What is Money Laundering?
Money laundering is a process whereby the origin of funds generated by illegal means is concealed (drug trafficking, arms smuggling, corruption, etc.). The objective of the operation, which usually takes places in several stages, consists of making the capital and assets that are illegally gained, seem as though they are derived from a legitimate source, and inserting them into economic circulation.
What are the Stages of Money Laundering?
Placement: Placement is the first stage in the money laundering process. It refers to the placement of proceeds derived from illegal activities into financial institutions.
Layering: "Layering" refers to the separation of proceeds from illegal source by using complex financial transactions. Layering conceals the audit trail and provides anonymity.
Integration: The third phase is integration, which means conversion of illegal proceeds into apparently legitimate business earnings through normal financial or commercial operations.
What are the Objectives of Anti- Money Laundering Act?
a. To prevent criminal elements from using the Banking System for money laundering activities.
b. To enable the Bank to know / understand the customers and their financial dealings better, which in turn would help the Bank to manage risks prudently.
c. To put in place appropriate controls for detection and reporting of suspicious activities in accordance with applicable laws/laid down procedures.
d. To comply with applicable laws and regulatory guidelines.
e. To take necessary steps to ensure that the concerned staff are adequately trained in KYC/AML Procedures.
What is the risk perception of Money Laundering and what are the Guidelines and Act prevailing in India to prevent Money Laundering?
Money laundering activities expose the banks to various risks such as operational risks, reputation risk, compliance risk and legal risk.
In order to ensure that banks are not used by the money launderers, the Reserve Bank of India has issued KYC guidelines by invoking section 35 A of the Banking Regulation Act.
India now has a specific money laundering law in the ‘Prevention of Money Laundering Act, 2002’ (PMLA) and its intention is to become a full member of the Financial Action Task Force (FATF).
Necessary Notifications / Rules under the said Act have been published
in the Gazette of India on 1st July 2005 by the Department of
Revenue, Ministry of Finance, Government of India.
Obligations of Banks under Prevention of Money Laundering Act, 2002:
Section 12 of PMLA-2002 casts following reporting obligations for Banking Companies, to Director, FIU-IND (Financial Intelligence Unit – India) besides obligations of record keeping and preservation of information.
(i) Cash Transaction Report (CTR)
To be reported on monthly basis.
(a) all cash transactions of the value of more than Rs. 10 lakh or its equivalent in foreign currency and
(b) all series of cash transactions integrally connected to each other, which have been valued below Rs. 10 lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds Rs. 10 lakh; however, individual transactions for below Rs. 50,000 are not to be included in CTR.
(ii) Suspicious Transactions Report (STR)
This report should be submitted as and when any suspicious transaction takes place, whether cash or non-cash or a series of transactions integrally connected.
iii) Counterfeit currency Report (CCR):
Transactions relating to deposit of counterfeit currency notes or defrauding the bank by forged high value securities etc shall be reported as and when any such incident takes place.
Monitoring of Transactions
Monitoring of transactions will be conducted taking into consideration the risk profile of the account. Special attention will be paid to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer will be subjected to detailed scrutiny.
While opening the account an indicative threshold limit should be fixed as under:
Ø For accounts of individuals. Rs 10 lakhs or 25% of the annual income, whichever is higher
Ø For business enterprises, Rs 10 lakhs or one-month turnover whichever is higher.
Principal Officer (Money Laundering Reporting Officer):
Banks will designate a senior officer as Principal Officer who shall be responsible for implementation of and compliance with this policy.
His illustrative duties will be as follows –
a. Monitoring the implementation of the Bank's KYC/AML Policy.
b. Reporting of Transactions and sharing of the information as required under the law.
c. Maintaining liaison with law enforcement agencies.
d. Ensuring submission of periodical reports to the Top Management/Board.
Preservation and Maintenance of Records under PML Act, 2002
Branches of banks should maintain proper records of the following
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 Rs 10 lakhs or equivalent in foreign currency which such series of transactions have taken place with in a month and aggregate value of such transactions exceeds Rs 10 lakhs
- All forged 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
- All suspicious transactions whether or not made in cash
Know Your Customer (KYC) Policy:
Money laundering activities expose the banks to various risks such as operational risks, reputation risk, compliance risk and legal risk. In order to ensure that banks are not used by the money launderers, the Reserve Bank of India has issued KYC guidelines by invoking section 35 A of the Banking Regulation Act.
Objective of KYC Guidelines:
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.
As per RBI KYC Guidelines all the banks should frame their KYC policies incorporating the following four key elements:
- Customer Acceptance Policy;
- Customer Identification Procedures;
- Monitoring of Transactions; and
- Risk management.
A customer for the purpose of this policy is defined as:
a. A person or an entity that maintains an account and/or has a business relationship with the Bank.
b. One on whose behalf the account is maintained (i.e. the beneficial owner).
c. Beneficiaries of transactions conducted by professional intermediaries such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
d. any person or entity connected with financial transactions, say, wire transfer, high value DD etc.
Customer Acceptance Policy
The Bank will:
a. classify customers into various risk categories and based on risk perception decide on acceptance criteria for each category of customers;
b. accept customers after verifying their identity as laid down in Customer Identification Procedures;
c. not open accounts in the name of anonymous/fictitious/ benami persons
Customer Identification Procedures
Customer Identification has been defined as identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. Emphasis has been laid on verifying customer identity not only while establishing a banking relationship but also at the time of executing a transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data.
Wherever applicable, information on the nature of business activity, location, mode of payments, volume of turnover, social and financial status etc. will be collected for completing the profile of the customer.
Customers will be classified into three risk categories namely High, Medium and Low, based on the risk perception.
Different identification procedure has been prescribed for different risk categories.
Banks should obtain sufficient identification data to verify the identity of the customer, his address/location and also his recent photograph, while for legal persons/ entities, extra caution has been suggested.
An indicative list of documents/information to verify the identity, address and other features suggested by RBI is given below.
Features |
Documents |
Accounts of individuals
- Legal name and any other names used
- Correct permanent address
|
(i) Passport (ii) PAN card (iii) Voter’s Identity Card (iv) Driving licence
(v) Identity card (subject to the bank’s satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank
(i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority
(iv) Electricity bill (v) Ration card
(vi) Letter from employer (subject to satisfaction of the bank)( any one document which provides customer information to the satisfaction of the bank will suffice ) |
Accounts of companies
- Name of the company
- Principal place of business
- Mailing address of the company
- Telephone/Fax Number
| (i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill |
Accounts of partnership firms
- Legal name
- Address
- Names of all partners and their addresses
- Telephone numbers of the firm and partners
| (i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm/partners |
Accounts of trusts & foundations
- Names of trustees, settlers, beneficiaries and signatories
- Names and addresses of the founder, the managers/directors and the beneficiaries
- Telephone/fax numbers
| (i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf (iii) Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders/managers/ directors and their addresses (iv) Resolution of the managing body of the foundation/association (v) Telephone bill |
Relaxation for Small Customers
If a person is unable to produce documents mentioned a relaxation was extended if:
(a) Balance is not exceeding Rs. 50,000 in all their accounts taken together, and (b) the total credit in all the accounts taken together is not expected to exceed Rs. 200,000 in a year, subject to introduction from another KYC compliant existing customer having satisfactory performance for atleast six months. The photograph is also to be verified by such introducer.
Further, RBI has suggested stopping the transactions as and when balance reaches Rs. 40,000 and turnover reaches Rs.80,000 by notifying the customer if the customer fails to comply with normal KYC procedure.
