BPD Circullar No. 20 - PakSearch.com

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040716

STATE BANK OF PAKISTAN - BANKING POLICY DEPARTMENT

BPD Circular No. 20 of 2004
June 16, 2004

The Presidents / Chief Executives,
All Banks/ DFIs.
Dear Sirs / Madam,

ANTI MONEY LAUNDERING MEASURES

In order to ensure compliance with Financial Action Task Force recommendations on anti-money laundering, safeguard the interest of depositors from risks arising out of money laundering and to reinforce the measures being taken by the banks / DFIs for proper management of their institutions, the following additions are made, in public interest, in the Prudential Regulations for Corporate / Commercial Banking with immediate effect:

1. REGULATION G-1

E. FITNESS AND PROPRIETY OF KEY EXECUTIVES:

The following new paragraph has been added at number 3 and the existing paragraph No.3 has been renumbered as 4:
“3. The banks / DFIs should also develop and implement appropriate screening procedures to ensure high standards and integrity at the time of hiring all employees, whether contractual or permanent.”

2. REGULATION M-1

KNOW YOUR CUSTOMER (KYC)

The following new paragraph has been added at number 8 and the existing paragraph No.8 has been renumbered as 9:
“8. Banks / DFIs will also undertake customer due diligence measures, including identifying and verifying the identity of walk-in-customers conducting transactions above an appropriate limit to be prescribed by the banks / DFIs themselves.”

3. The following new regulation M-3 will be added in the Prudential Regulations for Corporate / Commercial Banking:

REGULATION M-3

RECORD RETENTION

The records of transactions and identification data etc. maintained by banks / DFIs occupy critical importance as for as legal proceedings are concerned. The prudence demand that such records may be maintained in systematic manner with exactness of period of preservation to avoid any set back on legal and reputational fronts. Banks / DFIs shall therefore, maintain, for a minimum period of five years, all necessary records on transactions, both domestic and international. The records so maintained must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved, if any) so as to provide, if necessary, to SBP or law enforcement agencies for investigation or as an evidence in legal proceedings. Banks / DFIs shall, however, retain those records for longer period where transactions relate to litigation or are required by the Court of law or by any other competent authority.

2. The banks / DFIs shall keep records on the identification data obtained through the customer due diligence process (e.g. copies or records of official identification documents like passports, identity cards, driving licenses or similar documents), account files and business correspondence for at least five years after the business relationship is ended.

3. The records relating to the suspicious transactions reported by the bank / DFI will be retained by the bank / DFI, even after the lapse of the period prescribed above, till such time the bank / DFI gets permission from State Bank of Pakistan to destroy such record.

4. The following new regulation M-4 will be added in the Prudential Regulations for Corporate / Commercial Banking:

REGULATION M-4

CORRESPONDENT BANKING

The banks / DFIs shall gather sufficient information about their correspondent banks to understand fully the nature of their business. Factors to consider include:
• Know your customer policy (KYC)
• Information about the correspondent bank’s management and ownership
• Major business activities
• Their location
• Money laundering prevention and detection measures
• The purpose of the account
• The identity of any third party that will use the correspondent banking services (i.e. in case of payable through accounts)
• Condition of the bank regulation and supervision in the correspondent’s country

2. The banks / DFIs should establish correspondent relationships with only those foreign banks that have effective customer acceptance and KYC policies and are effectively supervised by the relevant authorities.

3. The banks / DFIs should refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it (the correspondent bank) has no physical presence and which is unaffiliated with a regulated financial group (i.e., shell banks). The banks / DFIs should also guard against establishing relations with correspondent foreign financial institutions that permit their accounts to be used by shell banks.

4. The banks / DFIs should pay particular attention when continuing relationships with correspondent banks located in jurisdictions that have poor KYC standards or have been identified by Financial Action Task Force as being “non-cooperative” in the fight against money laundering.

5. The banks / DFIs should be particularly alert to the risk that correspondent accounts might be used directly by third parties to transact business on their own behalf (e.g., payable-through-accounts). In such circumstances, the banks / DFIs must satisfy themselves that the correspondent bank has verified the identity of and performed on-going due diligence on the customers having direct access to accounts of the correspondent bank / DFI and that it is able to provide relevant customer identification data upon request to the correspondent bank / DFI.

6. Approval should be obtained from senior management, preferably at the level of Executive Vice President or equivalent, before establishing new correspondent banking relationships.

7. The following new regulation M-5 will be added in the Prudential Regulations for Corporate / Commercial Banking:

REGULATION M-5

SUSPICIOUS TRANSACTIONS

The banks / DFIs should pay special attention to all complex, unusually large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. Examples of such suspicious transactions are listed at Appendix-I to this circular. However, these are not intended to be exhaustive and only provide examples of the most basic ways in which money may be laundered. The back ground and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help the relevant authorities in inspection and investigation.

2. If the bank / DFI suspects, or has reasonable grounds to suspect, that funds are the proceeds of a criminal activity, it should report promptly within three days, after conducting appropriate investigation, its suspicions, through Compliance Officer of the bank / DFI to Banking Policy Department of the State Bank of Pakistan. The report should contain, at a minimum, the following information:

a) Title, type and number of the accounts.
b) Amounts involved.
c) Detail of the transactions.
d) Reasons for suspicion.
e) Nature of the underlying criminal activity, the bank / DFI suspects, has generated the proceeds under suspicion.

3. The employees of the banks / DFIs are strictly prohibited to disclose the fact to the customer or any irrelevant quarter that a suspicious transaction or related information is being reported for investigation.

4. In cases of foreign branches of the banks/DFIs and subsidiaries of the banks/DFIs in foreign countries undertaking banking business, the banks/DFIs would ensure compliance with the regulations (relating to Anti Money Laundering and KYC) of State Bank of Pakistan or the relevant regulations of the host country, whichever are more exhaustive.

6. Please acknowledge receipt.

Encl. (3 pages)

Yours faithfully,

Sd/-
(Muhammad Kamran Shehzad)
Director

Appendix I

EXAMPLES OF SUSPICIOUS TRANSACTIONS

1. General Comments

The list of situations given below is intended mainly as a means of highlighting the basic ways in which money may be laundered. While each individual situation may not be sufficient to suggest that money laundering is taking place, a combination of such situations may be indicative of such a transaction. Further, the list is by no means complete, and will require constant updating and adaptation to changing circumstances and new methods of laundering money. The list is intended solely as an aid, and must not be applied as a routine instrument in place of common sense.

A customer's declarations regarding the background of such transactions should be checked for plausibility. Not every explanation offered by the customer can be accepted without scrutiny.

It is justifiable to suspect any customer who is reluctant to provide normal information and documents required routinely by the bank in the course of the business relationship. Banks should pay attention to customers who provide minimal, false or misleading information or, when applying to open an account, provide information that is difficult or expensive for the bank to verify.

2. Transactions Which Do Not Make Economic Sense

i) A customer-relationship with the bank that does not appear to make economic sense, for example, a customer having a large number of accounts with the same bank, frequent transfers between different accounts or exaggeratedly high liquidity;

ii) Transactions in which assets are withdrawn immediately after being deposited, unless the customer's business activities furnish a plausible reason for immediate withdrawal;

iii) Transactions that cannot be reconciled with the usual activities of the customer, for example, the use of Letters of Credit and other methods of trade finance to move money between countries where such trade is not consistent with the customer's usual business;

iv) Transactions which, without plausible reason, result in the intensive use of what was previously a relatively inactive account, such as a customer's account which shows virtually no normal personal or business related activities but is used to receive or disburse unusually large sums which have no obvious purpose or relationship to the customer and/or his business;

v) Provision of bank guarantees or indemnities as collateral for loans between third parties that are not in conformity with market conditions;

vi) Unexpected repayment of an overdue credit without any plausible explanation; vii) Back-to-back loans without any identifiable and legally admissible purpose.

3. Transactions Involving Large Amounts of Cash

i) Exchanging an unusually large amount of small-denominated notes for those of higher denomination;

ii) Purchasing or selling of foreign currencies in substantial amounts by cash settlement despite the customer having an account with the bank;

iii) Frequent withdrawal of large amounts by means of cheques, including traveller's cheques;iv) Frequent withdrawal of large cash amounts that do not appear to be justified by the customer's business activity;

v) Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad;

vi) Company transactions, both deposits and withdrawals, that are denominated by unusually large amounts of cash, rather than by way of debits and credits normally associated with the normal commercial operations of the company, e.g. cheques, letters of credit, bills of exchange, etc;

vii) Depositing cash by means of numerous credit slips by a customer such that the amount of each deposit is not substantial, but the total of which is substantial;

viii) The deposit of unusually large amounts of cash by a customer to cover requests for bankers' drafts, money transfers or other negotiable and readily marketable money instruments;

ix) Customers whose deposits contain counterfeit notes or forged instruments;

x) Large cash deposits using night safe facilities, thereby avoiding direct contact with the bank;

xi) Customers making large and frequent cash deposits but cheques drawn on the accounts are mostly to individuals and firms not normally associated with their business;

xii) Customers who together, and simultaneously, use separate tellers to conduct large cash transactions or foreign exchange transactions.

4. Transactions Involving Bank Accounts

i) Matching of payments out with credits paid in by cash on the same or previous day;

ii) Paying in large third party cheques endorsed in favour of the customer;

iii) Substantial increases in deposits of cash or negotiable instruments by a professional firm or company, using client accounts or in-house company or trust accounts, especially if the deposits are promptly transferred between other client company and trust accounts;

iv) High velocity of funds through an account, i.e., low beginning and ending daily balances, which do not reflect the large volume of funds flowing through an account;

v) Multiple depositors using a single bank account;

vi) An account opened in the name of a moneychanger that receives structured deposits;

vii) An account operated in the name of an offshore company with structured movement of funds.

5. Transactions Involving Transfers Abroad

i) Transfer of money abroad by an interim customer^{1 in the absence of
any legitimate reason;}

ii) A customer which appears to have accounts with several banks in the same locality, especially when the bank is aware of a regular consolidated process from such accounts prior to a request for onward transmission of the funds elsewhere.

^{1An interim customer is one who is not a regular customer of the bank in
question, or does not maintain an account, deposit account, safe deposit box,
etc. with the bank.iii) Repeated transfers of large amounts of money abroad
accompanied by the instruction to pay the beneficiary in cash;
iv) Large and regular payments that cannot be clearly identified as bona fide
transactions, from and to countries associated with (i) the production,
processing or marketing of narcotics or other illegal drugs or (ii) criminal
conduct;
v) Substantial increase in cash deposits by a customer without apparent
cause, especially if such deposits are subsequently transferred within a short
period out of the account and/or to a destination not normally associated with
the customer;
vi) Building up large balances, not consistent with the known turnover of the
customer's business, and subsequent transfer to account(s) held overseas;
vii) Cash payments remitted to a single account by a large number of
different persons without an adequate explanation.

6. Investment Related Transactions

i) Purchasing of securities to be held by the bank in safe custody, where
this does not appear appropriate given the customer's apparent standing;

ii) Requests by a customer for investment management services where the source
of funds is unclear or not consistent with the customer's apparent standing;

iii) Larger or unusual settlements of securities transactions in cash form;

iv) Buying and selling of a security with no discernible purpose or in
circumstances which appear unusual.

7. Transactions Involving Unidentified Parties

i) Provision of collateral by way of pledge or guarantee without any
discernible plausible reason by third parties unknown to the bank and who have
no identifiable close relationship with the customer;

ii) Transfer of money to another bank without indication of the beneficiary;

iii) Payment orders with inaccurate information concerning the person placing
the orders;

iv) Use of pseudonyms or numbered accounts for effecting commercial transactions
by enterprises active in trade and industry;

v) Holding in trust of shares in an unlisted company whose activities cannot be
ascertained by the bank;

vi) Customers who wish to maintain a number of trustee or clients' accounts that
do not appear consistent with their type of business, including transactions
that involve nominee names.

8. Miscellaneous Transactions

i) Purchase or sale of large amounts of precious metals by an interim
customer;

ii) Purchase of bank cheques on a large scale by an interim customer;

iii) Extensive or increased use of safe deposit facilities that do not appear to
be justified by the customer's personal or business activities.}

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