Anti Money Laundering Compliance

What is Anti Money Laundering Compliance?

To understand the meaning of anti-money laundering, first, the meaning of laundering of money must be construed. Money laundering is the criminal activity where the original source of funds is concealed within an institution. The concealment of the source of funds is through a complex net of bank transfers or commercial transactions. The main objective behind money laundering is to ensure that unclean money is converted to clean money through a sequence or chain of transactions. Hence an organization must have an effective framework to tackle money laundering activities.

Framework for Anti Money Laundering Compliance in India

Money laundering is present in all jurisdictions. In India, the Reserve Bank of India (RBI) provides guidance on anti-money laundering provisions and the combating of terrorist financing. The RBI and Government of India (GOI) have brought out the Prevention of Money Laundering Act 2002 (PMLA). Through this act, the RBI expects all banks and financial institutions to comply with the rules related to anti-money laundering. The standards followed by the RBI are based on the AML provisions which are adopted by international agencies. The Basel Committee on Banking Supervision (BCBS) has stated that transactions or credit transfers which include wire transfers, coming from FATF grey listed countries have to comply with the due diligence norms. A bank or financial institution must conduct due diligence on the customer.

Customer Due Diligence can be divided into the following:

• General Due Diligence

It is the basic due diligence that is carried out by a bank, financial institution, microfinance company, or an NBFC. This due diligence is used to carry out the basic background check of the client. Documents such as Aadhaar Card, Passport, Voter ID, and Pan Card will be used for general due diligence.

• Simple Due Diligence

This type of due diligence is carried out, which is one step ahead of general due diligence. Normally this is carried out for institutional clients such as Corporate, International Organizations, and other institutions.

• Enhanced Due Diligence

This form of due diligence is carried out only for international clients. This due diligence is carried out for clients from FATF grey listed countries such as North Korea and Yemen. More Paper works is asked in this form of due diligence.

Why is Anti Money Laundering Compliance Carried out?

• KYC is known as know your customer. Through this information, the credentials of the customer can be derived.
• Anti Money Laundering and KYC compliance are carried out to prevent money laundering activities.
• Another advantage of KYC is to understand the dealings of customers and prevent any form of risk that is prone to customer dealings.
• Through KYC, banks will comply with the norms issued by the RBI.
• Applicability of Anti Money Laundering Compliance.

As per the Master Direction issued by the RBI, these guidelines would be applicable to all microfinance institutions, private sector banks, scheduled commercial banks, local area co-operative banks, and central co-operative banks. Non-compliance with the above guidelines would attract penalties.

For the above guidelines, a person is defined as:

• An Individual;
• HUF (Hindu Undivided Family);
• A corporate house or a company;
• A firm or an association of persons; and
• Any form of artificial juridical person who does not come under the above categories.

Under the above guidelines, a transaction is understood as some form of acquisition, sale, loan, transfer, gift, or an arrangement which can be either one of the following:

• Bank Account opening;
• Crediting money into the bank account, withdrawing money from the bank account, drawing foreign exchange from the bank, or any other form of transaction which involves some form of money;
• Entering into some form of trust relationship for the benefit of the fiduciary;
• Forming a legal company; and
• Debt or payment received from the company.

Types of Know Your Client/Customer Policy

Customer Acceptance

This can be understood as the first step for a bank or financial institution to understand their customer. Banks and Financial Institutions conduct this to understand the amount of risk present in the transaction. The following parameters have to be considered:

• Accounts cannot be opened in a fictitious or benami name.
• Risk indicators such as location, geographical factors, financial status, and social status of the customer. Based on this, the amount of risk will be measured.
• Documents have to be submitted as per the requirements of the AML policy.
• Banks can only open an account after conducting appropriate due diligence measures for the customer.
• When an individual is acting as an agent of a company, then information on the same must be provided to the bank or financial institution.

Customer Identification

In this procedure, the bank or financial institution has to perform CDD measures to begin the relationship between the customer and the bank.

• Customer identification is one of the crucial steps in Anti Money Laundering Compliance. Through this process, a customer is identified.
• Sufficient Paper works is required for this process.
• A customer having a regular relationship with a bank would not have to carry out CDD measures for anti-money laundering compliance.
• The following is crucial when identification is carried out:

a) Banking Relationship Derived.

b) When a financial transaction is carried out on behalf of the customer.

c) When products are sold by the bank to a third-party agent.

d) When products are sold by the bank exceed Rs. 50,000/- and this transaction is conducted as a single transaction.

Monitoring Transactions

Monitoring is a requirement of KYC Paper works. Monitoring does not stop when the transaction is completed. It has to be a continuous process. Monitoring is divided into low monitoring and high monitoring. High monitoring practices have to be conducted on several transactions. Financial institutions have to take more caution when dealing with the following transactions:

• Commercial transactions which involve transferring money within group structures.
• Transactions which involve a large amount of money. This amount has to exceed a specific limit.
• Transactions where there is more amount of customer dealing.
• Where there are more turnovers rather than the stated amount.
• Banks should be more cautious when it comes to firms having multi-level marketing.

Management of Risks

Risk management is the process of handling risks prevalent in an organization. Therefore banks conducting due diligence processes must ensure that risk management strategies are used to analyze the transactions.

The board of the bank or financial institution must ensure that there are proper risk management protocols. Through this, a proper framework for anti money laundering compliance can be effectively maintained by the organization.

An effective anti money laundering compliance policy would contain the following:

• An effective risk-based approach to mitigate any form of risks
• Authorizing executives with responsibility.
• Conducting an internal management audit to ensure that there is compliance with the anti money laundering compliance policies.
• Liaising with the audit committee.

Procedure for Anti Money Laundering Compliance/ KYC compliance

Banks and financial institutions have to follow the below procedure for anti money laundering compliance.

Step 1- Introduction

A customer or client wanting to conduct a transaction with a bank has to open an account or speak to the representative of the bank. This is considered as the customer interaction process, which is an integral part of the risk management framework.

Step 2- Documentation/ Customer Due Diligence

In this step, the bank requests for important Paper works. This is where the customer has to provide minimum Paper works to the bank. If the bank or financial institution feels that there is a need to secure additional Paper works, then further Paper works would be requested. In such circumstances, the bank will conduct enhanced due diligence, if there is a reasonable belief that the customer or transaction poses a high amount of risk.

Step 3-  Process

Depending on the category of the person, the bank will act accordingly. The following anti money laundering compliance requirements have to be complied with:

For an Individual: 

• Official valid Paper works must be provided by the individual. As per the Unique Identification Authority of India (UIDAI), electronic KYC is also permitted for individual customers. If an individual customer does not have any of the official valid Paper works, then small accounts will be opened for the customer. There are specific conditions for opening a small account.
• Suppose a Document does not have an address, then another Document containing the address proof has to be provided as an official Document.
• If the customer is genuine and the bank feels that due to circumstances, no verification can be provided, then the bank will conduct its own risk analysis within six months from the day of establishment of the relationship.

For Non-face to face customers:

• This will be used more for mobile banking and smartphone banking customers.
• E-KYC procedures are normally used when banks are dealing with such customers.
• Additional Paper works may be requested for anti money laundering compliance.

Anti Money laundering compliance for Politically Exposed Persons Outside India:

• Enhanced monitoring measures will be conducted for such individuals.

For a Company:

• Certificate Documents such as the Memorandum of Association and Articles of Association.
• Resolution from the Board of Directors of the Company.
• Certificate of Incorporation.
• Power of Attorney from the company that a representative such as a manager can conduct transactions on behalf of the company.

For a Partnership Firm:

• Partnership Agreement or Partnership Deed.
• Registration Certificate of the Partnership.

For a Trust:

• Registration certificate of trust.
• Trust deed.

For Foreign Portfolio Investors (Foreign Institutional Investors):

• Portfolio investors come under the Securities Exchange Board of India (SEBI). Hence Anti Money Laundering compliance must be taken as per the prescribed regulations of SEBI.
• Banks' accounts under this will be opened as a portfolio investment scheme.

For a Beneficial Owner:

• A beneficial owner of the company is normally a natural person. This can be either an executive of the company, a director or a shareholder.
• The beneficial owner of a company will have a controlling interest in the share of profits that are earned by the company.

(Note: Controlling interest for the purposes of anti-money laundering compliance is when an individual or person has more than 25% of the share capital of the profits of the company.)

• In a partnership firm, the partner will have a beneficial interest of 15%.

(Note: Controlling interest or beneficial interest in a partnership firm is understood by 15% of the capital of the firm.)

• For the trust or body of associations, the amount of beneficial interest is 15%.

Step 4- Updating  Anti Money Laundering Compliance/ Know Your Client

The anti money laundering compliance must be updated at least once in two years for customers having a high-risk profile. For customers having a medium risk profile the KYC has to be updated every 8 years and for low-risk profile customers, the KYC has to be updated every 10 years. New Documents need not be submitted at the time of updating of for low-risk customers.

Step 5- Noncompliance with rules of Anti Money Laundering compliance

Banks or financial institutions can carry out the following for noncompliance:

• Freeze the accounts of individuals.
• Partial freezing such accounts. However, if there is compliance by customers then these accounts will be unfrozen.
• Banks have the liberty to close the accounts if there is further noncompliance with the above.

Step 6- Maintenance of Documentation

Transactions of certain values must be maintained by the bank or financial institution.  The following transactions have to be maintained for the purposes of record management.

• Transactions that have a value of more than Rs. 10 Lakhs or above. This can be in foreign currency.
• Series of intertwined transactions that exceed the cash value of Rs. 10 Lakh rupees or more.
• Suspicious transactions are made over wire transfers.
• Any transactions which involve forged banknotes or counterfeit currencies.
• Transactions include the receipt of money from a nonprofit organization which is more than Rs. 10 Lakhs.

Step 7- Preservation of Records and Documentation

As per the Prevention of Money Laundering Amendment Act 2012, banks and financial institutions are required to preserve Documents for a minimum time period. The preservation period is as follows:

• 5 years from the time of the first transaction.
• Records of clients can be maintained by banks in hard and soft copy format.
• Any unusual transaction which involves a complex chain of events has to be reported to the principal officer of the bank or the Money Laundering Officer.

Step 8- Reporting

Any form of transactions which occur in NGO’s has to be reported to comply with the provisions of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Apart from this, banks are also required to report transactions of trusts and any form of society. Reporting transactions must be made to the Director of Financial Intelligent Unit of India.

The following reports have to be furnished to the Director of Financial Intelligent Unit of India. By carrying this out the bank or financial institution will be following anti money laundering compliance.

• Cash transactions.
• Suspicious Transactions.
• Cross Border Wire Transfers.
• NGO transactions.

Guidelines to be followed when implementing Anti Money Laundering compliance

The following guidelines have to be observed by banks while following anti money laundering compliance:

• Customer Confidentiality.
• Sensitive Information.
• Technological criteria.
• Principal Officer of the institution.

Regulatory Body/ Law which governs AML

The following regulatory bodies and laws apply to anti money laundering compliance in India:

• Reserve Bank of India.
• Director of the Financial Intelligence Unit.
• Prevention of Money Laundering Act, 2002. (PMLA, 2002)
• PML( Maintenance of Record) Rules, 2005.
• PML ( Maintenance of Records Intermediaries) Rules, 2005.
• Prevention of Money Laundering Amendment Act, 2012.
• RBI Act, 1934.
• Banking Regulation Act, 1949.

Documents required for AML

• KYC Paper works.
• Electronic KYC Paper works.
• Official Valid Documents which include the following:

a) Individual Voter ID.

b) Aadhaar Card.

c) Pan Card.

d) Utility Bill of the individual which is for two months with the provider.

e) Receipts such as municipal tax.

f) PPO (Pension Payment Order Documents).

g) Letter Issued by Gazette Officer with Photograph of the individual.

• For Companies / Partnerships

a) MOA and AOA.

b) Certificate of Incorporation of the Company.

c) Partnership Deed.

d) Resolutions of Directors.

Enterslice Advantage- Anti Money Laundering Compliance

• Enterslice is a recognized provider of Anti Money Laundering Compliance.
• Our primary objective is to add value to your organization by developing AML protocols.
• We have multifaceted teams of professionals comprising of IT professionals, lawyers, and analysts.

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