Briefing on ‘KYC’ Norms and ‘AML’ Measures for IBA Member Banks

1. Briefing on ‘KYC’ Norms and ‘AML’ Measures for IBA Member Banks Venue: Hotel Hilton Towers, Mumbai Date: 12th April 2006 Presented by Sanjeev Singh Additional Director, FIU-IND Financial Intelligence Unit-India

2. Contents • Background • About FIU-IND • Legal Framework • Verification of identity • Furnishing information • AML and Tax Compliance

3. Background

4. Timeline • 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. • 1997- Asia/Pacific Group on money laundering (APG) set up to create awareness and encourage adoption of AML measures.

5. Need for a Financial Intelligence Unit • Law enforcement agencies had limited access to relevant financial information. • Need to engage the financial system in the efforts to combat laundering. • Need to report suspect financial transactions by financial institutions to a central agency for assessing and processing reported transactions.

6. Definition of a FIU A central, national agency responsible for receiving, (and as permitted, requesting) analysing and disseminating to the competent authorities, disclosures of financial information: (i) Concerning suspected proceeds of crime, or (ii) Required by national legislation or regulation, in order to combat money laundering. - Definition formalised by Egmont Group in 1996

7. About FIU-IND

8. Background of FIU-IND Set up vide Government of India’s Office Memorandum (O.M.) dated 18th November 2004 “To coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.” • Multi-disciplinary unit headed by a Director. • Core Functions • Intelligence Management • Relationship Management • Policy Review and Development

9. Framework Supervisory and Regulatory Agencies RBI DCA Supervisory and Regulatory Agencies SEBI IRDA RBI Reporting Entities DCA SEBI IRDA Banking Company Financial Institutions Intelligence/Enforcement Agencies FIU-IND Intermediaries IB /RAW Intelligence/Enforcement Agencies REIC CBDT-DGIT/CCIT IB /RAW CBEC-DGDRI/DGCEI REIC CBDT-DGIT/CCIT ED/NCB CBEC-DGDRI/DGCEI EOW of Police/CBI ED/NCB Others EOW of Police/CBI Foreign FIUs Others Foreign FIUs

10. Legal Framework

11. Prevention of Money Laundering Act Prevention of Money Laundering Act (PMLA) and the Rules notified thereunder impose obligation on • banking companies • financial institutions • intermediaries of the securities market to • appoint principal officer • verify identity of clients • maintain records • furnish information

12. Banking Company under PMLA “Banking Company” under PMLA includes: • All nationalized banks, private Indian banks and private foreign banks. • All co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) co-operative banks. • State Bank of India and its associates and subsidiaries. • Regional Rural Banks.

13. Role of Principal Officer • Every banking company shall communicate the name, designation and address of the Principal Officer to the Director, FIU-IND. (Rule 7) • The Principal Officer shall: • furnish the information referred to in rule 3 to the Director. • retain copy of such information shall for the purposes of official record.

14. Scheduled Offences under PMLA • 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

15. Know Your Customer Guidelines Customer Acceptance - Ensure that you accept only legitimate and bona fide customers. Customer Identification- Ensure that you properly identify your customers to understand the risks they may pose. Transactions Monitoring- Monitor customers accounts and transactions to prevent or detect illegal activities. Risk Management- Implement processes to effectively manage the risks posed by customers trying to misuse facilities.

16. Verification of identity

17. Verification of Identity of Clients • Verify and maintain the record of: • Identity of client • Address - current and permanent • Nature of business • Financial Status • Maintain records of the identity of clients for a period of ten years from the date of cessation of the transactions with the client.

18. Challenges in verification of identity • Mechanism to verify ID • Multiple IDs • Existing Clients • Consolidated Hot List

19. Furnishing Information

20. Information to be furnished • Cash Transactions • All cash 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 • Suspicious Transactions • All suspicious transactions whether or not made in cash

21. Suspicious Transactions • Suspicious transactionmeans 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; Reference: Categories of suspicion for banks

22. Reporting Formats Manual CTR Summary of Cash Transaction Reports Cash Transaction Report Annexure A- Individual Detail Sheet Annexure B- Legal Person/Entity Detail Sheet Attributes • Scalable design - STRs involving numerous individuals, legal entities and accounts. • Normalised design- Reduced repetitive information capture. • Editable PDF forms- Ease of filling. • Compatibility of electronic formats with transactional data structure of reporting entities. • Compatibility of electronic and manual formats. Roadmap Ahead • Secure Gateway • Information security standards (BS 7799) Manual STR Suspicious Transaction Report Annexure A- Individual Detail Sheet Annexure B- Legal Person/Entity Detail Sheet Annexure C- Account Detail Sheet Electronic Formats STR for a Banking Company CTR for a Banking Company STR for an Intermediary CTR for an Intermediary Data Files in Electronic Reporting Control File Branch Data File Account Data File Transaction Data File Individual Data File Legal Person Data File

23. Challenges in detection of suspicious transactions • Data Quality • Decentralized databases • Data not captured in electronic form • Process • New Roles and Responsibilities • Identity matching with hot list of individuals and entities • Mechanism to verify financial details • Technology • Selection of appropriate AML solution and analytical tools • Money laundering typologies • People • Awareness • Training • Compliance Cost • Confidentiality and Privacy

24. Data Quality of Reports • Significance • Meet data requirements of data mining, identity matching • Reduce false positives • Validation of data files • Valid data structure • Mandatory data fields • Relationship integrity • Data sufficiency (File Validation Utility-Assist in error correction)

25. FIU-IND Website www.fiuindia.gov.in About FIU-IND Maintenance of Records Furnishing Information PMLA 2002 Scheduled Offences Identity of Clients Notifications International Publications FAQs

26. AML and Tax Compliance

27. AML Measures and Tax Compliance Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets. Investments Purchases Placement: Illegal funds or assets are first brought into the financial system Layering: Use of multiple accounts, banks, intermediaries, corporations, trusts, countries to disguise the origin. Integration: Laundered funds are made available as apparently legitimate funds. Money Laundering is tax evasion in progress

28. Thank You sanjeev.singh@fiuindia.gov.in