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INTERNATIONAL TRADE & FINANCE

Know your Customer (KYC)/Anti Money Laundering (AML)

ACKNOWLEDGEMENT & TABLE OF CONTENT

http://www.hindustantimes.com/india-news/india-s-black-moneystats-over-1-lakh-crore-undisclosed-income-globally-5th-in-illicitoutflows/article1-1279432.aspx ------DATA & GRAPHS ( BACKGROUND
OF MONEY LAUNDERING )

annually. the reality is that hundreds of billions of dollars of criminally derived money is laundered through financial institutions. Generally speaking. Though criminal money may be successfully laundered without the assistance of the financial sector. Placement.Money Laundering Meaning AKA what is money laundering? Money laundering is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source. The nature of the services and products offered by the financial services industry (namely managing. the stage at which criminally derived funds are introduced in the financial system. How is money laundered? The processes are extensive. Traditionally money laundering has been described as a process which takes place in three distinct stages. That can occur in a countless number of diverse ways. The processes by which criminally derived property may be laundered are extensive. controlling and possessing money and property belonging to others) means that it is vulnerable to abuse by money launderers. money is laundered whenever a person or business deals in any way with another person’s benefit from crime. .

When real estate is purchased with laundered funds. Integration. the substantive stage of the process in which the property is ‘washed’ and its ownership and source is disguised. Once money laundering happens in a financial institution.Layering. it is clear that such activities damage not only the financial institutions (which damage is direct). However. such as private lenders. and most of the time the real estate channel is utilized. It is often the case when money is laundered through the real sector of the economy. Once customer trust is gone. the financial institution becomes victim of its own reputation and its whole purpose for existence is shaken because it becomes unable to effectively collect and invest capital resources. goods such as automobiles. international trade sector and capital flows. and equity markets. Effects of Money Laundering The negative effects of money laundering on economy are hard to put into numbers. among others (as indirect damage). Things like real estate. This three staged definition of money laundering is highly simplistic. How is Financial Sector Affected? Financial sector includes financial institutions such as banks. there is no requirement for the proceeds of crime to be ‘placed’. such as real sector. How is External Sector Affected? . real estate value suffers as a result of money laundering because its prices are usually artificially determined and are below the fair market value. the final stage at which the ‘laundered’ property is re-introduced into the legitimate economy. this most likely means that an employee is involved. The effect on financial sector is rather indirect. Further. These institutions are important because they represent the concentration of capital resources for the country and their allocation by means of investments which in turn generate self-sustainable economic development. customer trust is damaged as the perceived risk grows and the institution is now viewed as corrupted. and it becomes known to its customers. non-banks financial institutions. The reality is that the so called stages often overlap and in some cases. When money laundering takes place in a financial institution. either unknowingly or knowingly. for example in cases of financial crimes. but also country’s productivity in its various economic sectors. How is Real Sector Affected? The Real sector deals with things other than those in financial sector. it creates artificial demand. which damages the institution itself. and the latter would mean that the affected financial institution is prone to corruption from within. arts and anything else that can be called “goods” fall into this sector of the economy. which can falsely trigger supply and thus saturate the real estate market.

following the September 11 terrorist attacks in the United States. and reduce profitability of domestic companies. They set out the principles for action and allow countries a measure of flexibility in implementing these principles according to their particular circumstances and constitutional frameworks. identity verification). the Forty Recommendation and Special Recommendations on Terrorism Financing set the international standard for anti-money laundering measures and combating the financing of terrorism and terrorist acts. can depress domestic prices. therefore. economy suffers because no fair economic activity is generated: employment is not created and competition is not supported due to usually artificially set prices for the purpose of laundering.. to:      Implement relevant international conventions Criminalise money laundering and enable authorities to confiscate the proceeds of money laundering Implement customer due diligence (e. The FATF Forty Recommendations and Special Recommendations on Terrorism Financing The primary policies issued by the FATF are the Forty Recommendations[2] on money laundering and the 9 Special Recommendations (SR) on Terrorism Financing (TF).The External Sector holds in itself things like trade (imports and exports) and international capital flows. India has “Know Your Customer” regulations that dictate that financial institutions and law firms must verify identity of their potential clients before accepting them or on existing clients before proceeding with certain financial activities at clients’ requests. These become affected when proceeds from an illegal activity are used to purchase imported luxury goods with the intention to launder funds. among other things. When imports are purchased with these funds. record keeping and suspicious transaction reporting requirements for financial institutions and designated non-financial businesses and professions Establish a financial intelligence unit to receive and disseminate suspicious transaction reports. etc. The FATF issued a ninth Special Recommendation on Terrorism Financing in October 2004. Money laundering is an activity that potentially has a lot of negative effects on most countries in the world.[3] Together. But it can and should be prevented. .g. Both sets of FATF Recommendations are intended to be implemented at the national level through legislation and other legally binding measures. damage natural competition between domestic and international companies. Such activities. and Cooperate internationally in investigating and prosecuting money laundering The FATF issued 8 Special Recommendations on Terrorism Financing in October 2001.[2] The current (2003) Forty Recommendations require states. The FATF issued the Forty Recommendations in 1990 and completely revised them in 1996 and 2003.

MEASURES TO BE TAKEN BY FINANCIAL INSTITUTIONS AND NON-FINANCIAL BUSINESSES AND PROFESSIONS TO PREVENT MONEY LAUNDERING AND TERRORIST FINANCING Copy from pdf point 5 to 12 . Department of Treasury’s Anti-Terrorist Financing Guidelines. move and use funds”.S. Among the measures. released one month before the U. “Special Recommendation VIII” (SR VIII) was targeted specifically at nonprofit organizations. the FATF codified its recommendations and Interpretive Notes into one document that maintains SR VIII (renamed “Recommendation 8”). This was followed by the International Best Practices Combating the Abuse of Non-Profit Organizations in 2002. The 2009 Handbook for Countries and Assessors outlines criteria for evaluating whether FATF standards are achieved in participating countries. and also includes new rules on weapons of mass destruction.Since 9/11 the FATF has expanded its efforts to combat terrorist financing. and the Interpretive Note for SR VIII in 2006. In February 2008 the FATF published a report on terrorist financing typologies “to provide a contemporary snapshot of the ways in which terrorists raise. FATF created eight additional “Special Recommendations” on terrorist financing in October 2001. corruption and wire transfers (“Recommendation 16”). In February 2012. but it misrepresents the nonprofit sector as “compromised or complicit” with terrorist activities.

Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These ‘Know Your Customer’ guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Banks are advised to ensure that a proper policy framework on ‘Know Your Customer’ and Anti-Money Laundering measures with the approval of the Board is formulated and put in place.1 General i. Detailed guidelines based on the Recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision.LEGAL FRAMEWORK PREVENTION OF MONEY LAUNDERING ACT PMLA 2002 Blah blah blah blah…… daal dena baad me. The objective of KYC/AML/CFT guidelines is to prevent banks from being used. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Guidelines 2. maintain records and furnish information to Financial Intelligence Unit(FIU)-IND That’s why we need KYC.. The guidelines issued by the Reserve Bank are under Section 35 A of Banking Regulation Act. The PMLA and rules notified there under impose obligation on banking companies. 1949 (As Applicable to Co-operative Societies) and any contravention of or non. have been issued. with indicative suggestions wherever considered necessary. financial institutions and intermediaries to verify identity of clients. Banks should collect only ‘mandatory’ information required for KYC purpose which the customer is obliged to give while opening an account at the time of opening the account / . intentionally or unintentionally. by criminal elements for money laundering or terrorist financing activities. seizure and confiscation of the proceeds of crime. PMLA defines money laundering as an offence and provides for the freezing.compliance with the same may attract penalties under the relevant provisions of the Act. 2.

2 KYC Policy Banks should frame their KYC policies incorporating the following four key elements: a. ensure that information sought from the customer is relevant to the perceived risk. iv. are strictly adhered to. if required. http://rbi. Banks should ensure that the provisions of Foreign Contribution (Regulation) Act. therefore. Banks should ensure that any remittance of funds by way of demand draft. d. during periodic updation. and is in conformity with the guidelines issued in this regard. mail/telegraphic transfer or any other mode and issue of travellers’ cheques for value of Rupees fifty thousand and above is effected by debit to the customer’s account or against cheques and not against cash payment. Banks should keep in mind that the information (both 'mandatory' . and Risk Management. Monitoring of Transactions. wherever applicable.before opening the account as well as 'optional'.for more information .ii. b. Customer Acceptance Policy.in/scripts/FAQView. Other 'optional' customer details / additional information.org. Customer Identification Procedures. may be obtained separately only after the account is opened with the explicit consent of the customer. is not intrusive. iii. The customer has a right to know what is the information required for KYC that she / he is obliged to give and what is the additional information sought by the bank that is optional. Banks should.after opening the account with the explicit consent of the customer) collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purposes. 1976 as amended from time to time. c. 2.aspx?Id=82 ----.