INTRODUCTION
Anti-money
laundering (AML) is a term mainly used in the financial and legal
industries to describe the legal controls that require financial
institutions and other regulated entities to prevent or report money
laundering activities. Anti-money laundering guidelines came into
prominence globally after the September 11, 2001 attacks and the
subsequent enactment of the USA PATRIOT Act. It was Britain's The Guardian newspaper that coined the term, referring to the process as "laundering."
As
financial crime has become more complex, and "financial intelligence
information gathering intelligence" (FININT) has become more recognized
in combating international crime and terrorism, money laundering has
become more prominent in political, economic, and legal debate. Money
laundering is ipso facto illegal; the acts generating the money almost
always are themselves criminal in some way for if not, the money would
not need to be laundered.
Anti
money laundering is the legal procedure which aims to ensure zero money
laundering. it envisages the use of regulatory and banking norms
coupled with traditional policing and newer technological tools to fight
money laundering operations.
MONEY LAUNDERING: DEFINITION
In
the past, the term "money laundering" was applied only to financial
transactions related to organized crime. Today its definition is often
expanded by government and international regulators to mean any
financial transaction which generates an asset or a value as the result
of an illegal act, which may involve actions such as tax evasion or
false accounting. In the UK,
it does not even need to involve money, but any economic good. As a
result, courts may see money laundering committed by private
individuals, drug dealers, businesses, corrupt officials, members of
criminal organizations such as the Mafia, and even states. However
basically ML is the process which criminals
engineer to cover the real origin and ownership of dirty or illegal
money emanating from criminal illegal activities, and thereby render the
prosecution and confiscation of funds so generated, impossible. Some definitions of the term are as follows:
· Money
laundering is the practice of disguising illegally obtained funds so
that they seem legal. It is a crime in many jurisdictions with varying
definitions. It is a key operation of the underground economy.
· In
US law it is the practice of engaging in financial transactions to
conceal the identity, source, or destination of illegally gained money.
· In UK
law the common law definition is wider. The act is defined as taking
any action with property of any form which is either wholly or in part
the proceeds of a crime that will disguise the fact that that property
is the proceeds of a crime or obscure the beneficial ownership of said
property.
STEPS IN MONEY LAUNDERING
Money laundering involves three independent and often simultaneous steps:
· Placement:
The first stage is successfully disposing of the physical cash received
thru illegal activity. The crooks accomplish this by placing this into
traditional or non-traditional financial institutions.
· Layering:
The second stage concentrates on separation of proceeds from criminal
activity thru the use of various layers of monetary transactions. These
layers are aimed at wiping audit trails, disguise the origin and
maintain anonymity for people behind the transactions. E.g. Fraudulent
letters of credit transactions, over invoicing for goods transshipped
from another country, using high value credit cards to pay for
goods/services and accounting for the credit card invoices with balances
held in offshore banking secrecy havens .
· Integration:
The final link in money laundering process is sometimes called the
integration stage. This occurs when the laundered or cleaned up money is
legitimately brought back into financial systems operated by end user
and when it is safe and insulated from enquiry by any agency with a
legitimate reason for querying the existence of money. E.g. Loan back
technique or loan-default technique where the lender bank seeks to
recover its assets (loans to money launderers) by attaching the
securities held by bank which exist in the form of black money.
MONEY LAUNDERING: WHAT MAKES IT POSSIBLE?
The
major factors which create money laundering vulnerabilities are: the
role of private bankers, banks as client advocates, powerful customers, a
corporate culture of secrecy, a corporate culture of lax controls and
the competitive nature of the industry. Apart from these factors the
very products offered by the banks may sometimes lead to money
laundering activities. These are now dealt with in detail:
1. Private Bankers as Client Advocates
Private
bankers are the linchpin of the private bank system. They are trained
to service their clients and to set up accounts and move money around
the world using sophisticated financial systems and secrecy tools.
Private Banks encourage their bankers to develop personal relationships
with their clients. The result is that private bankers may feel loyalty
to their clients for both professional and personal reasons, leading
private bankers use their expertise in bank systems to evade what they
may perceive as unnecessary "red tape" hampering the services their
clients want, thereby evading controls designed to detect or prevent
money laundering.
2. Powerful Clients
Private
bank clients are, by definition, wealthy. Many also exert political or
economic influence which may make banks anxious to satisfy their
requests and reluctant to ask hard questions. If a client is a
government official with influence over the bank's in country
operations, the bank has added reason to avoid offence.
3. Culture of Secrecy
A
culture of secrecy pervades the banking industry. Numbered accounts at
Swiss banks are but one example. There are other layers of secrecy that
banks and clients routinely use to mask accounts and transactions. For
example, banks may create shell companies and trusts to shield the
identity of the beneficial owner of a bank account. Banks also open
accounts under code names and will, when asked, refer to clients by code
names of encode account transactions.
4. Secrecy Jurisdictions
In additions to shell corporations and codes, a number of banks also conduct business in secrecy jurisdictions such as Switzerland and Cayman Islands,
which impose criminal sanctions on the disclosure of bank information,
related to clients and restrict oversight. The secrecy laws are so
light; they even restrict internal bank oversight.
5. Culture of Lax Controls
In
addition to secrecy, banking operates in a corporate culture that is at
times indifferent or resistant to anti-money laundering controls, such
as due diligence requirements and accounts monitoring. The problem
begins with the banker who, in most banks, is responsible for the
initial enforcement of anti-money laundering controls. It is the banker
who is charged with researching the background of prospective clients,
and it is the banker who is, asked in the first instance to monitor
existing accounts for suspicious activity. But it is also the job of the
banker to open accounts and expand client deposits this creates
substantial conflict of interest.
6. Cut throat Competition
Another
factor creating money laundering concerns is the ongoing competition
among banks for clients, due to profitability of the business. The dual
pressures of competition and expansion are disincentives for banks to
impose tough anti-money laundering controls that may discourage new
business or cause existing clients to move to other institutions.
In
addition to the general factors cited above, the actual products and
services offered by banks also create opportunities for money
laundering. These products and services are as follows:
1. Multiple Accounts: Bank
clients often have many accounts in many locations. Some are personal
checking, money market or credit card accounts. Others are in the name
of one or more shell companies and multiple investment accounts are
common including mutual funds, stock, bonds and time deposits. This
approach creates vulnerabilities to money laundering by making it
difficult for banks to have a comprehensive understanding of their own
client's accounts. It also complicates regulatory oversight and law
enforcement, by making it nearly impossible for an outside reviewer to
be sure that all bank accounts belonging to an individual have been
identified.
2. Secrecy Products: Most
private banks offer a number of products and services that shield a
client's ownership of funds. They include offshore trusts and shell
corporations, special name accounts, and codes used to refer to clients
or fund transfers. Such a secrecy regime promotes criminal activities
and proves to be of immense hindrance in the event of any investigations
into crime.
3. Movements of Funds: Current
account transactions at private banks routinely involve large sums of
money. The size of client transaction increases the banks vulnerability
to money laundering by providing an attractive venue for money
launderers who want to move large sums without attracting notice. In
addition, most private banks provide products and services that
facilitate the quick, confidential and hard-to-trace movement of money
across jurisdictional lines.
4. Credit: Another
common private bank service involves the extension of credit to
clients. Several private bankers told the subcommittee that private
banks urge their private bankers to convince clients to leave their
deposits in the bank and use them as collateral for large loans. This
practice enables a bank to earn a free not only on the deposits under
their management, but also on the loans. This practice also however,
creates vulnerability for money laundering by allowing a client to
deposit questionable funds and replace them with “clean" money from a
loan. Moreover, as the client loans are fully collaborative by assets on
deposits with the bank, the bank may not scrutinize the loan purpose
and repayment prospects as carefully as for a conventional loan, and may
unwittingly further a money launderer's efforts to hide illicit
proceeds behind seemingly legitimate transactions.
5. Development of Off -Shore Banking: Originally,
off-shore centers were quite literally islands, hence the expression.
Today the term is used rather loosely for financial centers, which
operate within a low tax regime; this enables international transfers of
money to take place with a great deal of facility and with no hindrance
to capital flows.
MONEY LAUNDERING: HOW IS IT DONE?
Most money-laundering schemes involve some
combination of methods, The variety of tools available to launderers
makes this a difficult crime to stop. Some of these methods are listed
below:
1. Cashing Up
A
business taking large amounts of small change each week (e.g. a
convenience store) needs to deposit that money in a bank. If its
deposits vary greatly for no obvious reason this can draw suspicion; but
if the transactions are regular and roughly the same the suspicion is
easily discounted. This is the basis of all money laundering, a track
record of depositing clean money before slipping through dirty money.
2. Irregular Funding
One
way to keep cash anonymous is to give it to another who is already
legitimately taking in large amounts of cash. The intermediary then
deposits the money in an account, takes a premium, and writes a cheque.
Little attention is drawn because, for the intermediary, it is a
relatively small amount of the usual takings, but for the originator it
is all of his takings. This works well for one-off transactions, but if
it happens regularly then the cheques themselves forms a paper trail
that can raise suspicion.
3. Captive Business
Another
method is to start a business whose cash inflow cannot be monitored,
and funnel the small change into it and pay taxes on it. But all bank
employees are trained to be constantly on the lookout for transactions
that seem to be trying to get around reporting requirements. To avoid
suspicion, shell companies should deal directly with the public, perform
some service (not provide physical goods), and have a business that
reasonably would accept cash as a matter of course. Dealing directly
with the public in cash gives a plausible reason for not having a record
of customers.
4. Smurfing
This
is the system which is used wherein random amounts of less than $10,000
are deposited in many different bank accounts. This stops suspicion as
no large amounts are involved and investigations into such varied
amounts deposits by different people in far flung areas usually does not
lead to any positive results.
5. Underground/Alternative Banking
Some countries in Asia
have well-established, legal alternative banking systems that allow for
undocumented deposits, withdrawals and transfers. These are trust-based
systems, often with ancient roots, that leave no paper trail and
operate outside of government control. This includes the hawala system
in Pakistan and India and the fie chen system in China.
6. Shell Companies
These
are fake companies that exist for no other reason than to launder
money. They take in dirty money as "payment" for supposed goods or
services but actually provide no goods or services; they simply create
the appearance of legitimate transactions through fake invoices and
balance sheets.
7. Overseas banks
Money
launderers often send money through various "offshore accounts" in
countries that have bank secrecy laws, meaning that for all intents and
purposes, these countries allow anonymous banking. A complex scheme can
involve hundreds of bank transfers to and from offshore banks. According
to the International Monetary Fund, "major offshore centers" include
the Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.
MONEY LAUNDERING: THE RISKY FACTORS
Identification
of the money laundering risks of customers and transactions allows us
to determine and implement proportionate measures and controls to
mitigate these risks. The used risk criteria inter alia are the
following:
1. Country Risk
Factors that may result in a determination that a country poses a higher risk include:
• Countries subject to sanctions, embargoes or similar measures;
•
Countries identified by the Financial Action Task Force (“FATF”) as
non-cooperative in the fight against money laundering or identified by
credible sources as lacking appropriate money laundering laws and
regulations;
• Countries identified by credible sources as providing funding or support for terrorist activities;
• Countries identified by credible sources as having significant levels of corruption, or non-transparent tax environment.
2. Customer Risk
Characteristics of customers that have been identified with potentially higher money laundering risks are:
• Armament manufactures,
• Cash intensive business;
• Unregulated charities and other unregulated “non profit” organizations;
• Dealers in high value of precious goods.
3. Services Risk
Determining the money laundering risks of services should include a consideration of such factors as:
•
Services identified by regulators, governmental authorities or other
credible sources as being potentially high risk for money laundering;
• Services involving banknote and precious metals trading and delivery.
ADVERSE EFFECTS OF MONEY LAUNDERING
1. The Financial Sector: Money Laundering Undermines Domestic Capital Formation
· Erodes financial institutions
· Weakens the financial sector's role in economic growth
· Anti-money-laundering reforms support financial institutions through enhanced financial prudence.
2. The Real Sector: Money Laundering Depresses Growth
· Distorts investment and depresses productivity
· Facilitates corruption and crime at the expense of development
· Increases the risk of macroeconomic instability
3. The External Sector: Money Laundering Diverts Capital Away from
Development
· Outbound capital flows: facilitating illicit capital flight
· Inbound capital flows: depressing foreign investment
· Trade: distorting prices and content.
ANTI MONEY LAUNDERING
Since
human greed and the profit motive fuel organized crime, it seems
logical that confiscating the proceeds of crime would adequately deter
potential criminals. Anxious to avoid confiscation, organized criminals
now need to give these huge sums of money, not easily consumed or
invested in the legal economy without raising eyebrows, a patina of
legitimacy, i.e. they need to “launder” it. Money laundering has been
dubbed the “Achilles’ heel of organized crime,” for it compels them to
seek out and co-opt established businessmen and women with highly
technical know-how and access to legal institutions like banks to
launder their plunder.
Today,
most financial institutions globally, and many non-financial
institutions, are required to identify and report transactions of a
suspicious nature to the financial intelligence unit in the respective
country. For example, a bank must perform due diligence by ascertaining a
customer's identity and monitor transactions for suspicious activity.
To do this, many financial institutions utilize the services of special
software, and use the services of companies such as World Compliance to
gather information about high risk individuals and organizations.
Financial institutions face penalties for failing to properly file CTRs
(Currency Transaction Reports) and SARs (Suspicious Activity Reports),
including heavy fines and regulatory restrictions.
Different standards exist in different countries and, depending on the activity, demand different action. For example; in the US a deposit of US$10,000 or more requires a CTR, in Europe it is EUR 15,000, and in Switzerland it is CHF 25,000. In some countries there is no CTR requirement. Suspicion of ML activity in the US requires the submission of a SAR, while in Switzerland a SAR will only get filed if that activity can be proved. As a result, thousands of SARs are filed daily in the US, while in Switzerland the rate is much lower.
A
whole industry has developed to provide software for AML procedures.
These software applications effectively monitor bank customer
transactions on a daily basis and, using customer historical information
and account profile, provide a whole picture to the bank management.
Transaction monitoring can include cash deposits and withdrawals, wire
transfers, credit card activity, cheques (checks), share (securities)
dealing and ACH activity. In the bank circles, these applications are
known as BSA software or AML software.
THE INTERNATIONAL SCENARIO
· THE UNITED STATES OF AMERICA
United States
federal law related to money laundering is implemented under the Bank
Secrecy Act of 1970 as amended by anti-money laundering acts up to the
present. In US Law, "reasonably accepting cash" means the business must
regularly perform services that on average are less than $500 each. It
is assumed that above that amount most people pay with a check, a credit
card, or other another (traceable) payment method. The company should
actually function on a legitimate level. So the legitimate business will
generate a legitimate (if low) level of parts use, and enough traceable
transactions to mask the illegitimate ones.
Anti-money
laundering laws typically have other offences such as "tipping off
(warning)", "wilful blindness", "not reporting suspicious activity",
"conscious facilitation of a money launderer", "assisting a terrorist
financier with moving terrorist financing".
The
Bank Secrecy Act of 1970 requires banks to report cash transactions of
$10,000.01 or more. The Money Laundering Control Act of 1986 further
defined money laundering as a federal crime. The USA PATRIOT Act of 2001
expanded the scope of prior laws to more types of financial
institutions, and added a focus on terrorist financing, specifying that
financial institutions take specific actions to "know your customer"
(KYC).
In
the United States, Federal law provides: "Whoever ... knowingly ...
conducts or attempts to conduct ... a financial transaction which in
fact involves the proceeds of specified unlawful activity ... with the
intent to promote the carrying on of specified unlawful activity ...
shall be sentenced to a fine of not more than $500,000 or twice the
value of the property involved in the transaction, whichever is greater,
or imprisonment for not more than twenty years, or both.
While
money laundering typically involves the flow of "dirty money" (criminal
proceeds) into a clean bank account or negotiable instrument, terrorist
financing frequently involves the reverse flow: apparently clean funds
converted to "dirty" purposes. A criminal may launder drug proceeds and
help fund a terrorist, netting the incoming and outgoing funds with only
occasional small net settlement transactions. The word “proceeds” in
the federal money-laundering statute, 18 U.S.C. §1956, and §1956(a) (1)
(A) (i) and§1956 (h), applies only to transactions involving criminal
profits, not criminal receipts; those are expenses, and prosecutors must
show that profits were used to promote the illegal activity." Congress
enacted the 1986 statute after the President's Commission on Organized
Crime stressed the problem of "washing" criminal proceeds through
overseas bank accounts and legitimate businesses. It imposes a 20-year
maximum prison term.
· THE UNITED KINGDOM
The United Kingdom has an "all-crimes" regime. Money laundering legislation in the UK is governed by three Acts of primary legislation:-
1. The Terrorism Act 2000.
2. The Anti-Terrorist Crime & Security Act 2001.
3. The Proceeds of Crime Act 2002.
Secondary regulation is provided by the Money Laundering Regulations 2003 and 2007.
In the UK
"money laundering" need not involve money (it relates to assets of any
kind, both tangible and intangible, and to the avoidance of a liability)
and need not mean passing on the assets: a thief's possession himself
is included. There is no lower limit to what has to be reported— a
suspicious transaction involving a single £5 note must be reported.
Technically, everyone, not just financial services employees or firms,
is required to report, and get consent for, his own involvement in crime
or suspicious activities involving money or assets of any kind. So in
the UK
a thief who steals a vest from a clothes store commits, as well as
common theft, a money laundering offence: because he has possession of
an asset derived from crime. He is technically required to seek consent
from law enforcement for his continued possession of the vest if he is
to avoid risk of prosecution for money laundering.
The UK
law makes it a money laundering offence when a person enters into, or
becomes concerned in, an arrangement which facilitates by whatever means
the acquisition, retention, use, or control of criminal property by
another person.
· BANGLADESH
In Bangladesh,
this issue has been dealt with by the Prevention of Money Laundering
Act, 2002 (Act No. VII of 2002). In terms of section 2 (a), “Money
Laundering means (a) Properties acquired or earned directly or
indirectly through illegal means; (b) Illegal transfer, conversion,
concealment of location or assistance in the above act of the properties
acquired or earned directly of indirectly through legal or illegal
means.” In this Act, “Properties means movable or immovable properties
of any nature and description”.
THE DOMESTIC SCENE
In India
the fight against money laundering is carried out through the
Prevention of money laundering act which came into force in 2005.
Section 3 of the Act makes the offence of money-laundering cover those
persons or entities who directly or indirectly attempt to indulge or
knowingly assist or knowingly are party or are actually involved in any
process or activity connected with the proceeds of crime and projecting
it as untainted property, such person or entity shall be guilty of
offence of money-laundering.
Section
4 of the Act prescribes punishment for money-laundering with rigorous
imprisonment for a term which shall not be less than three years but
which may extend to seven years and shall also be liable to fine which
may extend to five lakh rupees and for the offences mentioned
[elsewhere] the punishment shall be up to ten years.
Section
12 (1) prescribes the obligations on banks, financial institutions and
intermediaries (a) to maintain records detailing the nature and value of
transactions which may be prescribed, whether such transactions
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 month; (b) to furnish information of transactions
referred to in clause (a) to the Director within such time as may be
prescribed and to (c) verify and maintain the records of the identity of
all its clients, As per Section 12 (2), the records referred to in
sub-section (1) as mentioned above, must be maintained for ten years
after the transactions finished.
As
per the provisions of the Act, every banking company, financial
institution (which includes chit fund company, a co-operative bank, a
housing finance institution and a non banking financial company) and
intermediary (which includes a stock-broker, sub-broker, share transfer
agent, banker to an issue, trustee to a trust deed, registrar to an
issue, merchant banker, underwriter, portfolio manager, investment
adviser and any other intermediary associated with securities market and
registered under section 12 of the Securities and Exchange Board of
India Act, 1992) shall have to maintain a record of all the
transactions; the nature and value of which has been prescribed in the
Rules under the PMLA. Such transactions include:
· 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 Rs 10 lakhs or its equivalent in foreign currency
where such series of transactions take place within one calendar month.
· All
suspicious transactions whether or not made in cash and including,
inter-alia, credits or debits into from any non monetary account such as
dmat account, security account maintained by the registered
intermediary.
· For
the purpose of suspicious transactions reporting, apart from
‘transactions integrally connected’, ‘transactions remotely connected or
related’ should also be considered.
Thus
the act has tried to be as comprehensive as possible and has described
both the offence and the obligations on financials institutions very
succinctly.
The Reserve Bank of India
has also passed various orders and circulars from time to time and has
brought various entities which deal with cash within the purview of the
act. Prominent amongst such are the various Money Changers who regularly
deal with foreign currency and are thus a highly exposed to the risk of
money laundering. The RBI has made the following norms through a
circular wherein it has prescribed the following guidelines:
The
purpose of prescribing Anti-Money Laundering Guidelines is to prevent
the system of Authorised Money Changers (AMCs) engaged in the purchase
and / or sale of foreign currency notes/Travellers cheques from being
used for money laundering. Therefore, Anti-Money Laundering (AML)
measures should include:
1. Identification of Customer according to "Know Your Customer" norms,
2. Recognition, handling and disclosure of suspicious transactions,
3. Appointment of Money Laundering Reporting Officer (MLRO),
4. Staff Training,
5. Maintenance of records,
6. Audit of transactions.
Another
method on combating the menace of money laundering is by creating a
system of internal checks and balances within financial institutions in
order to achieve this government has relied on the Appointment of a
Money Laundering Reporting Officer (MLRO)
An
MLRO may be appointed for monitoring transactions and ensuring
compliance with the AML Guidelines issued by the Reserve Bank from time
to time. The MLRO will also be responsible for reporting of suspicious
transaction/s to the Financial Intelligence Unit (FIU). Any suspicious
transaction/s, if undertaken, should have prior approval of MLRO. The
MLRO shall have reasonable access to all the necessary information/
documents, which would help him in effective discharge of his
responsibilities. The responsibility of the MLRO may include:
1. Putting in place necessary controls for detection of suspicious transactions.
2. Receiving disclosures related to suspicious transactions.
3. Deciding whether a transaction should be reported to the appropriate authorities
4. Training of staff & preparing guidelines for detection of suspicious transactions.
5. Preparing
annual reports on the adequacy or otherwise of systems and procedures
in place to prevent money laundering and submit it to the Top Management
within 3 months of the end of the financial year.
To
the extent possible, all suspicious transactions should be reported to
the MLRO before they are undertaken. Full details of all suspicious
transactions, whether put through or not, should be reported, in
writing, to the MLRO. Any transaction which seems suspicious may be
undertaken only with prior approval of MLRO. If the MLRO is reasonably
satisfied that the suspicious transaction has / may have resulted in
money laundering, he should make a report to the appropriate authority
viz. the FIU.
FIGHTING MONEY LAUNDERING: WHAT NEEDS TO BE DONE
Successful
money laundering means that criminal activity actually does pay off.
This success encourages criminals to continue their illicit schemes
because they get to spend the profit with no repercussions. This means
more fraud, more corporate embezzling (which means more workers losing
their jobs when the corporation collapses), more drugs on the streets,
more drug-related crime, law-enforcement resources stretched beyond
their means and a general loss of morale on the part of legitimate
business people who don't break the law and don't make nearly the
profits that the criminals do.
1. KYC
The
first defence against money laundering is the requirement on financial
intermediaries to know their customers— often termed KYC know your
customer requirements. Knowing one's customers, financial intermediaries
will often be able to identify unusual or suspicious behaviour,
including false identities, unusual transactions, changing behaviour, or
other indicators of laundering. The requirements under these norms need
to be made more stringent and greater compliance must be demanded and
ensured. Regular checks must be conducted to ensure the compliance of
these norms.
2. Using Information Technology
Information
technology can never be a replacement for a well-trained investigator,
but as money laundering techniques become more sophisticated, so too
does the technology used to fight it. There are various software
packages capable of name analysis, rule-based systems, statistical and
profiling engines, neural networks, link analysis, peer group analysis,
and time sequence matching.. Other elements of AML technology include
portals to share knowledge and e-learning for training and awareness.
3. Financial Crimes Enforcement Network (FinCEN)
It
is an organization created by the United States Department of the
Treasury. FinCEN receives Suspicious Activity Reports from financial
institutions, analyses them, and shares their data with U.S.
law enforcement agencies and Financial Intelligence Units FIUs of other
countries. One of its strategic goals is to improve information-sharing
through e-Government. It offers training and advice to organizations of
foreign governments to help improve the efficacy of their own
anti-money laundering programs. We need such an office in India as well so that the various anti money laundering activities may be coordinated properly.
4. Amounts
Many
regulatory and governmental authorities quote estimates each year for
the amount of money laundered, either worldwide or within their national
economy. A frequently cited figure is 2-5% of the worldwide global
economy, stated by the IMF. There is a dearth of data on the actual
amounts of money laundered worldwide. Some academic commentators have
expressed real concerns about the reliability and basis of figures used
by governmental and multinational organizations. It is always hard to
find out real figures about illegal acts. Therefore we need to put in
place a system not only to stop money laundering but also to effectively
detect and calculate its amount so as to have better clarity regarding
its consequences
5. Establishment Of Business Relationship
Relationship
with a business entity like a company / firm should be established only
after obtaining and verifying suitable documents in support of name,
address and business activity such as certificate of incorporation under
the Companies Act, 1956, MOA and AOA, registration certificate of a
firm (if registered), partnership deed, etc. A list of employees who
would be authorised to transact on behalf of the company/ firm and
documents of their identification together with their signatures, should
also be called for. Copies of all documents called for verification
should be kept on record.
6. Suspicious Transactions
The
financial institutions must ensure that its staff is vigilant against
money laundering transactions at all times. An important part of the AML
measures is determining whether a transaction is suspicious or not. A
transaction may be of suspicious nature irrespective of the amount
involved.
7. Staff Training
All
the managers and staff of the AMC must be trained to be aware of the
policies and procedures relating to prevention of money laundering,
provisions of the PMLA and the need to monitor all transactions to
ensure that no suspicious activity is being undertaken under the guise
of money changing. The steps to be taken when the staff comes across any
suspicious transactions should be carefully formulated by the AMC and
suitable procedure should be laid down.
8. Audit/Compliance
The
concurrent auditor should check all transactions to verify that they
have been done in compliance with the anti-money laundering guidelines
and have been reported as required. Compliance on the lapses, if any,
recorded by the concurrent auditor should be put up to the Board. A
certificate from the Statutory Auditor on the compliance with AML
guidelines should be obtained at the time of preparation of the Annual
Report and kept on record.
9. Maintenance Of Records
The following documents should be preserved for a minimum period of five years.
1. Records including identification obtained in respect of all transactions.
2. Statements / Registers prescribed by the Reserve Bank from time to time.
3. All Inspection / Audit / Concurrent Audit Reports.
4. Annual reports of the MLRO submitted to the Top Management and details of all
suspicious transactions reported in writing or otherwise to the MLRO.
5. Details
of transactions involving purchase of foreign exchange against payment
in cash exceeding Rs.10, 00,000 from inter-related persons during one
month.
10. Build an internal taskforce to identify laundering clues.
The
financial institutions should invest in building an internal task force
which would work towards identifying any suspicious transactions at the
best possible speed thereby reducing the chances of the money being
lost in layering
11. Change regulations regarding cash transactions.
The
terms of executing different payments, on a household or company level,
should favour the usage of bank instruments (like electronic cards,
wires, etc.) and in some transactions (where involved big amounts)
payments in cash should be completely forbidden. There are exactly these
transactions that may represent the biggest risk of money that is
laundered from illegal activities, including fraud and tax evasion.
THE HARMFUL EFFECTS OF ANTI MONEY LAUNDERING
1. Costs
The
financial services industry has become increasingly vocal about the
rising costs of anti-money laundering regulation, and the limited
benefits that it appears to bring.
Legislation
has sometime been driven on rhetoric, driving by ill-guided activism
responding to the need to be "seen to be doing something" rather than by
an objective understanding of its impact on predicate crime. The social
panic approach is justified by the language used - we talk of the
battle against terrorism or the war on drugs”
.
2. Small Institutions
For
small institutions, especially for those that are not branches or
subsidiaries of any stronger financial institution, the costs and other
requirements can be substantial and difficult to be absorbed.
3. Haste In Making The Law
The
anti money laundering laws have been made in a haste after the 9/11
attacks as a knee jerk reaction and therefore require careful revision.
The law needs to be updated frequently so as to remain effective in
today’s world of ever changing technology.
4. Targeting Only banks
While
banks, as regulated, transparent and supervised institutions, play an
important role in this objective, they are not the sole institutions. A
no less important role play other institutions, especially those of tax
collection or other institutions of services. Special attention should
be paid to the supervision of market segments out of the banking system
but within the scope of law.
CONCLUSION
The
negative economic effects of money laundering on economic development
are difficult to quantify, just as the extent of money laundering itself
is difficult to estimate. Nonetheless, it is clear from the evidence
that allowing money laundering activity to proceed unchallenged is not
an optimal economic-development policy because it damages the financial
institutions that are critical to economic growth, reduces productivity
in the economy's real sector by diverting resources and encouraging
crime and corruption, and can distort the economy's international trade
and capital flows to the detriment of long-term economic development.
Effective anti-money-laundering policies, on the other hand, reinforce a
variety of other good-governance policies that help sustain economic
development, particularly through the strengthening of the financial
sector. The connection between money laundering and terrorism may be a
bit complex, but it plays a crucial role in the sustainability of
terrorist organizations. Most people who financially support terrorist
organizations do not simply write a personal check and hand it over to a
member of the terrorist group. They send the money in roundabout ways
that allow them to fund terrorism while maintaining anonymity. And on
the other end, terrorists do not use credit cards and checks to purchase
the weapons, plane tickets and civilian assistance they need to carry
out a plot. They launder the money so authorities can't trace it back to
them and foil their planned attack. Interrupting the laundering process
can cut off funding and resources to terrorist groups.
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