KYC AML SHORT NOTES

KYC AML :: (Short notes 1)

1. The objective of KYC/AML/CFT guidelines is to prevent banks/FIs from being used,

intentionally or unintentionally, by criminal elements for money laundering or terrorist

financing activities.

2. The PMLA came into effect from 1st July 2005. Necessary Notifications / Rules under the

said Act were published in the Gazette of India on 1st July, 2005 by the Department of

Revenue, Ministry of Finance, Government of India. The PMLA has been further amended

vide notification dated March 6, 2009 and inter alia provides that violating the prohibitions

on manipulative and deceptive devices, insider trading and substantial acquisition of

securities or control as prescribed in Section 12 A read with Section 24 of the Securities and

Exchange Board of India Act, 1992 (SEBI Act) will now be treated as a scheduled offence

under schedule B of the PMLA.

3. KYC procedures also enable banks/FIs to know/understand their customers and their

financial dealings better and manage their risks prudently.


4. For the purpose of KYC Norms, a ‘Customer’ is defined as a person who is engaged in a

financial transaction or activity with a reporting entity and includes a person on whose

behalf the person who is engaged in the transaction or activity, is acting.

5. “Designated Director" means a person designated by the reporting entity (bank, financial

institution, etc.) to ensure overall compliance with the obligations imposed under chapter IV

of the PML Act.

6. In terms of PML Act a ‘person’ includes: (i) an individual, (ii) a Hindu undivided family, (iii) a

company, (iv) a firm, (v) an association of persons or a body of individuals, whether

incorporated or not, (vi) every artificial juridical person, not falling within any one of the

above persons (i to v), and (vii) any agency, office or branch owned or controlled by any of

the above persons (i to vi).

7. “Transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the

arrangement thereof and includes- (i) opening of an account; (ii) deposits, withdrawal,

exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment

order or other instruments or by electronic or other non-physical means; (iii) the use of a

safety deposit box or any other form of safe deposit; (iv) entering into any fiduciary

relationship; (v) any payment made or received in whole or in part of any contractual or

other legal obligation; or (vi) establishing or creating a legal person or legal arrangement.

8. Banks/FIs should frame their KYC policies incorporating the following four key elements: (i)

Customer Acceptance Policy (CAP); (ii) Customer Identification Procedures (CIP); (iii)

Monitoring of Transactions; and (iv) Risk Management.

9. Documents and other information to be collected from different categories of customers

depending on perceived risk and the requirements of PML Act, 2002 and

instructions/guidelines issued by Reserve Bank from time to time.

10. Customer Identification Procedure (CIP) : Customer identification means undertaking client

due diligence measures while commencing an account-based relationship including

identifying and verifying the customer and the beneficial owner on the basis of one of the

OVDs

11. Customer Due Diligence requirements (CDD) while opening accounts

12. introduction is not necessary for opening of accounts under PML Act and Rules or the

Reserve Bank’s extant instructions, banks/FIs should not insist on introduction for opening of

bank accounts.

13. Small Accounts If an individual customer does not possess either any of the OVDs or the

documents applicable in respect of simplified procedure (as detailed at paragraph 2.3

above), then ‘Small Accounts’ may be opened for such an individual. A ‘Small Account'

means a savings account in which the aggregate of all credits in a financial year does not

exceed rupees one lakh; the aggregate of all withdrawals and transfers in a month does

not exceed rupees ten thousand and the balance at any point of time does not exceed

rupees fifty thousand. A ‘small account’ maybe opened on the basis of a self-attested

photograph and affixation of signature or thumb print.

14. a small account shall be opened only at Core Banking Solution (CBS) linked branches or in a

branch where it is possible to manually monitor and ensure that foreign remittances are not

credited to the account and that the stipulated monthly and annual limits on aggregate of

transactions and balance requirements in such accounts are not breached, before a

transaction is allowed to take place;

15. a small account shall remain operational initially for a period of twelve months, and

thereafter for a further period of twelve months if the holder of such an account provides

evidence before the banking company of having applied for any of the officially valid

documents within twelve months of the opening of the said account, with the entire

relaxation provisions to be reviewed in respect of the said account after twenty four

months.

16. Where a customer categorised as low risk expresses inability to complete the

documentation requirements on account of any reason that the bank considers to be

genuine, and where it is essential not to interrupt the normal conduct of business, the bank

may complete the verification of identity within a period of six months from the date of

establishment of the relationship.

17. Procedure to be followed in respect of foreign students : Banks should follow the following

procedure for foreign students studying in India: 1) Banks may open a Non Resident

Ordinary (NRO) bank account of a foreign student on the basis of his/her passport (with visa

& immigration endorsement) bearing the proof of identity and address in the home country

together with a photograph and a letter offering admission from the educational institution

in India. 2) Banks should obtain a declaration about the local address within a period of 30

days of opening the account and verify the said local address. 3) During the 30 days period,

the account should be operated with a condition of allowing foreign remittances not

exceeding USD 1,000 or equivalent into the account and a cap of monthly withdrawal to Rs.

50,000/-, pending verification of address. 4) The account would be treated as a normal NRO

account, and will be operated in terms of instructions contained in the Reserve Bank of

India’s instructions on Non-Resident Ordinary Rupee (NRO) Account. Students with Pakistani

and Bangladesh nationality will need prior approval of the Reserve Bank for opening the

account.

18. Where the customer is a company, one certified copy each of the following documents are

required for customer identification: (a) Certificate of incorporation; (b) Memorandum and

Articles of Association; (c) A resolution from the Board of Directors and power of attorney

granted to its managers, officers or employees to transact on its behalf and (d) An officially

valid document in respect of managers, officers or employees holding an attorney to

transact on its behalf.

19. Where the customer is a partnership firm, one certified copy of the following documents is

required for customer identification: (a) registration certificate; (b) partnership deed and (c)

an officially valid document in respect of the person holding an attorney to transact on its

behalf.

20. Where the customer is a trust, one certified copy of the following documents is required for

customer identification: (a) registration certificate; (b) trust deed and (c) an officially valid

document in respect of the person holding a power of attorney to transact on its behalf.

21. Where the customer is an unincorporated association or a body of individuals, one certified

copy of the following documents is required for customer identification: (a) resolution of the

managing body of such association or body of individuals; (b) power of attorney granted to

transact on its behalf; (c) an officially valid document in respect of the person holding an

attorney to transact on its behalf and (d) such information as may be required by the

bank/FI to collectively establish the legal existence of such an association or body of

individuals.

22. Proprietary concerns: (1) For proprietary concerns, in addition to the OVD applicable to the

individual (proprietor), any two of the following documents in the name of the proprietary

concern are required to be submitted: (a) Registration certificate (b) Certificate/licence

issued by the municipal authorities under Shop and Establishment Act. (c) Sales and income

tax returns. (d) CST/VAT certificate. (e) Certificate/registration document issued by Sales

Tax/Service Tax/Professional Tax authorities. (f) Licence/certificate of practice issued in the

name of the proprietary concern by any professional body incorporated under a statute. (g)

Complete Income Tax Return (not just the acknowledgement) in the name of the sole

proprietor where the firm's income is reflected, duly authenticated/acknowledged by the

Income Tax authorities. (h) Utility bills such as electricity, water, and landline telephone bills.

23. When the client accounts are 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, however, should not open accounts of

such professional intermediaries who are bound by any client confidentiality that prohibits

disclosure of the client details to the banks.

24. Where funds held by the intermediaries are not co-mingled at the bank and there are 'sub-

accounts', each of them attributable to a beneficial owner, all the beneficial owners must be

identified. Where such funds are co-mingled at the bank, the bank should still look into the

beneficial owners. Where the banks rely on the 'customer due diligence' (CDD) done by an

intermediary, they should satisfy themselves that the intermediary is a regulated and

supervised entity and has adequate systems in place to comply with the KYC requirements of

the customers. It should be understood that the ultimate responsibility for knowing the

customer lies with the bank.

25. Beneficial ownership :When a bank/FI identifies a customer for opening an account, it

should identify the beneficial owner(s) and take all reasonable steps in terms of Rule 9(3) of

the PML Rules to verify his identity, as per guidelines provided below:

(a) Where the client is a company, the beneficial owner is the natural person(s), who,

whether acting alone or together, or through one or more juridical person, has/have a

controlling ownership interest or who exercises control through other means.

Explanation- For the purpose of this sub-clause- 1. “Controlling ownership interest” means

ownership of/entitlement to more than 25 per cent of the shares or capital or profits of the

company. 2. “Control” shall include the right to appoint majority of the directors or to

control the management or policy decisions including by virtue of their shareholding or

management rights or shareholders agreements or voting agreements.

(b) Where the client is a partnership firm, the beneficial owner is the natural person(s),

who, whether acting alone or together, or through one or more juridical person, has/have

ownership of/entitlement to more than 15 per cent of capital or profits of the partnership.

(c) Where the client is an unincorporated association or body of individuals, the beneficial

owner is the natural person(s), who, whether acting alone or together, or through one or

more juridical person, has/have ownership of/entitlement to more than 15 per cent of the

property or capital or profits of the unincorporated association or body of individuals.

(d) Where no natural person is identified under (a), (b) or (c) above, the beneficial owner is

the relevant natural person who holds the position of senior managing official.

(e) Where the client is a trust, the identification of beneficial owner(s) shall include

identification of the author of the trust, the trustee, the beneficiaries with 15% or more

interest in the trust and any other natural person. exercising ultimate effective control over

the trust through a chain of control or ownership.

(f) Where the client or the owner of the controlling interest is a company listed on a stock

exchange, or is a subsidiary of such a company, it is not necessary to identify and verify the

identity of any shareholder or beneficial owner of such companies.

26. KYC exercise should be done at least every two years for high risk customers, every eight

years for medium risk customers and every ten years for low risk customers. Such KYC

exercise may include all measures for confirming the identity and address and other

particulars of the customer that the bank/FI may consider reasonable and necessary based

on the risk profile of the customer, taking into account whether and when client due

diligence measures were last undertaken and the adequacy of data obtained.

27. Freezing and closure of accounts :

(i) In case of non-compliance of KYC requirements by the customers despite repeated

reminders by banks/FIs, banks/FIs may impose ‘partial freezing’ on such KYC non-compliant

accounts in a phased manner.

(ii) During the course of such partial freezing, the account holders can revive their accounts

by submitting the KYC documents as per instructions in force.

(iii) While imposing ‘partial freezing’, banks/FIs have to ensure that the option of ‘partial

freezing’ is exercised after giving due notice of three months initially to the customers to

comply with KYC requirements to be followed by a reminder giving a further period of three

months.

(iv) Thereafter, banks/FIs may impose ‘partial freezing’ by allowing all credits and

disallowing all debits with the freedom to close the accounts.

(v) If the accounts are still KYC non-compliant after six months of imposing initial ‘partial

freezing’ banks/FIs should disallow all debits and credits from/to the accounts thereby,

rendering them inoperative.

(vi) Further, it would always be open to the bank/FI to close the account of such customers

after issuing due notice to the customer explaining the reasons for taking such a decision.

Such decisions, however, need to be taken at a reasonably senior level. In the circumstances

when a bank/FI believes that it would no longer be satisfied about the true identity of the

account holder, the bank/FI should file a Suspicious Transaction Report (STR) with Financial

Intelligence Unit – India (FIU-IND) under Department of Revenue, Ministry of Finance,

Government of India.

28. At-par cheque facility availed by co-operative banks : Some commercial banks have

arrangements with co-operative banks under which the latter open current accounts with

the commercial banks and use the cheque book facility to issue ‘at par’ cheques to their

constituents and walk-in- customers for effecting their remittances and payments. Since the

‘at par’ cheque facility offered by commercial banks to co-operative banks is in the nature of

correspondent banking arrangement, banks should monitor and review such arrangements

to assess the risks including credit risk and reputational risk arising there from. For this

purpose, banks should retain the right to verify the records maintained by the client

cooperative banks/ societies for compliance with the extant instructions on KYC and AML

under such arrangements.

29. In this regard, Urban Cooperative Banks (UCBs) are advised to utilize the ‘at par’ cheque

facility only for the following purposes:

(i) For their own use.

(ii) For their account holders who are KYC complaint provided that all transactions of

Rs.50,000/- or more should be strictly by debit to the customer’s account.

(iii) For walk-in customers against cash for less than Rs.50,000/- per individual. In order to

utilise the ‘at par’ cheque facility in the above manner, UCBs should maintain the following:

(i) Records pertaining to issuance of ‘at par’ cheques covering inter alia applicant’s name and

account number, beneficiary’s details and date of issuance of the ‘at par’ cheque. (ii)

Sufficient balances/drawing arrangements with the commercial bank extending such facility

for purpose of honouring such instruments. UCBs should also ensure that all ‘at par’ cheques

issued by them are crossed ‘account payee’ irrespective of the amount involved.

30. Simplified norms for Self Help Groups (SHGs) : KYC verification of all the members of SHG

need not be done while opening the savings bank account of the SHG and KYC verification of

all the office bearers would suffice. As regards KYC verification at the time of credit linking of

SHGs, no separate KYC verification of the members or office bearers is necessary