensure the
controls put in place to identify AML transactions are working as expected. This is done by
picking up samples and auditing them.
 KYC - Maintaining customer records, Introducing identity verification procedures for clients,
Conducting Customer Due Diligence checks.
 Using transaction monitoring solutions – Banks maintain different databases to track clients
which are suspicious;
o Fircosoft database – List of client which are Sanctioned (trading prohibited) by
regulators in US,UK, etc.
o Fraud transactions monitoring – Systemic monitoring of First time trading with client,
First time payment to a client, Payment to different SSI’s as compared to previous
payment, Payment of higher amount than previous payment amount.
 o 3rd party Payments – Payments to an unknown clients as per request from bank
customer. E.g. payment to clients spare parts vendor.
o Setting up Fraud monitoring teams - These transactions are validated by Fraud teams
and either cleared or rejected based on their investigation.

QUESTIONS

 What is Money Laundering or ML?

 What are the ways through which a person can make illegal or black money?
 What is Financial Action Task Force /FATF?
 What is relevance of Forty recommendations on money laundering?
 What are the 3 Methods/Steps to Launder money?
 What do you understand by Placement in AML?
 Explain 6 most common ways through which Placement is achieved?
 What do you understand by Layering in AML?
 Explain 3 common ways/tactics through which Layering is achieved?
 What do you understand by Integration in AML?
 Explain 2 common ways through which Integration is achieved?
 What is Financial Intelligence Unit (FIU)? What is its functions? Name some FIUs?
 What are Processes put in place in international markets to prevent ML?
 Explain any 3 Global AML fine examples?
 What is KYC? What is importance of KYC?
 What are the 3 Steps in KYC?
 What are Red flags in KYC?
 What would you do if you find a customer suspicious of ML/FT?
 What do you understand by Sanctions? Name any 5 Sanctioned countries along with reason for
Sanction?
 What is the difference between Money Laundering & Terrorist Financing?