Learn · Banking operations
KYC and AML in banks: know the customer, spot the pattern.
Know Your Customer (KYC) is how a bank establishes who a customer is and what normal activity looks like for them. Anti-money laundering (AML) is how it watches for activity that does not fit and reports it. In India the rules come from the Prevention of Money Laundering Act, 2002 and its rules, and RBI’s Master Direction on KYC; reports go to the Financial Intelligence Unit, India (FIU-IND).
Customer due diligence (CDD)
Before opening an account the bank identifies the customer and verifies the identity and address, using an officially valid document such as a passport, driving licence, voter ID card or proof of Aadhaar possession, along with PAN or the form allowed in its place. For a company or trust it also identifies the beneficial owners, the people who ultimately own or control it. It records the purpose of the account and the expected activity, because that is the yardstick for monitoring later.
Risk-based categorisation
Customers are categorised as low, medium or high risk from their profile, business, geography and products. Higher-risk customers get enhanced due diligence: more checks at onboarding, closer monitoring and more frequent periodic updation of KYC. Politically exposed persons are an example that always needs senior approval and enhanced checks.
Red flags and reporting
- Cash Transaction Report (CTR): cash transactions above 10 lakh rupees, or connected ones adding up to more than that within a month, are reported to FIU-IND.
- Suspicious Transaction Report (STR): any transaction, of any size, that gives reasonable grounds for suspicion is reported, within seven working days of the bank concluding that it is suspicious.
- The customer must not be told that a report is being made (no tipping off).
Common red flags: activity out of line with the declared profile, deposits split to stay under a threshold (structuring), money that comes in and goes straight out, many unrelated people paying into one account, and reluctance to give information.
A worked case: is this a mule account?
A student’s savings account at the virtual bank, opened six months ago with low expected activity, shows this pattern over one week:
| What the monitoring shows | Why it matters |
|---|---|
| Dozens of small UPI credits from unrelated people | Out of line with a student’s declared profile |
| Each day’s credits moved out within hours to a few accounts | Pass-through: the account is a conduit, not a user |
| Login from a new device in another city | The holder may have handed over control |
| Several payers later complain of a fraud | Links the credits to fraud proceeds |
The right steps, in order: the alert is reviewed and the account’s KYC and profile checked; the case is escalated to the AML team or the principal officer; the bank decides on an STR to FIU-IND and acts on the account as its policy and the law allow; and it does not tell the customer about the report. Closing the alert as ‘customer says it was for friends’ without checking is the classic mistake.
Key terms
- CDD and EDD: Customer due diligence, and enhanced due diligence for higher-risk customers.
- OVD: Officially valid document, accepted for proof of identity and address.
- Beneficial owner: The natural person who ultimately owns or controls a customer that is a company, firm or trust.
- Principal officer: The officer responsible for the bank’s reporting to FIU-IND.
- Structuring: Splitting transactions to stay below a reporting threshold.
Practise it in TrezCap
Reading is the start. In TrezCap you do the job in FinTreasury Bank, our virtual bank: the platform calculates every figure, you take the decision and see the consequence. Free to try.
Banking operations simulations
Account opening and CDD, fraud red flags, complaint handling and large-transaction approval.
See the page →Questions
What is the difference between KYC and AML?
KYC is establishing who the customer is and what normal activity looks like for them. AML is the wider programme of monitoring, investigating and reporting activity that may be money laundering. KYC is the foundation AML depends on.
What is an STR and when is it filed?
A Suspicious Transaction Report is filed with FIU-IND for any transaction that gives reasonable grounds for suspicion, whatever its size, within seven working days of the bank concluding that it is suspicious. The customer must not be told.
What is a CTR?
A Cash Transaction Report covers cash transactions above 10 lakh rupees, or connected cash transactions adding up to more than that within a month. Banks file it with FIU-IND.
What is a mule account?
An account used to receive and pass on money for someone else, often the proceeds of fraud. Signs include many credits from unrelated people and money moved out quickly.
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