What are the ways to combat money laundering?

Prabhat Nigam

18 Jul, 2022

Recently, a spurt in the activities of the Enforcement Directorate and FIU has been observed with the rise in money laundering cases. With less than one percent conviction rate under PMLA cases and the incessant acts of attachment of property by the ED, there are concerns within the industry as to what can be done on their part to prevent ED from knocking on their doors.

This article discusses some ways NBFCs can implement their system to combat money laundering within their organisation.

What is money laundering?

Money laundering is the process of disguising the source of illegal proceeds and channelising them into legal businesses through a series of activities called placement, layering and integration so that source of such proceeds cannot be traced back to their origin. These series of transactions are undertaken so that the black money invested into legal businesses can be extracted as white money, and law enforcement authorities cannot hold them liable. 

Ways to combat money laundering for NBFCs in India

1. Integration of auditing channels by design

Before initiating business operations, new NBFCs and other financial institutions must integrate auditing channels into their system. This will allow them to keep a check on their systems from the outset, thus improving the overall quality and efficiency. This process of auditing by design includes the following processes:

• Using technology to improve searches: With advanced technology such as AI, the need to conduct regular and manual searches by the Anti-Money Laundering officials can be significantly brought down by removing false positives and simultaneously increasing the sphere of their search. Using technology, your organisation can expand the scope of alerts without physically going through the records. This practice allows better coverage of records while letting the accounts department’s efforts direct their attention to some better areas.
• Regular meetings between the management and law enforcement agencies: Regular meetings between the management of NBFCs and the law enforcement agencies. It helps to keep each other updated with the latest developments, verify any suspicion, identify any laundering networks, and build confidence and trust while creating a united front against money launderers.
• Usage of data analytics to spot patterns: data analytics can be introduced to spot suspicious patterns and simultaneously incorporate daily negative alerts to cease anti-money laundering activities.
• The channels of profit should also be monitored continuously.

2. Tracking NBFCs financial statements

It is also incumbent upon the NBFCs management to keep track of the company’s financial statements, not just of the existing financial year but also make a comparison with the previous year’s financial statements. Such comparison allows the NBFCs to track any significant shifts in the company’s financials and quickly initiate internal controls to take stock of the situation. In addition, an NBFC must check its profit repatriation activities, especially to their offshore parent companies.

Further, all the financial statements such as balance sheets, profit and loss statements and cash flow analysis should corroborate. Otherwise, the law enforcement agencies will be alerted to take action against your organisation. For example: in a recent case where a Chinese mobile manufacturing manufacturer has come under the scanner of ED because of serious aberrations in their financial statements and outright violations of FEMA. 

3. Standardisation of the internal systems

As the organisation grows and scales in size, acquiring more businesses and expanding in multiple jurisdictions, an effort should be made from their end to connect all the offices. All jurisdictions should be aligned in a single network of computer systems so that all the organisation’s systems can be tracked simultaneously. Further, there is also a possibility that different offices and jurisdictions have different ways of operating. For example, some of the offices may be using spreadsheets while others are using ledgers.

The differences in their operating methods can prevent different branches from effectively communicating with each other and can significantly hinder the organisation’s anti-fraud efforts. This is why most financial institutions are standardising their internal control systems and taking their operations into digital mode using cloud software and big data. Additionally, efforts are being made to standardise definitions and inventories of definitions so that every employee of the organisation is on the same page while referring to any event.

4. Ensure compliance with the AML laws

Another way to combat money laundering is to be regulatory compliant and follow the mandate of the anti-money laundering laws and the related rules and regulations. The laws against money laundering that an organisation needs to follow the mandate of include:

• Prevention of Money Laundering Act, 2002^[1];
• The Benami Transactions (Prohibition) Act, 1988;
• The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
• The Narcotic Drugs and Psychotropic Substances Act, 1985;
• IPC, 1860 and CrPC, 1973 and
• The Foreign Exchange Management Act, 1999.

In 2018, obligations were imposed on NBFCs under PMLA to verify the identity of their clients, maintain their records and furnish the prescribed information to the Financial Intelligence Unit of India.

5. Monitoring the financial activities of the Directors of NBFC

It is also the duty of the NBFC to monitor their directors’ financial activity, especially related to transferring outside the jurisdiction of India. As a measure to combat money laundering, the PMLA made it mandatory for the NBFCs to intimate the details of their designated directors and principal directors to FIU-IND.

Conclusion

Money laundering is a serious crime which has the potential to impair the financial system of any country. With international organisations coming into play, such as FATF, countries have strengthened their laws to combat money laundering taking place in their countries. With stringent provisions related to the attachment of property and other harsh provisions, it is prudent that NBFCs proactively take such steps to avoid attracting provisions of PMLA. To ensure that your NBFC does not attract ED’s attention, NBFCs must initiate a programme to secure themselves from violating anti-money laundering provisions. You can avail yourself of Enterslice to initiate such a programme. 

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