AML Survey 2012

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FORENSIC

India

Anti-MoneyLaunderingSurvey 2012

kpmg.com/in

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c | Section or Brochure nameIndia Anti-Money Laundering Survey 2012

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Foreword 01

Executive Summary 04

AML Environment 07

Know your customer 11

Client screening, Transaction Filteringand Monitoring 17

Reporting 23

Training 24

Cost o Compliance 25

Conclusion 26

Prole o Respondents 27

Contents

India Anti-Money Laundering Survey 2012

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ForewordI am happy to learn that KPMG in India is launching its Anti Money

Laundering (AML) Survey 2012. Ater the legislative ramework or

AML was laid down by the Prevention o Money Laundering Act, 2002,

substantial progress has been made in increasing awareness and

strengthening the anti-money laundering/counter nancing o terrorism

(AML/CFT) regime.

The Financial Action Task Force (FATF), which sets standards in the area o

AML/CFT, is undertaking a resh exercise to review and revise the existing

recommendations to make them more relevant to the changing times.These changes may pose resh challenges in terms o implementation and

compliance.

The survey being brought out by KPMG is an important initiative in capturing

inputs rom the reporting universe. The survey also highlights important

trends and patterns that would assist the regulators and policy makers in

better understanding o the issues and challenges aced by the reporting

entities.

While complimenting KPMG on taking this initiative, I am condent that the

publication will also help in wider dissemination o the relevant issues and in

improving compliance to urther our quest or protecting the integrity o thenancial sector.

Shri P. K. Tiwari

Director

Financial Intelligence Unit – India

1 | India Anti-Money Laundering Survey 2012

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India Anti-Money Laundering Survey 2012 | 2

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Executive SummaryIncreased ocus on money laundering risk by the Senior

Management

The estimated amount o money laundered globally in one year is 2-5 percent o the

global GDP, or USD 800 billion - USD 2 trillion1. Increasingly, the nancial services

industry is looking at anti money laundering compliance as a key concern area,

with it guring as an important point o discussion or board o directors and senior

management on a requent basis. Organizations are using AML compliance as aparameter to measure senior management perormance, which in turn is ensuring

accountability across organizational processes and products. Increasing internal

ocus by the organizations on AML coupled with the external actors such as high

prole corruption cases, terrorism, heavy nes paid by global nancial institutions

and FATF membership is gradually leading to tighter AML compliance.

FATF: Membership comes with increased responsibilities

The commitment o nancial institutions to the Financial Action Task Force (FATF)

standards is crucial or the ght against money laundering and terrorist nancing.

India’s membership and commitment to FATF standards will eventually lead us to

attain an equal ooting with other developed countries on compliance with AML

regulations. The nancial services industry has recognized the changes due to FATF

membership and our respondents believe that scrutiny is intensiying primarily oncustomer identication procedures (KYC) and transaction monitoring and reporting.Increasingly, nancial institutions are evaluating the inherent AML risks in their

products and services/ delivery channels/ transactions and taking steps to mitigate

those risks.

1 United Nations Oce on Drugs and Crime(http://www.unodc.org/unodc/en/money-laundering/globalization.html


Discuss the AML

prole on at leasta monthly or

quarterly basis

76%

Regulatory

scrutiny has

become more

stringent post

FATF membership

84%

Integrate AML

in the businessstrategy o

new products/

services

41%

Regulatory scrutiny

is high in the area

o Know Your

Customer policy

and processes

90%

Publicize the

AML complianceprogramme

internally

35%

Agree that scrutiny

will remain high in the

area o Transaction

Monitoring /

Reporting

81%

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Laying the oundation: Money laundering risk assessment

Regulators have advised nancial institutions to regularly assess money laundering

risks in their products/services/transactions/delivery channels as well as evaluate

i their current policies and procedures mitigate those risks. While an increasing

number o respondents conduct periodic risk assessments to evaluate their

money laundering risks, a signicant number undertake this based on a change in

product/ procedure or regulatory change, which is a matter o concern. Also, with a

signicant number stating that their institutions’ AML policies and procedures arebased on local regulations and benchmarked against global best practices – this

percentage needs to increase given the global requirements and standards that

come as a part o being a member o the FATF.

Drilling down to unearth the core

Largely, nancial institutions have put in place basic policies and procedures toidentiy and prevent money laundering and terrorist nancing. A risk based approach

towards AML, proper customer identication procedures including identication o

benecial ownership and politically exposed persons, ongoing client due diligence

and sanctions monitoring etc. are some o the key areas that are being monitored

closely. However, while monitoring and identiying o these procedures is

important, establishing an ecient client data updation process is also equally vital.

Conduct an AML

risk assessment on

at least a hal yearly

or yearly basis

Institution ollows arisk based approach

in relation to

account opening

Conduct an AML

risk assessment

on the basis o an

event

Benecial owneridentied at the

time o opening an

account

AML policies and

procedures are based

on local regulations and

benchmarked against

global best practices

Have proceduresor monitoring

sanctions lists

beore account

opening

Customerdocuments are

collected and

veried beore

opening an account

Have specicprocedures in place

or identiying

politically exposed

persons

65%

86%

32%

84%

51%

83% 81% 77%


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Testing and monitoring the eectiveness oyour controls

As important as it is to set up policies and procedures to

monitor the risk o money laundering, it is equally important

to establish a ormal programme that tests and monitors the

eectiveness o that system. A majority o our respondents

do have such a procedure in place with the onus largely alling

on the Compliance and Internal Audit unctions.

Investment to be made in the area o AMLNot only is the risk o money laundering being taken more

seriously, a majority o our respondents also eel that the

overall investment in AML, including direct and indirect

cost, will increase in the next two to three years. A

majority o the respondents eel that this investment will,

in all likelihood, be in the area o a 10 to 50 percent hike

largely in areas such as implementing / upgrading their

transaction monitoring system ollowed by implementingglobal policies and remediating/ reresh exercise.

Have a ormal

procedure to test

and monitor the

eectiveness

o anti-money

laundering systems

and controls

Investment wil l

increase by 10 to 20

percent

Compliance

unction plays an

important role

in the testing

and monitoring

procedures

Internal Audit

plays an important

role in the testing

and monitoring

procedures

Investment will

increase by 21 to

50 percent

71% 44%80% 76% 29%


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In June 2010, ater a stringent

evaluation, India was admitted asthe 34th country member to the

Financial Action Task Force (FATF). This

membership has helped domestic

enorcement agencies to exchange

inormation and Indian nancial

institutions gain entry into markets oother member countries by portraying

that Indian nancial institutions are

more comparative in terms o risk

management standards.

The FATF mutual evaluation report

also highlighted certain improvement

areas in the AML regime within India

and hence it comes as no surprise that

the regulatory guidelines have been

strengthened by bringing in changes to

the Prevention o Money Laundering Act

(PMLA) and Rules in 2009.

The Financial Intelligence Unit - India (FIU-India) is the nodal agency in India or

managing the AML ecosystem and has signicantly helped in coordinating and

strengthening eorts o national and international intelligence, investigation and

enorcement agencies in pursuing the global eorts against money laundering and

related crimes; while the Prevention o Money Laundering Act (PMLA) 2002, orms

the core ramework or combating money laundering in the country.

AML Environment

Environment post FATF membership

On discussing the state o AML

compliance post the FATF membership

o India, while a majority o the

respondents elt that the AML

requirements were acceptable, a

signicant number also indicated thatthese requirements needed to bebetter ocused primarily with respect

to areas like customer due diligence,

identication o benecial owners and

ongoing due diligence approach. Some

o the respondents also eel that the

burden is getting onerous. (refer to

Figure 1)

FATF is an inter-governmental

policy making body whose purpose

is development and promotion

o policies to combat money

laundering and terrorist nancing

threats. FATF has established aseries o orty recommendations

and nine special recommendations

that set out the basic ramework

or anti money laundering eortsand are intended or universal

application.


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Figure 1: In relation to AML compliance in the country post FATF membership,

which o the ollowing statements fts your view?

Figure 2: Which o the ollowing areas has the most regulatory scrutiny?

Post obtaining the membership, an

overwhelming 84 percent o the

respondents believe, as a consequence,

that the regulatory scrutiny will become

more stringent. The key areas that

Source: KPMG in India’s AML survey 2012


1 As per news reports - http://articles.economictimes.

indiatimes.com/2011-07-1/news/29758455_1_small-

banks-aml-apex-bank

2 www.bankersonline.com/security/bsapenaltylist.htm

specically stand out (refer to Figure

2) are Know Your Customer (KYC)

policy and processes and transaction

monitoring.

Globally, regulators have imposed nancial penaltiesand initiated look back reviews or deciencies in the

areas o sanction screening and payment ltering2.

Though currently the respondents to the survey have

not considered these areas to be prime areas or

regulatory scrutiny, however, in our opinion based on

global trends, this shit will probably occur.

There have been multiple instances whereenorcement agencies have taken action against

nancial institutions in the recent past. RBI has ned

48 Indian Banks in six months leading up to June 2011

or violating the KYC and AML norms1. These actions

by the banking regulator may have triggered the

respondents to believe that regulatory scrutiny hasbecome stringent.


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percent o the respondents stating that

discussions relating to AML issues areundertaken at least quarterly.

We can attribute multiple reasons or

this shit bucking the global trend. Over

and above the FATF membership o

the country, there have been multiple

high prole instances o nancial

crime, corruption and black money

investigations which have hit the Indian

corporate world. This has led to serious

questioning o corporate governance

standards and increased pressure

on organizations rom enorcementagencies to ocus on regulatory

compliance. Moreover, India has been

This increasing importance being

given may be due to a combination oactors such as FATF membership o the

country, higher scrutiny o regulators,

nancial penalties on major global banks

by respective country regulators and

reputational risk associated with non

compliance.

Globally there has been a downward

shit, with only 62 percent o the

respondents3 citing anti-money

laundering as a high prole issue or

senior management; this o course

could be attributed to the global nancialcrisis. In India, the risk o AML seems

to be taken more seriously with 76

Senior management play a key role in

setting the right tone at the top and

ensuring accountability throughout the

hierarchy to maintain eective oversightat all levels within an organization.

They are responsible or managing

the risks aced by the organization and

are accountable to shareholders and

regulators alike.

Compared to our last survey, there

has been a substantial increase in the

level o involvement and importance

that is now being given to AML issues.While in 2009 only 67 percent o the

respondents indicated that their senior

management including their board

o directors took an active interest in

AML related issues and discussions;

in the current survey 86 percent o therespondents state the same.

Today, management is setting

leadership examples by integrating AML

compliance within the business strategy

(refer to Figure 3). It is important to notethat respondents have begun to take

disciplinary action against employees

breaching policy. While it is a very small

percentage, this shows the growing

seriousness o the management

towards AML compliance.

Figure 3: How has the management set an example or AML compliance in your

organization?


a target o terrorism rom homegrown

and separatist cross border terroristgroups and thus the greater need

to manage nancial channels and

scrutinize the movement o unds.

In comparison to the western world,

India has been a late entrant (34th

member country o FATF) thus being

lower in the AML compliance maturity

curve vis-à-vis. other developed nations.

Hence, in our opinion, the management

ocus in India will continue to remain on

AML compliance as regulatory scrutiny

will become more rigorous.

AML is a board level topic

3 Statistic rom the KPMG Global Anti-Money Laundering Survey 2011


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Moving away rom just a ‘Tick in the Box’

While the current AML regulations are old, they are still evolving. A review o the surveyresults indicate that entities are still trying to nd their way in relation to the implementation

o an eective AML compliance program in their organizations. Though the seniormanagement are actively involved in discussing and reviewing the status o AML compliance,

the same may be because o heightened regulatory scrutiny and in light o imposition o nesby regulators across the globe.

AML has traditionally been a compliance topic and the nancial services community howeveris yet to view it with all its potential as a risk management tool. Hence the objective has been

basic compliance rather than using it as a risk management practice. In order o priority, AMLcompliance, i not at the same level, would all ater basic regulatory and nancial requirements,

Basel II requirements and nancial crime (raud) management requirements o an institution.

The Basel II requirements ocus on credit and market risk and more recently operational risk area.As per Basel Il guidelines, the operational risk area is the risk o direct or indirect loss resulting rom

inadequate, or ailed internal processes, people and systems, or rom external events. One o thekey requirements o operational risk management is managing the risk o money laundering which

is vulnerable to high regulatory action in turn eecting the reserve requirements and eventually theprotability o a bank. Hence, managing money laundering can be considered to be an integral part o the

risk management unction.

The perception o the industry is slowly undergoing a transormation. Regulators have become moreactive and are developing robust processes such as FIU India has signed MoU’s with multiple geographies

or sharing o inormation and data related to money laundering activities. These developments, along withthe FATF umbrella, would eventually urge institutions to benchmark themselves globally on AML compliance

procedures and processes, thus enabling them to make that strategic move rom basic compliance to a riskmanagement outlook towards AML compliance.


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Know your customer (KYC)

Global benchmarking

Financial institutions are increasingly

becoming global in their approach by

establishing branches, subsidiariesor promoting entities in multiplegeographies. This creates a unique

challenge to manage the regulatory

requirements o multiple regulators.

Hence, more and more institutions

have been benchmarking their policies

and procedures with global best

practices. This was evident in our

2009 India survey wherein 66 percent

o the respondents had stated thatthey benchmark their policies andprocedures with global best practices

which are implemented as consistently

as possible across all locations.

However, there are only 51 percent

respondents stating the same this year.

(refer to Figure 4) This could be due

to the turmoil in the nancial markets

across the globe which may have ledmultiple nancial institutions to hold onto their global expansion plans. Indian

regulators themselves are moving

towards global standards as FATF

requirements are being introduced in a

phased manner by incorporating those

guidelines in domestic regulations.

Policy

Figure 4: Which o the ollowing best describes your organization’s current AML

policies and procedures?



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Risk based approach

A risk based approach helps to

avoid additional cumbersome cost

or the organization as it eliminates

elaborate identication procedures

and acceptance measures or all the

customers who do not pose signicantrisks as perceived by the bank.

A structured due diligence procedure

at the time o customer on- boarding

ensures that the organization is taking

adequate precautions in its anti-money

laundering eorts. Encouragingly, 86

percent o the respondents have stated

that their institutions ollow a risk based

approach.

Institutions should look to capture

adequate data and inormation such as

background, social and nancial status,

source o unds, nature o business,

country o origin etc. in a bid to identiy

the customer. However there is

disparity in the actors which are used

by the nancial institutions in applying

the risk based approach, as highlightedby the respondents in Figure 5 .

Having said that, it is critical or

institutions to understand that there are

inherent AML risks in their products and

services/delivery channels/transactions;

hence, they need to accordingly

conduct a comprehensive assessment

to identiy their AML risk prole and

how these are/can be mitigated.

With 65 percent o the respondents

stating that AML risk assessment isconducted either hal yearly or yearly

(refer to Figure 6) ; it is clear that the

risk o money laundering is now

being perceived as a major ocus and

organizations are gearing up to identiy

and insulate themselves rom such

risks. However, nearly one third o the

respondents stated that a periodic risk

assessment is not carried out and is

instead event driven. In our experience

global rms conduct annual and eventdriven AML risk assessments more

requently, owing to the act that

Figure 5: In relation to account opening, which o the ollowing actors are considered while ollowing a

risk based assessment/ approach?

Figure 6: How oten does your organization conduct an AML risk assessment?



AML risk assessment is mandatory

regulatory requirement in the western

jurisdictions. In India, regulators are

emulating global trends which is evidentrom the recent RBI circular4, which has

asked banking companies to assess

money laundering/ terrorist nancing

(ML/ TF) risks in their products/ services/

transactions/ delivery channels and thus

make the AML/ CFT (Counter nancingo terrorism) regime more robust.

4 Reerence to the RBI Circular dated 19 December 2011


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A vast majority o respondents (81

percent) mentioned that customer

documents are collected and veried

beore opening an account, however

13 percent open accounts without ullycollecting or veriying the documents

(refer to Figure 7) . While this might be

a small percentage, it is worrisome

because this is not in line with the

regulatory requirements which clearly

state that KYC documents should becollected beore the commencement

o an account based relationship. The

KYC documentation process orms

the oundation o a satisactory due

diligence process; with this missing

even in a partial orm, is a red fag thatneeds to be addressed.

As a ollow on, when asked about theincrease in raudulent documentation

being provided at the due diligence

stage, 21 percent o the respondents

(refer to Figure 8) stated that raudulent

documents have been encountered

in ve to ten percent cases. While this

number may be a conservative gure,

there are chances o this percentage

being higher since a large number ounveried documents (as highlighted

in Figure 7) may also turn out to be

raudulent.

Currently, India does not have any

unique citizen identier such as a

social security number as in some othe western countries. The problem o

raudulent documents should hopeully

reduce with the implementation

o Unique Identication Authorityo India (UIDAI)/ Aadhar project

o the government. However, the

implementation o this project will take

some time and even once implemented,

the same may need to be reviewedand tested beore using it as a valid

KYC option to be implemented by the

nancial institutions.

Hence, organizations need to put in

place robust processes and solutions

to monitor any lapse in the KYC

process and remediate the same at

the earliest. There should be qualitychecks in place to identiy anomalies

in the documentation and procedures

ollowed. Adequate training should also

be imparted to the ront oce sta oncustomer identication and acceptance

procedures.

DocumentationFigure 7: Are all customer documents collected and verifed beore opening an

account

Figure 8: In the past two years, how many instances o raudulent documents in

account opening have been encountered?




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The benecial owner (BO) as per Rule 9 sub rule (1A) o the

PMLA is the natural person who ultimately owns or controls

a client and/or the person on whose behal a transaction is

being conducted.

Thus it was interesting to note that only 52 percent o our

respondents (refer to Figure 9) identiy the BO up to thenatural person. In light o non identication o benecial

owners up to natural persons, it is dicult to state whether

adequate customer verication procedures are deployed

beore commencement o the relationship. It is also hard to

judge how the screening procedures or identication o PEP

and Sanctioned entities/individuals are implemented by the

organizations.

Another key element o the AML monitoring requirement is

the need to keep relevant KYC data attributes up-to-date.

The local regulatory requirements state that KYC data rereshshould be done once in two years or high and medium risk

customers and once in ve years or low risk customers.

70 percent o the respondents do not ollow any proactiveapproach to collecting customer data. Surprisingly, 14 percent

o the respondents do not undertake any periodic updation o

existing KYC at all. (refer to Figure 10)

Benefcial Ownership KYC data reresh

Figure 9: Which o the ollowing best describes the

procedures adopted by your organization?

Figure 10: Which o the ollowing best describes your

approach to periodic updation o existing KYC inormation?

Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012


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Other respondents who do not have a proactive strategy in

place to update KYC records have cited various reasons such

as system limitations, cost and lack o legal mandates (refer to

Figure 11) .

o the respondents stated that they havespecic procedures in place or updating

the principal inormation on an ongoing

basis which comprises o collecting

customer inormation and data to ll any

gaps that might exist in the KYC process.

On comparing the responses to the 2009 survey results, we

note that this year only 25 percent o the respondents have

stated that they do not have enough gaps in the system to

warrant such an exercise against 36 percent in 2009. This

shows that respondents have become aware o the need to

have updated inormation about customers on an ongoingbasis.

Another reason that also gets highlighted this year is the

existence o system limitations – 38 percent this year versus

32 percent in the 2009 survey. This shows that instead o any

undamental policy level issues in not conducting the activity,the main hurdle in implementing an eective remediation

policy is at the operational level.

72%

Figure 11: Why is there no program in place to update the

principal inormation?


On-going due diligence


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Do we really know our customers?A robust compliance program needs to take into consideration all aspects in the customer lie

cycle rom customer identication to customer acceptance and periodic review o customer

inormation. While nancial institutions have come a long way in ollowing requisite due diligence

procedures and adopting global best practices, the survey results also lead us to question the extent

o the level o control that organizations have on their KYC compliance programs.

As evident rom the responses, many organizations are still struggling with basic issues like customer

identication and acceptance programs and also ew others such as benecial owner identication, KYC

reresh exercises and on-going due diligence programs. The requent challenges aced by organizations in

implementing adequate and robust processes in place is due to non-cooperative customers, inadequate

strategy, employee training issues, co-ordination problems and inconsistent policies and processes across

geographies. In addition, at a later stage, due to regulatory scrutiny they might also be mandated to conductlook back reviews and remediation plans. I customer behavior were static, then the entire process would

be nalized once and or all; but in this scenario where customer prole and preerences keep changing with

time, organizations need to have an ongoing oversight on the customer.

Regulatory scrutiny is bound to increase in the next ew years as domestic regulations are being benchmarked

against the global AML ramework. This will entail that regulators might be more inclined to award nes/

penalties in the event o non compliance o the regulatory guidelines as is evident in some o the western

geographies such as the US. Penalties applied in ASPAC jurisdictions have been relatively small by European and

US standards5.

A sizable majority o respondents have also stated that senior management is taking a keen interest in the

development o their AML ramework while making the eort to benchmark their policies and procedures with global

best practices. While this is a good sign, organizations need to move away rom the mindset o satisying only the

minimum regulatory requirements and actively take it orward to proactive levels o compliance. In our opinion, data

gathering is only the rst step in the process o identiying the customer. Once the required data has been captured,organizations need to convert this into meaningul customer proles which would help to identiy behavior and manage

money laundering risks more eectively.

5 Finding iterated in the KPMG Global Anti-Money Laundering Survey 2011


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Politically Exposed Persons(PEP)One o the major cornerstones in AML is screening otransactions and customers. The current regulatory guidelinesrequire institutions to identiy politically exposed persons and

also carry out sanction screening against United Nations list.

Globally, there has been increased ocus on PEP screening

due to multiple actors such as recent events in the Middle

East and Arica. While the Indian nancial sector sharesglobal concerns on PEP status, the ASPAC including the India

region, lags behind on the actual identication and monitoring

process o PEPs. In the ASPAC region only 73 percent o the

respondents6 identiy and monitor PEPs. The trend in India is

no dierent as only 77 percent o the institutions have specic

procedures in place, using a combination o commercial lists

and the vigilance o branch sta to identiy PEPs (refer to

Figure 12) .

This lag can mainly be attributed to the act that while the

FATF has issued guidelines, there is no global denition

o a PEP. There is ambiguity in terms o the denition o

a person considered as a ‘senior’ as well as the extent o

coverage towards amily, relatives and riends. The denition

also talks about prominent public unction but does not give

any indication as to what they reer to and thus adds more

ambiguity to the whole denition o PEP.

In addition, the interpretation o PEP varies between

countries. Some countries ocus on oreign political gures

while others limit the denition to the national level; alsoincluding regional politically exposed persons

Sanction screening83 percent o the respondents have stated that they

undertake sanction screening o customers beore account

opening, with a majority reerring to the United Nations (UN)

list, Oce o Foreign Assets Control (OFAC) and other lists.

The local regulation requires screening against the UN listwhile the global best practice is to generally use multiple lists

such as the UN, OFAC, SDN (Specially designated Nationals

list issued by the US department o Treasury) and Blocked

list, Her Majesty’s treasury list, EU terrorism list, Interpol,

CBI (Central Bureau o Investigation) and others. Indian

organizations have been using a combination o lists (refer to

Figure 13) or the sanction screening process and hence have

benchmarked this activity with its global counterparts.

Figure 12: How do you identiy PEP’s?

Figure 13: Which lists are used by you or the purpose o

screening customers?


Client screening, Transaction

fltering and MonitoringGlobal nancial institutions have paid millions in nancial penalties or breach in their

sanction compliance programs, lapses in transaction monitoring and non-identication

o PEPs. The nancial sector in India needs to realize the growing importance o

investing a larger portion o their resources in building world class operations in the

areas pertaining to PEP identication, transaction monitoring and sanction compliance.

6 Statistic rom the KPMG Global Anti-Money Laundering Survey 2011


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While it is comorting to know that global practices are

ollowed, 72 percent o the respondents have stated that they

screen benecial owners against sanction list. This needs to

be considered under the given circumstances wherein 16percent o them do not identiy benecial owners at all and

a urther 40 percent o the respondents do not identiy the

benecial owners till the natural person. This questions the

eectiveness o how the benecial owners are screened i

they are not identied.

By and large, while screening is conducted on at least amonthly basis, 34 percent o the respondents have stated that

the process is undertaken at the time o change in customer

inormation (refer to Figure 14) . This may be inconsistent with

the global approach as the customer demographic inormation

is primarily static in nature and undergoes changes on

irregular intervals.

Another important actor that emerges is that only 49 percent

o the respondents have an automated system in place or

PEP and sanction screening(refer to Figure 15).This makes it

dicult to understand the robustness o the periodic sanctionscreening process or the customer database as generally the

names existing on sanctioned lists have multiple aliases and

data sets or individuals and entities.

One o the advantages or automating screening procedures

is that there would be very minimal chances o manual errors.

The automated system would be able to handle multiple lists

and use uzzy logic and phonetics approach to reduce alse

positives.

Figure 14: As part o the ongoing monitoring process, how

oten is a customer’s data reviewed against PEP and sanction

list?

Figure 15: Do you have an automated system or PEP and

sanction screening?




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Payment flteringPayment ltering is screening or ltering o relevant payment

instructions and is a real time activity. This involves screening

o payment inormation to identiy payment instructions

involving potential sanction targets and geographies.

Surprisingly, only 37 percent o the respondents stated that

their organization has an automated system or payment

ltering, with the rest either having a manual system in place

or planning to introduce an automated system sometimein the uture. In the absence o robust controls o real time

monitoring o the payments, it cannot be ruled out that

potential sanction violations may occur.

63 percent o the respondents replied in the armative when

questioned whether they include originator inormation in theSWIFT messages sent to other banks. On asking whether

they receive SWIFT messages with originator inormation

rom other banks (refer to Figure 16) , majority (71 percent)

o the respondents stated that they have aced less than 5

percent cases where this inormation is incomplete.

The absence o complete originator inormation or

transactions aected through SWIFT puts a question mark on

the payment ltering process. With organizations relying on

their counterparts or adequate due diligence on the originator

inormation which is not shared with them, this lacuna

hole could be used by money launderers to circumvent thenancial systems.

Figure 16: What percentage o SWIFT messages received by

you has incomplete originator inormation?



7/27/2019 AML Survey 2012


In excess o 70 percent o the respondents ound client

screening and the handling o lter hits either challenging orvery challenging, while 35 percent o the respondents did

not consider sactions list management to be a challenge

(refer to Figure 17) . This is surprising, given the regular

complaints about duplication o names on dierent lists,

lack o identier inormation and the diculty o getting lists

uploaded into ltering systems with the 24-48 hours timeline

that the authorities expect adherence to. These ndings are

complementary and in proportion to our Global Anti-Money

Laundering Survey 2011 as well.

Similarly, in relation to payment ltering, the key challenge

lies with automatic screening o payments and handling o

lter hits. The diculty arises in relation to management oalse positives which increases in number due to incomplete

customer inormation available with organizations.

The monitoring o transactions to ensure that they are

consistent with the institution’s understanding o the

customer behavior is the cornerstone o any nancial

institutions’ AML systems and controls.

Almost 63 percent o the respondents appear to be satised

with their transaction monitoring system. A large number

o respondents also depend on the vigilance o their sta to

identiy suspicious activity or by investigation o exceptionreports (refer to Figure 18) .

Figure 17: How would you describe the ollowing areas o

sanctions compliance?

Figure 18: Which o the ollowing methods are used by your

organization to monitor transactions in order to identiy

potential money laundering?



Challenges being aced inSanction compliance

Transaction monitoring


7/27/2019 AML Survey 2012


An overwhelming number o respondents (89 percent)

mentioned that increased levels o human and nancial

resources were required. This was due to multiple actors

such as complex implementation, ongoing maintenance and

need to review the alse positive (refer to Figure 19) .

On delving urther into transaction monitoring, it appears

that customer proles and risk categorization does not

reside in the transaction monitoring system as indicated by

49 percent o the respondents. Additionally, 46 percent o

the respondents have indicated that they do not have the

capability to view single customer transactions and account

status across products and business. This also questions

the use o IT systems developed internally instead o using

externally developed IT systems which generally encompass

an overall IT ramework in relation to the organization. The

inability o a nancial institution to monitor transactionsacross dierent products or business, calls into question

their capability o a consolidated and comprehensive AML

transaction monitoring system.

In our view, ongoing monitoring is an essential requirement

and only a ew organizations are able to use the data collected

and prole created or customers to leverage the identication

o suspicious transactions. KYC and transaction monitoring

processes are distinctly separate unctions which operate

in silos. Hence the holistic view o the customer and related

transactions are not available or the purpose o transaction

monitoring in turn reducing its eectiveness.

Figure 19: Increase in the level o human and fnancial

intervention is due to?



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Are we doing enough?

A comprehensive review o the survey responses has made

us question i the industry is doing enough to combat money

laundering and terrorist nancing.

The transaction monitoring system needs to be geared to

have a single view o the customer across products and

services so that a holistic view o the customer relationship

can be judged. This would ultimately help to comprehend

whether the customer transaction is suspicious or not.

Similarly, the customer risk categorization should be strong

enough to decide the extent o monitoring or dierent typeso customers (RBI regulatory guidelines state that transactionmonitoring should be high or higher risk categorized

customers). With hal o our survey respondents stating

that their customer risk categorization resides outside the

transaction monitoring system, this needs to be reviewed.

The threshold or transaction monitoring is another areawhich may be improved by using statistical modeling and

judging the risk perception o the organization to identiy the

right mix o thresholds or dierent types o customers and

their risk categorization.

Sanctions screening or customers and payments to date

have ocused almost exclusively on screening ociallists. Knowledge o this act, coupled with the publicity

surrounding nancial penalties across the globe means

money launderers seeking to evade sanctions will inevitably

adopt an approach to circumvent these controls. It will

become increasingly important to conduct screening against

lists containing relevant geographic indicators such as cities

and ports, particularly when dealing with trade nance.

The key concern or sanction screening is the duplication

o names on dierent lists and the perennial concern about

the amount o identier inormation included in such lists.

Surprisingly, only 17 percent o survey respondents stated

that they nd maintenance o sanctions list challenging.

Globally, rms spend enormous amounts on screening

customers and payments. In this environment, rms have

to ocus on ensuring eective screening o payments.Institutions should look to get their own houses in orderbeore tracking others in the market that do not provide the

necessary inormation or screening. The eectiveness o

this screening is reduced, however, i everyone is not doing

the same.

The challenges highlighted above in both the areas oTransaction Monitoring and Sanctions Compliance indicate an

underdeveloped or rudimentary system which would require

investment to be made in areas o building IT capabilities

encompassing the customer prole, risk ratings and nancial

transactions. Non availability o expert tools or transaction

monitoring, customer and payment screening can hamperthe AML program o an organization. Thus we believe that

Indian organizations need to realize the importance o ully

integrating AML as a risk management practice keeping

in mind all the various AML related processes such as

transaction monitoring, sanction and PEP compliance.


7/27/2019 AML Survey 2012


More than hal (60 percent) o the respondents indicated

that there has been an increase in the STRs led by the

organization to the FIU.

A major attribute to this (refer to Figure 20) is sta awareness,

improved interactions with regulatory bodies, increased

regulatory scrutiny and enhanced due diligence procedures

ollowing suit. A deensive approach to reporting more cases

is also a signicant actor.

Figure 20: I there has been an increase in the STRs fled to FIU, could you defne the impact each o the ollowing 8 reasons

had on the increase, on a scale rom 1 to 5, where 1 is no impact at all and 5 is very strong impact.


Reporting


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TrainingIt is essential that nancial institutions are equipped with

the appropriate resources to tackle money laundering risks.

This does not only include technological solutions, but also

the provision o training and tools to assist those in the ‘rontoce’ who are best placed to identiy riskier transactions,such as relationship managers and private bankers.

Most organizations today impart AML training directly to their

sta – majority o who concentrate on role specic training

using an internally developed training module (refer to Figure

21) .

While ace to ace and computer based training appear to

be the most popular methodologies (refer to Figure 22)

adopted, 85 percent o the respondents have their internal

compliance team taking the ownership o AML training.Thus, organizations have not had the benet o industry bestpractices as they have primarily been internally developed and

conducted.

The mindset however does seem to be changing or the better

with a majority o the respondents having specied training to

be a major area or investment in the days to come.

Figure 21: Do you conduct role specifc training or sta

handling transaction monitoring/cross border payments/

branch sta/AML compliance division and operation teams? Figure 22: What methods are used to deliver AML trainings?



7/27/2019 AML Survey 2012


It is surprising that not many respondents eel that the cost

o sanction screening will be very high which is slightly in

variance with the current status o implementation. As per

the responses 37 percent o the respondents do not have anautomated system or PEP and sanction screening. Similarly,

customer screening is conducted as and when there is a

change in sanction and PEP databases, as indicated by 34

percent o the respondents. In our opinion, the respondents

have under estimated the cost to be incurred towards

screening activity.However, it is interesting to note that institutions are

increasing their ocus towards transaction look back reviews.

This can be considered as a maturing o the compliance

program and a welcome proactive step.

To keep up with the regulatory environment, sound

investments are required in customer due diligence,

customer identication & acceptance procedures, monitoring

suspicious transactions and related AML processes and

procedures. This will lead to improved condence amongst

various stakeholders domestically and allow organizations

to explore greater business opportunities in the international

arena in developed economies which may have stringent AML

regulations.

An overwhelming 82 percent o respondents indicated that

the cost o AML compliance will increase over the next 3

years, with investment being mostly in the area o 10 to 20

percent. The majority o the increase would be (refer to Figure

23) in the area o implementing/upgrading their transaction

monitoring system ollowed by implementing global policies

and remediating/reresh exercise.

Figure 23: Out o the nine areas o anti money laundering activity, could you defne relatively how much investment each area

will need in the next three years, including all direct and indirect costs on a scale rom 1 to 5, where 1 is no investment at all

and 5 is great investment required


Cost o compliance

While in the 2009 survey, more than 73 percent had indicated

that cost will increase over the next three years, in the current

survey, over 82 percent have indicated the same. Compared

to the 2009 survey where introduction o global polices andtransaction monitoring were indicated as the major ocus

areas needing investment, the current survey also indicates

the same in addition to remediation/reresh exercise. This

indicates that the cost o AML compliance is going to keep

rising and institutions may be underestimating costs or

deerring the investments required.


7/27/2019 AML Survey 2012



Conclusion

The integrity o the banking and nancial services

marketplace depends heavily on the perception that itunctions within a ramework o high legal, proessional and

ethical standards. A reputation or integrity is one o the most

valuable assets o a nancial institution. A damaged integrity

o a nancial institution can lead to a damping eect on a

country’s growth aspects when a country’s commercial and

nancial sectors are perceived to be subject to the controland infuence o organised crime. Fighting money laundering

and terrorist nancing is thereore a part o creating a

business riendly environment which is a precondition or

lasting economic development.

This is not to say that we are not headed in the right

direction. We are on the right path with India having

tripled the manpower o the Directorate o Enorcement7

which spearheads the money laundering investigations

in the country; presence o the Financial Intelligence Unit

which tracks and analyses money laundering risk through

its reporting mechanism; and the recent updation o the

legislative ramework through the proposed changes. Someo other positive signs are the existing unied KYC platorm

or the mutual und industry and a similar platorm being

mooted or the insurance sector.

However what needs to be done urther is increased

enorcement and action against the entities violating them.Further, nancial institutions need to bring in additional levels

o control in relation to ew areas highlighted in the survey like

transaction monitoring, annual review and periodic updation

o accounts that is legally mandatory. It is clear that the

maturity o the AML environment is varied between MNC,

public sector, private sector, co-operative banks etc. andthe challenge or regulators would be to plug the regulatory

arbitrage that money-launderers are able to utilize and

eventually exploit the system. However, cost actors would

also play a signicant role as budgets or institutions do vary,

leading to a reduced ocus and thus high AML risk.

With India being a member o the FATF which was not an

easy process and was only granted ater a very stringent

evaluation process by the ocials o the FATF, we need to

be geared up or the increased responsibility and the road

that lies ahead. While this might present its own gamut o

challenges, regulatory requirements and risk mitigation has to

be a key area o ocus and cannot be given secondary status.

7 Source: Article in The Times o India dated 19 July 2011 (http://articles.timesondia. indiatimes.com/2011-07-19/india/29790686_1_money-laundering-act-nancial-action-

task-orce-laundering-and-terror-unding)

Regulators and the Indian Ministry are denitely taking

charge, with amendments currently in progress on the

Prevention o Money Laundering Act, 2002 and Unlawul

Activities (Prevention) Act, 1967 to make them more eective

in dealing with money laundering and terror unding. With

the act having been amended twice in 2005 and 2009,

the proposal o this new amendment bill is a positive sign.It will help to bring us at par with international standards

and to obviate some o the deciencies existing in the act.

The amendment is necessitated by the act that India is an

important member o the FATF and chairs its Asia Pacicgroup.

The PMLA amendment act 2011 plans to bridge the gap

between the FATF recommendations and the Indian

regulatory requirements with respect to enacting o strong

and eective anti money laundering laws and to remove

operational diculties or the regulators and government

agencies implementing these regulations. Thus eventually

make the existing PMLA in tune with the practice being

ollowed world over.

Tightening the noose: Recommendations to amend the PMLA, 2002

Key changes under PMLA amendment bill 2011

Introduce and recognize corresponding law provisions o othercountries in respect to money laundering oences and to provide ortranser o proceeds o oreign oences in any manner in India

Increase in power o directors to call or records and conduct inquiriesand direct audits in cases o non compliance o obligations

Reporting entity to include banks, nancial institutions, intermediariesor a proessional including persons engaged in real estate businessand/or jewelry business

Money-laundering denition widened to include concealment,acquisition, possession and use o proceeds o crime

Removal o upper cap or ne o INR 5 lakh and no caps prescribed

Attachment and conscation o the proceeds o crime withoutconviction in proven cases o oence

Provision or appeal against appellate tribunal’s order directly to theSupreme Court

Responsibility o omissions and commissions on reporting entity,Board o directors and employees

Addition o multiple persons/ entities including members o ICAI,

ICWAI, ICSI to assist the authorities in the enorcement o this Act.

7/27/2019 AML Survey 2012


We have made a conscious attempt to include a variety o institutions with dierent

sizes and type o operations in order to obtain a detailed picture and an in-depth

understanding o the AML regime in India.

The survey was conducted across the nancial services sector covering public

sector banks, private sector banks, oreign banks, general and lie insurancecompanies, mutual unds, non-banking nancial companies and other institutions inthe FS sector covered under PMLA.

The primary target respondents o the survey were senior and mid management

members rom Compliance, Audit, Risk Management and AML departments.

The respondents were also senior management members rom the business and

operation unctions.

Profle o respondents

Figure 24: Scope o respondent organization’s operations Figure 25: Annual turnover o respondent organizations (in INR)



7/27/2019 AML Survey 2012


Figure 26: Designation o respondents Figure 27: Type o organization that respondents represent



7/27/2019 AML Survey 2012


The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual

or entity. Although we endeavour to provide accurate and timely inormation, there can be no guarantee that such inormation

is accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on such inormation

without appropriate proessional advice ater a thorough examination o the particular situation. The views and opinions expressed

herein as a part o the Survey are those o the survey respondents and do not necessarily represent the views and opinions o

KPMG i I di

Contact us

Rajesh Jain

Partner and HeadMarkets

T: + 91 22 3090 2370

E: [email protected]

Deepankar Sanwalka

Partner and Head

Risk Consulting

T: + 91 124 307 4302


Rohit Mahajan

Partner and co-Head

Forensic Services

T: +91 22 3090 2626


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