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Prevention of Money Laundering

By Ms. Lakshmi Arun Assistant Director

Have any of you who have not experienced giving bribe directly or indirectly?

How do you think that the money earned out of corruption, bribery etc is utilised by Criminals?

Some taunting facts

According to United Nations office of Drugs and Crime, the estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. According to Corruption Perception Index 2011 India is in 95th position, where as according to doing business report 2012 of the world bank India is in 132nd position.

Some taunting facts

As many as 62% of all citizens think that corruption is real and they have in fact have had first hand experience of paying a bribe or using a contact to get a job done in a public office India Corruption Study 2005 by Transparency International. In the book 'Corruption in India: The DNA and RNA' authored by Professors Bibek Debroy and Laveesh Bhandari say that the public officials in India may be cornering as much as Rs.92,122 crore ($18.42 billion), or 1.26 per cent of the GDP, through corruption. The books estimates that corruption has virtually enveloped India growing annually by over 100 percent (Source : Economic Times Dated December 11, 2011)


Black Money and its laundering

Act of Money Laundering

Process by which illegal funds and assets are converted into legitimate funds and assets.

How the process takes place

Entry of illegal funds into the systemPlacement Distancing of funds from its originLayering Laundered funds are made available as legitimate funds-Integration.

The Process

How Does It Work?

Sell cocaine and get a million dollars.

Take the million in cash to the some Islands.

Buy a legitimate company , complete with a board of directors. Open a bank account in the companys name and deposit the rest of the money. Enjoy the islands, get some sun, then go home. When you get home, borrow $200,000 from the Company account and have it delivered via wire transfer.

How does it work?

Open a restaurant.

Deposit proceeds from ongoing drug business along with proceeds from the restaurant every month into a legitimate bank account. Dont add too much illegal money, just enough to make it look as though your restaurant is doing a good, healthy business.
Pay all of your taxes on the restaurant deposits, so the tax authorities dont start an investigation.

Parliamentary History of the Law.

The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998.

Referred to Standing committee on finance on 05-08-1998. The committee submitted its report on 04-03-1999. The bill was presented in Rajya Sabha on 08-03-1999.

Parliamentary History of the Law.

The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999.

The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999. Rajya Sabha referred the bill to Select committee. The committee finalised its report on 24th July, 2000. The present act after being passed by both the houses received the assent of the president on 17th January, 2003.

What is a Financial Intelligence Unit?

A financial intelligence unit (FIU) is a central agency of a government that

receives financial information pursuant to country's anti-money laundering laws


analyzes and processes such information and

disseminates the information to appropriate national and international authorities, to support anti-money laundering efforts.

Broad Regulatory Framework

The Prevention of Money Laundering Act, 2002 Prevention 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) Rules, 2005. Guidelines on Anti Money Laundering Standards/KYC norms/customer identification process issued by SEBI/RBI/IRDA

The Prevention of MoneyLaundering Act, 2002

Director, Financial Intelligence Unit-India

The reporting entities to furnish information of specified transaction to FIU-IND Analyse and process reports and disseminate to LEAs/IAs Power to impose fine for non-compliance

Director of Enforcement
Powers relating to investigation of and prosecution for moneylaundering offences Power of attachment of property, survey, search & seizure and retention of property and document Power regarding summons, production of document and recording of statement .

Obligation under PMLA

PMLA impose obligations on Banking Companies Financial Institutions Intermediaries in respect of Maintenance of Records Furnishing of information Verification of identity of the clients.

Banking Company includes

Public sector banks Private sector banks Private foreign banks Co-operative banks Regional rural banks

Financial Institutions includes

Financial Institution as defined under Section 45-I of the RBI Act Insurance Companies Hire purchase companies Chit fund Companies Housing finance institutions Non-banking financial companies.

Intermediary includes
Stock Brokers Sub-brokers Share-transfer agents Bankers to an issue Trustees to trust deed Registrar to an Issue Merchant Bankers.

Obligation in respect of maintenance of records

Maintenance of records includes records of All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency All series of cash transactions which are integrally connected All suspicious transactions

Furnishing of Information
Reporting of cash and suspicious transactions Reporting on the appointment/change in the principal officer etc.

Suspicious Transaction means

A transaction whether or not made in cash,which, to a person acting in good faith 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

Illustrative list of suspicious transactions

False Identification documents Identification documents which could not be verified within reasonable time Multiple Demat Accounts Multiple Trading Account with the broker Sudden increase in the transaction of client Huge off-market deals

Illustrative list of suspicious transactions

Multiple Bank accounts Huge withdrawals/deposits Nature of transactions inconsistent with what would be expected from declared business Foreclosure of home loan accounts by substantial cash payments

Illustrative list of suspicious transactions

Frequent purchases of drafts or other negotiable instruments with cash Large number of accounts with common account holders , introducer or authorised signatory Unexplained transfers between multiple accounts with no rationale

Data on cash/suspicious Transactions (as on 31.07.11)

Collection of Information 30.36 million Cash Transaction Reports (CTRs) received 99.62 % CTRs received in electronic format 46,409 Suspicious Transaction Reports (STRs) received 5.26 lakh Counterfeit Currency Reports (CCR) of face value of Rs.446 million Analysis and Dissemination of Information 41,934 STRs processed 28,210 STRs disseminated

Data on Suspicious Transactions

Banking Company Financial Institution Intermediary Total

2,826 841 742 4,409

200910 7,394 1,655 1,018 10,067

201011 12,287 7,006 1,405 20,698

24,127 9,878 3,902 37,907

How to increase the Compliance level

Spread financial literacy among reporting entities and their clients. Conduct educational programmes to reinforce the importance of reporting requirements Impose more stringent penalties for money laundering offences. Training of staff

KYC norms issued by RBI,SEBI & IRDA covers Customer Acceptance Customer Identification Transaction Monitoring Risk Management

International efforts

1985- The United Nations- Started efforts with the recognition that drug traffickingand associated money launderingwere truly international problems and could be addressed effectively only on a multinational basis 1988 Basel Committee on Banking Supervision - issued a statement on Prevention of Criminal use of Banking System for the purpose of ML 1989 Financial Action Taskforce (FATF)- Set up to ensure global action to combat money laundering ( subsequently included terrorist financing ) 1995 - Egmont Group- Set up to stimulate international cooperation and develop best Practices for exchange of information amongst FIUs 1997- Asia/Pacific Group on money laundering (APG)- FATF-style regional body (FSRB)-set up to create awareness and encourage adoption of AML measures in the region. World Bank and International Monetary Fund- have evolved a comprehensive AML/CFT assessment methodology for evaluating countrys compliance with FATF Standards and provide technical support


Mandate :

Establish, revise and clarify global standards and measures for combating ML/TF; Promote global implementation of the standards; Identify and respond to new money laundering and terrorist financing threats; Engage with stakeholders and partners throughout the world.

FATF Forty+ Nine Recommendations:

Forty Recommendations - Complete set of counter-measures against money laundering Nine Special Recommendations on Terrorist Financing

Internal Review Mechanisms :

Self-assessment exercise based on a standard questionnaire designed by FATF and used by its members to report on their anti-money laundering system on an annual basis and Mutual evaluation process in which each country is evaluated by a team of experts drawn from other member countries to give ratings with respect to each recommendation of FATF

FATF Recommendations
Criminalization: To criminalize money laundering and terrorist financing. The definition of money laundering offenses has now expanded to include all serious offenses. Provisional Measures and Confiscation: To put in place measures to identify, trace, freeze, or seize and finally to confiscate the illegal proceeds. Customer due diligence: To impose duties on financial institutions to know their customers and to abolish the use of anonymous accounts. Record keeping: Financial institutions to keep records on all the transactions that they conduct. Suspicious transactions reporting: Financial institutions to report all transactions that raise their suspicion, without alerting the clients. Internal controls: Financial institutions adopt internal mechanisms that allow them to comply with the regulatory requirements. Implementation: To create regulatory and supervisory agencies that are capable of implementing the international standards set by the Recommendations. International cooperation: To put in place a system that allows it to cooperate with other countries on all aspects of law enforcement including exchange of information, preservation and confiscation of assets and extradition.

KPMG -India Anti-Money Laundering Survey 2012

This survey was conducted across the financial services sector covering public sector banks, private sector banks, foreign banks, general and life insurance companies, mutual funds, non-banking financial companies and other institutions in the FS sector covered under PMLA. The primary target respondents of the survey were senior and mid management members from Compliance, Audit, Risk Management and AML departments. The respondents were also senior management members from the business and operation functions.

KPMG -India Anti-Money Laundering Survey 2012

Increased focus on money laundering risk by the Senior Management 1. 76% Discuss the AML profile on at least a monthly or quarterly basis 2. 41% Integrate AML in the business strategy of new products/services. 3. 35% Publicize the AML compliance programme internally

KPMG -India Anti-Money Laundering Survey 2012

FATF: Membership comes with increased responsibilities 84% -Regulatory scrutiny has become more stringent post FATF membership 90% -Regulatory scrutiny is high in the area of Know Your Customer policy and processes 81% - Agree that scrutiny will remain high in the area of Transaction Monitoring / Reporting

KPMG -India Anti-Money Laundering Survey 2012

Laying the foundation: Money laundering risk assessment 65%Conduct an AML risk assessment on at least a half yearly or yearly basis 32%Conduct an AML risk assessment on the basis of an event 51% AML policies and procedures are based on local regulations and benchmarked against global best practices

KPMG -India Anti-Money Laundering Survey 2012

Drilling down to unearth the core 86% -Institution follows a risk based approach in relation to account opening 84%-Beneficial owner identified at the time of opening an account 83% -Have procedures for monitoring sanctions lists before account opening 81% -Customer documents are collected and verified before opening an account 77%-Have specific procedures in place for identifying politically exposed persons

KPMG -India Anti-Money Laundering Survey 2012

Testing and monitoring the effectiveness of your controls 71%- Have a formal procedure to test and monitor the effectiveness of anti-money laundering systems and controls 80% - Compliance function plays an important role in the testing and monitoring procedures 76%-Internal Audit plays an important role in the testing and monitoring procedures.

KPMG -India Anti-Money Laundering Survey 2012

Investment to be made in the area of AML 44% -Investment will increase by 10 to 20 percent. 29%- Investment will increase by 21 to 50 percent


Assocham in its recent report on 'Black money menace in India' had suggested the government should provide immunity to persons wanting to bring back funds stashed abroad.


As Practising Company Secretary/Company Secretary in whole time employment, what shall we do to prevent money laundering?

Thank you

Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.