This document discusses Know Your Customer (KYC) procedures that banks must follow. It explains that KYC involves verifying a customer's identity, profiling them to understand their source of income and expected account activity. The rationale is to prevent money laundering and financing of illegal activities. Non-compliance with KYC carries penalties like fines, suspension of business, and even closure for banks.

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Banker - Customer Relationships
Outline of Bank Services
Types of Accounts
Know Your Customer (KYC)
Savings and Fixed Deposit Accounts
Cheques, Money Transmission, and Other Payment Mechanisms
MODULE COVERAGE
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Code of Banking Practice
Plastic Cards and Electronic Banking

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Money laundering and Know Your Customer (KYC)
Introduction
Banks have always made efforts to know who their customers are
before opening an account by insisting on references mainly to
avoid being accused of negligence and suffer damages. However, as
competition heated up, banks became a bit lax and started opening
accounts without insisting on proof of identity.
With the advent of money laundering laws, increase in drug trafficking
and terrorism, it has become absolutely necessary for banks to
know who they are dealing with, the nature of his business and
sources of his income because as not to do so might spell danger
not only for the banking institutions but also for management. It is
with this background and the desire for banks to deepen their
target marketing that ‘Know Your Customer’ has gained
prominence.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Money laundering – This is the practice of disguising the origins of illegally-
obtained money. It is the process by which the proceeds of crime are
made to appear legitimate. The money involved can be generated by any
number of criminal acts, including drug dealing, corruption, accounting
fraud and other types of fraud, and tax evasion. The methods by which
money may be laundered are varied and can range in sophistication from
simple to complex although it usually consists of three steps:
• Placement
• Layering
• Integration
Placement - This is the depositing of funds in financial institutions or the
conversion of cash into negotiable instruments. The easiest way to begin
laundering large amounts of cash is to deposit them into a financial
institution. But it is also the most dangerous for the money launderer
because of suspicions once large amounts of cash are deposited
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Layering –
This is the transfer of funds through a series of accounts in an attempt
to hide the funds' true origins. Once money has been placed in the
banking system a launderer will start transferring it to different
accounts in small amounts not arouse suspicion.
Integration –
Integration involves the movement of layered funds, which are no
longer traceable to their criminal origin, into the financial world,
where they are mixed with funds of legitimate origin.
This dirty money as it is known once it enters the banking system may
be invested in real estate, stock exchange to buy shares, invested in
legitimate businesses and in the end emerges clean and almost un
traceable.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What is money laundering & anti money laundering (AML)?
The anti money laundering law is in the offing. However, Bank of
Uganda has spelt out strict guidelines for banks to follow to
minimize money laundering and if not adhered to, banks risk heavy
penalties and in the extreme, possibility of closure of the banking
business. Be that as it may, Uganda is considered to be a conduit for
money laundering mainly because of our porous borders, weak
legislation and rampant corruption
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What is KYC?
Know your customer (KYC) is) is a process of due diligence that requires banks
to obtain detailed information about their customers both existing and
new. This information includes proof of identity, physical address, the
nature of his business, where it is located so that you are able to tell
whether his banking operations are compatible with a business of that
type.
Rationale for KYC
• The objective of KYC guidelines is to prevent banks from being used,
intentionally or unintentionally by criminal elements for money laundering
activities, financing of terrorist or criminal activities or transacting with
banned/ ineligible entities.
• Regulators internationally are becoming increasingly strict about financial
institutions having sufficient knowledge about their customers to ensure
that they can properly identify them and know where their monies
originate from.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
When to do KYC
KYC needs to be done on a customer at the time of opening an
account and in the following cases:
i. Prior to entering a business relation with a customer (including
permanent and on-off business relationships).
ii. When periodically updating customer information like when a
customer has applied to access a product or service such as a loan
or overdraft
iii. Where time has passed since the initial KYC information was
collected
iv. Where there is a change in the customer’s transactional levels or
v. Where regulatory or supervisory developments dictate so.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
KYC Process
There are three stages of KYC, that is, identification, verification and
profiling.
• Identification - Identification is a process through which sufficient
information regarding the customer’s identity is obtained (identity
document and address information).
• Verification - This involves the steps taken by the bank to ensure
that the information, which has been accumulated, is valid and
reliable.
• Profiling - This is a process through which information regarding the
source of income and funds is obtained from the customer. In this
process, the bank can also obtain information regarding the activity
that can be expected on the customer’s account.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Implications of non adherence to KYC
Bank of Uganda established The Bank of Uganda Anti Money
Laundering Guidelines in 2002 which among others requires banks
to conduct proper KYC and to monitor accounts so as to control
money laundering. Non-compliance with KYC requirements could
result into:-
a. Fines & penalties to the bank - The Financial Institutional Act in
Uganda provides for a penalty of UGX 5 million for KYC non
compliance.
b. Suspension of the bank’s business
c. Imprisonment of bank executives
d. Irreparable reputational risk to the bank
e. Financial risk to the bank (fraud)
f. In severe cases, closure of the bank
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