GROUP 6, SEC-A

Ajith S
Aviraj
Pawan
Raina
Rajkumar
Rajnish

MONEY LAUNDERING
 Agenda
1 INTRODUCTION

2 IMPACT

3 SCANDALS

4 KYC NORMS

5 PMLA ACT & FEMA

6 TRENDS

2
Money Laundering
Money laundering is the process by which the
proceeds of the crime, and the true ownership
of those proceeds, are concealed or made
opaque so that the proceeds appear to come
from a legitimate source

Appears to
Illegally obtained
originate from
money
legitimate source

3
 Cont..
Money laundering generally refers to
washing of the proceeds or profits generated
from:
Drug trafficking
People smuggling
Arms, antique, gold smuggling
Financial frauds
Corruption, or
Illegal sale of wild life products and other
specified predicate offences

4
Steps in money laundering
PLACEMENT
Getting Currency into the financial system so as to convert
illicit funds from cash straight into a financial instrument or
bank account
Immersion / Soaking
LAYERING
Separation of proceeds from illegal source through the use of
complex transactions designed to obscure the audit trail and
hide the proceeds. The criminals frequently use shell
corporations, offshore banks with loose regulation and
secrecy laws for this purpose.
Soaping / Scrubbing
INTEGRATION
It represents the conversion of
illegal proceeds into apparently
legitimate business earnings
through normal financial or
commercial operations. For e.g.
false invoices for goods exported,
domestic loan against a foreign
deposit, purchasing of property

Repatriation / Spin Dry

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Money laundering cycle

7
 Money laundering techniques

Placement Layering Integration

Smurfing Tax Havens & Use of haven bank

Shipping Money Offshore Banks credit cards
Abroad Bank Secrecy Law Proceeds of
Placement through as a layering tool gambling
Banks Corporations & Real estate
Electronic Wire Shell Companies as transactions
Transfers a layering tool Stock Purchase
Transactions Use of trusts Use of business
NBFCs Use of walking International
accounts importing and
exporting

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Smurfing
It is the practice of executing financial transactions
(such as the making of bank deposits) in a specific
pattern calculated to avoid the creation of certain
records and reports required by law.

Smurfing includes the act of parceling what would

otherwise be a large financial transaction into a series
of smaller transactions to avoid scrutiny
by regulators
Impact of Money Laundering
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Impact of Money Laundering

Undermining the Legitimate Private

Sector
Use of front company to hide his illegal
funds
Subsidized operations and funding
Products at below manufacturing cost
Competition with legitimate business
Crowding out of private sector business
by criminal organizations

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Undermining the Integrity of Financi
Markets
Challenge for financial institutions to manage
their assets liabilities and operations
Sudden disappearance of money through
Wire transfers in response to non-market
factors
Liquidity problem & bank collapses
Loss of Control of Economic
Policy
Money laundering is between 2 - 5
% of world gross domestic product
Errors in economic policy resulting
from artificially inflated financial
sectors
False demand
Inexplicable changes in money
demand and increased volatility of
international capital flows, interest,
and exchange rates
Economic Distortion and Instability

Investments not for gain but for protecting their

proceeds

Redirect funds from sound investments to low-quality

investments

Withdrawal of money results in collapse of these sectors

and immense damage to economies
Impacts conti...
Loss of revenue
No tax on laundering
money
Reputation risk
Confidence in markets
The signalling role of
profits
Social impacts
Increase in crime

Drug trafficking, smuggling, and other crimes

increased law enforcement and health care

expenditures

Terrorist financing

Transfer of economic power from the market,

government, and citizens to criminals
Money Laundering Scandals
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World's Worst Banking Scandal
The world's worst banking scandal, of Bank of Credit and
Commerce International (BCCI) inflicting huge financial losses on
thousands of people worldwide, surfaced in the media in 1991.
It had heavy ties with the CIA, terrorist organizations, drug
traffickers, & other crooked financial transactions shunned by most
other banks.
BCCI started operations in Pakistan in 1972, with much of funding
provided by Bank of America & CIA.
CIA knew about BCCI's activities, & found its mindset to be very
manipulating and planned its own operations through BCCI.
 World's Worst Banking Scandal
CIA knew about BCCI's activities, & found its
mindset to be very manipulating and planned its
own operations through BCCI

Investigating reports showed that BCCI was able to

simultaneously manipulate the spy agencies of
numerous countries

BCCI was supplying funds for terrorist organizations

BCCI rigged international commodity markets

It was laundering drug money for drug cartels

worldwide.
South Indian Bank -1995
(Abusing of banking facility by
banks & individual)
 Modus Operandi Contacting
financer who can
lend money to
racketeer
Opening A/C for Submit
fictitious & non- cash/deposit
existing firm

Specialized
in preparing
forged
South Submit
documents
documents
Indian showing goods
Remitted to Bank imported to India
foreign bank

A/C in Hong-Kong Sell foreign

for receiving foreign exchange to
exchange smugglers
Money Laundering on global scale
ABN AMRO Case (2005)

The US Justice Department alleges that ABN helped

governments and banks of Iran, Libya, Sudan and
Cuba evade sanctions and bring money into the
United States, according to papers filed in the case

ABN AMRO Bank to Pay $80 Million in Civil

Settlement

DAIWA CASE (1995)

Money Laundering of $1.1 billion while trading US

Treasury Bonds

Lost license to operate in US

 Money laundering in India(Hawala)

Money transfer
without money
movement developed
in India

Also known as chop,

chit , flying money
and underground
bank
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Money Laundering Vs Hawala
Money
Hawala
Laundering

Informal
Formal money
money transfer
transfer system
system

Layering Layering
process is process is
involved eliminated

Conversion of Conversion of
black money to white money
white money to black money
Other Banking scams & Penalties
Jan. 2006 ABM AMRO US$ 80 mio
Aug. 2005 Arab Bank US$ 24 mio
Feb. 2005 City National Bank US$750,000
Jan. 2005 Riggs Bank US$ 41 mio
Oct. 2004 AmSouth Bank US$ 50 mio
Sep. 2004 City Bank Japan Licence cancelled
May. 2004 Riggs Bank US$ 25 mio

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KYC Norms
 KYC norms, what is it?
RBI directed all banks and financial institutions to
put in place a policy framework to know their
customers before opening any account
Mandatory details required under KYC norms are
proof of identity and proof of address
Banks may even ask for verification by an existing
account holder
Standard documents which are accepted as proof of
identity and residence remain the same across
various banks, some deviations are permitted
 KYC, what are the features

Features
Making
reasonable
efforts to What
Who your
determine Nature of constitutes
Sources of customers
the true customers reasonable
funds customer
identity and business account
are?
beneficial activity?
ownership
of accounts
 KYC, Objectives
Enable Banks to understand their customers and their
financial dealings better

Prevent banks from being used by criminal elements

To prevent the possible misuse of banking activities for

anti-national or illegal activities

Strengthening the banks' 'Internal Control System' by

allocating duties and responsibilities clearly
 KYC what are the norms?
Customer Acceptance Policy

No account is opened in anonymous or fictitious name

Customers are categorized based on risk perceptions

Customer Identification procedures

Means identifying the customer by using reliable, independent

source documents, data or information
Customer to be identified not only while opening the account, but
also at the time when the bank has a doubt about his transactions.
 KYC what are the norms?
Monitoring of transactions

KYC can be effective by regular monitoring of transactions

Identifying an abnormal or unusual transaction and keeping a watch on higher
risk group of the account is essential in monitoring transactions

Risk Management

It is about managing internal work to reduce the risk of any unwanted activity.
Managing responsibilities, duties and various audits plus regular employee
training for KYC procedures
Regular review and updating of the parameters or criteria used to generate
monitoring reports or issue alerts
IPO scam 2005-06
Initial public offering of IDFC
Few investors opened 14000 dematerialized accounts
Purpose was to corner large number of shares of the
company
The Reserve Bank of India on Monday 27th Feb 2006 fined
HDFC Bank, IDBI and ING Vysya Bank for violation of
Know Your Customer norms
PMLA ACT & FEMA
Mid 1980s - Growing concern of international
community to deprive criminal elements of
the proceeds of their crimes.

1989 Financial Action Taskforce (FATF) set

up to ensure global action to combat money
laundering.

Forty Recommendations - Complete set of

counter-measures against money laundering

Nine Special Recommendations on Terrorist

Financing

1995 - Egmont Group set up to stimulate

international cooperation amongst FIUs. Best
Practices for exchange of information.
PMLA (2002)

To combat money Came into force with

laundering in India effect from July 1, 2005

Defines money Defines offence as:

laundering as an offence Whosoever directly or indirectly
attempts to indulge or knowingly
and allows freezing, assists or knowingly is a party or is
seizure and confiscation actually involved in any process or
of the proceeds activity connected with the proceeds of
crime and projecting it as untainted
property shall be guilty of offence of
money laundering
 PMLA (2002)
Banks and financial institutions will have to mandatorily
report to Government all suspicious transactions (cash/non-
cash), counterfeit currency and those over Rs.10 Lakh

They need to furnish information to FIU IND

Financial Intelligence Unit India

Set up by government in 2004

responsible for receiving, processing, analysing and disseminating
information relating to suspect financial transactions
 Schedule offences under PMLA (2002)
Offences
Offences under the Indian Penal Code (Sec 121, 121A)
specified under
Part A of the
Schedule

Offences under the Narcotic Drugs And Psychotropic

Substances Act, 1985

Offences Offences under the Indian Penal Code

specified under
Part B of the Offences under the Arms Act, 1959
Schedule if the
total value Offences under the Wild Life (Protection) Act, 1972
involved in such
offences is thirty Offences under the Immoral Traffic (Prevention) Act, 1956
lakh rupees or
more. Offences under the Prevention Of Corruption Act, 1988
 Information Furbished
Cash Transactions

All cash transactions of the value of more than Rs. 10 lakhs

or its equivalent in foreign currency

All series of cash transactions integrally connected to each

other which have been valued below rupees ten lakhs or its
equivalent in foreign currency where such series of
transactions have taken place within a month

Suspicious Transactions

All suspicious transactions whether or not made in cash

 Suspicious Transactions
Transaction whether or not made in cash which, to a
person acting in good faith

Gives rise to a reasonable ground of suspicion that it may

involve the proceeds of crime

Appears to be made in circumstances of unusual or

unjustified complexity

Appears to have no economic rationale or bonafide

purpose

Give rise to a reasonable ground of suspicion that involve

financing of the activities relating to terrorism
Transactions

Deposits

Exchange or
transfer of
Withdrawals
funds in any
currency

This can be in cash or in cheque payment order or other

instruments or by electronic or other physical means
 Reasons for Suspicion
Identity of client

Background of client

Multiple accounts

Activity in accounts

Nature of transactions

Value of transactions
Reasons for Suspicion

Identity of client
False identification documents
Identification documents which could not be
verified within reasonable time
Accounts opened with names very close to
other established business entities
Reasons for Suspicion

Background of client
Suspicious background or links with known
criminals
Reasons for Suspicion

Multiple accounts
Large number of accounts having a common
account holder, introducer or authorized
signatory with no rationale
Unexplained transfers between multiple
accounts with no rationale
Reasons for Suspicion

Activity in accounts
Unusual activity compared with past
transactions
Sudden activity in dormant accounts
Activity inconsistent with what would be
expected from declared business
Reasons for Suspicion

Nature of transactions
Unusual or unjustified complexity
No economic rationale or bonafide purpose
Frequent purchases of drafts or other
negotiable instruments with cash
Nature of transactions inconsistent with what
would be expected from declared business
Reasons for Suspicion

Value of transactions
Value just under the reporting threshold amount
in an apparent attempt to avoid reporting
Value inconsistent with the clients apparent
financial standing
 Other features
In case of conflict between PMLA and FEMA or other
acts/laws, the provisions of PMLA have over riding effect

There has been two amendments in PMLA act in 2005 and

in 2009

Additional intermediaries (money changers, money

transfer service providers and international payment
gateways and casinos) brought under the ambit of
amended PMLA 2009
FEMA

Introduced as a replacement for Foreign Exchange Regulation Act

(FERA)

Became valid from 1st June 2000

Objective was to consolidate laws related to foreign exchange to

facilitate external trade and payments

Applicable to all parts of India as well as to all branches, offices and

agencies outside India owned or controlled by Indian resident
 PMLA vs FEMA
FEMA provides lesser power to ED compared to PMLA
and hence sometimes called toothless act

Proceedings under FEMA are quasi-judicial in nature and

the punishment prescribed is only fine, whereas under
PMLA the proceedings are criminal and the court can
award sentence too

Major distinction is that in PMLA the holding should be

proceed of crime

offences under FEMA are not listed in the PMLA schedule

TRENDS IN MONEY LAUNDERING
 Money Laundering then and now..
1997
Wire transfers
Internet-based and e-money systems
Remittance services and money
exchange services
Assistance from lawyers
Hawala, hundi or other underground
banking systems
Bank-centered techniques: collection
accounts, loan back arrangements
bank drafts, money orders and
cashiers cheques smurfing
Cash smuggling
Accounts in relatives names, shell
companies
2011
Wire transfers
New electronic payment systems
Remittance services and money
exchange services
Assistance from Gatekeepers
Hawala, hundi or other
underground banking systems
Terrorist financing through non-
profit organizations
Insurance industry, particularly
through independent insurance agents
Politically Exposed Persons (PEPs)
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 Affect of Regulations in
US and UK Money Laundering by region
Totally Funds Laundered Worldwide
$1,200

$1,100

$1,000
Asia UAE
34% 15% America
$900
24%
$800
2004 2005 2006 2007 2008 2009 Africa Europe
20% 13%

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 Activities involved
Terrorist
The usual suspects drugs, smuggling, 1%
organized crimeaccount for over
of all money laundering Other
Drugs
Crimes
Terrorist financing is a drop in the 26%
23%
bucket in real terms
Nevertheless it is driving todays AML
and KYC regulations
White collar crime, including Embezz Smuggli
embezzlement and internal fraud, is a elment ng
significant (and growing) problem 21% 29%

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 Spending trends Global AML Software Spending

Spending on anti-money 160 142.1 144.7 148.5 146.0 139.5142.1 146.0

laundering solutions in Asia will 129.2 133.0 139.5
140 122.7
grow faster than in Europe or 113.7
120
North America 93.0

US$ millions
100 81.4
80 71.0
60.7
60 38.7
40 28.4
20
0
2004 2005 2006 2007 2008 2009

Asia EMEA Americas

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 Recent Methods

Organised Maritime Risks Arising from

Piracy and Related Trafficking of Human New Payment
Kidnapping for Beings and Smuggling Methods
Ransom of Migrants

Trusts and Company Vulnerabilities of Free

Securities Sector
Service Providers Trade Zones

Casinos and Gaming

Football Sector Real Estate Sector
Sector

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 Third party funding
Typologies
accounts can be funded
Development of new payment
anonymously where the
methods
specific business model
prepaid cards
permits
mobile payment services
internet payment services (IPS)
Exploitation of the non-
face-to-face nature of NPM
accounts
stolen or fake identities
Minimal face-to-face
contact

Complicit NPM providers

or their employees
controlled by criminals

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Typology 1
Internet Payment Mobile Payment
Prepaid- cards
) Services Services:
Third Party Funding
Illegal online Move funds
Sale of stolen
steroid sales related to
goods on a
fraud
commercial
Gambling website
proceeds
Telemarketing
fraud
Payment for
drugs Cash vouchers
to collect
extortion Selling stolen
Terrorist
money phone credits
financing

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Typology 2 Prepaid- cards

Exploitation of the non-

face-to-face nature of Individuals Companys
Phishing Terrorist
bank payroll
NPM accounts activity financing
accounts accounts

Internet Payment Services

digital currency provider Fraud scheme

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Typology 3 Prepaid- cards

Complicit NPM
providers or their
Use of open-loop cards for Embezzlement activities and
employees drug proceeds money laundering

Internet Payment Services

Digital Digital
currency and Fraud Illegal online precious
prepaid scheme gambling metals
cards provider

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 References
www.fiuindia.gov.in
www.moneylaundering.com
www.sebi.gov.in
www.rbi.org.in
www.irdaindia.org
www.finmin.nic.in
www.infrasoftech.com
www.mantas.com
FATF Annual Report Oct 2010
Www.imf.org

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Questions?
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