Due Diligence

A Guide on Customer Due Diligence under PMLA

A Master Circular was released by the Reserve Bank of India (RBI) “Know Your Customer (KYC) Directions, 2016”.  The title of the Master Direction was “Know Your Customer (KYC) Guidelines/ Anti-Money Laundering Standards (AML)/ Combating Financing of Terrorism (CFT)/ Obligations of the banks and financial institutions under the Prevention of Money Laundering Act, 2002 (PMLA)”. These guidelines mentioned under these Master Directions have to be complied by all the financial institutions. These Directions also provide that a minimum requirement or disclosures that need to be made in respect of the clients of the company in furtherance of the customer due diligence under PMLA.   

What is customer due diligence under PMLA?

Customer due diligence under PMLA is a set of guidelines that need to be followed by all the financial institutions while opening an account of a client and to oversee that the account is not opened in furtherance of money laundering activities and terrorist financing activities  or other such criminal activities. Proper identification and verification of the client needs to be done according to the directions.   

Highlights of the Customer Due Diligence under PMLA

Following is the list of due diligence measures under PMLA that have been highlighted under the Master Directions released by the RBI which states that a company has to monitor their clients to identify, mitigate and manage any money laundering/ terrorist financing risks that may arise while offering any loan facility to a potential or existing client:

1. Measures related to customer due diligence under PMLA^[1] have to be applied to the extent that they take into account the risks associated with money laundering and terrorist financing. Such measures will be taken depending on the type of customer, business relationship or transactions involved.
2. The company needs to find out from the resources at its disposal whether the client or the potential client or the beneficial owner of that particular client is a politically exposed person (PEP) or not. Where circumstances require, the company needs to take a PEP declaration form such a client.
3. Prior approvals need to be taken from senior management before engaging and establishing business relationships with the PEPs or their family members or close relatives. However, in case a person becomes a client or beneficial owner and thereafter becomes a PEP, even in such a case approval from senior management would become necessary for continuing the business relationship with such a client.
4. It is encumbent on the company to find out the persons who beneficially own or influence or control a client’s loan account and they shall also include such persons who exercise ultimate control over a legal person or arrangement.
5. If the company feels that the loan account maintained is beneficially owned by a person other than the client, then the company needs to employ the client identification and verification procedures to find out the identity of such person.
6. The process of due diligence and scrutiny from the company’s side shall continue for a long time process which includes scrutinising the client’s transactions and the account throughout till the business relationship with the company lasts. Such scrutiny shall be conducted to ensure that the transactions being conducted are consistent with the company’s knowledge about the customer, its business and its risk profile.
7. Customer due diligence shall be conducted by the company on a risk sensitive basis. The due diligence shall be done keeping mind the type of customer, nature of business relationship and the transactions undertaken by such person.
8.  The need for documentation and collection of other information shall be done for different classes of clients on the basis of perceived risk and the prescribed requirements of the PMLA, the guidelines issued by RBI from time to time. Following is the list of documents that may be sought from the clients put in the high risk category:
9. Financial information/ annual statement of accounts
10. Sources of funds or securities
11. Bank statement for the last three months
12. The company needs to ensure that an account is not created where
13. The company has not been able to apply client due diligence measures/ KYC policies.
14. It becomes impossible to ascertain the identity of the client
15. Where the information supplied by the client to the subsidiary is suspected to be non-genuine
16. If the company realises that the client is not interested in providing its full and complete information
17. It is also the duty of the company to put in place adequate checks before opening an account so as to ensure that the identity of the client doesn’t matches with the identity of a person having a criminal background or is banned in any other manner whether in terms of criminal and civil proceedings by any enforcement agency worldwide. A list of individuals or entities can be obtained from the website of the United Nations should be checked. The company before opening any new account must ensure that the names of the proposed customers or clients don’t appear in that list.
18. The names of the existing clients should also be necessarily checked on an ongoing basis to ensure that such names do not fall in the list provided in the banned list taken out by stock exchanges/ SEBI/ RBI from time to time.   

Conclusion 

The Master Circular released by RBI on Customer Due Diligence under PMLA will ensure that the transaction activities of the clients are monitored by the financial institution in such a manner that the accounts are do not become the tools or gateways of money laundering and terrorist financing. The government has initiated towards digitisation of KYC records so that clients do not face any hassles while submitting their records.

Read Our Article: Summarizing the Due Diligence Process in India