GROUP 6, SEC-A

Ajith S Aviraj Pawan Raina Rajkumar Rajnish

MONEY LAUNDERING

Agenda
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INTRODUCTION

IMPACT

SCANDALS

KYC NORMS

PMLA ACT & FEMA

TRENDS

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

Illegally obtained money

Appears to originate from legitimate source

Cont..
Money laundering generally refers to washing of the proceeds or profits generated from: Drug trafficking People smuggling Arms, antique, gold smuggling Financial frauds Corruption, or Illegal sale of wild life products and other specified predicate offences
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Steps in money laundering

PLACEMENT
Getting Currency into the financial system so as to convert illicit funds from cash straight into a financial instrument or bank account

Immersion / Soaking
LAYERING 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 with loose regulation and secrecy laws for this purpose. Soaping / Scrubbing

INTEGRATION
It represents the conversion of

illegal proceeds into apparently

legitimate through business normal earnings or

financial

commercial

operations.

For e.g.

false invoices for goods exported, domestic loan against a foreign deposit, purchasing of property Repatriation / Spin Dry

Money laundering cycle

Money laundering techniques

Placement Smurfing Shipping Money Abroad Placement through Banks Electronic Wire Transfers Transactions NBFCs Layering Tax Havens & Offshore Banks Bank Secrecy Law as a layering tool Corporations & Shell Companies as a layering tool Use of trusts Use of walking accounts Integration Use of haven bank credit cards Proceeds of gambling Real estate transactions Stock Purchase Use of business International importing and exporting
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Smurfing
It is the practice of executing financial transactions (such as the making of bank deposits) in a specific pattern calculated to avoid the creation of certain records and reports required by law. Smurfing includes the act of parceling what would otherwise be a large financial transaction into a series of smaller transactions to avoid scrutiny

by regulators

Impact of Money Laundering

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Impact of Money Laundering

Undermining the Legitimate Private Sector Use of front company to hide his illegal funds Subsidized operations and funding Products at below manufacturing cost Competition with legitimate business Crowding out of private sector business by criminal organizations

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Undermining the Integrity of Financi Markets

Challenge for financial institutions to manage their assets liabilities and operations Sudden disappearance of money through Wire transfers in response to non-market factors Liquidity problem & bank collapses

Loss of Control of Economic Policy

Money laundering is between 2 - 5

% of world gross domestic product

Errors in economic policy resulting from artificially inflated financial sectors False demand Inexplicable changes in money demand and increased volatility of international capital flows, interest, and exchange rates

Economic Distortion and Instability

Investments not for gain but for protecting their proceeds Redirect funds from sound investments to low-quality investments Withdrawal of money results in collapse of these sectors and immense damage to economies

Impacts conti...
Loss of revenue No tax on laundering money Reputation risk Confidence in markets The signalling role of profits

Social impacts
Increase in crime Drug trafficking, smuggling, and other crimes increased law enforcement and health care expenditures

Terrorist financing
Transfer of economic power from the market,

government, and citizens to criminals

Money Laundering Scandals

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World's Worst Banking Scandal

The world's worst banking scandal, of Bank of Credit and Commerce International (BCCI) inflicting huge financial losses on

thousands of people worldwide, surfaced in the media in 1991.

It had heavy ties with the CIA, terrorist organizations, drug traffickers, & other crooked financial transactions shunned by most other banks. BCCI started operations in Pakistan in 1972, with much of funding provided by Bank of America & CIA. CIA knew about BCCI's activities, & found its mindset to be very

manipulating and planned its own operations through BCCI.

World's Worst Banking Scandal

CIA knew about BCCI's activities, & found its mindset to be very manipulating and planned its

own operations through BCCI

Investigating reports showed that BCCI was able to
simultaneously manipulate

the spy agencies of

numerous countries
BCCI was supplying funds for terrorist organizations BCCI rigged international commodity markets It was laundering drug money for drug cartels worldwide.

South Indian Bank -1995

(Abusing of banking facility by banks & individual)

Modus Operandi
Opening A/C for fictitious & nonexisting firm Submit cash/deposit

Contacting financer who can lend money to racketeer

Remitted to foreign bank

South Indian Bank

Submit documents showing goods imported to India

Specialized in preparing forged documents

A/C in Hong-Kong for receiving foreign exchange

Sell foreign exchange to smugglers

Money Laundering on global scale

ABN AMRO Case (2005) The US Justice Department alleges that ABN helped governments and banks of Iran, Libya, Sudan and Cuba evade sanctions and bring money into the United States, according to papers filed in the case ABN AMRO Bank to Pay $80 Million in Civil Settlement DAIWA CASE (1995) Money Laundering of $1.1 billion while trading US Treasury Bonds Lost license to operate in US

Money laundering in India(Hawala)

Money transfer without money movement developed in India Also known as chop, chit , flying money and underground bank
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Money Laundering Vs Hawala

Money Laundering Hawala

Formal money transfer system Layering process is involved Conversion of black money to white money

Informal money transfer system

Layering process is eliminated Conversion of white money to black money

Other Banking scams & Penalties

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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KYC Norms

KYC norms, what is it?

RBI directed all banks and financial institutions to put in place a policy framework to know their

customers before opening any account

Mandatory details required under KYC norms are proof of identity and proof of address Banks may even ask for verification by an existing account holder Standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted

KYC, what are the features

Features
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?

KYC, Objectives
Enable Banks to understand their customers and their financial dealings better

Prevent banks from being used by criminal elements

To prevent the possible misuse of banking activities for anti-national or illegal activities

Strengthening the banks' 'Internal Control System' by

allocating duties and responsibilities clearly

KYC what are the norms?

Customer Acceptance Policy No account is opened in anonymous or fictitious name Customers are categorized based on risk perceptions

Customer Identification procedures Means identifying the customer by using reliable, independent source documents, data or information Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions.

KYC what are the norms?

Monitoring of transactions KYC can be effective by regular monitoring of transactions Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions

Risk Management It is about managing internal work to reduce the risk of any unwanted activity. Managing responsibilities, duties and various audits plus regular employee training for KYC procedures Regular review and updating of the parameters or criteria used to generate monitoring reports or issue alerts

IPO scam 2005-06

Initial public offering of IDFC Few investors opened 14000 dematerialized accounts Purpose was to corner large number of shares of the company The Reserve Bank of India on Monday 27th Feb 2006 fined HDFC Bank, IDBI and ING Vysya Bank for violation of Know Your Customer norms

PMLA ACT & FEMA

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.

Forty Recommendations - Complete set of counter-measures against money laundering

Nine Special Recommendations on Terrorist Financing

1995 - Egmont Group set up to stimulate international cooperation amongst FIUs. Best Practices for exchange of information.

PMLA (2002)

To combat money laundering in India

Came into force with effect from July 1, 2005

Defines money laundering as an offence and allows freezing, seizure and confiscation of the proceeds

Defines offence 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 offence of money laundering

PMLA (2002)
Banks and financial institutions will have to mandatorily report to Government all suspicious transactions (cash/noncash), counterfeit currency and those over Rs.10 Lakh

They need to furnish information to FIU IND

Financial Intelligence Unit India

Set up by government in 2004 responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions

Schedule offences under PMLA (2002)

Offences specified under Part A of the Schedule

Offences under the Indian Penal Code (Sec 121, 121A)

Offences under the Narcotic Drugs And Psychotropic Substances Act, 1985

Offences specified under Part B of the Schedule if the total value involved in such offences is thirty lakh rupees or more.

Offences under the Indian Penal Code Offences under the Arms Act, 1959 Offences under the Wild Life (Protection) Act, 1972

Offences under the Immoral Traffic (Prevention) Act, 1956

Offences under the Prevention Of Corruption Act, 1988

Information Furbished
Cash Transactions All cash transactions of the value of more than Rs. 10 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 Suspicious Transactions

All suspicious transactions whether or not made in cash

Suspicious Transactions
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 Appears to be made in circumstances of unusual or unjustified complexity Appears to have no economic rationale or bonafide purpose Give rise to a reasonable ground of suspicion that involve financing of the activities relating to terrorism

Transactions
Deposits

Exchange or transfer of funds in any currency

Withdrawals

This can be in cash or in cheque payment order or other instruments or by electronic or other physical means

Reasons for Suspicion

Identity of client

Background of client Multiple accounts

Activity in accounts Nature of transactions Value of transactions

Reasons for Suspicion

Identity of client
False identification documents Identification documents which could not be verified within reasonable time Accounts opened with names very close to other established business entities

Reasons for Suspicion

Background of client
Suspicious background or links with known criminals

Reasons for Suspicion

Multiple accounts
Large number of accounts having a common account holder, introducer or authorized signatory with no rationale Unexplained transfers between multiple accounts with no rationale

Reasons for Suspicion

Activity in accounts
Unusual activity compared with past transactions Sudden activity in dormant accounts Activity inconsistent with what would be expected from declared business

Reasons for Suspicion

Nature of transactions
Unusual or unjustified complexity No economic rationale or bonafide purpose Frequent purchases of drafts or other negotiable instruments with cash Nature of transactions inconsistent with what would be expected from declared business

Reasons for Suspicion

Value of transactions
Value just under the reporting threshold amount in an apparent attempt to avoid reporting Value inconsistent with the clients apparent financial standing

Other features
In case of conflict between PMLA and FEMA or other acts/laws, the provisions of PMLA have over riding effect There has been two amendments in PMLA act in 2005 and in 2009 Additional intermediaries (money changers, money

transfer service providers and international payment

gateways and casinos) brought under the ambit of amended PMLA 2009

FEMA
Introduced as a replacement for Foreign Exchange Regulation Act (FERA)

Became valid from 1st June 2000

Objective was to consolidate laws related to foreign exchange to facilitate external trade and payments

Applicable to all parts of India as well as to all branches, offices and agencies outside India owned or controlled by Indian resident

PMLA vs FEMA
FEMA provides lesser power to ED compared to PMLA and hence sometimes called toothless act Proceedings under FEMA are quasi-judicial in nature and the punishment prescribed is only fine, whereas under PMLA the proceedings are criminal and the court can award sentence too Major distinction is that in PMLA the holding should be proceed of crime offences under FEMA are not listed in the PMLA schedule

TRENDS IN MONEY LAUNDERING

Money Laundering then and now..

1997
Wire transfers Internet-based and e-money systems Remittance services and money exchange services Assistance from lawyers Hawala, hundi or other underground banking systems Bank-centered techniques: collection accounts, loan back arrangements bank drafts, money orders and cashiers cheques smurfing Cash smuggling Accounts in relatives names, shell companies

2011
Wire transfers New electronic payment systems Remittance services and money exchange services Assistance from Gatekeepers Hawala, hundi or other underground banking systems Terrorist financing through nonprofit organizations Insurance industry, particularly through independent insurance agents Politically Exposed Persons (PEPs)

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Affect of Regulations in US and UK

Totally Funds Laundered Worldwide

Money Laundering by region

$1,200

$1,100

$1,000 $900 $800 2004 2005 2006 2007 2008 2009

Asia 34%

UAE 15% America 24% Europe 13%

Africa 20%

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Activities involved
The usual suspects drugs, smuggling, organized crimeaccount for over of all money laundering Terrorist financing is a drop in the bucket in real terms

Terrorist 1% Other Crimes 23%

Drugs 26%

Nevertheless it is driving todays AML

and KYC regulations White collar crime, including embezzlement and internal fraud, is a

significant (and growing) problem

Embezz elment 21%

Smuggli ng 29%

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Spending trends
Spending on anti-money laundering solutions in Asia will grow faster than in Europe or North America

Global AML Software Spending 142.1 146.0 148.5 146.0 139.5 160 144.7 142.1 133.0 139.5 129.2 140 122.7 113.7 120 93.0 100 81.4 71.0 80 60.7 60 38.7 28.4 40 20 0 2004 2005 Asia 2006 EMEA 2007 2008 2009

US$ millions

Americas

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Recent Methods
Organised Maritime Piracy and Related Kidnapping for Ransom Risks Arising from Trafficking of Human Beings and Smuggling of Migrants

New Payment Methods

Trusts and Company Service Providers

Vulnerabilities of Free Trade Zones

Securities Sector

Football Sector

Casinos and Gaming Sector

Real Estate Sector

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Typologies
Development of new payment methods
prepaid cards mobile payment services internet payment services (IPS)

Third party funding

accounts can be funded anonymously where the specific business model permits Exploitation of the nonface-to-face nature of NPM accounts stolen or fake identities Minimal face-to-face contact

Complicit NPM providers or their employees controlled by criminals

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Typology 1
)

Prepaid- cards

Internet Payment Services

Mobile Payment Services:

Third Party Funding

Illegal online steroid sales Gambling proceeds Payment for drugs Sale of stolen goods on a commercial website Move funds related to fraud

Telemarketing fraud Cash vouchers to collect extortion money

Terrorist financing

Selling stolen phone credits

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Typology 2

Prepaid- cards

Exploitation of the nonface-to-face nature of NPM accounts

Individuals bank accounts

Companys payroll accounts

Phishing activity

Terrorist financing

Internet Payment Services

digital currency provider

Fraud scheme

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Typology 3

Prepaid- cards

Complicit NPM providers or their employees

Use of open-loop cards for drug proceeds

Embezzlement activities and money laundering

Internet Payment Services

Digital currency and prepaid cards

Fraud scheme

Illegal online gambling

Digital precious metals provider

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References
www.fiuindia.gov.in www.moneylaundering.com www.sebi.gov.in www.rbi.org.in www.irdaindia.org

www.finmin.nic.in www.infrasoftech.com www.mantas.com FATF Annual Report Oct 2010 Www.imf.org

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Questions?

We are happy to help you!

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