By Kanika Dhingra Ankita Sanjay Singh Alka

What is Money Laundering?

y It is a process of making dirty money clean. y Money is moved around the financial system again and again in such manner

that its origin gets hidden. y Money generated from illegitimate source is converted into that derived from legitimate source

Concepts of Money laundering

 Is to conceal criminal activity associated with it, including crimes it generated

such as drug trafficking, tax evasion, corruption, extortion, circumventing regulations etc  Process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of criminal activities, thereby avoiding prosecution, conviction and confiscation of criminal funds(IBA definition)  Process by which dirty money appear clean or profits of criminal activities are made to appear legitimate.  Organized criminal groups use money laundering as a means to reinvest money.

 The main objective is to get the illegal funds back to the individual or group of

individuals who generated them  Financial intermediaries (banks, financial institutions) are used to change money gained from illegal businesses into acceptable and transferable units, turning illegal gain into legal tender

Money Laundering Process

Money laundering is a diverse and a complicated process that involves three independent steps that often occur simultaneously
Placement Layering Integration

Stage 1 - Placement
Physically disposing of cash derived from illegal activity. Funds are placed close to the underlying activity in the country where the funds originate. One way of accomplishing this is by placing criminal proceeds into traditional financial institutions or non financial institutions such as currency exchanges, casinos. launderer inserts the dirty money into a legitimate financial institution.

In the form of cash deposits. to report high value transactions. This is the riskiest stage of the ML process because large amounts of cash are pretty conspicuous and banks are required

Stage 2 - Layering
o Separating the proceeds of criminal activity from their source through the use

of layers of financial transactions.

o These layers are designed to hamper the audit trail, disguise the origin of funds

and provide anonymity

o They use shell companies, offshore banks or countries with no or less

regulation, a large business centre.

o involves sending the money through various financial transactions to change

its form and make it difficult to follow.

o o

ayering may consist of several bank to bank transfers Wire transfers between different accounts in different names in different countries Making deposit and withdrawals to continually vary the amount of money in the accounts Changing the moneys currency Purchasing high value items (boats, houses cars, diamonds) to change the form of money-making it hard to trace.

o o

Stage 3 - Integration
o Placing the laundered proceeds back into the economy in such a way that they

re-enter the financial system as apparently legitimate funds.

o The launderer may choose to invest in other centers. o Eg. False invoices for goods exported, domestic loan against a foreign deposit,

purchasing property, etc.

o At the integration stage the money re-enters the mainstream economy in legitimate looking

form it appears as a legal transaction. this may involves final bank transfer into an account of a local business in which the launderer is investing in exchange for a cut in the profits., a sale of a yacht bought during the layering stage. at this point the criminal can use the money without being caught. It is difficult to catch a launderer during the integration stage if there is no documentation during the previous stages
o Overseas banks o Money launderers often send money through various offshore accounts in countries that have

bank secrecy laws these countries allow anonymous transactions. A complex scheme may involve hundreds of bank transfers to and offshore banks .According to the international Monetary fund ,major offshore centers include Bahamas, Bahrain, Cayman islands, Hong Kong, Antilles, Panama, and Singapore (IMF)

Types of Money Laundering activities

Engaging in transactions involving property derived from criminal activity

Helping to conceal Origin or ownership of proceeds of criminal activity

Money Laundering

Handling funds used to finance terrorism

Structuring financial transactions to avoid reporting requirements

Common sources of money laundering

y Corruption y Fraud y Illegal trafficking of drugs, weapons, people y Contract killing, extortion, payment to political parties, politicians y Terrorism y smuggling

Techniques used by money launderers

1. deposit structuring/smurfing 2. Cash deposits followed by TT 3. Connected accounts 4. Payable through accounts 5. Bank drafts/cashiers cheques 6. Back to back loans 7. Remittance services/hawala 8. Credit /debit card 9. Internet banking 10.International trade & finance 11.Shell companies

12.Gold and diamond market 13.Politically exposed persons/ corruption 14.Charities/ non profit organizations 15.Dormant accounts

Indian Scenario/Initiatives Prevention of Money Laundering Act, 2002

 Under the PMLA 2002, rules were framed in 2005 & 2009  Setting up of the FIU-IND in 2004  Section 12 of the Act casts certain obligations on banking companies/Financial

Institutions/Intermediaries in regard to reporting of customer account information and preservation of records

 Maintenance of record of all cash transactions above Rs 10 lakhs  All series of cash transactions of value less than Rs 10 lakhs integrally connected if

they have taken place within a month (aggregate value above Rs 10 lakhs)

 All cash transactions here forged or counterfeit notes have been used.  All suspicious transactions made in cash or otherwise.

What KYC means?

y Making reasonable efforts to determine the true identity and y y y y

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

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

KYC DOES NOT MEAN

arbitrarily

Advantages of KYC norms

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 likelihood of banks becoming a vehicle for or 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

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

RBI KYC norms

x Appointment of a Principal Officer x To assess, monitor and control money laundering risks. x Receive information from branches and analyze information x The PO will be responsible for timely submission of CTR and STR to FIU-IND x Utmost confidentiality to be maintained while filing x Reports for all branches are filed in one mode manual and electronic x A summary of cash transaction report for the bank as whole be complied by

PO of the bank

COMPARATIVE ANALYSIS IN PUBLIC Vs PRIVATE BANKS

STATE BANK OF INDORE and AXIS BANK

Reserve Bank of India has been issuing guidelines in regard to Know Your Customer (KYC) standards to be followed by banks and measures to be taken in regard to Anti Money Laundering (AML).Although all banks have same KYC and AML Norms as per guidelines of RBI.
STATE BANK OF INDORE

The KYC Policy of the Bank has the following key elements: Customer Acceptance Policy Customer Identification Procedures Monitoring of Transactions and Risk Management

Customer Acceptance Policy Banks Customer Acceptance policy (CAP) lays down the criteria for acceptance of Customers. 1.No account is to be opened in anonymous or fictitious/benami name(s)/entity(ies) 2. Accept customers only after verifying their identity. 3.Classify customers into various risk categories and, based on risk perception, apply the acceptance criteria for each category of customers. Also, a profile of each customer will be prepared based on risk categorization 4.Documentation requirements and other information to be collected, as per PMLA and RBI guidelines/instructions, to be complied with. 5. Not to open an account or close an existing account where identity of the account holder cannot be verified and/or documents/information required could not be obtained/confirmed due to non-cooperation of the customer

6.Identity of a new customer to be checked so as to ensure that it does not match with any person with known criminal background or banned entities such as individual terrorists or terrorist organizations etc. 7. Implementation of CAP should not become too restrictive and result in denial of banking services to general public, especially those who are financially or socially disadvantaged. 8.The decision to open an account for Politically Exposed Person (PEP) should be taken at a senior level.

Customer Identification Procedures Customer identification requires identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information.

Identification data, as under, would be required to be obtained in respect of different classes of customers: 1. For customers that are natural persons: a) Address/location details b) Recent photograph 2. For customers that are legal persons: a) Legal status of the legal person/entity through proper and relevant Documents b) Verification that any person purporting to act on behalf of the legal person/entity is so authorized and identity of that person is established and Verified c) Understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person

The Customer Identification Procedures are to be carried out at the following stages: o While establishing a banking relationship; o When the bank feels it is necessary to obtain additional information from the existing customers based on the conduct or behaviour of the account. o Customer identification data (including photograph/s) should be periodically updated after the account is opened. Such verification should be done atleast once in five years in case of low risk category customers and not less than once in two years in case of high and medium risk customers. o Customer Identification will also be carried out in respect of non-account holders approaching bank for high value one-off transaction as well as any person or entity connected with a financial transaction which can pose significant reputational or other risks to the Bank.

Monitoring and Reporting of Transactions Monitoring of transactions will be conducted taking into consideration the risk profile of the account. Special attention will be paid to all complex, unusually large transactions and all unusual patterns, which have no apparent economic or visible lawful purpose. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer will be subjected to detailed scrutiny. Risk Management While the Bank has adopted a risk-based approach to the implementation of this Policy, it is necessary to establish appropriate framework covering proper management oversight, systems, controls and other related matters.

Obligations under Prevention of Money Laundering (PML) Act 2002 Section 12 of PMLA places certain obligations on every banking company, financial institution and intermediary, which include (i) Maintaining a record of prescribed transactions (ii) Furnishing information of prescribed transactions to the specified Authority (iii) Verifying and maintaining records of the identity of its clients (iv) Preserving records in respect of (i), (ii) and (iii) above for a period of ten years from the date of cessation of transactions with the clients.

AXIS BANK The KYC guidelines of RBI mandate banks to collect three proofs from their customers. They are 1. Photograph 2. Proof of identity 3. Proof of address Accordingly, Axis Bank has framed its KYC procedure according to which, a photograph and documentary proof of personal identification and address proof are required to be provided. Our KYC procedure specifies certain commonly available documents as proof of personal identification and address proof, so as to not cause inconvenience to those intending to open bank accounts in our Bank.

KYC will be carried out at the following stages: Opening a new account Opening a subsequent account where documents as per current KYC standards not been submitted while opening the initial account Opening a Locker Facility where these documents are not available with the bank for all the Locker facility holders When the bank feels it necessary to obtain additional information from existing customers based on conduct of the account When there are changes to signatories, mandate holders, beneficial owners etc KYC will also be carried out in respect of non-account holders approaching the bank for high value one-off transactions.

Indian Regulations on Prevention of Money Laundering A customer must know Under the Prevention of Money Laundering Act (PMLA) 2002, and the Rules thereof, the banks are required to report: a) All cash transactions (deposits and withdrawals) of the value of more than Rupees Ten Lakhs or equivalent thereof in foreign currency; b) All series of cash transactions integrally connected to each other, which have been valued below Rupees Ten Lakhs 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 Lakhs. c) All cash transactions where forged or counterfeit currency notes or Bank notes have been used as genuine and where any forgery of a valuable security has taken place; d) All suspicious transactions whether or note made in cash and by way of as mentioned in the Rules.

Under regulatory instructions issued by the Reserve Bank of India in consultation with the Government of India and Indian Banks Association a) Demand drafts, mail transfers and travelers cheques for Rs. 50,000/- and above can be issued by banks only by debit to the customers account or against cheque or other instrument tendered by the purchaser and not against cash payment; b) Demand drafts, mail transfers and travelers cheques for Rs. 50,000/- and above can be paid by banks only by credit to the customers account or through other banking channels and not in cash.

RBI imposes penalty on ICICI Bank, Standard Chartered Bank Mumbai, July 30, (PTI):

DECCAN HERALD

The Reserve Bank today imposed a penalty of Rs five lakh on private sector lender ICICI Bank for violating Know-Your Customer norms, and the same amount on Standard Chartered Bank for not providing information on time about its foreign currency loan facility. "The RBI has imposed a penalty of Rs 5 lakh on ICICI Bank Ltd... for violation of the guidelines on Know Your Customer (KYC)/Anti Money Laundering (AML) standards," the central bank said in a statement. On Standard Chartered Bank, the RBI said the lender did not furnish, within stipulated time, information to the central bank about a foreign currency loan facility it arranged for an offshore special purpose vehicle. Earlier, the RBI had issued show cause notices to the both the banks in response to which they had submitted written replies. RBI said that on careful examination of the banks' replies and the oral submissions made by them, it was found that the violations were "conclusively established" and the penalties accordingly imposed. Reactions from both the banks on the RBI action were awaited.