KYC Directions 2016 Trade Finance Related Issues. Varsha Bajpai Assistant General Manager Reserve Bank of India, Bangalore

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1 KYC Directions 2016 Trade Finance Related Issues Varsha Bajpai Assistant General Manager Reserve Bank of India, Bangalore

2 Know Your Customer (KYC) Master Directions 2016 A regulatory perspective and issues in trade finance arsha Bajpai Reserve Bank of India, Bengaluru

3 Scheme of Presentation Need for KYC KYC AML Guidelines of RBI PMLA Regulatory Concerns

4 Need to adhere to KYC/AML Guidelines Sound KYC/AML/CFT practices: Preserves the integrity of/faith in the financial system Reduces the banks exposure to reputational, operational, compliance and concentration risks Recent spurt in supervisory actions against banks highlights the risks banks are exposed to Reduces diversion of limited and valuable management & operational resources to resolve issues Helps in understanding the customers and their financial dealings KYC hand in hand with AML

5 KYC/AML Guidelines of RBI Evolution in Stages First Circular on KYC Guidelines revisited to be compliant with FATF Recommendations on AML/CFT, BCBS Guidelines on CDD Reporting to FIU-IND st Master Circular January 2016 Master Directions replaced master circulars Till now 39 such master directions issues Relevance for today s session Master Direction on KYC AML

6 KYC -AML Master Directions 2016 Master Direction Know Your Customer issued On February 25, 2016 issued in exercise of the powers conferred by Sections 35 A of the Banking Regulation Act, 1949 and the Banking Regulation Act (AACS), 1949, read with Section 56 of the Act ibid and Rule 9(14) of Prevention of Money-Laundering (Maintenance of Records) Rules, The essence of these directions are to ensure that all the Regulated Entities (REs) which includes banks, AIFIs, NBFCs, payment service providers, Prepaid Payment Instrument Issuers, all authorized persons who are agent of Money Transfer service need to follow certain customer identification procedure while undertaking a transaction either by establishing an account based relationship or otherwise and monitor their transactions.

7 KYC -AML Master Directions 2016 contd. Board approved Policy-Customer acceptance, identification, transaction monitoring, risk management Bank s Board to nominate a Designated Director. Principal officer shall in no case be the Designated Director. The Principal Officer shall be responsible for ensuring compliance, monitoring transactions, and sharing and reporting information as required under the law/regulations. Customer Acceptance Policy No accounts where identity cannot be verified- No benami account Parameters for risk assessment to be clearly defined Documentation requirements in tune with regulatory guidelines depending on risk categorisation Circumstances, in which a customer is permitted to act on behalf of another person / entity Checks before account opening-criminal background, terrorist links etc Customer due diligence very important and that has to be done on an ongoing basis.

8 KYC -AML Master Directions 2016 contd. Risk Profiling-based on risk perception and categorisation Documentation Non-intrusive Risk categorisation-based on bank s assessment and risk perception of the customers and not merely based on any group or class Board approved well defined guidelines; meticulous compliance Bank s should identify, assess and mitigate laundering risk for customers, countries and geographical areas as also for products/ services/ transactions/delivery channels. Customer Acceptance Policy not too restrictive

9 Master Directions Contd.. 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. need to obtain sufficient information necessary to establish, to bank s satisfaction, the identity of each new customer & purpose of the intended nature of banking relationship Nature of documents/information based on bank s perception of risk & type of customer Natural person-identity, address, photograph Legal person-legal status, ownership & control structure, beneficial owner, persons acting on behalf of the legal person

10 Master Directions Contd.. Uniform Customer Identification Code-better monitoring, better risk profiling Customer Identification Review-when? Customer Identification-periodical updation-full KYC exercise Walk-in-customers-customer identification, STRs to FIU-IND Foreign PEPs, non-face-to-face customers, accounts opened by professional intermediaries Customer Identification Requirements-Regulatory Guidelines are indicative Irrespective of type of customer, ultimate responsibility for knowing the customer lies with the bank.

11 Master Directions Contd.. Monitoring of transactions-banks should exercise ongoing due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, his business and risk profile and where necessary, the source of funds 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 extent of monitoring will depend on the risk sensitivity of the account threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits review of risk categorisation of customers once in six months for high risk customers, partial freezing only after giving two notices at the interval of three months. After six months of partial freezing all debits and credits to be disallowed Risk profiling is integrated with monitoring of the customer account?

12 Master Directions Contd.. Sale of third party products as agents banks should verify the identity and address of the walk-in customer maintain transaction details with regard to sale of third party products and related records Bank's AML software should be able to capture, generate and analyse alerts for the purpose of filing CTR / STR in respect of transactions relating to third party products with customers including walk-in customers. No cash transactions for sale of third party products above Rs. 50,000; PAN verification mandatory for regular and walk-in customers Correspondent banking-at-par cheque facility for co-operative banks-right to verify records of co-op banks to ensure KYC/AML/CFT compliance

13 Proprietor Ship Concern - For opening an account in the name of a sole proprietary firm, a certified copy of an OVD as mentioned at Section 3(a) (vi) of Chapter I, containing details of identity and address of the individual (proprietor) shall be obtained. Any two of the following documents as a proof of business/ activity in the name of the proprietary firm shall also be obtained: Registration certificate / Certificate/licence issued by the municipal authorities under S&E Act/CST/VAT certificate/ Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities/licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute/ Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm's income is reflected, duly authenticated/acknowledged by the Income Tax authorities/utility bills such as electricity, water, and landline telephone bills.

14 Contd.. If the REs are able to satisfy through contact point verification to establish the existence of such firm and is satisfied that it is not possible to furnish two such documents, REs may, at their discretion, accept only one of those documents as proof of business/activity. If an existing KYC compliant customer of a RE desires to open another account with the same RE, there shall be no need for a fresh CDD exercise. Some concessions to accounts of SHGs KYC verification once done by one branch/office of the RE shall be valid for transfer of the account to any other branch/office of the same RE, provided full KYC verification has already been done for the concerned account and the same is not due for periodic updation and a self-declaration from the account holder about his/her current address is obtained in such cases.

15 Master Direction on Import of Goods and Services Issued on January 1, 2016 Import of Goods and Services into India is being allowed in terms of Section 5 of the Foreign Exchange Management Act 1999 (42 of 1999), read with Notification No. G.S.R. 381(E) dated May 3, 2000 viz. Foreign Exchange Management (Current Account Transaction) Rules, Bonafide remittance purpose to be established by the AD banks before advance import remittance Copy of license for which import is made

16 Master Direction on Import of Goods and Services contd. Importer to furnish evidence of import viz., Exchange Control Copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., payment for import can also be made by way of credit to non-resident account of the overseas exporter maintained with a bank in India Remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc. Some exceptions allowed in settlement of import dues delayed due to disputes, financial difficulties, etc.

17 Contd. In case of advance remittance exceeding USD 2,00,000 irrevocable standby Letter of Credit or a guarantee is required. In cases where such a guarantee is not available and the bank is satisfied of the bonafide of transactions, no requirement of SBLC up to an amount of USD 5 million. For public sector companies the amount is USD 100,000. Third party payments allowed subject to being in place a purchase order/tripartite agreement, bonafide transactions and other stipulations

18 PMLA, 2002 & PML Rules, 2005 Money laundering is The process by which the proceeds of crime are converted into assets which appear to have a legitimate origin The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, Effective September 2015 Director, FIU-IND shall have powers to issue guidelines to the REs for detecting transactions referred to in various clauses of sub-rule (1) of rule 3, to direct them about the form of furnishing information and to specify the procedure and the manner of furnishing information. Designated Director from the bank s Board of Directors Principal Officer-Senior Management Official- Functional independence, access to customer information, transaction records etc. monitoring and reporting of all transactions and sharing of information as required under the law. overseeing and ensuring overall compliance with regulatory guidelines on KYC / AML / CFT issued from time to time and obligations under the Prevention of Money Laundering Act, 2002, rules and regulations timely submission of CTR, STR and reporting of counterfeit notes and all transactions involving receipts by non-profit organisations of value more than Rupees Ten Lakh or its equivalent in foreign currency to FIU-IND

19 PMLA, 2002 & PML Rules, 2005 Suspicious Transactions-cash or non-cash Suspicious Transactions-to be guided by definition in PML Rules, 2005 Robust Software generating alerts-identification and reporting of suspicious transactions Non-Profit Organisations transaction reporting Cross Border Wire Transfer Reporting REs shall ensure that in terms of Section 51A of the Unlawful Activities (Prevention) (UAPA) Act, 1967, they do not have any account in the name of individuals/entities appearing in the lists of individuals and entities, suspected of having terrorist links, which are approved by and periodically circulated by the United Nations Security Council (UNSC) mainly in the ISIL (Da esh) & Al-Qaida Sanctions List and the 1988 Sanctions List,

20 PMLA, 2002 & PML Rules, 2005 Section 12 of PMLA, 2002-Obligations of banks to maintain records, Director s access to banks customer information, Director s authority to impose fine for non-compliance Maintenance of Records-cash and suspicious transactions Information to be preserved-nature, amount, currency, date, parties Period of preservation of transactions & customer records-5 years from date of transaction/5years from end of relationship to reconstruct individual transactions Cash Transactions Reporting & Suspicious Transaction Reporting

21 TRADE FINANCE Some Key issues recently observed by regulator Risk profiles not being prepared keeping in view the risk categorization of newly opened current accounts. Banks not vigilant against the proprietorship concerns and not determining the source of funds being remitted by the newly opened current account holders. No attention being paid to unusually large transactions and unusual patterns which had no apparent economic purpose and inconsistent with the nature of activity and turnover of business declared by the customer at the time of account opening and no ongoing monitoring ensured. Funds remitted for intended foreign tour but no copies of VISA/ air tickets available on record

22 Contd.. The absence/ incorrect risk categorization of customers and eventual nonupdation of customer profiles and lack of monitoring leading to non-generation of AML alerts in the accounts and effective implementation of KYC / AML / CFT measures. Advance remittances for imports being allowed immediately after opening of account. The value of individual transaction being structured to less than USD 100,000 or equivalent in other currencies. The values of the transactions reduced in order to take advantage of the regulatory relaxation Credit opinion report of the overseas buyer not obtained huge volumes remitted in short period

23 Contd. MOS (Manager Order Slip) not on record for all FX outward TTs. Accounts of customers debited on the basis of request letters and not on the basis of physical cheques. Remittances made to dissolved companies The turnover/ number and volume of outward/ import remittance in the account not in sync with the nature of activity Incomplete account opening forms Account introduced by persons who themselves have opened accounts recently No filing of mandatory CTR/STR Complete failure of audit systems ( bank s internal and concurrent audit)

24 Contd Alerts were closed in a very routine and casual manner without proper review by the higher authorities. Frequent manipulation of sensitive Internal General Ledger accounts. Sharing of password among staff Exceptional Transaction reports were not examined.

25 Thematic Review-2013 UCIC Dummy PANs Risk Profiling-flaws Risk Categorisation Identification of beneficial owners KYC rigors not applied for PoA holders KYC not done for add-on/supplementary card holders No thresholds for monitoring purposes Transactions of walk-in-customers not monitored

26 Thematic Review-2013 PEP accounts not subjected to enhanced monitoring Multiple DDs below Rs. 50,000/- Cash Transactions for issue of DDs to existing customers-not reflected in customer accounts/routed through internal accounts CTRs-non-reporting to FIU-IND

27 Some good practices in place No issue of LCs without recourse. Strict control through analytics End of day reports, outstanding amount reports, overdue monitoring, portfolio spike report, branch wise outstanding report. Robust authentication procedures followed in the form of KYC checks, approval matrix and other statutory checks. Product offering in respect of LC/BD is restricted to only a few corporate branches for better control. Transaction processing is undertaken at centralized operations unit to avoid multiplicity of limits.

28 Risk Management Risk Management-Lines of Defence 1 st line of defence-frontline staff, who needs to imbibe bank s KYC/AML policy in letter and spirit-training 2 nd line of defence-compliance & Principal Officers-business interests of the bank vs effective discharge of role 3 rd line of defence-internal/external Audit-should not be perfunctory; appropriate oversight Restricted Lists, Caution Advices issues by RBI-Screening in FATF Statements

29 Contd.. UAPA( Unlawful activities Prevention Act)- Compliance to GoI ordersreporting to FIU,GoI, RBI; freezing/unfreezing of accounts special attention to business relationships and transactions with persons (including legal persons and other financial institutions) from or in countries that do not or insufficiently apply the FATF Recommendations and jurisdictions included

30 Risk Management Correspondent Banking-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. KYC/AML Guidelines-Applicability to overseas branches/subsidiaries Restrictions in host country to implementation of the guidelines? Wire transfers-concerns of investigative agencies on intentionally structured transactions-reporting to FIU-IND

31 Commitment to International Best Practices Financial Action Task Force-An inter-governmental policy making body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system The FATF has developed a series of 40 Recommendations/international standard and Nine Special Recommendations for combating money laundering and financing of terrorism and proliferation of weapons of mass destruction. India became a member of FATF in June With a view to recognizing indicators which may help in identifying non-genuine trade transactions out of billions of the trade transactions without affecting the free flow of trade, Financial Intelligence Unit India (FIU-IND) had constituted a Working Group of senior bankers. Based on the recommendations of the working group, certain red flags have been identified and FIU-India has issued guidelines to all the Reporting Entities in November 2015 for implementation by bank s Branches, for detecting Suspicious Trade Based Money Laundering Transactions.

32 Central KYC Records Registry (CKYCR) REs shall capture the KYC information for sharing with the CKYCR in the manner mentioned in the Rules, as required by the revised KYC templates prepared for individuals and Legal Entities as the case may be. Government of India has authorized the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), to act as, and to perform the functions of the CKYCR vide Gazette Notification No. S.O. 3183(E) dated November 26, This has been brought to live run w.e.f July 15, Recently RBI levied penalty on 13 banks for non-adherence to KYC norms, transactions in customer accounts FEMA violations and issued warnings to eight banks.

33 BE VIGILANT BE AWARE KNOW YOUR CUSTOMER

34 Thank You