Compiled By : Vishal Chopra

1
Basics of Anti-Money Laundering Know Your
Customer

• Compiled By Vishal Chopra

2

What is Money Laundering?

Illegally obtained money
Appears to originate from legitimate source
Conversion
Criminal Activity
Drugs / Arms Trafficking
Terrorism
Extortion
3
Money Laundering

• 'Any act or attempted act to conceal or disguise
  the identity of illegally obtained proceeds so
  that they appear to have originated from
  legitimate sources'.
• In other words, it is the process used by
  criminals through which they make dirty money
  appear clean

4

• Sec.3 of PML Act, 2002 defines money laundering
  as
• whosoever directly or indirectly attempts to
  indulge or knowingly assists or knowingly is a
  party or is actually involved in any process or
  activity connected with the proceeds of crime and
  projecting it as untainted property shall be
  guilty of the offence of money-laundering

5
Money Laundering

• Money laundering generally refers to washing
  of the proceeds or profits generated from
• Drug trafficking
• Arms, antique, gold smuggling
• Prostitution rings
• Financial frauds
• Corruption, or
• Illegal sale of wild life products and other
  specified predicate offences

6
Money Laundering Process

• PLACEMENT
• LAYERING
• INTEGRATION

7
Placement

• Immersion or Soaking
• The physical disposal of bulk cash proceeds
  derived from illegal activity

8
(No Transcript)
9
LAYERING

• Soaping / Scrubbing
• The separation of illicit proceeds from their
  source by creating complex layers of financial
  transactions
• These disguise the audit trail provide
  anonymity

10
Integration
Repatriation / Spin Dry Reinjecting laundered
proceeds into economy so that they reenter
financial system as normal business
funds Provides an apparently legitimate
explanation to criminally derived wealth

11
(No Transcript)
12
Techniques employed

• Deposit structuring or smurfing
• Connected Accounts
• Payable Through Accounts
• Loan back arrangements
• Forex Money Changers
• Credit/ Debit cards
• Companies Trading and Business Activity
• Correspondent Banking
• Lawyers, Accountants other Intermediaries
• Misuse of Non-Profit Organisations

13
Financing of terrorism

• Money to fund terrorist activities moves through
  the global financial system via wire transfers
  and in and out of personal and business accounts
• It can sit in the accounts of illegitimate
  charities and be laundered through buying and
  selling securities and other commodities, or
  purchasing and cashing out insurance policies.

14
Legal Sources of terrorist financing

• legal or non-legal
• legal
• Collection of membership dues
• Sale of publications
• Cultural of social events
• Door to door solicitation within community
• Appeal to wealthy members of the community
• Donation of a portion of personal savings

15
Illegal Sources

• Kidnap and extortion
• Smuggling
• Fraud including credit card fraud
• Misuse of non-profit organisations and charities
  fraud
• Thefts and robbery and
• Drug trafficking

16
Money Laundering Risks

• What are the risks to banks?
• (i) Reputational risk
• (ii) Legal risk
• (iii) Operational risk (failed internal
  processes, people and systems technology)
• (iv) Concentration risk (either side of balance
  sheet)
• All risks are inter-related and together have
  the potential of causing serious threat to the
  survival of the bank

17
Reputational Risk

• The potential that adverse publicity regarding a
  banks business practices, whether accurate or
  not, will cause a loss of confidence in the
  integrity of the institution
• Reputational Risk a major threat to banks as
  confidence of depositors, creditors and general
  market place to be maintained
• Banks vulnerable to Reputational Risk as they can
  easily become a vehicle for or a victim of
  customers illegal activities

18
Operational Risk

• The risk of direct or indirect loss resulting
  from inadequate or failed internal processes,
  people and systems or from external events
• Weaknesses in implementation of banks
  programmes, ineffective control procedures and
  failure to practise due diligence

19
Legal Risk

• The possibility that lawsuits, adverse judgements
  or contracts that turn out to be unenforceable
  can disrupt or adversely affect the operations or
  condition of a bank
• Banks may become subject to lawsuits resulting
  from the failure to observe mandatory KYC
  standards or from the failure to practise due
  diligence
• Banks can suffer fines, criminal liabilities and
  special penalties imposed by supervisors

20
Concentration Risk

• Mostly applies on the assets side of the balance
  sheet Information systems to identify credit
  concentrations setting prudential limits to
  restrict banks exposures to single borrowers or
  groups of related borrowers
• On liabilities side Risk of early and sudden
  withdrawal of funds by large depositors- damages
  to liquidity

21
Penalties imposed on banks

• Jan. 2006 ABM AMRO US 80 mio
• Aug. 2005 Arab Bank US 24 mio
• Feb. 2005 City National Bank US750,000
• Jan. 2005 Riggs Bank US 41 mio
• Oct. 2004 AmSouth Bank US 50 mio
• Sep. 2004 City Bank Japan Licence cancelled
• May. 2004 Riggs Bank US 25 mio

22
What KYC means?

• Customer?
• One who maintains an account, establishes
  business relationship, on whos behalf account is
  maintained, beneficiary of accounts maintained
  by intermediaries, and one who carries potential
  risk through one off transaction
• Your? Who should know?
• Branch manager, audit officer, monitoring
  officials, PO
• Know? What you should know?
• True identity and beneficial ownership of the
  accounts
• Permanent address, registered administrative
  address

23
What KYC means?

• Making reasonable efforts to determine the true
  identity and beneficial ownership of accounts
• Sources of funds
• Nature of customers business
• What constitutes reasonable account activity?
• Who your customers customer are?

24
KYC DOES NOT MEAN

• Denial of Service to the Common Person
• Intrusive Behaviour
• Use of information for cross selling
• Harassment of customers- threatening to close
  down the accounts arbitrarily

25
Advantages of KYC norms

• Sound KYC procedures have particular relevance
  to the safety and soundness of banks, in that
• They help to protect banks reputation and the
  integrity of banking systems by reducing the
  likelyhood of banks becoming a vehicle for or a
  victim of financial crime and suffering
  consequential reputational damage
• They provide an essential part of sound risk
  management system (basis for identifying,
  limiting and controlling risk exposures in assets
  liabilities)

26
Core elements of KYC

• Customer Acceptance Policy
• Customer Identification Procedure- Customer
  Profile
• Risk classification of accounts- risk based
  approach
• Risk Management
• Ongoing monitoring of account activity
• Reporting of cash and suspicious transactions

27
Measures to deter money laundering

• Board and management oversight of AML risks
• Appointment a senior executive as principal
  officer with adequate authority and resources at
  his command
• Systems and controls to identify, assess manage
  the money laundering risks
• Make a report to the Board on the operation and
  effectiveness of systems and control
• Appropriate documentation of risk management
  policies, their application and risk profiles

28

Summary Prevention of Money Laundering
Observing Rules for Bankers

Money Laundering Prevention
Customer due Diligence
Compliance with Laws
Identifying Irregular / Suspicious Transactions
29
Asset Liability Management in Banks
30
Components of a Bank Balance sheet
Liabilities Assets
Capital Reserve Surplus Deposits Borrowings Other Liabilities Cash Balances with RBI Bal. With Banks Money at Call and Short Notices Investments Advances Fixed Assets 6. Other Assets
Contingent Liabilities
31
Components of Liabilities

• Capital
• Capital represents owners contribution/stake in
  the bank.
• It serves as a cushion for depositors and
  creditors.
• It is considered to be a long term sources for
  the bank.

32
Components of Liabilities

• 2. Reserves Surplus
• Components under this head includes
• I. Statutory Reserves
• II. Capital Reserves
• III. Investment Fluctuation Reserve
• IV. Revenue and Other Reserves
• V. Balance in Profit and Loss Account

33
Components of Liabilities

• 3. Deposits
• This is the main source of banks funds. The
  deposits are classified as deposits payable on
  demand and time. They are reflected in
  balance sheet as under
• I. Demand Deposits
• II. Savings Bank Deposits
• III. Term Deposits

34
Components of Liabilities

• 4. Borrowings
• (Borrowings include Refinance / Borrowings from
  RBI, Inter-bank other institutions)
• I. Borrowings in India
• i) Reserve Bank of India
• ii) Other Banks
• iii) Other Institutions Agencies
• II. Borrowings outside India

35
Components of Liabilities

• 5. Other Liabilities Provisions
• It is grouped as under
• I. Bills Payable
• II. Inter Office Adjustments (Net)
• III. Interest Accrued
• IV. Unsecured Redeemable Bonds
• (Subordinated Debt for Tier-II Capital)
• V. Others(including provisions)

36
Components of Assets

• Cash Bank Balances with RBI
• I. Cash in hand
• (including foreign currency notes)
• II. Balances with Reserve Bank of India
•  
• In Current Accounts
• In Other Accounts

37
Components of Assets

• 2. BALANCES WITH BANKS AND MONEY AT CALL SHORT
  NOTICE
• I. In India
• i) Balances with Banks
• a) In Current Accounts
•   b) In Other Deposit Accounts
• ii) Money at Call and Short Notice
• a) With Banks
•   b) With Other Institutions
• II. Outside India
• a) In Current Accounts
• b) In Other Deposit Accounts
• c) Money at Call Short Notice

38
Components of Assets

• 3. Investments
• A major asset item in the banks balance sheet.
  Reflected under 6 buckets as under
• I. Investments in India in
• i) Government Securities
• ii) Other approved Securities
• iii) Shares
• iv) Debentures and Bonds
• v) Subsidiaries and Sponsored Institutions
• vi) Others (UTI Shares , Commercial Papers,
  COD
• Mutual Fund Units etc.)
• II. Investments outside India in
•   Subsidiaries and/or Associates abroad

39
Components of Assets

• 4. Advances
• The most important assets for a bank.
• A. i) Bills Purchased and Discounted
• ii) Cash Credits, Overdrafts Loans
• repayable on demand
• iii) Term Loans
• B. Particulars of Advances
• i) Secured by tangible assets
• (including advances against Book Debts)
• ii) Covered by Bank/ Government Guarantees
• iii) Unsecured

40
Components of Assets

• 5. Fixed Asset
• I. Premises
• II. Other Fixed Assets (Including furniture and
  fixtures)
• 6. Other Assets
• I. Interest accrued
•   II. Tax paid in advance/tax deducted at
  source
• (Net of Provisions)
•   III. Stationery and Stamps
•   IV. Non-banking assets acquired in
  satisfaction of claims
•   V. Deferred Tax Asset (Net)
•  VI. Others

41
Contingent Liability

• Banks obligations under LCs, Guarantees,
  Acceptances on behalf of constituents and Bills
  accepted by the bank are reflected under this
  heads.

42
Banks Profit Loss Account

• A banks profit Loss Account has the following
  components
• Income This includes Interest Income and Other
  Income.
• II. Expenses This includes Interest Expended,
  Operating Expenses and Provisions contingencies.

43
Components of Income

• INTEREST EARNED
• I. Interest/Discount on Advances / Bills
•  II. Income on Investments
•  III. Interest on balances with Reserve Bank
• of India and other inter-bank funds
•  IV. Others

44
Components of Income

• 2. OTHER INCOME
• I. Commission, Exchange and Brokerage
• II. Profit on sale of Investments (Net)
• III. Profit/(Loss) on Revaluation of Investments
• IV. Profit on sale of land, buildings and other
• assets (Net)
• V. Profit on exchange transactions (Net)
• VI. Income earned by way of dividends etc. from
  subsidiaries and Associates abroad/in India
• VII. Miscellaneous Income

45
Components of Expenses

• INTEREST EXPENDED
• I. Interest on Deposits
• II. Interest on Reserve Bank of India /
  Inter-Bank
• borrowings
• III. Others

46
Components of Expenses

• 2. OPERATING EXPENSES
• I. Payments to and Provisions for employees
• II. Rent, Taxes and Lighting
•  III. Printing and Stationery
• IV. Advertisement and Publicity
•  V. Depreciation on Bank's property
• VI. Directors' Fees, Allowances and Expenses
•  VII. Auditors' Fees and Expenses (including
  Branch Auditors)
•  VIII. Law Charges
•   IX. Postages, Telegrams, Telephones etc.
•   X. Repairs and Maintenance
•   XI. Insurance
•  XII. Other Expenditure

47
Assets Liability Management
ALM
It is a dynamic process of Planning, Organizing
Controlling of Assets Liabilities- their
volumes, mixes, maturities, yields and costs in
order to maintain liquidity and NII.
48
Purpose Objective of ALM

• An effective Asset Liability Management
  Technique aims to manage the volume, mix,
  maturity, rate sensitivity, quality and liquidity
  of assets and liabilities as a whole so as to
  attain a predetermined acceptable risk/reward
  ratio.
• It is aimed to stabilize short-term profits,
  long-term earnings and long-term substance of the
  bank. The parameters for stabilizing ALM system
  are
• 1. Net Interest Income (NII)
• 2. Net Interest Margin (NIM)
• 3. Economic Equity Ratio

49
RBI DIRECTIVES

• Issued draft guidelines on 10th Sept98.
• Final guidelines issued on 10th Feb99 for
  implementation of ALM w.e.f. 01.04.99.
• To begin with 60 of asset liabilities will be
  covered 100 from 01.04.2000.
• Initially Gap Analysis to be applied in the first
  stage of implementation.
• Disclosure to Balance Sheet on maturity pattern
  on Deposits, Borrowings, Investment Advances
  w.e.f. 31.03.01

50
SUCCESS OF ALM IN BANKS PRE - CONDITIONS

• Awareness for ALM in the Bank staff at all
  levelssupportive Management dedicated Teams.
• Method of reporting data from Branches/ other
  Departments. (Strong MIS).
• Computerization-Full computerization, networking.
• Insight into the banking operations, economic
  forecasting, computerization, investment, credit.
• 5. Linking up ALM to future Risk Management
  Strategies.

51
THANK YOU