Transcript Identification and Reporting of Suspicious Transactions

Anti Money Laundering
PMLA Guidelines
Contents
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Introduction to Money Laundering
Introduction : FATF / FIU INDIA / PMLA (2002)
Obligations Under PMLA / AML Workflow
Suspicious Transaction in brief
STR Reporting
Sample / Case Studies
Recordkeeping
What is Money laundering ?
• The goal of most criminal acts is to generate profit for
the individual or group
• Money laundering is the processing of these criminal
proceeds to disguise their illegal origin
• The criminal involved must find a way to control the
funds without attracting attention to the underlying
activity or the persons involved
• They disguise the sources, change the form, or move
the funds to a place where they are less likely to
attract attention
Where Does Money Laundering
occur?
• As money laundering is a consequence of almost all
profit generating crime, it can occur practically
anywhere in the world
• Because the objective of money laundering is to get
the illegal funds back to the individual who generated
them, launderers usually prefer to move funds through
stable financial systems
How is Money laundered ?
Stage 1: Placement
The launderer introduces his illegal profits into the
financial system. This is done by
• Breaking up large amounts of cash into less
conspicuous smaller sums that are then deposited
directly into a bank account
• Purchasing a series of monetary instruments (cheques,
money orders, etc.) that are then collected and
deposited into accounts at another location
How is Money laundered ?
Stage 2 : Layering
• The launderer engages in a series of conversions or
movements of the funds to distance them from their
source
• The funds might be channeled through the purchase
and sales of investment instruments
How is Money laundered ?
Stage 3 : Integration
• Having successfully processed his criminal profits
through the first two phases the launderer then
moves them to the third stage, integration
• The funds re-enter the legitimate economy. The
launderer might choose to invest the funds into real
estate, luxury assets, or business ventures
Financial Action Task Force
• About FATF
An inter governmental policy making body, comprised of
around 25 countries, that has a ministerial mandate to
establish international standards for combating money
laundering and terrorist financing.
• Birth
The FATF was created at the 1989 G7 Summit meeting in
Paris
• Role of FATF
Sets international standards to combat money laundering
and terrorist financing.
Assesses and monitors compliance with the FATF standards
FATF - Recommendations
• The internationally endorsed global standards for
implementing effective AML/CFT measures. In 1990,
the FATF issued 40 recommendations to fight money
laundering
• In 2001 it issued 8 special recommendations
• In 2003 it issued 9th Special recommendation
FATF - Benefits
• Securing a more transparent and stable financial
system that is more attractive to foreign investors
• Ensure that financial institutions are not vulnerable to
infiltration or abuse by organised crime groups
• Build the capacity to fight terrorism and trace terrorist
money
• Meet binding international obligations, and avoid the
risk of sanctions or other action by the international
community
• Avoid becoming a haven for criminals
FIU India
• Financial Intelligence Unit – India (FIU-IND) was set by
the Government of India vide O.M. dated 18th
November 2004
• FIU-IND is an independent body reporting directly to
the Economic Intelligence Council (EIC) headed by the
Finance Minister
• The main function of FIU-IND is to receive
cash/suspicious transaction reports, analyse them and,
as appropriate, disseminate valuable financial
information to intelligence/enforcement agencies and
regulatory authorities
Functions of FIU India
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Collection of Information
Analysis of Information
Sharing of Information
Act as Central Repository
Coordination
Research and Analysis
Prevention of Money
Laundering Act (PMLA 2002)
• PMLA 2002 forms the core of the legal framework put
in place by India to combat money laundering
• Came into force with effect from July 1, 2005
• The PMLA rules impose obligation on banking
companies, financial institutions and intermediaries to
verify identity of clients, maintain records and furnish
information to FIU-IND
• PMLA defines money laundering offence and
provides for the freezing, seizure and confiscation of
the proceeds of crime
Obligations under PMLA
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Every banking company, financial institution and
intermediary shall Maintain a record of all transactions, the nature and
value of which may be prescribed
Such transactions may comprise of a single transaction
or a series of transactions integrally connected to each
other, and where such series of transactions take place
within a month
Furnish information of transactions referred to in
clause (a) to the FIU Director
Verify and maintain the records of the identity of all its
clients
AML Workflow
Appointing a Principal Officer , Establishing Policies and Procedures,
Sending these details to FIU IND
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Screening of Client with Known criminal background
, Sebi Debarred Database or UNSC
Capture Various Inputs in the Client Master,
Client’ Risk Profile
Marking of Client With Special Category
Capturing Financial Parameters like Income, Net worth etc..
Monitoring of Transactions and creation of alerts through a system
Once a transaction crosses the thresh hold limit,
as defined in AML Policy / Risk Profile
Senior Management would consider the suspicious alerts
and report the same to FIU if required
Client Of Special Category
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Non Resident Indians
High Net worth Clients
Trust / Charities / Non Governmental Organization
Entities / Companies having close family Shareholding
or Beneficial Owner Ship
Companies offering Foreign Exchange Offerings
Clients from High Risk Countries
Non Face to Face Client
Client with Dubious Public Reputation
PEP (Politically Exposed Persons)
Others
Suspicious transaction
Suspicious transaction means a transaction or a series
of transactions, undertaken by a client or a group
clients, that
• 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 Transaction
Criteria
• Clients whose identity verification seems difficult or
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clients that appear not to cooperate
Source of funds of client is not keeping in line with his
apparent standing
Substantial Increase in business without apparent cause
Attempted transfer of investment proceeds to apparently
unrelated parties
Appears to be an agent of an undisclosed principal
Multiple accounts with no apparent reason.
Unexplained high level funds activity with low securities
transactions
Large deposits for long term investments. Immediate
liquidation
Suspicious Trading Common
Violations
• Insider trading is unique to the securities industry and
generates illicit assets. As a predicate offence for
money laundering, and an offence in its own right
• This type of misconduct is reportable on STRs
• It has proven useful in assisting law enforcement and
regulators to prosecute such misconduct
Insider Trading Indicators
• The customer makes a large purchase or sale of a security, or
option on a security, shortly before news is issued that affects
the price of the security
• The customer is known to have friends or family who work at
or for the securities issuer
• The customer lives in the locality where the issuer is located
• The customer’s purchase does not correspond to his or her
investment profile. For example, the customer may never have
invested in equity securities, but does so at an opportune time
• The customer’s account is opened or significantly funded
shortly before a purchase; and
• The customer sells his or her position in a security in
conjunction with a significant announcement about the
security.
Insider Trading : Sample
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Indicators: Unusual important transactions; Suspicion of insider trading; and
Securities sold a few months later.
Suspicious transaction/activity report information
In 2004, an ABC institution reported several unusual important purchases of shares of
two quoted companies, belonging to the same group, by company Y represented by
Mr. X and a third party also in relation with company Y. Mr. X was manager in the two
quoted companies, but also managed company Y.
Case description
Mr. X, manager of an important group of companies, knew that a reorganisation of
the group was going to be publicly announced. This could have a favourable effect on
the share price of two companies of this group after the reorganisation was
announced.
Mr. X used this knowledge to purchase securities of these two companies through
another company he managed and through a third party before the reorganisation
was announced.
Once the reorganisation was announced, the share price of these two companies rose
sharply. The shares were sold at a high profit.
Suspicious Trading Common
Violations continued
• Market manipulation generally refers to conduct that
is intended to deceive investors by controlling or
artificially affecting the market for a security
• The simplest form is penny stock manipulation. The
widely known scheme is pump and dump
• This scheme involves touting a company’s stock with
false or misleading statements, often in conjunction
with securities trades that raise the price of the
security or make it appear as if the securities trading
volume is higher than it actually is. Therefore the
security price is artificially raised (“pumped”); the
security is then sold (“dumped”) for a profit
Suspicious Trading Common
Violations continued
• Securities fraud broadly refers to deceptive practices in
connection with the offer and sale of securities
• Encompasses insider trading and market manipulation
• In a Ponzi scheme, a fraudster lures investors with the
promise of high returns that are to be
• Instead of generating actual profits, the fraudster creates
the illusion of profits by paying investors returns from
their original investment or paying returns from the
money that new investors contribute to the fraud
• This type of scheme tends to collapse when the number
of new investments into the scheme do not satisfy the
payment obligations for previous investors
Filing an STR
• Furnish the information of the suspicious transactions to Director, FIUIND within 7 working days of establishment of suspicion at the level of
Principal Officer
Concluded that an STR is
to be filed
Electronic Format
Six Files to be prepared
in a CD
CD to be Sent to FIU
(Delhi)
Not
applicable
to brokers
Manual Format
SINCTL.txt - Control File
SINBRC.txt - Branch Data File
SINACC.txt - Account Data File
SINTRN.txt - Transaction File
SININP.txt - Individual Data File
SINLPE.txt - Legal Person/Entity
Filing an STR
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Suspicious Transaction Report for an intermediary is to be uploaded in
soft copy which is digitally signed by the principal officer. Various files
which gets uploaded and makes an STR are as below.
SINACC.txt -The records containing details of accounts containing the
suspicious transactions are extracted in Accounts Data File
SINTRN.txt - The records containing details of suspicious transactions to
be reported are extracted in Transaction Data File
SININP.txt - If the account is for Individuals, the records containing
details of Individuals who are account holders are extracted in
Individual Data File
SINLPE.txt - If the account is for a Legal Person /Entity, the records
containing details of Legal Persons /Entities who are account holders are
extracted in Legal Persons /Entities Data File.
SINBRC.txt - Records containing details of branches/franchisees which
have reported suspicious transactions are extracted in Branch Data File
SINCTL.txt - The report level details and summary of other five tables is
entered in Control file
Filing STR (Control File)
• Identity of Client (Yes or No)
False identification documents, Identification documents which
could not be verified within reasonable time, Non-face to face client,
Doubt over the real beneficiary of the account, Accounts opened
with names very close to other established business entities
• Suspicious Background (Yes or No)
Suspicious background or links with known criminals
• Multiple Accounts (Yes or No)
Large number of accounts having a common account holder,
introducer or authorized signatory with no rationale, Unexplained
transfers between multiple accounts with no rationale
Filing STR (Control File)
• Activity in Accounts ( Yes or No )
Unusual activity compared to past transactions, use of different
accounts by client alternatively, Sudden activity in dormant
accounts, Activity inconsistent with what would be expected
from declared business, Account used for circular trading
• Nature of Transactions ( Yes or No )
Unusual or unjustified complexity, No economic rationale or
bonafide purpose, Source of funds are doubtful, Appears to be
case of insider trading, Investment proceeds transferred to a
third party, Transactions reflect likely market manipulations,
Suspicious off market transactions
• Value of Transactions ( Yes or No )
Value just under the reporting threshold amount in an apparent
attempt to avoid reporting, Large sums being transferred from
overseas for making payments, Inconsistent with the clients
apparent financial standing, Inconsistency in the payment pattern
by client, Block deal which is not at market price or prices appear
to be artificially inflated/deflated
STR Important Points
• Continuity in dealing with the client as normal until told
otherwise and the client shall not be told of the
report/suspicion
• Intermediaries shall not put any restrictions on operations
in the accounts where an STR has been made
• Intermediaries and their directors, officers and employees
(permanent and temporary) shall be prohibited from
disclosing (“tipping off”) the fact that a STR or related
information is being reported or provided to the FIU-IND.
Thus, it shall be ensured that there is no tipping off to the
client at any level.
STR Important Points.. contd
• It is likely that in some cases transactions are abandoned or
aborted by clients on being asked to give some details or to
provide documents
• It is clarified that intermediaries shall report all such attempted
transactions in STRs, even if not completed by clients,
irrespective of the amount of the transaction
• If you are suspicious then do not fail to file a STR report to the
designated authority. Not to do so could be tantamount to
actively aiding a money launderer
• PMLA Policy of the organisation must be thoroughly understood
by all employees of the organization.
• FIU-IND is in the process of developing technological
infrastructure to enable submission of electronic return over a
secure gateway provision for which is already done in file formats
Recordkeeping
• Maintain such records as are sufficient to permit reconstruction of
individual transactions so as to provide, if necessary, evidence for
prosecution of criminal behavior
• Where required by the investigating authority, they shall retain
certain records, e.g. client identification, account files, and business
correspondence, for periods which may exceed those required
under the SEBI Act, Rules and Regulations framed there-under
PMLA, other relevant legislations, Rules and Regulations or
Exchange bye-laws or circulars
• Maintain records for a period of five years from the date of
transactions between the client and intermediary i.e. the date of
termination of an account or business
• In situations where the records relate to on-going investigations or
transactions which have been the subject of a suspicious transaction
reporting, they shall be retained until it is confirmed that the case
has been closed relationship between the client and intermediary
Summary : Money Laundering
in some Economies
• Launderers are continuously looking for new routes for
laundering their funds
• Economies with growing or developing financial centers,
but inadequate controls are particularly vulnerable as
established financial centre countries implement
comprehensive anti-money laundering regimes
• Some might argue that developing economies cannot afford
to be too selective about the sources of capital they attract.
But postponing action is dangerous. The more it is
deferred, the more entrenched organized crime can
become.
How does Money Laundering affect business ?
• Hampers economic growth.
• Allows anti social elements to damage our society.
• Will take investors away from the financial system if they
feel it is unsafe.
• A reputation for integrity is the one of the most valuable
assets of a financial institution
• The institution could be drawn into active complicity with
criminals and become part of the criminal network itself, if
the employees have been involved or for turning blind eye
• Evidence of such complicity will have a damaging effect on
the attitudes of other financial intermediaries and of
regulatory authorities, as well as ordinary customers
Thank You…