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Page 1: B R ACT, AML & KYC,INVESTMENT AND AUDIT

B R ACTAML amp KYCINVESTMENT

AND AUDIT

PresentedBy

M C ParekhFaculty Member

N I C M Gandhinagar

bull Spelled out in Section 56 of Part V of B R Act 1949

bull RBI regulates and supervises the UCBs vide the various provisions of the Act applicable to UCBs which is mainly relate to banking activities viz

bull Requirement of minimum paid-up capital and reserves

bull Maintenance of cash reserve and liquid assets

bull Restrictions on loans and advancesbull Power to inspect the books of accountsbull Power to give directionsbull The power to impose penalty

Relevant Provisions of B R Act 1949 (AACS)

bull Section 56bull RBI exercises its regulatory supervisory

and developmental control on UCBs through the applicability of select provisions of the parent Act of this section from March 1966

bull The duality of control was extended automatically to the sector with the extension of the Act to the UCBs

Not Authorized under B R Act

bull The following powers are not prescribed to RBI under the B R Act 1949 (AACS)

bull Registration of cooperative banksbull Constitution of Board of UCBsbull Removal of directorsbull Superceding of the Board of Directorsbull Auditing of the cooperative banksbull Enquiry into the affairs of the UCBsbull Enquiry into the conduct of the CEO Chairman

directors of UCBsbull Winding up of UCBs

Important Sectionsbull Section 5 ndash Definitionsbull banking means the accepting for the

purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque draft or otherwise

bull banking company means any company which transacts the business of banking

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 2: B R ACT, AML & KYC,INVESTMENT AND AUDIT

bull Spelled out in Section 56 of Part V of B R Act 1949

bull RBI regulates and supervises the UCBs vide the various provisions of the Act applicable to UCBs which is mainly relate to banking activities viz

bull Requirement of minimum paid-up capital and reserves

bull Maintenance of cash reserve and liquid assets

bull Restrictions on loans and advancesbull Power to inspect the books of accountsbull Power to give directionsbull The power to impose penalty

Relevant Provisions of B R Act 1949 (AACS)

bull Section 56bull RBI exercises its regulatory supervisory

and developmental control on UCBs through the applicability of select provisions of the parent Act of this section from March 1966

bull The duality of control was extended automatically to the sector with the extension of the Act to the UCBs

Not Authorized under B R Act

bull The following powers are not prescribed to RBI under the B R Act 1949 (AACS)

bull Registration of cooperative banksbull Constitution of Board of UCBsbull Removal of directorsbull Superceding of the Board of Directorsbull Auditing of the cooperative banksbull Enquiry into the affairs of the UCBsbull Enquiry into the conduct of the CEO Chairman

directors of UCBsbull Winding up of UCBs

Important Sectionsbull Section 5 ndash Definitionsbull banking means the accepting for the

purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque draft or otherwise

bull banking company means any company which transacts the business of banking

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 3: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Relevant Provisions of B R Act 1949 (AACS)

bull Section 56bull RBI exercises its regulatory supervisory

and developmental control on UCBs through the applicability of select provisions of the parent Act of this section from March 1966

bull The duality of control was extended automatically to the sector with the extension of the Act to the UCBs

Not Authorized under B R Act

bull The following powers are not prescribed to RBI under the B R Act 1949 (AACS)

bull Registration of cooperative banksbull Constitution of Board of UCBsbull Removal of directorsbull Superceding of the Board of Directorsbull Auditing of the cooperative banksbull Enquiry into the affairs of the UCBsbull Enquiry into the conduct of the CEO Chairman

directors of UCBsbull Winding up of UCBs

Important Sectionsbull Section 5 ndash Definitionsbull banking means the accepting for the

purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque draft or otherwise

bull banking company means any company which transacts the business of banking

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 4: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Not Authorized under B R Act

bull The following powers are not prescribed to RBI under the B R Act 1949 (AACS)

bull Registration of cooperative banksbull Constitution of Board of UCBsbull Removal of directorsbull Superceding of the Board of Directorsbull Auditing of the cooperative banksbull Enquiry into the affairs of the UCBsbull Enquiry into the conduct of the CEO Chairman

directors of UCBsbull Winding up of UCBs

Important Sectionsbull Section 5 ndash Definitionsbull banking means the accepting for the

purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque draft or otherwise

bull banking company means any company which transacts the business of banking

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 5: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Important Sectionsbull Section 5 ndash Definitionsbull banking means the accepting for the

purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque draft or otherwise

bull banking company means any company which transacts the business of banking

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 6: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Important Sectionsbull Section 6 - Forms of business in which

banking companies may engagebull borrowing raising or taking up of moneybull acting as agents for any Government or

local authority or any other person or persons

bull carrying on of agency business of any description including the clearing

bull RBI Insp Obs Sect-6 not complied-Leasing out entire premises amp earning rent

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 7: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Important Sections (Contd)bull Section 8 - Prohibition of trading 1048713

Notwithstanding anything contained in Sec 6 or in any contract no banking company shall directly or indirectly deal in the buying or selling or bartering of goods except in connection with the realization of security given to or held by it

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 8: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Important Sections (Contd)bull Section 9 - Disposal of non-banking

assets 1048713 Notwithstanding anything contained in Sec 6 no banking company shall hold any immovable property howsoever acquired except such as is required for its own use

bull RBI Insp Obs Sec-9 not complied-Holding non banking assest gt7 yrs

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 9: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 11 Minimum Paid-up Share Capital

bull Minimum paid-up share capital required for UCBs to carry out banking business is Rs 1 lakh

bull RBI ObsSect-11 not complied- REV less than Rs 1 lakh

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 10: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 18Cash Reservebull

bull UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets

bull Cash in hand and gold Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries and nationalised banks

bull The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis

bull Obs Sec-18-Included amount kept in current ac with HDFCAXIS bank for calculating CRR amount

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 11: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 18 ndash Cash Reserve (Contd)

bull Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act 1934

bull The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis

bull The returns are to be submitted in Form B within 7 days from the reporting fortnight

bull They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis

lbull In case of short fall penalty is levied at 3 per cent above Bank Rate

on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights if the default continues

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 12: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 19 Restriction on Holding Shares

bull No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf

bull Provided that nothing contained in this sectionshall apply tomdash

bull shares acquired through funds provided by the State Government for that purpose

bull in the case of a Central Co-operative Bank the holding of shares in the State Cooperative Bank to which it is affiliatedObs Sec-19 Invested in IFFCOKRIBHCO more than minimum level required for the representation in case of DCCBs

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 13: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 20 Restriction on Loans and Advances

No UCBs can make loans against the security of its own sharesNo UCBs are allowed to grant unsecured loans and advances Directors

and to any firms where any of the Directors is having interestPresently there is a complete ban on loans and advances to Directors

and their relatives However the following categories of director related loans are presently permitted

Regular employee-related loans to staff directors on the Board of UCBsNormal loans as applicable to members to the directors on the Boardsof salary earnersrsquo co-operative banks andNormal employee-related loans to Managing Directors of Multi-Stateco-operative banksSection 21- relates to Rates of interestObs Sect-21-Interest rate violation amp declaration from staff not

taken

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 14: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 22 - Licensing of UCBs

bull No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI

bull Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities

bull obs REV of assets less than Outside liabilities in case of some UCBs

bull Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks amp Control Large scale frauds Violation of Exposure norms RBI guidelines not followed (KYC Investment etc)

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 15: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 24Statutory Liquidity Ratio

bull Every UCB is required to maintain liquid assets in the form of cash gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 )

bull Obs Sect-24 Separately not earmarked ACSF deposits included SBI FD for calculating SLR amount

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 16: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 26- Unclaimed Deposits

Deposits not claimed for 10 years should be reported to RBI in the prescribed form

Obs Sec-26 Unclaimed deposits not reported properly ndash Inoperative aor Dormant acs mixed up with unclaimed deposit

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 17: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 27 ReturnsUCBs are required to submit offsite Returns to RBI NABARD ndashTier-I UCBS-5 SOSS amp Tier II ndash 8 OSS Returns

Obs Sect 27- Various returns to RBI not properly prepared and submitted in time

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 18: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 29 and 31Account and Balance Sheet

bull At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto

bull To be submitted within 6 months

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 19: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 35 ndash Inspection of UCBs

bull RBI inspects basically to verifybull if the conditions subject to which the banks have been issued licence

to undertake banking business continued to be fulfilled 1048713 The bank has adequate capital structure (Section 11(1)) and earning prospects

bull Itrsquos affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b))

bull The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors

bull The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of BR Act 1949 (AACS)

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 20: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Supervision of Coops Bank Coop Banks are supervised on the

basis of On-site Supervision

ie inspection us 35 of BR Act Off-site Supervision

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 21: B R ACT, AML & KYC,INVESTMENT AND AUDIT

On-site Supervision

To safeguard the interest of depositorsTo maintain a sound banking system as

per banking laws and regulationsFinancial position ndash Assets amp Liabilities

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 22: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Off-site SupervisionVariation in periodicity To bridge the gap between two

inspections off-site monitoring system has been put up to have up to date evaluation of financial position

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 23: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Off-site Supervision Off-site supervision is done by calling

various returns from the banks These returns are of two types ie

Statutory Returns stipulated under either

BR Act 1949 or RBI Act 1934 and Other regulatory returns

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 24: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory ProvisionsOSS returns are statutory

Sec 27 (2) of BR Act

RBI may at any time direct a co-op bank to furnish it within such time with such returns and information relating to business or affairs of the bank

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 25: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory ProvisionsSec 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns

Returns are signed by the bankrsquos authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management ndash usually head of compliance

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 26: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Prudential Concerns of Regulator

1 Solvency2 Liquidity3 Capital Adequacy4 Asset Quality5 Portfolio risk profile6 Concentration of exposure7 ConnectedRelated lending

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 27: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory ReturnsFORM IForm IIForm VIForm VIIIForm IXBalance Sheet and Profit amp Loss Ac

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 28: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory Returns FORM I

Sec 24 of BR Act for SCBs Sec 18 amp 24 for other cooperative banks Statement of demand and time liabilities

in India and amount maintained in cash gold and unencumbered securities Monthly Statement

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 29: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory Returnsdiams Form II

Unsecured Loans and Advances to Directors ndash firms in which they have

interest BR Act (AACS) Sec 20 (2) Monthly To be submitted within 10 days after the end of month Nil statement

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 30: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory Returns Form VIII

Unclaimed Deposit Accounts not operated for more than 10 years BR Act (AACS) Sec 26 Yearly as on 31st December To be submitted within 15 days from the close of calendar year Discrepancies observed

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 31: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory Returns Form IX and Special Form IX

AssetsLiabilities at close of business on last Friday of the month

BR Act (AACS) Sec 27 Monthly To be submitted with 10 days of

completion of the month

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 32: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Statutory Returns

Balance Sheet and Profit amp Loss Ac

BR Act (AACS) Sec 29 and 31 Yearly as on March 31 (Unaudited) On or before 30 September (Audited)

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 33: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Regulatory Returns

OSS returns Statements 1 to 8 RBI has prescribed the eight Off-site

Surveillance returns under the prudential supervisory reporting system (PSRS)

Due Dates Within 1 month from the close of the quarteryear

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 34: B R ACT, AML & KYC,INVESTMENT AND AUDIT

OSS SOSS Returns

8 OSS Returns by Tier II5 SOSS (Simplified OSS) Returns by Tier I UCBs

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 35: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Sr No Name of the Return Periodicity

1 Statement on Assets and LiabilitiesTop 10 Deposits Sundry Suspens

Quarterly

2 Statement on Earnings-NIIOP ldquo

3 Statement on Asset QualitySubD1 loss ldquo4 Statement on NPAs-Gross NPANet Npa

Violation of Exposure normsldquo

5 Statement sector wise advances- PS ldquo6 Statement on connected lending ldquo

7 Statement on CRAR ldquo8 Report on Bank Profile Annual

Regulatory Returns

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 36: B R ACT, AML & KYC,INVESTMENT AND AUDIT

SOSS ReturnsSr No Name of the Return Periodicity

1 Statement on Assets and Liabilities

Quarterly

2 Statement on Earnings ldquo3 Statement on Asset Quality ldquo4 Statement on NPAs large

exposure segment wise advances net demand and time liabilitiesnet owned funds ratio

ldquo

5 Statement on Bank Profile Annual

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Acceptance Policy

bull Check whether the documents for identity amp residence proof taken by branches are taken as per banksrsquo policy or not

bull Bank should prepare Customer Profile ndash Identity Social ndash Economical status etc

bull Bank can send Letter of Thanks for further verification

55

Towards Name proof Photo Identification Towards address proof

Passport where the address differs Telephone Bill

Voterrsquos Identity Card Bank account statement

PAN Card IncomeWealth tax assessment order

Driving Licence Credit Card Statement

Govt Defence ID card Electricity Bill

ID cards of reputed employers Ration Card

Letter from a recognised public authority or public servantverifying the identity and residence of the customer

Letter from employer

56

Subject to the satisfaction of the officer authorising the opening of the accountbull Note Original should be produced for verification and copy duly

attested by the verifying official shall be kept along with the accountopening form

Customer Identification Procedure

The Board approved policy should clearly indicate CIP to be carried out at different stages

a While establishing a banking relationship

b Carrying out a financial transaction or

c When the bank has a doubt about the veracity authenticity or adequacy of the customer data available

57

KYC for Existing Accounts

bull All existing accounts of companies firms trusts charities religious organizations and other institutions to be subjected to minimum KYC

bull Proper procedure should be followed to freeze the non KYC compliance account and to defreeze the same

58

Risk Categorization

High Risk

Medium Risk

Low Risk

59

High risk customer- due diligence

bull Accounts of Trustsbull Accounts of Companies and Firmsbull Accounts opened by professional

intermediariesbull Accounts of Politically Exposed

Persons resident outside Indiabull Non-Face-To-Face Transaction bull Correspondent Banking

ndash Countries linked to terrorist financingndash Non Cooperative Countries and

Territories

60

Instances where customer are connected with high-risk Industries

bull Non-bank financial institutions (for eg money transmitters)

bull Travel agenciesbull Jewel Gem Precious metal

dealersbull Securities broker dealers solicitor

firms etcbull Car boat dealershipsbull Property dealers buildersbull Arms art and antique dealers 61

High-Risk Products

bull Any product which allows a customer to readily convert cash to a monetary instrument

bull Any product or service which allows a customer to readily move from one jurisdiction to another which conceals the source of those funds

bull Relevance of the products or services asked to the nature of business account

62

Instances where customers are connected with high-risk customers

bull Geographyndash Drug producing nationsndash Drug transshipment countriesndash Drug using countriesndash Secrecy jurisdictions and tax havens

particularly those that grant offshore banking licenses

ndash Countries with high degree of public corruption

63

Monitoring of Transactions

64

Training amp Education

Employee Trainingbull Banks should take steps to provide proper

training to its employees on the statutory regulatory requirements and the internal policy amp procedures so that the risks are well understood and managed

bull Employees should also be educated on the need for proper handling of customer queries

Customer Educationbull Distribution of pamphlets etc may be

considered

65

What is meant by lsquosuspicionrsquo

Suspicion is personal and subjective and falls far short of proof based on firm evidence Suspicion has been defined by the courts as being beyond mere speculation and based on some foundation ie ldquo a degree of satisfaction and not necessarily amounting to belief but at least extending beyond speculation as to whether an event has occurred or notrdquo and ldquoalthough the creation of suspicion requires a lesser factual basis than the creation of a belief it must nonetheless be built upon some foundation

66

Suspicious TransactionActivity

bull Beware of activity not consistent with the customerrsquos business

bull Beware of a customer who provides insufficientsuspicious information

bull Beware of attempts to avoid reporting or record keeping requirements

bull Beware of certain funds transfer activities

bull Beware of unusual activities such as changes in bank transactions

67

Suspicious Transaction Activity

bull A customercompany who is reluctant to provide complete information regarding purpose of the business prior banking relationships officers or directors or its location

bull A customercompany who is reluctant to provide sufficient identification informationfinancial statements

68

Suspicious Transaction Activity

bull Sending or receiving frequent or large volumes of cross border remittances

bull Receiving large TTDD remittances from various centres and remitting the consolidated amount to a different accountcentre on the same day leaving minimum balance in the account

69

Suspicious TransactionActivity

bull Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques

bull Corporate accounts where deposits and withdrawals by chequeTTsforeign inward remittancesany other means are received frommade to sources apparently unconnected with the corporate business activitydealings

bull A single substantial cash deposit composed of many high denomination notes

70

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

71

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

72

Suspicious TransactionActivity

bull A customer who is reluctant to provide information needed for a mandatory report or to proceed with a transaction after being informed that the report must be filed

bull Any individual or group that coercesinduces or attempts to coerceinduce a bank employee to not file any reports or any other forms

73

Suspicious TransactionsActivity

bull An account where there are several cash depositswithdrawals below a specified threshold level to avoid filing of reports by intentionally splitting the transaction into smaller amounts for the purpose of avoiding the threshold limit

bull Multiple accounts under the same name

74

Audit of UCB

bull It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal disbursement without observing the terms of sanction failure to exercise proper post-disbursement supervision even suppression of information relating to unauthorised excess drawals allowed kite flying in bills and cheques etc

bull The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out The follow up of the inspection is not carried out seriously Personnel who cannot otherwise be deployed in other sensitivecritical areas more often staff the inspectiona

Internal Audit Machinery

bull The banks should introduce a sound system of internal audit With a view to strengthening the credibility of the inspection system in detecting cases of fraudsmalpractices steps need to be taken to gear up the inspectionaudit machinery and to improve the quality of officers of the inspection department The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman

Periodicity of Internal Auditbull The periodicity of the internal audit of the

branches should be at least once in every 12 months which should be really of surprise character

bull 23 Coverage of Internal Audit bull 231 The coverage of such inspections

should also be made more comprehensive inter alia to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices The internal inspection report should specifically comment on the position of irregularities pointed out in the inspection report of RBI

CONCURRENT AUDIT SYSTEM bull Ghosh Committee had recommended

introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches help in adherence to prescribed systems and procedures and prevention and timely detection of lapsesirregularities Accordingly all scheduled and other primary (urban) co-op banks with deposits over Rs50 crore were required to introduce the system of concurrent audit Subsequently JPC recommended for all UCBs

bull for all UCBs

Concurrent Audit of InvestmentsThe concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned held by it as evidenced by physical securities or the custodians statement The certificate should be submitted to the Regional Office of the Reserve Bank of India having jurisdiction over the bank within thirty days from the end of the relative quarter

bull 47 The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBDBPDSUB No5 098000 2003-04 dated 28 April 2004 regarding transactions in Govt Securities

Thank You

81

  • B R ACT AML amp KYCINVESTMENT AND AUDIT
  • Slide 2
  • Relevant Provisions of B R Act 1949 (AACS)
  • Not Authorized under B R Act
  • Important Sections
  • Important Sections (2)
  • Important Sections (Contd)
  • Important Sections (Contd) (2)
  • Section 11 Minimum Paid-up Share Capital
  • Section 18 Cash Reserve
  • Section 18 ndash Cash Reserve (Contd)
  • Section 19 Restriction on Holding Shares
  • Section 20 Restriction on Loans and Advances
  • Section 22 - Licensing of UCBs
  • Section 24 Statutory Liquidity Ratio
  • Section 26- Unclaimed Deposits
  • Section 27 Returns
  • Section 29 and 31 Account and Balance Sheet
  • Section 35 ndash Inspection of UCBs
  • Supervision of Coops Bank
  • On-site Supervision
  • Off-site Supervision
  • Off-site Supervision
  • Slide 24
  • Slide 25
  • Slide 26
  • Statutory Returns
  • Statutory Returns (2)
  • Statutory Returns (3)
  • Statutory Returns (4)
  • Statutory Returns (5)
  • Statutory Returns (6)
  • Regulatory Returns
  • OSS SOSS Returns
  • Slide 35
  • Slide 36
  • Section 35 A ndash Power of the Reserve Bank to give Directions
  • Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relatio
  • Aspects to be seen
  • Aspects to be seen Contd
  • Aspects to be seen Contd (2)
  • Aspects to be seen Contd (3)
  • Aspects to be seen Contd (4)
  • Front Office
  • Mid Office
  • Back Office
  • Exposure Norms ndash Coops
  • Classification of Investments
  • Know Your Customer Norms
  • What is money laundering
  • What are the key stages of the Money Laundering Cycle
  • PMLA Definition
  • KYC Policy should be reviewed by Board once in a year and amend
  • Slide 54
  • Customer Acceptance Policy
  • Slide 56
  • Customer Identification Procedure
  • KYC for Existing Accounts
  • Risk Categorization
  • High risk customer- due diligence
  • Instances where customer are connected with high-risk Industrie
  • High-Risk Products
  • Instances where customers are connected with high-risk customer
  • Monitoring of Transactions
  • Training amp Education
  • What is meant by lsquosuspicionrsquo
  • Suspicious TransactionActivity
  • Suspicious Transaction Activity
  • Suspicious Transaction Activity
  • Suspicious TransactionActivity
  • Suspicious TransactionActivity (2)
  • Suspicious TransactionsActivity
  • Suspicious TransactionActivity (3)
  • Suspicious TransactionsActivity (2)
  • Audit of UCB
  • Slide 76
  • Internal Audit Machinery
  • Periodicity of Internal Audit
  • CONCURRENT AUDIT SYSTEM
  • Concurrent Audit of Investments
  • Slide 81
Page 37: B R ACT, AML & KYC,INVESTMENT AND AUDIT

Section 35 A ndash Power of the Reserve Bank to give Directions

bull RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank

bull RBI derives it powers to order winding up of an UCB or its reconstruction only for the eligible cooperative bank stipulated under section 2(gg) of the DICGC Act 1961

Section 55 ndashAct 18 of 1891 amp Act 46 of 1949 to apply in relation to Cooperative

Banksbull The Bankers Books Evidence Act 1891 shall

apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec 2 of that Act

bull The Banking Companies (Legal Practitioners Clients Accounts) Act 1949 shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec 2 of that Actrdquo

Aspects to be seen

bull Whether Investment Policy is in voguebull Contents of the Policy - as per RBI

Guidelinesbull Approval of policy by Boardbull Formation of Investment Committeebull Delegation of Powersbull Procedure for obtaining approval

Aspects to be seen Contd

bull Approved list of brokersbull Criteria for empanelmentbull Verification of creditworthiness market

reputation of brokers - done or notbull Annual review of list of approved brokers -

done or notbull Dealings through brokers - role of broker

Aspects to be seen Contdbull Periodical reconciliation of SGL CGSL

balances

bull Generation of periodical reports and submission to BoD RBI amp NABARD

bull Submission of half yearly review note to Board

bull Whether the bank has invested its surplus funds in non-permissible investments

Aspects to be seen Contdbull Whether bank has purchased or sold any

security from to broker on principal to principal basis

bull Volume of business with each broker not to exceed 5 of the total transactions

bull Whether the contract note contains name of the counter party details of settlement etc

Aspects to be seen Contdbull Whether the bank has specified single exposure

normsbull Whether stop loss limit has been mentioned in

the policybull Whether the bank has violated the prudential

norms fixed by RBI bull Whether functional separation of the front office

mid office and back office exists

Front Office

bull Deals in securities (Buy Sale amp Repo Deals)

bull Putting the bids in the auctions of T- bills and other securities

bull Maintenance of deal records including the tapping of telephonic conversation

Mid Office

bull Risk Monitoringbull Risk Measurementbull Risk Managementbull Management Information Systembull Formulation and review of investment Policy ampbull guidelines for transactions in securities

bull Submission of reports to the top executives amp Boardbull Maintenance of data base and updating front office with

relevant information

Back Office

bull Inter Bank settlements of funds borrowed or lentbull Settlement of Call Notice Term CD CP REPO T-Bills

NCDbull Physical verification of securitiesbull Monitoring brokersrsquo turnoverbull Reconciliation of RBI current Ac and constituents own

SGL investment portfoliobull Interest collection on NCDs Bondsbull Dividend collection on shares or unitsbull Follow-up on concurrent statutory and RBI inspection

reports

Exposure Norms ndash Coopsbull Investments in PSU bonds Not to exceed 10 of the

banks deposits at the end of previous year

bull Investing FDs with Nationalised banks- total 20 and individual 5 of total Deposits

Classification of Investments

SLR securities to be classified as underPermanent- HTM- Premium to be amortisedCurrent ndashHFTAFS- Make ProvisionsNon SLR securites- To be provided if market

price below bv

Know Your Customer Norms

49

What is money laundering

Money Laundering is called what it is because that perfectly describes what takes place ndash illegal or dirty money is put through a cycle of transactions or washed so that it comes out of the other end as legal or clean money In other words the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income 50

What are the key stages of the Money Laundering

Cycle Placementof criminal proceeds into the financial system

Layeringof transactions to confuse the audit trail and distance the

original source of funds (eg successive transactions international transfers early termination products tax haven companies genuine businesses)

Integrationof funds back into the real economy as ldquoclean and respectable

moneyrdquo

51

PMLA Definitionbull Offence of Money Laundering (section 3)

Whoeverbull (a) acquires owns possesses or transfers

any proceeds of crime or bull (b) knowingly enters into any transaction

which is related to proceeds of crime either directly or indirectly or

bull (c ) conceals or aids in the concealment of the proceeds of crime

bull Commits the offence of money laundering52

KYC Policy should be reviewed by Board once in a year and

amended according to guidelines issued by RBI

53

54

KYC Policy includes the following nine key elements1 Customer Acceptance Policy (CAP)2 Customer Identification Procedures (CIP)3 Monitoring of Transactions4 Risk management5 Training Programme6 Internal Control Systems7 Record Keeping8 Evaluations of KYC guidelines by internal audit and inspection system9 Duties Responsibilities and Accountability

Customer Accept