Anti-Money Laundering and Know Your Customer: The Story of India’s Largest Bank Heist

The year was 2018, and India’s banking industry was shaken to its core by the largest bank heist in the country’s history. A total of $1.8 billion had been siphoned off from the Punjab National Bank (PNB) through fraudulent transactions carried out by a few of its employees in collusion with businessmen. The scam was an eye-opener for the entire industry, exposing loopholes in the bank’s anti-money laundering and know your customer (KYC) processes.

Anti-Money Laundering (AML) refers to the laws, regulations, and procedures aimed at preventing criminals from disguising the proceeds of their illegal activities as legitimate funds. In the case of PNB, the fraudulent transactions were carried out through the misuse of the SWIFT messaging system, which is used for international money transfers. The bank’s internal AML controls failed to detect these transactions, allowing the fraudsters to transfer funds undetected.

Know Your Customer (KYC), on the other hand, refers to the process of verifying the identity of customers to ensure that they are who they claim to be. The PNB fraudsters were able to circumvent the bank’s KYC process by using fake documents and opening accounts under false names. They also managed to bypass the bank’s dual control system, which requires two employees to authorise any transaction above a certain limit.

The PNB scam highlighted the urgent need for Indian banks to strengthen their AML and KYC processes. In response, the Reserve Bank of India (RBI) issued a circular in February 2018, instructing banks to implement various measures to improve their AML and KYC controls. These measures included the use of artificial intelligence and machine learning for transaction monitoring and customer profiling, enhanced due diligence for high-risk customers, and regular staff training on AML and KYC regulations.

One example of a bank that has implemented robust AML and KYC controls is HDFC Bank, India’s largest private sector bank. The bank has invested heavily in technology to automate its AML and KYC processes and has established dedicated teams to monitor and investigate suspicious transactions. HDFC Bank also conducts regular KYC audits and has implemented strict protocols for the onboarding of new customers.

The PNB scam and HDFC Bank's response show the importance of having strong AML and KYC controls in place. AML measures are crucial for preventing criminals from disguising illegal funds as legitimate, while KYC procedures are necessary for verifying the identities of customers and preventing fraudulent account openings. The RBI's circular and HDFC Bank's example demonstrate that the Indian banking industry is taking steps in the right direction to prevent such scams from happening again. However, it is essential for all banks to remain vigilant and continuously improve their AML and KYC processes to stay one step ahead of fraudsters.