KYC, AML & COMPLIANCE

BASIC MODULE
By GNANENDRA REDDY KAKARAKAYALA

Please Contact Me
+91 9686347038 / [email protected]

Release: September 2018

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KYC, AML & COMPLIANCE BASIC MODULE
Know Your Customer (alternatively know your client or 'KYC') is the process of a business verifying the
identity of its clients and assessing potential risks of illegal intentions for the business relationship. The term is
also used to refer to the bank regulations and anti-money laundering regulations which govern these activities.
Know your customer processes are also employed by companies of all sizes for ensuring their proposed agents,
consultants, or distributors are anti-bribery compliant. Banks, insurers and export creditors are increasingly
demanding that customers provide detailed anti-corruption due diligence information.

The objective of KYC guidelines is to prevent banks and other financial institutions from being used, intentionally
or unintentionally, by criminal elements for money laundering, terrorist financing activities. Related procedures
also enable banks to better understand their customers and their financial dealings. This helps them manage
their risks prudently.

Money Laundering: Money laundering involves taking criminal proceeds and disguising their illegal source
in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities.

Simply put, money laundering is the process of making dirty money look clean.

Step 1: Placement — The physical disposal of cash or other assets derived from criminal activity.

Step 2: Layering — The separation of illicit proceeds from their source by layers of financial transactions
intended to conceal the origin of the proceeds.

Step 3: Integration — Supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the
economy in what appears to be normal business or personal transactions.

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KYC, AML & COMPLIANCE BASIC MODULE

Terrorist Financing: After the terrorist attacks of September 11, 2001, the finance ministers of the Group of Seven
(G-7) industrialized nations met on October 7, 2001, in Washington, D.C., and urged all nations to freeze the assets of
known terrorists. Since then, many countries have committed themselves to helping disrupt terrorist assets by alerting
financial institutions about persons and organizations that authorities determine are linked to terrorism.

the process of supplying money to terrorist activities. But the money is not necessarily derived from illicit
proceeds. On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of
laundering is to enable the money to be used legally.

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KYC, AML & COMPLIANCE BASIC MODULE

KYC = CIP + CDD + EDD.

CIP (Customer Identification Program):

It is a first phase in KYC.

It is process of gathering primary information regarding client before we on-board them. (Pre-On-
boarding).

CDD (Customer Due Diligence):

It is second phase in KYC.

After completion of CIP (Collecting all the required information), CDD step will come into picture.
Main Activities under CDD is – Documents verification, as per requirements matrix (requirements matrix
is the tool/document, where we find the list of documents / information to be obtained depends on
client type).
Need to perform screenings.
Need to Compute Risk Rating.

Note: KYC Checks / Process will be end with CDD if client risk is Low & Medium with no high-risk indicators.

EDD (Enhanced Due Diligence):

If client risk rating turned into High (or any high-risk indicators identified in Low/Medium risk cases), the
EDD step will come to picture.
Main Activities under EDD:
Need to obtain additional requirements/documents/information.
Need to perform additional Screenings.
Need to obtain additional approvals from Compliance.
Need to input more mitigations (controls) on client.

WHEN TO DO KYC
On-Boarding: While onboarding any client we need to perform KYC checks.
Periodic Reviews: Once we onboard the clients, we need to conduct KYC checks based on their risk
ratings.
o LOW RISK – Once in every 3 Years.
o MEDIUM RISK – Once in every 2 Years.
o HIGH RISK – Annually.
Event Driven’s: Based on below situations.
o Any Change in Client Corporate structure or Ownership or Top Management.
o Corporate Actions (Mergers & Acquisitions)
o Adverse Negative news on Media.
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KYC, AML & COMPLIANCE BASIC MODULE
o Business & Geographical Expansion. Etc.,

CUSTOMERS / CLIENTS
Customers/clients of any Financial Institutions (Banking or Non-Banking). In simple terms, account holders of any Financial
Institutions.

Types of Customers:

Individual Clients.
Entities / Corporate Clients.

Note: In this module, we will only discuss about KYC checks on Entities / Corporate Clients (Job Oriented).

Various types of Corporate Clients:

Corporates (Listed/Unlisted)
Sovereign, Supranational Entity or Central Banks.
SOE/SIE (State Owned or State Instructed Entities) Government owned.
Banking Institutions
Non- Banking Financial Institutions
Asset / Investment Managers.
Funds (Mutual/Hegde/Pension. Etc.,)
Partnerships
Trusts
SPVs (Special Purpose Vehicles)
MSBs (Money Service Businesses
Holdings Companies
NPO, NGO, Foundations
Governments
Schools and Universities. Etc.,

Note: Enhanced Module will provide the detailed explanation, KYC procedures & required documents for above
mentioned clients. (Please go google checks for additional info on above).

RESEARCH DOCUMENTS
We need to obtain various documents from various sources to fulfill KYC requirements.

Mainly sources are classified into two types. They are.

1. Primary

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KYC, AML & COMPLIANCE BASIC MODULE
2. Secondary.

Primary Sources
Certified Documents from the Client
Passport Copies of Directors, Controllers, Shareholders & Other connected parties
Company Registries of various Countries
Extracts from Stock Exchange Websites
Extracts from Regulatory websites
Audited Annual Reports / Financial Statements
Documents certified by Independent Law firms. Etc.,

Secondary Sources
Blomberg Terminal / Businessweek
Thomson Reuters
Lexis Nexis
D&B
Bankers Almanac.
Verified Entity Data as a Service – VEDaaS
Other paid sources.

Key Data / Information obtain from Documents

We need to obtain below date from the documents which we collected from primary or secondary sources.

Legal Name of the client / LEI Proofs.

Registered & Business Address
Nature of Business of the client
Business Locations
Ownership Details (Beneficial Owners/Share Holders)
List of Subsidiaries
List of Branches (if applicable)
ID & V of Key Controllers (CEO, CFO, CCO, COO, CIO. Etc.,)
ID & V of Directors & Authorized Signatories.
Auditors Information
Regulator information (If client is regulated)
Listing Information (If Client is Listed)
Products services provided by Bank (Sales Team will Provide this)
Financial Data (Assets, Sales, Net Profit. Etc.,)
Sanction Related Information.
Tax Related Information.
Other Connected parties (Custodians, Prime Brokers, Legal Advisors, Administrators. Etc.,)
Source of Funds & Source of Wealth of Client
NACE Codes
Parent Details.
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KYC, AML & COMPLIANCE BASIC MODULE

Various Documents to be Collected from Primary and Secondary Sources

Registry Extracts.
Regulatory Proofs.
Listing Proofs
Certificate of Incorporation
Certificate of Good Standing.
Annual Reports (Parent level / Subsidiary Level)
ID & V Copies (Passport, Driving Licenses, Govt ID & Address verification documents)
Client Regd. & Business Address Proofs
Articles & Memorandum of Association
LLC & LP Agreements
Prospectus
Investment Management Agreements
Constitution & Statutes.
Trust Deed (If Client is Trust)
Questionnaires (Sanctions, Embargoes, Wolfsberg. Etc.,)
Licenses
Tax Forms (Form W-9, Form W-8BEN-E. Etc.,)
Other Mandatory documents.
LEI Proof.

Screenings
we need do perform the screenings on client and its connected parties (Controllers, Shareholders, Directors, Authorized
Signatories and other connected parties) to know PEP status, Adverse negative news, sanctions news & other fraud news
on them).

General screening checks performed by Client.

World Check
Lexis Diligence
RDC – Regulatory Data Corp.
SDN Searches

Objectives of Screenings:

To identify the PEPs

To identify the Adverse Negative News
To Identify the Sanctions Negative News.
To Identify the any fraud and Money laundering news.
To Identify the regulatory fines and Restrictions

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KYC, AML & COMPLIANCE BASIC MODULE
Note: Screenings are major things to identify the client Risk.

World Check.

Lexis Diligence.

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KYC, AML & COMPLIANCE BASIC MODULE
RDC (Regulatory Data Corp)

SDN SEARCH:

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KYC, AML & COMPLIANCE BASIC MODULE
RISK RATING
It is an Internal Tool which helps to compute the risk rating of the client based on given inputs.

Main Risk Factors.

Country Risk (Incorporation and Business locations)

Business Nature / Operations Risk
Ownership Risk (Type of Ownership)
Product & Services Risk.

Risk Calculator Model (Illustration)

Note: Various Banks will follow their own formats & risk classifications (For e.g. Bank A (Low, Medium & High) Bank B
(Low, Medium, High or SCC) & Bank C (Low, Medium Low, Medium High & High).
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KYC, AML & COMPLIANCE BASIC MODULE
ESCALATIONS TO COMPLAINCE TEAM
Material Negative News Found and screenings, which KYC team unable to mitigate or discount.
If Client is High Risk
Any Sanction Related Issues
PEP with Negative News
Any Documents are Missing and Client is not ready to provide.
Suspicious Activity Reporting
Other KYC Issues.

KYC ON-BOARDING MODEL

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KYC, AML & COMPLIANCE BASIC MODULE
KYC Work Flow Model
KYC work flow is divided to two major parts. IDD (Initial Due Diligence) and Full KYC / Profile Completion.

IDD (Initial Due Diligence).

In this step, we will check the required information from available documents and will list out the missing
information / documents.
Will compute the FCCR to know risk rating of the client with the available information to request more/less docs
depends on the risk.
Finally, will reach out to Sales Team / Front Office for Missing information.

Full KYC / Profile Completion.

Once we get the all missing documents, Full KYC / Profile completion step will start.
We will complete (answer the all questions & Upload the all documents) Client profile in KYC platform (KYC
Platform means the application the bank maintains to keep customers’ records).
Once we complete everything, will submit the profile for Checking (4 eye). If all clear case will be approved.

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KYC, AML & COMPLIANCE BASIC MODULE
Sanctions
A threatened penalty for disobeying a law or rule. And sanctions are two types. 1. sensitive sanctions and 2. List based
sanctions countries.

1. Sensitive Sanctions: A client will not maintain any economic, financial or any other relationship with a part of
country or full country.
2. List based Sanctions: A client can have relationship with the countries except specified businesses or parts of the
country.

List of Sanction Countries. (Countries Sanctioned by The U.S.)

Burma. The Southeast Asian nation of Burma – also known as the Union of Myanmar – is one of the countries that
the U.S. has placed sanctions on for human rights and political reasons. ...
Côte d'Ivoire
Cuba
Iran
North Korea
Syria.
Sudan

PEPs
To ensure your organization fully complies with the latest financial PEP regulations, it is essential that you and your team
are aware of who or what a Politically Exposed Person (PEP) could potentially be.

Providing a definitive list of who could be classed as a PEP is difficult, as the criteria is so broad; international definitions
vary and the Financial Action Task Force (FATF) is frequently issuing updated recommendations.

In basic terms, a Politically Exposed Person is someone who, through their prominent position or influence, is more
susceptible to being involved in bribery or corruption. In addition, any close business associate or family member of such
a person will also be deemed as being a risk, and therefore could also be added to the PEP list.

The Basic Criteria for Deciding who is a Politically Exposed Person

Any one in any of the following roles should be considered a potential PEP.

PEPs in Government Roles

Legislative Bodies: A good example here would be a Member of Parliament

Executive Bodies: A PEP could range from the head of state down to the assistant ministers
Diplomatic Roles: Ambassadors or charges d’affaires would be considered PEPs
Judiciary Bodies: Key people working within supreme courts, constitutional courts or high-level judicial bodies
State-Owned Enterprises: A PEP would typically be anyone from a senior executive upwards. However, even
former members of the board of directors no longer associated with an organization may retain influence and still
be flagged as PEPs

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KYC, AML & COMPLIANCE BASIC MODULE
PEPs in Organizations and Institutions

Central Financial Institutions: Examples here would be the Court of Auditors and members on the boards of central
banks
Armed Forces: In this situation, a PEP rating would typically only apply to a high-ranking officer
International Sports Committees: Members of these committees may be influenced to vote on the location of
major sporting events/contracts for building venues, etc., so have recently been included by FATF under their
definition of a PEP.

Known ‘Close Associates’ who are Considered PEPs

Anyone who has a close business relationship or joint beneficial ownership of legal entities or legal arrangements
with a PEP
Anyone who has the sole beneficial ownership of a legal entity which is known to have been set up for the benefit
de facto of the PEP

Immediate Family Members who are Considered PEPs

Parents and children of PEPs

Spouse or partner
Siblings
Uncles and aunts
Girlfriend, Boyfriend / Lovers. (Ex also).
Even slightly indirect family members (such as in-laws) will be considered as a politically exposed person

Note: Each country may have different local PEP regulations that you need to comply with when doing business in that
region.

Others
For prohibited customers and high-risk customers, please check in google.

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KYC, AML & COMPLIANCE BASIC MODULE
Glossary (some important abbreviations, Terminology & Definitions)
KYC – Know Your Customer / Client SEQ – Sanctions Exposed Questionnaire

CIP - Customer Identification Program AML – Anti Money Laundering

CDD – Customer Due Diligence. CTF – Counter Terrorist Financing

EDD – Enhanced Due Diligence. AM/IM – Asset / Investment Manager

BO – Beneficial Owner(s) ID & V – Identification & Verification

UBO - Ultimate Beneficial Owner(s) FCCR - FCCR (Financial Crime Risk Client Rating)

IBO – Intermediary / Immediate Beneficial Owner(s) FCC - Financial Crime Compliance.

Notes and Conclusion.

My Next Module KYC, AML & COMPLIANCE ADVANCED MODULE will be released soon.

Topics to be covered.

Live - Screenings’ Sessions

Live - Documents obtaining and verifying
Live - Cases (Full KYC Live)
Detailed explanation regarding client types and Documents
Detailed explanation regarding documents specific to all client types.
PEP Assessment and Procedures.
Understanding and calculating Ownership in Charts***.
Interview Questions and Answers
FAQs.

All The Best

GNANENDRA REDDY KAKARAKAYALA

+91 9686347038 / [email protected] GNANENDRA REDDY KAKARAKAYALA