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Transaction Monitoring Process in Banks Research Team | Posted On Sunday, February 22,2009, 02:31 PM

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Transaction Monitoring Process in Banks



Transaction Monitoring Process

Ongoing monitoring is an indispensable element of effective KYC procedures. Banks can effectively control and lessen their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the degree of monitoring will depend on the risk sensitivity of the account. Banks must pay special attention to all complex, unusually large transactions and all unusual patterns, which have no apparent economic or noticeable lawful purpose. The bank may prescribe threshold limits for a particular class of accounts and pay particular attention to the transactions which exceed these limits.

Transactions that involve huge amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may point out that funds are being washed through the account. High-risk accounts have to be subjected to intensified monitoring.

Every bank must set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the kind of transactions involved and other risk factors. Banks should put in place a system of periodical review of risk categorization of accounts and the need for applying improved due diligence measures.

Banks must ensure that a record of transactions in the accounts is preserved and maintained as required in terms of section 12 of the PML Act, 2002. It could also be ensured that transactions of a doubtful nature and / or any other type of transaction notified under section 12 of the PML Act, 2002, is reported to the appropriate law enforcement authority.

Banks must ensure that its branches :

  • Continue to maintain appropriate record of all cash transactions (deposits and withdrawals) of Rs.10, 00,000 and above.
  • Have an internal monitoring system that has an inbuilt practice for reporting of large cash transactions and those of a doubtful nature to controlling/ head office on a fortnightly basis. Early computerization of branch reporting will make possible the punctual generation of such reports.
  • Report transactions of a doubtful nature to the appropriate law enforcement authorities designated under the relevant laws governing such activities.
  • Have well laid down systems for freezing of suspicious/doubtful accounts.
  • There should be quarterly reporting of suspicious accounts to the audit committee of the board or the board of directors.

Terrorism Finance

RBI has been circulating lists of terrorist entities informed by the Government of India to banks so that banks may exercise vigilance if any transaction is detected with such entities. There must be a system at the branch level to ensure that such lists are consulted in order to find out whether a person/organization involved in a prospective or existing business relationship appears on such a list. The authority to which banks may report accounts suspected to belong to terrorist entities will be advised in consultation with Government.

Foreign Contribution Regulation Act (FCRA), 1976

Banks must also adhere to the instructions on the provisions of the Foreign Contribution Regulation Act (FCRA), 1976 cautioning them to open accounts or collect cheques only in favor of associations that are registered under the Act by the Government of India. A certificate to the effect that the association is registered with the Government of India must be attained from the concerned associations at the time of opening of the account or collection of cheques.

Branches of banks must be advised to exercise due care to ensure compliance and desist from opening accounts in the name of banned organizations and those without requisite registration.


Banks should ensure that any remittance of funds by way of demand draft, mail/ telegraphic transfer or any other mode and issue of travelers’ cheques for value of Rs50,000 and above is effected by way of debit to the customers’ account or against cheques and not against cash payment.

Customer Education

Implementation of KYC (Know Your Customer) procedures requires banks to demand certain information from customers which can be of personal nature or which have until now never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. There is, therefore, a need for banks to prepare exact literature/ pamphlets etc. so as to educate the customer of the objectives of the KYC program. The front desk staff needs to be specially trained to handle such circumstances while dealing with customers.

Introduction of New Technologies (Credit cards/debit cards/smart cards/gift cards)

Banks must pay special attention to any money laundering threats that may arise from new or developing technologies including internet banking that might favor anonymity, and take actions, if needed, to prevent their use in money laundering schemes.

Many banks are engaged in the business of issuing a range of electronic cards that are used by customers for buying goods and services, drawing cash from ATMs, and can be used for electronic transfer of funds. Further, marketing of these cards is generally done through the services of agents. Banks must ensure that appropriate KYC procedures are duly applied before issuing the cards to the customers. It is also desirable that agents are also subjected to KYC measures.

Importance of RBI Guidelines

It must be noted that RBI guidelines are issued under Section 35 (A) of the Banking Regulation Act, 1949 and any contravention will call for penalties under the relevant provisions of the Act. Banks are advised to bring the guidelines to the notice of their branches and controlling offices.

RBI guidelines also apply to the branches and majority owned subsidiaries located abroad, especially, in countries that do not or inadequately apply the Financial Actions Task Force (FATF) recommendations, to the degree local laws permit. When local applicable laws and regulations forbid implementation of these guidelines, that fact must be brought to the notice of Reserve Bank.

KYC and Lower income Groups

In October 2005, the RBI declared that these guidelines should not be an excuse for banks to keep the poor away from the banking system. Though the KYC guidelines require an individual opening a new account to produce a number of identification documents, these might be done away with for lower income groups. The RBI has asked banks to make sure that the inability of the lower income group to produce documents to establish their identity and address does not direct to their financial exclusion and denial of banking services. A simplified procedure can be provided for opening of account in respect of those persons who do not intend to keep balances above Rs. 50,000 and whose total credit in one year is not likely to exceed Rs.100, 000.

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