Ask Mint | Laundry service: Keeping money, bank accounts clean

Ask Mint | Laundry service: Keeping money, bank accounts clean
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First Published: Mon, Sep 24 2007. 01 40 AM IST

Shailaja (R) and  Manoj K. Singh
Shailaja (R) and Manoj K. Singh
Updated: Mon, Sep 24 2007. 01 40 AM IST
D.B.C. Demellow is a dirty fellow. He knows how to take anyone for a ride. One fine morning, he appeared at the doorstep of a small bank in a sleepy corner of our town. He wanted to open an account. The branch manager, in his hurry to tap a
Shailaja (R) and Manoj K. Singh
money-loaded customer, forgot to ask the many questions that any prudent banker should ask. The result was disastrous. The money deposited that day subsequently disappeared to a remote corner of the globe for some nefarious design. Demellow was successful in using banking channels to transmit his dirty money for a wicked plan. People like Demellow can strike once again anywhere, any time. How to stop them is a challenge. Let’s see what solution our friends Jinny and Johnny have:
Johnny: Earlier, we used to hear about celebrities washing their dirty linen in public but nowadays, we hear about people like Demellow washing their dirty money through banks. What is this all about?
Jinny: Well, dirty money, if kept at one place, starts stinking, like dirty socks. Such a stink may invite the sniffing nose of law enforcement agencies. Banks can be used as an easy conduit for flushing out dirty money from one place to another. This enables people like Demellow to carry out one transaction after another with the hope that a series of transactions will conceal the real source of money. Cash is put in one bank and transferred from one account to another to make the trail difficult to trace or follow.
Afterwards, the same cash is invested in some business activity to make it appear like a part of some legitimate business. The main purpose of such investments is to conceal the real source of money through mix and match. Just like a magician who puts a rat in his hat and pulls out a cat. The dirty money slowly begins to look clean and white. This kind of eyewash, in the parlance of law enforcement agencies, is called money laundering.
Johnny: Money laundering? I never thought that some people specialize in it. But first tell me, what is dirty money?
Jinny: Dirty money comes out of dirty sources like smuggling, drug trafficking, illegal arms trade and a host of other sinful activities.
In fact, India’s Prevention of Money Laundering Act, 2002, gives a long list of all such activities. However, the riskiest kind of dirty money comes out of unknown sources. For instance, it is very difficult to establish the trail of money used to finance terrorist activities. Terrorist money could come out of any of the above sources or it could even come out of donations for waging war. A few months ago, Mint had reported on one militant outfit extorting money in equated monthly instalments from people. Unless our banks are cautious, all this money may be put in our banking channels. We really need to arm ourselves for preventing the misuse of our financial system for such purposes.
Johnny: Yeah, sure! We should not allow money launderers to use our financial system as a washing machine. But what steps can we take?
Jinny: KYC norms are one such step, which all financial institutions around the world are following. In our country, the Reserve Bank of India has given all banks guidelines on KYC norms. KYC, as you may be aware, stands for Know Your Customer. The basic philosophy behind these norms is that a bank should be careful while starting a relationship with a new customer. It should also be careful in monitoring suspicious transactions in respect of all its customers.
Johnny: Thanks for clarifying what KYC stands for. I used to think that banks use it as a Kick-out Your Customer policy if they are not satisfied with their monthly average balance. Anyway, tell me, what kind of precautions do banks have to take under the KYC norms?
Jinny: Banks have to be careful in many respects. First of all, while opening a new account, they need to be sure about the identity of their customer. This can be done through several sources. A documentary proof of identity, such as a PAN card, voter I-Card, passport, etc, is one such source. Introduction through an existing customer of the bank could be another source. Taking a photograph of the customer at the time of opening the account ensures the physical identity of the customer. Further, banks are also required to obtain address proof from the customer. For this purpose, banks request for copies of telephone bills, lease deeds, and so on. However, bankers should not merely rely blindly on all the documents submitted by a new customer. They should cross-check the authenticity of information through independent sources. Small steps, such as sending a welcome letter to the customer at the given address, can reveal a fake address if the letter is returned undelivered. Once the account is operational, the bank should be careful about any suspicious transaction. In short, all these efforts require cooperation between the customers and the bank.
Johnny: Yes, of course! This is a small price you pay if you want to keep people like Demellow away.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at realsimple@livemint.com
What: Know Your Customer (KYC) norms work as an antidote to money laundering.
Who: Banks and financial institutions need to follow KYC norms while starting business with a new client.
Why: Prevention of money laundering helps in checking the use of banking channels for transmitting money for illegal purposes.
How: Banks should verify the identity of their new customers through different sources. They should also carefully monitor all suspicious transactions.
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First Published: Mon, Sep 24 2007. 01 40 AM IST