Page 152 - DMGT303_BANKING_AND_INSURANCE

Unit 7: KYC Norms and Anti Money Laundering

With remarkable alacrity, FIU-IND has ramped up on infrastructure and resources. By Notes
December 2005, the FIU set up its office in Delhi, and by January 2006 it had completed
compilation of the list of reporting entities comprising of banks, financial institutions and
intermediaries. By February 2006, it completed its reporting formats. FIU-IND is now in
the process of hiring a consultant to prepare and implement a detailed project roadmap.
The FIU-IND roadmap includes plans for a secure gateway and information security
standards (BS7799). In a futuristic look at its vision, FIU-IND seeks the development of
systems that can intuitively link independent triggers that span cash transaction reports,
suspicious transaction reports, hotlists and permanent account number (PAN) data.
While FIU-IND has been set up to monitor and analyse instances of potential money
laundering, RBI has been instrumental in clamping down on defaulters with deterrents
and penalties. In his presentation titled 'IPO Scam - A Lesson for Banks', Mr. Lalit Srivastava,
General Manager, department of banking operations and development, RBI, urged bankers
to understand the spirit behind RBI guidelines and policies, sensitizing banks to the impact
of failure of systems and non-compliance. Mr. Srivastava elaborated on the need to counter
creative techniques used by money launderers in committing financial crimes, discerning
between a normal transaction and those facilitated by banks tainted by the IPO scam.

Describing the modus operandi used in the initial public offering (IPO) scam, Srivastava
said that current accounts were opened in the name of multiple companies on the same
date in the same branch of a bank with a sole person authorised to operate all these
accounts, who was also a director in all the companies. Further, identities were disguised
by spelling the same name differently in various companies and multiple accounts opened
in different banks by the same group of joint account holders.
Huge amount of funds transferred from companies accounts to the individual's account
were invested in IPOs. Loans and overdrafts were sanctioned to multiple names to bypass
the limits imposed by RBI. Also, loans were sanctioned to brokers in direct contravention
of RBI guidelines. At the request of brokers, several accounts were opened for funding the
IPO, most of them in fictitious names. Refunds received were credited in brokers' accounts,
indicating suspicions of a nexus between merchant bankers, brokers and banks.
The regulator also spelt out operational deficiencies, pointing out to factors that facilitated
the scam -including unsatisfactory levels of training, incomplete customer identification,
lack of customer profiling based on risk classification, ineffective monitoring and control,
and the absence of accountability of bank officials responsible for opening accounts and
complying with KYC procedures. Commenting on the impact of penalties levied on
banks tainted by the IPO Scam, Mr. Srivastava clarified that in the initial stages, more than
the quantum of penalties it is the signal sent out by the regulator, that banks need to
recognise.
Emphasizing measures to prevent such scams, the regulator spelt out areas that spanned
the need for classification of customer risk, and the need to determine beneficial ownership.
Srivastava drew the attention of banks in India to a recent move by US banks - under the
US Patriot Act - to review all correspondent bank relationships. From an outsourcing
perspective, the regulator also clarified the limited role of direct selling agents (DSA) in
capturing customer data and validating it, thereby ensuring that KYC compliance remains
the onus of the banks.
Mr. Jay Jhaveri, Director, World-Check (Asia) - an organisation dedicated to maintaining
hotlists on politically exposed persons (PEP) - shared insights on the cost of non-compliance
among banks globally. Citing the case of Riggs Bank, which laundered funds belonging to
Chilean dictator Pinochet, the total cost of non-compliance went over US$200 million,
Contd....

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