KNOW YOUR CUSTOMER GUIDELINES (KYC):
KYC Guidelines & Anti Money Laundering Measures
“Know Your Customers” and “Anti Money Laundering Measures” have been adopted on the basis of guidelines issued by NHB.
These measures seek to serve the following objectives:-
- To prevent MHFSL from being used, intentionally or un-intentionally, by criminal elements for money laundering activities.
To enable us to know and understand our customers and their financial dealings adequately which will facilitate prudent risk management. KYC Policy – Key Elements: the KYC policy adopted by MHFSL has the following key elements.
- customer Acceptance Policy
- customer Identification Procedure
- Monitoring of Transactions; and
- Risk management.
For the purpose of KYC policy, a `Customer’ is defined as:-
- A person or entity that maintains an account and/or has a business relationship with the MHFSL
- 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 reputation or other risks to the MHFSL, say, a wire transfer or issue of a high value demand draft as a single transaction.
MHFSL has evolved a customer acceptance policy prescribing explicit criteria for acceptance of customers. The Customer acceptance Policy seeks to ensure that :-
- No account is opened in anonymous or fictitious/benami name(s);
- Parameters of risk perception are clearly defined in terms of the location of customer and his clients and mode of payments, volume of turnover, social and financial status, etc to enable categorization of customers into low, medium and high risk (choosing any suitable nomenclature, viz level I, level II, level III etc) customers requiring very high level of monitoring, e.g. Politically Exposed Persons (PEPs – as explained in Annex) may, if considered necessary, be categorised even higher;
- Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of Prevention of Money Laundering Act, 2002 (Central Act No.15 of 2003) (Hereinafter referred to as PMLA), rules framed thereunder and guidelines issued from time to time;
- Not to open an account or close an existing account where the MHFSL is unable to apply appropriate customer due diligence measures, i.e. MHFSL is unable to verify the identity and/or obtain documents required as per the risk categorization due to non co-operation of the customer or non reliability of the data/information furnished to the MHFSL. It may, however, be necessary to have suitable built-in safeguards to avoid harassment of the customer. For example, decision to close an account will be taken at HO level after giving due notice to the customer through the branch concerned explaining the reasons for such a decision;
- Circumstances, in which a customer is permitted to act on behalf of another person/entity, should be clearly spelt out in conformity with the established law and practices, as there could be occasions when an account is operated by a mandate holder or where an account may be opened by an intermediary in a fiduciary capacity; and
- Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations, etc.
Profile for each new customer has to be prepared based on risk categorization. The customer profile may contain information relating to the customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location, etc. the nature and extent of due diligence will depend on the risk perceived by MHFSL. However, while preparing customer profile the MHFSL will take care to seek only such information from the customer which is relevant to the risk category and is not intrusive and is in conformity with the guidelines issued by NHB. Any other information from the customer will be sought separately with his/her consent and after opening the account. The customer profile will be a confidential document and details contained therein shall not be divulged for cross selling or any other purposes.
For the purpose of risk categorization, individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Illustrative examples of low risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, government departments & Government owned companies, regulators and statutory bodies, etc. In such cases, only the basic requirements of verifying the identity and location of the customer are to be met.
Customers that are likely to pose a higher than average risk to the HFC will be categorized 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. MHFSL may 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 higher due diligence include
- non-resident customers,
- high net worth individuals
- trusts, charities, NGOs and organizations receiving donations
- companies having close family shareholding or beneficial ownership
- firms with `sleeping partners’
- politically exposed persons (PEPs) of foreign origin
- non-face to face customers, and
- those with dubious reputation as per public information available, etc
As regards the accounts of politically exposed persons (PEPs) it is advised that in the event of an existing customer or the beneficial owner of an existing account subsequently becoming a PEP, MHFSL branches will obtain approval from HO in such cases to continue the business relationship with such person and also undertake enhanced monitoring as specified in Annexure – I.
It is important to bear in mind that the adoption of Customer Acceptance Policy and its implementation should not become too restrictive and must not result in denial of our services to general public, especially to those, who are financially or socially disadvantaged.
Rule 9 of the 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 (hereinafter referred to as PML Rules), requires every HFC.
- at the time of commencement of an account-based relationship, identify its clients, verify their identity and obtain information on the purpose and intended nature of the business relationship, and
in all other cases, verify identity while carrying out:
- transaction of an amount equal to or exceeding rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected, or
- any international money transfer operations.
In terms of provision to rule 9 of the PML Rules, the relaxation, in verifying the identity of the client within a reasonable time after opening the account / execution of the transaction, stands withdrawn.
Rule 9 also provides that every HFC shall identify the beneficial owner and take all reasonable steps to verify his identity. The said Rule also require HFCs to exercise ongoing due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the customer, his business and risk profile.
Therefore, the Customer Identification Policy approved by the Board of MHFSL should clearly spell out the Identification Procedure to be carried out at different stages, i.e. while establishing a relationship; carrying out a financial transaction or when the MHFSL has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data.
Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information.
MHFSL branches have to obtain sufficient information necessary to establish, to their satisfaction, the identity of each new customer, whether regular or occasional and the purpose of the intended nature of relationship. Rule 9 of the PLM rules provides for the documents/information to be obtained for identifying various types of customers i.e. individuals, companies, partnership firms, trusts, un-incorporated association or a body of individuals and juridical persons. MHFSL branches are advised to take note of the provisions of the above rule and ensure compliance. Customer identification requirements keeping in view the provisions of the said rule are also given in Annex-I for guidance. An indicative list of the nature and type of documents /information that may be relied upon for customer identification is given in the Annex-II. MHFSL will frame its own internal guidelines based on its experience of dealing with such persons/entities, normal prudence and the legal requirements from time to time.
Branches should formulate and implement a Client Identification Programme to determine the true identity of its clients keeping the above in view.
Ongoing monitoring is an essential element of effective KYC procedures. We can effectively control and reduce our risk only if we have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will depend on the risk sensitivity of the account. We should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. We may prescribe threshold limits for a particular category or accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract our attention. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being `washed’ through the account. High-risk accounts have to be subjected to intensified monitoring. We should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds the type of transactions involved and other risk factors. MHFSL will put in place a system of periodical review of risk categorization of accounts and the need for applying enhanced due diligence measures.
MHFSL has put in place an effective KYC programme prescribing appropriate procedures and ensuring their effective implementation. It covers proper management oversight, systems and controls, segregation of duties, training and other related matters. It is necessary to ensure that our policies and procedures are implemented effectively. We have devised procedures for creating Risk Profiles of our existing and new customers to facilitate application of various Anti Money Laundering measures keeping in view the risks involved in a transaction, account or business relationship.
Our internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policies and procedures. As a general rule, the compliance function should provide an independent evaluation of our own policies and procedures, including legal and regulatory requirements. Internal Auditors will specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard. The compliance in this regard will be put up before the Audit Committee of the Board at quarterly intervals. We will also fix accountability for serious lapses and intentional circumvention of prescribed procedures and guidelines by our officials and staff members.
We have an ongoing employee training programme to ensure that the members of the staff are adequately trained in KYC procedures. Training requirements have different focus for frontline staff, compliance staff and staff dealing with new customers. It is crucial that all those concerned fully understand the retionale behind the KYC policies and implement them consistently.
Implementation of KYC procedures requires certain information from customers which may be of personal nature or which have hitherto never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. There is, therefore, a need to educate the customer about the objectives of the KYC programme. The front desk staff needs to be specially trained at branches to handle such situations while dealing with customers.
We should pay special attention to any money laundering threats that may arise from new or developing technologies including on-line transactions that might favour anonymity and take measures, if needed, to prevent their use in money laundering schemes.
The above guidelines shall apply to all branches.
MHFSL has designated as the General Manager of the company `Principal Officer’. The name of the Principal Officer and address and other relevant details have been communicated to the Director, FIU-IND and also to NHB. Principal Officer shall be responsible for monitoring and reporting of all transactions and sharing of information as required under the law. He will maintain close liaison with enforcement agencies, HFCs and any other institutions which are involved in the fight against money laundering and combating financing of terrorism.
We have introduced a system of maintaining proper record of transactions as required under section 12 of the PMLA read with Rule 3 of the PML Rules, as mentioned below:-
- all cash transactions of the value of more than rupees ten lakh or its equivalent in foreign currency;
- all series of cash transactions integrally connected to each other which have been valued below rupees ten lakh 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 rupees ten lakh;
- all transactions involving receipts by non-profit organisations of rupees ten lakhs or its equivalent in foreign currency;
- all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transactions; and
- all suspicious transactions whether or not made in cash and by way of as mentioned in the Rule 3 (1) (D).
All branches must maintain proper record of all cash transactions (deposits and withdrawals)of Rs.10 Lakh and above. The internal monitoring system should have an inbuilt procedure for reporting of such transactions and those of suspicious nature whether made in cash or otherwise, to controlling/head office on a fortnightly basis.
Records referred to above in Rule 3 of the PML Rules must contain the following information:-
- 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.
Section 12 of PMLA requires every housing finance company to maintain records as under:-
- records of all transactions referred to in clause (a) of Sub-section (1) of section 12 read with Rule 3 of the PML Rules is required to be maintained for a period of ten years from the date of transactions between the clients and the housing finance company.
- Records of the identity of all clients of the housing finance company is required to be maintained for a period of ten years from the date of cessation of transactions between the clients and the housing finance company.
We have taken steps to evolve a system for proper maintenance and preservation of information in a manner (in hard and soft copies) that allows data to be retrieved easily and quickly whenever required or when requested by the competent authorities.
Section 12 of PMLA requires every housing finance company to report information of transaction referred to in clause (a) of sub-section 91) of section 12 read with Rule 3 of the PML Rules relating to cash and suspicious transactions etc to the Director, Financial Intelligence Unit-India (FIU-IND). The provision to the said section also provides that where the principal officer has reason to believe that a single transaction or serious of transactions integrally connected to each other have been valued below the prescribed value so as to defeat the provisions of this section, such officer shall furnish information in respect of such transactions to the Director within the prescribed time.
The information is to be furnished at the following address by the Principal Officer of MHFSL
Financial Intelligence Unit-India
6th Floor, Hotel Samrat
New Delhi – 110 021
A copy of information furnished shall be retained by the Principal Officer for the purposes of official record.
- The information in respect of the transactions referred to in clause (A), (B) and (BA) of sub-rule (1) of rule 3 of the PML Rules (i.e. clauses (i), (ii) and (iii) referred to in Paragraph 19 supra) is to be submitted to the Director every month by the 15th day of the succeeding month.
- information in respect of the transactions referred to in clause (C) of sub-rule (1) of rule 3 of the PML Rules (i.e. clause (iv) in paragraph 19 supra) is to be furnished promptly to the director in writing, or by fax or by electronic mail not later than seven working days from the date of occurrence of such transaction.
- The information in respect of the transactions referred to in clause (D) of sub-rule (1) of rule 3 of the PML Rules (i.e. clause (v) in paragraph 19 supra) is to be furnished promptly to the Director in writing or by fax or by electronic mail not later than seven working days on being satisfied that transaction is suspicious.
Provided the housing finance company and its employees maintain strict confidentiality of the fact of furnishing/reporting details of suspicious transactions.
It has been advised by the FIU-IND, New Delhi that we need not submit `NIL’ reports in case there are no Cash/Suspicious Transactions, during a particular period.
MHFSL will ensure that the provisions of PML Act and Rules framed thereunder and the Foreign Contribution and Regulation Act, 1976, wherever applicable, are adhered to strictly.
Where the MHFSL is unable to apply appropriate KYC measures due to non-furnishing of information and/or non-cooperation by the customer, it may consider closing the account or terminating the business relationship after issuing due notice to the customer through branch concerned explaining the reasons for taking such a decision. Such decisions will be taken at Head office.
These guidelines are based on NHB guidelines issued under National Housing Bank Act and any contravention of or non-compliance with the same may attract penal consequences under the said Act.