The Hindu Business Line : From a `friendly chat', KYC is now `a modern day intelligence art form'

A question that the Big B may not ask on KBC is: "What does KYC stand for: a) Kaun Yaar Crorepati; b) Kentucky Yummy Chicken; c) Know Your Customer; d) Kieler Yacht Club?" No prize for the right answer. But penalty is huge if you don't `know your customer', especially in the world of finance.

Which is why, the Indian Banks' Association (IBA) organised on Wednesday, in Mumbai, a `focused briefing' on `Compliance to KYC norms'. IBA's letter about the programme exudes urgency: "With Financial Intelligence Unit (FIU) formed in India, in tune with FATF (Financial Action Task Force) guidelines, and RBI (Reserve Bank of India) stepping up KYC compliance pressures... "

KYC is not an option, therefore, but a global pressure, you'd realise when reading about FATF on www.fatf-gafi.org. "The FATF monitors members' progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally."

The FIU-India functions under the Department of Revenue of the Ministry of Finance. It was in November 2004 that the Cabinet gave its nod to the formation of FIU-IND, as an independent unit of the Central Economic Intelligence Bureau, to coordinate and support the efforts of national and international intelligence, investigation and enforcement agencies in pursuing global efforts against money laundering and related crimes.

KYC is not a one-time effort while signing up a new customer, points out the IBA. "It involves continuous monitoring of customer behaviour as reflected through his transactions with the bank. It is here that AML technology finds its use."

AML is a live issue

What is AML? Anti-Money Laundering. A topic that is alive and kicking in global news. "China imposed fines totalling 56.29 million yuan (about $7 million) on 600 financial institutions in 2005 for violating anti-money laundering rules," informed Xinhua on April 5. `FPA wants more time on anti-money laundering rules,' writes Ross Kelly on www.moneymanagement.com.au, about the Financial Planning Association, Down Under.

An April 11 report on www.antiguasun.com is about the country's newest Certified Anti-Money Laundering Specialist (CAMS). And in Nigeria, Malam Nuhu Ribadu, chairman, Economic and Financial Crimes Commission (EFCC), has called on financial operators to ensure compliance with AML laws in the country, as one learns from an April 10 posting on www.thetidenews.com.

The insurance regulator, IRDA (Insurance Regulatory and Development Authority), has issued AML guidelines that include strict adherence of KYC norms by insurance companies. "IRDA has asked the insurers to put in place a proper policy framework by July 1 as the AML regime becomes effective from August 1, 2006," informs a story dated April 4.

A recent issue of Gtnews (www.gtnews.com) has an article titled Protect Your Reputation; Don't Take a Risk with Financial Crime by Brendan Hewson. "Banks and other financial institutions must put in place effective measures and keep up-to-date with latest developments to stop themselves becoming victims of financial crime," alerts Hewson.

"Banks are cautioned regularly to make sure that they do know their customers. They must make every reasonable effort to determine the customer's true identity and have effective procedures in place for verifying the bona fides of all new customers, whether they are borrowers or depositors."

Bankers on the alert

No wonder, therefore, that the first find for `KYC' on Google is Consolidated KYC Risk Management, a consultative document of the Basel Committee on Banking Supervision, on www.bis.org. Must-read for bankers is `Comparison between the 1999 and 2006 versions of the Core Principles Methodology,' a 61-page document of the BIS (Bank for International Settlements), dated April 6. The latest version speaks of `ongoing training programmes' for bank staff `on KYC and methods to detect criminal and suspicious activities.'

For an update on `Financial Crime From Wall Street to Easy Street' check KYC News on www.offshorebusiness.com. The site has, as its motto, `The pen is mightier than the fraud.' The US taxman's site (www.irs.gov) has `a list of countries whose know-your-customer rules have been approved by the IRS'. KYC is explained as `know your client' on www.investopedia.com. "A standard form in the investment industry that ensures investment advisors know detailed information about their clients' risk tolerance, investment knowledge and financial position," states the entry.

"When you open an account, we will ask you for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see a driver's licence, passport, or other identifying documents from you," states Deutsche Bank (www.db.com) in a page titled `KYC/AML/Patriot Act'. London-based Jordans Ltd (www.jordans.co.uk) offers KYC report `from only £5 plus VAT online'; it "not only gives you the information that you need to verify the company's existence and identify the individuals behind it, but also provides basic details of the company's financial performance and credit worthiness."

An oft-found quote of Mahatma Gandhi in banks is this: "A customer is the most important visitor on our premises. He is not dependent on us; we are dependent on him. He is not an interruption on our work; he is the purpose of it. He is not an outsider on our business; he is a part of it. We are not doing him a favour by serving him; he is doing us a favour by giving us an opportunity to do so."

Pitching this as `deposit policy' begins a page on www.canbankindia.com. Wonder if Gandhiji would have added, "He doesn't have to know us, but we have to know him," were financial crime a Frankenstein those days. Of importance, therefore, is "knowledge at the court of guard," as the Bard writes in King Henry VI.

The central banker offers guidance. For instance, on http://rbidocs.rbi.org.in, you can find Guidelines on KYC norms and `Cash transactions' issued in August 2002. "The objectives of the KYC framework should be two fold, (i) to ensure appropriate customer identification and (ii) to monitor transactions of a suspicious nature," notes the RBI.

Launderers are professionals

KYC is no longer a `friendly chat' in the bank manager's office and the production of acceptable identity, points out Hewson. It is `a modern day intelligence art form'. No man means evil but the devil, and we shall know him by his horns, is a line from Merry Wives of Windsor. Alas, financial criminals cannot be identified with such ease.

"Launderers are professionals themselves," cautions Hewson. "Not only professional in their methods of operation, but often professional, almost vocational, by calling."

There used to be a time when criminals used banks `as their first place of depositing money'. Now, the dirty money goes to non-bank institutions or their own import/export companies, informs Gtnews. "Criminals now also legitimise their illegally obtained income through acquisition of domestic and international real estate, investment in securities, personal property, works of art or loans."

Money eventually passes through the banking system "whether as a deposit, collateral for a loan or maybe the purchase of a derivative product," explains Hewson.

Knowledge of `true identity and beneficial ownership of accounts' won't be enough, therefore. "Thou must now know farther," as Prospero says in The Tempest. The banker would have to know the source of funds, nature of customer's business, what constitutes reasonable account activity, and who the customer's customers are!

Why? Because, "Even if a financial institution takes all reasonable steps to determine the veracity of a potential customer, it may still be held responsible if that customer is subsequently determined to be engaged in criminal or other illegal activities," as Hewson reasons.

Else, of the naïve bank, the launderer would sing, "I know a bank where the wild thyme blows, where oxlips and the nodding violet grows... " drawing inspiration from A Midsummer Night's Dream.

http://AccountSpeak.blogspot.com

D. Murali

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