RBI GUIDELINES UNDER ANTI-MONEY LAUNDERING
In this post of AML & KYC notes 2024, we will discuss the RBI Guidelines issued in view of anti-money laundering activities.
Our focus will be on Guidelines of RBI to curb money laundering activities through banks in this article. This is one of the important topics from the prescribed syllabus of IIBF Certification Course of Anti-Money Laundering & Know Your Customer 2024. The first thing we would like to do is to give you an overview of AML & KYC so that when you proceed with money laundering guidelines, you will feel more comfortable, and after discussing the topic, we will also discuss the latest KYC AML study material available on the Learning Sessions platforms for 2024 upcoming exams.
VISIT NOW-> AML KYC LATEST STUDY MATERIAL
AML IN BANKING
The Anti-Money Laundering Guidelines are rules, regulations & obligations to detect and prevent money laundering and other financial crimes. And the banking sector having the personal data of its customers right at the beginning of the customer journey helps in catching attempts at illegal activity. When transacting through the bank, every person is scanned & through compliance procedure – abnormal actions and suspicious transactions can get detected.
AML Compliance Program For Banks
A compliance program must effectively combat financial crimes and have anti-money laundering principles in place. Therefore, banks must set up a compelling AML compliance program to meet the regulations they are required to comply with.
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Know Your Customer in Banking:
It is a step to collect personal data like name, ID, nationality etc. during registration of customer & is the first control mechanism applied in the AML program.
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Customer Due Diligence in Banking:
A screening process to identify potential money laundering and terrorist financing risks posed by customers.
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Screening of transactions:
Bank faces major sanctions if it mediates a payment sent to a prohibited or sanctioned person & therefore it needs an automated transaction screening tool to process customer transactions as per to AML regulations.
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Independent AML audits:
It is an AML compliance program from start to finish to eliminate any missing points of their compliance implementation.
RBI GUIDELINES
The Reserve Bank of India has issued regulatory guidelines on Know Your Customer (KYC) / Anti-Money Laundering (AML) / Countering Financing of Terrorism (CFT) standards & we have discussed the same below:
Purpose of these KYC, AML, CFT guidelines:
Banks have been advised to follow a certain client identification procedure (These have been revised in relation to the Financial Action Task Force (FATF) recommendations on AML & CFT) for reporting to the relevant authority when opening accounts and monitoring transactions of a suspicious nature.
Banks have been advised to ensure that a proper policy framework for Know Your Customer and Anti-Money Laundering measures is formulated and implemented with board approval.
APPLICABILITY OF THESE RBI GUIDELINES:
The instructions contained in the Master Circular are applicable to:
- All financial institutions and all scheduled commercial banks except RRBs. Including :
Branches & majority-owned subsidiaries located abroad, particularly in countries that do not apply or under-apply the FATF recommendations, to the extent permitted by local laws.
Where applicable local laws and regulations prohibit the implementation of these guidelines, the Reserve Bank should be notified.
In case there is a difference in the KYC/AML standards prescribed by the Reserve Bank and the host country regulators, the branches/overseas subsidiaries of the banks have to adopt the more stringent regulation of the two.
These instructions are issued under Section 35A of the Banking Regulation Act 1949 and Rule 7 of the Prevention of Money Laundering (Maintenance of Records of Nature and Value of Transactions, Procedure and Manner of Keeping and Time Limits for Providing Information and Verification and Keeping of Records of Clients’ Identity Rules banking companies, financial institutions and intermediaries) of 2005.
AIM OF THE KYC/AML/CFT DIRECTIVES
To prevent banks from being used intentionally or unintentionally by criminal elements for money laundering or terrorist financing. KYC procedures also enable banks to better know/understand their customers and their financial transactions, which in turn helps them prudently manage their risks.
READ ALSO -> AML KYC NOTES
THE DEFINITION OF CUSTOMER
For the purposes of the KYC Policy, “Customer” has been defined as:
- a natural or legal person having an account or \a business relationship with the bank;
- one on whose behalf (i.e. the beneficial owner) the account is maintained;
- recipients of transactions conducted by professional intermediaries such as chartered accountants, attorneys, stockbrokers, etc., as permitted by law, and
- any person or entity associated with a financial transaction that may present significant reputational or other risks to the bank, for example a wire transfer or the issuance of a high value bill as a single transaction.
THE GUIDELINES: General
- Banks should keep in mind that the information collected from the customer for account opening should be treated as confidential and the details should not be disclosed for cross-selling or any other similar purposes. Banks should therefore, ensure that the information required from the customer is relevant to the perceived risk, non-intrusive and in accordance with the guidelines. Any additional information from the customer must be requested separately with his consent and after opening the account.
- Banks should ensure that any remittance of funds by way of draft, postal/telegraphic transfer or any other mode & issue of traveller’s cheques of Rs. 50000.00 and above shall be made by debiting the customer’s account or against cheques and not against payment in cash.
- Banks should ensure that the provisions of the Foreign Contributions (Regulation) Act, 1976, are strictly complied with wherever possible.
KYC Policy
Banks should frame their KYC policies incorporating the following four key elements:
- Customer Acceptance Policy (CAP);
- Customer Identification Procedures;
- Monitoring of Transactions; and
- Risk Management.
CUSTOMER ACCEPTANCE POLICY (CAP)
- Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers on the following aspects of customer relationship in the bank:
- no account is opened in an anonymous or fictitious or benami name;
- The parameters of risk perception – in terms of the nature of the business activity, location of the customer and his clients, method of payment, volume of turnover, social and financial status, etc., are clearly defined in order to categorize customers into low, medium and high risk;
- Documentation requirements and other information to be collected with respect to different categories of customers depending on the perceived risk and having regard to the requirements of the PMLA, 2002 and the instructions/guidelines issued by the RBI;
- Not open an account or cancel an existing account if the bank is unable to apply appropriate measures for due diligence on the client. However, it is necessary to have appropriate built-in safeguards to avoid customer harassment.
For example: a bank’s decision to close an account should be taken at a reasonably high level after properly notifying the customer and explaining the reasons for such a decision;
- The circumstances under which the customer is permitted to act on behalf of another person/entity should be clearly stated in accordance with established banking law and practice, as there may be cases where the account is operated by a proxy holder or if the account is opened by an intermediary in an administrator capacity; and
- Necessary checks before opening a new account to ensure that the customer’s identity does not have any known criminal history or prohibited entities such as individual terrorists or terrorist organizations, etc.
We will continue the further guidelines in our next set of notes on the AML-KYC Guidelines of RBI for the latest IIBF Exams 2022. Though you can check out our other articles on this certificate exam, here: Learning Sessions
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