Anti Money Laundering (AML)
Learnings from Banks
Compliance Group-AML
July 16, 2010
Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
2
Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
3
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?
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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
money
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Legal/Clean Money
Stages of Money Laundering
A/c 3
A/c 6
A/c 4
A/c 7
A/c 1
A/c 9
A/c 2
A/c 5
Placement
Investment
A/c 8
Layering
Placement Stage - easy to detect start of ML
Layering Stage - Relatively Difficult to detect
Integration Stage - Almost impossible to detect
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Integration
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
Motive
Profit
Source of funds Il egal
Volume of funds Large
Modus operandi Front Companies
Final effect
Drain of the country's resources
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Terrorist Financing
Ideological
Legal + Il egal
Small
Charities + Individuals
Acts of Terror
The AML Transition in India for Banks
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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
Prevention of Money Laundering Act,2002 (PMLA)
Prevention of Money Laundering Rules
Reporting Agencies
Regulatory Agencies
RBI
Master
Circular
on
KYC/AML/CFT/
Banking Company
RBI
Obligation
of
Banks
under
PMLA,
2002
Financial Institutions
IRDA
Intermediaries
SEBI
Regulatory Agencies
RBI
Enforcement Agencies
SEBI
IRDA
Enforcement Agencies
IB
FIU-IND
RAW
IB
REIC
CBDT-DGIT/CCIT
RAW
CBEC-DGDRI/DGCEI
REIC
CBDT-DGIT/CCIT
ED
CBEC-DGDRI/DGCEI
EOW of Police
EOW of CBI
ED
EOW of Police
EOW of CBI
Foreign FIUs
Foreign FIUs
Scheduled Offences included in PMLA
2009
Drug
Trafficking
Smuggling
(arms, people,
goods)
Kidnapping
Criminal
Activities
Extortion
Bribery
& Corruption
Prostitution
Terrorist Act
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Counterfeiting
& Forgery
Gambling,
Robbery,
Cheating
Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
12
AML approach-3D Concept
Deterring
Adherence to KYC Norms
Activity Indicators
Detecting
Transaction Monitoring
Disrupting
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Reporting transactions
Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
14
Risk Comparison between Insurance &
Banking
CIP/ ML/ TF Risk Comparison
3
2
Insurance
Banking
1
0
C us tom er
Identific ation
0-1: Low Risk
1-2: Medium Risk
2-3: High Risk
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Money
Laundering
T errorist
F inanc ing
Risk Comparison between Banking &
Others
CTR/ STR/ CCR comparison
100
90
80
70
60
CTRs
STRs
CCRs
50
40
30
20
10
0
Banking
Others
Figures in percentage for the FY 2008-09
(Source: FIU Annual Report)
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Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
17
Elements of AML Framework in
Banks
Know Your
Customer
(KYC)
Enterprise Wide AML
Framework
Transaction
Monitoring
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
risk
Identification of unusual transactions
Confirmation of Suspicion
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
Banks V/s Insurance Companies
Controls &ofChecks
Elements
AML Framework in Banks
Summary
21
Summary
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Appointment of Principal Officer
 Creation of KYC/ AML/ CFT framework
 Understanding
the
industry
&
product
vulnerabilities to ML/ TF
 Awareness about the various typologies related to
the products
 Timely & effective reporting to FIU-IND
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Thank you
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