89
C h a pt e r 4
ANTI-MONEY LAUNDERING
ON BANKS
ByK.K.JindaV^
INTRODUCTION
Across the World, banks have become a major target o f Money
Laundering operations and financial crimes because banks provide a variety
of services and instruments that can be used to conceal the source of
money. Iw o cardinal rules that are to be invariably observed by banks for
steering clear of the money laundering traps are
1. Know your customer [KYC] and
2. Know your employees
Commercial Banks in India are required to adhere to Anti money
laundering guidelines based upon ‘Know Your C.ustomer’ norms issued by
Reserve Bank of India in August- 2002. Banks have been ad\nsed to follow
customer identification procedure for opening of accounts and monitoring
transactions o f suspicious nature for the purpose of reporting it to
appropriate authority. These ‘Know Your Customer’ guidelines have been
revisited in the context of the Recommendations made by the Financial
Action Task Force (FAl'F) on Anti Money Laundering (AML) standards and
on Combating Financing of Terrorism (C F l). These standards have become
the international benchmark for framing Anti Money Laundering and
combating financing of terrorism policies by the regulatory authorities.
Compliance with these standards both by the banks/financial institutions in
the country has become necessary for international financial relationships.
Detailed guidelines based on the Recommendations of the FATl* and the
paper issued on Customer Due Diligence (CDD) for banks by the Basel
Committee on Banking Supervision, with indicative suggestions of RBI are
discussed in this Chapter.
P ro gram m e D irecto r, N IB SC O M , N oida, UP.
90 Prevention o f Money laundering — Ijiga l and Finandal Issues
Banks have also been advised by Reserve Bank of India to ensure that a
proper policy framework on ‘Know Your Customer’ and Anti-Money
Laundering measures is formulated and put in place with the approval of
their respective Boards so that banks are fully compliant with the provisions
before December 31, 2005. Banks have already taken steps in this direction
so as to avoid money laundering related frauds.
I ’hc following are the key elements now being observed by banks to
curb money laundering
1. Customer Acceptance Policy
2. Customer Identification Procedure
3. Monitoring of Transactions; and
4. Risk Management
Customer Identification Requirements - Indicative Guidelines
Trust/Nominee or Fiduciary Accounts
There exists the possibility that trust/nominee or fiduciary accounts can
be used to circumvent the customer identification procedures. Banks are
required to determine whether the customer is acting on behalf of another
person as trustee/nominee or any other intermediary. If so, banks may insist
on receipt of satisfactory evidence of the identity of the intermediaries and
of the persons on whose behalf they are acting, as also obtain details of the
nature of the trust or other arrangements in place. While opening an account
for a trust, banks should take reasonable precautions to verify the identity of
the trustees and the settlers of trust (including any person settling assets into
the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries
should be identified when they are defined. In the case of a ‘foundation’,
steps should be taken to verify the founder managers/directors and the
beneficiaries, if defined.
Accounts of companies and firms
Banks need to be vigilant against business entities being used by
individual as a ‘front’ for maintaining accounts with banks. Banks should
examine the control strucmre of the entity, determine the source of funds
and identify the natural persons '^'ho have a controlling interest and who
comprise the management. I'hese requirements may be moderated according
to the risk perception e.g. in the case of a public company it will not be
necessary to identify all the shareholders.
Anti-Money iMundering on Banks 91
Client accounts opened by professional intermediaries
When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified. Banks may hold ‘pooled’ accounts
managed by professional intermediaries on behalf of entities like mutual
funds, pension funds or other types of funds. Banks also maintain ‘pooled’
accounts managed by lawyers/chartered accountants or stockbrokers for
funds held ‘on deposit’ or ‘in escrow’ for a range of clients. Where funds
held by the intermediaries are not co-mingled at the bank and there are ‘sub
accounts’, each of them attributable to a beneficial owner, all the beneficial
owners must be identified. Where such funds are co-mingled at the bank, the
bank shovild still look through to the beneficial owners. Where the banks rely
on the ‘customer due diligence’ (CDD) done by an intermediary, they should
satisfy themselves that the intermediary is regulated and supervised and has
adequate systems in place to comply with the KYC requirements. It should
be understood that the ultimate responsibility for knowing the customer lies
with the bank.
Accounts of Politically Exposed Persons (PEPs) resident outside
India
Politically exposed persons are individuals who are or have been
entrusted with prominent public functions in a foreign country, e.g., Heads
of States or of Governments, senior politicians, senior government/judicial/
military officers, senior executives of state-owned corporations, important
political party officials, etc. Banks should gather sufficient information on
any person/customer of this category intending to establish a relationship
and check all the information available on the person in the public domain.
Banks should verify the identity of the person and seek information about
the sources of funds before accepting the PEP as a customer. The decision
to open an account for PEP should be taken at a senior level which should
be clearly spelt out in Customer Acceptance Policy. Banks should also
subject such accounts to enhanced monitoring on an ongoing basis. The
above norms may also be applied to the accounts of the family members or
close relatives of PEPs.
Accounts o f non-face-to-face customers
With the introduction of telephone and electronic banking, increasingly
accounts are being opened by banks for customers without the need for the
92 Prevention o f Money laundering — l^ ga l and I'inandal Issues
customer to visit the bank branch. In the case of non-face-to-face customers,
apart from applying the usual customer identification procedure, there must
be specific and adequate procedure to mitigate the higher risk involved.
Certification of aU the documents presented may be insisted upon and, if
necessary, additional documents may be called for. In such cases, banks may
also require the first payment to be effected through the customer’s account
with another bank which, in turn, adheres to similar KYC standards. In the
case of cross border customers, there is the additional difficulty of matching
the customer with the documentation and the bank may have to rely on third
party certification/introduction. In such cases, it must be ensured that the
third party is a regulated and supervised entity and has adequate KYC
systems m place.
Correspondent Banking
(Correspondent banking is the provision of banking services by one bank
(the “correspondent bank”) to another bank (the “respondent bank”). These
services may include cash/funds management, international wire transfers,
drawing arrangements for demand drafts and mail transfers, payable-through-
accounts, cheques clearing, etc. Banks should gather sufficient information
to understand fully the nature of the business of the correspondent/
respondent bank. Information on the other bank’s management, major
business activities, level of AML/CFT compliance, purpose of opening the
account, identify of any third party entities that will use the correspondent
banking services, and regulatory/supervisory framework in the
correspondent’s/respondent’s country may be of special relevance.
Similarly, banks should try to ascertain from publicly available information
whether the other bank has been subject to any money laundering or terrorist
financing investigation or regulatory action. While it is desirable that such
relationships should be established only with the approval of the Board, in
case the Boards of some banks wish to delegate the power to an
administrative authority, they may delegate the power to a committee headed
by the Chairman/CEO of the bank while laying down clear parameters for
approving such relationships. Proposals approved by the Committee should
invariably be put up to the Board at its next meeting for post facto approval.
The responsibilities of each bank with whom correspondent banking
relationship is established should be clearly documented. In the case of
payable-through-accounts, the correspondent bank should be satisfied that
the respondent bank has verified the identity of the customers having direct
access to the accounts and is undertaking ongoing ‘due diligence’ on them.
Anti-Money 'Laundering on Banks 93
The correspondent bank should also ensure that the respondent bank is able
to provide the relevant customer identification data immediately on request.
Banks should refuse to enter into a correspondent relationship with a
“shell bank” (i.e. a bank which is incorporated in a country where it has no
physical presence and is unaffiliated to any regulated financial group). Shell
banks are not permitted to operate in India. Banks should also guard against
establishing relationships with respondent foreign financial institutions that
permit their accounts to be used by shell banks. Banks should be extremely
cautious while continuing relationships with respondent banks located in
countries with poor KYC standards and countries identified as ‘non
cooperative’ in the fight against money laundering and terrorist financing.
Banks should ensure that their respondent banks have anti money laundering
policies and procedures in place and apply enhanced ‘due diligence’
procedures for transactions carried out through the correspondent accounts.
Customer Identification procedure
Features to be verified and documents that may be obtained from
customers
Features Documents
Accounts o f individuals
- legal nam e and any other (i) Passport (ii) PAN card (iii) Voter’s Identity Card (iv)
names used D riving licence,(v) Identity card (subject to the bank’s
satisfaction) (vi) Letter from a recogmzcd public authority or
public servant verifying the identity and residence of he
customer to the satisfaction o f bank
(i) Telephone bill (ii) Bank account statement (m) Letter from
any recognized public authority (iv) Electncit)' bill (v) Ration
card
Correct perm anent address (vi) Letter from employer (subjcct to satisfaction o f the
bank)
(any one document which provides customer information
to the satisfaction of the bank suffice)
Accounts o f companies
- Nam e o f the company (i) C ertificate of incorporation and M em orandum &
- Principal place o f business Articles o f Association (ii) Resolution o f the Board o f
- M ailing address o f the Directors to open an account and identification o f those
company who have authority to operate the account (iu) Power of
- Telephone/Fax N umber Attorney granted to its managers, officers or employees to
transact business on its behalf (iv) Copy of P.<\N allotment
letter (v) Copy of the telephone bill
94 Prepetition o f Money iMundering — Ijegal and Financial Issues
Accounts o f partnership firms
- Legal name (i) Registration certificate, if registered
- Address (li) Partnership deed (iii) Power o f Attorney granted to a
- Name of all partners and partner or an employee o f the firm to transact business on
theur addresses its behalf (iv) Any officially valid docum ent identifying the
- Telephone numbers o f partners and the persons holding the Power o f Attorney and
the firm and partners their addresses (v) Telephone bill in the nam e o f firm
partners
Accounts o f trusts & foundations
' Names o f trustees, settlers, (i) C ertificate of registratio n , if registered
beneficiaries and signatories (ii) Power o f Attorney granted to transact business on its
Name and addresses o f behalf (iii) Any officially valid docum ent to identify the
the founder, the managers/ trustees, setders, beneficiaries and those holding Power of
directors and the bene- Attorney, founders/managers/ directors and their addresses
ficianes .
- Telephone/fax numbers (iv) Resolution of the managing body o f the foundation'
association
(v) Telephone bill
Banks were advised to put in place a policy framework within three
months of the date of the circular and ensure that the banks were fully
.compliant with the provisions of the Anti money laundering by December
31, 2005. The Chairmen/CEOs of banks were advised by RBI to personally
monitor the progress in this regard and take appropriate steps to ensure that
systems and procedures were put in place and instructions had percolated to
the operational levels. It should also be ensured that there is a proper system
of fixing accountability for serious lapses and intentional circumvention of
the prescribed procedures and guidelines.
Banks have appointed Principal officers in their banks and put in place a
system of internal reporting of suspicious transactions and cash transactions
of Rs. 10 lakh and above. In this connection, the Government of India,
Ministry of Finance, Department of Revenue, issued a notification dated
July 1, 2005 in the Gazette of India, Notify the Rules under the Prevention
of Money Laundering Act (PMLA), 2002. In terms of the Rules, the
provisions of PMLA, 2002 came into effect from July 1, 2005. Section 12 of
the PMLA, 2002 casts following obligations on the banking companies in
regard to preservation and reporting of customer account information.
Maintenance of records of transactions
Banks to have a system of maintaining proper record of transactions as
mentioned below:
Anti-Money iMundering on Banks 95
(i) all cash transactions of the value of more than rupees ten lakh or its
equivalent in foreign currency;
(ii) all series of cash transactions integrally connected to each other
which have been 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;
(iii) all cash transactions where forged or counterfeit currency notes or
bank notes have been used as genuine and where any forgery of a
valuable security has taken place;
(iv) all suspicious transactions whether or not made in cash and by way
of as mentioned in the Rules.
Information to be preserved
Banks are required to maintain the following information in respect of
specified transactions
(i) the nature of the transactions;
(u) the amount of the transaction and the currency in which it was
denominated;
(iii) the date on which the transaction was conducted; and
(iv) the parties to the transaction.
Maintenance and Preservation of records
Banks are to evolve a system for proper maintenance and preservation
of account information in a manner that allows data to be retrieved easily and
quickly whenever required or when requests by the competent authorities.
Further, banks are to maintain for at least ten years from the date of cessation
of transaction between the bank and the client, all necessary records of
transactions, both domestic or international, which will permit reconstruction
of individual transactions (including the amounts and types of currency
involved if any) so as to provide, if necessary, evidence for prosecution of
persons involved in criminal activity.
Records pertaining to the identification of the customer and his address
(e.g. copies of documents Like passports, identity cards, driving licenses,
PAN, utility bills etc.) obtained while opening the account and during the
course of business relationship, are properly preserved for at least ten years
after the business relationship is ended. The identification records and
transaction data should be made available by Banks to the competent
authorities upon request.
96 Prevention o f Money Luiundering — Ijegal and Financial Issues
Reporting to Financial Intelligence Unit-India
Banks are required to report information relating to cash and suspicious
transactions to the Director, Financial Intelligence Unit-India (FIU-IND) at
the following address;
Director, FIU-IND,
Financial Intelligence Unit-India,
6**' Floor, Hotel Samrat,
Chanakyapuri,
New Delhi-110021
Reporting Formats
There are altogether five reporting formats viz.
(i) Manual reporting of cash transactions
(ii) Manual reporting of suspicious transactions
(iii) Consolidated reporting of cash transactions by Principal Officer of
the bank
(iv) Electronic data strucmre for cash transaction reporting and
(v) Electronic data structure for suspicious transaction reporting.
(\’i) The reporting formats contain detailed guidelines on the compilation
and manner/procedure of submission of the reports to FIU-IND.
Banks to initiate urgent steps to ensure electronic filing of cash
transaction report (CTR) as early as po3'''''’“ The related hardware
and technical requirement for preparing reports in an electronic
format, the related date files and data structures thereof are
furnished in the instructions part o f the concerned formats.
However, banks which are not in a position to immediately file
electronic reports may file manual reports to FIU-IND. While
detailed instructions for filing all types of reports are given in the
instructions part of the related formats, banks have to adhere to the
following:
(a) The cash transaction report (CTR) for each month should be
submitted to FIU-IND by 15'’’ of the succeeding month. While
filing CTR, individual transactions below rupees fifty thousand
' may not be included;
(b) The Suspicious Transaction Report (STR) should be furnished
within 7 days of arriving at a conclusion that any transaction,
whether cash or non-cash, or a series of transactions integrally
connected are of suspicious nature. The Principal Officer
Anti-M onej Laundering on Banks 97
should record his reasons for treating any transaction or a series
of transactions as suspicious. It should be ensured that there is
no undue delay in arriving at such a conclusion once a
suspicious transaction report is received from a branch or any
other office. Such report should be made available to the
competent authorities on request;
(c) The Principal Officer wiU be responsible for timely submission
of CTR and STR to FIU-IND;
(d) Utmost confidentiality should be maintained in filing of CTR
and STR to FIU-IND. The reports may be transmitted by
Speed/registered post, fax, email at the notified address;
(e) It should be ensured that the reports for all the branches are
fded in one mode i.e. electronic or manual;
(f) A summary of cash transaction report for the bank as a whole
may be compiled by the Principal Officer of the bank in
physical form as per the format specified. The summary should
be signed by the Principal Officer and submitted both for
manual and electronic reporting.
Banks may not put any restrictions on operations in the accounts where
an STR has been made. However, banks to ensure that there is no ripping off
to the customer at any level.
C o n c l u s io n
Money laundering is a serious, highly sophisticated and global criminal
activity. The degree of organization displayed in Money Laundering is a
major cause of concern for banks and Reserve Bank of India. Banks and
Financial Institutions can protect themselves against Money Laundering by
implementing an effective KYC policy knowing their customers, checking
the source of funds, monitoring the conduct of accounts, and by learning to
recognize suspicious/irregular transactions.
