The Banker  - Customer Relationship

Who is a Banker?

As per Banking Regulation Act 1949 (Sec 5 (b)), a Banker is -

“A person undertaking business of banking”  which means:-

accepting deposit from public for the purpose of lending and investment

repayable on demand or otherwise

Withdrawable by  cheque, draft, order or otherwise

Who is a Customer?

A Bank Customer is one who has an account with a Bank.

A casual transaction like encashment of a cheque does not entail a person to be customer.

Legal Requirements to become a Customer:

Age of maturity

Sound Mind

Not debarred under any law

Must have an offer, proposal and acceptance

Contractual relationship with commercial intentions

Types of Customers:

Natural Person

Individual and joint account

Proprietorship concern

Association of persons

Legal Person

Private limited/public limited company ( limited companies)

Trust

Societies

Clubs

Associations

Partnership firms

Bankers obligation

Duty to honour cheque/ payment instructions of customer- Sec 31 of NI Act 1881

Duty to maintain secrecy of accounts—Sec 13 of Banking companies(acquisition & transfer of undertaking) Act 1970

Exceptions:

Under compulsion of law under Banker’s Book Evidence Act , Criminal Procedure Code, FEMA, IT Act, BR Act 1949, RBI Act 1934.

To protect national Interest—money laundering etc

In the interest of the Bank.

With the implied consent of the customer

As per banking practices

Relationship stands terminated when..

Bank comes to know the death/lunacy/ insolvency of the customer

The customer close the account with an appropriate notice.

The bank closes the account with a due notice to the customer. If notice not given, bank can be held liable.

On garnishee order or attachment order from the competent authority

Know Your Customer- KYC

 Objectives of KYC:

To prevent banks from being used, by unscrupulous or criminal elements for their criminal activities including money laundering.

To minimize frauds and risks and protect banks reputation.

To avoid opening of accounts with fictitious name and address.

To weed out bad customers and protect good ones.

Officially Valid Documents (OVDs)  For ID Proof  

Passport

Voter’s ID

Driving License

PAN Card

Aadhar Card

Job Card issued by NREGA

Simplified KYC Norms

A person who does not have ‘officially valid documents’ can open ‘small accounts’ with banks. A small account can be opened on the basis of a self-attested photograph and either a signature or thumb print in the presence of an official of the bank.

However, a Small Account has the following limitations:-

Aggregate credits in the account cannot exceed Rupees one lacs in a year

Aggregate withdrawals cannot be more than Rupees ten thousand in a month

Balance in the accounts cannot not be more than Rupees fifty thousand at any point in time.

These small accounts would be valid normally for the period of twelve months.

E – KYC through Aadhaar

Electronic KYC, based on the Aadhar or unique identification number (UDI), is a valid way to open a bank account. This could reduce the risk to identity fraud and document forgery, paving the way for a paperless way of fulfilling KYC norms.

Anti-Money Laundering/Combating the Financing of Terrorism

Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets.

What is Money Laundering

Criminal activities, such as drug trafficking, smuggling, human trafficking, corruption and others, tend to generate large amounts of profits for the persons carrying out the criminal act.

However, by using funds from such illicit sources, criminals risk drawing the authorities' attention to the underlying criminal activity and exposing themselves to criminal prosecution. In order to benefit freely from the proceeds of their crime, they must therefore conceal the illicit origin of these funds.

Money laundering" is the process by which proceeds from a criminal activity are disguised to conceal their illicit origin. Terrorist financing is the collection of funds for terrorist purposes. In the case of money laundering, the funds are always of illicit origin, whereas in the case of terrorist financing, funds can stem from both legal and illicit sources.

In both cases, the perpetrators of crime  make an illegitimate use of the financial sector.

How  banks are used by money launderers

Money Launderers generally use three stages  to clean their dirty money through banking channel:-

Placement is the first stage in money laundering where the cash proceeds of criminal activity enter into the financial system.

This is most critical stage for any money launderer as the criminal can effectively mask his ‘dirty’ funds by  mixing with  his ‘clean’ funds and create an impression of legitimacy.

Examples of Placement include:

Depositing cash below threshold reporting limits for AML purposes into multiple bank accounts

Purchasing demand drafts for cash and depositing the same into bank account.

Layering is the second stage in money laundering where attempts are made to distance the money from its illegal source through layers of financial transactions.

Examples of Layering include:

Sending funds to different onshore and offshore bank accounts

Creating complex financial transactions

Loans and borrowing against financial and non-financial assets

Integration is the third stage of money laundering. This stage involves the re-introduction of the illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation for the funds.

Examples of Integration include:

Buying businesses

Investing in luxury goods

Buying commercial property

Buying residential property

It is clear from above that banking institutions are required by money launderers to conceal their illegal funds and that is why it is important that Know-Your-Customer (KYC) checks are done on customers. In certain cases there may be a need for Enhanced Due Diligence (EDD) on clients.

Money laundering can’t happen without banks being involved somewhere within the three stages. Since they are our first line of defence against criminals, by having robust controls and access to accurate KYC data, banks can prevent many money laundering attempts.

Money Laundering  Risks to Banks

Reputational risk

Legal risk

Operational risk (failed internal processes, people and systems & technology)

All  risks are inter-related and together have the potential of causing serious  threat  to the survival of the bank

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you will do things differently”,  Warren Buffett.