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B R ACT, AML & KYC,INVESTMENT AND AUDIT . Presented By M C Parekh Faculty Member N. I. C. M. Gandhinagar. Spelled out in Section 56 of Part V of B. R. Act, 1949 - PowerPoint PPT Presentation
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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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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
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
Thank You
81
