B R ACT,
AML & KYC,INVESTMENT
AND AUDIT
Presented
By
M C Parekh
Faculty Member
N. I. C. M. Gandhinagar
• Spelled out in Section 56 of Part V of B. R.
Act, 1949
• RBI regulates and supervises the UCBs
vide the various provisions of the Act
applicable to UCBs which is mainly relate
to banking activities viz.
• Requirement of minimum paid-up capital
and reserves
• Maintenance of cash reserve and liquid
assets
• Restrictions on loans and advances
Relevant Provisions of B. R. Act, 1949
(AACS)
• Section 56
• RBI exercises its regulatory, supervisory
and developmental control on UCBs
through the applicability of select
provisions of the parent Act of this section
from March 1966
• The duality of control was extended
automatically to the sector with the
extension of the Act to the UCBs
Not Authorized under B. R.
Act
• The following powers are not prescribed to RBI
under the B. R. Act, 1949 (AACS):
• Registration of cooperative banks
• Constitution of Board of UCBs
• Removal of directors
• Superceding of the Board of Directors
• Auditing of the cooperative banks
• Enquiry into the affairs of the UCBs
• Enquiry into the conduct of the CEO / Chairman /
directors of UCBs
• Winding up of UCBs
Important Sections
• Section 5 – Definitions
• "banking" means the accepting, for the
purpose of lending or investment, of
deposits of money from the public,
repayable on demand or otherwise, and
withdrawal by cheque, draft, or otherwise;
• "banking company" means any company
which transacts the business of banking
Important Sections
• Section 6 - Forms of business in which
banking companies may engage
• borrowing, raising, or taking up of money
• acting as agents for any Government or
local authority or any other person or
persons
• carrying on of agency business of any
description including the clearing
• RBI Insp Obs: Sect-6 not compliedLeasing out entire premises & earning rent
Important Sections (Contd.)
• Section 8 - Prohibition of trading 􀂉
Notwithstanding anything contained in
Sec. 6 or in any contract, no banking
company shall directly or indirectly deal in
the buying or selling or bartering of goods,
except in connection with the realization of
security given to or held by it
Important Sections (Contd.)
• Section 9 - Disposal of non-banking
assets 􀂉 Notwithstanding anything
contained in Sec. 6, no banking company
shall hold any immovable property,
howsoever acquired, except such as is
required for its own use
• RBI Insp Obs: Sec-9 not compliedHolding non banking assest >7 yrs
Section 11
Minimum Paid-up Share Capital
• Minimum paid-up share capital required
for UCBs to carry out banking business is
Rs. 1 lakh
• RBI Obs:Sect-11 not complied- REV
less than Rs. 1 lakh
Section 18
Cash Reserve
•
• UCBs are required to maintain Cash Reserve
Ratio on a daily basis in the following assets
• Cash in hand and gold, Current Account
balances with State Cooperative Banks and in
notified banks including State Bank of India
and its subsidiaries, and nationalised banks
• The present stipulation is to maintain 3 per
cent of the net demand and time liabilities on
a daily basis
• Obs. Sec-18-Included amount kept in
current a/c with HDFC/AXIS bank for
calculating CRR amount
•
Section 18 – Cash Reserve
(Contd.)
Scheduled UCBs maintain CRR under the provisions of the Section
42 of the RBI Act, 1934
• The present stipulation is to maintain 4 per cent of the Demand and
Time Liabilities on an fortnightly average basis
• The returns are to be submitted in Form B within 7 days from the
reporting fortnight
• They are required to maintain a minimum of 70 per cent of CRR
balance on a daily basis
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• In case of short fall, penalty is levied at 3 per cent above Bank Rate
on the amount of shortfall for the first fortnight and at 5 per cent
above the Bank Rate for the subsequent fortnights, if the default
continues
Section 19
Restriction on Holding Shares
• No Cooperative Bank shall hold shares in any other cooperative
society except to such extent and subject to such conditions as the
Reserve Bank may specify in that behalf:
• Provided that nothing contained in this section
shall apply to—
• shares acquired through funds provided by the State Government for
that purpose;
• in the case of a Central Co-operative Bank, the holding of shares in
the State Cooperative Bank to which it is affiliated;
Obs: Sec-19 Invested in IFFCO/KRIBHCO more than
minimum level required for the representation in case of
DCCBs
Section 20
Restriction on Loans and Advances
 No UCBs can make loans against the security of its own shares
 No UCBs are allowed to grant unsecured loans and advances Directors
and to any firms where any of the Directors is having interest
 Presently there is a complete ban on loans and advances to Directors
and their relatives. However, the following categories of director related
loans are presently permitted:
 Regular employee-related loans to staff directors on the Board of UCBs
 Normal loans as applicable to members to the directors on the Boards
 of salary earners’ co-operative banks and
 Normal employee-related loans to Managing Directors of Multi-State
 co-operative banks
 Section 21- relates to Rates of interest
 Obs Sect-21-Interest rate violation & declaration from staff not
taken
Section 22 - Licensing of
UCBs
• No co-operative society can carry on
banking business unless it is a cooperative bank and holds a license issued
by RBI
• Sect-22(3)(a)-Real or exchangebable
value of assets should be more than
outside liabilities
• obs :REV of assets less than Outside
liabilities in case of some UCBs
• Sect-22(3)(b)-Detrimental to interests of
Section 24
Statutory Liquidity Ratio
• Every UCB is required to maintain liquid assets in the form of cash,
gold or unencumbered approved securities and Fixed Deposits with
SCB which should not be less than 25 per cent of the total of its
demand and time liabilities (In case of Scheduled UCB-23 %).
• Obs : Sect-24 Separately not earmarked ACSF deposits,
included SBI FD for calculating SLR amount
Section 26- Unclaimed Deposits
Deposits not claimed for 10 years should be reported to RBI in the
prescribed form,
Obs: Sec-26 Unclaimed deposits not reported properly – Inoperative
aor Dormant a/cs mixed up with unclaimed deposit
Section 27 Returns
UCBs are required to submit offsite Returns to RBI/ NABARD –Tier-I
UCBS-5 SOSS & Tier II – 8 OSS Returns
Obs. Sect 27- Various returns to RBI not properly prepared and
submitted in time
Section 29 and 31
Account and Balance Sheet
• At the end of each year UCBs are required
to prepare balance-sheet and profit and
loss account as on the last day of the year
in the forms set out in the Third Schedule
or is near thereto
• To be submitted within 6 months
Section 35 – Inspection of UCBs
• RBI inspects basically to verify
• if the conditions subject to which the banks have been issued licence
to undertake banking business continued to be fulfilled 􀂉 The bank
has adequate capital structure (Section 11(1)) and earning prospects
• It’s affairs are not conducted in a manner detrimental to the interest
of the present and future depositors (section 22(3) (b))
• The general character of the management of the bank is not
prejudicial to the public interest and the interest of the depositors.
• The bank is in a position to pay its present and future depositors in
full as and when the claim arise (section 22(3)(a) of B.R. Act, 1949
(AACS)
Supervision of Coops Bank
 Coop Banks are supervised on the
basis of
 On-site Supervision
i.e. inspection u/s 35 of BR Act
 Off-site Supervision
On-site Supervision
 To safeguard the interest of depositors
 To maintain a sound banking system as
per banking laws and regulations
 Financial position – Assets & Liabilities
Off-site Supervision
 Variation in periodicity
 To bridge the gap between two
inspections off-site monitoring system
has been put up to have up to date
evaluation of financial position
Off-site Supervision
 Off-site supervision is done by calling
various returns from the banks
 These returns are of two types i.e.
 Statutory Returns stipulated under
either
BR Act 1949 or RBI Act 1934 and
 Other regulatory returns
Statutory Provisions
OSS returns are statutory
Sec. 27 (2) of BR Act :
RBI may at any time direct a co-op
bank to furnish it within such time, with
such returns and information relating
to business or affairs of the bank
Statutory Provisions
Sec. 46 of BR Act specifies penalties for
non submission of or wrong reporting of
these returns
Returns are signed by the bank’s
authorized signatory and countersigned
and certified by Chairman or his
authorized representative from the top
management – usually head of
compliance
Prudential Concerns of Regulator
1. Solvency
2. Liquidity
3. Capital Adequacy
4. Asset Quality
5. Portfolio risk profile
6. Concentration of exposure
7. Connected/Related lending
Statutory Returns
 FORM I
 Form II
 Form VI
 Form VIII
 Form IX
 Balance Sheet and
Profit & Loss A/c
Statutory Returns
 FORM I
 Sec. 24 of BR Act for SCBs /
Sec 18 & 24 for other cooperative banks
 Statement of demand and time liabilities
in India and amount maintained in cash,
gold and unencumbered securities
 Monthly Statement
Statutory Returns
♦ Form II
 Unsecured Loans and Advances to
Directors – firms in which they have
interest
 BR Act (AACS) Sec. 20 (2)
 Monthly
 To be submitted within 10 days
after the end of month /Nil statement
Statutory Returns
 Form VIII
 Unclaimed Deposit Accounts not
operated for more than 10 years
 BR Act (AACS) Sec 26
 Yearly as on 31st December
 To be submitted within 15 days
from the close of calendar year
 Discrepancies observed
Statutory Returns
 Form IX and Special Form IX
 Assets/Liabilities at close of
business on last Friday of the month
 BR Act (AACS) Sec 27
 Monthly
 To be submitted with 10 days of
completion of the month
Statutory Returns
 Balance Sheet and Profit & Loss A/c
 BR Act (AACS) Sec 29 and 31
 Yearly as on March 31 (Unaudited)
 On or before 30 September (Audited)
Regulatory Returns
 OSS returns: Statements 1 to 8
 RBI has prescribed the eight Off-site
Surveillance returns under the
prudential
supervisory
reporting
system (PSRS)
 Due Dates : Within 1 month from the
close of the quarter/year
OSS / SOSS Returns
 8 OSS Returns by Tier II
 5 SOSS (Simplified OSS) Returns by
Tier I UCBs
Regulatory Returns
Sr. No.
1
Name of the Return
Statement on Assets and Liabilities
Periodicity
Quarterly
Top 10 Deposits, Sundry /Suspens
2
Statement on Earnings-NII,OP
“
3
Statement on Asset QualitySub,D1 loss
“
4
Statement on NPAs-Gross NPA/Net Npa
“
Violation of Exposure norms
5
Statement sector wise advances- PS
“
6
Statement on connected lending
“
7
Statement on CRAR
“
8
Report on Bank Profile
Annual
SOSS Returns
Sr.
Name of the Return
No.
1 Statement
on
Assets
Liabilities
2
3
4
5
Periodicity
and
Statement on Earnings
Statement on Asset Quality
Statement on NPAs, large
exposure, segment wise
advances, net demand and time
liabilities/net owned funds ratio
Statement on Bank Profile
Quarterly
“
“
“
Annual
Section 35 A – Power of the
Reserve Bank to give Directions
• RBI may issue direction to UCBs if it is
satisfied that in public interest or in the
interest of the banking policy and to prevent
the affairs of the bank from being conducted
in a manner detrimental to the interest of the
depositors and to secure proper management
of the bank
• RBI derives it powers to order winding up of
an UCB or its reconstruction only for the
"eligible cooperative bank" stipulated under
section 2(gg) of the DICGC Act, 1961
Section 55 –Act 18 of 1891 & Act 46 of
1949 to apply in relation to Cooperative
Banks
• The Bankers' Books Evidence Act, 1891 shall
apply in relation to a Co-operative Bank as it
applies in relation to a bank as defined in Sec. 2
of that Act
• The Banking Companies (Legal Practitioners'
Clients' Accounts) Act, 1949, shall apply in
relation to a Co-operative Bank as it applies in
relation to a banking company as defined in Sec.
2 of that Act.”
Aspects to be seen
• Whether Investment Policy is in vogue
• Contents of the Policy - as per RBI
Guidelines
• Approval of policy by Board
• Formation of Investment Committee
• Delegation of Powers
• Procedure for obtaining approval
Aspects to be seen .. Contd..
• Approved list of brokers
• Criteria for empanelment
• Verification of creditworthiness, market
reputation of brokers - done or not
• Annual review of list of approved brokers done or not
• Dealings through brokers - role of broker
Aspects to be seen .. Contd..
• Periodical reconciliation of SGL / CGSL
balances
• Generation of periodical reports and submission
to BoD, RBI & NABARD
• Submission of half yearly review note to Board
• Whether the bank has invested its surplus funds
in non-permissible investments
Aspects to be seen .. Contd..
• Whether bank has purchased or sold any
security from / to broker on principal to principal
basis
• Volume of business with each broker not to
exceed 5 % of the total transactions
• Whether the contract note contains name of the
counter party, details of settlement, etc
Aspects to be seen .. Contd..
• Whether the bank has specified single exposure
norms
• Whether stop loss limit has been mentioned in
the policy
• Whether the bank has violated the prudential
norms fixed by RBI
• Whether functional separation of the front office,
mid office and back office exists
Front Office
• Deals in securities (Buy, Sale, & Repo
Deals)
• Putting the bids in the auctions of T- bills
and other securities
• Maintenance of deal records including the
tapping of telephonic conversation
Mid Office
• Risk Monitoring
• Risk Measurement
• Risk Management
• Management Information System
• Formulation and review of investment Policy &
• guidelines for transactions in securities
• Submission of reports to the top executives & Board
• Maintenance of data base and updating front office with
relevant information
Back Office
• Inter Bank settlements of funds borrowed or lent
• Settlement of Call/ Notice/ Term/ CD/ CP/ REPO/ T-Bills/
NCD
• Physical verification of securities
• Monitoring brokers’ turnover
• Reconciliation of RBI current A/c and constituents, own
SGL investment portfolio
• Interest collection on NCDs / Bonds
• Dividend collection on shares or units
• Follow-up on concurrent, statutory and RBI inspection
reports
Exposure Norms – Coops.
• Investments in PSU bonds Not to exceed 10% of the
bank's deposits at the end of previous year
• Investing FDs with Nationalised banks- total 20
% and individual 5 % of total Deposits
Classification of Investments
SLR securities to be classified as under:
Permanent- HTM- Premium to be amortised
Current –HFT/AFS- Make Provisions
Non SLR securites- To be provided if market
price below b/v
Know Your Customer
Norms
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What is money
laundering?
Money Laundering is called what it is
because that perfectly describes what takes
place – illegal, or dirty money is put through
a cycle of transactions or washed, so that it
comes out of the other end as legal, or
clean, money. In other words, the source of
illegally obtained funds is obscured through
a succession of transfers and deals in order
that those same funds can eventually be
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made to appear as legitimate income.
What are the key stages of
the Money Laundering
 Placement Cycle?
 of criminal proceeds into the financial system
 Layering
 of transactions to confuse the audit trail and distance
the original source of funds (e.g. successive
transactions, international transfers, early termination
products, tax haven companies, genuine businesses).
 Integration
 of funds back into the real economy as “clean and
respectable money”
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PMLA Definition
• Offence of Money Laundering (section 3)
Whoever
• (a) acquires, owns, possesses or transfers
any proceeds of crime; or
• (b) knowingly enters into any transaction
which is related to proceeds of crime
either directly or indirectly; or
• (c ) conceals or aids in the concealment of
the proceeds of crime
• Commits the offence of money laundering
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KYC Policy should be reviewed
by Board once in a year and
amended according to
guidelines issued by RBI
53
KYC. Policy includes the following nine key elements:
1 Customer Acceptance Policy (CAP)
2. Customer Identification Procedures (CIP)
3. Monitoring of Transactions
4. Risk management
5. Training Programme
6. Internal Control Systems
7. Record Keeping
8. Evaluations of KYC guidelines by internal audit and
inspection system
9. Duties / Responsibilities and Accountability
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Customer Acceptance Policy
• Check whether the documents for identity
& residence proof taken by branches are
taken as per banks’ policy or not
• Bank should prepare Customer Profile –
Identity, Social – Economical status etc.
• Bank can send Letter of Thanks for further
verification
55
Towards Name proof Photo
Identification Towards address proof
Passport where the address differs
Telephone Bill
Voter’s Identity Card
Bank account statement
PAN Card
Income/Wealth tax assessment order
Driving Licence
Credit Card Statement
Govt. /Defence ID card *
Electricity Bill
ID cards of reputed employers *
Ration Card
Letter from a recognised public
authority or public servant
verifying the identity and residence of
the customer*
Letter from employer*
*Subject to the satisfaction of the officer authorising the opening of the account
•Note: Original should be produced for verification and copy, duly
attested by the verifying official, shall be kept along with the account
opening form.
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Customer Identification
Procedure
The Board approved policy
should clearly indicate CIP to
be carried out at different
stages
a. While establishing a banking
relationship
b. Carrying out a financial
transaction or
c. When the bank has a doubt
about the veracity/ authenticity or
adequacy of the customer data
available.
57
KYC for Existing Accounts
• All existing accounts of
companies, firms, trusts,
charities, religious
organizations and other
institutions to be subjected
to minimum KYC
• Proper procedure should be
followed to freeze the non
KYC compliance account
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Risk Categorization
High Risk
Medium Risk
Low Risk
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High risk customerdue diligence
• Accounts of Trusts
• Accounts of Companies and Firms
• Accounts opened by professional
intermediaries
• Accounts of Politically Exposed
Persons resident outside India
• Non-Face-To-Face Transaction
• Correspondent Banking
– Countries linked to terrorist financing
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Instances where customer are connected with
high-risk Industries
• Non-bank financial institutions (for
e.g. money transmitters)
• Travel agencies
• Jewel/ Gem/ Precious metal
dealers
• Securities broker/ dealers, solicitor
firms, etc.
• Car/ boat dealerships
• Property dealers/ builders
• Arms, art and antique dealers
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High-Risk Products
• Any product which allows a
customer to readily convert
cash to a monetary
instrument.
• Any product or service
which allows a customer to
readily move from one
jurisdiction to another which
conceals the source of
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Instances where customers are connected with
high-risk customers
• Geography
– Drug producing nations
– Drug transshipment countries
– Drug using countries
– Secrecy jurisdictions and tax havens,
particularly those that grant offshore banking
licenses.
– Countries with high degree of public
corruption
63
Monitoring of
Transactions
64
Training & Education
Employee Training
• Banks should take steps to provide proper
training to its employees on the statutory/
regulatory requirements and the internal
policy & procedures so that the risks are
well understood and managed
• Employees should also be educated on
the need for proper handling of customer
queries
Customer Education
65
What is meant by ‘suspicion’?
Suspicion is personal and subjective
and falls far short of proof based on firm
evidence. Suspicion has been defined
by the courts as being beyond mere
speculation and based on some
foundation i.e. “ a degree of satisfaction
and not necessarily amounting to belief
but at least extending beyond
speculation as to whether an event has
occurred or not”; and “although the
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creation of suspicion requires a lesser
Suspicious Transaction/Activity
• Beware of activity not consistent
with the customer’s business
• Beware of a customer who provides
insufficient/suspicious information
• Beware of attempts to avoid
reporting
or
record
keeping
requirements
• Beware of certain funds transfer
activities
• Beware of unusual activities such as
67
Suspicious Transaction/ Activity
• A customer/company who is reluctant to
provide complete information regarding
purpose of the business, prior banking
relationships, officers or directors, or its
location.
• A customer/company who is reluctant to
provide
sufficient
identification
information/financial statements.
68
Suspicious Transaction/ Activity
• Sending or receiving frequent or large
volumes of cross border remittances
• Receiving large TT/DD remittances from
various centres and remitting the
consolidated amount to a different
account/centre on the same day leaving
minimum balance in the account
69
Suspicious Transaction/Activity
• Corporate accounts where deposits or
withdrawals are primarily in cash rather
than cheques
• Corporate accounts where deposits and
withdrawals by cheque/TTs/foreign inward
remittances/any other means are received
from/made
to
sources
apparently
unconnected with the corporate business
activity/dealings.
• A single substantial cash deposit70
Suspicious Transaction/Activity
• A customer who is reluctant to provide
information needed for a mandatory report
or to proceed with a transaction after being
informed that the report must be filed.
• Any
individual
or
group
that
coerces/induces
or
attempts
to
coerce/induce a bank employee to not file
any reports or any other forms.
71
Suspicious
Transactions/Activity
• An account where there are several cash
deposits/withdrawals below a specified
threshold level to avoid filing of reports by
intentionally splitting the transaction into
smaller amounts for the purpose of
avoiding the threshold limit.
• Multiple accounts under the same name
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Suspicious Transaction/Activity
• A customer who is reluctant to provide
information needed for a mandatory report
or to proceed with a transaction after being
informed that the report must be filed.
• Any
individual
or
group
that
coerces/induces
or
attempts
to
coerce/induce a bank employee to not file
any reports or any other forms.
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Suspicious
Transactions/Activity
• An account where there are several cash
deposits/withdrawals below a specified
threshold level to avoid filing of reports by
intentionally splitting the transaction into
smaller amounts for the purpose of
avoiding the threshold limit.
• Multiple accounts under the same name
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Audit of UCB
• It has been observed that quite often the
internal inspection machinery in banks has
failed to highlight and pinpoint the existence
of gross and serious irregularities such as
improper credit appraisal, disbursement
without observing the terms of sanction,
failure to exercise proper post-disbursement
supervision, even suppression of information
relating to unauthorised excess drawals
allowed, kite flying in bills and cheques, etc.
• The failure of the internal inspection
machinery is mainly attributable to the
Internal Audit Machinery
• The banks should introduce a sound
system of internal audit. With a view to
strengthening the credibility of the
inspection system in detecting cases of
frauds/malpractices, steps need to be
taken to gear up the inspection/audit
machinery and to improve the quality of
officers of the inspection department. The
head of the inspection department at the
Head Office should be a sufficiently senior
Periodicity of Internal Audit
• The periodicity of the internal audit of the
branches should be at least once in every
12 months, which should be really of
surprise character.
• 2.3 Coverage of Internal Audit
• 2.3.1 The coverage of such inspections
should also be made more
comprehensive, inter alia, to include a
thorough examination of the internal
control system obtaining at the branches
including the various periodical control
returns submitted to the controlling offices.
CONCURRENT AUDIT SYSTEM
• Ghosh Committee had recommended
introduction of concurrent audit at large and
exceptionally large branches of banks to serve
as administrative support to branches, help in
adherence to prescribed systems and
procedures and prevention and timely detection
of lapses/irregularities. Accordingly, all
scheduled and other primary (urban) co-op.
banks with deposits over Rs.50 crore were
required to introduce the system of concurrent
audit. Subsequently, JPC recommended for all
UCBs
Concurrent Audit of Investments
The concurrent auditors shall certify that the investments
held by the bank as on the last reporting Friday of each
quarter as reported to the Reserve Bank of India are
actually owned / held by it as evidenced by physical
securities or the custodians statement. The certificate
should be submitted to the Regional Office of the
Reserve Bank of India, having jurisdiction over the bank,
within thirty days from the end of the relative quarter.
• 4.7 The concurrent auditors should specifically verify
compliance to the instructions contained in our circular
UBD.BPD.SUB No.5/ 09.80.00/ 2003-04 dated 28 April
2004 regarding transactions in Govt. Securities.
Thank You
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