PREVENTION OF MONEY LAUNDERING ACT, 2002

What is Money- Laundering?• Disguise of illegal origin of money• Smuggling, Drug trafficking, Illegal arms sales,

Computer frauds, Embezzlement• Regarded as ‘DIRTY- MONEY’

Conversion of the ‘dirty- money’ to a

legitimate money.

Money Laundering by Activity

Terroristgroups

1% Drugs26%

OtherOrganized

Crime23%

Smuggling29%

Embezzle-ment/WhiteCollarCrime21%

Stages in Money Laundering

Placement Layering Integration

Placement: Illegal funds or assets are bought into the financial system.

Layering: Use of multiple accounts, banks, intermediaries, corporations, countries etc. to disguise the origin.

Integration: Funds are made available as apparently legitimate.

Continuity and EvolutionEarly 1990s

Bank-centered techniques: collection accounts, loan back arrangements bank drafts, money orders and cashier’s cheques smurfingCash smugglingAccounts in relatives’ names, shell companiesHawala, hundi or other “underground banking” systems

2010Wire transfersNew electronic payment systemsRemittance services and money exchange servicesAssistance from “Gatekeepers” Terrorist financing through non-profit organizationsInsurance industry, particularly through independent insurance agentsPolitically Exposed Persons (PEPs)

PMLA, 2002

Came into force with effect from 01st July, 2005 The Act extend to whole of India except J&K Object:

To prevent money- laundering, seize the property with authority, involved in money laundering

Administration:Directorate of Enforcement of the Department of

Revenue, Ministry of Finance

• Various Rules came into effect from July 2005– Rules detailing Powers of Director FIU & ED – Rules detailing the method of attachment of

property, period of retention etc.– Rules detailing the receipt & management of

confiscated assets– Rules relating to legal obligations of reporting

entities

According to Section 12 PMLA and the Rules impose obligations on

Banking companies Financial institutions Intermediaries of the securities marketTo maintain records furnish information verify identity of clients

“Banking Company” under PMLA includes:All nationalized banks, private Indian banks and private foreign banksAll co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) co-operative banksState Bank of India and its associates and subsidiariesRegional Rural Banks

“Financial Institution” under PMLA includes:Financial Institutions as defined in Section 45-I of the RBI Act namely EXIM Bank, NABARD, NHB, SIDBI, IFCI Ltd., IDFC Ltd., IIBI Ltd. and TFCI Ltd. Insurance companiesHire Purchase companiesChit fund companies as defined in the Chit Funds Act.

“Intermediary” under PMLA includes:Persons registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992:

• Stock brokers• Sub-brokers• Share transfer agents• Registrars to issue• Merchant bankers• Underwriters• Portfolio Managers

• Appointment of Principal Officer:– Every reporting entity shall communicate the

name, designation and address of the Principal Officer to the Director, FIU-IND

• Furnishing of information by the Principal Officer:– furnish the information referred to in the Rules to

the authorities– retain copy of such information for the purposes

of official record

Obligations of reporting entities

Requirements Under the Act

Every Broker shall—(a) maintain a record of all transactions, the nature and

value of which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month;

(b) furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed; (i.e. every month)

(c) verify and maintain the records of the identity of all its clients, in such manner as may be prescribed (i.e. KYC)

Every broker has to maintain the record of-• All cash transactions of the value of more than Rs 10

lakh or its equivalent in foreign currency.• All series of cash transactions integrally connected to

each other which have been valued below Rs 10 lakh or its equivalent in foreign currency where such series of transactions take place within one calendar month.

• All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as DEMAT account, security account maintained by the registered intermediary

Suspicion Transactions

• Funds derived from illegal activities• Conducted to disguise such funds• No apparent purpose• Not the sort of transaction the customer would enter

into• No reasonable explanation considering the

background and purpose

EXAMPLES:• Large transactions or patterns• Clients with links to criminals• False ID documents or not face to face• Multiple accounts• Sudden activity in dormant accounts• Use of different accounts alternately

Client Identity

• Verify identity of clients:– Identity of clients– Current and permanent address– Nature of business– Financial status

• Maintain records of the identity of clients for a period of 10 years from the date of cessation of the transactions with the client. (Rule 10)

Changes in Subordinate Legislation

• Reporting entity to maintain records of all transaction which contain all necessary information to permit reconstruction of individual transaction …

• Record of receipt by NPOs of value more than Rs 10 lakh to be maintained and reported

• Record of cash transaction to be maintained where forged or counterfeit currency notes tendered

• No specific mode of maintaining the information• Period of ten years for retention of records - from the

date of transaction and not from the date of cessation of the transaction

Legal Obligations & Guidelines imply

CUSTOMER DUE DILIGENCECustomer Acceptance -• Ensure acceptance of only legitimate and bona fide

customers– Issue of mechanism to verify ID– Issue of Multiple IDs– Issue of list of suspects/criminals/unwanted elements– Awareness and training of staff

Customer Identification- • Ensure that the customers are properly identified to

understand the risks they may pose.– Background check of new customer– Background check of existing clients– Issue of List of suspects/criminals/unwanted elements– Awareness and training of staff

Transactions Monitoring-• Monitor customers accounts and transactions to prevent or

detect illegal activities.– Issue of Mechanism to verify financial details– Transactions inconsistent with customers profile (business)– Unexplained transfers between multiple accounts with no

rationale– Sudden activity in dormant accounts

Risk Management-• Implement processes to effectively manage the risks posed by

customers trying to misuse facilities.– Categorization of customers: high/medium/low risk : a

dynamic concept– Constant interaction between front desk and the

compliance team required– Awareness and training of staff

• Set up processes and technology to identify and report suspicious transactions– Capture customer details– Generate alerts– Collect and analyze additional information– Decide whether transactions are suspicious– Ensuring reporting of quality data electronically

• Alignment of people, process and technology • Confidentiality and Privacy