PML-ACT 2002 responsibility & IMPORTANCE OF REPORTING AND PRESERVING RECORDS

D SUDHAKAR DY. MGR.(TRG) STATE BANK OF INDIA STATE BANK LEARNING CENTER HYD.

Are the following money laundering activities ?

Conversion from black money to white money

Under or over invoicing in export trade

IPO Scam

Over or understating of expenditure

Bogus expenditures Misleading transactions with related parties Bribe

Money Laundering
'Any act or attempted act to conceal or disguise the identity
of illegally obtained proceeds so that they appear to have originated from legitimate sources'. In other words, it is the process used by criminals through which they make dirty money appear clean

Money Laundering
Money laundering generally refers to washing of the proceeds or profits generated from: (i) Drug trafficking (ii) Arms, antique, gold smuggling (iii) Prostitution rings (iv) Financial frauds (v) Corruption, or (vi) Illegal sale of wild life products and other specified predicate offences

Why is it a Problem for Countries?

Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption. Money laundering deprives governments of some tax revenues, thereby raising the relative burden of honest citizens. Because of rapid movements of large amounts of money, normally stable financial institutions become destabilized, threatening savings accounts and retirement funds of innocent citizens. Estimates of the size of the money laundering problem totals more than $500 billion annually world - wide

Typologies/ Techniques employed

Deposit structuring or smurfing Connected Accounts Payable Through Accounts Loan back arrangements Forex Money Changers Credit/ Debit cards Companies Trading and Business Activity Correspondent Banking Lawyers, Accountants & other Intermediaries Misuse of Non-Profit Organisations

Money Laundering Process

PLACEMENT LAYERING INTEGRATION

PLACEMENT
The first step is to introduce cash into the financial system. The money launderers use various vehicles to do this e.g Deposits, Money transfers, purchases of monetary instruments such as travellers cheques, bank cheques or money orders, foreign currency conversions etc. They may also use insurance companies, brokerage accounts, credit cards and other financial services.

LAYERING
The layering is like a shell game- many transactions

and conversions take place to blur the trail back to

the original crime. This may include investments, purchases of goods and services, encashing cheques, using several smaller cheques to purchase a bank wire etc.

INTEGRATION
Integration is the final stage of the money laundering process. This is when the criminal re-introduces the funds into the legitimate economy with an apparently legitimate provenance.

Examples include investing in a company, purchasing real estate, luxury goods, etc.

Financing of terrorism
Money to fund terrorist activities moves through the global financial system via wire transfers and in and out of personal and business accounts It can sit in the accounts of illegitimate charities and be laundered through buying and selling securities and other commodities, or purchasing and cashing out insurance policies.

Legal Sources of terrorist financing

legal or non-legal legal
Collection of membership dues Sale of publications Cultural of social events Door to door solicitation within community Appeal to wealthy members of the community Donation of a portion of personal savings

Illegal Sources
Kidnap and extortion; Smuggling; Fraud including credit card fraud; Misuse of non-profit organisations and charities fraud; Thefts and robbery; and Drug trafficking

Money Laundering Risks

What are the risks to banks? (i) Reputational risk (ii) Legal risk (iii) Operational risk (failed internal processes, people and systems & technology) (iv) Concentration risk (either side of balance sheet) All risks are inter-related and together have the potential of causing serious threat to the survival of the bank

Reputational Risk:
The potential that adverse publicity regarding a banks business practices, whether accurate or not, will cause a loss of confidence in the integrity of the institution Reputational Risk : a major threat to banks as confidence of depositors, creditors and general market place to be maintained Banks vulnerable to Reputational Risk as they can easily become a vehicle for or a victim of customers illegal activities

Operational Risk
The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events Weaknesses in implementation of banks programmes, ineffective control procedures and failure to practise due diligence

Legal Risk
The possibility that lawsuits, adverse judgements or contracts that turn out to be unenforceable can disrupt or adversely affect the operations or condition of a bank Banks may become subject to lawsuits resulting from the failure to observe mandatory KYC standards or from the failure to practise due diligence Banks can suffer fines, criminal liabilities and special penalties imposed by supervisors

Concentration Risk
Mostly applies on the assets side of the balance sheet: Information systems to identify credit concentrations; setting prudential limits to restrict banks exposures to single borrowers or groups of related borrowers

On liabilities side: Risk of early and sudden withdrawal of funds by large depositors- damages to liquidity

Approaches for AML Implementation

Two possible approaches Only-Compliance approach Tactical approach Compliance + Business approach Strategic approach Only-Compliance approach Tactical approach Reactive mode Involves Point Solutions, specific to compliance requirements of date Involves Additional Point solutions to address new regulations and changing scenarios
Involves issues relating to Providing resources to a cost centre a difficult issue for management

Approaches for AML Implementation (cont)

Compliance + Business approach Strategic approach Proactive mode Involves Business Process Management, even while addressing compliance
Information important for business is available in the compliance process Source of funds How the customer uses these funds Developments in the financial life of the customer These can be used for business promotion, internal control and other productive purposes

Anti- Money Laundering Legislation in India

The Prevention of Money Laundering Act, 2002 (PMLA) enacted in 2003 to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering. PMLA and rules notified thereunder came into effect from 1st July, 2005.

As per Section 3 of PMLA, whosoever, directly or indirectly, attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of Money Laundering.

Proceeds of Crime
As per Section 2(1)(u) of PMLA, proceeds of crime means any property derived or obtained directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. As per Section 2(1)(y) of PMLA, Scheduled offence means a) the offences specified under part A of the Schedule, or b) the offences specified under part B of the Schedule, if the total value involved in such offences is Rs.30 lakhs or more.

Scheduled offences
(i) Following offences are specified under the two schedules:Part A Certain offences under Sections 121 and 121A of the IPC, relating to waging war against the State. Certain offences under the NDPS Act 1985 relating to drug trafficking. Part B Certain offences under the IPC relating to murder, extortion, robbery, kidnapping for ransom, forgery and counterfeiting currency notes. Certain offences under the Arms Act, 1959 relating to illegal manufacture, trading and possession of fire arms. Certain offences under the Wild Life (Protection) Act, 1972 relating to illegal trade in flora and fauna. Certain offences under the Immoral Traffic (Prevention )Act, 1956 relating to prostitution. Certain offences under the Prevention of Corruption Act, 1988 relating to corruption by public servants.

(ii)
(i) (ii) (iii) (iv) (v)

The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 (PMLA) and Rules notified thereunder came into force from 1st July 2005. PMLA and the Rules notified thereunder impose obligations on banking companies financial institutions intermediaries of the securities market to maintain records furnish information verify identity of clients

Banking Company under PMLA

Banking Company under PMLA includes: All nationalized banks, private Indian banks and private foreign banks. All co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) cooperative banks. State Bank of India and its associates and subsidiaries. Regional Rural Banks.

Transactions of which record to be maintained

Cash transactions
more than rupees ten lakhs cash transactions integrally connected to each other

Counterfeit currency transactions

Suspicious transactions whether or not made in cash
Rule 3

Integrally connected cash transactions

Maintenance of records of transactions

valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds rupees ten lakh;

Furnishing of CTR
individual transactions below rupees fifty thousand may not be included;

Suspicious Transactions
Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith
gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or appears to be made in circumstances of unusual or unjustified complexity; or appears to have no economic rationale or bonafide purpose;
Rule 2(g)

Reasons for Suspicion for banking companies

Identity of client False identification documents Identification documents which could not be verified within reasonable time Accounts opened with names very close to other established business entities Background of client Suspicious background or links with known criminals Multiple accounts Large number of accounts having a common account holder, introducer or authorized signatory with no rationale Unexplained transfers between multiple accounts with no rationale Activity in accounts Unusual activity compared with past transactions Sudden activity in dormant accounts Activity inconsistent with what would be expected from declared business Nature of transactions Unusual or unjustified complexity No economic rationale or bonafide purpose Frequent purchases of drafts or other negotiable instruments with cash Nature of transactions inconsistent with what would be expected from declared business Value of transactions Value just under the reporting threshold amount in an apparent attempt to avoid reporting Value inconsistent with the clients apparent financial standing

Indicative List of Suspicious TransactionsTransactions Involving Large Amounts of Cash

(i) Exchanging an unusually large amount of small denomination notes for those of higher denomination;

(ii) Purchasing or selling of foreign currencies in substantial amounts by cash settlement despite the customer having an account with the bank; (iii) Frequent withdrawal of large amounts by means of cheques, including travellers cheques; (iv) Frequent withdrawal of large cash amounts that do not appear to be justified by the customers business activity;

Indicative List of Suspicious TransactionsTransactions Involving Large Amounts of Cash (v) Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad; (vi) Company transactions, both deposits and withdrawals, that are denominated by unusually large amounts of cash, rather than by way of debits and credits normally associated with the normal commercial operations of the company, e.g. cheques, letters of credit, bills of exchange etc.;

Indicative List of Suspicious Transactions- Transactions Involving Large

Amounts of Cash

(vii) Depositing cash by means of numerous credit slips by a customer such that the amount of each deposit is not substantial, but the total of which is substantial. (viii) All cash transactions, where counterfeit currency notes have been used and where any forgery of a valuable security / instrument has taken place.

Indicative List of Suspicious Transactions- Transactions which do not

make Economic Sense

(i) A customer having a large number of accounts with the same bank, with frequent transfers between different accounts; (ii) Transactions in which assets are withdrawn immediately after being deposited, unless the customers business activities furnish a plausible reason for immediate withdrawal.

Indicative List of Suspicious Transactions- Activities not consistent

with the Customers Business

(i) Corporate accounts where deposits or withdrawals are primarily in cash rather than cheques. (ii) Corporate accounts where deposits & withdrawals by cheque/ telegraphic transfers/foreign inward remittances/any other means are received from/made to sources apparently unconnected with the corporate business activity/dealings. (iii) Unusual applications for DD/TT/PO against cash.

Indicative List of Suspicious Transactions- Activities not consistent with the Customers Business

(iv) Accounts with large volume of credits through DD/TT/PO whereas the nature of business does not justify such credits. (v) Retail deposit of many cheques but rare withdrawals for daily operations.

Indicative List of Suspicious TransactionsAttempts to avoid Reporting/Record-keeping Requirements

(i) A customer who is reluctant to provide information needed for a mandatory report, to have the report filed or to proceed with a transaction after being informed that the report must be filed. (ii) Any individual or group that coerces/induces or attempts to coerce/induce a bank employee not to file any reports or any other forms. (iii) An account where there are several cash deposits/ withdrawals below a specified threshold level to a avoid filing of reports that may be necessary in case of transactions above the threshold level, as the customer intentionally splits the transaction into smaller amounts for the purpose of avoiding the threshold limit. .

Indicative List of Suspicious TransactionsUnusual Activities (i) An account of a customer who does not reside/have office near the branch even though there are bank branches near his residence/ office. (ii) A customer who often visits the safe deposit area immediately before making cash deposits, especially deposits just under the threshold level. (iii) Funds coming from the list of countries/ centers which are known for money laundering. Risk Categarisation of Countries.doc

Indicative List of Suspicious TransactionsCustomer who provides Insufficient or Suspicious Information (i) A customer/company who is reluctant to provide complete information regarding the purpose of the business, prior banking relationships, officers or directors, or its locations. (ii) A customer/company who is reluctant to reveal details about its activities or to provide financial statements. (iii) A customer who has no record of past or present employment but makes frequent large transactions.

Indicative List of Suspicious TransactionsCertain Suspicious Funds Transfer Activities

(i) Sending or receiving frequent or large volumes of remittances to/from countries outside India. (ii) Receiving large TT/DD remittances from various centers and remitting the consolidated amount to a different account/center on the same day leaving minimum balance in the account. (iii) Maintaining multiple accounts, transferring money among the accounts and using one account as a master account for wire/funds transfer.

Furnishing of information

Principal Officer to be appointed by reporting entity Information to be furnished to Director, FIU-IND

Cash Transaction Report
Within 15th day of the succeeding month

Suspicious Transaction Report

Within 7 days of arriving at a conclusion that any transaction is of suspicious nature Rule 7,8

Verification of Identity of Clients

Verify and maintain the record of:

Identity of client Address - current and permanent Nature of business Financial Status

Maintain records of the identity of clients for a period of ten years from the date of cessation of the transactions with the client.
Rule 9, 10

Authorities for enforcement of PMLA

Financial Intelligence Unit-India:

For matters relating to obligations of Reporting Entities

Directorate of Enforcement:
For matters relating to investigation and prosecution of money laundering offences

Background of FIU-IND

Set up vide Government of Indias Office Memorandum (O.M.) dated 18th November 2004
To coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.

Multi-disciplinary unit headed by a Director.

Definition of a FIU
A central, national agency responsible for receiving, (and as permitted, requesting) analysing and disseminating to the competent authorities, disclosures of financial information: (i) Concerning suspected proceeds of crime and potential financing of terrorism, or (ii) Required by national legislation or regulation, in order to combat money laundering and terrorist financing.

- Definition formalised by Egmont Group

Functions of FIU-IND
Collection of InformationAct as the central reception point for receiving Cash Transaction reports (CTRs) and Suspicious Transaction Reports (STRs) from various reporting entities. Analysis of Information Analyze received information to uncover patterns of transactions suggesting suspicion of money launderingand related crimes.

CONT
Sharing of Information Share information with national intelligence/ law enforcement agencies, regulatory authorities and foreign Financial Intelligence Units.Act as Central RepositoryEstablish and maintain national data base on cash transactions and suspicious transactions on the basis of reports received from reporting entities.

CONT
Coordination Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network. Research and Analysis Monitor and identify strategic key areas on money laundering trends, typologies and developments.

Technology in Anti-Money Laundering

Key Challenges
Compliance pressure vs customer relationships

Compliance at what cost ?

New remote channels bring anonymity & speed Customer data do we know enough ? We have the data how do we make sense of it? Manage data from multiple/ legacy applications Multiple locations, entities, financial institutions, transactions Leverage existing technology investments

Enabling Technologies for

Customer due diligence/ KYC
Mapping Behaviour

Detection
Taking action

Decision criteria

THANK YOU