Basics of Money laundering &

Anti-Money Laundering

PRESESNTED By
RIHSI RANJAN
GURU NANAK BUSINESS SCHOOL.
 What is Money Laundering?

 Appears to
Illegally originate from
Conversion
obtained money legitimate
source

Drugs / Arms Trafficking

Criminal Activity
Terrorism
Extortion
Money Laundering
'Any act or attempted act to conceal or
disguise the identity of illegally
obtained proceeds so that they appear
to have originated from legitimate
sources'.
In other words, it is the process used by
criminals through which they make
“dirty” money appear “clean”
Sec.3 of PML Act, 2002 defines ‘money
laundering’ as:
“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 the offence
of money-laundering”
 Money Laundering
Money laundering generally refers to ‘washing’ of the
proceeds or profits generated from:
(i) Drug trafficking
(ii) Arms, antique, gold smuggling
(iii) Prostitution rings
(iv) Financial frauds
(v) Corruption, or
(vi) Illegal sale of wild life products and other specified
predicate offences
Money Laundering Process
PLACEMENT
LAYERING
INTEGRATION
Placement
Immersion or Soaking
The physical disposal of bulk cash
proceeds derived from illegal activity
LAYERING
“Soaping / Scrubbing”
The separation of illicit proceeds from
their source by creating complex layers
of financial transactions
These disguise the audit trail & provide
anonymity
Integration
“Repatriation / Spin Dry”
Reinjecting laundered proceeds into
economy so that they reenter
financial system as normal business
funds
Provides an apparently legitimate
explanation to criminally derived
wealth
Typologies/ Techniques employed
Deposit structuring or smurfing
Connected Accounts
Payable Through Accounts
Loan back arrangements
Forex Money Changers
Credit/ Debit cards
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 wire transfers 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.
Legal Sources of terrorist financing
 legal or non-legal
legal
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
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
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
Reputational Risk:

The potential that adverse publicity regarding a

bank’s business practices, whether accurate or
not, will cause a loss of confidence in the integrity
of the institution
Reputational Risk : a major threat to banks as
confidence of depositors, creditors and general
market place to be maintained
Banks vulnerable to Reputational Risk as they can
easily become a vehicle for or a victim of
customers’ illegal activities
Operational Risk

The risk of direct or indirect loss resulting from

inadequate or failed internal processes, people and
systems or from external events
Weaknesses in implementation of banks’
programmes, ineffective control procedures and
failure to practise due diligence
Legal Risk
The possibility that lawsuits, adverse judgements
or contracts that turn out to be unenforceable can
disrupt or adversely affect the operations or
condition of a bank
Banks may become subject to lawsuits resulting
from the failure to observe mandatory KYC
standards or from the failure to practise due
diligence
Banks can suffer fines, criminal liabilities and
special penalties imposed by supervisors
Concentration Risk
Mostly applies on the assets side of the balance
sheet: Information systems to identify credit
concentrations; setting prudential limits to
restrict banks’ exposures to single borrowers or
groups of related borrowers
On liabilities side: Risk of early and sudden
withdrawal of funds by large depositors- damages
to liquidity
Penalties imposed on banks
Jan. 2006 ABM AMRO US$ 80 mio
Aug. 2005 Arab Bank US$ 24 mio
Feb. 2005 City National Bank US$750,000
Jan. 2005 Riggs Bank US$ 41 mio
Oct. 2004 AmSouth Bank US$ 50 mio
Sep. 2004 City Bank Japan Licence cancelled
May. 2004 Riggs Bank US$ 25 mio
SUSPICIOUS TRANACTION
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;
Suspicious Transactions
Providing misleading information / information
not easily verifiable while opening an Account
Large cash withdrawals from: a dormant or
inactive account or account with unexpected large
credit from abroad
Sudden increase in cash deposits of an individual
with no justification
Employees leading lavish lifestyles that do not
match their known income sources
Suspicious Transactions
Large cash deposits into same account
Substantial increase in turnover in a dormant account
Receipt or payment of large cash sums with no
obvious purpose or relationship to Account holder /
his business
Reluctance to provide normal information when
opening an Account or providing minimal or fictitious
information
Cash Transactions
Allcash transactions of the value of more than
rupees ten lakhs or its equivalent in foreign
currency

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
Cash Transaction Report
Maintenance of records of transactions
valued below rupees ten lakh or its equivalent in
foreign currency where such
series of transactions have taken place within a month
and
the aggregate value of such transactions exceeds rupees
ten lakh;
Furnishing of CTR
individual transactions below rupees fifty thousand
may not be included;
DUE DATES
Cash Transaction Report
by 15th of the succeeding month.

Suspicious Transaction Report

within 7 days of arriving at a conclusion that any
transaction is of suspicious nature.
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
 Summary: Prevention of Money
Laundering
Observing Rules for
Bankers

Compliance with Customer

Money Laundering
Laws due Diligence
Prevention

Identifying
Irregular / Suspicious
Transactions
Anti Money Laundering
 Definition
 An AML/ CFT on-site examination (OSE) is a
 comprehensive review of the AML/CFT compliance
 program of a financial institution.

 Purpose
 The object of the OSE is to determine whether a
 financial institution has appropriate policies and
 procedures in place to ensure compliance with the
 AML/CFT laws and regulations.
Cont

Section 43 (b) of the Financial Transactions

Reporting Act, Chapter 368 (FTRA) and Section
11 (3) (b) of the Financial & Corporate Service
Providers Act, Chapter 369 authorize the
Commission to conduct on-site examinations of
financial institutions under its supervision.
TYPES OF AML
There are four specific types of on-site examinations
which the Commission conducts. These are Routine,
Follow-up, Random and Special.

Routine
These are mandatory examinations which are conducted
by designated licensed public accountants. The
examination period for routine examinations runs from 1st
August of one year to the 31st July of the following year.
CONT.
 Special examinations are conducted in
circumstances where a financial institution has violated
any provision of the AML/CFT laws, or where information
comes to the knowledge of the Commission that a
financial institution is providing financial services despite
having advised the Commission to the contrary.

 Depending on the nature of the circumstances which

give rise to a special examination, the procedure may be
either a full examination as in the case of a routine
examination process, or a specific investigation directed
towards a specific issue.