IIBF Seminar on Anti Money Laundering & Know Your Customer’ Lucknow 14th September 2006 Vasant Godse ‘

Background The process of transforming illicit funds into legal capital. Involves Placement /Layering/Integration Money laundered annually nearly 3 to 5 % of World GDP or USD 500 billion to 1.5 trillion. Organized crime groups becoming more global and carrying on their activities far away from their geographic region Not only economically destabilizes a country but also exposes to terrorist attacks,threatening its integrity & sovereignty Result: International organizations and regulators to developing international standards and best practices to address to money laundering issues in a collaborative manner

Players/Detectors Who is watching? FATF/UN Who are involved? European Union Directives Basel II OFAC USA Patriot act BSA APGML Wolfsburg Principles on Private Banking and Correspondent Banking All countries’ regulators Who are involved? Bankers Lawyers, Car dealers, Real estates builders, Accountants and Others, who allow their businesses to be used by someone to launder the proceeds of a crime. (23 industries covered in USA)

RBI Guidelines – KYC KYC guidelines to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering Components Customer Acceptance Policy Customer Identification Procedures Monitoring of Transactions; and Risk management Two broad approaches to controlling money laundering: 1.  Know your customer and correspondent. 2. Monitoring the transaction flows. (Correspondents yet to be covered in India)

Data Information requirements Compliance expectations Bank must locate, extract, warehouse and assimilate data Solution that can evaluate transactions at more details Single view on customer activity Data/Informational needs Data Acquisition from source system, transformation and loading capabilities. Data analysis engines Analysis and detection capable of revealing pattern Identify behavior changes System in place to document all findings Ad hoc research capabilities

Technology Criteria Any solution for AML compliance has to address to the following issues:- Monitoring of individual transaction Profiling of risk in respect of existing and new customers Referencing the transaction with regard to the watch list Marinating of records on customers, transactions, regulations and their up-dates Analytics to assess and develop patterns of client behavior Facilitating regulatory reporting and related requirements Providing alerts and Generation of audit trails

Technology Offers Risk Assessment KYC Maintains & monitors details for customer Profiling technique to evaluate customer & transaction Creates customer behavior pattern Tool for reviewing suspicious activity Real time transaction enquiry tools Automates creation and filing of suspicious activity Comprehensive audit trail KYC Manage customer account opening, acceptance & ongoing maintenance Risk based customer modeling Risk class based on risk factors and scores Links company wide customer acceptance documentation requirements Stores, manages and queries electronic documents

Technology Offers Legal/Regulatory compliance Electronic workflow from receipt of information to response back Automated process to import the request for information Flexible search algorithm Electronic filing of responses back to inquiring parties Comprehensive security control to ensure confidentiality Detection of Black listed customer Detects violations consistently across enterprise for a multitude of global sanctioning bodies Real time, intra-day interfaces to all at-risk business system Reduce expensive due diligence Provide automatic sanctioned party updates Integrates with multiple disparate business systems

Technology– Present Status Product vendors as well as solution framework providers like L&T Infotech Multiple approaches to AML implementation Basic transaction filtering and exceptions based reporting systems that give 'hits' and 'alerts' based on the violation of rules. Artificial intelligence based adaptive learning systems that monitor activity patterns in transactions and accounts to detect and prevent money laundering Integrating these solutions with the current architectures and developing multiple interfaces to existing systems More vendors and processes. Additional costs in maintaining multiple packages Security and database issues.

Technology Trends Browser-based interfaces, for enhanced usability and ease of deployment Visualization tools, such as network diagrams to depict account relationships Peer profiling, network analysis, risk scoring and other analytic approaches currently being emphasized by regulators Enhanced case management functionality with rich workflow and investigation features “Compliance dashboards,” to integrate output from multiple regional and line of business systems, including the integration of AML with anti-fraud and other compliance systems Source: Celent, Trends in Anti-Money Laundering 2006.

Technology Trends Additional modules to make a more comprehensive solution suite, including account opening due diligence and watch list filtering in addition to transaction monitoring Integration with SWIFT and other payments networks to enable real time interdiction of wires Outsourced AML services, offered by major core banking processors such as Fiserv or Metavante, as well as new shared data center initiatives focused solely on AML The pursuit of scalability, to achieve greater competitiveness for business from large financial institutions Introduction by high end vendors of “AML lite” versions of their products, aimed at the emerging small and midsize FI market.  

Commandments for Compliance AML Compliance is a Board level and not only Branch level issue Size of the bank is immaterial Locations is redundant AML Compliance is NOT a local problem Compliance is a business challenge not MIS drill Address to data needs and data consistency Training and its proper documentation for regulatory review NO OPTION BUT TO GO IN FOR TECHNOLOGY SOLUTION

Thank You Vasant.godse@lntinfotech.com