Transcript Anti Money Laundering Measures Implementing Issues for Banks

Basics
of
Anti-Money Laundering
& Know Your Customer
Compiled By : Vishal Chopra
What is Money Laundering?
•
Illegally
Conversion
obtained money
Criminal Activity
Appears to
originate from
legitimate
source
Drugs / Arms Trafficking
Terrorism
Extortion
Money Laundering
'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'.
In other words, it is the process used by
criminals through which they make
“dirty” money appear “clean”
Sec.3 of PML Act, 2002 defines ‘money
laundering’ as:
“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 the offence of moneylaundering”
Money Laundering
Money laundering generally refers to ‘washing’
of the proceeds or profits generated from:
(i) Drug trafficking
(ii) Arms, antique, gold smuggling
(iii)Prostitution rings
(iv)Financial frauds
(v) Corruption, or
(vi)Illegal sale of wild life products and other
specified predicate offences
Money Laundering Process
• PLACEMENT
• LAYERING
• INTEGRATION
Placement
• Immersion or 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 transactions
These disguise the audit trail & provide
anonymity
Integration
“Repatriation / Spin Dry”
Reinjecting laundered proceeds into
economy so that they reenter
financial system as normal business
funds
Provides an apparently legitimate
explanation to criminally derived
wealth
Techniques employed
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Deposit structuring or smurfing
Connected Accounts
Payable Through Accounts
Loan back arrangements
Forex Money Changers
Credit/ Debit cards
Companies Trading and Business Activity
Correspondent Banking
Lawyers, Accountants & other Intermediaries
Misuse of Non-Profit Organisations
Financing of terrorism
• Money to fund terrorist activities moves
through the global financial system via wire
transfers and in and out of personal and
business accounts
• It can sit in the accounts of illegitimate
charities and be laundered through buying and
selling securities and other commodities, or
purchasing and cashing out insurance policies.
Legal Sources of terrorist financing
• legal or non-legal
• legal
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Collection of membership dues
Sale of publications
Cultural of social events
Door to door solicitation within community
Appeal to wealthy members of the community
Donation of a portion of personal savings
Illegal Sources
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Kidnap and extortion;
Smuggling;
Fraud including credit card fraud;
Misuse of non-profit organisations and
charities fraud;
• Thefts and robbery; and
• Drug trafficking
Money Laundering Risks
What are the risks to banks?
(i) Reputational risk
(ii) Legal risk
(iii) Operational risk (failed internal processes, people
and systems & technology)
(iv) Concentration risk (either side of balance sheet)
All risks are inter-related and together have the
potential of causing serious threat to the survival of
the bank
Reputational Risk:
• The potential that adverse publicity regarding a
bank’s business practices, whether accurate or not,
will cause a loss of confidence in the integrity of the
institution
• Reputational Risk : a major threat to banks as
confidence of depositors, creditors and general
market place to be maintained
• Banks vulnerable to Reputational Risk as they can
easily become a vehicle for or a victim of customers’
illegal activities
Operational Risk
• The risk of direct or indirect loss resulting
from inadequate or failed internal processes,
people and systems or from external events
• Weaknesses in implementation of banks’
programmes, ineffective control procedures
and failure to practise due diligence
Legal Risk
• The possibility that lawsuits, adverse judgements or
contracts that turn out to be unenforceable can
disrupt or adversely affect the operations or
condition of a bank
• Banks may become subject to lawsuits resulting
from the failure to observe mandatory KYC
standards or from the failure to practise due
diligence
• Banks can suffer fines, criminal liabilities and
special penalties imposed by supervisors
Concentration Risk
• Mostly applies on the assets side of the balance
sheet: Information systems to identify credit
concentrations; setting prudential limits to restrict
banks’ exposures to single borrowers or groups of
related borrowers
• On liabilities side: Risk of early and sudden
withdrawal of funds by large depositors- damages to
liquidity
Penalties imposed on banks
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Jan. 2006
Aug. 2005
Feb. 2005
Jan. 2005
Oct. 2004
Sep. 2004
May. 2004
ABM AMRO
US$ 80 mio
Arab Bank
US$ 24 mio
City National Bank US$750,000
Riggs Bank
US$ 41 mio
AmSouth Bank
US$ 50 mio
City Bank Japan Licence cancelled
Riggs Bank
US$ 25 mio
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,
PO
• Know? What you should know?
• True identity and beneficial ownership of the
accounts
• Permanent address, registered & administrative
address
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 customer are?
KYC DOES NOT MEAN
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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
•
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)
Core elements of KYC
• Customer Acceptance Policy
• Customer Identification Procedure- Customer
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
• Board and management oversight of AML risks
• Appointment 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
Summary: Prevention of Money
Laundering
Observing Rules for
Bankers
Compliance with
Laws
Money Laundering
Prevention
Identifying
Irregular / Suspicious
Transactions
Customer
due Diligence
Asset Liability Management in Banks
Components of a
Bank Balance sheet
Liabilities
Assets
1.
2.
3.
4.
5.
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities
Contingent Liabilities
Components of Liabilities
1.
Capital:
Capital
represents
owner’s
contribution/stake in the bank.
- It serves as a cushion for depositors and
creditors.
- It is considered to be a long term sources
for the bank.
Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I.
II.
III.
IV.
V.
Statutory Reserves
Capital Reserves
Investment Fluctuation Reserve
Revenue and Other Reserves
Balance in Profit and Loss Account
Components of Liabilities
3. Deposits
This is the main source of bank’s funds. The
deposits are classified as deposits payable on
‘demand’ and ‘time’. They are reflected in
balance sheet as under:
I.
Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
Components of Liabilities
4. Borrowings
(Borrowings
include
Refinance
/
Borrowings from RBI, Inter-bank & other
institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:
I.
II.
III.
IV.
V.
Bills Payable
Inter Office Adjustments (Net)
Interest Accrued
Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
Others(including provisions)
Components of Assets
1. Cash & Bank Balances with RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts
Components of Assets
2. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
Components of Assets
3. Investments
A major asset item in the bank’s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in : *
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad
Components of Assets
4. Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
Components of Assets
5. Fixed Asset
I.
Premises
II.
Other Fixed Assets (Including furniture and fixtures)
6. Other Assets
I.
II.
III.
IV.
V.
VI.
Interest accrued
Tax paid in advance/tax deducted at source
(Net of Provisions)
Stationery and Stamps
Non-banking assets acquired in satisfaction of claims
Deferred Tax Asset (Net)
Others
Contingent Liability
Bank’s obligations under LCs, Guarantees,
Acceptances on behalf of constituents and
Bills accepted by the bank are reflected
under this heads.
Banks Profit & Loss Account
I.
II.
A bank’s profit & Loss Account has
the following components:
Income: This includes Interest Income
and Other Income.
Expenses: This includes Interest
Expended, Operating Expenses and
Provisions & contingencies.
Components of Income
1. INTEREST EARNED
I.
II.
III.
IV.
Interest/Discount on Advances / Bills
Income on Investments
Interest on balances with Reserve Bank
of India and other inter-bank funds
Others
Components of Income
2. OTHER INCOME
I.
II.
III.
IV.
V.
VI.
VII.
Commission, Exchange and Brokerage
Profit on sale of Investments (Net)
Profit/(Loss) on Revaluation of Investments
Profit on sale of land, buildings and other
assets (Net)
Profit on exchange transactions (Net)
Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
Miscellaneous Income
Components of Expenses
1. INTEREST EXPENDED
I.
II.
III.
Interest on Deposits
Interest on Reserve Bank of India / Inter-Bank
borrowings
Others
Components of Expenses
2. OPERATING EXPENSES
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
Payments to and Provisions for employees
Rent, Taxes and Lighting
Printing and Stationery
Advertisement and Publicity
Depreciation on Bank's property
Directors' Fees, Allowances and Expenses
Auditors' Fees and Expenses (including Branch Auditors)
Law Charges
Postages, Telegrams, Telephones etc.
Repairs and Maintenance
Insurance
Other Expenditure
Assets Liability Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets
& Liabilities- their volumes, mixes,
maturities, yields and costs in order
to maintain liquidity and NII.
Purpose & Objective of ALM
An effective Asset Liability Management Technique
aims to manage the volume, mix, maturity, rate
sensitivity, quality and liquidity of assets and
liabilities as a whole so as to attain a predetermined
acceptable risk/reward ratio.
It is aimed to stabilize short-term profits, long-term
earnings and long-term substance of the bank. The
parameters for stabilizing ALM system are:
1.
2.
3.
Net Interest Income (NII)
Net Interest Margin (NIM)
Economic Equity Ratio
RBI DIRECTIVES
• Issued draft guidelines on 10th Sept’98.
• Final guidelines issued on 10th
implementation of ALM w.e.f. 01.04.99.
Feb’99
for
• To begin with 60% of asset &liabilities will be
covered; 100% from 01.04.2000.
• Initially Gap Analysis to be applied in the first stage of
implementation.
• Disclosure to Balance Sheet on maturity pattern on
Deposits, Borrowings, Investment & Advances w.e.f.
31.03.01
SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1. Awareness for ALM in the Bank staff at all
levels–supportive Management & dedicated
Teams.
2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
3. Computerization-Full computerization,
networking.
4. Insight into the banking operations, economic
forecasting,
computerization,
investment,
credit.
5. Linking up ALM to future Risk Management
Strategies.
THANK YOU