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.

Know? What you should know?

True identity and beneficial ownership of the accounts
permanent address, registered & administrative address,
sources of funds, nature of customers business etc.

Your? Who should know?

Branch manager, audit officer, monitoring officials, PO.

Customer?
One who maintains an account, establishes business
relationship, on whos behalf account is maintained,
beneficiary of accounts maintained by intermediaries, and
one who carries potential risk through one off transaction

Opening a new account.

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

To prevent banks from being used, intentionally or

unintentionally, by criminal elements for money
laundering 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.

4 key elements of KYC policies

1) Customer Acceptance Policy;
2) Customer Identification Procedures;
3) Monitoring of Transactions; and
4) Risk management

The Customer Acceptance Policy must ensure that explicit

guidelines are in place on the following aspects of customer
relationship in the bank.
No

account is opened in anonymous

Parameters of risk perception are clearly defined.
Documentation requirements and other information to be
collected.
Circumstances, in which a customer is permitted to act on behalf
of another person/entity, should be clearly spelt out
Necessary checks before opening a new account .
Not to open an account or close an existing account where the
bank is unable to apply appropriate customer due diligence

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. while establishing a
banking relationship. i.e. while establishing a banking
relationship; 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, data or
information.

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.
However, 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.

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 banks policies and procedures are
implemented effectively.

Apart from the key elements the other things that a bank
should look into customer education, introduction of new
technologies, applicability to branches outside India and
appointment of principal officer.

Sound KYC procedures have particular relevance to the

safety and soundness of banks, in that:

1.

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.

They provide an essential part of sound risk

management system (basis for identifying, limiting and
controlling risk exposures in assets & liabilities

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.
As per Sub - 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.

Money Laundering generally refers to washing of

the proceeds or profits generated from:
Kidnapping
Extortion

Black marketing

Drug
Trafficking

Criminal
Activities

Bribery
& Corruption

Gambling,
Robbery,
Cheating

Smuggling
(arms, people,
goods)
Terrorist Act

Counterfeiting
& Forgery

Money Laundering Risks:

What are the risks to banks?
(i) Reputational risk
(ii) Legal risk
(iii) Operational risk (failed internal processes,
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

Reputational Risk:
The

potential that adverse publicity regarding a banks

business practices, whether accurate or not, will cause a

loss of confidence in the integrity of the institution.
Reputational

Risk : a major threat to banks as

confidence of depositors, creditors and general market

place to be maintained.
Banks

vulnerable to Reputational Risk as they can easily

become a vehicle for or a victim of customers illegal

activities.

Operational Risk:
The

risk of direct or indirect loss resulting from

inadequate or failed internal processes, people

and systems or from external events.
Weaknesses

in

implementation

of

banks

programs, ineffective control procedures and

failure to practice due diligence.

Legal Risk:
The

possibility that lawsuits, adverse judgments or

contracts that turn out to be unenforceable can disrupt
or adversely affect the operations or condition of a
bank.

Banks

may become subject to lawsuits resulting from

the failure to observe mandatory KYC standards or from
the failure to practice due diligence.

Banks

can suffer fines, criminal liabilities and special

penalties imposed by supervisors.

Concentration Risk:
Mostly

applies on the
assets side of the
balance sheet: Information systems to identify
credit concentrations; setting prudential limits
to restrict banks exposures to single borrowers
or groups of related borrowers.

On

liabilities side: Risk of early and sudden

withdrawal of funds by large depositorsdamages to liquidity.

At this stage, illegal funds or assets are first

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

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

To conceal the illegal origin of the placed funds and

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

Laundered funds are made available for activities

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

Integration is the third stage of the money laundering process,

in which the illegal funds or assets are successfully cleansed
and appear legitimate in the financial system, making them
available for investment, saving or expenditure.
Integration techniques include:
credit

and debit cards

consultants
corporate financing
asset sales and purchases
business recycling
import/export transactions.

Money Laundering Cycle:

1.
Predicate Crimes
Corruption and Bribery
Fraud
Organized crime
Drug and human trafficking
Environmental crime
Terrorism
Other serious crimes

4.
INTEGRATION
The last stage in the
laundering process.
Occurs when the laundered
proceeds are distributed
back to the criminal.
Creates appearance of
legitimate wealth.

2.
PLACEMENT

Initial introduction of
criminal proceeds into
the stream of
commerce
Most vulnerable stage
of money laundering
process

3.
LAYERING
Involves distancing the money
from its criminal source:
movements of $ into
different accounts
movements of money to
different countries
Increasingly difficult to detect.

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

Measures to deter money laundering:

Board

and management oversight of AML risks.

Appointment

a senior executive as principal officer with

adequate authority and resources at his command.

Systems

and controls to identify, assess & manage the money

laundering risks.

Make

a report to the Board on the operation and effectiveness

of systems and control.

Appropriate

documentation of risk management policies,

their application and risk profiles.

Measures to deter money laundering:

Appropriate

measures to ensure that ML risks are taken

into account in daily operations, development of new
financial
products,
establishing
new
business
relationships and changes in the customer profile.

Screening

of employees before hiring and of those who

have access to sensitive information.

Appropriate
Quick

quality training to staff.

and timely reporting of suspicious transactions.

SUSPICIOUS TRANACTION:
Suspicious

transaction means a transaction whether or

not made in cash which, to a person acting in good
faith
gives rise to a reasonable ground of suspicion that it
may involve the proceeds of crime; or
appears to be made in circumstances of unusual or
unjustified complexity; or
appears to have no economic rationale or bonafide
purpose;

SUSPICIOUS TRANACTION:
Providing

misleading information / information not

easily verifiable while opening an Account.

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.

Employees

leading lavish lifestyles that do not match

their known income sources.

Measures to deter money laundering:

Board

and management oversight of AML risks.

Appointment

a senior executive as principal officer with

adequate authority and resources at his command.

Systems

and controls to identify, assess & manage the money

laundering risks.

Make

a report to the Board on the operation and effectiveness

of systems and control.

Appropriate

documentation of risk management policies,

their application and risk profiles.

Measures to deter money laundering:

Appropriate

measures to ensure that ML risks are taken

into account in daily operations, development of new
financial
products,
establishing
new
business
relationships and changes in the customer profile.

Screening

of employees before hiring and of those who

have access to sensitive information.

Appropriate
Quick

quality training to staff.

and timely reporting of suspicious transactions.

SUSPICIOUS TRANACTION:
Suspicious

transaction means a transaction whether or

not made in cash which, to a person acting in good
faith
gives rise to a reasonable ground of suspicion that it
may involve the proceeds of crime; or
appears to be made in circumstances of unusual or
unjustified complexity; or
appears to have no economic rationale or bonafide
purpose;

THANK YOU