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KYC GUIDE
Prepared by :
Nitin Nirgude
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KYC Overview & Introduction – ........................................................................................ 1
KYC purpose & objectives ................................................................................................. 4
Money Laundering & steps involved ................................................................................. 5
Impact of money laundering ............................................................................................. 7
Techniques of money laundering ...................................................................................... 8
AML Red flags ................................................................................................................ 11
OFAC - ............................................................................................................................ 13
Embargo & Sanctions ..................................................................................................... 14
Risk Parameters ............................................................................................................. 15
Real Life Cases ................................................................................................................ 21
When do financial institutions need to perform KYC? ..................................................... 21
Document Sources ......................................................................................................... 22
General KYC Requirements ............................................................................................. 23
Money Flow ................................................................................................................... 24
Document Sourcing Grid ................................................................................................. 26
Entity types (KYC Perspective) ........................................................................................ 27
MIFID - ........................................................................................................................... 52
Client On boarding - ....................................................................................................... 53
System work-around ...................................................................................................... 55
COB work flow ............................................................................................................... 57
Setups - .......................................................................................................................... 58
Client Communication – ................................................................................................. 59
RISK RATING questionnaire ............................................................................................ 61
Know Your Employee ..................................................................................................... 62
Conclusion- .................................................................................................................... 62
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KYC Overview & Introduction –
KYC introduced in 80’s decade when drug trafficking & arms smuggling troubled the world. Thus
concerns were raised on the huge profit generated from these activities & threat of laundering the
illicit money. Due to massive safety & security threat encouraged governments to come up with
regulations.
The Bank Secrecy Act was established in 1970 and has become one of the most important tools in
the fight against money laundering. Since then, numerous other laws have enhanced and amended
the BSA to provide law enforcement and regulatory agencies with the most effective tools to
combat money laundering. An index of anti-money laundering laws since 1970 with their respective
requirements and goals are listed below in chronological order.
• Established requirements for recordkeeping and reporting by private individuals, banks and
other financial institutions
• Designed to help identify the source, volume, and movement of currency and other
monetary instruments transported or transmitted into or out of the United States or
deposited in financial institutions
• Required banks to (1) report cash transactions over $10,000 using the Currency Transaction
Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail
by keeping appropriate records of financial transactions.
• Expanded the definition of financial institution to include businesses such as car dealers and
real estate closing personnel and required them to file reports on large currency
transactions
• Required the verification of identity of purchasers of monetary instruments over $3,000
In response to mounting concern over money laundering, the Financial Action Task Force on Money
Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. Recognizing
the threat posed to the banking system and to financial institutions, the G-7 Heads of State or
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Government and President of the European Commission convened the Task Force from the G-7
member States, the European Commission and eight other countries.
FATF Recommendations
The Task Force was given the responsibility of examining money laundering techniques and trends,
reviewing the action which had already been taken at a national or international level, and setting
out the measures that still needed to be taken to combat money laundering. In April 1990, less than
one year after its creation, the FATF issued a report containing a set of Forty Recommendations,
which were intended to provide a comprehensive plan of action needed to fight against money
laundering.
In 2001, the development of standards in the fight against terrorist financing was added to the
mission of the FATF. In October 2001 the FATF issued the Eight Special Recommendations to deal
with the issue of terrorist financing. The continued evolution of money laundering techniques led
the FATF to revise the FATF standards comprehensively in June 2003. In October 2004 the FATF
published a Ninth Special Recommendations, further strengthening the agreed international
standards for combating money laundering and terrorist financing - the 40+9 Recommendations.
The Law Enforcement, Organized Crime and Anti-Money-Laundering Unit of UNODC is responsible
for carrying out the Global Programme against Money-Laundering, Proceeds of Crime and the
Financing of Terrorism, which was established in 1997 in response to the mandate given to UNODC
through the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances of 1988. The Unit's mandate was strengthened in 1998 by the Political Declaration and
the measures for countering money-laundering adopted by the General Assembly at its twentieth
special session, which broadened the scope of the mandate to cover all serious crime, not just drug-
related offences.
The broad objective of the Global Programme is to strengthen the ability of Member States to
implement measures against money-laundering and the financing of terrorism and to assist them in
detecting, seizing and confiscating illicit proceeds, as required pursuant to United Nations
instruments and other globally accepted standards, by providing relevant and appropriate technical
assistance upon request.
KYC rules & Regulations became more stringent after the major attack took place in USA.
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MONEY was the essential element to plan this disaster
The official title of the USA PATRIOT Act is "Uniting and Strengthening America by Providing
Appropriate Tools Required to intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001”
The purpose of the USA PATRIOT Act is to deter and punish terrorist acts in the United States and
around the world, to enhance law enforcement investigatory tools, and other purposes, some of
which include:
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The Prevention of Money Laundering Act (India)
The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework
put in place by India to combat money laundering. PMLA and the Rules notified there under
came into force with effect from July 1, 2005. Director, FIU-IND and Director (Enforcement) have
been conferred with exclusive and concurrent powers under relevant sections of the Act to
implement the provisions of the Act.
The PMLA and rules notified thereunder impose obligation on banking companies, financial
institutions and intermediaries to verify identity of clients, maintain records and furnish
information to FIU-IND. PMLA defines money laundering offence and provides for the freezing,
seizure and confiscation of the proceeds of crime.
2008 Recession –
Subprime crisis – 2008 recession occurred in USA due to fall of real estate.
Before recession, there was a boom in real estate market. Many people took loan to purchase real
estate property. Due to stiff competition banks provided loan without proper due diligence & checking
credit capabilities of the borrowers.
Later prices of the real estate started falling down resulted in default in payment by
borrowers. That’s the reason banks got collapsed. Even Asset securitization was one of the major
reasons. (That we will cover in SPV).
Thus it is important for Bank & Financial Institutions to perform details background checks on
their customers.
Money laundering is a growing menace & it not only poses serious threat to the stability & integrity
of the financial system but also to the sovereignty & safety of nation worldwide.
The objective of KYC/AML guidelines is to prevent banks from being used 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.
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Ensuring that only legitimate and bona fide customers are accepted
Ensuring that customers are properly identified and that they understand the risks they may
pose
Verifying the identity of customers using reliable and independent documentation
Monitoring customer accounts and transactions to prevent or detect illegal activities
Implementing processes to effectively manage the risks posed by customers trying to misuse
facilities.
Risk Mitigation (money laundering, terrorist financing & any other financial crime.)
E.g. – purchase of real estate property. Buyer will deposit cash into real estate developer’s account
through a bank account. Thus bank will be aware about this transaction.
As we know KYC helps to mitigate money laundering risk, we will understand the money laundering
concept.
Illegal arms sales, smuggling, and the activities of organized crime, including for example drug
trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider
trading, bribery and computer fraud schemes can also produce large profits and create the incentive
to “legitimize” the ill-gotten gains through money laundering.
When a criminal activity generates substantial profits, the individual or group involved must find a
way to control the funds without attracting attention to the underlying activity or the persons
involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place
where they are less likely to attract attention.
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Basically, money laundering is a method of converting black money in to white.
Steps –
Placement
It is the initial stage of money laundering, the launderer introduces his illegal profits into the financial
system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums
that are then deposited directly into a bank account, or by purchasing a series of monetary
instruments (cheque, money orders, etc.) that are then collected and deposited into accounts at
another location.
Layering
After the funds have entered the financial system, the layering stage takes place. In this phase, the
launderer engages in a series of conversions or movements of the funds to distance them from their
source. The funds might be channeled through the purchase and sales of investment instruments, or
the launderer might simply wire the funds through a series of accounts at various banks across the
globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions
that do not co-operate in anti-money laundering investigations. In some instances, the launderer
might disguise the transfers as payments for goods or services, thus giving them a legitimate
appearance.
Integration
Having successfully processed his criminal profits through the first two phases the launderer then
moves them to the third stage in which the funds re-enter the legitimate economy. The launderer
might choose to invest the funds into real estate, luxury assets, or business ventures.
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Impact of money laundering
Money laundering & terrorist financing can have potentially devastating economic, security & social
consequences.
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Reduced stock value of financial institutions.
- Loss of tax
Money laundering diminishes government tax revenue & therefore indirectly harms honest
tax payers. It also makes government tax collection more difficult. This loss of revenue
generally means higher tax rates than would normally be the case.
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- Electronic transfer of funds
Electronic funds transfer systems offer money launderers a fast conduit for moving money
between countries & accounts. Illicit fund transfers are easily hidden among the other millions
of legitimate transfers that occur each day. Systems like fed wire, swift, & chips move millions
of wire transfer messages on daily basis.
- Correspondent banking –
The bank of New York scandal which erupted in august 1999 & exposed money laundering
through Russian correspondent accounts at BONY was an early instance of laundering abuses
through correspondent banking. A 305 page report, “Correspondent banking : A gateway to
money laundering” issued by united states senate permanent subcommittee on
investigations found that some large US foreign banks facilitated through carelessness & lax
procedures, the movement of diverse criminal proceeds into the USA.
Correspondent banking is a provision of banking services by one bank to other bank.
By establishing multiple correspondent relationships globally, banks can undertake
international financial transactions for themselves & for their customers in jurisdictions where
they have no physical presence.
E.g. – SBI does not have presence in USA however it want to provide banking services to the
Indian people who are residing in USA. Thus SBI will open a correspondent account with BNY
Mellon to provide banking services to Indian people. Indian people residing in USA are indirect
clients for BNY thus BNY will not have proper information on them.
USA Patriot Act contains several provisions concerning due diligence US financial
institutions needed to perform for relationship with foreign correspondent banking
customers. They include
Section 312 -
Requires US Financial institutions to conduct enhanced due diligence on foreign banks who
maintains correspondent accounts.
Section 312 –
The bank had no physical offices except a small office in Northern Cyprus.
Its chairman & managing director Hakki Yaman Namli was sought by Italian authorities in connection
with allegedly laundering $50 million.
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- Private banking
It is an extremely lucrative competitive & worldwide industry & is an important issue when
discussing the money laundering field. In the early 1990’s private banking received unwanted
publicity from the scandal surrounding the movement of hundreds of millions of dollars of
purportedly ill-gotten money belonging to Raul Salinas, the brother of former Mexican
president Carlos Salinas. His fortune in large measure was handled by private bankers
employed by Citibank in Mexico City, New York, London & Geneva.
Private banking provides highly personalized & confidential products & services to
well-heeled clients at fees that are often based on asset under management. Stiff competition
among private bankers for the high net worth individuals who are their main clientele has
given rise to the need for tighter government controls worldwide.
- Structuring –
Designing a transaction to evade triggering or reporting or recordkeeping requirement is
called structuring. It’s a most common known money laundering method. It’s a crime in many
countries & must be reported filling a suspicious transaction report.
- Cuckoo Smurfing –
Form of money laundering linked to alternate remittance systems in which criminal funds are
transferred through the accounts of unwitting persons who are expecting genuine funds or
payments from overseas. The cuckoo is a European bird that is a parasite because it lays its
eggs in the nests of other birds, which hatch them and rear the offspring. The main difference
between traditional structure & cuckoo smurfing is that in the latter the third parties who
hold the bank accounts being used are not aware of the fact that illicit money is being
deposited into their accounts. It requires a work of an insider within a financial institution and
is generally a four step process.
1 step – occurs when a customer provides funds to an alternative remitter for transfer to a
beneficiary generally in another country.
2 step – involves insider who will provide the transaction details (beneficiary name, bank,
account number & amount) of the transfer to an associate in the foreign country where the
beneficiary of the transfer is located. The associate in the foreign country will have cash that
needs to be placed into the financial system.
3 step – the associate in the foreign country will then deposit cash into the bank account of
the intended beneficiary. The beneficiary will receive the full amount if the transfer & the
associate in the foreign country will be able to place some of its cash into the financial system.
4th step – the associate in the foreign country then arranges to get the funds from the
alternate remitter, using one of the methods by which alternate remitter transfer funds. In
this case the associate in the foreign country will have laundered the funds & will have
legitimate funds to replace the criminally derived ones deposited into the beneficiary’s
account.
To combat cuckoo smurfing, FATF recommends that banks have controls in place to
identify depositors who pay cash into third party accounts. Also banks should monitor for
unusual cash deposits that are structured or placed in branches other than where the
customer’s account is held.
- Insurance companies –
FATF experts submitted case examples that showed the vulnerabilities of the insurance sector
to money laundering. Launderers pay insurance premium at lump sum rather than paying in
installments. Then after some time they will get the insurance policy withdrawn at a
discounted price. This is how they can convert the black money into white.
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Casinos are most proficient cash generating business. Money laundering through casinos
generally occurs in placement stage. Converting the funds to be laundered from cash to
checks. A launderer can buy chips with cash generated from a crime & then request
repayment by check drawn on casino’s account. Often rather than requesting repayment by
a check in the casino where the chips were purchased with cash the gambler says that he will
be travelling to another country in which the casino chain has an establishment, ask for his
credit to be made available there & withdraws it in the form of a check in the other
jurisdiction.
3. Non-local address. The individual does not have a local residential or business
Address, and there is no apparent legitimate reason for opening an account with the
Bank.
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Currency.
8. Accounts with a high volume of activity and low balances. Accounts with a high
volume of activity, which carry low balances or are frequently overdrawn, may be
indicative of money laundering or check kiting.
9. Large deposits and balances. A customer makes large deposits and maintains large
balances with little or no apparent justification.
10. Deposits and immediate requests for wire transfers or cash shipments. A customer
makes numerous deposits in an account and almost immediately requests wire transfers
or a cash shipment from that account to another account, possibly in another country.
These transactions are not consistent with the customer’s legitimate business needs.
Normally, only a token amount remains in the original account.
12. Accounts used as a temporary repository for funds. The customer appears to use an
account as a temporary repository for funds that ultimately will be transferred out of
the bank, sometimes to foreign-based accounts. There is little account activity.
13. Funds deposited into several accounts, transferred to another account, and then transferred
outside of the U.S... This involves the deposit of funds into several
accounts, which are then combined into one account, and ultimately transferred outside
the U.S. This activity is usually not consistent with the known legitimate business of
the customer.
14. Disbursement of certificates of deposit by multiple bank checks. A customer may
Request disbursement of the proceeds of a certificate of deposit or other investments in
Multiple bank checks, each under $10,000. The customer can then negotiate these
checks elsewhere for currency. He/she avoids the currency transaction reporting
requirements and severs the paper trail.
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16. Sudden, unexplained increase in account activity or balance. There may be a
sudden, unexplained increase in account activity, both from cash and from non-cash
items. An account may be opened with a nominal balance that subsequently increases
rapidly and significantly.
17. Limited use of services. Frequent large cash deposits are made by a corporate
customer, who maintains high balances but does not use the bank’s other services.
18. Inconsistent deposit and withdrawal activity. Retail businesses may deposit
numerous checks, but there will rarely be withdrawals for daily operations.
OFAC -
Mission –
The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and
enforces economic and trade sanctions based on US foreign policy and national security goals against
targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged
in activities related to the proliferation of weapons of mass destruction, and other threats to the
national security, foreign policy or economy of the United States. OFAC acts under Presidential
national emergency powers, as well as authority granted by specific legislation, to impose controls on
transactions and freeze assets under US jurisdiction. Many of the sanctions are based on United
Nations and other international mandates, are multilateral in scope, and involve close cooperation
with allied governments.
As per OFAC body, these countries are most vulnerable to money laundering & terrorist financing
activities. Thus OFAC has imposed all kind of sanctions on them. It means no other country or
entity/individuals should deal with OFAC sanctioned countries. If they deal, it will be an OFAC
violations & OFAC body will take necessary actions.
Exception – aviation industry – as it can’t stop its flights going in to these countries.
Risk – as these countries are vulnerable for money laundering & terrorist financing,
If money is going to such countries, it might be used for terrorist financing or any other criminal
activities.
While doing KYC if we get to know that client or associates of client have got links with OFAC
countries, we need to raise it immediately to AML Compliance & seek their guidance.
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Specially Designated Nationals
s part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or
acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and
narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and
companies are called "Specially Designated Nationals" or "SDNs." Their assets are blocked and U.S. persons are
generally prohibited from dealing with them.
https://sdnsearch.ofac.treas.gov/Details.aspx?id=1874
- A strategic embargo prevents the exchange of any military goods with a country.
A trade embargo will restrict anyone from exporting to the target nation. Because many nations
rely on global trade, an embargo is a powerful tool for influencing a nation.
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• EU, US, Australia, Canada and Norway (by Russia) since August 2014, beef, pork, fruit and
vegetable produce, poultry, fish, cheese, milk and dairy.[21]
These are the countries that do not comply with anti-money laundering requirements or do not
cooperate sufficiently, according to the FATF. Between 2000 and 2006, the FATF conducted the
process of generating a list on non-co-operative countries and territories (NCCTs)
. The FATF closely monitors progress of these jurisdictions and the implementation of their
action plans.
http://www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/
Risk Parameters
Client Risk (Nature of business)
Country risk
Product Risk
Negative Screening
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What is the industry type?
How long has the business been in existence?
Client risk is categorized based on the nature of business. If business falls under high risk
industries, client risk will be high
- Gambling –
As we have already discussed, gambling business is exposed to money laundering as it is easy to invest
money there & latter withdraw it by check.
Cash-intensive businesses and entities cover various industry sectors. Most of these
businesses are conducting legitimate business; however, some aspects of these businesses
may be susceptible to money laundering or terrorist financing. Common examples include,
but are not limited to, the following:
• Convenience stores.
• Restaurants.
• Retail stores.
• Liquor stores.
• Cigarette distributors.
• Privately owned automated teller machines (ATM).
• Vending machine operators.
Parking garages
Risk Factors
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Risk Mitigation
- Defense Equipment –
The defense industry comprises of government & commercial industry involved in
research, development, production & service of military material, equipment &
facilities include –
Defense Contractors
Arms industry
Private Military contractors
Impact – if defense company exports defense equipment to the country where war is going on. They
can use the weapons & other equipment’s for attack purpose. That the reason it is a high risk industry.
- Gold/Precious metals –
Gold & precious gem dealers, as the name suggests are dealers of precious stones e.g. –
diamonds, rubies, gold. The risks of criminals misusing dealers in precious stones & metals are
due to the fact that precious metals attract money launderers as it has a high actual value &
can be found in relatively small sizes, thus facilitating its transport purchase & sale in several
regions around the world. Precious metal also preserves its value regardless of its form.
Dealers are often interested in precious metals more than gems as they may be melted to
change their form while preserving their value.
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The vast majority of charitable activity is undertaken by trustees acting honorably and
in the best interests of their beneficiaries. However money laundering does exist & it does
affects charities. The misuse of nonprofit organizations for the financing of terrorism is coming
to be recognized as a crucial weak point in the global struggle to stop such funding as its
source. Some charities and NGOs work internationally crossing international boundaries &
jurisdictions making any audit trail difficult to follow.
Methods of using charities by terrorist or criminal organizations may include –
- Travel Agencies –
Travel agencies are categorized as high risk due to some of the products provided (e.g. FX
services, prepaid cards) caution should applied where it is identified that a travel agency is
providing foreign exchange services as some travel agencies also offer Hawala banking
products in addition to their foreign exchange business.
Issues could be
- Corruption
- Terrorist activities
- Internal conflicts
- Riots
- Tax evasion
- Political, economic instability
e.g. – Pakistan – Due to continuous terrorist activities it has categorized as a high risk
jurisdiction.
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- Product Risk Rating –
Products can be misused for money laundering or terrorist financing or product can facilitate
anonymity of business relationships or transactions. Generally credit relevant products are
categorized as high risk.
Negative screening is applied on all type of entities & individuals who deal with financial
institutions or who are clients of financial institutions.
This is a precautionary measure taken to identify whether client is involved in any
negative news or not.
Applications –
With the help of above application clients’ needs to be screened against negative news.
To search in Lexis Nexis search, negative string will be provided. It has all negative words thus
Nexis throws articles that have name given in search criteria & words mentioned in the string.
KYC analyst need to analyze news the news & decide whether it’s a negative news or
not. If any kind of negative news found, analyst need to reach out to AML Compliance for
further guidance & approvals.
Broad categories of negative news –
Allegation –
Conviction
- Allegations –
e.g. – ABC Ltd has filled a court case against XYZ ltd & court case is going on.
- Convictions -
In law, a conviction is the verdict that results when a court of law finds a defendant guilty of
a crime
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e.g. – XYZ Ltd found guilty as per the verdict given by court.
KYC analyst need to refer both types of news to AML Compliance. KYC team is not supposed
to take any decision on its own.
If any negative news is found, Client may be treated as high risk depend on the criticality &
impact of the negative news.
Situation C – Any other significant PEP linked to the client. E.g. – legal representative is a PEP.
Escalation to local AML Compliance is required.
Reputational Loss
Legal loss/fines
Operational loss
Reputational Loss –
If bank or FI is not compliant to KYC it causes reputational loss for the institutions.
Counterparts may deny doing business with the institutions.
Legal Loss/Fines –
If bank or FIs got sacked by regulators in any kind of fraudulent activities, regulators will put
fine on them heavily. Sometimes they may lose license to do the business.
Operational loss –
If Institution is found guilty in any negative issue, it may have to perform KYC again on its
clients as ordered by Regulators. It leads to time cost, employee deployment for rework,
system etc. which is quite expensive & affect the business.
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Real Life Cases
HSBC money laundering case
HSBC Holdings Plc. agreed to pay a record $1.92 billion in fines to U.S. authorities for allowing itself to
be used to launder a river of drug money flowing out of Mexico and other banking lapses.
Mexico's Sinaloa cartel and Colombia's Norte Del Valle cartel between them laundered $881 million
through HSBC and a Mexican unit, the U.S. Justice Department said on Tuesday.
In a deferred prosecution agreement with the Justice Department, the bank acknowledged it failed to
maintain an effective program against money laundering and failed to conduct basic due diligence on
some of its account holders.
Despite the known risks of doing business in Mexico, the bank put the country in its lowest risk
category, which excluded $670 billion in transactions from the monitoring systems, according to the
documents
Bank officials repeatedly ignored internal warnings that HSBC's monitoring systems were inadequate,
the Justice Department said. In 2008, for example, the CEO of HSBC Mexico was told that Mexican law
enforcement had a recording of a Mexican drug lord saying that HSBC Mexico was the place to launder
money.
Mexican traffickers used boxes specifically designed to the dimensions of an HSBC Mexico teller's
window to deposit cash on a daily basis.
French bank BNP Paribas BNPP.PA has pleaded guilty to two criminal charges and agreed to pay almost
$9 billion to resolve accusations it violated U.S. sanctions against Sudan, Cuba and Iran, a severe
punishment aimed at sending a clear message to other financial institutions around the world.
The guilty plea is the direct consequence of a broader U.S. Justice Department shift in strategy that is
expected to try to snare more major banks for possible money laundering or sanctions violations.
In an unprecedented move, regulators banned BNP for a year from conducting certain U.S. dollar
transactions, a critical part of the bank's global business, in addition to the fine which was a record for
violating American sanctions.
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New Client Adoption
Renewals/Remediation
Event Driven Review
Extension of new products/new business line
- Renewals/Remediation –
KYC due diligence is performed on existing clients. Every FI should monitor & refresh KYC docs
on regular basis.
Time frame –
Low risk – 3 to 5 year
Medium risk – 2 to 3 Year
High risk – 6 months to 1 Year
Document Sources
Primary Secondary
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Listing
COI
Name
Address (registered & trading)
Government issued ID
Nature of Business
Ownership
Directors
Source of income (individual)
Once we source the requirements final step is to perform negative screening on all identified parties.
Will discuss each attribute (why it is required to source & which risk gets covered)
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- Name –
Customer walks in to banks account to open an account. It is banks responsibility to verify it name.
Name provided on KYC form should be true & correct
Risk – if customer provides incorrect name which is not verified properly, in future customer can
commit fraud & vanish. Accuse will be on someone else who’s name has been used by customer.
- Address –
Financial institutions must verify address provided by client.
Risk – 1 - customer can provide false address & in future commit frauds, money laundering &
vanish.
2 – Customer could be a shell organization or connected with a shell organization that
does not have any physical existence. Shell companies are mainly set up to launder money.
- GOVT issued ID -
It is required for financial institutions to source the GOVT issued ID. As it is an assurance that GOVT
would have performed necessary checks on the customer.
- Nature of business –
Financial institutions must know in which business customer is dealing.
Risk – customer can be involved in illegal activities like drug trafficking, narcotics etc.
Customer can be involved in high risk business which we have discussed. So for high risk
business FIs needs to apply enhanced due diligence.
- Risk Mitigation
Money Flow
While performing review on any entity or individual, we need to understand money flow.
Required parties are identified based on the money flow logic.
Money inflow
Money outflow
Beneficiary
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Money inflow – this is to understand from where money is coming. It is required to mitigate the risk
of money laundering. FIs must check the source of money coming to the customer.
Money outflow – this is to understand where money is getting invested. Money came in the business
will be used by entities to run the operations.
Risk – money can be provided to terrorist financing or any other fraudulent activities.
Beneficiary – From KYC standpoint, we need to know who is getting benefitted from the profit.
Risk – money can be provided to terrorist financing or any other fraudulent activities through
beneficiaries.
e.g. 1 – Rakesh walk in to a banks office to open saving account. Bank will ask Rakesh to fill up KYC
form.
Bank will verify his CIP details as well as source of income to make sure that he is putting legal, white
money into the bank.
e.g. 2 – ABL Ltd walks into a CITI banks office to open trading account. CITI bank will verify ABC ltd.’s
CIP details as well as “Money inflow-outflow & Beneficiaries” to mitigate the risk of Money Laundering
& Terrorist Financing or any other fraudulent activities.
SO WHO ARE THE PEOPLE WHO RUN THE OPERATION & TAKES THE MAJOR COMPANY DECISIONS?
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They are directors/management body
Beneficiary
Profit generated routs back to the shareholders which we already covered in inflow for corporations
That’s the reason we source ownership & directors while performing KYC on corporation.
Based on the above concept, we can identify below three things to mitigate the risk from kYC
perspective of any type of entity.
We can work on any type of entity & identify the relevant parties (directors, shareholders etc.) by
applying money flow logic.
- Always check who puts the money into business, who manage it & who is getting benefitted
out of the profit
. Then we can work on any type of entity & CIP is constant across all types.
We will move on to Entity types from KYC perspective. Generally we know there are different legal
entities differentiated by their legal forms. E.g. - LLC, L.P., Ltd company, PLC, LLP etc. however entities
are differentiated in different way in KYC.
Regulated
Listed Entity Private entity Govt Entity Funds
Entity
Name Name Name Name Name
Address Address
Address (registered Operating
(registered & (registered & Address (registered & trading)
& trading) address
trading) trading)
Nature of Nature of Nature of
Nature of Business Nature of Business
Business Business Business
Govt Issued ID Govt Issued ID Govt Issued ID _ GOVT Issued ID
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Ownership (money
Regulation proof listing Proof Investment manager (money
inflow & money
(covers money (covers money _ inflow, outflow, beneficiaries
outflow via
flow) flow) related risk)
beneficiary)
Directors
Negative Negative Directors (money & Directors of IM (money
(money
screening screening outflow) outflow)
outflow)
Anti-money laundering service
Negative provider (if applicable) (money
Negative screening
Screening inflow, money outflow via
beneficiary)
CIS Questionnaire (if
applicable) (money inflow &
money outflow via beneficiary)
Negative screening
Limited Partnership
Name
Address (registered & trading)
Nature of Business
_
General Partner (money outflow)
Limited Partners (money inflow money outflow via beneficiary)
Negative screening
As per the above grid, CIP requirements (highlighted) are same across all entity
types.
Regulated Entity
Listed Entity
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Sub of listed
Private
Government
Funds
SPV
Trust
Foundation
Association
Limited Partnership
Individual
1 – Regulated entity –
Regulator –
Regulator is a GOVT body which regulates the financial market. As we know money laundering
happens through financial institutions we are concerned about financial regulation.
Any entity which provides financial services can be regulated. Entity which is into financial business
can’t be regulated.
E.g. – if you are working on State bank of India, you can go & check for its regulation as it’s a bank (CIP
> nature of business.
If you are working on TCS, you should not check as in CIP > nature of business you got to know TCS is
an IT & BPS consultancy firm.
Regulators perform AML checks, ownership checks & directors’ check while regulating any entity. Thus
we do not have to worry about money flow (ownership, directors). If you found entity is regulated, -
Procedure-
- Complete CIP.
- Attach regulation proof. (as per the domicile of the entity)
- Perform screening on entity.
Before considering regulation we need to make sure is the regulator in approved regulator list.
Every bank has a list of approved & non approved regulation list.
We can always rely on approved regulator. We have a comfort of regulation thus we don’t need to
identify ownership & directors.
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Unapproved Regulator –
Regulator is considered as approved or non-approved based on the country’s situation. If there are
frequent issues are going on like, corruption, tax evasion, terrorist attacks, internal conflict means
regulator is not strong enough to combat with such issues. Thus we cannot rely on the regulation. We
still need money flow details.
e.g. – Afghanistan, Pakistan – due to the continuous terrorist activities, regulator of these both
countries is in non-approved list. Means if we are working on an entity which regulated on these
countries still we need to
2 – Listed entity
It means entity that floats its shares in to the stock market. Entity can float different types of securities
in stock market.
Procedure-
- Complete CIP.
- Attach listing proof. (as per the domicile of the entity)
- Perform screening on entity.
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Subsidiary of a listed company -
To become a major shareholder in any entity, 25% or more stakes is required for low risk
Major shareholder -
That’s the reason we are concerned about major shareholders. We don’t have concerns about
3- SUB of listed-
Should be owned by a single entity more that 75 % (so possibility of any other entity owning
more than 25% is nil
If this is the scenario then we can tag our entity as a sub of listed.
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Procedure-
CIP
4- Private Entity -
When entity is not Listed, regulated or sub of listed it falls under private entity category.
Private entity means risk is more from the KYC stand point compare to listed, regulated or sub of
As we know ownership threshold for Low risk entity is 25 % & for high risk it is 10 %.
Means we need to identify all owners who all holding more than 25% till ultimate beneficiary level.
E.g.
A is owned by B
B is owned by c
C is owned by D
D is owned by E (E is regulated)
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We will stop ownership here. As E is regulated.
If owner is listed
If owner is regulated
For drilling down the ownership, we need to apply threshold criteria as per the risk level.
E.g. 2 -
- For others check the regulation, listing (if non-financial business, directly jump on listing.)
- As C & D both are major shareholders (not listed, regulated) & we do not have any comfort to
Thus whoever owns more than the threshold, we need to further identify the ownership if
that owner is not listed, regulated, GOVT or individual.
Procedure -
CIP
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Directors
If we find negative news on any party, we need to reach out to AML for further guidance.
“Beneficial owner” refers to the natural person(s) who ultimately owns or controls a customer
and/or the person on whose behalf a transaction is being conducted. It also incorporates those
persons who exercise ultimate effective control over a legal person or arrangement. (FATF definition)
Trust – Beneficiaries’
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Source of wealth –
Source of Wealth In order to evaluate the source of a client’s (or beneficial owner’s) wealth, the bank
should gather information relevant to the manner in which the wealth was obtained. For example,
the information collected by the bank will differ depending on whether the wealth was acquired
through ownership of a business, employment or professional practice, inheritance, investments or
otherwise.
Account Information ■ Purpose for Account ■ Expected Account Size ■ Expected Account Activity
Occupation Nature of Client’s (or Beneficial Owner’s) Business Role/Relationship of Powers of
Attorney or Authorized Third Parties
e.g. –
Property sales
Gifts
Sale of shares
Bearer Shares –
An equity security that is wholly owned by whoever holds the physical stock certificate.
The issuing firm neither registers the owner of the stock, nor does it track transfers of ownership.
The company disperses dividends to bearer shares when a physical coupon is presented to the firm.
Work-around
If we found that entity has issued a bearer shares, we need to get below confirmations -
Shares should be kept in safe & client should notify bank immediately whenever there are
any changes in the ownership.
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If bearer shares are with custodian, we need to know the name of custodian also they need
to notify bank if there are any changes in the ownership.
If bearer shares are traded on a recognized stock exchange, then we do not have to get
above confirmations.
5- Government entity –
Government agencies
Central banks
Features –
Procedure
PEP – most of the legal representatives will be PEP however we do not have to bother. If we get only
PEP hit as per negative screening search still we can proceed without AML approval or sales
acknowledgement
Supranational entities –
Likewise government, such entities are also treated as government entity & KYC procedure is same
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Supranational entity is created by multiple countries. They are the members. E.g. World bank, World
trade organization, International monetary fund.
6- Funds –
Fund is a pool of money received from investors. It is also known as collective investment scheme.
Some investors invest in fund rather than directly invest in to the stock market. Risk is lower than
direct investment in stock market as funds are managed by asset management companies
(investment manager) who are expert in investments.
Fund structure –
Mutual fund
Hedge funds
Pension funds
SICAV
UCITS
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Personal Investment Company/Family office/fund
Mutual Funds –
Mutual fund managers are paid fees regardless of their funds’ performance
Hedge funds –
A hedge fund is an alternative investment vehicle available only to sophisticated investors, such as
institutions and individuals with significant assets.
Like mutual funds, hedge funds are pools of underlying securities. Also like mutual funds, they can
invest in many types of securities—but there are a number of differences between these two
investment vehicles.
Due to the nature of these fund, their member investors generally have significant personal
wealth and are considered sophisticated enough to not require the same level of regulatory
protection accorded to small investors by law in mutual funds.
Features –
Closed ended
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Hedge fund managers, receive a percentage of the returns they earn for investors,
Pension funds –
SICAV –
It is an open ended fund set up in Luxemburg. It is similar to mutual funds. In Luxembourg it is called
as SICAV.
Fund Structures -
1- Master- Feeder
A structure commonly used by hedge funds to pool investment capital raised by U.S.
investors - both taxable and tax-exempt - and overseas investors into one central vehicle
called the master fund, with separate investment vehicles or feeders created for each
investor group. Investors invest in the feeder funds, which in turn invest their assets in the
master fund. The master fund makes all the portfolio investments and conducts trading
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activity, while management and performance fees are payable at the feeder-funds level.
Feeder funds do not directly invest in the financial market.
Master & feeders are separately registered funds only for common purpose they come
together & form such structure.
Advantages -
Reduce competition
Economies of scale
operational efficiency
Tax benefits to investors
Master fund is typically set up in offshore jurisdictions (generally in tax havens like Cayman
Island). Feeders will be from onshore & offshore location.
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Umbrella-sub fund -
An umbrella fund is an investment fund containing several distinct sub-funds which in effect
are traded as individual investment funds in a different market or country. It is an
investment fund that Invests in other funds rather than in direct investments. Umbrella fund
was originally developed in the European investment management industry. An umbrella
fund is sometimes known as a fund of funds. The umbrella fund structure makes.
Sub funds are created by umbrella fund. Sub funds are part of umbrella funds thus they do
not have separate legal existence.
Advantages -
- It is cheaper for depositors to move from one sub-fund to another.
- Assets & liabilities of each sub fund is separated from each other thus it reduces the risk at
umbrella fund level
- Investors can invest in the fund as per their convenience. E.g. If investors want their money
to get Invested only
In equity they can go for a sub fund set up only for equity investment.
Documentation -
Generally we require Prospectus of the fund to source required parties & complete KYC.
We can also rely on annual report or IMA based on the fund type
In master-feeder structure, master fund generally does not have prospectus. Information of
master fund is mentioned in the feeder’s prospectus.
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We can consider regulation, address, and registration proof of umbrella fund for its sub
funds as sub funds do not have separate legal existence.
Listing cannot be taken as it is not an equity listing. Investors do not have any decision
making or voting rights
Fund is not a legal form, it can be set up as a L.P, trust or corporate.
– Mutual/hedge/pension fund issued to public (units are offered to vast number of investors)
– Corporate/GOVT pension fund (units are offered to specific people)
– Personal Investment Company/Family office (units are offered to very less investors)
Step 1 –
Check fund regulation
(As fund is a financial institution & in this type units are offered to vast number of investors, it can be
regulated.)
- If regulated by approved regulator– attach the regulation proof, complete CIP (as we have a
comfort of regulation so no need to worry about money flow. Treat it as a regulated entity. Run
screening.
Stop
Step 2 -
If fund is not regulated
We need prospectus to get below parties
Identify Investment Manager. Party naming could be different. It can be called as portfolio
manager, Investment adviser, Sub investment manager etc. we need to make sure who is taking the
investment decisions. This we get in investment objectives, investment strategies.
As IM is a whole & sole of a fund, we identify IM. Money flow risk lies with IM.
Check regulation of IM
If IM is regulated
Attach the regulation proof, complete CIP (as we have a comfort of regulation so no need to worry
about money flow.)
Stop
If IM is not regulated
– Need to identify ownership & directors of IM (as we are concerned about IM's money flow
because he is the whole & sole of the fund)
+
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– Anti-money laundering service provider (IM is not regulated so we are concerned about
money inflow in the fund. AML SP does KYC checks on investors & responsible to comply with AML
rules & regulations.
If AML SP is regulated - (risk is mitigated)
– Attach the regulation proof of AML SP
– attach ownership & directors of IM
– complete CIP
– run screening on all identified parties
Stop
CIS Questionnaire
1 – Do you have a written policies & procedures in place regarding anti-money laundering & know
your client practices? Y/N
a – does the policy reflect the regular process to obtain information about customers that
relate to money laundering risk, including name, address, & type of business? Y/N
b – All are investors screened for PEP, terrorist & blocked person status against international
sanctions list? Y/N
c – Does the policy reflect a regular process to identify categories of suspicious activity? Y/N
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d – Does the policy reflect a regular process to notify appropriate govt/supervisory
authorities regarding suspicious activity? Y/N
e – Does the policy reflect an AML training program designed to deliver information to your
employees who would reasonably be expected to encounter potentially suspicious activity? Y/N
2 – Do you follow the AML policies as laid out in local legislation/regulation? Y/N
3 – Do you have record keeping requirements for a minimum of 5 years from the cessation of the
relationship with an investor? Y/N
4 – Please provide the details on the approximate number of investors (If there are less than 10
investors please provide the exact number of investors). Note – In-case of master feeder structure,
investors are the investors in the feeder funds.
5 – Please confirm whether one or more investors owns/controls directly and/or indirectly 25% or
more of the investment & if yes provide below details.
A – Natural person’s full name, date of birth & nationality & source of income.
B – Legal entities full name & registered address and for any natural person who directly or
indirectly, owns/controls 25% or more of the CIS (through the legal entity) full name, date of birth &
nationality.
6 – Please specify the type of investors. E.g. Trust, corporations, HNIs etc.
Final Stop
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Pension fund created by corporate for its employees or government for government employees.
Features -
Procedure -
– Prove it’s a GOVT or corporate pension fund. Govt funds are generally created by law.
– Identify IM
IM can be a third party asset management company or internal board of directors or investment
committee.
If IM is an internal board or Investment Committee, we just need to screen them against negative
news.
Stop
If not regulated,
Final Stop
3 - Personal Investment Company/Family office (units are offered to very less investors)
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Documents -
Primary document is Investment Management Agreement or L.P. Agreement if fund is set up as a Limited
Partnership.
If we do not get required information in this documents we need to reach out sales/client to get the
information.
In public domains generally we do not find much information as these are privately operating funds.
Procedure
– Complete CIP
– Funds are not regulated so identify IM
If IM is regulated, attach the regulation proof of IM, establish relation between IM & Fund
Perform screening on identified parties
Stop
Note – As these are privately operating funds created by investors & investor base is very limited,
AML SP is not involved. Thus to mitigate the money inflow risk (if IM is not regulated) we need the
details of investors.
Final Stop
Features
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– limited life
Types -
Securitization SPV
Securitization SPV.
Generally SPVs are formed for securitization purpose. If we come across an SPV set up for other than
securitization, we need to apply money flow logic to complete the due-diligence.
Future Cash flows of loans are transferred to SPV by banks/financial institutions in order to
create liquidity or to raise finance.
It’s a cheaper way to raise finance. Banks/FI's will receive present value of a future cash flow
for selling the loans.
To finance the purchase of loan books SPV will issue notes in to the market & raise money.
Thus future cash flow of loan will not be paid to banks/FI's (as they already have sold) rather
it will be paid to investors.
If borrower makes a default in paying loan installments, investors will have to bear loss.
Notes will be issued by arranger in to the open market. Notes can be floated in to stock
exchange.
Credit Rating -
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Different series of notes are issued by SPV. Notes are rated by credit rating agencies. Based on the
risk involved in the loans, credit rating is given.
E.g. – notes are backed by credit card loans are risky as chances of default on credit card payment is
high compare to real estate.
Parties to be identified
once parties are identified, check their regulation. If regulated stop it there if not regulated to cover
the risk, source further ownership of parties connected to inflow & controllers/directors of parties
connected to outflow.
2008 Recession -
One of the major reason of 2008 recession was Securitization of loan books.
There was a boom in real estate market of USA. Many people bought loan from banks to purchase
real estate property. Banks gave loan without checking credit ability of the investors & without
proper due diligence as there was a stiff competition among the banks.
Later prices started falling. Thus borrowers could not pay the loan installments to banks. As
banks had securitized the assets & risk was at investor’s side. They had to face losses.
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Structure -
Sets out the particular risks the swap counter party will take on and the fee it will receive
Fluctuations in interest or currency exchange rates may therefore mean the SPV:
Pays more interest on the securities than it receives from the receivables.
Pays amounts due on the securities in a relatively more expensive currency than that in which it
receives the proceeds from the receivables.
To manage these risks, the SPV enters into one or more derivative contracts with a swap counter
party, such as an interest rate and/or currency swap agreement.
Lehman Brothers was the swap counter party for many securitizations SP
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8 - Trust –
Family trust
A fiduciary relationship in which one party, known as a trustor/grantor/settlor, gives another party,
the trustee, the right to hold title to property or assets for the benefit of a third party, the
beneficiary.
It’s a legal arrangement. Trust act on behalf of trustee. If the trust is set up, it is easy to
transfer a property to beneficiaries without much legal constrain.
Parties involved –
1. Settlor/grantor/trustor (Money Inflow)
4. Beneficiary (they get benefits, so they can rout money in illegal sources)
In case of corporation, profit routs back to shareholders which we already cover in money
inflow.
Grantor will be individual. As he is giving the property to the trust (money inflow) we need to
identify source of income of grantor.
Trustee – if it is an entity, check for regulation, if not regulated identify its directors (money
outflow)
Beneficiary – we need beneficiary holding more than 25 % for low risk & 10 % for high risk.
Protector - Grantor appoints protector if trust is in offshore location. Protector will supervise the
activities of trustee.
Beneficiaries will be individuals. We just need to screen them against negative news.
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Check their regulation if applicable & accordingly check for further requirements based on money
inflow & outflow.
Beneficiary details you may not require, as beneficiaries will be many & they do not get the benefits
in cash,
For e.g. educational trust in which benefits are given to students. We do not have to get the
information about students. They are not prone to any risk. We just need to prove that students are
the beneficiaries.
Trustee address can be considered for trust as trusts are not registered.
9 - Foundation –
Requirements –
Who is a founder?
Source of funds of the foundation
Counselors (decision makers)
Purpose & objectives
Statute (proof of existence)
We can grab the information from audited annual report of the foundation
10 - Association –
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- Controllers/decision makers are appointed to run the association (money outflow)
Limited partnerships are formed by two or more people, with at least one person acting as the
general partner who has management authority and personal liability, and at least one person in the
role of limited partner who is a passive investor with no management authority. All partners – both
general and limited – must enter into limited partnership by either oral or written agreement.
Features
Procedure -
- Complete CIP
- Identify General partners & limited partners (limited partners holding more than 25& in low & 10 %
in high risk)
- If limited partners are not regulated, identify further ownership as per the ownership criteria
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Individual -
Requirements-
Name
Address (current & permanent)
Date of birth
GOVT issued ID
Source of income
Screen parties against negative news with Screen parties against negative news with
atleast one tool atleast one tool
generally Idcopies of directors & owners not ID copies of owners & directors require
required unless there is a negative news even if there is no negative news
renewal after every 5 yrs renewal after every 1 yr
MIFID -
MIFID is enacted by European Union on 1st Nov. 2007. The objective is to protect
investor’s right & harmonize European financial market. From KYC standpoint, it is more related
to protection of investors.
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E.g. State bank of India booking trades with Citi bank in London. Citi bank is required to
categorize state bank of India under MIFID.
Under MIFID, protection is given to the clients based on their level of knowledge in financial
markets.
- Retail clients
Afforded the most regulatory protection. Retail Clients are clients that do not belong to the
Professional Client or Eligible Counterparty categories. E.g. Individuals
- Professional clients
and sophisticated and able to assess their own risk and are afforded fewer
Regulatory protections. It consist, large undertakings, other financial institutions, funds etc.
‘light-touch’ regulatory regime when investment firms bring about or enter into
Client On boarding -
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– COB client service team
– COB KYC team
Co-ordinate requests between sales/credit/Legal/back office to facilitate & priorities front office
Consist of New Client Adoption & renewal/remediation team. Perform KYC review on new as well as
existing clients
– Product extension
KYC review –
Renewal/Remediation –
Bank system will have previous data updated. Analyst will search the documents from
internal repositories as well in external sources. If documents are insufficient, sales/clients
will be reached. Once all docs are grabbed, analyst will match the data with systems &
wherever require, systems will be updated.
NCA –
Analyst will grab the documentation & according to the documents systems will be updated.
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C- Pending with account closure team to close the account
G- Pending initiation
L- KYC complete
M- Review in progress
AML Team –
AML team is a core team of a bank to fight with money laundering & other issues. It is responsible to
protect Bank & FI to protect from these issues. Each bank has got a AML Team.
System work-around
NCA –
- Generally in NCA, COB team receive KYC request on regular basis via email.
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- Sales or sales assistance team will reach out to NCA KYC team to complete the KYC of a new
client.
- As client want to trade, limited TAT will be given thus KYC needs to be completed at
priority.
KYC analyst updates the banks KYC related system as per the documentation.
General Fields to be updated for new client from KYC stand point.
Name, address (name includes other name, trading name as well)
Nature of business along with industry code
GOVT issued ID
Type of entity (listed, regulated, private etc.)
PEP, Negative screening details.
Products details
Sales/business managers’ details
Review dates (as per the low, medium & high risk time frames)
Here systems are already updated while doing NCA. KYC analyst needs to source the documents
matches the data systems & wherever required, update the above specified details.
Booking location –
It is a location where client book the trades with a bank or FI. It could be different from domicile or
incorporation location.
e.g. – SBI (India) booking trades with CITI bank USA New York branch.
KYC rules may slightly differ as per the booking location. Policies & procedures are formed as per the
booking locations.
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COB work flow
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Setups -
Principle setup
Agent setup
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Principle setup -
E.g. Black rock asset management opens trading account with an investment bank for its own.
Agent setup
E.g. Black rock asset management opens trading account with an investment bank for its funds.
Trading decision maker will be black rock.
In such relationship, as agent is a trading decision maker & if agent is regulated by a recognized
regulator, we will complete KYC on agent only. That is applicable for all its underlying funds. So
separate KYC is not required on funds.
Layman terms
You have a saving & current account in a bank. Both accounts are managed by you. You are the decision
maker & moving money in to the accounts. Thus bank will perform KYC on you only. They will not
perform two separate KYC for saving & current account.
Client Communication –
Client Communication is very essential in KYC process. As we need to reach out to client/sales to get
the required KYC documents. We need to grab the documents from clients with ease & without
getting any escalations or bad remarks. If client is unhappy or responding in harsh due to any
mistakes from KYC team end, it can impact the banks business.
Request all documents at one shot we cannot reach them again & again
Wherever required, put conditions stating we may require documents in future or some
documents are dependent on each other. questionnaire,
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o E.g. – in case of funds, you do not have AML SP information & reaching out to client.
As you know if AML SP is not regulated you will require CIS questionnaire also. Thus
we should mention this condition in email in order to grab everything at one shot.
If case is very complex, or requirements are huge, first call the client/sales, make them
understand what exactly is required then mark it in mail & send.
Whenever we receive the documents from them, always acknowledge.
While starting a review on any KYC case, make sure we exhaust all resources, i.e. banks
internal document repositories as well as external sources.
In case of funds, SPVs, trust, even if we have old prospectus, trust deed, offering circular, make
sure we need review the documents, put all findings on an email & get the confirmation from
client on an old document.
Make sure we receive required documents from clients as for many KYC requirements, sales
is not authorized to confirm. We need client confirmation given by authorized person.
Chaser policy – follow chaser policy properly. We need to make sure we are not missing out
on anything.
o E.g. – we receive t=documents from client today, however we miss to track it after
some days we review the case & found out that still documents are required from
client. In such scenario if we go back client may come back harshly.
3. Verify ID of all UBOs with 10% (High risk level) and above with a
Government issued photo evidence of ID or equivalent means of verification
- Passport / Driving license
(1) This is not a definite list and further information might be requested depending on
any findings concluded from any internal searches.
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RISK RATING questionnaire
4 – If a natural person facing bank as a direct client – is he a PEP (Determined from Negative media
screening)
6 – Is legal reps (controlling person) of the entity a PEP (determined from Negative media screening?)
7 – Is ownership of the entity held in bearer form?? (Not applicable if the bearer shares are traded
on a recognized stock exchange)
9 – If Bank is facing a Fund does an investors owns greater than 25% of the investment (directly or
indirectly) in the Fund?
10 – Is the entity a private Investment Vehicle i.e. private investment company, foundation or trust
set up for/on behalf of a high net worth individual/family?
12 – Have you come across any other reason for escalation to AML compliance?
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Know Your Employee
Institutions and businesses have learned at great expense that an insider can pose the same money
laundering threat as a customer. It has become clear in the AML field that having equal programs to
know your customer and to know your employee are essential. A Know Your Employee (KYE)
program means that the institution has a program in place that allows it to understand an
employee’s background, conflicts of interest and susceptibility to money laundering complicity.
Policies, procedures, internal controls, job descriptions, code of conduct/ethics, levels of authority,
compliance with personnel laws and regulations, accountability, monitoring, dual control, and other
deterrents should be firmly in place. Background screening of prospective and current employees,
especially for criminal history, is essential to keeping out unwanted employees and identifying those
to be removed. The Federal Deposit Insurance Corporation (FDIC), a U.S. regulator, has provided
guidance on employee screening in its paper “Pre-Employment Background Screening: Guidance on
Developing an Effective Pre-Employment Background Screening Process,” issued in June 2005.
Conclusion-
Under the "Know Your Customer" requirements, people who refuse to "identify" themselves when
requested will be precluded from conducting business using contemporary methods of commerce.
And those who agree to the identification requirements will have their financial transactions
monitored.
KYC is not just about name, address verification. Non Compliance of KYC may lead to money
laundering, terrorist financing. Thus every Financial Institutions should have a robust policies,
procedures & systems to comply with KYC/AML norms.
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References -
http://www.unodc.org/unodc/money-laundering/
http://www.fincen.gov/news_room/aml_history.html
http://www.fatf-gafi.org/pages/aboutus/
http://www.ffiec.gov/bsa_aml_infobase/documents/red_flags/deposit_acct.pdf
http://www.fincen.gov/statutes_regs/patriot/
http://www.acams.org/wp-content/uploads/2014/12/Ultimate-Beneficial-Ownership-_South-
Africa-Chapter-Event-2-3-11_.pdf
http://fiuindia.gov.in/pmla2002.htm
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