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Identification of Suspicious Transactions under IFSCA AML/CFT Guidelines 2022

Nikhil Mogha

| Updated: Jan 04, 2023 | Category: IFSCA

The IFSCA has issued guidelines on curbing the activities of Anti-money laundering and Counter-terrorist financing activities wherein the regulated entity is directed to follow its provision while maintaining business relationships with customers. Therefore, in order to restrict the money laundering or terrorist financing risks, the regulated entity must frame such policies that will aid them in identifying suspicious transactions. The regulated entity shall put in place procedures and control & systems that will eliminate any risk arising from any relationship with the customer. Therefore, in lieu of said objective, chapter X of the guidelines has provided the process of identification of suspicious transactions.

What Are The Internal Reporting Requirements Under The Guidelines?

According to the chapter on the process of identification of suspicious transactions, the regulated entity is required to frame policies, procedures, controls & systems in order to detect and monitor the suspicious transaction related to Money laundering or terrorist financing activity. Moreover, the entity shall put in place policies and procedures which will ensure that whenever any employee, during the course of employment, either knows or suspects or has reasonable grounds for knowing or suspecting that any person is potentially suspected of attempting any ML or TF activity; in that case, the employee needs to notify such transaction to the principal officer immediately along with all the relevant details.

What are the Indications of Suspicious Transactions?

According to the chapter on the identification of suspicious transactions, the regulated entity can identify the suspicious transaction through the following steps:

1. Detection of Suspicious Indicators

The first step in the process of identification of suspicious transactions is to detect indicators. The suspicious indicators act as a red flag and enable the regulated entity to pay more attention to the transactions that:

  1. Involve funds received from any illegal activity
  2. Attempt to disguise funds received from any illegal activity 
  3. Lacks business or apparent lawful purpose.

However, any suspicious indicators do not directly equate to suspicion or criminality. Instead, it prompts the regulated entity to increase scrutiny over the transactions and involves assessing whether the regulated entity is required to report the transaction to the FIU-IND.

Types of Indicators

The types of indicators for the identification of suspicious transactions are:

  • Transactions that are complex, large or unusual and do not have any lawful purpose.
  • Transaction that involves unusual patterns.
  • Transaction that does not match the background, nature & type of customer.
  • There is unusual customer behaviour.
  • The customer whose identity verification is difficult or customers who are non-cooperative
  • In Asset Management services, if the source of funds is unclear or not in conformity with the customer’s business activity.
  • The customers operate from high-risk jurisdictions or country
  • There is a substantial rise in the business without any apparent cause
  • There is an attempt to transfer investment proceeds to an unrelated third party.

2. Asking Questions to Customers

The second step in the process of identification of suspicious transactions will be to ask questions to the customers if there exists more than one suspicious indicator and determine if there is a reasonable explanation for the observed indicator. The entity further ensures that while questioning, they do not “tip off” the customer; instead, they put those questions that are service oriented.

3. Reviewing Customer Records

The regulated entity is required to determine whether the indicators identified earlier are justifiable or not, given what is known about the customer. For this purpose, the entity is required to identify and review the records and information of the customer that is known to the entity, including but not limited to the following:

  • Occupation, business & principal activity of the customer
  • Transaction history of customer
  • Risk profile of the customer
  • Income level of the customer
  • Source of Income state during the opening of an account or at initial engagement
  • Reasons for transaction given by the customer
  • Customer’s relationship with sender or beneficiary
  • Frequency of Transaction
  • Transaction’s size & complexity
  • Location or identity of any other person involved in the transaction.
  • Usual financial, business or operation practices or behaviour of customers in a similar business category or occupation.
  • Availability of Identification Documents and other documents

If the regulated entity, after reviewing the above documents, finds that the profile of the customer has changed, then it shall update such profile.

4. Evaluation of Collected Information

The last step in the process of identification of suspicious transactions is the evaluation of collected information. The regulated entity should be able to determine the reason for the suspicions obtained from its evaluation. Further, the regulated entity is required to evaluate the following:

  • Suspicious Indicators
  • Evaluate the answers or information received from the customer through questions asked.
  • Evaluate the known information of the customer to determine if there exist reasonable grounds to suspect that the transaction is related to the commission of money laundering or terrorist financing activity, or other serious offences.

Moreover, if the regulated entity thinks that there are sufficient grounds or reason to suspect that the transaction is related to the commission of any money laundering or terrorist financing activity, in that case, the entity shall report it to the FIU-IND along with Suspicious Transaction Reports[1].

What Are The Other Conditions In The Process Of Identification Of Suspicious Transactions?

The other conditions for the identification of suspicious transactions are:

  • The regulated entity will continue to monitor the business relationship or the customer if it cannot gather reasonable grounds for suspicion.
  • The regulated entity may go back to the above steps (detect, ask, review & evaluate) later. It may find new facts that gave rise to suspicion in order to meet the reasonable grounds of suspicion.
  • There is no minimum monetary threshold for reporting any suspicious transaction. It applies to all transactions; therefore, any suspicion shall be reported to the FIU-IND regardless of any currency or amount.
  • Where the regulated entity cannot ascertain the evidence on the customer’s identity, in that case, the entity shall not proceed further with transactions unless the FIU-IND gives it permission in writing.
  • Where the Regulated Entity considers the failure of the customer to provide any identification documents as suspicious, in that case, the regulated entity may report the transaction to FIU-IND as a suspicious transaction.
  • If no suspicious transaction is reported, no reporting will be made to the FIU-IND.
  • There will be no restrictions on the operations of the accounts where STR will be made.
  • The entity and its employees shall be refrained from tipping off the fact that a Suspicious Transaction Report has been reported or any information at any level.

Where to Report Suspicious Transactions?

According to the chapter on the identification of suspicious transactions, the regulated entity must report the transaction to the Director of the Financial Intelligence Unit, India. The entity shall also furnish such documents or information during customer due diligence and the correspondent bank relationship. Moreover, the regulated entity, while reporting, shall adhere to the reporting formats & comprehensive reporting format guide prescribed by the FIU-IND. The entity may also use the editable electronic utilities to file Suspicious Transaction Reports (STR), which are placed on the website of FIU-IND. In addition this, the regulated entity is required to adhere to the following rules:

  • After successfully concluding that the transaction is suspicious, the regulated entity must submit STR within 7 days from the date of conclusion. Moreover, the principal officer shall record the reason for such suspicion in writing.
  • The NPRs or Not for Profit Organisation Transaction Report of each month shall be submitted by the 15th of next month to FIU-IND.
  • The principal officer shall be held responsible for the timely submission of NTR/STR to FIU-IND.
  • There shall be strict confidentiality maintained while filing NTR/STR to FIU-IND.

Further, a delay of each day in reporting transactions or a delay of each day in rectifying misrepresented transactions beyond the time limit to FIU-IND will constitute a separate violation.

What Is The Confidentiality Requirement For Reporting A Suspicious Transaction?

The chapter on the identification of suspicious transactions states that regulated entities and their employees shall maintain confidentially at all levels of reporting suspicious transactions. It is further required that the entities or its employees shall not disclose to any person (Including customers) that:

  1. They have reported and will be reporting the suspicious transaction to FIU-IND.
  2. They have formed a suspicion about a particular transaction.
  3. Any information that may form an opinion that a transaction can be suspected as suspicious and a report may be made to the FIU-IND for such suspicion.

Exemptions: Even though there is a restriction on disclosing any information, there are certain circumstances in which disclosures can be made:

  1. Disclosure to an employee or agent or officer of a regulated entity for the performance of their duties.
  2. Disclosure to a lawyer for taking legal advice.
  3. Disclosure to the supervisory authority for carrying out the supervisory function.
  4. Any disclosure in lieu of a court order

Protection from Civil and Criminal action: The regulated entities and their employees reporting any transaction in good faith shall be protected from any civil and criminal action taken against them.

What Are The Additional Measures For The Identification Of Suspicious Transactions?

The chapter on the identification of suspicious transactions in relation to anti-money laundering and counter-terrorist financing has allowed the lawyers, notaries, accountants & entities handling such services on behalf of the client to report suspicious transactions in reference to the following activities:

  • Buying & Selling of Real estate
  • Management of clients’ money, its securities and other assets
  • Managing savings and securities accounts
  • Buying & Selling of business entities
  • Creation, operation & management of legal persons or arrangements.

Conclusion

The process of identification of suspicious transactions in relation to anti-money laundering activities is the key chapter in the IFSCA guidelines on anti money laundering and counter-terrorist financing. The regulated entity is obliged to frame such policies and procedures that may include the identification and monitoring of suspicious transactions. Further, the employees of a regulated entity are also responsible for reporting such suspicious transactions to the principal officer. The framing of such policies will ensure that the reporting will be made immediately and there will be fewer chances of escape from any money laundering or terrorist financing risks.  

Read Our Article: Detailed Overview of FIU-IND Reporting

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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