STUDY ON MONEY LAUNDERING

A PROJECT SUBMITED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF DEGREE OF

BACHELOR IN COMMERCE (ACCOUNTING & FINANCE)

UNDER THE FACULTY OF COMMERCE

BY

SAYLI MORE

UNDER THE GUIDENCE OF

KIRAN

N.E.S RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE

BHANDUP – 400 078

2018-19
 DECLARATION BY LEARNER

I the undersigned Miss SAYLI VISHWANATH MORE here by , declare that the

Work embodies in this project work titled “ STUDY ON MONEY LAUNDERING ”

Forms my own contribution to the research work carried out under the guidance of

“KIRAN” is a result of my own research work and has not been previously submitted

To any other University for any other Degree to this or any University.

Wherever reference has been made to previous works of other , it has been clearly

Indicated as such and included in the bibliography.

I , here by further declare that all information of this documents has been obtained

and presented in accordance with academic rules and ethical conduct.

SAYLI V. MORE

Certified by

KIRAN
 ACKNOWLEDGMENT

To list who all have helped me is difficult they are so numerous and the depth is so
numerous.

I would like to acknowledge the following as idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal merry for providing the necessary facilities required for
completion of this project.

I take this opportunity to thank our Coordinator kiran, for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide whose guidance
and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the complention of the project especially my Parents and Peers who supported me throughout
my project.
 CERTIFICATE

Prof. SELVI NADAR do hereby certify that, Mr. BIRENDRA R GUPTA student of
T.Y.B.M.S (2014-2015) of Ramniranjan jhunjhunwala college Ghatkopar (W) Mumbai
400 086has completed the project work on MONEY LAUNDERING as the part of the
academic fulfilment under my guidance.

Signature of project guide Signature of principal

Signature of Examiner
 EXECUTIVE SUMMARY

MONEY LAUNDERING

A sophisticated crime not to be taken very seriously at the first glance by

anyone in the society as compared to the street crimes. To give a head start to this
paper, researcher wanted to limit the paper to national context, but was not able to do so
as it was not at all possible due to the fact that any instance of money laundering would
have a time of as international flavour of money laundering would have a time of
several countries in order to obscure its origin. It was difficult to discuss the topic of
money laundering nationally in abstract. If done so would have appeared as a
patchwork. to have a comprehensive paper, the researcher discuss the theme of the
paper in three parts.

Opens up with explaining the concept and processes of money laundering

pointing out the challenges and losses and is a kind of primer to money laundering. As
observed earlier, money laundering essentially involves a foreign ground for washing-
laundering the dirty money proceeds the crime.

moves with elaborating the international development & control mechanisms

to deal with the problem of money laundering. in light of aforesaid discussion.

proceeds to analyze the position of India in controlling money laundering &

keeping up with the mandate of international forum. India proposing to update its anti
money-laundering and a bill of 2008 is waiting for enforcement. A comparative
analysis of bill of 2008 is done in one of sub-parts of the paper.

To sum up the paper various problems & loopholes in implementation of anti money-
laundering laws are discussed putting forth few humble suggestion to have a balanced
anti-money-laundering.
 INDEX

SR.NO TOPIC PG.NO

I PART-I
I.I Introduction to money laundering 08
I.II Money laundering- The root Problem 08
I.III Money laundering- The concept 11
I.IV Money laundering- An organised crime 11
I.V Money laundering-Historical evolution 12
I.VI Money laundering- The Alarming Statistics 13

II PART-II
II.I The process of Money Laundering
II.II Some Techniques of Money Laundering
II.III New Areas of Operational of Money
Laundering
II.IV Harmful Effects of Money Laundering
II.V Argument for money laundering - how far
sustainable ?
II.VI Rational for Anti money laundering law

III PART-III
III.I Regulation of Money laundering international
perspective
III.II Basel committee on banking Regulation and
supervisory practices
III.III UN Convention against illegal traffic in
Narcotic drugs and psychotropic substances
III.IV GPML
III.V The financial action task force
III.VI Council of Europe Convention on Laundering ,
search, seizure and Confiscation of the proceeds
of crime
III.VII Other Organization and Initiatives against Anti-
Money-Laundering
IV PART-IV
IV-I REGULATION OF MONEY LAUNDERING IN
INDIA
IV-II Salient features of prevention of Money
Laundering Act 2002
IV-III The schedule to the Act
IV-IV Inclusion on New Definition
IV.V Prevention of Money laundering Act 2011
IV.VI Financial Intelligence Unit-India (FIU-IND)
IV.VII Role of Reserve Bank of India
IV.VIII Role of Securities Exchange Board of India
IV.XI Problem area for India in having a proper AML

V Steps Banks should follow to ensure a robust

anti-money laundering process
VI Master Circular on Know Your Customer
(KYC) norms
VII CONCULSION 57
VIII SUGGESTION 58
IX BIBLOGRAPGHY 60
X ABBREIVATION 61
PART-I
I.I. INTRODUCTION TO MONEY LAUNDERING

Money is like fire, an element as little troubled by moralising as earth,

air and water men can employ it as a tool or they can dance around it as if were
the incarnation of a God. money vote's socialist or monarchist, finds a profit in
pornography or translation from the bible, commissions Rembrandt and
underwrites the technology of Auschwitz. it acquires the meaning from the uses to
which it puts.

Mahatma Gandhi said:-

"Capital as such is not evil; it is its wrong use that is evil. Capital in
some form or in other will always be needed.

I.II Money laundering- The root Problem

The primary function of money is to serve as a medium of exchange and as

such it is accepted without question ton final discharge of debts or payment of goods or
services. The term 'money' generally includes banknotes as well as coins, although it
may be limited to such of as each legal tender at the time and place in question. The
precise meaning of the term depend upon the content in which it is used so that, for
example it is usually a wide meaning when used in a will and when that meaning gives
effect to the intension of the testator, an intermediate in connection with the claims for
money paid or for money had received and the narrow meaning in the criminal law and
in relation to execution.

Money has been regarded as bone of contention between friends and relative.
It is said that lend money to a person if you want to spoil him or make foe. Money-
wealth, property or estate have always caused family, feuds or even murder for it is said
that all is fair in love and war. Money is devil's child and responsible for mischief and
evils. Some people think that money can bring happiness in life but it is not so.

Money is root cause of many evils like corruption, black marketing,

smuggling, drug trafficking, tax evasion and the bucks does not stop here it goes to the
extent of sex tourism and human trafficking(A human selling another human)people are
crazy for money. Majority is here to become rich and money has become the basic goal
and education. The more developed the nation, the more the standard of living of the
people. People want more money to cater to their needs and at a point of time they don't
hesitate to have money from any source. this is available soft corner were the concept
of money laundering enter and prosper.

Influence of money on the people was appropriately portrayed by Henry

fielding as follows: Sir, money is the most charming of all the things; which will say
more in one moment than the most elegant lover can in years. Perhaps you will say a
man is not young; I answer is rich . he is genteel handsome, witty, brave, good
humoured, but he is rich, rich, rich and rich that one word contradicts everything you
can say against him.
I.III. Money laundering- The concept

Money laundering refers to the conversion or "laundering" of money which

is illegally obtained' so as to make it appear to originate from a legitimate source
money laundering is being employed by launders to worldwide to conceal criminal
activity associated with it such drug arms trafficking terrorism and extortion Robinson
states that:-

"Money laundering is called what it is because that perfectly describes what take place
illegally, or dirty, money is put through a cycle of transaction, or washed, so that it
comes out the other end as legal, or clean money. In other words, the source of
illegally obtained money is obscured through a succession of transfer and deals in order
that those same funds can eventually be made to appear as legitimate income."

EC directive defines the term 'Money laundering' as " the conversion of

property knowing that such property is derived from serious crime, for the purpose of
concealing or disguising the illegal origin of the property or of assisting any person
who is involved in the such an offence or offences to evade the legal consequences of
his action and the concealment or disguise of the true nature, source, location,
disposition, movement right with respect to, or ownership of the property is derived
from serious crime".

Thus, the money laundering is not an independent crime it depends upon

another crime the proceeds of which is the subject matter of the crime in the money
laundering.

I.IV Money laundering- An organised crime

Money laundering has a close nexus with organised crime. Money launderers
accumulate enormous profit through drug trafficking, international frauds, arms
dealing etc. Cash transaction are predominately used for money laundering as they
facilitate the concealment of the true ownership & origin of money. It is well organised
that through huge profit the criminals earn from drugs trafficking and other illegal
means, by way of money laundering could contaminate and corrupt the structure of the
state at all the levels, this definitely leads to corruption. Further, this adds to constant
pursuit of profits and the expansion to the new area of criminal activity.
Through money laundering organised crime diversifies its source of income and
enlarges its sphere of action. The social danger of money laundering consist in the
consolidate of the economic power of criminals organisations, enabling them to
penetrate the legitimate economy. In advanced societies. Crime is increasingly
economic in character. Criminal association now tend to organised like business
enterprise and to follow the same tendencies as legitimate firms; specialisation growth
expansion in market and linkage with other enterprise. The holders of capital of illegal
origin are prepared to bear considerable cost in order to legalise its use.

I.V. Money laundering-Historical evolution:

'Money laundering' as an expression is one of fairly recent origin. the original

sighting was in the newspapers reporting the Watergate scandal in the United States in
1973.

The expression first appeared in a judicial or legal context in 1982 in

America in the case of US $4,255,625.39. The term money laundering is said to be
originated from Mafia ownership Laundromats in the United States. Gangsters there
were earning huge sums in cash from extortion, prostitution, gambling and bootleg
liquor. They needed to show a legitimate source for these monies. One of the ways in
which they were able to do this was by purchasing outwardly legitimate businesses and
to min their illegal earnings with the legitimate earnings they received from these
businesses. Laundromats were chosen by these gangsters because they were cash
businesses and this was an undoubted advantage to people like AL Capone who
purchased them Capone was prosecuted, through not for money laundering but for tax
evasion. However, the conviction of Capone may have triggered the money laundering
business of the ground. But other historians differ from this in as much as they are of
the view that money laundering is called so, because it perfectly describes what takes
place illegal or dirty money is put through a cycle of transactions, or washed, so that it
comes out at the other end as legal or clean money. In other words, the source of
illegally obtained funds is obscured through a succession of transfers and deals, in order
that those same funds can eventually be made to appear as legitimately earned income.
Another celebrated mode of doing money laundering was with SWISS bank. Gangster
Meyer Lansky used the number of SWISS bank accounts to hide his illegal money. He
used the "loan-back" concepts, which meant that the illegal money could now be
disguised as 'loans' provided by complaint foreign banks, which could be declared as
their 'revenue' if necessary and a tax-deduction obtained in the bargain. Money
laundering as a crime attracted the interest in the 1980s, essentially within a drug
trafficking context. It was from an increasing awareness of the huge profit generated
from the criminal activity and a concern at the massive drug abuse problem dealers by
creating legislation that deprive them of their illegal gains.

I.VI. Money laundering- The Alarming Statistics

Estimating how much money is laundered is actually laundered in the United

States, any other, or globally is extremely difficult. Money laundering is a largely
secretive phenomenon. the exact number of launders that operate every year, how much
money they launder in which country and sector, and which money laundering
techniques they use it not known. however a sustain effort between 1996 and 2000 by
the FAFT(Financial Action Task Force) to produce such estimate failed. In fact, no
direct estimates exits of how much money passes through financial system, whether
broadly or narrowly defined, for the purpose of converting illegal gains into a non trace
able form.

john walker was the first to make a serious attempt at quantifying money laundering
and initial output. His model suggests that US $ 2.85 trillion are laundered globally. As
per an estimate of the international monetary fund, the aggregate size of money
laundering in the world could be somewhere between 2 or 5 % of the world's GDP.
Although money laundering is impossible to measure with precision, it is estimate that
US$5000 billon to US$10,000billon in proceeds from the serious crime is laundered
every year. Though data on the size of money laundering in the scant UK and US
officials estimate that the amount of money laundering in the financial system
worldwide was roughly $500billion gross domestic product.
PART-II
II.I. The process of Money Laundering

money laundering is not a single act but is in fact a process that is

accomplished in three basic steps as enumerated below:

1. Placement:

Placement refer to the physical disposal of bulk cash proceeds derived

from illegal activity. This is the 1st step of money laundering and ultimate aim of the is
to remove the cash from the location of acquisition so as to avoid detection from system
by opening up a bank account in the name of unknown individuals or organisations and
depositing the money in that account.

2. Layering :

Layering refers to the separation of illegal proceeds from their sources by

creating complex layer of financial transaction. Layering conceals the audit trail and
provides anonymity. This is achieved by moving money to offshore bank accounts in
the name offshore companies, purchasing high value commodities like diamond and
transferring the same to different jurisdictions. Now, electronic funds transfer(EFT) has
become boon for such layering exercise different techniques like correspondent
banking loan at low or no interest rates, money exchange offices, back- to-back loans,
fictitious sales and purchases, trust offices, and recently the special purpose
vehicles(SVPs) are utilized for the purpose of laundering the money.

3. Integration:

"Integration" refers to the reinjection of the laundered proceeds back into the
economy in such a way that they re-enter the financial system as normal business funds.
The launders normally accomplish this by setting up unknown institutions in nations
where secrecy is guaranteed. New forms of business with just a webpage and convert
his illegal money to legal by showing profits from the webpage. There are other ways
like capital market investments, real estate acquisition, the catering industry, the gold
market and the diamond market.

Money laundering, at its simplest, is the act of making money that comes
from source A look like it comes from source B.
II.II. Some Techniques of Money Laundering:

At each of three stage of money laundering various techniques can be

utilised. It is really not possible to enlist all the techniques of money laundering
exercise; however some of the techniques are illustrated for the sake of understanding.

1. Hawala:-

Hawala is a alternative and parallel remittance system. It exits and

operate outside of, or parallel to traditional banking or financial channels. It was
developed in India before
re the introduction of western banking practices, and is
currently a major remittance system and used around the world. In hawala network the
money is not moved physically. A typically hawala transaction would be like a resident
in USA of Indian person hass option either to send money through formal channel of
banking or through hawala system. The commission in hawala system less than the
bank charges and it is without any complications for opening account or visit the bank,
etc. The money reaches in to the doorstep of the person's relative and the process is
speedier and cheaper.
2. Structuring Deposits:-

Also known as smurfing, this method entails breaking up large amounts

off money into smaller, less-suspicious amounts. In the United States, this smaller
amount has to be below $10,000- the dollar amount at which U.S. banks have to report
the transaction to the government. The money is then deposited into one or more bank
accounts either by multiple people (smurfs) or by a single person over an extended
period of the time.

3. Third-party Cheques:-

Utilizing counter cheques or banker's drafts drawn on different

institutions and clearing them. Via various third-party accounts. Third party cheques
and traveller's cheques are often purchased using proceeds of crime. since these are
negotiable in many countries, the nexus with sources money is difficult to establish.

4. Credit card

clearing credit and credit card balance at the counter is different banks.
Such cards have a number of uses and can be used across international borders. For
example, to purchase assets, for payment of services or goods received a global
network of cash-dispensing machines.

5. Peso broker:-

A drug traffickers turns over dirty U.S dollars to a peso Colombia. the
peso then use those drug to purchase goods in united states for Colombia importers.
when the importer received those goods and sell them for peso in Colombia, they pay
back the peso broker from the proceeds. the broker then gives the drugs trafficker the
equivalent in peso of the original, dirty U.S dollars that began in the process. The list is
endless and quite a lot of techniques are not easily used to one laundering phase alone .
With each reporting of crime, the modus operandi changes keeping in view the earlier
detecting. the money laundering appear to be serious researcher and the officials
appear to be mere readers of research reports.
II.III Some New Areas of Operational of Money Laundering

Both authorities and the money launderers seem to permanently change their
behaviour. when trying to hunt and escape money laundering. One can notice changed
explored new routes of laundering their money. economies with growing and
developing establish financial centres as the latter must have implemented
comprehensive money laundering regimes.

1. Insurance sector

Then insurance sector is a relatively less haunted sector compared to

banks and other avenues of financial and other services, however there has been
gradual increase in laundering activity in insurance sector as well. The laundering in
insurances is either internal or external in nature. the internal channels of laundering
money or agent premium diversion, reinsurance fraud and rented assets scheme etc.
phony insurance companies, staged auto accident, vertical and senior settlement fraud
are external channels of money laundering.

2. Open Securities Market:-

Money launderers have traditionally targeted banks, which accept cash

and facilitate domestic and international funds are transfers. However the securities
markets, which is known for their liquidity, may also be targeted by criminals seeking
to hide and obscure illegal funds. Money launderers can targeted any type of the
businesses that participate in securities industry. Broker-dealer for instance provide a
variety product and services to retail and institutional investor buying and selling stocks
bond and mutual fund and shares. this is more over possible due the instrument like
hedge funds and participatory Notes which have very limited disclosure as to the
source.these funds can effectively used as Laundromat. although the number of
document cases in which broker and dealer or mutual fund accounts have been used to
launder money is limited, law enforcement agenices are concerned that criminals may
increasingly attempt to use the securities industry to launder money. this is new area
which requires a serious thought processing.
3. Cyber crime

Now one has to confront with hybrid crimes, the with many attributes .
According to capt. Raghu Raman "five types of crime are now converging. Cyber-
crimes such as identify theft access to e-mail and credit card fraud are coming together
with money laundering and terrorist activities. large amounts of money is now stored
in digital form . Now you can transfer money through electronic and online gateways
to multiple accounts. This convergence leads to a greater problem of tackling of
different issues at one time.
II.IV Harmful Effects of Money Laundering:

In a detailed study by Unger about money laundering literature they

were able to identify 25 different effects of money laundering. Unger classifies the
effect of money laundering on the basis of its gestation period within which it surfaces,
fewer than two broad heads, i.e. short term effects of money laundering and long term
effects of money laundering.

Money laundering threatens national governments and international

relations between them through corruption of officials and legal systems. It undermines
free enterprise and threatens financial stability by crowding out the private sector,
because legitimate businesses cannot compete with the lower prices for goods and
services that posed by Money-laundering activities throughout the world.

Terrorism:-

Terrorism is an evil which affects each and everybody. Now and then we can
find terrorist attacks being made by terrorists. These attacks definitely cannot be done
without the help of money. Money laundering serves as an important mode of terrorism
financing. Terrorist organizations rise funding from legitimate sources, including the
abuse of charitable entities or legitimate businesses or self-financing by the terrorists
themselves. Terrorists also derive funding from a variety of criminal activities ranging
in scale and sophistication from low-level crime to organized fraud or narcotics
smuggling or from state sponsors and activities in failed states and other safe havens.
Terrorists use a wide variety of methods to move money within and between
organisations including the financial sector, the physical movement of cash by couriers,
and the movement of goods through the trade system. Charities and alternative
remittance systems have also been used to disguise terrorist movement of funds.
Threat to banking system:-

Across the world, banks have become a major target of money laundering
operations and financial crime because they provide a variety of services and
instruments that can be used to conceal the source of money, with their polished.

Articulate and disarming behaviour, Money launderers attempt to make

bankers lower their guard so as to achieve their objective. through norms for record
keeping, reporting, account opening and transaction monitoring are being introduced by
central banks across the globe for checking the incidence of money laundering and the
employees of banks are also being trained to recognize suspicious transactions, the
dilemma of the banker in the context of money laundering is to sift the
irregular/suspicious transactions. Launders generally use this channel in two stages to
disguise the origin of the funds and introduce these funds in the financial system and
second, once these funds have entered the banking system, through a series of
transactions, they distance the funds from illegal source. The banks and financial
institutions through whom the 'dirty-money' is laundered become unwitting victims of
this crime.

Threat to Economic and Political Stability:-

The infiltration and sometimes saturation of dirty money into legitimate

financial sectors and national accounts can threaten economic and political stability. An
IMF working paper concludes that money laundering impact the financial behaviour
and macro-economic performance in variety of ways including policy mistake due to
measurement errors in national account statistics volatility in exchange and interest rate
due to unanticipated cross border transfer of funds the threat of monetary instability due
to unsound asset structures effects on tax collection and public expenditure allocation
due to misreporting of income and many more such ways.
 II.V. Argument for money laundering - how far sustainable ?

In contrast to the position with insider dealing a few serious academic argument have
been advanced that money laundering is beneficial or even that it should be permitted
there exists theory of legitimisation suggestion that money laundering enables to
criminals to come in from the shadows and take their place in the legitimate economy.
An of this was the Seychelles proposed economic development assistance act 1995,
which would have provided that, where a person invested a person invested at least
US$10 million in the country they would be immune from criminal prosecution by any
party the only exception bring by Seychelles authorities and then only in the context of
the drug investigation, Further the funds themselves would clean and not liable to the
confiscation. Professor Barry Rider and the other have also pointed out that it may
often be beneficial to the state as well as to the individual not only to keep the origin of
certain funds secret but actually to disguise their provenance. however this argument is
not sustainable because money laundering is essentially concerned with the enabling of
criminals and on occasions their associate to retain or to recover the proceeds of their
offences. moreover the financial confidentiality and money are to distinct things. Dr.
Kris Hinterseer has gone to the context of telling that actual money laundering is on
occasion in a country's interest.

II.VI. Rational for Anti money laundering law:-

Though academically it could be discussed that money laundering may prove

useful in certain context in light of harmful effects of money laundering posed above no
one would argue against the anti-money laundering laws. there are various motivation
to have an AML mechanism in place to began with at most basic, the rationale is to
support the adage that crimes don't play. Firstly there is the moral dimension; crime
should not pay. it is simply not acceptable to society that a person who does wrong
should benefit as a result.

A part from the aforesaid dimension it is intended to deprive the criminal organisation
of their financial lifeblood. Moreover if it is shown that crime does not pay would act as
a sufficient deterrent as few theorists suggest for the cost benefit analysis especially in
economics crime like money laundering . Further there is another theory that if
criminals can be prevented from profiting from their offences they will not able to re-
invest money in those various ways and hence will be hampered from the law abiding
public see criminal enjoying very comfortable life far more comfortable from their
own, this will lead to a considerable public disquiet. Further we live in a globalised
world as a community international relation at stake. There are pressure from parent
organisation to which one has acceded to as well as pressure from the developed
countries for compliance to tough anti-money-laundering regimes. The compliance
result in better international status of the country.

Anti-money laundering law is necessary because money laundering tends to

corrupt even the most professional players in the market. Now a money laundering can
be a white collar businessmen doing business legitimate. However when lured by low
interest rate loans, he would be tempted to launder the black money for the purpose.
This illegal business in the long run contaminates the legal business and profession, for
example money laundering needs lawyer and the lure of money can transform the noble
professional to criminals. Money laundering promotes corruption and bribery in very
sector specially the banking sector.

This provides a ration able for having an anti money laundering law which
act like a slow poison though to some it may seem as a power vitamin.
PART-III
III.I. Regulation of Money laundering international perspective:-

Money laundering is a truly global phenomenon. The increasing integration

of the world's financial system as technology has proved barriers to free movement of
capital have been reduced has meant that money launderers cam make use of this
system to hide ill-gotten gains. They are able to quickly move their criminal derived
cash proceeds between national jurisdiction complicating the task of tracing and
confiscating these assets.

The international dimension of money laundering was evident in the study of

Canadian money laundering polices files. They revealed that over 80percent of all
laundering schemes had an international dimension. More recently operation green ice
(1992) showed the essentially transnational nature of modern money laundering. Only a
handful of industrialised western nations had system in place by ends of 1980s.
Because of this, it has been recognised by many government that close international
operation was needed to counter money laundering and a number of agreements have
reached internationally in order to counter this menace.

Today there are an increasing number of states that are passing laws and
regulations but UNDCP estimates that about 70% of the government do not yet have
effect legislation in place. Action at the international level to combat money laundering
began in1998 with 2 important initiatives. The Basel committee on the banking
regulation and supervisory practices and the united nations convention against illegal
traffic in narcotic drugs and psychotropic substances.

III.II. Basel committee on banking Regulation and supervisory practices

The Basel committee statement of principles on the prevention of criminal use of

banking system was a significant breakout on the financial front to have some
controlling mechanism for money laundering on an international plane. The statement
of principles does not restrict itself to drug-related money laundering but extends to all
aspects of laundering through the banking system , i.e. the deposit transfer and/or
concealment of money derived from illegal activities whether robbery terrorism fraud
 or drugs. It seeks to deny the banking system to those involved in money laundering by
the application of the four basic principle.

1. Know Your Customer (KYC):-

This mandates the bank to take reasonable efforts to determine their customers
true identify and have effective procedures for verifying the confides of a new
customer.

2. Compliance with Laws:-

Bank management should ensure high ethical standards in complying with laws and
regulation and keep a vigil not to provide services when any money-laundering activity
is suspected.

3. Cooperation with the law Enforcement agencies

4. Adherence to the statement

III.III. UN Convention against illegal traffic in Narcotic drugs and

psychotropic substances:-

This UN Convention was one of the historic conventions in as much as the

parties to the convention recognised the links between illegal drugs traffic and other
related organised criminal activities which undermine the legitimate economics and
threaten the stability security and sovereignty of states and illegal drug trafficking is an
international criminal activity that generates large profits and wealth enabling
transnational criminal organisation to penetrate contaminate and the concept the
structures of the government legitimate commercial and financial business and society
at all levels. The treaty required the signatories to criminalise the laundering of drug
money and to confiscate it where found. All countries ratifying agree to introduce
measures to identify trace and freeze or seize the proceeds of drugs trafficking. council
of Europe Convention on laundering is motivated by this convention as well as this
convention gave a frame work for FATF to work.
 III.IV. GPML

The global programme against money laundering was established in year

1997 in response to the mandate given to UNODC by 1998 UN convention against
illegal traffic in narcotic drugs and psychotropic substance. GPML mandate was
strengthened in 1998 by the united nations General Assembly Special Session
(UNGASS) political declaration and Action plan against money laundering which
broadened its remit beyond drug offences to all serious crime.

Three further convention have been adopted/specify provisions for

AML/CFT related crimes.

international convention for the suppression of the financing of

terrorist.(1999)

UN convention against transnational organised crime(2000)

III.V. The financial action task force(FATF)

The Financial action task force(FATF) is an inter-government body founded

by G7 countries (Canada, France, Germany, Italy, United Kingdom), created in 1989,
whose purpose is the development and promotion of national and international policies
to combat money laundering and terrorist financing. The forty recommendation of the
FATF on money laundering have been established as the international standard for
effective anti money laundering measures.

FATF regularly reviews its member to check their compliance with these forty
recommendation and to suggest areas for improvement. It does this through annual self-
assessment of and periodic mutual evaluation of its members. The FATF also identifies
emerging trend in method used to launder money and suggest measures to combat them
in addition to the existing 40 recommendation FATF has come up with 9special
recommendation on terrorist financing. As per the recommendation of the task force all
countries have to ensure that offences such as financing of terrorism, terrorist act and
 terrorist organization are designated as " Money laundering predicate

offence "

The 40 recommendation provides a complete set of counter measures against

money laundering covering the criminal justice system and law enforcement the
financial system and its regulation, and international co-operation. They set out the
principles for action and allow countries a measures of flexibility in implementing these
principles according to their particular circumstance and constitutional frameworks.
Through not a binding international convention many countries in the world have made
a political commitment to combat money laundering by implementing the 40.

III.VI. Council of Europe Convention on Laundering , search, seizure and

Confiscation of the proceeds of crime:-

popularly known as a Strasbourg convention was intended to extend the

provision of international cooperation against the activities of international organised
criminality in general beyond the area of drug. Further the EC Directive on
prevention of the use of financial system for the purpose of money laundering in
1991 a legal regulation of mandatory force requiring member states to incorporate the
rules contained to therein in their own legal system by a certain date. Other initiatives
of European union to deal with situation are council common position on combating
terrorism, Council convention_ Council of Europe Convention on money laundering,
search, seizure and Confiscation of the proceeds from crime and on the financing of
Terrorism dated 16 may 2005 and Directive 2005/60/EC dated 26th October,2005.

III.VII. Other Organization and Initiatives against Anti-Money-

Laundering (AML)

Money laundering is an increasingly ramified, complex phenomenon that

must be tackled in an integrated and interdisciplinary fashion. Towards this there are
many organizations throughout the world co-ordinately. Some of the prominent ones
are discussed below:-
III.VII.A international money laundering Information Network
(IMoLIN):-

IMoLIN is an Internet-based network assisting government, organization and

individuals in the fight against money laundering and the financing of terrorism
administered by UN office on Drugs and Crime. IMoLIN has been developed with the
cooperation of the world's anti-money laundering organization. It provides with an
international database called Anti-money laundering international Database (AMLID)
2nd Round of Legal Analysis has been launched by UNODC on 27 February 2006,
IMoLIN has twelve participating organization , four international organization, and five
international financial institution on its website

III.VII.B Wolfberg AML Principal:

This gives eleven principal as an important step in the fight against

money laundering, corruption and other related crimes. Transparency International(TI),
a Berlin based NGO in collaboration with 11 International Private Banks under the
expert participation of Stanley Morris and Prof. Mark Pieth came out with these
principles as important global guidance for sound business conducting international
private banking. The importance of these principles is due to the fact that it comes from
initiative by private sector.

Normally, most initiatives to date have been public sector led by

governments and their regulatory and law enforcement agencies, or by government
representatives acting through international form such as the Financial Action Task
Force(FATF) and the Basel Committee of Bank Supervisors. The Wolfsberg Principles
are a non-binding set of best practice guidelines governing the establishment and
maintenance of relationships between private and bankers and clients.
III.VII.C Egmont Groups of Financial Intelligence Units:

The Egmont Group is the coordinating body for the international group of
Financial Intelligence Units (FIUs) formed in 1995 to promote and enhance
international co-operation in anti-money laundering and counter-terrorist financing. The
Egmont Group consist of 108 Financial intelligence units are responsible for following
the money trail, to counter money laundering and terrorism financing. FIUs are an
essential component of the international fight against laundering, the financing of
terrorism and related crime.

Their ability to transform data into financial intelligence is a key element in

the fight against money laundering and the financing of terrorism. The FIUs
participating in the Egmont Group affirm their commitment to encourage the
development of FIUs and cooperation among and between them in the interest of
combating Money Laundering and in assisting with the global fight against terrorism
financing.

III.VII.D. Asia-Pacific Group on Money Laundering(APG):

The Asia/Pacific group on Money Laundering is an International organization

consisting of 38 member countries/jurisdictions and a number of international and
regional observers including the United Nations, IMF and World Bank. The APG is
closely affiliated with the FATF in the OECD Headquaters at Paris, France.

All APG members commit to effectively implement the FATF's international

standards for anti-money laundering and combating financing of terrorism referred to as
the 40+9 Recommendations. Part of this commitment includes implementing measures
against terrorist listed by the United Nations in the "1267 consolidated List". The key
functions of APG is to access APG members compliance with the global AML/CFT
standards through mutual evaluations; coordinate technical assistance and training with
donor agencies and APG jurisdiction to improve compliance with the AML/CFT
standards; co-operate with the international AML/CFT network. Conduct research into
Money Laundering and terrorist financing methods, trends , risks, and vulnerabilities;
contribute to the global AML/CFT policy development by Associate Membership of
FATF.

Thus one can see the panoply of efforts taken by the international community to
fight the menace of money-laundering. As the financial systems of the world grow
increasingly interconnected, international cooperation has been, and must continue to
be fundamental in curtailing the growing influence on national economics of drug
trafficking, financial fraud, other serious transactional organized crime, and the
laundering of proceeds of such crimes.
PART-IV
IV.I REGULATION OF MONEY LAUNDERING IN INDIA:

With its growing financial strength, India is vulnerable to money laundering

activities even though the country's strict foreign exchange laws make it difficult for
criminals to launder money. International Narcotics and Law Enforcement Affairs
emphasizes India's Vulnerability to money-laundering activities in the following words.

"India emerging status as a regional financial centre, its large system of

informal cross-border money flows, and its widely vulnerability to money
laundering activities, some common sources of illegal proceeds in India are
narcotics trafficking, illegal trade in endangered wild life, trade in illegal gems
(particularly diamond), smuggling, trafficking in persons, corruption and income
tax evasion. Historically because of its location between the herion-providing
countries of the Golden Triangle Cresent, India continues to be a drug-transit
country."

Money-laundering in India has to be seen from two different perspective, i.e,

Money-laundering on international forum and Money-laundering within the country.
As far as the cross-border money-laundering is concerned in India's historically strict
foreign-exchange laws and reporting norms have contributed to a great extent to control
money laundering on international forum. However, there has been threat from
informal transaction like 'hawala'.

According to Indian observers, funds transferred through the hawala market

are equal to between 30 to 40 percent of the formal market. The Reserve Bank of
India(RBI), India's central bank, estimated that remittances to India sent through legal
formal channels in 2006-2007 amounted to US $28.2 billion. Due to large number of
expatriate Indians in North America and the Middle East, India continues to retain its
position as the leading recipient of remittances in the world, followed by China and
Mexico.

In India, before the enactment of the provision of Money-Laundering Act 2002

(PMLA-02 hereinafter), the following statues add reseed scantily the issue in question:

 The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act.

1974.
 The Income Tax Act, 1961.
 The Benami transaction (prohibition) act, 1988.
 The Indian Penal Code of Criminal Procedure, 1973.
 The Narcotics Drugs and Psychotropic substance Act, 1985.
 The Prevention of Illegal Traffic in Narcotics Drugs and Psychotropic Substance Act,
1988.

However, this was not sufficient with the growth of varied areas of
generating illegal money by selling antiques, rare animal flesh and skin, human organ
and many such varied new areas of generating money which was illegal. Money-
Laundering was an effective way to launder the black money (wash is to make it clean)
so as to make it white.

The International initiatives as discussed above to obviate the threat not

only to financial systems but also to the integrity and sovereignty of the nations and the
recent Hawala episode in India triggered the need for anti-money laundering law. In
view of the urgent need for the enactment of a comprehensive legislation inter alia for
preventing money laundering and connected activities, confiscation of proceeds of
crime, setting up of agencies and mechanisms for coordinating measures for combating
money-laundering etc. the PML Bill was introduced in the Lok Sabha on 4th August
1998, which ultimately was passed on 17th January 2003.

However the implementation of the same did not see the light of the day
until 2005 when it was enforced. The time when the Act of 2002 came to be enforced it
was too old to cater to the current needs of the anti-money laundering law. To bring the
necessary changes in light of the liberalization of economy and securities market in
India, there was a need to have more comprehensive anti money-laundering law and
that is how the Preventions of money laundering Act 2008 came into existance, the
salient feature of which will be discussed later.
IV.II. Salient features of prevention of Money Laundering Act 2002:-

The aforesaid Act was enacted to prevent money-laundering and to provide

for confiscation of property derived from or involved in money laundering . The Act
extends to the whole of India including J&K. The Act comprises of X chapter 75
section and a schedule.

IV.II.A. Offence of money laundering and punishment:-

offence of money laundering means the projection of tainted money as

untainted either directly or indirectly or assisting in such act knowingly is a party or is
actually involved in such process or activity the proceeds of the crime referred above
includes the normal crimes and scheduled crimes. The punishment prescribed for the
offence of money laundering in the case of money obtained from normal crime is
rigorous imprisonment for term which shall not be less than 3 years but which may
extend to 7 years and shall also be liable to fine which may extend to 5lakh rupees .
However for the proceeds of the crime which is involved in money laundering relates to
any offence specified under the paragraph 2 of the schedule the punishment of rigorous
imprisonment of 7 years has to be read as 10 years.

IV.II.B. Attachment of property involved in Money laundering:-

If the director has a reason to believe that a person is in possession of

property involved in money laundering or he is dealing in such property the director
empowered to attach the property. As far as offence under the NDPS Act is concerned
the director is empowered to attach the laundered property in drug related cases soon
after the case regarding offence is sent by the police officer or a complaint is field
before the court for taking cognisance of the offence. However in other cases some
safeguard is provided as to attachment can only be made only when the investigation is
complete and a report is forwarded under sec.173 of criminal procedure code. under the
proposed bill this distinction has been removed and the safeguard is now available to all
schedule offences.
IV.II.C. Reporting requirement for the certain entities:-

every banking company and financial institution and intermediary is under as

obligation to maintain a record and furnish information to the director with in such time
as prescribed of all transaction the nature and the value of 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. the said records have to be maintained for a period of 10years from the
date of transactions between the clients and the banking company or financial
institution or intermediary, as the case may be. further aforesaid entities have to
maintain the records of the identity of all its clients for a period of 10years from the
date of cession of the date of the transaction between the client and them.

IV.II.D. Salient features of the PML bill-2008:-

minister of the state for the finance Pawan Kumar Bansal tabled a bill
recently amend the prevention of money laundering Act, 2002(PMLA-02) in rajya
sabha. The present bill's key features are as follows:

1. It seeks to bring certain financial institutions like full Fledge money changers, money
transfer service and master card within the reporting regime of the Act.

2. Provision to combat financing of terrorism by way of introducing new category of

offence which have cross border implications.

3. Offences with cross border implication introduce by way of part C to the schedule of
the Act with the removal of monetary threshold limit of rs.30lakhs. However, the
monetary limit still limits for the part B offences.

4. Provisional attachment period is enhanced from 90dasys to 150days under section 5

and additional safeguard has been introduce in as much as the property can be attached
and a person can be searched only after completion of the investigation by the
investigation agency.

5. Enforcement Directorate is now more empowered to search the premises

immediately after the offence is committed and the police have filed the report under
section 157 of the Cr. P.C.
6. Protection of tenure of chairman and member of appellate tribunal in as much as
requirement of consultation with chief justice of India before their removal. Moreover
the retirement age of chairman/member is increased from 62 to 65.

7. The requirement of appointment of member of the Appellate tribunal that the person
should be or has been a judge of high court has been removed retaining other
qualifications.

8. In case of cross border money laundering the present bill enables the central
government to return the confiscated property to the requesting country in order to
implement the provision of the UN convention and corruption.

9. Expanded the reach of the act by adding many more crimes under various legislation
in part A and part B in the schedule of the Act.

10. delegated legislation is provided empowering Central Government to notify from

time to time activity for planning games of chances for cash or kind as designated
business or profession for the purpose of bringing them into the reporting regime under
the Act.

IV.III. The schedule to the Act:-

proceeds from a crime committed under the following legislation if shown as

untainted would be treated as money laundering and would be accordingly punishable
under the Act.

PART A

Paragraph 1 offences under the Indian penal code

Paragraph 2 The narcotic drugs and psychotropic on substances Act, 1985

Paragraph 3 The explosive substance Act 1908

Paragraph 4 The unlawful activities Act 1967

 PART B

Paragraph 1 offence under the Indian penal code

Paragraph 2 The arms Act 1959 Paragraph

Paragraph 3 The wild life protection Act 1956

Paragraph 4 The immoral traffic of corruption Act 1988

Paragraph 5 The prevention of corruption Act 1988

Paragraph 6 The Explosive Act 1884

Paragraph 7 The antiques and the Arts Treasures Act 1972

Paragraph 8 The securities and exchange board of India Act 1986

Paragraph 9 The customs Act 198

Paragraph 10 The bonded system Act 1976

Paragraph 11 The child labour prohibition and Regulation Act 1986

Paragraph 12 The transplantation of human organ Act 1994

Paragraph 13 The juvenile justice Act 2000

Paragraph 14 The emigration act 1983

Paragraph 15 The passport act 1957

Paragraph 16 The foreigner act 1946

Paragraph 17 The copyright Act 1957

Paragraph 18 The trade mark Act 1999

Paragraph 19 The information technology Act 2000

Paragraph 20 The biological diversity Act 2002

Paragraph 21 The protection of plant varieties and framer's right Act 2001

Paragraph 22 The environment protection Act 1986

Paragraph 23 The water (prevention and control of pollution Act) 1974

Paragraph 24 The air (prevention and control pollution Act) 1981

Paragraph 25 The suppression of unlawful acts against safety of maritime

navigation and fixed platforms on continental shelf Act 2002.

PART C

Includes an offences which is the offences of cross border implication and is

specified in Part A and Part B without any monetary threshold; or the offences against
property under chapter XVII of Indian panel code.

The schedule under each paragraph refers few specific section describing the
offence the proceeds of a crime under section 3 of the Act. There is a significant
addition to those offence under the aforesaid Act also by the amendment Bill of 2008.

From the aforesaid amendment it is evident than the legislature is vigilant towards
the illegal proceeds from various fields like illegal killing of animals, violation of
environmental laws violation of intellectual property laws, proceeds from selling of the
antiques and treasure against the law violation of customer Act, proceeds from internet
related crime cyber crime, proceeds from bonded labour and child labour, illegal organ
transplantation, proceeds from the illegalities in the securities market like insider
trading, violation of laws relating to dealing of explosive substances and many more.

IV.IV. Inclusion on New Definition:-

The new skills provides few definition and amends a few for further clarity
and broadening of the Act.

Authorised Person:-

Means an authorised person as defined in clause of section 2 of the FEMA,

1999 and includes a person who has been authorised or given general or principals with
whom the person so authorised or having general or special permission conducts a
services involving international money transfer.
Designated business or profession:-

Means carrying on activity for playing games of chance for cash or kind, and
includes such activities associated with casino or such other activities as the central
Government may by notification, so designated from time to time.

The Definition of Financial Institutions:-

Has been mended so as to include also an authorised person and a payment

system operator. As well as the Non-Banking Financial Company per clause.

Offences of Cross Border Implication:-

The bill introduces a new category that has cross-border implication for fighting
terrorism. This particular provision gives the Indian anti-money laundering legislation
an extraterritorial exposure. Now under this provision a person who is presently outside
India under one of the parts referred to above and transfer the proceeds or part thereof
outside India commits an offence of cross-border Implication. Thus now cross-border
illegal proceeds can be put under the scanner of anti-money laundering legislation in
India.

Regulation Payment System Operator:-

Payment gateways such as visa master card, money changers, money transfer,
service provider and casinos will soon come under the ambit of India's money
laundering law and face mandatory reporting obligations.

Strengthened Enforcement Directorate:-

As noted earlier the draft legislation also empowered the Enforcement

Directorate to search immediately after the offence is committed. The investigation
agency can attach any property and search a person after completing the probe. It can
enhance the period of provisional attachment of property from 90 days to150 days.
 Enhanced Reporting requirement:-

At the present the mandatory is applicable on banks, financial institutions and

intermediaries. Under the rules , every banking company, financial institution and
intermediaries has to maintain a record o f all transaction for 10 years. Records of all
transaction above the stipulated limit submitted to financial intelligence unit (FIU),
Which manages the data and deciphers it into intelligence to be used by various
agencies. The new entities that are proposed to be brought under the PMLA through
this amendment will now have to report details of transaction of FIU.

IV.V Prevention of Money laundering Act 2011

 During 2011 the Finance minister of India Mr. Pranab Mukherji presented the
Prevention of Money Laundering (Amendment) Bill in Lok Sabha. This Bill seeks to
amend the Prevention of Money Laundering Act, 2002.

 This law provides the provision to link the Indian law to the laws of the foreign
countries. It also adds the concept of ‘reporting entity’ which would include a banking
company, financial institution, intermediary or a person carrying on a designated
business or profession.

 The Bill expands the definition of offence under money laundering to include activities
like concealment, acquisition, possession and use of proceeds of crime.

 This law can allow to levy a fine of upto Rs. 5 lakh but upper limit needs to be
reconsidered.
 This bill gives the authority to
confiscate the property of any person
for a period not exceeding tha180
days. This power may be exercised by
the authority if it has reason to believe
that the offence of money laundering
Image Credit: PRS Legislative Research
has taken place.

 The Bill proposes to confer powers upon the Director to call for records of transactions
or any additional information that may be required for the purposes of investigation.
The Director may also make inquiries for non-compliance of the obligations of the
reporting entities.

 The Bill seeks to make the reporting entity, its designated directors on the Board and
employees responsible for omissions or commissions in relation to the reporting
obligations.

 The Bill states that in the proceedings relating to money laundering, the funds shall be
presumed to be involved in the offence, unless proven otherwise.

 The Bill proposes to provide for appeal against the orders of the Appellate Tribunal
directly to the Supreme Court within 60 days from the communication of the decision
or order of the Appellate Tribunal.

 The Bill seeks to provide for the process of transfer of cases of the Scheduled offences
pending in a court (which had taken cognizance of the offence) to the Special Court for
trial. In addition, on receiving such cases, the Special Court shall proceed to deal with
it from the stage at which it was committed.

 Part B of the Schedule in the existing Act includes only those crimes that are above Rs
30 lakh or more whereas Part A did not specify any monetary limit of the offence. The
Bill proposes to bring all the offences under Part A of the Schedule to ensure that the
monetary thresholds do not apply to the offence of money laundering.
IV.VI. Financial Intelligence Unit-India (FIU-IND):-

Financial intelligence Unit-India (FIU-IND) was setup by the government of

India the central national agency responsible for receiving processing, analysing and
disseminating information relating to suspect financial FIU-IND is also responsible for
coordinating and the strengthen efforts of national and international intelligence,
investigation and enforcement agency in pursuing the global efforts against money
laundering and related crimes. FIU-IND is an independent body reporting directly to
the economic intelligence council(EIC) headed by the finance minister. FIU-IND
mandates a series of reporting requirement as outlined below:

Cash Transaction Report:-

A. All the cash transaction of the value of more than rupees ten Lakhs is equivalent
in foreign currency.

B. All the series of cash transaction integrally connected to each other which have
valued below rupees ten lakhs or its equivalent in foreign currency where such series of
transaction have taken place within a month. These reports have to filed on 15th of the
succeeding month.

Suspicious transaction reports:-

Every banking company, financial institution and intermediary shall furnish

information of all suspicious transaction whether or not made cash. The reports has to
be field not later than seven working days on being satisfied that the transaction are
suspicious.

Counterfeit Currency Reports:-

Every banking company, financial institution and intermediary , to furnish to FIU-

IND information relating to all cash transaction were forged or counterfeit currency
notes or banknotes have been used as genuine or where any forgery of a valuable
security or a document has taken place facilitating the transaction . This report has to
be filed not later than seven working days from the date of occurrence of such
transaction.
 FIU-IND has doing great job in terms of information retrieval and remittance
and is applauded by the international community, but one should not be satisfied with
that there remains a lot to be done.

IV.VII. Role of Reserve Bank of India:-

The regulatory of the reserve bank of India extends to large segment of

financial institutional, including commercial bank, cooperative bank, non banking
financial institutions and various financial market. The board for financial supervision
continued to exercise its supervisory role over those segments of the financial
institutions that are under preview of the Reserve Bank.

Recently, the RBI has issued a series of the bank, about the precaution to be
exercised in handling their customer's transaction. Important amongst these is a
guidance note issued about treatment of customer and key to knowing the customer.
The identity, background and standing of the customer should be verified not only at
the time of commencement of relationship, but also be updated from time to time, to
reflect the changes of circumstances and the nature of operation of the account. RBI
plays a significant role AML activities. RBI, recently block the application of SWISS
bank UBS for a banking license in india on the ground that it was involved in $8 billion
money laundering racket. RBI said it put the UBS application on hold because the bank
failed to cooperate in a money laundering case in which controversial Bombay based
business man Hasan Ali Khan was involved. Khan is charged with large scale
breaching of Indian's currency controls. RBI investigators found a link between UBS
and Khan as a businessman had deposited $8 billion at a zurich branch of UBS. They
cited it a direct evidence for blocking the license of the bank.

IV.VIII. Role of Securities Exchange Board of India:-

Vulnerability of securities market to money laundering activities have

been discussed in the earlier part of this paper. Indian securities market is also prone to
money laundering activities. Intermediaries registered under the SEBI are under
reporting obligation of PMLA 02. FIU-IND has also issued certain guidelines relating
to KYC to followed by these intermediaries.
 The main source of money laundering would be particularly Notes
transaction and Overseas Direct Investment Routes. The finding in the UBS securities
case have highlighted serious regulatory concerns in that the PN/ODI route and its
cover of anonymity being used by certain entities without their being any real time
check, control and due to diligence on the credentials. Such a lapse have very grim
portents as far as the market integrity and interest of investor are concerned. The
mechanism of opening-up the Indian securities market through PN/ODI routes to
entities outside India impose a commensurate onus on the registered intermediaries of
maintaining high standards of regulatory compliance, exercise of high due diligences
and independent professional judgement and therefore any gaps in measuring up to the
onus may be fraught with critical repercussion in the market.

SEBI has almost taken a full circle on the issue of participatory Notes.
SEBI has taken certain important measures in favour of the Foreign Institutional
Investor (FII) as well as the unregistered foreign investors who intend to invest in the
Indian Securities market. Looking at the lacklustre performance of the capital markets
and in a order to encourage inflow of foreign capital in india .SEBI has decided to
remove the restriction on issuance offshore derivative instrument (ODI) commonly
known as participatory notes(PN), which had been imposed on FIIs. This is an evidence
of market forces compelling the regulator to change its tough stance of regulation.

IV.IX. Problem area for India in having a proper AML:-

Anti-money laundering efforts of india are commendable n paper. There are

many problem areas for india having an effective AML regime. There are several
factors contributing to these problem and there is a need to concentrate the efforts on
one direction aimed towards the focus of the problem. some of the key problem areas
are pointed out. They are as follows:-

Lethargy of Enforcement Mechanism:-

India started its anti-money laundering exercise in the year 1998, a well start but
not properly tackled and saw the day of enforcement only in 2005 seven years along
time for enforcement. When AML 02 with amendment 2005 came in force, It was
inherent with many lacunas as there were several development in those years which the
Act failed to address. Then, as obvious a need was felt to have a further
amendments.PML bill 2008 is laid before the parliament.

Growth of Technology:-

Not only the growth of technology has helped the common man its proved also a
boon for these money-laundering and India is not exception to this. Cyber finance is the
growing concept in this developing economy. The speed at which the technology is
growing is not matched up with the enforcement agencies, specifically highlighted by
the lame situation of cybercrimes.

Unawareness about the Problem:-

unawarness about the problem of money laundering among the people is an

impediment in having a proper AML regime . people in India especially among the
poor and illiterate, do not trust the bank and prefer to avoid the lengthy paper work
required to complete a money transfer through a financial institution. The Hawala
system provides them same remittance services as a bank with a little or no document
and at a lower rates and provides anonymity and securities. This is because many don't
treat this is to be a crime and are not aware about the harmful effects of crime.

KYC Norms-Do they serve the purpose:-

Now india has a KYC norms in place in both money market and capital
market. However, these KYC norm don't desist the Hawala transaction as RBI cannot
regulate them further , KYC norms become a mockery because of in difference shown
by the implementing authorities.KYC norms are followed in letters but the
requirement is to follow it in spirit. Increased competition in the market requires and
gives the motivation to the bank to lower their guards. specifically the franchises banks
that are authorised to open accounts.
smuggling- A rampant activity:-

India has illegal black market channels for selling the goods. Smuggled goods
such as food items, computer parts, cellular phones, gold and a wide range of imported
consumer goods are routinely sold through the black market. By dealing in cash
transaction and avoiding customs duties and taxes, black market merchants offer better
prices than those offered by the regulated merchants. This is the problem though
lessened due to liberalisation policy of the government.

Tax law:-

justice learned hand in commissioner. Newmen stated the " over and over
again court have said that there is nothing sinister in so arranging one's affairs to
keep taxes as low as possible, everybody does so rich, or poor, and all do right, for
nobody owes any public duty than the law demands. Taxes are enforced
exactions, not voluntary contributions. To demand more in the name of morals is
mere cant. closer Bach home in India, the supreme court of India in Azadi Bachao
Andolan & Anr cited Lord Tomlin in IRC vs Duke of west minister while uploading the
validity of treaty shopping. there is need to make a distinction between the tax
avoidance and tax evasion. There are comprehensions that double taxation treaties may
lead to the money laundering channel.

Threshold limit under PMLA02:-

The definition of money laundering creates 2classes of schedule offences. In

respect of offences against the state and drug related offences any sum or property how
so ever small may be seized and confiscated under the Act. In respect of other
scheduled offences failing under scheduled B, floor value of rs.30 lakh is prescribed so
as to exclude relatively small offences, and properties. Unfortunately, this floor limit
itself provides as escape route as a person may engage with relative immunity in a
series of transaction of money laundering below this limit. This had been discussed
under the concept of smurfing in earlier part of the paper.
Absence of comprehensive enforcement agency:-

As seen earlier money laundering has become hybrid and has not only
related to NDPS cases but many areas of operation. separate wings of the law
enforcement agencies are dealing with the digital crimes. Money laundering, economic
offences and terrorist crimes. The agencies do not have the convergence among
themselves but the criminals have. criminals are working in a borderless world but the
policies in one state is still grappling with the procedures on how to arrest a person in
another state.

Apart from the above problem areas costs involved in having a anti-money-
laundering regime is also relevant.
V. Steps Banks should follow to ensure a robust anti-money laundering
process

COBRAPOST an online magazine carried out a sting operation in March 2013 against three
private sector banks which had violated the money laundering rules and guidelines set by the
regulatory authorities. These violations are as follows.

1. Opening of account without mandatory PAN card.

2. Opening of account to route the cash to the Bank's menu of Insurance products.

3. Facilitating spilt of money to evade detection.

4. using dummy account to faceplate the conversion of black money.

Subsequently COBRAPOST alleged that many Public Sector Bank Units are also involved in
such scenarios and facilitate money laundering. The number of institutions under the scanner
is more than thirty now.

All the banks had immediately issued statements about the robustness of their systems and
about the actions they intended to take to get to the depth of the issue. The banks appointed
external auditors and / or set up high level expert committees to examine these allegations
and the underlying issues, if any. The banks also took actions such as suspending the
personnel concerned or asking them to go on leave till the completion of investigations.

Subsequently, some of the banks made public statements that there were no incidents of
money laundering found in their processes as alleged by COBRAPOST.

Reserve Bank of India (RBI) had also initiated its investigation based on the sting operation
allegations. RBI investigation had observed various concerns such as not collecting
mandatory PAN details, allowing submission of dummy PAN details, multiple cash
transactions below Rs. 10 lakh to avoid being reported and splitting of deposits into smaller
amounts to avoid providing PAN. The articles also reported that the banks had been found
suppressing the alerts generated through their AML solutions and non-reporting the integrally
connected transactions. Perverse insurance selling incentive structure had also been cited as a
driver of these transactions without due verifications.
What should the banks do?

In India, most of the banks have AML solutions / software that trigger alerts in case any
violation of the above-mentioned scenarios happens. These solutions are, in general,
compliant with the RBI mandated guidelines. However, in light of the COBRAPOST
sting operation and the subsequent initiatives taken by banks and the RBI, there is a need for
the entities to take certain additional steps and make the whole monitoring / anti-money
laundering exercise more robust and meaningful. Here’s a ten point program banks should
follow:

1. Response - Crisis Management Teams

Any untoward incident of this magnitude that can seriously dent the reputation or confidence
of an institution tends to consume large amounts of executive bandwidth. In the aftermath of
COBRAPOST sting, several senior executives were working with their teams to get a
detailed assessment of the issues at hand, and methods and means to fix these issues. A good
crisis management team should be able to investigate an issue, conduct a root cause analysis
and present the recommendations to an executive team.

2. Reputation Risk Management Committee

The biggest impact for a bank due to anti-money laundering non-compliance would be
through reputation risk / loss. Hence, a specialized team designated ‘Reputation Risk
Management Committee’ would be well-suited to handle any such issue, which has the
mandate to organize the institutional approach and thinking, manage the market facing
communication, maintain relationship with regulators, and ensure complete
cooperation amongst various stakeholders.

3. Process Redesign - Customer Due Diligence process

India as a country is known for different types of identity proof documents and the same
comes with an issue. There is no guarantee that the name will be spelt uniformly in all the
documents. For instance, PAN may be in the name of Akshay Kumar Gupta and the driving
license would be in the name of Akshay K Gupta or even spelt as Kumar Akshay. It also
means that same person can open accounts in different names. With inter- and intra-city
mobility being a common phenomenon, the customer addresses can never be fully relied
upon. The date of birth is a potential ‘unchangeable’ parameter, even though it is not a full
proof solution. Augmenting it with multiple addresses captured by bureaus like CIBIL to
create a robust customer deduplication process and verification is of paramount importance.
In the absence of above scenario, KYC compliance for each account would have no meaning.

4. Efficiency Improvement- Rationalization of alert scenarios and false positive

management

Banks should work towards rationalizing the alert scenarios built in the bank’s AML solution,
suiting its requirements taking into account parameters such as bank profile, customer profile,
past alert history, past reporting history etc. Such processes would gradually reduce the
number of alerts getting generated, thereby improving the efficiency in alert management.
Even a conservative 20 percent reduction can have a huge impact on the way alerts are
scrutinized. Further, the bank should carry out such rationalization process periodically,
preferably once in a quarter. Banks should explore working with the AML solution providers
and augmenting current framework through external consultants for false positive
management / reduction.

5. Field Execution - Centralized alert management teams

While some banks already have a centralized set-up, it would be advisable for other banks to
have similar set-ups and follow it up with duly documented policies and processes on
handling the alerts generated by the AML solution. The most important ingredient for success
is to provide necessary training to the staff assigned to these units.

6. Data Quality Improvement - Enterprise Data Review

Despite all the advancements in core banking solutions, database technologies and platforms,
and data enrichment solutions, most organizations struggle to arrive at a single version of
truth in times of crisis. Often, disconnect between various enterprise systems seems
magnified due to inconsistent data. A sub-segment within the analytics/ business intelligence
function should be dedicated for resolving inter-system inconsistencies and ensuring
customer data integrity.
7. Single Customer View - 360-degree

Having a comprehensive view of the customer across multiple relationship and products is a
necessity for compliance. Handling alerts will also not be considered proper if a case
investigator does not get complete picture of customer relationships or linkages. All banks
should make the investments in creating periodically refreshable universal IDs. Ability to
create dummy householder IDs would add more power to compliance process.

Larger groups of companies have a bigger challenge here. Achieving a comprehensive view
will require close and unobtrusive working relationship between the different group
companies, without stepping over the regulatory boundaries around sharing of information
(with or without customer consent).

Most importantly, an integrated view of the customer is a backward as well as forward

looking idea– forensics across asset and liability portfolio of a particular customer (fraud
prevention, risk monitoring), better customer lifetime value assessment, better cross-sell and
up-sell recommendations, and better overall customer relationship management.

8. Analytic Reengineering - From trigger reports to dashboards to analytics

Further, most software and solutions are good at capturing violates and creating alerts and
triggers. However, banks need to enable closed loop systems and thinking, whereby the
action and the resolution against a trigger is captured

as structured data, and is used for further profiling triggers, monitoring action windows,
measuring TATs, and evaluating risk to the business. Over a period of time, this analysis
should aspire to build custom risk assessment models for various triggers, thereby helping
prioritize action and managerial bandwidth.

9. Continuous Investigation - Forensic Analytics Unit (FAU)

Howsoever intelligent the system, the one’s looking to find a loophole, often manage to find
one. Banks should have an internal Forensic Analytics Units, something that is already being
done in many developed markets. FAU’s core job is to review the triggers that come in, and
find patterns and problems that are not part of the standard rule based systems that exist
today. It takes away the need to conduct these forensic exercise on a reactive basis, because
this team can act as the response team as well as the proactive deterrent team. These teams
can be set up as part of the central compliance and audit function, or a special unit within the
business intelligence unit.

10. Collaboration - Facilitating the regulator or FIU:

Once a transaction leaves a bank’s system, a bank’s ability to further track it is non-existent.
In order to make it possible for regulatory entities to track such transactions, exception
reports should be documented to facilitate the same. Furthermore, FIU / RBI can facilitate a
suspicious transaction report mechanism whereby bank’s FAU can request for more
information regarding tracking these through the next system. In an ideal world, a large team
under the aegis of FIU / RBI team can conduct such investigation under the economic crimes
investigation umbrella. Such a system shall also throw up persons misusing multiple banks
(for instance – breach of cash transaction trigger in more than one bank) and would also
facilitate AML policy / process making.
VI. Master Circular on Know Your Customer (KYC) norms/Anti-Money Laundering
(AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks
under Prevention of Money Laundering Act, (PMLA), 2002

The following are some of the bullets

'Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards Adherence to
Know Your Customer (KYC) guidelines by NBFC and persons authorised by NBFCs
including brokers/agents etc.

 Due diligence of persons authorised by NBFCs including brokers/agents etc.

 Customer service in terms of identifiable contact with persons authorised by NBFCs
including brokers/agents etc.
 Letter issued by Unique Identification Authority of India (UIDAI) containing details
of name, address and Aadhaar number
 Accounts of Politically Exposed Persons (PEPs)
 Client accounts opened by professional intermediaries
 Accounts of proprietary concerns
 Suspicion of money laundering/terrorist financing
 Filing of Suspicious Transaction Report (STR)
CONCULSION AND SUGGESTION:-

Combating money laundering is a dynamic process because of the criminal

who launder money are continually seeking new ways to achieve their illegal ends.
Moreover, it has become evident to the FATF through its regular typologies exercise
that as its member have strengthened their system to combat money laundering the
criminals have sought to exploit weakness in other jurisdiction to continue their
laundering activities.

many important financial centres have now adopted legislation to curb drug
related money laundering. However too many priority financial have still not adopted
needed legislation or ratified the convention. There is also substantial question of
whether the drug trafficking-oriented money laundering laws that many governments
adopted in the earlier part of this decade are adequate, given recent development in
money laundering practices and new technologies used in banking. organised crime
group are increasingly a factor in the major money laundering schemes and the multiple
sources of their proceeds compounds the difficulty of linking the monetary transaction
to a unique predicate offences like drug trafficking. moreover, criminal organisation
have distinct patterns of operations.

The need for definitive policy is obvious. UN data that terror group financing
accounts for just 0.5% of the total $856 billon money laundering worldwide. While
this amount to just $4.16billon money laundering the potency to cause for the global
economy.
Suggestion:-

1. As we have seen earlier, money laundering involves international activity at

a greater level hence a suggestion borrowing from the words of the Interpol expert Mr.
Brown would be appropriate the key to making impact in money laundering is to get all
of the countries of the world to enact and enforce the same laws dealing with money
laundering so the criminal have nowhere to go. As it is open to the states to decide
exactly which crimes would qualify as predicate offence to money laundering, this has
resulted into serious in road into the international harmonising efforts of money-
laundering.

Most countries have serious offences as predicate crimes but have

nevertheless, adopted different approaches to what exactly constitutes a serious crime
for the purpose. Thus there is a need to have a common list of predicate offences to
solve the problem of crossroads, specifically keeping into the mind the transactional
character of the money laundering crime and the need for a unitary and coherent
approach international level.

2. In order to reduce the vulnerability of the international financial system

money laundering, governments must intensify their efforts to remove any detrimental
rules and practices which obstruct the international co-operation against money
laundering.

3. Offshore financial confidentially is an issue. The states are reluctant to

comprise their financial confidentiality. There is a need to build a balance between
financial confidentiality to a money laundering haven.

4. Money laundering seems to be a various crime to the most of the persons,

however in view of the harmful, in view of the harmful effects to the crime discussed in
the earlier part of the discussion it is need of the day to educate people about such
crimes and inculcate a sense of vigilance towards the instances of money laundering.
Once the problem is visible to the eyes of people, it would contribute towards better
law enforcement as it would be subject to public examination.
 5. There is a need to sensitize the private sector about their role in anti-
money laundering activities. An example would be the wolfberg principals. Anti money
laundering should not be only the responsibility of the government, but also the private
players.

6. Continuous up-gradation and dissemination of the information is

necessary. FIU-IND website stills does not have a link which talks about the proposal
bill of 2008on AML. There is a need of reviewing the AML strategies periodically. The
enforcement agencies now have to step in the shoes of money laundering to find out
their techniques of money laundering.

7. There is a requirement to have a convergence of different enforcement

agencies sharing of the information is necessary.

8. It is suggested that a special cell dealing with money laundering activities

should be created on the lines of economics intelligence council exclusively dealing
with research and development of AML, this special cell should have a link with
Interpol and other international organisation dealing with AML. All key stakeholders ,
like RBI, SEBI etc, should be parts of this.

9. There is a need to develop the political will to tackle the problem, so long
as it will be just an international compliance show piece, any number of laws would
not serve the purpose. The tussle between the centre and the state has to be removed for
having an effective AML regime.

10. The law should be implemented at the level of state government and it
should not only be the responsibility of central government. The more decentralised the
law would be better the reach it would have. however there should be an effective co-
ordination between the central and state agencies.

11. To have an effective AML one should think regionally nationally and
globally.
BIBLOGRAPGHY:-

WWW.bis.org.com

WWW.fatf.com

WWW.un.com

WWW.money laundering.com

And various other site visited through www.google.com.

 ABBERIVATION

FATF:- FINANCIAL ACTION TASK FORCE.

GPML:- GLOBAL PROGRAMME AGANIST MONEY

LAUNDERING.

AML:- ANTI- MOENY LAUNDERING.

FIU-IND:- FINANCIAL INTELLIGENCE UNIT-INDIA.

UN:- UNITED NATIONS.

KYC:- KNOW YOURS CUSTOMER .

SEBI:- SECURITIES EXCHANGE BOARD OF INDIA.