KNOW YOUR CUSTOMER (KYC)
KNOW YOUR CUSTOMER (KYC): The adoption of effective Know Your Customer (KYC) program is an essential part of financial institutions’ risk management policies. Having sufficiently verified/corrected information about customers ―Knowing Your Customer (KYC) – is the most effective defense against being used to launder the proceeds of crime. Financial institutions with inadequate KYC program may be subject to significant risks, especially legal and reputational risk. Sound KYC Policies and Procedures not only contribute to the financial institution’s overall safety and soundness, they also protect the integrity of its system by reducing money laundering, terrorist financing and other related offences.
A false name or address or date of birth will usually mean that law enforcement agencies cannot trace the client if s/he is needed for interview as part of an investigation. Section 25 (1)(a) of the Money Laundering Prevention Act, 2012 (MLPA, 2012) requires all reporting institutions to obtain complete and correct information regarding the clients identity of those with whom they deal (referred herein this Guideline as verification of identity). Unless full and complete and correct information regarding the identity of potential Clients is obtained in good time, the business relationship should not be proceed.
KNOW YOUR CUSTOMER (KYC) PROCEDURE:
| Knowing Nature of Customer’s Business |
| Identifying Real Person |
| Authentic Document |
| Reliance on Third party |
COMPONENTS OF KYC PROGRAM
Financial institutions in the process of designing the KYC program should include certain key elements. Such essential elements should start from the financial institutions‘risk management and control procedures and should include –
| (1) Customer acceptance policy (2) Customer identification (3) On-going monitoring of high risk accounts, and (4) Identification of suspicious transactions. |
FIs should not only establish the identity of their customers, but should also monitor account activities to determine those transactions that do not conform with the normal or expected transactions for that customer or type of account. KYC should be a core feature of financial institutions‘risk management and control procedures, and be complemented by regular compliance reviews and internal audit. The intensity of KYC programs beyond these essential elements should be tailored to the degree of risk.
Who is a Customer?
For the purpose of KYC Procedure a “Customer” is defined in AML Circular No. 24 dated03/03/2010, as:
- any person or institution maintaining an account of any type with a bank or financial institution or having banking related business;
- the person or institution as true beneficial owner in whose favour the account is operated;
- the trustee, intermediary or true beneficial owner of the transaction of the accounts operated by the trust and professional intermediaries (such as lawyer/law firm, chartered accountant, etc)under the existing legal infrastructure;
- high value single transaction conducted in a single Demand Draft, Pay Order, Telegraphic Transfer by any person or institution or any person/institution involved in a financial transaction that may pose reputational and other risks to the institution. In this case if a transaction appears abnormal in relation to the usual transaction of the concerned person or institution that transaction will be treated as ―high value.
Individual Customers
FIs shall obtain following information while opening accounts or establishing other relationships with individual customers:
- Correct name and/or names used;
- parent‘s names;
- date of birth;
- current and permanent address;
- details of occupation/employment and sources of wealth or income
- Contact information, such as – mobile/telephone no.
The original, certified copy of the following Photo ID also play vital role to identify the customer:
(i) Current valid passport;
(ii) Valid driving license;
(iii) National ID Card;
(iv) Employer provided ID Card, bearing the photograph and signature of the applicant;
KYC for Internet or Online Based Customer
Banking and investment business through the Internet add a new dimension to Financial Institutions’ activities. The unregulated nature of the Internet is attractive to criminals, opening up alternative possibilities for money laundering and fraud. It is recognized that on-line account opening services are convenient. However, it is not appropriate that Financial Institutions should offer on-line live account opening allowing full immediate operation of the account in a way which would dispense with or bypass normal identification procedures. However, initial application forms could be completed on-line and then followed up with appropriate identification checks. The account, in common with accounts opened through more traditional methods, should not be put into full operation until the standardized account opening provisions have been satisfied in accordance with these Guidance Notes. The development of technologies such as encryption, digital signatures, etc., and the development of new financial services and products, makes the Internet a dynamic environment offering significant business opportunities. The fast pace of technological and product development has significant regulatory and legal implications, and Bangladesh Bank is committed to keeping up-to-date with any developments on these issues through future revisions to its Guidance Notes.
SUSPICIOUS TRANSACTION REPORT
Generally STR means a formatted report of suspicious transactions/activities where there are reasonable grounds to suspect that funds are the proceeds of predicate offence or may be linked to terrorist activity or the transactions do not seem to be usual manner. Such report is to be submitted by financial institutions to the competent authorities. In the section (2)(z) of MLPA, 2012 ―suspicious transaction means such transactions which deviates from usual transactions; of which there is ground to suspect that, (1) the property is the proceeds of an offence, (2) it is financing to any terrorist activity, a terrorist group or an individual terrorist; (3) which is, for the purposes of this Act, any other transaction or attempt of transaction delineated in the instructions issued by Bangladesh Bank from time to time. In Anti Terrorism Act, 2009 (as amended in 2012), STR refers to the transaction that relates to financing for terrorism or terrorist individual or entities. One important thing is that financial institutions need not to establish any proof of occurrence of a predicate offence; it is a must to submit STR only on the basis of suspicion.
REASONS FOR REPORTING OF STR:
As per the Money Laundering Prevention Act, 2012, FIs are obligated to submit STR to Bangladesh Bank. Such obligation also prevails for the FIs in the Anti Terrorism Act, 2009 (as amended in 2012). Other than the legislation, Bangladesh Bank has also instructed the FIs to submit STR through AML Circulars issued by Bangladesh Bank time to time. STR is very crucial for the safety and soundness of the financial institutions. The FIs should submit STR considering the followings:
- It is a legal requirement in Bangladesh;
- It helps protect the reputation of FIs ;
- It helps to protect FIs from unfounded allegations of assisting criminals, including terrorists;
- It helps the authorities to investigate money laundering, terrorist financing, and other financial crimes.
Identification of STR: Identification of STR may be started identifying unusual transaction and activity. Such unusual transaction may be unusual in terms of complexity of transaction, nature of transaction, volume of transaction, time of transaction etc. Generally the detection of unusual transactions/activities may something be sourced as follows:
- Comparing the KYC profile, if any inconsistency is found and there is no valid reasonable explanation.
- By monitoring customer transactions.
- By using red flag indicator.
Simply, if any transaction/activity is consistent with the provided information by the customer can be treated as normal and expected. When such transaction/activity is not normal and expected, it may treat as unusual transaction/activity.
| Normal / Expected Transaction |
| Comparing |
| Information provided in AOF (Account Opening Form) Transaction Profile KYC Profile Other relevant documents |
| Comparing |
| Findings |
| If inconsistent: Suspicious Transaction |
| If consistent: Normal/Expected Transaction |
Figure: STR identification steps
CASH TRANSACTION REPORT
According to BFIU circular no.11 dated 25th May, 2015 the guideline for CTR are as follows.
- Every financial institution has to report to BFIU via own Central Compliance Unit (CCU) as CTR on monthly basis after proper assessment if the transaction amount is 10, 00,000.00 or above in any account on a specific day through deposit or withdrawal including any online deposit or withdrawal. Here cash transaction means any transaction conducted by client or any third party in respective account maintained with Financial institution.
- This statement has to provide on monthly basis. Accordingly CTR of every month has to provide to BFIU through goAML website within on or before 21 days of next month.
- If there is no reportable transaction as CTR Financial Institution has to inform BFIU through message board of goAML web and the message will be “No Transaction as reportable Cash Transaction”
- No need to report as cash transaction in case of deposit to any Gov. account (including Ministry, Department) account of state owned organization, semi gov. or autonomous organization. But in case of withdrawal from these accounts cash transaction has to report accordingly.
- CTR and STR both are different reporting arrangement. Every reportable cash transaction will not be suspicious transaction. But CCU of Financial Institution identifies the suspicious transaction through proper assessment of cash transaction. If there is any suspicious transaction CCU has to report to BFIU as STR accordingly irrespective of CTR.
- Financial institutions have to preserve the CTR for minimum 5 years from the day of reporting to BFIU.
TP- TRANSACTION PROFILE
Customer’s transaction profile means expected number of monthly transaction, expected amount of monthly transaction and expected frequency of transaction on the basis of client’s business volume or earning sources.
Financial Institutions are expected to have systems and controls in place to monitor on an ongoing basis the relevant activities in the course of the business relationship. The nature of this monitoring will depend on the nature of the business. The purpose of this monitoring is for Financial Institutions to be vigilant for any significant changes or inconsistencies in the pattern of transactions. Inconsistency is measured against the stated original purpose of the accounts i.e. the declared Transaction Profile (TP) of the Customer. Possible areas to monitor could be: –
- transaction type
- frequency
- unusually large amounts
- geographical origin/destination
- changes in account signatories
………………………………………………………………………………………………………………
Abbreviation:
| KYC: Know Your Customer CTR: Cash Transaction Report STR: Suspicious Transaction Report TP: Transaction Profile AML: Anti Money Laundering | FI: Financial institution CCU: Central Compliance Unit BFIU: Bangladesh Financial Intelligence Unit MLPA: Money Laundering Prevention Act |
Reference:
- Guidance Notes On Prevention of Money Laundering and Terrorist Financing, Date: 16 th September, 2012
- BFIU circular no. 10, Date:28th December, 2014
- BFIU circular no. 11, Date:25th May, 2015
- Guidance Notes on Prevention of Money Laundering
- Money laundering & Terrorist financing Risk Management Guiddeline, Date: September, 2015
CASH TRANSACTIONS REPORT (CTR) AND SUSPICIOUS TRANSACTION REPORT (STR)
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KNOW YOUR CUSTOMER (KYC)
KNOW YOUR CUSTOMER (KYC)
KNOW YOUR CUSTOMER (KYC)