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 &ofChecks
Elements
AML Framework in Banks
Summary

Agenda
KYC/ AML/ CFT Overview
The 3D approach
Banks V/s Insurance Companies
Controls &ofChecks
Elements
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.
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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 1

A/c 3

A/c 6

A/c 4

A/c 7

A/c 2
A/c 5
Placement

A/c 9
Investment

A/c 8

Layering

Integration

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.
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Money Laundering
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

V/s

Terrorist

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
IRDA

Institutions
Intermediaries

SEBI

Regulatory Agencies
RBI

Enforcement Agencies

SEBI
IRDA

Enforcement Agencies
IB
RAW
REIC
CBDT-DGIT/CCIT
CBECDGDRI/DGCEI
ED
EOW of Police
EOW of CBI

Foreign FIUs

IB

FIU-IND

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

Foreign FIUs

Scheduled Offences included in

PMLA 2009
Drug
Trafficking
Smuggling
(arms, people,
goods)

Kidnapping

Criminal
Activities

Extortion
Bribery
& Corruption

Prostitution
Terrorist Act

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Counterfeiting
& Forgery

Gambling,
Robbery,
Cheating

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

12

AML approach-3D
Concept
Deterring

Adherence to KYC Norms

Activity Indicators
Detecting
Transaction Monitoring

Disrupting

13

Reporting transactions

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

14

Risk Comparison between Insurance

& Banking
CIP/ ML/ TF Risk Comparison
3

2
Insurance
Banking

0
Customer
Identif icatio
n

0-1: Low Risk

1-2:
Medium
Risk
2-3: High Risk
15

Money
Laundering

Terrorist
Financing

Risk Comparison between Banking

& Others
CTR/ STR/ CCR comparison
120
100
80
CTRs
STRs

60

CCRs

40
20
0
Banking

Others

Figures in percentage for the FY

2008-09 (Source: FIU Annual Report)

16

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

17

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

Training
FIU
Reporting
*
Regulator
y
Interface
Updates
to Senior
Mgmt
Audit

* 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 &ofChecks
Elements
AML Framework in Banks
Summary

21

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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