KYC short
Notes:
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.
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
meansExplanation- 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.
(v) (iv)
Thereafter, banks/FIs may impose ‘partial freezing’ by allowing all credits and
disallowing all debits with the freedom to close the accounts 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
31. Walk-in
Customer : In case of transactions carried out by a non-account based customer,
that is a walk in customer, where the amount of transaction is equal to or
exceeds Rs. 50,000/-, whether conducted as a single transaction or several transactions
that appear to be connected, the customer's identity and address should be
verified. If 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/- the bank should verify the identity and address of the customer and
also consider filing a Suspicious Transactions Report (STR) to Financial
Intelligence Unit – India (FIU-IND). In terms of Clause (b) (ii) of sub-Rule
(1) of Rule
9 of the PML Rules, 2005 banks
and financial institutions are required to verify the identity of the customers
for all international money transfer operations.
32. Issue
of Demand Drafts, etc, for more than Rs.50,000/- : Banks should ensure that any
remittance of funds by way of demand draft, mail/telegraphic transfer or any
other mode and issue of travellers’ cheques for value of Rs.50,000/- and above
is effected by debit to the customer’s account or against cheques and not
against cash payment. Banks should not make payment of cheques/drafts/pay
orders/banker’s cheques if they are presented beyond the period of three months
from the date of such instrument.
33. Unique
Customer Identification Code : A Unique Customer Identification Code (UCIC)
will help banks to identify the customers, avoid multiple identities, track the
facilities availed, monitor financial transactions in a holistic manner and
enable banks to have a better approach to risk profiling of customers. Banks
have been advised to allot UCIC while entering into new relationships with
individual customers as also the existing customers.
34. Banks/FIs
should put in place a system of periodical review of risk categorization of
accounts and the need for applying enhanced due diligence measures. Such review
of risk categorisation of customers should be carried out at a periodicity of
not less than once in six months.
35. Banks
should closely monitor the transactions in accounts of marketing firms,
especially accounts of Multi-level Marketing (MLM) Companies. Banks should
analyse data in cases where a large number of cheque books are sought by the
company, there are multiple small deposits (generally in cash) across the
country in one bank account and where a large number of cheques are issued
bearing similar amounts/dates. Where such features are noticed by the bank and
in case they find such unusual operations in their accounts, the matter should
be immediately reported to Reserve Bank and other appropriate authorities such
as FIU-IND.
36. Banks/FIs
should exercise ongoing due diligence with respect to the business relationship
with every client and closely examine the transactions in order to ensure that
they are consistent with their knowledge about the clients, their business and
risk profile and where necessary, the source of funds.
37. The
Board of Directors should ensure that an effective AML/CFT programme is in
place by establishing appropriate procedures and ensuring their effective
implementation. It should cover proper management oversight, systems and
controls, segregation of duties, training of staff and other related matters.
38. Customers
who are likely to pose a higher than average risk should be categorised as
medium or high risk depending on the background, nature and location of
activity, country of origin, sources of funds, customer profile, etc. Customers
requiring very high level of monitoring, e.g., those involved in cash intensive
business, Politically Exposed Persons (PEPs) of foreign origin, may, if
considered necessary, be categorised as high risk.
39. Correspondent
banking is the provision of banking services by one bank (the “correspondent
bank”) to another bank (the “respondent bank”). These services may include
cash/funds management, international wire transfers, drawing arrangements for
demand drafts and mail transfers, payable-through-accounts, cheques clearing
etc.
40. In
case of payable-through-accounts, the correspondent bank should be satisfied
that the respondent bank has verified the identity of the customers having
direct access to the accounts and is undertaking ongoing 'due diligence' on
them. The correspondent bank
should ensure that the
respondent bank is able to provide the relevant customer identification data
immediately on request.
41. Banks
should ensure that their respondent banks have KYC/AML policies and procedures
in place and apply enhanced 'due diligence' procedures for transactions carried
out through the correspondent accounts. Banks should not enter into a
correspondent relationship with a “shell bank” (i.e., a bank which is
incorporated in a country where it has no physical presence and is not
affiliated to any regulated financial group). The correspondent bank should not
permit its accounts to be used by shell banks.
42. Wire
Transfer : Banks/FIs use wire transfers as an expeditious method for
transferring funds between bank accounts. Wire transfers include transactions
occurring within the national boundaries of a country or from one country to
another. As wire transfers do not involve actual movement of currency, they are
considered as rapid and secure method for transferring value from one location
to another.
43. (a)
The salient features of a wire transfer transaction are as under: (i) Wire
transfer is a transaction carried out on behalf of an originator person (both
natural and legal) through a bank by electronic means with a view to making an
amount of money available to a beneficiary person at a bank. The originator and
the beneficiary could be the same person. (ii) Domestic wire transfer means any
wire transfer where the originator and receiver are located in the same
country. It may also include a chain of wire transfers that takes place
entirely within the borders of a single country even though the system used to
effect the wire transfer may be located in another country. (iii) Cross-border
transfer means any wire transfer where the originator and the beneficiary bank
or financial institutions are located in different countries. It may include
any chain of wire transfers that has at least one cross-border element. (iv)
The originator is the account holder, or where there is no account, the person
(natural or legal) that places the order with the bank to perform the wire
transfer.
44. Accordingly,
banks/FIs must ensure that all wire transfers are accompanied by the following
information: 1. Cross-border wire transfers 2. Domestic wire transfers
45. Cross-border
wire transfers (i) All cross-border wire transfers must be accompanied by
accurate and meaningful originator information. (ii) Information accompanying
cross-border wire transfers must contain the name and address of the originator
and where an account exists, the number of that account. In the absence of an
account, a unique reference number, as prevalent in the country concerned, must
be included. (iii) Where several individual transfers from a single originator
are bundled in a batch file for transmission to beneficiaries in another
country, they may be exempted from including full originator information,
provided they include the originator’s account number or unique reference
number as at (ii) above.
46. Domestic
wire transfers (i) Information accompanying all domestic wire transfers of
Rs.50000/- (Rupees Fifty Thousand) and above must include complete originator
information i.e. name, address and account number etc., unless full originator
information can be made available to the beneficiary bank by other means. (ii)
If a bank has reason to believe that a customer is intentionally structuring
wire transfer to below Rs.50,000/- (Rupees Fifty Thousand) to several
beneficiaries in order to avoid reporting or monitoring, the bank must insist
on complete customer identification before effecting the transfer. In case of
non-cooperation from the customer, efforts should be made to establish his
identity and Suspicious Transaction Report (STR) should be made to FIU-IND. (iii)
When a credit or debit
card is used to effect money
transfer, necessary information as at (i) above should be included in the
message.
47.
)
Role of Ordering, Intermediary and Beneficiary banks
(i) Ordering
Bank : An ordering bank is the one that originates a wire transfer as per the
order placed by its customer. The ordering bank must ensure that qualifying
wire transfers contain complete originator information. The bank must also
verify and preserve the information at least for a period of five years.
(ii) Intermediary
bank : For both cross-border and domestic wire transfers, a bank processing an
intermediary element of a chain of wire transfers must ensure that all
originator information accompanying a wire transfer is retained with the
transfer. Where technical limitations prevent full originator information
accompanying a cross-border wire transfer from remaining with a related
domestic wire transfer, a record must be kept at least for five years (as
required under Prevention of Money Laundering Act, 2002) by the receiving
intermediary bank of all the information received from the ordering bank.
(iii) Beneficiary
bank :A beneficiary bank should have effective risk-based procedures in place
to identify wire transfers lacking complete originator information. The lack of
complete originator information may be considered as a factor in assessing
whether a wire transfer or related transactions are suspicious and whether they
should be reported to the Financial Intelligence Unit-India. The beneficiary
bank should also take up the matter with the ordering bank if a transaction is
not accompanied by detailed information of the fund remitter. If the ordering
bank fails to furnish information on the remitter, the beneficiary bank should
consider restricting or even terminating its business relationship with the
ordering bank.
48. Maintenance
of records of transactions : Banks/FIs should introduce a system of maintaining
proper record of transactions prescribed under Rule 3 of Prevention of Money
Laundering (Maintenance of Records) Rules, 2005 (PML Rules, 2005), as mentioned
below:
(i) All
cash transactions of the value of more than Rupees Ten Lakh or its equivalent
in foreign currency.
(ii)Series of all cash
transactions individually valued below Rupees Ten Lakh, or its equivalent in
foreign currency which are that have taken place within a month and the monthly
aggregate which exceeds rupees ten lakhs or its equivalent in foreign currency.
It is clarified that for determining ‘integrally connected transactions’ ‘all
accounts of the same customer’ should be taken into account.
(iii) All
transactions involving receipts by non-profit organisations of value more than
rupees ten lakh or its equivalent in foreign currency [Ref: Government of India
Notification dated November 12, 2009- Rule 3,subrule (1) clause (BA) of PML
Rules]
(iv) All
cash transactions ; where forged or counterfeit currency notes or bank notes
have been used as genuine and where any forgery of a valuable security or a
document has taken place facilitating the transaction and
(v)
All
suspicious transactions, whether or not in cash, made as mentioned in the Rules
49. Banks/FIs
are required to maintain all necessary information in respect of transactions
prescribed under PML Rule 3 so as to permit reconstruction of individual
transaction, including the following information: (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.
50. In
terms of PML Amendment Act 2012, banks/FIs should maintain for at least five
years from the date of transaction between the bank/FI and the client, all
necessary records of transactions, both domestic or international, which will
permit reconstruction of individual transactions (including the amounts and
types of currency involved, if any) so as to provide, if necessary, evidence
for prosecution of persons involved in criminal activity.
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