KYC 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
1.
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.
2.
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;
3.
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.
4.
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.
5.
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
13. 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.
14.
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.
15.
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.
16.
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.
17.
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.
18.
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.
19.
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.
20. 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.
21.
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.
22.
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 theb‘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.
23. 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.
