A project Report on Kyc and money laundering A DISSERTATION

Submitted for the partial fulfillment of the requirement for the degree of MASTERS IN MANAGEMENT STUDIES

MONALI S. SHINDE. MMS FINANCE- MS 1213048

INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES Thane -401 104 UNIVERSITY OF MUMBAI 2013-2014

T.G Hotchandani Associate

(Chartered Accountancy firm)

Profile- Charted account firm:

T.G hotchandani & Associate Charted accountants (TGH), based in Thane , Mumbai is rendering comprehensive professional services in the areas of direct & indirect tax consultancy, operational audit, compliance audit and operational and compliance advisory service. T.G Hotchandani & associates is a proprietary firm established by CA thakur G. Hotchandani, Who Qualified in the year 1997 with 26Th India rank. The firms constant endeavor is to craft a premier focused professional firm providing high quality services and integrating value of added knowledge for its clients. Firms Professional approach couple with personal touch has earned it enormous confidence of clients, which is reflected in a business relationship that it enjoys with them and also in the consistent growth in portfolio of its services. The firm regards the provisional of a personal, high quality service to the clients as an absolute priority.

Vision and mission: Tgh believe in providing quality services in a time bound manner. Tgh is committed to helping
its clients succeed in delivering business values and in achieving value goals for stakeholder. The firm is committed to its people, clients and the society at large and believes in the motto, service above self

Our Team: TGH is well equipped and a competent team. It works relentlessly using legal, taxation,
accounting, advisory and auditing expertise, knowledge and experience to deliver value and quality. Our talent is our single most important sustainable competitive advantage for future growth.

Human Resources:
Qualified Charted Accountants Four Professionally qualified executives Two Semi qualified six Executives & Assistants- Forty Five

Services:
Services among other include: Assurance services Managements Assurance Services Taxation HR& payroll operation solutions Compliance Advisory services Operational consultancy.

Clients :
The client of firm include prestigious corporate and non corporate, which includes Indian corporate houses, Multinational companies and other High net worth Individuals. However, the core clientele of firms is service industry including Banks, Financial Institutions, BFS companies and BPO companies. These include:

Axis Bank ICICi Bank IDBI Bank HDFC Bank Yes Bank Ltd First Rand Bank ICICI Investment Management Co. Ltd. India Infradebt Ltd IDBI intech Limited Endress + Heusser (India) limited

 Globeop Financial Services (India) Limited

Areas of experiance:
The firm in past among others; has handled assignment in following areas:

Audit & Taxation:

Operation & process Audits Statutory Audits Internal Audits Concurrent Audits Fraud investigation assignments Provident fund and superannuation Trust Audits Tax Audits Direct & Indirect Tax Consultancy Specialized Consultancy in withholding tax and TDS matters Processing and outsourcing Payment processing TDS operations Payroll processing Inter branch reconciliation Reconciliation of inter office accounts Inwards and outward clearing accounts reconciliation Pay order and DD Reconciliation ATM reconciliation Esop Administration & Consultancy Conceptualizing , devising and implementations of processes Business process re- engineering

Infracture: The firm is equipped with sufficient infrastructure and resources to carry our the assignment enumerated above. Contact details: #209, Paradise Tower, Near McDonalds, Gokhale Road, Thane (West), Mumbai- 400 602

Introduction of axis bank History of Axis bank:

1993: The Bank was incorporated on 3rd December and Certificate of business on 14th December. The Bank transacts banking business of all description. UTI Bank Ltd. was promoted by Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India
Axis Bank is the third largest private sector bank in India. Axis Bank offers the entire spectrum of financial services to customer segments covering Large and Mid-Corporates, MSME, Agriculture and Retail Businesses. The Bank also has overseas offices in Singapore, Hong Kong, Shanghai, Colombo, Dubai and Abu Dhabi. Axis banks is commercial banking services, which includes merchant banking, direct finance infracture finance, venture capital fund , advisory, trusteeship, forex, treasury and other related financial services. As on 31 Mar 2009, the group has 827 branches, extension counters and 3,595 automatic teller machine (ATMs) Axis bank was the first of the new private banks to have begun operations in 1994, after the government of India allowed new private banks to be established. The bank was promoted jointly by the Administrator of the specified undertaking of the Unit trust of India (UTI-I), Life Insurance Corporation of India (LIC) and Genera Insurance Corporation of India(GIC) and other four PSU insurance companies , I.e. National insurance Company LTD., The new India assurance Company ltd., Oriental Insurance Company Ltd., and United India Insurance Company ltd. The bank today is capitalized to the extent of Rs. 359.76 cores with the public holding (other than promoters) at 57.795. The banks registered office is at Ahmadabad and its central office is located at Mumbai. The bank has very wide network of more than 853 branches and Extension counters (as on 30th June 2009). The bank has a network of over 3723 ATMs (as on 30th June 2009). Providing 24 hrs a day bank convenience to its customers. This is one of the largest ATM networks in the country. Has strength in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

An overview of various business segments:

RETAIL BANKING, BUSINESS BANKING, CORPORATE CREDIT TREASURY INTERNATIONAL BANKING INFORMATION TECHNOLOGY AGRICULTURE FINANCIAL INCLUSION HUMAN RESOURCES CORPORATE SOCIAL RESPONSIBILITY (CSR)

Board of Directors

Dr. Sanjiv Misra Chairman Shikha Sharma -Managing Director and Chief Executive Officer

Key Milestones: 1. Opens the 10,000th ATM - Largest ATM network amongst private sector banks in India 2. Reached 2 lakh installed EDC machines the highest for any bank in India 3. Becomes the first Bank in the world to reach $2 billion loading on prepaid Travel CurrencyCards

Subsidiaries:
The Bank has set up eight wholly-owned subsidiaries: Axis Capital Ltd. Axis Private Equity Ltd. Axis Trustee Services Ltd. Axis Asset Management Company Ltd. Axis Mutual Fund Trustee Ltd. Axis Bank UK Ltd. Axis Securities Ltd. Axis Finance Ltd. Promoters Axis Bank Ltd. has been promoted by the largest Financial Institutions of the country, UTI, LIC, GIC and its subsidiaries. The Bank was set up in 1993 with a capital of Rs. 115 crore, with UTI contributing Rs. 100 crore, LIC - Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5 crore each

Vision 2015
To be the preferred financial solutions provider excelling in customer delivery through insight, empowered employees and smart use of technology

What is KYC? KYC (Know Your Customer) is a framework for banks which enables them to know / understand the customers and their financial dealings to be able to serve them better. All banks have been advised by The Reserve Bank of India (RBI) to follow certain KYC Guidelines 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 customers business, reasonableness of operations in the account in relation to the customers 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.

Objectives of KYC
The KYC process involves determining the true identity and beneficial ownership of accounts, source of funds, the nature of customers business, reasonableness of operations in the account in relation to the customers business, and so on. To enable the Bank to have positive identification of its relationship Is in the interest of customers to safeguard their hard earned money effective control of consolidated KYC risk requires banks to coordinate their risk management activities on a group wide basis across the head office and all branches and subsidiaries

When does KYC apply?

KYC will be carried out at the following stages: Opening a new account In respect of accounts where documents as per current KYC standards have not been submitted while opening the initial account Opening a Locker Facility where these documents are not available with the Bank for all the Locker facility holders When the Bank feels it necessary to obtain additional information from existing customers based on conduct of account When there are changes to signatories, mandate holders, beneficial owners etc. For non-account holders approaching the Bank for high Value one-off transactions like Drafts, Remittances etc.

Any 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. If anyone want to keep a fixed deposit in a bank. also kyc applicable to them Yes. KYC is applicable to 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.

There is 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.

Proof needed from customers regarding KYC RBI mandates three proofs to be collected from customers: o Photograph Proof o Proof of identity o Address proof These are to be submitted by the customer both at the time of opening of account as well as at the time of change of address. a. What proof of identity will you need? Best identification documents are those issued by a Government authority, having a photograph, address and signature One document can be used to establish both identity and address, else two or more documents will suffice b. Some proofs of Identity & Address for Individuals: Passport Election ID card Driving License Voter ID card

c. Proofs of Identity & Address for companies, Trusts, Firms:

Partnership Deed Trust Deed Memorandum & Articles of

d.

Documents used for Identity only for individuals:

Pan card ID card of reputed employers

e.

Documents used for Address only for individuals: Salary Slip Electricity Bill Telephone Bill Ration Card

If we are submitted our driving licence as a proof of identity and address but still the bank asked for telephone / electricity bill. There are two aspects of Customer Identification. One is establishing identity and the other is establishing present residential address. For establishing identity, the bank requires any authentic document carrying photo of the customer such as driving licence/ passport/ pan card/ voters' card etc. Though these documents carry the residential address of the customer, it may not be the present address. Therefore, in order to establish the present address of the customer, in addition to passport/ driving licence / voters' card / pan card, the bank may ask for utility bills such as Telephone / Electricity bill etc. Once KYC requirements are complied with while opening the account, the bank can again ask for KYC compliance from us. 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 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.

Contact Point in Banks for KYC

Contact point for customers in the Bank will be the Relationship Manager / official who opens the account and is the contact person during transactions

Effect on Customers
For prevention of opening of accounts in false identities, Banks have to ask for proof of customers identity and address during opening of new accounts Being asked for these documents does not imply that the customers are suspected of money laundering It is a necessity to identify all prospective account holders or customers as anybody including a criminal could falsely use another customers identity, if the respective Salary Slip Electricity Bill Telephone Bill Ration Card documents are not obtained.

Fine by Top three private banks

9% 48% 43% ICICI Bank HDFC Bank AXIS Bank

The Reserve Bank of India on Monday penalised top three private sector banks ICICI Bank, HDFC Bank and Axis Bank for violating, among others, know-your-customer (KYC) norms and failing to file cash-transaction reports in some cases. It levied a penalty of Rs 1 crore, Rs 4.5 crore and Rs 5 crore on ICICI Bank, HDFC Bank and Axis Bank, respectively.

The central bank, however, said its investigation of these banks did not reveal any prima facie evidence of money laundering. It observed that any conclusive inference in this regard can be drawn only by an end-to-end investigation of the transactions by tax and enforcement agencies. The RBI scrutinized books of accounts, internal control, compliance systems and processes of the banks corporate offices and some branches during March-April 2013. This was to investigate the allegations of violation of several RBI regulations, Foreign Exchange Management Act guidelines, and so on, made by online magazine Cobrapost.com in a sting operation. Based on the findings of the scrutiny, the Reserve Bank issued a show-cause notice to each of these banks, in response to which they submitted written replies. A similar scrutiny was also conducted at the corporate offices of 36 other banks during April and May 2013. The process of follow-up action in respect of these banks is at different stages of completion, the RBI said.

RBI penalizes 6 PSBs for violating KYC,

For violation, among other, on kyc and aml penalty amount (in rs crore)

2.5

RBI panalise to 6 PSBs Bank

1.5

0.5

0 Dena Bank Corporate bank Indian bank IDBI Bank Bank of maharashra Allahabad bank

Can KYC sanitize Indian banks?

KYC (Know Your Customer) is a term used by the banks for customer identification process. As per the Reserve Bank of India (RBI) guidelines, KYC 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. KYC guidelines ensure that the banks act with prudence and refrain from criminal acts of money laundering intentionally or unintentionally. While KYC norms apply to individuals as part of account opening process with any bank, needless to mention it holds true for companies, partnership firms, partnership concerns and trusts and foundations as well

Money laundering
The rise of global financial markets makes money laundering easier than ever -- countries with banksecrecy laws are directly connected to countries with bank-reporting laws, making it possible to anonymously deposit "dirty" money in one country and then have it transferred to any other country for use. Money laundering, at its simplest, is the act of making money that comes from Source A look like it comes from Source B. In practice, criminals are trying to disguise the origins of money obtained through illegal activities so it looks like it was obtained from legal sources. Otherwise, they can't use the money because it would connect them to the criminal activity, and law-enforcement officials would seize it.

Criminal activity Placement - At this stage, the launderer inserts the dirty money into a legitimate financial institution. This is often in the form of cash bank deposits. This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions. Layering - Layering involves sending the money through various financial transactions to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money's currency, and purchasing high-value items (boats, houses, cars, diamonds) to change the form of the money. This is the most complex step in any laundering scheme, and it's all about making the original dirty money as hard to trace as possible. Integration - At the integration stage, the money re-enters the mainstream economy in legitimate-looking form -- it appears to come from a legal transaction. This may involve a final bank transfer into the account of a local business in which the launderer is "investing" in exchange for a cut of the profits, the sale of a yacht bought during the layering stage or the purchase of a $10 million screwdriver from a company owned by the launderer. At this point, the criminal can use the money without getting caught. It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.

Ex. Placement: Jurado deposited cash from U.S. drug sales in Panama bank accounts. Layering: He then transferred the money from Panama to more than 100 bank accounts in 68 banks in nine countries in Europe, always in transactions under $10,000 to avoid suspicion. The bank accounts were in made-up names and names of Santacruz-Londono's mistresses and family members. Jurado then set up shell companies in Europe in order to document the money as legitimate income. Integration: The plan was to send the money to Colombia, where Santacruz-Londono would use it to fund his numerous legitimate business there. But Jurado got caught.

Money laundering is a crucial step in the success of drug trafficking and terrorist activities, not to mention white collar crime, and there are countless organizations trying to get a handle on the problem. Global financial systems play a major role in most high-level laundering schemes, the international community is fighting money laundering through various means, including the Financial Action Task Force on Money Laundering (FATF), which as of 2005 has 33 member states and organizations. The United Nations, the World Bank and the International Monetary Fund also have anti-money-laundering divisions.

The Effects of Money Laundering

criminals launder anywhere between $500 billion and $1 trillion worldwide every year. The global effect is staggering in social, economic and security terms. Socio-cultural end of the spectrum: successfully laundering money means that criminal activity actually does pay off. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions. This means more fraud, more corporate embezzling, more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who don't break the law and don't make nearly the profits that the criminals do. Economic effects are on a broader scale:. Developing countries often bear the brunt of modern money laundering because the governments are still in the process of establishing regulations for their newly privatized financial sectors. This makes them a prime target. In the 1990s, numerous banks in the developing Baltic States ended up with huge, widely rumored deposits of dirty money. Bank patrons proceeded to withdraw their own clean money for fear of losing it if the banks came under investigation and lost their insurance. The banks collapsed as a result. Other major issues facing the world's economies include errors in economic policy resulting from artificially inflated financial sectors. Massive influxes of dirty cash into particular areas of the economy that are desirable to money launderers create false demand, and officials act on this new demand by adjusting economic policy. When the laundering process reaches a certain point or if lawenforcement officials start to show interest, all of that money that will suddenly disappears without any predictable economic cause and that financial sector falls apart. Taxation and Small-Business Competition: Laundered money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax revenue. Also, legitimate small businesses can't compete with money-laundering front businesses that can afford to sell a product for cheaper because their primary purpose is to clean money, not turn a profit. They have so much cash coming in that they might even sell a product or service below cost. The majority of global investigations focus on two prime money-laundering industries: Drug trafficking and terrorist organizations. The effect of successfully cleaning drug money is clear: More drugs, more crime, and more violence. The connection between money laundering and terrorism may be a bit more complex, but it plays a crucial role in the sustainability of terrorist organizations.

Most people who financially support terrorist organizations do not simply write a personal check and hand it over to a member of the terrorist group. They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot. They launder the money so authorities can't trace it back to them and foil their planned attack. Interrupting the laundering process can cut off funding and resources to terrorist groups.

Connection between KYC & AML:

The contribution of KYC (Know Your Customer) and AML (Anti Money Laundering) policies and procedures to a banks overall safety and soundness is a key to the integrity of global financial systems. Banks with inadequate KYC and AML and risk management programs may be subjected to significant risks, especially legal risk and reputation risk. The implementation of strong KYC and AML policies and processes also protects the integrity of the banking system by reducing the likelihood of banks becoming vehicles for money laundering, terrorist financing and other unlawful activities. IGATE KYC & AML Experience: Our AML implementation framework ranges from enabling client origination and complying with KYC structures to monitoring account transaction patterns. The key services for the implementation of the entire KYC and AML value chain are:

Designing & understanding the building blocks of KYC processes and systems Developing efficient front-end solutions for KYC data input Enabling and implementing electronic verification solutions Developing identity fraud management systems Enabling transactional analysis of bank originating and receiving funds transfers across customers, accounts and networks Developing a comprehensive range of KYC and AML compliance reports.

Select Success Stories

Customizing and deploying a Business Rule Engine (BRE) for a leading Fortune 100 financial services organization to ensure rigorous KYC compliance. Validation of customer details was done on a continuous basis (through key external interfacing agencies). iGATE worked with a leading Europe based global bank in rationalization and reengineering of the customer data warehouse to ensure risk compliance and conformity with the applicable SOX regulations. Designing of OFAC (Office of Foreign Asset Control) parsing logic to ensure compliance with all OFAC business rules & legal requirements for a leading financial services company.

Consolidated KYC Risk Management

he adoption of effective know-your-customer (KYC) standards is an essential part of banks' risk management practices. Banks with inadequate KYC risk management programmes may be subject to significant risks, especially legal and reputational risk. Sound KYC policies and procedures not only contribute to a bank's overall safety and soundness, they also protect the integrity of the banking system by reducing the likelihood of banks becoming vehicles for money laundering, terrorist financing and other unlawful activities. In October 2001, the Basel Committee on Banking Supervision (BCBS) issued Customer due diligence for banks, subsequently reinforced by a General Guide to account opening and customer identification (CDD) in February 2003. The CDD paper outlines four essential elements necessary for a sound KYC programme. These elements are: (i) (ii) (iii) (iv) customer acceptance policy; customer identification; on-going monitoring of higher risk accounts; and risk management.

The principles laid down have been accepted and widely adopted by jurisdictions throughout the world as a benchmark for commercial banks and a good practice guideline for other categories of financial institution.

A key challenge in implementing sound KYC policies and procedures is how to put in place an effective groupwide approach. The legal and reputational risks identified in paragraph 1 are global in nature. As such, it is essential that each group develop a global risk management programme supported by policies that incorporate groupwide KYC standards. Policies and procedures at the branch- or subsidiary-level must be consistent with and supportive of the group KYC standards even where for local or business reasons such policies and procedures are not identical to the group's. Consolidated KYC Risk Management means an established centralised process for coordinating and promulgating policies and procedures on a groupwide basis, as well as robust arrangements for the sharing of information within the group. Policies and procedures should be designed not merely to comply strictly with all relevant laws and regulations, but more broadly to identify, monitor and mitigate reputational, operational, legal and concentration risks. Similar to the approach to consolidated credit, market and operational risk, effective control of consolidated KYC risk requires banks to coordinate their risk management activities on a groupwide basis across the head office and all branches and subsidiaries. The BCBS recognises that implementing effective KYC procedures on a groupwide basis is more challenging than many other risk management processes because KYC involves

in most cases the liabilities rather than the assets side of the balance sheet, as well as balances that are carried as off-balance sheet items. For reasons of customer privacy, some jurisdictions continue to restrict banks' ability to transmit names and balances as regards customer liabilities whereas there are now very few countries maintaining similar barriers on the assets side of the balance sheet. It is essential, in conducting effective monitoring on a groupwide basis, that banks be free to pass information about their liabilities or assets under management, subject to adequate legal protection, back to their head offices or parent bank. This applies in the case of both branches and subsidiaries. The conditions under which this might be achieved are set out in paragraphs [20 to 23]. Jurisdictions should facilitate consolidated KYC risk management by providing an appropriate legal framework which allows the cross-border sharing of information. Legal restrictions that impede effective consolidated KYC risk management processes should be removed.

Conclusion:
On a macro level, the KYC lapse is a problem of corporate governance. While the RBI has done its job well and would continue to do so, it's also the responsibility of the stakeholders to ensure that corporations are being transparent and honest and that the management does not engage in unethical practices that would prove detrimental to the vested interests