Presentation on theme: "IBA Seminar on preventing abuse of banking system for money laundering"— Presentation transcript:
1 IBA Seminar on preventing abuse of banking system for money laundering Presentation byLalit SrivastavaGeneral ManagerReserve Bank of IndiaMumbai
2 What is Money Laundering? Money laundering is the process by which the proceeds of the crime, and the true ownership of those proceeds, are concealed or made opaque so that the proceeds appear to come from a legitimate source.Generally money laundering is the process by which one conceals the existence, illegal source, or illegal application of income to make it appear legitimate. In other words, it is the process used by criminals through which they make “dirty” money appear “clean” or the profits of criminal activities are made to appear legitimate.
3 Money LaunderingMoney laundering generally refers to ‘washing’ of the proceeds or profits generated from:Drug traffickingPeople smugglingArms, antique, gold smugglingProstitution ringsFinancial fraudsCorruption, orIllegal sale of wild life products and other specified predicate offences
4 Money LaunderingMoney launderers are big time criminals who operate through international networks without disclosing their identity.The money laundered every year could be in the range of $600 bio to $2 trio. This gives money launderers enormous financial power to engage or coerce or bribe people to work for themGenerally, money launderers use professionals to create legal structure/ entities which act as ‘front’ and use them for laundering of funds
5 Money Laundering Process Money Laundering consists of three stages:The first stage involves the Placement of proceeds derived from illegal activities – the movement of proceeds, frequently currency, from the scene of the crime to a place, or into a form, less suspicious and more convenient for the criminal.2. The second stage is called Layering. It involves the separation of proceeds from illegal source through the use of complex transactions designed to obscure the audit trail and hide the proceeds. The criminals frequently use shell corporations, offshore banks or countries with loose regulation and secrecy laws for this purpose.
6 Money Laundering Process 3. The third stage is called Integration. It represents the conversion of illegal proceeds into apparently legitimate business earnings through normal financial or commercial operations. Integration creates the illusion of a legitimate source for criminally derived funds and involves techniques as numerous and creative as those used by legitimate businesses. For e.g false invoices for goods exported, domestic loan against a foreign deposit, purchasing of property and co-mingling of money in bank accounts.
7 Typologies/ Techniques employed Deposit structuring or smurfingConnected AccountsPayable Through AccountsLoan back arrangementsForex Money ChangersCredit/ Debit cardsInvestment Banking and the Securities SectorInsurance and Personal Investment ProductsCompanies Trading and Business ActivityCorrespondent BankingLawyers, Accountants & other IntermediariesMisuse of Non-Profit Organisations
8 Financing of terrorism Money to fund terrorist activities moves through the global financial system via wire transfers and in and out of personal and business accounts. It can sit in the accounts of illegitimate charities and be laundered through buying and selling securities and other commodities, or purchasing and cashing out insurance policies.Although terrorist financing is a form of money laundering, it doesn’t work the way conventional money laundering works. The money frequently starts out clean i.e. as a ‘charitable donation’ before moving to terrorist accounts. It is highly time sensitive requiring quick response.
9 Combating financing of terrorism (i) State Sponsored(ii) Other Activities- legal or non-legalLegal Sources of terrorist financingCollection of membership duesSale of publicationsCultural of social eventsDoor to door solicitation within communityAppeal to wealthy members of the communityDonation of a portion of personal savings
10 Combating financing of terrorism Illegal SourcesKidnap and extortion;Smuggling;Fraud including credit card fraud;Misuse of non-profit organisations and charities fraud;Thefts and robbery; andDrug trafficking
11 Macroeconomic impactMoney laundering can have a range of severe macroeconomic consequences on countries.IMF has cited unpredictable changes in money demand, prudential risks to the soundness of banking systems, contamination of legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers.
12 Macroeconomic impactThe economic and political influence of criminal organizations can weaken the social fabric; collective ethical standards and ultimately the democratic institutions of the society. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or other bribes to public officials and indeed governmentsMoney Laundering can also have a dampening effect on FDI if a country’s financial sectors are perceived to be under control and influence of organized crime.
13 Money Laundering Risks What are the risks to banks?(i) Reputational risk(ii) Legal risk(iii) Operational risk (failed internal processes, people and systems & technology)(iv) Concentration risk (either side of balance sheet)All risks are inter-related and together have the potential of causing serious threat to the survival of the bank
14 Penalties imposed on banks Jan ABM AMRO US$ 80 mioAug Arab Bank US$ 24 mioFeb City National Bank US$750,000Jan Riggs Bank US$ 41 mioOct AmSouth Bank US$ 50 mioSep City Bank Japan Licence cancelledMay Riggs Bank US$ 25 mio
15 Advantages of KYC norms Sound KYC procedures have particular relevance to the safety and soundness of banks, in that:They help to protect banks’ reputation and the integrity of banking systems by reducing the likelyhood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage;They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities)
16 What KYC means? Customer? Your? Who should know? One who maintains an account, establishes business relationship, on who’s behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transactionYour? Who should know?Branch manager, audit officer, monitoring officials, POKnow? What you should know?True identity and beneficial ownership of the accountsPermanent address, registered & administrative address
17 What KYC means?Making reasonable efforts to determine the true identity and beneficial ownership of accounts;Sources of fundsNature of customers’ businessWhat constitutes reasonable account activity?Who your customer’s customer are?
18 Core elements of KYC Customer Acceptance Policy Customer Identification Procedure- Customer ProfileRisk classification of accounts- risk based approachRisk ManagementOngoing monitoring of account activityReporting of cash and suspicious transactions
19 Risk based approachThe potential risk that a customer carries depends on:Identity of the customer including beneficial ownershipThe nature of customer’s business and his product profile-jewels, precious metals, arms, antiquesLocation of businessProducts and services offeredCustomer’s customer or clientrs; their location & business
20 High risk countries Geography Drug producing nations Drug transshipment countriesDrug using countriesSecrecy jurisdictions and tax havens, particularly those that grant offshore banking licenses.Countries with high degree of public corruptionCountries linked to terrorist financingNon Cooperative Countries and Territories
21 High risk customersNon-bank financial institutions ( money transmitters, cheque cashiers, full fledged money changers, sellers of stored value cards, security brokers & dealers etc. )Travel agencies / Property dealers/ buildersProfessional and consulting firmsExporters or importers of goods and servicesCash intensive business e.g. retail stores, restaurants, gambling casinos, second hand car dealerships etc.Off-shore corporations, banks in secrecy heavensNon-profit organisations e.g charities
22 High risk products & services Wire transfersElectronic banking services which includes services offered through internet, credit cards, stored value cardsPrivate banking relationshipsCorrespondent banking relationships
23 Cross border accounts-deposits All KYC procedures to be observedThird party verification of documents through Correspondent bank which is committed to KYC regime and is willing to share KYC information on demandVerification of document during visit to IndiaRemittance through banking channels
24 Payment gateways/ wire transfers Both domestic and cross border wire transfers carry potential risk of money launderingPayment gateways facilitate wire transfers for customers of banks located anywhere in the worldWhether AML/ KYC compliance levelAscertain whether it is regulated at the place of incorporationInsist on complete originator information with wireMake payment to beneficiary through account or DDKeep record of transactions
25 Measures to deter money laundering Board and management oversight of AML risksAppointment a senior executive as principal officer with adequate authority and resources at his commandSystems and controls to identify, assess & manage the money laundering risksMake a report to the Board on the operation and effectiveness of systems and controlAppropriate documentation of risk management policies, their application and risk profiles
26 Measures to deter money laundering Appropriate measures to ensure that ML risks are taken into account in daily operations, development of new financial products, establishing new business relationships and changes in the customer profileScreening of employees before hiring and of those who have access to sensitive informationAppropriate quality training to staffQuick and timely reporting of suspicious transactions
27 Salient features of IPO scam Modus operandiCurrent account opened in the name of multiple companies on the same date in the same branch of a bankSole person authorised to operate all these accounts who was also a Director in all the companiesIdentity disguised by using different spelling for the same name in different companiesMultiple accounts opened in different banks by the same group of joint account holders
28 Salient features of IPO scam Huge funds transferred from companies accounts to the individual’s account which was invested in IPO’sLoans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBILoans sanctioned to brokers violating guidelinesMultiple DP accounts opened to facilitate investment in IPOLarge number of cheques for the same value issued from a single account on the same day
29 Salient features of IPO scam Multiple large value credits received by way of transfer from other banksSeveral accounts opened for funding the IPO on the request of brokers, some were in fictitious namesRefunds received got credited in brokers a/csMargin money provided by brokers through single chequeNexus between merchant banker, brokers and banks suspected
30 Operational deficiencies Factors that facilitated the scamPhotographs not obtainedProper introductions not obtainedSignatures not taken in the presence of bank officialFailure to independently verify the identity and address of all joint account holdersDirectors identity/ address not verifiedCustomer Due Diligence done by a subsidiary
31 Operational Deficiencies Objective of large number of jt. account holders opening account not ascertainedPurpose of relationship not clearly establishedCustomer profiling based on risk classification not donePoor monitoring and reporting system due to inadequate appreciation of ML issuesAbsence of investigation about use and sources of funds
32 Operational Deficiencies Unsatisfactory training of personnelNo system of fixing accountability of bank officials responsible for opening of accounts and complying with KYC proceduresIneffective monitoring and control
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