Why is AML(Anti Money Laundering )highly important? Why are KYC norms not fully accomplished?

Strict compliance of KYC must be insisted on all banks by banking regulator. And audit should be conducted periodically for making sure that the adhere to the said KYC norms. A small fluctuation in KYC norms make easy path to Money laundering which disrupt our economy. So it is in the hand of each and every bank and employee to adhere to KYC norms to protect our own economy.

The money laundering has three phases,There are Placement,Layering and integrity. Placement is the most vulnerable stage of the process, as the chance of discovery of the illicit origin of the money is greatest at the beginning.

 anti money laundering is a process to check the conversion of black money  to white money

In today's scenario every country in the world is suffering due to Money Laundering. End use of money laundering can  increase in Drug trafficking, terrorist/ criminal activities. There are three stages in Money Laundering. Placement : when the small amount of cash deposits in the different account. Layering : when the initial deposits transfer to different accounts to hide the source of account and funds. Integration : when all the money from different accounts comes to a single account to make the final payment for the required purpose.

KYC: It stand for Know Your  Customer. As per only name suggest we  are able to understand its about customer details.

Its basically a term which is used for customer identification process. It involves making efforts to determine to true identity and beneficial ownership of accounts, source of funds, nature of customer business. It helps  to manage the bank risk prudently.

The objective of the KYC guidelines is to prevent banks being used intentionally or unintentionally by criminal elements or money laundering.

 

KYC has two components : Identity and address, while identity remains the the address may be change.

 

AML: It is a set of procedures, laws or regulations designed to stop the practice of generating income through illegal activities.

 

So as per above small description about KYC and AML, my conclusion is both  the process help to  prevent bank from money laundering, here KYC is 1st step and AML is 2nd.

At least in the case of Indian scenario, apart from catering to the minimum standards stipulated by regulators most of the Indian industry is still seems to care less about the importance of AML/KYC.

Since being an insider I am confident enough to say that this is true at least as far as the financial industry in concerned.

We have enough research and evidence to prove that not only for your clients but even for your employees (Know Your Employee) , KYC is very crucial. Any casual approach to KYC norms and their implementations will ultimately result in the organization facing the wrath of regulators.

 

Apart from that the cost of neglecting a healthy AML/KYC policy will ultimately push the organization towards fire fighting rather than preventing it.   

AML-The perception that still endures of money laundering is that of a suspicious character turning up at the counter of a bank with a suitcase (probably helpfully labelled Swag) overflowing with used notes. Until recently even more sophisticated analyses of the problem have attempted to reduce the process to a neat three stage technique (placement, layering and integration). It is perhaps only now that it is becoming clear that money laundering is a robust, corrosive, all-consuming and dynamic activity with far reaching consequences and effects. Traditionally money laundering has been viewed in isolation as the cleaning of dirty money generated by criminal activity: in the collective mindset these crimes are probably associated with the drugs trade. Of course, money laundering is linked to this area, but there are also several others sectors that can be associated with this crime. To understand and appreciate the power and influence of money laundering, one needs to go back to the purpose of crime. The vast majority of illegal acts are perpetrated to achieve one thing: money. If money is generated by crime, it is useless unless the original tainted source of funds can be disguised, or preferably obliterated. The money laundering dynamic lies at the corrupt heart of many of the social and economic problems experienced across the globe.

KYC-Banks should frame their KYC policies incorporating the following four key elements:

1. Customer Acceptance Policy;

2. Customer Identification Procedures;

3. Monitoring of Transactions; and

4. Risk Management.

The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, 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.

Ant Money Laundering is the process by which proceeds from criminal activity are disguised to conceal their illicit origins. it understood in 3 parts 

1.Placement: initial transaction and proceed of crime enter the financial system

2.Layering: Its series of transaction si that follow the placement stage.Purpose s to confuse the audit trial back to the origin of the money

3. Integration: Final stage of process where criminal successfully launder money

 

Every Major Bank has set of Manual and procedure. All staff have personal liabilty for ensurng full compliance.Analyst should have full knowledge about AML/KYC norms, incomplete knowledge would cost banks reputaton,fine and customer

Money laundering is a process of converting black money and untaxed money into formal market channels in the way, that it is clean, enquiry and taxation.

===> Impact on society:

1. This act is high injustice to those, who pay regular taxes from their income.

2. It increases inflation as buying power of money launderers increases while the commodities and products go out of the reach of tax payers.

3. Money launderers earns this money by social crimes like doing illegal business and hoarding of commodities.

===> Impact on economy

1. Money laundering evades taxes and income of the government. Thus burden comes on tax payers and poor people.

2. Money launderer helps in smuggling and evasion of taxes.

 

 

For Banks Anti-Money Laundering measures are highly important?

•          To  be a part of global efforts preventing the possible use of the banking sector for money laundering, terrorist financing, transfer of illegal/ill-gotten monies and white collar crime.

 

•          To ensure business is conducted in conformity with high ethical standards and banking laws and regulations

 

•          To ensure transparency/prudence in banking transactions while starting relationship with a new customer and maintaining and continuing relationship with existing customers,

 

KYC norms are not accoplished due to lack of commitment and awareness.  

 

 

 

Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank.

(i) No account is opened in anonymous or fictitious/benami name. [Ref: Government of India Notification dated June 16, 2010 Rule 9, sub-rule (1C) - Banks should not  allow the opening  of or keep any anonymous account  or accounts in fictitious name or account  on behalf of  other persons whose identity  has not been disclosed or cannot  be verified].

(ii) Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorisation of customers into low, medium and high risk (banks may choose any suitable nomenclature viz. level I, level II and level III). Customers requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs) may, if considered necessary, be categorised even higher;

(iii) Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of PML Act, 2002 and instructions/guidelines issued by Reserve Bank from time to time;

(iv) Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures, i.e., bank is unable to verify the identity and /or obtain documents required as per the risk categorisation due to non cooperation of the customer or non reliability of the data/information furnished to the bank. It is, however, necessary to have suitable built in safeguards to avoid harassment of the customer. For example, decision by a bank to close an account should be taken at a reasonably high level after giving due notice to the customer explaining the reasons for such a decision.

(v) Circumstances, in which a customer is permitted to act on behalf of another person/entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate holder or where an account is opened by an intermediary in fiduciary capacity and

(vi) Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organisations etc.

b) Banks should prepare a profile for each new customer based on risk categorisation. The customer profile may contain information relating to customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location etc. The nature and extent of due diligence will depend on the risk perceived by the bank. However, while preparing customer profile banks should take care to seek only such information from the customer, which is relevant to the risk category and is not intrusive. The customer profile is a confidential document and details contained therein should not be divulged for cross selling or any other purposes.

c) For the purpose of risk categorisation, individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government Departments and Government owned companies, regulators and statutory bodies etc. In such cases, the policy may require that only the basic requirements of verifying the identity and location of the customer are to be met. Customers that are likely to pose a higher than average risk to the bank should be categorised as medium or high risk depending on customer's background, nature and location of activity, country of origin, sources of funds and his client profile, etc. Banks should apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive ‘due diligence’ for higher risk customers, especially those for whom the sources of funds are not clear. In view of the risks involved in cash intensive businesses, accounts of bullion dealers (including sub-dealers) & jewelers should also be categorized by banks as 'high risk' requiring enhanced due diligence. Other examples of customers requiring higher due diligence include (a) non­resident customers; (b) high net worth individuals; (c) trusts, charities, NGOs and organizations receiving donations; (d) companies having close family shareholding  or  beneficial  ownership; (e)  firms with  'sleeping partners'; (f) politically exposed persons (PEPs) of foreign origin, customers  who are close relatives  of PEPs and accounts of which a PEP is the ultimate beneficial owner; (g) non-face to face customers and (h) those with dubious reputation as per public information available etc. Howeveronly NPOs/NGOs promoted by United Nations or its agencies may be classified as low risk customers.

d) In addition to what has been indicated above, banks/FIs should take steps to identify and assess their ML/TF risk for customers, countries and geographical areas as also for products/ services/ transactions/delivery channels, Banks/FIs should have policies, controls and procedures, duly approved by their boards, in place to effectively manage and mitigate their risk adopting a risk-based approach. As a corollary, banks would be required to adopt enhanced measures for products, services and customers with a medium or high risk rating.  In this regard, banks may use for guidance in their own risk assessment, a Report on Parameters for Risk-Based Transaction Monitoring (RBTM) dated March 30, 2011 issued by Indian Banks' Association on May 18, 2011 as a supplement to their guidance note on Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards issued in July 2009. The IBA guidance also provides an indicative list of high risk customers, products, services and geographies.

e) It is important to bear in mind that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged.