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									Money Laundering

        Prevention of Money Laundering Act 2002
Group 8
    03 Tashween Ahluwalia

    06 Ayush Bhatia

    07 Naresh Bhoravat

    09 Sumitra Cardoz

    11 Amit Das

    23 Vinod Iyer

    53 Mita Shah

    61 Vishal Kalro
Road Ahead

    Are the Foreign Exchange Management Act (FEMA) and Prevention
     of Money Laundering Act (PMLA) connected ?
    What is Money Laundering
    Salient Provisions of PLMA 2002
    Techniques of Money Laundering
    New Area of operations
    Harmful effects of Money Laundering
    Problem areas for India in having a proper AML
    References
Are the Foreign Exchange Management Act (FEMA)
 and Prevention of Money Laundering Act (PMLA)
                   connected ?
Broad Scheme of FEMA
    SECTION 3 - Prohibits dealings in foreign exchange except through an authorized person
    i.e. an authorized dealer, money changer, off shore banking unit or any other person being
    authorized to deal in foreign exchange or foreign securities.

    SECTION 4 - restrains any person resident in India from acquiring, holding, owning,
    possessing or transferring any foreign exchange, foreign security or any immovable
    property situated outside India except as specifically provided in the Act.

   SECTIONS 13 and 15 - of the Act with penalties and enforcement of the orders of
    Adjudicating Authority

   SECTION 36 to 37 - pertains to the establishment of Directorate of Enforcement and the
    powers to investigate the violation of any provisions of Act.
Foreign Exchange Transactions

     Current Account                                       Capital Account

                                             FDI    Portfolio
    Trade              Invisibles                                  Loan

                          Tour                                  (Govt/Pvt(ECB)
                                       Foreign Source    Indian Source
Exports     Imports   Profit/Div/int
                                           (FII)          (GDR/ADR)       Fcy A/C

                                                                          (RI & NRI)
Capital Account Transactions
Capital Account Transactions (By a person resident in India)

1. Investment in foreign securities
2. Loan raised in foreign currency in India or abroad
3. Acquisition or transfer of immovable property outside India.
4. Guarantees issued in favour of a person resident outside India
5. Export, import or holding of currency or currency notes
6. Loans and overdrafts from a person resident outside India;
7. Maintenance of foreign currency accounts in India and outside India
8. Insurance policy from an insurance company outside India
9. Remittance of capital assets outside India
10. Sale and purchase of foreign exchange derivatives in India and abroad and commodity
  derivatives abroad
Prohibitions - Capital Account Transactions
Two types of prohibitions
General Prohibitions

A person shall not buy / sell foreign exchange to an authorised person for
any capital account transactions.

Special Prohibitions

A non resident person shall not make investment in India which is
engaged in,

         -   the business of chit funds
         -   as nidhi company
         -   in agricultural or plantation activities
         -   in real estate business or construction of farm houses
         -   in trading in Transferable Development Rights (TDRs)
 Current Account Transactions
A transaction other than a capital account transaction also includes,

         1. payments due in connection with
             - foreign trade
             - other current business or services,
             - Short term banking and credit facilities in ordinary course of business.

         2. payments due as
                - interest on loans
                - Net income from investments
                - remittances for living expenses of parents, spouse and children
                  residing abroad
                - expenses in connection with foreign travel, education and medical
                  care of parents, spouse and children
Prohibitions - Current Account Transactions

 Foreign Exchange Management (current account transactions) rules, 2000

 The Classification of current account transactions which are,

           - Totally prohibited

           - Permitted, subject to prior approval of Govt.

           - Permitted, subject to prior approval of RBI

 Exhaustive List
           - Authorized dealers are free to release foreign exchange upon the
 satisfaction that the transactions will not involve / designed for violation of the act.
Schedule I - Expressly Prohibited
      Remittance out of lottery winnings

      Remittance of income from racing/riding or any hobby

      Remittance for purchase of banned products

      Payment of commission on exports made towards investment in JV / WOS
       abroad of Indian companies

      Payment related to callback services of telephones

      Remittance of dividend by any company where dividend balancing is

      Remittance of interest income on funds held in Non – Resident Special
       Rupee ( Account ) Scheme.

      Payment of commission on exports under Rupee state credit Route, except
       commission upto 10% of invoice value of exports of tea and tobaco.
Schedule II -By ADs on approval from GOI

 Remittances which need prior approval from the dealing ministry / department
 of GOI and permitted up to the amounts as mentioned in the approval letter –

    Cultural tours
    Advertisement in foreign print media
    Freight of vessel charted by a PSU
    Payment for import by a Govt, dept. on c.i.f. basis
    Multi modal transport operators making remittance to their agents abroad , hiring
     of transponders by TV channels , ISPs
    Remittances under technical collaboration agreements etc.

Schedule III-RBI approval if limits exceed

Transactions needing RBI approval for amounts exceeding delegated powers of Ads

   Travel
   Gift
   Donation
   Employment
   Emigration
   Maintenance
   Medical expenses exceeding the estimates
   Higher studies exceeding the estimates
   Commission to agents for sale of flats etc. in India
   Consultancy fees
   Pre- incorporation expenses
What is money laundering?

    Money laundering involves disguising financial assets so that they can be used without
     detection of the illegal activity that produced them. Through money laundering, the
     launderer transforms the monetary proceeds derived from criminal activity into funds
     with an apparently legal source.

    The dirty money is called “Proceeds of Crime” (POC).

    For example, Mr. A does not pay income-tax on his income of say Rs. 1,00,000. The
     entire amount is black money. He has gained Rs. 33,333 in income-tax. However, an
     offence under Income-tax is not covered in the PMLA schedule. Hence neither Rs.
     33,333 nor Rs. 1,00,000 is covered by PMLA. Any attempt in converting the black
     money into white is NOT money laundering.

    Similarly, sales tax, excise or octroi evasion is not covered under PMLA.

    Similarly, offences under FEMA are not listed in the PMLA schedule. This means that
     an offence under FEMA is not covered by the PMLA.
The Main objective of the PLMA 2002

    To Prevent, Combat and Control money laundering;

    To Confiscate and seize the property obtained from the laundered

     To deal with any other issue connected with money laundering in
Apex Body – FIU India

   Financial Intelligence Unit – India (FIU-IND) was set by the
    Government of India vide O.M. dated 18th November 2004 as the
    central national agency responsible for
    - receiving,
    - processing,
    - analyzing and
    - disseminating information relating to suspect financial transactions.

   FIU-IND is an independent body reporting directly to the Economic
    Intelligence Council (EIC) headed by the Finance Minister.
Functions FIU India
    Collection of Information:
     - Cash Transaction reports (CTRs)
     - Suspicious Transaction Reports (STRs) from various reporting entities.

    Analysis of Information: In order to uncover patterns of transactions suggesting suspicion
     of money laundering and related crimes.

    Sharing of Information: With national intelligence/law enforcement agencies, national
     regulatory authorities and foreign Financial Intelligence Units.

    Act as Central Repository: Establish and maintain national data base on cash transactions
     and suspicious transactions on the basis of reports received from reporting entities.

    Coordination: Coordinate and strengthen collection and sharing of financial intelligence
     through an effective national, regional and global network to combat money laundering and
     related crimes.

    Research and Analysis: Monitor and identify strategic key areas on money laundering
     trends, typologies and developments.
A Typical Money Laundering Scheme – 3 Stages

(Stage 1) Placement: Illegal funds or assets
are first brought into the financial system

Criminal activities
 - Illegal arm sale
- Smuggling
- Activities of Organized Crime
- Embezzlement
- Insider trading
- Bribery

(Stage 2) Layering: Use of multiple accounts,
banks, intermediaries, corporations, trusts,
countries to disguise the origin.

 (Stage 3) Integration: Laundered funds are
 made available as apparently legitimate funds.
Schedule Offences
  As per 2(1)(y) of the Prevention of Money Laundering Act, 2002, Scheduled offence means

     The offences specified under Part A of the Schedule, or

      Paragraph 1 - The Indian Penal Code, 1860
      Paragraph 2 - The Narcotic Drugs and Psychotropic Substances Act, 1985
      Paragraph 3 - The Explosive Substances Act, 1908
      Paragraph 4 - The Unlawful Activities (Prevention) Act, 1967

     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 Indian Penal Code, 1860
      - Arms Act, 1959
      - Wild Life (Protection) Act, 1972
      - Immoral Traffic (Prevention) Act, 1956
      - Prevention Of Corruption Act, 1988
      - The Securities and Exchange Board Of India Act, 1992
        Total 25 Acts under this category

      The offences specified under Part C of the Schedule.
      - An offence which is the offence of cross border implications and which is specified in,-
      (1) Part-A; or
      (2) Part-B without any threshold; or

      - The offences against property under chapter XVII of the Indian Penal Code
Punishment for Money-Laundering

 Section 4 of the Prevention of Money Laundering Act, 2002 specifies
 punishment for money laundering as under:

    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

    Provided that where the proceeds of crime involved in money-laundering
     relates to any offence specified under paragraph 2 of Part A of the Schedule,
     the provisions of this section shall have effect as if for the words "which may
     extend to seven years", the words "which may extend to ten years" had been
Reporting Entities
Reporting Entities
Reporting Entities

 All Reporting Entities are required to:

 a) Maintain a record of prescribed transactions

 b) Furnish information of transactions to Director FIU-IND

 c) Verify and maintain the records of the identity of all its
     Cash Transactions

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

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

      Cash transactions are required to be reported to FIU-IND on a monthly
      basis by the 15th day of the succeeding month.
     Cash Transaction Reporting



                                                Co-operative and other
   4000000                                      Banks

                                                Private Foreign Banks

                                                Indian Private Banks

                                                Public Sector Banks

              2000-07       2007-08   2008-09
     Suspicious Transactions

      (a) gives rise to a reasonable ground of suspicion that it may involve
      proceeds of an offence specified in the Schedule to the Act regardless
      of the value involved
      (b) appears to be made in circumstances of unusual or unjustified
      (c) appears to have no economic rationale or bonafide purpose
      (d) gives rise to a reasonable ground of suspicion that it may
      involve financing of the activities relating to terrorism;

      Suspicious transactions are required to be reported within 7 working
      days on being satisfied that the transaction is suspicious.
      Suspicious Transaction Reporting





      2000                                          Institutions

      1500                                          Banks


               2006-07        2007-08     2008-09
     Counterfeit Currency Transactions

      All cash transactions where forged or counterfeit currency notes or
      bank notes have been used as genuine or where any forgery of a
      valuable security or a document has taken place facilitating the
      Counterfeit Currency Transaction Reporting




      25000                                         Others

      20000                                         Private Foreign Banks

                                                    Indian Private Banks
                                                    Public Sector Banks

                  2007-08               2008-09
Authorities under Money Laundering Act

      Adjudicating Authority
      Appellate Tribunal
      Special Court
      Director, Financial Intelligence Unit
Adjudicating Authorities eligibility

      The Central Government appoints one or more Adjudicating Authorities

      Consist of chairperson and two other members

      Member should posses experience in the field of law, administration,
       finance or accountancy.

      In the field of law
           (i) He/she is qualified for appointment as District Judge; or
           (ii) been a member of the Indian Legal Service and has held a post in
                Grade I of that service

      In the field of finance, accountancy or administration
           (i) Posses qualifications, as prescribed.
Salient features of Adjudicating authority

     Adjudicating Authority shall ordinarily sit at New Delhi

     Central Government shall, by notification, specify the areas in relation to which each
      Bench of the Adjudicating Authority may exercise jurisdiction

     Chairperson may transfer a Member from one Bench to another Bench

     The Chairperson and every Member shall hold office as such for a term of five years
      (Max age 62)

     Central Government shall appoint another person to fill the temporary vacancy

     Chairperson or any other Member shall not be removed from his office except by an
      order made by the Central Government after giving necessary opportunity of hearing

     Adjudicating Authority shall have powers to regulate its own procedure
Appellate Tribunal
      Central Government shall, by notification, establish an Appellate Tribunal to hear appeals
       against the orders of the Adjudicating Authority
      The Appellate Tribunal shall consist of a Chair-person and two other Members.
      A person shall not be qualified for appointment as Chairperson unless he is or has been a
       Judge of the Supreme Court or of a High Court or is qualified to be a judge of the High
      A person shall be qualified for appointment as a Member-
          - If he/she is or has been a Judge of a High Court; or
          - Should be a member of the Indian Legal Service and has held a post in Grade I of that
            Service for at least three years; or
          - Should be a member of the Indian Revenue Service and has held the post of
            Commissioner of Income-tax or equivalent post in that Service for at least three years;
      The Director or any person aggrieved by an order made by the Adjudicating Authority
       under this Act, may prefer an appeal to the Appellate Tribunal
      Every appeal should 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.
      Appellate Tribunal may take up the appeal after 45 days if it is satisfied that there was
       sufficient cause for not filing it within that period.
Salient features of Appellate Tribunal

      No sitting Judge of the Supreme Court or of a High Court shall be appointed under
       this section except after consultation with the Chief Justice of India
      The Chairperson or any other Member may, by notice in writing under his hand
       addressed to the Central Government, resign his office
      The Chairperson or any other Member shall not be removed from his office except
       by an order made by the Central Government on the ground of proved misbehavior
       or incapacity.
      Appellate Tribunal shall be guided by the principles of natural justice and, subject
       to the other provisions of this Act.
      The Appellate Tribunal shall have, for the purposes of discharging its functions
       under this Act, the same powers as are vested in a civil court under the Code of
       Civil Procedure, 1908
      An order made by the Appellate Tribunal under this Act shall be executable by the
       Appellate Tribunal as a decree of civil court
      Any person aggrieved by any decision or order of the Appellate
      Tribunal may file an appeal to the High Court within sixty days from the date of
       communication of the decision or order of the Appellate Tribunal
Adjudication process
      Director shall immediately after attachment of property forward a copy of
       the order, along with the material in his possession, to the Adjudicating
      Director will within a period of thirty days from such attachment, file a
       complaint stating the facts before the Adjudicating Authority
      On receipt of a complaint Adjudicating Authority examines the cases.
      SNC of not less than thirty days is issued 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-
        (a) Considering the reply of SCN
        (b) Hearing the aggrieved person and the Director /Officer assigned,
        (c) Relevant materials placed on record before him,
        record a finding whether all or any of the properties referred to in the notice
       issued under involved in money-laundering
Techniques of Money Laundering

     Hawala

     Structuring Deposits – Also known as Smurfing

     Third-Party Cheques

     Credit Cards

     Shell companies

         Hawala is an alternative or parallel remittance system
             Money transfer without money movement
Hawala - Why is it popular?
    Cost Effective
    Efficient
    Reliable
    Lack of Bureaucracy
    Tax evasion
Smurfing/ Structuring Deposits

     The act of parceling what would otherwise be a large financial
       transaction into a series of smaller transactions to avoid
               scrutiny by regulators or law enforcement.

    1.   Random small deposits made in different banks

    2.   Deposits in accounts of relatives/ friends

    3.   Buy bank drafts from various FI’s
Techniques of Money Laundering
    Third-Party Cheques – Utilizing counter cheques or banker’s drafts drawn on
     different institutions and clearing them via various third-party accounts. Third
     party-cheques and traveller’s cheques are often purchased using proceeds of
     crime. Since these are negotiable in many countries, the nexus with the source
     money is difficult to establish.

    Credit Cards – Clearing credit and charge card balances at the counters of
     different banks. Such cards have a number of uses and can be used across
     international borders. For example, to purchase assets, for payment of services
     or goods received or in a global network of cash-dispensing machines

    Shell Companies - These are fake companies that exist for no other reason than
     to launder money. They take in dirty money as "payment" for supposed goods
     or services but actually provide no goods or services; they simply create the
     appearance of legitimate transactions through fake invoices and balance sheets.
New areas of Operation of Money Laundering

    Insurance Sector

    Open Securities Market

    Cyber Crime
Insurance Sector

      Payment of premium for insurance policies in cash

   Eg. 1:-Persons residing at same address and apparently related to
     each other paid insurance premium of over Rs 1 crore in cash
     each below Rs 50k in single month towards 229 life insurance

   Eg. 2:A husband and wife paid insurance premium over Rs 2.5
     crore for over 15 policies out of which over Rs 80 lacs was
     paid in cash in installments of less than Rs 50k
Open Securities Market

      Investment in capital markets and investment in mutual
       funds through multiple folios.

   E.g. 1:-Accounts opened in the name of salaried employees and
     large investments in capital markets were made through these
     accounts .The employees wee office assistants and their
     employer was routing his unaccounted income through these
     bank accounts.

   E.g. 2: An individual invested Rs 4 crore in a mutual fund
      through 25 folios. Some transactions were undertaken in the
      same scheme on the same day but in different folios
Cyber Crime

     Financial fraud through use of internet /emails-The Internet
      has presented a number of challenges for credit card issuers
      and cardholders
        Account Number Generation Programs

        Mass Compromises of Hacked Data with or without

         Magnetic Stripe
        PC spyware travels in emails or attaches itself when

         infected websites are surfed
        Illegal web sites disseminate “how to” kits for perpetrating

Harmful Effects of Money Laundering

      Terrorism
      Threat to Banking System
      Threat to Economic and Political Stability

      Terrorist Financing is defined as providing funds
       and financial services to a terrorist, terrorist
       associate or terrorist connected organization.
Some of the key differences between Money Laundering and Terrorist

        Money Launderers will send crime proceeds through legal
         channels in order to conceal their criminal origins, whilst
         terrorist financiers will transfer funds that may be legal or
         illicit in origin in such a way as to conceal their source and
         ultimate use, which is the support of terrorism.
Threat to Banking System

      Banks face a number of risks when their Institutions are
       used for money laundering/ terrorist financing activity,
       including :-
       - Reputational Damage
       - Loss of Customers
       - Loss of staff (criminal charges against bank employees)
       - Legal actions (fine / penalty)
       - Loss of Business License
Examples of serious penalties on financial institutions due to AML
Impact of Money Laundering on the Economy
Amendment in 2009

     Under the amended PMLA Act, the Enforcement Directorate will be empowered to
      search the premises immediately after the offence is committed and the police has filed
      a report under the Code of Criminal Procedures.

      It will also enable the Central Government to return the confiscated property to the
      requesting country in order to implement the provisions of the United Nation's
      convention against corruption.

     New definitions of authorized persons and payment system operators are incorporated
      and the definition of financial institution is also amended in the new amended PMLA.

     Financial intermediaries like full-fledged money changer, money transfer service
      providers such as Western Union and International Payment gateways, including VISA
      and MasterCard have also been brought under the ambit of amended PMLA.
Amendment in 2009 (Cont’d)

      The passage of the Prevention of Money Laundering (Amendment) Bill, 2009 will
       enable India’s entry into Financial Action Task Force (FATF), an inter-
       governmental body that has the mandate to combat money laundering and terrorist

      The amended PMLA, will address India’s international obligation.
In news – (India)

     India's lone banking regulator, Reserve Bank of India, recently
      blocked the application of Swiss bank UBS for a banking
      license in India on the ground that it was involved in $8 billion
      money-laundering racket.

     The Enforcement Directorate has registered a case against
      Satyam Computer and its tainted founder chairman B
      Ramalinga Raju for alleged money laundering.

     Common Wealth Games 2010 - India
Basel Committee on Banking Regulations & Supervisory Practices

  The Basel Statement of Principles on the prevention of criminal use of the banking system was a significant
  breakthrough on the financial front to have some controlling mechanism for money-laundering on an
  international plane.

  The Statement of Principles does not restrict itself to drug-related money laundering but extends to all aspects
  of laundering through the banking system, i.e. the deposit, transfer and/or concealment of money derived from
  illicit activities whether robbery, terrorism, fraud or drugs. It seeks to deny the banking system to those
  involved in money laundering by the application of the four basic principles:
                                                                    Customer Acceptance - Ensure that only
                                                                    legitimate and bona fide customers are
  1. Know Your Customer (KYC)                                       accepted.
                                                                    Customer Identification- Ensure that
  2. Compliance with Laws                                           customers are properly identified to
                                                                    understand the risks they may pose.
  3. Cooperation with Law Enforcement Agencies
                                                                    Transactions Monitoring- Monitor
  4. Adherence to the Statement
                                                                    customers accounts and transactions to
                                                                    prevent or detect illegal activities.

                                                                    Risk Management- Implement processes to
                                                                    effectively manage the risks posed by
                                                                    customers trying to misuse facilities.
Problem areas for India in having a proper AML

      Lethargy of Enforcement Mechanism
      Growth of Technology
      Unawareness about the Problem
      KYC Norms – Do they serve the purpose
      Smuggling – a rampant activity
      Tax Laws
      Absence of comprehensive enforcement agency
The influence of money on the people was appropriately portrayed
by Henry Fielding as follows:

―Sir, money, money, the most charming of all things; money, which
will say more in one moment than the most elegant lover can in
years. Perhaps you will say a man is not young; I answer he is
rich. He is not genteel, handsome, witty, brave, good-humoured,
but he is rich, rich, rich, rich, and rich— that one word contradicts
everything you can say against him.‖


     FATF

     Wikipedia - FATF

     Indian Bank’s Association

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