Compliance Contest

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AML case study

Mobile Banking Risks

Dear Colleagues,Happy New Year to all of you dear colleagues and also warm greetings on 30 years of Kotak groupNew Year brings in more optimism for positive developments in country’s economy and is adding new dimensions to the Kotak Group. Kotak General Insurance will be beginning its operations in this year and it marks yet another milestone in the history of Kotak. On a more cautionary note, while I take this opportunity to pray for the victims of the recent floods in the city of Chennai, the calamity has given the humanity a great lesson, which is true even for us in the finance field. “Take timely action to prevent risks, monitor its appropriateness continuously to ensure that we do not land in trouble”. As a financial hub, we need to be always alert and careful in areas like money laundering, terrorist financing etc., so that we are not used as conduit to channelize resources for such activities. I am sure you all must have read about the recent events involving Bank of Baroda. As per the press reports, the bank officials who were suspected for involvement with fraudsters in these activities were arrested. Unless we exhibit “robust common sense” while dealing with the clients and their transactions and unless we keep overall organisational interests in the forefront of our ethics, we cannot prevent such events. I therefore take this opportunity to urge upon you all to keep the antennas up and the need to focus even amidst numerous transactions that we do daily.As you may also be aware RBI has conducted a credit audit of all banks and started action to clean up the banking system to get rid of errant borrowers. The credit audit has shown many system-wide issues in identification and provisioning against the Non-Performing Assets. As far as we are concerned there were no such cases but we should continue to adhere to our philosophy on credit that “Return of Principal is always ensured before Return on Principal”.RBI has brought about a significant change in the way they issue the regulations. In place of master circulars which were hitherto issued – which was seen more as a consolidation of instructions, they have commenced issuing “Master Directions” which will be a self-contained regulation. There would not be any need to refer to any other previous circular as this will be a zero based circular. This simplifies the approach and makes adherence simple as there will be no slip between the circulars. Request all of you to go through these master directions for all future use.Communication is key to avoid gaps and I would like to re-assure you all that the compliance team is always available to give clarifications on any issue whenever you would like to have. Please feel free to get in touch with us to have clarity on the action to be taken at your end.Wish you all a bright year ahead and three cheers to “Team Kotak” on completion of 30 years in service to the people of India.

T V Sudhakar Head Compliance

Please go to page number 2 of the newsletter to participate in the contest.First five correct entries get to win goodies!

1. Chandresh Bhayani (Wholesale Banking) 4. Mohit S (Business Banking Asset) 2. Chintan Bhatia (Relationship Banking Group-Credit) 5. Venkatesh G (Wholesale Banking) 3. Ankit Kothari (Support Services-Internal Audit)

CONTENT

October - December 2015

Surekha Bendale and Gaurav Bhelsekarhave joined the AML team.

Welcome!

Maneesh Philip has successfully completed the Junior Associate of the Indian Institute of Bankers (JAIIB) Examination.K R Jayalakshmi has successfully completed the Certification on Financial Risk Management Professional.

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Winners of the last Contest:

My Musings

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1) Regularization of assets held abroad by a person resident in India under Foreign Exchange Management Act, 1999:

RBI has clarified as below:

a) No proceedings shall lie under the FEMA against the declarant with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid.

b) No permission under FEMA will be required to dispose of the asset so declared and bring back the proceeds to India through banking channels within 180 days from the date of declaration.

c) In case the declarant wishes to hold the asset so declared, she/ he may apply to the RBI within 180 days from the date of declaration if such permission is necessary as on date of application. Such applications will be dealt by the RBI as per extant regulations. In case such permission is not granted, the asset will have to be disposed of within 180 days from the date of receipt of the communication from the Reserve Bank conveying refusal of permission or within such extended period as may be permitted by the Reserve Bank and proceeds brought back to India immediately through the banking channel.

A.P. (DIR Series) Circular No.18 dated September 30, 2015

2) Individual Housing Loans : Rationalization of Risk-Weights and LTV Ratios

RBI has now fixed the Loan to Value (LTV) ratios and risk weights for individual housing loans as under:

Category of loan LTV ratio (%) Risk Weight (%)

Upto S 30 lakh ≤ 80 35

> 80 and ≤ 90 50

Above S 30 lakh

and upto S 75 lakh

≤ 75 35

> 75 and ≤ 80 50

Above S 75 lakh ≤ 75 75

DBR.BP.BC.No.44/08.12.015/2015-16 dated October 08, 2015

3) Risk Management & Inter-Bank Dealings : Booking of Forward Contracts– Liberalisation

RBI has decided to allow all resident individuals, firms and companies, who have actual or anticipated foreign exchange exposures, to book foreign exchange forward and FCY-INR options contracts up to USD 1,000,000 (USD one million) without any requirement of documentation on the basis of a simple declaration. While the contracts booked under this facility would normally be on a deliverable basis, cancellation and rebooking of contracts are permitted. Based on the track record of the entity, the bank can call

1) No permission under FEMA will be required to dispose of the asset so declared and bring back the proceeds to India through banking channels within ___days from the date of declaration.

2) Maximum subscription in the Gold Sovereign Bonds shall be of __ grams per person per fiscal year.

3) The maturity period of Foreign Portfolio Investor acquired NCDs/bonds, restructured based on negotiations with the issuing Indian company, should be ____ years or more.

4) The criteria regarding asset and income of factoring companies eligible for bank finance stands at ____

5) The minimum average maturity for long term foreign currency denominated ECB is __ years.

6) LTV ratios and risk weights for individual housing loans prescribed by RBI for loans above Rs. 30 lakhs is less than or equal to ____ % and ___ % respectively.

7) Pre-mature redemption of Gold Sovereign Bonds is allowed from ___year of the date of issue on the interest payment dates.

8) The pre-payment amount offered for receivables acquired under factoring should not exceed _____ of the invoice value.

Send in your answers to ankita.naik@kotak.com First five correct entries get to win goodies!

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for underlying documents, if considered necessary, at the time of rebooking of cancelled contracts.

A. P. (DIR Series) Circular No. 20 dated October 8, 2015

4) Interim Order on establishment of Liaison Offices in India by foreign law firms

As per the interim Supreme Court order dated September 14, 2015, no permission shall be granted to any foreign law firm on or after the date of the said interim order, for establishing a Liaison Office in India. Foreign Law Firms which have been granted permission prior to the date of interim order for opening Liaison Offices in India may be allowed to continue provided such permission is still in force. No renewal of permission shall be granted by AD banks. Existing foreign law firms, which have been granted permission prior to the date of interim order, may not be advised by RBI / AD banks to close down their Liaison Office in India.

FED Mail Box Clarification dated October 8, 2015.

5) Gold Monetisation Scheme, 2015

In exercise of the powers conferred on the Reserve Bank of India (RBI) under Section 35A of the Banking Regulation Act, 1949 and in pursuance of the Central Government notification issued vide Office Memorandum F.No.20/6/2015-FT dated September 15, 2015 regarding “Gold Monetization Scheme (GMS)”, the RBI has issued this Direction to all Scheduled Commercial Banks (excluding Regional Rural Banks).

This scheme is intended to mobilse gold held by households and institutions in the country and facilitates its use for productive purposes and thereby to reduce country’s reliance on import of gold.

DBR.IBD.No.45/23.67.003/2015-16 dated October 22, 2015

6) Amendment to PML (Maintenance of Records) Rules, 2005 – Submitting ‘Officially Valid Documents’ - Change in name on account of marriage or otherwise

In terms of clause 2 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2015and explanation has been inserted in the clause (d) of Rule 2. Sub rule (1) which reads as under:

“Explanation: For the purpose of this clause, a document shall be deemed to an “officially valid document” even if there is a change in the name subsequent to its issuance, provided it is supported by a marriage certificate issued by the State Government or a Gazette notification, indicating such a change of name”.

Accordingly, banks were instructed to accept a copy of marriage certificate issued by the State Government or Gazette notification indicating change in name together with a certified copy of the ‘officially valid document’ in the existing name of the person while establishing an account based relationship or while undergoing periodic updation exercise.

Further, Amendment to Rule 7 (3) and 7(4) has also been notified which reads as under:

(7)(3): Every reporting entity shall evolve an internal mechanism having regard to any guidelines issued by the director in consultation with its regulator, for detecting the transactions referred to in clauses (A), (B), (BA), (C), (D), (E) and (F) of sub-rule (1) of rule 3 and for furnishing information about such transactions in such form as may be directed by the director in consultation with its Regulator.

(7)(4): It shall be the duty of every reporting entity, its designated director, officers and employees to observe the procedure and the manner of furnishing information as specified by the director in consultation with its Regulator.”

DBR. AML.BC. No. 46/14.01.001/2015-16 dated October 29 2015

7) Sovereign Gold Bonds, 2015-16:

Government of India (GoI) vide itsNotification F.No. 4(19)-W&M/2014 dated October 30, 2015has permitted to issue Sovereign Gold Bonds, 2015 (“the Bonds”) with effect from November 05, 2015 to November 20, 2015. The GoI will close the Scheme before the specified period with prior notice.

RBI also issued Operational Guidelines vide its circular No. IDMD.CDD.No. 968/14.04.050/2015-16 dated 4th November 2015.

IDMD.CDD.No.939/14.04.050/2015-16 dated October 30, 2015

8) Mail Box Clarification:Master Circular on Priority Sector Lending – Targets & Classification:

Reserve Bank of India, DBOD has provided the below clarification with reference to sub-para 8 under Paragraph III of the Master Circular – FIDD.CO.Plan.BC.04/04.09.01/2015-2016 dated July 1, 2015 – Priority Sector Lending – Targets & Classification.

Keeping in view the instructions contained in para 3 of letter F.No.27/01/2015-CP/RRB dated May 14, 2015 by Government of India, the overdrafts extended by banks after April 8, 2015 uptoRs. 5,000/- under Pradhan Mantri Jan DhanYojana (PMJDY) accounts may be classified under ‘Micro, Small and Medium Enterprises (MSME)’ instead of ‘Others’, provided the borrowers household annual income does not exceed ₹ 100,000/- for rural areas and ₹ 160,000/- for non-rural areas. These overdrafts will also qualify for target for Micro Enterprises and Weaker Section under priority sector lending.

Mail Box Clarification dated 3rd November 2015

9) Risk Management & Inter-Bank Dealings: Relaxation of facilities for residents for hedging of foreign currency borrowings:

In terms of existing Reserve Bank guidelines, residents having a long term foreign currency liability are permitted to hedge exchange rate and/or interest rate risk exposure thereof by undertaking a foreign

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currency-INR swap to move from a foreign currency liability to a rupee liability with bank subject to the operational guidelines, terms and conditions.

With a view to facilitating hedging of long term foreign currency borrowings by residents, RBI has decided to permit residents to enter in to FCY-INR swaps with Multilateral or International Financial Institutions (MFI/IFI) in which Government of India is a shareholding member subject to the following terms and conditions:

(i) Such swap transactions to be undertaken by the MFI / IFI concerned on a back-to-back basis with bank in India.

(ii) Bank will face, for the purpose of the swap, only those Multilateral Financial Institutions (MFIs) and International Financial Institutions (IFIs) in which Government of India is a shareholding member.

(iii) The FCY-INR swaps shall have a minimum tenor of three years. All other operational guidelines, terms and conditions relating to FCY-INR swaps as laid down in A.P. (DIR Series) Circular No. 32 dated December 28, 2010, as amended from time to time, shall apply, mutatis mutandis.

(iv) In the event of a default by the resident borrower on its swap obligations, the MFI / IFI concerned shall bring in foreign currency funds to meet its corresponding liabilities to the counterparty bank in India.

A.P. (DIR Series) Circular No.28 dated November 5, 2015

10) Priority Sector Lending - Targets & Classification

Reserve Bank had communicated vide their Circular No. FIDD.CO.Plan.BC.08/04.09.01/2015-16 dated July 16, 2015 on the captioned subject, that the system-wide average of the last three years achievement with regard to overall direct lending to non-corporate farmers will be notified shortly, and henceforth at the beginning of each year.

Thus the applicable system wide average figures for computing achievements under priority sector lending for the FY 2015-16 has been communicated as 11.57 percent.

FIDD.CO.Plan.BC.13/04.09.01/2015-16 dated November 18, 2015

11) Provision of Factoring Services by Banks – Review :

Reserve Bank vide their circular DBR.No.FSD.BC.32/24.01.007/2015-16 dated July 30, 2015 on Provision of Factoring Services by banks – Review, had mentioned that while offering the factoring services banks to ensure enough margin to cover any deficiencies in the payment of the related invoice, thereby the pre-payment amount offered for receivables acquired under factoring should not exceed 80% of the invoice value.

Further it has now been informed that while offering factoring services banks to decide percentage of the invoice to be paid upfront based on their own assessment of the credit worthiness of the assignor/ buyer, due diligence carried out and other commercial considerations.

DBR.No.FSD.BC. 58/24.01.007/2015-16 dated 19th November 2015

12) Investment by Foreign Portfolio Investors (FPI) in Corporate Bonds:

RBI has decided to permit FPI to acquire NCDs/bonds, which are under default, either fully or partly, in the repayment of principal on maturity or principal installment in the case of amortising bond. The revised maturity period of such NCDs/bonds, restructured based on negotiations with the issuing Indian company, should be three years or more.

The FPI which propose to acquire such NCDs/bonds under default should disclose to the Debenture Trustees the terms of their offer to the existing debenture holders / beneficial owners from whom they are acquiring. Such investment should be within the overall limit prescribed for corporate debt from time to time (currently Rs. 2443.23 billion). All other existing conditions for investment by FPIs in the debt market remain unchanged.

A.P. (DIR) Series No.31 dated November 26, 2015

13) Central KYC Records Registry (CKYC) – template for KYC and reporting requirements under FATCA/Common Reporting Standards (CRS) :

The Government of India vide notification dated July 7, 2015 amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 for setting up of the Central KYC Records Registry (CKYCR). In terms of the notification, the proposed CKYCR would receive, store, safeguard and retrieve the KYC records in digital form of a client, for which necessary amendments were made to Rules. The KYC records received and stored by the CKYCR could be retrieved online by any reporting entity across the financial sector for the purpose of establishing an account based relationship in terms clause (a) and (b) of Rule 9. A formal announcement by the Government naming the entity which will function as the CKYCR is expected shortly.

In order to facilitate collating and reporting the KYC data to the proposed CKYCR, templates finalized in consultation with other regulators and CBDT (separate for individuals and legal entity) are enclosed to the circular. Further in case of opening of ‘Small Accounts’, only personal details in section 1 of the template together with the photograph, signature/thumb impression and self-certification document should be obtained. Banks are advised to be in readiness to share the KYC data with the CKYCR once the CKYCR is notified by the Government.

DBR.AML.BC.No.60/14.01.001/2015-16 dated 26th November 2015.

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14) Bank Finance to Factoring Companies :

In terms existing Reserve Bank guidelines banks can extend financial assistance to support the factoring business of Factoring Companies complying to certain criteria, which, inter-alia, included the following:

i. Such companies derive at least 75 per cent of their income from factoring activity. The receivables purchased / financed, irrespective of whether on ‘with recourse’ or ‘without recourse’ basis, form at least 75 per cent of the assets of the Factoring Company.

Subsequently, in terms of RBIcircular DNBR (PD) CC.No.003/22.10.91/2014-15 on ‘Review of the Non-Banking Financial Company – Factors (Reserve Bank) Directions, 2012’ dated November 10, 2014, it was informed that an NBFC for registering as NBFC-Factor should ensure that its financial assets in the factoring business constitute at least 50 per cent of its total assets and its income derived from factoring business is not less than 50 per cent of its gross income.

Accordingly, the criteria regarding asset and income of factoring companies eligible for bank finance stands revised to 50% from 75%.

DBR.BP.BC.No.55/21.04.172/2015-16 dated 26th November 2015.

15) Advance Remittance for Import of aircrafts /helicopters / other aviation related purchases

RBI has informed that Banks while allowing advance remittance without bank guarantee or an unconditional, irrevocable standby letter of credit up to USD 50 million, should ensure that only the requisite approval of DGCA for import of aircrafts/helicopters in terms of the extant Foreign Trade Policy has been obtained by the company for operating Scheduled or Non-Scheduled Air Transport Services (including Air Taxi Services). Thus approval from MoCA will not be required.

A.P. (DIR) Series No.30 dated November 26, 2015

16) Priority Sector Lending - Targets and Classification – Bank Loans to SHGs/JLGs :

i. Reserve Bank of India, DBOD has provided the below clarification.

Question : In case of eligible Priority Sector loans to SHGs/JLGs, is the loan limit prescribed under sub-para 2 of Para XII of the Master Circular on Priority Sector Lending – Targets and Classification applicable per member of the SHG/JLG or to the group as a whole?

Clarification: The loan limit of Rs.25,000/- prescribed under Para XII (2) of the Master Circular on Priority Sector Lending – Targets and Classification dated July 1, 2015 is applicable per member of the SHG/JLG and not to the group as a whole.

17) External Commercial Borrowings (ECB) Policy – Revised

framework :

The revised ECB framework will comprise the following three tracks:

Track I: Medium term foreign currency denominated ECB with Minimum Average Maturity (MAM) of 3/5 years.

Track II: Long term foreign currency denominated ECB with MAM of 10 years.

Track III: Indian Rupee denominated ECB with MAM of 3/5 years.

The guidelines for the revised ECB framework specifying the parameters and other terms & conditions are mentioned in the Annex of the Circular and the parameters will apply in totality and not on a standalone basis. Criteria for raising ECB under both the routes, viz., the automatic route where entities do not require the prior approval of the RBI for raising ECB and the approval route where entities can raise ECB only with the prior approval of the RBI are also given in the Annex.

The primary responsibility for ensuring that the ECB is in compliance with the applicable guidelines is that of the borrower concerned and any contravention of the applicable provisions of ECB guidelines will invite penal action under the FEMA.

Entities raising ECB under extant framework can raise the said loans by March 31, 2016 provided the agreement in respect of the loan is already signed by the date the new framework comes into effect. For raising of ECB under certain carve outs, such as working capital by airlines companies, foreign exchange earners under the USD 10 billion Scheme and ECB facility for low cost affordable housing projects , the borrowers will have time up to March 31, 2016 to sign the loan agreement and obtain the Loan Registration Number (LRN) from RBI by this date.

A.P. (DIR) Series No.32 dated November 30, 2015

18) Interest Rate on Advances

RBI has issued the below guidelines for pricing the advances:

Internal Benchmark: All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes and the MCLR will comprise of below components.

a. Marginal cost of funds;

b. Negative carry on account of CRR;

c. Operating costs;

d. Tenor premium.

Accordingly, bank should publish the internal benchmark for the following maturities and in addition bank has the option of publishing MCLR of any other longer maturity

a. overnight MCLR,

b. one-month MCLR,

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c. three-month MCLR,

d. six month MCLR,

e. One year MCLR.

Bank to have a Board approved policy delineating the components of spread charged to a customer. The policy shall include principles:

a. To determine the quantum of each component of spread.

b. To determine the range of spread for a given category of borrower / type of loan.

c. To delegate powers in respect of loan pricing.

The categories of loans can be priced without being linked to / exempted from MCLR as the benchmark for determining interest rate has been specified in the circular.

Further Bank should review and publish the Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month or once a quarter ( in absence of adequate systems) on a pre-announced date , subject to with the approval of the Board or any other committee to which powers have been delegated.

Bank to move to the MCLR based pricing and the effective date of these guidelines is April 1, 2016.

DBR.Dir.BC.No.67/13.03.001/2015-16 dated 18th December 2015

19) Mobile Banking Transactions in India - Operative Guidelines for Banks - Customer Registration for Mobile Banking

As a measure of simplification and greater degree of standardization in procedures relating to registering of customers for mobile banking, RBI has advised the following:

Mobile Banking Registration through ATMs: National Payment Corporation of India (NPCI) has since developed the mobile banking registration service / option on the National Financial Switch (NFS) and after a pilot with a few banks, the service is ready to be deployed on ATMs of all the NFS member banks.

In view of the above, all the banks participating in NFS are required to carry out necessary changes in ATM switches and enable the capability of customer registration for mobile banking at all the ATMs latest by 31st March 2016.

Registration through other Channels and Customer Awareness : In addition to the above, banks are required to also strive to facilitate customer registration for mobile banking through other channels including internet banking, IVR, phone banking, etc. As customer registration is an important pre-requisite for offering mobile banking services, bank should also use multiple channels to create awareness among the customers regarding mobile banking services and options available for customer registration.

DPSS.CO.PD.No.1265/02.23.001/2015-16 dated 21st December 2015

20) Section 24 and Section 56 of the Banking Regulation Act, 1949 - Maintenance of SLR:

Reserve Bank has reduced the Statutory Liquidity Ratio (SLR) from 21.50 per cent of the Net Demand and Time Liabilities (NDTL) as below:

(i) 21.25 per cent from April 2, 2016

(ii) 21.00 per cent from July 9, 2016

(iii) 20.75 per cent from October 1, 2016

(iv) 20.50 per cent from January 7, 2017

DBR.Dir.Ret.BC.No.64/12.01.001/2015-16 dated 21st December 2015

21) Fourth Bi-monthly Monetary Policy Statement, 2015-16 – SLR Holdings under Held to Maturity Category :

In terms of existing Reserve Bank guidelines all banks are permitted to exceed the limit of 25 per cent of total investments under HTM category provided (a) the excess comprises only of SLR securities, and (b) the total SLR securities held in the HTM category are not more than 23.50 per cent of their NDTL with effect from January 10, 2015, 23.0 per cent with effect from April 4, 2015, 22.5 per cent with effect from July 11, 2015 and 22.0 per cent with effect from September 19, 2015.

Further, as announced in the Fourth Bi-monthly Monetary Policy Statement, 2015-16 on September 29, 2015, RBI has decided to progressively bring down the SLR by 0.25 per cent every quarter till March 31, 2017 and concurrently reduce the above mentioned ceiling on SLR holdings under HTM in alignment with the SLR requirement.

Accordingly, in order to align the ceiling on SLR holdings under HTM category with the mandatory SLR, banks are permitted to exceed the limit of 25 per cent of total investments under HTM category provided:

a. the excess comprises only of SLR securities, and

b. the total SLR securities held under the HTM category are not more than

• 21.50 per cent from January 9, 2016

• 21.25 per cent from April 2, 2016;

• 21.00 per cent from July 9, 2016;

• 20.75 per cent from October 1, 2016;

• 20.50 per cent from January 7, 2017.

DBR.Dir.Ret.BC.No.64/12.01.001/2015-16 dated 21st December 2015

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1) Investments by FPIs in Government securities

It has been decided that the limits for FPI investment in debt securities shall henceforth be announced/fixed in rupee terms. Further, it has been decided to enhance the limit for investment by FPIs in Government Securities

CIR/IMD/FPIC/8/2015 dated October 06, 2015

2) Facility for Basic Services Demat Account (BSDA)

The Depository Participants (DPs) were advised to provide an option to all the existing eligible individuals to convert their demat account into BSDA. So far, few demat accounts have actually been converted into BSDA during the last three years despite large number of demat accounts being eligible for conversion into BSDA

CIR/MRD/DP/ 20 /2015 dated December 11, 2015.

3) Investor Grievance Redressal System and Arbitration Mechanism

This circular is issued with an objective to streamline and strengthen the framework of investor redressal and arbitration mechanism at commodity derivatives exchanges in line with the securities market.

The national commodity derivatives exchanges are advised to:-

• Make necessary amendments to relevant bye-laws for the implementation of this circular

• Bring the provisions of this circular to the notice of the members of the commodity derivatives exchanges and also to disseminate the same through their website

• Take necessary steps to make investors aware of the grievances redressal mechanism and arbitration process.

• Communicate SEBI, the status of implementation of the provisions of this circular

CIR/CDMRD/DIECE/02/2015 dated November 16, 2015

The above Circularsare available on the SEBI website (www.sebi.gov.in) under the section SEBI Home > Legal Framework > Circulars.

AML case studyLaunderers recruit individuals for the use of their bank account

An FIU received suspicious transaction reports from three financial institutions concerning international fund transfers. Through police investigation, it was discovered that several individuals were acting as money collectors for a cocaine trafficking organization. The job of these individuals was to identify and “recruit” professionals already established in various trades and services who might be amenable to earning some extra money by allowing their bank accounts to be used in a laundering scheme. The professionals would place cash in their accounts and then transfer the sum to accounts indicated by the money collectors.

The professionals who became involved in the activity were active in several types of business, including travel agencies, and import / export in commodities and computers. In return for their services, they received a commission on the funds transferred through their accounts. The transfers out of the accounts were justified by fictitious invoicing that corresponded to their particular business.

This investigation uncovered an organization that was laundering the proceeds of cocaine trafficking believed to be worth US$ 30 million. Several members of the group were identified and tried in two countries.

Key Message:

This scheme illustrates how criminals put additional measures into place further to distance the money from narcotics trafficking operation. Cash is collected from the drug dealer; the collector passes the funds to the launderer; the launderer then passes them to the recruited business professional, who then transfers the funds abroad for further processing. The money continues to move, and the trail becomes more complex. The use of professionals can establish a ‘break’ in the trail, and so thwart financial investigators.

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Mobile banking: RisksThere are two types of mobile financial services that are currently offered in the Indian market—mobile banking and mobile wallets. Being an easy and convenient mode of transacting, there has been a 55 times rise in value usage of mobile banking and 5.5 times rise in the volume of transactions between FY12 and FY15.

After the recent changes to RBI policy, customers of semi-closed pre-paid instruments (PPIs) can now do the following:

• Load up to 1,00,000 INR in wallets.

• Transfer money from their wallet to any bank account. This move, on one hand, enhances the convenience and adoptability of a mobile wallet and on the other, makes it more susceptible to fraud risks.

Risks associated with mobile banking• Mobile banking application being mapped to an incorrect mobile number:

For bank customers who do not use mobile banking, an employee of the bank could attach an associate’s mobile number to the bank account and install a mobile application on his mobile device. The customer’s account is compromised by the associate and he or she does not get any notification about the same.

• Creating fake and non-existent users on the mobile financial services platform:

Most of the banks appoint a third party vendor to develop a mobile application to be integrated with their core banking system. The vendor may create two unauthorized users with rights to initiate and verify transactions, and transfer funds from the organisation to his associates’ wallets, effectively stealing money from the bank.

• Malware:

The increase in the number of mobile banking users is accompanied by a rise in attacks through malware.

• Data theft:

Mass attacks are possible through the theft of credentials which can be used for personal benefits

• SIM swap:

SIM swap means replacing the old SIM with a new one, when the old gets lost or damaged, or when one needs a differently sized SIM card. If a fraudster manages such a swap, he can carry out numerous fraudulent transactions using the mobile number of the victim. For instance, the valid mobile station international subscriber directory number (MSISDN) is moved to another handset. The user has no access to their account and receives no notification. The user with the other handset, on knowing the PIN, can transact in the account.

• Fake or similar interface apps:

Fake applications, with exactly the same user interface as the original application, are being created to steal confidential information shared by the user.

Risks associated with mobile wallets• Increased risk of money laundering:

Transfer of money into and out of a mobile wallet from or to a bank account is now possible. Cash-in from the bank account of an individual and cash-out to a different bank account of another individual can be used as a platform for laundering unaccounted money.

• Unauthorized deductions from the wallet of a customer (especially a dormant or infrequent customer account):

Employees of the mobile wallet service provider may misuse the balance stored in the wallet of a customer by making unauthorized deductions. Moreover, in case of a mis-happening to a customer with no nomination facility, the balance in the customer’s account is not passed on to his family members and remains with the service provider, which ultimately becomes a low-hanging fruit for the fraudsters.

• Failure to conduct proper due diligence of merchants:

If the merchant on-boarded by the service provider is a fraudster, and the payment is made by the customer for fictitious goods or services from the merchant, cash can be rotated with minimum transaction fees.

• No auto log off facility:

An individual usually opens the application on his mobile device for availing of the services and closes the application, instead of logging out. If the mobile device is stolen or lost and a fraudster opens the application, he can misuse the remaining balance in the service provider’s wallet.

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Disclaimer:

The material contained in this document aims at providing a summary of various guidelines, notifications, circulars etc. issued by various regulatory authorities from time to time and is for information purposes only. The same should not be construed as an advice on any matter. For complete information on the matter provided therein, readers are advised to refer to the detailed guidelines, notifications, circulars etc. available on the websites of the respective regulators or they may consult the respective compliance departments before acting on any matter.

Brickbats/bouquets: ankita.naik@kotak.com

Regulatory and legislative landscapeWith the rapid growth in users and wider coverage of mobile phone networks, mobile banking is increasingly coming up as a significant delivery channel for extending banking services to customers. Putting the onus on banks, the RBI has issued operative guidelines to regulate this channel, suggesting reporting of suspicious transactions to its financial intelligence unit. Owing to the heavy reliance on telecom operators for its services, the prevention and detection of frauds in mobile banking have become even more complex. To keep a check on frauds, banks need to incorporate a greater level of scrutiny, by deploying advanced tools and technology capable of protecting the customers against unethical activities.

Source: pwc.in