2Contents Introduction to Money Laundering Introduction : FATF / FIU INDIA / PMLA (2002)Obligations Under PMLA / AML WorkflowSuspicious Transaction in briefSTR ReportingSample / Case StudiesRecordkeeping
3What is Money laundering ? The goal of most criminal acts is to generate profit for the individual or groupMoney laundering is the processing of these criminal proceeds to disguise their illegal originThe criminal involved must find a way to control the funds without attracting attention to the underlying activity or the persons involvedThey disguise the sources, change the form, or move the funds to a place where they are less likely to attract attention
4Where Does Money Laundering occur? As money laundering is a consequence of almost all profit generating crime, it can occur practically anywhere in the worldBecause the objective of money laundering is to get the illegal funds back to the individual who generated them, launderers usually prefer to move funds through stable financial systems
5How is Money laundered ? Stage 1: Placement The launderer introduces his illegal profits into the financial system. This is done byBreaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank accountPurchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location
6How is Money laundered ? Stage 2 : Layering The launderer engages in a series of conversions or movements of the funds to distance them from their sourceThe funds might be channeled through the purchase and sales of investment instruments
7How is Money laundered ? Stage 3 : Integration Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage, integrationThe funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures
8Financial Action Task Force About FATFAn inter governmental policy making body, comprised of around 25 countries, that has a ministerial mandate to establish international standards for combating money laundering and terrorist financing.BirthThe FATF was created at the 1989 G7 Summit meeting in ParisRole of FATFSets international standards to combat money laundering and terrorist financing.Assesses and monitors compliance with the FATF standards
9FATF - Recommendations The internationally endorsed global standards for implementing effective AML/CFT measures. In 1990, the FATF issued 40 recommendations to fight money launderingIn 2001 it issued 8 special recommendationsIn 2003 it issued 9th Special recommendation
10FATF - BenefitsSecuring a more transparent and stable financial system that is more attractive to foreign investorsEnsure that financial institutions are not vulnerable to infiltration or abuse by organised crime groupsBuild the capacity to fight terrorism and trace terrorist moneyMeet binding international obligations, and avoid the risk of sanctions or other action by the international communityAvoid becoming a haven for criminals
11FIU IndiaFinancial Intelligence Unit – India (FIU-IND) was set by the Government of India vide O.M. dated 18th November 2004FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance MinisterThe main function of FIU-IND is to receive cash/suspicious transaction reports, analyse them and, as appropriate, disseminate valuable financial information to intelligence/enforcement agencies and regulatory authorities
12Functions of FIU India Collection of Information Analysis of InformationSharing of InformationAct as Central RepositoryCoordinationResearch and Analysis
13Prevention of Money Laundering Act (PMLA 2002) PMLA 2002 forms the core of the legal framework put in place by India to combat money launderingCame into force with effect from July 1, 2005The PMLA rules impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-INDPMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime
14Obligations under PMLA Every banking company, financial institution and intermediary shall -Maintain a record of all transactions, the nature and value of which may be prescribedSuch transactions may comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a monthFurnish information of transactions referred to in clause (a) to the FIU DirectorVerify and maintain the records of the identity of all its clients
15AML WorkflowCDPROESMonitoring of Transactions and creation of alerts through a systemOnce a transaction crosses the thresh hold limit,as defined in AML Policy / Risk ProfileSenior Management would consider the suspicious alertsand report the same to FIU if required
16Client Of Special Category Non Resident IndiansHigh Net worth ClientsTrust / Charities / Non Governmental OrganizationEntities / Companies having close family Shareholding or Beneficial Owner ShipCompanies offering Foreign Exchange OfferingsClients from High Risk CountriesNon Face to Face ClientClient with Dubious Public ReputationPEP (Politically Exposed Persons)Others
17Suspicious transaction Suspicious transaction means a transaction or a series of transactions, undertaken by a client or a group clients, thatgives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; orappears to be made in circumstances of unusual or unjustified complexity; orappears to have no economic rationale or bonafide purpose
18Suspicious Transaction Criteria Clients whose identity verification seems difficult or clients that appear not to cooperateSource of funds of client is not keeping in line with his apparent standingSubstantial Increase in business without apparent causeAttempted transfer of investment proceeds to apparently unrelated partiesAppears to be an agent of an undisclosed principalMultiple accounts with no apparent reason.Unexplained high level funds activity with low securities transactionsLarge deposits for long term investments. Immediate liquidation
19Suspicious Trading Common Violations Insider trading is unique to the securities industry and generates illicit assets. As a predicate offence for money laundering, and an offence in its own rightThis type of misconduct is reportable on STRsIt has proven useful in assisting law enforcement and regulators to prosecute such misconduct
20Insider Trading Indicators The customer makes a large purchase or sale of a security, or option on a security, shortly before news is issued that affects the price of the securityThe customer is known to have friends or family who work at or for the securities issuerThe customer lives in the locality where the issuer is locatedThe customer’s purchase does not correspond to his or her investment profile. For example, the customer may never have invested in equity securities, but does so at an opportune timeThe customer’s account is opened or significantly funded shortly before a purchase; andThe customer sells his or her position in a security in conjunction with a significant announcement about the security.
21Insider Trading : Sample Indicators: Unusual important transactions; Suspicion of insider trading; and Securities sold a few months later.Suspicious transaction/activity report informationIn 2004, an ABC institution reported several unusual important purchases of shares of two quoted companies, belonging to the same group, by company Y represented by Mr. X and a third party also in relation with company Y. Mr. X was manager in the two quoted companies, but also managed company Y.Case descriptionMr. X, manager of an important group of companies, knew that a reorganisation of the group was going to be publicly announced. This could have a favourable effect on the share price of two companies of this group after the reorganisation was announced.Mr. X used this knowledge to purchase securities of these two companies through another company he managed and through a third party before the reorganisation was announced.Once the reorganisation was announced, the share price of these two companies rose sharply. The shares were sold at a high profit.
22Suspicious Trading Common Violations continued Market manipulation generally refers to conduct that is intended to deceive investors by controlling or artificially affecting the market for a securityThe simplest form is penny stock manipulation. The widely known scheme is pump and dumpThis scheme involves touting a company’s stock with false or misleading statements, often in conjunction with securities trades that raise the price of the security or make it appear as if the securities trading volume is higher than it actually is. Therefore the security price is artificially raised (“pumped”); the security is then sold (“dumped”) for a profit
23Suspicious Trading Common Violations continued Securities fraud broadly refers to deceptive practices in connection with the offer and sale of securitiesEncompasses insider trading and market manipulationIn a Ponzi scheme, a fraudster lures investors with the promise of high returns that are to beInstead of generating actual profits, the fraudster creates the illusion of profits by paying investors returns from their original investment or paying returns from the money that new investors contribute to the fraudThis type of scheme tends to collapse when the number of new investments into the scheme do not satisfy the payment obligations for previous investors
24Filing an STRFurnish the information of the suspicious transactions to Director, FIU-IND within 7 working days of establishment of suspicion at the level of Principal OfficerNot applicable to brokersConcluded that an STR is to be filedElectronic FormatManual FormatSINCTL.txt - Control FileSINBRC.txt - Branch Data FileSINACC.txt - Account Data FileSINTRN.txt - Transaction FileSININP.txt - Individual Data FileSINLPE.txt - Legal Person/EntitySix Files to be prepared in a CDCD to be Sent to FIU (Delhi)
25Filing an STRSuspicious Transaction Report for an intermediary is to be uploaded in soft copy which is digitally signed by the principal officer. Various files which gets uploaded and makes an STR are as below.SINACC.txt -The records containing details of accounts containing the suspicious transactions are extracted in Accounts Data FileSINTRN.txt - The records containing details of suspicious transactions to be reported are extracted in Transaction Data FileSININP.txt - If the account is for Individuals, the records containing details of Individuals who are account holders are extracted in Individual Data FileSINLPE.txt - If the account is for a Legal Person /Entity, the records containing details of Legal Persons /Entities who are account holders are extracted in Legal Persons /Entities Data File.SINBRC.txt - Records containing details of branches/franchisees which have reported suspicious transactions are extracted in Branch Data FileSINCTL.txt - The report level details and summary of other five tables is entered in Control file
26Filing STR (Control File) Identity of Client (Yes or No)False identification documents, Identification documents which could not be verified within reasonable time, Non-face to face client, Doubt over the real beneficiary of the account, Accounts opened with names very close to other established business entitiesSuspicious Background (Yes or No)Suspicious background or links with known criminalsMultiple Accounts (Yes or No)Large number of accounts having a common account holder, introducer or authorized signatory with no rationale, Unexplained transfers between multiple accounts with no rationale
27Filing STR (Control File) Activity in Accounts ( Yes or No )Unusual activity compared to past transactions, use of different accounts by client alternatively, Sudden activity in dormant accounts, Activity inconsistent with what would be expected from declared business, Account used for circular tradingNature of Transactions ( Yes or No )Unusual or unjustified complexity, No economic rationale or bonafide purpose, Source of funds are doubtful, Appears to be case of insider trading, Investment proceeds transferred to a third party, Transactions reflect likely market manipulations, Suspicious off market transactionsValue of Transactions ( Yes or No )Value just under the reporting threshold amount in an apparent attempt to avoid reporting, Large sums being transferred from overseas for making payments, Inconsistent with the clients apparent financial standing, Inconsistency in the payment pattern by client, Block deal which is not at market price or prices appear to be artificially inflated/deflated
28STR Important PointsContinuity in dealing with the client as normal until told otherwise and the client shall not be told of the report/suspicionIntermediaries shall not put any restrictions on operations in the accounts where an STR has been madeIntermediaries and their directors, officers and employees (permanent and temporary) shall be prohibited from disclosing (“tipping off”) the fact that a STR or related information is being reported or provided to the FIU-IND. Thus, it shall be ensured that there is no tipping off to the client at any level.
29STR Important Points.. contd It is likely that in some cases transactions are abandoned or aborted by clients on being asked to give some details or to provide documentsIt is clarified that intermediaries shall report all such attempted transactions in STRs, even if not completed by clients, irrespective of the amount of the transactionIf you are suspicious then do not fail to file a STR report to the designated authority. Not to do so could be tantamount to actively aiding a money laundererPMLA Policy of the organisation must be thoroughly understood by all employees of the organization.FIU-IND is in the process of developing technological infrastructure to enable submission of electronic return over a secure gateway provision for which is already done in file formats
30RecordkeepingMaintain such records as are sufficient to permit reconstruction of individual transactions so as to provide, if necessary, evidence for prosecution of criminal behaviorWhere required by the investigating authority, they shall retain certain records, e.g. client identification, account files, and business correspondence, for periods which may exceed those required under the SEBI Act, Rules and Regulations framed there-under PMLA, other relevant legislations, Rules and Regulations or Exchange bye-laws or circularsMaintain records for a period of five years from the date of transactions between the client and intermediary i.e. the date of termination of an account or businessIn situations where the records relate to on-going investigations or transactions which have been the subject of a suspicious transaction reporting, they shall be retained until it is confirmed that the case has been closed relationship between the client and intermediary
31Summary : Money Laundering in some Economies Launderers are continuously looking for new routes for laundering their fundsEconomies with growing or developing financial centers, but inadequate controls are particularly vulnerable as established financial centre countries implement comprehensive anti-money laundering regimesSome might argue that developing economies cannot afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organized crime can become.
32How does Money Laundering affect business ? Hampers economic growth.Allows anti social elements to damage our society.Will take investors away from the financial system if they feel it is unsafe.A reputation for integrity is the one of the most valuable assets of a financial institutionThe institution could be drawn into active complicity with criminals and become part of the criminal network itself, if the employees have been involved or for turning blind eyeEvidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers