Introduction

With reference to the guidelines regarding ‘Know Your Customer’ norms issued by the National Housing Bank (“NHB”) in terms of its Circulars No. (1) NHB(ND)/DRS/POL-No-02/2004-05 dated August 25, 2004, (2) NHB(ND)/DRS/POL-No-05/2004-05 dated September 23, 2004, (3) NHB(ND)/DRS/POL-No-08/2004-05 dated March 31, 2005, (4) NHB(ND)/DRS/POL-No-32/2009- 10 dated March 16, 2010 and (5) NHB/ND/DRS/POL-No-33/2010-11 dated October 11, 2010 wherein Housing Finance Companies(HFCs) were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of suspicious nature for the purpose of reporting it to appropriate authority, Ummeed Housing Finance Pvt. Ltd. has adhered to the guidelines of National Housing Bank.

Background

The Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT) standards have become the international benchmark for framing Anti Money Laundering and combating financing of terrorism policies by the regulatory authorities. Compliance with these standards both by the banks/financial institutions, including HFCs, has become necessary for international financial relationships. The Reserve Bank of India(RBI) has issued revised set of comprehensive ‘Know Your Customer' Guidelines to all Non-Banking Financial Companies (NBFCs), Miscellaneous Non-Banking Companies and Residuary Non-Banking Companies in the context of the recommendations made by the Financial Action Task Force(FATF) and Anti Money Laundering (AML) standards and combating financing of terrorism policies by the regulatory authorities and advised all NBFCs to adopt the same with suitable modifications depending on the activity undertaken by them and ensure that a proper policy framework on KYC and AML measures are formulated and put in place with the approval of their respective Boards. The ‘Know Your Customer' Guidelines issued by the National Housing Bank for HFCs have been drafted and issued in the above context.

Applicability

The Know Your Customer and Anti-Money Laundering (the Policy) applies to Ummeed Housing Finance (UHF or the Company). The Policy also applies to any third parties relied upon or used by the Company to perform any of the requirements of its Anti-Money Laundering (AML) Program. This policy will be reviewed annually or on the basis of any material change in the regulatory requirements or business operations of the Company.

The said policy & measures will enable the company to know and understand its customers and their financial dealings better which in turn will help it manage risks prudently. The policy and measures will further help in preventing the company being used, intentionally or unintentionally by unscrupulous and criminal elements for money laundering activities.

This Policy establishes minimum requirements for the Company to establish, implement, and maintain an AML Program that is reasonably designed to(a) implement this Policy and (b) to ensure compliance with applicable AML laws, rules and regulations.

POLICY STANDARDS AND AML PROGRAM STRUCTURE

• The KYC and AML Policy has been prepared considering the following 4 key elements:
  • Customer Acceptance Policy (CAP)
  • Customer identification Procedures (CIP)
  • Monitoring of Transactions, and
  • Risk Categorization

• For the purpose of the Policy, a ‘Customer’ is defined as:
  • a person or entity (including an employee) that maintains an account and/or has a business relationship with the Company;
  • one on whose behalf the account is maintained (i.e. the beneficial owner);
  • beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
  • any person or entity connected with a financial transaction which can pose significant reputational or other risks to the Company, say, a wire transfer or issue of a high value demand draft as a single transaction.

Customer Acceptance Policy (CAP)

The Company has evolved a Customer Acceptance Policy (CAP) which lays down the criteria for the acceptance of Customers. In line with the NHB guidelines on “Know Your Customer Guidelines & Anti Money Laundering Standards”, the Company has formulated Customer Acceptance Policy (CAP) which lays down the broad criteria for acceptance of customers which forms an integral part of the Group AML Policy.

• The features of the CAP are detailed below:
  • No account is opened in anonymous or fictitious/benami name(s);
  • Customers are all assessed for location of residence, business if any including type of clients and also the mode of transactions and payments;
  • Volume of turnover, social and financial status, etc. to enable categorization of customers into low, medium and high risk (these customers will require very high level of monitoring). Currently given the size of our loans and type of clients we deal with, all our customers are considered low risk;
  • Documentation requirements and other information collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of PML Act, 2002 and guidelines issued from time to time;
  • The company will not open an account where it is unable to apply appropriate customer due diligence measures, i.e. where COMPANY is unable to verify the identity and /or obtain documents required as per the risk categorization due to non co-operation of the customer or non reliability of the data/information furnished. However, COMPANY will have suitable built-in safeguards to avoid harassment of the customer.
  • Circumstances, in which a customer is permitted to act on behalf of another person/entity, will be clearly spelt out in conformity with the established law and practices, as there could be occasions when an account is operated by a mandate holder or where an account may be opened by an intermediary in a fiduciary capacity, and
  • Checks against any notified list of the NHB or the RBI any other regulator, before accepting a customer, to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations, etc.

The aspects mentioned in the CAP would be reckoned while evolving the KYC/AML procedures for various customers/products. However, while developing the KYC/CDD procedures, the Company shall ensure that its procedures do not become too restrictive or pose significant difficulties in availing its services by deserving general public, especially the financially and socially disadvantaged sections of society.

• The company will prepare a profile for each new customer which may contain information relating to the customer's identity, social/financial status, nature of business activity, information about his clients' business and their location, etc. The nature and extent of due diligence will depend on the risk perceived by COMPANY. However, while preparing the customer profile, COMPANY will seek only such information from the customer which is relevant and is not intrusive. The customer profile will be a confidential document and details contained therein will not be divulged for cross selling or any other purposes.

• Given the nature of our business – small ticket loans to low and middle income, informal and financially excluded families – we have categorized our customers as low risk.. It is highly unlikely that COMPANY will have any medium / high risk clients given its focus on the lower income section of society, but for information, examples of customers requiring higher due diligence may include:
  • non-resident customers,
  • high net worth individuals,
  • trusts, charities, NGOs and organizations receiving donations,
  • companies having close family shareholding or beneficial ownership,
  • firms with 'sleeping partners',
  • politically exposed persons (PEPs) of foreign origin,
  • non-face to face customers, and
  • those with dubious reputation as per public information available, etc.

It is important to bear in mind that the adoption of Customer Acceptance Policy and its implementation will not result in denial of COMPANY’s services to the general public, especially to those who are financially or socially disadvantaged.

Customer Identification Procedures

• COMPANY will follow clear NHB guidelines on the Customer Identification Procedure to be carried out at different stages, i.e. while establishing a relationship; carrying out a financial transaction or when COMPANY has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data. Customer identification means identifying the customer and verifying his/ her identity by using reliable, independent source documents, data or information. COMPANY will obtain sufficient information necessary to establish, to its satisfaction, the identity of each new customer, whether regular or occasional and the purpose of the intended nature of relationship. Being satisfied means that COMPANY must be able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance with the extant guidelines in place. Besides risk perception, the nature of information/documents required would also depend on the type of customer (individual, corporate etc). For customers that are natural persons, which will be most of its clients, COMPANY will obtain sufficient identification data to verify the identity of the customer, his address/location, and also his recent photograph. For customers that are legal persons or entities (very unlikely to be a customer except for project finance to construction companies), COMPANY will:
  • verify the legal status of the legal person/ entity through proper and relevant documents;
  • verify that any person purporting to act on behalf of the legal person/entity is so authorized and identify and verify the identity of that person; and
  • understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person.

Where COMPANY is unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer, COMPANY may consider closing the account or terminating the business relationship after issuing due notice to the customer explaining the reasons for taking such a decision.

Monitoring of Transactions

Ongoing monitoring is an essential element of effective KYC procedures. COMPANY can effectively control and reduce its risk only if it has an understanding of the normal and reasonable activity of the customer so that it can identify transactions that fall outside the regular pattern. However, the extent of monitoring will depend on the risk sensitivity of the account. Since COMPANY will not have any deposit accounts, this situation will hardly arise, but COMPANY will in any case pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose, or transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer. COMPANY will put in place a system of periodical review of risk categorization of accounts and the need for applying enhanced due diligence measures. COMPANY will ensure that a record of transactions in the accounts is preserved and maintained as required in terms of section 12 of the PML Act, 2002 (and the Amended Act, 2009). It will also ensure that transactions of suspicious nature and/or any other type of transaction notified under section 12 of the PML Act, 2002 (and the Amended Act, 2009), is reported to the appropriate law enforcement authority.

Risk Management

The Board of Directors of COMPANY has ensured that an effective KYC program is in place and has established appropriate procedures and is overseeing its effective implementation. The program covers proper management oversight, systems and controls, segregation of duties, training and other related matters. Responsibility has been explicitly allocated within COMPANY to ensure that COMPANY’s policies and procedures are implemented effectively. The Board of COMPANY is aware that while all customers will be of low risk profile given the nature of its business, unless belonging to a higher risk profile listed under #5 above and approved as an exception, it will apply various Anti Money Laundering measures keeping in view the risks involved in a transaction, account or business relationship.

COMPANY's Board -through its Audit Committee will directly evaluate and ensure adherence to the KYC policies and procedures, including legal and regulatory requirements.

COMPANY has already ensured that its front line staff and credit staff are aware that no loan accounts will be created unless the KYC procedures are adhered to completely.

Customer Education

The implementation of KYC procedures requires COMPANY to demand certain information from customers, which may be of personal nature, or which has hitherto never been called for. This can sometimes lead to a lot of questioning by the customer as to the motive and purpose of collecting such information. COMPANY’s front line staff will therefore personally discuss this with customers and if required, COMPANY will also prepare specific literature/ pamphlets, etc. so as to educate the customer on the objectives of the KYC program.

Introduction of New Technologies

COMPANY will pay special attention to any money laundering threats that may arise from new or developing technologies including on-line transactions that might favour anonymity, and take measures, if needed, to prevent its use in money laundering schemes.

Appointment of Principal Officer

COMPANY has appointed Shariq Khan to be designated as ‘Principal Officer'. Per the NHB guidelines, the Principal Officer will be located at the corporate office and will be responsible for monitoring and reporting of all transactions and sharing of information as required under the law. He will maintain close liaison with enforcement agencies, other HFCs and any other institution which are involved in the fight against money laundering and combating financing of terrorism.

Maintenance of records of transactions

• Though it will be unlikely in COMPANY’s case, due to its focus on lower income families, COMPANY has a system of maintaining proper record of transactions prescribed under Rule 3, of the Prevention of Money-Laundering and value of transactions, the procedure and manner of maintaining and verification and maintenance of records of the identity of the clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005, as mentioned below:
• all cash transactions of the value of more than rupees ten lakh or its equivalent in foreign currency;
• all series of cash transactions integrally connected to each other which have been valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds rupees ten lakh;
• all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place;
• all suspicious transactions whether or not made in cash and by way of as mentioned in the Rules.

Information to be preserved

• As per the NHB guidelines, COMPANY is required to maintain the following information in respect of transactions referred to in Rule 3:
  • the nature of the transactions;
  • the amount of the transaction and the currency in which it was denominated;
  • the date on which the transaction was conducted; and
  • the parties to the transaction.

Maintenance and Preservation of records

COMPANY has a system for proper maintenance and preservation of account information in a manner that allows data to be retrieved easily and quickly whenever required or when requested by the competent authorities. COMPANY will maintain for at least ten years from the date of cessation of transaction between the bank and the client, all necessary records of transactions, both domestic or international, which will permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of persons involved in criminal activity.

COMPANY will also ensure that records pertaining to the identification of the customer and his / her address (e.g. copies of documents like passports, identity cards, driving licenses, PAN, utility bills etc.) obtained while opening the account and during the course of business relationship, are properly preserved for at least ten years after the business relationship is ended. The identification records and transaction data will be made available to the competent authorities upon request.

Reporting to Financial Intelligence Unit-India

In terms of the PMLA rules, COMPANY will report information relating to cash and suspicious transactions to the Director, Financial Intelligence Unit-India (FIU-IND) at the following address:

Director, FIU-IND,
Financial Intelligence Unit-India,
6 th Floor, Hotel Samrat,
Chanakyapuri,
New Delhi-110021

COMPANY will ensure that the provisions of PMLA Rules framed and the Foreign Contribution and Regulation Act, 1976, wherever applicable, are adhered to strictly.