ANTI MONEY LAUNDERING

Money Laundering What is Money Laundering???

1. To move illegally acquired cash through financial systems so that it appears to be legally acquired.

2. Taking dirty money from crime and turning it into clean money by putting it through some process which disguises its origin.

3. Generally speaking, 'money laundering' is the introduction of illegally gained assets into the legal financial system with the aim of covering up its true origin.

Stages in Money Laundering

1. Placement: Parking of money Cash placed in legal channels, camouflaged with legitimate receipts sometimes.

Buying of High Value properties for cash.

Cash Exported.

2. Layering: Chaining the incidents Multiple Bank Transfers in home foreign countries.

Changing forms of High Value properties.

Deposition of cash in foreign bank accounts.

3. Integration: Recollection of money Receipt of proceeds as loan repayments or proceeds.

Encashment of High Value Assets.

Raising incomes from other sources.

The Process in Practice

Modes of Money Laundering

1. Structuring a Transactions into multiple transactions below threshold limits.

2. Overvaluing or undervaluing of assets traded 3. Hawala 4. Real Estate Transactions 5. Casino and other Gambling havens 6. High Value Items like antiques, art, precious stones and metals 7. Stock and Commodities Market Transactions 8. And Many More

Money Laundering and Securities Market

1. Highly Vulnerable 2. Easy Placement 3. Easy Layering 4. Easy Integration 5. Jugglery between Funds and Shares to clean the dirty money 6. Concealment to a non-traceable extent 7. Profit generation in Cash & F&O Segment 8. Participatory Note Transactions 9. Commodities even easier due to relaxed laws

Why Combat Money Laundering???

1. Proceeds used by anti-social elements to create hardships to others and harass the human fraternity 2. To create fear in the minds of common man and claim it as achievement 3. Used to come into power or become more powerful 4. Life blood of all anti-social groups to run their organisations 5. According to studies if properly combated, it can reduce terrorism to an extent of 70%

Recognition of the need

1. Resolution to combat was adopted by UN in 17 th special session of General Assembly in Feb 1990 2. Political Declaration adopted by UN General Assembly called upon members to adopt National Money Laundering Legislation and Program in 1998 3. PMLA to come into force from 1 st July 2005 4. Applies to whole of India

Regulatory Structure

PREVENTION OF MONEY-LAUNDERING ACT, 2002 Extends to the whole of India.

Came into force 1st of July, 2005.

PREAMBLE An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto.

Section 3 of PMLA

3. OFFENCE OF MONEY-LAUNDERING 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.

Important Parts of Sec 3 a) Directly or indirectly b) Knowingly attempts to indulge / assists / is a party or is actually involved c) Proceeds of crime d) Projecting it as untainted property

Some Definitions of PMLA

2(u) "Proceeds of Crime" “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property 2(v) Property “property” means any property or assets of every description, located; whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and instruments evidencing title to, or interest in, such property or assets, wherever

Punishment and Confiscation

Sec 4: PUNISHMENT FOR MONEY-LAUNDERING

• • • •

Imprisonment for minimum 3 to maximum 7 years Fine up to a maximum of Rs. 5,00,000/ If proceeds of crime involved in money-laundering relates to any offence under the NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985.

Maximum punishment can be extended up to 10 years.

CONFISCATION

•

The property or the assets acquired from these proceeds are confiscated and vest in the hands of the central government free from all encumbrances.

Rules

PREVENTION RULES, 2005 (… OF MONEY-LAUNDERING (…) Maintenance of Records of the Nature and Value of Transactions, The Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries)

Some Definitions of PMLR

2(b) Client “client” means a person that engages in a financial transaction with B/F/I and includes a person on whose behalf the person that engages in the transaction or activity, is acting.

2(d) Officially Valid Document “officially valid document” means Passport, Driving license, PAN Card, Voter’s Id Card or any other document as may be required by the banking company, or financial institution or intermediary; 2(e) Prescribed Value “prescribed value” means the value of transaction prescribed under these rules;

Some Definitions of PMLR

2(h) Transaction “transaction” includes deposit, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means.

2(g) Suspicious Transaction “suspicious transaction” means a transaction whether or not made in cash which, to a person acting in good faith – (a) gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or (b) appears to be made in circumstances of unusual or unjustified complexity; or (c) appears to have no economic rationale or bonafide purpose;

Maintenance of Records

Rule 3 (1) B/F/I to maintain records of….

(A) All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency; (B) All series of cash transactions integrally connected to each other which have been valued below rupees ten lakhs or its equivalent in foreign currency where such series of transactions have taken place within a month; (C) All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place; (D) All suspicious transactions whether or not made in cash “transaction” includes deposit, withdrawal, exchange or transfer of funds in whatever currency, whether in cash or by cheque, payment order or other instruments or by electronic or other non-physical means.

What Records to Maintain and How???

Rule 4 (a) the nature of the transactions; (b) the amount of the transaction and the currency in which it was denominated; (c) the date on which the transaction was conducted; and (d) the parties to the transaction.

Rule 5 (1) In hard and soft in manner as specified by RBI or SEBI (2) Evolve (3) Observe an the internal mechanism specified by RBI or SEBI for information as specified by RBI or SEBI maintaining such information in such form and at such intervals as may be procedure and the manner of maintaining Rule 6 Retention of Records for 10 years from the date of cessation of transaction

Furnishing of Information & Time Frame

Rule 7 - Furnishing of Information (1) Appointment of principal and communicate the name, designation and address of the Principal Officer to the Director FIU (2) Principal Officer to report to the Director the information referred to in Rule 3 (3) Every B/F/I may evolve internal mechanism for furnishing information referred to in Rule 3 Rule 8 - Time Frame (1) Information in clause (A) & (B) of sub-rule (1) of Rule 3 i.e.

details of Cash Transactions, by 15 th day of succeeding month.

(2) Information in clause (C) & (D) of sub-rule (1) of Rule 3 i.e.

details of Cash Transactions, within 7 days from the date of arriving at the conclusion of occurrence of such transaction

Rule 9 - Verification of Records

At the time of opening of an account the B/F/I shall maintain a record of the following and maintain it for

10 years

•Identity •Address or addresses both current and permanent •Nature of Business •Financial Status

Individuals to provide

•A Photograph •Copy of Officially valid document •Proof for nature of Business and Financial Status

Firms to provide

•Registration certificate •Partnership deed •A copy of officially valid document of a person holding attorney to transact

on its behalf

•Proof for Nature of Business and Financial Status

Rule 9 - Verification of Records cont’d…

Companies to provide

• Certificate of Incorporation • MOA & AOA • Resolution authorising managers, officers or employees to

transact on their behalf

• A copy of official valid document of the person so authorised • Proof for Nature of Business and Financial Status

Firms to provide

• Registration certificate • Partnership deed • A copy of officially valid document of a person holding

attorney to transact on its behalf

• Proof for Nature of Business and Financial Status

Rule 9 - Verification of Records cont’d…

Trust to provide

• Registration certificate • Trust Deed • A copy of officially valid document of a person holding

attorney to transact on its behalf

• Proof for Nature of Business and Financial Status

AOP/BOI to provide

• Resolution of the managing body • POA granted to him to transact on its behalf • A copy of officially valid document of a person holding

attorney to transact on its behalf

• Such document as required by B/F/I to establish legal

existence of such AOP/BOI

• Proof for Nature of Business and Financial Status

The other Regulators & Regulatory Norms

The Act and the Rules have given reference to 2 regulators viz. RBI and SEBI The RBI

• The KYC Norms for Commercial Banks (29/11/2004) • KYC Norms for NBFCs and others (21/2/2005)

The SEBI

• The KYC norms from mid 90s • Revised detailed formats issued on 24/8/2004 • Guidelines on AML Standards on 18/1/2006 • Obligations of Intermediaries in terms of the Act on

20/3/2006 including Reporting Formats for CTR and STR

SEBI Requirements in detail

SEBI Circular on Guidelines on AML Standards dated 18/1/2006 requires:

• Maintain Records as per Rule 3(1) (Cash & Suspicious

Transactions)

• Prepare proper policy framework to ensure compliance

with PMLA within one month of the Circular

• To designate a ‘Principal Officer’ to ensure compliance

with the Act within one month and submit details thereof to the Director-FIU

• To designate a “Designated Director”

SEBI Requirements in detail cont’d…

SEBI circular 20/3/2006 including Reporting Formats for CTR and STR

• CTR to be reported by 15th of the succeeding month • STR within 7 days of conclusion that such a transaction

has taken place

• Principal officer to record reason treating a transaction

as suspicious

• Principal officer to be responsible for timely submission

of CTR & STR

• Utmost confidentiality to be maintained about the

information being submitted to FIU

• Information to be sent by speed/registered post or fax

at the registered address.

• Ensure that there is no tipping off to the client.

Filing of CTR

• Manual or Electronic • If technically capable then reports to be filed in electronic

form only

• Technical capability means:

i) A personal computer with 32 MB memory RAM, 800 x 600 VGA video display, Windows® 98/Me/NT/2000/XP; and ii) An Internet connection.

It means all have to submit the information in electronic form only

• Reporting for all its branches and franchisees also • CTR in Manual form includes: • Summery of CTR • CTR (detailed) • Annexure A (details of individual) • Annexure B (details of non-individuals) • CTR in electronic forms is to be given in prescribed structure

Filing of STR

• Manual or Electronic • If technically capable then reports to be filed in electronic

form only

• Technical capability means:

i) A personal computer with 32 MB memory RAM, 800 x 600 VGA video display, Windows® 98/Me/NT/2000/XP; and ii) An Internet connection.

It means all have to submit the information in electronic form only

• Reporting for all its branches and franchisees also • STR in Manual form includes: • Summery of STR • Annexure A (details of individual) • Annexure B (details of non-individuals) • Annexure C (Account Detail Sheet or Transaction Details) • STR in electronic forms is to be given in prescribed structure

Framing of Internal Procedures

Parts of the Procedures:

• Commitment from the Management (Policy Statement) • Customer Acceptance Policy • Customer Identification Procedures • Customer Due Diligence • Customer Categorization (geographical, nature of business,

politically exposed persons, defamed NGOs, criminal record etc.)

• Monitoring of Transactions • Periodicity of Transaction Monitoring • Risk management • Staff and Customer Education • Introduction of New Technologies • Ensuring effectiveness through independent reviews • Policy & Procedures approved by Board

Identification of Suspicious Transaction

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Assess the policies and procedures for compliance with statutory and regulatory requirements for

• Monitoring • Detecting • Reporting

suspicious transactions

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Systems to search, identify, and report suspicious activity

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Manual transaction monitoring

Review of various reports such as MIS, Fund Transfer Report etc.

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Automated account monitoring

Development and implementation of computer programmes

Identification of Suspicious Transaction

Indicators for Suspicious Activities

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Clients whose identity verification seems difficult or clients appears not to cooperate

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Asset management services for clients where the source of the funds is not clear or not in keeping with clients apparent standing/business activity

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Clients in high-risk jurisdictions or clients introduced by banks or affiliates or other clients based in high risk jurisdictions

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Substantial increases in business without apparent cause

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Unusually large cash deposits made by an individual or business

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Clients transferring large sums of money to or from overseas locations with instructions for payment in cash

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Transfer of investment proceeds to apparently unrelated third parties

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Unusual transactions by high-risk clients and businesses undertaken by shell corporations, offshore banks /financial services, businesses reported to be in the nature of export-import of small items

Sec 13: Effects of Non Compliance

Section 13 of the Act provides that non-compliance will result in:

   

levy of fine on the banking company, financial institution or an intermediary or any of its officers which shall be a minimum of Rs. 10,000 and which may extend to Rs. 1,00,000 for each failure

Our Profession & Role

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CAs maintain independence high ethical Possess specialised knowledge Accounts, Law & Technology standards of and Finance, Integration of the above qualities to Combat the global problem of Money Laundering and Terrorist Funding

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Help the mankind and further the motive of a peaceful world Law is evolving and so not that detailed and hence it needs to be taken by the spirit Great opportunity for specialisation requirements will be ever increasing as the