TaxTMI 
TaxTMI 
Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009- Money changing activities
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..... (FL Series) Circular No. 1] dated October 17, 2007 and A.P. (DIR Series) Circular No. 15 [A.P. (FL Series) Circular No. 2] dated November 19, 2009. 2. In terms of Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009, all Authorized Persons, authorized under Section 10(1) of FEMA, 1999 have been brought under the purview of PMLA, 2002. Therefore, the existing Know Your Customer (KYC) norms/ Anti-Money Launderings (AML) standards/ Combating the Financing of Terrorism (CFT) for money changing activities have been revisited in the context of the Financial Action Task Force (FATF) Recommendations on Anti Money Laundering (AML) standards and on Combating the Financing of Terrorism (CFT). Detailed instructions on Know Your Customer (KYC) norms/ Anti-Money Launderings (AML) standards/ Combating the Financing of Terrorism (CFT) for money changing activities have been revised. 3. Accordingly, revised guidelines on obligation of Authorised Persons under PMLA, 2002 as amended by Prevention of Money Laundering (Amendment) Act, 2009 in respect of money changing activities are given in (F-Part-I) annexed. All Auth....
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....nbsp; Yours faithfully, (Salim Gangadharan) Chief General Manager-in-Charge (F-Part-I) [Annex to A.P. (DIR Series) Circular No. 17 {A.P. (FL/RL Series) Circular No. 4 dated November 27, 2009] Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of APs under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009- Money Changing activities 1. Introduction The offence of Money Laundering has been defined in Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA) 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 ....
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....efore, 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, wherever necessary, should be sought separately with his/her consent. 4.2 KYC Policy APs should frame their KYC policies incorporating the following four key elements: a) Customer Acceptance Policy; b) Customer Identification Procedures; c) Monitoring of Transactions; and d) Risk Management. 4.3 Customer Acceptance Policy (CAP) a) Every AP 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 AP: i) No transaction is conducted 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 (APs may choose any....
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....d entities whose identities and sources of wealth can be easily identified and transactions by whom by and large conform to the known profile, may be categorised as low risk. Customers that are likely to pose a higher than average risk 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. APs 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 requiring enhanced due diligence include (a) non­resident customers; (b) customers from countries that do not or insufficiently apply the FATF standards; (c) high net worth individuals; (d) trusts, charities, NGOs and organizations receiving donations; (e) companies having close family shareholding or beneficial ownership; (f) firms with ' sleeping partners'; (g) politically exposed persons (PEPs); (h) non-face to face customers; and (i) those with dubious reputation as per public informat....
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....are given in paragraph 4.5 below for guidance of APs. APs may, however, frame their own internal guidelines based on their experience of dealing with such persons / entities, their normal prudence and the legal requirements as per established practices. If the AP decides to undertake such transactions in terms of the Customer Acceptance Policy, the AP should take reasonable measures to identify the beneficial owner(s) and take all reasonable steps to verify his identity. b) Some close relatives, e.g. wife, son, daughter and parents, etc. who live with their husband, father/mother and son, as the case may be, may find it difficult to undertake transactions with APs as the utility bills required for address verification are not in their name. It is clarified, that in such cases, APs 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 undertake a transaction is a relative and is staying with him/her. APs can use any supplementary evidence such as a letter received through post for further verification of the address. Whil....
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....or terrorist financing, irrespective of the amount involved, enhanced Customer Due Diligence (CDD) should be applied. f) Sale of foreign exchange to customers (i) Inall cases of sale of foreign exchange, irrespective of the amount involved, for identification purpose the passport of the customer should be insisted upon and sale of foreign exchange should be made only on personal application and after verification of the identification document. A copy of the identification document should be retained by the AP. (ii) Payment in excess of Rs. 50,000 towards sale of foreign exchange should be received only by crossed cheque drawn on the bank account of the applicant's firm / company sponsoring the visit of the applicant / Banker's cheque / Pay Order / Demand Draft. Such payment can also be received through debit cards / credit cards / prepaid cards provided (a) KYC/ AML guidelines are complied with, (b) sale of foreign currency / issue of Foreign Currency Travellers' cheques is within the limits (credit / prepaid cards) prescribed by the bank, (c) the purchaser of foreign currency / Foreign Currency Travellers' Cheque and the credit / debit / prepaid card holder is one and th....
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....should be identified with reference to necessary documents. In the case of a 'foundation', steps should be taken to verify the founder managers/ directors and the beneficiaries. ii) Transactions by companies and firms APs need to be vigilant against business entities being used by individuals as a 'front' for undertaking transactions with APs. APs 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 company that is listed on a recognized stock exchange, it will not be necessary to identify all the shareholders. iii) Transactions by 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. APs should gather sufficient information on any person/customer of....
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....unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer, the AP should not undertake the transaction. Under these circumstances, APs should make a suspicious transactions report to FIU-IND in relation to the customer, even if the transaction is not put through. 4.8 Risk Management a) The Board of Directors of the AP should ensure that an effective KYC programme is put in place by establishing appropriate procedures and ensuring 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 AP for ensuring that the APs' policies and procedures are implemented effectively. APs 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 or business relationship. b) APs' internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policie....
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....www.fatf-gafi.org), issued from time to time, while dealing with individuals or businesses from these jurisdications. 4.11 Applicability to branches and subsidiaries outside India The guidelines contained in this 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 the Reserve Bank. In case there is a variance in KYC/AML/CFT standards prescribed by the Reserve Bank and the host country regulators, branches/overseas subsidiaries of APs are required to adopt the more stringent regulation of the two. 4.12 Principal Officer a) APs should appoint a senior management officer to be designated as Principal Officer. Principal Officer shall be located at the head/corporate office of the AP and shall be responsible for monitoring and reporting of all transactions and sharing of information as required under the law. The Principal Officer should also be responsible for developin....
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.... the nature of the transactions; · the amount of the transaction and the currency in which it was denominated; · the date on which the transaction was conducted; and · the parties to the transaction (iii) Maintenance and Preservation of Record a) APs are required to maintain the records containing information in respect of transactions referred to in Rule 3 above. APs should take appropriate steps to evolve a system for proper maintenance and preservation of transaction information in a manner that allows data to be retrieved easily and quickly whenever required or when requested by the competent authorities. Further, APs should maintain for at least ten years from the date of transaction between the AP and the client, all necessary records of transactions, both with residents and non-residents, 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 prose....
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....l the reporting formats. There are altogether four reporting formats, as detailed in (F-Part-III) annexed to this circular, viz. i) Cash Transactions Report (CTR); ii) Electronic File Structure-CTR; iii) Suspicious Transactions Report (STR); iv) Electronic File Structure-STR. 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 APs 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 formats concerned. c) In terms of instructions contained in paragraph 4.3(b) of this Circular, APs are required to prepare a profile for each customer based on risk categorisation. Further, vide paragraph 4.6, the need for periodical review of risk categorisation has been emphasized. It is, therefore, reiterated that APs, as a part of transaction monitoring mechanism, are required to put in place an appropriate software application to throw alerts when the transactions are i....
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....cer for onward transmission to the FIU-IND. B) Suspicious Transaction Reports (STR) i) While determining suspicious transactions, APs should be guided by definition of suspicious transaction contained in PML 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 provide documents. It is clarified that APs should report all such attempted transactions in STRs, even if not completed by customers, irrespective of the amount of the transaction. iii) APs should make STRs if they have reasonable ground to believe that the transaction, including an attempted transaction, involves proceeds of crime irrespective of the amount of transaction and/or the threshold limit envisaged for predicate offences in part B of Schedule of Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009. iv) The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that any transaction, including an attempted transaction, whether cash or non-cash, or a series of transactions integrally conne....
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....evention of money laundering, provisions of the PMLA and the need to monitor all transactions to ensure that no suspicious activity is being undertaken under the guise of money changing. 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. The steps to be taken when the staff come across any suspicious transactions (such as asking questions about the source of funds, checking the identification documents carefully, reporting immediately to the Principal Officer, etc.) should be carefully formulated by the AP and suitable procedure laid down. The APs should have an ongoing training programme for consistent implementation of the AML measures. 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 system of APs. It would, therefore, be necessary that adequate screening mechanism is put in place by APs as an integral part of their recruitment/hiring process of personnel ....