1 know your list.pdf

6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm Circular No. TJSB/Operations/2011/0001 Date Subject...

6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm Circular No. TJSB/Operations/2011/0001 Date Subject Know Your Customer (KYC) · Every bank needs to “know “its customer. The main reason we bankers need to “know” our customer is very simple. Just as a stranger knocks on our door when we are home, we make some discreet enquiries before letting him in, the same logic applies to a person who intends to open an account with us. · We need to take all the basic precautions before we open an account, as opening the account permits him access to his bank account which at times can be misused. · The very fact that we have opened the account we take on ourselves the responsibility of collecting his cheques. Thus it is very important that we identify the customer properly and know all facts about him before we open the account and collect cheques on his behalf. The very act of sending a cheque in clearing on behalf of the customer, we as the collecting banker are indicating to the paying banker that we know the customer and take full responsibility for his actions. · There should be no shortcuts/deviations in the KYC procedure as any shortfalls might lead to a financial loss and will prevent the bank from getting protection under section 131 of the Negotiable Instruments Act.1881,which clearly states that the “Cheques should have been collected for the customer and all KYC norms should have been followed” · The Bank’s guidelines are very clear in this respect and states as follows · “Not to open an account or close an existing account where the bank is unable to verify the identity and /or obtain documents required due to non-cooperation of the customer or non-reliability of the data/information furnished to the bank “ · Thus KYC norms will help us know and understand the customer and their financial dealings better which in turn will help the bank to monitor the account and manage the risk in a better way. KYC rules are a offshoot of the following acts and rules 1. Prevention of Money laundering Act 2002 or PMLA 2002 2. Financial Action Task Force or FATF 3. Combating Financing of Terrorism 4. Reserve Bank of India guidelines KYC norms are framed based on the following four points: 1. Customer Acceptance Policy 192.168.232.78/elearn/SOP/1 know your list.htm 1/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm 2. Customer Identification Procedures 3. Monitoring of Transactions 4. Risk Management. A customer as per the banks’ KYC policy is defined as - 1. A person who maintains an account or has a business relationship with the bank. The business relationship here means a loan, overdraft, Cash Credit, locker, safe custody etc. 2. A customer is a person on whose behalf the account is maintained (beneficial owner). Beneficial owner here means to whom the funds in the account belong to. 3. The customer is any person or entity connected with a financial transaction which can pose significant financial, reputational or other risks to a bank. 4. A customer is a person on whose behalf the account is maintained (beneficial owner). Beneficial owner here means to whom the monies in the account belong to. § In a normal situation when an individual comes to open an account with the bank, we as bankers presume that the monies which the person will be transacting on belong to that person. § We as bankers need to discreetly inquire with the person whether the monies belong to him. If the person replies in the affirmative, we can presume that the person is the beneficial owner of the account. § This might not be true as many a times the person acts as a front for some other person and might be diverting these third party funds through his account to avoid detection and avoid taxes. When such doubts exists in our mind as bankers we need to probe further and get more information from the customer. The term “beneficial owner” has been defined as a natural person who ultimately “owns” or controls a client and/or the person on whose behalf the transaction is being conducted and includes a person who exercises ultimate control over the firm,company,or legal entity. Additionally, if it is a business account, we as a banker need to make a judgment based on the nature of his business and the quantum of money flowing through his account. This is the responsibility of the banker to monitor the account. In case of suspicious transaction we need to report the matter to our HO. 192.168.232.78/elearn/SOP/1 know your list.htm 2/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm § This can be done by matching the total income declared on the account opening form and value of transactions being routed through the account. Additionally if it is a business account we as bankers need to make a judgment based on the nature of his business and the quantum of monies flowing through his account. This is the responsibility of the banker to monitor the account. If in doubt we can call for the financials and the income tax papers of the customer to satisfy ourselves. § Trust accounts are other sources of such “beneficial ownership” accounts. For example an industrialist might set up a trust fund wherein his family members might be the beneficiaries as their names appear on the trust as beneficiaries. But in fact the industrialist himself might be the “beneficial owner” and the funds being routed through the trust account might be to avoid taxes and launder money and will be used by him for his business or personal use. § The industrialist must be using the trust account as a routing account. Such accounts require a high level of monitoring and reporting. 3. Beneficiaries of transactions conducted by Chartered Accountants/Solicitors/Stock brokers. · The above professionals are permitted to open accounts on behalf of their clients as in such situations the funds belong to the client. For example many high net worth individuals invest in the share market through the portfolio management scheme wherein a given amount of funds are parked with the stock broker. Additionally they authorize the stock broker through a power of attorney to operate the account and purchase/sale of shares on their behalf. The stock broker in this case has per SEBI regulations have to separately keep the funds in a client account and not to mix it with his own stock broking account. Thus each client who is a customer of the stock broker will have a separate account. If a stockbroker approaches us to open a client account we need to have a complete KYC done of the stockbrokers ‘client. In this case it is understood that the stockbroker already has a running account with us which is completely KYC compliant Thus each client who is a customer of the bank will have a separate account. · Similarly in case of chartered accountants and solicitors these situations may arise. For example in a property deal where a buying and selling of a specific property is about to happen the sale agreement at times specifies a certain amount to be 192.168.232.78/elearn/SOP/1 know your list.htm 3/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm kept with a solicitor or a chartered accountants who acts as a third party between the seller & buyer. In such situations the CA or the solicitor parks the funds in a bank. These funds as per rules have to be kept in a client account separately and not to be mixed with solicitors/CA, account. This in this case to the solicitor’s client becomes the customer of the bank, and we need to do a complete KYC of this person. It is understood that the CA/Solicitor is already banking with us and their accounts are completely KYC compliant. 5. The customer is any person or entity connected with a financial transaction which can pose significant reputational or other risk to the bank 6. The above statement is associated with a risk and is normally applicable to very high value transactions. The risk here is so high that in the event of anything adversely happening the reputation of the bank itself will be affected. For example we receive funds as an agent to be passed to some other bank where a person or an entity with a known criminal background has an account and we are aware of it. In this case even though the person does not bank with us, and we are only passing on the funds to the other bank, we become a party to the transaction and will be pulled up by the regulatory authorities for not taking proper precautions. Customer Acceptance Policy (CAP) The Reserve Bank of India has directed each bank to have its own Customer Acceptance Policy within the regulatory framework. The customer acceptance policy of each bank should be clear and has permitted each bank to decide the customer profile they are comfortable with. The minimum balance requirement of each bank is decided by the profile they choose to accept as policy. For example some banks have stipulated Rs.25000/- as a minimum balance for current account while we have decided Rs.2000/- as a minimum balance for current accounts. This is an offshoot of the Customer Acceptance Policy. The Customer Acceptance Policy of the Bank is as follows:- · No account is opened in a fictitious/anonymous or benami name(s) · We have internal clearly defined parameters of risk perception, identifying which businesses pose a risk to the bank, identify the location of the customers, his clients, mode of payments, social and financial status to enable the bank to assess the level of risk they pose to the bank. For example a bullion or gold merchant attracts a higher risk category than a medical shop because the gold trade is a high value 192.168.232.78/elearn/SOP/1 know your list.htm 4/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm trade and a huge amount of cash transactions takes place. · The Risk Grading of our customers will be on the following parameters Low Risk Medium Risk High Risk · Politically connected persons to be graded under the highest risk category requiring constant monitoring. · Suitable additional documentation to be obtained depending on the risk level of the customer for example if you find a lot of cash transactions in an account which seems to be abnormal, we as bankers can call for copies of income tax returns or copies of the invoices/details of his clients for cross checking. · Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures i.e. bank is unable to verify the identity and /or obtain documents required as per the risk categorization due to non- cooperation of the customer or non-reliability of the data/information furnished to the bank. · 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. · Necessary checks are in place before opening the account to ensure that persons or organizations with a known criminal/terrorist or questionable background are not allowed to open an account. But we should not insist for too much of documentation so as to avoid harassment of the customer. For example, decision to close an account when we find suspicious transaction in our bank has to be taken in consultation with our Head Office and after due notice to the customer. We need to be alert and look out to ensure that persons or organizations with a known criminal/terrorist or questionable background are not allowed to open an account. · The account opening form which runs into four pages has been designed with the intention of capturing the information and building a profile of the customer. This is part of the Customer Acceptance Policy. The profiling helps us in assessing the risk category in which the customer will fall into so that the account can be suitably monitored. Thus a high level risk customer will require more periodical monitoring than a medium or low level risk 192.168.232.78/elearn/SOP/1 know your list.htm 5/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm customer. A detailed circular on CRC or Customer Risk Categorization is available in our office. · The risk is based on the customer’s background, nature of activity, country of origin, sources of funds etc. · We as a bank have very taken a policy decision that too much of personal or business information should not be insisted upon as this will be intrusive. Similarly the information should be kept confidential and not to be used as a marketing tool or for cross selling. · We need to categorise the customers based on a risk profile. Generally all individual accounts i.e. salaried individuals, retired persons, low and medium income individuals small traders are grouped as low risk category. For such low risk customers so long as the basic requirement of identity and location are met the account can be opened. These low level risk accounts require less monitoring · When we feel that the risk category of a certain customer needs to be moved from a low to medium or high the monitoring level goes up and additional documentation needs to be obtained from the customer. · Following is the Risk Rating parameters of our bank Low Risk 1. Salaried Employees whose Customers ID/Address proof is fully verified 2. Small Traders 3. Small business accounts. Medium Risk 1. Non Resident Customers customers 2. HNIs or High Net-worth Individuals (other than salaried individuals) 3. Trusts 4. Charities 5. NGOs and organizations receiving donations 6. Companies having closed family shareholding or beneficial ownership 7. Firms with sleeping partners High Risk 1. PEP Politically Exposed Persons of foreign origin 2. Non Face to Face customers / customers who do not deal directly with the bank i.e. through an intermediary or a Power of Attorney holder. 192.168.232.78/elearn/SOP/1 know your list.htm 6/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm 3. Persons of dubious reputation as per public information available. THE RISK CATEGORIZATION OF CUSTOMERS IS AN INTERNAL MATTER OF THE BANK AND SHOULD IN NO CIRCUMSTANCES BE REVEALED TO THE CUSTOMER. Customer Identification Procedures CDD or Customer Due Diligence: Customer Due Diligence is defined as any measure undertaken by us to collect and verify information to positively establish the identity of a customer. We have in place a CDD which has been approved by our Board. We need to do a CDD on the following:- When a customer establishes a business relationship Carries out an occasional transaction When we suspect a transaction When we doubt the authencity of the documents submitted or if we suspect that the document provided are fraudulent. Thus if we are unable to apply CDD we should not: Establish the business relationship or carry out the occasional transaction Should not carry out the transaction through our bank Should terminate all existing relationships with the customer after obtaining approval from Head Office. Should report the matter to the FIU or Financial Intelligence Unit and the Reserve Bank of India. There are three types of CDD or Customer Due Diligence which are as follows:- Basic Due Diligence: This means collecting basic KYC document like Pan card/Driving license supported by an address document like a utility bill. At times we find that some customers are unable to give an address document in their own name, in such a case a letter from a close or blood relative can be accepted. Simplified Due Diligence : This refers to the documents obtained for people who belong to the low income group or for opening a NO FRILLS account in which case we take only a photograph and an introduction from an existing account holder. Enhanced Due Diligence: Any additional measures over and above simple due diligence is known as enhanced due diligence. Thus EDDs need to be done for all high risk customers. This involves enhanced level of monitoring. 192.168.232.78/elearn/SOP/1 know your list.htm 7/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm Customer identification means identifying the customer and verifying his/ her identity by using reliable, independent source documents, data or information. Besides identification we should obtain the latest photograph of the customer. We need to obtain sufficient information necessary to establish, to our satisfaction, the identity of each new customer, whether regular or occasional, and the purpose of the intended nature of banking relationship. Being satisfied means that we must be able to satisfy the competent authorities that proper precautions were observed based on the risk profile of the customer in compliance with the guidelines in place. Such risk based approach is considered necessary to avoid cost to us and a burden for the customers. The nature of the documents required depend on the type of customers i.e. whether it is an individual, a corporate, a partnership firm etc., We should verify the legal status of the person/entity through proper documentation. For eg.individuals would require a Pan Card/Driving License/Passport or an Election card for identification and a phone/electricity bill for address verification. In case of a partnership firm in addition to the identity/address proof of each of the partners, the partnership deed and a valid business license will be required.The list of KYC documents required for each type of account is available under the respective section Monitoring of Transactions Know your Customer does not stop after satisfying yourself that the account has been opened after obtaining proper documentation, on the contrary we need to “know “ the customer better when he is operating the account. This can happen only when we monitor the account properly. Monitoring of the account is dependent on the risk profile of the particular customer. Higher the risk level of the customer, more stringent is the monitoring of the accounts of the customer. We need to pay more attention to complex transactions for e.g. large numbers of transfer entries between various accounts which have no apparent economic or lawful value. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring. Transactions are monitored through the following three reports. 1. CTR or Cash Transaction Reports 2. STR or Suspicious Transaction Reports 192.168.232.78/elearn/SOP/1 know your list.htm 8/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm 3. CCR or Counterfeit Currency Reports 4. Report on Transactions in NPO A/cs. or Non Profit Organizations All new accounts opened are subject to monitoring for a period of six month. As of now all cash transactions whether it be an individual transaction of Rs.10 lacs. or cash transactions totaling Rs.10 lacs during a month are subject to scrutiny. A report of these transactions are generated by the Head Office and details sent to the respective branches for the managers’ comments. On receipt of these comments from the branch the report is collated at the Head Office by the Banks’ Principal Officer who has been specially designated for this purpose. The Principal Officer for the bank is, DGM, Audit, Inspection & Vigilance. The report is sent to the FIU, New Delhi by the 15th of the succeeding month. The FIU or Financial Intelligence Unit as it is known is controlled by the Finance Ministry. The FIU is a central national agency responsible for receiving, processing, analyzing and disseminating information to the various regulatory and enforcement bodies. FIU by itself is not a regulatory authority, but as mentioned above it sends information relating to suspicious transactions to the RBI/CBI/Enforcement Directorate/Income Tax authorities etc., for investigation and follow up. Customer Service Implementation of KYC procedures requires us to demand certain information from customers which may be of personal nature or which have hitherto never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. That is the reason why we have designed the account opening form so that all the required information is captured. Pamphlets and brochures also carry this information so that the customer is kept properly informed about the objectives of the KYC programme. 192.168.232.78/elearn/SOP/1 know your list.htm 9/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm List of Identity and Address Proof Remarks documents Passport (Both Identity and Address Proof) Ideal document for Identity/Address /Signature proof. Considered to be the most secure document as it has a police verification. Should not be considered if the passport has expired. Driving License (Identity proof document) Only for identity proof – Discreetly match the face/photograph and the document. Has a validity date. Expired license not a valid document Voters ID card (Identity proof document) Only for identity proof – Has a reputation for spelling mistakes and times creates confusion. Refer your supervisor Government/Defence ID Card (Identity proof Only for identity proof - Check for the document) government Seal and validity date. Should not be considered if expired. ID card of reputed Companies (Identity proof Only companies listed on the stock exchange document) should be considered. /check for validity Should be additionally supported by a letter from the HR of the Company. Normally such accounts are preferred If the company itself is banking with the bank/branch. 192.168.232.78/elearn/SOP/1 know your list.htm 10/11 6/26/24, 3:29 PM 192.168.232.78/elearn/SOP/1 know your list.htm Pan Card (Identity proof document) Identity proof document – Check for authenticity through web site DIT - Know Your Pan Electricity Bill./MGL Bill/Telephone Bill/LIC Should be the latest. Should not be more than premium receipt (Only address proof 3 months old document) Students ID card ((Identity proof document) Should be supported by a ration card wherein the customers’ relationship can be established for address proof. Ration card by itself is not a proof document and is used only to establish the relationship. Copy of Lease agreement ( only Address proof The agreement should preferably be a document) registered agreement 192.168.232.78/elearn/SOP/1 know your list.htm 11/11