Anti Money Laundering (AML) Learnings from Banks

Compliance Group-AMLJuly 16, 2010

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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Know Your Customer (KYC) Reserve Bank of India (RBI) circular on AML/ KYC

states:

“The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently”

Banks should frame their KYC policies incorporating the following four key elements:

a) Customer Acceptance Policy;

b) Customer Identification Procedures;

c) Monitoring of Transactions; and

d) Risk Management.

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What is Money Laundering? Section 3 of the Prevention of Money Laundering Act

(PMLA), 2002 defines the offence of money laundering as under:

“ 3. 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”.

'Money Laundering' is the process by which illegal funds and assets are converted into legitimate funds and assets

The International monetary fund in 1996 estimated per year laundering volume between USD 600 bn and USD 1.5 tn.Illegal/ Dirty

moneyLegal/Clean Money

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Stages of Money Laundering

Placement Stage - easy to detect start of MLLayering Stage - Relatively Difficult to detectIntegration Stage - Almost impossible to detect

Placement Layering Integration

A/c 1

A/c 2

A/c 5

A/c 4

A/c 3

A/c 8

A/c 7

A/c 6

A/c 9

Investment

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What is Terrorist Financing?

The United Nations International Convention for the Suppression of the Financing of Terrorism broadly defines an act of terror as:

a) An act which constitutes an offence within the scope of and as defined in one of the treaties listed by the United Nations (UN); or

b) Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organisation to do or to abstain from doing any act.

The act of financing such an act of terror can be termed as Terrorist Financing.

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Money Laundering V/s Terrorist Financing

Money Laundering Terrorist FinancingMotive Profit IdeologicalSource of funds Illegal Legal + IllegalVolume of funds Large SmallModus operandi Front Companies Charities + IndividualsFinal effect Drain of the country's resources Acts of Terror

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The AML Transition in India for Banks August 16, 2002 - The Reserve Bank of India (RBI)

released its first circular on “Guidelines on "Know Your Customer" norms and “Cash transactions”

January 17, 2003 – Prevention of Money Laundering Act (PMLA) published in the Gazette

November 24, 2004 - The first set of comprehensive guidelines on 'Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards issued

July 1, 2005 – PMLA Rules November 27, 2006 – India becomes an 'observer' at

the Financial Action Task Force (FATF) March 6, 2009 – Amendment to PMLA, 2002 November 12, 2009 – Amendment to PMLA Rules,

2005 June 25, 2010 – India becomes a member of the FATF

AML framework in India

CBDT-DGIT/CCITCBEC-DGDRI/DGCEIED

REIC

RAW

IB

EOW of CBI

EOW of Police

Enforcement Agencies

RBI

SEBI

IRDA

Regulatory Agencies

Banking CompanyFinancial InstitutionsIntermediaries

Reporting Agencies

Foreign FIUs

CBDT-DGIT/CCIT

CBEC-DGDRI/DGCEI

ED

REIC

RAW

IB

EOW of CBI

EOW of Police

Enforcement Agencies

RBI

SEBI

IRDA

Regulatory Agencies

Foreign FIUs

Prevention of Money Laundering Act,2002 (PMLA)Prevention of Money Laundering Rules

RBI Master Circular on KYC/AML/CFT/Obligation of Banks under PMLA, 2002

FIU-IND

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Scheduled Offences included in PMLA 2009

Kidnapping

Criminal Activities

Terrorist Act

Gambling, Robbery, Cheating

Extortion

Smuggling(arms, people,

goods)

Prostitution

Counterfeiting & Forgery

Bribery & Corruption

Drug Trafficking

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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AML approach-3D ConceptDeterring Adherence to KYC Norms

DetectingActivity Indicators

Transaction Monitoring

Disrupting Reporting transactions

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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Risk Comparison between Insurance & Banking

0

1

2

3CIP/ ML/ TF Risk Comparison

Insurance

Banking

0-1: Low Risk1-2: Medium Risk2-3: High Risk

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Risk Comparison between Banking & Others

Figures in percentage for the FY 2008-09 (Source: FIU Annual Report)

Banking Others

0

20

40

60

80

100

120

CTR/ STR/ CCR comparison

CTRs

STRs

CCRs

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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Enterprise - Wide AML

Framework

Elements of AML Framework in Banks

Enterprise - Wide AML

Framework

Know Your Customer

(KYC)

Due diligence measures•Basic •Enhanced

Centralised Account Opening Centers

Name Screening•Account opening stage•Legacy customers•Screening of Cross Border Transactions

Performed on the basis of pre defined rules based on product , customer and transaction riskIdentification of unusual transactionsConfirmation of Suspicion

Transaction

Monitoring

Training

FIU Reporting*

Regulatory Interface

Updates to Senior Mgmt

Audit

* Includes STR, CTR, CCR, NPOR

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Typologies observed Large value and volume of cash

deposits followed by immediate RTGS payment or transfer.

Large value of RTGS or transfer followed by immediate withdrawal/ transfers.

Issuing large number of cheques.Cash deposits across various branches

followed by withdrawals, transfer.Frequent closure and subsequent

opening of accounts.Sudden activity in a dormant account.

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Typologies observed ...contd High number of debit and credits by way

of small value cheques.Large value inward remittance followed by

cash withdrawals.Inward remittance to one account followed

by small value transfers to multiple accounts

Inward remittance from a high risk country followed by cash withdrawal from a third party bank ATM located in a sensitive area

Deposit and withdrawal of cash from multiple locations in one account all being non base branches/ ATMs

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Agenda

KYC/ AML/ CFT Overview

The 3D approach

Controls & Checks

Banks V/s Insurance Companies

Elements of AML Framework in Banks

Summary

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Summary

Appointment of Principal OfficerCreation of KYC/ AML/ CFT frameworkUnderstanding the industry & product

vulnerabilities to ML/ TFAwareness about the various typologies

related to the productsTimely & effective reporting to FIU-IND

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Thank you