Reserve Bank of India Fined Banks For Violating “Know Your Customer”/KYC- norms and Anti-Money Laundering Guidelines.

An Online Portal “Cobrapost” 

    had levelled charges against the following 3 private banks in India:

    • Axis Bank,
    • HDFC Bank and
    • ICICI Bank.
    As per the Reserve Bank of India, the probe/investigations into the allegations, did not reveal any prima facie- evidence of money laundering, and any conclusive inference in this regard could be drawn only by an end-to-end investigation of the transactions by tax and enforcement agencies.

    However, the RBI imposed fines totalling Rs 10.5 crores on the aboe 3 top private Banks in India for the irregularities and violations of norms found.

    The RBI conducted probes/investigations into the working of Banks in India, following the exposes made by “Cobrapost”, with allegations of contravention of “Know Your Customer”/KYC norms and Money Laundering guidelines.

    As per RBI ,the scrutiny of the banks revealed violation of certain regulations and instructions issued by the RBI.

    The Banks did not adhere to the KYC norms for walk—in customers for sale of third party products and failed to file cash transaction reports in respect of some cash transactions and sale of gold coins for cash beyond Rs 50,000.

    The Banks did not adhere to the to instructions on import of gold on consignment basis, limits on remittances under Liberalised Remittance Scheme and repatriation of funds from non—resident ordinary (NRO) account.

    After considering the facts of each case, and having  concluded that some of the violations were substantiated and warrented imposition of monetary penalty for violations of KYC norms and Money Laundering Guidelines, the Reserve Bank of India imposed fines totalling Rs 49.5 crores on 22 Private and Publice Sector Banks in India, as detailed below:

    • State Bank of India, Bank of India, Canara Bank, Bank of Baroda, Central Bank of India, Indian Overseas Bank and Federal Bank- 7 Banks- Rs 3 Crores each,(Rs 21 Crores)
    • The United Bank of India, Lakshmi Vilas Bank, Punjab National Bank, Punjab&Sind Bank,Jammu & Kashmir Bank and Andhra Bank – 6 Banks- Rs 2.5 Crores each,(Rs 15 Crores)
    • The Yes Bank, Vijaya Bank, Oriental Bank of Commerce, Dhanalakshmi Bank and  4 Banks – Rs 2 Crores each (8 Crores)
    • ING Vysya Bank and  Kotak Mahindra Bank – 2 Banks -Rs 1 .5 Crores each (Rs 3 Crores)
    • Deutsche Bank, Development Credit Bank-Rs 1 Crore each (Rs 2 Crores)
    • Ratnakar Bank- Rs 50 Lakhs (Rs 0.5 Crores)
    The Reserve  Bank of India has issued cautionary letters to the following Banks regarding  adherence of KYC norms and Money Laundering Guidelines:
    • Citibank,
    • Standard Chartered Bank,
    • Barclays Bank,
    • BNP Paribas,
    • Royal Bank of Scotland,
    • Bank of Tokyo Mitsubishi and
    • State Bank of Patiala.

    The following are the details of RBI’s -Know Your Customer Guidelines:

    What is KYC:
    KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc which in turn helps the banks to manage their risks prudently. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering.

    KYC has two components – Identity and Address. While identity remains the same, the address may change and hence the banks are required to periodically update their records.

    Legal backing for verifying identity of clients:
    Reserve Bank of India has issued guidelines to banks 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 Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.

    Applicablility of KYC:
    KYC is applicable to all the customers of the bank.

    For the purpose of KYC following are the ‘Customers of the bank:

    • 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 reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.
    Procedure specified for Customer Identification:
    Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. Banks have been advised to lay down 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.

    Periodical Updating of  the Details of the Customers:
    To ensure that the latest details about the customer are available, banks have been advised to periodically update the customer identification data based upon the risk category of the customers.

    Banks create a customer profile based on details about the customer like social/financial status, nature of business activity, information about his clients’ business and their location, the purpose and reason for opening the account, the expected origin of the funds to be used within the relationship and details of occupation/employment, sources of wealth or income, expected monthly remittance, expected monthly withdrawals etc. When the transactions in the account are observed not consistent with the profile, bank may ask for any additional details / documents as required. This is just to confirm that the account is not being used for any Money Laundering/Terrorist/Criminal activities.

    Proof of Identity / PoI and Proof of Address /PoA For Individuals :-
    One of the following Photo-Identity Documents Required For Proof of Identity:

    • Driving licence,
    • Passport,
    • IT PAN Card,
    • Voters’ Card or
    • Any Photo Identity card Issued by Employer/College etc. (subject to the bank’s satisfaction)
    • One of the following Documents Required For Address Proof:
    The above Photo Identity Documents /PoI may be having any address, and not necessarily the Present Address, and in order to establish the present address of the customer, in addition to one of above  Photo Identification Document, the Bank may require any of the Utility Bills such as:
    • Telephone Bill,
    • The Electricity Bill,
    • LPG Cooking Gas Deposit Receipt/bill,
    • Bank Account Passbook/Statement,
    • Letter from any recognized public authority,
    • Family Ration card or
    • Letter from Employer (subject to satisfaction of the bank).
    For Accounts of Companies:
    • Name of the Company,
    • Address of the Company, 
    • Certificate of incorporation and Memorandum & Articles of Association,
    • Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account,
    • Power of Attorney granted to its managers, officers or employees to transact business on its behalf,
    • Copy of IT PAN Allotment letter and
    • Copy of the Telephone Bill.
    For Partnership Firms:
    • Name of the Firm,
    • Address of the Firm,
    • Registration certificate, if registered,
    • Partnership deed,
    • Names  and Addresses of all the partners,
    • Telephone numbers of the firm and partners,
    • Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf,
    • Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses and
    • Telephone bill in the name of firm / partners.
    For Accounts of Trusts and Foundations:
    • Names of Trustees, Settlers, Beneficiaries and Signatories,
    • Certificate of registration, if registered,
    • Power of Attorney granted to transact business on its behalf,
    • Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders / managers / directors and their addresses,
    • Resolution of the managing body of the foundation / association,
    • Telephone bill,
    • Names and Addresses of the Founder, The Managers / Directors and the Beneficiaries,
    • Telephone / FAX- Number.
    Accounts of Proprietorship Concerns:
    • Name and  Address and Activity of the concern,
    • Registration certificate (in the case of a registered concern),
    • Certificate / license issued by the Municipal authorities under Shop & Establishment Act,
    • Sales and income tax returns
    • CST / VAT certificate
    • Certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities
    • Registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department.
    • IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of bank account.
    • Licence issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc.
    • Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.
    For Individuals who do not have Address Proof Documents in their names:
    Address Proof Documents/Identity Proof Documents in the Name of a close relative,such as, wife, son, daughter and parents etc. who live with their husband, father/mother and son, as the case may be, with whom the prospective customer is living,  along with a declaration from the relative that the said person /prospective customer,  wishing to open an account with the Bank,  is a relative and is staying with him/her is acceptable.

    As and additional and  supplementary evidence bank may ask for a letter received through post for further confirmation.

    For persons Not Having Any Proof of Identity or Address:
    A  person  belonging to low income group who is not able to produce  documents to satisfy the bank about his identity and address, can open bank account with an introduction from another account holder who has been subjected to full KYC procedure provided that the balance in all his accounts taken together is not expected to exceed Rupees Fifty Thousand (Rs. 50,000/-) 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.

    The introducer’s account with the bank should be at least six months old and should show satisfactory transactions.

    Photograph of the customer who proposes to open the account and also his address needs 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.

    If at any point of time, the balance 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 will 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.

    A Certificate from Employer as Proof of Identity and Proof of Address:
    Banks may rely on such certifications only from corporate and other entities of repute provided that they are aware of the competent authority designated by the concerned employer to issue such certificate.

    In addition, banks also require at least one of the valid documents indicated above viz. Passport, Driving Licence, PAN Card, Voter’s Identity Card etc. or utility bills for KYC purposes for opening bank account of salaried employees of corporate and other entities.

    Confidentiality of the Information collected vide KYC from a  customer;
    The information collected from the customer, vide KYC, for the purpose of opening of account is treated as confidential and details thereof are not divulged for cross selling or any other similar purposes.

    Applicability of KYC for Credit Cards/Debit Cards/Smart Cards:

    KYC is necessary for Credit Cards/Debit Cards/Smart Cards and also in respect of add-on/ supplementary cards.

    Banks’ Action For Non –furnishing of information  required for KYC:
    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 can 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.

    According to  “Cobrapost”, the following are some of the ways banks in India absorb “Black Money” and convert it into white (Money-Laundering):

    • Accept huge amounts of cash and invest it in insurance products and gold,
    • Open an account to route the cash into various investment schemes of the bank,
    • Do it even without the mandatory PAN card number or adhering to the KYC norms laid down by RBI,
    • Split the money into tranches to get it into the banking system without being detected,
    • Use ‘benami’ accounts to facilitate the conversion of black money,
    • Use accounts of other customers to channelise black money into the system for a fee,
    • Get demand drafts made for the client either from their own banks or from other banks to facilitate investment without it showing up in the client’s account,
    • Keep the identity of the investor/depositor secret,
    • Open multiple accounts and close them at will to facilitate investment of black money,
    • Invest black money in multiple instruments in the names of different individuals, not necessarily drawn from among the family,
    • Allot lockers for the safekeeping of the illegitimate cash, including special large lockers to accommodate crores of hard cash,
    • Personally come to the residence of the client to take the black money deal forward and collect cash, even bring along a currency counting machine,
    • Use provisions like Form 60 to deposit the illegitimate cash into the account to route it into investment,
    • Help the client to transfer black money abroad through NRE (non-resident external)/NRO (non-resident ordinary) account and
    • Transfer the money telegraphically or through means other than regular banking procedures,
    • Operation of lockers (with cash in them) outside regular banking hours to ensure secrecy of these customers’ identities and to mask the nature of the transactions,
    • To make a suitable profile for the client, such as showing him as an agriculturist or engaged in some business, so as to make the investment unquestionable,
    • Use “sundry” accounts of the bank to deposit all the illegal cash from where it is to be routed into investment,
    • Use some company and take away a chunk of foreign currency as expenses toward business-cum-leisure trips.

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