Know Your Customer (KYC)

 It is a process by which banks obtain information about

the identity and address of the customers.
 KYC is a legal requirement to comply with Anti-Money
Laundering (AML) laws and is also important for
preventing other illegal activities like fraud.
 It is a crucial process ensuring banks identify and verify
clients' identities during account opening and
periodically after that.
 Adhering to minimum KYC requirements is mandatory
for account opening and maintaining a business
relationship.
 You must meet these requirements to avoid account
refusal or termination.
Importance of KYC
 Preventing Financial Fraud: KYC acts as a robust shield against
financial crimes like money laundering and fraudulent activities by
ensuring the accurate identification of customers.
 Enhancing Security: Rigorous KYC procedures bolster the security
of banking transactions, instilling confidence among customers
and regulatory authorities.
 Compliance with Regulations: Meeting KYC requirements is not
just a good practice; it's a legal mandate. Banks adhere to
international standards and national regulations to combat
financial crimes effectively.
 Building Trust: KYC fosters trust between banks and clients,
assuring customers that their financial institution is committed to
safeguarding their interests and maintaining a secure financial
environment.
 Mitigating Risks: By thoroughly knowing their customers, banks
can assess and reduce risks associated with potential financial
fraud, identity theft, and other illicit activities.
 Ensuring Accountability: KYC procedures hold individuals
accountable for their financial transactions, promoting
transparency and ethical conduct in banking.
KYC Process & Components
 The KYC process encompasses essential components
designed to ensure the security and authenticity of
transactions. Let's discuss each factor below:
 Identity Verification: It is a primary step which involves
careful checks to verify the customer's identity, employing
various documents and data to confirm their legitimacy.
 Customer Due Diligence: A comprehensive examination
that goes beyond mere identification, delving into the
customer's background, financial activities, and potential
risk factors. This in-depth analysis aids in creating a
holistic understanding of the customer.
 Ongoing (Automated) Monitoring: Continuous
vigilance is maintained through automated systems
monitoring real-time transactions. Any anomalies or
suspicious activities trigger alerts, enabling swift
intervention and investigation.
Types of KYC
 KYC used various methods for customer verification. Let's look
at the types of KYC for a more precise understanding:
 Paper-based KYC: The primary method requires physical visits
to submit self-attested copies of address and identity proofs at
the bank or KYC Registration Agency.
 Aadhaar-based eKYC: It involves remote authentication using
UIDAI data, Aadhaar OTP or biometric-based verification for
online identity confirmation.
 Digital KYC: Modern verification method involving geotagged
live photographs and Officially Valid Documents (OVDs)
submitted online and cross-verified against geotagged
documents. The KYC status can be checked later online as well.
 Video KYC: An online, paperless verification process using an
assisted or unassisted video with manual review and verification
by an agent.
Key Documents Required for KYC
 Here are the various documents required for KYC:
 For Identity Proof:
 Aadhaar card, Voter ID, Passport, or Driving License.
 PAN card with a photograph.
 Government-issued photo-bearing documents.
 For Address Proof:
 Voter's card, Passport, or Driving License.
 Utility bills (electricity, gas, water) not over three months.
 Documents issued by statutory authorities, government, or
elected representatives.

Anti Money-Laundering (AML)
 ‘Money Laundering’ is the cleaning of dirty money. It is a
process whereby proceeds of crimes and illegal means (such
as drug trafficking, smuggling, corruption etc.) are converted
into legitimate money through a complex series of financial
transactions making it difficult to trace back the origin of
funds.

 Can happen across continents, making preventive action much

more difficult.

 In India, popularly known as ‘Hawala transactions’

 Considered a serious crime by internationally community.

Impacts of Money Laundring
 Economic Impacts
 Economic instability: Money laundering can lead to
economic instability by causing unpredictable
transfers of large sums of money, which can make it
difficult for banks to maintain liquidity. This can lead
to bank runs.
 Loss of revenue: Money laundering can lead to a loss
of tax revenue because criminals try to avoid taxes
when laundering money.
 Damage to financial institutions: Money laundering
can damage financial institutions, such as banks, and
the soundness of a country's financial sector. It can
also lead to reputational, operational, concentration,
and legal risks for financial institutions
 Volatile Exchange Rate : Unpredictable transfers of
large sums of money across border can create volatility
in Exchange Rates.
 Deterrence of foreign investment: When a country is
seen as a safe haven for money laundering, foreign
investors may be less likely to invest in its commercial
and financial sectors.
 Rise in Prices: It can lead to serious inflation making
life difficult for people.
 Disruption of Economic and Monitory Policy.
 Social Impacts
 Increases Corruption: Money laundering can
encourage corruption, which can slow economic
growth.
 Increased crime rates: Money laundering can lead to
increased crime rates in society.
 Increase in Terror Activity
 Misallocation of Resources
 Decrease in trust on local institution and government
 Political Impacts
 Criminalization of Politics
 Initiates Political distrust and instability on country
How Money Laundering is done
Three stages of Money-Laundering
 Placement is injecting illegal money into the financial system – E.g.
by inflating invoices in shell company transactions, purchase and
sale of sports tickets etc.

 Layering is the process of moving illegal funds through multiple

transactions in order to camouflage or conceal their source – E.g.
breaking up a large transfer into smaller ones to evade AML
reporting limits (smurfing), putting it in foreign location which
accept NR transfers etc.

 Integration is the process of returning the money to the criminal in

a way that appears to be legitimate and creating wealth for him
through it E.g. dividend, loans, purchasing immovable property/gold
etc.

 Recent Case of Money Laundering

How Money Laundering is done
 Smurfing- Smurfing, also referred to as structuring, is when
criminals break a large number of funds into small chunks of
cash, making multiple transactions and spreading the amount to
different accounts, thereby making it hard to detect the origin.
Electronic money- There are many ways where criminals can
acquire money, whether by infusing malware, phishing, account
hackers, or other vectors. Stored value cards are often used to
launder such illegal money by purchasing items from that money.
Offshore Accounts- Individuals with unexplained excess credits
place such money into bank accounts of countries with less or no
jurisdiction related to anti-money laundering. The no disclosure
policy in those tax haven countries makes the criminals feel safe,
defeating the law.

How Money Laundering is done
 Money Mules- Cash smugglers who help carry the illegal cash
across different countries and deposit that cash in countries with
less stringent tax laws are equally liable as the money launderer.

Cryptocurrencies- The newly inserted online transacting
currency in the form of cryptos such as Bitcoin and several
others has increased the chances of money laundering.
Increasing amounts of OTC trade might result in the heavy
transfer of funds between countries. The lack of strict KYC
norms in some cryptocurrencies has also acted as an invitation to
money laundering.
Casinos- Money launderers buy chips from the casinos with
their cash and later get those chips exchanged with checks
provided by the casinos, sometimes without betting or gambling.
Steps Taken by Government of India to Prevent
Money Laundering
 Criminal Law Amendment Ordinance (XXXVIII of
1944): It covers proceeds of only certain crimes such
corruption, breach of trust and cheating and not all the
crimes under the Indian Penal Code.
 The Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976: It covers penalty of
illegally acquired properties of smugglers and foreign
exchange manipulators and for matters connected
therewith and incidental thereto.
 Narcotic Drugs and Psychotropic Substances Act,
1985: It provides for the penalty of property derived
from, or used in illegal traffic in narcotic drugs.
 Prevention of Money-Laundering Act, 2002 (PMLA)

 It forms the core of the legal framework put in place by India

to combat Money Laundering.
 The provisions of this act are applicable to all financial
institutions, banks(Including RBI), mutual funds, insurance
companies, and their financial intermediaries.
 PMLA (Amendment) Act, 2012.
Adds the concept of ‘reporting entity’ which would include a
banking company, financial institution, intermediary etc.
 PMLA, 2002 levied a fine up to Rs 5 lakh, but the amendment
act has removed this upper limit.
 It has provided for provisional attachment and confiscation of
property of any person involved in such activities.
Steps Taken by Government of India to Prevent Money
Laundering
 Financial Intelligence Unit-IND: It is an independent
body reporting directly to the Economic Intelligence
Council (EIC) headed by the Finance Minister.

 Enforcement Directorate
 It is a law enforcement agency and economic intelligence
agency responsible for enforcing economic laws and fighting
economic crime in India. It works under MoF
 One of the main functions of ED is to Investigate offences of
money laundering under the provisions of Prevention of
Money Laundering Act, 2002(PMLA).
 It can take actions like confiscation of property if the same is
determined to be proceeds of crime derived from a Scheduled
Offence under PMLA, and to prosecute the persons involved
in the offence of money laundering.
Anti Money-Laundering (AML)
 The Prevention of Money Laundering Act, 2002 (“PMLA”), and
the rules issued thereunder (“PML Rules”), provides the key
legislative framework for the prevention & prosecution of
money laundering in India.

 Legal authority responsible for investigating and prosecuting -

Directorate of Enforcement (“ED”), under the aegis of MoF.

 The Anti-Money Laundering Act, 2020 passed in US recently

to overhaul U.S. AML regulations include the Corporate
Transparency Act (making it harder to use shell companies),
subjecting crypto-currency exchanges as well as art/antiquities
dealers to the same KYC requirements as FI.
Anti Money-Laundering (AML)
 Key Elements of the PMLA, 2002:

 1. Customer acceptance policy– only after receiving Know-your-

customer (KYC) documents relating to name/address, not opening
account in name of anonymous/benami, understanding nature of
business and customer profiling etc.

 2. Customer risk identification – Customers should be classified

into three categories – high, medium and low, and negligible risk
perceived. Reviewed periodically.

 3. Monitoring of transactions – Special attention paid to all

complex, unusually large transactions (CTR) and all unusual patterns,
which have no apparent logic or visible lawful purpose (STR),
subjected to detailed scrutiny and if considered suspicious, reported
to appropriate authority.
Anti Money-Laundering (AML)
 4. Risk Management- Auditors to specifically check and verify the
application of KYC/AML procedures at the branches and comment
on the lapses observed, auditor’s report to be put up before the
Audit Committee of the Board quarterly. Also, banks to designate a
senior officer as Principal Officer for implementation of AML.

 5. Record Keeping & Reporting – Record nature and value of all

designated cash transactions (> 10L) and all suspicious transaction
w.r.t. known customer profiling. Reporting to be done by bank
within prescribed time. Record of such transactions preserved and
maintained for 10 years from cessation of relationship.

 In May 2023, PMLA revised to include practicing CA-CS-ICWA who

conduct financial transactions on behalf of their clients under the
anti-money laundering law.
Priority Sector Lending
Priority Sector Lending (PSL) is lending to the sectors of an economy that may not
otherwise get adequate and timely credit.

The need for Priority Sector Lending was felt way back in 1966 when the agriculture
and small industries had a demanding need for the credit and was formalized in 1972
after a formal RBI report on its definition. Over the years, PSL has been retained,
though its scope and definition fine-tuned.

As per revised priority sector norms 2020, priority sector definition to include:
- Agriculture
- Micro, Small, and Medium Enterprises (MSMEs)
- Export Credit
- Education loan;
- Housing loan
- Social Infrastructure
- Renewable Energy
- Others
- (Electric Vehicles being considered, not finalized)
Priority Sector Lending
 Overall priority sector lending targets:
 Scheduled commercial banks: 40 percent of Adjusted Net Bank
Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet
Exposure (CEOBE), whichever is higher.
 RRBs and Small Finance Banks: 75% of ANBC

 Sub-targets for Commercial Banks/RRB/SFB/FB>20:

 18% out of overall 40% to be lent to agricultural sector.
 7.5% to be lent to Micro enterprises
 12% to be lent to weaker sections of Society

 For Foreign Banks with less than 20 branches: 32% can be in the
form of lending to Exports and not less than 8% can be to any other
priority sector.
Priority Sector Lending
 In case banks not able to meet targets, they have to contribute to
NABARD or SIDBI.
 Alternatively, now Priority Sector Lending Certificates (PSLC) also
available, from one bank to another.

 What are Micro/small/medium enterprise - Business entities with

specified limits of investments in P & M.
 What is Agriculture? Includes direct agriculture, horticulture and
allied activities like dairy, fisheries, poultry, bee-keeping, sericulture
etc. Indirect Agricultural share to be limited to 25%

 For detailed & latest guidelines 2023 check:

[Link]
9#Targets
Electronic Banking
Meaning:
- Use of computers and telecommunications
- to enable banking transactions to be done
- by electronic means rather than through physical human
interaction.

- E.g. Internet Banking

- Mobile Banking
- Automatic teller machines (ATMs)
- Use of credit and debit cards
- Automatic payroll deposits/ standing instructions on bills
Electronic Banking
Advantages:

- minimizes the need for customers to visit the bank;

- makes banking more accessible, quick and convenient;
- Low Overhead for banks;
- 24/7 Service Access
- Many more..

- But need to be completely safe and secure also i.e. protected

against new and creative cyber frauds
Phishing, Vishing, Smishing
Three different attack methods, all with the same end goal - to get you
to divulge personal information like bank OTPs, credit card numbers,
CVV etc.

Phishing uses emails and links, gives a bait to get account credentials
and passwords

E.g. An email from PayPal arrives telling the victim that their account
has been compromised and will be deactivated unless they confirm
their credit card details. The link in the phishing email takes the victim
to a fake PayPal website, and the stolen credit card information is used
to commit further crimes.

Involves fraudulent emails, malicious links, duplicate websites etc.

Phishing, Vishing, Smishing
Vishing is similar to phishing, except that the scam
execution is through a voice call or voice mails instead of
email.

E.g. the fraudster calls the victim saying they are from their bank
or FI and informs them that there is a problem with their account
or credit card and asking them to share OTP.

Smishing uses text messages (SMS) or common messaging

apps to do the fraud.

E.g. posing as a government agency such as Income-tax,

electricity office etc. and telling you of dire consequences if you
do not pay urgently.
Phishing, Vishing, Smishing
Few primary security principles we can do to prevent:

 Type exact URL of bank

 Use banks with double passwords
 Reveal details only to own banker. That also CVV never tell.
User id or account number max.
 Be very careful sply with unknown and international numbers.
Beginning with +92, +236
 Do not react on mails/SMS purported to be from RBI, LIC, IT,
own bank (only respond)
 Do not save a/c credentials in phone memory
 Do not have huge sums of money in savings account, sply that
relies on single parameter.
Reference

 Introduction to Banking- Vijayaraghavan Iyengar (Chapter 7 –

AML Measures)
 Essentials of Banking & Insurance. Dr Sunil Kumar

 Priority Sector Advances

 [Link]
lending-meaning-history-targets-revision/

 Video on Money Laundering stages/process:

 [Link]