ANTI MONEY LAUNDERING – THE COMPLETE PICTURE

(This is the second in a series of articles which tend to explain the concept of Money Laundering and the efforts needed to combat it.)

To deal with wrongdoers and deter them from operating freely, we need to achieve standard coordination and co-operation amongst regulators of different countries. This can be achieved through international bodies with representations from different countries to mutually accept and contribute to promote AML measures and combat financing of terrorism. Towards this objective, I now describe some such international bodies.

• FATF & Associates – The Financial Action Task Force (FATF) was created during the G-7 Summit, Paris 1989 to create political will and regulatory reforms in the AML Area. It is an inter-governmental body involved in development and promoting national & international policies to combat Money Laundering and terrorist financing.

The task force was given the responsibility of examining Money laundering techniques and trends, reviewing the actions which had already been taken at a national/international level, and setting out the measures that were needed to be enforced to combat it.

In April 1990, the FATF issued a report containing a set of 40 recommendations which provide comprehensive measures. Post September 2001, the development of standards to fight terrorist financing was added to the mission of FATF. The group has thus published 40 recommendations and 9 special recommendations in order to support these objectives widely known as AMLCFT (Anti Money Laundering & Combating Financing Terrorism).

FATF membership is currently made up of 31 countries and territories and 2 regional organizations. It also works in close co-operation with a number of international and regional bodies to achieve its objectives.

Some of its associate members are:

• Asia/Pacific Group of Money Laundering (APG)
• Council of Europe Select Committee of Experts on Evaluation of AML Measures (MONEYVAL)
• FATF on Money Laundering in South America (GAFISUD)

In addition, the following bodies have observer status with the FATF:

• Caribbean FATF (CFATF)
• Eurasian Group (EAG)
• Eastern and Southern Africa AML Group (ESAAMLG)
• Intergovernmental Action Group against Money Laundering in Africa (GIABA)
• Middle East and North Africa FATF (MENAFATF)

• BASEL Committee on Banking Supervision (BCBS) – The BCBS was formed in 1974 by the Central Bank Governors. Its current members include Belgium, Canada, France, Germany, Italy etc.

The committee does not force any law, but provides recommendations through its papers ensuring best practices in banking supervision. The BASEL committee has suggested the following supervisory standards and guidelines:

• Statement of Prevention of Criminal Use of Banking System for the purpose of Money Laundering (1988)
• Core Principles for Effective Banking Supervision (1997)
• Customer Due Diligence for Banks (2001)

·         International Association of Insurance Supervisors (IAIS)

·         International Organization of Security Commissioners (IOSCO)

·         EGMONT Group

Legislative Bodies in India

• Financial Intelligence Unit – India (FIU-IND): This is the central agency in the country responsible to receive, process, analyze data from various financial institutions in the country to facilitate disseminating information relating to suspicious transactions to curb Money Laundering.
• Securities Exchange Board of India
• Reserve Bank of India

A Complete AML Programme

In order to combat Money Laundering, financial institutions need to have an exhaustive program to curb potential usage and vulnerability of their entities by anti social elements. The following is a list of aspects that should be covered in such a program.

1. Customer Due Diligence: This is the process of banks knowing their customers in terms of identification, assessing potential AML Risk Exposure and being able to prove the same to regulators when required. Financial institutions can no longer plead ignorance about their customer’s identity and occupation if regulators seek such information.
2. Enhanced Due Diligence: This is intensive due diligence for customers that are likely to pose an above-average risk depending on their background, nature of financial activity, country of origin etc. Certain examples of high risk profiles are:

1. Non Resident Customers (NRIs)
2. High Net Worth Individuals (HNWs)
3. Politically Exposed Persons (PEPs)
4. Trusts, charities, NGOs and organizations receiving donations
5. Firms with sleeping partners
6. Non face-to-face customers

1. KYC/KYE Policy: Ensuring Appropriate Customer & Employee Identification, and monitoring transactions of a suspicious nature.

1. Risk – Assessment, Categorization and Management
2. Transaction Monitoring

The author was working as an IT Enabler for a leading American Bank’s AML Division for a period of 2.5 years prior to joining the Management Program @ IIT Kanpur.

Manu Agrawal

MBA batch of 2011,

IIT Kanpur