Anti Money Laundering and Combating Terrorist Financing: Indian Initiative and

Global Backdrop

Presentation at Risk and Compliance Summit 2007

Mumbai, 9th March 2007

Arun Goyal Director

Financial Intelligence Unit-India(FIU-IND)

FIU-IND

Need for Money Laundering

Every year, huge amounts of funds are generated from illegal activities. These funds are mostly in the form of cash. 

The criminals who generate these funds need to bring them into the legitimate financial system.

Hide Wealth Avoid Prosecution Evade Taxes

Increase Profits Become Legitimate

Over $1.5 trillion of illegal funds are laundered each year

FIU-IND

Consequences of Money Laundering

Finances Terrorism: Money laundering provides terrorists with funds to carry out their activities.

Undermines rule of law and governance: Rule of Law is a precondition for economic development – Clear and certain rules applicable for all

Affects macro economy Money launderers put money into unproductive assets to avoid detection.

Affects the integrity of the financial system: Financial system advancing criminal purposes undermines the function and integrity of the financial system.

Reduces Revenue and Control: Money laundering diminishes government tax revenue and weakens government control over the economy.

FIU-IND

Global Framework - Financial Action Task Force

Established by the G-7 Summit in Paris in 1989 in response to mounting concern over money laundering.

A policy making body, having secretariat at Organisation for Economic Co-operation and Development (OECD).

Works to generate the necessary political will to bring about national legislative and regulatory reforms to combat money laundering and terrorist financing.

Members: 31 countries, European Commission and Gulf Co-operation Council

India has been accorded ‘Observer’ status

FIU-IND

FATF Mandate

Sets Standards

Assesses compliance against standards

Researches money laundering and terrorist financing threats

FIU-IND

FATF Recommendations

1990 - Forty Recommendations - Complete set of counter-measures against money laundering covering:

Criminal justice system and law enforcement Financial system and its regulation National and international co-operation

1996 -Recommendations Revised Nine Special Recommendations on Terrorist

Financing 2003: Eight Special Recommendations 2004: 9th Special Recommendation

FIU-IND

Global Framework -Asia/Pacific

Group The Asia/Pacific Group on money laundering (APG) is a

FATF styled regional body

Established in February 1997 at Bangkok, Thailand.

Facilitates adoption of internationally accepted anti-money laundering and anti-terrorist financing standards set out in the recommendations of the Financial Action Task Force (FATF).

Similar FATF styled regional bodies for other regions

FIU-IND

The Global Framework - Egmont Group

The Egmont Group serves as an international network fostering improved communication and interaction among FIUs.

Egmont Group is named after the venue in Brussels where the first such meeting of FIUs was held in June of 1995.

FIUs provide support to their respective governments in the fight against money laundering, terrorist financing and other financial crimes

Best Practices for exchange of information

Members- 101 FIUs (13 from Asia)

FIU-IND

Why AML/KYC? Reduces reputational, operational, regulatory

risk

Reduces risk of adverse impact on business Share price impact Suspension, downgrade or revocation of licence Loss of consumer confidence: bank run

they make good business sense.

FIU-IND

FATF Recommendations: Criminal Justice System

Criminalisation of Money Laundering (R.1 & 2) Criminalisation of Terrorist Financing (SR.II) Confiscation, freezing and seizing of proceeds of

crime (R.3) Freezing of funds used for terrorist financing

(SR.III) The Financial Intelligence Unit and its functions

(R.26, 30 & 32) Law enforcement, prosecution and other

competent authorities (R.27, 28, 30 & 32)

FIU-IND

Indian Context

Prevention of Money Laundering Act brought into force form 1st July 2005

to prevent money laundering and to provide for confiscation of property derived from,

or involved in, money laundering. Offence of money laundering (section 3 of PMLA) Proceeds of crime (section 2(1)(u) of PMLA) Scheduled offences

FIU-IND established in Nov 2004. Enforcement Directorate

Powers to investigate

FIU-IND

FATF Recommendations : Financial System & Regulation

Customer due diligence, including enhanced or reduced measures (R.5 to 8)

Third parties and introduced business (R.9) Financial institution secrecy or confidentiality (R.4) Record keeping and wire transfer rules (R.10 & SR.VII) Monitoring of transactions and relationships (R.11 & 21) Suspicious transaction reports and other reporting (R.13-14, 19, 25 &

SR.IV) Internal controls, compliance, audit and foreign branches (R.15 & 22) Shell banks (R.18) The supervisory and oversight system - competent authorities and SROs (R. 17,

23, 29 & 30) Financial institutions - market entry and ownership/control (R.23) AML/CFT Guidelines (R.25) Ongoing supervision and monitoring (R.23, 29 & 32) Money value transfer services (SR.VI and SR. IX)

FIU-IND

Indian Context

Obligations under PMLA on Banking companies, financial institutions and intermediaries to

Appoint of Principal Officer

Verify identity, address, nature of business and financial status of the client at the time of opening an account and while executing transactions.

FIU-IND

Indian Context

To furnish information Cash transactions of more than Rs.10 lakhs Integrally connected cash transactions adding to Rs. 10

lakhs in a month, Cash transactions where forged or counterfeit currency or

bank notes have been used, Suspicious transactions

whether or not made in cash. Need not involve proceeds of crime

maintain records

FIU-IND

FATF Recommendations: National and International Cooperation

National co-operation and coordination (R.31) Mutual Legal Assistance (R.32, 36-38, SR.V) Extradition (R.32, 37 & 39, & SR.V) Other Forms of Co-operation (R.32 & 40, &

SR.V)

FIU-IND

Indian Context

Dissemination of STRs to Enforcement Agencies

Sharing information with Foreign FIUs Egmont Group Membership Establish clear mechanism for the exchange of

information Case to case on reciprocal basis MOU Egmont Group’s best practices for information

exchange

FIU-IND

AML/CFT Timeline

198919901991199219931994199519961997199819992000200120022003200420052006

FATF Established at Paris

Egmont Group

Established at

Brussels

FATF Recommendat

ions

Special FATF Recommendat

ions

FIU-IND set up by

GOI

RBI KYC/ AML

Guidelines

IRDA KYC/AML Guideline

s

Prevention of

Money Launderin

g Act, 2002

enactedAPG Set up

US Patriot Act, 2001

Revised FATF Recommendat

ions

9/11 Terrorist Attack

PMLA brought

into force

RBI KYC/AML Circular

RBI KYC Guideline

s

SEBI KYC/AML Guideline

s

FIU-IND

Compliance under PMLA

Detailed guidelines on AML/KYC by regulators viz RBI, SEBI, IRDA, NHB

Principal officers have been appointed More than 15 lakh CTRs have been received More than 500 STRs have been received After analysis and value addition more than 300 STRs

have already been disseminated to enforcement and intelligence agencies

FIU-IND

Expectations from the Financial Sector

Senior officers to be appointed Principal Officers KYC norms to be followed uniformly CTRs to be submitted regularly, where applicable Capacity of the financial institution to habitually

detect and report suspicious– not merely reactive filing Increase awareness and training of staff – new roles

and responsibilities Evaluate and ensure adherence to AML/KYC policies

FIU-IND

The way forward

Manual filing to Electronic filing User driven searches to system driven alerts Analysis - Report driven to intelligence led Feedback

Enforcement Agency to FIU FIU to Reporting Entity

Money Laundering Typology Report Trends in STRs received Sanitised money laundering cases Indicators for detection of suspicious transactions

Thank Youarun.goyal@fiuindia.gov.in

www.fiuindia.gov.in