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 & Elements of Checks AML Framework in Banks Summary

Agenda
KYC/ AML/ CFT Overview The 3D approach Banks V/s Insurance Companies Controls & Elements of Checks AML Framework in Banks Summary

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.

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 money Legal/Clean Money

Stages of Money Laundering

A/c 3
A/c 1 A/c 4 A/c 2 A/c 6 A/c 7 A/c 9
Investment

A/c 5
Placement

A/c 8 Integration

Layering

Placement Stage - easy to detect start of ML Layering Stage - Relatively Difficult to detect Integration Stage - Almost impossible to detect

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.

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

Terrorist Financing Ideological Legal + Il egal Small Charities + Individuals Acts of Terror

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

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 SEBI IRDA

Enforcement Agencies
IB

Enforcement Agencies
IB

FIU-IND

RAW REIC CBDT-DGIT/CCIT CBEC-DGDRI/DGCEI ED EOW of Police EOW of CBI

RAW
REIC CBDT-DGIT/CCIT CBEC-DGDRI/DGCEI ED EOW of Police EOW of CBI

Foreign FIUs

Foreign FIUs

Scheduled Offences included in PMLA 2009

Drug Trafficking Smuggling (arms, people, goods) Kidnapping Extortion Bribery & Corruption

Criminal Activities

Prostitution Terrorist Act Counterfeiting & Forgery

Gambling, Robbery, Cheating

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Agenda
KYC/ AML/ CFT Overview The 3D approach Banks V/s Insurance Companies Controls & Elements of Checks AML Framework in Banks Summary

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AML approach-3D Concept

Deterring Adherence to KYC Norms

Activity Indicators Detecting Transaction Monitoring

Disrupting

Reporting transactions

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Agenda
KYC/ AML/ CFT Overview The 3D approach Banks V/s Insurance Companies Controls & Elements of Checks AML Framework in Banks Summary

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Risk Comparison between Insurance & Banking

CIP/ ML/ TF Risk Comparison
3

2
Insurance Banking

0 C us tom er Identific ation Money Laundering T errorist F inanc ing

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

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Risk Comparison between Banking & Others

CTR/ STR/ CCR comparison
100 90 80 70 60 50 40 30 20 10 0 Banking Others
CTRs STRs CCRs

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 & Elements of Checks AML Framework in Banks Summary

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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

Training FIU Reporting* Regulatory Interface Updates to Senior Mgmt Audit

Performed on the basis of pre defined rules based on product , customer and transaction risk Identification of unusual transactions Confirmation of Suspicion

* 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 & Elements of Checks AML Framework in Banks Summary

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Summary

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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