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1 Prevention of Money laundering on Tue 18 Oct 2011 - 12:20


Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. It is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance; as it enables the criminal to enjoy these profits without jeopardize their source.
• the need to conceal the origin and true ownership of the proceeds;
• the need to maintain control of the proceeds;
• the need to change the form of the proceeds in order to shrink the huge volumes of cash generated by the initial criminal activity.

The Money Laundering Process
Money laundering is not a single act but is in fact a process that is accomplished in three basic steps. These steps can be taken at the same time in the course of a single transaction, but they can also appear in well separable forms one by one as well. The steps are:-
• Placement: The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travelers cheque, postal orders, etc.
• Layering: In the course of layering, there is the first attempt at concealment or disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. The purpose of layering is to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds.
• Integration: The final stage in the process. It is this stage at which the money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system.

The Prevention of Money Laundering Act, 2002 (PMLA) : In India, the Anti Money Laundering (AML) measures are controlled through the Prevention of Money Laundering Act, 2002 which was brought in force with effect from 1st July 2005. The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. RBI, SEBI and IRDA have been brought under the PML Act, and therefore it will be applicable to all financial institutions, banks, mutual funds, insurance companies, and their financial intermediaries. The agency monitoring the AML activities in India is called Financial Intelligence Unit (FIU IND) and compliance is required by all financial intermediaries. Director, FIU-IND (Financial Intelligence Unit) and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act.

The PMLA and rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

Offence: 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.
Scheduled offence means
• the offences specified under Part A of the Schedule, or
• the offences specified under Part B of the Schedule if the total value involved in such offences is thirty lakh rupees or more, or
• the offences specified under Part C of the Schedule.
Obligations of Banking Companies, Financial Institution and Intermediaries:
The Act provides that every banking company, financial institution and intermediaries should maintain a record of transaction and provide this information to the Director when required to do so. They are also required to verify and maintain the records of the identity of all its clients. Such records shall be maintained for a period of 10 years from the date of cessation of the transaction between the clients and the banking companies.
As the passing of the information is part of the statute hence no proceedings can be taken on account of the same. The procedure for procuring the information shall be drawn by the Central Government in consultation with the RBI.
This is to track the usage of cash for the purposes of illegal transactions particularly advanced for sale/purchase of property. The check over the Bank creates a stricter balance because the influx and out flux of money can easily be kept in account.

Punishment: Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees.
Summons, Searches and Seizures, etc.:
The Director, or any other officer not below the rank of Deputy Director can survey, search and seizure, power of arrest or retention of property or records as well as presumptions as to records/property, or even inter-connected transaction. The burden of proof however shall lie on the accused to show that his property is untainted.

Attachment: The attachments are done by the Director or any person below the Deputy Director authorized to do so by him. Where the Director, or any other officer not below the rank of Deputy Director authorized by him, has reason to believe on the basis of material in his possession, that—
I. any person is in possession of any proceeds of crime;
II. such person has been charged of having committed a scheduled offence; and
III. such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime
by order in writing, provisionally attach such property for a period not exceeding ninety days from the date of the order.

The Director, or any other officer not below the rank of Deputy Director, shall, immediately after forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the Adjudicating Authority, in a sealed envelope, in the manner as may be prescribed and such Adjudicating Authority shall keep such order and material for such period as may be prescribed.

The Director or any other officer, who provisionally attaches any property within a period of thirty days from such attachment, files a complaint stating the facts of such attachment before the Adjudicating Authority.

Adjudication: On receipt of a complaint from Director or any other officer, if the Adjudicating Authority has reason to believe that any person has committed an offence under section 3, it may serve a notice of not less than thirty days on such person calling upon him to indicate the sources of his income, earning or assets, out of which or by means of which he has acquired the property attached.

The Adjudicating Authority shall, after--
I. Considering the reply, if any, to the notice issued
II. Hearing the aggrieved person and the Director or any other officer authorized by him in this behalf; and
III. Taking into account all relevant materials placed on record before him,

by an order, record a finding whether all or any of the properties are involved in money-laundering.
Attachment of any property or retention of the seized property or record becomes final shall, after giving an opportunity of being heard to the person concerned, make an order confiscating such property

Confiscation: Where an order of confiscation has been in respect of any property of a person, all the rights and title in such property shall vest absolutely in the Central Government free from all encumbrances. The Central Government may, by order published in the Official Gazette, appoint as many of its officers. The Administrator shall also take such measures, as the Central Government may direct, to dispose of the property which is vested in the Central Government.
Appeal to Appellate Tribunal: any person aggrieved by an order made by the Adjudicating Authority under this Act, may prefer an appeal to the Appellate Tribunal. Appeal shall be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or Director is received and it shall be in such form and be accompanied by such fee as may be prescribed.

Appellate Tribunal:
The Appellate Tribunal was established by Central Government to hear appeals against the dealers of Adjudicating Authority and authorities under this Act. Civil Court shall have no jurisdiction over the suit/proceeding empowered to be determined by the Director, Adjudicating Authority or Appellate Tribunal. However appeal may be furthered to the High Court within 60 days from the date of communication of the decision/order of Appellate Tribunal to him.
Special Courts:
The Central Government shall constitute the Special Courts in consultation of the Chief Justice of India to try the offence of Money Laundering.
The offences triable by Special Court are the scheduled offences. However due respect shall be paid to the Code of Criminal Procedure. In fact, the Code shall also apply to the Special Courts. Accordingly appeals and revisions can be made to the Higher Courts.
Like any other Act, even PMLA provides for certain Authorities. They are:
1 Director/ Additional Director/ Joint Director.
2 Deputy Director
3 Assistant Director, and
4 Other officers appointed by the Act.

All the aforesaid appointments shall be made by the Central Government. However, the powers granted are in accordance with the grade of the authority and accordingly powers of the superior authority can be given over to the lesser authority to reduce the burden of the same.
To assist the officers, certain other officers may be appointed like
1 Officers of customs of Central Excise Department
2 Officers under the NDPs Act
3 Officers of the Stock Exchange
4 Officers of the RBI
5 Officers of the police
6 Officers of the Securities Exchange Board
7 Officers of Central Government, State Government, local authorities/ banking companies.
Reciprocal Arrangement for Assistance in certain matters and Procedure for Attachment and Confiscation of Property:
Central Government may enter into agreement with the Foreign Government in respect of this Act for enforcing the provisions of the Act or exchanging information. In order to examine the facts/circumstances, enforce steps as per the specification of the Special Courts or to forward the evidences to the Special Courts etc. Similarly, the Central Government shall also assist the contracting state. The basic idea is that of international co-operation and the member’s state of UN particularly has an obligation to co-operate on accepted principles.

Financial Action Task Force (FATF): is an intergovernmental organization founded in 1989 on the initiative of the G-7 Summit that was held in Paris in 1989. Recognizing the threat posed to the banking system and to financial institutions the G-7 member States convened the Task. 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. In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF. The FATF membership is currently made up of 34 countries and territories and 2 regional organizations. The FATF also works in close co-operation with a number of international and regional bodies involved in combating money laundering and terrorist financing. India is also a member in FAFT

Know Your Customer (KYC) Guidelines – Anti Money Laundering Standards Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These ‘Know Your Customer’ guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). These standards have become the international benchmark for framing Anti Money Laundering and combating financing of terrorism policies by the regulatory authorities. Compliance with these standards both by the banks/financial institutions and the country have become necessary for international financial relationships.
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks should frame their KYC policies incorporating the following four key elements:
i. Customer Acceptance Policy: Customer Acceptance Policy must ensure that explicit guidelines of customer relationship in the bank.
• No account is opened in anonymous or fictitious/ benami name(s)
• Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorization of customers into low, medium and high risk
• Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and guidelines issued by Reserve Bank from time to time.
• Circumstances, in which a customer is permitted to act on behalf of another person/entity.
• Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc.
ii. Customer Identification Procedures: are to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data
iii. Monitoring of Transactions: Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will depend on the risk sensitivity of the account. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. The bank may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors.
iv. Risk management: Banks may, in consultation with their boards, devise procedures for creating Risk Profiles of their existing and new customers and apply various Anti Money Laundering measures keeping in view the risks involved in a transaction, account or banking/business relationship. Banks’ internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policies and procedures. As a general rule, the compliance function should provide an independent evaluation of the bank’s own policies and procedures, including legal and regulatory requirements. Banks should ensure that their audit machinery is staffed adequately with individuals who are well-versed in such policies and procedures.

Need of KYC
• To establish the identity of the client
• verify the legal status of the legal person/ entity
• verify identity of the authorized signatories and
• verify identity of the Beneficial owners/ controllers of the account

KYC will be carried out at the following stages:
• Opening a new account
• Opening a subsequent account where documents as per current KYC standards not been submitted while opening the initial account
• Opening a Locker Facility where these documents are not available with the bank for all the Locker facility holders
• When the bank feels it necessary to obtain additional information from existing customers based on conduct of the account
• When there are changes to signatories, mandate holders, beneficial owners etc
KYC will also be carried out in respect of non-account holders approaching the bank for high value one-off transactions.

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