RBI set to tight norms to check money laundering

The Reserve Bank of India (RBI) is understood to be in the process of tightening norms for banks to check money laundering and terrorist financing even as the notification on the Anti Money Laundering (AML) Act is yet to be issued by the government.

According to banking sources, the new norms could bring in "politically exposed persons" (PEPs) under the ambit of the 'know your customer' (KYC) norms.

This could be done by setting up risk management systems and obtaining senior management approval for establishing customer relations, etc. among other measures. PEPs are individuals who are or have been entrusted with prominent public functions overseas and important political party officials.

After the abolition of Foreign Exchange Regulation Act (Fera), two Acts of Foreign Exchange Management Act (Fema) and AML Act were to be put in place. Fema was introduced but AML never saw the light of the day as both Enforcement Department (ED) and Central Board of Direct Taxes (CBDT) wanted to play the role of the implementing agency.

In the absence of ALM, the Indian central bank wants to tightend the KYC norms and check money laundering. It has become very crucial in the wake of Telgi case, stock market scams and terrorist activities. There is a concern that the bankint sector should not get embroiled in the terrorist financing which has a systemic risk as well.

However, RBI can only regulate banks under the Banking Regulation Act (BRA) but cannot take any action against a third-party like bank customes. For the time being the RBI wants to banks to set up financial intelligence units (FIUs) within banks and report on all fraud cases like diversion of funds.

The new norms will be in line with the recommendations of Financial Action Task force on money laundering which had proposed 40 guidelines for countries across the globe in 2003 on the basis of United Nations convention against Illicit Traffic in narcotic drugs and psychotropic substances 1988 and UN convention against Transnational Organised crime 2000.

Banks will be directed to put in place strict norms for disclosure of benficial ownership of corporate accounts. This means banks will have to disclose the identity of persons who ultimately own or control a body on behalf of which the transaction is made and not the executive body which is represented in the bank account.

Banks will also be required to fish out data on suspicious transactions spanning across 10 years and not just five years as proposed in the original KYC guidelines issued in 2002.

Corresponding banking activity of the banks in the overseas market will also be required to adhere to tougher AML norms so that Indian banks should not end up dealing with overseas intermediaries exposed in money laundering.