Content

• Concepts

• Process how it happens

• Basis for the requirement to have a Compliance Officer

Case

• Case Studies -Abroad

• Initiatives taken

Scenario-India

• KYC (Know your customer)

• Case Studies

PML(Prevention of Money Laundering) Act, Sec.3 of 2002 defines ‘money laundering’ as:

“Anyone who, directly or indirectly, tries to deliver or knowingly aid or knowingly is part or is actually involved in any process or activity connected with the products of the crime and its projection as pure property must be guilty of the offense of laundering the money”

Is to conceal criminal activities related to it, including the crimes that it has generated as the traffic of narcotics, tax evasion, corruption, extortion, circumvent the regulations

etc

The process by which criminals seek to conceal the origin and ownership of the products of criminal activities, in order to avoid prosecution, conviction and confiscation of funds of

criminal origin(IBA definition)

The process by which the dirty money appear clean or profits of criminal activities are made to the appearance of

legitimacy.

Concepts of Money laundering

Organized criminal groups use the money laundering as a means to reinvest the money.

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

generated.

Financial intermediaries (banks, financial institutions) are used to change the money

acquired from illegal businesses in acceptable and transferable units, running illicit gain in legal course

Concepts - contd..

Concepts - contd..

AML generally refers to

‘washing’ of the proceeds

or profits generated

from:-

Drug trafficking

smugglingFinancial

frauds

Arms, Antique and

gold smuggling

Illegal sale of wild life products

and others.

Prostitution rings

Corruption

Concepts of Money laundering

For the “average” criminal: money laundering is theprocess by which the proceeds of criminal activity are

made to appear legitimate

For the “average” Terrorist: money laundering is theprocess by which money used to fund terrorist activity ismoved without revealing its true source, destination or

purpose

For “average” tax evader: money laundering is theprocess of spending money without leaving a trail showing

who owns it

Concepts - contd..

2%-5% of Global GDP is laundered every year $800 Billion to $2 Trillion.

Financial powers

Most wanted criminals

Use the nexus pool of professionals to create legal structure/ entities which act as a front

Money laundering is diversified and a complicated process that involves three stages independent who often occur simultaneously

Money Laundering Process

Step 1 - Placement

Physically the elimination of species from illegal activities.

Funds are placed near the underlying activity in the countries where the funds come from.

One of the ways to do this is by placing the proceeds of criminal activities in traditional

financial institutions or non financial institutions such as the offices of exchange, casinos.

Money Launderer inserts the dirty money in a financial institution is legitimate.

In the form of cash deposits.

To report high transactions.

This step is the most risky of the process of money laundering because large quantities of species are fairly visible and banks are required

The placement

Step 2 - Layering

Separate the product of a criminal activity of their source through the use

of layers of financial transactions.

These layers are designed to impede the audit trail, disguise the origin of

funds and provide the anonymity

They use of shell corporations, offshore banks or countries without or with less

regulation, a large business center.

Involves the sending of money through various financial operations to change its form and make it difficult to follow.

The Layering can be comprised of several transfers from bank to bank

Electronic funds transfers between different accounts in different names in different countries

Make the deposits and withdrawals of continually vary the amount of money in the accounts

Change the currency of the money

The purchase of high value items (cars, boats, houses diamonds) to change the form of the money-making it difficult to trace.

Step 2 - Layering

Place the laundered proceeds in the economy in such a way that they return to the financial

system as a fund apparently legitimate.

The launderer may choose to invest in other centers.

Eg. False invoices for the goods exported, ready against a deposit abroad, the purchase

of properties, etc.

Step 3 - Integration

At the integration stage the money returned to mainstream economy in legitimate form it appears as a legal operation. This may involve the bank transfer final on an account of a local company in which the launderer invests in exchange for a reduction of profits., the sale of a yacht purchased during the phase of the stacking. At this stage, the criminal can use of the money without be taken. It is difficult to catch a launderer during the phase of

integration is there is no documentation during the previous steps

Banks abroad

Money launderers often send money through various offshore accounts in the countries which have laws protecting the Banking Secrecy -These countries allow anonymous

transactions. A complex scheme can involve hundreds of bank transfers and offshore banks .according to the International Monetary Fund ,"offshore centers important iclude

Bahamas, Bahrain, Hong Kong, the Cayman Islands, the Netherlands Antilles, Panama and Singapore (IMF)

Step 3 - Integration

Types/Techniques

Debit/Credit Cards

Deposit structuring (or smurfing)

Connected accounts –Connected to each other

Alternative Remittance services –the hawala

routeLoan back arrangements

Forex money changers

Investment banking and the securities

sectors

Insurance and personal investment products

Correspondent banking

Lawyers, Accountants and other intermediaries

Mis-use of non-profit organizations

Use of “Payable through accounts” by international

launderers

Money laundering through electronic systems/cross-border activities

• Organized criminals can break in the electronic security systems more easily and at lower costs by forcing the employees who have a legitimate access to the system to provide them with passwords.

Computers/electronic systems can be used as a tool to commit illegal or criminal activities .

• Money launderers seek the countries where there are highly educated and trained of Bank staff on a low salary of the corrupt.

Easier to corrupt an individual in a country

where the average salary is low.

Legal Sources of financing of terrorist activities:

Collection of union dues

Sale of publications

Social cultural events

The solicitation of door to door, within the community

Appeal to the wealthiest members of the community

Donation of a part of the personal savings

Illegal sources

Kidnapping and extortion

The Smuggling

Of fraud, including fraud by credit card

Misuse of non-profit organizations and charities

Fraud, theft and burglary and

The drug trafficking

The use of shell corporations by the lawyers

Involvement of distinguished attorney and personalities

Responsible for the fixed costs for the money laundering of funds

The funds of customers have been transferred to his son offshore accounts

Moved to the destinations of the Caribbean and USA

Credit cards issued in false names to help customers remove the money through ATMS

The small banks and NBFCs

The Private Banking assistance provided by the structure of assistance to employees and the smurfs to recycle funds in the bank accounts, usually

by deposits and of withdrawal heavily from the accounting. A few months before the audit of the activity would stop with a small balance.

Done To avoid the suspicion and the Disclosure

Arrangements of ready a technical- the launderer usually transfers the product of illegal activities to another country- removal then the product

as security Or g'tee for a bank loan- and then returned to original country -gives the appearance of a genuine loan.

The accounts of transit

• They are deposits to view the accounts required to the SIF by foreign banks. The foreign banks channel all of the deposits and checks of its customers in an account at the local bank. The foreign customers have signing authority on the account as the holders of a secondary account and could conduct international banking transactions-normal defeats KYC standards.

Case Study-Accounting splits

Services provided by many professionals such as accountants, lawyers, real estate agents are also used as potential mechanisms to launder money.

Purchase of truck parts, has reduced the parts in countries sold for a profit. Has also purchased real property.

The purchase of assets

Transferred the product abroad. Structured transactions

Wire Transfer

Stored in the office of the Accountant. Accountant of deposits split. Open Trust/personal accounts

Accounting Firm

Regular Deposit of criminal proceeds of the sale of the drug receipts issued.

Two drug traffickers

Case Study-Insurance policies and real estate

Two European nationals

Purchase of Life insurance policies (Total value Rs 1,60,80,000)

Payment of premium

Policies put up as collateral (provided by a leasing company)

The offenders were brothers who were involved in the illegal export/import of classic cars

Non banking institutions could also become conduits for money laundering.

Reports/facts on the Laundering of Money

Approximate estimate - 2 to 5 % of GDP (1996) $600 billion to 2 trillion dollars each year.

The main sources of income of illicit drugs -only more important generator of illegal funds

The banking sector- smurfing common

The shell companies-tool commonly used by lawyers and accountants

The small banks and NBFCs used as assistance channels private banking to the assistance given in the restructuring of the accounts-

Impact - on the economy

Unpredictable changes in the demand for currency

The risks to the banking system - the risk of harm to the reputation, legal risk, operational risk, the risk of concentration.

The increase in the volatility of international capital flows

The increase in the volatility of exchange rates due to unforeseen circumstances of transfers of property. transversal

Economic and political influence of criminals may modify the social systems, the ethical standards

Crime can infiltrate financial organizations, officials/ Governments

Macro-economic situations

Money laundering poses a serious threat to the international community and financial systems of the countries of the world

AML – Knowledge Check

KYC – Know your Customer

Know Your Customer Policy:

to screen Customers andSuppliers

establish and enforce standards and steps to verify and document Customer and Supplier information, including

identity and verify address of both

documentation verifying personal identity

documentation verifying corporate identity

check the OFAC (“Terrorist”) List

RBI KYC standards

Appointment of a chief agent

In order to assess, monitor and control the risks of money laundering.

Receive information from branches and analyze information

The highest confidentiality to be maintained during the deposit

Reports for all branches are filed in a mode -manual and electronic

A summary report of cash transaction for the Bank as a whole are met by the bank

Benefits of standards KYC

Sound KYC procedures have a particular relevance to the safety and soundness of banks, in that:

- They help to protect the reputation of the banks and the integrity of the banking systems in reducing the likelihood of banks for becoming an

instrument or a victim of financial crime and the suffering; the damage to the correlative reputation

- They provide an essential part of the system of sound risk management (base of identification, to limit and control the exposures to risks of assets

and liabilities)

KYC - Direction

Customer?

The one who maintains an account, establishes the business relationship, on who's name account is maintained, the

recipient of accounts held by intermediaries, and the one who carries potential risk through a transaction.

Your? Who should know?- Director of Branch, Audit Officer, official

surveillance, PO

Know?What you need to know?

- true identity and the effective property of

accounts

- Permanent address, registered and

Administrative address

KYC - Direction

Make reasonable efforts to determine the true identity and actual ownership of the accounts;

Sources of Funds

Nature of the customers

What constitutes the activity of reasonable account?

Who is the client of your customer?

Elements of KYC

Policy on the acceptance by the customer

Procedure for client identification- Profile of the customer

Risk Classification of Accounts -- approach based on risk

The management of the risks

The continuous monitoring of the activity of the account

The Declaration of species and suspicious transactions

High risk clients

Non-bank financial institutions ( money transmitters, check the cashiers, changers with whole share, sellers of stored value cards, brokers in Security & Resellers, etc. )

Travel Agencies / Property Dealers/ builders

And companies of expert professional advice

The exporters or importers of goods and services

Activity requiring a lot of liquidity e.g., retail stores, restaurants, casinos, second hand car dealers, etc.

Off-shore companies

Non-profit organizations eg. Charities

High risk products

EFTs:

Both national and cross-border wire transfers carry the potential risks of money laundering

Payment Gateways facilitate electronic transfers for the customers of the banks located anywhere in the world

Check if it is regulated on the place of incorporation

Insist on the complete information on the payer with wire

Make the payment to the beneficiary through Account or DD

Keep a record of the transaction

Electronic banking services, which includes the services offered by the Internet, credit cards.

The relations of private bank

The correspondent banking relationships

KYC – Know you Customer!

Measures to discourage the ML

Council and the monitoring of the management of the risks AML

An appointment a member of the senior management as main agent with appropriate powers and resources at his command

Systems, Orders & Documentation - identify, assess and manage the risks of money laundering

Make a report to the Council on the operation and effectiveness of the systems and the control

Creating client profiles

Screening of employees before hiring and of those who have access to sensitive information

The quality of the appropriate training to staff

Fast and timely reports of suspicious transactions

Suspicious Transactions – FIU (financial Intelligence Unit)-IND

A transaction if yes or no made in cash to a person acting in good faith.

Gives birth to a reasonable ground to suspect that he may be the proceeds of crime

No economic justification or bonafide Purpose

The identity of the customer

False Identification of Documents

Exhibit of identity cannot be verified in a reasonable period of time

The accounts opened with names very close to those of other companies already established

Customer History

Links with the known criminals

Suspicious Transactions - FIU-IND

Multiple Accounts

The transfer between the accounts of unexplained no justification

Unusual activity compared with past operations

Sudden activity in the Inactive Accounts

Activity incompatible with what he must wait for activity declared

Frequent purchase of drafts in cash

Categories of financial intermediaries -financial brokers. Merchant bankers, Portfolio Manager

Large sums of money to be transferred abroad for Payment

Reports to the market rate.

FIU Directions

Only the banks and other financial institutions are required to report suspicious transactions regularly to the financial intelligence unit established under the authority of the Department of Finance.

Such transactions are transmitted by the FIU to the law enforcement agencies of action after a careful review.

Financial intermediaries as real money changer, suppliers of money transfer services, such as Western Union and payment gateways

International, including VISA and MasterCard cards are brought under the amended version of the MLPA.

The India of its international obligations and empower the direction of application of the Act to search for the premises immediately after that the offenses are committed and the police have filed a report

IPO scam - India

Manipulation of primary market by donors and actors in the market by using fictitious names.

The only person authorized to operate all of the accounts. The person was also director in all societies

Current accounts opened in different companies on the same day in the same bank branch

The failure to identify the identity and address of all directors of corporations

Identity using different spellings of disguised for the same name in different businesses.

The presentations, nor obtained

Risk profiles not performed

Objective for the opening of a large number of accounts opened in the name of a large number of holders of joint account not interrogated

Transfer of huge funds from companies account for individuals which account was used to invest in the IPO

Poor monitoring and reporting system

Operational deficiencies

Factors that have facilitated the IPO scam are -

The presentations not obtained

Photographs not obtained

Failure to independently verify the identity and address of all the holders of a joint account

Signatures not taken in the presence of BANK REPRESENTATIVE

Identity Administration/ Address Not Verified

Customer due diligence carried out by a subsidiary

Take Away till now…

SATYAM - number

The direction of application of the Act has registered a complaint against Satyam Computer and its president-founder contaminated Ramalinga Raju

for alleged B the laundering of money.

The ED sources alleged that Raju had misappropriated funds from Satyam in the purchase of nearly 50 plots in Qutbullahpur Medchal and near

Hyderabad

The ED has alleged that several hundreds of crores rupees had been diverted from the Satyam Computer Accounts and had been invested in

the purchase of the land and other infrastructure Maytas.

The Directorate will go through the offers of the computer society and check their authenticity including payments made to acquire companies

abroad.

The ED will also send a team to a few countries to investigate and obtain documents of bank accounts opened In violation of the Indian laws

The high risk areas of AML

High-risk countries

The drug-producing countries

Countries with high levels of corruption

Countries linked to the financing of

terrorism

High risk clients

The private money transmitters

The money changers

Real Estate Brokers

The casinos, gambling held

Non-profit organizations -

Charities

Services to High Risk

Wire Transfers

The Private Banking

Correspondent banking

Electronic banking services-internet,

Credit/Debit Cards

Risk Factors

Vulnerabilities

• The Entities may not be regulated

• The anonymity of the client(Secret)

• No relationship of face to face

• Anonymous funding(in the form of promissory notes)

• Cross-border transfers

• Access to cash on a global scale through ATMS

Possible mitigation measures

• The verification of the identity of clients

• Limit the options of funding

• Limit the value of the card

• Monitor transactions

• Reporting of Suspicious Activity

• No direct cash by the ATM

Advise customers

• The Bank - Legislative Audit (Long Form Audit Report)

• Concurrent audit

• KYC and AML checks

• DP (depository Participant) audits as by SEBI Guidelines

• Audit of the broker in stock by SEBI Guidelines

Audits -

Thank youHave a Safe and Secured Financial

Transaction.