Customer Due Diligence (CDD)
Customer Due Diligence : Rule 9 of PMLR 2005
Rule 9(1)(a) at the time of commencement of an account-based relationship
(i) Identify its
clients, verify their identity, obtain information on the purpose and intended
nature of the business relationship; and
(ii) Determine
whether a client is acting on behalf of a beneficial owner, and the identify
the beneficial owner and take all steps to verify the identity of the
beneficial owner
Amendments
to PML (Maintenance of Records) Rules 2005
Through an
amendment in 2015 in the Finance Act, the PMLA was amended and the definition
of “proceeds of crime” was widened to include property taken or held outside
the country as a result of criminal activity relating to a “scheduled offence”.
In case of offences specified under Part B of the Act, value involved in such
offence was increased from Rs.30 Lakhs to Rs.1 Crore. Amendments were made in
sections 5, 8, 20, 21 & 60 of the Act. In the Schedule to the Act after
Part A, Part B was added which includes Section 132 – false declaration, false
documents etc. of the Customs Act, 1962. The PML Rules were amended in July,
2015 and September, 2015 to provide for a Central KYC Records Registry and
empower Director-FIU to issue guidelines in consultation with Regulator
The PML
(Maintenance of Records) Rules, 2005 have also been amended in July, 2015
following amendment of the PMLA in April, 2015, to give effect to changes made
in PMLA and the revised recommendations of FATF. The salient features of the
amendments are given below:
·
A provision of Central Know Your Customer (CKYC)
Records Registry has been provided which shall be an agency owned and
controlled by the Federal Government and a repository of all customers of all
the reporting entities. This provision makes KYC provision easy and forgery of
KYC documents difficult. Functions and obligations of CKYC Records Registry
were also specified.
·
Definition of non profit organisation was
clarified.
·
Officially valid documents have been specified.
·
Maintenance of physical copy of records of
identity of client by reporting entity, that have been obtained in accordance
with the provision of client due diligence, after filing electronic copy with
CKYC Records Registry.
These
records have to be maintained in the manner specified by the Regulator.[source:
FIU-Ind annual report 2015-16]
Central KYC Records Registry Rule 9(1)(b)
1A: Every reporting entity shall within 10 days [immediately,
wef 17/10/2023] after the commencement of account-based relationship with a
client, file the electronic copy of the client’s KYC records with Central KYC
Records Registry.
1B: The
Central KYC Records Registry shall process the KYC records received from a
reporting entity for de-duplicating and issue a KYC Identifier for each client
to the reporting entity, which shall communicate the KYC Identifier in writing
to their client.
1C: Where
a client, for the purposes of clause (a) and clause (b), submits a KYC
Identifier to a reporting entity, then such reporting entity shall retrieve the
KYC records online from the Central KYC Records Registry by using the KYC
Identifier and shall not require a client to submit the same KYC records or
information or any other additional identification documents or details (except
in some given circumstances).
1D: A
reporting entity after obtaining additional or updated information from a
client under sub-rule (1C), shall as soon as possible furnish the updated
information to the Central KYC Records Registry which shall update the existing
KYC records of the client and the Central KYC Records Registry shall thereafter
inform electronically all reporting entities who have dealt with the concerned
client regarding updation of KYC record of the said client.
1E: The
reporting entity which performed the last KYC verification or sent updated
information in respect of a client shall be responsible for verifying the
authenticity of the identity or address of the client.
1F: A
reporting entity shall not use the KYC records of a client obtained from the
Central KYC Records Registry for purposes other than verifying the identity or
address of the client and shall not transfer KYC records or any information
contained therein to any third party unless authorised to do so by the client
or by the Regulator or by the Director.
1G: The
regulator shall issue guidelines to ensure that the Central KYC records are
accessible to the reporting entities in real time.
One of the most important aspects of anti-money laundering measures with respect to financial transactions is client due diligence or customer due diligence. Client is the main cornerstone of any financial transaction. Every financial transaction revolves around a client. Hence the anti-money laundering measures with regard to a financial transaction will revolve only around a client. As mentioned earlier, client is a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting. “Transaction” means a purchase, sale, loan, pledge, gift, transfer, delivery or the arrangement thereof and includes –
(i) Opening of an account;
(ii) Deposits, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means;
(iii) The use of a safety deposit box or any other form of safe deposit;
(iv) Entering into any fiduciary relationship;
(v) Any payment made or received in whole or in part of any contractual or other legal obligation;
(vi) Any payment made in respect of playing games of chance for cash or kind including such activities associated with casino; and
(vii) Establishing or creating a legal person or legal arrangement.
It is mandatory for every reporting entity, at the time of opening an account or executing any transaction with it, to verify the record of identity and current address or addresses including permanent address or addresses of the client, the nature of business of the client and his financial status. If it is not possible to verify the identity of the client at the time of opening an account or executing any transaction, the reporting entity should verify the identity of the client within a reasonable time after the account has been opened or the transaction has been executed. Every reporting entity should 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
· Authentication under the Aadhaar (offline/online)/Passport
·
Verify the identity of
its Clients and the Beneficial Owner
The
amended norms broaden the scope of the definition by incorporating the phrase
“using reliable and independent sources of identification”. As a result, the
term “client due diligence” now covers due diligence carried out on a client as
defined in section 2(1)(ha) of the Act by using reliable and independent
sources of identification as per G.S.R
745(E), dated October 17, 2023, notified the Prevention of
Money-laundering (Maintenance of Records) Third Amendment Rules, 2023 which
came into force w e f 17 Oct 2023.
CDD done by third parties
As per G.S.R 745(E), dated October 17, 2023, notified
the Prevention of Money-laundering (Maintenance of Records) Third
Amendment Rules, 2023 require reporting entities to immediately obtain
client due diligence records or information from a third party or from the
Central KYC Records Registry.
Section 12AA – Enhanced Due Diligence
Every
Reporting Entity to do following before commencement of each specified
transaction:
·
Verification of
identity of the clients by authentication under the Aadhaar (Targeted Delivery
of Financial and Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016)
·
Tal‹e additional steps
to examine the ownership and financial position, including sources of funds of
the client
·
Take additional steps
to record the purpose behind conducting the specified transaction and the
intended nature of the relationship between the transaction parties
·
Where the clients
fails to fulfil the above conditions, the reporting entity to not allow the
specified transaction to be carried out
·
Reporting entity to
increase the monitoring of the business relationship with the client and to
make the greater scrutiny of transactions if these are considered suspicious or
likely to involve proceeds of crime
·
Above-said information
to be maintained for a period of five years from the date of transaction
between a client and the reporting entity
Occasional Transactions
As per G.S.R 745(E), dated October 17, 2023, notified
the Prevention of Money-laundering (Maintenance of Records) Third
Amendment Rules, 2023, every reporting entity must, at the time of
commencement of an account-based relationship or while carrying out occasional
transactions of an amount equal to or exceeding Rs 50,000, undertake several key
obligations. These obligations include identifying clients, verifying their
identity using reliable and independent sources of identification and obtaining
information on the purpose and intended nature of business relationship.
Further,
the reporting entity is required to determine whether a client is acting on
behalf of a beneficial owner, identify the beneficial owner and undertake all
necessary steps to verify the identity of the beneficial owner using reliable
and independent sources of identification.
Also, the
reporting entity is required to take all reasonable steps to understand the
nature of the customer’s business, and its ownership and control.
The Union Budget 2023-24, to bring ease of doing business in the country, also allowed the Permanent Account Number (PAN) as the common business identifier for all digital systems of specified government agencies. This will be similar to the role Aadhaar plays as a common identifier for individuals. The advantage of having PAN as the common business identifier results in doing away with repeated document submission or difficulties in accessing data across regulatory and other databases across various submissions and other compliance requirements. In fact, the RBI Report of the Expert Committee on Micro, Small and Medium Enterprises, dated June 25, 2019, (the U.K. Sinha Committee Report) had recommended PAN to be recognized as a unique identifier for micro, small and medium enterprises, suggesting that the Central Board of Direct Taxes be recognized as the nodal institution for its implementation.
Currently, businesses are required to obtain multiple
identifiers, as required under different laws applicable, including the PAN,
TAN, CIN, GST, professional tax, and labor registrations. These identifiers are
required to be submitted to multiple government and private institutions to
obtain business approvals. Considering that PAN already contains most of the
business-related information of the business entity and accordingly will reduce
duplicity of submission of information for obtaining government approvals and
compliance burden. It is further expected that the development will help reduce
the time taken to verify the information and grant approvals by government
agencies by at least half.
Happy Reading
3. Customer due Diligence(CDD)- Individuals
4. The Know Your Customer (K Y C) Policy
5. RBI Guidelines on AML/CFT and PMLA 2002
6. RBI Guidelines on Transaction Analysis
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