To curb money laundering and terror financing activities, the international panel on banking supervision on Thursday came out with suggestions, including stronger due diligence and clear policies by banks.
The suggestions of Basel Committee on Banking Supervision, whose members include India and the U.S., come amid governments worldwide making substantial efforts to tackle the menace of money laundering and terror funding.
Besides strict due diligence, the panel said, banks should have a thorough understanding about inherent money laundering or terror funding risks across customer bases, products and services.
“Inadequacy or absence of sound ML/FT risk management can increase the exposure of banks to serious risks, especially reputational, operational, compliance and concentration risks,” it said.
Earlier this month, the Reserve Bank of India (RBI) had slapped penalties on three private lenders for violating KYC (know your customer) and anti-money laundering norms and more entities are under the scanner.
The consultative document titled ‘Sound management of risks related to money laundering and financing of terrorism’ has proposed that identity of customers, beneficial owners, as well as persons acting on behalf of customers, should be properly verified.
The verification should be done using reliable, independent source documents, data or information, it added.
“Recent developments, including robust enforcement actions taken by regulators and the corresponding direct and indirect costs incurred by banks due to their lack of diligence in applying appropriate risk management policies, procedures and controls, have highlighted those risks,” the document said.
Without divulging specific details, the panel said these costs and damage could probably have been avoided had the banks maintained effective risk-based AML/CFT policies and procedures.
“... a bank should develop a thorough understanding of the inherent ML/FT risks present in its customer base, products and services offered (including products under development or to be launched) and the jurisdictions within which it or its customers do business,” the document said.
Besides, the panel has said there are primarily three lines of defence against money laundering and terror funding.
“As part of the first line of defence, policies and procedures should be clearly specified in writing, and communicated to all personnel,” it noted.
Further, the chief officer in charge of keeping a tab on money laundering and terror funding activities should ensure bank’s compliance and the third line of defence, internal audit, plays an important role, the document said.
