Revision and Practical Case Studies
Know Your Customer (KYC) & Anti-Money Laundering (AML)
“Know Your Customer” (KYC) is the platform on which banking system operates to avoid the pitfalls of operational, legal and reputational risks and consequential losses by scrupulously adhering to the various procedures laid down for opening and conduct of accounts.
Know Your Customer (KYC) standards and Anti-Money Laundering (AML) measures has assumed greater urgency and importance in the light of recent developments such as notification of obligations on banks under the Prevention of Money Laundering Act (POMLA) Rules 2005 and the move towards adoption of International Best Practices and Risk Management. Against this backdrop, our bank has come out with the Policy Document on Know Your Customer standards and Anti-Money Laundering (AML) measures.
With a view to increasing the awareness at the branch level, series of circular on the above subject are also issued from time to time by Central Office.
The adherence to KYC norms does not end with proper identification of customers at the time of opening of accounts by following the guidelines for Customer Identification Process (CIP) and by following the Customer Acceptance Policy (CAP). It is about Monitoring of Transactions (MOT) on a continuous and regular basis
Customers are behind every transaction. The transactions and customers cannot be separated from each other. The identity of the customer is closely related to the legitimacy of the source of funds as well as their end use, destination and purpose. It is, therefore, essential to monitor the transactions on a continuous basis under the following four areas:
Study of such Large-value Transactions should be made to satisfy that all the three basic tenets viz,
These are cash transactions which are below Rs.10.00 lakhs or its equivalent in foreign currency but these transactions are integrally connected to each other and such transactions have taken place within a month. In other words, the cash remittances / withdrawals by a party within a period of one month whose aggregate value touches the threshold limit of Rs.10.00 lakhs and above. The idea behind this reporting is that some customers may deliberately keep their cash transactions well within the threshold limit of Rs.10.00 lakhs on a single day. They may have huge transactions and they are avoiding from reporting by banks through restricting their cash transaction within the limit of Rs.10.00 lakhs. The spirit behind this reporting of ICTR is to net such parties who are basically transacting huge cash either as remittance or as withdrawal.
Suspicious Transactions:
All suspicious transactions are to be reported to Principal Officer - AML (PO – AML) immediately. Our General Manager (Inspection & Audit Department) has been appointed as Principal Officer–AML.
Any transactions (irrespective of the fact whether made in cash or not) giving grounds of suspicion should be reported under this category.
Unusual Transactions (UTR):
This is another category of transactions, where, it is found that the transaction is unusual and not in tune with the volume of transactions / nature of activity of the customer or sudden change in the transaction behaviour of the customers or turnover in the account varies much from what the customer had furnished to the bank, at the time of opening the account.
An alert bank official can watch the transactions which are unusual in nature. Some times, this may give early warning signals for suspicious transactions also.
Transactions involving forged or counterfeit currency notes / bank notes(F/C TR):
All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where forgery of a valuable security has taken place, such transactions have to be reported to the respective Divisional Office.
Reporting formalities under POMLA, 2002: Presently, the LTRs are provided in the FRS.com as a daily report. It is advised to scrutinise those transactions relating to their branch and report to Principal Officer – AML, if the report contains any unrelated / inaccurate transactions.
The suspicious and unusual transactions observed, if any, shall be reported to the Principal Officer Anti Money Laundering within 3 days from the date of occurance with a copy to D.O
The Divisional Offices, in turn collate and consolidate the reports received from branches under their jurisdiction and submit to PO-AML for the following three types of transactions:
The time-frame for submission of the Report:
This is a Statutory Return to be submitted to Financial Intelligence Unit (FIU) – New Delhi in the Finance Ministry. Any delay will attract severe penalty and bank’s image will be affected, if there is any delay / incorrect reporting.
List of Illustrative transactions coming under suspicious transactions / activities
Transactions involving large amount of cash:
Transactions that do not make economic sense
Activities not consistent with the customer’s business
TWO CASE STUDIES FOR PRACTICAL UNDERSTANDING OF IMPLEMENTATION OF KYC
CASE I:
Loans against Warehouse receipts:
At one of our branches, 3 persons belonging to the State of Punjab opened current accounts with mutual introduction. Subsequently, the parties requested for loans against warehouse receipts. The branch without ascertaining their background, net worth and their standing in the particular business, extended loans against warehouse receipts of approved private cold storage after obtaining oral permission. Initially, the warehouse receipts tendered were found to be genuine but subsequently, in respect of certain warehouse loans released against warehouse receipts, purported to have been issued by the said cold storage turned out to be fake one. The branch has released the warehouse loans purely on the strength of the number of bags mentioned in the warehouse receipt without independently verifying the weight, value and quality of the goods covered under the receipt. Though the goods lodged under the warehouse receipt are reported to have been imported one, the branch has not collected the invoice / shipping document etc. to ascertain the value / weight of the goods. The branch has released the loan at a higher rate resulting in excess finance by the bank. The officials at the branch have not visited and verified the goods either at the time of release of the loan or after the loan has been dispersed. The borrowers taking advantage of this laxity on the part of the branch management and also the lack of knowledge in that particular trade produced certain fake warehouse receipts and defrauded the bank.
The guidelines specified in the Book of Instructions - Advances to be followed, while extending the warehouse loans.
The following points are to be borne in mind.
a. Before making any advance, stock in warehouses of private agencies, wherever allowed, and also of central / State warehousing corporation should be inspected to ensure that the goods are the some as stated in the warehouse receipt / certificate. Samples of stock in the warehouse shall be obtained and market value thereof cross-checked.
b. The rates mentioned should be cost or market value, whichever is less and verified. The details are to be entered in the Market Rate Register.
c. Periodical visit of the Manager to the cold storage / warehouse is to be. Made to ascertain that goods are intact and that the quality of goods has not deteriorated.. The details of visit report should be entered in the register maintained at the branch. If any irregularity is observed during the visit, such as, shortage of goods, deterioration of quality and damage in packings etc., the branch should inform D.O. / C.O. and take steps to recover the money and also for de-listing the warehouse / cold storage.
d. In case of storage of goods lying beyond stipulated period, branches have to discuss with the parties and ensure early closure of the accounts.
e. In case of part deliveries, after issuing the Delivery Order through the borrower, the branch should present the warehouse receipt through the branch staff to the warehouse keeper for endorsement and return.
CASE II:
Opening and allowing operations in newly opened accounts:
One of our branches opened a current account in a particular name followed by its abbreviated form. The account was operated by the sole proprietor. The abbreviated form of this account had resemblance to that of a leading corporate which is normally known by its abbreviated form. The account holder in collaboration with a person working in the corporate, obtained pay orders drawn in favour of the corporate in the abbreviated form and got the same collected through the newly opened current account with our bank. Subsequently, he has withdrawn the entire amount in cash. The fraud came to light when the Manager suspected the bonafides of a pay order which was received in collection and which was for a huge value.
The fraudster was able to open the account and play a fraud on the bank because of non-compliance of laid down systems and procedures, mentioned hereunder, by the branch officials:
1. The branch has not made enquiries regarding the abbreviated words added to the title of the account.
2. The branch has not carried out any visit to the premises of the account holder / conducted independent verification of address / nature of business etc.
3. Propel, residential proof was not obtained and kept on record. 4. PAN No. / IT status of the account holder was not obtained.
5. Not keeping a close watch on the operations of the newly opened account especially, when cheques for large amounts were collected and withdrawals in cash are made.
6. Not maintaining register to record cash transactions of Rs.10.00 lacs and above. 7. Collecting pay orders with payees name in abbreviated form whereas account was opened with full name suffixed by abbreviated form.
Branches should exercise caution while extending credit facility against warehouse receipts and also while opening / allowing operations under newly opened accounts.
Know Your Customer (KYC) & Anti-Money Laundering (AML)
“Know Your Customer” (KYC) is the platform on which banking system operates to avoid the pitfalls of operational, legal and reputational risks and consequential losses by scrupulously adhering to the various procedures laid down for opening and conduct of accounts.
Know Your Customer (KYC) standards and Anti-Money Laundering (AML) measures has assumed greater urgency and importance in the light of recent developments such as notification of obligations on banks under the Prevention of Money Laundering Act (POMLA) Rules 2005 and the move towards adoption of International Best Practices and Risk Management. Against this backdrop, our bank has come out with the Policy Document on Know Your Customer standards and Anti-Money Laundering (AML) measures.
With a view to increasing the awareness at the branch level, series of circular on the above subject are also issued from time to time by Central Office.
The adherence to KYC norms does not end with proper identification of customers at the time of opening of accounts by following the guidelines for Customer Identification Process (CIP) and by following the Customer Acceptance Policy (CAP). It is about Monitoring of Transactions (MOT) on a continuous and regular basis
Customers are behind every transaction. The transactions and customers cannot be separated from each other. The identity of the customer is closely related to the legitimacy of the source of funds as well as their end use, destination and purpose. It is, therefore, essential to monitor the transactions on a continuous basis under the following four areas:
- Large-value Transactions (LTR),
- Integrally Connected Cash Transactions (ICTR),
- Suspicious Transactions (STR) and
- Unusual Transactions (UTR).
Study of such Large-value Transactions should be made to satisfy that all the three basic tenets viz,
- Identifying the customer (Who remits / withdraws such large amount of cash?)
- Source of funds (What is the source for this remittance?)
- Purpose / end use / destination (What is the purpose of this remittance? How the cash is utilized? Where the cash goes?)
These are cash transactions which are below Rs.10.00 lakhs or its equivalent in foreign currency but these transactions are integrally connected to each other and such transactions have taken place within a month. In other words, the cash remittances / withdrawals by a party within a period of one month whose aggregate value touches the threshold limit of Rs.10.00 lakhs and above. The idea behind this reporting is that some customers may deliberately keep their cash transactions well within the threshold limit of Rs.10.00 lakhs on a single day. They may have huge transactions and they are avoiding from reporting by banks through restricting their cash transaction within the limit of Rs.10.00 lakhs. The spirit behind this reporting of ICTR is to net such parties who are basically transacting huge cash either as remittance or as withdrawal.
Suspicious Transactions:
All suspicious transactions are to be reported to Principal Officer - AML (PO – AML) immediately. Our General Manager (Inspection & Audit Department) has been appointed as Principal Officer–AML.
Any transactions (irrespective of the fact whether made in cash or not) giving grounds of suspicion should be reported under this category.
Unusual Transactions (UTR):
This is another category of transactions, where, it is found that the transaction is unusual and not in tune with the volume of transactions / nature of activity of the customer or sudden change in the transaction behaviour of the customers or turnover in the account varies much from what the customer had furnished to the bank, at the time of opening the account.
An alert bank official can watch the transactions which are unusual in nature. Some times, this may give early warning signals for suspicious transactions also.
Transactions involving forged or counterfeit currency notes / bank notes(F/C TR):
All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where forgery of a valuable security has taken place, such transactions have to be reported to the respective Divisional Office.
Reporting formalities under POMLA, 2002: Presently, the LTRs are provided in the FRS.com as a daily report. It is advised to scrutinise those transactions relating to their branch and report to Principal Officer – AML, if the report contains any unrelated / inaccurate transactions.
The suspicious and unusual transactions observed, if any, shall be reported to the Principal Officer Anti Money Laundering within 3 days from the date of occurance with a copy to D.O
The Divisional Offices, in turn collate and consolidate the reports received from branches under their jurisdiction and submit to PO-AML for the following three types of transactions:
- STR,
- UTR and
- F/C TR.
The time-frame for submission of the Report:
This is a Statutory Return to be submitted to Financial Intelligence Unit (FIU) – New Delhi in the Finance Ministry. Any delay will attract severe penalty and bank’s image will be affected, if there is any delay / incorrect reporting.
List of Illustrative transactions coming under suspicious transactions / activities
Transactions involving large amount of cash:
- Frequent withdrawals of large amount of cash that do not appear to be justified by customers business / activity.
- Depositing cash by means of numerous credit slips by a customer such that the amount of cash deposit is not substantial, but the total of which is substantial.
- Corporate accounts where deposits or withdrawals are primarily in cash rather than by cheques.
Transactions that do not make economic sense
- A customer having large number of accounts with our bank with frequent transfers between different accounts.
- Transactions in which withdrawals are there immediately after being deposited unless the customer’s business activities warrant such immediate withdrawals.
Activities not consistent with the customer’s business
- Accounts of large volume of credits through DD / PO / TT whereas the nature of business does not justify such credits.
- Transactions which are inconsistent with the purpose of the account
TWO CASE STUDIES FOR PRACTICAL UNDERSTANDING OF IMPLEMENTATION OF KYC
CASE I:
Loans against Warehouse receipts:
At one of our branches, 3 persons belonging to the State of Punjab opened current accounts with mutual introduction. Subsequently, the parties requested for loans against warehouse receipts. The branch without ascertaining their background, net worth and their standing in the particular business, extended loans against warehouse receipts of approved private cold storage after obtaining oral permission. Initially, the warehouse receipts tendered were found to be genuine but subsequently, in respect of certain warehouse loans released against warehouse receipts, purported to have been issued by the said cold storage turned out to be fake one. The branch has released the warehouse loans purely on the strength of the number of bags mentioned in the warehouse receipt without independently verifying the weight, value and quality of the goods covered under the receipt. Though the goods lodged under the warehouse receipt are reported to have been imported one, the branch has not collected the invoice / shipping document etc. to ascertain the value / weight of the goods. The branch has released the loan at a higher rate resulting in excess finance by the bank. The officials at the branch have not visited and verified the goods either at the time of release of the loan or after the loan has been dispersed. The borrowers taking advantage of this laxity on the part of the branch management and also the lack of knowledge in that particular trade produced certain fake warehouse receipts and defrauded the bank.
The guidelines specified in the Book of Instructions - Advances to be followed, while extending the warehouse loans.
The following points are to be borne in mind.
a. Before making any advance, stock in warehouses of private agencies, wherever allowed, and also of central / State warehousing corporation should be inspected to ensure that the goods are the some as stated in the warehouse receipt / certificate. Samples of stock in the warehouse shall be obtained and market value thereof cross-checked.
b. The rates mentioned should be cost or market value, whichever is less and verified. The details are to be entered in the Market Rate Register.
c. Periodical visit of the Manager to the cold storage / warehouse is to be. Made to ascertain that goods are intact and that the quality of goods has not deteriorated.. The details of visit report should be entered in the register maintained at the branch. If any irregularity is observed during the visit, such as, shortage of goods, deterioration of quality and damage in packings etc., the branch should inform D.O. / C.O. and take steps to recover the money and also for de-listing the warehouse / cold storage.
d. In case of storage of goods lying beyond stipulated period, branches have to discuss with the parties and ensure early closure of the accounts.
e. In case of part deliveries, after issuing the Delivery Order through the borrower, the branch should present the warehouse receipt through the branch staff to the warehouse keeper for endorsement and return.
CASE II:
Opening and allowing operations in newly opened accounts:
One of our branches opened a current account in a particular name followed by its abbreviated form. The account was operated by the sole proprietor. The abbreviated form of this account had resemblance to that of a leading corporate which is normally known by its abbreviated form. The account holder in collaboration with a person working in the corporate, obtained pay orders drawn in favour of the corporate in the abbreviated form and got the same collected through the newly opened current account with our bank. Subsequently, he has withdrawn the entire amount in cash. The fraud came to light when the Manager suspected the bonafides of a pay order which was received in collection and which was for a huge value.
The fraudster was able to open the account and play a fraud on the bank because of non-compliance of laid down systems and procedures, mentioned hereunder, by the branch officials:
1. The branch has not made enquiries regarding the abbreviated words added to the title of the account.
2. The branch has not carried out any visit to the premises of the account holder / conducted independent verification of address / nature of business etc.
3. Propel, residential proof was not obtained and kept on record. 4. PAN No. / IT status of the account holder was not obtained.
5. Not keeping a close watch on the operations of the newly opened account especially, when cheques for large amounts were collected and withdrawals in cash are made.
6. Not maintaining register to record cash transactions of Rs.10.00 lacs and above. 7. Collecting pay orders with payees name in abbreviated form whereas account was opened with full name suffixed by abbreviated form.
Branches should exercise caution while extending credit facility against warehouse receipts and also while opening / allowing operations under newly opened accounts.