Anti Money Laundering efforts by Banks

BASICS OF AML & KYC : 

24 December 2008 DR. N. BHASKARAN 1 BASICS OF AML & KYC

What is Money Laundering? : 

24 December 2008 DR. N. BHASKARAN 2 What is Money Laundering? It is a process of making dirty money clean. Money is moved around the financial system again and again in such manner that its origin gets hidden. Money generated from illegitimate source is converted as if derived from legitimate source

Money Laundering Process : 

24 December 2008 DR. N. BHASKARAN 3 Money Laundering Process PLACEMENT- Entry of funds in banking system LAYERING Distancing of funds from point of entry INTEGRATION Usage of funds

Few ways of ML : 

24 December 2008 DR. N. BHASKARAN 4 Few ways of ML Number of cash deposits in same a/c / numerous accounts Increase in turnover in dormant a/c Receipt & payment of cash from/to unrelated to business/relationship Providing fictitious or Reluctance in providing minimal / normal information Deposit of third party cheques Sudden increase in cash deposit in a/c from abroad

Financial Institution used as conduit : 

24 December 2008 DR. N. BHASKARAN 5 Financial Institution used as conduit By Offshore shell corporations By Trusts located at multiple jurisdiction with “banking secrecy” and “corporate secrecy clauses By Directors, shareholders, authorized signatories Banking secrecy- delay in investigation –no direct information Corporate secrecy- ownership information is not easily revealed

AML & CFT PRACTICES : 

AML & CFT PRACTICES POLICIES PROCEDURES CONTROLS COMPLIANCES TRAINING INTERNAL AUDIT

RISK BASED PROCESSES : 

RISK BASED PROCESSES Identification of high risk areas such as: cash intensive businesses, import Export businesses, Politically Exposed Persons (PEPs), Correspondent Banking, Non face to face businesses, Charitable Institutions Aim: identification of beneficial ownership of various accounts

Monitoring of accounts : 

Monitoring of accounts Linking of multiple accounts in multiple jurisdictions with number of people. Comparing account activity against transaction history and comparison with peer accounts

AML Skills Development : 

AML Skills Development Customer information- building up to date KYC design Training & Awareness Flagging high risk accounts Transaction monitoring

WAYS AVAILABLE FOR EXCHANGE OF INFORAMTION : 

WAYS AVAILABLE FOR EXCHANGE OF INFORAMTION 1. Access of information from countries where Mutual Legal Assistance Treaty is signed Financial Intelligence Unit( FIU) Supervisory Gateway

Bank Staff- do’s & don’ts : 

24 December 2008 DR. N. BHASKARAN 11 Bank Staff- do’s & don’ts Exercise constant vigilance right from opening of new accounts Know your customer & know your colleagues Separate legitimate business & illegitimate /irregular/ suspicious business Always think of bank’s reputation/clean image Develop risk awareness culture- – a good customer today may not be good tomorrow Do not exercise willful blindness Involve in public awareness of KYC issues

What KYC means? : 

24 December 2008 DR. N. BHASKARAN 12 What KYC means? Customer? One who maintains an account, establishes business relationship, on who’s behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction Your? Who should know? Branch manager, audit officer, monitoring officials, Principal Officer Know? What you should know? True identity and beneficial ownership of the accounts Permanent address, registered & administrative address

What KYC means? : 

24 December 2008 DR. N. BHASKARAN 13 What KYC means? Making reasonable efforts to determine the true identity and beneficial ownership of accounts; Sources of funds Nature of customers’ business What constitutes reasonable account activity? Who your customer’s customers are?

KYC DOES NOT MEAN : 

24 December 2008 DR. N. BHASKARAN 14 KYC DOES NOT MEAN Denial of Service to the Common Person Intrusive Behaviour Use of information for Cross Selling Harassment of customers- threatening to close down the accounts arbitrarily

Advantages of KYC norms : 

24 December 2008 DR. N. BHASKARAN 15 Advantages of KYC norms Sound KYC procedures have particular relevance to the safety and soundness of banks, in that: They help to protect banks’ reputation and the integrity of banking systems by reducing the likelyhood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage; They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities)

Core elements of KYC : 

24 December 2008 DR. N. BHASKARAN 16 Core elements of KYC Customer Acceptance Policy Customer Identification Procedure- Customer Information / Profile Risk classification of accounts- risk based approach Risk Management Ongoing monitoring of account activity Reporting of cash and suspicious transactions

Measures to deter money laundering : 

24 December 2008 DR. N. BHASKARAN 17 Measures to deter money laundering Board and management oversight of AML risks Appointment of a Senior Executive as Principal Officer with adequate authority and resources at his command Systems and controls to identify, assess & manage the money laundering risks Make a report to the Board on the operation and effectiveness of systems and control Appropriate documentation of risk management policies, their application and risk profiles

Measures to deter money laundering (ML) : 

24 December 2008 DR. N. BHASKARAN 18 Measures to deter money laundering (ML) Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profile Screening of employees before hiring and of those who have access to sensitive information Appropriate quality training to staff Quick and timely reporting of suspicious transactions

SUSPICIOUS TRANACTION : 

24 December 2008 DR. N. BHASKARAN 19 SUSPICIOUS TRANACTION Suspicious transaction means a 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; or appears to be made in circumstances of unusual or unjustified complexity; or appears to have no economic rationale or bonafide purpose;

Suspicious Transactions : 

24 December 2008 DR. N. BHASKARAN 20 Suspicious Transactions Providing misleading information / information not easily verifiable while opening an Account Large cash withdrawals from: a dormant or inactive account or account with unexpected large credit from abroad Sudden increase in cash deposits of an individual with no justification Employees leading lavish lifestyles that do not match their known income sources

Suspicious Transactions : 

24 December 2008 DR. N. BHASKARAN 21 Suspicious Transactions Large cash deposits into same account Substantial increase in turnover in a dormant account Receipt or payment of large cash sums with no obvious purpose or relationship to Account holder / his business Reluctance to provide normal information when opening an Account or providing minimal or fictitious information

Role of cash in money laundering : 

24 December 2008 DR. N. BHASKARAN 22 Role of cash in money laundering Disguise the audit trail Provide anonymity Concealing true ownership and origin of money Control over money Changing the form of money

Reports : 

24 December 2008 DR. N. BHASKARAN 23 Reports Cash Transaction Report Suspicious Transaction Report

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24 December 2008 DR. N. BHASKARAN 24 Summary: Prevention of Money Laundering Money Laundering Prevention Observing Rules for Bankers Compliance with Laws Identifying Irregular / Suspicious Transactions Customer due Diligence

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24 December 2008 DR. N. BHASKARAN 25 Thank You