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KYC, Money Laundering and Basel Norms

DECEMBER 02, 2014

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KYC, Money Laundering and Basel Norms

 KYC, Money Laundering and Basel Norms


The banks’ operations carry the risks of money laundering and terrorist financing. To check money laundering, it is imperative for the banks to know their customers well. To check the financing of terrorism, the international body called Financial Action Task Force (FATF), Paris has introduced norms on identification of customers and address verification, called Know Your Customer (KYC) norms. The RBI has made the KYC norms compulsory for opening all types of bank accounts. The Prevention of Money Laundering Act, 2002 contains the relevant provisions in this regard.


Disguising the illegal sources of money so that it appears to come from legal channels. Such money is generated through illegal activities like drug trafficking, illegal arms sales, ransom in kidnappings, extortions, smuggling, etc. Money laundering is a major means of funding terrorism around the world. KYC norms are an effective method to check money laundering. The government has introduced the Prevention of Money Laundering Act – (PMLA) 2002 to curb money laundering, the instances of which have to be reported to FIU-IND (Financial Intelligence Unit – India) in the Finance Ministry. As part of this procedure, the banks are required to report all cash transactions of above Rs 10 Lac to FIU-IND on a monthly basis.


Refers to fake currency. The possession or use of such counterfeit currency is a legal offence and upon detection by a banker, it has to be cancelled and surrendered to the nearest police station.


Capital Adequacy norms refer to the minimum capital to be maintained by the banks globally, the norms for which have been formulated by the Bank for International Settlements (BIS). The bank, headquartered in Basel, Switzerland coordinates and regulates the banking business the world over. Its recommendations are popularly called ‘Basel norms’.

The bank’s committee called Basel Committee on Banking Supervision (BCBS) prescribes various norms for banks including the minimum capital requirements. As per the recommendations, the capital of a bank cannot be less than 8% of its Risk Weighted Assets (RWA). Here the assets are the loans and investments made the bank. This ratio is termed Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).


These recommendations are known as the 3 pillars of Basel.

1st Pillar – Minimum capital requirement – (8%): It aligns the minimum capital requirements more closely to each bank’s actual risk of loss.

2nd Pillar – Supervisory review process: The supervisors will evaluate the activities and the risk profile of the banks to determine their need for more capital reserves.

3rd Pillar – Market discipline: Mandatory disclosures to be made by the banks for transparency.


The Basel III guidelines (2010) prescribe higher and better-quality capital, better risk coverage, leverage ratio as a backup to the risk-based requirement, measures to promote the capital buildup that can be drawn down during financial stress. It recommends the formation of a Capital Conservation Buffer equal to 2.5% of the risk weighted assets of a bank, above the minimum capital requirements. These norms are to be implemented phase-wise by March, 2018.


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