KYC & AML Booklet - July 2009

Know Your Customer (KYC) Norms
And
Anti-Money Laundering (AML) Standards
GUIDANCE NOTES FOR BANKS
July 2009
Indian Banks' Association

KYC & AML Guidance Notes For Banks
First Edition - October 2005
Second Edition - July 2009

FOREWORD
Indian Banks' Association brought out the first edition of "Know Your
Customer (KYC) Standards and Anti-Money Laundering (AML) Measures -
IBA Guidance Notes for Banks" in October 2005. This was meant to give
broad outlines of policy frame work based on international practices to
serve as a reference guide to banks in complying with the provisions of
the Reserve Bank of India guidelines on "Know Your Customer Guidelines
and Anti-Money Laundering Standards" and also to meet the obligations of
banks under the Prevention of Money Laundering Act (PMLA) 2002. The
IBA Guidance Notes were seen as useful in ensuring uniformity of approach
among the banks in implementing the KYC Norms and AML Standards.
Since 2005, there has been a number of developments in AML / CFT

regimes globally and in our country and also the RBI has revisited some
aspects of their KYC guidelines issued in November 2004. It was therefore
felt necessary to review and revise the Guidance Notes by incorporating
new developments to serve as a reference document to the banks on all
KYC / AML / CFT issues.
The task of revising the Guidance Notes was assigned to a Working Group
formed with Senior Executives of member banks overseeing KYC / AML
measures. The hard work of going through relevant rules, regulations and
guidelines both national and international and redrafting the document
was taken up by a Core Group of members drawn from State Bank of India,
ICICI Bank Ltd., Standard Chartered Bank and HSBC. The Core Group met
on a number of occasions and deliberated on minute details to be
incorporated in the draft document before presenting to the Working Group.
I understand that the contents of the guidance notes were shared with
Reserve Bank of India and Financial Intelligence Unit-India (FIU-IND), New
Delhi and their informal but valuable suggestions incorporated in the
document. Financial Intelligence Unit - India (FIU-IND) had complimented
the efforts made by IBA for preparing comprehensive Guidance Notes for
the Industry. FIU-IND also mentioned that the document would be found
useful by banks and their employees and improve compliance to the
Prevention of Money Laundering Act (PMLA) 2002.
I am sure that the Guidance Notes will create awareness on the legal and
regulatory framework for AML / CFT requirements and systems across the
banking sector. It would help banks to interpret the obligations under the
PMLA and other relevant regulations and how they might be implemented
in practice. Also, it would facilitate banks to align their operations with
good international industry practices in AML / CFT procedures through an
appropriate risk based approach and provide a framework for banks to
design and implement the systems and controls necessary to mitigate the
risks of the bank being used in connection with money laundering and
terrorist financing.
I compliment and place on record my sincere appreciation of the contribution

made by members of the Core Group as well as Working Group and IBA
secretariat in revising and updating these Guidance Notes.
Mumbai M. V. NAIR
July 30, 2009 Chairman
INDIAN BANKS' ASSOCIATION
IBA Working Group on KYC & AML
CONVENER
Mr. K Unnikrishnan
Deputy Chief Executive
MEMBERS
1) Mr. B S Bhasin 2) Dr. Sanjay Chougule

Chief General Manager (BO) Global Head - Financial Crime
State Bank of India Prevention & Reputation Risk
Management,
ICICI Bank Ltd.
3) Ms. Neeta Rege 4) Mr. Robby Abraham

Head, Compliance - Consumer Sr. Vice President - Compliance
Banking & CMLPO, India HSBC Ltd.
Standard Chartered Bank
5) Mr. V Ganesan 6) Mr. K C Pillai

General Manager Asst. General Manager &
Indian Bank Principal Officer - AML Cell
Union Bank of India
7) Mr. Manoj Nadkarni 8) Ms. Bhuvana Rao

Sr. Vice President Sr. Vice President
Audit & Compliance Country AML Compliance
HDFC Bank Ltd. Citibank N.A.
9) Mr. S. Gopal 10) Mr. Govind Shukla

Chief Manager - AML Cell Chief Manager
Bank of India Punjab National Bank
IBA SECRETARIAT
Mr. Tushar A Shah

Manager
IBA Core Group on KYC & AML

CONVENER
Mr. K Unnikrishnan
Deputy Chief Executive
MEMBERS
1) Mr. B S Bhasin 2) Dr. Sanjay Chougule

Chief General Manager (BO) Global Head – Financial Crime
State Bank of India Prevention & Reputation Risk
Management,
ICICI Bank Ltd.
3) Ms. Neeta Rege 4) Mr. Robby Abraham

Head, Compliance–Consumer Sr. Vice President - Compliance
Banking & CMLPO, India HSBC Ltd.
Standard Chartered Bank
5) Ms. Madhu Sinha 6) Mr. K T Mathew

Dy. General Manager Head - Financial Crime Risk
& Head AML Compliance & Assurance
Central Compliance Group Standard Chartered Bank
ICICI Bank Ltd.
7) Mr. Arun Boyina 8) Mr. Krishna M Trivedi

Vice President – Compliance Dy. General Manager
HSBC Ltd. State Bank of India
9) Ms. Manisha Agaskar 10) Mr. Umesh Chandra

Head–Transaction Monitoring Unit Asst. General Manager
Standard Chartered Bank State Bank of India
11) Mr. Praveen Mohan Dayal 12) Mr. Narasinh Prabhu

Chief Manager Chief Manager
ICICI Bank Ltd. ICICI Bank Ltd.
IBA SECRETARIAT
Mr. Tushar A Shah
Manager
Contents Page No.
PREFACE
* Preamble 1
* Purpose 2
* Scope 2
CHAPTERS
1. Overview and Regulatory Frame Work 3
2. Internal Controls and Structure in Banks 13
3. Customer Risk Categorization (CRC) 19
4. Know Your Customer (KYC) 23
5. Reporting Obligation under PMLA Act 34
6. Transaction Monitoring 38
7. Name Screening Process 46
8. Wire Transfers – FATF SR VII Compliance 54
9. Staff and Customer Awareness 57
10. Preservation of Records 60

Contents Page No.
ANNEXURES
I. Resident Individual Account Opening Form 62

- Annexure A
II. Non-Resident Individual Account Opening Form 68

- Annexure B
III. Customer Behavior Indicators 75

- Annexure C
IV. An Indicative List of Suspicious Activities 76

- Annexure D
V. Anti-Money Laundering - Case Studies of 85

Suspicious Activities
(Useful For Training Purposes)
- Annexure E
VI. Suggested solutions to certain situations 115

- Annexure F
VII. Reserve Bank of India (RBI) 121

Master Circular dated July 1, 2009
- Annexure G
PREFACE
Preamble
In India, there had been laws and regulations for quite some time to address
certain aspects of money laundering prevention, like Criminal Law Amendment
Ordinance 1944 for attachment of proceeds of certain crimes or Reserve
Bank of India (RBI) instructions regarding identification requirements for
opening of the bank accounts. However, a consolidated anti-money
laundering specific legislation, Prevention of Money Laundering Act, 2002
(PMLA), came in to effect with the Government of India Gazette notification
on 1st July 2005. The Financial Intelligence Unit-India (FIU-IND) constituted
by Government of India on 18th November 2004 as a nodal agency for the
anti-money laundering measures also got statutory recognition on 1st July
2005.
In October, 2005 Indian Banks' Association (IBA) issued the "Know Your
Customer (KYC) Standards and Anti-Money Laundering (AML) - Guidance
Notes for Banks", basically for giving broad outlines of policy frame work
based on international practices to serve as a reference guide to the banks
in complying with the provisions of the RBI Circular dated 29th November
2004 on "Know Your Customer (KYC) Guidance - Anti-Money Laundering
Standards" and also to meet the obligations of banks under the PMLA. The
Guidance Notes helped in ensuring uniformity of approach among the banks
in implementing the KYC Standards and AML measures.
Since 2005, there has been a number of developments in the Anti-Money

Laundering (AML) / Combating of Financing of Terrorism (CFT) internationally
and within India that it was considered necessary to review and revise the
Guidance Note to incorporate the new developments and to give a more
detailed Note that could serve as a reference document to the banks on all
KYC / AML / CFT.
1
Purpose
The purpose of this Guidance Notes is to:
• Create awareness to the legal and regulatory frame work for AML/CFT
requirements and systems across the banking sector,
• Interpret the obligations under the PMLA and other relevant regulations and
how they may be implemented in practice,
• Help banks to align their operations with good international industry practice
in AML/CFT procedures through a proportionate risk based approach, and
• Provide a framework for banks to design and implement the systems and
controls necessary to mitigate the risks of the bank being used in connection
with money laundering and terrorist financing.
Scope
The scope of these Guidance Notes covers all member banks of IBA. Although
these Guidance Notes are designed primarily to cover the activities of banks, the
contents are generally applicable to other financial institutions and intermediaries
covered under the PMLA and are required to adopt KYC Standards.
It should be noted that these Guidance Notes issued by IBA are voluntary and
recommendatory in nature. Failure to comply with these Guidance Notes does
not mean that a Bank has automatically breached the Rules under PMLA or any
of the Guidelines issued by RBI. They do, however, provide an indication of what
the supervisors/ regulators may take into account as being expected of banks.
When tailored by a bank to its own risk management architecture and business
processes, these Guidelines provide a safety net in respect of Rules and Regulations
pertaining to AML.
It may please be noted that these Guidance Notes is an IBA document and the
information contained therein is only for the guidance of the industry and ease of
understanding of the legal provisions, and for legal purposes the provisions
contained in the PMLA and rules there under and instructions issued by RBI from
time to time would be applicable.
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Chapter 1
OVERVIEW AND REGULATORY FRAME WORK
1.1 What is Money Laundering?
As per the Prevention of Money Laundering Act 2002, the offence of

Money Laundering is defined as:
Whosoever directly or indirectly attempts to indulge or knowingly assists

or knowingly is a party or is actually involved in any process or activity
connected with the proceeds of crime and projecting it as untainted
property shall be guilty of offence of money-laundering.
"proceeds of crime" means any property derived or obtained, directly or

indirectly, by any person as a result of criminal activity relating to a
scheduled offence or the value of any such property.
Money laundering is the process by which criminals attempt to hide and

disguise the true origin and ownership of the proceeds of their criminal
activities, thereby avoiding prosecution, conviction and confiscation of
the criminal funds. The proceeds of crime laundered by criminals often
are generated in very heinous crimes like drug trafficking, trafficking in
women and children, child pornography, extortion, murder, etc.
Money Laundering Prevention, therefore, is not only a statutory or

regulatory requirement but also a moral responsibility for all the bank
employees as any facilitation of money laundering indirectly supports these
criminal activities.
1.2 Terrorist Financing
Terrorists use similar methods as Money Launderers for moving their funds.
Some of the terrorist groups also indulge in criminal activities for generating
funds for their activities and some of them are even known to have
strong relationships with criminal gangs. The two major differences between
terrorist financing and money laundering are:
• Terrorist funding can happen from legitimately obtained income

whereas the source of money in money laundering is always from
illegal source, and
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• More often terrorist activities require small amounts and hence it is

increasingly difficult to identify terrorist funding transactions.
1.3 Other Financial Crimes
Other financial crimes such as Fraud and market abuse (insider trading)
are closely related to money laundering and terrorist financing and most
often the measures described in these guidelines for preventing money
laundering and terrorist financing may help financial institutions in preventing
fraud and other financial crimes, as well.
1.4 International Developments & Recommended Standards
1.4.1 Financial Action Task Force (FATF)
One of the most important events to influence international money

laundering prevention efforts was the establishment of FATF by the G-7
Summit in 1989 consisting of the G-7 member states, the European Union
and 8 other countries. In April 1990, they came out with the Forty
Recommendations that provided a comprehensive plan of action to fight
against money laundering. In 2001, the development of standards in the
fight against terrorist financing was added to the mission of FATF and it
came out with the Nine Special Recommendations for combating terrorist
financing. These 40+9 recommendations form the backbone for all the
international AML/CFT policies, procedures and processes.
Over the years more members were admitted to the FATF and the current
membership is 34, including 32 member states and 2 regional organizations,
European Union and Gulf Development Council. India and Republic of Korea
are currently countries with observer status aspiring to be full members.
Forty Recommendations
(http://www.fatfgafi.org/document/28
0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html)
While most of the recommendations are meant for the countries to establish
an AML Infrastructure by criminalizing money laundering, making provisions
for confiscating assets of the money launderers, establishing Financial
Intelligence Unit, transparency of legal persons and arrangements,
international co-operation, mutual legal assistance and extradition, etc.
the following recommendations relate to measures to be taken by financial
4
institutions and non-financial entities and professions to prevent money

laundering and terrorist financing:
Customer due diligence and record keeping

(Recommendations: 4 to 12)
Reporting of suspicious transactions

(Recommendations 13 to 16)
Other measures to deter money laundering and terroris financing

Measures to be taken with respect to countries that do not or

in-sufficiently comply with the FATF Recommendations
(Recommendations 21 and 22)
Regulation and supervision

Nine Special Recommendations

(http://www.fatf-gafi.org/document/9/
0,3343,en_32250379_32236920_34032073_1_1_1_1,00.html)
These nine recommendations are special measures to combat terrorist

financing and include measures to be taken by countries to criminalise
terrorist financing, ratification and implementation of UN resolutions on
terrorism, freezing and confiscation of terrorist assets, etc. One of the
important recommendations concerning banks is Recommendation 7 dealing
with "Wire Transfers" which is reproduced below:
Countries should take measures to require financial institutions, including

money remitters, to include accurate and meaningful originator information
(name, address and account number) on funds transfers and related
messages that are sent, and the information should remain with the transfer
or related message through the payment chain.
Countries should take measures to ensure that financial institutions,

including money remitters, conduct enhanced scrutiny of and monitor for
suspicious activity funds transfers, which do not contain complete originator
information (name, address and account number).
FATF also issued an Interpretative Note to Special Recommendation VII :
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Wire Transfers. (http://www.fatf.org/dataoecd/34/56/35002635.pdf)
Guidance on the Risk Based Approach to Combating Money

Laundering and Terrorist Financing
(http://www.fatf.org/dataoecd/43/46/38960576.pdf)
This guidelines on the high level principles and procedures in risk based
approach in combating money laundering and terrorist financing was
prepared by FATF in close consultation with representatives of the
international banking and securities sector and was adopted by FATF at
its Plenary in June, 2007.
1.4.2 UN Security Council Resolutions 1267 (1999), 1373 (2001) and 1390
(2002)
These UN Security Council Resolutions require members to take steps in

preventing terrorism and UN issues lists of names of persons and
organizations concerned with terrorism and the member countries are
required to freeze their assets.
1.4.3 Wolfs berg Principles - Private Banking & Correspondent Banking
(http: www.wolfsberg-principles.com/privat-banking.html) and (http:

www.wolfsberg-principles.com/corresp-banking.html)
The Wolfs berg Group consisting of 12 leading international financial

institutions formulated AML Principles, specially intended for combating
increased money laundering risk in case of private banking and correspondent
banking. These principles are considered as the most acceptable standards
in these areas by most of the major international regulators and institutions.
1.4.4 Asia Pacific Group on money laundering (APG)
Asia Pacific Group on money laundering (APG) has been constituted to

facilitate the adoption, implementation and enforcement of internationally
accepted standards (such as those issued by FATF) against money
laundering and the financing of terrorism. APG also assists its member
jurisdictions to enact laws criminalising the laundering of the proceeds of
crime and dealing also with mutual legal assistance, confiscation, forfeiture
and extradition. APG also guides the member jurisdictions in setting up
systems for reporting and investigating suspicious transactions and helps
6
them in the establishment of financial intelligence units. Presently there

are 28 member jurisdictions in APG. Mutual evaluations are the primary
means by which the APG monitors progress. Mutual evaluation is a
mechanism of multilateral monitoring and peer review of the progress
made by members in implementing the FATF Forty Recommendations. The
process is designed to identify weaknesses in member jurisdictions and
make appropriate recommendations with a view to improvement where
they are not.
India was evaluated for its compliance on AML/CFT with 40+9 FATF
recommendations by APG in 2005. Following were the recommendations
and Comments of the APG in its Mutual Evaluation Report (APGMER) 2005
in regard to FATF recommendation 21 about dealing with countries with
insufficient FATF standards:
• Implement measures to require financial institutions to examine the

background to transactions that are complex, unusual or have no
apparent economic or lawful purpose, and to retain a written record
of the examination in line with the underlying transaction record.
• Provide that financial institutions should pay special attention in relation

to transactions and relationships that involve persons from or in
countries that do not adequately apply the FATF Recommendations.
• Introduce a mechanism to alert financial institutions to those countries

that are considered not to apply the FATF Recommendations
adequately.
• Introduce an inter-agency procedure for determining whether specific

counter measures should be taken, in particular circumstances, against
countries that do not adequately apply the FATF Recommendations.
1.5 Legislation & Regulations in India
Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI),
Insurance Regulatory and Development Authority (IRDA) and FIU-IND are
the bodies mainly responsible for the anti-money laundering efforts for
financial institutions in India. RBI as the lead regulator for banks and other
financial institutions issue regulations on the subject. FIU-IND is an
independent body reporting directly to the Economic Intelligence Council
(EIC) headed by the Finance Minister of India and is responsible for
7
receiving, processing, analyzing and disseminating information relating to

suspicious financial transactions. FIU-IND is also responsible for coordinating
and strengthening efforts of national and international intelligence,
investigation and enforcement agencies in pursuing the global efforts
against money laundering and related crimes. The key legislations and
regulations towards AML efforts in India are given below:
1.5.1 A) Prevention of Money Laundering Act, (PMLA) 2002
The first step in the anti-money laundering legislation in India was the
introduction of the Prevention of Money Laundering Bill 1998 in the
Parliament in August 1998. Since the Lok Sabha was dissolved in April
1999, this bill could not be passed. Prevention of Money Laundering Bill
1999 was introduced in the Parliament in October 1999. This bill was
passed by the Parliament in 2002 and received President's assent in January
2003 and PMLA, 2002 was enacted. This law came to effect on 01 July
2005 after an amendment.
The act criminalises money laundering and also provides for freezing and
confiscation of assets concerned in money laundering. Appointment of
various authorities including Financial Intelligence Unit is also covered in
its provisions. The Act also lays down obligations of banks in maintaining
records of certain prescribed transactions and reporting such transactions
to FIU-IND. This also lists out the prescriptive offences, which will come
under the purview of the Act.
B) Prevention of Money Laundering (Amendment) Act, (PMLA) 2009
Prevention of Money Laundering (Amendment) Act 2009 was duly notified

in March 2009. The key amendments are listed as under:
• The Act incorporates additional categories of offenses punishable

under PMLA.
• The Act extends coverage to additional categories of reporting entities

such as money remittance businesses/intermediaries, casinos & dealers
in foreign currency authorised under FEMA. The Act also provides
authority to the Government to extend coverage to other entities.
• Separate categories of offenses with cross border implications have

been defined.
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1.5.2 Know Your Customer (KYC) Guidelines -Anti Money Laundering (AML)
Standards - RBI Circular dated November 29, 2004
This was the major step in the banking industry in India towards money
laundering prevention. Though RBI had historically issued guidelines to
banks for conducting due diligence of customers including taking
photographs, this was the first comprehensive anti-money laundering
initiative by RBI. The Guidelines required the banks in India to follow the
following steps towards preventing money laundering :
• Customer Acceptance Policy
• Customer identification Procedures
• Monitoring of Transactions, and
• Risk Management
1.5.3 Know Your Customer (KYC) Guidelines - Anti-Money Laundering

(AML) Standards - RBI Circular dated August 23, 2005
By this circular RBI has instructed the Banks to apply limited due diligence
to people belonging to low income group who are unable to produce CDD
documents as prescribed in RBI's KYC Guidelines for opening the accounts.
Limits are prescribed for aggregate credits and balance in these accounts.
1.5.4 Anti-Money Laundering (AML) Guidelines for Authorised Money

Changers - RBI Circular dated December 2, 2005
These are specific guidelines issued by RBI for authorised moneychangers

for complying with the requirements of PMLA. They are required to do due
diligence on their customers, depending on the value of the transactions.
They are also required to maintain records of certain prescriptive
transactions and report suspicious activities to FIU-IND. This circular also
puts restrictions on cash transactions for both purchase and sale of
foreign currency.
1.5.5 Guidelines for Anti-Money Laundering (AML) Measures issued by

SEBI dated January 2006
SEBI issued these guidelines to all the SEBI regulated entities for complying
with the requirements of PMLA, like CDD on customers, maintaining records
of prescriptive transactions, reporting of suspicious activities, etc.
9
1.5.6 Prevention of Money Laundering Act, (PMLA) 2002 - Obligation of

Banks in Terms of Rules Notified there under - RBI Circular dated
February 15, 2006
Consequent to the PMLA 2002 coming into effect and notification of the
rules framed there under, RBI issued this circular to issue detailed
instructions regarding the responsibilities of the regulated entities under
the act, especially on the following points :
• Appointment of Principal Officers
• Reporting of cash transactions above INR 1 million
• Reporting of integrally connected cash transactions below INR 1 million
but the aggregate amount exceeded INR 1 million within a period of
one month.
• Reporting of counterfeit currency notes and forged valuable securities
detected, and
• Reporting of all suspicious transactions
1.5.7 Know Your Customer (KYC) Norms/Anti Money Laundering (AML)
Standards/Combating of Financing of Terrorism (CFT) - Wire
Transfers - RBI Circular dated April 13, 2007
RBI vide this circular has given specific instructions regarding furnishing of
originators name and address/ account details in the cross border and
domestic wire transfers.
1.5.8 Know Your Customer (KYC) Norms/Anti-Money Laundering (AML)
Standards /Combating of Financing of Terrorism (CFT) - RBI Circular
dated February 18, 2008
This circular clarifies certain points regarding CDD documentation as required
in the KYC Guidelines and AML Standards and also on risk categorization
review of accounts, periodic KYC updation and screening of names against
lists of entities contained in the UN Security Council resolutions in their
anti money laundering and terrorist financing measures.
1.5.9 Prevention of Money Laundering Act, (PMLA) 2002 - Obligation of
banks in terms of Rules notified there under - RBI Circular dated
May 22, 2008
This circular clarifies on the reporting obligations under the PMLA, especially
on what constitute integrally connected cash transactions and also on
reporting requirements irrespective of the threshold applicable for certain
10
prescriptive offences in the PMLA.

1.5.10 Know Your Customer (KYC) Norms/Anti-Money Laundering (AML)
Standards/Combating of Financing of Terrorism (CFT)/Obligation
of banks under Prevention of Money Laundering Act, (PMLA) 2002 -
RBI Master Circular dated July 1, 2009
This latest master circular issued by RBI consolidates all the instructions
issued in the earlier circulars on KYC norms, AML standards, CFT and
obligations of banks on PMLA. RBI had started issuing master circulars on
KYC/AML/CFT on annual basis from July 2008.
1.5.11 UN Security Council Resolutions 1267 (1999) - RBI Circulars
RBI periodically issues circulars following on UN Security council resolutions
on measures taken by the UN for money laundering prevention and
combating terrorist financing. The names of the persons/ entities contained
in these circulars are required to be maintained as a watch list to prevent
accounts being opened in these names or transactions being done with
them as counter parties. The updated list of such persons and entities
can be accessed at the UN site http://www.un.org/sc/committees/1267/
consolist.shtml.
1.5.12 UN Security Council Resolutions on Iran - RBI Circulars dated
September 10, 2007 and September 19, 2008
These circulars were issued in pursuance of UN Security Council Resolutions
1737/2006 and 1803/2008 on Iran. Banks have been advised to check for
accounts and transactions involving the listed entities and persons and
to report to RBI and FIU-IND any accounts held in these names. Banks
were also advised to exercise vigilance over the activities of financial
institutions and banks domiciled in Iran, in particular, with bank Meli and
Bank Saderat and their branches and subsidiaries abroad, in order to
avoid such activities contributing to the proliferation sensitive nuclear
activities or to the developments of nuclear weapon delivery systems as
referred to in UNSCR 1737/2006.
1.5.13 FATF's statement highlighting deficiencies in the AML/CFT systems
in certain jurisdictions - RBI Circular dated February 2, 2009 - This
has been reiterated by RBI in its Master Circular dated July 1, 2009
The RBI circular, quoting the statements issued at the Plenary of FATF
held on February 28, 2008 and October 16, 2008, advises banks and
financial institutions to take into account risks arising from the deficiencies
11
in the AML/CFT regime of six countries namely Sao Tome and Principe,
Turkmenistan, Iran, Northern Part of Uzbekistan and Pakistan.
Accordingly, banks and financial institutions may place these countries in
a higher risk category, and put in place a framework to monitor the cross
border transactions involving these countries.
1.6 Extra-territorial Applicability of the Indian Anti-Money Laundering
Laws and Regulations
As per the provisions of PMLA, Central Government of India may enter in
to reciprocator agreement with other countries for implementation of all
or some of the provisions of the Act in that country.
The RBI regulations are applicable to all the branches of subsidiaries of
Indian banks functioning in other countries and for these institutions where
the host country regulations are more onerous; the host country regulation
will prevail.
1.7 Implications of International Regulations - UN / US / EU Sanctions
International bodies such as the United Nations (UN) and other regulators
belonging to the United States (US) and European Union (EU) periodically
release information on the various sanction programmes imposed at country
and individual / entity level with regards to AML/ CFT measures. Member
nations of the UN need to comply with the resolutions passed at the UN.
Banks are advised by RBI for complying with the same.
Where the Bank has a US listing, or has activities in, or linked to, the USA,
whether through a branch, subsidiary, associated company or
correspondent bank relationship, there could be application of US AML/
CTF and financial sanctions regimes to the non-US activities of the firm,
e.g. US Dollar transactions cleared through US. It essentially means that
though a particular US AML / CTF or financial sanction may not be applicable
directly to a transaction if done in India, it may become applicable if it is
carried out in US dollar or any 'US person' like a US based bank or branch
is involved in the transaction. Banks may take appropriate advice on the
extent to which the firm's activities may be covered in this way.
Similarly, for transactions denominated in Euros or routed through European

Banks, the sanctions imposed by EU would be applicable.
Banks in India need to be aware and create a framework for complying

with these sanction programmes to the extent applicable.
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Chapter 2
INTERNAL CONTROLS AND STRUCTURE IN BANKS
2.1 What are the roles and responsibilities of Board of Directors and
Senior Management
The Board of Directors and the senior management of the bank have the
responsibility to ensure that the bank's control processes and procedures
are appropriately designed and implemented, and are effectively operated
to reduce the risk of the Bank being used in connection with money
laundering or terrorist financing.
Appointment of Principal Officer
It is the responsibility of the Board of Directors to appoint the Principal
Officer (PO). It is recommended that the PO has a sufficient level of seniority
within the bank and has sufficient resources, including sufficient time and (if
necessary) support staff. The level of resources should reflect the size,
complexity and geographical spread of the bank's customer/product base
and should include arrangements to apply in the event of the temporary
absence of the PO.
2.1.1 Managing the risk of money laundering

The senior management of the bank is required to ensure that appropriate
risk-based policies are in place across different aspects of the business. The
banks should adopt an approach to mitigate themselves of the risk of being
used for the purposes of money laundering or terrorist financing. Senior
management must be entirely engaged in the decision-making and must take
ownership of the risk-based approach, since they will be held accountable if
the approach is inadequate.
2.1.2 Formulation of appropriate procedures to prevent money laundering

As per the RBI master circular dated July 1, 2009, banks are required to
formulate appropriate procedures to prevent money laundering, specifically:
a. KYC policies and procedures specifying the objective of KYC framework,

i.e. appropriate customer identification. The KYC policies should
incorporate the following four key elements:
• Customer Acceptance Policy;
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• Customer Identification Procedures;

• Monitoring of Transactions; and
• Risk management
b. Monitor transactions of a suspicious nature;
c. Risk management and monitoring procedures, i.e. staff awareness,
identification and reporting of suspicious transactions, record keeping
of transactions;
d. Treating the information collected from the customer for the purpose
of opening of account as confidential and not divulge any details
thereof for cross selling or any other purposes;
e. Ensuring that any remittance of funds by way of demand draft, mail/
telegraphic transfer or any other mode and issue of travelers' cheques
for value of INR 50,000 and above is effected by debit to the
customer's account or against cheques and not against cash payment;
f. Ensuring that the provisions of Foreign Contribution and Regulation
Act, 1976 wherever applicable, are adhered to strictly.
Guidance against "Tipping off"
Senior management should provide sufficient guidance to staff to ensure

that the customers are not informed (i.e. tipped off) that his/her accounts
are under monitoring for suspicious activities and/or that a disclosure has
been made to the FIU-IND.
The Bank can however make normal enquiries to learn more about the
transaction or instruction to determine whether the activities of the
customer arouse suspicion.
Where it is known or suspected that a STR has already been made internally
or externally, and it then becomes necessary to make further enquiries,
care must be taken to ensure that the suspicion is not disclosed either to
the client or to any other third party. Subject to internal procedures, such
enquiries should normally/only be made as directed by the Principal Officer
(PO).
Internal Reporting Procedures
Reporting lines should be as short as possible, with the minimum number
14
of people between the person with the suspicion and the PO. This ensures
speed, confidentiality and accessibility to the PO. All procedures should
be documented in an appropriate manual or handbook and job descriptions
drawn up. All suspicions reported to the PO should be documented (in
urgent cases this may follow an initial discussion by telephone).
All internal enquiries made in relation to the report, and the reason behind
whether or not to submit the report to the FIU-IND, should be documented.
This information may be required to supplement the initial report or as
evidence of good practice and best endeavors if, at some future date,
there is an investigation and the suspicions are confirmed.
2.2 What are the roles and responsibilities of the staff
2.2.1 Keeping abreast with AML information relevant to their role
The communication of a Bank's policies and procedures to its staff to
prevent money laundering, and the training in how to apply those
procedures, is the key to the success of anti-money laundering strategies.
The staff that are interacting with customers or handling customer
transactions/instructions will be a Bank's strongest defense against money
laundering or its weakest link. The means by which their obligations are
communicated to them, and the effectiveness of the associated training,
will therefore determine the success of the bank's anti-money laundering
efforts. Therefore, as much as it is important for the Bank to communicate
the policies and procedures to its staff, it is equally important for the
staff to keep themselves abreast with the policies and procedures relevant
to their role.
2.2.2 Reporting of suspicious transactions

Every employee has an obligation to report transactions suspicious of a
money laundering or terrorist financing activity. It is required to report
suspicious transactions even if the employee does not know precisely
what the underlying criminal activity is or whether illegal activities have
occurred.
The reporting system is suspicion based as opposed to transactions or value
based. A suspicion is what it means to the person who decides to report. It
is a wholly subjective and analytical concept. The golden rule is, even after
undertaking the due diligence, if there is still a doubt, report.
The reporting of these transactions by an employee does not constitute
15
a breach of the employee's duty of confidentiality owed to customers. In

addition, as per the PMLA 2002, the banks and their officers shall not be
liable to any civil proceedings against them for furnishing information on
any suspicious transaction.
2.3 What are the roles and responsibilities of the Principal Officer
Banks must take reasonable steps to give its PO, or any person to whom
the PO's duties have been delegated, access to any information it has
about the customer or transaction(s). The PO will support and co-ordinate
senior management focus on managing the money laundering/terrorist
financing risk in individual functions within the bank. The bank should
make the PO responsible for the following:
2.3.1 Reporting Requirements
Ensuring that the reporting obligations under PMLA are met, i.e. furnishing
FIU-IND information relating to:
i. All cash transactions of the value of more than INR 1,000,000 or its
equivalent in foreign currency;
ii. All series of cash transactions integrally connected to each other
which have been valued below INR 1,000,000 or its equivalent in
foreign currency where such series of transactions have taken place
within a month, however, aggregating to more than INR 1,000,000;
iii. All cash transactions where forged or counterfeit currency notes or
bank notes have been used as genuine or where any forgery of a
valuable security or a document has taken place facilitating the
transactions; and
iv. All suspicious transactions whether or not made in cash. To this
effect, the bank should make PO responsible to receive the internal
suspicious activity reports within reasonable period of time so as to
meet the reporting deadline to FIU-IND.
In case of banks, where all the branches are not yet fully computerized,
the PO of the bank should cull out the transaction details from branches
which are not computerized and suitably arrange to feed the data into an
electronic file with the help of the editable electronic utilities of CTR/STR
as have been made available by FIU-IND on their website.
The PO should also ensure that any significant issues are reported to the
senior management of the bank on a periodic basis.
16
2.3.2 Review the adequacy of AML systems and controls

Banks are required to carry out regular assessments of the adequacy of
its systems and controls to ensure that they manage the money laundering
risk effectively. Oversight of the implementation of the bank's AML/CFT
policies and procedures, including the operation of the risk-based approach,
is the responsibility of the PO, under delegation from senior management.
He/she must therefore ensure that appropriate monitoring processes and
procedures across the bank are established and maintained.
The PO should also get actively involved in the selection of the appropriate
software for monitoring of customer transactions/activities.
2.3.3 Liaison with various stakeholders/parties
The PO should maintain liaison with various stakeholders/parties, such as
regulators (internal and external), FIU-IND, IBA and other member banks.
Specifically, the PO should ensure that any queries raised by the regulators
are answered within the stipulated deadlines.
2.3.4 Staff awareness - provision of relevant information to staff
The PO is responsible for oversight of the bank's compliance with its
requirements in respect of staff training, including ensuring that adequate
arrangements for awareness and training of employees are in place. Although
this is a bank-wide responsibility, there may be some delegation to appropriate
persons/functions in business areas. The PO, however, is responsible for
ensuring that the training is offered, that the standards and scope of the
training are appropriate, and that appropriate records are kept.
To this effect, the bank should also make the PO responsible to keep
himself/herself abreast of developments in the AML environment at national
and international level. The PO should also disseminate relevant information
to the business heads and staff in a timely manner.
2.4 What are the roles and responsibilities of the Internal Audit/Internal
Control
The Internal Audit and Internal Control teams within the banks would be
responsible to ascertain the effectiveness and efficiency of the AML
framework of the bank. This would specifically include checking the
adequacy of policies, procedures, and system support to detect suspicious
and potential money laundering transactions, and the subsequent monitoring
and reporting to regulators, FIU-IND and senior management.
17
2.5 What are the roles and responsibilities of the Business Groups
Banks may consider appointing business groups, who are usually the heads
of the respective businesses/functions within the bank. The responsibilities
of the business groups would be as follows:
a. Assist line management in their responsibility for complying with all
relevant AML regulations and standards;
b. Cascade AML related information and requirements to department
staff and to ensure AML related requirements are incorporated into
operating procedures;
c. Monitor adherence to AML procedures and controls. In particular, to
monitor changes to business practices and products to ensure that
AML procedures and controls are adequate to cover them;
d. Assist in the provision of anti-money laundering training, where
necessary;
e. Report all material and significant breaches or potential breaches of
AML requirements to the PO.
18
Chapter 3
CUSTOMER RISK CATEGORIZATION (CRC)
3.1 What is Customer Risk: 'Customer risk ' in the present context refers to
the money laundering risk associated with a particular customer from a
bank's perspective. This risk is based on the risk perceptions associated
with the parameters comprising a customer's profile, and the level of risk
associated with the product and channels being used by him.
3.2 Need for Customer Risk Categorization: The RBI master circular dated
July 01, 2009 on Know Your Customer (KYC) Norms/Anti Money Laundering
Standards, which consolidates all guidelines issued on the subject, requires
the banks to categorise customers into low, medium, & high risk categories
and have differential due diligence and monitoring standards based on the
risk assessment.
The guidelines mention some of the parameters, which may be considered

for categorising a customer's risk. Examples of some high risk categories
are also given, which include Non Resident Indians (NRIs), High Networth
Individuals (HNIs), Trusts, Charities, Non Governmental Organisations
(NGOs), companies having closed shareholding structure, firms with sleeping
partners, Politically Exposed Persons (PEPs), non-face-to-face customers,
persons with dubious reputation, etc.
The guidelines further require the banks to carry out a review of risk
categorization of customers at a periodicity of not less than once in six
months. It is therefore, now mandatory for banks in India to introduce a
system of CRC for their customers.
3.3 Risk based approach: RBI guidelines also reiterate that Banks should
follow a 'risk based approach' on KYC/AML standards to avoid
disproportionate costs and a burdensome regime for the customers.
Categorising customers into different risk buckets can serve as a platform
to adopt such approach.
3.4 Approach for Customer Risk Categorization: Customers may be

classified into low, medium and high risk. Customers requiring higher level
of monitoring may if considered necessary be classified even higher.
19
Each bank may develop its own model for customer risk categorization
based on available product/customer information, risk perception, and
other factors such as available technology, etc. A profile of the customer
may be created in the system using available information based on which
the risk should be assigned. The following broad approach may be adopted
for risk categorisaton:
A) Selection of Parameters for risk categorization: The first step in process

of risk categorization is selection of parameters, which would determine
customer risk. Some indicative parameters, which can be used to
determine the profile & risk category of a customer, are as follows:
1. Customer constitution: Individual, proprietorship, partner-ship,
private limited, etc
2. Business segment: Retail, Corporate, etc
3. Country of residence/ Nationality: Whether India or any overseas
location/ Indian or foreign national.
4. Product subscription: Salary account, NRI products, etc.
5. Economic profile: HNI, public limited company, etc.
6. Account status: Active, inoperative, dormant.
7. Account vintage: less than six months old, etc.
8. Presence in regulatory negative/PEP/defaulter/fraudster lists.
9. Suspicious Transaction Report (STR) filed for the customer.
10. AML Alerts
Other parameters like source of funds, occupation, purpose of account

opening, nature of business, mode of operation, credit rating, etc can
also be used in addition to the above parameters. Banks may adopt all or
some of these parameters based on availability of data.
B) Deciding on type of classification- Banks may choose to carry out

either Manual Classification or Automated Classification using
technology systems or a combination of both. In case of manual
classification each customer would be classified based on the risk
parameters and assigned risk on a case to case basis. In case of
banks wanting to do a manual CRC, they may adopt suitable
parameters from indicative list above and accordingly devise a model/
policy for assigning risk category to each customer/customer segment.
20
In case of automated classification, the banks computer systems

would assign risk based on parameters adopted using standard rules
and scale for same.
C) Determining the Risk rating methodology Once the parameters are
finalized, depending upon the data availability banks may choose an
appropriate risk rating model. One of the easy to use models is the
weighted average method. In the weighted average method each
parameter is assigned a 'risk score' and a 'weight' is attached to the
parameter depending upon its accuracy and criticality to the overall
risk. The output score is compared to a final scale. Banks need to
ensure that while assigning risk score and weight to various parameters,
Critical and more accurate parameters like customer constitution and
product subscription are given their due weightage.
D) Risk Categories: Depending on the risk score obtained as per the

above method, the customers will be assigned low, medium and high
risk ratings. Banks may also choose additional categories or sub divide
these main categories such as 'very low' or 'very high'.
Note :Loan accounts of non-operative nature having a pre-determined

cash flow (e.g. home loans), and fixed cap accounts like the
small deposit accounts, can be regarded as low risk.
3.5 Use of Software for risk categorization: Banks may (if required by their
approach to risk categorization), deploy suitable software for purpose of
risk categorisaton. Such software can be used to extract customer data
from the banking software and assign risk rating based on the scoring model
selected by the bank. If a bank chooses and if its core banking application
permits, CRC maybe done in the core banking software as well.
3.6 CRC and Transaction Monitoring: A risk based approach on AML requires
the CRC to be linked to transaction monitoring process, with a high risk
account requiring a more enhanced monitoring by way of lower thresholds
and periodical reviews, as compared to a low risk account.
3.7 Periodic review of CRC: RBI guidelines mandated that a review of risk
categorization of customers should be carried out at a periodicity of not
less than once in six months. Since CRC is an on going process, a 'risk
21
date' i.e. a cut-off date would need to be determined to serve as a start

date for the process of risk categorisation. The periodic reviews would be
calculated from this start date. During such review, the risk assigned to
an existing customer may undergo change depending on the change in
parameters consisting his profile.
3.8 Risk Categorisation of Existing Customers: The main challenge of CRC

for the legacy customers is the availability and accuracy of available
data. Banks may therefore need to categorse customers based on available
information.
3.9 Conclusion:
• CRC enables a bank to follow a risk based approach on AML/ KYC as

per the RBI guidelines.
• The customer risk may be integrated with transaction monitoring by

adequately adopting differential rules/ thresholds for different risk
profiles.
• Enhanced due diligence/periodic review for high risk customers can

be adopted based on CRC.
• The RBI guidelines also mandate a periodic KYC updation of customers

based on their risk profiles. CRC will also help in effective
implementation of this requirement.
22
Chapter 4
KNOW YOUR CUSTOMER (KYC)
4.1 Customer defined: The RBI Master Circular dated July 1, 2009 on Know
Your Customer (KYC) Norms & Anti Money Laundering Standards, which
consolidates all guidelines issued on the subject, defines 'Customer' as:
• a person or entity that maintains an account and/or has a business

relationship with the bank;
• one on whose behalf the account is maintained (i.e. the beneficial

owner);
• beneficiaries of transactions conducted by professional intermediaries,

such as Stock Brokers, Chartered Accountants, Solicitors etc. as
permitted under the law, and
• any person or entity connected with a financial transaction which

can pose significant reputation or other risks to the bank, say, a wire
transfer or issue of a high value demand draft as a single transaction.
Banks need to frame policies, which will enable the identification of the
customer. The KYC policy of a bank should incorporate the following four
elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management
4.2 Customer Acceptance Policy (CAP): 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(s);
ii. The customers are categorized as per their risk perception based on
their profile (See Chapter 3 - Customer Risk Categorization)
23
iii. Documentation requirements and other information to be collected in

respect of different categories of customers depending on perceived
risk. (For details see the note below on Types of CDD)
iv. Not to open an account or close an existing account where the bank
is unable to apply appropriate customer due diligence measures. (Please
see below for a detailed note on CDD).
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.
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. (See Chapter 7 -
Name Screening Process)
4.3 Customer Identification Procedures: The above mentioned master

circular requires banks to clearly spell out the Customer Identification
Procedure to be carried out at different stages i.e. while establishing a
banking relationship; carrying out a financial transaction or when the
bank has a doubt about the authenticity/veracity or the adequacy of the
previously obtained customer identification data. Customer identification
means identifying the customer and verifying his/her identity by using
reliable, independent source documents, data or information. Banks need
to obtain sufficient information necessary to establish, to their satisfaction,
the identity of each new customer, whether regular or occasional, and
the purpose of the intended nature of banking relationship.
4.4 Establishing Identity
It is important to recognise that the customer identification process does

not start and end at the point of application. However, the process of
confirming and updating identity and address, and the extent of additional
KYC information collected, will differ from bank to bank.
What is Identity?
Identity generally means a set of attributes which together uniquely
24
identify a natural or legal person. The attributes, which help establishing

the unique identity of a natural or legal person, are called 'identifiers'.
Name (in full), Father' Name, Date of birth, Passport number, Election Card
number (EPIC number), PAN number, Driving License number, etc are unique
identifiers available which help establishing the identity of a natural or
legal person. These are termed as 'primary identifiers' as they help in
uniquely establishing the identity of a natural or legal person.
Addresses / location and nationality and other such identifiers may serve
as secondary identifiers' as they help further refine the identity though
they may not directly help uniquely identify a natural or legal person.
4.5 What is Customer Due Diligence?: Customer Due Diligence (CDD) can
be defined as any measure undertaken by a financial institution to collect
and verify information and positively establish the identity of a customer.
The base of CDD would be the board approved Customer Acceptance
Policy of a bank. Based on Customer Acceptance Policy, the Customer
Identification Procedures needs to be drawn.
4.6 When should a bank apply CDD?: CDD should be conducted as a part of
the Customer Identification Procedures. A bank should apply Customer
Due Diligence measures when it:
i. establishes a business relationship;
ii. carries out an occasional transaction;
iii. suspects money laundering or terrorist financing; or
iv. doubts the veracity of documents, data or information previously
obtained for the purpose of identification or verification
4.7 When a Bank is unable to apply Customer Due Diligence measures, it:
i. must not establish a business relationship or carry out an occasional

transaction with the customer;
ii. should not carry out a transaction with or for the customer through a
bank account;
iii. should terminate all existing business relationship with the customer;
iv. should consider whether it ought to report to FIU-IND/ Regulators, in

accordance with extant guidelines.
25
4.8 Types of CDD: There are three types of CDD that can be used by a bank
in accordance with the risk category of the customer. These are listed as
follows:
1. Basic Due Diligence: This implies collection and verification of identity

proof, address proof and photograph to establish the identity of the
customer. This is based on documents and forms the basis of the KYC
program for a bank. Different set of documents can be listed for
different types of customers. A bank can draw reference from the list
of indicative documents provided by the above mentioned master
circular but should not restrict itself solely to that list. Documents
other than the indicative list such as a property tax bill issued by the
local authorities as address proof is as acceptable as any other proof.
Banks can have their own list of acceptable documents for KYC as
long as they can verify the same with the original. It has been observed
that some customers find it difficult to produce the address proof in
their own name. In such cases, address proof in the name of their
close family members along with a relationship proof may also be
accepted.
2. Simplified Due Diligence: Any due diligence applied to establish the

identity of customer, which involves measures less stringent then basic
due, diligence can be termed as 'Simplified Due Diligence'. As per the
above mentioned RBI guidelines, simplified due diligence can be applied
to accounts of people belonging to low income group, both in urban as
well as rural areas, to enable 'Financial Inclusion' of this segment. It can
also be applied to accounts which have a financial cap, like the "Small
Deposit Accounts" where the balances of all accounts and total credits
of all accounts at any point of time in a year should not exceed Rs.
50,000/- and Rs. 1,00,000/- respectively. Simplified due diligence can
also be applied to low value/ non-recurring transactions. For example,
relying on third party certification in case of lending through Business
Correspondents and Micro Finance Institutions can be taken as a form
of simplified due diligence.
3. Enhanced Due Diligence (EDD): Any additional due diligence measures

undertaken over and above the basic due diligence can be termed as
'Enhanced Due Diligence'. As per the above-mentioned RBI guidelines,
EDD needs to be undertaken for all the high-risk customers of a bank.
26
EDD can also be built in the account opening processes at the product
level or customer type level, where the high risk customers are easily
identifiable (e.g. NRIs, Trust accounts, Correspondent banking). Other
EDD measures like enhanced level of transaction monitoring for high-risk
customers can be undertaken for customers who fall in the high-risk
category post the exercise of customer risk categorisation. EDD on
existing accounts may also be conducted if required when AML alerts
are generated as a part of the transaction monitoring process.
4.9 Specific types of relationships where EDD measures could be applied

are:
i. Politically Exposed Persons (PEPs): Politically exposed persons are

individuals who are or have been entrusted with prominent public
functions in a foreign country, e.g., Heads of States or of Governments,
senior politicians, senior government/judicial/military officers, senior
executives of state-owned corporations, important political party
officials, etc. Persons of foreign origin/ diplomatic missions, such as
the ones listed above, located in India, also qualify as PEPs. Persons
holding prominent positions in multilateral agencies such as the United
Nations, World Bank, etc, can also be construed as PEPs. PEPs of
foreign origin and their associates and relatives form group of customers,
which should be considered as 'High Risk' by the Bank. Bank should
obtained additional information/carry out additional due diligence
depending on the risk perception in respect of transactions handled on
their behalf. Banks should however, take care not to deny service to
PEPs on account of their higher risk perception.
ii. High Risk Countries: Customers who live in countries that are
considered High Risk or deficient in respect of implementation of KYC
and Anti Money Laundering measures should be classified by a bank as
high risk. Each Bank should draw its own list of high risk countries for
monitoring of such customers. The list can be based on parameters
such as FATF membership, advisories issued by FATF/UN on certain
countries, etc. A country risk rating can be further integrated into the
customer risk emanating from the country of their residence.
iii. Specific types of business: Customers having business where value

of the goods is not easily assessable like antique dealers and businesses
dealing in money as a commodity like money exchange bureaus need
27
to classify as high risk.
iv. Trust accounts: Would require strict documentation and due diligence
to be exercised as given in the KYC documentation table below.
Trusts are popular vehicles for criminals wishing to avoid the
identification procedures and mask the origin of the criminal money
they wish to launder. The principal objective for money laundering
prevention via trusts is to verify the identity of the provider of funds/
those who have control over the funds, i.e. the grantors, settlers &
trustees.
v. Non resident Indians (NRIs)/Foreign Nationals: Indian customers

resident overseas and foreign nationals based in India pose a bigger
risk from money laundering perspective then ones placed domestically.
vi. Non face-to-face customers: Customers with whom the bank has
not had direct interaction at the time of opening the account would
require stricter documentation as the Bank may specify. e.g.
Certification by independent authority such as notary, foreign resident
banks, correspondent banking partners, embassy officials; insisting
on additional documentation to establish identity and address etc.
vii. Correspondent Banking: Transactions conducted through

correspondent relationships need to be managed taking a risk-based
approach. "Know Your Correspondent" procedures should be
established to ascertain whether the correspondent bank or counter-
party is itself regulated for money laundering prevention and, if so,
whether the correspondent is required to verify the identity of their
customers to FATF standards. Where the correspondent bank are
not following FATF guidelines, additional due diligence should be
exercised. Additional due diligence will be required to ascertain and
assess the correspondent's internal policy on money laundering
prevention and its KYC procedures.
Transactions conducted through correspondent relationships need to

be monitored taking a risk-based approach. Particular attention should
be paid to the type of business that the correspondent engages in,
the market place in which it operates, etc. A country risk rating
model can be used to evaluate money laundering risk emanating from
the country of location & operations.
28
vii. Fiduciary Accounts: Bank may exercise enhanced due diligence at

the time of opening fiduciary accounts by intermediaries such as
guardians of estates, executors, administrators, assignees, receivers
etc. For e.g. While opening of the account of an administrator of the
estate, it may be necessary to examine the Letter of Administration
(Authority) as it would give a picture of the assets of the estate.
viii. Pooled Accounts - Pooled Accounts are essentially fiduciary accounts
where investments of a number of persons are pooled together. Normally,
such accounts are titled to reflect that the account is being held by a
fiduciary. The fiduciary or financial intermediary operating the pool is
expected to maintain records that contain statements of all accounts
giving investments and disbursements. Pooled accounts managed by
professional intermediaries on behalf of entities like mutual funds, pension
funds, etc., may not pose much difficulties as these are generally
regulated entities. Banks may also come across pooled accounts
managed by lawyers, chartered accountants or stockbrokers on behalf
of a range of clients. Banks should endeavor to satisfy about the
identity of individual investors/beneficiaries of the pool at the time of
opening such account. Banks should also satisfy that the intermediary
managing the pool in a fiduciary capacity maintain proper accounts of
individual investors.
4.10 In case of high risk customers, banks may obtain additional
information on the customer beyond documentary evidence. An
indicative list is as under:
• Information on net worth
• Intended business activity in case of NRI customers
• Report by relationship manager/ branch manager
• Higher level of approvals
• Verification of customer information with independent data sources
4.11 Transaction Monitoring: (See Chapter 6 - Transaction Monitoring)
4.12 Risk Management: (See Chapter 2 - Internal Controls and Structure

in Banks)
29
Note : In accordance with the RBI guidelines on outsourcing, KYC

compliance for a bank should not be outsourced.
4.13 The practice of obtaining Introduction

The system of obtaining introduction of prospective customer by an existing
customer with whom the Bank has had satisfactory dealings is in vogue in
the Indian Banking system. Introduction is also a recognized due diligence
procedure to obtain protection under sec 131 of NI Act 1881 relating to
collection of instruments. Introduction by an existing customer is not mentioned
as a procedure for identifying the customer under FATF and RBI guidelines of
November 2004. However, with a view to ensure that strict adherence to
KYC Standards would not result in basic banking services being denied to
underprivileged segments of the society (financial exclusion) the RBI has
permitted flexibility in KYC Standards in opening of accounts for such persons
vide Circular DBOD.NO.AML.BC.28/14.01.001/2005-06 dated August 23, 2005.
Flexibility allowed in such cases provide for obtaining introduction when the
prospective customer is unable to furnish the documents given in the guidelines
issued by the RBI. Banks currently following this procedure may, at their
discretion, continue the same, while complying with the present guidelines.
KYC UPDATION
4.14 Meaning: As defined in the above mentioned RBI guidelines, customer

identification means "identifying the customer and verifying his/ her identity
by using reliable, independent source documents, data or information".
These guidelines require the banks to "introduce a system of periodical
updation of customer identification data (including photograph/s) after
the account is opened". Therefore 'KYC updation'' can be defined as a
process of customer identification and consequent re-affirmation of his
identity using reliable, independent source documents, data or information
available, in addition to the collection of a photograph.
4.15 Need for KYC updation: RBI guidelines require banks in India to "introduce
a system of periodical updation of customer identification data (including
photograph/s) after the account is opened. The periodicity of such updation
should not be less than once in five years in case of low risk category
customers and not less than once in two years in case of high and
medium risk categories."
30
4.16 Basis for KYC updation: Since the KYC updation is to be carried out
based on the risk category of the customer; it becomes essential that all
customers of the bank have been given a risk category before proceeding
for KYC updation.
4.17 Approach for KYC updation: Before developing their own approach for
KYC updation, banks need to assess the following:
I. Results of the risk categorisation exercise.
II. Availability of KYC data of the customers in electronic database.
III. Demographic spread of the customers i.e. location of the customer,

type, whether rural or urban, etc.
IV. Past experiences in customer contact
Based on the above assessment, each bank may decide on a suitable

method for KYC updation. Some options, which may be adopted, are as
under:
• Customer Contact: Under this approach, banks would contact all

customers directly through various means such as branch walk-ins,
letters, e-mails, phone, etc., asking them to furnish their KYC documents
afresh. Banks could also use pre-printed standard letter formats to
seek customers' confirmation on the KYC records available in their
database. Customers confirmations may be obtained by post or through
branches. Similar confirmations can also be obtained over other channels
like Internet/phone banking/ATMs. As is evident, this method would
warrant a large campaign for contacting the customers and may be a
challenge in terms of resources and cost.
• Relationship KYC: Under this approach, any new account opened

by the customer is linked to his existing relationship with the bank.
For example, a savings account customer who is more than five
years old comes to open a current account. Bank identifies him as an
old customer, and looking at his account vintage, he is asked to
furnish a fresh KYC. The KYC procedures applied at this stage may be
considered as KYC updation. The KYC updation in this case is done at
the Customer ID/relationship level.
31
• Surrogate methods of KYC updation: Some of the customer

identification data available with the bank may also be verified with
independent and authentic public sources and confirmed. For example,
a PAN card taken as identity proof at the time of initial KYC can be
verified with the PAN number on Income Tax website to confirm its
validity and existence of the customer. Company's details can be
checked from Ministry of Corporate Affairs (MCA) website. Such
verification may be deemed as updation of customer identification
data. Other surrogate measures such as delivery of bank statements
and deliverables to the customer's address, telephone directory search
etc. may be considered as reaffirmation of his address. Collection of
scanned images from customers over secured connections or through
registered e-mail IDs in lieu of physical copies of the KYC documents
may also be used as additional measures for KYC updation.
Banks may adopt one or a combination of the above suggested

approaches depending on their business model, customer-base, and
available technology, data and resources.
• Scope of KYC Updation: Accounts of some publicly known entities

like Government departments and listed companies may be excluded
from this exercise. Asset products of non-transactional nature like
home loans, personal loans, etc. which carry low AML risk and where
a higher level of due diligence has been conducted at the time of
credit exposure may also not require KYC updation. For asset products
like Cash Credit, Overdrafts, and Credit Cards, which are subject to
periodic review/renewal, KYC updation may be treated as a part of
the review/renewal exercise. Similarly, non-transactional liability
products like term deposits and restricted value accounts like the
small deposit accounts also can be kept out of the purview of KYC
updation due to the low AML risk.
Note : Identity of the customer does not change over the lifetime of the
customer. The identity verification needs to be done only to confirm
his current existence, and validity of the identity document.
4.18 Other Aspects related to KYC updation:
Software & channel capabilities: Banks would need to determine its software
and channel requirement for this exercise. If a bank wants to store scanned
32
images of the KYC documents for future references, then appropriate

systems need to be implemented. In case multiple channels such as
branches, phone banking, Internet banking etc. are proposed to be used
in the process of updation, integration of channels is essential to avoid
duplication and to bring about synergy and uniformity in their effectiveness.
For example, KYC updation using branch banking channel is a more direct
way of KYC updation than through phone banking. To make the phone call
updation as effective, suitable verification parameters should be put in
place.
4.19 Making customer responsible for KYC updation: The customer may
be informed about his obligation to fulfill the RBI requirements of KYC
updation. This can be done by incorporating appropriate clause in the
Account Opening Form (AOF), by way of periodic reminders in the
communication sent out to him, or through customer education campaigns.
33
Chapter 5
REPORTING OBLIGATION UNDER PMLA ACT
5.1 In terms of the Rules notified under Prevention of Money Laundering Act,
2002 (PMLA) certain obligations were cast on banking companies with
regard to reporting of certain transactions. The RBI has issued circular No
DBOD.NO.AML.BC.63 /14.01.001/2005-06 dated February 15, 2006 and
DBOD.AML.BC. No. 85/ 14.01.001 / 2007-08 dated May 22, 2008, detailing
the obligation of banks in terms of the Rules notified under PMLA.
Accordingly, Banks are required to make the following reports to the FIU-
IND.
Cash Transaction Reporting (CTR)
Counterfeit Currency Reporting (CCR)
Suspicious Transaction Reporting (STR)
5.2 Cash Transaction Reporting (CTR)
As per the PMLA rules, Bank is required to submit the details of:
All cash transactions of the value of more than rupees ten lakh or its
equivalent in foreign currency.
All series of cash transactions integrally connected to each other, which

have been valued below rupees ten lakh or its equivalent in foreign
currency, where such series of transactions have taken place within a
month and the aggregate value of such transactions exceeds rupees ten
lakh.
The format for reporting of the above-mentioned cash transactions, known

as Cash Transaction Report (CTR) has been provided by the RBI vide its
circular dated February 15, 2006. This report is required to be filed on a
monthly basis by 15th of the succeeding month.
RBI vide circular dated May 22, 2008 has clarified that Cash transaction
reporting by branches to their controlling offices should be submitted on
monthly basis and not on fortnightly basis.
34
While the circular provides both manual as well as electronic formats for
submission of CTR, banks have been advised to initiate urgent steps to
ensure electronic filing of CTR.
In case of Banks who have implemented software solutions for AML, CTR
generation module forms part of the standard suite of the software.
Some Banks who have not availed of AML software may require their
technology departments to institute suitable procedures for extraction of
data and arranging the same in form of text files in specified format every
month.
The FIU-IND has provided an excel based utility at its website

www.fiuindia.gov.in for generation of CTR in electronic form. This could
be used by banks who do not have a core banking system. After following
steps instructed by FIU-IND therein, the said utility automatically generates
a set of 6 files for onward reporting to FIU-IND.
Banks on CBS find it relatively easier to report the CTR. However other
banks would have to ensure that the generation of CTR is a centralised
activity and therefore their processes have to facilitate timely collation of
data across all branches at one location so that reporting can be done.
Banks are required to incorporate the BSR code in the Branch file of the
CTR and this is also necessary as part of the format to be incorporated in
the CBAACC, CBAINP and CBALPE for cross-referencing. In case BSR is
not available in case of new branches, banks may use a unique code
other than BSR for the branch so that it is possible to identify records
across the CTR files.
5.3 Counterfeit Currency Reporting (CCR)
The PMLA Rule 3(1)(C) read with rule 8 requires the reporting of all cash
transactions where forged or counterfeit Indian currency notes have been
used as genuine. The RBI vide circular dated May 22, 2008 provided the
format in which the CCR needs to be reported to the FIU-IND. The said
report is required to be filed not later than seven working days from the
date of occurrence of such transactions.
Banks may enter data centrally on counterfeit currency into a separate
35
utility provided by FIU-IND for same. This utility is available on FIU-IND

website. After following steps instructed by FIU-IND therein, this utility
automatically generates a set of 3 files for onward reporting to FIU-IND.
For enabling CCR reporting banks would need to put in place a mechanism
such that information on counterfeit currency flows to a central location
for onward submission to FIU-IND through the principal officer.
It is necessary that each entry in the counterfeit currency report carries

the details of the account in which such currency is deposited.
RBI vide circular dated May 22, 2008 provides that these cash transactions
should also include transactions where forgery of valuable security or
documents has taken place and may be reported to FIU-IND in plain text
form.
5.4 Suspicious Transaction Report (STR)
The PMLA Rule 3(1)(D) read with rule 8 requires the reporting of all
suspicious transactions whether or not made in cash.
It may be noted that the process for arriving at suspicious transaction is

covered separately in the chapter on transaction monitoring. In this section
we have only dealt with the modalities of reporting an STR.
RBI circular dated February 15, 2006 requires that the Suspicious
Transaction Report (STR) should be furnished within 7 days of arriving at
a conclusion that any transaction, is of suspicious nature. The Principal
Officer should record his reasons for treating any transaction or a series
of transactions as suspicious. It should be ensured that there is no undue
delay in arriving at such a conclusion once a suspicious transaction report
is received from a branch or any other office. The said circular also
provides the format of the STR.
FIU-IND has provided a utility at its website for generation of STRs in

electronic formats. On following steps instructed by FIU-IND therein, the
said utility automatically generates a set of 6 files for onward reporting to
FIU-IND.
While furnishing the STR care needs to be exercised on drafting of the

grounds of suspicion (GOS) in part 8 of the STR format. This part of the
36
STR is the 'Soul' of the STR as it answers the essential question of why
the STR is being filed. Therefore the GOS have to be accurate and
complete. The grounds of suspicion should express fully 'why' the
transaction or activity is unusual, unjustified, does not have economic
rationale, or bonafide purpose keeping in mind the banking business and
services offered by the Bank. The GOS could also explain the relationship
between persons (natural & legal), accounts and transactions that are
being reported as part of the STR. Correct reason for suspicion needs to
be identified as it signifies the character of suspicious activity. GOS need
to be in form of a detailed paragraph justifying why the transactions are
considered to be suspicious. Specific reference requires to be drawn to
the customers profile, apparent financial standing, past activity in account,
rationale/purpose behind the transactions, business profile and general
transaction pattern etc. These grounds are indicative in nature and may
vary from case to case. Findings of any other due diligence may also be
mentioned in the GOS.
Subsequent to furnishing an STR the FIU-IND/ other investigative agencies

to whom the STR is forwarded by FIU-IND, may seek additional inputs in
form of documents such as Account opening form and KYC documents.
Pertaining to the customer from the bank. Banks may therefore arrange
to keep these documents ready for submission (if required).
37
Chapter 6
TRANSACTION MONITORING
6.1 What is Transaction Monitoring?
As mentioned in Chapter on reporting requirements, banks are required to

report suspicious transactions to the FIU-IND. This requires the Banks to
put in place a formal process for identifying suspicious transactions and a
procedure for reporting the same internally. This process is known as
transaction monitoring.
Monitoring customer activity helps identify unusual activity. If unusual

activities cannot be rationally explained, they may involve money laundering
or terrorist financing. Monitoring customer activity and transactions that
take place throughout a relationship helps the banks to know their
customers, assess risk and provides greater assurance that the Bank is
not being used for the purposes of financial crime. Thus monitoring means
analysis of a customer's transactions to detect whether the transactions
appear to be suspicious from an AML or CFT perspective.
Suspicious transactions are reported to the Financial Intelligence Unit,

India (FIU-IND).
6.2 Methods of Monitoring
Banks need to have suitable mechanisms to identify suspicious transactions.

The methods for monitoring may be broadly classified as follows:
i) Observation: The staff at the bank's branches may at the time of

processing the transaction or otherwise come across certain transactions
not in line with the profile of the customer. Certain behaviour displayed
by the customer during their interactions with such customer may also
lead to suspicion. Banks may advise their branch staff to report such
instances to the principal officers/ his representatives so that additional
due diligence may be done on same. A list of behavioural indicators that
should trigger suspicion is enclosed as Annexure C.
ii) Analysis of Exception Reports: Banks may have in place a system

of generation of exception reports at branches or at the central
office to examine accounts based on certain threshold limits. Suitable
due diligence may be conducted for these accounts and accounts
38
concluded to be suspicious may be reported to the FIU-IND through

the principal officer.
iii) AML Software: Banks may have an AML software to generate alerts
/ exceptions and then channel these alerts for suitable due diligence
and reporting. Alerts concluded to be suspicious might be reported to
the FIU-IND through the principal officer. RBI vide its circular dated
May 22, 2008, as a part of transaction monitoring mechanism, requires
banks to put in place an appropriate software application to throw
alerts when the transactions are inconsistent with risk categorization
and updated profile of customers.
6.3 What is a suspicious transaction?
As per PMLA Rule 2 (g) suspicious transaction means a transaction whether

or not made in cash which to a person acting in good faith-
a. gives rise to reasonable ground of suspicion that it may involve the

proceeds of crime or
b. appears to be made in circumstances of unusual or unjustified

complexity or
c. appears to have no economic rationale or bonafide purpose
d. gives rise to a reasonable ground of suspicion that it may involve

financing of the activities relating to terrorism
In determining whether the transaction is suspicious or not, Banks needs

to have regard to the indicators of suspicion. Indicative lists of such
indicators are listed in Annexure D.
Complex transactions having no economic rationale or bonafide purpose,

concluded to be suspicious, need to be reported to FIU-IND. Banks need
to put in place suitable systems to identify and report such transactions
through transaction monitoring.
What are the essentials of transaction monitoring process?
An effective transaction monitoring process should contain the following

necessary elements:
Identification of Exceptional transactions: Recognition of suspicious
39
transaction requires the banks to know which transactions it should analyze

from the huge number of transactions they process. Therefore, based on
above indicators of suspicion, banks need to devise business rules based
on value, number and frequency. In advanced stages of an AML program,
Banks may use customer profiles and historical activity to alert them on
suspicion. Banks may also use predictive modeling at mature stages of
AML implementation. This involves analyzing the salient features of
suspicious activity reported in STRs by the bank and devise scenarios
involving such features.
Analysis of transactions / available customer information: This

involves scrutiny of the transactions carried out by the customer over a
longer period of time, the basic KYC information available in the bank's
systems as also checking on any unusual patterns or complexity in the
transaction.
Enhanced Due diligence: In case the bank requires additional information

on the customer for concluding the suspicion or otherwise, it may conduct
an enhanced due diligence through the Branch manager or any other bank
official having knowledge of the customer. Based on such customer
information, objective parameters, judgment of business group, and banker's
prudence, Banks arrive at a conclusion whether the transaction is suspicious
or not. Some of the objective parameters which can be used for enhanced
due diligence could be:
a. Customer location
b. Financial status
c. Nature of business
d. Purpose of transaction
Confirmation of Suspicion: In case the above process leads the Bank to

conclude that transaction is suspicious, then the same would be reported
to the principal officer who on confirmation of the suspicion would file a
report onward to the FIU-IND in an STR.
6.4 Who should perform transaction monitoring?
Depending on the structure of the Bank, transaction monitoring may be

either be based at branches or at centralized location. Alerts/exceptions
40
generated may be filtered by a central unit and then forwarded to business

units/ branches having knowledge about the customer. In case of Branches
not on core banking these exception reports/ alerts may be generated at
the branch and analysed by the branch manager or designated officer.
6.5 What types of rules should be used for generation of exception
Banks may as per their internal policy in this regard and based on their
assessment of risk use following types of rules based on threshold limits
or patterns for generation of exception reports/alerts :
1. Pure thresholds:
Large Value Cash Transactions
Large Value Non Cash Transactions
Large Volume of Transactions
Large Value transaction in dormant accounts
Large number of remittances
Large value of remittances
2. Pattern checks:
Single remitter transmitting funds to multiple beneficiaries
Multiple remitters transmitting funds to single beneficiary
Multiple accounts of the same customer
Any other pattern, which appears unusual, based on banks experience
Profile based alerts:
Significant deviation from known transaction profile of customer
Note: Above are purely indicative in nature. Fine-tuning of these may be

done based on typologies observed during the course of time.
6.6 Challenges in Transaction monitoring:
What is white listing? How does a bank manage white listing?
41
With threshold-based alerts, there may be instances where the same

customer accounts repeatedly hit the threshold limit to generate alerts.
This results in a large number of repeated alerts involving the same
accounts. To deal with such situations the AML softwares provide a false
positive manager which allows accounts to be white listed for a specified
period of time if they are found to be non suspicious after due diligence.
6.7 Do banks need to Report attempted ML transactions

RBI circular No DBOD.AML.BC. No. 85/14.01.001/2007-08 dated May 22,
2008 has advised banks that in case a transaction is abandoned/ aborted
by customers on being asked to give some details or provide documents,
it should report all attempted transactions in STRs even if not completed
by customers irrespective of the amount of transaction. Thus banks may
need to issue instructions to its branches to note above during course of
customer interaction.
6.8 Do banks need to File repeat STR
In case one STR has already been filed for a particular account and fresh
alerts pertaining to the same account are observed, the Bank needs to
exercise judgment as to whether it requires to be reported considering
following factors :
• Has any additional ground of suspicion which has not been reported
earlier, been discovered.
• Is the Alert value/volume/frequency is substantially high as compared

to the earlier STR
6.9 How should Banks deal with reported accounts?
Reported accounts are required to be put on enhanced monitoring. These

accounts should be classified as high risk. In case significant activity is
observed in such accounts, a repeat STR may be triggered.
In case the STR is repeatedly reported, banks may consider closing the
account. However customer should not be tipped off.
6.10 What is the key to an effective transaction monitoring process?

The following are key requirements of any transaction monitoring system:
42
1. Performing sufficient due diligence on the customer.

2. Documenting reasons for arriving at conclusion of alert/ exception as
suspicious/ non suspicious.
6.11 Is it necessary to have software for AML transaction monitoring?
The RBI circular dated May 22, 2008 requires banks to have suitable
software to throw alerts for transaction monitoring. Thus it is an important
requirement for robust transaction monitoring system, especially in view
of the high number of transactions that the banks handle everyday, which
is making it increasingly difficult to monitor these through manual methods.
6.12 How does AML software operate?
An AML software solution provides the interface wherein data from Core
banking system is uploaded into it on a periodical basis. Based on this
information the software generates alerts, which need to be investigated
by the Bank.
6.13 What are the features that should be available while selecting AML
software?
Following are the minimum features which should be available as part of

any AML software:
1. Cash Transaction Report: The system should be capable of

generating automated Cash Transaction Reports to the Financial
Intelligence Unit. It should also be up gradable to carry out online
reporting as and when required by FIU-IND.
2. Customer Risk Categorization: The system should have a feature

for automated customer risk categorization based on available
parameters of customer information.
3. Alerts Generation / Rule Engine: The system should be capable of

generating alerts based on rules specified therein. The alerts should
be capable of being configured based on varied criteria such as
customer segment, product type, and customer risk.
4. Case Management: The system should be flexible enough to be

customized to suit the bank's requirement. The case management
consists of features such as assignment/reassignment, attachment
43
facility, making comments and flexible templates for recording due

diligence.
5. Investigation Tools: AML systems also have features for user to

carry out multi dimensional analysis of data, viewing customer
information, linked accounts, details of transactions.
6. Suspicious Transaction Report: The software should be capable of

generating auto populated suspicious transaction reports for reporting
of suspicious transactions to the Financial Intelligence Unit.
7. Reports: The software should be able to generate various transaction

reports as also management information reports.
Besides above any software should be compatible with the core banking
system and scalable and up gradable to meet the changing face of banking.
6.14 How can Banks institutions effectively implement AML monitoring

software?
Immediate fallout of AML software implementation could be a very large

number of alerts. Banks would need to fine-tune the systems and processes
during the initial implementation phase. The AML and technology
departments would need to work together to ensure stabilization of the
system in the initial phases.
6.15 How can bank carry out due diligence without tipping off the
customer?
As a general practice Banks are advised by RBI not to put any restrictions
on operations in the accounts where an STR has been made. However, in
case any restrictions are placed it should be ensured that there is no
tipping off to the customer at any level.
Although the definition of tipping off has not been specified, tipping off
would mean informing/communicating to the customer that his account
has been or would be reported for suspicious activity to the regulators/
FIU-IND.
Merely seeking information about a particular transaction, as part of the

due diligence should not tantamount to tipping off. This is so because
44
most customers are well aware of the statute on money laundering and
legal provisions involving obligations of banks thereon.
Some of the suggestions to avoid tipping off are :
1. Due diligence should be preferably by way of pretext sales calls.
2. No statement should be made, which cautions or warns the

customer.
3. AML triggers / rules / reporting thresholds and internal monitoring

processes should not be discussed with the customers.
4. The conclusion that has been arrived at after making the necessary
enquiries should not be revealed to the customer.
5. No disclosure should be made to the customers that his/her

accounts are under monitoring for suspicious activities or that
STR has been filed/is being filed against him.
45
Chapter 7
NAME SCREENING PROCESS
7.1 Defining Name Screening

Name screening refers to the process of determining whether any of the
bank's existing or potential customers are part of any blacklists or regulatory
lists.
Under the risk based approach, banks should also put in place procedures
for conducting enhanced due diligence in dealings with customers under
certain categories, who may be perceived to pose higher risk from Money
Laundering and Reputation Risk Perspective (e.g. Politically Exposed Persons
(PEPs), persons entities, located in high risk locations, etc.). Name
screening is used to identify such individuals also.
7.2 Purpose of Name Screening
RBI Master Circular on Know Your Customer (KYC) Norms/Anti Money

Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)/
Obligations of Banks under PML Act 2002 dated July 1, 2009 as part of the
Customer Acceptance Policy makes it mandatory for banks to conduct
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 terrorist individuals or
terrorist organizations.
Further, RBI circular notifying the rules under the Prevention of Money
Laundering Act, 2002, dated February 15, 2006 indicated that the banks
need to monitor transactions of the customers for the purpose of reporting
suspicious transactions to the FIU-IND in the specified format named as
'Suspicious Transaction Report (STR)'. STR specifies one of the categories
of suspicious transactions as "Background of the client", which means
clients with suspicious background or links with known criminals.
RBI Master Circular also advises Banks that before opening any new account
it should be ensured that the name/s of the proposed customer does not
appear in the consolidated list of terrorist individuals and entities circulated
by RBI. Further Banks should scan all existing accounts to ensure that no
account is held by or linked to any of the entities or individuals included in
the list.
46
In order to meet these regulatory objectives, name-screening process is

required to be embedded as an essential element of the effective customer
due diligence program. Additionally, name screening is also required to be
performed at the transaction monitoring or customer review mechanism.
Apart from the regulatory requirements, name screening processes is also

a safety mechanism used to guard against reputation, operational or legal
risks and to prevent themselves being used as a channel for money
laundering or terrorist financing purposes.
7.3 Scope of Screening

Name screening process should be performed for the following types of
transactions:
i. New customers should be screened at the time of opening of accounts.
ii. Screening of legacy customers, i.e. screening of the bank's existing
customers at regular intervals.
iii. Employees are required to be screened as a part of their pre-
recruitment process, besides screening the existing employees at
regular intervals. Vendors and contractual staff may also be included
as a part of the screening.
iv. Counter parties to the cross border transactions (i.e. remitters,
beneficiaries, intermediary banks, other intermediaries, etc.) in
remittance or trade transactions need to be screened.
v. It also needs to be a part of the enhanced due diligence for high-risk
customers or suspicious transactions review.
7.4 Negative lists to use for name screening
As per extant RBI guidelines, banks are required to ensure that before
opening any new accounts, proposed customers do not appear in the
United Nations' List under Security Council Resolutions (mainly 1267 and
such others as may be specified by RBI from time to time) and the terrorist
lists circulated by RBI. All the UN resolutions published by RBI should be
made available at the branches or the relevant processing centres where
the account opening takes place.
Other lists issued by enforcement agencies may also be included in the

negative lists suite, such as: Interpol Most Wanted, Central Bureau of
Investigation, Lists issued under other Resolutions by United Nations, etc.
47
Banks may also follow a risk-based approach and depending upon

jurisdictions they operate, they may include foreign regulators'/enforcement
agencies negative lists for name screening purposes.
7.5 Need for software
In order to perform the name screening function in a timely manner and

reduce dependency on manual processes, it is desirable that the name
screening function be performed in an automated manner. Extent of
automation would depend upon the following factors:
a. risk policy of the institution
b. volume of transactions
c. turn around time available for processing of transactions
d. availability of resources (capital, manpower, etc.)

Before establishing the name screening systems, following preparatory
steps are required to be in place:
• Determine the category of lists to be included in screening universe.
• Decide about the timing of screening of transactions.
• Establish due diligence procedures and the process of conducting

due diligence on the probable matches.
• Establish reporting procedures for confirmed matches.
• Estimate the number of matches at each stage and capacities

concerned departments appropriately.
Selection of software and database vendors may involve following steps:
• Due diligence on the service provider
• Evaluation of logic used in name matching
• Check for suitability of workflow and modes of name screening (on-

line, batch upload, etc.)
• Compatibility of database formats with the software
48
• Lists and category of names covered by the vendor
• Check for the frequency of updates being provided by the vendor

and integration of the software to apply updates.
• Request a demonstration for usability, presentation and compatibility

on formats provided by the Bank.
• Conduct pre-selection user level tests against simulated data to

understand the functionality in full and likely impact on the systems.
7.6 Components of a name screening system & process
A typical name screening system will comprise of the following elements:
i. Database: The name screening software will scan the names against
a database of derogatory lists, which the Bank will decide to use for
scrubbing its customers or transactions. The lists may contain the
following categories:
• Regulatory lists
• Politically Exposed Persons (PEPs) list
• Other high risk categories' list
The Bank may decide to prepare and maintain its own list or subscribe to
the lists provided by external vendors
ii. Application: It refers to the software application which will consist

of following components:
• Name matching engine
• Work flow tools
• report generation utility for control and audit purposes
• Front end interface for users and administrator
• Interface with payment gateway or core banking system, etc.
7.7 Logic used for name screening

Name screening software's use different logic for searching a match against
the negative list. Commonly used logic is fuzzy logic algorithms like
Levenshetin or phonetic algorithms like Soundex.
Based upon the degree of closeness to the source name against a probable
negative listed person, system allocates a score to the match. Based on
49
the nearness of the match, the algorithm would arrive at the score of the
match. Minimum value of the match score is 1 and 100 is the maximum
score. A match score of 100 indicates an exact match.
System can be configured to ignore matches below a certain threshold.
Loose or tight matching logic can also be applied to arrive at the right
balance of false positives as per Bank's own judgment. The process of
fixing the threshold or matching logic should be done after detailed tests
and should be controlled at the Principal Officer level.
7.8 Dealing with name matches

The name screening application provides a list of the probable matches;
which contain the source data against the probable names matching in
the negative lists with their details (such as name, age/date of birth,
address, nationality, offence, listing authority, etc.). A confirmed name
match is termed as a 'true positive match' whereas others are termed as
'true negative match'.
A 'false positive match' is the matching of two individuals having different

identities. Conversely, 'false negative match' indicates matching of the
same individual but adjudged as a false match. 'False positive' requires
additional research but the 'false negative' might trigger an investigation,
penalties, legal fees, reputation damage, etc.
Due to the negative correlation and probable risks, systems and processes
should be designed to eliminate 'false positives' but not at the cost of
'false negatives'.
The following grid can be used to determine a 'true' or 'false' match:
Details Criteria
Date of Birth
Place of Birth Any two details to match with name
City (listed name or alias)
Nationality
Passport No; SSN;

Driving License; etc. Single match
50
False positives can be reduced by deploying white-listing functionality. It

refers to the process of adding a customer to the accept list against the
given negative listed persons. If the same customer is scanned subsequently,
the system will not show a match against the previously white-listed profiles
against that customer. Any changes in the white-listed customer record or
entity listing should trigger the screening process afresh.
7.9 Reporting confirmed matches on Regulatory Lists
Once it is concluded that the match found is 'true', following actionable
are suggested. However, these are indicative steps only and may vary
depending upon the Bank's policy in this regard:
Match against Suggested action

Individuals or Entities • Stop the transaction or account
opening activity. (If account is already
opened, close the account.)
• Report
Banks/Country • As per the Bank's risk based policy,
respective sanction program being
adhered to by the Bank and applicable
regulations.
In addition to the details of the matched entity, the account opening and
customer identification documents also need to be forwarded to the Principal
Officer.
7.10 Roles and responsibility of the Principal Officer

The Principal Officer of the bank is the single point contact for reporting of
suspicious transactions to FIU-IND and/or RBI. Thus, all internal cases should
culminate at Principal Officer's office for onward reporting by the Bank.
Based on the review of the relevant documents, the Principal Officer shall
decide whether the transaction or account or applicant needs to be
reported to the appropriate authorities. The reports shall be in the format
prescribed by the FIU-IND.
Once the Principal Officer concludes a transaction/customer to be
suspicious, he is responsible to report the case in Suspicious Transaction
Report (STR) format within 7 working days (after confirmation of suspicion)
to the Director, FIU-IND in the STR format.
51
7.11 Guidelines to avoid Tipping Off

PMLA mandates that the STR related information should not revealed to
the customers to avoid prejudicing or affecting an investigation, which may
be initiated by the law enforcement agencies.
Thus, it is essential that all of the aforesaid activities of reporting of the
confirmed matches are kept strictly confidential.
Records of all such reports and investigations should be kept securely and
separately so as not to mix with general transactional data. Custody of
such records may be entrusted with staff of sufficient seniority or
responsibility.
Customers should not be informed of any such reports in any circumstances
to avoid 'TIPPING OFF' offence.
7.12 Due Diligence Procedures for High Risk Category Matches
While the process stated in point no. 1 to 10 is followed for screening
against regulatory lists. The same process can be observed for identification
of High Risk Customers (like Politically Exposed Persons (PEPs) matches,
Fraudsters, etc.).
As per extant guidelines, PEPs are defined as the individuals who are or
have been entrusted prominent public functions in a foreign country, e.g.
Heads of States or of Governments, senior politicians, senior government/
judicial/military officers, senior executives of state owned corporations,
important political party officials, etc. PEPs' definition includes the family
members or close relatives of the individuals identified as above.
The regulatory guidelines mandate that the Banks should classify such
customers in higher risk category. Higher level of scrutiny or enhanced due
diligence (EDD) should be conducted while enrolling such customers and
accounts should be monitored closely for transaction monitoring purposes
and review of KYC at regular intervals. The decision to open PEPs' or any
other high-risk account should be taken at a senior level, preferably in
concurrence with Principal Officer.
Suggested EDD measures for PEP customers include the following:
• checking for any adverse information on such individuals or entities
available in public domain,
52
• checking for sources of funds proposed to be routed/invested through

the bank,
• tighter threshold for monitoring of transactions through these
accounts,
frequent review of relationships and accounts for keeping KYC information
up-to-date.
53
Chapter 8
WIRE TRANSFERS - FATF SR VII COMPLIANCE
8.1 Banks use wire transfers as an expeditious method for transferring funds
between bank accounts. The wire transfer could be domestic or cross
border. The beneficiary and originator could also be the same person.
8.2 Domestic wire transfer means any wire transfer where the originator
and beneficiary are located within the same country. A transaction involving
a chain of wire transfers that take place within the borders of a single
country is domestic wire transfer even though the system used for effecting
the transaction is located outside the country.
8.3 Cross-border transfer means any wire transfer where the originator and
the beneficiary bank or financial institution are located in different
countries. It may include any chain of wire transfers that has at least one
cross-border element.
8.4 Wire transfers, because of its capability of transferring funds

instantaneously between geographies, have become the preferred mode
of transfer of funds across the globe. In addition, because of the lesser
human intervention in the transfer and hence lesser scrutiny, it also
becomes a preferred route for criminals and terrorists to transfer their
funds. To address this, FATF in its Special Recommendations to combat
terrorist financing made recommendations of some minimum requirements
for the wire transfers. RBI vide its circular dated 13 April 2007 implemented
the recommendations in the banks in India.
8.5 Requirements for Domestic Transactions:
(a) Information accompanying all domestic wire transfers of Rs.50000/-

(Rupees Fifty Thousand) and above must include complete originator
information i.e. name, address and account number etc., unless full
originator information can be made available to the beneficiary bank
by other means.
(b) If a bank has reason to believe that a customer is intentionally

structuring wire transfer to below Rs.50000/- (Rupees Fifty Thousand)
to several beneficiaries in order to avoid reporting or monitoring, the
bank must insist on complete customer identification before effecting
54
the transfer. In case of no cooperation from the customer, efforts

should be made to establish his identity and Suspicious Transaction
Report (STR) should be made to FIU-IND.
(c) When a credit or debit card is used to effect money transfer, necessary
information as (a) above should be included in the message.
8.6 Requirements for Cross-border Transactions:
(a) All cross-border wire transfers must be accompanied by accurate

and meaningful originator information.
(b) Information accompanying cross-border wire transfers must contain

the name and address of the originator and where an account exists,
the number of that account. In the absence of an account, a unique
reference number, as prevalent in the country concerned, must be
included.
(c) Where several individual transfers from a single originator are bundled
in a batch file for transmission to beneficiaries in another country,
they may be exempted from including full originator information,
provided they include the originator's account number or unique
reference number as at (b) above.
8.7 Inter-bank transfers and settlements where both the originator and
beneficiary are banks or financial institutions are exempted from the above
requirements.
8.8 Role of Ordering, Intermediary and Beneficiary Banks
(i) Ordering Bank
An ordering bank is the one that originates a wire transfer as per the
order placed by its customer. The ordering bank must ensure that
qualifying wire transfers contain complete originator information. The
bank must also verify and preserve the information at least for a
period of ten years.
(ii) Intermediary Bank
For both cross-border and domestic wire transfers, a bank processing

an intermediary element of a chain of wire transfers must ensure that
all originator information accompanying a wire transfer is retained
55
with the transfer. Where technical limitations prevent full originator

information accompanying a cross-border wire transfer from remaining
with a related domestic wire transfer, a record must be kept at least
for ten years (as required under Prevention of Money Laundering Act,
2002) by the receiving intermediary bank of all the information received
from the ordering bank.
(iii) Beneficiary Bank
A beneficiary bank should have effective risk-based procedures in

place to identify wire transfers lacking complete originator information.
The lack of complete originator information may be considered as a
factor in assessing whether a wire transfer or related transactions
are suspicious and whether they should be reported to the Financial
Intelligence Unit-India. The beneficiary bank should also take up the
matter with the ordering bank if a transaction is not accompanied by
detailed information of the fund remitter. If the ordering bank fails to
furnish information on the remitter, the beneficiary bank should consider
restricting or even terminating its business relationship with the ordering
bank.
8.9 While the information as required above will enable banks to furnish the
details to authorities in an expeditious manner for investigation or
prosecution of money laundering or terrorist financing cases, the beneficiary
banks also should analyse the data to find out any unusual/ suspicious
activities which they may consider reporting to the FIU-IND India.
56
Chapter 9
STAFF AND CUSTOMER AWARENESS
9.1 Why is it important to create staff awareness
One of the most important controls over the prevention and detection of
money laundering is to have staff members who are alert to the risks of
money laundering/terrorist financing and well trained in the identification
of unusual activities or transactions, which may prove to be suspicious.
The effective application of even the best-designed control systems can
be quickly compromised if the staff members applying the systems are not
adequately trained. The effectiveness of the training will therefore be
important to the success of the bank's AML/CFT strategy.
9.2 How should the staff awareness be created

Responsibilities of the senior management
The senior management of the Bank should provide appropriate training to
the staff members, specifically to those working in high-risk areas, e.g.
branches, remittances etc on how to recognize and deal with transactions
which may be related to money laundering or terrorist financing.
Responsibilities and obligations of staff
Please refer to Section 2.2 of this document.
Training methods and assessment
Induction training in money laundering prevention, recognition and reporting

of suspicions and the KYC requirement should be given to relevant staff
at the start of their employment in that role. Relevant staff members are
those who handle or are managerially responsible for handling transactions,
which may involve money laundering. On-going training / information must
then be given to relevant staff at appropriate intervals to keep them
abreast with developments in the area of AML.
Banks need to take appropriate measures so that relevant employees are

aware of-
a. Policies and procedures put in place to prevent money laundering.
57
b. The legal requirements contained in the PMLA and the rules and
regulations framed there under.
c. KYC/AML guidelines issued by the RBI from time to time.
Banks are required to take reasonable steps to ensure that staffs who
handle or are responsible for the handling of transactions which may
involve money laundering, are aware of:
a. their responsibilities under the Bank's arrangements for money

laundering prevention including those for obtaining sufficient evidence
of identity, recognising and reporting knowledge or suspicion of money
laundering activity.
b. findings on countries with a poor record in their anti money laundering

legislations/regulations and their implementation (e.g. FATF notified
list of NCCT).
c. the identity and responsibilities of the PO.
d. the potential effect on the bank, on its employees and its customers,
of any breach of law.
All relevant staff should be made aware of the importance of the KYC
requirements for money laundering prevention purposes. The creation of
awareness and training of staff in this respect should cover:
a. the need to know the true identity of the customer.
b. where a business relationship is being established, the need to know

enough about the nature of business activities expected in relation
to that customer.
c. at the outset to know what might constitute suspicious activity at a

future date and the circumstances that would give rise to reasonable
grounds for suspicion.
Records of training
It is the responsibility of senior management to ensure that their staff

members have taken appropriate training and records are properly
maintained. To this effect, any system report or manual (attendance)
records can be maintained, which should be available for review by the
RBI or other regulatory bodies.
58
It is important that training for relevant staff is made mandatory and

that, in addition to the records of staff training, the Bank is required to
maintain record of the date and nature of the training received.
9.3 Why is it important to create customer awareness on AML
In order to have an adequate control over AML, it is critical that key AML
controls, such as KYC checks, have the support of industry and customers.
Customers should see the KYC checks process as a sensible contribution
to the fight against crime and terrorism and not as a burdensome and
deliberate barrier to the access to banking. To promote this understanding,
KYC checks should to be done in a customer-friendly way and Banks'
procedures and staff training should be designed accordingly.
9.4 How to create customer awareness on AML
There needs to be an effective communication to the customers of the

reasons for KYC checks and what it normally involves. This could be done
by various mediums, e.g.
• incorporating the requirements in the account opening forms;

• provision of relevant training to staff members to address any customer
queries;
• a ready reckoner on frequently asked questions related to KYC should
be visibly displayed on the notice boards;
• publishing relevant information on the websites of the bank;
• advertising AML/KYC related information on posters of the bank, which
should be prominently visible.
• Customer awareness articles in newspapers and other media.
59
Chapter 10
PRESERVATION OF RECORDS
Section 12 of the PMLA 2002 makes it mandatory for every bank to

maintain a record of all transactions, the nature and value of which may
be prescribed.
10.1 Why is it important to maintain records?
The keeping of proper records is essential to enable the Banks to demonstrate

that they have operated in conformity with local laws and regulations. This
will in turn enable the Banks and individual staff members to defend
themselves against any allegations of knowingly assisting a money launderer.
Banks must retain records concerning customer identification and
transactions as evidence of the work they have undertaken in complying
with their legal and regulatory obligations, as well as for use as evidence in
any investigation conducted by law enforcement.
It is important for the bank at all stages in a transaction to be able to

retrieve relevant information, to the extent it is available, without undue
delay.
10.2 What is record keeping?
Record keeping is an essential component of the audit trail that the

regulators seek to establish in order to assist in any investigation and to
ensure that criminal funds are kept out of the banking system.
10.3 What records have to be kept ?
The investigating authorities need to ensure a satisfactory audit trail for

suspected money laundering transactions and to be able to establish a
financial profile of the suspect account. For example, to satisfy these
requirements the following information may be sought by the investigating
authorities:
the beneficial owner of the account;
the volume of funds flowing through the account;
for selected transactions:
60
a) the origin of the funds (if known)

b) nature of the transactions;
c) the amount of the transactions and the currency in which it was
denominated.
d) the date on which the transaction was conducted;
e) the form in which the funds were offered or withdrawn i.e. cash,
cheque etc;
f) the identity of the person undertaking the transaction;
g) the parties to the transaction;
h) the destination of the funds; and
i) the form of instruction and authority.
10.4 What are the timelines for retention of records?
As per the PMLA, the account opening records including identification

documents should be kept for 10 years from the date of cessation of the
transactions/relationship between the customer and the bank and
transaction records including credit/debit slips, cheques and other forms
of vouchers (for account holders and non-account holders) should be
kept for 10 years from the cessation of the transaction. Records relating
to investigations and transactions, which have been the subject of a
disclosure, should be kept for 10 years from the time the STR is filed with
FIU-IND. Such records and related documents should be made available
to help auditors in their work relating to scrutiny of transactions and also
to RBI/other relevant authorities.
The term 'cessation' would broadly mean the time of closure of account.
However, there may be certain exceptions to this, for example:
a. If the matter related to a suspicious transaction is pending in a

court, the relevant records should be retained for 10 years from the
date of final verdict of the court.
b. In specific cases, where RBI/FIU-IND or any other regulatory body

requests for the retention of records for a period more than 10 years,
the banks should be guided by such specific requests.
61
Annexure A
Resident Individual Account Opening Form

Please open the following account(s) for me / us at (Branch).
Please fill the form in CAPITAL LETTERS. Please additionally complete the
supplementary form in case of more than 2 applicants. Please do not staple this
form.
Product Choice : Savings Account Term Deposit Fixed Deposit (FD)

Re-Investment Deposit (RD) Others
Customer Details - 1st Applicant For Bank Use only

Mr. / Ms. / Mrs.
Title Surname First Name Middle Name
Date of Birth : Gender : Male Female
Nationality :
PAN / GIR Number If you do not have a PAN / GIR
Number please fill in the following:
Are you an Income Tax Assessee? Yes No
If yes 1. Details of the Ward / Circle Range where the last return of income
was filed
2. Reasons for Not having a PAN / GIR No.
Residential Address
Landmark :
City : Pincode : State :
Office Address :
Landmark :
Res Tel No. Office Tel No. Extn. :
STD Code STD Code
Mobile No.
62
Mobile No. Email

Mailing Address: Residence :
Office :
Education : Under Graduate Graduate

Post Graduate Professional
Occupation : Salaried* Business#
Self Employed# Retired / Housewife Student
Other (Please specify) :

*Name of Employer / #Line of Business / Industry
(Please provide details) :
Income p.a. : Rs. 60,000 Rs. 60,000 to Rs. 100,000

Rs. 100,000 to Rs. 500,000
Rs. 500,000 to Rs. 1,500,000 Rs. 1,500,000
Source of Funds : Salary Business Inheritance

Investments Other (Please specify)
Existing Account Number 1.
Existing Card Number 2.
2nd Applicant / Guardian Details:
If the first applicant is a minor For Bank use only
Mr. / Ms. / Mrs.
Nationality :
PAN / GIR Number If you do not have a PAN / GIR

Number please fill in the following:
Are you an Income Tax Assessee? Yes No
If yes 1. Details of the Ward / Circle Range where the last return of income
63
was filed
2. Reasons for Not having a PAN / GIR No.
Residential Address
(If different from 1st App.)

Landmark :
Landmark :
Office Address :
Landmark :
STD Code STD Code
Mobile No.
Mobile No. Email
Mailing Address: Residence :
Office :
Occupation : Salaried* Business# Self Employed#

Retired / Housewife Student Other (Please specify):
*Name of Employer / #Line of Business / Industries (Please provide details)

Rel. with the 1st Holder :

Parent / Parent in Law / Spouse / Child / Sibling / Other
3rd Applicant Name :
64
(If applicable)
4th Applicant Name :

(If applicable)
Mode of operation : Singly / Jointly / Either or Survivor
Customer Benefits :
1st Holder :
2nd Holder :
Debit / ATM Card:
Regular Name as it should appear on card
Photo Debit Card - Please fill a separate form
Please leave a space between two words
Cheque Book : Local or Multicity
Internet banking
1st Applicant Yes No

nd
2 Applicant Yes No
If yes, email address must be provided on page 1
E-statements: Yes No
Nomination :
Form DA1 Nomination under Section 45ZA of the Banking Regulation Act 1949
and Rule 2(1) of the Banking Companies (Nomination) Rule 1985 in respect of
Bank deposits.
I/We nominate the following person to whom in the event of my/our/ minor's
death, the amount of the deposit in the account, particulars, whereof are given
below, may be returned by
Bank Branch Deposit/Account:
Nature of Deposit
65
Distinguishing No.
Additional Details if any
Full Name of the Nominee :
Date of Birth : Relationship with the depositor
Address of the Nominee
(If different from First App.)
**As the nominee is a minor on this date I/We appoint
Guardian's Address :
to receive the amount of the deposit on behalf of the nominee in the event of
my/our minor's* death during the minority of the nominee.
*Signature of the *Signature of the

First Applicant Second Applicant
If the account is in more than 2 names, do not complete this nomination form but
complete the nomination form in the supplementary account opening form.
Witness Name Witness Name
Signature*** Signature***
Address Address
Date Date
* where the deposit is made in the name of a minor the nomination must be
66
signed by a person lawfully entitled to act on behalf of the minor. **Strike out if
not a minor *** Thumb impressions must be attested by two witnesses.
Customer Instructions
Initial Deposit Details : Rs. (amount in words)
Cash/Cheque No. Dated

Drawn on (Bank Name)
Debit to Account No
Please note all Cheques should be CROSSED and in favour of
A/C (Your Name)
Term Deposit Tenure Days
Months Years
Maturity Instructions Auto Renewal
Credit A/C No.
Issue a P/O favg. (One of the account holders)
Interest Payment Renew with Principal Credit A/C
No.
# Signature # Signature
Name Name
# If the signature above does not tally with that on the ID Document please
confirm that you want the signature to be recorded as per above by signing as
per the identity document.
Date
Please submit a passport size photo for all holders signed on the face/reverse
with the documents.
For Bank use only.
67
Annexure B
Non-Resident Individual Account Opening Form

Please open the following account(s) for me / us at (Branch)
Please fill the form in CAPITAL LETTERS. Please additionally complete the
supplementary form in case of more than 2 applicants. Please do not staple this
form.
Product Choice
Savings Account NRO Savings NRE Savings NRE Super Value

Term Deposit NRO (FD) NRE (FD) NRO Re-
Investment Deposit
NRE Re-Investment Deposit FCNR Deposit Others
Customer Details - 1st Applicant
Mr. / Ms. / Mrs.
Nationality :
Overseas Residential Address
(If P.O. Box address, Landmark City

Landmark is compulsory) Pincode State Country
Overseas Office Address
(If P.O. Box address, Landmark City

Landmark is compulsory) Pincode State Country
Mailing Address
(If different from any of Landmark City
68
the addresses above) Pincode State Country
Res Tel No. Office Tel No. Extn

STD Code STD Code
Mobile No. Email
Mailing Address
Residence Office Mailing
Education : Under Graduate Graduate

Post Graduate Professional
Occupation : Salaried* Business#
Self Employed# Retired / Housewife Student
Other (Please specify) :

*Name of Employer / #Line of Business / Industry
(Please provide details) :
Income p.a. : Rs. 60,000 Rs. 60,000 to Rs. 100,000

Rs. 100,000 to Rs. 500,000
Rs. 500,000 to Rs. 1,500,000 Rs. 1,500,000


2nd Applicant / Guardian Details:
If the first applicant is a minor For Bank use only
Mr. / Ms. / Mrs.
Overseas Residential Address

Landmark : City :
Pincode : State : Country
69
Overseas Mailing Address

Landmark : City :
Pincode : State : Country
STD Code STD Code
Mobile No. Email
Mailing Address
Residence
Occupation : Salaried* Business# Self Employed#

Retired / Housewife Student Other (Please specify):
*Name of Empoyer / #Line of Business / Industry (Please provide details)

Rel. with the 1st Holder :

Parent / Parent in Law / Spouse / Child / Sibling / Other
3rd Applicant Name :
(If applicable)
4th Applicant Name :
(If applicable)
Mode of operation : Singly / Jointly / Either or Survivor
Customer Benefits :
1st Holder :
2nd Holder :
Debit / ATM Card :
70
Regular Smart Fill ATM Regular Smart Fill ATM
Name as it should appear on card
Photo Debit Card - Please fill a separate form
Please leave a space between two words

*Issued only on NRE transaction account; conditions apply
Customer Benefits
Cheque Book Re-Order Automatic Yes/No

Internet banking 1st Applicant Yes/No
2nd Applicant Yes/No

(Only available if you have
Current/Savings A/C with us)
E-statements Yes/No
Nomination Form DA1 Nomination under Section 45ZA of the Banking Regulation
Act 1949 and Rule 2(1) of the Banking Companies (Nomination) Rule 1985 in
respect of Bank deposits.
I/We nominate the following person to whom in the event of my/our/ minor's
death, the amount of the deposit in the account, particulars, where of are given
below, may be returned by
Bank __________________________ Branch __________________________
Deposit/Account: Nature of Deposit
Distinguishing No. Additional Details if any
Full Name of the Nominee
Date of Birth Relationship with the depositor ____________
Address of the Nominee
(If different from First App.)
**As the nominee is a minor on this date I/We appoint
71
Guardian's Address __________________________________________________
to receive the amount of the deposit on behalf of the nominee in the event of
my/our minor's* death during the minority of the nominee.
*Signature of the First Applicant *Signature of the Second Applicant
If the account is in more than 2 names, do not complete this nomination form but
complete the nomination form in the supplementary account opening form.
Witness Name Witness Name
Signature*** Signature***
Address Address
Date Date
* where the deposit is made in the name of a minor the nomination must be
signed by a person lawfully entitled to act on behalf of the minor. **Strike out if
not a minor *** Thumb impressions must be attested by two witnesses.
Customer Instructions
Initial Deposit Details : Rs./USD/GBP/EUR

(amount in words)
Cash (Cash option not available for Indian Rupees)
Cheque No. Dated
Drawn on (Bank Name) Debit to Account No
Please note all Cheques should be Crossed and in favour of A/C (Your Name)
Term Deposit Tenure Days Months Years
Maturity Instructions Auto Renewal Credit A/C No.
72
Interest Payment Renew with Principal Credit A/C No.
It is my/our responsibility to obtain the terms and conditions from your bank and
read the same. I/We confirm that all information given in this application form is
true, correct, complete and upto date in all respects and I/We have not withheld
any information. I/We shall be held responsible for the same at all times if it is
incorrect. I/We confirm having read and understood the Rules and Regulations of
the Bank including Bank's tariff regarding the conduct of the account/deposits
and pertaining to Phone Banking, ATM, Debit Card, Internet Banking and Electronic
Banking facilities (collectively called "the said banking facilities") and agree to be
bound and abide by them/any other rules that may be in force from time to time.
I/We confirm being persons of Indian origin not residing in India. I/We understand
that the above account/deposit will be opened on the basis of statements made
by me/ us. I/we also confirm that my/ our residential status as per Indian Income
Tax Act 1962, in Non Resident Indian and I/ we agree and undertake to inform
the Bank in writing of any change in residential status. I/We undertake to strictly
operate and use the account/deposit and the said banking facilities in accordance
with the Exchange Control Regulations as laid down by RBI from time to time.
Declaration under Section 10 (5) of FEMA 1999: I/We hereby declare that all
foreign exchange transactions as may be entrusted by us to the Bank from time
to time do not involve and are not designed for the purpose of any contravention
or evasion of the provisions of the aforesaid Act or of any rule, regulation,
notification, direction or order made thereunder. I/We also hereby agree undertake
to give such information/documents as will reasonably satisfy you about the
transaction in terms of the above declaration. I/We also understand that if I/We
refuse to comply with any such requirement or make only unsatisfactory compliant
therewith the Bank shall refuse in writing to undertake the transaction and shall
if it has reason to believe that any contravention/evasion is contemplated by
me/us report the matter to RBI.
# Signature # Signature
Name Name
73
# If the signature above does not tally with that on the ID Document please
confirm that you want the signature to be recorded as per above by signing as
per the identity document.
# #
Date
Please submit a passport size photo for all holders signed on the face/reverse
with the documents.
For Bank use only
******
74
Annexure C
Customer Behaviour Indicators

Customers who are reluctant in providing normal information while opening
an account, providing minimal or fictitious information or when applying to
open an account, providing information that is difficult or expensive for
the institution to verify.
Customer expressing unusual curiosity about a secrecy of information

involved in the transaction.
Customers who decline to provide information that in normal circumstances

would make the customer eligible for banking services.
Customer giving confusing details about a transaction.
Customer reluctant or refuses to state a purpose of a particular large /

complex transaction/ source of funds involved or provides a questionable
purpose and / or source.
Customers who use separate tellers to conduct cash transaction or foreign

exchange transactions.
Customers who deposit cash / withdrawals by means of numerous deposit

slips / cheques leaves so that the total of each deposits is unremarkable,
but the total of all credits / debits is significant.
Customer's representatives avoiding contact with the branch.
Customers who repay the problem loans unexpectedly.
Customers who appear to have accounts with several institutions within

the same locality without any apparent logical reason.
Customers seeks to change or cancel a transaction after the customer is

informed of currency transaction reporting / information verification or
record keeping requirements relevant to the transaction.
Customer regularly issues large value cheques without balance and then
deposits cash.
75
Annexure D
An Indicative List of Suspicious Activities

Transactions Involving Large Amounts of Cash
(i) Exchanging an unusually large amount of small denomination notes for

those of higher denomination;
(ii) Purchasing or selling of foreign currencies in substantial amounts by cash

settlement despite the customer having an account with the bank;
(iii) Frequent withdrawal of large amounts by means of cheques, including

traveller's cheques;
(iv) Frequent withdrawal of large cash amounts that do not appear to be

justified by the customer's business activity;
(v) Large cash withdrawals from a previously dormant/inactive account, or

from an account which has just received an unexpected large credit from
abroad;
(vi) Company transactions, both deposits and withdrawals, that are

denominated by unusually large amounts of cash, rather than by way of
debits and credits normally associated with the normal commercial operations
of the company, e.g. cheques, letters of credit, bills of exchange etc.;
(vii) Depositing cash by means of numerous credit slips by a customer such

that the amount of each deposit is not substantial, but the total of which
is substantial.
Transactions that do not make Economic Sense
(i) A customer having a large number of accounts with the same bank, with
frequent transfers between different accounts;
(ii) Transactions in which assets are withdrawn immediately after being

deposited, unless the customer's business activities furnish a plausible
reason for immediate withdrawal.
Activities not consistent with the Customer's Business
(i) Corporate accounts where deposits or withdrawals are primarily in cash
76
rather than cheques.
(ii) Corporate accounts where deposits & withdrawals by cheque/telegraphic

transfers/foreign inward remittances/any other means are received from/
made to sources apparently unconnected with the corporate business
activity/dealings.
(iii) Unusual applications for DD/TT/PO against cash.
(iv) Accounts with large volume of credits through DD/TT/PO whereas the
nature of business does not justify such credits.
(v) Retail deposit of many cheques but rare withdrawals for daily operations.
Attempts to avoid Reporting/Record-keeping Requirements
(i) A customer who is reluctant to provide information needed for a mandatory

report, to have the report filed or to proceed with a transaction after
being informed that the report must be filed.
(ii) Any individual or group that coerces/induces or attempts to coerce/induce

a bank employee not to file any reports or any other forms.
(iii) An account where there are several cash deposits/withdrawals below a

specified threshold level to a avoid filing of reports that may be necessary
in case of transactions above the threshold level, as the customer
intentionally splits the transaction into smaller amounts for the purpose of
avoiding the threshold limit.
Unusual Activities
(i) An account of a customer who does not reside/have office near the
branch even though there are bank branches near his residence/office.
(ii) A customer who often visits the safe deposit area immediately before
making cash deposits, especially deposits just under the threshold level.
(iii) Funds coming from the list of countries/centers, which are known for
money laundering.
Customer who provides Insufficient or Suspicious Information
(i) A customer/company who is reluctant to provide complete information
77
regarding the purpose of the business, prior banking relationships, officers

or directors, or its locations.
(ii) A customer/company who is reluctant to reveal details about its activities

or to provide financial statements.
(iii) A customer who has no record of past or present employment but makes
frequent large transactions.
Certain Suspicious Funds Transfer Activities
(i) Sending or receiving frequent or large volumes of remittances to/from

countries outside India.
(ii) Receiving large TT/DD remittances from various centers and remitting the
consolidated amount to a different account/center on the same day leaving
minimum balance in the account.
(iii) Maintaining multiple accounts, transferring money among the accounts

and using one account as a master account for wire/funds transfer.
Certain Bank Employees arousing Suspicion
(i) An employee whose lavish lifestyle cannot be supported by his or her

salary.
(ii) Negligence of employees/willful blindness is reported repeatedly.
Some examples of suspicious activities/transactions to be monitored by the

operating staff-
Large Cash Transactions
Multiple accounts under the same name
Frequently converting large amounts of currency from small to large

denomination notes
Placing funds in term Deposits and using them as security for more loans
Large deposits immediately followed by wire transfers
Sudden surge in activity level
Same funds being moved repeatedly among several accounts
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Multiple deposits of money orders, Banker's cheques, drafts of third parties
Multiple deposits of Banker's cheques, demand drafts, cross/ bearer

cheques of third parties into the account followed by immediate cash
withdrawals
Transactions inconsistent with the purpose of the account
Maintaining a low or overdrawn balance with high activity
Check list for preventing money-laundering activities:

A customer maintains multiple accounts, transfer money among the
accounts and uses one account as a master account from which wire/
funds transfer originates or into which wire/funds transfer are received (a
customer deposits funds in several accounts, usually in amounts below a
specified threshold and the funds are then consolidated into one master
account and wired outside the country).
A customer regularly depositing or withdrawing large amounts by a wire
transfer to, from, or through countries that are known sources of narcotics
or where Bank secrecy laws facilitate laundering money.
A customer sends and receives wire transfers (from financial haven
countries) particularly if there is no apparent business reason for such
transfers and is not consistent with the customer's business or history.
A customer receiving many small incoming wire transfer of funds or deposits
of cheques and money orders, then orders large outgoing wire transfers
to another city or country.
A customer experiences increased wire activity when previously there
has been no regular wire activity.
Loan proceeds unexpectedly are wired or mailed to an offshore Bank or
third party.
A business customer uses or evidences or sudden increase in wire transfer to
send and receive large amounts of money, internationally and/or domestically
and such transfers are not consistent with the customer's history.
Deposits of currency or monetary instruments into the account of a
domestic trade or business, which in turn are quickly wire transferred
abroad or moved among other accounts for no particular business purpose.
Sending or receiving frequent or large volumes of wire transfers to and
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from offshore institutions.

Instructing the Bank to transfer funds abroad and to expect an equal
incoming wire transfer from other sources.
Wiring cash or proceeds of a cash deposit to another country without
changing the form of the currency
Receiving wire transfers and immediately purchasing monetary instruments
prepared for payment to a third party.
Periodic wire transfers from a person's account/s to Bank haven countries.
A customer pays for a large (international or domestic) wire transfers
using multiple monetary instruments drawn on several financial institutions.
A customer or a non-customer receives incoming or makes outgoing wire

transfers involving currency amounts just below a specified threshold, or
that involve numerous Bank or travelers cheques
A customer or a non customer receives incoming wire transfers from the

Bank to 'Pay upon proper identification' or to convert the funds to bankers'
cheques and mail them to the customer or non-customer, when
The amount is very large (say over Rs.10 lakhs)
The amount is just under a specified threshold (to be decided by the

Bank based on local regulations, if any)
The funds come from a foreign country or
Such transactions occur repeatedly.
A customer or a non-customer arranges large wire transfers out of the country

which are paid for by multiple Bankers' cheques (just under a specified threshold)
A Non-customer sends numerous wire transfers using currency amounts just
below a specified threshold limit.
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Grounds of suspicion reported in STRs

(Extracted from the Annual Report of Financial Intelligence Unit -India (FIU-
IND) for the year 2007-08)
Banking Companies
No. Suspicion Summary of detection and review
1 False Identity Identification documents were found to be

forged during customer verification process. The
account holder was not traceable
2 Wrong Address Welcome pack was received back as the person

was not staying at the given address or address
details given by the account holder were found
to be false. The account holder was not traceable
3 Doubt over the The customer not aware of transactions in the

real beneficiary account. Transactions were inconsistent with
of the account customer's profile.
4 Account of persons The customer was reported in media for

under investigation being under investigation.
5 Account of Name of the account holder and additional

wanted criminal criteria (Date of birth / Father's name / Nationality)
were same as a person on the watch list of UN,
Interpol etc.
6 Account used for Complaints of cyber crime were received against

cyber crime a customer. No valid explanation for the
transactions by account holder.
7 Account used for Complaints were received against a bank account

lottery fraud used for receiving money from the victims.
Deposits at multiple locations followed by
immediate cash withdrawals using ATMs. No
valid explanation provided by the account holder.
8 Doubtful activity Cash deposited in a bank account at different
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of a customer from cities on the same day. The account account

high risk country holder a citizen of a high risk country with
known cases of drug trafficking.
9 Doubtful Large number of accounts involving common

investment in IPO introducer or authorized signatory. A c c o u n t s
used for multiple investments in IPOs of various
companies.
10 Unexplained Large number of related accounts with substantial

transfers between inter-account transactions without any economic
multiple accounts rationale.
11 Unexplained Sudden spurt in activity of dormant account.

activity in dormant The customer could not provide satisfactory
accounts explanation for the transactions.
12 Unexplained Transactions in account inconsistent with what

activity in account would be expected from declared business. The
inconsistent with the customer could not provide satisfactory
declared business explanation.
13 Unexplained large Large value transactions in an account which

value transactions usually has small value transactions. No valid
inconsistent with explanation provided by the account holder.
client's apparent
financial standing
14 Doubtful source of Credit card topped up by substantial cash first

payment for credit and then used for incurring expenses. Cumulative
card purchases payment during the year was beyond known
sources of income.
15 Suspicious use of Frequent cash deposits in the account followed

ATM card by ATM withdrawals at different locations. No
valid explation.
16 Doubtful use of Safe deposit locker operated frequently though

safe deposit locker the financial status of client
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17 Doubtful source Frequent cash transactions of value just under

of cash deposited the reporting threshold. Cash transactions split
in bank account across accounts to avoid reporting. No valid
explanation provided.
18 Suspicious cash Large value cheques deposited followed by

withdrawals from immediate cash withdrawals.
bank account
19 Doubtful source Deposit of series of demand drafts purchased from

of foreign inward Exchange House abroad. Sudden deposits in
transfers in bank dormant account immediately followed by
account withdrawals.
20 Doubtful remitter Name and other details of the remitter

of foreign matches with a person on watch list.
remittances
21 Doubtful beneficiary Name and other details of the beneficiary

of foreign matches with a person on watch list.
remittances
22 Doubtful utilizations Foreign remittance being withdrawn in cash

of foreign immediately. No valid explanation.
remittances
23 Misappropriation Reports of misappropriation of funds. Substantial

of funds cash withdrawals in account of a charitable
organizations.
Financial Institutions
24 Doubtful source Substantial premium paid by cash/demand
of insurance draft in premium multiple insurance policies
without valid explanation.
Substantial premium paid by multiple
demand drafts of amounts below Rs.50,000.
Insurance premium much beyond declared
sources of income.
25 Doubtful source Substantial amount paid in cash / demand draft
of loan foreclosure for foreclosure of loan account. No valid
explanation provided.
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26 Doubtful source Inward foreign remittance received from a non

of the inward relative. No valid explanation provided by the
foreign remittances beneficiary.
27 Suspicious Splitting of inward foreign remittances to collect
inward foreign funds in cash in an apparent attempt to avoid
remittances fund trail.
28 Doubtful beneficiary Doubtful credentials of the beneficiary. No
of foreign remittances valid explanation for the remittance provided.
29 Doubtful purchase Substantial foreign exchange purchased in cash
of foreign exchange or demand draft. No valid explanation provided.
by a customer
30 Doubtful sale of Substantial foreign exchange sold without any
foreign exchange valid explanation.
Intermediaries
31 Doubtful source Substantial investment in multiple folios in short
of investment in span. Form 60/61 provided for substantial
mutual funds investment. No valid explanation provided.
32 Doubtful ownership Large investment in mutual fund using third
of investment in party cheques. No valid explanation provided.
mutual funds
33 Suspicious off Off-market transfer of shares from multiple demat
market accounts to one demat account. No valid
transactions in explanation provided. Suspected share price
demat accounts manipulation by bulk off-market transactions.
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Annexure E
Anti-Money laundering - Case Studies of Suspicious Activities

(Useful For Training Purposes)
Case Study 1
Mercury Leather Impex Pvt Ltd. deals in manufacture and export of rexin goods,
as per the documents provided. Transactions in the account were normal with
no inward or outward remittances. Customer receives an inward remittance of
INR 5.5m and issues cheques for smaller amounts to various persons. Customer
explains the transaction as proceeds of an export of wrist watches to Dubai. No
proof shown regarding trading in wrist watches and no explanation given for the
pay outs. Unusual transaction. Activity not in line with the known business/
source of funds - an apt case for raising a SAR.
Key Message
Continuously look out for transactions not in line with the customer's known
business activity.
Case Study 2
ABC Tours & Travels is a customer. Manager of this company introduced a person
for opening a current account. AR, the person introduced claims to have business
in Canada and intending to start property business in the country. KS, the Asstt.
Manager approves opening of the account on the basis of National Identity Card
and Certificate of Registration of business issued by govt. Within a few days of
opening of account, address changed. Initial address same as that of ABC Tours
& Travels. Within a month of opening of account, 4 remittances from Canada
totaling TBD 21M (USD 210K) received in the account. Followed by cash
withdrawals. Most of the transactions were approved and/or were in the knowledge
of the Asstt Branch Manager and the Branch Manager. Subsequent information
revealed that the money was proceeds of a fraud perpetrated on the remitting
bank. The owner of ABC Tours & Travels was arrested a few years back for
suspected association with a terrorist group operating in the country. He was let
off without framing any charges. This fact was known to the branch personnel.
Inadequate KYC information about the new business. No enquiries/ verification
regarding the claim of business in Canada. Large inward remittances in newly
opened account followed by immediate withdrawals in cash - clear indicators to
85
raise suspicion. Change of address soon after opening account, another indicator
for suspicion. Above indicators coupled with the information about the suspected
involvement of the owner of ABC Travels & Tours Ltd. with a terrorist organisation
should have raised suspicion at some stage.
Key Message
Do not let your judgment be influenced by extraneous matters like the introduction
by a known person or tall claims of business activities else where. Always look
for evidence to support the claims.
Case Study 3
RD Group, a well known group in city KK has non-borrowal relationship with the
bank. Operated three main accounts, one a private limited co. and two partnership
firms. Mr. RD is MD in the pvt. Ltd. co. and partner in others. Around 15 other
accounts of the group where about 10 persons, believed to be employees of the
group, operated the accounts as proprietors or partners in various combinations.
Large cash deposits and very frequent inter-account transfers. I.T. made enquiries
about operations in some of the accounts. During verification, it was found that
addresses in some of the accounts were non-existent. Group explained that
they sell goods to retailers and that generate cash and they are also in real
estate business. Multiple accounts are maintained for efficient tax management.
Since the transactions lacked transparency and verifications were negative,
decided to exit relationship. Some of the existing accounts in the group were not
KYC compliant. It was known to the staff in KK that all the 15 odd accounts were
being operated as a group. They should have questioned the necessity of all
these accounts and the transactions going through these accounts. SARs should
have been raised, if proper explanation was not forthcoming on the transactions.
Key Message
Do not compromise compliance for revenue. Apply caution in case of regular inter
group transfers with no apparent economic sense.
Case Study 4
Between May 2004 and October 2004 MA opens 12 accounts, seven individual
accounts and 5 business accounts (MA as proprietor). Transactions large deposit
of cash and withdrawals through ATMs or by cheque. Multiple accounts caused
suspicion and SAR filed by one branch in November, 2004. On 2/12/04, BDD 2.8M
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(USD 40K) deposited in to five of the accounts. The amount deposited came
from cash withdrawal from another individual's account (SRC). The whole amount
withdrawn in cash from all the accounts through various branches, the next day.
Subsequently, it came to light that the amount was transferred to SRC account
from a corporate account through fraudulent means. Lack of application of mind
and caution while multiple accounts were opened. Nobody made enough enquiries
to know the details of the business of the account holder or the necessity of his
maintaining so many accounts. TR sourcing multiple accounts without really
knowing the customers business and need for the accounts was not prudent.
While allowing the cash withdrawal from the account of SRC and depositing this
amount in the five accounts of MA, the concerned staff did not make enough
enquiries regarding the purpose of the transactions but merely accepted some
perfunctory explanations given. The officer allowing the above transaction should
have gone through the transaction details in SRC account ( a newly opened
account) and probed the large credit in to this account
Key Message
Always look for the real purpose while opening multiple accounts and be careful
about inter group transfers.
Case Study 5
GI was issued a credit card in January 2002 with credit limit INR 30,000. Some
small transactions and payment through third party cheque drawn in favour of the
card holder. Since April, 2004, payments through demand drafts issued in .Africa,
etc. drawn in favour of various persons with endorsements authorising payment to
GI's credit card account. Number of withdrawals in cash through ATMs and branches,
high value purchases from jewelers, electronic shops, etc. Account continuously
remained in credit. Fraud Control got alert due to high value transactions. Verified
with customer who confirmed the transactions. Complaint from one of the
beneficiaries of the draft led to the discovery that about 30 drafts for approx. INR
950,000 were fraudulently collected through the credit card account. Subsequent
investigation revealed airline staff pilfered drafts from mail bags. The drafts should
not have been credited in the account, as the endorsements were not valid.
Authorisation while making the verification should have gone through the pattern
of transactions in the account. There were indications such as large purchases
from Jewelers, electronic goods shop and cash withdrawals that would have given
suspicion about the transactions. The large credit balance and the odd figures of
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deposit should also have given doubt about the transactions.
Key Message
While investigating an unusual or suspicious activity, go into all aspects and get
satisfied before giving a go ahead. Do not simply rely on explanations / clarifications
unless there are grounds to believe them.
Case Study 6
Money Transfers
The police arrested suspect A, the leader of an Iranian drug trafficking group, for
possessing stimulants and other kinds of drugs. The subsequent investigation
revealed that the suspect had remitted part of his illegal proceeds abroad. A
total of US$450,000 was remitted via three banks to an account on behalf of
suspect as older brother B at the head office of an international bank in Dubai.
Transfers were made on five occasions during a two-month period in amounts
ranging from US$50,000 to US$150,000. Another individual, suspect C, actually
remitted the funds and later returned to Iran. On each occasion C took the funds
in cash to the bank, exchanged them for dollars, and then had the funds
transferred. Each of the transactions took about one hour to conduct, and the
stated purpose for the remittances was to cover "living expenses". Suspect A
was initially charged with violating provisions of the anti-narcotics trafficking
law. The money transfers revealed during the investigation led to additional
charges under the anti-money laundering law.
Key Message
This case represents a classic example of a simple money laundering scheme and
is also a good example of a case derived, not just from suspicious transaction
reporting, but also as a follow-up to traditional investigative activity.
Case Study 7
Exchange transaction relates to laundered drug money and diamond

smuggling.
A foreign exchange transaction of a European currency into US dollars for a

value of almost US$177,000 was reported to the FIU of an FATF member jurisdiction
(Country A). At the time of the transaction, the individual, of Asian origin, gave
the exchange office an address in another FATF country (Country B). This first
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transaction was soon followed by four more similar transactions. After several
weeks, the total had already attained US$618,000. After a break of six months,
the exchange transactions resumed. Over a four-month period, the intermediary
appeared with large amounts in pesetas to be converted into dollars. The total
amount of the transactions described in reports to the FIU amounted to more
than US$1.3mn.
The information obtained from law enforcement demonstrated that the individual
had no criminal record in Country A. Given that the case involved large amounts
for which there existed no apparently legitimate economic justification, the FIU
pursued the investigation. Several foreign FIU were queried. One of them was
able to provide useful information: the individual was known as a member of a
group of drug traffickers who performed the same type of transactions in the
country involved. Investigation of the members of this group was already in
progress in this latter country. Secondly, it appeared that the address provided
during the first contact with the financial institution was false. On the basis of
these elements, the FIU decided to turn over the case file to the prosecutorial
authority. The subsequent investigation showed that the individual had not been
acting alone. For a number of years she had played a dominant role in money
laundering transactions involving a total amount of around US$11.5mn.
The individual was arrested in the company of one of her accomplices and in
possession of a large sum in US dollars. She acknowledged the retail foreign
exchange transactions, as well as the illicit origin of the funds. According to her
account, they were derived from illegal diamond trafficking. She was sentenced
to four years in prison (two of which were suspended) and a fine of nearly
US$1mn. The funds seized were confiscated, as well as the amounts exchanged;
her accomplices were each sentenced to two years in prison (one of which was
suspended).
Key Message
This example clearly illustrates the importance of international co-operation and

the exchange of information between FIU and their foreign counterparts in the
detection of money laundering transactions. It also demonstrates the necessity
for financial institutions to continue sending suspicious transaction reports to
the FIU, even when they do not at first seem to produce an immediate response
from the authorities.
89
Case Study 8
Launderers recruit individuals for the use of their bank account.

An FIU received suspicious transaction reports from three financial institutions
concerning international fund transfers. Through police investigation, it was
discovered that several individuals were acting as money collectors for a cocaine
trafficking organisation. The job of these individuals was to identify and "recruit"
professionals already established in various trades and services who might be
amenable to earning some extra money by allowing their bank accounts to be
used in a laundering scheme. The professionals would place cash in their accounts
and then transfer the sum to accounts indicated by the money collectors.
The professionals who became involved in this activity were active in several
types of business, including travel agencies, and import/export in commodities
and computers. In return for their services, they received a commission on the
funds transferred through their accounts. The transfers out of the accounts
were justified by fictitious invoicing that corresponded to their particular business.
This investigation uncovered an organisation that was laundering the proceeds
of cocaine trafficking believed to be worth US$ 30 million. Several members of
the group were identified and tried in two countries.
Key Message
This scheme illustrates how criminals put additional measures into place further
to distance the money from the narcotics trafficking operation. Cash is collected
from the drug dealer; the collector passes the funds to the launderer; the
launderer then passes them to the recruited business professional, who then
transfers the funds abroad for further processing. The money continues to move,
and the trail becomes more complex. The use of professionals can establish a
'break' in the trail, and so thwart financial investigators.
Case Study 9
Use of bank safety deposit boxes
A law enforcement investigation centred on the suspicious behaviour of a bank
customer who appeared to be exchanging old, outdated banknotes for a new
series of banknotes. The suspect appeared to be storing the old banknotes in
one of the bank's safety deposit boxes.
The suspect received social security payments and had no other identifiable
90
legitimate income.
Further enquiries revealed that the suspect had an extensive criminal history
and had recently purchased a motor vehicle with a large amount of cash and
owned a number of high value real estate properties.
The investigation established that the suspect was involved in drug cultivation
in the houses that he had purchased using the proceeds of his drug trafficking
activities. The suspect was using the bank's safety deposit facilities to store
cash obtained from the sale of the illegal drugs and also to store jewellery
purchased with the same proceeds.
Key Message
This example illustrates that a complicated money laundering scheme is not

always necessary to integrate illegal proceeds back into the circulation.
Case Study 10
Use of a bureau de change and bank accounts under false names
A drug trafficking investigation established that cash collected from the sale of
drugs was taken to a bureau de change at the border, where large sums of
money in small denominations were exchanged into denominations of a foreign
currency. This money was then moved in bags of cash across the border and
abroad to purchase a further supply of drugs.
Further investigation identified a scheme in which illegally obtained funds were
deposited under a false name into a holding account within the bureau de change,
which was controlled by the money launderer. During a search of the premises, it
was also established that the bureau de change did not maintain detailed records
of cash transactions.
Three individuals were charged with money laundering in this investigation.
Key Message
Although the bureau de change had an obligation to identify customers and

maintain records, it did not do so. A money laundering operation was uncovered
through the police investigation; however, this example shows that, if preventive
measures are not enforced, laundering activity can continue, even in supposedly
regulated financial institutions.
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Case Study 11
Payments structured to avoid detection
Over a four year period, Mr. A and his uncle operated a money remittance service
known as Company S and conducted their business as an agent of a larger
money remitting business that was suspected of being used to finance terrorism.
Later, an investigation was initiated in relation to Company S based on a suspicious
transaction report.
The investigation showed that over the four year period, Mr. A's business had
received over US$4 million in cash from individuals wishing to transmit money to
various countries. When Mr. A's business received the cash from customers, it
was deposited into multiple accounts at various branches of banks in country X.
In order to avoid reporting requirements in place in Country X, Mr. A and others
always deposited the cash with the banks in sums of less than US$10,000,
sometimes making multiple deposits of less than US$10,000 in a single day.
Mr. A was charged and pleaded guilty to a conspiracy to "structure" currency

transactions in order to evade the financial reporting requirements.
Key Message
This case underlines the need to have mechanisms in place to monitor and link
transactions (especially cash deposits) made by the same individual or entity
through different branches of the same bank, or through different banks.
Case Study 12
Cross border cash
Three suspicious transaction reports were received, relating to a number of

transactions which were carried out at Danish banks, whereby large amounts of
money were deposited into accounts and then withdrawn shortly afterwards as
cash. The first report concerned an account held by customer X. Upon initial
investigation, the subjects of the reports (X, Y and Z) were not known in police
databases as being connected to drugs or any other criminal activity. However,
further investigation showed that X had imported more than three tonnes of
hashish into Denmark over a nine-year period. Y had assisted him on one occasion,
whilst Z had assisted in laundering the money.
Most of the money was transported by Z as cash from Denmark to Luxembourg
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where X and Z held 16 accounts at different banks, or to Spain and subsequently

Gibraltar, where they held 25 accounts. The receipts from the Danish banks for
the withdrawn money were used as documentation to prove the legal origin of
the money when the money was deposited into banks in Gibraltar and Luxembourg.
It turned out that sometimes the same receipt was used at several banks, so
that more cash could be deposited as "legal" than had actually been through the
Danish bank accounts.
X and Y were arrested, prosecuted and convicted for drug trafficking offences
and received sentences of six and two years imprisonment respectively. A
confiscation order for the equivalent of US$6mn was made against X. Z was
convicted of drug money laundering involving US$1.3mn, and was sentenced to
21 months' imprisonment.
Key Message
Financial institutions should not accept proof of deposit to a bank account as

being equivalent to proof of a legitimate origin. Carrying illegal proceeds as cash
across national borders remains an important method of money laundering.
Case Study 13
Bureaux de change
At the point when exchange offices became regulated, and it became subject to
obligations to prevent money laundering, one bureau ("The Counter") had been
doing business in a small town near the German border for a number of years.
The Counter often had a surplus of bank notes with a high denomination, and the
owner (Peter) knew that these notes were not popular and so exchanged them
into smaller denomination notes at a nearby bank. Prior to the new legislation
taking effect, persons acting on behalf of The Counter regularly exchanged
amounts in excess of the equivalent to US$50,000, but immediately after the
legislation took effect, the transactions were reduced to amounts between
US$15,000 and US$30,000 per transaction. The employees of the bank branch
soon noticed the dubious nature of the exchanges did not have any sound
economic reason, and the transactions were reported.
Peter had a record with the police relating to fencing and dealing in soft drugs,
and because of this he transferred the ownership of The Counter to a new owner
with no police record (Andre). Andre applied to register The Counter to the
93
Central Bank as an exchange office and was accepted on a temporary basis. The
financial intelligence unit consulted various police files and established that the
police had been observing this exchange office for some time. The suspect's
transactions were passed on to the crime squad in the town where The Counter
has its office, and it started an investigation. A few months later, the crime
squad arrested Andre, house searches are made, expensive objects and an
amount equivalent to more than US$250,000 in cash were seized. The records of
The Counter showed that many transactions were kept out of its official books
and records. For example, over a period of thirteen months The Counter changed
the equivalent of more than US$50mn at a foreign bank without registering these
exchange transactions in its official books and records. The investigation showed
that The Counter and its owners were working with a group of drug traffickers,
who used the exchange office to launder their proceeds, and this formed a
substantial part of the turnover of the business.
The drug traffickers were prosecuted and convicted and are now serving long
prison sentences. Andre was sentenced to six years in prison for laundering the
proceeds of crime and forgery. Peter moved abroad with his family. A separate
legal action is still pending to take away Andre's profits, the confiscated objects
and the cash found. The Counter has been closed and its registration as an
exchange office rescinded.
Key Message
This case shows the need for banks and large, legitimate bureaux de change to
pay attention to their business relations with smaller bureaux, particularly when
supplying or exchanging currency with them.
Case Study 14
Alternative remittance systems use of retail outlets
This case involved a number of overseas remittance services. Common elements

of these services were that they operated from retail shops selling clothes or
fabrics and arranged the transfer of money to Country A (for a fee).
The largest remittance service among those investigated, 'Servicio Uno', was an
incorporated company and had an annual turnover in excess of US$3.3mn. It
accepted money from individual customers and also received funds from smaller
remittance services locally and regionally. These smaller services channelled
94
money through Servicio Uno because it had an extensive family-based delivery

network in Country A.
The general method used by Servicio Uno was as follows-
Cash was received from customers and sub-agents; a proportion of these funds
was deposited in a bank, and some was kept on hand.
Funds were transferred to Country A in two ways: either by telegraphic transfer

purchased with cash or cheque; or by sending money to a trading company,
'Trans-Expedición SA', in Country B. This second company did business in Country
A and had associates there that owed it money. Once Trans-Expedición received
the money in Country B from Servicio Uno, it advised its debtors in Country A to
pay a specified amount direct to another remittance business, Remesas-X, in
Country A.
Twice weekly, Servicio Uno faxed a list of required deliveries to a company it

owned and operated in Country A, including details of the sender, the recipient
and their address, and the amount and type of currency or gold bars to be
delivered. A fee of 5-10% was charged by Servicio Uno.
There was also evidence of substantial amounts of money flowing from Country
A back to Servicio Uno. A fax was sent from Country A to Servicio Uno instructing
it to provide a specific amount of money to an individual in Servicio Unos country
or to pay the funds into a particular bank account there. No funds were actually
transferred from Country A. Instead, a method was used whereby the remittance
services at either end of the operation paid off each others liability with their
own assets.
Investigations revealed that several legitimate businesses in Servicio Uno's country

had also repatriated funds to Country A using this method. They also revealed
that a previously convicted money launderer had on at least one occasion
transferred US$60,000 to Country A through Servicio Uno. Additionally, one sub-
agent of Servicio Uno transferred funds on behalf of two active drug traffickers.
Key Message
This is a classic example of an alternative remittance system. The difficulties

that an investigative agency might have if it were to detect part of the scheme
would be the ability to determine the links to and from the third country. The
process would be further complicated by the high volume of legitimate business
95
using this channel to move funds, and by the indirect settlement methods
sometimes employed.
Case Study 15
Alternative remittance systems laundering cash from the sale of narcotics
Cash from the sale of narcotics was brought to shops and bureaux de change
(controlled by a single organisation) in a town located in an overseas territory of
Country P. The shops provided specially validated coupons in return for the
deposits. These coupons were then used as bearer instruments that permitted
the holder to obtain funds to purchase more drugs or to make investments. The
controlling organisation also owned several real estate agencies.
The laundering network converted currency from other countries through middlemen
that were paid a commission for the use of their identities in the depositing of
these currencies at financial institutions. An employee at one of these institutions
was also involved in the scheme. Other funds processed through this system
originated in the local black market in consumer goods intended for smuggling
operations into the neighbouring jurisdiction.
The law enforcement investigation of this case brought about charges against
73 persons, and the seizure of 10 tonnes of narcotics, 11 boats and US$4.7mn in
foreign currency. Suspicious transactions submitted by local financial institutions
during the scheme reported transactions totalling more than US$400mn.
Key Message
This scheme is yet another example of an alternative remittance scheme, but

one in which coupons were issued to evidence the deposit of cash proceeds.
Case Study 16
Alternative remittance systems - supported by import/export activity
A national from Country S was arrested in Country M on suspicion of unlicensed

banking. The investigation revealed that this subject had been running an informal
fund transfer system (hawala) for almost four years. Three other individuals who
had already left country M were also identified as associates.
Balances were settled between countries M and S through import/export

transactions relating to car parts. A company exported car parts from Country M
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to an importer in Country S with a specific charge. The importer from country S

paid 50% of the specific charge directly to the exporter in country M and the
hawala operators paid the other half. In return, the importer in Country S paid 50
% of the price to the groups account in country S to settle the balance. The
payment was made in local currency and at a rate advantageous to the receivers,
so that the group was certain to make a given profit from the transaction.
Key Message
Had the exporter's bank been alert to the source of funds for payment of the
exported goods, suspicions would have been raised that payment was being
made from two different sources in respect of one transaction.
Case Study 17
Underground banking activity revealed through large turnover in small

business
Investigations were triggered by several reports of suspected money laundering

submitted by various banks over a period of three years in respect of a national
of Country N born in south Asia. Although the suspect ran a small business with
an annual turnover of around US$150,000, between US$1.7mn and 3.5 mn per
year flowed through his private accounts.
Investigations revealed that the suspects business was the headquarters in

Country N of an international underground bank with branches in several Central
Asian and European countries and a chain of 14 branches in Country N. In
addition to being used by Asian nationals to transfer small amounts to support
their families back home - a traditional use of the hawala system - this illegal
banking system was used to transfer considerable sums for human trafficking
into Europe.
The suspect and the manager of one branch were arrested. A number of properties
were searched throughout Country N. A forfeiture notice amounting to
approximately US$350,000 was issued against the suspect and around US$140,000
in cash was confiscated in preparation for forfeiture. The suspect and the manager
were sentenced for human trafficking and the accused voluntarily renounced his
claim to the confiscated cash.
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Key Message
This is a classic case where KYC information relating to the size of the business
activities of the account holder demonstrated that the legitimate business activity
could not possibly generate the funds available to the owner of the business.
Case Study 18
The derivatives market: a typology
In the following example of how funds could be laundered using the derivatives
market, the broker must be willing to allocate genuinely losing trades to the
account in which criminal proceeds are deposited. Instead of relying on misleading
or false documentation, the broker allocates genuine loss-making documentation
to the detriment of the 'dirty money' account holder.
As an example, a broker uses two accounts, one called 'A' into which the client
regularly deposits money which needs laundering, and one called 'B' which is
intended to receive the laundered funds. The broker enters the trading market
and 'goes long' (purchases) 100 derivative contracts of a commodity, trading at
an offer price of $85.02, with a tick size of $25. At the same time he 'goes short'
(sells) 100 contracts of the same commodity at the bid price of $85.00. At that
moment, he has two legitimate contracts which have been cleared through the
floor of the exchange.
Later in the trading day, the contract price has altered to $84.72 bid and $84.74
offered. The broker returns to the market, closing both open positions at the
prevailing prices. Now, the broker, in his own books assigns the original purchase
at $85.02 and the subsequent sale at $84.72 to account A. The percentage
difference between the two prices is 30 points or ticks (the difference between
$84.72 and $85.02). To calculate the loss on this contract, the tick size of $25 is
multiplied by the number of contracts, 100, multiplied by the price movement,
30. Thus: $25 x 100 x 30 = $75,000 (loss).
The other trades are allocated to the B account, which following the same
calculation theory results in a profit as follows: $25 x 100 x 26 = $65,000
(profit). The account containing the money to be laundered has just paid out
$75,000 for the privilege of receiving a profit of $65,000 on the other side. In
other words, the launderer has paid $10,000 for the privilege of successfully
laundering $75,000. Such a sum is well within the premium professional launderers
are prepared to pay for the privilege of cleaning up such money. As a transaction,
it is perfectly lawful from the point of view of the broker. He has not taken the
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risk of creating false documentation, which could conceivably be discovered,

and everything has been done in full sight of the market.
Case Study 19
Criminal cash proceeds placed through margin trading
This case involved the theft of approximately US$384mn from a bank in country
T over a ten-year period. Initial investigations revealed that the money was sent
to country G and laundered through a serious of 550 bank accounts in the names
of 80 companies. Much of the money was invested in the property and stock
markets in Country G and ultimately used at will by the four principal thieves. At
one time during the fraud, one of the thieves was reported as being the largest
margin stock investor in the Country G market, with a huge turnover in stocks
and shares through some of Country G companies, as well as enjoying dividends
from long term investments. Initial investigations appear to indicate that the
majority of funds stolen in Country T occurred towards the end of the ten-year
period, when a regional economic downturn adversely affected the local property
and stock markets.
No disclosures were ever made by stockbrokers about the dealings of these

companies. Four people were charged with money laundering and warrants were
issued for a number of others.
Case Study 20
Shell corporations
A drug trafficker used his proceeds to purchase a property, in respect of which

part was paid in cash and the remainder was obtained through a mortgage. He
then sold the property to a shell corporation, which he controlled, for a nominal
sum. The corporation sold the property to an innocent third party for the original
purchase price. By this means the drug trafficker concealed his proceeds of crime
in a shell corporation, and thereby attempted to disguise the origin of the original
purchase funds.
The accused pleaded guilty and an order of forfeiture was granted. The property,
which was part of the money laundering scheme, was disposed of by the
authorities.
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Key Message
This case illustrates the need to trace the ownership history of a property
carefully, in order to identify possible links between owners, and any suspicious
transfers that may indicate attempts to co-mingle assets. There is also a need
for law enforcement agencies to be familiar with the general rules and practice
regarding the purchase of property in relevant jurisdictions, and the need to be
aware that transfers involving nominal amounts can be easily structured in some
jurisdictions.
Case Study 21
Shell companies and Corporate Service Providers
During a two-year period, financial institutions in a European country made suspicious
transaction reports to the relevant financial intelligence unit. The reports identified
large cash deposits made to the banks, which were exchanged for bank drafts
made payable to a shell corporation based and operated from an Asian jurisdiction.
The reports identified transfers totally approximately US$1.6mn to an account
held by the shell corporation at a financial institution in the Asian jurisdiction.
At the same time, police had been investigating a group in that country which
was involved in importing drugs. The following year, police arrested several persons
in the group, including the principal, who controlled the company in the Asian
jurisdiction. They were charged with conspiring to import a large amount of
cannabis. A financial investigation showed that the principal had made sizeable
profits, and a large percentage of this was traced and restrained. A total of
approximately US$2mn was sent from the European country to the Asian
jurisdiction, and subsequently transferred back to bank accounts in Europe,
where it was restrained.
Two methods were used to launder the money. The principal purchased a shell
company in the Asian jurisdiction, which was operated there, by a secretarial
company on his instruction. The shell company opened a bank account, which
was used to receive cashiers' orders and bank drafts, which had been purchased
for, cash in the country of origin. The principal was also assisted by another
person who controlled (through the same secretarial company) several companies,
which were operated for both legitimate reasons and otherwise. This person
laundered part of the proceeds by selling the funds on to several other
jurisdictions, and used non face-to-face banking (computer instructions from
the original country) to do so.
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Seven persons including the principal were put on trial in the European country
on charges of drug trafficking, and the principal and three other persons faced
money laundering charges.
Key Message
This example shows how attractive and easy it is for criminals (even if not part
of international organised crime) to use corporate entities in other jurisdictions,
and to transfer illegal proceeds through several other jurisdictions in the hope of
disguising the origin of the money.
It demonstrates the ease with which company incorporation services can be
obtained, and shows that many of the companies, which sell shell companies, as
well as the secretarial companies, which operate them, are not likely to be
concerned about the purpose for which the shell company is used.
It highlights the need for financial institutions to have a system, which identifies
suspicious transactions not just at the front counter, but also for non face-to-
face transactions, such as occurred in this case.
It can take some time to conduct international financial investigations and to
trace the proceeds of crime transferred through several jurisdictions, and there
is a consequent risk that, during the investigation, funds will be dissipated.
Case Study 22
Front companies, insurance and bureaux de change
An FIU received a suspicious transaction report from a life assurance company.

The report referred to Mr. H, born and resident in a Latin American country, as
having recently taken out two single premium life insurance policies for a total
amount of US$702,800. Subsequent information provided to the FIU indicated
that the policies' premiums had been paid with two personal cheques made out
by a third party and drawn against a major bank. The third party, Mr. K, was also
resident in the same Latin American country, although he was not a national of
that country. Further checks at Mr. K's bank revealed that both he and Mr. H had
signature authority on two business accounts, Sam Ltd and Dim Ltd.
Examination of the accounts showed that transactions, especially in Mr. K's

account, were carried out on behalf of Mr. H. Thus, the account had received
funds from abroad and had also been used for other financial products besides
the life insurance policies. Indeed, ten cheques in US dollars, totalling
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US$1,054,200, drawn against American banks and issued by two bureaux de

change operating out of the Latin American country where the two men resided,
had been deposited into Mr. Ks account.
This activity appeared to show that the funds had been used to pay the insurance
premiums on Mr. H's life and to acquire stakes in investment funds (also for Mr. H)
amounting to another US$210,840. There were also other related transactions in
the accounts of the two companies and Mr. H's personal account. Cash or
cheque transactions for amounts between US$14,000 and US$70,000 were among
the related transactions. In one instance, a cheque was drawn on the Sam Ltd
account for US$63,300 on the day following the deposit of US$70,280 in cheques
into Mr. Ks account.
Checks into the backgrounds of Mr. H and Mr. K revealed that Mr. H was suspected
of being involved in cocaine trafficking in Latin America. Mr. K had some minor
violations (uttering bad cheques etc.); however, he had no serious criminal
background. The business activities and backgrounds of Sam Ltd and Dim Ltd
were looked at. In each instance, the companies had been incorporated with a
stock capital of US$36,400 in which Mr. H and Mr. K had a 50% interest and were
joint directors. Queries made at the "Balance of Payments Office" as to foreign
collection and payment, revealed a total absence of operations in the previous
two financial years.
It appeared that Mr. K was being used as the front man for Mr. H's efforts to
move funds out of his country of residence. For greater security of the scheme,
firms under their control, that did not perform any corporate or commercial
activity, were established. Mr. H received the funds deposited into Mr. K's account
through the single premium insurance policies and shares in investment funds
that had been paid for by that account, as well as through indirect income from
the companies mentioned. In this case, the FIU believed there to be sufficient
signs of money laundering and therefore passed the matter on to prosecutorial
authorities.
Key Message
This operation shows that payment instruments or third party involvement, having
no apparent economic relationship to the transaction, are often a key indicator
of suspicious activity. It is worth noting that, so as to minimise suspicion, Mr K
was obviously selected based on his lack of prior criminal record and his nationality.
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The activities of the front companies were also conducted in such a way as to
give the appearance of transactions from corporate activities. The case also
highlights the potential value of suspicious transaction reporting by insurance
companies.
Case Study 23
Front companies
An FIU in Country B received a report of a series of suspicious transactions

involving the bank accounts of a West African citizen and his businesses, which
specialised in industrial fishing. These accounts were opened in banks located in
Country B and consisted primarily of money changing operations. The businessman
also owned several residences in his home country and in the capital region of
Country B. The companies that he jointly managed all had the same address in
his home country.
The personal account of the West African businessman received a number of

transfers from accounts in another European country and in his home country
(over US$2 million in a two-year period). The companies' accounts received
transfers from several business entities based in Europe, ostensibly linked to
fishing related activities (over US$7 million over a three-year period). The transfers
out of the account (estimated at nearly US$4 million over the same period) were
made to various companies whose business was (according to official records)
connected with maritime activity and to other individuals.
The FIU analysis showed that the income of the West African companies concerned
was grossly disproportionate to reported sales. In fact, the account transactions
seemed to have little to do with industrial fishing (i.e. foreign currency sales,
transfers from the bank accounts of European residents, transfers between the
personal account of the West African businessman and his businesses, transfers
between these businesses and those of Europe-based partners).
Furthermore, according to additional information received by the FIU, one of the

business partners of the West African businessman, a co-manager of one of the
companies, was suspected of being involved in several financial offences in Italy.
This individual reportedly had close associations with two Italian organised crime
figures, and his Italian businesses have become the target of an investigation
into money laundering in that country. Still another business partner of the West
African businessman appeared also to be involved in financial and fiscal offences.
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Key Message
Given the unusual account transactions and the lack of a clear economic purpose
or connection for some of the business activities, the operations described in
this example very likely constitute a money laundering scheme to conceal the
illegal sources of proceeds derived from various criminal activities. This case
gives further support to the need for analysis of information from a variety of
sources (suspicious transaction reports, financial institutions, company registries,
police records etc.) in order to gain a full picture of a complex laundering scheme.
Case Study 24
Silver and gold smuggling
Cross-jurisdictional investigations permitted the detection of a silver and gold

smuggling system aimed at VAT evasion and the laundering of the illicit profits of
several local, regional and global criminal organisations. The banking and financial
systems were used to process large-value transactions supporting the fictitious
payment of precious metals supplies. The laundering was primarily undertaken
through:
Creation of a network of companies, including financial, throughout the region,

with the task of "filtering" the money. Using criminal proceeds derived from
cigarette smuggling, drug trafficking, illegal arms trafficking and the smuggling of
oil products, to purchase silver and gold, which was in turn smuggled into the
markets of Country J and other European countries. Reinvestment of the profits
of the illicit trafficking of silver into smuggling activities. Use of false invoices in
respect of the importation of precious metals which never actually reached
country J. Use of bearer savings deposit passbooks and of false Treasury
certificates of deposit to be offered as guarantees to the banks for the purchase
of precious metals.
Fifteen suspects were arrested for criminal conspiracy aimed at money laundering
and smuggling, and four suspects were charged with money laundering offences.
The total amount of funds involved was US$101mn with the consequent evasion
of export duties amounting to US$72mn, VAT evasion totalling US$37mn and the
laundering of over US$31mn.
Key Message
Enquiries should always be undertaken to ascertain the purpose and beneficial
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ownership of companies that are formed in offshore jurisdictions with lax corporate
registration requirements. The source of the economic activity that created the
funds for transfer should be established. Where the sale of precious metals is
involved, checks should be made that the goods exist and that excise duty and
VAT has been paid.
Case Study 25
Laundering the proceeds of fraud through the diamond market
A known criminal who had benefited financially from a fraud in an overseas

jurisdiction attempted to transfer US$8.2mn to a jeweler in Country A with a
view to purchasing precious stones. The bankers in Country A had already submitted
various suspicion reports in relation to the individual, and on this occasion the
bank made a further suspicion report and took the commercial decision to freeze
the account. On investigation, it was determined that the objective of purchasing
the precious stones had been an attempt to launder the proceeds of the fraud.
Key Message
Suspicious transactions reports will not always bring immediate results and where
a series of suspicion reports has been made justifying significant concern, it may
be necessary to freeze the account voluntarily, pending an investigation.
Confidential discussions with the local FIU will normally confirm when a criminal
who is known to the FIU is involved.
Case Study 26
Terrorists collect funds from lawful sources
A number of individuals known to belong to religious extremist groups established

in the south-east of Country C (a FATF country) convinced wealthy foreign
nationals, living for unspecified reasons in Country C, to finance the construction
of a place of worship. These wealthy individuals were suspected of assisting in
the concealment of part of the activities of a terrorist group.
It was later established that S, a businessman in the building sector, had bought
the building intended to house the place of worship and had renovated it using
funds from one of his companies. He then transferred the ownership of this
building, for a large profit, to Group Y belonging to the wealthy foreigners
mentioned above. This place of worship, intended for the local community, in
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fact also served as a place to lodge clandestine "travellers" from extremist

circles and to collect funds.
Soon after the work was completed, it was noticed that the place of worship
was receiving large donations (millions of dollars) from other wealthy foreign
businessmen. Moreover, a Group Y worker was said to have convinced his employers
that a "foundation" would be more suitable for collecting and using large funds
without attracting the attention of the local authorities. A foundation was thus
reportedly established for this purpose.
It was also believed that part of S's activities in heading a multipurpose

international financial network (for which investments allegedly stood at
US$53mn for Country C in one particular year alone) was to provide support
to a terrorist network. S had made a number of trips to Afghanistan and
the United States. Amongst his assets were several companies registered
in Country C and elsewhere. One of these companies, located in the capital
of Country C, was allegedly a platform for collecting funds. S also purchased
several buildings in the south of Country C with the potential collusion of a
notary and a financial institution.
When the authorities of Country C blocked a property transaction on the basis of

the foreign investment regulations, the financial institutions director stepped in
to support his clients transaction and the notary presented a purchase document
for the building, thus ensuring that the relevant authorisation was delivered. The
company's funds held by the bank were then transferred to another account in a
bank in an NCCT jurisdiction to conceal their origin when they were ultimately
used in Country C.
Even though a formal link was not able to be incontrovertibly established between
the (more or less) legal activities of the various parties in Country C and abroad
and the financing of terrorist activities carried out under the authority of a
specific terrorist network, the investigators suspect that at least part of the
proceeds from these activities have been used for this purpose.
Key Message
The scale and complexity of the corporate and business arrangements, and the
amounts involved, should not deter proper checks and monitoring.
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Case Study 27
Simple transactions found to be suspect
The financial intelligence unit (FIU) of Country E forwarded to the judicial authorities
ten files in relation to money laundering derived from terrorism. In general, the files
dealt with instances in which simple operations had been performed (retail foreign
exchange operations and international transfer of funds), revealing links with other
countries. Some of the customers had criminal records, particularly for trafficking
in narcotics and weapons, and were linked with foreign terrorist groups.
In one of the files submitted by the FIU in relation with terrorism, the customer
was the holder of a current account and of a savings account with the reporting
financial institution. Moreover, he purchased securities, and a single premium life
insurance contract, in the same institution. He executed several transfers from
his current account to beneficiaries in different countries. The suspicions of the
bank arose from the fact that a name similar to that of the customer appeared
on the consolidated list of persons and/or entities included in the UN Security
Council Committee on Afghanistan (S/RES/1333(2000)) and Regulation 1354/
2001 of the European Commission).
The suspicion of the bank was strengthened by the fact that the customer had
been progressively withdrawing funds he held at this bank since the end of April
2001. He successively cleared out his savings account, sold the securities he
had purchased (before their maturity date), surrendered his life insurance policy
and finally transferred his remaining funds to the European country where he
resided. The last operation he performed occurred at the end of August 2001,
that is, about two weeks before the attacks in the United States on September
11th 2001.
The bank has had no more contact with this customer since August 2001.
Key Message
Timely identification and reporting of suspicions matters by firms is important,

even if the authorities are not able to react effectively and in good time.
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Case Study 28
Charity used to finance terrorism
One UK investigation arose as a consequence of a suspicious transaction report.

A bank disclosed that an individual who allegedly was earning a salary of £12,000
per annum had a turnover in the account of £250,000. A financial investigation
revealed that the individual did not exist and that the account, fraudulently
obtained, was linked to a Middle East charity. A fraud was being perpetrated for
the purpose of raising funds for a terrorist organisation. Donations were paid into
an account and the additional charitable payment was being claimed back from
the government. The donation was then returned to the donor. This fraud resulted
in over £800,000 being fraudulently obtained.
Key Message
Even UK charities can be used to raise funds for terrorist purposes.
Case Study 29
Correspondent banking, wire transfers facilitate transactions by shell

companies
Company Q, a suspected shell company registered in Country F (a FATF member

country), was reportedly involved in the transportation of oil and other raw materials
(metal, timber, gas). Company Q was a customer of a bank in Country G that
maintained a correspondent account at a Country F bank. The Company received
several wire transfers from another, rather vague company located offshore. At
the request of the bank in Country F, the Country G bank asked Company Q to
provide copies of a business contract that would justify the financial activity. The
Country F bank submitted an STR in respect of these transactions.
Rather than providing the requested documents to the bank, Company Q simply
closed its account.
Key Message
Sometimes there is a need to look through the correspondent. Due diligence can
reveal situations shown by this case that warrant reporting to the relevant authorities.
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Case Study 30
Private banker helps conceal suspect's illegal proceeds
This example relates to a bank whose services included institutional brokering,

retail brokering, private client services, global equity derivatives, securities, futures
and margin lending. Clients of the bank could enter into a private client agreement,
which enabled the client to perform transactions by telephone or facsimile.
During the course of an investigation, difficulty was encountered in matching
money coming into the suspects trust account with funds sent out of the country
by a co-offender. Upon reconstructing the money trail through bank deposit and
withdrawal records, it was found that the co-offender had sent an equivalent
amount of funds out of the country through international telegraphic transfers
but the transfer documentation did not record the co-offender as the ordering
customer - who was shown as the merchant bank.
This provided a way to disguise the remittance of funds offshore.
Key Message
Inadequate transaction records can preclude "matching up" of connected

transactions that, when matched, can lead to suspicion.
Case Study 31
A bank observes large value cash transactions executed through its accounts
almost on a daily basis by a trading concern, X Enterprises. The deposits are
always below the reporting threshold of Rs. 10 lakh. These deposits are done
using multiple tellers at the same branch. The value of each cash transaction
hovers between Rs. 8 to 9.5 lakhs. The customer is in the business of garments.
The pattern observed is deposit of cash followed by simultaneous transfer to
other accounts within the bank or issue of cheques. On investigation into the
profile of other accounts it is observed that these accounts are of entities of
varied industries like chemicals, plastic, metals, food grains & packaging. The
turnover in each of these accounts amounts to crores of Rupees. On scrutiny it
is observed that many of these entities are related by virtue of same partners,
same address, same telephone. They have different PAN numbers. Most of these
entities are in near vicinity of each other. These entities have availed no credit
facilities from the banks.
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The Branch manager decides to visit some of these entities and discretely finds
that none of these entities have infrastructure to support the activities as per
their profile. Many are not open during business hours. It is found that these
entities are into business of converting cash into cheques and vice versa for
persons across a spectrum of businesses. This type of business is colloquially
called 'entry business'. An STR is raised for these accounts.
Key Message:
This is a classic example of money laundering in Indian Context. Enhanced Due
diligence helped reveal that transactions are not in line with the profile of the
customer and indeed suspicious.
Case Study 32
The branch manager comes across a large value transaction for purchase of
property in Mr. A's savings account worth Rs. 30 crores in month of October. A
closer analysis of the account statement for last 3 months reveals about 50
transfer transactions from 10 different accounts in names of customers having
similar or different family names. On further perusing through account statements
of these customers, it is observed that cash has been deposited therein and this
is followed by transfer to Mr. A's Account. The Branch manager also finds that all
these accounts were opened on same day. An STR is filed for these accounts.
Key Message:
While analyzing the trigger for an unusual transaction one should examine
transactions, which precede as well as following the unusual transactions. This
may enable the Bank to confirm suspicion.
Case Study 33
Mr. B is a wealthy customer staying in a plush locality New Delhi. The branch
manager observes that on a particular day in February the turnover in his account
crosses 25 transactions. On analyzing the account for the day it is observed that
the customer has deposited 20 demand drafts of Rs 45,000 each. Customer refuses
to divulge the reason for these transactions and hurriedly hangs up the telephone.
On a closer look at account statement an account transfer is seen in January to
his wife's account. On analyzing the account of the spouse of the customer,
similar pattern in the month of January is observed. An STR is filed for these
accounts.
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Key Message:
Analysis of linked accounts help a bank to determine nature of customer activity.
Case Study 34
A Bank officer processing foreign currency cheques observes that an Non Resident
customer receives three to four foreign currency cheques in a day for clearing.
There are also credits from on line site aggregators. Each credit is between 3000
to 4000 USD. These credits come from different countries. On checking with the
customer's mandate holder, he states that these are payments received by way
of commission in the business of internet marketing. On conducting a search
over the internet it is also revealed that the customer is running a site which
invites people to subscribe to his services. The content of the site is perfectly
educational and legal. However this conflicts with the version of the mandate
holder. The customer has not made a single withdrawal from the account over a
period of one year that he has an account with the bank and the total balance in
the account is very high. An STR is filed for the customer.
Key Message:
In respect of certain customers a desktop due diligence in form of Internet
searches may reveal details of the customer activity and help gather evidence
for reporting a suspicious transaction.
Case Study 35
An NRI customer from Europe receives remittances worth crores of Rupees into
his account. The proceeds are invested into various capital market instruments
covering mutual funds, shares and securities. On checking the remitter details it
is observed that funds are being received from his account in Europe. The bank
officer checks the remittances received from this remitter across the Bank and
finds that similar large value amounts are transferred into accounts of un related
persons over last six months whose accounts have since gone dormant. The
amount has been withdrawn in cash and currently there is no balance in these
accounts. These accounts are reported as an STR
Key Message:
Whle an instant unusual transaction may not appear to be suspicious, related

accounts may throw up suspicion. Therefore it is necessary to look at the
totality of the customer transactions.
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Case Study 36
The account of a resident Y is receiving a number transfers from a non-resident

X stationed in gulf through internet transfers. The account of X in turn is receiving
remittances from another non resident Z working in same oil refinery as X. Z
receives money through large value clearing cheques from another non resident
W. Inspite of due diligence it is not possible to establish any relation between
these persons. The manager files the STR and two months later finds the name
of the Y as being involved in a terrorist act in a foreign country. An STR s filed in
the case.
Key Message:
Look out for transactions that do not make economic sense.
Case Study 37
The Branch manager during his analysis of AML exception reports for May finds
some accounts where cash is being deposited through multiple branches and
withdrawn on same day. One such account holder is Mr Y. who ensures that he
does not maintain balance over a period of one or two days. Deposits are in form
of third party walk ins. The amounts deposited are between Rs 2500 to 3000. The
manager directs the teller to inform him the next time any person other than the
account holder approaches to deposit cash in the account. Five days later the
manager is alerted by teller and immediately asks the depositor reason for depositing
cash in this account who informs him that he has been instructed to do so by one
Mr T who has promised him a lottery winning of Rs 10 lakhs provided he deposits Rs
3000 as processing fee. Manager immediately files an STR for same.
Manager comes across another such account in name of Mr. O. Unlike Mr. T the
amounts are received by him though ATM cash deposits. No person physically
visits branch to deposit the amount. The transaction pattern is similar to that of
account of Mr. Y. An STR is filed by the manager. One month later the manager
receives a letter from the Narcotic Control Bureau asking him further information
in relation to Mr. O. It has now come to light that O was a drug peddler was using
bank's channels to receive cash from his customers who were couriered drugs.
Key Message:
Compare the activity in the account to the profile of the customer/behavior of

such segment of customers. This may reveal unusual behavior.
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Case Study 38
Mr. D is holding a credit card of the bank with a Rs 1 Lakh limit. He deposits large
value of cash to repay his card dues. His spends are on all airline company web
sites. The total value of spends per month is approximately 15 lakhs. All repayments
are made in cash. On investigation into the KYC documents it is observed that
he is working in a travel agency. It can thus be deduced that he takes cash from
customers and uses his credit card to book tickets from them and repays same
into his card account after one month.
Key Message:
Misuse of personal banking channels /products for business purposes.
Case Study 39
A person spends approximately five lakhs every month on his credit card. The
spends are on only one particular merchant establishment. On closer analysis
the merchant establishment is a on line gambling site in a foreign country. It is
suspected that the customer may be transferring value by way of credits into
account of some other person holding account with the site.
Key Message:
Misuse of banking channels for illegal purposes should be reported as suspicious

transaction.
Case Study 40
A savings account of Mr. ABC (a telephone booth operator) is held with a banks
branch in a small town for about one year. It is observed that in recent times
persons other than the depositors or his family members frequent the branch for
making withdrawals. The teller informs the branch manager about this unusual
activity. On checking with the customer discretely he informs that he has allowed
certain persons to use his account for conducting transactions. The Branch
manager immediately reports this as a STR.
Key Message:
Inputs from branch are helpful in determining suspicious transactions
113
Case Study 41
A friendly customer having a savings bank account asks the cashier at the
branch as to what the bank would do if he deposits Rs. 2 crore in cash from him.
The total turnover in the customer's account has thus far been in range of Rs. 3
lakhs in a year. However the customer never carries out this transaction. The
branch files a STR in the matter for an attempted suspicious activity.
Key Message:
Although the transaction has not taken place as required by RBI regulations
attempted suspicious transactions should also be reported.
Case Study 42
M/s. ABC Electronics P Ltd, a new customer lodges an export bill for collection
with the Bank. The customer has submitted an invoice and bill of lading worth $
20,00,000 for sale of 300 laptops. The invoice is raised on M/s PQR trading,
Nigeria. The Bank Officer on scrutiny of the bill finds that the value of a laptop as
per this invoice is highly overvalued and files an STR for the same. On investigation
it is revealed that M/s PQR, the front for a criminal wanted to send an amount of
$ 10,00,000 to India. M/s ABC electronics P Ltd was a front for the hawala
operator who through over invoicing achieved this through the official channel.
Key Message:
Tranactions that do not make economic sense should be identified for reporting
suspicious transactions.
******
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Annexure F
Suggested solutions to certain situations

Situation 1
ABC Enterprises has a current account with you. ABC Enterprises is a dealer of
house hold appliances. Normal transactions in the account are daily cash deposits
of about INR 100,000 and deposit of cheque and credit card charge slips for
about 100,000. Payments to various distributors are through cheques. There are
some cash withdrawals especially in the beginning of the month for salary
payments. During the last 15 days, you have noticed that the cash deposits are
in the range of INR 150,000 to INR 200,000 and there have been some increase
in the deposits by cheques and charge slips as well.
Solution
Mere increase in the cash deposit does not necessarily mean a suspicious activity.
Here in this case, there has been an increase in the cheque/ charge slips deposit
as well. There could be some reason for the increase in sale, like a festival
season. Make enquiry about a reason for the increased sale and also check the
payment part to see whether the money is going anywhere other than the usual
suppliers. File a SAR only if you are not convinced about the reason for the
increase in cash deposit.
Situation 2
DEF Traders maintains a current account with you for the last three months. The
account was opened with a deposit of INR 25,000. While opening the account,
the business declared is Commission agents and he mentioned that he is getting
distribution agency for some well-known cosmetic and detergent products. The
expected transaction volume declared was monthly credit of INR 1 million and an
average balance of INR 50,000. There were no transactions in the account for 2
months. For the last one month, the volume of transactions suddenly increased
and at present there is a daily deposit of approximately INR 200K and the average
balance is around 25,000. The withdrawals are through pay orders and most of
the time favouring different firms and the pay orders are paid in clearing through
banks in various cities. You met the customer and enquired about the business
and he mentioned that he did not take the distributorship of the cosmetic and
detergent products as he did not want to restrict his product range and he is
now purchasing from various distributors and supplying to small businesses in the
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area and the business was very good. Your enquiry revealed that the customer
did not have any separate office or godown and the business address given in
the AOF is his residence address.
Solution
Though the explanation of the customer could account for the large cash deposits
(sale to small traders) and payments to different firms, absence of any godown
or distribution set up give sufficient reasons to suspect the bonafides of the
customer. An SAR should be filed.
Situation 3
ABC, a walk in customer approaches you. She wanted to open a savings account
with you. On your request, she produced a Voter's ID Card and ration card for
identity verification and address verification. While taking further details of activity
profile, you realize that the customer would be getting a monthly pension credited
to her account and she would be withdrawing most of the amounts for her
expenses. You tell her the Bank's rule of maintaining minimum balance in the
account and she expresses her inability to do so. Hence, you decline to open the
account.
Solution
The refusal to open the account was not due to any suspicion. It was because
the customer was not able to met your banking requirement of maintaining the
minimum balance in the account. No SAR to be filed.
Situation 4
LKG Corporation is a SME customer for about 2 years. They are in the import
export business and use the bank for their international trades on a regular
basis. So far the business had been some export bill collections and some payments
against the import documents. They did not have any import LC facility but has
an OD facility for INR 2 million. Now the customer has approached you for
opening an LC for USD 100,000 for import palm oil. The beneficiary of the LC is in
Dubai and the shipment will be made from Malaysia to Mumbai. The customer is
offering security of term deposits held in the names of his close relatives.
Solution
We have a fairly good knowledge of the customer. There is nothing apparently
suspicious about the transaction on a money laundering point of view.
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Situation 5
ABC Enterprises is a partnership firm. The firm opened a current account with
your branch in January 2004. The proprietor was identified through his driving
license and his address verified through a utility bill. The business address was
verified through the agreement with the landlord. Initially there were some cash
deposits and cheque deposits and some remittances to Hongkong against import
documents, which included Bill of Entry with Customs stamp and invoice. The
remittances were small and on all the occasions the goods imported were "halogen
lamps". Around June, 2004, the proprietor opened another account in the name
of DEF Traders, a partnership firm with him and his wife as partners. He also
opened a third account in the name of GHI Agencies, another partnership firm
with his wife and another person as the partners. In all these accounts, there
have been similar transactions, i.e. deposits through cash and cheques and
foreign remittance against the import documents. Of late, the frequency of the
transactions increased so much so that the daily deposits in these accounts are
just below INR 1 million (There is a reporting requirement for all cash transactions
above INR 1million) and the remittances takes place in every three days.
Solution
Definitely, the activities are suspicious. SAR has to be raised.
Situation 6
XYZ Infotech Pvt Ltd. opened an account with your branch about three months
back. The company has declared its business as software development. For the
first two months there were very few transactions, some low value cash
transactions and cheque deposits and withdrawals by clearing. During the last
one month, the transactions have increased and there had been some large
value inward remittances ranging from USD 25,000 to USD 75,000 and payments
by cheques to various firms in different cities in India. Your initial enquiries
revealed that the company has its office at the residence of its Managing Director
and only have two people working in there. During one of your casual talks with
the MD, he mentioned that he had some good contacts abroad and they canvass
business and he gets the work done through some of the smaller software
companies. You do not feel that most of the beneficiaries of the payments from
the account are software companies.
Solution
There are reasons to suspect the activities. The claim of the customer may be
true but needs verification through an investigation. SAR should be filed.
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Situation 7
MNO Corporation, a partnership firm opened an account with you branch about
three months back. AB and his wife are the partners of the firm. AB was working
in US as a software engineer and he returned to India recently and started this
firm. The declared business of the firm is software development. Initially, there
were a few large foreign inward remittances from AB's own account in US and
there were payments to various people. These payments could be connected to
purchase and development of office premises. During the last one-month, there
had been a few large foreign inward remittances and payments to two firms, one
in Hyderabad and one in Bangalore. Your casual talks with AB revealed that he
has employed about 20 employees in office and as he was not able to cop up
with the work he was getting from US, he has sub-contracted the work to two
firms, one in Hyderabad and one in Bangalore.
Solution
Though prima facie it appears that the customer is doing a genuine business, it
will be prudent to make some enquiries regarding the firms in Hyderabad and
Bangalore and an SAR need be raised only if your findings are not conforming to
the versions of AB.
Situation 8
FM is one of your savings bank account holder. The account was opened about 5
years ago. As per the KYC profile, FM is working as a journalist for a small
newspaper and the transactions in the account had been mostly deposit of
salary and withdrawals by cash or cheques in small amounts. For the last three
months, he had been receiving foreign inward remittances of approximately USD
5000 from an individual DK in London every month. The customer withdraws the
amount in cash in two or three withdrawals. When you enquired with the customer
about the purpose of the remittance, he mentioned that he was helping DK in a
project regarding tribals in India and the payments are in this respect. He mentioned
that he continued to work with the news paper. You do not find any credit for
salary in his account for the last few months and a telephone call to the
newspaper office confirmed that FM had left the newspaper.
Solution
The transactions are suspicious and should be reported as a SAR.
Situation 9
ABC Charities is a charity trust registered with the charity commissioner. The
trust also has necessary government approval for getting donations from abroad
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for its charity works. ABC Charities had opened an account with your branch
about four years ago with all the necessary documentation. The transactions in
the account were mostly cash deposits and cheque deposits for small amounts
and there were cash withdrawals mostly to meet the expenses of a home for
aged and destitute run by the trust. There were also some foreign inward
remittances for amounts varying from USD 50 to USD 100. During the last three
months, there had been 10 remittances from one organization from a country
that has no strict AML laws or regulations. The amounts of these remittances
were between USD 5000 and USD 9000. The total amount received is USD
80,000. Since the starting of these inward remittances, there had been some
changes in the withdrawal pattern. Pay orders/demand drafts favouring some
individuals and organisations were taken and these were paid through banks
situated in locations known for terrorist activity.
Solution
There are enough reasons to suspect the activities. SAR has to be filed.
Situation 10
ABC Corporation is a partnership firm with AB and CD and their wives as partners.
About six months ago, ABC Corporation opened a current account with your
branch. While opening the account, the firm has shown its business as multi layer
marketing and the expected volume of transactions in the account was shown as
deposits of INR 2,000.000 and withdrawals of INR 2,000,000. For the first two
months of operation, there were very few transactions in the account. Now, there
are daily cash deposits of about INR 400,000 through different branches. You
have noticed that different people come to the branch for depositing amounts
ranging from INR 10,000 to INR 30,000. The withdrawals are by way of clearing
cheques or by purchase of demand drafts or pay orders.
Solution
Definitely, the transactions are unusual and need to be investigated. There should be a
discreet talk with the customer to clarify as to who are the people who were making
deposits to the account and what is the source of these funds. It may also be
ascertained as to who are the beneficiaries of the payments from the account. From
the explanation, if you get satisfied that the money is from a genuine business and the
payments are going for meeting the business related expenses, no SAR be raised. If the
customer is evasive or refuses to answer your queries or the explanation does not
satisfy you, you have to raise a SAR.
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Situation 11
NM has taken a loan of INR 5 million against mortgage of a commercial property

valued at INR 20 million. The KYC and credit information collected during the
opening of the account showed that NM was a real estate developer and also a
trader in commodities. He has declared an average income of INR 3 million during
the last three years. He has also been maintaining a current account with you.
After six months of taking the loan, NM came with a request to pre-close the
loan account. You calculate the amount to be repaid and add the pre-closure
penalty and as per the instructions of the customer, transfer the amount from
his current account. After about two months, the customer again comes to you
and request for a loan of INR 10 million against mortgage of the same property.
Solution
The situation definitely needs further probe. First of all, it has to be seen how
the current account was funded for the earlier pre-closure. If these were through
cash deposits or other deposits that cannot be connected to his business or
personal finance, then you have to file an SAR. If the funding is through genuine
business receipts or transparent personal financial transactions, you may seek
further clarifications from the customer through normal queries like the purpose
of taking the loan, how he intends to repay, etc. and if you are satisfied with the
responses, go ahead with the transaction in the usual course of business.
Situation 12
JK is one of your customers. He runs a proprietory firm JK Enterprises. This firm is

in transport business, hiring of cars and small trucks. He had taken loans from
your bank for purchase of some of the cars and trucks. Within the last two
months, he had pre-closed all the loan accounts, one by one.
Solution
The situation is open to suspicion. The important point to be seen is the source
of funds to pre-close the account. If the money has come from genuine sources
like, loan taken from another financial institution, sale of some assets, etc., then
there is no cause for concern but if the source of funds is not clear or suspicious,
SAR has to be filed.
******
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ANNEXURE G
RESERVE BANK OF INDIA
RBI/2009-10/73
DBOD. AML. BC. No. 2/14 .01.001/2009-10
Date: Jul 01, 2009
The Chairman/CEOs of all Scheduled Commercial Banks (excluding RRBs) / all

Financial Institutions
Dear Sir,
Master Circular - Know Your Customer (KYC) norms / Anti-Money

Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/
Obligation of banks under PMLA, 2002
Please refer to our Master Circular DBOD.AML.BC.No.12/ 14.01.001 / 2008 - 09

dated July 01, 2008 consolidating instructions/guidelines issued to banks till June
30, 2008 on Know Your Customer (KYC) norms /Anti-Money Laundering (AML)
standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under
PMLA, 2002. This Master Circular is a consolidation of the instructions on Know
Your Customer (KYC) norms /Anti-Money Laundering (AML) standards/Combating
of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002 issued up
to June 30, 2009.
2. The Master Circular has been placed on the RBI website:

(http://www.rbi.org.in)
Yours faithfully,
(Vinay Baijal)
Chief General Manager
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Master Circular on Know Your Customer (KYC) norms/Anti-Money

Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/
Obligation of banks under Prevention of Money Laundering Act, (PMLA),
2002
Purpose
Banks were advised to follow certain customer identification procedure for opening
of accounts and monitoring transactions of a suspicious nature for the purpose
of reporting it to appropriate authority. These 'Know Your Customer' guidelines
have been revisited in the context of the Recommendations made by the Financial
Action Task Force (FATF) on Anti Money Laundering (AML) standards and on
Combating Financing of Terrorism (CFT). Detailed guidelines based on the
Recommendations of the Financial Action Task Force and the paper issued on
Customer Due Diligence (CDD) for banks by the Basel Committee on Banking
Supervision, with indicative suggestions wherever considered necessary, have
been issued. Banks have been advised to ensure that a proper policy framework
on 'Know Your Customer' and Anti-Money Laundering measures with the approval
of the Board is formulated and put in place.
2. This Master Circular aims at consolidating all the instructions/guidelines issued

by RBI on Know Your Customer (KYC) norms/Anti-Money Laundering (AML)
standards/Combating Financing of Terrorism (CFT)/Obligations of banks under
PMLA, 2002. The Master Circular has been placed on the RBI website (http://
www.rbi.org.in).
Previous instructions
A list of circulars issued in this regard is given in Annex - III.
Application
i) The instructions, contained in the master circular, are applicable to all

Financial Institutions and all the scheduled commercial banks excluding
RRBs.
ii) These guidelines are issued under Section 35A of the Banking Regulation
Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of
Records of the Nature and Value of Transactions, the Procedure and
Manner of Maintaining and Time for Furnishing Information and Verification
and Maintenance of Records of the Identity of the Clients of the Banking
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Companies, Financial Institutions and Intermediaries) Rules, 2005. Any

contravention thereof or non-compliance shall attract penalties under
Banking Regulation Act.
iii) This Master Circular consolidates all the circulars issued on the subject up
to June 30, 2009.
Structure
1 Introduction
1.1 KYC/AML/CFT
1.2 Definition of Customer
2 Guidelines
2.1 General
2.2 KYC Policy
2.3 Customer Acceptance Policy
2.4 Customer Identification Procedure
2.5 Customer Identification Requirements - Indicative guidelines
2.6 Small deposit accounts
2.7 Monitoring of transactions
2.8 Closure of Accounts
2.9 Risk Management
2.10 Introduction of new technology - credit/debit/smart/gift card
2.11 Combating Financing of Terrorism
2.12 Correspondent Banking
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2.13 Applicability to branches and subsidiaries outside India
2.14 Wire Transfers
2.15 Principal Officer
2.16 Maintenance of records of transactions/Information to be

preserved / maintenance and preservation of records / Cash
and Suspicious transactions reporting to Financial Intelligence
Unit-India (FIU-IND)
2.17 Cash and Suspicious Transaction Report
2.18 Customer Education/Training of Employees/Hiring of Employees
3 Annex
3.1 Annex - I - Indicative List of documents required for opening

of accounts
3.2 Annex - II - List of reporting formats
3.3 Annex - III - List of circulars consolidated in the Master

Circular
1 Introduction
1.1 Know Your Customer (KYC) Norms/Anti-Money Laundering (AML)

Measures/Combating of Financing of Terrorism (CFT)/Obligations
of banks under PMLA, 2002.
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.
1. 2 Definition of Customer
For the purpose of KYC policy, a 'Customer' is defined as :
a person or entity that maintains an account and/or has a business

relationship with the bank;
124
one on whose behalf the account is maintained (i.e. the beneficial

owner);
beneficiaries of transactions conducted by professional intermediaries,
such as Stock Brokers, Chartered Accountants, Solicitors etc. as
permitted under the law, and
any person or entity connected with a financial transaction which
can pose significant reputational or other risks to the bank, say, a
wire transfer or issue of a high value demand draft as a single
transaction.
2. Guidelines
2.1 General
i) Banks should keep in mind that the information collected from the
customer for the purpose of opening of account is to be treated as
confidential and details thereof are not to be divulged for cross selling
or any other like purposes. Banks should, therefore, ensure that
information sought from the customer is relevant to the perceived
risk, is not intrusive, and is in conformity with the guidelines issued in
this regard. Any other information from the customer should be sought
separately with his/her consent and after opening the account.
ii) Banks should ensure that any remittance of funds by way of demand
draft, mail/telegraphic transfer or any other mode and issue of
travellers' cheques for value of Rupees fifty thousand and above is
effected by debit to the customer's account or against cheques and
not against cash payment.
iii) Banks should ensure that the provisions of Foreign Contribution

(Regulation) Act, 1976 as amended from time to time, wherever
applicable are strictly adhered to.
2.2 KYC Policy
Banks should frame their KYC policies incorporating the following four key
elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
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c) Monitoring of Transactions; and
d) Risk Management.
2.3 Customer Acceptance Policy (CAP)

a) 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(s);
(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
126
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. Examples of customers
127
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; (g) non-face to face
customers and (h) those with dubious reputation as per public
information available etc. However, only NPOs/NGOs promoted by
United Nations or its agencies may be classified as low risk customer.
d) 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.
2.4 Customer Identification Procedure ( CIP)
a) The policy approved by the Board of banks should clearly spell out
the Customer Identification Procedure to be carried out at different
stages i.e. while establishing a banking relationship; carrying out a
financial transaction or when the bank has a doubt about the
authenticity/veracity or the adequacy of the previously obtained
customer identification data. Customer identification means identifying
the customer and verifying his/her identity by using reliable,
independent source documents, data or information. Banks need to
obtain sufficient information necessary to establish, to their
satisfaction, the identity of each new customer, whether regular or
occasional, and the purpose of the intended nature of banking
relationship. Being satisfied means that the bank must be able to
satisfy the competent authorities that due diligence was observed
based on the risk profile of the customer in compliance with the
extant guidelines in place. Such risk based approach is considered
necessary to avoid disproportionate cost to banks and a burdensome
regime for the customers. Besides risk perception, the nature of
information/documents required would also depend on the type of
customer (individual, corporate etc.). For customers that are natural
persons, the banks should obtain sufficient identification data to
verify the identity of the customer, his address/location, and also his
recent photograph. For customers that are legal persons or entities,
128
the bank should (i) verify the legal status of the legal person/entity
through proper and relevant documents; (ii) verify that any person
purporting to act on behalf of the legal person/entity is so authorised
and identify and verify the identity of that person; (iii) understand
the ownership and control structure of the customer and determine
who are the natural persons who ultimately control the legal person.
Customer identification requirements in respect of a few typical cases,
especially, legal persons requiring an extra element of caution are
given in paragraph 2.5 below for guidance of banks. Banks may,
however, frame their own internal guidelines based on their experience
of dealing with such persons/entities, normal bankers' prudence and
the legal requirements as per established practices. If the bank decides
to accept such accounts in terms of the Customer Acceptance Policy,
the bank should take reasonable measures to identify the beneficial
owner(s) and verify his/her/their identity in a manner so that it is
satisfied that it knows who the beneficial owner(s) is/are.
b) It has been observed that some close relatives, e.g. wife, son, daughter
and daughter and parents etc. who live with their husband, father/
mother and son, as the case may be, are finding it difficult to open
account in some banks as the utility bills required for address verification
are not in their name. It is clarified, that in such cases, banks can
obtain an identity document and a utility bill of the relative with whom
the prospective customer is living along with a declaration from the
relative that the said person (prospective customer) wanting to open
an account is a relative and is staying with him/her. Banks can use any
supplementary evidence such as a letter received through post for
further verification of the address. While issuing operational instructions
to the branches on the subject, banks should keep in mind the spirit of
instructions issued by the Reserve Bank and avoid undue hardships to
individuals who are, otherwise, classified as low risk customers.
c) Banks should introduce a system of periodical updation of customer

identification data (including photograph/s) after the account is
opened. The periodicity of such updation should not be less than
once in five years in case of low risk category customers and not less
than once in two years in case of high and medium risk categories.
d) An indicative list of the nature and type of documents/information

that may be may be relied upon for customer identification is given in
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Annex-I to this Master Circular. It is clarified that permanent correct

address, as referred to in Annex-I, means the address at which a
person usually resides and can be taken as the address as mentioned
in a utility bill or any other document accepted by the bank for
verification of the address of the customer.
e) It has been brought to our notice that the said indicative list furnished
in Annex -I, is being treated by some banks as an exhaustive list as a
result of which a section of public is being denied access to banking
services. Banks are, therefore, advised to take a review of their
extant internal instructions in this regard.
2.5 Customer Identification Requirements - Indicative Guidelines
i) Trust/Nominee or Fiduciary Accounts
There exists the possibility that trust/nominee or fiduciary accounts

can be used to circumvent the customer identification procedures.
Banks should determine whether the customer is acting on behalf of
another person as trustee/nominee or any other intermediary. If so,
banks should insist on receipt of satisfactory evidence of the identity
of the intermediaries and of the persons on whose behalf they are
acting, as also obtain details of the nature of the trust or other
arrangements in place. While opening an account for a trust, banks
should take reasonable precautions to verify the identity of the
trustees and the settlors of trust (including any person settling assets
into the trust), grantors, protectors, beneficiaries and signatories.
Beneficiaries should be identified when they are defined. In the case
of a 'foundation', steps should be taken to verify the founder managers/
directors and the beneficiaries, if defined.
ii) Accounts of companies and firms
Banks need to be vigilant against business entities being used by

individuals as a 'front' for maintaining accounts with banks. Banks
should examine the control structure of the entity, determine the
source of funds and identify the natural persons who have a controlling
interest and who comprise the management. These requirements may
be moderated according to the risk perception e.g. in the case of a
public company it will not be necessary to identify all the shareholders.
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iii) Client accounts opened by professional intermediaries
When the bank has knowledge or reason to believe that the client
account opened by a professional intermediary is on behalf of a single
client, that client must be identified. Banks may hold 'pooled' accounts
managed by professional intermediaries on behalf of entities like mutual
funds, pension funds or other types of funds. Banks also maintain
'pooled' accounts managed by lawyers/chartered accountants or
stockbrokers for funds held 'on deposit' or 'in escrow' for a range of
clients. Where funds held by the intermediaries are not co-mingled at
the bank and there are 'sub-accounts', each of them attributable to
a beneficial owner, all the beneficial owners must be identified. Where
such funds are co-mingled at the bank, the bank should still look
through to the beneficial owners. Where the banks rely on the
'customer due diligence' (CDD) done by an intermediary, they should
satisfy themselves that the intermediary is regulated and supervised
and has adequate systems in place to comply with the KYC
requirements. It should be understood that the ultimate responsibility
for knowing the customer lies with the bank.
iv) Accounts of Politically Exposed Persons (PEPs) resident outside

India
Politically exposed persons are individuals who are or have been
entrusted with prominent public functions in a foreign country, e.g.,
Heads of States or of Governments, senior politicians, senior
government/judicial/military officers, senior executives of state-owned
corporations, important political party officials, etc. Banks should
gather sufficient information on any person/customer of this category
intending to establish a relationship and check all the information
available on the person in the public domain. Banks should verify the
identity of the person and seek information about the sources of
funds before accepting the PEP as a customer. The decision to open
an account for a PEP should be taken at a senior level which should
be clearly spelt out in Customer Acceptance Policy. Banks should
also subject such accounts to enhanced monitoring on an ongoing
basis. The above norms may also be applied to the accounts of the
family members or close relatives of PEPs.
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v) Accounts of non-face-to-face customers
With the introduction of telephone and electronic banking, increasingly

accounts are being opened by banks for customers without the need
for the customer to visit the bank branch. In the case of non-face-
to-face customers, apart from applying the usual customer
identification procedures, there must be specific and adequate
procedures to mitigate the higher risk involved. Certification of all the
documents presented should be insisted upon and, if necessary,
additional documents may be called for. In such cases, banks may
also require the first payment to be effected through the customer's
account with another bank which, in turn, adheres to similar KYC
standards. In the case of cross-border customers, there is the
additional difficulty of matching the customer with the documentation
and the bank may have to rely on third party certification/introduction.
In such cases, it must be ensured that the third party is a regulated
and supervised entity and has adequate KYC systems in place.
2.6 Small Deposit Accounts
(i) Although flexibility in the requirements of documents of identity and

proof of address has been provided in the above mentioned KYC
guidelines, it has been observed that a large number of persons,
especially, those belonging to low income group both in urban and
rural areas are not able to produce such documents to satisfy the
bank about their identity and address. This would lead to their inability
to access the banking services and result in their financial exclusion.
Accordingly, the KYC procedure also provides for opening accounts
for those persons who intend to keep balances not exceeding Rupees
Fifty Thousand (Rs. 50,000/-) in all their accounts taken together
and the total credit in all the accounts taken together is not expected
to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases,
if a person who wants to open an account and is not able to produce
documents mentioned in Annex I of this master circular, banks should
open an account for him, subject to:
Introduction from another account holder who has been subjected to

full KYC procedure. The introducer's account with the bank should be
at least six months old and should show satisfactory transactions.
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Photograph of the customer who proposes to open the account and

also his address need to be certified by the introducer,
or
any other evidence as to the identity and address of the customer to

the satisfaction of the bank.
ii) While opening accounts as described above, the customer should be

made aware that if at any point of time, the balances in all his/her
accounts with the bank (taken together) exceeds Rupees Fifty
Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees
One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be
permitted until the full KYC procedure is completed. In order not to
inconvenience the customer, the bank must notify the customer when
the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the
total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-)
that appropriate documents for conducting the KYC must be submitted
otherwise operations in the account will be stopped.
2.7 Monitoring of Transactions
Ongoing monitoring is an essential element of effective KYC procedures.

Banks can effectively control and reduce their risk only if they have an
understanding of the normal and reasonable activity of the customer so
that they have the means of identifying transactions that fall outside the
regular pattern of activity. However, the extent of monitoring will depend
on the risk sensitivity of the account. Banks should pay special attention
to all complex, unusually large transactions and all unusual patterns which
have no apparent economic or visible lawful purpose. Banks may prescribe
threshold limits for a particular category of accounts and pay particular
attention to the transactions which exceed these limits. Transactions
that involve large amounts of cash inconsistent with the normal and
expected activity of the customer should particularly attract the attention
of the bank. Very high account turnover inconsistent with the size of the
balance maintained may indicate that funds are being 'washed' through
the account. High-risk accounts have to be subjected to intensified
monitoring. Every bank should set key indicators for such accounts, taking
note of the background of the customer, such as the country of origin,
sources of funds, the type of transactions involved and other risk factors.
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Banks should put in place a system of periodical review of risk categorization

of accounts and the need for applying enhanced due diligence measures.
Such review of risk categorisation of customers should be carried out at a
periodicity of not less than once in six months.
2.8 Closure of accounts
Where the bank is unable to apply appropriate KYC measures due to non-
furnishing of information and /or non-cooperation by the customer, the
bank should consider closing the account or terminating the banking/
business relationship after issuing due notice to the customer explaining
the reasons for taking such a decision. Such decisions need to be taken
at a reasonably senior level.
2.9 Risk Management
a) The Board of Directors of the bank should ensure that an effective

KYC programme is put in place by establishing appropriate procedures
and ensuring their effective implementation. It should cover proper
management oversight, systems and controls, segregation of duties,
training and other related matters. Responsibility should be explicitly
allocated within the bank for ensuring that the bank's policies and
procedures are implemented effectively. Banks should, in consultation
with their boards, devise procedures for creating risk profiles of their
existing and new customers and apply various anti money laundering
measures keeping in view the risks involved in a transaction, account
or banking/business relationship.
b) Banks' internal audit and compliance functions have an important role

in evaluating and ensuring adherence to the KYC policies and
procedures. As a general rule, the compliance function should provide
an independent evaluation of the bank's own policies and procedures,
including legal and regulatory requirements. Banks should ensure that
their audit machinery is staffed adequately with individuals who are
well-versed in such policies and procedures. Concurrent/ Internal
Auditors should specifically check and verify the application of KYC
procedures at the branches and comment on the lapses observed in
this regard. The compliance in this regard should be put up before
the Audit Committee of the Board on quarterly intervals.
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2.10 Introduction of New Technologies - Credit cards/debit cards/ smart

cards/gift cards
Banks should pay special attention to any money laundering threats that
may arise from new or developing technologies including internet banking
that might favour anonymity, and take measures, if needed, to prevent
their use in money laundering schemes. Many banks are engaged in the
business of issuing a variety of Electronic Cards that are used by customers
for buying goods and services, drawing cash from ATMs, and can be used
for electronic transfer of funds. Banks are required to ensure full compliance
with all KYC/AML/CFT guidelines issued from time to time, in respect of
add-on/ supplementary cardholders also. Further, marketing of credit cards
is generally done through the services of agents. Banks should ensure
that appropriate KYC procedures are duly applied before issuing the cards
to the customers. It is also desirable that agents are also subjected to
KYC measures.
2.11 Combating Financing of Terrorism
a) In terms of PMLA Rules, suspicious transaction should include inter

alia transactions which give rise to a reasonable ground of suspicion
that these may involve financing of the activities relating to terrorism.
Banks are, therefore, advised to develop suitable mechanism through
appropriate policy framework for enhanced monitoring of accounts
suspected of having terrorist links and swift identification of the
transactions and making suitable reports to the Financial Intelligence
Unit - India (FIU-IND) on priority.
b) As and when list of individuals and entities, approved by Security

Council Committee established pursuant to various United Nations'
Security Council Resolutions (UNSCRs), are received from Government
of India, Reserve Bank circulates these to all banks and financial
institutions. Banks/Financial Institutions should ensure to update the
consolidated list of individuals and entities as circulated by Reserve
Bank. Further, the updated list of such individuals/entities can be
accessed in the United Nations website at http://www.un.org/sc/
committees/1267/consolist.shtml. Banks are advised that before
opening any new account it should be ensured that the name/s of
the proposed customer does not appear in the list. Further, banks
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should scan all existing accounts to ensure that no account is held

by or linked to any of the entities or individuals included in the list.
Full details of accounts bearing resemblance with any of the
individuals/entities in the list should immediately be intimated to RBI
and FIU-IND.
c) Banks are also advised to take into account risks arising from the
deficiencies in AML/CFT regime of certain jurisdictions viz. Iran,
Uzbekistan, Pakistan, Turkmenistan and Sao Tome and Principe, as
identified in FATF Statement of February 25, 2009 circulated to banks
vide our circular letter DBOD.AML. No.20716/14.01.027/2008-09 dated
June 03, 2009.
2.12 Correspondent Banking
a) Correspondent banking is the provision of banking services by one

bank (the "correspondent bank") to another bank (the "respondent
bank"). These services may include cash/funds management,
international wire transfers, drawing arrangements for demand drafts
and mail transfers, payable-through-accounts, cheques clearing etc.
Banks should gather sufficient information to understand fully the
nature of the business of the correspondent/respondent bank.
Information on the other bank's management, major business activities,
level of AML/CFT compliance, purpose of opening the account, identity
of any third party entities that will use the correspondent banking
services, and regulatory/supervisory framework in the correspondent's/
respondent's country may be of special relevance. Similarly, banks
should try to ascertain from publicly available information whether
the other bank has been subject to any money laundering or terrorist
financing investigation or regulatory action. While it is desirable that
such relationships should be established only with the approval of
the Board, in case the Boards of some banks wish to delegate the
power to an administrative authority, they may delegate the power
to a committee headed by the Chairman/CEO of the bank while laying
down clear parameters for approving such relationships. Proposals
approved by the Committee should invariably be put up to the Board
at its next meeting for post facto approval. The responsibilities of
each bank with whom correspondent banking relationship is established
should be clearly documented. In the case of payable-through-
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accounts, the correspondent bank should be satisfied that the

respondent bank has verified the identity of the customers having
direct access to the accounts and is undertaking ongoing 'due
diligence' on them. The correspondent bank should also ensure that
the respondent bank is able to provide the relevant customer
identification data immediately on request.
b) Correspondent relationship with a "Shell Bank"
Banks should refuse to enter into a correspondent relationship with a

"shell bank" (i.e. a bank which is incorporated in a country where it has
no physical presence and is unaffiliated to any regulated financial group).
Shell banks are not permitted to operate in India. Banks should also
guard against establishing relationships with respondent foreign financial
institutions that permit their accounts to be used by shell banks. Banks
should be extremely cautious while continuing relationships with
respondent banks located in countries with poor KYC standards and
countries identified as 'non-cooperative' in the fight against money
laundering and terrorist financing. Banks should ensure that their
respondent banks have anti money laundering policies and procedures
in place and apply enhanced 'due diligence' procedures for transactions
carried out through the correspondent accounts.
2.13 Applicability to branches and subsidiaries outside India
The guidelines contained in this master circular shall apply to the branches
and majority owned subsidiaries located abroad, especially, in countries
which do not or insufficiently apply the FATF Recommendations, to the
extent local laws permit. When local applicable laws and regulations prohibit
implementation of these guidelines, the same should be brought to the
notice of Reserve Bank. In case there is a variance in KYC/AML standards
prescribed by the Reserve Bank and the host country regulators, branches/
overseas subsidiaries of banks are required to adopt the more stringent
regulation of the two.
2.14 Wire Transfer
Banks use wire transfers as an expeditious method for transferring funds

between bank accounts. Wire transfers include transactions occurring
within the national boundaries of a country or from one country to another.
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As wire transfers do not involve actual movement of currency, they are

considered as a rapid and secure method for transferring value from one
location to another.
i) The salient features of a wire transfer transaction are as under:
a) Wire transfer is a transaction carried out on behalf of an originator
person (both natural and legal) through a bank by electronic means
with a view to making an amount of money available to a beneficiary
person at a bank. The originator and the beneficiary may be the
same person.
b) Cross-border transfer means any wire transfer where the originator
and the beneficiary bank or financial institutions are located in
different countries. It may include any chain of wire transfers that
has at least one cross-border element.
c) Domestic wire transfer means any wire transfer where the originator
and receiver are located in the same country. It may also include
a chain of wire transfers that takes place entirely within the borders
of a single country even though the system used to effect the
wire transfer may be located in another country.
d) The originator is the account holder, or where there is no account,

the person (natural or legal) that places the order with the bank
to perform the wire transfer.
ii) Wire transfer is an instantaneous and most preferred route for transfer
of funds across the globe and hence, there is a need for preventing
terrorists and other criminals from having unfettered access to wire
transfers for moving their funds and for detecting any misuse when it
occurs. This can be achieved if basic information on the originator of
wire transfers is immediately available to appropriate law enforcement
and/or prosecutorial authorities in order to assist them in detecting,
investigating, prosecuting terrorists or other criminals and tracing
their assets. The information can be used by Financial Intelligence
Unit - India (FIU-IND) for analysing suspicious or unusual activity and
disseminating it as necessary. The originator information can also be
put to use by the beneficiary bank to facilitate identification and
reporting of suspicious transactions to FIU-IND. Owing to the potential
terrorist financing threat posed by small wire transfers, the objective
is to be in a position to trace all wire transfers with minimum threshold
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limits. Accordingly, banks must ensure that all wire transfers are
accompanied by the following information:
( A ) Cross-border wire transfers

i) All cross-border wire transfers must be accompanied by accurate
and meaningful originator information.
ii) Information accompanying cross-border wire transfers must contain
the name and address of the originator and where an account exists,
the number of that account. In the absence of an account, a unique
reference number, as prevalent in the country concerned, must be
included.
iii) Where several individual transfers from a single originator are bundled
in a batch file for transmission to beneficiaries in another country,
they may be exempted from including full originator information,
provided they include the originator's account number or unique
reference number as at (ii) above.
( B ) Domestic wire transfers

i) Information accompanying all domestic wire transfers of Rs.50000/-
(Rupees Fifty Thousand) and above must include complete originator
information i.e. name, address and account number etc., unless full
originator information can be made available to the beneficiary bank
by other means.
ii) If a bank has reason to believe that a customer is intentionally
structuring wire transfer to below Rs. 50000/- (Rupees Fifty Thousand)
to several beneficiaries in order to avoid reporting or monitoring, the
bank must insist on complete customer identification before effecting
the transfer. In case of non-cooperation from the customer, efforts
should be made to establish his identity and Suspicious Transaction
Report (STR) should be made to FIU-IND.
iii) When a credit or debit card is used to effect money transfer, necessary
information as (i) above should be included in the message.
(iii) Exemptions
Interbank transfers and settlements where both the originator and
beneficiary are banks or financial institutions would be exempted from the
above requirements.
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(iv) Role of Ordering, Intermediary and Beneficiary banks
(a) Ordering Bank
An ordering bank is the one that originates a wire transfer as per the
order placed by its customer. The ordering bank must ensure that
qualifying wire transfers contain complete originator information. The
bank must also verify and preserve the information at least for a
period of ten years.
(b) Intermediary bank

For both cross-border and domestic wire transfers, a bank processing
an intermediary element of a chain of wire transfers must ensure that
all originator information accompanying a wire transfer is retained
with the transfer. Where technical limitations prevent full originator
information accompanying a cross-border wire transfer from remaining
with a related domestic wire transfer, a record must be kept at least
for ten years (as required under Prevention of Money Laundering Act,
2002) by the receiving intermediary bank of all the information received
from the ordering bank.
( c) Beneficiary bank
A beneficiary bank should have effective risk-based procedures in
place to identify wire transfers lacking complete originator information.
The lack of complete originator information may be considered as a
factor in assessing whether a wire transfer or related transactions
are suspicious and whether they should be reported to the Financial
Intelligence Unit-India. The beneficiary bank should also take up the
matter with the ordering bank if a transaction is not accompanied by
detailed information of the fund remitter. It the ordering bank fails to
furnish information on the remitter, the beneficiary bank should consider
restricting or even terminating its business relationship with the ordering
bank.
2.15 Principal Officer

a) Banks should appoint a senior management officer to be designated
as Principal Officer. Principal Officer shall be located at the head/
corporate office of the bank and shall be responsible for monitoring
and reporting of all transactions and sharing of information as required
under the law. He will maintain close liaison with enforcement agencies,
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banks and any other institution which are involved in the fight against
money laundering and combating financing of terrorism.
b) The Principal Officer will be responsible for timely submission of CTR,

STR and reporting of counterfeit notes to FIU-IND.
2.16 Maintenance of records of transactions/Information to be preserved/

Maintenance and preservation of records/Cash and Suspicious
transactions reporting to Financial Intelligence Unit- India (FIU-IND)
Government of India, Ministry of Finance, Department of Revenue, vide

its notification dated July 1, 2005 in the Gazette of India, has notified the
Rules under the Prevention of Money Laundering Act (PMLA), 2002. In
terms of the said Rules, the provisions of PMLA, 2002 came into effect
from July 1, 2005. Section 12 of the PMLA, 2002 casts certain obligations
on the banking companies in regard to preservation and reporting of
customer account information. Banks are, therefore, advised to go through
the provisions of PMLA, 2002 and the Rules notified there under and take
all steps considered necessary to ensure compliance with the requirements
of Section 12 of the Act ibid.
(i) Maintenance of records of transactions

Banks should introduce a system of maintaining proper record of
transactions prescribed under Rule 3, as mentioned below:
a) all cash transactions of the value of more than Rupees Ten

Lakh or its equivalent in foreign currency;
b) all series of cash transactions integrally connected to each

other which have been valued below Rupees Ten Lakh or its
equivalent in foreign currency where such series of transactions
have taken place within a month and the aggregate value of
such transactions exceeds Rupees Ten Lakh;
c) all cash transactions where forged or counterfeit currency notes

or bank notes have been used as genuine and where any forgery
of a valuable security or a document has taken place facilitating
the transaction and
d) all suspicious transactions whether or not made in cash and by

way of as mentioned in the Rules.
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Explanation - Integrally connected cash transactions referred

to at (b) above
The following transactions have taken place in a branch during the

month of April , 2008:
Date Mode Dr. Cr. Balance (in Rs.)

(in Rs.) (in Rs.) BF-8,00,000.00
02/04/2008 Cash 5,00,000.00 3,00,000.00 6,00,000.00
07/04/2008 Cash 40,000.00 2,00,000.00 7,60,000.00
08/04/2008 Cash 4,70,000.00 1,00,000.00 3,90,000.00
Monthly summation 10,10,000.00 6,00,000.00
f) As per above clarification, the debit transactions in the above

example are integrally connected cash transactions because
total cash debits during the calendar month exceeds Rs. 10
lakhs. However, the bank should report only the debit transaction
taken place on 02/04 & 08/04/2008. The debit transaction dated
07/04/2008 should not be separately reported by the bank,
which is less than Rs.50,000/-.
g) All the credit transactions in the above example would not be

treated as integrally connected, as the sum total of the credit
transactions during the month does not exceed Rs.10 lakh and
hence credit transaction dated 02, 07 & 08/04/2008 should not
be reported by banks.
(ii) Information to be preserved
Banks are required to maintain the following information in respect of

transactions referred to in Rule 3:
a) the nature of the transactions;
b) the amount of the transaction and the currency in which it was
denominated;
c) the date on which the transaction was conducted; and
d) the parties to the transaction
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(iii) Maintenance and Preservation of record
a) Banks are required to maintain the records containing information

in respect of transactions referred to in Rule 3 above. Banks
should take appropriate steps to evolve a system for proper
maintenance and preservation of account information in a manner
that allows data to be retrieved easily and quickly whenever
required or when requested by the competent authorities.
Further, banks should maintain for at least ten years from the
date of cessation of transaction between the bank and the
client, all necessary records of transactions, both domestic or
international, which will permit reconstruction of individual
transactions (including the amounts and types of currency
involved if any) so as to provide, if necessary, evidence for
prosecution of persons involved in criminal activity.
b) Banks should ensure that records pertaining to the identification

of the customer and his address (e.g. copies of documents like
passports, identity cards, driving licenses, PAN card, utility
bills etc.) obtained while opening the account and during the
course of business relationship, are properly preserved for at
least ten years after the business relationship is ended. The
identification records and transaction data should be made
available to the competent authorities upon request.
c) In paragraph 2.7 of this Master Circular, banks have been advised

to pay special attention to all complex, unusual large transactions
and all unusual patterns of transactions, which have no apparent
economic or visible lawful purpose. It is further clarified that
the background including all documents/office records/
memorandums pertaining to such transactions and purpose
thereof should, as far as possible, be examined and the findings
at branch as well as Principal Officer level should be properly
recorded. Such records and related documents should be made
available to help auditors in their day-to-day work relating to
scrutiny of transactions and also to Reserve Bank/other relevant
authorities. These records are required to be preserved for ten
years as is required under PMLA, 2002.
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(iv) Reporting to Financial Intelligence Unit - India
a) In terms of the PMLA rules, banks are required to report

information relating to cash and suspicious transactions to the
Director, Financial Intelligence Unit-India (FIU-IND) in respect
of transactions referred to in Rule 3 at the following address:
Director, FIU-IND, Financial Intelligence Unit-India,

6th Floor, Hotel Samrat, Chanakyapuri, New Delhi-110021.
Website - http://fiuindia.gov.in/
b) Banks should carefully go through all the reporting formats.

There are altogether eight reporting formats, as detailed in Annex
II, viz. i) Cash Transactions Report (CTR); ii) Summary of CTR
iii) Electronic File Structure-CTR; iv) Suspicious Transactions
Report (STR); v) Electronic File Structure-STR; vi) Counterfeit
Currency Report (CCR); vii) Summary of CCR and viii) Electronic
File Structure-CCR. The reporting formats contain detailed
guidelines on the compilation and manner/procedure of
submission of the reports to FIU-IND. It would be necessary for
banks to initiate urgent steps to ensure electronic filing of all
types of reports to FIU-IND. The related hardware and technical
requirement for preparing reports in an electronic format, the
related data files and data structures thereof are furnished in
the instructions part of the concerned formats.
c) FIU-IND have placed on their website editable electronic utilities

to enable banks to file electronic CTR/STR who are yet to install/
adopt suitable technological tools for extracting CTR/STR from
their live transaction data base. It is, therefore, advised that in
cases of banks, where all the branches are not fully computerized,
the Principal Officer of the bank should cull out the transaction
details from branches which are not yet computerized and suitably
arrange to feed the data into an electronic file with the help of
the editable electronic utilities of CTR/STR as have been made
available by FIU-IND in their website http://fiuindia.gov.in.
d) In terms of instructions contained in paragraph 2.3(b) of this

Master Circular, banks are required to prepare a profile for each
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customer based on risk categorisation. Further, vide paragraph

2.7, the need for periodical review of risk categorisation has
been emphasized. It is, therefore, reiterated that banks, as a
part of transaction monitoring mechanism, are required to put
in place an appropriate software application to throw alerts
when the transactions are inconsistent with risk categorization
and updated profile of customers. It is needless to add that a
robust software throwing alerts is essential for effective
identification and reporting of suspicious transaction.
2.17 Cash and Suspicious Transaction Reports
a) Cash Transaction Report (CTR)

While detailed instructions for filing all types of reports are given in
the instructions part of the related formats, banks should scrupulously
adhere to the following:
i) The Cash Transaction Report (CTR) for each month should be
submitted to FIU-IND by 15th of the succeeding month. Cash
transaction reporting by branches to their controlling offices
should, therefore, invariably be submitted on monthly basis (not
on fortnightly basis) and banks should ensure to submit CTR
for every month to FIU-IND within the prescribed time schedule.
ii) All cash transactions, where forged or counterfeit Indian currency
notes have been used as genuine should be reported by the
Principal Officer to FIU-IND immediately in the specified format
(Counterfeit Currency Report - CCR). These cash transactions
should also include transactions where forgery of valuable
security or documents has taken place and may be reported to
FIU-IND in plain text form.
iii) While filing CTR, details of individual transactions below Rupees
Fifty thousand need not be furnished.
iv) CTR should contain only the transactions carried out by the
bank on behalf of their clients/customers excluding transactions
between the internal accounts of the bank.
v) A summary of cash transaction report for the bank as a whole
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should be compiled by the Principal Officer of the bank every

month in physical form as per the format specified. The summary
should be signed by the Principal Officer and submitted to FIU-
IND.
vi) In case of Cash Transaction Reports (CTR) compiled centrally

by banks for the branches having Core Banking Solution (CBS)
at their central data centre level, banks may generate centralised
Cash Transaction Reports (CTR) in respect of branches under
core banking solution at one point for onward transmission to
FIU-IND, provided:
a) The CTR is generated in the format prescribed by Reserve

Bank in Para 2.16(iv)(b) of Master Circular on Know Your
Customer (KYC) norms /Anti-Money Laundering (AML)
standards/ Combating of Financing of Terrorism (CFT)/
Obligation of banks under PMLA, 2002 dated July 01, 2009;
b) A copy of the monthly CTR submitted on its behalf to FIU-

IND is available at the concerned branch for production to
auditors/inspectors, when asked for; and
c) The instruction on 'Maintenance of records of transactions';

'Information to be preserved' and 'Maintenance and
Preservation of records' as contained above in this master
circular at Para 2.16 (i), (ii) and (iii) respectively are
scrupulously followed by the branch.
However, in respect of branches not under CBS, the monthly

CTR should continue to be compiled and forwarded by the
branch to the Principal Officer for onward transmission to
FIU-IND.
b) Suspicious Transaction Reports (STR)
i) While determining suspicious transactions, banks should be guided

by definition of suspicious transaction contained in PMLA Rules
as amended from time to time.
ii) It is likely that in some cases transactions are abandoned/

aborted by customers on being asked to give some details or to
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provide documents. It is clarified that banks should report all

such attempted transactions in STRs, even if not completed
by customers, irrespective of the amount of the transaction.
iii) Banks should make STRs if they have reasonable ground to

believe that the transaction involve proceeds of crime generally
irrespective of the amount of transaction and/or the threshold
limit envisaged for predicate offences in part B of Schedule of
PMLA, 2002.
iv) The Suspicious Transaction Report (STR) should be furnished

within 7 days of arriving at a conclusion that any transaction,
whether cash or non-cash, or a series of transactions integrally
connected are of suspicious nature. The Principal Officer should
record his reasons for treating any transaction or a series of
transactions as suspicious. It should be ensured that there is
no undue delay in arriving at such a conclusion once a suspicious
transaction report is received from a branch or any other office.
Such report should be made available to the competent
authorities on request.
v) In the context of creating KYC/AML awareness among the staff

and for generating alerts for suspicious transactions, banks
may consider the indicative list of suspicious activities contained
in Annex-E of the IBA's Guidance Note for Banks, 2005.
vi) Banks should not put any restrictions on operations in the

accounts where an STR has been made. Moreover, it should be
ensured that there is no tipping off to the customer at any
level.
2.18 Customer Education/Employee's Training/Employee's Hiring
a) Customer Education
Implementation of KYC procedures requires banks to demand certain

information from customers which may be of personal nature or which
has hitherto never been called for. This can sometimes lead to a lot
of questioning by the customer as to the motive and purpose of
collecting such information. There is, therefore, a need for banks to
147
prepare specific literature/ pamphlets etc. so as to educate the

customer of the objectives of the KYC programme. The front desk
staff needs to be specially trained to handle such situations while
dealing with customers.
b) Employee's Training
Banks must have an ongoing employee training programme so that

the members of the staff are adequately trained in KYC procedures.
Training requirements should have different focuses for frontline staff,
compliance staff and staff dealing with new customers. It is crucial
that all those concerned fully understand the rationale behind the
KYC policies and implement them consistently.
c) Hiring of Employees
It may be appreciated that KYC norms/AML standards/CFT measures

have been prescribed to ensure that criminals are not allowed to
misuse the banking channels. It would, therefore, be necessary that
adequate screening mechanism is put in place by banks as an integral
part of their recruitment/hiring process of personnel.
148
Annex- I
Customer Identification Procedure
Features to be verified and documents that may be obtained from cus-

tomers
Features Documents
Accounts of individuals
- Legal name and any other (i) Passport
names used (ii) PAN card
(iii) Voter's Identity Card
(iv) Driving licence
(v) Identity card (subject to the
bank's satisfaction)
(vi) Letter from a recognized public
authority or public servant verifying
the identity and residence of the
customer to the satisfaction of
bank.
- Correct permanent address (i) Telephone bill
(ii) Bank account statement
(iii) Letter from any recognized public
authority
(iv) Electricity bill
(v) Ration card
(vi) Letter from employer (subject to
satisfaction of the bank) (any one
document which provides
customer information to the
satisfaction of the bank will suffice)
Accounts of companies
- Name of the company (i) Correct permanent address
- Principal place of business Memorandum & Articles of
- Mailing address of the Association
company (ii) Resolution of the Board of
- Telephone/Fax Number Directors to open an account and
identification of those who have
authority to operate the account
149
Features Documents
(iii) Power of Attorney granted to its

managers, officers or employees to
transact business on its behalf
(iv) Copy of PAN allotment letter
(v) Copy of the telephone bill
Accounts of partnership firms
- Legal name (i) Registration certificate, if

registered
- Address (ii) Partnership deed
- Names of all partners and (iii) Power of Attorney granted to a
their addresses partner or an employee of the firm
- Telephone numbers of the to transact business on its behalf
firm and partners (iv) Any officially valid document
identifying the partners and the
persons holding the Power of
Attorney and their addresses
(v) Telephone bill in the name of firm /
partners
Accounts of trusts &

foundations
- Names of trustees, settlers, (i) Certificate of registration, if
beneficiaries and signatories registered
- Names and addresses of (ii) Power of Attorney granted to
the founder, the managers/ transact business on its behalf
directors and the (iii) Any officially valid document to
beneficiaries identify the trustees, settlors,
- Telephone/fax numbers beneficiaries and those holding
Power of Attorney, founders /
managers / directors and their
addresses
(iv) Resolution of the managing
body of the foundation /
association
(v) Telephone bill
150
Annex - II
(List of various reports and their formats)
1. Cash Transaction Report (CTR)
2. Summary of CTR
3. Electronic File Structure - CTR
4. Suspicious Transaction Report (STR)
5. Electronic File Structure - STR
6. Counterfeit Currency Report (CCR)
7. Summary of CCR
8. Electronic File Structure - CCR
151
Annex - III
(List of Circulars on ‘Know your Customer’ and

Monitoring of Cash Transactions)
Sr. Circular No. and Subject Gist of instructions

No. Date
1. DBOD.BP.BC.92/C.469-76 Rs.5000/- Applicants (whether
dated 12th August,1976 customer or not) for DD/
MT / TT / Travellers
cheques for amount
exceeding Rs.10,000/-
should affix Permanent
Income Tax Number on
the application.
2. DBOD.GC.BC.62/c.408(A)/87 Frauds in banks- Payment for imports
dated 11th November, 1987 opening of new should be made by debit
accounts. to the accounts
maintained with the same
bank or any other bank
and under no circum-
stances cash should be
accepted for retirement
of import bills. There
should be reasonable gap
of say, 6 months between
the time an introducer
opens his account and
introduces another
prospective account
holder to the bank.
Introduction of an account
should enable proper
identification of the
person opening an
account so that the
person can be traced if
the account is misused.
152

No. Date
3. DBOD.BP.BC.114/C.469(81)-91 Misuse of Banks to issue travellers
dated 19th April, 1991 banking channels cheques, demand drafts,
for violation of mail transfers,
fiscal laws and telegraphic transfers for
evasion of taxes Rs.50,000/- and above
- Issue and by debit to customers
payment of accounts or against
demand drafts cheques only and
for Rs.50,000 not against cash.
and above.
4. DBOD.BC.20/17.04.001/92 Committee to Banks advised to adhere
dated 25th August, 1992 enquire into to the prescribed norms
various aspects and safeguards while
relating to opening accounts etc.
and frauds
malpractices
in banks.
5. DBOD.BP.BC.60/21.01.023/92 Diversion of Banks to ensure that
dated 21st December, 1992 working capital withdrawals from cash
funds. credit / overdraft
accounts are strictly for
the purpose for which
the credit limits were
sanctioned by them.
There should be no
diversion of working
capital finance for
acquisition of fixed
assets, investments in
associate companies /
sub sidiaries and
acquisition of shares,
debentures, units of UTI
and other mutual funds
and other investments in
the capital market.
153

No. Date
6. DBOD.FMC.No.153/ Monitoring of Banks to be vigilant and
27.01.003/93-94 flow of funds. ensure proper end use of
dated 1st September, 1993 bank funds / monitoring
flow of funds. Banks to
keep vigil over heavy
cash withdrawals by
account holders which
may be disproportionate
to their normal trade /
business requirements
and cases of unusual
trends. Doubtful cases to
be reported to DBOD,
Regional office.
7. DBOD.GC.BC.193 Frauds in banks- Banks to be vigilant
dated 18th November, 1993 in Encashment of
opening new accounts
Interest / without
proper introduc Dividend
tion, new accounts with
Warrants, fictitious
names and Refund
Orders addresses.
Banks in etc. structed to
strictly adhere to the
instructions issued on
opening and operating of
bank accounts.
8. DBOD.GC.BC.202/ The Committee Customer identification
17.04.001/93 to enquire into while opening accounts
dated 6th December, 1993 various aspects including obtaining of
relating to photographs ofcustomers
frauds and while opening accounts.
malpractices in
banks.
154

No. Date
9. DBOD.No.GC.BC.46/17.04.001 The Committee Clarifications given to
dated 22nd April, 1994 to enquire into banks regarding
obtaining various
aspects photographs
of the de relating to
positors / account holder
frauds and authorised to
operate new
malpractices accounts
with effect from in banks.
1.1.1994. Obtaining of
photographs would apply
to residents and non-
residents and all
categories of depos its
including fixed / recurring
/ cumulative deposit
accounts and also to
those persons authorised
to oper ate the
accounts.
10. DBOD.BP.BC.106/ Fraudulent Banks to examine every
21.01.001/94 operations in request for opening joint
dated 23rd September, 1994 deposit accounts accounts very carefully,
-opening and look into the purpose,
collection of other relevant aspects
cheques / pay relating to business, the
orders etc. financial position of the
account holders and
whether number of
account holders are
large. 'Generally crossed'
cheques and pay able to'
order' should be collected
only on proper
endorsement by the
payee. Banks to exercise
care in collection of
cheques of large amounts
and ensure that joint
accounts are not used
for benami transactions.
155

No. Date
11. DBOD.BP.BC.57/21.01.001/95 Frauds in banks- Banks to introduce
dated 4th May, 1995 Monitoring of system of close watch of
deposit new deposit accounts
accounts. and and monitoring of
cash withdrawals and
deposits for Rs.10 lakh
and above in deposit,
cash credit and overdraft
accounts. Banks to keep
record of details of these
large cash transactions
in a separate register.
12. DBOD.BP.BC.102/ Monitoring of Reporting of all cash
21.01.001/95 Deposit deposits and withdrawals
dated 20th September, 1995 Accounts. of Rs.10 lakhs and above
with full details in
fortnightly statements by
bank branches to their
controlling offices.
Transactions of
suspicious nature to be
apprised to Head Office.
RBI to look into these
statements at the time
of inspections.
13. DBOD.BP.BC.42/21.01.001/96 Monitoring cash Banks asked to submit
dated 6th April, 1996 deposits and feedback on implementa
withdrawals of tion of the system of
Rs.10 lakh and close monitoring of
above in large cash deposits and
deposit / other withdrawals of Rs.10 lakh
and above accounts.
156

No. Date
14. DBOD.No.BP.BC.12/ Furnishing of Banks should satisfy
21.01.023/98 data-violation themselves that informa
dated 11th February, 1998 of secrecy tion sought will not
violate obligations.
the laws relating to
secrecy in banking
transactions except
under compulsion
of law, duty to the public
to disclose, where
interest of bank requires
disclosure and where
disclosure is made with
the express or implied
consent of the customer.
15. DBS.FGV.BC.56/23.04.001/ Report of the Banks advised to imple
98-99 Study Group on ment the main recommen
dated 21st June, 1999 Large Value dations of the Study
Bank Frauds. Group on Large Value
Bank Frauds.
16. DBOD.COMP.BC.No.130/ Internet Banking Banking facilities on
07.03.23/2000-01 in India- Internet will be subject
dated 14th June, 2001 Guidelines. to the existing regulatory
framework. Banks having
physical presence in
India only will be allowed
to offer banking services
over Internet to
residents in India and any
cross border
transactions will be
subject to existing
exchange control
regulations. Banks to
establish identity and
also make enquiries
about integrity and
reputation of the
prospective customer.
Internet accounts should
be opened only after
proper introduction and
physical verification of
the identity of the
customer.
157

No. Date
17. DBOD.BP.52/ Prevention of Banks should keep a
21.01.001/2001-02 Terrorism watchful eye on the
dated 5th December, 2001 Ordinance,2001 transactions of the 23
-Implementation terrorist organisations
thereof. listed in the Schedule to
the Ordinance. Violations
of the extant Acts or
normal banking
operations must be
reported to the
appropriate
authorities under the
Ordinance under advice
to RBI. Banks to
undertake 'due diligence'
in respect of the 'KYC'
principle.
18. DBOD.AML.BC.89/14.01.001/ Freezing of Accounts of individuals
2001-02 funds pursuant and entities listed should
dated 15th April, 2002 to United be immediately frozen as
Nations informed by the Security
Security Council Sanctions Com
Council -mittee of the UN. If any
Resolution, transaction is detected
1390 involving any of these
entities, banks to report
to RBI promptly for
necessary action.
19. DBOD.AML.BC.No.102/ Monitoring of Banks should ensure
14.01.001/2001-02 accounts - that no new accounts
dated 10th May, 2002 compliance with are opened by banned
instructions. organisations. Banks to
strictly adhere to the
extant guidelines
regarding opening and
monitoring of accounts.
Banks to confirm having
issued instructions for
immediate compliance
by the branches and
158

No. Date
20. DBOD.AML.BC.18/14.01.001/ Guidelines on First circular on KYC.
2002-03 "Know Your The customer
dated August 16, 2002 Customer" identification should
norms and entail verification through
"Cash an introductory reference
transactions" from an existing
account holder/a person
known to the bank or on
the basis of documents
provided by the customer.
The Board of Directors of
the banks should have in
place adequate policies
that establish procedures
to verify the bonafide
identification of
individual / c o r p o r a t e s
opening an account.
Branches of banks are
required to report all cash
deposits and withdrawals
of Rs.10 lakhs and above
as well as transactions of
suspicious nature with
full details in fortnightly
statements to their
21. DBOD.NO.AML.BC.58/ 'Know Your Our guidelines were
14.01.001/2004-05 Customer' revisited to make those
dated November 29, 2004 (KYC) compliant with FATF
Guidelines -Anti recommendations and
Money Basel Committee Report
Laundering on CDD. Four pronged
Standards approach was prescribed
to banks based on
Customer Acceptance
Policy, Customer
Identification Procedure,
Monitoring of
Transaction and Risk
Management.
159

No. Date
22. DBOD.NO.AML.BC.28/ Know Your KYC guidelines on
14.01.001/2005-06 Customer document requirement
dated August 23, 2005 Guidelines - were relaxed for people
Anti-Money belonging to financially
Laundering disadvantageous
sections standards in the
society, who could open
account with
introductory reference.
23. DBOD.NO.AML.BC.63/ Prevention of Reporting mechanism and
14.01.001/2005-06 Money formats were prescribed
dated February 15, 2006 Laundering Act, to banks to report cash
2002-Obligation and suspicious
of banks in transactions to Financial
terms of Rules Intelligence Unit- India
notified (FIU-IND).
thereunder
24. DBOD.AML.BC.No.77/ Wire transfers Banks were advised to
14.01.001/2006-07 ensure that all wire
April 13, 2007 transfers involving
domestic and cross
boarder fund transfers
are accompanied by full
originator information.
25. DBOD.AML.BC.No.63/ Know Your Revised guidelines on
14.01.001/2007-08 Customer KYC / AML issued on
dated February 18, 2008 (KYC) Norms / review of risk
Anti Money categorization of
Laundering customers; periodical
(AML) updation of customer
Standards / identification data and
Comba ting of screening mechanism for
Financing of recruitment / hiring
Terrorism (CFT) process of personnel.
160

No. Date
26. DBOD.AML.BC.No.85/ Prevention of Revised guidelines issued
14.01.001/2007-08 Money on CTR and STR by
dated May 22, 2008 Laundering banks to FIU-IND.
Act, 2002 -
Obligation of
banks in terms
of Rules notified
thereunder.
27. DBOD.AML.BC.No.12/ Master Circular- The Master Circular
14.01.001/2008-09 KYC norms / consolidates all the guide
dated July 1, 2008 AML Standards lines issued by RBI on
/ CFT / KYC / AML / CFT norms
Obligation of up to June 30, 2008
Banks under
PMLA, 2002
161

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Know Your Customer (KYC) Norms

GUIDANCE NOTES FOR BANKS

Indian Banks' Association

First Edition - October 2005

Second Edition - July 2009

Since 2005, there has been a number of developments in AML / CFT

I compliment and place on record my sincere appreciation of the contribution

IBA Working Group on KYC & AML

1) Mr. B S Bhasin 2) Dr. Sanjay Chougule

3) Ms. Neeta Rege 4) Mr. Robby Abraham

5) Mr. V Ganesan 6) Mr. K C Pillai

7) Mr. Manoj Nadkarni 8) Ms. Bhuvana Rao

9) Mr. S. Gopal 10) Mr. Govind Shukla

Mr. Tushar A Shah

IBA Core Group on KYC & AML

1) Mr. B S Bhasin 2) Dr. Sanjay Chougule

3) Ms. Neeta Rege 4) Mr. Robby Abraham

5) Ms. Madhu Sinha 6) Mr. K T Mathew

7) Mr. Arun Boyina 8) Mr. Krishna M Trivedi

9) Ms. Manisha Agaskar 10) Mr. Umesh Chandra

11) Mr. Praveen Mohan Dayal 12) Mr. Narasinh Prabhu

Contents Page No.

1. Overview and Regulatory Frame Work 3

2. Internal Controls and Structure in Banks 13

3. Customer Risk Categorization (CRC) 19

4. Know Your Customer (KYC) 23

5. Reporting Obligation under PMLA Act 34

7. Name Screening Process 46

8. Wire Transfers – FATF SR VII Compliance 54

9. Staff and Customer Awareness 57

10. Preservation of Records 60

Contents Page No.

I. Resident Individual Account Opening Form 62

II. Non-Resident Individual Account Opening Form 68

III. Customer Behavior Indicators 75

IV. An Indicative List of Suspicious Activities 76

V. Anti-Money Laundering - Case Studies of 85

VI. Suggested solutions to certain situations 115

VII. Reserve Bank of India (RBI) 121

Since 2005, there has been a number of developments in the Anti-Money

The purpose of this Guidance Notes is to:

1.1 What is Money Laundering?

As per the Prevention of Money Laundering Act 2002, the offence of

Whosoever directly or indirectly attempts to indulge or knowingly assists

"proceeds of crime" means any property derived or obtained, directly or

Money laundering is the process by which criminals attempt to hide and

Money Laundering Prevention, therefore, is not only a statutory or

1.2 Terrorist Financing

• Terrorist funding can happen from legitimately obtained income

• More often terrorist activities require small amounts and hence it is

1.3 Other Financial Crimes

1.4 International Developments & Recommended Standards

1.4.1 Financial Action Task Force (FATF)

One of the most important events to influence international money

institutions and non-financial entities and professions to prevent money

Customer due diligence and record keeping

Reporting of suspicious transactions

Other measures to deter money laundering and terroris financing

Measures to be taken with respect to countries that do not or

Regulation and supervision