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Briefing on ‘KYC’ Norms and ‘AML’ Measures
for IBA Member Banks
Presented by Sanjeev SinghAdditional Director, FIU-INDFinancial Intelligence Unit-India
Venue: Hotel Hilton Towers, Mumbai
Date: 12th April 2006
FIU-IND
Contents
Background
About FIU-IND
Legal Framework
Verification of identity
Furnishing information
AML and Tax Compliance
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Background
FIU-IND
Timeline
Mid 1980s - Growing concern of international community to deprive criminal elements of the proceeds of their crimes.
1989 – Financial Action Taskforce (FATF) set up to ensure global action to combat money laundering.
Forty Recommendations - Complete set of counter-measures against money laundering
Nine Special Recommendations on Terrorist Financing
1995 - Egmont Group set up to stimulate international cooperation amongst FIUs. Best Practices for exchange of information.
1997- Asia/Pacific Group on money laundering (APG) set up to create awareness and encourage adoption of AML measures.
FIU-IND
Need for a Financial Intelligence Unit
Law enforcement agencies had limited access to relevant financial information.
Need to engage the financial system in the efforts to combat laundering.
Need to report suspect financial transactions by financial institutions to a central agency for assessing and processing reported transactions.
FIU-IND
Definition of a FIU
A central, national agency responsible for receiving, (and as permitted, requesting) analysing and disseminating to the competent authorities, disclosures of financial information:
(i) Concerning suspected proceeds of crime, or
(ii) Required by national legislation or regulation,
in order to combat money laundering.
- Definition formalised by Egmont Group in 1996
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About FIU-IND
FIU-IND
Background of FIU-IND
Set up vide Government of India’s Office Memorandum (O.M.) dated 18th November 2004
“To coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.”
Multi-disciplinary unit headed by a Director.
Core Functions Intelligence Management Relationship Management Policy Review and Development
FIU-IND
Framework
CBDT-DGIT/CCIT
CBEC-DGDRI/DGCEI
ED/NCB
REIC
IB /RAW
Others
EOW of Police/CBI
Intelligence/Enforcement Agencies
FIU-IND
RBI
SEBI IRDA
Supervisory and Regulatory Agencies
Banking Company
Financial Institutions
Intermediaries
Reporting Entities
Foreign FIUs
DCA
CBDT-DGIT/CCIT
CBEC-DGDRI/DGCEI
ED/NCB
REIC
IB /RAW
Others
EOW of Police/CBI
Intelligence/Enforcement Agencies
Foreign FIUs
RBI
SEBI IRDA
Supervisory and Regulatory Agencies
DCA
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Legal Framework
FIU-IND
Prevention of Money Laundering Act
Prevention of Money Laundering Act (PMLA) and the Rules notified thereunder impose obligation on
banking companies financial institutions intermediaries of the securities market
to appoint principal officer verify identity of clients maintain records furnish information
FIU-IND
Banking Company under PMLA
“Banking Company” under PMLA includes: All nationalized banks, private Indian banks
and private foreign banks. All co-operative banks viz. primary co-
operative banks, state co-operative banks and central (district level) co-operative banks.
State Bank of India and its associates and subsidiaries.
Regional Rural Banks.
FIU-IND
Role of Principal Officer
Every banking company shall communicate the name, designation and address of the Principal Officer to the Director, FIU-IND. (Rule 7)
The Principal Officer shall: furnish the information referred to in rule 3 to the
Director. retain copy of such information shall for the purposes
of official record.
FIU-IND
Scheduled Offences under PMLA
Offences specified under Part A of the Schedule Offences under the Indian Penal Code (Sec 121, 121A) Offences under the Narcotic Drugs And Psychotropic Substances
Act, 1985
Offences specified under Part B of the Schedule if the total value involved in such offences is thirty lakh rupees or more. Offences under the Indian Penal Code Offences under the Arms Act, 1959 Offences under the Wild Life (Protection) Act, 1972 Offences under the Immoral Traffic (Prevention) Act, 1956 Offences under the Prevention Of Corruption Act, 1988
FIU-IND
Know Your Customer Guidelines
Customer Acceptance - Ensure that you accept only legitimate and bona fide customers.
Customer Identification- Ensure that you properly identify your customers to understand the risks they may pose.
Transactions Monitoring- Monitor customers accounts and transactions to prevent or detect illegal activities.
Risk Management- Implement processes to effectively manage the risks posed by customers trying to misuse facilities.
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Verification of identity
FIU-IND
Verification of Identity of Clients
Verify and maintain the record of: Identity of client Address - current and permanent Nature of business Financial Status
Maintain records of the identity of clients for a period of ten years from the date of cessation of the transactions with the client.
FIU-IND
Challenges in verification of identity
Mechanism to verify ID
Multiple IDs
Existing Clients
Consolidated Hot List
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Furnishing Information
FIU-IND
Information to be furnished
Cash Transactions All cash transactions of the value of more than rupees ten
lakhs or its equivalent in foreign currency 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
Suspicious Transactions All suspicious transactions whether or not made in cash
FIU-IND
Suspicious Transactions
Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith –
gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or
appears to be made in circumstances of unusual or unjustified complexity; or
appears to have no economic rationale or bonafide purpose;
Reference: Categories of suspicion for banks
FIU-IND
Reporting Formats
Attributes Scalable design - STRs involving
numerous individuals, legal entities and accounts.
Normalised design- Reduced repetitive information capture.
Editable PDF forms- Ease of filling. Compatibility of electronic formats with
transactional data structure of reporting entities.
Compatibility of electronic and manual formats.
Roadmap Ahead Secure Gateway Information security standards (BS 7799)
Manual STRSuspicious Transaction ReportAnnexure A- Individual Detail Sheet Annexure B- Legal Person/Entity Detail SheetAnnexure C- Account Detail Sheet
Manual CTRSummary of Cash Transaction Reports Cash Transaction ReportAnnexure A- Individual Detail Sheet Annexure B- Legal Person/Entity Detail Sheet
Data Files in Electronic ReportingControl FileBranch Data FileAccount Data File
Electronic FormatsSTR for a Banking Company CTR for a Banking CompanySTR for an IntermediaryCTR for an Intermediary
Transaction Data FileIndividual Data FileLegal Person Data File
FIU-IND
Challenges in detection of suspicious transactions Data Quality
Decentralized databases Data not captured in electronic form
Process New Roles and Responsibilities Identity matching with hot list of individuals and entities Mechanism to verify financial details
Technology Selection of appropriate AML solution and analytical tools Money laundering typologies
People Awareness Training
Compliance Cost Confidentiality and Privacy
FIU-IND
Data Quality of Reports
Significance Meet data requirements of data mining, identity matching Reduce false positives
Validation of data files Valid data structure Mandatory data fields Relationship integrity Data sufficiency
(File Validation Utility-Assist in error correction)
FIU-IND
FIU-IND Website
About FIU-IND
PMLA 2002
Scheduled Offences
Notifications
Publications
Maintenance of Records
Furnishing Information
Identity of Clients
International
FAQs
www.fiuindia.gov.in
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AML and Tax Compliance
FIU-IND
AML Measures and Tax Compliance
Money Laundering is tax evasion in progress
Money Laundering is the process by which illegal funds and assets are converted into legitimate funds and assets.
Placement: Illegal funds or assets are first brought into the financial system
Layering: Use of multiple accounts, banks, intermediaries, corporations, trusts, countries to disguise the origin.
Integration: Laundered funds are made available as apparently legitimate funds.
Investments
Purchases
