BASICS OF AML & KYC

9 May 2012

DR. N. BHASKARAN

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
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Money Laundering Process

PLACEMENT-

Entry of funds in banking system LAYERING Distancing of funds from point of entry INTEGRATION Usage of funds
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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

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DR. N. BHASKARAN

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
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9 May 2012

AML & CFT PRACTICES

POLICIES PROCEDURES CONTROLS COMPLIANCES TRAINING INTERNAL AUDIT

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
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

Customer information- building up to date KYC design 2. Training & Awareness 3. Flagging high risk accounts 4. Transaction monitoring
1.

WAYS AVAILABLE FOR EXCHANGE OF INFORAMTION

1. Access of information from countries where Mutual Legal Assistance Treaty is signed 2. Financial Intelligence Unit( FIU) 3. Supervisory Gateway

Bank Staff- dos & donts

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 banks 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
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What KYC means?

Customer? One who maintains an account, establishes business relationship, on whos 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
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9 May 2012

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 customers customers are?
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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

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DR. N. BHASKARAN

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Advantages of KYC norms

Sound KYC procedures have particular relevance to the safety and soundness of banks, in that: 1. 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; 2. They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities)
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Core elements of KYC

Customer

Acceptance Policy Customer Identification ProcedureCustomer Information / Profile Risk classification of accounts- risk based approach Risk Management Ongoing monitoring of account activity Reporting of cash and suspicious transactions
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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
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9 May 2012

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
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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;
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9 May 2012

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
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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
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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
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Reports

Cash

Transaction Report Transaction Report

Suspicious

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DR. N. BHASKARAN

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Summary: Prevention of Money Laundering

Observing Rules for Bankers

Compliance with Laws

Money Laundering Prevention

Customer due Diligence

9 May 2012

Identifying Irregular / Suspicious Transactions DR. N. BHASKARAN

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Thank You

9 May 2012

DR. N. BHASKARAN

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