pmla presentation

Overview of Prevention of

Money Laundering Act, 2002

G. K. Choksi & Co.

[email protected]

Website : www.gkcco.comPhone : 91-79-30012009 Fax : 91-79-26562999

http://www.gkcco.com/

G. K. Choksi & Co. 2

Agenda

1.) What is Money Laundering

2.) Parliamentary History of the Law.

3.) Provisions of the Law – A Bird Eye view.

4.) Provisions of law – Detailed Study.

5) Reporting under money Laundering

6) Prevention of Money Laundering Rules

7.) Important Websites.

8.) Opportunities for Chartered

Accountants.


Are the following money laundering activities ?

Conversion from black money to white money

Under or over invoicing in export trade

IPO Scam

Over or understating of expenditure

Bogus expenditures

Misleading transactions with related parties

Bribe


Background

The goal of a large number of criminal acts is to

generate a profit for the individual or group that

carries out the act.

Money laundering is the processing of these criminal

proceeds to disguise their illegal origin.

It enables the criminal to enjoy these profits without

jeopardising their source.


Background

When a criminal activity generates substantial

profits, the individual or group involved must find a

way to control the funds without attracting attention

to the underlying activity or the persons involved.

Criminals do this by disguising the sources, changing

the form, or moving the funds to a place where they

are less likely to attract attention.


TYPOLOGY OF ECONOMIC CORRUPTION

Abuse of positions and privileges.

Low levels of transparency and accountability.

Inflation of contracts.

Bribery/kickbacks.

Misappropriation or diversion of funds.

Under and over-invoicing.

False declarations

Advance fee fraud and other deceptive schemes.

Collection of illegal tolls.


IMPACT OF CORRUPTION

Loss of much needed revenue.

Discourages foreign investment, leading to

decreased FDI.

Banks may lose viable business.

Stifles economic growth which results in

development failure

Corruption diminishes national prestige and respect.

People are treated with suspicion in most business

dealings.

Honest (majority) People suffer the stigma of

corruption due to stereotyping.


What is Laundering ?

In Black Law of Lexicon the term Laundering is

referred to as being used to describe investment or

other transfer of money flowing from

racketeering ,drug transactions and other illegal

sources into legitimate channels so that its original

source can not be traced

The literal meaning of laundering is washing


What is Money Laundering?

Money laundering is the disguising or concealing of

illicit income in order to make it appear legitimate.

Indian anti-money laundering law encompasses the

money generated from numerous different crimes –

e.g., drug trafficking, murder for hire, racketeering,

and embezzlement.

The word laundering is used for cleaning dirty

clothes. Money Laundering is used to clean the dirty

money

Just as soap and water are used for cleaning clothes

In the same way Placement ,Layering and integration

are used for Cleaning Dirty Money


Why is it a Problem for Countries?

Money laundering may look like a polite form of white

collar crime, but it is the companion of brutality, deceit

and corruption.

Money laundering deprives governments of some tax

revenues, thereby raising the relative burden of honest

citizens.

Because of rapid movements of large amounts of

money, normally stable financial institutions become

destabilized, threatening savings accounts and

retirement funds of innocent citizens.

Estimates of the size of the money laundering problem

totals more than $500 billion annually world - wide


How Does It Work? Method 1 - Classic

• Sell cocaine and get a million dollars.

• Take the million in cash to the some Islands.

• Buy a legitimate company , complete with a board of

directors.

• Open a bank account in the company’s name and

deposit the rest of the money.

• Enjoy the islands, get some sun, then go home.

• When you get home, borrow $200,000 from the

Company account and have it delivered via wire

transfer.


Method 1 – Classic….

• Open a restaurant.

• Deposit proceeds from ongoing drug business along

with proceeds from the restaurant every month into

a legitimate bank account. Don’t add too much

illegal money, just enough to make it look as though

your restaurant is doing a good, healthy business.

• Pay all of your taxes on the restaurant deposits, so

the tax authorities don’t start an investigation.


How Does It Work? Method 2 – The Loan back

• Open a Swiss bank account and routinely deposit

receipts from illegal gambling operation.

• Buy a string of carwashes in the U.S. worth

$1,000,000.

• Put $50,000 in legitimate cash as a down payment

and get a $450,000 mortgage from a legitimate

financial institution in the U.S.


Method 2 – The Loan back…

• “Borrow” the other $500,000 from the Swiss

account. When you pay interest on this “loan” you

are really paying it to yourself. Much of this

interest, since it is mortgage interest, is tax-

deductible.

• Once you have paid yourself back in the Swiss

account, you can borrow from that account again

and again and again….


How Does It Work? Method 3– The Money Broker

shuffle

• Mr A is a Colombian drug lord with $1,000,000 in

illegal proceeds sitting in a house in New York.

• Mr B is a “legitimate” Colombian businessman who

wants to buy one million dollars’ worth of

computers from Gateway. But he wants to avoid

paying the high bank fees for exchanging his pesos

for dollars. If he wants $1,000,000 in US dollars he

must actually exchange the peso equivalent of

$1,210,000.


Method 3– The Money Broker shuffle…

• Mr A and MR B use the services of Mr C , a money

broker in Mexico, who is also a legitimate importer.

Mr C uses Mr D, her partner in New York, to give

people who are going to Mexico a small fee to

smuggle in small chunks of Mallinger’s cash. Each

carrier or “smurf” brings less than $10,000, to avoid

customs violations.

• Alternatively, Mr D gives each smurf under $10,000

in cash, plus a small “handling fee” to transfer less

than $10,000 from a New York bank account to a

Mexican branch of the same bank.


Examples of Money Laundering

Smurfing

Bank Complicity

Money Services and Currency Exchanges

Asset Purchases with Bulk Cash

Electronic Funds Transfer

Postal Money Orders

Credit Cards

Casinos

Legitimate Business / Co-mingling of Funds

Value Tampering


Money Laundering - The Concept

Most crimes such as drug trafficking, fraud,

extortion, smuggling, arms sales etc. are motivated

by profit.

To avoid detection and possible confiscation of

money acquired through illegal means, criminals

need to provide a clock of legitimacy to such

proceeds.

This process is called money laundering.


Money Laundering - The Process

Money laundering is the process that criminals use

to erase the connection between the crime and the

money, concealing the criminal source of the funds.


General Steps in any money laundering

process.


Money Laundering - The stages

The process generally has three stages.

PLACEMENT

LAYERING

INTEGRATION


PLACEMENT

The first step is to introduce cash into the financial

system.

The money launderers use various vehicles to do this

e.g Deposits, Money transfers, purchases of

monetary instruments such as travellers’ cheques,

bank cheques or money orders, foreign currency

conversions etc.

They may also use insurance companies, brokerage

accounts, credit cards and other financial services.


LAYERING

The layering is like a shell game- many transactions

and conversions take place to blur the trail back to

the original crime.

This may include investments, purchases of goods

and services, encashing cheques, using several

smaller cheques to purchase a bank wire etc.


INTEGRATION

Integration is the final stage of the money laundering process.

This is when the criminal re-introduces the funds into the

legitimate economy with an apparently legitimate provenance.

Examples include investing in a company, purchasing real

estate, luxury goods, etc.


Terrorist Financing• Terrorist Financing is the reverse procedure of Money

Laundering. Here the money earned from legitimate sources is

used for illegitimate activities i.e. financing terrorism.

• Funds earned by Political bosses, Industrial organisations etc

interested in such activity is supplied to extremist

organisations for carrying out their motives.

• Terrorist financing is converting of White money to dirty money

and Money Laundering is converting of dirty money into white

money


Flow Chart on Money Laundering

Definition of Money Laundering u/s 2(p)

Offence of Money Laundering u/s 3

Proceeds of Crime u/s 2(u)

Schedule offenceu/s 2(y)

Property u/s2(v)

Value u/s2(zb)

Part A of Schedule Part B of Schedule


Money Laundering - The Legal Framework

Whosoever directly or indirectly attempts to indulge

or knowingly assists or knowingly is a party or is

actually involved in any process or activity

connected with the proceeds of crime and projecting

it as untainted property shall be guilty of offence of

money-laundering- Sec 3


Essential ingredients of Money Laundering

1. A crime has been committed

2. There are proceeds of or gains from crime

3. There is a transaction in respect of proceeds of the

gains


In today’s world of advanced technologies, once the

money enters the banking channels it is difficult to

check its movement alone, forget Origin.

The Best Way to check money laundering is to check

it at Placement stage itself by effective KYC

techniques.


Origin of Money Laundering Expression

‘Money laundering’ as an expression is one of fairly recent

origin.

The original sighting was in 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 US v $4,255,625.39 (1982) 551 F

Supp.314


Parliamentary History of the Law.

The PML bill, 1998 was introduced in Lok Sabha on 04-08-1998.

Referred to Standing committee on finance on 05-08-1998.

The committee submitted its report on 04-03-1999.

The bill was presented in Rajya Sabha on 08-03-1999.

Lok Sabha was dissolved on 26-04-1999.


Parliamentary History of the Law.

The PML, Bill 1999 was presented in Lok Sabha on 29-10-1999.

The PML, Bill 1999 was passed in Lok Sabha on 02-12-1999.

Rajya Sabha referred the bill to Select committee.

The committee finalised its report on 24th July, 2000.

The present act after being passed by both the houses

received the assent of the president on 17th January, 2003.


Authorities under Money Laundering Act

Adjudicating Authority

Appellate Tribunal

Special Court

Director, Financial Intelligence Unit


Bird Eye View of the Act

Chapter Section Title

I 1-2 Preliminary

II 3-4 Offence of Money Laundering

III 5-11 Attachment, Adjudication and

confiscation


Bird Eye View of the Act


IV 12-15 Obligation of the Banks, Financial Institutions and Intermediaries.

V 16-24 Summons, Searches And Seizures, Etc.

VI 25-42 Appellate Tribunal


….Bird Eye View of the Act


VII 43-47 Special Courts

VIII 48-54 Authorities

IX 55-61 Reciprocal, arrangements for

assistance in certain matters and

procedure for confiscation of

property.


….Bird Eye View of the Act


X 62-75 Miscellaneous

Schedule Part A Offences which are covered regardless

of the value

Schedule Part B Offences which are covered if the value

exceeds 30L or more


Section 1 –

– Called the Prevention of Money-Laundering Act.

– Extends to the whole of India.

– Comes into operation on the notified date i.e. 01-07-05.

{Notification No. GSR-436(E) dated 01-07-05.}

Chapter I – Preliminary


Section 2 – Definitions

Section 2(s) defines person to include-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether

incorporated or not,

(vi) every artificial juridical person not falling within any of the

preceding sub-clauses, and

(vii) any agency, office or branch owned or controlled by any of

the above persons mentioned in the preceding sub-clauses;



Section 2 – Definitions

– The phrase "proceeds of crime" has been defined in Section

2(u) to mean any property

derived or obtained,

directly or indirectly,

by any person as a result of criminal activity relating to a

scheduled offence or the value of any such property;

– Section 2(zb) defines "value" to mean the fair market value of

any property on the date of its acquisition by any person, or if

such date cannot be determined, the date on which such

property is possessed by such person.



Section 2 – Definitions (contd)

– Section 2(y) defines "scheduled offence" to mean-

(i) the offences specified under Part A of the Schedule; or

(ii) the offences specified under Part B of the Schedule if the

total value involved in such offences is thirty lakh rupees or

more;



Section 3 defines Offence of money-laundering. As per the

section “Whosoever

– directly or indirectly attempts to indulge or;

– knowingly assists or;

– knowingly is a party or;

– is actually involved in any process or activity.

connected with the proceeds of crime and projecting it as

untainted property shall be guilty of offence of money-

laundering.

Chapter II- Offence of Money Laundering


Offences – Schedule Part A

OFFENCES UNDER “THE INDIAN PENAL CODE” 1. Section 121 Waging or attempting to wage war or abetting

waging war against the Government of India. 2. Section 121A Conspiracy to commit offences punishable by

section 121 against the State.

OFFENCES NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985

1. Section 15 Contravention in relation to Poppy Straw2. Section 18 Contravention in relation to Opium Poppy & Opium3. Section 20 Contravention in relation to Cannabis plant &

Cannabis4. Section 22 Contravention in relation to Psychotropic

Substances5. Section 23 Illegal import into India, export from India or

transshipment of narcotic drugs and psychotropic substances


6. Section 24 External dealings in narcotic drugs & psychotropic

substances in contravention of section 12 of the Narcotic

Drugs and Psychotropic Substances Act, 1985

7. 25AContravention of orders made U/s 9A of the Narcotic Drugs

and Psychotropic Substances Act, 1985

8. 27AFinancing illicit traffic and harboring offenders

9. Section 29 Abatement & Criminal Conspiracy


Offences – Schedule Part B

OFFENCES UNDER “THE INDIAN PENAL CODE “

1. Section 302 Murder2. Section 304 Culpable homicide not amounting to murder, if act by which

the death is caused is done with the intention of causing death3. Section 307 Attempt to Murder4. Section 308 Attempt to commit culpable homicide5. Section 327 Voluntarily causing hurt to extort property or a valuable

security or to constrain to do anything which is illegal or which may facilitate the commission of an offence


6. Section 329 Voluntarily causing grievous hurt to extort property or a valuable security or to constrain to do anything which is illegal or which may facilitate the commission of an offence

7. Section 364 A Kidnapping for ransom8. Sections 384- 389 Offences relating to extortion9. Sections 392-402 Offences relating to robbery and dacoity10. Section 467 Forgery of valuable security, will or authority to

make or transfer any valuable security or to receive any money, etc.

11. Section 489A Counterfeiting currency notes or bank notes12. Section 489B Using as genuine, forged or counterfeit currency

notes or bank notes



OFFENCES UNDER “THE ARMS ACT, 1959”1. Section 25

To manufacture, sell, transfer, convert, repair or test or prove or expose or offer for sale or transfer or have in his possession for sale, transfer, conversion, repair, test or proof any arms or ammunition to contravention of section 5 of the Arms Act, 1959

To acquire, have in possession or carry any prohibited arms or prohibited ammunition in contravention of section 7 of the Arms Act, 1959

Contravention of section 24A of the Arms Act, 1959 relating to prohibition as to possession of notified arms in distributed areas.

Contravention of section 24 B of the Arms Act, 1959 relating to prohibition as to carrying of notified arms in or through public places in disturbed areas.

Other offences specified U/s 25



2. Section 26 To do any act in contravention of any provisions of

section 3,4,10 or 12 of the Arms Act, 1959 in such manner as specified U/s 26(1)the Act.

To do any act in contravention of any provisions of section 5,6,7 or 11 of the Arms Act, 1959 in such manner as specified U/s 26(2)the Act.

Other offences specified U/s 263. Section 27 Use of Arms or ammunition in contravention of

section 5 or use of arms or ammunitions in contravention of section 7 of the Act.

4. Section 28 Use and possession of the fire arms in certain cases.

5. Section 29 Knowingly purchasing arms from unlicensed person or for delivering arms etc., to person not entitled to possess the same.

6. Section 30 Contravention of any condition of a licence or any provisions of the Act of rules made therunder.



OFFENCES UNDER “THE WILD LIFE (PROTECTION) ACT, 1972

1. Section 51 read with section 17A Contravention of provisions of section 17A relating to prohibition of picking, uprooting etc., of specified plants

2. Section 51 read with section 39 Contravention of provisions of section 39 relating to wild animals etc to be government property.

3. Section 51 read with section 44 Contravention of provisions of section 44 relating to dealing in trophy & animal articles with licenced prohibited.

4. Section 51 read with section 48 Contravention of provisions of section 48 relating to purchase of animals etc by licensee.

5. Section 51 read with sec 49B Contravention of any provisions of section 49B relating to prohibition of dealing in trophies, animal articles etc., derived from scheduled animals.


Offences – Schedule Part BOFFENCES UNDER “THE IMMORAL TTRAFFIC (PREVENTION) ACT,

1956”1. Section 5 Procuring inducing or taking person for the sake of

prostitution 2. Section 6 Detaining a person in premises where prostitution is carried

on 3. Section 8 Seducing or Soliciting for purpose of prostitution4. Section 9 Seduction of a person in custody

OFFENCES UNDER “THE PREVENTION OF CORRUPTION ACT, 1988”5. Section 7 Public servant taking gratification other than legal

remuneration in respect of his official Act. 6. Section 8 Taking gratification in order, by corrupt or illegal means to

influence public servant7. Section 9 Taking gratification in exercise of personal influence with

public servant8. Section 10 Abetment by public servant of offences defined in section

8 or 9 of the Act.


Offences

Offences in Part A (2 + 9) =11

Offences in Part B ( 12 + 6 + 5 + 4 + 4) = 31

Total offences covered (11 + 31) = 42


…Chapter II- Offence of Money Laundering

Section 4 of the act prescribes the punishment for the offence of

Money laundering as described in section 3.

A rigorous imprisonment of 3 to 10 years has been prescribed.

The culprit can also be fined upto 5 Lakh Rupees.


Chapter III – Attachment, Adjudication and confiscation

Section 5 of the act provides for pre-adjudication provisional

attachment in appropriate cases. It outlines the procedure of such

provisional attachment.

Section 6 of the act deals with appointment, composition and

powers of adjudicating authority to carry out the purpose of the act.


…Chapter III – Attachment, Adjudication and confiscation

Section 7 of the act makes provisions regarding staff of the

Adjudicating authority.

Section 8 of the act provides for Adjudication for the purpose of

determination and recording a finding, whether the provisionally

attached proceeds of crime, or retention of the record and property

seized under the act are involved in money laundering, and if so, to

confirm the attachment till conclusion of the trial proceedings as

provided in the act.


…Chapter III – Attachment, Adjudication and confiscation

Section 9 provides for absolute vesting in the central

government of all rights and title of the confiscated property

free from all encumbrances

Section 10 provides for the appropriate procedure for

management of the confiscated property.

Section 11 confers the powers on adjudicating authority similar

to as vested in a civil court inder the CPC, 1908.


Chapter IV – Obligations of Banks, FIs, Intermediaries

Chapter IV of the act deals with obligation of Banking

Companies, Financial Institutions and Intermediaries.

Section 12 requires BIF to

1. Maintain records of transactions of the prescribed

nature and Value.

2. Furnish the above information to the director.

3. Verify and maintain of records of the identity of the

customers in prescribed manner.


Section 13 of the act empowers the director to Scrutinise records and

impose penalty of a minimum of Rupees 10,000/- to a maximum of

Rupees 1,00,000/-.

Section 14 provides protection to the BIF and its officers from any

liability in Civil or criminal proceedings for providing the information

required by section 12.

Section 15 provides for the manner of furnishing of information to the

director. The same has been delegated to rules and have been

provided in the rules.

….Chapter IV – Obligations of Banks, FIs, Intermediaries


The act places responsibility on BIF.

Lets understand each one of them in detail:

Banking company has been defined in 2(1)(e) of the act as a banking company

or cooperative bank to which the Banking Regulation Act, 1949 applies. The

banking regulation act interalia requires that any company which is engaged in

accepting repayable deposits (either on demand or otherwise) for the purpose

of lending of investments is called a banking company.

A company which is engaged in manufacturing or trade which accepts

deposits only for financing its own business is specifically excluded.



The Banking regulation Act applies to – Banking companies which are not nationalised.– Nationalised Banks.– Co-operative banks which have a paid up share capital of

Rupee 1 lakh or more whether State or Central.

Intermediary has been defined in clause 2(1)(n) of the act to mean-– Stock-brokers.– Sub-brokers.– Share transfer agents.– Bankers to an Issue.– Trustee to a trust deed.– Registrar to an issue.– Merchant bankers.– Underwriters.



…Chapter IV – Obligations of Banks, FIs, Intermediaries

– Portfolio manager.

– Investment Adviser.

– Depository Participants.

– Custodian of Securities.

– Foreign Institutional Investors.

– Credit Rating Agencies.

– Others, as may be notified under the section 12 of the SEBI

Act, 1992 by the SEBI.


Financial Institutions have been defined under section 2(1) (l) of the act

to mean a financial institution defined under 45-I(c) of the Banking

regulation act and includes a

– Chit fund company.

– Cooperative Bank.

– Housing Finance Institution.

– Non banking Finance Institution.

Hence the Cooperative banks having paid up capital of less than 1

lakh rupee which are not covered under the definition of Banking

Company are covered under the Financial Institution category.

…Chapter IV – Obligations of Banks, FIs, Intermediaries


Chapter V – Summons, Searches and Seizures

Section 16 of the act empowers the authority to carry out a survey of the

premises where he has Reason to believe that offence of ML has been

committed. Powers similar to 133A of the IT act.

Section 17 of the act empowers the director where he has reasonable

belief, to be recorded in writing, that any person has committed any act of

money laundering, or is in possession of proceeds of the crime or is in

possession of records relating to money laundering, to authorize any

officer to

– Search Premises,

– Seize record or property found,

– Make inventory and

– Examine person in control on oath.


…Chapter V – Summons, Searches and Seizures

Section 18 provides for search of persons by the authority

empowered and having reason to believe that any person has

secreted on his person or anything under his possession,

ownership, or control any record or proceeds of crime which

may be useful for or relevant to any proceedings under the act.

Section 19 empowers appropriate authority to arrest a person if

he has reason to believe that the person is guilty of any offence

punishable under the act.


…Chapter V – Summons, Searches and Seizures

Section 22, 23 provides for necessary presumptions for the

purposes of the act.

Section 24 of the act provide the burden of proving that the

proceeds of crime are Untainted property shall be on the

accused.


OTHER PROVISIONS OF THE ACT

The other provisions of the act provide for establishment of

Appellate tribunal ( Chapter VI)

Special Courts (Chapter VII)

Authorities under the act (Chapter VIII)

Reciprocal arrangement for assistance in certain matters.

(Chapter IX)

Miscellaneous provisions (Chapter X)


What is a Financial Intelligence Unit?

A financial intelligence unit (FIU) is a central agency of a

government that

1. receives financial information pursuant to country's anti-money

laundering laws

2. analyzes and processes such information and

3. disseminates the information to appropriate national and

international authorities, to support anti-money laundering

efforts.


Overview of FIU-IND

Financial Intelligence Unit – India (FIU-IND) was set by the

Government of India vide O.M. dated 18th November 2004 as

the central national agency It is responsible for receiving, processing, analyzing and

disseminating information relating to suspect financial

transactions. FIU-IND is also responsible for coordinating and strengthening

efforts of national and international intelligence, investigation

and enforcement agencies 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.


Contact details of FIU IND

Director, FIU-IND

Financial Intelligence Unit - India

6th Floor, Hotel Samrat

Kautilya Marg, Chankyapuri

New Delhi -110021, India

Telephone 91-11-26874473 (For Queries)

Fax 91-11-26874459 (For Sending STR)

[email protected] (For Queries)

[email protected] (For Feedback)

mailto:[email protected]

mailto:[email protected]


Overview of reporting under PMLA

The Prevention of Money-laundering Act, 2002, and the rules there under require every banking company, financial institution and intermediary, to furnish to FIU-IND information relating to

(A) All cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency

(B) All series of cash transactions integrally connected to each other which have been valued below rupees ten lakhs or its equivalent in foreign currency where such series of transactions have taken place within a month

(C) All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place

(D) All suspicious transactions whether or not made in cash.


Rules under Prevention of Money Laundering Act

1. Prevention Of Money-laundering (The Manner Of Forwarding A Copy Of The Order Of Provisional Attachment Of Property Along With The Material, And Copy Of The Reasons Along With The Material In Respect Of Rules,2005

2. Prevention Of Money-laundering (Receipt And Management Of Confiscated Properties) Rules,2005

3. Prevention Of Money-laundering (Maintenance Of Records Of The Nature And Value Of Transactions, The Procedure And Manner Of Maintaining And Time For Furnishing Information And Verification And Maintenance Of Records Of The Identity Of The Clients Of The Banking Companies, Financial Institutions And Intermediaries) Rules,2005



4. Prevention Of Money-laundering (Forms, Search And Seizure

And The Manner Of Forwarding The Reasons And Material To

The Adjudicating Authority, Impounding And Custody Of

Records And The Period Of Retention) Rules, 2005

5. Prevention Of Money-laundering (The Forms And The

Manner Of Forwarding A Copy Of Order Of Arrest Of A

Person Along With The Material To The Adjudicating

Authority And Its Period Of Retention) Rules , 2005



6. Prevention Of Money-laundering (The Manner Of Forwarding

A Copy Of The Order Of Retention Of Seized Property Along

With The Material To The Adjudicating Authority And The

Period Of Its Retention) Rules, 2005

7. The prevention of money-laundering(manner of receiving the

records authenticated outside India) Rules ,2005

8. The Prevention of Money Laundering( Appeal) Rules,2005

Maintenance of Records under Prevention

of Money Laundering Rules


PML(Maintenance of Records etc.) Rules 2005,Rule 3:

Every Banking Company , Financial Institution or intermediary

shall maintain a record of

1) All cash transactions of value more than Rs.10 lakhs or its

equivalent in foreign currency

2) All series of integrally connected cash transactions which are

valued below Rs.10 lakhs or its equivalent in foreign currency

and which have taken place within a month.

3) All cash transactions in which forged or counterfeit currency

or bank notes have been used as genuine and where any

forgery of a valuable security takes place

4) All suspicious transactions made in cash or otherwise


What are suspicious transactions?

Suspicious transaction means a transaction whether or not made

in cash which, to a person acting in good faith-

(a) gives rise to a reasonable ground of suspicion that it may

involve the proceeds of crime; or

(b) appears to be made in circumstances of unusual or unjustified

complexity; or

(c) appears to have no economic rationale or bona fide purpose;


Illustrative list of Suspicious Transactions for a Bank/FI

False identification documents Identification documents which could not be verified within reasonable time Accounts opened with names very close to other established business entities Suspicious background or links with known criminals Large number of accounts having a common account holder, introducer or authorized signatory with no rationale Unexplained transfers between multiple accounts with no rationale


Illustrative list of Suspicious Transactions for a Bank/FI

Unusual activity compared with past transactions

Sudden activity in dormant accounts

Activity inconsistent with what would be expected from

declared business

Unusual or unjustified complexity

No economic rationale or bonafide purpose

Frequent purchases of drafts or other negotiable instruments

with cash

Value just under the reporting threshold amount in an apparent

attempt to avoid reporting


Illustrative list of Suspicious Transactions of a Intermediary Non-face to face client

Doubt over the real beneficiary of the account

Use of different accounts by client alternatively

Account used for circular trading

Source of funds are doubtful

Appears to be case of insider trading

Large sums being transferred from overseas for making

payments

Block deal which is not at market price or prices appear to be

artificially inflated/deflated


PML (Maintenance of Records etc.) Rules 2005,Rule 4:

The records referred to above must

contain the following information :-

1. Nature of the transactions

2. The amount and currency of the transaction

3. Date of the transaction

4. Parties involved in the transaction



Procedure and manner of maintaining

information

1. Information to be maintained in hard and soft copy

2. There should be an internal mechanism for maintaining such

information

3. Duty of every banking company, FI and intermediary to

ensure information is being maintained as specified in Rules



Retention of Records

Records as mentioned in Rule 3 will be

maintained for a period of 10 years

starting from the date of cessation of

transaction between the clients and the banking company,

Financial Institution,intermediary as the case may be



Procedure and manner of furnishing information

Principal Officer of a banking company, Financial

Institution,intermediary has to furnish following reports to

FIU in Manual/Electronic format:

1. Cash Transactions Report(CTR)

2. Suspicious Transaction Report(STR)


Manual Reports of CTR of Banks/FI/Intermediary

Form Information Completed by

Summary of CTR’s Contains summary of enclosed CTRs

Principal officer

CTR Details of account and cash transactions

Reporting branch

Annexure A- Individual Detail Sheet

Identification details of individual

Reporting branch

Annexure B- Legal Person/ Entity Detail

Identification details of legal person /entity

Reporting branch


Manual Reports of STR of Banks/FI/Intermediary

Form Information

STR Details of Suspicious transactions





Annexure C- Account Detail Sheet

Details of account and transactions


Electronic Reports of CTR of Banking Company/FI

Sr.No File Name Description

1 CBACTL.txt Control file

2 CBABRC.txt Branch Data file

3 CBAACC.txt Account Data file

4 CBATRN.txt Transaction data file

5 CBAINP.txt Individual Data file

6 CBALPE.txt Legal Person/Entity Data file


Electronic Reports of STR of Banking Company/FI


1 SBACTL.txt Control file

2 SBABRC.txt Branch Data file

3 SBAACC.txt Account Data file

4 SBATRN.txt Transaction data file

5 SBAINP.txt Individual Data file

6 SBALPE.txt Legal Person/Entity Data file


Electronic Reports of CTR of Intermediary


1 CINCTL.txt Control file

2 CINBRC.txt Branch Data file

3 CINACC.txt Account Data file

4 CINTRN.txt Transaction data file

5 CININP.txt Individual Data file

6 CINLPE.txt Legal Person/Entity Data file


Electronic Reports of STR of Intermediary


1 SINCTL.txt Control file

2 SINBRC.txt Branch Data file

3 SINACC.txt Account Data file

4 SINTRN.txt Transaction data file

5 SININP.txt Individual Data file

6 SINLPE.txt Legal Person/Entity Data file


Steps to generate electronic date files

1) The records containing details of cash transactions are

extracted in Transaction Data File

2) The records containing details of bank accounts containing

the cash transactions are extracted in Accounts Data File

3) The records containing details of Individuals who are account

holders are extracted in Individual Data File


Steps to generate electronic date files

4) The records containing details of bank branches which have

reported cash transactions are extracted in Branch Data File

5) The report level details and summary of other five tables is

entered in Control file.

6) The records containing details of Legal Persons /Entities who

are account holders are extracted in Legal Persons /Entities

Data File


Due Dates for filing Reports

Report Description Due Date

CTR Cash Transactions>10LSeries of Cash transactions integrally connected to each other

15 th day of the succeeding month

CCR All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place

Three working days from the date of occurrence of such transactions

STR All suspicious transactions Three working days from the date of occurrence of such transactions ( 7 days as per SEBI and RBI)



Verification of records of the identity of clients:

1. At the time of account opening verify and maintain the record

of identity.

2. Where the client is an individual he shall submit details of his

permanent and current address, one copy of his recent

photograph, documents in respect of his nature of business

and financial status



Where the client is a company it shall submit 3 certified copies of

1. Certificate of Incorporation

2. Memorandum and Articles of Association

3. A resolution and power of attorney by the Board of Directors

granted to its employees to transact on its behalf

4. An officially valid document for an attorney to transact on

behalf of the employees



Where the client is a partnership firm it

shall submit 3 certified copies of :

1. Registration certificate

2. Partnership deed


behalf of the firm



Where the client is a trust it shall submit 3 certified copies of :

1. Registration certificate

2. trust deed


behalf of the trust



Where the client is a unincorporated association or a BOI it shall

submit 3 copies of:

1. Resolution of the managing body

2. Power of attorney granted to transact on its behalf

3. An officially valid document for an attorney to transact on its

behalf

4. Such other information as may be required to establish its

legal existence


PML (Maintenance of Records etc.) Rules 2005,Rule 10

Maintenance of client identity records

Records to be maintained in hard and soft copy

To be maintained for a period of 10 years from the date of start

of transactions with the client

AML for the Insurance sector


Anti Money Laundering Programme (AML) for the Insurance sector

The insurer/agents/corporate agents are required to maintain the

records of types of transactions mentioned under Rule 3 of PMLA

Rules 2005 as well as those relating to the verification of identity of

clients for a period of 10 years

The AML program promotes submission of Suspicious Transaction

Reports (STR)/Cash Transactions Reports (CTR) to the Financial

Intelligence Unit-India


Maintenance of records for insurance companies

Customer information may be allowed to be shared between

different organizations on request

Procedures must be implemented for retaining internal records

of transactions both domestic and overseas



Companies should retain the records of those contracts, which

have been settled by claim, surrender or cancellation, for a

period of at least 10 years after that settlement

records relate to ongoing investigations, or transactions, which

have been the subject of a disclosure, they should be

retained until it is confirmed that the case has been closed



Customer identification data obtained through the customer

due diligence process, account files and business

correspondence should be retained for at least 10 years after

the business relationship is ended


Monitoring cash transactions for Insurance Companies

ensure that premiums are paid out of clearly identifiable

sources of funds, and remittances of premium by cash should

not exceed Rs. 50,000/-

Premium/proposal deposits beyond Rs. 50,000 should be

remitted only through cheques, demand drafts, credit card or

any other banking channels


Monitoring cash transactions for Insurance Companies

Integrally related transactions, premium amount greater than

Rs. 50,000 in a month should be examined more closely. This

limit will apply at an aggregate level considering all the roles of

a single person-as a proposer or life assured or assignee

Integrally connected cash transactions above Rs. 10 lakhs per

month have to be reported to FIU


Illustrative list of Suspicious Transactions for Insurance

Companies

Customer insisting on anonymity, or providing minimal,

seemingly fictitious information

Frequent free look surrenders by customers

Assignments to unrelated parties without valid consideration

Request for a purchase of policy in amount considered beyond

his apparent need



Companies

Cash based suspicious transactions for premium and top ups

over and above Rs. 5 lakhs per person per month. It should

also consider multiple DDs each for less than Rs. 50,000/-

Policy from a place where he does not reside or is employed

Unusual terminating of policies and refunds



Companies

Frequent request for change in addresses

Borrowing the maximum amount against a policy soon after

buying it

Inflated or totally fraudulent claims

Overpayment of premiums with a request for a refund of the

amount overpaid


Manual Reports of CTR of Insurance Companies

Form Information Completed by

Summary of CTR’s Contains summary of enclosed CTRs

Principal Compliance officer of Insurance Company

CTR Details of account and cash transactions

Reporting branch of the insurer








Manual Reports of STR of Insurance Companies

Form Information

STR Details of Suspicious transactions





Annexure C- Account Detail Sheet

Details of account and transactions


Electronic Reports of CTR/STR of Insurance Companies

Electronic reporting formats of Insurance companies is the

same as used in Banking Companies and Financial Institutions

The steps to generate the electronic files is also the same as in

the case of Banks and FI’s.


Due Dates of reporting for Insurance Companies

Cash transaction reports shall be submitted by the 15th

day of the succeeding month

Suspicious transaction reports shall be submitted in writing

or by fax or electronic mail within 3 working days from the

date of occurrence of such transactions


IRDA guidelines

1. Customer Identification

a. Establish the customer identity consistent with risk profile in

respect of all new insurance contracts

b. Due diligence to be exercised for premium above 1 lakh

c. Customer information should be collected from all relevant

sources, including from agents.

d. Insurance premium paid by persons other than the person

insured should be looked into to establish insurable interest.

e. No criminal background

f. at the claim payout stage and at times when additional top up

remittances are inconsistent the customer known profile.


IRDA guidelines

2. KYC – When?

a. For new customers- at the time of entering contract

b. For existing customers- based on the limits fixed for new policies

on all contracts/relevant transactions in case of the existing

polices.

3. KYC- Risk Profile

companies are advised to classify the customer into high risk and

low risk, based on the individual’s profile and product profile, to

decide upon the extent of due diligence.


Reserve Bank of India The RBI has said every bank should set key indicators for accounts,

taking note of the background of the customer, the type of

transactions involved and other risk factors

The Reserve Bank of India has asked Indian banks to put in place a

proper policy framework on the `Know Your Customer' (KYC)

guidelines and `Anti-Money Laundering' (AML) measures.

It has asked all commercial banks to submit their plan of action with

regard to deployment of AML systems by June 2006

submit the final report on the solutions and infrastructure installed

by December 2006.

Banks should put in place a system of periodical review of risk

categorisation of accounts.


Notifications issued by RBI applicable to Banks

1) 16.08.2002 - Guidelines on “Know Your Customer” norms

and “Cash transactions” -Commercial Banks

2) 19.02.2003 - Risk Management Systems in Banks -Scheduled

Commercial Banks (excluding RRBs and LABs)

3) 29.05.2004 - KYC Guidelines - Compliance - Primary (Urban)

Co-Operative Banks

4) 21.06.2004 - Guidelines on KYC Norms – Existing Accounts -

Commercial Banks (excluding RRBs)

5) 09.07.2004 - KYC Guidelines - Compliance -Primary (Urban)

Co-Operative Bank

6) 29.11.2004 - KYC guidelines – AML Standards -Commercial

Banks


Notifications issued by RBI applicable to Banks

7) 15.12.2004 - KYC guidelines – AML Standards - Primary (Urban) Co-Operative Banks

8) 18.02.2005 - KYC guidelines – AML Standards - State and District Central Co-operative Banks

9) 18.02.2005 - KYC guidelines – AML Standards - Regional Rural Banks

10) 21.02.2005 - KYC guidelines – AML Standards – NBFCs, Miscellaneous NBCs, and Residuary NBCs

11) 23.08.2005 - KYC guidelines – AML Standards - Scheduled Commercial Banks (Excluding RRBs)

12) 23.08.2005 - KYC guidelines – AML Standards - State and District Central Co-operative Banks

13) 23.08.2005 - KYC guidelines – AML Standards - Regional Rural Banks

14) 23.08.2005 - KYC guidelines – AML Standards – Primary (Urban) Co-operative Banks

15) 11.10.2005 - KYC for persons authorized by NBFCs to collect public deposit on behalf of NBFCs


Notifications issued by RBI applicable to Financial

Institution

1) 21.02.2005 - KYC guidelines – AML Standards – NBFCs,

Miscellaneous NBCs, and Residuary NBCs

2) 11.10.2005 - KYC for persons authorized by NBFCs to collect

public deposit on behalf of NBFCs

3) 21.11.2005 - Credit Card Operations of banks - Commercial

Banks/NBFCs (Excluding RRBs)

4) 07.03.2006 - KYC guidelines – AML Standards – NBFCs,

Miscellaneous NBCs, and Residuary NBCs

Circulars issued by IRDA

31.03.2006 - Guidelines of Anti Money Laundering

Programme for Insurers


SEBI

Securities and Exchange Board of India (SEBI) has asked non-

banking agencies to put in place their AML policies and KYC

norms and procedures.

All this is good news for the country's software industry, which

is sitting on a $2-billion market for AML solutions.


Circulars issued by SEBI

18.01.2006 - Guidelines for Anti Money Laundering Measures

20.03.2006 - Obligations of Intermediaries under PMLA


Guidelines by SEBIDetailed guidelines include:

1) Written Anti Money Laundering Procedures

2) Customer Due Diligence

3) Elements of Customer Due Diligence

4) Policy for acceptance of clients

5) Risk Based Approach

6) Clients of special category (CSC)

7) Client identification procedure

8) Record Keeping

9) Retention of Records

10) Monitoring of transactions

11) Suspicious Transaction Monitoring & Reporting

AML Software


Some AML software available in the Market.

Complinet from Mantas Softwares.

Omni Enterprise from Infrasoftech.

Searchspace AML.

ACI proactive risk Manager from ACI worldwide.

The Actimize Solution – From Actimize.

AML2 from ECONWARE.

AMLOCK and Bank alert from 3i infotech


Some software adopted

‘NetEconomy's ERASE’ compliance manager, an AML solution

of LogicaCMG, at IndusInd Bank

– to monitor customer profiles and `suspicious' financial

transactions through advanced statistical analysis and

transaction monitoring, to provide extensive case

management and reporting facilities.

– solutions also at ING Vysya Bank and Bank of Baroda

Bankalert at UTI Bank (India and Singapore), Karnataka Bank

(India), Bank Dhofar (Sultanate of Oman), Alliance Housing

Bank (Sultanate of Oman), Abu Dhabi Islamic Bank (UAE) and

Permata Bank (Indonesia)


AML modules

Transaction filtering– real-time queries of transactions against a watch list, including

specific customer names, countries or business types – batch scans against customer databases and historical

transaction data. – the checks must run in real-time to be effective, must be able to

interdict, or "pick-off" a transaction and hold it until it is either confirmed to be a violation, or is cleared

KYC analytics– enables financial institutions to meet compliance requirements

by analysing all transactions and accounts – Techniques such as statistical profiling, link analysis and

sequence analysis can be used to find complex, hard-to-find behaviours, events or patterns


AML Systems

All banks, asset management companies and securities

agencies would be target markets

The Indian AML software market is pegged at more than Rs 200

crore.

The Indian AML software market is still at an early stage

AML vendors need to upgrade beyond KYC requirements.

The BFSI segment is the treasure trove for AML vendors.

Major companies

– TCS, Infosys, Wipro, LogicaCMG, Misys, 3i Infotech and

SAS India

International Scenario


International Scenario

The Financial Action Task Force (FATF) is an inter-

governmental body which sets standards, and develops and

promotes policies to combat money laundering and terrorist

financing.

The Forty Recommendations and Nine Special

Recommendations of FATF provide 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. These

Recommendations have been recognised, endorsed, or

adopted by many international bodies as the international

standards for combating money laundering.


About FATF

The Financial Action Task Force on Money Laundering (FATF)

was established by the G-7 Summit that was held in Paris in

1989.

The Task Force was given the responsibility of examining

money laundering techniques and trends, reviewing the action

which had already been taken at a national or international

level, and setting out the measures that still needed to be taken

to combat money laundering.


About FATF

In April 1990, less than one year after its creation, the FATF

issued a report containing a set of Forty Recommendations,

which provide a comprehensive plan of action needed to fight

against money laundering

During 1991 and 1992, the FATF expanded its membership from

the original 16 to 28 members

The FATF membership is currently made up of thirty-one

countries and territories and two regional organisations


Nine Special Recommendations of FATF

1. Take immediate steps to ratify and fully implement the 1999

United Nations Convention for the Suppression of the

Financing of Terrorism, as well as United Nations resolutions

relating to the prevention and suppression of the financing of

terrorist acts, particularly United Nations Security Council

Resolution 1373;

2. Criminalize the financing of terrorism, terrorist acts and

terrorist organizations;

3. Freeze without delay funds or other assets of terrorists and

those who finance terrorism and terrorist organizations;



4. Require that financial institutions or other entities subject to

anti-money laundering obligations report their suspicions to

the competent authorities, when they suspect that funds may

be linked, related to or are to be used for financing terrorism,

terrorist acts or terrorist organizations;

5. Afford other countries the greatest possible assistance in

connection with criminal, civil or administrative inquiries,

investigations or proceedings in this area;

6. Ensure that they do not provide safe havens for individuals

being sought for financing terrorist, terrorist acts or terrorist

organizations



7. Institute supervisory measures applicable to individuals or

legal entities that provide a service for the transmission of

money or value, including transmission through an informal

money or value transfer system or network, particularly

“Hawala” networks;

8. Require financial institutions, including money remitters, to

include accurate and meaningful originator information

(name, address and account number) on fund transfers and

related messages that are sent, and;

9. Give particular attention to non-profit organizations, such as

charitable organizations, that can be used or exploited by

terrorist organizations.


Global situation

Money laundering

– $500 billion to $1.5 trillion billion a year, of which the Asia-

Pacific alone accounts for around 30 per cent.

International Monetary Fund figures

– 2-5 per cent of the world's Gross Domestic Product


Other Laws for Prevention of Money laundering

Smugglers and Foreign Exchange Manipulators Forfeiture of

Property Act, 1976

The Conservation of Foreign Exchange and Prevention of

Smuggling Activities Act, 1974 (COFEPOSA)

The Benami Transactions (Prohibition) Act, 1988

the Prevention of Illicit Traffic in Narcotic Drugs and

Psychotropic Substances Act, 1988


Related Acts

Banking Regulation Act ,1949

Chit Funds Act ,1982

DICGC Act, 1961

NABARD Act,1981

National Housing Bank Act ,1987

RBI Act, 1934

SEBI Act ,1992

Insurance Act ,1938

IRDA Act 1999


Related Websites

www.fiuindia.gov.in

www.moneylaundering.com

www.sebi.gov.in

www.rbi.org.in

www.irdaindia.org

www.finmin.nic.in

www.infrasoftech.com

www.mantas.com


Opportunities for CAs in the sector

As a consultant providing

– his vast expertise in handling huge quantitative data for

verification of the exact nature of transactions.

– Building effective AML programs for the financial

organisations to protect them from the potential threats.

As the trusted partner of the government,

– ensuring implementation of the Act in letter and spirit.

– KYC AUDIT


Opportunities generating from the legislation for CAs

1. KYC audit

– Customers due diligence procedures to confirm identity of Client from the

records produced by him.

– Systems audit for checking Identity from external database.

– formulating and implementing the programme of KYC which is to be

forwarded to Director in PMLA [Rule 9 sub rule (7) of the PML

maintenance of records of the nature and value … rules].

2. Risk Advisory services (RAS), identifying the risk & its mitigating controls in

the systems for proper internal control environment.

3. Management Advisory service (MAS), creating proper administrative and

organisation structure to ensure the loop free information flows.


Questions!!

Suggestions!!

Comments!!


THANK YOU.

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