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					Briefing on ‘KYC’ Norms and ‘AML’ Measures
            for IBA Member Banks

Venue: Hotel Hilton Towers, Mumbai
Date: 12th April 2006

                                     Presented by
                                     Sanjeev Singh
                                     Additional Director, FIU-IND
                                     Financial Intelligence Unit-India



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Contents


     Background

     About FIU-IND

     Legal Framework

     Verification of identity

     Furnishing information

     AML and Tax Compliance



                                 FIU-IND
Background




             3
Timeline


      Mid 1980s - Growing concern of international community to deprive
       criminal elements of the proceeds of their crimes.

      1989 – Financial Action Taskforce (FATF) set up to ensure global action
       to combat money laundering.
             Forty Recommendations - Complete set of counter-measures against money
              laundering
             Nine Special Recommendations on Terrorist Financing



      1995 - Egmont Group set up to stimulate international cooperation
       amongst FIUs. Best Practices for exchange of information.


      1997- Asia/Pacific Group on money laundering (APG) set up to create
       awareness and encourage adoption of AML measures.


                                                                             FIU-IND
Need for a Financial Intelligence Unit


      Law enforcement agencies had limited access to
       relevant financial information.

      Need to engage the financial system in the efforts
       to combat laundering.

      Need to report suspect financial transactions by
       financial institutions to a central agency for
       assessing and processing reported transactions.

                                                 FIU-IND
Definition of a FIU


     A central, national agency responsible for receiving, (and as
     permitted, requesting) analysing and disseminating to the
     competent authorities, disclosures of financial information:

      (i) Concerning suspected proceeds of crime, or
      (ii) Required by national legislation or regulation,

      in order to combat money laundering.


                                 - Definition formalised by Egmont Group in 1996




                                                                   FIU-IND
About FIU-IND




                7
Background of FIU-IND


      Set up vide Government of India’s Office Memorandum
      (O.M.) dated 18th November 2004

        “To coordinate and strengthen collection and sharing of
        financial intelligence through an effective national, regional and
        global network to combat money laundering and related crimes.”

     Multi-disciplinary unit headed by a Director.

     Core Functions
           Intelligence Management
           Relationship Management
           Policy Review and Development



                                                                 FIU-IND
Framework
     Supervisory and
   Regulatory Agencies
    RBI             DCA                   Supervisory and
    SEBI            IRDA                Regulatory Agencies

    Reporting Entities                   RBI          DCA
   Banking Company                       SEBI         IRDA
   Financial Institutions
                            FIU-IND   Intelligence/Enforcement
   Intermediaries                              Agencies

 Intelligence/Enforcement                IB /RAW
          Agencies                       REIC
    IB /RAW                              CBDT-DGIT/CCIT
    REIC                                 CBEC-DGDRI/DGCEI
    CBDT-DGIT/CCIT                       ED/NCB
    CBEC-DGDRI/DGCEI                     EOW of Police/CBI
    ED/NCB                               Others
    EOW of Police/CBI
                                           Foreign FIUs
    Others

      Foreign FIUs


                                                FIU-IND
Legal Framework




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Prevention of Money Laundering Act


  Prevention of Money Laundering Act (PMLA) and the Rules
  notified thereunder impose obligation on
          banking companies

          financial institutions

          intermediaries of the securities market

     to
          appoint principal officer

          verify identity of clients

          maintain records

          furnish information




                                                     FIU-IND
Banking Company under PMLA


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


                                              FIU-IND
Role of Principal Officer



      Every banking company shall communicate the
       name, designation and address of the Principal
       Officer to the Director, FIU-IND. (Rule 7)

      The Principal Officer shall:
          furnish the information referred to in rule 3 to the
           Director.
          retain copy of such information shall for the purposes
           of official record.


                                                          FIU-IND
Scheduled Offences under PMLA

     Offences specified under Part A of the Schedule
         Offences under the Indian Penal Code (Sec 121, 121A)
         Offences under the Narcotic Drugs And Psychotropic Substances
          Act, 1985
     Offences specified under Part B of the Schedule if the
      total value involved in such offences is thirty lakh rupees
      or more.
         Offences under the Indian Penal Code
         Offences under the Arms Act, 1959
         Offences under the Wild Life (Protection) Act, 1972
         Offences under the Immoral Traffic (Prevention) Act, 1956
         Offences under the Prevention Of Corruption Act, 1988


                                                               FIU-IND
Know Your Customer Guidelines


              Customer Acceptance - Ensure that you
              accept only legitimate and bona fide
              customers.

              Customer Identification- Ensure that you
              properly identify your customers to
              understand the risks they may pose.


              Transactions Monitoring- Monitor
              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.




                                                         FIU-IND
Verification of identity




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Verification of Identity of Clients


      Verify and maintain the record of:
            Identity of client
            Address - current and permanent
            Nature of business
            Financial Status


      Maintain records of the identity of clients for a
       period of ten years from the date of cessation of
       the transactions with the client.



                                                   FIU-IND
Challenges in verification of identity


      Mechanism to verify ID

      Multiple IDs

      Existing Clients

      Consolidated Hot List




                                         FIU-IND
Furnishing Information




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Information to be furnished


      Cash Transactions
            All cash transactions of the value of more than rupees ten
             lakhs or its equivalent in foreign currency
            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
      Suspicious Transactions
            All suspicious transactions whether or not made in cash




                                                                  FIU-IND
Suspicious Transactions

         Suspicious transaction means a transaction
          whether or not made in cash which, to a person
          acting in good faith –
          gives rise to a reasonable ground of suspicion that it
           may involve the proceeds of crime; or
          appears to be made in circumstances of unusual or
           unjustified complexity; or
          appears to have no economic rationale or bonafide
           purpose;

   Reference: Categories of suspicion for banks
                                                         FIU-IND
Reporting Formats

                                                   Manual CTR
   Attributes                                      Summary of Cash Transaction Reports
                                                   Cash Transaction Report
      Scalable design - STRs involving            Annexure A- Individual Detail Sheet
       numerous individuals, legal entities and    Annexure B- Legal Person/Entity Detail Sheet
       accounts.
                                                   Manual STR
      Normalised design- Reduced repetitive
                                                   Suspicious Transaction Report
       information capture.                        Annexure A- Individual Detail Sheet
      Editable PDF forms- Ease of filling.        Annexure B- Legal Person/Entity Detail Sheet
      Compatibility of electronic formats with    Annexure C- Account Detail Sheet
       transactional data structure of reporting   Electronic Formats
       entities.                                   STR for a Banking Company
      Compatibility of electronic and manual      CTR for a Banking Company
       formats.                                    STR for an Intermediary
                                                   CTR for an Intermediary
   Roadmap Ahead
      Secure Gateway                              Data Files in Electronic Reporting
      Information security standards (BS 7799)    Control File        Transaction Data File
                                                   Branch Data File Individual Data File
                                                   Account Data File Legal Person Data File


                                                                             FIU-IND
Challenges in detection of suspicious transactions
          Data Quality
            Decentralized databases
            Data not captured in electronic form

          Process
            New Roles and Responsibilities
            Identity matching with hot list of individuals and entities
            Mechanism to verify financial details

          Technology
            Selection of appropriate AML solution and analytical tools
            Money laundering typologies

          People
            Awareness
            Training

          Compliance Cost
          Confidentiality and Privacy



                                                                           FIU-IND
Data Quality of Reports


      Significance
            Meet data requirements of data mining, identity matching
            Reduce false positives


      Validation of data files
            Valid data structure
            Mandatory data fields
            Relationship integrity
            Data sufficiency
       (File Validation Utility-Assist in error correction)


                                                                FIU-IND
FIU-IND Website

               www.fiuindia.gov.in

        About FIU-IND                Maintenance of Records

        PMLA 2002                    Furnishing Information


        Scheduled Offences           Identity of Clients

        Notifications                International


        Publications                 FAQs




                                                      FIU-IND
AML and Tax Compliance




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AML Measures and Tax Compliance

                       Money Laundering is the process by which illegal funds and
                       assets are converted into legitimate funds and assets.




                                                                                                   Investments
                                                                                                   Purchases




   Placement: Illegal funds or assets     Layering: Use of multiple            Integration: Laundered funds are
   are first brought into the financial   accounts, banks, intermediaries,     made available as apparently
   system                                 corporations, trusts, countries to   legitimate funds.
                                          disguise the origin.

                               Money Laundering is tax evasion in progress
                                                                                                 FIU-IND
Thank You




sanjeev.singh@fiuindia.gov.in



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