KYC, AML and Banking Risk

Overview

Money laundering is making illegally obtained money look legitimate, classically through three stages: placement, layering and integration. Nepal's main law is the Assets (Money) Laundering Prevention Act, 2064 (2008), known as ALPA. Banks are reporting entities under it.

KYC and customer due diligence (ALPA Chapter 3)

Know Your Customer (KYC) means identifying the customer and verifying that identity from reliable, independent documents. Customer due diligence (CDD) is wider: it adds identifying the beneficial owner, understanding the purpose of the relationship and monitoring transactions.

• No account in an anonymous or fictitious name (Section 6); no dealings with shell banks (Section 7).
• Identify and verify when opening an account or starting a business relationship, for occasional transactions above the prescribed limit, for wire transfers, and whenever there is suspicion or doubt about earlier information (Section 7A).
• Enhanced CDD for high-risk customers, politically exposed persons (PEPs) with their family members and associates, customers from countries with weak AML controls, and unusually large or complex transactions (Section 7E).
• Simplified CDD is allowed for low-risk cases (Section 7F).
• Record keeping: at least five years after the business relationship ends or from the date of the transaction (Section 7R).
• Each reporting entity appoints a compliance officer of management level (Section 7P).

Reporting to FIU-Nepal

The Financial Intelligence Unit (FIU-Nepal) was established on 21 April 2008 under Section 9 of ALPA as an autonomous unit in Nepal Rastra Bank. It receives reports, analyses them and passes intelligence to law enforcement agencies. Banks file through the goAML system.

TTR limits for class A, B and C institutions under the FIU-Nepal TTR Guidelines updated July 2025:

• Cash deposit or withdrawal of Rs 1 million or more in one transaction or a series in one day in a single account.
• Cross-border transfer of Rs 1 million or more in a day.
• Foreign currency exchange equivalent to Rs 500,000 or more in a day.

The customer must not be told that a report has been filed (confidentiality, Sections 10B and 44A).

Types of banking risk

• Credit risk: the borrower or counterparty fails to repay. It is the major risk in lending.
• Market risk: losses in on- and off-balance-sheet positions from adverse movements in market prices, such as interest rates and exchange rates.
• Operational risk: loss from inadequate or failed internal processes, people and systems, or from external events.
• Liquidity risk: the bank cannot meet its obligations as they fall due without unacceptable loss.

Capital adequacy basics

NRB's Capital Adequacy Framework 2015 (Basel III) has three pillars: minimum capital requirements, supervisory review, and market discipline through disclosure.

Approaches prescribed: Simplified Standardized Approach for credit risk, Basic Indicator Approach for operational risk and Net Open Position Approach for market risk.

Worked examples

1. Tier 1 capital Rs 90 crore, Tier 2 Rs 30 crore; risk-weighted exposure 900 (credit) + 70 (operational) + 30 (market) = Rs 1,000 crore. Capital adequacy ratio = 120/1,000 = 12 percent.
2. Basic Indicator Approach: capital charge = 15 percent of average positive gross income of the last three years. Gross income of 400, 500 and 600 gives an average of 500 and a charge of Rs 75 crore.

Exam pointers

• STR: no amount limit, filed promptly. TTR: fifteen days, Rs 1 million cash.
• FIU-Nepal: 21 April 2008, Section 9 of ALPA, housed in NRB.
• Records: five years. Enhanced CDD for PEPs and high-risk customers.
• Operational risk is about processes, people, systems and external events.
• Capital: 4.5, 6, 8.5, and 11 percent with the buffer.
• Thresholds are set by notice and can change; quote them with the guideline date.