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GROUP 6, SEC-A

Ajith S

AvirajPawan

Raina

Rajkumar

Rajnish

MONEY LAUNDERING

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2

SCANDALS

Agenda

INTRODUCTION

IMPACT

KYC NORMS

PMLA ACT & FEMA

1

2

3

4

5

TRENDS6

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3

Money LaunderingMoney laundering is the process by which the

proceeds of the crime, and the true ownershipof those proceeds, are concealed or madeopaque so that the proceeds appear to comefrom a legitimate source

Illegally obtained

money

Appears to

originate fromlegitimate source

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4

Cont..

Money laundering generally refers towashing of the proceeds or profits generatedfrom:

Drug trafficking

People smuggling

Arms, antique, gold smuggling

Financial frauds

Corruption, orIllegal sale of wild life products and otherspecified predicate offences

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INTEGRATION

It represents the conversion of

illegal proceeds into apparently

legitimate business earnings

through normal financial or

commercial operations. For e.g.

false invoices for goods exported,

domestic loan against a foreign

deposit, purchasing of property

Repatriation / Spin Dry

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7

Money laundering cycle

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Placement

Smurfing

Shipping Money

Abroad Placement through

Banks

Electronic WireTransfers

Transactions NBFCs

Layering

Tax Havens &Offshore Banks

Bank Secrecy Lawas a layering tool

Corporations &Shell Companies asa layering tool

Use of trusts Use of walking

accounts

Integration

Use of haven bankcredit cards

Proceeds ofgambling

Real estatetransactions

Stock Purchase

Use of business International

importing andexporting

Money laundering techniques

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Smurfing

It is the practice of executing financial transactions

(such as the making of bank deposits) in a specific

pattern calculated to avoid the creation of certain

records and reports required by law.

Smurfing includes the act of parceling what wouldotherwise be a large financial transaction into a series

of smaller transactions to avoid scrutiny

by regulators

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Impact of Money Laundering

10

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Undermining the Legitimate PrivateSector

Use of front company to hide his illegalfunds

Subsidized operations and funding

Products at below manufacturing cost

Competition with legitimate business

Crowding out of private sector businessby criminal organizations

11

Impact of Money Laundering

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Challenge for financial institutions to managetheir assets liabilities and operations

Sudden disappearance of money through

Wire transfers in response to non-marketfactors

Liquidity problem & bank collapses

Undermining the Integrity of FinancMarkets

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Loss of Control of Economic

Policy

Money laundering is between 2 - 5

% of world gross domestic product

Errors in economic policy resulting

from artificially inflated financialsectors

False demand

Inexplicable changes in money

demand and increased volatility of

international capital flows, interest,

and exchange rates

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Economic Distortion and Instability

Investments not for gain but for protecting their

proceeds

Redirect funds from sound investments to low-quality

investments

Withdrawal of money results in collapse of these sectors

and immense damage to economies

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Impacts conti...

Loss of revenue

No tax on launderingmoney

Reputation risk Confidence in markets

The signalling role ofprofits

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Social impacts

Increase in crime Drug trafficking, smuggling, and other crimes

increased law enforcement and health care

expenditures

Terrorist financing

Transfer of economic power from the market,

government, and citizens to criminals

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Money Laundering Scandals

17

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World's Worst Banking Scandal

The world's worst banking scandal, of Bank of Credit and

Commerce International (BCCI) inflicting huge financial losses on

thousands of people worldwide, surfaced in the media in 1991.

It had heavy ties with the CIA, terrorist organizations, drug

traffickers, & other crooked financial transactions shunned by most

other banks.

BCCI started operations in Pakistan in 1972, with much of funding

provided by Bank of America & CIA.

CIA knew about BCCI's activities, & found its mindset to be verymanipulating and planned its own operations through BCCI.

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World's Worst Banking Scandal

CIA knew about BCCI's activities, & found its

mindset to be very manipulating and planned its

own operations through BCCI

Investigating reports showed that BCCI was able to

simultaneously manipulate the spy agencies of

numerous countries

BCCI was supplying funds for terrorist organizations

BCCI rigged international commodity markets

It was laundering drug money for drug cartels

worldwide.

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South Indian Bank -1995

(Abusing of banking facility by

banks & individual)

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Modus Operandi

Opening A/C for

fictitious & non-existing firm

SouthIndianBank

Submit

cash/deposit

Submit

documentsshowing goods

imported to India

Contactingfinancer who canlend money toracketeer

Specializedin preparingforged

documents

A/C in Hong-Kongfor receiving foreign

exchange

Remitted toforeign bank

Sell foreignexchange tosmugglers

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ABN AMRO Case (2005)

The US Justice Department alleges that ABN helped

governments and banks of Iran, Libya, Sudan and

Cuba evade sanctions and bring money into the

United States, according to papers filed in the case ABN AMRO Bank to Pay $80 Million in Civil

Settlement

DAIWA CASE (1995)

Money Laundering of $1.1 billion while trading US

Treasury Bonds

Lost license to operate in US

Money Laundering on global scale

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Money transferwithout money

movement developed

in India

Also known as chop,

chit , flying money

and underground

bank

23

Money laundering in India(Hawala)

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Money Laundering Vs Hawala

MoneyLaundering Hawala

Formal money

transfer system

Informal

money transfersystem

Layeringprocess is

involved

Layeringprocess is

eliminated

Conversion ofblack money to

white money

Conversion ofwhite money

to black money

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Other Banking scams & Penalties

Jan. 2006 ABM AMRO US$ 80 mio

Aug. 2005 Arab Bank US$ 24 mio Feb. 2005 City National Bank US$750,000

Jan. 2005 Riggs Bank US$ 41 mio

Oct. 2004 AmSouth Bank US$ 50 mio

Sep. 2004 City Bank Japan Licence cancelled

May. 2004 Riggs Bank US$ 25 mio

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KYC Norms

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KYC norms, what is it? RBI directed all banks and financial institutions to

put in place a policy framework to know their

customers before opening any account

Mandatory details required under KYC norms are

proof of identity and proof of address

Banks may even ask for verification by an existing

account holder

Standard documents which are accepted as proof of

identity and residence remain the same across

various banks, some deviations are permitted

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KYC, what are the features

Features

Makingreasonableefforts to

determinethe true

identity andbeneficialownershipof accounts

Sources of

funds

Nature ofcustomersbusiness

Whatconstitutesreasonable

accountactivity?

Who yourcustomers

customerare?

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KYC, Objectives

Enable Banks to understand their customers and their

financial dealings better

Prevent banks from being used by criminal elements

To prevent the possible misuse of banking activities for

anti-national or illegal activities

Strengthening the banks' 'Internal Control System' by

allocating duties and responsibilities clearly

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KYC what are the norms?

No account is opened in anonymous or fictitious name

Customers are categorized based on risk perceptions

Customer Acceptance Policy

Means identifying the customer by using reliable, independentsource documents, data or information

Customer to be identified not only while opening the account, butalso at the time when the bank has a doubt about his transactions.

Customer Identification procedures

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KYC what are the norms?

KYC can be effective by regular monitoring of transactions

Identifying an abnormal or unusual transaction and keeping a watch on higherrisk group of the account is essential in monitoring transactions

Monitoring of transactions

It is about managing internal work to reduce the risk of any unwanted activity.

Managing responsibilities, duties and various audits plus regular employeetraining for KYC procedures

Regular review and updating of the parameters or criteria used to generatemonitoring reports or issue alerts

Risk Management

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IPO scam 2005-06

Initial public offering of IDFC

Few investors opened 14000 dematerialized accounts

Purpose was to corner large number of shares of thecompany

The Reserve Bank of India on Monday 27th Feb 2006 finedHDFC Bank, IDBI and ING Vysya Bank for violation of

Know Your Customer norms

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PMLA ACT & FEMA

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Mid 1980s - Growing concern of internationalcommunity to deprive criminal elements ofthe proceeds of their crimes.

1989 Financial Action Taskforce (FATF) setup to ensure global action to combat moneylaundering.

Forty Recommendations - Complete set ofcounter-measures against money laundering

Nine Special Recommendations on TerroristFinancing

1995 - Egmont Group set up to stimulateinternational cooperation amongst FIUs. Best

Practices for exchange of information.

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PMLA (2002)

To combat moneylaundering in India

Came into force witheffect from July 1, 2005

Defines moneylaundering as an offence

and allows freezing,seizure and confiscationof the proceeds

Defines offence as:

Whosoever directly or indirectlyattempts to indulge or knowingly

assists or knowingly is a party or isactually involved in any process oractivity connected with the proceeds ofcrime and projecting it as untaintedproperty shall be guilty of offence ofmoney laundering

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PMLA (2002)

Banks and financial institutions will have to mandatorily

report to Government all suspicious transactions (cash/non-cash), counterfeit currency and those over Rs.10 Lakh

They need to furnish information to FIU IND

Financial Intelligence Unit India

Set up by government in 2004

responsible for receiving, processing, analysing and disseminatinginformation relating to suspect financial transactions

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Schedule offences under PMLA (2002)

Offences

specified underPart A of theSchedule

Offences under the Indian Penal Code (Sec 121, 121A)

Offences under the Narcotic Drugs And PsychotropicSubstances Act, 1985

Offencesspecified underPart B of theSchedule if the

total valueinvolved in suchoffences is thirtylakh rupees ormore.

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

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Information Furbished

Cash 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 rupees ten lakhs or itsequivalent 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

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Suspicious Transactions

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

Appears to be made in circumstances of unusual orunjustified complexity

Appears to have no economic rationale or bonafide

purpose

Give rise to a reasonable ground of suspicion that involve

financing of the activities relating to terrorism

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Transactions

Deposits

Withdrawals

Exchange or

transfer offunds in any

currency

This can be in cash or in cheque payment order or otherinstruments or by electronic or other physical means

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Reasons for Suspicion

Identity of client

Background of client

Multiple accounts

Activity in accounts

Nature of transactions

Value of transactions

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Identity of client

False identification documents Identification documents which could not be

verified within reasonable time Accounts opened with names very close to

other established business entities

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Background of client

Suspicious background or links with known

criminals

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Multiple accounts

Large number of accounts having a commonaccount holder, introducer or authorized

signatory with no rationale Unexplained transfers between multiple

accounts with no rationale

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Activity in accounts Unusual activity compared with past

transactions Sudden activity in dormant accounts Activity inconsistent with what would be

expected from declared business

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Nature of transactions Unusual or unjustified complexity No economic rationale or bonafide purpose

Frequent purchases of drafts or othernegotiable instruments with cash

Nature of transactions inconsistent with whatwould be expected from declared business

f i i

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Value of transactions

Value just under the reporting threshold amountin an apparent attempt to avoid reporting

Value inconsistent with the clients apparentfinancial standing

O h f

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Other features

In case of conflict between PMLA and FEMA or other

acts/laws, the provisions of PMLA have over riding effect

There has been two amendments in PMLA act in 2005 and

in 2009

Additional intermediaries (money changers, moneytransfer service providers and international payment

gateways and casinos) brought under the ambit of

amended PMLA 2009

FEMA

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FEMA

Introduced as a replacement for Foreign Exchange Regulation Act(FERA)

Became valid from 1st June 2000

Objective was to consolidate laws related to foreign exchange tofacilitate external trade and payments

Applicable to all parts of India as well as to all branches, offices andagencies outside India owned or controlled by Indian resident

PMLA FEMA

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PMLA vs FEMA

FEMA provides lesser power to ED compared to PMLA

and hence sometimes called toothless act

Proceedings under FEMA are quasi-judicial in nature and

the punishment prescribed is only fine, whereas under

PMLA the proceedings are criminal and the court canaward sentence too

Major distinction is that in PMLA the holding should be

proceed of crime

offences under FEMA are not listed in the PMLA schedule

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TRENDS IN MONEY LAUNDERIN

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1997Wire transfersInternet-based and e-money systemsRemittance services and moneyexchange servicesAssistance from lawyersHawala, hundi or other underground

banking systemsBank-centered techniques: collectionaccounts, loan back arrangementsbank drafts, money orders andcashiers cheques smurfingCash smugglingAccounts in relatives names, shellcompanies

Money Laundering then and now..

2011 Wire transfers New electronic payment systems Remittance services and moneyexchange services Assistance from Gatekeepers Hawala, hundi or otherunderground banking systems Terrorist financing through non-profit organizations Insurance industry, particularlythrough independent insurance agents Politically Exposed Persons (PEPs)

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Affect of Regulations inUS and UK

UAE

15% America24%

Europe

13%Africa

20%

Asia

34%

Money Laundering by region

53

Totally Funds Laundered Worldwide

$800

$900

1,000

1,100

1,200

2004 2005 2006 2007 2008 2009

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Activities involved

The usual suspects drugs, smuggling,

organized crimeaccount for over

of all money laundering

Terrorist financing is a drop in the

bucket in real terms

Nevertheless it is driving todays AML

and KYC regulations

White collar crime, including

embezzlement and internal fraud, is asignificant (and growing) problem

Terrorist

1%

Other

Crimes

23%

Smuggli

ng29%

Embezz

elment21%

Drugs

26%

54

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Spending trends

Spending on anti-moneylaundering solutions in Asia willgrow faster than in Europe orNorth America

55

Global AML Software Spending

28.438.7

60.771.0

81.493.0

113.7122.7

129.2 133.0146.0142.1 144.7

148.5 146.0139.5

142.1

139.5

0

20

4060

80

100

120

140

160

2004 2005 2006 2007 2008 2009

US$

millions

Asia EMEA Americas

h d

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Recent Methods

Organised MaritimePiracy and Related

Kidnapping forRansom

Risks Arising fromTrafficking of HumanBeings and Smuggling

of Migrants

New PaymentMethods

Trusts and CompanyService Providers

Vulnerabilities of FreeTrade Zones

Securities Sector

Football SectorCasinos and Gaming

SectorReal Estate Sector

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Typologies

Development of new paymentmethods

prepaid cards

mobile payment services

internet payment services (IPS)

Third party funding

accounts can be funded

anonymously where thespecific business modelpermits

Exploitation of the non-face-to-face nature of NPMaccounts

stolen or fake identities

Minimal face-to-facecontact

Complicit NPM providersor their employees

controlled by criminals

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ypology 1

)

Third Party Funding

Prepaid- cards

Illegal onlinesteroid sales

Gamblingproceeds

Payment fordrugs

Terroristfinancing

Internet PaymentServices

Sale of stolengoods on acommercial

website

Cash vouchersto collectextortionmoney

Mobile PaymentServices:

Move fundsrelated to

fraud

Telemarketingfraud

Selling stolenphone credits

58

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Typology 2

Exploitation of the non-face-to-face nature ofNPM accounts

Internet Payment Services

digital currency provider Fraud scheme

Prepaid- cards

Individuals bank

accounts

Companyspayroll

accounts

Phishingactivity

Terroristfinancing

59

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Typology 3

Complicit NPMproviders or theiremployees

Internet Payment Services

Digitalcurrency and

prepaidcards

Fraudscheme

Illegal onlinegambling

Digitalpreciousmetals

provider

Prepaid- cards

Use of open-loop cards fordrug proceeds

Embezzlement activities andmoney laundering

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References

61

www.fiuindia.gov.in

www.moneylaundering.com

www.sebi.gov.in

www.rbi.org.in

www.irdaindia.org www.finmin.nic.in

www.infrasoftech.com

www.mantas.com

FATF Annual Report Oct 2010

Www.imf.org
http://www.mantas.com/http://www.mantas.com/

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