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Combating money laundering in India
This document discusses combating money laundering in India. It provides an overview of the framework for combating money laundering, including the roles and responsibilities of banks and financial institutions. Key aspects covered are customer acceptance policies, know-your-customer procedures, monitoring suspicious transactions, and performance of the Financial Intelligence Unit. Examples of money laundering activities in India like import remittance scams, property deals, hawala transactions, and corporate frauds are also summarized as case studies.
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Combating money laundering in India
- 1. Combating Money Laundering Experiencein India Prepared by A.K. Sahoo, Reserve Bank of India Assisted by Kritika & Anuroop
- 2. Directly orDirectly or indirectlyindulge,indirectly indulge, involve or assistinvolve or assist • Process or ActivityProcess or Activity connected with ‘proceeds ofconnected with ‘proceeds of crime’crime’ • including concealment,including concealment, possession, acquisition or usepossession, acquisition or use and projecting or claimingand projecting or claiming Projecting proceedsProjecting proceeds of crime as untaintedof crime as untainted propertyproperty
- 3. Money Laundering Accounts for 47%of white collar crimes in India
- 4. Framework for CombatingMoney Laundering
- 5. Role of Banks& Financial Institutions Directors: Not more than 1 family member/ associate (partner, employee, director) on Board 5% or more shares: Integrity, reputation, track record in financial matters & compliance with tax laws 30% or more shares: Source & stability of funds, business record Customer Acceptance Policy Customer Identification Procedure Risk classification of accounts Low Risk: Identity and Source of Income easily identified, salaried, pensioners, low income High Risk: Cash intensive business, politically exposed persons of foreign origin Cash transactions of value more than INR 1 Million or equivalent in foreign currency Individual or integrally connected Receipts by non-profit organisations Use of forged/ counterfeit currency notes Any Suspicious transaction in cash or not- Report to Financial Intelligence Unit All KYC documents Suspicious Transactions For 5 years from date of transaction Special attention to all complex, unusual large transactions and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose Nature, Amount, Date, Parties, Currency denomination
- 6. Performance of FinancialIntelligence Unit Source: Annual Report 2013-14, FIU-India, Ministry of Finance, Government of India
- 7. Case Studies Import Remittances-Chinubhai Patel & Co. Scam Immovable Property Deals Hawala transactions Satyam Corporate Accounting Fraud
Editor's Notes
- #3 Money Laundering consists of three stages: 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. 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. 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 co-mingling of money in bank accounts. Section 2(p) read with Section 3- Prevention of Money Laundering Act- 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 1[proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming] it as untainted property shall be guilty of offence of money-laundering. "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.
- #5 Regulation- As a prerequisite, legislation must be in place that provides the general legal framework and establishes the obligations of financial institutions and other providers of financial services. Such legislation needs to define and criminalize money laundering and terrorist financing with suitably graduated penalties. It has to cover a wide set of predicate crimes and also needs to define the responsibilities and powers of the various government agencies involved. The legislation will typically set out reporting requirements for different categories of institutions: commercial banks are generally obligated to be especially vigilant, given their role in the payment system. However, because criminals exploit loopholes, wide sectoral coverage is needed. Implementation- For primary legislation to be operational, regulations and supervision must be implemented. First, financial institutions must make efforts to avoid dealing with criminal elements. Checks have to be made on the identity and legitimacy of clients, especially new clients and those acting on behalf of others. The "know your customer" or "due diligence" obligation is partly a matter of establishing that potential clients are who they say they are, but can also involve elaborate background checks. In a globalizing world, it can be quite difficult to distinguish when a foreign business is entirely honest and when it is involved in a scam to launder money, although there are circumstances that should prompt close scrutiny, such as when a counterpart comes from a jurisdiction known to have weak AML/CFT systems. Second, these provisions must be backed by measures to ensure that criminals do not gain control of financial institutions. If that happens, it will be very difficult to detect and root out money laundering (or the financing of terrorism). Therefore, it is important that major shareholders and senior managers in financial institutions demonstrate that they are "fit and proper" to hold these positions of control and oversight. These requirements apply at the initial licensing stage but need to be maintained as shareholdings change hands and management turns over. Third, financial institutions must establish systems of identifying and reporting unusual or suspicious transactions. The financial institutions themselves need to be aware of the threat of money laundering and terrorist financing, to train their staff to spot activities that raise a suspicion of money laundering, and to have clear processes in place for reporting back to the authorities. Elaborate AML/CFT systems are irrelevant if the people who deal with clients are not able to identify and report suspicious transactions. (As an example of what can go wrong, in a recent case, a bank hired more staff to handle the increased volume of new, large-denomination banknotes being deposited by one client before considering that the transactions might be related to money laundering. In the end, the deposits turned out to be from criminal sources.) Compliance- Only those who are compliant or have a ‘clean chit’ are allowed access to the regular banking and financial services and allowed to participate in the management and control of such institutions.
- #6 KYC, Suspicious Transactions and Maintenance of Records- Refer Master Circular on KYC/AML Fit and Proper Criteria- Refer Guidelines on Fit and Proper Criteria
- #7 Enforcement Case Information Report (ECIR) Annual Report 2013-14 is the latest report available Financial Intelligence Unit – India (FIU-IND) was set by the Government of India vide O.M. dated 18th November 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. 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 . The functions of FIU-IND are: Collection of Information: Act as the central reception point for receiving Cash Transaction reports (CTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities. Analysis of Information: Analyze received information in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes. Sharing of Information: Share information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units. Act as Central Repository: Establish and maintain national data base on cash transactions and suspicious transactions on the basis of reports received from reporting entities. Coordination: Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes. Research and Analysis: Monitor and identify strategic key areas on money laundering trends, typologies and developments. Also refer brochure on FUI
- #8 Import Remittance, Immovable Property Deals and Hawala- Refer notes on case studies Satyam Scandal- Refer pdf file named satyam case study
- #9 Any questions from the participants