BASICS OF AML & KYC

What is Money Laundering?

It is a process of making dirty money

clean. Money is moved around the financial system again and again in such manner that its origin gets hidden. Money generated from illegitimate source is converted into that derived from legitimate source

Money Laundering Process

PLACEMENT-

entry of funds in banking system LAYERING distancing of funds from point of entry INTEGRATION usage of funds

some ways of ML
Number

of cash deposits in same a/c / numerous accounts Increase in turnover in dormant a/c Receipt & payment of cash from/to unrelated to business/relationship Reluctance in providing fictitious/ minimal /normal information Deposit of third party cheques Sudden increase in cash deposit in a/c from abroad

Financial Institution used as conduit

By Offshore shell corporations By Trusts located at multiple jurisdiction with banking secrecy and corporate secrecy clauses By Directors, shareholders, authorized signatories Banking secrecy- delay in investigation no direct information corporate secrecy- ownership information is not easily revealed- (FATF- 40 -2003 ?)

AML & CFT* PRACTICES

POLICIES PROCEDURES CONTROLS COMPLIANCES TRAINING INTERNAL AUDIT

*combating financing of terrorism

RISK BASED PROCESSES

Use of AML SOFTWARE

Identification of high risk areas such as: cash intensive businesses, import Export businesses, Politically exposed persons (PEPs), correspondent banking, non face to face businesses, charitable institutions Aim: identification of beneficial ownership of various accounts

Monitoring of accounts
Linking

of multiple accounts in multiple jurisdictions with number of people. Comparing account activity against transaction history and comparison with peer accounts <<<Tools>>> AML transaction trend monitoring software + Link Analysis software + good data base & name recognition software

AML skills development

1. 2. 3. 4.

Customer information- building up to date KYC design Training & Awareness Flagging high risk accounts Transaction monitoring

WAYS AVAILABLE FOR EXCHANGE OF INFORAMTION

1. Access of information from countries where Mutual Legal Assistance Treaty is signed 2. Financial Intelligence Unit( FIU) MOU 3. Supervisory gateway

Critical view of AML Programme

Compliance overhead No value addition Delivers little Contributes little to bottom line Increased compliance cost Excessive regulation Competitive disadvantage Case of misplaced energies

Bank officers- dos & donts

Exercise

constant vigilance right from opening of new accounts Know your customer & know your colleagues Separate legitimate business & illegitimate /irregular/ suspicious business Always think of banks reputation/clean image Develop risk aware culture- a good customer today may not be good tomorrow Do not exercise willful blindness Involve in public awareness of KYC issues

What KYC means?

Customer? One who maintains an account, establishes business relationship, on whos behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction Your? Who should know? Branch manager, audit officer, monitoring officials, PO Know? What you should know? True identity and beneficial ownership of the accounts Permanent address, registered & administrative address

What KYC means?

Making reasonable efforts to determine

the true identity and beneficial ownership of accounts; Sources of funds Nature of customers business What constitutes reasonable account activity? Who your customers customer are?

KYC DOES NOT MEAN

Denial of Service to the Common Person Intrusive Behaviour Use of information for cross selling Harassment of customers- threatening to

close down the accounts arbitrarily

Advantages of KYC norms

1.

2.

Sound KYC procedures have particular relevance to the safety and soundness of banks, in that: They help to protect banks reputation and the integrity of banking systems by reducing the likelyhood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage; They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities)

Core elements of KYC

Customer Acceptance Policy Customer Identification Procedure-

Customer Profile Risk classification of accounts- risk based approach Risk Management Ongoing monitoring of account activity Reporting of cash and suspicious transactions

Measures to deter money laundering

Board and management oversight of AML risks Appointment a senior executive as principal officer with adequate authority and resources at his command Systems and controls to identify, assess & manage the money laundering risks Make a report to the Board on the operation and effectiveness of systems and control Appropriate documentation of risk management policies, their application and risk profiles

Measures to deter money laundering

Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile Screening of employees before hiring and of those who have access to sensitive information Appropriate quality training to staff Quick and timely reporting of suspicious transactions

SUSPICIOUS TRANACTION
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;

Suspicious Transactions

Providing misleading information / information not easily verifiable while opening an Account Large cash withdrawals from: a dormant or inactive account or account with unexpected large credit from abroad Sudden increase in cash deposits of an individual with no justification Employees leading lavish lifestyles that do not match their known income sources

Suspicious Transactions
Large cash deposits into same account Substantial increase in turnover in a

dormant account Receipt or payment of large cash sums with no obvious purpose or relationship to Account holder / his business Reluctance to provide normal information when opening an Account or providing minimal or fictitious information

Role of cash in money laundering

Disguise the audit trail Provide anonymity Concealing true ownership and origin

of money Control over money Changing the form of money

DUE DATES
Cash Transaction Report

by 15th of the succeeding month.

Suspicious Transaction Report

within 7 days of arriving at a conclusion that any transaction is of suspicious nature.

DUE DATES
Cash Transaction Report

by 15th of the succeeding month.

Suspicious Transaction Report

within 7 days of arriving at a conclusion that any transaction is of suspicious nature.

Summary: Prevention of Money Laundering

Observing Rules for Bankers

Compliance with Laws

Money Laundering Prevention

Customer due Diligence

Identifying Irregular / Suspicious Transactions

Thank You