KYC

-DHRUVA SAREEN
-955

What is KYC?
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

Contd.

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.

What KYC means?

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
Your? Who should know?
Branch manager, audit officer, monitoring officials, PO.
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.

When does KYC apply?

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, mandate holders,
beneficial owners etc.
For non-account holders approaching the Bank for high
value one-off transactions like Drafts, Remittances etc.

KYC
KYC/Customer due diligence is an on-going process for prudent banking
practices, therefore the banks are encouraged to: Set up a compliance unit with a full time Head.
Put in place a system to monitor the accounts and transactions on a regular
basis.
Update customer information and records at reasonable intervals.
Chalk out plan of imparting suitable training to the staff of bank periodically.
Maintain proper records of customer identifications and clearly indicate, in writing.
Monitor and check unusually large cash transactions, especially those which are
out of character/ inconsistent with the history.

Why KYC?

To establish the identity of the client. This means

identifying the customer and verifying his/her identity
by using reliable, independent source documents, data
or information.

To ensure that sufficient information is obtained on the

nature of employment/business that the customer
does/expects to undertake and the purpose of the
account.

To prevent banks from being used, intentionally or

unintentionally, by criminal elements for money
laundering activities.

When does KYC apply?

KYC will be carried out at the following stages:

o

Opening a new account.

Opening a subsequent account 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
the account.

When there are changes to signatories, mandate holders,

beneficial owners etc.

Are KYC requirements

new?

No ! KYC requirements have always been in place

and Banks have been taking KYC documents in
accordance with the guidelines issued by SBP from time
to time. SBP has revisited the KYC guidelines in the
context of the recommendations made by the
Financial Action Task Force (FATF) on Anti Money
Laundering Measures and Combating Financing of
Terrorism and enhanced the KYC Standards in line
with International benchmarks.

The Financial Action Task Force (FATF) was established in July 1989
by a Group of Seven (G-7) Summit in Paris, initially to examine and
develop measures to combat money laundering.

Regulations

PRUDENTIAL REGULATION XI: KNOW YOUR

CUSTOMER (KYC)

Banks/DFIs are advised to fully comply with the

requirements of Prudential Regulation No. XI

Non-compliance of instructions will attract penal

provision under the Banking Companies Ordinance,
1962.

KYC Guidelines

These guidelines are issued under Section 35 (A) of the Banking

Regulation Act, 1949 and any contravention of the same will
attract penalties under the relevant provisions of the Act. Banks
are advised to bring the guidelines to the notice of their branches
and controlling offices.

Towards Name proof Photo

Identification Towards address

proof

Passport where the address differs

Telephone Bill

Voters Identity Card

Bank account statement

PAN Card

Income/Wealth tax assessment

order

Driving Licence

Credit Card Statement

Govt. /Defence ID card *

Electricity Bill

ID cards of reputed employers *

Ration Card

Letter from a recognised public

authority or public servant
verifying the identity and
residence of the customer*

Letter from employer*

*Subject to the satisfaction of the officer authorising the opening of

the account
Note: Original should be produced for verification and copy,
duly attested by the verifying official, shall be kept along
with the account

The customer profile shall be updated,

on a periodical basis, as under:

For low risk customers Once in three years

For medium risk customers Every year

For high risk customers Every year

Monitoring of Transactions

On-going monitoring of transactions for identifying

suspicious and high value cash transactions (Rs. 10
lakhs)

Special attention to all complex, unusually large

transactions and all unusual patterns which have no
apparent economic or visible lawful purpose.

Prescription of threshold limits

Review of risk classification

Reporting to law enforcement authority

Risk Category

High Risk Customers

Medium risk customers

Low risk customers

Risk Management

Proper systems and procedures to be in place to

enable the management to review effective
implementation of KYC norms

Banks internal/concurrent auditors to verify

application of KYC procedures and to evaluate the
effectiveness of banks KYC policies and procedures

A quarterly compliance report to be placed before

the audit committee.

High risk customer- due

diligence

Accounts of Trusts

Accounts of Companies and Firms

Accounts opened by professional intermediaries

Accounts of Politically Exposed Persons resident

outside India

Non-Face-To-Face Transaction

Correspondent Banking

KYC for Existing Accounts

Revised guidelines to apply to all the existing

customers on the basis of materiality and risk

Transactions in existing accounts to be continuously

monitored for review of CDD measures

All existing accounts of companies, firms, trusts,

charities, religious organizations and other
institutions to be subjected to minimum KYC

Reports to be prepaid

CTR- Cash Transaction Report

- For all cash transaction above Rs. 10 lakhs in a
month

STR- Suspicious Transaction Report

Reports should be prepaid in E- Form

Should be sent to RBI on each working last Friday

Record Keeping
Financial intermediaries should prepare and
maintain documentation on their customer
relationships and transactions to meet the
requirements of relevant laws and regulations, to
enable any transaction effected through them to
be reconstructed. In the case of wire transfer
transactions, the records of electronic payments
and messages must be treated in the same way as
other records in support of entries in the account.
All financial
transactions records should be
retained for at least five years after the transaction
has taken place and should be available for perusal
and scrutiny of audit functionaries as well as
regulators as and when required.

Relaxed KYC Procedure

Relaxed KYC procedure refers to acceptance of
an introduction in full KYC procedure subject to
certain conditions prescribed.
This relaxation is applicable for Low Income
Group customers, individuals falling under the
'No frill category, persons affected by natural
calamities like floods, cyclone, tsunami, etc.
Low Income group customers are those who
keep balances not exceeding Rs.50000/- in all
their accounts (FDR/CA/SB) taken together and
the total credit summation in all the accounts
taken together is not expected to exceed
Rupees One Lakh (Rs.100000/-) in a year.

Contd
For these customers, branches are permitted to open
accounts subject to the following conditions:
I. An introduction (in lieu of the KYC documents) from another
account holder who has been subjected to full KYC
procedure should be given.
II.The introducer's account with the Bank should be at least
six month's old and should show satisfactory transactions.
III.The photograph of the customer who proposes to open the
account and his address need to be certified by the
introducer.
When, at any point of time, the total balance in all his/her
accounts (FDR/SB/CA) with the Bank taken together
exceeds Rupees Fifty thousands (Rs.50000/-) or total credit
summation in all the accounts exceeds Rupees one lakh
(Rs.100000/-) in a year, no further transactions will be
permitted until the full KYC procedure is completed.

Training & Education

Employee Training
Banks should take steps to provide proper training
to its employees on the statutory/ regulatory
requirements and the internal policy & procedures
so that the risks are well understood and managed
Employees should also be educated on the need for
proper handling of customer queries
Customer Education
Distribution of pamphlets etc. may be considered

KYC Guidelines
Definition of Customer:
o A customer or entity that maintains an account
and/or has a business relationship with the bank;
o One on whose behalf the account is maintained
(i.e. the beneficial owner)

KYC Guidelines

The Bank/branch shall obtain satisfactory evidence duly

verified/authenticated by the branch manager and shall be
placed on record in respect of
(i) the true identity of the beneficial owners of all accounts
opened by a person, entity etc,
(ii) the real party in interest or controlling person/entity of the
account(s) in case of nominee or minors account.

The Banks shall obtain Introduction on the new account to

assess the prospective customers/account holders integrity,
respectability and the nature of business etc.
( Introducer is an existing account holder of the same branch )

KYC Guidelines
The Banks are also advised that KYC/customer due diligence is
not a one time exercise to be conducted at the time of entering
into a formal relationship with customer/account holder.
Each Bank shall formulate and keep in place, in writing, a
comprehensive Know-Your-Customer policy duly approved by
their Board of Directors and in case of branches of foreign
banks, approved by their head office.
State Bank of Pakistan, during the course of inspection, would
particularly check the efficacy of the KYC system put in place by
the banks and its compliance by all the branches and the staff.

KYC Guidelines
Training & Education:
Employee Training

Banks should take steps to provide proper training to its

employees on the statutory/ regulatory requirements and the
internal policy & procedures so that the risks are well
understood and managed.
Employees should also be educated on the need for proper
handling of customer queries.
Customer Education

Distribution of pamphlets etc. .may be considered

KYC Guidelines

REGULATION-XI

OPENING OF ACCOUNTS

Banks shall make all reasonable efforts to determine

the true identity of every would be account holder.
Towards this end, banks shall institute effective
procedure and methods for obtaining proper
identification from the new customers.

KYC Guidelines
All reasonable efforts shall be made to determine true identity of every
prospective customer. The following minimum set of documents must be
obtained from various types of customers/ account holder(s).

Individuals:
(i) Attested photocopy of national identity card or passport of the individual.

(ii) In case the NIC does not contain a photograph, the bank should also
obtain, in addition to NIC, any other document such as drivers license
etc that contains a photograph.
(iii) In case of a salaried person, attested copy of his service card, or any
other acceptable evidence of service, including, but not limited to a
certificate from the employer.
(iv) In case of illiterate person, a passport size photograph of the new
account holder besides taking his right and left thumb impression on the
specimen signature card.

KYC Guidelines
Partnership:
(i) Attested photocopies of identity cards of all partners.
(ii) Attested copy of Partnership Deed duly signed by
all partners of the firm.
(iii) Attested copy of Registration Certificate with
Registrar of Firms. In case the partnership is
unregistered, this fact should be clearly mentioned on
the Account Opening form.
(iv) Authority letter, in original, in favor of the person
authorized to operate on the account of the firm.

KYC Guidelines

Joint Stock companies:

Certified copies of:
(i) Resolution of Board of Directors for opening of account
specifying the
person(s) authorized to operate the company account.
(ii) Memorandum and Article of Association
(iii) Certificate of Incorporation.
(iv) Certificate of Commencement of Business.
(v) Attested photocopies of identity cards of all the
directors.

KYC Guidelines
Clubs, Societies and Associations:
(i) Certified copies of
Certificate of Registration.
By-laws/Rules & Regulations.
(ii) Resolution of the Governing Body/Executive
Committee for opening of account authorizing the
person(s) to operate the account and attested copy of
the identity card of the authorized person(s).
(iii) An undertaking signed by all the authorized persons
on behalf of the institution mentioning that when any
change takes place in the persons authorized to operate
on the account, the banker will be informed
immediately.

KYC Guidelines

Agents Accounts:
(i) Certified copy of Power of Attorney.
(ii) Attested photocopy of identity card of the agent.
Trust Account:
(i) Attested copy of Certificate of Registration.
(ii) Attested copies of NIC of all the trustees.
(iii) Certified copies of Instrument of Trust.

Advantages of KYC
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

Risk Management
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.

Violating KYC: RBIs Stance

Case : Aug 2012

TWO PUBLIC SECTOR BANKS AND ONE PRIVATE BANK

WERE HELD ACCOUNTABLE BY THE RESERVE BANK
OF INDIA (RBI), BANGALORE, FOR FAILURE TO
EXERCISE DUE DILIGENCE IN OPENING BANK
ACCOUNTS THAT ENABLED ONLINE FRAUDSTERS TO
HACK INTO THE ACCOUNTS OF GENUINE
CUSTOMERS AND WALK AWAY WITH RS 6.60 LAKH,
EXPOSING THE LAX IMPLEMENTATION OF KNOW
YOUR CUSTOMER (KYC) NORMS

Contd.
The cases were taken up by the RBI ombudsman after the
customers lodged complaints with him; the money trail was traced
to Mumbai and Coimbatore; the fraudsters had opened accounts
with fake employment letters, residence documents and given
fictituous telephone numbers.
The banks were found guilty and went in for appeal to the appellate
authority (Deputy Governor, RBI) who upheld two of our verdicts
In another case, a public sector bank was asked to suspend its
mobile banking services after its security systems were found to be
deficient.

 In all, the ombudsman received 3,486 complaints during

the year compared to 3,470 last year.
-failure to implement commitments made-1,209 .
-followed by those pertaining to credit and debit cards - 732
-other categories included levy of service charges without
prior permission, loans and advances and recovery agent
harassment.
-banks had wrongly rejected applications for education
loans, which were then rectified by the respective banks.
RBI ensures that the grievances are resolved and benefits
are restored to the customers, with occasional cases of
compensation to them.

Money Laundering
o Money laundering is the process by which large amounts of illegally
obtained money (from drug trafficking, terrorist activity or other
serious crimes) is given the appearance of having originated from a
legitimate source.

What are the Risks in Banking Sector

today?

Types of risk in bank

Credit risk
Market risk
Interest Rate risk
Liquidity risk
Investment risk
Operational risk
Technology risk
Legal risk
Reputation risk

Criminal Activities
Kidnapping
Drug Trafficking
Bribery/corruption
Tax Evasion
Serious crime or All crimes
White collar crimes (including insides trading and
securities offences)/ Pink collar crimes
Robbery and Fraud
Gambling
Organized crime
Extortion
Prostitution
Smuggling (arms, people, goods)

What are the key stages of the

Money Laundering Cycle?
Placement

of criminal proceeds into the financial system

Layering

of transactions to confuse the audit trail and distance

the original source of funds (e.g. successive
transactions, international transfers, early
termination products, tax haven companies, genuine
businesses).
Integration

of funds back into the real economy as clean and

respectable money

PMLA Definition

Offence of Money Laundering (section 3)

Whoever

(a) acquires, owns, possesses or transfers any proceeds of crime; or

(b) knowingly enters into any transaction which is related to proceeds

of crime either directly or indirectly; or

(c ) conceals or aids in the concealment of the proceeds of crime

Commits the offence of money laundering

Offences covered under PML Act, 2002

Indian Penal Codes

Narcotic Drugs and Psychotropic Substances Act, 1985

Arms Act 1959

Wild Life (Protection) Act, 1972

Immoral Traffic (prevention) Act, 1956

Prevention of Corruption Act, 1988

Money Laundering
What are the risks to banks?
(i) Reputational risk
(ii) Legal risk
(iii) Operational risk
(iv) Concentration risk
All risks are inter-related and together have the potential of
causing serious threat to the survival of the bank

What is Money Laundering?

Illegally
Conversion
obtained money

Criminal Activity

Appears to
originate from
legitimate
source

Drugs / Arms Trafficking

Terrorism
Extortion

Money Laundering
'Any act or attempted act to conceal
or disguise the identity of illegally
obtained proceeds so that they
appear to have originated from
legitimate sources'.
In other words, it is the process
used by criminals through which
they make dirty money appear
clean

Sec.3 of PML Act, 2002 defines money

laundering as:
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
the offence of money-laundering

Money Laundering
Money laundering generally refers to washing of the proceeds or
profits generated from:
(i)

Drug trafficking

(ii)

Arms, antique, gold smuggling

(iii)

Prostitution rings

(iv) Financial frauds

(v)

Corruption, or

(vi) Illegal sale of wild life products and other specified predicate
offences

Money Laundering Process

PLACEMENT
LAYERING
INTEGRATION

Placement
Immersion or Soaking
The physical disposal of
bulk cash proceeds
derived from illegal
activity

LAYERING
Soaping / Scrubbing
The separation of illicit
proceeds from their source
by creating complex layers
of financial transactions
These disguise the audit trail
& provide anonymity

Integration
Repatriation / Spin Dry
Reinjecting laundered proceeds into
economy so that they reenter
financial system as normal business
funds
Provides an apparently legitimate
explanation to criminally derived
wealth

Typologies/ Techniques
employed
Deposit structuring or smurfing
Connected Accounts
Payable Through Accounts
Loan back arrangements
Forex Money Changers
Credit/ Debit cards
Companies Trading and Business Activity
Correspondent Banking
Lawyers, Accountants & other
Intermediaries
Misuse of Non-Profit Organisations

Financing of terrorism

Money to fund terrorist activities moves through the

global financial system via wire transfers and in and
out of personal and business accounts

It can sit in the accounts of illegitimate charities

and be laundered through buying and selling
securities and other commodities, or purchasing and
cashing out insurance policies.

Legal Sources of terrorist

financing

legal or non-legal
legal

Collection of membership dues

Sale of publications
Cultural of social events
Door to door solicitation within
community
Appeal to wealthy members of the
community
Donation of a portion of personal savings

Illegal Sources

Kidnap and extortion;

Smuggling;
Fraud including credit card fraud;
Misuse of non-profit organisations
and charities fraud;
Thefts and robbery; and
Drug trafficking

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

programmes, ineffective control procedures and
failure to practise due diligence

Legal Risk

The possibility that lawsuits, adverse

judgements 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 practise 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
depositors- damages to liquidity

Penalties imposed on banks

Jan. 2006 ABM AMRO
US$ 80 mio
Aug. 2005 Arab Bank
US$ 24 mio
Feb. 2005 City National Bank US$750,000
Jan. 2005
Riggs Bank
US$ 41 mio
Oct. 2004 AmSouth Bank
US$ 50 mio
Sep. 2004 City Bank Japan Licence
cancelled
May. 2004 Riggs Bank
US$ 25 mio

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 Transactions
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

Suspicious Transactions

Large cash deposits into same account

Substantial increase in turnover in a dormant

account

Receipt or payment of large cash sums with no

obvious purpose or relationship to Account holder /
his business

Reluctance to provide normal information when

opening an Account or providing minimal or
fictitious information

Role of cash in money

laundering
Disguise the audit trail
Provide anonymity
Concealing true ownership
and origin of money
Control over money
Changing the form of money

Cash Transactions

All cash transactions of the value of more

than rupees ten lakhs or its equivalent in
foreign currency
All series of cash transactions integrally
connected to each other which have been
valued below rupees ten lakhs or its
equivalent in foreign currency where such
series of transactions have taken place
within a month

Cash Transaction Report

Maintenance of records of transactions

valued below rupees ten lakh or its equivalent in foreign currency

where such

series of transactions have taken place within a month and

the aggregate value of such transactions exceeds rupees ten lakh;

Furnishing of CTR

individual transactions below rupees fifty thousand may not be

included;

DUE DATES

Cash Transaction Report

by 15th of the succeeding month.

Suspicious Transaction Report

within 7 days of arriving at a conclusion that any

transaction is of suspicious nature.

What KYC means?

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
Your? Who should know?
Branch manager, audit officer, monitoring
officials, PO
Know? What you should know?
True identity and beneficial ownership of the
accounts
Permanent address, registered &
administrative address

KYC DOES NOT MEAN

Denial of Service to the Common Person

Intrusive Behaviour

Use of information for cross selling

Harassment of customers- threatening to close

down the accounts arbitrarily

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 quality training to staff
Quick and timely reporting of suspicious
transactions

Stages of the Money

Laundering
1.

Placement

Induction of illegal money into the financial

system
2.

Layering

Multiple transactions to confuse the audit trail

and distance the original source of funds (e.g.
successive transactions, international transfers).
3.

Integration
than integrating funds back into the real economy
as clean and
Respectable money

Stages of the Money Laundering

Money Laundering
Risks to banks?

(I) Reputational risk

(ii) Legal risk
(iii) Operational risk
All risks are inter-related and together have the potential of
causing serious threat to the survival of the bank

Summary: Prevention of Money Laundering

Observing Rules for
Bankers

Compliance with
Laws

Money Laundering
Prevention

Identifying
Irregular / Suspicious
Transactions

Customer
due Diligence

Reports to be prepared

CTR- Currency Transaction Report

For all cash transaction above Rs. 2.5 million.

STR- Suspicious Transaction Report

e.g.

Transactions which do not make economic sense.

Transactions inconsistent with the customer's business.

Transactions involving large amounts of cash.
Transactions involving transfers to and from abroad.

FMU is the only designated agency in Pakistan to which

suspicious transaction reports (STRs) and currency transaction
reports (CTRs) shall be made.

Thank You