Financial Crime World

Financial Institutions Under Fire for Lack of Transparency in Client Identification

New Guidelines Aim to Prevent Money Laundering and Terrorist Financing

In a move to curb money laundering and terrorist financing, financial institutions are being advised to ensure that they know the true identity of their clients. This comes as a major blow to non-banking finance companies (NBFCs) who have been accused of lacking transparency in client identification.

New Guidelines for NBFCs

Under new guidelines, NBFCs will no longer be allowed to open accounts on behalf of clients without verifying their true identity. The move is aimed at preventing financial institutions from being used by criminal elements for money laundering or terrorist financing.

  • Frame internal guidelines for customer identification procedures based on experience, normal lender’s prudence, and legal requirements
  • Verify the beneficial owner’s identity in a manner that ensures they know who the beneficial owner is
  • Lay down criteria for customer identification procedures for account opening by proprietary concerns

Responsibilities of NBFCs

NBFCs have been advised to:

  • Appoint a senior management officer, known as the Principal Officer, responsible for overseeing compliance with regulatory guidelines on Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating Financing of Terrorism (CFT)
  • File Suspicious Transaction Reports (STRs) whenever there is suspicion of money laundering or terrorist financing
  • Maintain proper records of transactions and report cash transactions exceeding Rs 10 lakh

Amendments to the Prevention of Money Laundering Act, 2002

The amendments require NBFCs to nominate a Director on their Boards as the “designated Director” to ensure compliance with the obligations under the Act.

Significance of the New Guidelines

The new guidelines are seen as a major step forward in ensuring transparency and accountability in the financial sector. They will help to prevent the misuse of financial institutions by criminal elements and protect the integrity of the financial system.

By implementing these measures, financial institutions can ensure that they are not used for illegal activities and maintain public trust in the financial sector.