JAIIB PPB Module A Unit 2 : KYC and AML Guidelines

JAIIB Paper 2 (PPB) Module A Unit 2: KYC and AML Guidelines (New Syllabus) 

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 2 (Principles and Practices of Banking) includes an important topic called “KYC and AML Guidelines”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 2 (PPB) Module A Unit 2: KYC and AML Guidelines.
Aspirants must go through this article to better understand the topic, Banker Customer Relationship and practice using our Online Mock Test Series to strengthen their knowledge of Banker Customer Relationship.

Anti- Money Laundering (PMLA Act 2002)

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 and projecting it as untainted property shall be guilty of offence of money laundering”.

Stages of Money laundering

  • Placement: Placement is the first stage in the money laundering process. It refers to the physical disposal of proceeds of criminal activity.
  • Layering: “Layering” refers to the separation of illicit proceeds from their sources by creating complex layers of financial transactions. Layering conceals the audit trial and provides anonymity.
  • Integration: The third phase is integration, which means placing laundered proceeds into the legitimate economy as normal funds.

Stages of Financing of Terrorism 

There are numerous terrorist outfits, in the world. These have financial cycles similar to commercial  entities, and use banks and financial institutions. Financing of Terrorism comprises following stages:

  • Raising
  • Moving
  • Storing
  • Using

Objectives of Prevention of Money Laundering 

The main objectives of measures for prevention of money laundering are:

  • To prevent criminal elements from using the financial system for money laundering activities.
  • To prevent spread of criminal activities in society.
  • To safeguard the economy from financial crimes.
  • To prevent terrorists from gaining access to financial resources.

Money Laundering Offence 

The offence of money laundering has been defined in Sec. 3 of the PMLA as: 

  • 45 of PMLA stipulates that all offences under the PMLA are to be deemed to be cognizable and non-bailable offences.
  • 4 of PMLA stipulates the punishment for money laundering offence, which is rigorous imprisonment for not less than 3 years but up to 7 years and fine as per the gravity of the offence. In cases connected  with offences under the Narcotics Drugs and Psychotropic Substances Act the imprisonment may extend  up to maximum 10 years. 

Money Laundering – Risk Perception 

Financial products and services are designed to provide quick, convenient and efficient modes for dealing with funds for different purposes. These are abused by the criminals for money laundering and financing of terrorism, by disguising or misrepresenting their true identities, profiles and purposes.

Thus the primary source of ML/FT risks is the customers. These are also affected by: 

  • Nature of products and services
  • Country of incorporation of the bank
  • Place of the bank branch
  • Place(s) with which the transaction is connected.
  • Nature and value of transaction

Measures to Mitigate Money Laundering Risk 

The obligations under PMLA require the banks to mitigate ML/FT risks. Banks are required to take appropriate measures for the following purposes: 

  • To know/understand the customers and their financial dealings better.
  • To detect and report suspicious activities to FIU-Ind as per the laid down procedures.
  • To comply with applicable laws and regulatory guidelines.
  • To adequately train the staff in KYC/AML procedures. These make it difficult for criminals to abuse banks for ML/FT

Know Your Customer Policy

Prior to the introduction of “Know Your Customer (KYC)” guidelines by the RBI in 2002, the banking practice was to obtain introduction for a new customer from an existing account holder of satisfactory  standing and for certain period or from a staff member who knows the customer properly.

‘Customer’ Definition: KYC Norms  Sec. 2(ha) of the PMLA defines customer as ‘client’ as follows: ‘“client” means a person who is engaged in a financial transaction or activity with a reporting  entity and includes a person on whose behalf the person who engaged in the transaction or activity,  is acting;’  This definition has been adopted by RBI in Master Direction – Know Your Customer (KYC) Direction,  2016 for defining ‘Customer’.

A ‘customer’ from KYC norms perspective differs in from the traditional meaning of ‘customer’: 

(i) It includes not just the person in whose name the dealings are carried out with the bank, but also  those who actually act for such person.

(ii) It covers not only the account holders and those having continued relationship, but also those who  avail of any service on one-off basis.

For the purpose of KYC requirements, a bank needs to include a wide range of persons availing various  services, like: 

  • A bank account including fixed deposits
  • Credit facilities (fund-based or non-fund based)
  • Remittance facility on stand-alone basis even once or multiple times
  • Demat account (Bank is a Depository Participant)
  • PPF Account Or Pension Fund Account
  • Third party product (e.g. insurance, mutual fund)
  • Safe custody services or safe deposit locker services
  • Receiving remittances for payouts

Besides, the following persons are also considered ‘customer’: 

  • In case of entities availing services – their beneficial owners
  • In case of accounts maintained by Professional Intermediaries for their clients – beneficiaries of the transactions

Risk Management 

  • Risk Based Approach : Banks shall apply a Risk Based Approach (RBA) for mitigation and management of the identified risk and should have Board approved policies, controls and procedures in this regard.
  • Risk Assessment: Banks should undertake assessment of and take effective measures to mitigate the ML/TF risks from customers, products/ services, regions/ countries where its offices are located, delivery channels, and  the transactions undertaken by their customers.  This exercise should be proportionate to the nature, size, geographical presence, complexity of  activities/ structure, etc.
  • Customer Risk: Categorisation Customers are classified into three risk categories namely high, medium and low, based on the  risk perception of the bank. 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.
  • Role of Other Functions For effective risk management, an appropriate framework covering proper management oversight,  systems, controls and other related matters is required.  The bank’s internal audit team undertakes independent evaluation of the compliance with KYC/  AML Policy, including legal and regulatory requirements.
  • Introduction of New Technologies: Continuing development of Information and Communication Technology leads to new technology  based products, like Smart Cards/Mobile Wallet/ Net Banking/ Mobile Banking/RTGS/ NEFT/IMPS
  • Staff Hiring and Training: Bank staff, are potentially of high inherent risk by virtue of their access to the bank’s systems, their role in conducting the bank’s business and the powers exercised by them.

FATF (The Financial Action Task Force)

FATF Issues Revised Recommendations

The FATF Recommendations are the international standards set by the FATF to combat money laundering, terrorist financing, and more recently, the financing of proliferation. They cover the comprehensive set of measures that countries should have in place within their criminal justice and regulatory systems; the preventive measures to be taken by financial institutions and other businesses and professions; measures to ensure transparency on the ownership of legal persons and arrangements; the establishment of competent authorities with appropriate functions, and powers and mechanism for cooperation; and arrangements to cooperate with other countries.

On Feb. 16, 2012, the FATF issued revised Recommendations. A number of significant and important changes have been made to the FATF Recommendations. These have strengthened the standards in the following key areas:

  • The risk-based approach to implementing AML/CFT measures has been clarified and more fully elaborated within the Standards. This would allow countries to adopt an effective and appropriate response commensurate to the risks.
  • The requirements to ensure timely access to adequate and accurate information on the beneficial ownership of legal persons and arrangements have been strengthened and clarified.
  • Tax offenses have been made predicate offenses for money laundering.
  • The powers and responsibilities of law enforcement and the FIU has been elaborated and the scope for international cooperation strengthened.
  • The definition of politically exposed persons (PEPs) has been broadened to include domestic PEPs and PEPs from international organizations.
  • The scope for financial group (or consolidated) supervision has been elaborated and enhanced.
  • The transparency of wire transfers has been enhanced.
  • A new standard has been added concerning the implementation of targeted financial sanctions related to the proliferation of weapons of mass destruction.

Reporting Obligations

Banks are required to furnish to FIU-IND reports pertaining to transactions of prescribed type and value  at prescribed frequency.

(a)Monthly Reports  Following four reports are required to be submitted for each calendar month by the 15thof the following  month.

(b)Suspicious Transactions Report (STR)  Banks are required to report to FIU-IND any suspicious transaction noticed by them, within 7 days of  establishing suspicion. This is the key report for FIU-IND to enable it to provide useful intelligence  to the law enforcement agencies. A transaction is considered as suspicious if to a person acting in  good faith, it appears to satisfy any of the following:

  • A reasonable doubt that it may involve proceeds of an offence specified in the Schedule to PMLA, i.e. likely to be for money laundering.
  • Appears to be made in circumstances of unusual or unjustified complexity.
  • Appears to have no economic rationale or bonafide purpose.
  • A reasonable doubt that it may involve financing of the activities relating to terrorism.

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