What changed
RBI expanded the scope of earlier KYC/AML circulars by requiring banks to also use publicly available information, not just RBI-circulated FATF statements, to identify countries with deficient AML/CFT regimes. It clarified that ongoing monitoring must include examining the background and purpose of transactions from such jurisdictions. Additionally, it reinforced the prohibition on correspondent relationships with shell banks and the need to verify that foreign respondent institutions do not allow shell bank use.
What it means for you
Co-operative banks must now proactively source and apply external intelligence on high-risk jurisdictions beyond RBI's FATF updates, increasing compliance burden. The emphasis on documenting transactions without apparent lawful purpose strengthens audit trails and regulatory scrutiny. The shell bank prohibition tightens correspondent banking due diligence, potentially limiting relationships with certain foreign institutions.
What you must do
- Update KYC/AML policies to include procedures for using publicly available information to identify FATF non-compliant countries.
- Enhance transaction monitoring systems to flag and examine transactions from high-risk jurisdictions, documenting findings.
- Review all existing correspondent banking relationships to ensure no shell bank exposure and obtain certifications from foreign respondents.
- Train staff on identifying suspicious transactions from non-compliant countries and maintaining written records for regulatory access.
- Conduct periodic audits of AML/CFT compliance, focusing on FATF-related risks and shell bank prohibitions.
Who it affects
All State and District Central Co-operative Banks, Compliance and AML teams, Correspondent banking relationship managers, Internal audit departments
What is a 'shell bank' and why is it prohibited?
A shell bank is a bank without a physical presence in the country where it is incorporated and licensed, and which is not part of a regulated financial group. RBI prohibits co-op banks from entering into relationships with shell banks because they pose high money laundering and terrorist financing risks.
How should we identify countries that do not apply FATF recommendations?
In addition to FATF statements circulated by RBI, banks must use publicly available information such as FATF public statements, mutual evaluation reports, and other credible sources to identify jurisdictions with deficient AML/CFT regimes.
What documentation is required for transactions from high-risk countries?
Banks must examine the background and purpose of such transactions. If no apparent economic or lawful purpose exists, written findings and all related documents must be retained and made available to RBI or other authorities upon request.