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Overview of Prevention of
Money Laundering Act, 2002
G. K. Choksi & Co.
Website : www.gkcco.comPhone : 91-79-30012009 Fax : 91-79-26562999
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Agenda
1.) What is Money Laundering
2.) Parliamentary History of the Law.
3.) Provisions of the Law – A Bird Eye view.
4.) Provisions of law – Detailed Study.
5) Reporting under money Laundering
6) Prevention of Money Laundering Rules
7.) Important Websites.
8.) Opportunities for Chartered
Accountants.
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Are the following money laundering activities ?
Conversion from black money to white money
Under or over invoicing in export trade
IPO Scam
Over or understating of expenditure
Bogus expenditures
Misleading transactions with related parties
Bribe
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Background
The goal of a large number of criminal acts is to
generate a profit for the individual or group that
carries out the act.
Money laundering is the processing of these criminal
proceeds to disguise their illegal origin.
It enables the criminal to enjoy these profits without
jeopardising their source.
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Background
When a criminal activity generates substantial
profits, the individual or group involved must find a
way to control the funds without attracting attention
to the underlying activity or the persons involved.
Criminals do this by disguising the sources, changing
the form, or moving the funds to a place where they
are less likely to attract attention.
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TYPOLOGY OF ECONOMIC CORRUPTION
Abuse of positions and privileges.
Low levels of transparency and accountability.
Inflation of contracts.
Bribery/kickbacks.
Misappropriation or diversion of funds.
Under and over-invoicing.
False declarations
Advance fee fraud and other deceptive schemes.
Collection of illegal tolls.
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IMPACT OF CORRUPTION
Loss of much needed revenue.
Discourages foreign investment, leading to
decreased FDI.
Banks may lose viable business.
Stifles economic growth which results in
development failure
Corruption diminishes national prestige and respect.
People are treated with suspicion in most business
dealings.
Honest (majority) People suffer the stigma of
corruption due to stereotyping.
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What is Laundering ?
In Black Law of Lexicon the term Laundering is
referred to as being used to describe investment or
other transfer of money flowing from
racketeering ,drug transactions and other illegal
sources into legitimate channels so that its original
source can not be traced
The literal meaning of laundering is washing
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What is Money Laundering?
Money laundering is the disguising or concealing of
illicit income in order to make it appear legitimate.
Indian anti-money laundering law encompasses the
money generated from numerous different crimes –
e.g., drug trafficking, murder for hire, racketeering,
and embezzlement.
The word laundering is used for cleaning dirty
clothes. Money Laundering is used to clean the dirty
money
Just as soap and water are used for cleaning clothes
In the same way Placement ,Layering and integration
are used for Cleaning Dirty Money
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Why is it a Problem for Countries?
Money laundering may look like a polite form of white
collar crime, but it is the companion of brutality, deceit
and corruption.
Money laundering deprives governments of some tax
revenues, thereby raising the relative burden of honest
citizens.
Because of rapid movements of large amounts of
money, normally stable financial institutions become
destabilized, threatening savings accounts and
retirement funds of innocent citizens.
Estimates of the size of the money laundering problem
totals more than $500 billion annually world - wide
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How Does It Work? Method 1 - Classic
• 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.
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Method 1 – Classic….
• 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.
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How Does It Work? Method 2 – The Loan back
• Open a Swiss bank account and routinely deposit
receipts from illegal gambling operation.
• Buy a string of carwashes in the U.S. worth
$1,000,000.
• Put $50,000 in legitimate cash as a down payment
and get a $450,000 mortgage from a legitimate
financial institution in the U.S.
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Method 2 – The Loan back…
• “Borrow” the other $500,000 from the Swiss
account. When you pay interest on this “loan” you
are really paying it to yourself. Much of this
interest, since it is mortgage interest, is tax-
deductible.
• Once you have paid yourself back in the Swiss
account, you can borrow from that account again
and again and again….
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How Does It Work? Method 3– The Money Broker
shuffle
• Mr A is a Colombian drug lord with $1,000,000 in
illegal proceeds sitting in a house in New York.
• Mr B is a “legitimate” Colombian businessman who
wants to buy one million dollars’ worth of
computers from Gateway. But he wants to avoid
paying the high bank fees for exchanging his pesos
for dollars. If he wants $1,000,000 in US dollars he
must actually exchange the peso equivalent of
$1,210,000.
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Method 3– The Money Broker shuffle…
• Mr A and MR B use the services of Mr C , a money
broker in Mexico, who is also a legitimate importer.
Mr C uses Mr D, her partner in New York, to give
people who are going to Mexico a small fee to
smuggle in small chunks of Mallinger’s cash. Each
carrier or “smurf” brings less than $10,000, to avoid
customs violations.
• Alternatively, Mr D gives each smurf under $10,000
in cash, plus a small “handling fee” to transfer less
than $10,000 from a New York bank account to a
Mexican branch of the same bank.
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Examples of Money Laundering
Smurfing
Bank Complicity
Money Services and Currency Exchanges
Asset Purchases with Bulk Cash
Electronic Funds Transfer
Postal Money Orders
Credit Cards
Casinos
Legitimate Business / Co-mingling of Funds
Value Tampering
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Money Laundering - The Concept
Most crimes such as drug trafficking, fraud,
extortion, smuggling, arms sales etc. are motivated
by profit.
To avoid detection and possible confiscation of
money acquired through illegal means, criminals
need to provide a clock of legitimacy to such
proceeds.
This process is called money laundering.
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Money Laundering - The Process
Money laundering is the process that criminals use
to erase the connection between the crime and the
money, concealing the criminal source of the funds.
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General Steps in any money laundering
process.
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Money Laundering - The stages
The process generally has three stages.
PLACEMENT
LAYERING
INTEGRATION
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PLACEMENT
The first step is to introduce cash into the financial
system.
The money launderers use various vehicles to do this
e.g Deposits, Money transfers, purchases of
monetary instruments such as travellers’ cheques,
bank cheques or money orders, foreign currency
conversions etc.
They may also use insurance companies, brokerage
accounts, credit cards and other financial services.
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LAYERING
The layering is like a shell game- many transactions
and conversions take place to blur the trail back to
the original crime.
This may include investments, purchases of goods
and services, encashing cheques, using several
smaller cheques to purchase a bank wire etc.
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INTEGRATION
Integration is the final stage of the money laundering process.
This is when the criminal re-introduces the funds into the
legitimate economy with an apparently legitimate provenance.
Examples include investing in a company, purchasing real
estate, luxury goods, etc.
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Terrorist Financing• Terrorist Financing is the reverse procedure of Money
Laundering. Here the money earned from legitimate sources is
used for illegitimate activities i.e. financing terrorism.
• Funds earned by Political bosses, Industrial organisations etc
interested in such activity is supplied to extremist
organisations for carrying out their motives.
• Terrorist financing is converting of White money to dirty money
and Money Laundering is converting of dirty money into white
money
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Flow Chart on Money Laundering
Definition of Money Laundering u/s 2(p)
Offence of Money Laundering u/s 3
Proceeds of Crime u/s 2(u)
Schedule offenceu/s 2(y)
Property u/s2(v)
Value u/s2(zb)
Part A of Schedule Part B of Schedule
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Money Laundering - The Legal Framework
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- Sec 3
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Essential ingredients of Money Laundering
1. A crime has been committed
2. There are proceeds of or gains from crime
3. There is a transaction in respect of proceeds of the
gains
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In today’s world of advanced technologies, once the
money enters the banking channels it is difficult to
check its movement alone, forget Origin.
The Best Way to check money laundering is to check
it at Placement stage itself by effective KYC
techniques.
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Origin of Money Laundering Expression
‘Money laundering’ as an expression is one of fairly recent
origin.
The original sighting was in newspapers reporting the
Watergate scandal in the United States in 1973.
The expression first appeared in a judicial or legal context in
1982 in America in the case US v $4,255,625.39 (1982) 551 F
Supp.314
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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.
Lok Sabha was dissolved on 26-04-1999.
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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.
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Authorities under Money Laundering Act
Adjudicating Authority
Appellate Tribunal
Special Court
Director, Financial Intelligence Unit
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Bird Eye View of the Act
Chapter Section Title
I 1-2 Preliminary
II 3-4 Offence of Money Laundering
III 5-11 Attachment, Adjudication and
confiscation
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Bird Eye View of the Act
Chapter Section Title
IV 12-15 Obligation of the Banks, Financial Institutions and Intermediaries.
V 16-24 Summons, Searches And Seizures, Etc.
VI 25-42 Appellate Tribunal
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….Bird Eye View of the Act
Chapter Section Title
VII 43-47 Special Courts
VIII 48-54 Authorities
IX 55-61 Reciprocal, arrangements for
assistance in certain matters and
procedure for confiscation of
property.
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….Bird Eye View of the Act
Chapter Section Title
X 62-75 Miscellaneous
Schedule Part A Offences which are covered regardless
of the value
Schedule Part B Offences which are covered if the value
exceeds 30L or more
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Section 1 –
– Called the Prevention of Money-Laundering Act.
– Extends to the whole of India.
– Comes into operation on the notified date i.e. 01-07-05.
{Notification No. GSR-436(E) dated 01-07-05.}
Chapter I – Preliminary
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Section 2 – Definitions
Section 2(s) defines person to include-
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether
incorporated or not,
(vi) every artificial juridical person not falling within any of the
preceding sub-clauses, and
(vii) any agency, office or branch owned or controlled by any of
the above persons mentioned in the preceding sub-clauses;
Chapter I – Preliminary
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Section 2 – Definitions
– The phrase "proceeds of crime" has been defined in Section
2(u) to mean any property
derived or obtained,
directly or indirectly,
by any person as a result of criminal activity relating to a
scheduled offence or the value of any such property;
– Section 2(zb) defines "value" to mean the fair market value of
any property on the date of its acquisition by any person, or if
such date cannot be determined, the date on which such
property is possessed by such person.
Chapter I – Preliminary
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Section 2 – Definitions (contd)
– Section 2(y) defines "scheduled offence" to mean-
(i) the offences specified under Part A of the Schedule; or
(ii) the offences specified under Part B of the Schedule if the
total value involved in such offences is thirty lakh rupees or
more;
Chapter I – Preliminary
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Section 3 defines Offence of money-laundering. As per the
section “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.
Chapter II- Offence of Money Laundering
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Offences – Schedule Part A
OFFENCES UNDER “THE INDIAN PENAL CODE” 1. Section 121 Waging or attempting to wage war or abetting
waging war against the Government of India. 2. Section 121A Conspiracy to commit offences punishable by
section 121 against the State.
OFFENCES NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985
1. Section 15 Contravention in relation to Poppy Straw2. Section 18 Contravention in relation to Opium Poppy & Opium3. Section 20 Contravention in relation to Cannabis plant &
Cannabis4. Section 22 Contravention in relation to Psychotropic
Substances5. Section 23 Illegal import into India, export from India or
transshipment of narcotic drugs and psychotropic substances
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6. Section 24 External dealings in narcotic drugs & psychotropic
substances in contravention of section 12 of the Narcotic
Drugs and Psychotropic Substances Act, 1985
7. 25AContravention of orders made U/s 9A of the Narcotic Drugs
and Psychotropic Substances Act, 1985
8. 27AFinancing illicit traffic and harboring offenders
9. Section 29 Abatement & Criminal Conspiracy
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Offences – Schedule Part B
OFFENCES UNDER “THE INDIAN PENAL CODE “
1. Section 302 Murder2. Section 304 Culpable homicide not amounting to murder, if act by which
the death is caused is done with the intention of causing death3. Section 307 Attempt to Murder4. Section 308 Attempt to commit culpable homicide5. Section 327 Voluntarily causing hurt to extort property or a valuable
security or to constrain to do anything which is illegal or which may facilitate the commission of an offence
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6. Section 329 Voluntarily causing grievous hurt to extort property or a valuable security or to constrain to do anything which is illegal or which may facilitate the commission of an offence
7. Section 364 A Kidnapping for ransom8. Sections 384- 389 Offences relating to extortion9. Sections 392-402 Offences relating to robbery and dacoity10. Section 467 Forgery of valuable security, will or authority to
make or transfer any valuable security or to receive any money, etc.
11. Section 489A Counterfeiting currency notes or bank notes12. Section 489B Using as genuine, forged or counterfeit currency
notes or bank notes
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Offences – Schedule Part B
OFFENCES UNDER “THE ARMS ACT, 1959”1. Section 25
To manufacture, sell, transfer, convert, repair or test or prove or expose or offer for sale or transfer or have in his possession for sale, transfer, conversion, repair, test or proof any arms or ammunition to contravention of section 5 of the Arms Act, 1959
To acquire, have in possession or carry any prohibited arms or prohibited ammunition in contravention of section 7 of the Arms Act, 1959
Contravention of section 24A of the Arms Act, 1959 relating to prohibition as to possession of notified arms in distributed areas.
Contravention of section 24 B of the Arms Act, 1959 relating to prohibition as to carrying of notified arms in or through public places in disturbed areas.
Other offences specified U/s 25
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Offences – Schedule Part B
2. Section 26 To do any act in contravention of any provisions of
section 3,4,10 or 12 of the Arms Act, 1959 in such manner as specified U/s 26(1)the Act.
To do any act in contravention of any provisions of section 5,6,7 or 11 of the Arms Act, 1959 in such manner as specified U/s 26(2)the Act.
Other offences specified U/s 263. Section 27 Use of Arms or ammunition in contravention of
section 5 or use of arms or ammunitions in contravention of section 7 of the Act.
4. Section 28 Use and possession of the fire arms in certain cases.
5. Section 29 Knowingly purchasing arms from unlicensed person or for delivering arms etc., to person not entitled to possess the same.
6. Section 30 Contravention of any condition of a licence or any provisions of the Act of rules made therunder.
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Offences – Schedule Part B
OFFENCES UNDER “THE WILD LIFE (PROTECTION) ACT, 1972
1. Section 51 read with section 17A Contravention of provisions of section 17A relating to prohibition of picking, uprooting etc., of specified plants
2. Section 51 read with section 39 Contravention of provisions of section 39 relating to wild animals etc to be government property.
3. Section 51 read with section 44 Contravention of provisions of section 44 relating to dealing in trophy & animal articles with licenced prohibited.
4. Section 51 read with section 48 Contravention of provisions of section 48 relating to purchase of animals etc by licensee.
5. Section 51 read with sec 49B Contravention of any provisions of section 49B relating to prohibition of dealing in trophies, animal articles etc., derived from scheduled animals.
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Offences – Schedule Part BOFFENCES UNDER “THE IMMORAL TTRAFFIC (PREVENTION) ACT,
1956”1. Section 5 Procuring inducing or taking person for the sake of
prostitution 2. Section 6 Detaining a person in premises where prostitution is carried
on 3. Section 8 Seducing or Soliciting for purpose of prostitution4. Section 9 Seduction of a person in custody
OFFENCES UNDER “THE PREVENTION OF CORRUPTION ACT, 1988”5. Section 7 Public servant taking gratification other than legal
remuneration in respect of his official Act. 6. Section 8 Taking gratification in order, by corrupt or illegal means to
influence public servant7. Section 9 Taking gratification in exercise of personal influence with
public servant8. Section 10 Abetment by public servant of offences defined in section
8 or 9 of the Act.
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Offences
Offences in Part A (2 + 9) =11
Offences in Part B ( 12 + 6 + 5 + 4 + 4) = 31
Total offences covered (11 + 31) = 42
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…Chapter II- Offence of Money Laundering
Section 4 of the act prescribes the punishment for the offence of
Money laundering as described in section 3.
A rigorous imprisonment of 3 to 10 years has been prescribed.
The culprit can also be fined upto 5 Lakh Rupees.
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Chapter III – Attachment, Adjudication and confiscation
Section 5 of the act provides for pre-adjudication provisional
attachment in appropriate cases. It outlines the procedure of such
provisional attachment.
Section 6 of the act deals with appointment, composition and
powers of adjudicating authority to carry out the purpose of the act.
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…Chapter III – Attachment, Adjudication and confiscation
Section 7 of the act makes provisions regarding staff of the
Adjudicating authority.
Section 8 of the act provides for Adjudication for the purpose of
determination and recording a finding, whether the provisionally
attached proceeds of crime, or retention of the record and property
seized under the act are involved in money laundering, and if so, to
confirm the attachment till conclusion of the trial proceedings as
provided in the act.
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…Chapter III – Attachment, Adjudication and confiscation
Section 9 provides for absolute vesting in the central
government of all rights and title of the confiscated property
free from all encumbrances
Section 10 provides for the appropriate procedure for
management of the confiscated property.
Section 11 confers the powers on adjudicating authority similar
to as vested in a civil court inder the CPC, 1908.
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Chapter IV – Obligations of Banks, FIs, Intermediaries
Chapter IV of the act deals with obligation of Banking
Companies, Financial Institutions and Intermediaries.
Section 12 requires BIF to
1. Maintain records of transactions of the prescribed
nature and Value.
2. Furnish the above information to the director.
3. Verify and maintain of records of the identity of the
customers in prescribed manner.
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Section 13 of the act empowers the director to Scrutinise records and
impose penalty of a minimum of Rupees 10,000/- to a maximum of
Rupees 1,00,000/-.
Section 14 provides protection to the BIF and its officers from any
liability in Civil or criminal proceedings for providing the information
required by section 12.
Section 15 provides for the manner of furnishing of information to the
director. The same has been delegated to rules and have been
provided in the rules.
….Chapter IV – Obligations of Banks, FIs, Intermediaries
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The act places responsibility on BIF.
Lets understand each one of them in detail:
Banking company has been defined in 2(1)(e) of the act as a banking company
or cooperative bank to which the Banking Regulation Act, 1949 applies. The
banking regulation act interalia requires that any company which is engaged in
accepting repayable deposits (either on demand or otherwise) for the purpose
of lending of investments is called a banking company.
A company which is engaged in manufacturing or trade which accepts
deposits only for financing its own business is specifically excluded.
Chapter IV – Obligations of Banks, FIs, Intermediaries
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The Banking regulation Act applies to – Banking companies which are not nationalised.– Nationalised Banks.– Co-operative banks which have a paid up share capital of
Rupee 1 lakh or more whether State or Central.
Intermediary has been defined in clause 2(1)(n) of the act to mean-– Stock-brokers.– Sub-brokers.– Share transfer agents.– Bankers to an Issue.– Trustee to a trust deed.– Registrar to an issue.– Merchant bankers.– Underwriters.
Chapter IV – Obligations of Banks, FIs, Intermediaries
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…Chapter IV – Obligations of Banks, FIs, Intermediaries
– Portfolio manager.
– Investment Adviser.
– Depository Participants.
– Custodian of Securities.
– Foreign Institutional Investors.
– Credit Rating Agencies.
– Others, as may be notified under the section 12 of the SEBI
Act, 1992 by the SEBI.
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Financial Institutions have been defined under section 2(1) (l) of the act
to mean a financial institution defined under 45-I(c) of the Banking
regulation act and includes a
– Chit fund company.
– Cooperative Bank.
– Housing Finance Institution.
– Non banking Finance Institution.
Hence the Cooperative banks having paid up capital of less than 1
lakh rupee which are not covered under the definition of Banking
Company are covered under the Financial Institution category.
…Chapter IV – Obligations of Banks, FIs, Intermediaries
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Chapter V – Summons, Searches and Seizures
Section 16 of the act empowers the authority to carry out a survey of the
premises where he has Reason to believe that offence of ML has been
committed. Powers similar to 133A of the IT act.
Section 17 of the act empowers the director where he has reasonable
belief, to be recorded in writing, that any person has committed any act of
money laundering, or is in possession of proceeds of the crime or is in
possession of records relating to money laundering, to authorize any
officer to
– Search Premises,
– Seize record or property found,
– Make inventory and
– Examine person in control on oath.
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…Chapter V – Summons, Searches and Seizures
Section 18 provides for search of persons by the authority
empowered and having reason to believe that any person has
secreted on his person or anything under his possession,
ownership, or control any record or proceeds of crime which
may be useful for or relevant to any proceedings under the act.
Section 19 empowers appropriate authority to arrest a person if
he has reason to believe that the person is guilty of any offence
punishable under the act.
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…Chapter V – Summons, Searches and Seizures
Section 22, 23 provides for necessary presumptions for the
purposes of the act.
Section 24 of the act provide the burden of proving that the
proceeds of crime are Untainted property shall be on the
accused.
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OTHER PROVISIONS OF THE ACT
The other provisions of the act provide for establishment of
Appellate tribunal ( Chapter VI)
Special Courts (Chapter VII)
Authorities under the act (Chapter VIII)
Reciprocal arrangement for assistance in certain matters.
(Chapter IX)
Miscellaneous provisions (Chapter X)
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What is a Financial Intelligence Unit?
A financial intelligence unit (FIU) is a central agency of a
government that
1. receives financial information pursuant to country's anti-money
laundering laws
2. analyzes and processes such information and
3. disseminates the information to appropriate national and
international authorities, to support anti-money laundering
efforts.
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Overview of FIU-IND
Financial Intelligence Unit – India (FIU-IND) was set by the
Government of India vide O.M. dated 18th November 2004 as
the central national agency It is responsible for receiving, processing, analyzing and
disseminating information relating to suspect financial
transactions. FIU-IND is also responsible for coordinating and strengthening
efforts of national and international intelligence, investigation
and enforcement agencies in pursuing the global efforts
against money laundering and related crimes. FIU-IND is an independent body reporting directly to the
Economic Intelligence Council (EIC) headed by the Finance
Minister.
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Contact details of FIU IND
Director, FIU-IND
Financial Intelligence Unit - India
6th Floor, Hotel Samrat
Kautilya Marg, Chankyapuri
New Delhi -110021, India
Telephone 91-11-26874473 (For Queries)
Fax 91-11-26874459 (For Sending STR)
[email protected] (For Queries)
[email protected] (For Feedback)
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Overview of reporting under PMLA
The Prevention of Money-laundering Act, 2002, and the rules there under require every banking company, financial institution and intermediary, to furnish to FIU-IND information relating to
(A) All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency
(B) 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
(C) All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place
(D) All suspicious transactions whether or not made in cash.
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Rules under Prevention of Money Laundering Act
1. Prevention Of Money-laundering (The Manner Of Forwarding A Copy Of The Order Of Provisional Attachment Of Property Along With The Material, And Copy Of The Reasons Along With The Material In Respect Of Rules,2005
2. Prevention Of Money-laundering (Receipt And Management Of Confiscated Properties) Rules,2005
3. 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
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Rules under Prevention of Money Laundering Act
4. Prevention Of Money-laundering (Forms, Search And Seizure
And The Manner Of Forwarding The Reasons And Material To
The Adjudicating Authority, Impounding And Custody Of
Records And The Period Of Retention) Rules, 2005
5. Prevention Of Money-laundering (The Forms And The
Manner Of Forwarding A Copy Of Order Of Arrest Of A
Person Along With The Material To The Adjudicating
Authority And Its Period Of Retention) Rules , 2005
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Rules under Prevention of Money Laundering Act
6. Prevention Of Money-laundering (The Manner Of Forwarding
A Copy Of The Order Of Retention Of Seized Property Along
With The Material To The Adjudicating Authority And The
Period Of Its Retention) Rules, 2005
7. The prevention of money-laundering(manner of receiving the
records authenticated outside India) Rules ,2005
8. The Prevention of Money Laundering( Appeal) Rules,2005
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Maintenance of Records under Prevention
of Money Laundering Rules
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PML(Maintenance of Records etc.) Rules 2005,Rule 3:
Every Banking Company , Financial Institution or intermediary
shall maintain a record of
1) All cash transactions of value more than Rs.10 lakhs or its
equivalent in foreign currency
2) All series of integrally connected cash transactions which are
valued below Rs.10 lakhs or its equivalent in foreign currency
and which have taken place within a month.
3) All cash transactions in which forged or counterfeit currency
or bank notes have been used as genuine and where any
forgery of a valuable security takes place
4) All suspicious transactions made in cash or otherwise
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What are suspicious transactions?
Suspicious transaction means a transaction whether or not made
in cash which, to a person acting in good faith-
(a) gives rise to a reasonable ground of suspicion that it may
involve the proceeds of crime; or
(b) appears to be made in circumstances of unusual or unjustified
complexity; or
(c) appears to have no economic rationale or bona fide purpose;
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Illustrative list of Suspicious Transactions for a Bank/FI
False identification documents Identification documents which could not be verified within reasonable time Accounts opened with names very close to other established business entities Suspicious background or links with known criminals Large number of accounts having a common account holder, introducer or authorized signatory with no rationale Unexplained transfers between multiple accounts with no rationale
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Illustrative list of Suspicious Transactions for a Bank/FI
Unusual activity compared with past transactions
Sudden activity in dormant accounts
Activity inconsistent with what would be expected from
declared business
Unusual or unjustified complexity
No economic rationale or bonafide purpose
Frequent purchases of drafts or other negotiable instruments
with cash
Value just under the reporting threshold amount in an apparent
attempt to avoid reporting
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Illustrative list of Suspicious Transactions of a Intermediary Non-face to face client
Doubt over the real beneficiary of the account
Use of different accounts by client alternatively
Account used for circular trading
Source of funds are doubtful
Appears to be case of insider trading
Large sums being transferred from overseas for making
payments
Block deal which is not at market price or prices appear to be
artificially inflated/deflated
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PML (Maintenance of Records etc.) Rules 2005,Rule 4:
The records referred to above must
contain the following information :-
1. Nature of the transactions
2. The amount and currency of the transaction
3. Date of the transaction
4. Parties involved in the transaction
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PML (Maintenance of Records etc.) Rules 2005,Rule 5:
Procedure and manner of maintaining
information
1. Information to be maintained in hard and soft copy
2. There should be an internal mechanism for maintaining such
information
3. Duty of every banking company, FI and intermediary to
ensure information is being maintained as specified in Rules
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PML (Maintenance of Records etc.) Rules 2005,Rule 6:
Retention of Records
Records as mentioned in Rule 3 will be
maintained for a period of 10 years
starting from the date of cessation of
transaction between the clients and the banking company,
Financial Institution,intermediary as the case may be
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PML (Maintenance of Records etc.) Rules 2005,Rule 7:
Procedure and manner of furnishing information
Principal Officer of a banking company, Financial
Institution,intermediary has to furnish following reports to
FIU in Manual/Electronic format:
1. Cash Transactions Report(CTR)
2. Suspicious Transaction Report(STR)
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Manual Reports of CTR of Banks/FI/Intermediary
Form Information Completed by
Summary of CTR’s Contains summary of enclosed CTRs
Principal officer
CTR Details of account and cash transactions
Reporting branch
Annexure A- Individual Detail Sheet
Identification details of individual
Reporting branch
Annexure B- Legal Person/ Entity Detail
Identification details of legal person /entity
Reporting branch
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Manual Reports of STR of Banks/FI/Intermediary
Form Information
STR Details of Suspicious transactions
Annexure A- Individual Detail Sheet
Identification details of individual
Annexure B- Legal Person/ Entity Detail
Identification details of legal person /entity
Annexure C- Account Detail Sheet
Details of account and transactions
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Electronic Reports of CTR of Banking Company/FI
Sr.No File Name Description
1 CBACTL.txt Control file
2 CBABRC.txt Branch Data file
3 CBAACC.txt Account Data file
4 CBATRN.txt Transaction data file
5 CBAINP.txt Individual Data file
6 CBALPE.txt Legal Person/Entity Data file
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Electronic Reports of STR of Banking Company/FI
Sr.No File Name Description
1 SBACTL.txt Control file
2 SBABRC.txt Branch Data file
3 SBAACC.txt Account Data file
4 SBATRN.txt Transaction data file
5 SBAINP.txt Individual Data file
6 SBALPE.txt Legal Person/Entity Data file
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Electronic Reports of CTR of Intermediary
Sr.No File Name Description
1 CINCTL.txt Control file
2 CINBRC.txt Branch Data file
3 CINACC.txt Account Data file
4 CINTRN.txt Transaction data file
5 CININP.txt Individual Data file
6 CINLPE.txt Legal Person/Entity Data file
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Electronic Reports of STR of Intermediary
Sr.No File Name Description
1 SINCTL.txt Control file
2 SINBRC.txt Branch Data file
3 SINACC.txt Account Data file
4 SINTRN.txt Transaction data file
5 SININP.txt Individual Data file
6 SINLPE.txt Legal Person/Entity Data file
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Steps to generate electronic date files
1) The records containing details of cash transactions are
extracted in Transaction Data File
2) The records containing details of bank accounts containing
the cash transactions are extracted in Accounts Data File
3) The records containing details of Individuals who are account
holders are extracted in Individual Data File
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Steps to generate electronic date files
4) The records containing details of bank branches which have
reported cash transactions are extracted in Branch Data File
5) The report level details and summary of other five tables is
entered in Control file.
6) The records containing details of Legal Persons /Entities who
are account holders are extracted in Legal Persons /Entities
Data File
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Due Dates for filing Reports
Report Description Due Date
CTR Cash Transactions>10LSeries of Cash transactions integrally connected to each other
15 th day of the succeeding month
CCR All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place
Three working days from the date of occurrence of such transactions
STR All suspicious transactions Three working days from the date of occurrence of such transactions ( 7 days as per SEBI and RBI)
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PML (Maintenance of Records etc.) Rules 2005,Rule 9:
Verification of records of the identity of clients:
1. At the time of account opening verify and maintain the record
of identity.
2. Where the client is an individual he shall submit details of his
permanent and current address, one copy of his recent
photograph, documents in respect of his nature of business
and financial status
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PML (Maintenance of Records etc.) Rules 2005,Rule 9:
Where the client is a company it shall submit 3 certified copies of
1. Certificate of Incorporation
2. Memorandum and Articles of Association
3. A resolution and power of attorney by the Board of Directors
granted to its employees to transact on its behalf
4. An officially valid document for an attorney to transact on
behalf of the employees
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PML (Maintenance of Records etc.) Rules 2005,Rule 9:
Where the client is a partnership firm it
shall submit 3 certified copies of :
1. Registration certificate
2. Partnership deed
3. An officially valid document for an attorney to transact on
behalf of the firm
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PML (Maintenance of Records etc.) Rules 2005,Rule 9:
Where the client is a trust it shall submit 3 certified copies of :
1. Registration certificate
2. trust deed
3. An officially valid document for an attorney to transact on
behalf of the trust
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PML (Maintenance of Records etc.) Rules 2005,Rule 9:
Where the client is a unincorporated association or a BOI it shall
submit 3 copies of:
1. Resolution of the managing body
2. Power of attorney granted to transact on its behalf
3. An officially valid document for an attorney to transact on its
behalf
4. Such other information as may be required to establish its
legal existence
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PML (Maintenance of Records etc.) Rules 2005,Rule 10
Maintenance of client identity records
Records to be maintained in hard and soft copy
To be maintained for a period of 10 years from the date of start
of transactions with the client
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AML for the Insurance sector
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G. K. Choksi & Co. 100
Anti Money Laundering Programme (AML) for the Insurance sector
The insurer/agents/corporate agents are required to maintain the
records of types of transactions mentioned under Rule 3 of PMLA
Rules 2005 as well as those relating to the verification of identity of
clients for a period of 10 years
The AML program promotes submission of Suspicious Transaction
Reports (STR)/Cash Transactions Reports (CTR) to the Financial
Intelligence Unit-India
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Maintenance of records for insurance companies
Customer information may be allowed to be shared between
different organizations on request
Procedures must be implemented for retaining internal records
of transactions both domestic and overseas
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Maintenance of records for insurance companies
Companies should retain the records of those contracts, which
have been settled by claim, surrender or cancellation, for a
period of at least 10 years after that settlement
records relate to ongoing investigations, or transactions, which
have been the subject of a disclosure, they should be
retained until it is confirmed that the case has been closed
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Maintenance of records for insurance companies
Customer identification data obtained through the customer
due diligence process, account files and business
correspondence should be retained for at least 10 years after
the business relationship is ended
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G. K. Choksi & Co. 104
Monitoring cash transactions for Insurance Companies
ensure that premiums are paid out of clearly identifiable
sources of funds, and remittances of premium by cash should
not exceed Rs. 50,000/-
Premium/proposal deposits beyond Rs. 50,000 should be
remitted only through cheques, demand drafts, credit card or
any other banking channels
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G. K. Choksi & Co. 105
Monitoring cash transactions for Insurance Companies
Integrally related transactions, premium amount greater than
Rs. 50,000 in a month should be examined more closely. This
limit will apply at an aggregate level considering all the roles of
a single person-as a proposer or life assured or assignee
Integrally connected cash transactions above Rs. 10 lakhs per
month have to be reported to FIU
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G. K. Choksi & Co. 106
Illustrative list of Suspicious Transactions for Insurance
Companies
Customer insisting on anonymity, or providing minimal,
seemingly fictitious information
Frequent free look surrenders by customers
Assignments to unrelated parties without valid consideration
Request for a purchase of policy in amount considered beyond
his apparent need
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G. K. Choksi & Co. 107
Illustrative list of Suspicious Transactions for Insurance
Companies
Cash based suspicious transactions for premium and top ups
over and above Rs. 5 lakhs per person per month. It should
also consider multiple DDs each for less than Rs. 50,000/-
Policy from a place where he does not reside or is employed
Unusual terminating of policies and refunds
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G. K. Choksi & Co. 108
Illustrative list of Suspicious Transactions for Insurance
Companies
Frequent request for change in addresses
Borrowing the maximum amount against a policy soon after
buying it
Inflated or totally fraudulent claims
Overpayment of premiums with a request for a refund of the
amount overpaid
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G. K. Choksi & Co. 109
Manual Reports of CTR of Insurance Companies
Form Information Completed by
Summary of CTR’s Contains summary of enclosed CTRs
Principal Compliance officer of Insurance Company
CTR Details of account and cash transactions
Reporting branch of the insurer
Annexure A- Individual Detail Sheet
Identification details of individual
Reporting branch of the insurer
Annexure B- Legal Person/ Entity Detail
Identification details of legal person /entity
Reporting branch of the insurer
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Manual Reports of STR of Insurance Companies
Form Information
STR Details of Suspicious transactions
Annexure A- Individual Detail Sheet
Identification details of individual
Annexure B- Legal Person/ Entity Detail
Identification details of legal person /entity
Annexure C- Account Detail Sheet
Details of account and transactions
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G. K. Choksi & Co. 111
Electronic Reports of CTR/STR of Insurance Companies
Electronic reporting formats of Insurance companies is the
same as used in Banking Companies and Financial Institutions
The steps to generate the electronic files is also the same as in
the case of Banks and FI’s.
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Due Dates of reporting for Insurance Companies
Cash transaction reports shall be submitted by the 15th
day of the succeeding month
Suspicious transaction reports shall be submitted in writing
or by fax or electronic mail within 3 working days from the
date of occurrence of such transactions
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G. K. Choksi & Co. 113
IRDA guidelines
1. Customer Identification
a. Establish the customer identity consistent with risk profile in
respect of all new insurance contracts
b. Due diligence to be exercised for premium above 1 lakh
c. Customer information should be collected from all relevant
sources, including from agents.
d. Insurance premium paid by persons other than the person
insured should be looked into to establish insurable interest.
e. No criminal background
f. at the claim payout stage and at times when additional top up
remittances are inconsistent the customer known profile.
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G. K. Choksi & Co. 114
IRDA guidelines
2. KYC – When?
a. For new customers- at the time of entering contract
b. For existing customers- based on the limits fixed for new policies
on all contracts/relevant transactions in case of the existing
polices.
3. KYC- Risk Profile
companies are advised to classify the customer into high risk and
low risk, based on the individual’s profile and product profile, to
decide upon the extent of due diligence.
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G. K. Choksi & Co. 115
Reserve Bank of India The RBI has said every bank should set key indicators for accounts,
taking note of the background of the customer, the type of
transactions involved and other risk factors
The Reserve Bank of India has asked Indian banks to put in place a
proper policy framework on the `Know Your Customer' (KYC)
guidelines and `Anti-Money Laundering' (AML) measures.
It has asked all commercial banks to submit their plan of action with
regard to deployment of AML systems by June 2006
submit the final report on the solutions and infrastructure installed
by December 2006.
Banks should put in place a system of periodical review of risk
categorisation of accounts.
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Notifications issued by RBI applicable to Banks
1) 16.08.2002 - Guidelines on “Know Your Customer” norms
and “Cash transactions” -Commercial Banks
2) 19.02.2003 - Risk Management Systems in Banks -Scheduled
Commercial Banks (excluding RRBs and LABs)
3) 29.05.2004 - KYC Guidelines - Compliance - Primary (Urban)
Co-Operative Banks
4) 21.06.2004 - Guidelines on KYC Norms – Existing Accounts -
Commercial Banks (excluding RRBs)
5) 09.07.2004 - KYC Guidelines - Compliance -Primary (Urban)
Co-Operative Bank
6) 29.11.2004 - KYC guidelines – AML Standards -Commercial
Banks
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G. K. Choksi & Co. 117
Notifications issued by RBI applicable to Banks
7) 15.12.2004 - KYC guidelines – AML Standards - Primary (Urban) Co-Operative Banks
8) 18.02.2005 - KYC guidelines – AML Standards - State and District Central Co-operative Banks
9) 18.02.2005 - KYC guidelines – AML Standards - Regional Rural Banks
10) 21.02.2005 - KYC guidelines – AML Standards – NBFCs, Miscellaneous NBCs, and Residuary NBCs
11) 23.08.2005 - KYC guidelines – AML Standards - Scheduled Commercial Banks (Excluding RRBs)
12) 23.08.2005 - KYC guidelines – AML Standards - State and District Central Co-operative Banks
13) 23.08.2005 - KYC guidelines – AML Standards - Regional Rural Banks
14) 23.08.2005 - KYC guidelines – AML Standards – Primary (Urban) Co-operative Banks
15) 11.10.2005 - KYC for persons authorized by NBFCs to collect public deposit on behalf of NBFCs
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G. K. Choksi & Co. 118
Notifications issued by RBI applicable to Financial
Institution
1) 21.02.2005 - KYC guidelines – AML Standards – NBFCs,
Miscellaneous NBCs, and Residuary NBCs
2) 11.10.2005 - KYC for persons authorized by NBFCs to collect
public deposit on behalf of NBFCs
3) 21.11.2005 - Credit Card Operations of banks - Commercial
Banks/NBFCs (Excluding RRBs)
4) 07.03.2006 - KYC guidelines – AML Standards – NBFCs,
Miscellaneous NBCs, and Residuary NBCs
Circulars issued by IRDA
31.03.2006 - Guidelines of Anti Money Laundering
Programme for Insurers
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G. K. Choksi & Co. 119
SEBI
Securities and Exchange Board of India (SEBI) has asked non-
banking agencies to put in place their AML policies and KYC
norms and procedures.
All this is good news for the country's software industry, which
is sitting on a $2-billion market for AML solutions.
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G. K. Choksi & Co. 120
Circulars issued by SEBI
18.01.2006 - Guidelines for Anti Money Laundering Measures
20.03.2006 - Obligations of Intermediaries under PMLA
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Guidelines by SEBIDetailed guidelines include:
1) Written Anti Money Laundering Procedures
2) Customer Due Diligence
3) Elements of Customer Due Diligence
4) Policy for acceptance of clients
5) Risk Based Approach
6) Clients of special category (CSC)
7) Client identification procedure
8) Record Keeping
9) Retention of Records
10) Monitoring of transactions
11) Suspicious Transaction Monitoring & Reporting
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AML Software
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Some AML software available in the Market.
Complinet from Mantas Softwares.
Omni Enterprise from Infrasoftech.
Searchspace AML.
ACI proactive risk Manager from ACI worldwide.
The Actimize Solution – From Actimize.
AML2 from ECONWARE.
AMLOCK and Bank alert from 3i infotech
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Some software adopted
‘NetEconomy's ERASE’ compliance manager, an AML solution
of LogicaCMG, at IndusInd Bank
– to monitor customer profiles and `suspicious' financial
transactions through advanced statistical analysis and
transaction monitoring, to provide extensive case
management and reporting facilities.
– solutions also at ING Vysya Bank and Bank of Baroda
Bankalert at UTI Bank (India and Singapore), Karnataka Bank
(India), Bank Dhofar (Sultanate of Oman), Alliance Housing
Bank (Sultanate of Oman), Abu Dhabi Islamic Bank (UAE) and
Permata Bank (Indonesia)
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AML modules
Transaction filtering– real-time queries of transactions against a watch list, including
specific customer names, countries or business types – batch scans against customer databases and historical
transaction data. – the checks must run in real-time to be effective, must be able to
interdict, or "pick-off" a transaction and hold it until it is either confirmed to be a violation, or is cleared
KYC analytics– enables financial institutions to meet compliance requirements
by analysing all transactions and accounts – Techniques such as statistical profiling, link analysis and
sequence analysis can be used to find complex, hard-to-find behaviours, events or patterns
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G. K. Choksi & Co. 126
AML Systems
All banks, asset management companies and securities
agencies would be target markets
The Indian AML software market is pegged at more than Rs 200
crore.
The Indian AML software market is still at an early stage
AML vendors need to upgrade beyond KYC requirements.
The BFSI segment is the treasure trove for AML vendors.
Major companies
– TCS, Infosys, Wipro, LogicaCMG, Misys, 3i Infotech and
SAS India
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International Scenario
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G. K. Choksi & Co. 128
International Scenario
The Financial Action Task Force (FATF) is an inter-
governmental body which sets standards, and develops and
promotes policies to combat money laundering and terrorist
financing.
The Forty Recommendations and Nine Special
Recommendations of FATF provide a complete set of counter-
measures against money laundering covering the criminal
justice system and law enforcement, the financial system and
its regulation, and international co-operation. These
Recommendations have been recognised, endorsed, or
adopted by many international bodies as the international
standards for combating money laundering.
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About FATF
The Financial Action Task Force on Money Laundering (FATF)
was established by the G-7 Summit that was held in Paris in
1989.
The Task Force was given the responsibility of examining
money laundering techniques and trends, reviewing the action
which had already been taken at a national or international
level, and setting out the measures that still needed to be taken
to combat money laundering.
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About FATF
In April 1990, less than one year after its creation, the FATF
issued a report containing a set of Forty Recommendations,
which provide a comprehensive plan of action needed to fight
against money laundering
During 1991 and 1992, the FATF expanded its membership from
the original 16 to 28 members
The FATF membership is currently made up of thirty-one
countries and territories and two regional organisations
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Nine Special Recommendations of FATF
1. Take immediate steps to ratify and fully implement the 1999
United Nations Convention for the Suppression of the
Financing of Terrorism, as well as United Nations resolutions
relating to the prevention and suppression of the financing of
terrorist acts, particularly United Nations Security Council
Resolution 1373;
2. Criminalize the financing of terrorism, terrorist acts and
terrorist organizations;
3. Freeze without delay funds or other assets of terrorists and
those who finance terrorism and terrorist organizations;
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Nine Special Recommendations of FATF
4. Require that financial institutions or other entities subject to
anti-money laundering obligations report their suspicions to
the competent authorities, when they suspect that funds may
be linked, related to or are to be used for financing terrorism,
terrorist acts or terrorist organizations;
5. Afford other countries the greatest possible assistance in
connection with criminal, civil or administrative inquiries,
investigations or proceedings in this area;
6. Ensure that they do not provide safe havens for individuals
being sought for financing terrorist, terrorist acts or terrorist
organizations
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G. K. Choksi & Co. 133
Nine Special Recommendations of FATF
7. Institute supervisory measures applicable to individuals or
legal entities that provide a service for the transmission of
money or value, including transmission through an informal
money or value transfer system or network, particularly
“Hawala” networks;
8. Require financial institutions, including money remitters, to
include accurate and meaningful originator information
(name, address and account number) on fund transfers and
related messages that are sent, and;
9. Give particular attention to non-profit organizations, such as
charitable organizations, that can be used or exploited by
terrorist organizations.
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G. K. Choksi & Co. 134
Global situation
Money laundering
– $500 billion to $1.5 trillion billion a year, of which the Asia-
Pacific alone accounts for around 30 per cent.
International Monetary Fund figures
– 2-5 per cent of the world's Gross Domestic Product
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G. K. Choksi & Co. 135
Other Laws for Prevention of Money laundering
Smugglers and Foreign Exchange Manipulators Forfeiture of
Property Act, 1976
The Conservation of Foreign Exchange and Prevention of
Smuggling Activities Act, 1974 (COFEPOSA)
The Benami Transactions (Prohibition) Act, 1988
the Prevention of Illicit Traffic in Narcotic Drugs and
Psychotropic Substances Act, 1988
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G. K. Choksi & Co. 136
Related Acts
Banking Regulation Act ,1949
Chit Funds Act ,1982
DICGC Act, 1961
NABARD Act,1981
National Housing Bank Act ,1987
RBI Act, 1934
SEBI Act ,1992
Insurance Act ,1938
IRDA Act 1999
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G. K. Choksi & Co. 137
Related Websites
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
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G. K. Choksi & Co. 138
Opportunities for CAs in the sector
As a consultant providing
– his vast expertise in handling huge quantitative data for
verification of the exact nature of transactions.
– Building effective AML programs for the financial
organisations to protect them from the potential threats.
As the trusted partner of the government,
– ensuring implementation of the Act in letter and spirit.
– KYC AUDIT
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G. K. Choksi & Co. 139
Opportunities generating from the legislation for CAs
1. KYC audit
– Customers due diligence procedures to confirm identity of Client from the
records produced by him.
– Systems audit for checking Identity from external database.
– formulating and implementing the programme of KYC which is to be
forwarded to Director in PMLA [Rule 9 sub rule (7) of the PML
maintenance of records of the nature and value … rules].
2. Risk Advisory services (RAS), identifying the risk & its mitigating controls in
the systems for proper internal control environment.
3. Management Advisory service (MAS), creating proper administrative and
organisation structure to ensure the loop free information flows.
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G. K. Choksi & Co. 140
Questions!!
Suggestions!!
Comments!!
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G. K. Choksi & Co. 141
THANK YOU.