AML KYC: PREFACE

AML KYC:

This policy and procedure document is a comprehensive source of reference for all the

concerned and relevant activities of the Bank towards Know Your Customer (KYC), Anti

Money Laundering (AML) and Combating the Financing of Terrorism (CFT) compliance. The

policies and procedures developed are designed to ensure that the Bank is committed to the

prevention of the use of its facilities for laundering the proceeds of crime and financing

terrorist activities. It consists of the following sections:

− Risk based acceptance model to facilitate the classification of current and

existing customers on the basis of money laundering and terrorist financing

risk;

− Account opening procedures including customer classification, verification of

customer information using documentary and non-documentary methods and

escalation processes;

− Policy for customer information updates based on the risk level of the

individual or entity;

− Internal controls to measure the risk levels of products, services and

customers accepted and to measure the effectiveness of current policies and

procedures;

− Policies and procedures for the monitoring and reporting of transactions;

− Policies and procedures for customer record maintenance, retention and their

sharing with government agencies; and

− Recommendation for a training programme for Bank officials geared towards

customer identification and acceptance, customer risk ranking and detection

of money laundering instances.

1.1 Statement of commitment

The goals and objectives of this KYC, AML & CFT programme are to (1) deter

individuals and entities from using the Bank to launder the proceeds of illegal activities;

(2) enable member branches of the Bank to comply with their obligations under the

Prevention of Money Laundering Act, Unlawful Activities Prevention Act (ULPA) and

regulations from Reserve Bank of India (RBI) and National Bank for Agriculture and

Rural Development (NABARD), regulatory bodies for the banks; (3) manage and

mitigate money laundering and terrorist financing related risks; (4) allow banks to cooperate

with regulatory bodies and government agencies in detecting and deterring

money laundering and terrorist financing; and (5) provide employees with guidance for

actions to be taken to comply with the Bank’s obligations under the law and the Bank’s

policies.

2 Definitions

2.1 Customer

RBI defines a customer1 as any one of the following:

− A person or entity that maintains an account and/or has a business

relationship with the Bank.

− One on whose behalf the account is maintained (i.e., the beneficial owner) or

beneficiary of transactions conducted by professional intermediaries, such as

stock brokers, chartered accountants, solicitors, etc. as permitted under the

law.

− Any person or entity connected with a financial transaction or any other

product offered by the Bank including walk-in customers.

2.2 High Net-Worth Individual

An individual is designated as a High Net-Worth Individual (HNI) for the purposes of

the Bank if the sum of all the credits for the individual at the Bank across all products

exceeds Rupees 15 lakhs (Rs. 15,00,000)

2.3 Beneficial Owners

The Beneficial Owner for an entity constitution type is any individual or entity that owns

or controls over 20% of the entity. For an individual constitution type the beneficial

owner refers to the individual itself or all the operators of the account.

2.4 Controlling Parties

Controlling parties are individuals or entities with direct or indirect control over the

account created. For KYC purposes, the controlling parties are defined as authorized

signatories, power of attorney holders, executive management (e.g. CEO, CFO,

Directors) and Board of Directors. Different account types and transactions could

involve different controlling parties.

2.5 Money Laundering

Money Laundering is a process by which illegal sources of money are disguised to

make it appear as if they were the proceeds of legal activities. It usually occurs in three

steps:

1. The placement step involving the introduction of the money into the financial

system;

2. The second step known as layering involves performing complex financial

transactions to hide the illegal source; and

3. Finally, the integration step, during which the previously illegal proceeds enter

the economy and are converted into apparently legitimate earnings.

2.6 Terrorist Financing

Terrorist Financing relates to the use of financial institutions to launder money or

misdirect clean money for illegal and illegitimate terrorist activities. Terrorist financing,

unlike money laundering, cares little about the source of the funds and its purpose is

what defines the scope.

2.7 Small Account

A small account refers to a savings bank account where:

1. The aggregate of all credits in a financial year does not exceed Rupees one

lakh (Rs. 1,00,000);

2. The aggregate of all withdrawals and transfers in a month does not exceed

Rupees ten thousand (Rs. 10,000); and

3. The balance at any point of time does not exceed Rupees fifty thousand (Rs.

50,000)

2.8 Financial Intermediary

For the purposes of this document, a financial intermediary is a person or institution

that acts on behalf of its customers to conduct a transaction or open an account with

the Bank.

As per the RBI, the term Financial Intermediary includes following persons or entities

registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act,

1992:

1. Stock brokers

2. Sub-brokers

3. Share transfer agents

4. Bankers to an issue

5. Trustees to trust deed

6. Registrars to issue

7. Merchant bankers

8. Underwriters

9. Portfolio Managers

10. Depositories and Participants

11. Custodian of securities

12. Credit rating agencies

13. Venture capital funds

14. Collective investment schemes including mutual funds

2.9 Ordering Bank

In relation with wire transfers, an Ordering Bank is a Bank that originates a wire

transfer as per the order placed by its customers

2.10 Intermediary Bank

In relation with wire transfers, an Intermediary Bank provides business services on

behalf of another financial institution (ordering and beneficiary bank). Intermediary

Banks are also known as Correspondent Banks and are used by domestic banks in

order to service transactions originating in different cities, states or foreign countries,

and act as a domestic bank's agent. This is done because the domestic bank may

have limited access to markets outside of its geography, and cannot service its client

accounts without opening up a branch in that particular city, state or country.

2.11 Beneficiary Bank

In relation with wire transfers, a Beneficiary Bank refers to the bank identified in a

payment order in which an account of the beneficiary is to be credited pursuant to the

order or which otherwise is to make payment to the beneficiary if the order does not

provide for payment to an account.

3 Legislative and Regulatory Framework

3.1 Defined legal frameworks

3.1.1 Prevention of Money Laundering Act 2002

The Prevention of Money Laundering Act (PMLA) of 20022 is the legislation that forms

the core of the legal framework put in to place to combat money laundering. The PMLA

came into effect from 1st July 2005 with two amendments passed in May 2005 and

March 2009. The act criminalises money laundering and also provides for freezing and

confiscation of assets associated in money laundering. It requires financial institutions

and intermediaries to verify the identity of clients, maintain records and furnish

prescribed transactional information to the FIU-IND.

3.1.2 Rules under PMLA

In addition, the Government of India has strengthened the PMLA through the

notification of various rules, known as Prevention of Money Laundering Rules (PMLR),

to enforce the PMLA which includes defining an adjudicating authority and appellate

tribunal, conferring exclusive and concurrent powers, specifying rules for receipt and

management of confiscated properties, etc. A complete listing of the rules and their

purpose is available on the FIU-IND website3

3.1.3 Unlawful Activities (Prevention) Act, 1967

The Unlawful Activities Prevention Act of 1967, amended in 2008, relates to the

purposes of prevention, and for coping with terrorist activities. The Government of

India has issued an order dated August 27 2009 detailing the procedure for

implementing of section 51A of the Act and it empowers the Central Government to

freeze, seize or attach funds and other financial assets or economic resources held by:

− On behalf of or at the direction of the individuals or entities listed in the

Schedule to the Order, or

− Any other person engaged in or suspected to be in engaged in terrorism ,or

− Prohibit any individual or entity from making any funds ,financial assets or

economic resources or related services available for the benefit of the

individuals or entities listed in the Schedule or Order.

3.2 Applicable Regulatory Authorities

3.2.1 Reserve Bank of India

The RBI is the central banking institution in India and controls the monetary policy of

the rupee and the currency reserves. Through its Master Circular on Know Your

Customer (KYC) norms/Anti Money Laundering (AML) Standards/Combating of

Financing of Terrorism/Obligations of Banks under PMLA, 2002 the RBI introduced KYC

guidelines for all banks which it has since updated yearly. The RBI also has the

authority to penalize banking institutions for violations in KYC, AML and CFT norms.

3.2.2 National Bank for Agriculture and Rural Development

NABARD is the apex development bank in India and is accredited with matters

regarding policy, planning and operations in the field of credit for agriculture and

other economic activities in rural regions in India. In discharging its role as a

facilitator for rural prosperity, NABARD is also entrusted with acting as a regulator for

Cooperative Banks and Regional Rural Banks (RRBs). NABARD created a model

KYC policy for its member banks with a stipulation that it be tailored to the individual

needs of the bank.

3.2.3 Financial Intelligence Unit – India

FIU-IND is the central national agency responsible for receiving, processing,

analysing and disseminating information relating to suspicious financial transactions

and is responsible for domestic and global efforts against money laundering and

related crimes. Any reports regarding financial transactions such as Suspicious

Transaction Reports (STRs) and Cash Transaction Reports (CTRs) must be filed

with the agency. FIU-IND also has the authority to request additional information on

individuals or entities from banks and other financial institutions.

3.3 Consequences of Non-Compliance

3.3.1 Penalties for Non-Compliance

Any contravention or non-compliance with RBI’s instructions relating to KYC, AML

and CFT guidelines shall attract penalties under the provisions of Section 47(A) (1)

(b) read with Section 46(4) of the Banking Regulation Act, 1949. The RBI has

imposed fines on various public and private sector banks for non-compliance with

KYC norms. In the first six months of 2011, over 48 cooperative banks had been

fined between Rupees one lakh (Rs. 1, 00,000) and Rupees five lakh (Rs. 5,

00,000) for various KYC, AML and CFT related offences.

Additionally, the PMLA specifies punishments of up to ten years of rigorous

imprisonment on whosoever willingly commits the offence of money laundering.

3.3.2 Reputational Risk

If the Bank is penalised for non-compliance, it can create a negative perception of the

institution on customers, investors and regulators and can adversely affect the

Bank’s ability to raise capital and to maintain and create business relationships.

RBI has stepped up its actions against non-compliant banks and in addition to fiscal

penalties, also issues notifications and press releases5 on the banks that have been

fined for violation of KYC, AML and CFT guidelines. These press releases are picked

up by national and international news media which can result in a severe reputational

damage to the banks.