Case Study of South Indian Bank Money Laundering Money Laundering cases on Global Scale Why do Indian Banks

adopt AML Act? Measures of AML Act Recommendations

Opening A/C for fictitious & non-existing firm

Submit cash/deposit

Contacting financer who can lend money to racketeer

Remitted to foreign bank

South Indian Bank

Submit documents showing goods imported to India

Specialized in preparing forged documents

A/C in HongKong for receiving foreign exchange

Sell foreign exchange to smugglers

Case study reveals how a criminal syndicate could be set up for money laundering without revealing the identity of top racketeers How the banking system is vulnerable to such operations and how the banking staff can be subverted Take up reasonable measures to obtain information about the true identity of the persons on whose behalf an account is being opened The financial institution should keep records on customer identification Necessary to observe due diligence and pay special attention to all complex and unusually large transactions which have no apparent economic or visible or lawful purpose

Illegally obtained money

Appears to originate from legitimate source

Drugs trafficking

Criminal Activity

Arms trafficking Terrorism Extortion

Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources INTERPOL definition It is the process by which the proceeds of crime are made to appear legitimate. Money laundering an offence PML Act 2002

Placement
Immersion / Soaking The physical disposal of bulk cash proceeds derived from illegal activity

Layering
Soaping / Scrubbing The separation of illicit proceeds from their source by creating complex layers of financial transaction

Integration
Repatriation / Spin Dry Re-injecting laundered proceeds into economy so that they reenter financial system as normal business funds

Money Laundering Formal money transfer system Layering process is involved Conversion of black money to white money

Hawala

Informal money transfer system Layering process is eliminated Conversion of white money to black money

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

Bank has to be fully compliant with the provisions under Section 35 (A) of Banking Regulation Act, 1949

Objectives
Prevent banks from being used by criminal elements
Enable Banks to understand their customers and their financial dealings better

KYC
Making reasonable efforts to determine the true identity and beneficial ownership of accounts What constitutes reasonable account activity? Who your customers customer are?

Sources of funds

Nature of customers business

Customer Acceptance Policy

No account is opened in anonymous or fictitious name Customers are categorized based on risk perceptions Means identifying the customer by using reliable, independent source documents, data or information Customer Due Diligence To alert the AI to unusual or suspicious activities for further examination and investigation Distinguished from transaction screening

Customer Identification procedures

Monitoring of transactions

Procedures to evaluate the pattern of transactions and the transaction flow

Risk Management

Automated monitoring systems should be placed Regular review and updating of the parameters or criteria used to generate monitoring reports or issue alerts

Absence of Unique Identification Number

Availability of multiple IDs and accounts Lack of ID by significant segment

Tradeoff between KYC and Financial Inclusion Customer reluctance to share the personal information

Refers to the process of determining whether any of the bank's existing or potential customers are part of any blacklists or regulatory lists Purpose: To ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as terrorist individuals or terrorist organizations

Mohammed/Muhammad/Muhamed No surnames

Purpose: Alert the AI to activities which appear to be unusual or suspicious for further examination and investigation Distinguished from transaction screening, which involves the screening or filtering of payment instructions (e.g. wire or fund transfers) prior to their execution in order to prevent the AI from providing services to unsuitable persons or entities

Monitoring performed by staff who deal directly with customers (e.g. relationship managers) or process customer transactions (e.g. counter staff) (referred to in this paper as front-line staff); and Regular reviews of past transactions to detect unusual activities

Transactions Volume is very high and hence, it is difficult to find transactions pattern
Entity ATM Credit Card Internet Banking (Debit) Internet Banking (Credit) No. of transactions 234 mn 17.6 mn 2.3 mn 1.3 mn

Single filtering rule is employed and hence transactions monitoring is not efficient Lack of sophisticated technology (static vs dynamic)

Front-line staffs are the persons who know most about the customers and their typical pattern of transaction activities Provision of regular training to front-line staff to foster a high level of AML/CFT awareness in them

Partnership with the training institutes Need of training for lateral employees

Dilemma over the scope of transactions Network building Availability of conversion risk
Sector to sector transfer

suspicious

Creating a full-proof UID Dynamic technology like neural networks for transaction monitoring Scope of suspicious transactions should be clearly defined and should be uniform across all nations Sharing the information across industries