prevention of money laundering

Prevention of Money Prevention of Money LaunderingLaundering

By Ms. Lakshmi ArunAssistant Director

Have any of you who Have any of you who have not experienced have not experienced giving bribe directly or giving bribe directly or

indirectly?indirectly?

How do you think that How do you think that the money earned out the money earned out of corruption, bribery of corruption, bribery

etc is utilised by etc is utilised by Criminals?Criminals?

Some taunting factsSome taunting facts

According to United Nations office of According to United Nations office of Drugs and Crime, the estimated amount Drugs and Crime, the estimated amount of money laundered globally in one year of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. $2 trillion in current US dollars.

According to Corruption Perception According to Corruption Perception Index 2011 India is in 95Index 2011 India is in 95thth position, position, where as according to doing business where as according to doing business report 2012 of the world bank India is in report 2012 of the world bank India is in 132132ndnd position. position.

Some taunting factsSome taunting facts As many as 62% of all citizens think that corruption

is real and they have in fact have had first hand experience of paying a bribe or “using a contact” to get a job done in a public office – India Corruption Study 2005 by Transparency International.

In the book 'Corruption in India: The DNA and RNA' authored by Professors Bibek Debroy and Laveesh Bhandari say that the public officials in India may be cornering as much as Rs.92,122 crore ($18.42 billion), or 1.26 per cent of the GDP, through corruption. The books estimates that corruption has virtually enveloped India growing annually by over 100 percent (Source : Economic Times Dated (Source : Economic Times Dated December 11, 2011)December 11, 2011)

Result…….Result…….

Black Money and its launderingBlack Money and its laundering

Act of Money LaunderingAct of Money Laundering

Process by which illegal funds Process by which illegal funds and assets are converted into and assets are converted into legitimate funds and assets.legitimate funds and assets.

How the process takes How the process takes placeplace

Entry of illegal funds into the system-Entry of illegal funds into the system-PlacementPlacement

Distancing of funds from its origin-Distancing of funds from its origin-LayeringLayering

Laundered funds are made available Laundered funds are made available as legitimate funds-Integration.as legitimate funds-Integration.

The ProcessThe Process

How Does It Work?How Does It Work?

• Sell cocaine and get a million dollars.Sell cocaine and get a million dollars.

• Take the million in cash to the some Islands.Take the million in cash to the some Islands.

• Buy a legitimate company , complete with a board of Buy a legitimate company , complete with a board of

directors.directors.

• Open a bank account in the company’s name and Open a bank account in the company’s name and

deposit the rest of the money.deposit the rest of the money.

• Enjoy the islands, get some sun, then go home.Enjoy the islands, get some sun, then go home.

• When you get home, borrow $200,000 from the When you get home, borrow $200,000 from the

Company account and have it delivered via wire Company account and have it delivered via wire

transfer.transfer.

How does it work?How does it work?

• Open a restaurant.Open a restaurant.

• Deposit proceeds from ongoing drug business along Deposit proceeds from ongoing drug business along

with proceeds from the restaurant every month into with proceeds from the restaurant every month into

a legitimate bank account. Don’t add too much a legitimate bank account. Don’t add too much

illegal money, just enough to make it look as though illegal money, just enough to make it look as though

your restaurant is doing a good, healthy business.your restaurant is doing a good, healthy business.

• Pay all of your taxes on the restaurant deposits, so Pay all of your taxes on the restaurant deposits, so

the tax authorities don’t start an investigation.the tax authorities don’t start an investigation.

Parliamentary History of Parliamentary History of

the Lawthe Law..

The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998.The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998.

Referred to Standing committee on finance on 05-08-1998.Referred to Standing committee on finance on 05-08-1998.

The committee submitted its report on 04-03-1999.The committee submitted its report on 04-03-1999.

The bill was presented in Rajya Sabha on 08-03-1999.The bill was presented in Rajya Sabha on 08-03-1999.

Parliamentary History of Parliamentary History of

the Lawthe Law..

The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999.The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999.

The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999.The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999.

Rajya Sabha referred the bill to Select committee.Rajya Sabha referred the bill to Select committee.

The committee finalised its report on 24The committee finalised its report on 24thth July, 2000. July, 2000.

The present act after being passed by both the houses The present act after being passed by both the houses

received the assent of the president on 17received the assent of the president on 17thth January, 2003. January, 2003.

What is a Financial What is a Financial Intelligence Unit?Intelligence Unit?

A financial intelligence unit (FIU) is a central agency of a A financial intelligence unit (FIU) is a central agency of a

government that government that

1.1. receives financial information pursuant to country's anti-money receives financial information pursuant to country's anti-money

laundering laws laundering laws

2.2. analyzes and processes such information and analyzes and processes such information and

3.3. disseminates the information to appropriate national and disseminates the information to appropriate national and

international authorities, to support anti-money laundering international authorities, to support anti-money laundering

efforts. efforts.

Broad Regulatory Broad Regulatory FrameworkFramework

The Prevention of Money Laundering Act, The Prevention of Money Laundering Act, 20022002

Prevention of Money-laundering Prevention of Money-laundering (Maintenance of Records of the Nature and (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Value of Transactions, the Procedure and Manner of Maintaining and Time for Manner of Maintaining and Time for Furnishing Information and Verification and Furnishing Information and Verification and Maintenance of Records of the Identity of the Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005.Institutions and Intermediaries) Rules, 2005.

Guidelines on Guidelines on Anti Money Laundering Anti Money Laundering Standards/KYC norms/customer identification Standards/KYC norms/customer identification process issued by process issued by SEBI/RBI/IRDASEBI/RBI/IRDA

The Prevention of Money-The Prevention of Money-Laundering Act, 2002Laundering Act, 2002

Director, Financial Intelligence Unit-India – The reporting entities to furnish information of specified

transaction to FIU-IND– Analyse and process reports and disseminate to LEAs/IAs– Power to impose fine for non-compliance

Director of Enforcement – Powers relating to investigation of and prosecution for

money-laundering offences– Power of attachment of property, survey, search &

seizure and retention of property and document– Power regarding summons, production of document and

recording of statement – ..

Obligation under PMLAObligation under PMLA

PMLA impose obligations onPMLA impose obligations on Banking CompaniesBanking Companies Financial InstitutionsFinancial Institutions IntermediariesIntermediariesin respect of in respect of Maintenance of RecordsMaintenance of Records Furnishing of informationFurnishing of information Verification of identity of the clients.Verification of identity of the clients.

Banking Company Banking Company includesincludes

Public sector banksPublic sector banks Private sector banksPrivate sector banks Private foreign banksPrivate foreign banks Co-operative banksCo-operative banks Regional rural banksRegional rural banks

Financial Institutions includesFinancial Institutions includes

Financial Institution as defined under Financial Institution as defined under Section 45-I of the RBI ActSection 45-I of the RBI Act

Insurance CompaniesInsurance Companies Hire purchase companiesHire purchase companies Chit fund CompaniesChit fund Companies Housing finance institutionsHousing finance institutions Non-banking financial companies.Non-banking financial companies.

Intermediary includesIntermediary includes

Stock BrokersStock Brokers Sub-brokersSub-brokers Share-transfer agentsShare-transfer agents Bankers to an issueBankers to an issue Trustees to trust deedTrustees to trust deed Registrar to an IssueRegistrar to an Issue Merchant Bankers…………….Merchant Bankers…………….

Obligation in respect of Obligation in respect of maintenance of recordsmaintenance of records

Maintenance of records includes records Maintenance of records includes records ofof

All cash transactions of the value of All cash transactions of the value of more than rupees ten lakhs or its more than rupees ten lakhs or its equivalent in foreign currency equivalent in foreign currency

All series of cash transactions which All series of cash transactions which are integrally connectedare integrally connected

All suspicious transactionsAll suspicious transactions

Furnishing of InformationFurnishing of Information

Reporting of cash and suspicious Reporting of cash and suspicious transactionstransactions

Reporting on the Reporting on the appointment/change in the principal appointment/change in the principal officer etc.officer etc.

Suspicious Transaction Suspicious Transaction meansmeans

A transaction whether or not made in A transaction whether or not made in cash,which, to a person acting in good faithcash,which, to a person acting in good faith

gives rise to a reasonable ground of gives rise to a reasonable ground of suspicion that it may involve the proceeds suspicion that it may involve the proceeds of crime; orof crime; or

appears to be made in circumstances of appears to be made in circumstances of unusual or unjustified complexity; orunusual or unjustified complexity; or

appears to have no economic rationale or appears to have no economic rationale or bonafide purposebonafide purpose

Illustrative list of suspicious Illustrative list of suspicious transactionstransactions

• False Identification documentsFalse Identification documents• Identification documents which could Identification documents which could

not be verified within reasonable timenot be verified within reasonable time• Multiple Demat AccountsMultiple Demat Accounts• Multiple Trading Account with the Multiple Trading Account with the

brokerbroker• Sudden increase in the transaction of Sudden increase in the transaction of

clientclient• Huge off-market dealsHuge off-market deals


• Multiple Bank accountsMultiple Bank accounts• Huge withdrawals/depositsHuge withdrawals/deposits• Nature of transactions inconsistent Nature of transactions inconsistent

with what would be expected from with what would be expected from declared businessdeclared business

• Foreclosure of home loan accounts Foreclosure of home loan accounts by substantial cash paymentsby substantial cash payments


• Frequent purchases of drafts or other Frequent purchases of drafts or other negotiable instruments with cashnegotiable instruments with cash

• Large number of accounts with Large number of accounts with common account holders , introducer common account holders , introducer or authorised signatoryor authorised signatory

• Unexplained transfers between Unexplained transfers between multiple accounts with no rationalemultiple accounts with no rationale

Data on cash/suspicious Data on cash/suspicious Transactions (as on 31.07.11)Transactions (as on 31.07.11)

Collection of InformationCollection of Information – 30.36 million Cash Transaction Reports (CTRs) received30.36 million Cash Transaction Reports (CTRs) received– 99.62 % CTRs received in electronic format 99.62 % CTRs received in electronic format – 46,409 Suspicious Transaction Reports (STRs) received 46,409 Suspicious Transaction Reports (STRs) received – 5.26 lakh Counterfeit Currency Reports (CCR) of face value of 5.26 lakh Counterfeit Currency Reports (CCR) of face value of

Rs.446 millionRs.446 million

Analysis and Dissemination of InformationAnalysis and Dissemination of Information – 41,934 STRs processed 41,934 STRs processed – 28,210 STRs disseminated 28,210 STRs disseminated

Data on Suspicious Data on Suspicious TransactionsTransactions

CategoryCategory 2008-092008-09 2009-2009-1010

2010-2010-1111 TotalTotal

Banking CompanyBanking Company 2,8262,826 7,3947,394 12,28712,287 24,12724,127

Financial Financial InstitutionInstitution 841841 1,6551,655 7,0067,006 9,8789,878

IntermediaryIntermediary 742742 1,0181,018 1,4051,405 3,9023,902

TotalTotal 4,4094,409 10,06710,067 20,69820,698 37,90737,907

How to increase the How to increase the Compliance levelCompliance level

Spread financial literacy among Spread financial literacy among reporting entities and their clients.reporting entities and their clients.

Conduct educational programmes to Conduct educational programmes to reinforce the importance of reporting reinforce the importance of reporting requirementsrequirements

Impose more stringent penalties for Impose more stringent penalties for money laundering offences.money laundering offences.

Training of staffTraining of staff

KYC norms issued by KYC norms issued by RBI,SEBI & IRDA coversRBI,SEBI & IRDA covers

Customer AcceptanceCustomer AcceptanceCustomer IdentificationCustomer IdentificationTransaction MonitoringTransaction MonitoringRisk ManagementRisk Management

International effortsInternational efforts 1985- The United Nations- Started efforts with the recognition

that drug trafficking—and associated money laundering—were truly international problems and could be addressed effectively only on a multinational basis

1988 – Basel Committee on Banking Supervision - issued a statement on Prevention of Criminal use of Banking System for the purpose of ML

1989 – Financial Action Taskforce (FATF)- Set up to ensure global action to combat money laundering ( subsequently included terrorist financing )

1995 - Egmont Group- Set up to stimulate international cooperation and develop best Practices for exchange of information amongst FIUs

1997- Asia/Pacific Group on money laundering (APG)- FATF-style regional body (FSRB)-set up to create awareness and encourage adoption of AML measures in the region.

World Bank and International Monetary Fund- have evolved a comprehensive AML/CFT assessment methodology for evaluating country’s compliance with FATF Standards and provide technical support

FATFFATF

Mandate :– Establish, revise and clarify global standards and measures for combating ML/TF;– Promote global implementation of the standards;– Identify and respond to new money laundering and terrorist financing threats;– Engage with stakeholders and partners throughout the world.

FATF Forty+ Nine Recommendations:

– Forty Recommendations - Complete set of counter-measures against money laundering

– Nine Special Recommendations on Terrorist Financing

Internal Review Mechanisms :– Self-assessment exercise based on a standard questionnaire designed by FATF

and used by its members to report on their anti-money laundering system on an annual basis and

– Mutual evaluation process in which each country is evaluated by a team of experts drawn from other member countries to give ratings with respect to each recommendation of FATF

FATF RecommendationsFATF Recommendations– Criminalization: To criminalize money laundering and terrorist

financing. The definition of money laundering offenses has now expanded to include all serious offenses.

– Provisional Measures and Confiscation: To put in place measures to identify, trace, freeze, or seize and finally to confiscate the illegal proceeds.

– Customer due diligence: To impose duties on financial institutions to know their customers and to abolish the use of anonymous accounts.

– Record keeping: Financial institutions to keep records on all the transactions that they conduct.

– Suspicious transactions reporting: Financial institutions to report all transactions that raise their suspicion, without alerting the clients.

– Internal controls: Financial institutions adopt internal mechanisms that allow them to comply with the regulatory requirements.

– Implementation: To create regulatory and supervisory agencies that are capable of implementing the international standards set by the Recommendations.

– International cooperation: To put in place a system that allows it to cooperate with other countries on all aspects of law enforcement including exchange of information, preservation and confiscation of assets and extradition.

KPMG -India Anti-Money KPMG -India Anti-Money Laundering Survey 2012Laundering Survey 2012

– This survey was conducted across the financial services sector covering public sector banks, private sector banks, foreign banks, general and life insurance companies, mutual funds, non-banking financial companies and other institutions in the FS sector covered under PMLA.

– The primary target respondents of the survey were senior and mid management members from Compliance, Audit, Risk Management and AML departments. The respondents were also senior management members from the business and operation functions.


Increased focus on money laundering risk by the Senior Management

1. 76% Discuss the AML profile on at least a monthly or quarterly basis

2. 41% Integrate AML in the business strategy of new products/services.

3. 35% Publicize the AML compliance programme

internally


FATF: Membership comes with increased responsibilities

84% -Regulatory scrutiny has become more stringent post FATF membership

90% -Regulatory scrutiny is high in the area of Know Your Customer

policy and processes81% - Agree that scrutiny will remain

high in the area of Transaction Monitoring / Reporting


Laying the foundation: Money laundering risk assessment

65%Conduct an AML risk assessment on at least a half yearly or yearly

basis32%Conduct an AML risk assessment on the basis of an event51% AML policies and procedures are based on local regulations and

benchmarked against global best practices


Drilling down to unearth the core 86% -Institution follows a risk based approach in relation to account opening84%-Beneficial owner identified at the time of opening an account83% -Have procedures for monitoring sanctions lists before account opening 81% -81% -Customer documents are collected and verified before opening an account77%-Have specific procedures in place for identifying politically exposed persons


Testing and monitoring the effectiveness of your controls

71%- Have a formal procedure to test and monitor the effectiveness of anti-money laundering systems and controls

80% - Compliance function plays an important role in the testing and monitoring procedures

76%-Internal Audit plays an important role in the testing and monitoring procedures.


Investment to be made in the area of AML

44% -Investment will increase by 10 to 20 percent.

29%- Investment will increase by 21 to 50 percent

ASSOCHAM REPORT ASSOCHAM REPORT 2012 ON BLACK MONEY 2012 ON BLACK MONEY

MENACE IN INDIAMENACE IN INDIA

Assocham in its recent report on Assocham in its recent report on 'Black money menace in India' had 'Black money menace in India' had suggested the government should suggested the government should provide immunity to persons wanting provide immunity to persons wanting to bring back funds stashed abroad.to bring back funds stashed abroad.

ROLE OF COMPANY ROLE OF COMPANY SECRETARIESSECRETARIES

As Practising Company As Practising Company Secretary/Company Secretary in whole Secretary/Company Secretary in whole time employment, what shall we do to time employment, what shall we do to prevent money laundering?prevent money laundering?

Thank youThank you

Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.

prevention of money laundering

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