Decoding the Role of Financial Institutions and Technology in Preventing Money Laundering

Decoding the Role of Financial Institutions and Technology in Money Laundering Prevention

Money launderers have employed new methods of their operation. With the change in regulations and laws, money launderers have also used new routes through which their launder money. In that case, economies with inadequate controls on financial centres are more vulnerable than countries with established financial centres. Therefore there is a need for financial institutions to work cohesively to tackle the menace of money laundering. In this article, we shall discuss the role of financial institutions and technology in preventing money laundering.

Role of Banks and Financial Institutions in Preventing Money Laundering

The Reserve Bank has issued various circulars which lays down the functioning of banks in India. With this development, other regulators such as SEBI and IRDA also issued such guidelines. As per the Reserve Bank of India, KYC is a critical aspect for identifying an individual/corporate opening an account.

The objective of the KYC framework is two-fold:

Role of Banks and Financial Institutions in Preventing Money Laundering
  • Ensuring appropriate customer identification;
  • Monitoring transactions of suspicious nature.

The KYC procedures should be applied to existing customers also, and the role of due diligence practice can never be undermined. The working group formed by the IBA came out with guidelines for banks in India to strengthen the KYC norms with anti-money laundering in focus. It also advised for formats for customer profile account opening procedures. Banks should focus on Customer categorization based on riskiness from the perspective of anti-money laundering. As per this method, salaried class and others with limited financial transactions in a month are customers with low risk as compared to business customers. However, certain customers with low income are also vulnerable groups.

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With regard to cash transactions monitoring, banks must monitor cash withdrawals or deposits of more than 10 lakh rupees in deposit, cash credit or overdraft accounts. Further, they should keep records of details regarding large cash transactions in separate registers.

The requirement of PAN now stands uniformly for transactions more than 50000 rupees. Bank branches must report cash deposits and withdrawal of more than 10 lakh rupees and also report transactions that are suspicious in nature with complete details in fortnightly statements to the controlling office. The controlling office then report to the FIU monthly. Further banks should have an adequate internal control system/audit and inspection mechanism forming part of its risk management system and adhere to the Foreign Contribution Regulation Act[1].

Banks need to appoint an exclusive principal officer for ensuring compliance with the KYC norms and undertake the responsibility of training the staff members.

The financial sector must proactively curb the instances of money laundering and terrorist financing. They must be able to distinguish between genuine transactions and suspicious transactions. The banks are at critical threat (adverse publicity) if it lacks in procedures and systems pertaining to customer identification or record keeping. If there is any lapse, the regulator can impose penalty on banks, which can jeopardize the reputation also. Therefore the banks have delicate task at hand and need to handle the same cautiously.

The role of the banks & financial institutions is to identify suspicious transactions. Now given the fact that e-banking services are more prevalent, there is hardly any activity that is free from suspicion.

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FIU has defined the term suspicious transaction as a transaction, whether or not made in cash, to someone which gives rise to a reasonable ground of suspicion that it might involve proceeds of crime or appear to be made in circumstances of unjustified and unusual complexity or appear to have nil economic rationale or bona fide purpose.

The role of banks and financial institutions in tackling the menace of money laundering is pivotal, and a lot depends upon the board level policy, KYC/AML policy, detailed anti money laundering manual, internal control procedures, continuous monitoring, and training of all staff members. The banks need to identify customer and monitor their accounts through due diligence process, keeping records and reporting suspicious transactions. It can help in curbing money laundering.

Role of Technology in Preventing Money Laundering

Technology plays a massive role in preventing financial crime all across the globe. Cutting-edge technologies such as AI, ML and Data analytics have been significant in this process.

To detect instances of money laundering, various financial institutions have used anti-money laundering detection solutions and employed enterprise-wide procedural programs. However, there is a need to take this to next level to address the loopholes in the first generation solutions.

There is also a second generation of AML technologies. It has the ability to monitor every transaction, discover different types of unusual behaviours, and caution officials about activities that pose a threat to the financial enterprise. These intelligent enterprise systems can comprehend the new money laundering schemes. They can analyze client profile as well as transactions that are undertaken by them. It helps the financial institution to prevent money laundering schemes in a much more efficient way.

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The significance of the anti-money laundering solution depends upon its ability to bring out suspicious financial transactions by identifying the individuals or organizations that may be involved. Further, it should be able to monitor every transaction, discover different types of unusual behaviour, and single out those transactions that pose a risk.


Various countries have used different tactics for preventing money laundering. However, what we need to understand is that the role of financial institutions and technology is critical to identify and take action right at the start. India has deployed the use of technology in combating this menace, but there are still some undiscovered ways in which technology can decrease money laundering cases. Therefore there is a need to speed up the process and implementation of advanced technologies in financial institutions.

Read our article:Impact of Money Laundering on Society at large

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