Banks now required to maintain a database of high-profile and high-risk customers for monitoringAs part of the central bank’s anti-money laundering efforts, banks will need to ensure that clients only employ legitimate sources of income for transactions.
Prithvi Man Shrestha
Nepal’s banks will now be required to maintain an additional database of ‘high-profile’ and ‘high-risk’ clients, who may be monitored for money laundering and other suspicious transactions.
Under the new rules set by the Nepal Rastra Bank, all banks will need to ensure that such clients employ only legitimate sources of income for transactions.
High-profile clients, as defined by the anti-money laundering law, include ‘politically exposed persons’ ranging from Rural Municipality vice-chairpersons and bureaucrats above secretary level to the central leaders of political parties up to the President.
High-risk clients include people with criminal backgrounds, those that the banks consider prone to corruption, those involved in the sale and purchase of commodities such as gold, and those dealing in heavy cash transactions.
Earlier, banks were only required to identify the sources of income and the objective of the transactions for sums above Rs1 million.
The revised directive, issued by the central bank in October, requires banks to confirm with the clients the financial source for transactions and also seek evidence on whether the transaction was conducted for the stated purpose.
“The stringent measure has been introduced as envisioned by the Money Laundering Prevention Act,” said an official at the Financial Information Unit (FIU) of the central bank who didn’t wish to be named.
As the Asia-Pacific Group on Money Laundering, a regional cluster of the Financial Action Task Force (FATF), the global anti-money laundering body, will be conducting a mutual evaluation of Nepal’s compliance with FATF recommendations on Anti-Money Laundering and Financing of Terrorism (AML/CFT) next year, government agencies, including the central bank, have been introducing more stringent measures to control money laundering.
In a recent self-evaluation of Nepal’s compliance conducted by the government, the country was found to be deficient in most FATF recommendations, including law-making, and particularly law enforcement.
Government officials said that Nepal faces the risk of being blacklisted by the FATF if the mutual evaluation shows more deficiencies, which would create difficulties for Nepali banks to conduct international financial transactions.
While bankers say they are ready to follow international norms on the control of money laundering, they also said it was difficult for them to confirm legitimate sources of income for transactions.
“Until now, customers were required to make a self-declaration about the sources of income for any transactions above Rs1 million and the objective of their transactions,” said Bhuvan Dahal, chief executive officer at Sanima Bank. “We will have to either seek all documents from high-profile people about their transactions or develop an intelligence mechanism to confirm whether they had a legitimate income source for the transaction.”
While bankers agree that the system of identifying high-risk people should be enhanced, they fear that customers could abandon them for seeking a lot of documentation.
“If someone self-declares that he or she earned the money by selling land, we seek documents related to the sold land. But such persons could then deposit that same amount in cooperatives where anti-money money laundering rules are not being implemented stringently,” said Anil Shah, chief executive officer of Nabil Bank.
Anti-money laundering measures could be enforced properly and the entire financial sector should comply with anti-money laundering standards, he said.
So far, banks have been collecting details from customers perceived to be making suspicious transactions and are reporting these to the Financial Information Unit, a national agency responsible for receiving, processing, analysing and disseminating financial information and intelligence on suspected money laundering and terrorist financing activities.
However, the FIU official said that the new directive says that banks should develop a specific mechanism, as per international best practices, for enhanced customer due diligence and collect information about high-profile and suspicious customers. Banks and financial institutions will need to collect details from the government and other agencies every year and update the list regularly, after conducting a risk-based analysis. The database will include senior elected representatives from all three layers of the government, high-level government officials and those in other state bodies. Those convicted of corruption will be placed in the ‘high-risk’ category.
For people with high net worths, banks should prepare ‘red flag indicators’ that indicate any suspicious transactions. But the banks are free to determine who constitute high net worth people.
Rastriya Banijya Bank Chief Executive Officer Kiran Kumar Shrestha said that his bank already maintains such a database as part of the government’s Anti-Money Laundering/Combating Financing of Terrorism (AML/CFT) policy.
As per the new directive, internal and external auditors will monitor whether banks have AML/CFT systems that conduct risk-based analysis. Auditors will look into whether banks have taken necessary AML/CFT measures with regard to transactions of politically exposed persons, high-risk countries, high-risk production, equipment, services and transactions. Banks should have provisions in their policies and working procedures regarding the tackling of terrorist activities and financing weapons of mass destruction. They also should develop a mechanism to identify, monitor and report terrorist activities and financing in such acts, according to the new directive.
From January 15 next year, banks will be submitting details about suspicious transactions above the threshold of Rs1 million through the goAML software installed by the Financial Information Unit. The goAML software was specifically built by the United Nations Office of Drugs and Crime to meet the data collection, management, analysis, and statistical needs of Finance Intelligence Units. The FIU had purchased the software in 2014 but only installed it in 2018. It has yet to come into full operation.