The only way your knowledge and vocabulary can grow is by looking up the meanings of all unfamiliar words in a good New Edition Dictionary. Specialized Dictionaries like the ones on (1) Law and (2) banking and finance can increase your understanding of technical terms and concepts.
Make a resolution that you will look up the words, whose meanings are not clear to you.

Know your Customer and Anti Money Laundering (AML)
(Story BCCI convicted of money laundering and liquidated world wide.)
What is Money Laundering?
Money laundering can be defined as the process whereby the true identity of illegally obtained money is changed or concealed so that it appears to have originated from a legitimate source.

The main purposes of money laundering are to disguise the origin of funds, integrate the funds into economy and spread and diversify the risk of seizure or confiscation of illegitimate funds, and to further finance criminal operations.

Money laundering serves as a form of security for individuals involved in criminal activities.
Cash being a bearer instrument and completely fungible, lends anonymity to a variety of criminal activities and is the preferred medium of exchange in the criminal world. That gives rise to a need for criminals to:

1. conceal the true ownership and origin of the money;
2. maintain control over the money; and
3. alter the form of money to mask its origins.
{ fun⋅gi⋅ble esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.}

Three important phases in Money Laundering.

1. Placement
Placement is the first stage of money laundering process. The criminals bring their ill-gotten money into the formal sector. Criminal activities almost always generate proceeds in CASH. Examples are proceeds of narcotics sales, taking bribes, selling smuggled goods. The cash received is introduced to the financial system or retail economy either in bulk or through “structuring” of transactions to avoid attention. This can be done in an increasingly varied number of ways. For example:
1. deposit of cash in banks or other financial institutions;
2. purchase of traveler’s cheques or foreign currency;
3. purchase of insurance, gold, paintings or other high value items;
4. using services of traders who may bank illegal money along with their own funds, for example ill gotten proceeds can be deposited in banks together with legal petrol pump receipts in cash.
The placement stage is most important as far as detection of illegally obtained money is concerned.

2. Layering
This is the usual process of separating the funds from their source and/or consolidating funds and transferring the funds through multiple accounts and financial instruments. Series of transactions are conducted from one account to another and from one institution to another including overseas transfers with the intent of making the money trail as muddy and murky(not clear, dark and dirty with mud etc.) as possible, because if the funds cannot be connected to criminal act, they cannot be seized.
At this stage, the money launderer’s sole objective is to break the link between the illegally obtained money and its source. If a banker comes across a banking transaction which has no apparent economic, commercial or visible lawful purpose, one could suspect that it involves layering.

3. Integration.
The final stage of money laundering, integration is turning the illegally obtained funds into tangible assets, such as real estate, car show room or reinvesting the funds into a business. In situations where the layering process succeeds, integration process effectively returns the laundered proceeds back into the general financial system and the proceeds appear to be the result of or connected to legitimate business activities.
At this stage, it is almost impossible to trace the funds back to their original criminal source.

Banks and financial institutions face the risk of inadvertently becoming involved in the process of money laundering. It would seem that the placement stage represents the most risk to financial institutions, but it can be seen that financial institutions can unknowingly become involved in money laundering at any stage of the process.
The banks normally do not have effective means of knowing whether a transaction stems from or forms part of a wrongful activity. Similarly, in international context, it may be difficult to ensure that cross border transactions on behalf of customers are in compliance with the regulations of another country.
Nevertheless, the staff should not set out to offer services or provide active assistance in transactions, which in their opinion, are associated with money derived from illegal activities.

Bank’s success on this front is dependent upon the prudence and vigilance of every manager and employee. All concerned must adhere to KYC policies and procedures for ascertaining customer’s status and his source of earning, for monitoring of accounts on regular basis, for checking identities and bona fides of remitters and beneficiaries, for retaining internal record of transactions for future reference.
(check bona fides = check to ensure that sb is who they say that they are; check to ensure that sb/sth is honest )

The transactions, which are out of character/inconsistent with the history, pattern, or normal operation of the account involving heavy deposits/withdrawals/transfers should be viewed with suspicion and properly investigated.

The circumstances generally and after the event of 9/11 (What is 9/11?) have invited attention of all concerned to heightened global efforts to prevent the possible use of the banking sector for money laundering, terrorist financing, transfer of illegal / ill-gotten monies, and as conduit for white collar crimes, etc. In order to bring banking operations at the desired level, State Bank of Pakistan has issued a set of Prudential Regulations No. M 1 to M 5 for the purpose.

4.1. Definition of Money Laundering:
There is a lack of consensus amongst even the developed countries about what criminal activities fall within the sphere of Money Laundering. The term Money Laundering was first used in early 1980s. Broadly it refers to:

“It is a process by which large amounts of illegally obtained money are given the appearance of having originated from a legitimate source.”
or
“The conversion of profits derived from illegal activities into financial assets which consequently appear to have legitimate origin”.
or
“Money Laundering is a magic trick for wealth creation, a haven for drug traffickers, arms dealers, tax evaders etc”.
{ haven = a place that is safe and peaceful where people or animals are protected: The hotel is a haven of peace and tranquillity. The river banks are a haven for wildlife.— safe haven, tax haven}

4.2. “Know Your Customer (KYC)”
Money laundering is increasingly seen to be within the sphere of responsibility of central banks and regulatory authorities. Money laundering legislation encourages banks to put in place effective procedures to ensure that all persons conducting business with them are properly identified and that transactions which do not appear to be legitimated are reported. In the year 2000 representatives of international banking industry launched the Global Anti Money Laundering Guidelines for Banks & DFIs. These underline legal obligations on banks to know their customers including “beneficial owners” and their “source of wealth”. What is a beneficial owner?

4.3. Anti Money Laundering Measures

The SBP has taken the following steps:

a. Under Prudential Regulations, Banks are required to take necessary safeguard at their respective levels against such transactions and use of banking channels for such activities.

b. Specific emphasis on the policy “Know Your Customer”.

c. Anti Money Laundering Unit established at State Bank.

d. Prudential Regulations provide a list of suspicious/suspected transactions for guidance to Bankers.

e. Appointment of Compliance Officer by all banks made compulsory to oversee money laundering measures in their respective institutions.

f. Restrictions on issuance of Rupee Travellers Cheques of denomination above Rs.l0,000.

g. Discontinuation of issuance of bearer instruments such as FEBCs, DBCs, FCBCs and US$ Special Bearer Bonds.

h. Replacement of Money Changers by Exchange Companies and setting up systems for their monitoring.

i. Anti Money Laundering Act has been passed and it is being improved in the wake of increasing terrorism.

j. Pakistan acquired membership of Asia Pacific Group on Money Laundering (APGML), a regional organization for combating money laundering.

k. Coordination with SECP and NAB to chalk out strategies for future course of action.

l. Withdrawal of immunity on Foreign Currency Accounts.
(Immunity meant that a person could keep as much money as he liked in a Foreign Currency and no Govt. entity could ask any questions. This has been withdrawn.)

State Bank Anti Money Laundering Regulations consist of two important Pillars of Protecting the banks from Money Laundering:-

First Pillar------ Comprehensive enquiries/care at the time of opening the account of a prospective customer which involves filling out a “Customer Profile Form”, taking all the

1) pertinent details of the customer,
2) his source of income,
3) the purpose of opening the account,
4) the details of the “beneficial owner”,
5) the expected volume of transactions,
6) the expected approximate amounts of the transactions that will be made,
7) the profession of the account holder,
8) the nature of business and
9) verified address of the customer.

The Branch manager has to make a judgement as to the level of riskiness of the account and if the account is that of a political figure (politically exposed person), the business entails cash transactions, or the use of the banking facilities is complex the branch manager will assign and mark a higher level of risk to the account. Higher risk accounts will be subject to ‘enhanced due diligence’ which means the account will be subject to closer scrutiny. If the manager is not satisfied he will not open the account.

Second Pillar----- Continued and constant monitoring / checking of the transactions being passed over the Accounts. The bank’s duty does not end with due care at the time of opening the account. Bank has a continuing duty under the Anti Money Laundering Act to keep a constant watch on the transactions being passed over the accounts in the bank’s books. If the bank detects that the volume or frequency of transactions is out of line with the indications given by the customer at the time of opening the account the bank must make enquiries.
There is a Head of Compliance in the Head Office and there are Compliance Officers in Branches. The compliance team keeps an eye on the banking transactions being passed over the accounts.
If they detect discrepancy between the nature, size, frequency of transactions indicated at the time of account opening and actual transactions the compliance team considers the discrepancies carefully. In less serious matters the bank may decide to take clarification/explanation from the customer.
If, however, the bank detects any suspicious entries which indicate that the customer is involved in money laundering or other illegal financial activities it is the incumbent duty of the banker to inform the Head of Compliance who should inform the Special Anti Money Laundering Cell created in State Bank of Pakistan. The bank must not inform the customer in question that the bank has reported the account to State Bank of Pakistan.

Practical Steps in :-
Compliance of
Know Your Customer,
Customer Due Diligence and
Enhanced Due Diligence
Walk-in Customers
Walk-in customers are those who just walk into branch premises to open an account or make use of other banking services. The priorities of walk-in customers may be that:
• The branch location is convenient for them
• The customer service of the branch is better than other branches or other banks
• The branch premises are better than other branches or other banks and are equipped with modern facilities
• The size and reputation of the bank is good
• The charges are less than other banks.
Solicited Customers
Solicited customers are those who are contacted by the bank staff with the purpose of establishing a business relationship. Generally these are customers whose credentials are well established and who enjoy a good reputation in the market.
An account is opened by completing an account opening form. This document is the means by which the banker-customer relationship is established. All the requirements of account opening apply to both the customer and the documentation depending on the type of account being opened in the bank.

Account opening basics for People/Natural persons:
For natural persons the following information should be obtained, where applicable:
1. Legal name and any other names used (such as maiden name); (maiden name is the previous name used by a woman before changing her name upon marriage)
2. Correct permanent address (the full address should be obtained; a Post Office box number is not sufficient);
3. Telephone number, fax number, and e-mail address;
4. Date and place of birth;
5. Nationality;
6. Occupation, public position held and/or name of employer;
7. An official personal identification number or other unique identifier contained in an unexpired official document {e.g. passport, identification card CNIC, POC(Pakistan Origin Card), NICOP(National Identity Card for Overseas Pakistanis} that bears a photograph of the customer;
8. Type of account and nature of the banking relationship;
9. Signature.
10. Letter of thanks must be prepared and mailed to the customer on the given address. Cheque book must not be delivered until the customer brings the thank you letter received by him through courier/mail.
11. If the letter of thanks is returned undelivered, it could be an indication that the prospective account holder is a fraudster, branch manager should be informed who should make careful, investigation. The account should be marked caution until the matter is sorted out. The branch manager to decide the action to be taken.

(Story AMExports thank you letter returned. Major fraud of customs deptt. revealed.)
12. The bank should verify the information on the account opening form by the following methods:
a. Confirming the date of birth from an official document (e.g. birth certificate, passport, Identity Card, social security records);
b. Confirming the permanent address (e.g. utility bill, tax assessment, bank statement, a letter from a public authority);
c. Contacting the customer by telephone, by letter or by e-mail to confirm the information supplied after an account has been opened (e.g. a disconnected phone, returned mail, or incorrect e-mail address should warrant further investigation);
d. Confirming the genuineness of the CNIC produced by the customer through online verification from NADRA is essential.

Account opening basics for Companies
For companies the following information should be obtained:
1. Name of institution
2. Principal place of institution's business operations
3. Mailing address of institution
4. Contact telephone and fax numbers
5. Partnership deed
6. Letterhead of proprietorship
7. Some form of official identification number, if available (e.g. tax identification number)
8. The original or certified copy of the Certificate of Incorporation and Memorandum and Articles of Association
9. The resolution of the Board of Directors to open an account and identification (CNIC) of those who have authority to operate the account
10. Nature and purpose of business and its legitimacy.
11. Letter of thanks drill and care if returned undelivered should be exercised for business accounts as well.
Customers Due Diligence (CDD)/ Know Your Customer (KYC)
Customers Due Diligence (CDD)/ Know Your Customer (KYC) are primarily procedures that are required to be implemented by the bank to identify their clients / customers in order to ascertain relevant information pertinent to doing business with them. Financial managers are increasingly recognizing the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing.
Adequate due diligence on new and existing customers is a key part of these controls. Without this, banks may become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost. In Pakistan, CDD/KYC is a regulatory policy requirement to be implemented to check the customer, their sources of funds and nature of business, etc. KYC implementations have become increasingly important globally to prevent theft, fraud, and money laundering activities. KYC should not be treated as just a formality of form filling; in fact it is a process to be undertaken with care. The objective being that account is opened for genuine customers and regular monitoring ensures that it is not used for criminal or money laundering purposes.
The second aspect of CDD/KYC checking is to verify that the customer
is not on any list of known persons suspected or convicted of financial crime or default. SBP issues a ‘negative’ list which is updated from time to time, highlighting such negative persons, companies and associations. Persons or Entities appearing on the negative list are not eligible to open accounts. Computer checking of the negative list is essential when starting any new financial relationship.

Another key aspect of CDD/KYC control is to monitor transactions of customers against their recorded profile, including their historical data.

Banks exercising CDD/KYC monitoring for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) purposes should use specialized Transaction Monitoring Software, as well as Names Analysis Software and Trend Monitoring Software. Such software should automatically highlight accounts appearing on a negative list and should also generate alerts to identify unusual activities.
Know Your Customer (KYC) policy
According to the SBP Prudential Regulation M-l, banks and DFIs should formulate in writing a comprehensive Know Your Customer (KYC) policy, duly approved by the bank’s Board of Directors and in line with international best practices. This policy should be applicable when starting a new relationship (new account) with the customer and a continuing relationship with existing customers. This has become more important in view of the recent rise in terrorist activities, where terrorists have used banking channels to transfer illegal funds.
Customer Due Diligence (CDD)
The following Due Diligence measures should be taken:
• No account of an anonymous or fictitious person shall be opened or maintained.
• All reasonable measures should be taken to identify beneficial ownership of an account.
• If a customer is acting on behalf of any other person(s), measures should be taken to verify the identity of the other person(s).
• When dealing with any Legal Person (companies, trusts, societies, NGOs, Non-profit Organizations, etc) information must be obtained and verified about the ownership and control structure of the account and about the person(s) who ultimately own(s) or control(s) the account/ customer.
Enhanced Due Diligence (EDD)
Enhanced due diligence should be exercised when dealing with High Risk customers such as:
a) Non-residence customers
b) Private banking companies
c) Legal persons
d) Customers belonging to countries where KYC, CDD, AML regulations are non-existent/not applied
e) Customers in cash-based business
f) Customers whose source of income is not clearly defined
g) Customers dealing in high value items.

EDD should also be used in the following situations:
• Customer who has been refused banking facilities by any other bank/ DFI
• Opening correspondence banking account
• Dealing with no face-to-face / online customers
• Dealing with politically exposed persons (PEP).'Politically exposed persons' (PEPs) are persons holding or who have held a position of public trust.


The following must be carried out at the time of establishing a relationship
with a customer:
1. All prospective customers must be seen face-to-face (except online customers, for whom a separate identification process is defined).
2. Proper completion of Account Opening and KYC forms and authorizations.
3. Documents produced by the customer must be original. In the case of photocopies, each copy must be marked “Original seen" after verifying the original documents.
4. All documentary evidence, information provided and signatures must be consistent.
5. Purpose and reason for opening the account or establishing the relationship.
6. Expected origin and use of funds that are routed through the bank.
7. Prepare and document customer’s business and transaction profile including details of occupation/employment/business activities and sources of wealth and income.
8. Evidence of identity and address of all account holders (including third party mandate) must be obtained and should be independently verified for authenticity.
9. Photocopy of CNIC along with original must be obtained at the time of opening the account. Original may be returned after marking copy “Original seen”.
10. Documents required under SBP Prudential Regulation No. M-l must be obtained.
11. Where there are doubts about the quality or adequacy of previously obtained customer identification material for existing customers, then, on the basis of materiality and risk identification, verification should be carried out at appropriate times.

Purpose of CDD/KYC and AML
The purpose of CDD/KYC and Anti-Money Laundering (AML) procedures is to check the authenticity of the customer and their business account.
For this purpose, the following steps should be taken.

Obtain all necessary identification documents. The customer can provide any of the following verification documents, along with a photocopy, for attestation / verification to the designated officer. The original documents should be returned to the customer after verification / attestation.
1. CNIC
2. Passport
3. Pakistan Origin Card (POC)
4. National Identity Card for Overseas Pakistani (NICOP) for accounts other than individual or joint. Various additional documents are required, the details of which are provided in the Account Opening portion of this book. NADRA verification should be completed immediately but no later than 5 working days. In no circumstance should the verification cost of CNIC verification be passed on to the account holder.
Generally, branch staff knows their customers well; the CDD/KYC exercise helps to document their knowledge of the customer. If information is not documented, verbal information will not be acceptable to the regulator.
CDD/KYC should not be merely a form-filling exercise but should be instrumental in building future relationships.
CDD/KYC is an ongoing process and does not end at the account opening stage. Any fresh information regarding the account holder, his/her new business, new sources of funds, or conversion of status from student to business / service, etc should be immediately updated in the AOF and in the computer system.
No customer is exempt from CDD/KYC. They all have to be taken through this route in a very professional manner, without annoying them. The banker should not behave like an investigator or a police officer, but instead be very courteous and tactful in their approach.
CDD/KYC is a very confidential part of the customer AOF and in no circumstances should it be shared with him/her. Do not write generalized statements / words such as “private service”, “business”, etc.; rather be more specific in recording information such as “serving in KESC”, “Kauser Medical Store”, etc.
It is not necessary that all information is backed by documentary evidence, but must be done wherever possible. Ensure that Government accounts are not opened in the personal name of government officials.

For opening any government account (Federal, Provincial, and Local Govt.) in an official capacity, the relevant government officials should produce an authority letter from the department concerned, duly endorsed by the Ministry of Finance or Finance Department of the relevant provincial/ local government.
Additional diligence should be applied to high risk customers who are engaged in cash-based businesses and whose actual source of funds is not clearly identifiable.
As per SBP instruction, any account that has not submitted a CNIC within a specified period can be discontinued.
Bank and DFIs should undertake due diligence and identification of walk- in customers who undertake transactions above the limit prescribed in the bank’s/DFI’s internal policies.
Public figures and politically exposed persons
The term "public figure" applies to a person who performs an important public function and is known by the public at large. Individuals belonging to political and social environments, showbiz, etc. should also be considered as public figures. These people will take advantage of their public figure status in order to achieve personal benefits. Following are a few examples of public figures:
• Head of State (present or past)
• Cabinet Ministers
• Chief Executives of nationalized industries and senior officials of government administration
• Chief Justice of High Courts and judges of Supreme Courts; senior leaders of political parties
• Senior journalists of electronic and print media etc
• Diplomats, Ambassadors and Counsel Generals serving abroad and Foreign Ambassadors and Counsel Generals of Increased Risk Countries
• Heads of Armed Forces (Army, Navy, Air Force, Joint Chiefs of Staff)
• Persons responsible for looking after the public interest at large. This list is only indicative and not exhaustive and is also based on subjective criteria, just to give an idea of PEPs/ public figures. You may be able to think of other examples from your own experience of dealing with such customers.


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“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain