Anti-Money Laundering

By Umesh Panjiyar Management Expert F&A Division, H.O. KTM

What is Money Laundering?

Illegally Conversion obtained money Appears to originate from legitimate source

Criminal Activity

Drugs / Arms Trafficking 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

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

Sec.4 of AML Act, Amendment 2068 defines money laundering as:

o; P]gsf] k|of]hgsf nflu s;}n] b]xfosf] s'g} jf ;a} sfo{ jf s;"/ u/L k|ToIf jf ck|ToIf kdf k|fKt, wf/0f, ef]urng u/] jf u/fPsf] ;DklQ jf To:tf] ;DklQ s'g} k|sf/af6 nufgL u/L a9] jf a9fPsf] ;DklQ ;DalGwt JolQm jf cGo s;}n] k|fKt, wf/0f, ef]urng, k|of]u, pkef]u, pkof]u jf cfh{g u/] jf u/fPdf jf b]vfPdf jf cGo s'g} klg tl/sfn] sf/f]af/ jf Jojxf/ u/] jf u/fPdf jf To:tf] ;DklQsf] ;|f]t, k|s[lt, :yfg, :jfldTj, clwsf/, sf/f]af/ -l8:kf]hn_ n'sfpg], kl/jt{g ug] { jf 5Ng] p2]Zon] To:tf] ;DklQ s'g} klg k|sf/n] kfGt/0f, kl/jt{g jf x:tfGt/0f u/] jf u/fPdf jf To;/L k| fKt ;DklQ xf] eGg] hfgL hfgL jf ljZjf; ug{' kg{] dgfl;a sf/0f eO{ To:tf] ;DklQ k|fKt, vl/b, wf/0f, ef]urng, k| of]u, pkef]u jf pkof]u u/] jf u/fPdf jf cGo s'g} klg

-s_ /fhZj 5nL, -v_ ;l7t kdf ck/fw u/L, u_ cftsf/L lqmofsnfkdf nufgL u/L, -3_ xftxltof/ v/vhfgf ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -_ ljb]zL ljlgdo lgoldt ug]{ ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -r_ Hofg, rf]/L, 7uL, lst]{ sfuh, vf]6f rng, ckx/0f jf z/L/ aGws ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -5_ nfu" cf}ifw lgoGq0f ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -h_ /fli6o lgs'~h tyf jGohGt' ;+/If0f ;DaGwL k| rlnt sfg"g cGtu{tsf] s;"/ u/L, -em_ dfgj a]rlavg tyf cf];f/k;f/ lgoGq0f ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L,

-8_ a} tyf ljQLo ;+:yf ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -9_ a}l s;"/ tyf ;hfo ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -0f_ k|frLg :df/s ;+/If0f ;DaGwL k|rlnt sfg"g cGtu{tsf] s;"/ u/L, -t_ g]kfn ;/sf/n] g]kfn /fhkqdf ;"rgf k| sfzg u/L tf]s]sf] cGo s'g} sfg"g jf g]kfn kIf ePsf] s'g} ;lGw cGtu{tsf] s;"/ u/L .

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 banks 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 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

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

Role of cash in money laundering

Disguise the audit trail Provide anonymity Concealing true ownership and origin of money Control over money Changing the form of money

Sec.6 & 7 of AML Act, Amendment 2068 on KYC, Suspicious Transaction & Statement
^= u|fxssf] klxrfg ug'{ kg]{ M -!_
s'g} a}, ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] s'g} JolQm;Fu s'g} k|sf/sf] Jofj;flos ;DaGw :yfkgf ubf{ jf /fi6 a}n] ;do ;dodf ;"Rfgf k|sfzg u/L tf]s]sf] /sdeGbf a9L /sdsf] Ps}k6s jf k6s k6s u/L sf/f]af/ ubf{ To:tf] JolQmsf] klxrfg :ki6 ? kdf ug'{ kg]{5 . -@_ pkbkmf -!_ adf]lhd u|fxssf] klxrfg ubf{ a}, ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] To;/L Jofj;flos ;DAfGw :yfkgf ug]{ jf sf/f]af/ ug]{ JolQmnfO{ b]xfo adf]lhdsf sfuhft k]z ug{ nufpg' kg]{5 M

Contd ...
-v_ v08 -s_ df n]lvP afx]ssf JolQm jf kmd{ eP ;+:yfkgf, :yfkgf jf btf{ ePsf] k|dfl0ft ug] { sfuhftsf] k|ltlnlk, ;+:yfsf ;~rfns ;ldltsf ;b:ox? tyf sfo{sf/L lgb]{zs jf kmd{sf] wgL jf ;fe]mbf/x?sf] gfd, y/, 7]ufgf, k]zf, Joj;fo v'Ng] sfuhft, -u_ s;}sf] tk{maf6 Jofj;flos ;DaGw :yfkgf jf sf/f]af/ ul/g] eP h;sf tk{maf6 To:tf] ;DaGWf jf sf/f]af/ ug{ vf]lhPsf] xf] lghsf] kl/ro, 7]ufgf, Joj;fo v'Ng] clVtof/gfdf ;lxtsf] sfuhft, -3_ Jofj;flos ;DaGwdf sf/f]af/af6 nfe k|fKt ug] { lgs6td gft]bf/, JolQm jf ;+:yfsf] gfd, y/, 7]ufgf,

Contd ...
-#_ a}, ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] k|To]s u|fxssf] pkbkmf -@_ adf]lhdsf sfuhft / sf/f]af/ ldlt tyf k|s[lt, vftf eP To:tf] vftfsf] lsl;d, ;]t gDa/ ;d]t ;dfj]z ePsf] 5'} clen]v /fVg' kg]{5 .

&= ;/sf/L lgsfo, a}, ljQLo ;+:yf / u}/ ljQLo ;+:yfsf] bfloTj M -!_ o; P]gsf] k|
of]hgsf] nflu ;/sf/L lgsfo, a}, ljQLo ;+:yf / u}/ ljQLo ;+:yfn] b]xfo adf]lhdsf] bfloTj k"/f ug'{ kg]{5 M -s_ s;}n] /fi6 a}n] tf]s]sf] /sdeGbf a9L /sdsf] Psd'i6 jf k6s k6s sf/f]af/ u/]df ;f]sf] clen]v /fVg],

Contd
-u_ v08 -s_ adf]lhdsf] sf/f]af/sf] ljj/0f ;f] sf/f]af/ ePsf ldltn] kGw| lbgleq / v08 -v_ adf]lhdsf] sf/f]af/sf] ljj/0f ;DaGwdf t'?Gt ljQLo hfgsf/L OsfO{nfO{ hfgsf/L lbg] .
-@_ pkbkmf -!_ adf]lhd ljQLo hfgsf/L OsfO{nfO{ lbOPsf] ljj/0fdf s'g} s'/f 5"6 ePdf jf To:tf] sf/f]af/ ubf{sf ;dodf ;DalGwt JolQmn] k]z u/]sf] ljj/0f jf hfgsf/LeGbf km/s ljj/0f jf hfgsf/L kl5 k|fKt ePdf ;DalGwt lgsfo, a}, ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] ;f]sf]

Contd
-#_ pkbkmf -!_ df h'g;'s} s'/f n]lvPsf] eP tfklg lgoldt Jofj;flos ;DaGw /fVg] jf sf/f]af/ ug]{ JolQmn] u/]sf] sf/f]af/sf ;DaGWfdf klg To:tf] lgsfo, a}, ljQLo ; +:yf jf u}/ ljQLo ;+:yfnfO{ zf nfu]df 5fglag u/L ;f]sf] hfgsf/L ljQLo hfgsf/L OsfO{nfO{ lbg' kg]{5 . -$_ a}, ljQLo ;+:yf jf u}/ ljQLo ;+:yfn] o; bkmf adf]lhdsf] sf/f]af/sf] clen]v ;f] sf/f]af/ ePsf] ldltn] sDtLdf kfFr jif{;Dd ;'/lIft /fVg' kg]{5 .

NRB Directives 19 on KYC

% a}+s tyf ljQLo ;+:yfn] s'g} u|fxssf] z+sf:kb tyf c:jfefljs ?kdf sf/f]jf/ a9]df jf 36]df jf c:jfefljs ?kdf ljb]zaf6 ljk|]if0fsf] dfWodaf6 jf s'g} dfWodaf6 /sd k|fKt ePdf jf jb]zaf6 k|fKt x'g] ljk|]if0f /sdsf] >f]t gv'n]df jf :ki6 gePdf To:tf z+sf:kb tyf c:jfefljs sf/f]jf/ / u|fxs -JolQm, kmd{, sDkgL jf ;+:yf_ sf] ljj/0f tof/ u/L dfl;s ?kdf cfgf] ;+rfns ;ldltdf k]z ug'{ kg] {5 . ;fy}, a}+s tyf ljQLo ;+:yfdf hDdf -k|fKt_ x'g cfpg] bz nfv ?k}ofFeGbf dflysf /sdsf] sf/f]jf/, vftf, jxL, >]:tf jf lx;fj ;~rfng ;DaGwL 5'} k|lqmofut ;+oGq tof/ ug'{ kg]{5 / To:tf] sf/f]jf/sf] >f]t ;d]t ;DalGwt u|fxsaf6 pNn]v

Contd
^= bz nfv ?k}ofF eGbf sd /sdsf] sf/f]jf/ ePsf]df ;d]t olb To:tf] sf/f]jf/ z+sf:kb jf c:jfefljs nfu]df To:tf] sf/f]jf/sf] vftf, jxL, >]:tf jf lx;fj ;d]t cBfjlws u/L /fVg' kg]{5 . &= a}+s tyf ljQLo ;+:yfx?n] cfgf] u|fxsx? jLrsf] sf/f]jf/sf] clen]v -O{n]S6f]lgs /]s8{ ;d]t_ sf/f]jf/ ;dfKt ePsf] ldltn] kfFr jif{;Dd ;'/lIft /fVg' kg]{5 . *= dfly a'Fbf g+= % / ^ adf]lhdsf ljj/0fx? k| To]s qodf; ;dfKt ePsf] ldltn] kGw| lbgleq lgoldt ?kdf lgodg ljefudf k]z ug'{ kg]{5 .

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

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 Laws

Money Laundering Prevention

Customer due Diligence

Identifying Irregular / Suspicious Transactions

Thank You for your attention