Prevention of Money Laundering

1. Prevention of Money Laundering By Ms. Lakshmi Arun Assistant Director

2. Have any of you who have not experienced giving bribe directly or indirectly?

3. How do you think that the money earned out of corruption, bribery etc is utilised by Criminals?

4. Some taunting facts • According to United Nations office of Drugs and Crime, the estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. • According to Corruption Perception Index 2011 India is in 95th position, where as according to doing business report 2012 of the world bank India is in 132nd position.

5. Some taunting facts • As many as 62% of all citizens think that corruption is real and they have in fact have had first hand experience of paying a bribe or “using a contact” to get a job done in a public office – India Corruption Study 2005 by Transparency International. • In the book 'Corruption in India: The DNA and RNA' authored by Professors Bibek Debroy and Laveesh Bhandari say that the public officials in India may be cornering as much as Rs.92,122 crore ($18.42 billion), or 1.26 per cent of the GDP, through corruption. The books estimates that corruption has virtually enveloped Indiagrowing annually by over 100 percent(Source : Economic Times Dated December 11, 2011)

6. Result……. Black Money and its laundering

7. Act of Money Laundering Process by which illegal funds and assets are converted into legitimate funds and assets.

8. How the process takes place • Entry of illegal funds into the system-Placement • Distancing of funds from its origin-Layering • Laundered funds are made available as legitimate funds-Integration.

9. The Process

10. How Does It Work? • Sell cocaine and get a million dollars. • Take the million in cash to the some Islands. • Buy a legitimate company , complete with a board of directors. • Open a bank account in the company’s name and deposit the rest of the money. • Enjoy the islands, get some sun, then go home. • When you get home, borrow $200,000 from the Company account and have it delivered via wire transfer.

11. How does it work? • Open a restaurant. • Deposit proceeds from ongoing drug business along with proceeds from the restaurant every month into a legitimate bank account. Don’t add too much illegal money, just enough to make it look as though your restaurant is doing a good, healthy business. • Pay all of your taxes on the restaurant deposits, so the tax authorities don’t start an investigation.

12. Parliamentary History of the Law. • The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998. • Referred to Standing committee on finance on 05-08-1998. • The committee submitted its report on 04-03-1999. • The bill was presented in Rajya Sabha on 08-03-1999.

13. Parliamentary History of the Law. • The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999. • The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999. • Rajya Sabha referred the bill to Select committee. • The committee finalised its report on 24th July, 2000. • The present act after being passed by both the houses received the assent of the president on 17th January, 2003.

14. What is a Financial Intelligence Unit? A financial intelligence unit (FIU) is a central agency of a government that • receives financial information pursuant to country's anti-money laundering laws • analyzes and processes such information and • disseminates the information to appropriate national and international authorities, to support anti-money laundering efforts.

15. Broad Regulatory Framework • The Prevention of Money Laundering Act, 2002 • Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. • Guidelines on Anti Money Laundering Standards/KYC norms/customer identification process issued by SEBI/RBI/IRDA

16. The Prevention of Money-Laundering Act, 2002 • Director, Financial Intelligence Unit-India • The reporting entities to furnish information of specified transaction to FIU-IND • Analyse and process reports and disseminate to LEAs/IAs • Power to impose fine for non-compliance • Director of Enforcement • Powers relating to investigation of and prosecution for money-laundering offences • Power of attachment of property, survey, search & seizure and retention of property and document • Power regarding summons, production of document and recording of statement • .

17. Obligation under PMLA PMLA impose obligations on • Banking Companies • Financial Institutions • Intermediaries in respect of • Maintenance of Records • Furnishing of information • Verification of identity of the clients.

18. Banking Company includes • Public sector banks • Private sector banks • Private foreign banks • Co-operative banks • Regional rural banks

19. Financial Institutions includes • Financial Institution as defined under Section 45-I of the RBI Act • Insurance Companies • Hire purchase companies • Chit fund Companies • Housing finance institutions • Non-banking financial companies.

20. Intermediary includes • Stock Brokers • Sub-brokers • Share-transfer agents • Bankers to an issue • Trustees to trust deed • Registrar to an Issue • Merchant Bankers…………….

21. Obligation in respect of maintenance of records Maintenance of records includes records of • All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency • All series of cash transactions which are integrally connected • All suspicious transactions

22. Furnishing of Information • Reporting of cash and suspicious transactions • Reporting on the appointment/change in the principal officer etc.

23. 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

24. Illustrative list of suspicious transactions • False Identification documents • Identification documents which could not be verified within reasonable time • Multiple Demat Accounts • Multiple Trading Account with the broker • Sudden increase in the transaction of client • Huge off-market deals

25. Illustrative list of suspicious transactions • Multiple Bank accounts • Huge withdrawals/deposits • Nature of transactions inconsistent with what would be expected from declared business • Foreclosure of home loan accounts by substantial cash payments

26. Illustrative list of suspicious transactions • Frequent purchases of drafts or other negotiable instruments with cash • Large number of accounts with common account holders , introducer or authorised signatory • Unexplained transfers between multiple accounts with no rationale

27. Data on cash/suspicious Transactions (as on 31.07.11) • Collection of Information • 30.36 million Cash Transaction Reports (CTRs) received • 99.62 % CTRs received in electronic format • 46,409 Suspicious Transaction Reports (STRs) received • 5.26 lakh Counterfeit Currency Reports (CCR) of face value of Rs.446 million • Analysis and Dissemination of Information • 41,934 STRs processed • 28,210 STRs disseminated

28. Data on Suspicious Transactions

29. How to increase the Compliance level • Spread financial literacy among reporting entities and their clients. • Conduct educational programmes to reinforce the importance of reporting requirements • Impose more stringent penalties for money laundering offences. • Training of staff

30. KYC norms issued by RBI,SEBI & IRDA covers • Customer Acceptance • Customer Identification • Transaction Monitoring • Risk Management

31. International efforts • 1985- The United Nations- Started effortswith the recognition that drug trafficking—and associated money laundering—were truly international problems and could be addressed effectively only on a multinational basis • 1988 –Basel Committee on Banking Supervision - issued a statement on Prevention of Criminal use of Banking System for the purpose of ML • 1989 – Financial Action Taskforce (FATF)- Set up to ensure global action to combat money laundering ( subsequently included terrorist financing ) • 1995 - Egmont Group- Set up to stimulate international cooperation and develop best Practices for exchange of information amongst FIUs • 1997- Asia/Pacific Group on money laundering(APG)- FATF-style regional body (FSRB)-set up to create awareness and encourage adoption of AML measures in the region. • World Bank and International Monetary Fund- have evolved a comprehensive AML/CFT assessment methodology for evaluating country’s compliance with FATF Standards and provide technical support

32. FATF • Mandate : • Establish, revise and clarify global standards and measures for combating ML/TF; • Promote global implementation of the standards; • Identify and respond to new money laundering and terrorist financing threats; • Engage with stakeholders and partners throughout the world. • FATF Forty+ Nine Recommendations: • Forty Recommendations - Complete set of counter-measures against money laundering • Nine Special Recommendations on Terrorist Financing • Internal Review Mechanisms : • Self-assessment exercise based on a standard questionnaire designed by FATF and used by its members to report on their anti-money laundering system on an annual basis and • Mutual evaluation process in which each country is evaluated by a team of experts drawn from other member countries to give ratings with respect to each recommendation of FATF

33. FATF Recommendations • Criminalization: To criminalize money laundering and terrorist financing. The definition of money laundering offenses has now expanded to include all serious offenses. • Provisional Measures and Confiscation: To put in place measures to identify, trace, freeze, or seize and finally to confiscate the illegal proceeds. • Customer due diligence: To impose duties on financial institutions to know their customers and to abolish the use of anonymous accounts. • Record keeping: Financial institutions to keep records on all the transactions that they conduct. • Suspicious transactions reporting: Financial institutions to report all transactions that raise their suspicion, without alerting the clients. • Internal controls: Financial institutions adopt internal mechanisms that allow them to comply with the regulatory requirements. • Implementation: To create regulatory and supervisory agencies that are capable of implementing the international standards set by the Recommendations. • International cooperation: To put in place a system that allows it to cooperate with other countries on all aspects of law enforcement including exchange of information, preservation and confiscation of assets and extradition.

34. KPMG -India Anti-Money Laundering Survey 2012 • This survey was conducted across the financial services sector covering public sector banks, private sector banks, foreign banks, general and life insurance companies, mutual funds, non-banking financial companies and other institutions in the FS sector covered under PMLA. • The primary target respondents of the survey were senior and mid management members from Compliance, Audit, Risk Management and AML departments. The respondents were also senior management members from the business and operation functions.

35. KPMG -India Anti-Money Laundering Survey 2012 • Increased focus on money laundering risk by the Senior Management 1. 76%Discuss the AML profile on at least a monthly or quarterly basis 2. 41% Integrate AML in the business strategy of new products/services. 3. 35% Publicize the AML compliance programme internally

36. KPMG -India Anti-Money Laundering Survey 2012 • FATF: Membership comes with increased responsibilities 84% -Regulatory scrutiny has become more stringent post FATF membership 90% -Regulatory scrutiny is high in the area of Know Your Customer policy and processes 81% - Agree that scrutiny will remain high in the area of Transaction Monitoring / Reporting

37. KPMG -India Anti-Money Laundering Survey 2012 • Laying the foundation: Money laundering risk assessment 65%Conduct an AML risk assessment on at least a half yearly or yearly basis 32%Conduct an AML risk assessment on the basis of an event 51% AML policies and procedures are based on local regulations and benchmarked against global best practices

38. KPMG -India Anti-Money Laundering Survey 2012 • Drilling down to unearth the core 86% -Institution follows a risk based approach in relation to account opening 84%-Beneficial owner identified at the time of opening an account 83% -Have procedures for monitoring sanctions lists before account opening 81% -Customer documents are collected and verified before opening an account 77%-Have specific procedures in place for identifying politically exposed persons

39. KPMG -India Anti-Money Laundering Survey 2012 • Testing and monitoring the effectiveness of your controls 71%- Have a formal procedure to test and monitor the effectiveness of anti-money laundering systems and controls 80% - Compliance function plays an important role in the testing and monitoring procedures 76%-Internal Audit plays an important role in the testing and monitoring procedures.

40. KPMG -India Anti-Money Laundering Survey 2012 • Investment to be made in the area of AML 44% -Investment will increase by 10 to 20 percent. 29%- Investment will increase by 21 to 50 percent

41. ASSOCHAM REPORT 2012 ON BLACK MONEY MENACE IN INDIA Assocham in its recent report on 'Black money menace in India' had suggested the government should provide immunity to persons wanting to bring back funds stashed abroad.

42. ROLE OF COMPANY SECRETARIES As Practising Company Secretary/Company Secretary in whole time employment, what shall we do to prevent money laundering?

43. Thank you Disclaimer Clause: Views expressed in this presentation views of the author do not necessary reflect those of the Institute.