Anti-Money Laundering The New Agenda

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					  Anti-Money Laundering: The New
              Agenda
                      December 22, 2006


 Hotel Surya Palace
       Baroda

                                          1
*connectedthinking
                         The Impact of Money Laundering




PwC Confidential                                          Page 2
PricewaterhouseCoopers
 What is Money Laundering?


     “Money Laundering” is generally defined as engaging in acts designed to
     conceal or disguise the true origin of criminally derived proceeds so that
     the unlawful proceeds appear to have derived from legitimate origins or
     constitute legitimate assets
        - Money laundering occurs in connection with a wide variety of crimes,
          including, but not limited to, drug trafficking, robbery, fraud,
          racketeering, and terrorism

     “Terrorist Financing” is referred to as the funding of criminal activity, both
     by criminal, as well as legitimate, means

     “Reverse Money Laundering” is the process where legitimate funds are
     used to finance criminal activity




PwC Confidential                                                                 Page 3
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              Major Anti-Money Laundering Laws and Regulations


  Proceeds of Crime Act 2002 in U.K.

  The 3rd E.U. directive on Money Laundering

  40 recommendations of the F.A.T.F.

  The Bank Secrecy Act (BSA) (1970): All national banks must develop, administer,
  and maintain a program that ensures and monitors compliance with the BSA and its
  implementing regulations, including record keeping and reporting requirements

  Annunizo-Wylie Act (1992): This addition to the Bank Secrecy Act increased
  penalties (Death Penalty Provision) and expectations (Suspicious Activity Reporting)

  Regulation H: Established a system of internal controls to ensure ongoing
  compliance with Bank Secrecy Act

PwC Confidential                                                                   Page 4
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         Major U.S. Anti-Money Laundering Laws and Regulations


   POP QUIZ
     What new law did President Bush sign on October 26, 2001?
        "Uniting and Strengthening America by Providing Appropriate Tools Required
        to Intercept and Obstruct Terrorism (USA Patriot Act) Act of 2001“

                   Included more than 50 amendments to the Bank Secrecy Act (BSA)

                   Designed to prevent the use of the U.S. financial system to help fund
                   terrorism and other crimes

                   Requires institutions to implement and maintain AML programs

                   Designate a Compliance officer with sufficient resources to administer an
                   effective program

                   Imposes criminal and civil penalties
PwC Confidential                                                                           Page 5
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What is Money
 Laundering?


                6
                         3 phases of Money Laundering




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                         Money Laundering in Action

  Illustration




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                         Channels of Money Laundering

  Illustration




PwC Confidential                                        Page 9
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                         Expanded Regulatory Oversight




PwC Confidential                                         Page 10
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                         Global Efforts to Curb Money Laundering




PwC Confidential                                                   Page 11
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                         Sharing Financial Intelligence




PwC Confidential                                          Page 12
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                         Important Global Initiatives




PwC Confidential                                        Page 13
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                         10 Principles of Money Laundering




PwC Confidential                                             Page 14
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        How an AML system helps identify suspicious transactions




PwC Confidential                                              Page 15
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                         Building blocks of an AML system




PwC Confidential                                            Page 16
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                         Link Analysis




PwC Confidential                         Page 17
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                         Sequence Matching




PwC Confidential                             Page 18
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                         Rule- based technologies




PwC Confidential                                    Page 19
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                         Data Aggregation & Analytics




PwC Confidential                                        Page 20
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                         Neural Network




PwC Confidential                          Page 21
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                         Have a Robust AML Vision




PwC Confidential                                    Page 22
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                         Architecture of an AML solution




PwC Confidential                                           Page 23
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                         Convergence of KYC requirements




PwC Confidential                                           Page 24
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                         A tactical strategy for AML program




PwC Confidential                                               Page 25
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 Customer Information Program/Know Your Customer/Enhanced
 Due Diligence Defined

        Customer Information Program (CIP)
         - Provides for the manner in which a bank obtains and verifies the
           identity of customers at the time an account is opened
        Know Your Customer (KYC)
         - Term used to describe a set of money laundering control policies and
           procedures that are used to determine the true identity of a customer
           and the type of activity that will be “normal and expected” for the
           customer, and to detect activity that should be considered “unusual”
           for the particular customer
        Enhanced Due Diligence (EDD)
         - Term used by regulatory authorities in the U.S. that requires financial
           institutions to take additional steps of examination and caution to
           identify their customers and confirm that their activities and funds are
           legitimate

PwC Confidential                                                               Page 26
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                         KYC Methodology –
        Understand the Bank’s Business and Customer Population

   What is the business of the bank?
    - Retail
    - Wholesale
    - Private
    - Foreign
   What is the size of the bank?
   What type of services and products does the bank offer its clients?




PwC Confidential                                                         Page 27
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                             KYC Methodology -
                           Develop Business Rules

   Develop high risk identification rules that will be used to identify high AML
   risk customers


   High risk identification rules can vary from bank to bank depending on some
   of the following items:
    - Type of bank (Retail, Wholesale, Private, etc.)

     - Size of the bank

     - Type of services and product the bank offers clients




PwC Confidential                                                              Page 28
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                                          KYC Methodology –
                                          Define Data Inputs
                                                    Critical Data Mapping Spreadsheet
   Need to identify data inputs that will
   be used to successfully risk rate
   customer base
   Critical data identification
   workshops are crucial
    - Need client business people
         and technical/data people
         involved
    - A workshop can be used to
         frame high risk identification
         rules
    - A critical data mapping
         spreadsheet can be used to
         capture the results of such a
         workshop




PwC Confidential                                                                        Page 29
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                               KYC Methodology –
                         Design and Develop Functionality

   Based on the high risk identification rules and the data model, develop technical
   functionality to perform the high risk identification


     - SQL stored procedures
   Customer level data should have risk category fields that are used to track rating
   categories for each customer


   Functionality should be developed in an automated manner so that the process is
   repeatable




PwC Confidential                                                                    Page 30
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                                      KYC Methodology -
                           High Risk Identification Rules (EXAMPLE)
   HIGH
               Close Monitoring Rules
                     Money Service Businesses (MSBs)
                     Non-Religious Charities
                     Politically Exposed Persons (PEPs)                                    Illustrative
                     Foreign Correspondent Financial Institutions

               High Risk Rules
LEVEL OF EDD




                     US financial institutions
                     Private banking clients
                     Foreign/NRAs
                     Trusts
                     Mortgage companies

               Potential High Risk Transactions Rules
                     Non-personal with high aggregate cash transactions (Aggregated cash transactions > 50,000 per
                     year
                     Small business customers with high aggregate cash transactions (Aggregated cash transactions
                     > 100,000 per year)
                     Non-personal customers with wires to high risk countries
                     Small business customers with wires to high risk countries
                     Corporation customers with wires to high risk countries
   LOW
PwC Confidential                                                                                            Page 31
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                          KYC Methodology -
                         KYC Form (EXAMPLE)




PwC Confidential                              Page 32
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                          Analysis/Activity Monitoring
                                  Overview

       Transactional analysis of transactions/fund movements/customers over a
       certain period of time
       Objective:
        - Showing diligence to the regulators that the appropriate
          controls/process flow by Compliance
        - Establish customer transaction profiles to identify suspicious activity
        - Identify potential suspicious/unusual activity for further
          analysis/investigation by Compliance
             Transactions/products covered: foreign exchange, dollar clearing,
             check settlement, loan, and wire transactions
        - Risk rating score from the KYC process will be used to help identify
          suspicious activity for all customers



PwC Confidential                                                             Page 33
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                           Analysis/Activity Monitoring
                           Key Steps and Procedures

       Identify and determine availability of data sources during look-back period

       Develop and apply data gathering processes

       Correlate fund movement data to product type and account/customer
       data

       Customize and apply risk-rating criteria at customer and transaction level

       Identify unusual activity

       Further research unusual activity to identify and report potential
       suspicious transactions

PwC Confidential                                                             Page 34
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                              Analysis/Activity Monitoring


                                                                               Illustrative
   Electronic Funds Transfer (EFT)
         - Any payment mechanism, that entails the transfer of value from the payor to the
           payee. Value is represented by credit balances on the bank's books reflecting
           customers' deposit balances. The EFT mechanism is merely a means of
           communicating the instruction to add value to one account and subtract value from
           another account. EFT methods are fast and carry a greater degree of certainty of final
           settlement. Some principal forms of EFT are the following:
      Wire Transfer
         - Refers to a same-day transfer of funds from an account at one bank to an account at
           another bank
         - Fed guarantees to pass value as of the date of the Fedwire transfer is initiated
           provided the transfer meets all required criteria
         - Fedwire is a part of the Federal Reserve System Communication Systems
      ACH Transfer
         - Electronic methods for clearinghouse associations to pas payments among members
           and other financial institutions in the region, and of exchanging payments among the
           ACHs themselves. ACH transfers may be either credit transfers (sending funds out) or
           debit transfers (pulling funds in)
PwC Confidential                                                                           Page 35
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Technology Compliance
Reviews




                        36
                             Technology Compliance
                                 Illustrative MIS

       Look Back Reviews
          - Analyzing customer, account, transaction, and wire transfer activity
            within a company’s operations during a certain timeframe
       Currency Transaction Reports (CTRs)
          - Filed by financial institutions that engage in a currency transaction in
            excess of x amount
       Suspicious Activity Reports (SARs)
          - Filed on transactions or attempted transactions involving at least x
            amount that the financial institution knows, suspects, or has reason to
            suspect the money was derived from illegal activities. Also filed when
            transactions are part of a plan to violate federal laws and financial
            reporting requirements (structuring)
       Customer Risk Rating
          - Applying criteria to identify the potential of money laundering risk in an
            entire customer population
PwC Confidential                                                                  Page 37
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                                Value adding Technology and Data related AML initiatives


INDUSTRY RISKS                                                  RISK MITIGATION                         VALUE ADD

                 GEOGRAPHY AND COUNTRY RISK
                 Many institutions have a large amount of       AML Technology Compliance                   IMPROVED
                 customers in countries where cash is
                                                                Reviews to test effectiveness of AML       PROCESSES
                 frequently used, there is a politically
                 unstable regime that are known to be           systems that are currently
                 drug producing or drug transit countries,      implemented
                 or are in countries that have been
                 classified as having poor AML strategies.
                                                                                                            IMPROVED
                                                                Customer Information Improvement          INFORMATION
                 BUSINESS AND ENTITY RISK                       and Sustenance Program to create a           QUALITY
                 The characteristics that make businesses       foundation, where customer
                 and entities high risk vary greatly. Banks
                 provide financial services that are            information can be used to generate
                 conducted behind the protection of strict      business value
                 bank secrecy laws. Cash intensive
                 businesses allow launderers to disguise                                                  MITIGATED RISK
                 cash derived from illegal activities in
                 deposits containing cash derived from          Account Opening Process
                 both regular and legitimate business
                                                                Improvement in support of KYC
                 activities.
                                                                requirements to streamline data
                                                                through the information supply chain
                 PRODUCT AND TRANSACTION RISK
                 Transactions and products with the                                                         IMPROVED
                 highest risk are generally considered to                                               DETECTION SYSTEMS
                 be those where unlimited third party           Activity Monitoring and Surveillance
                 funds can be freely received, or where         Enhanced Detection to improve the
                 funds can regularly be paid to third           identification of suspicious activity
                 parties, without evidence of identity of the
                 third parties being taken. Some of the
                 highest risk products and transactions                                                     SUSTAINED
                 are those offering money transfer              Proper AML Vendor Selection,
                 facilities though checks, wire transfers,                                                PROTECTION OF
                 cash transactions, and/or deposits from        superior Project Management etc              ASSETS
                 third parties.

DRAFT
        Thank You


Contact: robin.roy@in.pwc.com

022-66691561
98202 98237