Legal regime for AML

(Anti Money Laundering)

Issues for Discussion

Anti Money Laundering Legislation in Pakistan

Implications of AML/CFT Measures on the

Financial Sector

International Scenario

Key Issues

What is Money Laundering?

Money laundering is the process by which the proceeds of the

crime, and the true ownership of those proceeds, are concealed
or made opaque so that the proceeds appear to come from a
legitimate source.
Generally money laundering is the process by which one
conceals the existence, illegal source, or illegal application of
income to make it appear legitimate. In other words, it is the
process used by criminals through which they make dirty
money appear clean or the profits of criminal activities are
made to appear legitimate.

Money Laundering

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Money laundering generally refers to washing of the

proceeds or profits generated from:
Drug trafficking
People smuggling
Arms, antique, gold smuggling
Prostitution rings
Financial frauds
Corruption, or
Illegal sale of wild life products and other specified
predicate offences

Money Laundering

Money launderers are big time criminals who operate through

international networks without disclosing their identity.
The money laundered every year could be in the range of $600
bio to $2 trio. This gives money launderers enormous financial
power to engage or coerce or bribe people to work for them
Generally, money launderers use professionals to create legal
structure/ entities which act as front and use them for
laundering of funds

Money Laundering Process

Money Laundering consists of three stages:

1. The first stage involves the Placement of proceeds derived
from illegal activities the movement of proceeds,
frequently currency, from the scene of the crime to a place,
or into a form, less suspicious and more convenient for the
criminal.
2. The second stage is called Layering. It involves the
separation of proceeds from illegal source through the use
of complex transactions designed to obscure the audit trail
and hide the proceeds. The criminals frequently use shell
corporations, offshore banks or countries with loose
regulation and secrecy laws for this purpose.

Money Laundering Process

3. The third stage is called Integration. It represents the
conversion of illegal proceeds into apparently legitimate
business earnings through normal financial or commercial
operations. Integration creates the illusion of a legitimate
source for criminally derived funds and involves techniques as
numerous and creative as those used by legitimate businesses.
For e.g false invoices for goods exported, domestic loan
against a foreign deposit, purchasing of property and comingling of money in bank accounts.

What is Money
Laundering ?
Money Laundering is the process by which illegal funds and
assets are converted into legitimate funds and assets.

Investments
Purchases

Placement: Illegal funds or assets

are first brought into the financial
system

Layering: Use of multiple

accounts, banks, intermediaries,
corporations, trusts, countries to
disguise the origin.

Integration: Laundered funds are

made available as apparently
legitimate funds.

Important: All money laundering transactions need not go through this three-stage process.

Typologies/ Techniques
employed

Deposit structuring or smurfing

Connected Accounts
Payable Through Accounts
Loan back arrangements
Forex Money Changers
Credit/ Debit cards
Investment Banking and the Securities Sector
Insurance and Personal Investment Products
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 different typologies 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.
Although terrorist financing is a form of money laundering, it
doesnt work the way conventional money laundering works.
The money frequently starts out clean i.e. as a charitable
donation before moving to terrorist accounts. It is highly time
sensitive requiring quick response.

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Combating financing of
terrorism

(i) State Sponsored

(ii) Other Activities- legal or non-legal
Legal Sources of terrorist financing
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

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Combating financing of
terrorism

Illegal Sources
Kidnap and extortion;
Smuggling;
Fraud including credit card fraud;
Misuse of non-profit organisations and charities fraud;
Thefts and robbery; and
Drug trafficking

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Macroeconomic impact

Money laundering can have a range of severe macroeconomic

consequences on countries.
IMF has cited unpredictable changes in money demand,
prudential risks to the soundness of banking systems,
contamination of legal financial transactions, and increased
volatility of international capital flows and exchange rates due
to unanticipated cross-border asset transfers.

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Macroeconomic impact

The economic and political influence of criminal

organizations can weaken the social fabric; collective
ethical standards and ultimately the democratic institutions
of the society. Organized crime can infiltrate financial
institutions, acquire control of large sectors of the economy
through investment, or other bribes to public officials and
indeed governments
Money Laundering can also have a dampening effect on
FDI if a countrys financial sectors are perceived to be
under control and influence of organized crime.

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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

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Penalties imposed on banks

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

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What KYC means?

Customer?

One who maintains an account, establishes business relationship, on

whos 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

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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 customers customer are?

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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

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Know Your Customer (KYC)

Guidelines
Customer Acceptance - Ensure that only
legitimate and bona fide customers are
accepted.
Customer Identification- Ensure that
customers are properly identified to
understand the risks they may pose.
Transactions Monitoring- Monitor
customers accounts and transactions to
prevent or detect illegal activities.
Risk Management- Implement processes to
effectively manage the risks posed by
customers trying to misuse facilities.

Guidelines issued by FATF

Advantages of KYC norms

1.

2.

Sound KYC procedures have particular relevance to the

safety and soundness of banks, in that:
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;
They provide an essential part of sound risk management
system (basis for identifying, limiting and controlling risk
exposures in assets & liabilities)

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Risk based approach

(a)
(b)

(c)
(d)
(e)

The potential risk that a customer carries depends on:

Identity of the customer including beneficial ownership
The nature of customers business and his product profilejewels, precious metals, arms, antiques
Location of business
Products and services offered
Customers customer or clientrs; their location & business

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High risk countries

Geography
Drug producing nations
Drug transshipment countries
Drug using countries
Secrecy jurisdictions and tax havens, particularly those that
grant offshore banking licenses.
Countries with high degree of public corruption
Countries linked to terrorist financing
Non Cooperative Countries and Territories

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High risk customers

Non-bank financial institutions ( money transmitters, cheque

cashiers, full fledged money changers, sellers of stored value
cards, security brokers & dealers etc. )
Travel agencies / Property dealers/ builders
Professional and consulting firms
Exporters or importers of goods and services
Cash intensive business e.g. retail stores, restaurants,
gambling casinos, second hand car dealerships etc.
Off-shore corporations, banks in secrecy heavens
Non-profit organisations e.g charities

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High risk products &

services

Wire transfers
Electronic banking services which includes services offered
through internet, credit cards, stored value cards
Private banking relationships
Correspondent banking relationships

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Cross border accounts-deposits

All KYC procedures to be observed

Third party verification of documents through Correspondent
bank which is committed to KYC regime and is willing to
share KYC information on demand
Verification of document during visit to India
Remittance through banking channels

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Payment gateways/ wire

transfers

Both domestic and cross border wire transfers carry potential

risk of money laundering
Payment gateways facilitate wire transfers for customers of
banks located anywhere in the world
Whether AML/ KYC compliance level
Ascertain whether it is regulated at the place of incorporation
Insist on complete originator information with wire
Make payment to beneficiary through account or DD
Keep record of transactions

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Salient features of IPO

scam

Modus operandi
Current account opened in the name of multiple
companies on the same date in the same branch of a bank
Sole person authorised to operate all these accounts who
was also a Director in all the companies
Identity disguised by using different spelling for the same
name in different companies
Multiple accounts opened in different banks by the same
group of joint account holders

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Salient features of IPO

scam

Huge funds transferred from companies accounts to the

individuals account which was invested in IPOs
Loans/ overdrafts got sanctioned in multiple names to
bypass limit imposed by RBI
Loans sanctioned to brokers violating guidelines
Multiple DP accounts opened to facilitate investment in
IPO
Large number of cheques for the same value issued from
a single account on the same day

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Salient features of IPO

scam

Multiple large value credits received by way of transfer

from other banks
Several accounts opened for funding the IPO on the
request of brokers, some were in fictitious names
Refunds received got credited in brokers a/cs
Margin money provided by brokers through single
cheque
Nexus between merchant banker, brokers and banks
suspected

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Operational deficiencies
Factors that facilitated the scam
Photographs not obtained
Proper introductions not obtained
Signatures not taken in the presence of bank official
Failure to independently verify the identity and address of
all joint account holders
Directors identity/ address not verified
Customer Due Diligence done by a subsidiary

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Operational Deficiencies

Objective of large number of jt. account holders opening

account not ascertained
Purpose of relationship not clearly established
Customer profiling based on risk classification not done
Poor monitoring and reporting system due to inadequate
appreciation of ML issues
Absence of investigation about use and sources of funds

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Operational Deficiencies

Unsatisfactory training of personnel

No system of fixing accountability of bank officials
responsible for opening of accounts and complying with
KYC procedures
Ineffective monitoring and control

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Legislative Framework

Money Laundering Act, 2010

National Accountability Ordinance, 1999

Control of Narcotics Substance Act 1997

Anti-Terrorism Act 1997.

National Accountability Ordinance, 1999

Deals mainly with the detection, investigation,

prosecution and speedy disposal of cases involving
corruption and corrupt practices
The following offences under NAO covers the offence
of money laundering :

Acquisition of any property / pecuniary advantage

through corrupt, dishonest or illegal means
Having assets beyond known sources of income
which can not be reasonably accounted for.
Pursuant to Section 20, financial institutions are
bound to report suspicious financial transactions
to NAB.

Control of Narcotics Substance Act 1997

The following offences/ provisions under CNSA covers the
AML measures:

Makes the acquisition of assets through drug money an

offence
The suspected properties / assets may be frozen and
subsequently forfeited through the Court. This measure
can be construed as an anti-money laundering measure.
Section 67: it is mandatory for financial institutions to
report STRs to ANF, suspected to be related to drug
business.

Anti-Terrorism Act 1997

Deals comprehensively with the offences of

terrorism and financing of terrorism.
Makes compulsory for the proscribed
organizations to submit all accounts for its
political and social welfare activities and
disclose all funding sources.
Freezing, Seizure and Forfeiture of assets

AML/CFT Measures by SBP

Institutional Arrangements
Setting up of dedicated AML/ CFT Units.
Capacity Building- training
Regulatory Framework
Issuance of Prudential Regulations
Monitoring & Enforcement
On-site inspection and off-site surveillance
International Obligations
UNSC Resolutions- Freezing of accounts
Curbing of Informal Value Transfers
Formation of Exchange Companies
Documentation of Economy
Restriction on RTCs Bearer Instruments

AML/ CFT UNITS

Primary Responsibilities of the Units

Issuance of regulations and directions to banks and

DFIs in accordance with FATF Recommendations
and international best practices
Receive STRs and process them for suitable action
Coordination and liaison with relevant Govt.
departments, LEAs, International and Multilateral
bodies
Issue directives for freezing of accounts

Regulatory Framework

A separate section in new PRs has been dedicated

to regulations pertaining to AML and CFT.
PR Compliant with 40 + 9 recommendations
In line with Basel Core Principle No.15
Violations of regulations dealt with penal action

International scenario

International organizations engaged in

AML/CFT

Mid 1980s - Growing concern of international community to deprive

criminal elements of the proceeds of their crimes.

1989 Financial Action Taskforce (FATF) set up to ensure global action

to combat money laundering.

1995 - Egmont Group set up to stimulate international cooperation

amongst FIUs. Best Practices for exchange of information.

Forty Recommendations - Complete set of counter-measures against money

laundering
Nine Special Recommendations on Terrorist Financing
33 members

101 Members

1997- Asia/Pacific Group on money laundering (APG) set up to create

awareness and encourage adoption of AML measures.

International standards
FATF

40 Recommendations + 9 Special
Recommendations
on TF

Legal System and Related Institutional Measures

R 1,2,3,26,27,28,30,32
SR II,III
Preventive Measures Financial Institutions
R 4,5,6,7,8,9,10,11,13,14,15,17,18,19,21,22,23,25,29,32
SR VI, IX
Preventive Measures Non Financial Businesses and Profession
R 12,16,20,24
Legal Person and arrangements & Non-profit Organizations
R 33
SR VIII
National and International Cooperation
R 31,32,35,36,27,38,39,40
SR V

FATF

International standards
FATF

Extension of KYC, CDD & AML/CFT measures

to other sectors, as mentioned under 40+9
standards, in case of India, such as:

Non-Designated Financial Businesses & Professions

(NDFBPs) (R 12) : Casinos, Real estate agents, Dealers in
precious metals and precious stones, Lawyers, notaries, other
independent legal professionals and accountants, Trust and company
service providers

Exchange Houses and money remitters (R 23)

Alternative remittances, Wire transfers, Non-Profit
Organizations, Cash Couriers (SR VI to IX)

FATF

Salient Features of FATF

Recommendations

Criminalize ML to include all serious offences(R1)

Follow standards set in Vienna & Palermo UN conventions for
offence of ML(R2)
Confiscate/attach laundered assets(R3)
Secrecy laws should not prohibit sharing of information by
financial institutions (FI)-(R4)
Give special attention to business relation with countries,
which do not or insufficiently apply FATF standards(R21)
FIs should be subject to regulatory & supervisory measures
through licensing, registrations etc. for AML purposes(R23)
DNFBPs also be subject to similar regulations &
supervision(R24)

FATF

Salient Features of FATF

Recommendations

FIs to follow CDD:- no anonymous accounts, verify

identity of client & beneficial owner, CDD for politically
exposed persons (PEP)(R5,6)
CDD & Record keeping requirements for NDFBPs(R12)
CDD for cross border correspondent banking(R7)
Do not approve operations with Shell Banks(R18)
FIs should develop AML/CFT Programme(R15):

Develop internal AML/CFT policies

Set screening standards while hiring employees
Train employees
Independent audit to test check the system

Pay special attention to non face to face customers(R8)

Apply similar standards to branches/offices abroad(R22)

FATF

Salient Features of FATF

Recommendations

Set up FIU, empower law enforcement agencies and

competent authorities for AML/CFT(R26 to 32)
Filing of STRs(R13)
Provide legal immunities to financial institutions & their
representatives for disclosures(R14)
Maintain all necessary records(R10)
Dissuasive civil/administrative/criminal sanctions for
failing to comply with AML/CFT requirements(R17)
International cooperation, mutual legal assistance,
extradition & information exchange(R35 to 40)

FATF

Salient Features of FATF

Recommendations

Special Nine Recommendations on Terrorist

Financing (TF)

Ratify & implement UN instruments-SR I

Criminalize TF as ML offence-SR II
Freeze & confiscate terrorist assets-SR III
Report STRs on TF- SR IV
International cooperation on CFT- SR V
KYC/CDD & AML/CFT measure for- SR VI to IX:

Services involved in transmission of money/value

Wire transfers
Non-Profit organizations
Cash couriers

FATF

Key Issues

Key Issues

To what extent should Pakistan be compliant with

these 40+9 FATF recommendations?

No country fully compliant

These are ideal financial standards best suited for
developed countries where formalization of economy is
at an advanced stage
Non-membership likely to have consequences

How best can these standards be adopted in

Pakistan?

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

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Measures to deter money

laundering
Appropriate measures to ensure that ML risks are taken into
account in daily operations, development of new financial
products, establishing new business relationships and changes
in the customer profile
Screening of employees before hiring and of those who have
access to sensitive information
Appropriate quality training to staff
Quick and timely reporting of suspicious transactions
But it doesn't work they way we want
Because
The law hath not been dead, though it hath slept

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