KYC, AML, CFT & BANK OBLIGATION UNDER PMLA 2002

KYC enables banks to know/understand their customers and their financial dealings to be able to serve them better and prudently manage the risks of Money Laundering and Financing of Terrorism.
What KYC means?
Making reasonable efforts to determine the true identity and beneficial ownership of accounts
Sources of funds.
Nature of customers’ business.
What constitutes reasonable account activity?
Who your customer’s customer are?
What KYC does not mean?
Denial of Service to the Common Person.
Intrusive Behavior.
Use of information for cross selling.
Harassment of customers- threatening to close down the accounts arbitrarily.
KYC/Customer due diligence is an on-going process for prudent banking practices, therefore the banks are encouraged to:
Set up a compliance unit with a full time Head.
Put in place a system to monitor the accounts and transactions on a regular basis.
Update customer information and records at reasonable intervals.
Maintain proper records of customer identifications and clearly indicate, in writing.
Monitor and check unusually large cash transactions, especially those which are out of character/ inconsistent with the history

KYC/Customer due diligence is an on-going process for prudent banking practices, therefore the banks are encouraged to:
Set up a compliance unit with a full time Head.
Put in place a system to monitor the accounts and transactions on a regular basis.
Update customer information and records at reasonable intervals.
Maintain proper records of customer identifications and clearly indicate, in writing.
Monitor and check unusually large cash transactions, especially those which are out of character/ inconsistent with the history

1. KYC, AML, CFT & BANK OBLIGATION UNDER PMLA 2002 YASHLEEN KAUR BBA 6 TH SEM

2. KYC KNOW YOUR CUSTOMER / KNOW YOUR CLIENT

3. WHAT IS KYC ? ? KYC enables banks to know/understand their customers and their financial dealings to be able to serve them better and prudently manage the risks of Money Laundering and Financing of Terrorism. 3

4. What KYC means? Making reasonable efforts to determine the true identity and beneficial ownership of accounts Sources of funds. Nature of customers’ business. What constitutes reasonable account activity? Who your customer’s customer are? What KYC does not mean? Denial of Service to the Common Person. Intrusive Behavior. Use of information for cross selling. Harassment of customers- threatening to close down the accounts arbitrarily. 4

5. KYC/Customer due diligence is an on-going process for prudent banking practices, therefore the banks are encouraged to: Set up a compliance unit with a full time Head. Put in place a system to monitor the accounts and transactions on a regular basis. Update customer information and records at reasonable intervals. Maintain proper records of customer identifications and clearly indicate, in writing. Monitor and check unusually large cash transactions, especially those which are out of character/ inconsistent with the history 5

6. WH Y KYC ? ? ? To establish the identity of the client. This means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. To ensure that sufficient information is obtained on the nature of employment/business that the customer does/expects to undertake and the purpose of the account To prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. 6

7. W HEN DOES KYC APPLY ? ? ? KYC will be carried out at the following stages:  Opening a new account. Opening a subsequent account where documents as per current KYC standards have not been submitted while opening the initial account.  Opening a Locker facility where these documents are not available with the bank for all the Locker facility holders.  When the bank feels it necessary to obtain additional information from existing customers based on conduct of the account. When there are changes to signatories, mandate holders, beneficial owners etc. 7

8. Advantages of KYC norms: Sound KYC procedures have particular relevance to the safety and soundness of banks, in that: They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage; They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities). 8

9. AML ANTI MONEY LAUNDERING

10. 10 ILLEGAL / DIRTY MONEY LEGAL / WHITE MONEY 'Money Laundering' is the process by which illegal funds and assets are converted into legitimate funds and assets. Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering. Money Laundering is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins.

11. MONEY LAUNDERING GENREALLY REFERS TO “WASHING” OF THE PROCEEDS OR PROFITS GENERATED FROM: Kidnaping Extortion Bribery and corruption Gambling/ Robbery/ Cheating Counterfeiting & Forgery Terrorist Act Smuggling ( People, Arms, Goods ) Drug Trafficking Stock Market Agricultural Products ( As there is no income tax and mostly the transactions are on cash basis ). Creating Bogus Companies Showing Loans False export import invoices. Hawala Transactions Fictional Loans

12. MONEY LAUNDERING CYCLE 12 PLACEMENT STAGE Placement is the first step of money laundering which is the process of moving the money into the legitimate source via financial institutions, casinos, financial instruments etc. and at the same time, hiding its source. There are many ways of money laundering. This is the most vulnerable stage of money laundering as criminals are holding on to a bulk of funds and placing it into the financial system, which may attract the attention of law enforcement agencies.

13. MONEY LAUNDERING CYCLE 13 LAYERING STAGE The second stage is “layering”, sometimes it’s also referred to as “structuring stage”. It breaks the funds into small transactions and makes it difficult to detect and find out about the laundering activity. It usually entails international money movement, so the law enforcement agencies won’t be able to track the financial gains from illegal proceedings so easily. In this stage, money will be moving around the globe electronically, trading in overseas markets. Criminals usually convert the cash into monetary instruments once the funds are placed in the financial system without detection. The proceeds can either be banker’s drafts or money orders. In the modern world, the funds can also be used for trading in different stocks or currencies across different markets. Another common way that criminals use to cover the trail is buying assets with the cash and selling them. Assets can be re-sold locally or abroad and hence makes it harder to trace and thus seize. 

14. MONEY LAUNDERING CYCLE 14 INTEGRATION STAGE The third of the stages of money laundering is ‘integration’. The ‘dirty’ money is now absorbed into the economy, for instance via real estate. Once the ‘dirty’ money has been placed and layered, the funds will be integrated back into the legitimate financial system as ‘legal’ tender. Integration is done very carefully from legitimate sources to create a plausible explanation for where the money has come from. This money is then reunited with the criminal with what appears to be a legitimate source. At this stage, it is very difficult to distinguish between legal and illegal wealth. The launderer can use the money without getting caught. It is extremely challenging to catch the criminal if there is no documentation to use as evidence from the previous stages.

15. 15 HOW MONEY LAUNDERING WORKS

16. MEASURES TO DETER MONEY LAUNDERING: Board and management oversight of AML risks. Appointment a senior executive as principal officer with adequate authority and resources at his command. Systems and controls to identify, assess & manage the money laundering risks. Make a report to the Board on the operation and effectiveness of systems and control. Appropriate documentation of risk management policies, their application and risk profiles. Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile. Screening of employees before hiring and of those who have access to sensitive information. Appropriate quality training to staff. Quick and timely reporting of suspicious transactions.

17. CFT COMBATING THE FINANCING OF TERRORISIM

18. WHAT IS CFT ? ? CFT is also known as Counter financing of Terrorism. Combating the Financing of Terrorism (CFT) is a set of government laws, regulations, and other practices that are intended to restrict access to funding and financial services for those whom the government designates as terrorists. By tracking down the source of the funds that support terrorist activities, law enforcement may be able to prevent some of those activities from occurring. 18

19. HOW COMBATING THE FINANCING OF TERRORISM (CFT) WORKS 19 Terrorists use different methods to finance their activities and conceal the sources of their funds, so financial regulators and law enforcement must use a variety of techniques to catch these criminals. The funds may come from legal sources, such as legitimate businesses, government funding, and religious or cultural organizations, or from illegal sources, such as drug trafficking, kidnapping, and government corruption. The funds may also come from an illegal source but appear to come from a legal source, through money laundering.

20. 20 BENEFITS AND COSTS OF COMBATING THE FINANCING OF TERRORISM (CFT) The main intended benefit of CFT is to disrupt and prevent the incidence of terrorist activity. An additional reason for CFT is that the use of the financial system by criminals engaged in money laundering and terrorist financing may threaten the stability of the financial system. The public may not trust the integrity of the financial system if it cannot detect illicit activities. CFT also imposes major costs on society. The most significant of these is that CFT policies often reduce or eliminate privacy and anonymity in financial and other transactions for all people in society.

21. PMLA 2002 Prevention of Money Laundering Act, 2002 was enacted to fight against the criminal offence of legalizing the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds. 21

22. 22 AUTHORITIES ENTRUSTED FOR INVESTIGATION The Enforcement Directorate  in the Department of Revenue, Ministry of Finance, the Government of India is responsible for investigating the offences of money laundering under the PMLA.   Financial Intelligence Unit – India (FIU-IND)  under the Department of Revenue, Ministry of Finance is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND is the central national agency responsible for receiving, processing, analysing , and disseminating the information relating to suspect financial transactions.

23. 23 ACTIONS THAT CAN BE INITIATED AGAINST THE PERSON INVOLVED IN MONEY LAUNDERING Seizure/freezing of property and records and attachment of property obtained with the proceeds of crime. Any person who commits the offence of money laundering shall be punishable with : Rigorous imprisonment for a minimum term of three years and this may extend up to seven years. Fine (without any limit).

24. CONCLUSION The objective of  KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them  manage their risks prudently.  With the help of technology such as special compliance platforms, companies are now able to easily research their customers and ensure that they are not doing business with criminals. 24

25. 25 THANK YOU