KYC/ AML/ CFT Norms: Jaiib and Caiib


Know Your Customer (KYC) Norms, Anti Money Laundering (AML) and Countering the Terrorist Financing (CTF)

Dear bankers,

As we all know that  is KYC/ AML/ CFT Norms for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the KYC/ AML/ CFT Norms (Unit-2), FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♦ 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.

The act was amended in the year 2005, 2009 and 2012.

  • On 24 Nov 2017, In a ruling in favour of citizens’ liberty, the Supreme Court has set aside a clause in the Prevention of Money Laundering Act, which made it virtually impossible for a person convicted to more than three years in jail to get bail if the public prosecutor opposed it. (Section 45 of the PMLA Act, 2002, provides that no person can be granted bail for any offence under the Act unless the public prosecutor, appointed by the government, gets a chance to oppose his bail. And should the public prosecutor choose to oppose bail, the court has to be convinced that the accused was not guilty of the crime and additionally that he/she was not likely to commit any offence while out on bail- a tall order by any count.) (It observed that the provision violates Articles 14 and 21 of the Indian Constitution)

Any person who directly or indirectly:

  • Attempts to indulge.
  • Assists the person who is actually involved in any process.
  • Is a party to the activity connected with the proceeds of crime.

As the supply of illegal arms, drug trafficking, and prostitution, which can generate huge amounts of money and projecting or claiming it as untainted property; shall be guilty of the offence of Money Laundering.

The Act was formulated for the following objectives:

  • Prevent money-laundering.
  • Combat/prevent channelising of money into illegal activities and economic crimes.
  • Provide for the confiscation of property derived from, or involved/used in, money-laundering.
  • Provide for matters connected and incidental to the acts of money laundering.

Special Court

  • Section 43 of Prevention of Money Laundering Act, 2002 (PMLA) says that the Central Government, in consultation with the Chief Justice of the High Court, shall, for trial of offence punishable under Section 4, by notification, designate one or more Courts of Session as Special Court or Special Courts for such area or areas or for such case or class or group of cases as may be specified in the notification.

List of Offences

  • Under PMLA, the commission of any offence, as mentioned in Part A and Part C of the Schedule of PMLA will attract the provisions of PMLA.
  • Some of the Acts and offences, which may attract PMLA, are enumerated below:
  • Part A enlists offences under various acts such as:
  • Indian Penal Code, Narcotics Drugs and Psychotropic Substances Act, Prevention of Corruption Act, Antiquities and Art Treasures Act, Copyright Act, Trademark Act, Wildlife Protection Act, and Information Technology Act.
  • Part B specifies offences that are Part A offences, but the value involved in such offences is Rs 1 crore or more.
  • Part C deals with trans-border crimes and reflects the dedication to tackle money laundering across global boundaries.

Obligations Under Prevention of Money Laundering Act, 2002

  • Section 12 of PMLA, 2002 casts the following reporting obligation of banking companies to the Director, Financial intelligence Unit- India (FIU-IND), besides obligations of record keeping and preservation of information.

Cash Transaction Report (CTR):

  • All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign currency.
  • All series of cash transactions integrally connected to each other, which have been valued below Rs 10 lakhs 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 Rs 10 lakhs.
  • All cash transaction where forged or counterfeit currency notes or banknotes have been used as genuine and where any forgery of a valuable security has taken place. However, individual transactions for below Rs 50000 are not to be included in CTR.

Suspicious Transactions Report (STR)

  • If there are reasonable grounds to believe that the transaction involves proceeds of crime. 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.

Know your Customer

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.

  Is there any legal backing for verifying identity of clients?

  • Yes. 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.

What are the features to be verified and documents required to be obtained from customers?

  • The features to be verified and documents that may be obtained vary dependingupon the type of customers. The same are furnished below:
Features Documents
Accounts of individuals

o Legal name and any other names used







o Correct permanent address

(i)Passport (ii) PAN card (iii) Voter’s Identity Card (iv) Driving License (v) *Job Card issued by NREGA duly signed by an officer of the State Govt (vi) The letter issued by the Unique Identification Authority of India ( UIDAI) containing details of name, address and Aadhaar number (vii) Identity card (subject to the bank’s satisfaction) (viii) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank.

(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

o Name of the company

o Principal place of business

o Mailing address of the company

o Telephone/Fax Number

(i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (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

o Legal name

o Address

o Names of all partnersand their addresses

o Telephone numbers of the firm and partners

(i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (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

o Names of trustees, settlors, beneficiaries and signatories

o Names and addresses of the founder, the managers/directors and the beneficiaries

o Telephone/fax numbers

(i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf (iii) Any officially valid document to identify the trustees, settlors, 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

Accounts of Proprietorship Concerns Proof of the name, address and activity of the concern Registration certificate (in the case of a registered concern)

• Certificate/licence 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

• 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, registration/licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority/ Department, etc. Banks may also accept IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of the bank account. etc.

• The 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 in the name of the proprietary concern. Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

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