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Anti-Money Laundering and KYC

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 Anti Money Laundering

Agenda

Money Laundering

Anti Money Laundering

Hawala and Terrorist Financing

KYC, Technologies and Vendors

Regulations

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2
1 Money Laundering
 Anti Money Laundering

History & Origin

“Lords of the Rim” by Sterling Seagrave

In USA, prohibition and a restriction on gambling.

Used for first time after Watergate scandal in 1970 and then was
recognized internationally

"Money laundering is called what it is because that perfectly describes

what takes place - illegal, or dirty, money is put through a cycle of
transactions, or washed, so that it comes out the other end as legal, or
clean, money.”

TCS Business Domain Academy

 Anti Money Laundering

Money Laundering

Money Laundering involves taking criminal proceeds and disguising their

illegal source in anticipation of using the criminal proceeds (illegal arms sales,
narcotics trafficking, smuggling, bribery, embezzlement etc. ,) to perform other activities.

Simply put – “Process of making dirty money look clean”

Why? – Hide Wealth, Evade Taxes, Finance for illegal activities etc.,

Economic & Social Consequences – Finances Terrorism, Expands

Crime and Corruption, Economic Distortion and Instability, Loss of Tax
Revenue, Damage to Reputation, Undermining the Legitimate Private
Sector, Social Costs

TCS Business Domain Academy

 Anti Money Laundering

The United Nations 2000 Convention Against Transnational Organized Crime,

also known as the “Palermo Convention,” defines money laundering as:

The conversion or transfer of property, knowing it is derived from a criminal

offense, for the purpose of concealing or disguising its illicit origin or of
assisting any person who is involved in the commission of the crime to evade
the legal consequences of his actions.

The concealment or disguising of the true nature, source, location, disposition,

movement, rights with respect to, or ownership of property knowing that it is
derived from a criminal offense.

The acquisition, possession or use of property, knowing at the time of its

receipt that it was derived from a criminal offense or from participation in a
crime.
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 Anti Money Laundering

Sectors affected by money laundering

The largest portion of laundered funds are processed through banks. This is
largely due to the fact that banks are often the first stop in a multi-tiered
laundering scheme

Schemes targeting insurance companies are a growth sector, now accounting

Mone y La unde ring by Industry Se ctor
for close to 10% of activity Insuranc e
Firms
9% Banks
Credit 55%
Cards
5%
Money
Services
4%
Brokerage
Source: Celent
&
Investm ent
Firm s
27%

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 Anti Money Laundering

Stages of Money Laundering

TCS Business Domain Academy

 Anti Money Laundering

Stages Explained!

Placement:

Breaking up large amounts of cash into smaller sums and depositing them directly into bank account

Transporting cash across borders to deposit in Foreign FIs, or to buy high-value goods – artwork,
antiques, precious metals and stones etc., that can be resold later for payment by check or bank
transfer

Layering:

Sending wire transfers of funds from one account to another, sometimes to or from other institutions
or jurisdictions.

Converting deposited cash into monetary instruments (e.g. traveler’s checks).

Reselling high-value goods and prepaid access/stored value products.

Investing in real estate and legitimate businesses.

Placing money in investments such as stocks, bonds or life insurance

Using Shell Companies – to obscure the ownership of assets

Integration:

Re-entry of the funds into the economy in what appears to be normal business or personal
transactions.

Invest funds in real estate, financial ventures or luxury assets

Integration is difficult to spot
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 Anti Money Laundering

Methods of Money Laundering

Money laundering is an evolving activity, and must be continuously

monitored in all its various forms in order for measures against it to be
timely and effective.

Illicit money can move through numerous different commercial

channels, including checking, savings and brokerage accounts; offshore
entities and trusts; wire transfers; hawalas; securities dealers; banks; money
services businesses and car dealers etc.,

FATF uses its annual typologies exercise to “monitor changes and

better understand the underlying mechanisms of money laundering
and terrorist financing.”

FATF’s key objective – "Key methods and trends in these areas"

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 Anti Money Laundering
Money Laundering – Banks and Other Depository
Institutions
Generic Examples:

Using Shell Companies

Opening a Restaurant
Real Life Cases:

A law suite filed by Hong Kong investor group in 2004 accused the NY
branch of ABN AMRO of allowing First Merchant Bank, of the Turkish
Republic of Northern Cyprus, to defraud the group – Correspondent Banking
Case – Allegedly laundering $50 million (Chairman: Hakki Yaman Namli)

Vladimiro Montesinos, former spymaster and henchman of Peruvian

ex-President Alberto Fujimori – ML through Concentration Accounts

Case of American Express Bank International (AEBI) and Riggs bank

(close relationship with Augusto Pinochet, former president of Chile) –
ML through Private Banking. Riggs bank was fined millions of dollars for violations of US BSA
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 Anti Money Laundering

Contd..,

Mario Villanueva, the corrupt governor of the Mexican state of

Quintana Roo, according to the U.S. Drug Enforcement Agency,
facilitated the smuggling of 200 tons of cocaine in US – Maintained Private
Banking A/cs at Lehman Brothers and laundered $20 m

Mario Ruiz Massieu, the former deputy attorney general of Mexico in -

Maintained a private banking account at Texas Commerce Bank in Houston in the mid-1990s, where
he deposited drug traffickers’ bribes of $9 million in currency over a 13-month period.

Issac Kattan (Travel Agent) and The Great American Bank of Dede -
Using “Structuring” - laundered an estimated $500 m per year in drug money

- How foreign “money brokers” conduct Structuring?

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 Anti Money Laundering

Contd5

Structuring:

Designing a transaction to evade triggering a reporting or
recordkeeping requirement is called “structuring.”

Most commonly known Money Laundering method

The individuals engaged in structuring are runners, hired by the
launderers
Examples:

A customer breaks a large transaction into two or more smaller ones

A large transaction is broken into two or more smaller transactions
conducted by two or more people
There is also an another form called “Micro Structuring”

In 2000, Lucy Edwards and former vice president of BNY’s EE

Division, and her husband, Peter Berlin – ML because of “Bank Complicity”(KYE)

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 Anti Money Laundering

Contd..,

Money Laundering through Insurance:

Laundering through early policy redemption

Cash payments to purchase insurance

Laundering by cancelling contracts within Cooling Off period

Laundering through third party payment of premiums
Real Life Cases:

A Customer contracted a life insurance for a period of 10 years with
some insurance company. The amount deposited by the customer
was $400, 000.

In the year 1990 British sales agent was convicted for violating ML
rules and regulations.

Custom Officials investigation - The total money that was laundered
this way amounted to $29 million by the year 2004 itself, out of which
some $9 million were traced out in the same year.

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 Anti Money Laundering
Sensational Case! "Panama Pump" – Crazy Eddie’s Electronics

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2 Anti Money Laundering
 Anti Money Laundering

Anti Money Laundering

The main objective of this program is to protect the institution from the
clutches of illegitimate activities and ensure the organization is
complying with relevant laws and regulations

Risk based approach

Approach based on size of an organization
Stringent
internal
policies and
controls
Geography
Compliance
Officer
Elements
Factors to of AML
Types of
determine
risk
Customers Program
Continuous
training
Products and
Services
offered Independent
audit function
for AML

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3 Hawala & Terrorist Financing
 Anti Money Laundering

Hawala System

• White Hawala
• Black Hawala

• Why Hawala? – Cost

effective, Fast, Lack
of proper records, No
KYC requirement,
Evade Taxes.

Al Qaeda moved much of its money by hawala before September 11, 2001. Al Qaeda
used about a dozen trusted hawaldars, who almost certainly knew of the source and
purpose of the money
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 Anti Money Laundering

Terrorist Financing

After the terrorist attacks of September 11, 2001, the finance ministers
of the Group of Seven (G-7) industrialized nations met on October 7,
2001, in Washington, D.C., and urged all nations to freeze the assets
of known terrorists

SDN List published by OFAC

Difference between Money Laundering & Terrorist Financing

In 2004 “Monograph on Terrorist Financing” the National Commission
on Terrorist Attacks commented about September 11 hijackers

Real-Life Case:

The September 11 hijackers used U.S. and foreign financial institutions to hold, move and retrieve
their money. They deposited money into U.S. accounts, primarily by wire transfers and deposits of
cash or travelers checks brought from overseas. Several of them kept funds in foreign accounts,
which they accessed in the United States through ATM and credit card transactions. The hijackers
received funds from facilitators in Germany and the United Arab Emirates as they transited Pakistan
before coming to the United States. The plot cost al Qaeda somewhere in the range of $400,000–
$500,000, of which approximately $300,000 passed through the hijackers’ bank accounts in the
United States. While in the United States, the hijackers spent money primarily for flight training,
travel and living expenses. TCS Business Domain Academy
 Anti Money Laundering

Terrorist Financing

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4 Know Your Customer (KYC) &
Technologies
 Anti Money Laundering

Customer

For the purpose of KYC policy, a ‘Customer’ is defined as:

a person or entity that maintains an account and/or has a business

relationship with the bank;

one on whose behalf the account is maintained (i.e. the beneficial

owner);

beneficiaries of transactions conducted by professional intermediaries,

such as Stock Brokers, Chartered Accountants, Solicitors etc. as
permitted under the law, and

any person or entity connected with a financial transaction which can

pose significant reputational or other risks to the bank, say, a wire
transfer or issue of a high value demand draft as a single transaction.
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 Anti Money Laundering

Know Your Customer (KYC)

“Know Your Customer” is a term generally used for Client Identification
Process

A “KYC” norm assists/helps banks or financial institutions to know more

about their customers and their financial dealings

This enables banks or financial institutions to monitor the transactions that

are happening on a day-to-day basis and give a scope for them to identify
and prevent suspicious transactions.

KYC norms gained huge prominence especially after Terrorist attacks in

US in the year 2001

The sole objective of KYC norms is to identify bad customers and prevent
them from involving into various kinds of fraudulent activities and thereby
protecting the good/loyal customers which in turn reduces the reputational
risk of a bank/FI
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 Anti Money Laundering

Essential Elements of KYC

Customer
Acceptance
Policy

Customer
Identification
Procedure

Elements
of KYC
Monitoring of
transactions in • CTRs
customer
accounts
• STRs

Risk
Management
Framework &
Information
Sharing

In 2000, Lucy Edwards and former vice president of BNY’s EE Division, and her
husband, Peter Berlin – ML because of “Bank Complicity”

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 Anti Money Laundering

KYC for Individuals

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 Anti Money Laundering

KYC for Corporates

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 Anti Money Laundering

Customer Due Diligence (CDD)

Many experts say that a sound Customer Due Diligence (CDD)

program is the best way to prevent money laundering.

Knowledge is what the entire anti-money laundering compliance

program is built upon.

Main Elements of a CDD Program:

Full identification of customer and business entities, including source of funds and wealth when
appropriate.

Development of transaction and activity profiles of each customer’s anticipated activity.

Definition and acceptance of the customer in the context of specific products and services.

Assessment and grading of risks that the customer or the account present.

Account and transaction monitoring based on the risks presented.

Investigation and examination of unusual customer or account activity.

Documentation of findings.
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Comprehensive AML Solution

•Generally written as
Transaction
Monitoring
SQL commands
Watch List Rules •Monitor
Filtering
Engine Transactions and
Group of
Transactions
Reporting

Transaction
Monitoring
Pattern •Profiling
Comprehensive AML Recognition
Solutions Technology •Peer group
•Neural Networks

Watch List
Filtering

Built in Custom
Hybrid
Lists Lists
False Positives – Rules Too Stringent or Too Loose?

• Fraud Management Solutions’

ability to reduce false positives is
crucial, particularly for large
institutions and whenever
transaction volumes are high.
These capabilities which vary
widely among solutions include:
 Anti Money Laundering

Vendors

ACI Worldwide (ACI Proactive Risk Manager) – USA – Transaction Monitoring Solution

Nice / Actimize (AML Solution) – NY – Transaction Monitoring Solution

Americas Software (ASSIST) – Miami – Transaction Monitoring & Watch List Filtering
Solution

FircoSoft (OFAC-Agent) – Paris – Watch List Filtering

InfraSoft (OMNIEnterprise-AML) – Mumbai – Transaction Monitoring

Mantas (ML Monitor) – Fairfax, VA – Transaction Monitoring

Prime Associates (Compliance Manager) – NJ – Transaction Monitoring & Watch List
Filtering

SAS Institute (SAS AML Solution) – Cary, NC – Transaction Monitoring

Sybase (PATRIOTCompliance Solution) – Dublin, CA – Transaction Monitoring

TCS (finDNA) – Mumbai – Transaction Monitoring & Watch List Filtering

3i Infotech (AMLOCK) – Mumbai – Transaction Monitoring & Watch List Filtering

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5 Regulations
 Anti Money Laundering

Regulations

Regulations in US:

USA PATRIOT ACT – Deter and Punish Terrorist Acts in US and around the world. Prevent,
Detect and Prosecute international ML and financing of terrorism

Bank Secrecy Act (BSA) – Passed by US congress in 1970. Prevent FIs from being
used as channels for various criminal activities. Banks to submit the reports to govt relating to
customers’ use of money and various other monetary instruments on a timely basis. CTRs and STRs

Regulations in UK:

Proceeds of Crime Act (1995), Criminal Justice Act (1995), Drug
Trafficking Offenses (1998), Criminal Justice Act (1998)

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 Anti Money Laundering

Regulations Contd.

Regulations in India:

PMLA 2002 – Imposes obligation on BFS institutions to verify identity of clients, maintain
records and furnish information to FIU-IND (apex body for coordinating India’s AML efforts. Banks have to
submit CTRs and STRs to FIU IND)

RBI • KYC Standards

• CAP, CIP
• Monitoring of Transactions
• RM and Customer’s Education
SEBI • CDD
• Record Keeping and retention
• Monitoring of transactions
• Designation of officer
IRDA • Establish Internal Policies and Controls
• CDD
• Procedure for KYC
• Risk matrix for various class of customers
• Defining suspicious transactions
• Reporting to FIU
• Training of employees
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 Anti Money Laundering

Regulations Contd.

Financial Action Task Force (FATF):

Paris based Inter-governmental body established in 1989 by G7

nations.

“Policy-making Body”. Developed 40 Recommendations on ML and 9

Special Recommendations on TF

Combating ML, TF and other related threats to the integrity of the

international financial system.

Issued in 1990 and revised in - 1996, 2001, 2003 and 2012

36 members & 25 observers

Panel meets three times per year

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Hyperlink

Thank127
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