Page 141 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes 7.1 Policy on Know Your Customer Standards/Anti-Money
Laundering Measures

The RBI u/s 35 A of Banking Regulation Act has issued directive to banks to put in place KYC
policy and adopt anti-money laundering measures.

Preamble

On the recommendations of the United Nations, the Government of India has enacted Prevention
of Money Laundering Act 2002. Money laundering is the process whereby proceeds of crimes,
such as, drug trafficking, smuggling, etc. are converted into legitimate money through a series
of financial transactions making it impossible to trace back the origin of funds. Further, the
technological advancements have helped money launderers to adopt innovative means and
move funds faster across continents making detection and preventive action much more difficult.
The international community considers money laundering a serious crime. This calls for a
dynamic approach in tracking the crime. Bank officials need to be even more vigilant and
prudent in knowing their customers. Bank employees have to undertake enhanced due diligence
while opening accounts and also monitor operations more closely. "Know Your Customer" also
means knowing whom he deals with.

Objectives

The objectives of the policy are to prevent criminal elements from using the bank for money
laundering activities by enabling the bank to know/understand the customers and their financial
dealings better, which, in turn, would help the bank to manage risks prudently and to put in
place appropriate controls for detection and reporting of suspicious activities in accordance
with the laid down procedures so as to comply with applicable laws and regulatory guidelines.

Money Laundering - Risk Perception

The inadequacy or absence of KYC standards can subject the bank to serious customer and
counter-party risks:
Reputation Risk: Risk of loss due to severe impact on the bank's reputation. This may be
of particular concern given the nature of the bank's business which requires the confidence
of depositors, creditors and the general market place.
Compliance Risk: Risk of loss due to failure of compliance with key regulations governing
the bank's operations.
Legal Risk: Legal risk is the possibility of lawsuits, adverse judgments or contract resulting
from failure to observe mandatory KYC standards or from the failure to practice due
diligence. Consequently, the banks can suffer fines, criminal liabilities and special penalties
imposed by supervisor.

!
Caution The international community considers money laundering a serious crime. This
calls for a dynamic approach in tracking the crime. Bank officials need to be even more
vigilant and prudent in knowing their customers.

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