AML Compliance and Indian Perspective

Raghvendra Sonker

16 Jun, 2022

ALM Compliance is an effort to fulfil the standards required to prevent money laundering and terror financing. An AML Compliance Program helps strengthen internal operations, effectively monitor accounts and detect frauds, standardise business policies and financial reporting, and have proper rules for reporting such related crimes. The sole aim of AML compliance is to detect, respond and eliminate the menace of Money Laundering and Terror Financing. An AML Compliance is a legal obligation for all kinds of business organisations, especially in finance, Fin-Tech and Banking.

Regulations of AML Compliance

Anti-Money Laundering Compliance all over the world aims to disclose tax evasion, terror financing, fraud and money laundering. This revelation can only happen when an efficient Anti-Money Laundering Compliance Framework is adhered to, like:

• Effective Reporting of the Financial Data;
• Vigilance over the High-Risk Customers;
• Appointment of Compliance Officer;
• A risk-based strategy to mitigating any type of risk;
• Conduct an internal management audit so that AML compliance norms are followed;
• Keeping in touch with audit committee.

The process requires highly trained and experienced individuals to manage the business organisation to comply with anti-money laundering measures.

KYC (Know Your Customer)

The AML Compliance starts with the collection of the information and verification of the newly enrolled customers, this process of identifying and verification is sometimes called KNOW YOUR CUSTOMER (KYC)^[1]. To ascertain the customer’s identity, an organisation (a bank) must check the nature of the customer’s business and sources of the funds deposited in the banks. KYC mandates to have measures to screen the customers against the list of crime suspects.

Common Due Diligence

Customer due diligence is an integral part of the KYC process, ensuring that a potential customer’s information is genuine and legitimate. It is also a constant process which extends to the financial transactions the old and new customers. By using a risk-based approach, an organisation have to conduct a closer due diligence of non-compliant high risk customers. Banking and Non-Banking Financial Institutions are required to prepare and implement AML Compliance standards, which much be approved by senior member of management and overseen by a designated AML compliance officer.

General Due Diligence – A bank, financial institution, microfinance business, or non-bank financial company does basic due-diligence. It is used to do a basic client background investigation. For general due-diligence, documents like the Aadhaar Card, Passport, Voter ID, and Pan Card would be required.

Simple Due Diligence – This is a form of due-diligence that is one step ahead of General due-diligence. This is often done for institutional clients like corporations, international organisations, and other organisations.

Enhanced Due Diligence – Only foreign clients are subjected to this type of due-diligence. This DD is performed for clients from countries on the FATF’s grey list, like North Korea & Yemen. In this type of DD, more documents are required.

Non-compliance with AML Compliance

In the event of non-compliance, banks or financial entities may either completely freeze the bank accounts of persons, or partially freeze of them. However, customers’ accounts, on the other hand, will be unfrozen if they comply by the guidelines issued by Financial Institution. Further, if there is additional violation with the foregoing, banks have the right to deactivate the accounts.

Indian Perspective

India enacted the Pretension of Money-laundering Act, 2002 to prevent and criminalise money laundering activities and curb frauds/ economic offences in India.  Under PMLA Enforcement Directorate is the authority empowered to investigate and make arrests in money laundering and terror financing cases. In 2004, a Finance Intelligence Unit was established under the PMLA, 2002, as an apex organisation for coordinating India’s anti-money laundering efforts.  Banks, Non – Banking Financial Institutions, Intermediaries, and Stockbrokers are required to make record of financial transactions as prescribed by the regulators (RBI, SEBI etc.).  

In 2010, Indian became the 34th member of the FATF, i.e. Financial Action Task Force. Financial Action Task force recommends a framework of measures, which the countries shall follow to fight against money laundering and terror financing and stop the proliferation of weapons of mass destruction signatory to it.  FATF provides for two lists; Grey List and Black List. The countries put in the grey list are warned to make stringent laws for combating terror financing and money laundering activities. India is also a signatory of Asia/ Pacific Group on Money Laundering; Eurasian Group on Combating Money Laundering  and Financing of Terrorism, and  Basel Committee on Bank Supervision.

Conclusion

ALM compliance is a continuous assessment process to check the activities of Money Laundering. The problem of money laundering and terror financing is not limited to a single country; in reality, it is across borders. The AML Compliance on Money Laundering Prevention sets out the practices and requirements that not only help business organisations avoid becoming a victim of potential fraud but also improves, and optimizes the methods for keeping checks.

Read our Article: Knowing the Legalities of Anti Money Laundering Compliance in India