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The guide begins by addressing major

AML & sanction compliance


requirements. It focuses mainly on KYC
policies, procedures, entity type wise
document requirements, workflow, team
structures etc.

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.

Bank Secrecy Act (1970) –

• 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.

Money Laundering Control Act (1986)

• Established money laundering as a federal crime


• Prohibited structuring transactions to evade CTR filings
• Introduced civil and criminal forfeiture for BSA violations
• Directed banks to establish and maintain procedures to ensure and monitor compliance
with the reporting and recordkeeping requirements of the BSA

Anti-Drug Abuse Act of 1988

• 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

FATF - (Financial Action Task Force)

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.

UNODC on money-laundering and countering the financing of terrorism

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

Disasters funded through Money laundering & Terrorist Financing.

USA Patriot Act –

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:

• To strengthen U.S. measures to prevent, detect and prosecute international money


laundering and financing of terrorism;
• To subject to special scrutiny foreign jurisdictions, foreign financial institutions, and classes of
international transactions or types of accounts that are susceptible to criminal abuse;
• To require all appropriate elements of the financial services industry to report potential
money laundering;
• To strengthen measures to prevent use of the U.S. financial system for personal gain by
corrupt foreign officials and facilitate repatriation of stolen assets to the citizens of countries
to whom such assets belong.

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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.

Other side of a coin –


KYC not only mitigates the money laundering & terrorist Financing Risk. It has a wide scope.

What happened in 2008?

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.

KYC purpose & objectives

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.

Basically we implement below to complete KYC on any customers.

Client Identification Program

Risk Mitigation (money laundering, terrorist financing & any other financial crime.)

We will discuss above in later part of the document

Use of Financial Institutions -


Financial Institutions are the best platform for money launderers to launder the money generated by
the illegal activities. Also, a person or entity does any kind of transaction; it goes through a financial
institution.

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.

So it is a mandate for financial institutions to perform KYC on their clients.

As we know KYC helps to mitigate money laundering risk, we will understand the money laundering
concept.

Money Laundering & steps involved


The goal of a large number of criminal acts is to generate a profit for the individual or group that
carries out the act. Money laundering is the processing of these criminal proceeds to disguise their
illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits
without jeopardizing their source.

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.

- Increased Crime & Corruption –


Successful money laundering helps enhance the profitable aspects of criminal activity. When
n country is seen as a heaven for money laundering it will attract people who commit crime.
Money laundering leads to corruption as well as criminals try to bribe government officials or
they can generate the black money from corruption & converts into cash.

- Weakening of financial institutions-


Money laundering & terrorist financing can harm the soundness of a country’s financial
sector. Indeed criminal activities have been associated with a number of bank failures around
the globe, including the failure of a first internet bank, the European bank as well as Riggs
bank.
Below are the impacts on financial institutions
Loss of profitable business
Liquidity problems through withdrawal of funds
Termination of correspondent banking facilities
Investigation cost & fines
Asset seizures
Loan losses

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Reduced stock value of financial institutions.

- Mistakes in decisions regarding economic policies –


Due to the large amounts of money involved in the money laundering process, in some
emerging market countries, these illicit proceeds may impact government budgets, resulting
in a loss of control of economic policy by governments or policy mistakes due to measurement
errors in macro-economic statistics arising from money laundering.
Money launderers can adversely affect currencies & interest rates as launderers
invest funds where their schemes are less likely to be detected, rather than where rates of
return are higher. Volatility in exchange & interest rates due to unanticipated cross-border
transfer of funds can also be seen. Money laundering can increase the threat of monetary
instability due to the misallocation of resources from artificial distortions in asset &
commodity prices.

- Economic distortion & instability -


Money launderers are not primarily interested in profit generation from their investments but
rather in protecting their proceeds & hiding the illegal origin of the funds. Thus they invest in
the activities that are not necessarily economically beneficial to the country where the funds
are located.
In some countries, entire industries, such as construction & hotels have been financed
not because of actual demand but because of the short term interest of the money
launderers. When these industries no longer suits the needs of the money launderers, they
abandon them causing a collapse of these sectors & immense damage to economies that
could ill-afford these losses.

- 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.

- Reputation risk for the country


It diminishes legitimate global opportunities because foreign financial institutions may decide
to limit their transactions with institutions located in money laundering havens because the
necessary extra scrutiny will make them more expensive. Once a country’s financial
reputation is damaged reviving it is very difficult & requires significant resources to rectify a
problem that could have been prevented with proper AML controls.

Techniques of money laundering


Money laundering is an evolving activity, and must be continuously monitored in all its various
forms in order for measures against it to be timely & effective. Illicit money can move through
numerous different commercial channels, including checking, saving & brokerage accounts,
offshore entities & trust, wire transfers, hawalas, securities dealers, banks, money service
business & car dealers.

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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 –

Prevents US financial institutions from opening or maintaining correspondent accounts for


foreign shell banks & requires them to take reasonable steps to ensure that a correspondent account
of a foreign bank is not being used indirectly to provide banking services to a shell bank.

Real life case –


A lawsuit filed by Hong Kong investor group in 2004 accused the new York branch of ABN AMRO
allowing First Merchant Bank of the Turkish Republic of Northern Cyprus to defraud the group.
According the law suit ABN AMRO ignored several warnings on six correspondent accounts it opened
for First Merchant Bank its New York branch in 1998. The lawsuit claimed that ABN AMRO failed to
conduct proper due diligence on First Merchant & its accounts ignored a number of red flags including

First Merchant held only an offshore license from northern Cyprus.

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.

- Casinos & other business associated with gambling –

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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.

- Real Estate industry –


Investing illicit money in real estate is a classic method of laundering dirty money. Laundering
may be accomplished either by way of buying and selling real estate or by investment in for
e.g. – tourist or holiday complexes that led an appearance of legality (the integration phase)
- Shell companies –
Tax evasion and false accounting practices constitute common types of money laundering.
Often, criminals achieve these objectives through the use of shell companies, holding
companies, and offshore accounts. A shell company is an incorporated company that
possesses no significant assets and does not perform any significant operations. To launder
money, the shell company purports to perform some service that would reasonably require
its customers to often pay with cash. Cash transactions increase the anonymity of customers
and therefore decrease the government’s ability to trace the initial recipient of the dirty
money. Money launderers commonly select beauty salons and plumbing services as shell
companies. The launderer then deposits the money with the shell company, which deposits
it into its accounts. The company then creates fake invoices and receipts to account for the
cash. Such transactions create the appearance of propriety and clean money. The shell
company can then make withdrawals and either return the money to the initial criminal or
pass the money on to further shell companies before returning it to further cloud who first
deposited the money.

AML Red flags


1. Minimal, vague or fictitious information provided. An individual provides minimal,
Vague or fictitious information that the bank cannot readily verify.

2. Lack of references or identification. An individual attempts to open an account


Without references or identification, gives sketchy information, or refuses to provide
The information needed by the bank.

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.

4. Customers with multiple accounts. A customer maintains multiple accounts at a


Bank or at different banks for no apparent legitimate reason. The accounts may be in
The same names or in different names with different signature authorities. Interaccount
Transfers are evidence of common control.

5. Frequent deposits or withdrawals with no apparent business source. The customer


Frequently deposits or withdraws large amounts of currency with no apparent business
Source, or the business is of a type not known to generate substantial amounts of

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Currency.

6. Multiple accounts with numerous deposits under $10,000. An individual or group


Opens a number of accounts under one or more names, and makes numerous cash
Deposits just under 10,000, or deposits containing bank checks or travelers checks.

7. Numerous deposits under $10,000 in a short period of time. A customer makes


numerous deposits under $10,000 in an account in short periods of time, thereby
avoiding the requirement to file a Currency Transaction Report. This includes deposits
made at an automatic teller machine.

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.

11. Numerous deposits of small incoming wires or monetary instruments, followed by


a large outgoing wire. Numerous small incoming wires and/or multiple monetary
instruments are deposited into an account. The customer then requests a large outgoing
wire to another institution or country.

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.

15. Early redemption of certificates of deposits. A customer may request early


redemption of certificates of deposit or other investments within a relatively short
period of time from the purchase date of the certificate of deposit or investment. The
customer may be willing to lose interest and incur penalties as a result of the early
redemption.

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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.

OFAC sanctioned countries


Iran
Syria
Cuba
N. Korea
Sudan

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 coming from these countries, it might be a black or laundered money.

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.

On the below link we can search the SDNs.

https://sdnsearch.ofac.treas.gov/Details.aspx?id=1874

Embargo & Sanctions


Unlike OFAC, Embargo is a specific sanction. A government order that restricts commerce or exchange
with a specified country. An embargo is usually created as a result of unfavorable political or economic
circumstances between nations. The restriction looks to isolate the country and create difficulties for
its governing body, forcing it to act on the underlying issue. The Embargo of 1807 was a series of laws
passed by the U.S. Congress 1806–1808, during the second term of President Thomas Jefferson.[4]
Britain and France were engaged in a major war; the U.S. wanted to remain neutral and trade with
both sides, but neither side wanted the other to have the American supplies.[5] The American national-
interest goal was to use the new laws to avoid war and force that country to respect American rights.

- 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.

List of countries under embargo

• Sudan by US since 1997.


• Mali (by ECOWAS) total embargo in order to force Juntas to give power back and re-install
National constitution. Decided on April 2, 2012.[14]
• China (by EU and US), arms embargo, enacted in response to the Tiananmen Square protests
of 1989.[15]
• Iran (by US and US international allies), notably bar nuclear, missile and many military exports
to Iran and target investments in: oil, gas and petrochemicals, exports of refined petroleum
products, banks, insurance, financial institutions, and shipping.[16] Enacted 1979, increased
through the following years and reached its tightest point in 2010.[17]
• North Korea (by UN, USA, EU),[18] luxury goods (and arms), enacted 2006
• Turkish Republic of Northern Cyprus, (by UN), consumer goods, enacted 1975.
• Cuba (United States embargo against Cuba), arms, consumer goods, money, enacted 1960
• European Union arms embargo on the People's Republic of China
• Japan, animal shipments due to lack of infrastructure and radiation issue after the 2011
Tohoku earthquake aftermath.
• Indonesia (by Australia), live cattle because of cruel slaughter methods in Indonesia.[19]
• Gaza Strip by Israel and Egypt since 2001, under blockade since 2007.
• Syria (by EU, US), arms and imports of oil.[20]

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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]

Former trade embargoes

• Federal Republic of Yugoslavia (by UN)


• North Vietnam (1964–1975) and later Vietnam (1975–1994), trade embargo by the US [22]
• Republic of Macedonia (by Greece), complete trade embargo (1994-1995).
• Libya (by United Nations), weapons, enacted 2011 after mass killings of Libyan
protesters/rebels and ended later that year after the overthrow and summary execution of
Gaddafi.
• India (by UK), [23] nuclear exports restriction.
• Pakistan (by UK),[23] nuclear e exports restriction, enacted 2002
• Serbia by Kosovo's unilaterally declared government, since 2011[24]
• Embargo Act of 1807
• Former Yugoslavia Embargo November 21, 1995 Dayton Peace Accord
• Georgia (by Russia), agricultural products, wine, mineral water, enacted 2006, lifted 2013.[25]

Non-cooperative countries and territories (NCCTs)

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.

Below link prides the list of countries –

http://www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/

Risk Parameters
Client Risk (Nature of business)
Country risk
Product Risk
Negative Screening

Client Risk (Nature of business)


Understanding the nature of business of the client

What does the business involve?

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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

High Risk Industries

- Money Service business/money exchanges -


Money services business is vulnerable to money laundering as transfer of money from one party to
another or from one country to another country is quite easy. MSBs do not perform enhanced due
diligence on the person who wants to transfer the money & on the person who receives the money.
They just asked basic minimal details while doing the transactions. Thus it is categorized as a high risk
industry.

- 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 Business –

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

Some businesses and entities may be misused by money launderers to legitimize


their illicit proceeds. For example, a criminal may own a cash-intensive business,
such as a restaurant, and use it to launder currency from illicit criminal activities.
The restaurant's currency deposits with its bank do not, on the surface, appear
unusual because the business is legitimately a cash-generating entity. However,
the volume of currency in a restaurant used to launder money will most likely be
higher in comparison with similar restaurants in the area. The nature of cash-
intensive businesses and the difficulty in identifying unusual activity may cause
these businesses to be considered higher risk.

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Risk Mitigation

When establishing and maintaining relationships with cash-intensive businesses, banks


should establish policies, procedures, and processes to identify higher-risk relationships;
assess AML risks; complete due diligence at account opening and periodically throughout
the relationship; and include such relationships in appropriate monitoring for unusual or
suspicious activity. At the time of account opening, the bank should have an
understanding of the customer's business operations; the intended use of the account;
including anticipated transaction volume, products, and services used; and the geographic
locations involved in the relationship.

When conducting a risk assessment of cash-intensive businesses, banks should


direct their resources to those accounts that pose the greatest risk of money
laundering or terrorist financing. The following factors may be used to identify the
risks:

- 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.

- Political/religious associations & charities


Political & religious Associations & charities are regarded as high risk due to the risk of them
being used for the purposes of money laundering, terrorist financing or bribery & corruption.
This includes non-government organizations & nonprofit/not for profit organizations.

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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 –

Using money raised by charities to fund terrorist organizations.


Using charities to smuggle people into countries illegally
Using residential schools as a military recruitment & training centers
Base to spread propaganda

- 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.

Country Risk Rating

Country risk is defined under 1 to 4 level


Level 1 – Low
Level 2 – Medium
Level 3 – high
Level 4 High (escalate)

Country risk is defined based on the issues going on in that country.

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 Search Screening –

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 –

Lexis Nexis (globally accepted)


Bridger insight (for OFAC sanctions)
World Check (Especially for individuals)
Norkom

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 –

An allegation is a formal claim against someone. It sparks an investigation that leads to


someone being proven innocent or found guilty. In everyday use, however, an allegation is
what someone thinks, whether or not there is proof.

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.

PEP – (politically exposed person)


A politically exposed person (PEP) is an individual who is or has been entrusted with a
prominent function. Many PEPs hold positions that can be abused for the purpose of
laundering illicit funds or other predicate offences such as corruption or bribery.
Situation A – Direct PEP relationship.
The PEP is a prospective or existing client.
Escalation to regional head of AML is required for Scenario A PEP. Relationship must be
flagged as PEP client Relationship.

Situation B – UBO PEP relationship.


The PEP is a UBO of the prospective or existing client.
Escalation to local AML/Compliance is required for scenario B PEP
The relationship must be flagged as PEP Client Relationship

Situation C – Any other significant PEP linked to the client. E.g. – legal representative is a PEP.
Escalation to local AML Compliance is required.

Close associates/relatives of the PEP also considered PEP. e.g.


PEP will be considered PEP indefinitely, irrespective of the number of years since ceasing to
exercise his/her PEP function.

Negative screening is performed on all identified parties.

Impact of KYC non Compliance

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.

BNP OFAC Violations –

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.

When do financial institutions need to perform KYC?

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New Client Adoption
Renewals/Remediation
Event Driven Review
Extension of new products/new business line

- New Client Adoption


For all new clients that are adopted under Bank/FIs system, KYC is required to perform. Unless the
KYC is complete, client cannot do any financial transactions. It’s a compliance breach if client is trading
without having proper KYC.

- 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

Time lines may vary from bank to bank.

- Event Driven Review


Event driven review is required when any event is occurred which demands to refresh KYC in
between. For e.g. – client got sacked by regulators in any negative news. It is necessary to re-
review the KYC on such client even if it is within the renewal time frame.

- Extension of new products/new business line –


If client extends business or products, it requires to refresh the KYC.

Document Sources
Primary Secondary

Registry Company website

Regulation Any other Google sources except wiki

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Listing

Audited annual report

COI

any other GOVT issued document


Register of shareholders, register
of directors, L.P. IMA agreement,
L.P. IMA agreements, Prospectus,
Offering circulars, Offering memo
etc.
client approval on client letter head
provided by authorized person

General KYC Requirements

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.

Generally KYC is performed to implement below two things

CIP (client Identification Program)


Risk mitigation (money laundering, terrorist financing & any other fraudulent
activities)

CIP Risk Mitigation


Name Ownership (money Inflow)
Address (registered & trading) Directors (money outflow)
GOVT ID Negative screening
Nature of business
Date of birth (individual)

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.

CIP is needed for all customer types.

- Risk Mitigation

Risk Mitigation process is directly connected to money flow.

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.

Risk –black, laundered money can get invested by the investors.

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.

We need to understand how entity receives money to run its operations.

Let’s take an example of TCS.

So from where TCS receives the money to run the operations?

SHAREHOLDERS (MONEY INFLOW)

MONEY RECEIVED FROM SHAERHOLDERS, IS USED TO RUN THE OPERATOINS

DIRECTORS (MONEY OUTFLOW)

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.

For individuals we need to his/her source of income to mitigate the risk.

Based on the above concept, we can identify below three things to mitigate the risk from kYC
perspective of any type of entity.

- Who is investing money in to the entity


- Who is managing money
- Who is getting benefitted out of the profit

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.

Document Sourcing Grid

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

SPV Trust Foundation


Name Name Name
Address (registered & trading) Address (registered & trading) Operating address
Nature of Business Nature of Business Nature of Business
Govt Issued ID - Founder name
Source of funds of foundation
Originator (money inflow) Grantor (money inflow)
(money inflow)
Arranger (money outflow via directors/counsellors (money
Trustee (money outflow)
beneficiary) outflow)
Portfolio manager (money
Protector (if applicable) Statute (proof of existence)
outflow)
Beneficiary (money outflow via
Directors (money outflow)
beneficiary)
Negative screening Negative screening 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.

Entity types (KYC Perspective)

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.

Two primary task performed by regulator –


A – Protect investors’ rights
B - Combat with money laundering & other financial crimes

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

Identify money flow as we cannot trust on regulator.

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.

e.g. – equity, derivatives, bonds, commodities etc.

Below conditions to be satisfied to consider entity as listed

- Primary stock exchange (where entity is domiciled)


- It should be listed for equity stock.
- Approved stock exchange.

Equity share holders features –

Equity holders are the owners of the company.


They have voting rights
They can make & bend the major company decisions.

So from KYC standpoint we are concerned about equity share holders.

Approved Stock Exchange –


Likewise regulator, every bank has a list of approved or non-approved stock exchanges. The reason of
this bifurcation is same as regulators.

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

& for high risk threshold is 10 %

Major shareholder -

Can make & bend the decisions

Can manipulate things in the organization

can enforce directors

That’s the reason we are concerned about major shareholders. We don’t have concerns about

Minor shareholders & we do not require their information mandatorily

3- SUB of listed-

Below conditions to be satisfied

Should be owned by a single entity more that 75 % (so possibility of any other entity owning
more than 25% is nil

Both owner & entity should be from low risk jurisdiction.

Listing criteria’s should be met. (i.e. primary listing, ordinary shares)

If this is the scenario then we can tag our entity as a sub of listed.

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Procedure-

CIP

Owner/entity relation along with % (more than 75 % should be met)

Listing proof of owner

Negative screening on entity & owner.

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

Listed as we do not have any comfort on money flow

So we need to identify Money inflow & outflow here.

Money inflow - Shareholders

Money Outflow - Directors

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.

Where to stop the ownership…

If owner is listed

If owner is regulated

If owner is GOVT (GOVT can’t have ownership)

If owner is individual (need his/her source of income)

For drilling down the ownership, we need to apply threshold criteria as per the risk level.

E.g. 2 -

A is owned by B, C, D, E 30, 26, 26, 18 % respectively. A is a low risk entity

- E is holding below threshold. We can ignore.

- For others check the regulation, listing (if non-financial business, directly jump on listing.)

- Consider B is regulated. C & D not regulated not listed.

- B's ownership we don’t need as it’s regulated.

- As C & D both are major shareholders (not listed, regulated) & we do not have any comfort to

Mitigate the money inflow risk

We need to identify ownership of C & D.

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

Owners (above threshold)

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Directors

Screening on entity, owners & directors.

If we find negative news on any party, we need to reach out to AML for further guidance.

Sample ownership structure chart

UBO (Ultimate Beneficial Owner) –

“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)

UBOs as per entity types –

Private entities/corporations - Share holders

Trust – Beneficiaries’

Limited Partnerships – General partners/Limited partners

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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. –

Sale of interest in the company

Property sales

Gifts

Sale of shares

Maturing investments or encashment sales

Saving from employment income

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.

Thus bearer shares are prone to risk.

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 –

If government is dealing with a bank, entity categorization will be under government

e.g. – state government, central or local government.

Government agencies

Central banks

Features –

Risk is low from KYC stand point

GOVT can’t have ownership

not concerned about money inflow

only need to check party related to money outflow

not registered, regulated, listed

Procedure

Source company website proof stating nature of the government

E.g. central banks –regulate the banking industry

Source legal representative/directors

Source operating address

Negative screening on directors & entity itself

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

We just need to prove it’s a supranational entity.

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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.

KYC requirements are same like government entities.

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 –

General types of funds –

Mutual fund

Hedge funds

Pension funds

SICAV

UCITS

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Personal Investment Company/Family office/fund

Mutual Funds –

An open-ended fund operated by an investment company which raises money from


shareholders and invests in a group of assets, in accordance with a stated set of objectives.

Fund issues units to the investors

Units are offered to public

Mostly regulated as fund deal with common public money as well

High trading volumes as most of the mutual funds are listed.

Minimum subscription value is low

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

Low trading volume

Offered to institutional investors & HNI’s

Minimum subscription value is very high (in millions)

typically use long-short strategies

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Hedge fund managers, receive a percentage of the returns they earn for investors,

generally not regulated

Pension funds –

Pooled-contributions from pension plans set up by employers, unions, or other


Organizations to provide for the employees' or members' retirement benefits.
Pension fund holders can enjoy the benefits after retirement. Retirement plans, funds set up for
social welfare, death, accident plans also included in such category.

SICAV –

It is an open ended fund set up in Luxemburg. It is similar to mutual funds. In Luxembourg it is called
as SICAV.

UCITS (Undertaking of collective investments scheme in marketable securities)


It is an open ended fund set up in European Union. It is similar to mutual funds. In European Union it
is called as UCITS.

Personal Investment Company/Family office/fund -


Fund created by few people or family. Family or set of few investors come together
contribute money. Appoint investment manager to manage the money & generate returns for the
investors.
It has very less number of investors. It is operated privately thus regulatory supervision is not
required as fund is not dealing with common public's money. Investors are rich & sophisticated.

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.

Fund types (KYC Perspective)

– 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)

1 - Mutual/hedge/pension fund issued to public

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

If AML SP is not regulated -


AML SP does the KYC checks on investors however it is not regulated means money inflow
risk is not yet mitigated. Thus we need to get Collective Investment Scheme questionnaire filled from
client.

Questions included in CIS questionnaire -


Having CIS questionnaire filled by client, we take a confirmation from client that they are following
all AML rules & regulations. If tomorrow fund or any investor of the fund got sacked in any
fraudulent activity, bank will not be in accused as we have proper confirmations taken from client.

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

f – Does your institution have a designated AML compliance officer? Y/N

Name & contact details of the responsible AML officer....................................

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

2 - Corporate/GOVT pension fund (units are offered to specific people)

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Pension fund created by corporate for its employees or government for government employees.

Features -

Units are not offered to public


only employees can invest
as no public offering so issuance of prospectus is not necessary
audited annual report is the primary document
money inflow is known as amount will be deducted from salary
It cannot be regulated as no public offering.

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.

– If it’s a Third party Asset management company, check for regulation

If regulated, attach necessary documents

Stop

If not regulated,

Get the ownership & directors of IM

Complete CIP & negative screening

AML SP is not required as money source is known.

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

If IM is not regulated (means risk is not mitigated)

– Identify ownership & directors of IM


+
– Investors owning more than 25 % for low risk & 10 % for high risk along with their further
source of income.

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

7 - SPV (Special Purpose Vehicle)

Features

– used to isolate risk

– single defined purpose

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– limited life

Types -

Securitization SPV

Capital raising vehicle

Financial engineering (SPV is abused to hide fraudulent activities) Enron fall

Financial intermediary vehicles

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.

Almost any type of loan can be securitized.

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.

Notes are also mortgage backed or asset backed securities.

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

originators (money inflow)

Arranger (money outflow)

Portfolio manager (manages the loan portfolios)

Directors (connected to money outflow)

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 -

Swap counter party – (For your Information)

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)

2. Trustee (money outflow)

3. Protector (if applicable)

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.

Once we identify the above parties, we need following.

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)

If trustee is individual, screen him against negative news.

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.

Other than family trust –

Like Educational trust, charitable trust, unit trust.

Identify grantor, trustee

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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.

Documents – Trust deed will be the primary document

Trustee address can be considered for trust as trusts are not registered.

9 - Foundation –

A foundation (also a charitable foundation) is a legal categorization of nonprofit organizations that


will typically either donate funds and support to other organizations, or provide the source of
funding for its own charitable purposes. It also includes bank foundation set up by banks as the part
of their CSR activities

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 –

An organized body of people who have an interest, activity, or purpose in common

E.g. trade associations,

- Association is created by members

- They pay membership fees (money inflow)

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- Controllers/decision makers are appointed to run the association (money outflow)

11- Limited Partnership

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

-Limited partners are the investors in the partnership (money inflow)

-General Partner manage the partnership (money outflow)

- Profit generated routs back to the limited partners

- General partner receives management fee

- Limited partnership agreement is a primary document

- If Fund is set up as an L.P. we need to apply funds KYC guidelines.

Procedure -

- Complete CIP

- Identify General partners & limited partners (limited partners holding more than 25& in low & 10 %
in high risk)

- Check for regulation of the both parties

- If regulated, we do not require further docs

- If limited partners are not regulated, identify further ownership as per the ownership criteria

- If general partner is not regulated, identify its controllers/directors

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Individual -

Requirements-

Name
Address (current & permanent)
Date of birth
GOVT issued ID
Source of income

Difference between low RISK & high risk entities


Low risk High Risk
Standard due dillegince Enhanced due dilligence
ownership threshold 25% ownership threshold 10 %

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 -

Markets in financial instruments directive

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.

MIFID is applicable to any entity or individual who trades in Europe.

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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

Considered to be more experienced, knowledgeable

and sophisticated and able to assess their own risk and are afforded fewer

Regulatory protections. It consist, large undertakings, other financial institutions, funds etc.

- Eligible Counter-parties (‘ECP’)

Investment firms, credit institutions,

insurance companies, UCITS and their management companies, other regulated

financial institutions and in certain cases, other undertakings. MiFID provides a

‘light-touch’ regulatory regime when investment firms bring about or enter into

transactions with ECPs.

Client On boarding -

Generally it comprise two teams

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– COB client service team
– COB KYC team

COB Client service team -

Co-ordinate requests between sales/credit/Legal/back office to facilitate & priorities front office

COB Team – (KYC team)

Consist of New Client Adoption & renewal/remediation team. Perform KYC review on new as well as
existing clients

Type of account requests

– Product extension

– new trading account (new fund under existing fund manager)

– New party (brand new relationship.

KYC review –

- KYC analyst will pick up the entity to be reviewed.

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.

- Case can be moved in to different logical buckets –

A- Pending with sales/client (including chaser)

B- Pending for audit (internal)

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C- Pending with account closure team to close the account

D- Pending with AML compliance

E- Pending with onshore for query

F- Pending tech issue (while data modification in system)

G- Pending initiation

H- Insufficient documents – to be escalated to business

I- Pending with credit officer (for credit relevant products)

J- On hold – internal clarification

K- Pending for audit – onshore

L- KYC complete

M- Review in progress

- Every case should be audited by internal auditor in order to maintain quality.

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.

- Formulating AML/KYC policies


- Imparting AML/KYC trainings
- Provide decision/approvals on negative news
- Resolution of queries
- Incorporate the changes in the policies as per the changes in rules & regulations

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)

Remediation/Event driven/Product extension –

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.

Generally pipeline of cases is specified. Details includes ,

Name of the client (entity or individual)


Unique internal party ID
Domicile & incorporation
Booking location
Sales/business manager 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.

Domicile & incorporation – India

Booking location – USA (New York)

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 -

Client trades with a bank for its own account.

E.g. Black rock asset management opens trading account with an investment bank for its own.

Direct relationship with a bank

Agent setup

Client trades with a bank on behalf of others

E.g. Black rock asset management opens trading account with an investment bank for its funds.
Trading decision maker will be black rock.

Indirect relationship with a bank

Agent - Black rock asset management

Sub account – black rock funds

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.

Points to be taken care –

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.

Standard document request format –

1. Identify and Record - Full name - of all Legal Representatives


- A Recent document providing the list of Legal Representative (Board of Directors) such
as Register of Directors, Certificate of Incumbency, Commercial/Business registry
extract.
Note: If the Board of Directors of the Client is another legal entity, we need the Board of
Directors of that legal entity, we need to keep tracing back all the Board of Directors of
the client until we reach the Board of Directors who is Individuals.

2. Ownership structure chart


- A recent document to confirm the complete ownership structure details like Share
Registry Extract, Commercial/Business Registry extract, Register of Shareholders or
recent Audited Annual report or any valid legal documentation providing the complete
ownership details of the entity authorized by the company secretary, Legal counsel, CEO,
CFO, 3rd party auditor/lawyer. Kindly provide the ownership structure till UBO level.

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

4. Recent Unconsolidated Audited Financial Statements for Mifid categorization

Note: We will not be able to accept documents provided in foreign language.

(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

1 – Is the entity registered or domiciled in a high risk jurisdiction?

2- Is the entity involved in a high risk business?

3 – Is a UBO of the entity a national of a high risk jurisdiction?

4 – If a natural person facing bank as a direct client – is he a PEP (Determined from Negative media
screening)

5 – Is a UBO of the entity PEP?

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)

8 – Is there any negative information found on entity, its directors or owners?

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.

Know your KYC Guide to know your


Customer…

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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

ACAMS Study Guide 5th Edition.

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