Module 2
Module 2
Module 2
KYC
KYC means Know Your Customer and sometimes Know Your Client.
KYC or KYC check is the mandatory process of identifying and verifying the client's identity
when opening an account and periodically over time. In other words, banks must make sure
that their clients are genuinely who they claim to be.
KYC stands for know your customer. The associated standards are designed
to protect financial institutions against fraud, corruption, money laundering,
and terrorist financing.
By law, all financial institutions are required to know their customers. If a financial
institution fails to verify the identity of a customer and that customer goes on to commit
a financial crime such as money laundering or terrorist financing, then the bank can face
fines, sanctions, and reputational damage.
On top of this, effective KYC processes can also protect a bank from fraud and losses
that are associated with illegal funds and transactions. This is because the process has
been specifically designed to help prevent banks and other financial services from being
used for money laundering.
The KYC advantages a bank experiences are numerous. Not only do these procedures
ensure that bad actors cannot exploit their services, but they also help enhance the
bank’s reputation and save them money.
However, that isn’t to say that KYC disadvantages don’t exist. After all, if they’re not
properly implemented, then KYC processes can be burdensome and off-putting for some
customers. That said, KYC processes are mandatory, and you must ensure that you have
the correct checks in place before you allow a customer to access your services.
What is KYC?
KYC means to ‘know your customer’ which is an effective way for an institution to confirm
and thereby verify the authenticity of a customer. For this, the customer is required to submit
all KYC documentation before investing in various instruments. All financial institutions are
mandated by the RBI to do the KYC process for all customers before giving them the right to
carry out any financial transactions. Whether the customer uses KYC online verification or
opts for offline KYC, this is a simple one-time process.
KYC is an important tool as it looks after the financial bodies and keeps illegal activities in
check. Many non-individual customers use financial services like trading and mutual fund
investment. With KYC, banks have the right to verify the legal status of that entity which also
includes cross-checking customers’ operating addresses and verifying the identities of their
beneficial owners and authorized signatories.
Additionally, the KYC process also requires the nature of employment as well as the business
carried out by the customer which is useful in verifying the authenticity of an individual
and/or company.
Types of KYC
There are two types of KYC verification processes. Both are equally good, and it is simply a
matter of convenience whether one chooses to opt for one type over the other. Both are as
follows:
In-Person based KYC: If the customer wishes to invest more in mutual funds per
year, they will be required to carry out an in-person verification KYC which is done
offline. To do so, the customer can choose to visit a KYC kiosk and authenticate their
identity using Aadhar biometrics or can call the KYC registration agency to send an
executive to their home/office to carry out this verification.
Importance and Benefits of KYC
Helps lenders perform risk assessment by identifying the previous financial history
and assets owned
Limits fraud that result mainly due to hiding of identity
Prevents money laundering and other anti-social activities
Brings stability and investment to the country, as it makes the financial framework
more trustworthy and less risky
Decreased uncertainty allows institutions to lend more to customers and increase their
profits
KYC Process
The KYC process is simple and differs only slightly from country to country. A simple KYC
process flow is depicted below:
The Reserve Bank of India (RBI) has imposed, on December 12, 2017, a monetary
penalty of ₹ 50 million on Syndicate Bank (the bank) for non-compliance with the
directions/guidelines issued by RBI on cheque purchase/discounting, bill discounting,
and Know Your Customer (KYC)/Anti-Money Laundering (AML) norms. This
penalty has been imposed in exercise of powers vested in RBI under the provisions of
Section 47A(1)(c) read with Section 46(4)
(i) of the Banking Regulation Act, 1949, taking into account failure of the bank to
adhere to the aforesaid directions/guidelines issued by RBI.
A scrutiny was conducted by RBI of certain branches of the bank in the aftermath of a
fraud reported in these branches. Based on the findings of the scrutiny and
examination of related documents obtained in this regard, a Notice was issued to the
bank advising it to show cause as to why penalty should not be imposed for non-
compliance with directions/guidelines issued by RBI.
After considering the bank’s reply and oral submissions made in the personal hearing,
RBI came to the conclusion that the aforesaid charges of non-compliance with RBI
directions/guidelines were substantiated and warranted imposition of monetary
penalty.
Mumbai, Sep 9 (PTI) The Reserve Bank has imposed penalties on three entities,
including Industrial Bank of Korea, for non-compliance with regulatory norms. A
penalty of Rs 36 lakh has been imposed on Industrial Bank of Korea for non-
compliance with certain Know Your Customer (KYC) norms, the central bank said in
a statement on Friday.
In another release, it said a penalty of Rs 59.10 lakh has been imposed on Woori Bank
for non-compliance with RBI's directions on 'Creation of a Central Repository of
Large Common Exposures Across Banks'.
A fine of Rs 12.35 lakh has been slapped on India bulls Commercial Credit Limited,
New Delhi for contravention of certain provisions of KYC Directions.
The Reserve Bank, however, added that penalties are based on the deficiencies in
regulatory compliance and are not intended to pronounce upon the validity of any
transaction or agreement entered into by the entities with their customers.
The Reserve Bank of India (RBI) has imposed a penalty of Rs 1.75 crore on four
public sector banks for non-compliance with KYC requirement and norms for
opening of current accounts.
While Punjab National Bank, Allahabad Bank and UCO Bank have been fined Rs 50
lakh each, Corporation Bank has been asked to pay Rs 25 lakh as penalty.
The central bank said the penalties were imposed for non-compliance with certain
provisions of directions issued by it on Know Your Customer (KYC) norms or anti-
money laundering (AML) standards and opening of current accounts.
"The penalties have been imposed in exercise of powers vested in RBI under the
provisions of section 47A(1)(c) read with section 46(4)(i) of the Banking Regulation
Act 1949, taking into account the failure of the banks to adhere to the aforesaid
directions," said the RBI in a statement.
"This action is based on the deficiencies in regulatory compliance and is not intended
to pronounce upon the validity of any transaction or agreement entered into by the
banks with their customers," it said.
This is the first stage in the washing cycle. Money laundering is a “cash-intensive” business,
generating vast amounts of cash from illegal activities (for example, street dealing of drugs
where payment takes the form of cash in small denominations). The monies are placed into
the financial system or retail economy or are smuggled out of the country. The aims of the
launderer are to remove the cash from the location of acquisition so as to avoid detection
from the authorities and to then transform it into other asset forms; for example: travellers
cheques, postal orders, etc.
Layering
Layering is the process of separating the proceeds of criminal activity from their origin
through the use of many different techniques to layer the funds. These include using multiple
banks and accounts, having professionals act as intermediaries and transacting through
corporations and trusts, layers of complex financial transactions, such as converting cash into
traveler’s checks, money orders, wire transfers, letters of credit, stocks, bonds, or purchasing
valuable assets, such as art or jewelry. All these transactions are designed to disguise the
audit trail and provide anonymity.
Layering usually involves a complex system of transactions designed to hide the source and
ownership of the funds. Once cash has been successfully placed into the financial system,
launderers can engage in an infinite number of complex transactions and transfers designed to
disguise the audit trail and thus the source of the property and provide anonymity. One of the
primary objectives of the layering stage is to confuse any criminal investigation and place as
much distance as possible between the source of the ill-gotten gains and their present status
and appearance.
Typically, layers are created by moving monies in and out of the offshore bank accounts of
bearer share shell companies through electronic funds’ transfer (EFT). Given that there are
over 500,000 wire transfers – representing in excess of $1 trillion – electronically circling the
globe daily, most of which is legitimate, there isn’t enough information disclosed on any
single wire transfer to know how clean or dirty the money is, therefore providing an excellent
way for launderers to move their dirty money. Other forms used by launderers are complex
dealings with stock, commodity and futures brokers. Given the sheer volume of daily
transactions, and the high degree of anonymity available, the chances of transactions being
traced is insignificant.
Integration
It is the stage at which laundered funds are reintroduced into the legitimate economy,
appearing to have originated from a legitimate source. Integration is the final stage of the
process, whereby criminally derived property that has been placed and layered is returned
(integrated) to the legitimate economic and financial system and is assimilated with all other
assets in the system. Integration of the “cleaned” money into the economy is accomplished by
the launderer making it appear to have been legally earned. By this stage, it is exceedingly
difficult to distinguish legal and illegal wealth.
Not all money laundering transactions go through this three-stage process. The three basic
stages may occur as separate and distinct phases or may occur simultaneously or, more
commonly, they may overlap. Transactions designed to launder funds can for example be
effected in one or two stages, depending on the money laundering technique being used. How
the basic steps are used depends on the available laundering mechanisms and requirements of
the criminal organizations.
Importance of AML
AML is a set of regulations, laws and procedures that detect and prevent criminals from
disguising illegal funds as legitimate income. AML policies help banks and financial
institutions combat financial crimes.
AML regulations require banks to collect customer information, monitor and screen their
transactions and report suspicious activity to financial regulatory authorities. Additionally,
the AML holding period requires deposits to remain in an account for a specified amount of
time. Banks can use this holding period to help in anti-money laundering and risk
management.
Anti-Money Laundering
1. Criminalization
Many governments, financial institutions, and businesses impose controls to prevent money
laundering. The first is criminalization by the government. The United Nations Convention
Against Transnational Organized Crime has set forth guidelines that help governments to
prosecute individuals involved in money laundering schemes.
Financial institutions must also have “know your customer” policies in place to help prevent
money laundering. This involves monitoring the activity of clients and understanding the
types of transactions that should raise red flags. Financial institutions are required to report
suspicious activity to a financial investigation unit.
Financial institutions and businesses also keep detailed records of transactions and implement
software that can flag suspicious activity. Customer data can be classified based on varying
levels of suspicion, and transactions denied if they meet certain criteria.
4. Holding Period
Many banks require deposits to remain in an account for a designated number of days
(usually around five). This holding period helps manage risk associated with money being
moved through banks to launder money.
5. New Technology
The technology used to identify suspicious activity linked to money laundering continues to
evolve and become more accurate. Technologies, such as AI and Big Data software, allow
these systems to become more sophisticated.
AML IN GLOBAL
The first anti-money laundering structures came about with the Financial Action Task Force
(FATF). It ensures that international standards are put in place to prevent money laundering.
Since the 2001 terrorist attacks, the FATF now also includes terrorist surveillance in an effort
to mitigate terrorist financing. Recently, cryptocurrency has come under scrutiny, as it
provides anonymity to its users. This has facilitated a lower-risk method for criminals to go
about their transactions.
* Financial institutions are held to high standards with regards to following procedures
to identify money laundering. All bank employees are trained to some degree to
identify and monitor suspicious customer activity. Larger financial institutions will
also have dedicated departments to track fraud and money laundering.
* Many of the institutions put in place a “know your client” measure, which can help
flag suspicious transactions based on particular clients. Transactions and processes at
financial institutions are recorded extensively so that law enforcement can trace the
crimes back to the source.
AML (INDIA)
The Financial Intelligence Unit – India (FIU-IND) is a unit of the Indian Government’s
Department of Revenue that gathers financial intelligence on money laundering Offences
under the Prevention of Money Laundering Act, 2002.
It was established on November 18, 2004 and directly reporting to the Finance
Minister’s Economic Intelligence Council (EIC).
* The organisation is also applying for participation in the Egmont Group of Financial
Intelligence Units, which is an umbrella organization of Financial Intelligence Units
from around the world.
Functions
* Gathering of Reports:
Act as a central receiving point for Cash Transaction Reports (CTRs), Non-Profit
Organization Transaction Reports (NTRs), Cross Border Wire Transfer Reports (CBWTRs),
Reports on Purchase or Sale of Immovable Property (IPRs), and Suspicious Transaction
Reports (STRs) received from various reporting entities.
* Information Sharing:
Share data with national intelligence/law enforcement agencies, national regulatory agencies,
and foreign Financial Intelligence Units.
Create and manage a national data based on reports from reporting entities.
* Coordination:
To combat money laundering and related crimes, coordinate and strengthen the collection and
exchange of financial intelligence through an effective national, regional, and global network.
Critical important areas on money laundering trends, typologies, and advancements through
research and analysis.
(ii) No transaction or account based relationship will be undertaken without following the
Customer Due Diligence (CDD) procedure. a. The mandatory information to be sought for
KYC purpose while opening an account and during the periodic updates as specified, should
be obtained. b. ‘Optional’/additional information is obtained with the explicit consent of the
customer after the account is opened. c. CDD procedure is followed for all the joint account
holders while opening a Joint Account.
(iv) Parameters of risk assessment in terms of the customers’ identity, social/ financial status,
nature of business activity, information about the clients’ business and their locations, etc.
have been defined to enable categorization of customers into low, medium and high
risk.While considering customer’s identity, the ability to confirm identity documents through
online or other services offered by issuing authorities or other entities may also be factored in
documentation requirements and other information to be collected in respect of different
categories of customers depending on perceived risk and keeping in mind the requirements of
PML Act, 2002 and guidelines issued by the RBI from time to time;
(v) The Company shall not open an account where it is unable to apply appropriate CDD
measures, i.e., the Company is unable to verify the identity and /or obtain documents required
as per the risk categorisation due to non-cooperation of the customer or non-reliability of the
data/information furnished to the Company. It may, however, be necessary to have suitable
built in safeguards to avoid harassment of the customer. For example, decision to close an
account may be taken at a reasonably high level after giving due notice to the customer
explaining the reasons for such a decision;
(vi) Before opening a new account necessary screening will be performed so as to ensure that
the identity of the customer does not match with any person with known criminal background
or with banned entities such as individual terrorists or terrorist organizations or whose name
appears in the lists circulated by RBI/ SEBI/ NHB/ IRDA, United Nations Security Council
(UNSC), OFAC, as per section 51A of the Unlawful Activities (Prevention) Act, 1967, watch
list by Interpol, etc. These are done using the list/ information/ databases available on World-
check, Watch-out Investors, website of OFAC, UNSCR (as mentioned below) or such other
information sources/tools.
Individuals (other than High Net Worth) and entities whose identities and sources of wealth
can be easily identified and transactions in whose accounts by and large conform to the
known profile may be categorized as low risk. Examples of low-risk customers may be
salaried employees whose salary structures are well defined, individuals from the lower
economic strata of the income level whose accounts show minimal balances and low
turnover, Government Departments and Government-owned companies, regulators and
statutory bodies etc. In such instances, only the basic needs of verifying the identity and
location of the customer can be met.
Customers that are likely to pose a higher than average risk to the bank may be categorized as
medium or high risk depending on customer’s background, nature and location of activity,
country of origin, sources of funds and his client profile etc; such as:
a) Persons in business/industry or trading activity where the area of his residence or place of
business has a scope or history of unlawful trading/business activity.
b) Where the client profile of the person/s opening the account, according to the perception of
the branch is uncertain and/or doubtful/dubious.
The branches may apply enhanced due diligence measures based on the risk assessment,
thereby requiring intensive ‘due diligence’ for higher risk customers, especially those for
whom the sources of funds are not clear. The examples of customers requiring higher due
diligence mayinclude
The primary reason customer verification is needed is to prevent fraud. It's especially
important to verify customers in industries with high risk for fraud like banking and finance
or retail.
In the wake of recent data breaches, many companies are realizing that they need to improve
their customer verification process. It's no longer enough to simply check a customer's name
against a list of approved names at the time of purchase.
Today, you need to verify your customers' identities in more creative ways if you want to
keep your business safe from hackers and thieves.
In this post, you’ll learn some top ways to improve your customer verification process. But
first, let’s quickly understand the types of customer verification.
protection to the sign-in process. For example, the need to enter a code sent to their email or
answer to security questions. The question should be simple for the user to answer but
Age verification: It helps online businesses verify a customer’s age before allowing them to
These companies store extensive credit info of consumers, including names, add, and social
security numbers.
History of AML
AML (Anti-Money Laundering) is a term used for fighting money laundering and financial
crimes. The fight against money laundering in the world includes all policies, regulations, and
laws. These regulations are designed to prevent criminals from hiding illegally obtained
money. Governments have formed local and global institutions to spy and monitor money
laundering, illegal money flows, and financial crimes in their localities.
When we look at the history of Anti-Money Laundering, the USA is one of the first countries
that started to legislate the fight against Money Laundering in the 1970s. AML started with
the increase of dirty drug money in the USA. The Financial Action Task Force (FATF) was
established in 1989, and FATF is a supranational organization for fighting against money
laundering and financial crimes worldwide. This organization is the biggest organization
fighting against Money Laundering. Also, the International Monetary Fund (IMF) is another
organization combating money laundering crimes.
Also, the European Union and member countries use AML compliances and AML
procedures against Money Laundering. Most of the countries in the European Union are
members of the FATF organization. The European Union is going to publish another new
directive against Money Laundering and Financial Crimes. This is going to be the 6th
Directive on AML/CFT (AMLD 6) policies against Money laundering.
AML is a set of regulations, laws and procedures that detect and prevent criminals from
disguising illegal funds as legitimate income. AML policies help banks and financial
institutions combat financial crimes.
Banks are among the largest institutions in the field of finance. Since banks worldwide
mediate millions of transactions throughout the day, these institutions are at a higher risk of
financial crimes. And in fact, criminal organizations often carry out their money laundering
activities through banks and other financial institutions.
Banks must identify the risks by fulfilling their AML obligations and taking necessary
precautions. The AML process is critical for the financial and reputational standing of banks.
Auditors and regulators legally require this process.
In addition, the technological shift in financial infrastructure and the rise of online payments
has increased the demand for more rigorous customer identity protection. In response to new
and more stringent directives, banks and financial institutions adopt emerging trends in AI-
based AML solutions to handle AML compliance with greater efficiency.
How Does AML Work in Banking
There are four key areas banks must address with their anti-money laundering compliance
program:
In the KYC procedure, banks collect customer identification and check its
accuracy. Banks make sure that a customer’s digital identity matches their real-
world identity, proving they are who they say they are.
This process can be done using ID document verification, face verification and
proof of address (bills or bank statements). An identity verification solution can
help you meet your KYC obligations while delivering protection for your business
and convenience to your customers.
Banks implement a control process called customer due diligence (CDD), through which
relevant information of a customer’s profile is collected and assessed for potential money
laundering or terrorist financing risk. Although CDD procedures vary from country to
country, there is only one goal: to detect risks.
After the KYC control process, banks apply risk assessment to their new customers.
Customer information is checked and screened against several online databases, including
politically exposed persons (PEPs), government records, watchlists and sanctions screening.
The people included in these lists carry high risks for money laundering and terrorist
financing. In banks that provide global services, a customer’s nationality and record of
financial transactions can also affect a customer’s risk rating.
Banks and financial institutions generally have a broad customer portfolio. The transactions
mediated by these banks are not limited to their own customers. For instance, one customer
of a bank can transfer money or make payments to another bank’s customer. Throughout the
day, an average-sized bank mediates thousands of money transfers.
Banks are obligated to monitor and control the people involved in money transfer
transactions. It is a major crime for a bank to mediate payments sent to a sanctioned or
banned person.
The consequences of the crimes brought about by the uncontrolled transaction between the
sender and the receiver include severe administrative fines. The banks could also lose their
credibility and good reputation.
Banks and financial institutions must monitor all customer deposits and other transactions to
ensure they are not part of a money laundering scheme. This includes verifying the origin of
large sums of money and reporting cash transactions exceeding $10,000.
With today’s technology, manual money laundering controls are outdated and inefficient.
Banks need an automated transaction screening process to carry out customer transactions per
AML policies.