Kyc banks


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Compliance (Know Your Customer) for Banks

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Kyc banks

  1. 1. KYC – BANKSIntroductionIs it time for banks to look at their KYC (Know Your Customer) norms again and tighten up thescrews?Well, looking at all the disturbances in India, the thought that comes to mind is that it is not quitepossible without easy money transfer for people who are disturbing the society.Thus money is easily made available to such people, and, to say the least, this is a dangerousmatter. Apart from social awareness, help from public, and best governance practices, werequire very strict norms for identifying customers who enter into such banking transactions.If we look at the emergence of KYC norms we can understand how these standards emerged.The main purpose of KYC norms was to restrict money laundering and terrorist financing whenit was introduced in late the 1990s in the United States. The US government turned very strictafter 9/11 and all regulations were finalized before 2002 for KYC.The US has made changes in its major legislations -- Bank Secrecy Act, USA Patriot Act, etcetera -- to make KYC norms really effective for the banking sector.Taking a leaf out of the US book, the Reserve Bank of India too directed all banks to implementKYC guidelines for all new accounts in the 2nd half of 2002.For existing accounts, imposing KYC norms was a little difficult, so the RBI issued guidelines forthe same at the end of 2004.What is KYC?But let us first understand what KYC norms actually mean.In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, theRBI had directed all banks and financial institutions to put in place a policy framework to knowtheir customers before opening any account.This involves verifying customers identity and address by asking them to submit documents thatare accepted as relevant proof.Mandatory details required under KYC norms are proof of identity and proof of address.Passport, voters ID card, PAN card or driving license are accepted as proof of identity, andproof of residence can be a ration card, an electricity or telephone bill or a letter from theemployer or any recognized public authority certifying the address.Some banks may even ask for verification by an existing account holder. Though the standarddocuments which are accepted as proof of identity and residence remain the same acrossvarious banks, some deviations are permitted, which differ from bank to bank.So, all documents shall be checked against banks requirements to ascertain if those match ornot before initiating an account opening process with any bank. Thus opening a new bankaccount is no longer a cake walk.Author: Partho H. Chakraborty 1
  2. 2. KYC – BANKSThose are the basic requirements of KYC to identify a customer at the account opening stage.Lets check other aspects of KYC.To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBIhas given various directives to banks:Strengthening the banks Internal Control System by allocating duties and responsibilitiesclearly, and periodically monitoring them.Before giving any finance at branch level, making sure that the person has no links with notifiedterrorist entities and reporting any such suspect; accounts to the government.Regular Internal Audit by internal and concurrent auditors to check if the KYC guidelines arebeing properly adhered to or not by banks.Most important, banks must keep an eye out for all banking transactions and identify suspiciousones. Such transactions will be immediately reported to the banks head office and authoritiesand norms shall also be laid down for freezing of such accounts.In 2004, the RBI had come up with more specific guidelines regarding KYC. These were dividedinto four parts: 1. Customer Acceptance Policy: All banks shall develop criteria for accepting any person as their customer to restrict any anonymous accounts and ensure documentation mentioned in KYC. 2. Customer Identification Procedures: Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions. 3. Monitoring of Transactions: KYC can be effective by regular monitoring of transactions. Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions. 4. Risk management: This is about managing internal work to reduce the risk of any unwanted activity. Managing responsibilities, duties and various audits plus regular employee training for KYC procedures.These guidelines also specify that KYC should be implemented for existing account holders onthe basis of materiality and risk segments.The RBI had also directed all banks to make a policy for implementing Know Your Customerand anti-money laundering measures and remain fully compliant with given guidelines beforeDecember 31, 2005.Guidelines on "Know Your Customer" norms and "Cash transactions"DBOD.AML.BC.18/14.01.001/2002-03 August 16, 2002As part of ‘Know Your Customer’ (KYC) principle, RBI has issued several guidelines relating toidentification of depositors and advised the banks to put in place systems and procedures tohelp control financial frauds, identify money laundering and suspicious activities, and forscrutiny/monitoring of large value cash transactions. Instructions have also been issued by theAuthor: Partho H. Chakraborty 2
  3. 3. KYC – BANKSRBI from time to time advising banks to be vigilant while opening accounts for new customers toprevent misuse of the banking system for perpetration of frauds. A gist of the past circularsissued on the subjects under reference is listed in the Annexure. Taking into account recentdevelopments, both domestic and international, it has been decided to reiterate and consolidatethe extant instructions on KYC norms and cash transactions. The following guidelines reinforceour earlier instructions on the subject with a view to safeguarding banks from being unwittinglyused for the transfer or deposit of funds derived from criminal activity (both in respect of depositand borrowable accounts), or for financing of terrorism. The guidelines are also applicable toforeign currency accounts/transactions.2. "Know Your Customer" (KYC) guidelines for New accountsThe following KYC guidelines will be applicable to all new accounts with immediate effect.2.1 KYC Policy(i) "Know Your Customer" (KYC) procedure should be the key principle for identification of anindividual/corporate opening an account. The customer identification should entail verificationthrough an introductory reference from an existing account holder/a person known to the bankor on the basis of documents provided by the customer.(ii) The Board of Directors of the banks should have in place adequate policies that establishprocedures to verify the bonafide identification of individual/corporates opening an account. TheBoard should also have in place policies that establish processes and procedures to monitortransactions of suspicious nature in accounts and have systems of conducting due diligenceand reporting of such transactions.2.2 Customer identification(i) The objectives of the KYC framework should be two fold, (i) to ensure appropriate customeridentification and (ii) to monitor transactions of a suspicious nature. Banks should obtain allinformation necessary to establish the identity/legal existence of each new customer, basedpreferably on disclosures by customers themselves. Typically easy means of establishingidentity would be documents such as passport, driving license etc. However where suchdocuments are not available, verification by existing account holders or introduction by a personknown to the bank may suffice. It should be ensured that the procedure adopted does not leadto denial of access to the general public for banking services.(ii) In this connection, we also invite a reference to a Report on Anti Money LaunderingGuidelines for Banks in India prepared by a Working Group, set up by IBA, for your guidance. Itmay be seen that the IBA Working Group has made several recommendations for strengtheningKYC norms with anti money laundering focus and has also suggested formats for customerprofile, account opening procedures, establishing relationship with specific categories ofcustomers, as well as an illustrative list of suspicious activities.3. "Know Your Customer" procedures for existing customersBanks are expected to have adopted due diligence and appropriate KYC norms at the time ofopening of accounts in respect of existing customers in terms of our extant instructions referredto in the Annexure. However, in case of any omission, the requisite KYC procedures forcustomer identification should be got completed at the earliest.Author: Partho H. Chakraborty 3
  4. 4. KYC – BANKS4. Ceiling and monitoring of cash transactionsThe extant RBI guidelines on the subject are as under:(i) Banks are required to issue travelers cheques, demand drafts, mail transfers, and telegraphictransfers for Rs.50,000 and above only by debit to customers’ accounts or against cheques andnot against cash (Circular DBOD.BP.BC.114/C.469 (81)-91 dated April 19, 1991) Further, theapplicants (whether customers or not) for the above transactions for amount exceedingRs.10,000 should affix permanent (Income tax) account number on the applications (CircularDBOD.BP.BC.92/C469-76 dated August 12, 1976). Since KYC is now expected to establish theidentity of the customer and as the issue of demand draft etc. for Rs.50,000 and above is bydebit to account, the requirement for furnishing PAN stands increased uniformly to Rs.50,000/-.(ii) The banks are required to keep a close watch of cash withdrawals and deposits for Rs.10lakhs and above in deposit, cash credit or overdraft accounts and keep record of details of theselarge cash transactions in a separate register. (Circular DBOD.BP.BC.57/21.01.001/95 datedMay 4, 1995).(iii) Branches of banks are required to report all cash deposits and withdrawals of Rs.10 lakhsand above as well as transactions of suspicious nature with full details in fortnightly statementsto their controlling offices. Besides, controlling offices are also required to apprise their Headoffices regarding transactions of suspicious nature. (Circular DBOD.BP.BC.101 /21.01.001/95dated September 20, 1995). Early computerization of branch reporting will facilitate promptgeneration of such reports.5. Risk management and monitoring proceduresIn order to check possible abuse of banking channels for illegal and anti-national activities, theBoard should clearly lay down a policy for adherence to the above requirements comprising thefollowing:5.1 Internal Control SystemsDuties and responsibilities should be explicitly allocated for ensuring that policies andprocedures are managed effectively and that there is full commitment and compliance to aneffective KYC program in respect of both existing and prospective deposit accounts. Controllingoffices of banks should periodically monitor strict adherence to the laid down policies andprocedures by the officials at the branch level.5.2 Terrorism FinanceRBI has been circulating lists of terrorist entities notified by the Government of India to banks sothat banks may exercise caution if any transaction is detected with such entities. There shouldbe a system at the branch level to ensure that such lists are consulted in order to determinewhether a person/organization involved in a prospective or existing business relationshipappears on such a list. The authority to whom banks may report accounts suspected to belongto terrorist entities will be advised in consultation with Government.Author: Partho H. Chakraborty 4
  5. 5. KYC – BANKS5.3 Internal Audit / Inspection(i) An independent evaluation of the controls for identifying high value transactions should becarried out on a regular basis by the internal audit function in the banks.(ii) Concurrent/internal auditors must specifically scrutinize and comment on the effectiveness ofthe measures taken by branches in adoption of KYC norms and steps towards prevention ofmoney laundering. Such compliance report should be placed before the Audit Committee of theBoard of banks at quarterly intervals. This may be included in the Calendar of Reviews advisedin our Circular DBOD.No.BP.BC.3/21.03.038/2000 dated 14th July 2000.5.4 Identification and Reporting of Suspicious TransactionsBanks should ensure that the branches and controlling offices report transactions of suspiciousnature to the appropriate law enforcement authorities designated under the relevant lawsgoverning such activities. There should be well laid down systems for freezing of accounts asdirected by such authority and reporting thereof to the controlling office and head office. Beingmatters of sensitive nature, there must be a quarterly reporting of such aspects to the auditcommittee of the board or the board of directors.5.5 Adherence to Foreign Contribution Regulation Act (FCRA), 1976(i) Banks should also adhere to the instructions on the provisions of the Foreign ContributionRegulation Act, 1976 cautioning them to open accounts or collect cheques only in favour ofassociation which are registered under the Act ibid by Government of India. A certificate to theeffect that the association is registered with the Government of India should be obtained fromthe concerned associations at the time of opening of the account or collection of cheques.(ii) Branches of the banks should be advised to exercise due care to ensure compliance anddesist from opening accounts in the name of banned organizations and those without requisiteregistration.6. Record KeepingFinancial intermediaries should prepare and maintain documentation on their customerrelationships and transactions to meet the requirements of relevant laws and regulations, toenable any transaction effected through them to be reconstructed. In the case of wire transfertransactions, the records of electronic payments and messages must be treated in the sameway as other records in support of entries in the account. All financial transactions recordsshould be retained for at least five years after the transaction has taken place and should beavailable for perusal and scrutiny of audit functionaries as well as regulators as and whenrequired.7. Training of staff and managementIt is crucial that all the operating and management staff fully understand the need for strictadherence to KYC norms. All institutions must, therefore, have an ongoing training program sothat staff is adequately trained for their roles and responsibilities as appropriate to theirhierarchical level in complying with anti-money laundering guidelines and for implementing KYCpolicies consistently.Author: Partho H. Chakraborty 5
  6. 6. KYC – BANKS8. These guidelines are issued under Section 35 (A) of the Banking Regulation Act, 1949 andany 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.Note: Names if any are Suggestive only and without any relation to any real entity whatsoever. It is only to give a feel and touch of how transactions can be structured and names are indicative This article is meant for education purposes only and it is not be reproduced for any commercial purpose by print or electronic medium whatsoeverThis case study is written by:Partho H. ChakrabortyA - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560037, IndiaTel: +91 80 420 50293, Cell: +91 99863 22504email:; parthohc@rediffmail.comSkype: parthohc01Author: Partho H. Chakraborty 6