KYC norms violation: How 22 banks actually goofed up

The Reserve Bank of India (RBI) imposed penalties on 22 banks for violating rules for customer identification or anti-money laundering, ranging from Rs 50 lakh to around Rs 3 crore, notes Firstpost today. The apex bank had conducted scrutiny of banks in April and May 2013 to see if there were any incidence of Know Your Customer (KYC) norm violations or money laundering activities. While 22 banks were found guilty and penalized for violating KYC norms, seven were not penalized, since no serious violation of norms was found.

But how is that these 22 banks actually goofed up?

1. These banks did not adhere to certain KYC/ ALM norms. For instance they failed the basic process of customer identification, they failed to do periodic review of risk assessment of account holders. Nor did these banks ask their customers for the required KYC updation documents.

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2. For walk in customers in the bank branch, when third party products were sold, the did not ask for all KYC documents. Also these banks sold gold coins to customers against cash of more than Rs 50,000, this is not permitted as per RBI norms. Looks like making the most of the walk in customer by selling him, third party products and gold, was more important to these bankers, then abiding to RBI rules. And, banks even violated norms for import of gold on consignment basis.

3. Banks also failed to monitor transactions in customer’s accounts. Nor were dormant, inoperative accounts handled as per the guidelines. These accounts can be used by dishonest bank employees to conduct money laundering activities. And, yet banks did not take the necessary steps.

4. Banks are not permitted to issue Demand Drafts against cash of more than Rs 50,000 as per the rules. But, these banks didn’t comply to this rule either.

5. The banks also did not bother to maintain upper limits for remittances as well as repatriation of funds, for NRO accounts. Read RBI circular here.

In short, though on the face of it, banks did not violate anti money laundering norms, they were slack as for a KYC as well as other important norms goes. The truth is, a penalty of as much as Rs 3 crores is not a big deal for banks. The real question is why are banks unable to meet even basic norms like the customer identification process?