preventionofmoneylaunderingact2002-131206093709-phpapp01 (1).pdf
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This document summarizes India's Prevention of Money Laundering Act of 2002. It defines money laundering and outlines the three stages of the process: placement, layering, and integration. It describes the obligations the Act places on banks, financial institutions, and intermediaries to maintain records and verify customer identities. These entities must appoint a Principal Officer to furnish information to authorities and retain records for official purposes. The Act aims to prevent money laundering and seize illegally obtained assets.
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preventionofmoneylaunderingact2002-131206093709-phpapp01 (1).pdf
- 1. PREVENTION OF MONEY LAUNDERING ACT, 2002
- 2. What is Money- Laundering? • Disguise of illegal origin of money • Smuggling, Drug trafficking, Illegal arms sales, Computer frauds, Embezzlement • Regarded as ‘DIRTY- MONEY’ Conversion of the ‘dirty- money’ to a legitimate money. Money Laundering by Activity Terrorist groups 1% Drugs 26% Other Organized Crime 23% Smuggling 29% Embezzle- ment/ White Collar Crime 21%
- 3. Stages in Money Laundering
- 5. Placement: Illegal funds or assets are bought into the financial system. Layering: Use of multiple accounts, banks, intermediaries, corporations, countries etc. to disguise the origin. Integration: Funds are made available as apparently legitimate.
- 6. Continuity and Evolution Early 1990s Bank-centered techniques: collection accounts, loan back arrangements bank drafts, money orders and cashier’s cheques smurfing Cash smuggling Accounts in relatives’ names, shell companies Hawala, hundi or other “underground banking” systems 2010 Wire transfers New electronic payment systems Remittance services and money exchange services Assistance from “Gatekeepers” Terrorist financing through non-profit organizations Insurance industry, particularly through independent insurance agents Politically Exposed Persons (PEPs)
- 7. PMLA, 2002 Came into force with effect from 01st July, 2005 The Act extend to whole of India except J&K Object: To prevent money- laundering, seize the property with authority, involved in money laundering Administration: Directorate of Enforcement of the Department of Revenue, Ministry of Finance
- 8. • Various Rules came into effect from July 2005 – Rules detailing Powers of Director FIU & ED – Rules detailing the method of attachment of property, period of retention etc. – Rules detailing the receipt & management of confiscated assets – Rules relating to legal obligations of reporting entities
- 9. According to Section 12 PMLA and the Rules impose obligations on Banking companies Financial institutions Intermediaries of the securities market To maintain records furnish information verify identity of clients
- 10. “Banking Company” under PMLA includes: All nationalized banks, private Indian banks and private foreign banks All co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) co-operative banks State Bank of India and its associates and subsidiaries Regional Rural Banks
- 11. “Financial Institution” under PMLA includes: Financial Institutions as defined in Section 45-I of the RBI Act namely EXIM Bank, NABARD, NHB, SIDBI, IFCI Ltd., IDFC Ltd., IIBI Ltd. and TFCI Ltd. Insurance companies Hire Purchase companies Chit fund companies as defined in the Chit Funds Act.
- 12. “Intermediary” under PMLA includes: Persons registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992: • Stock brokers • Sub-brokers • Share transfer agents • Registrars to issue • Merchant bankers • Underwriters • Portfolio Managers
- 13. • Appointment of Principal Officer: – Every reporting entity shall communicate the name, designation and address of the Principal Officer to the Director, FIU-IND • Furnishing of information by the Principal Officer: – furnish the information referred to in the Rules to the authorities – retain copy of such information for the purposes of official record Obligations of reporting entities
- 14. Requirements Under the Act Every Broker shall— (a) maintain a record of all transactions, the nature and value of which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed; (i.e. every month) (c) verify and maintain the records of the identity of all its clients, in such manner as may be prescribed (i.e. KYC)
- 15. Every broker has to maintain the record of- • All cash transactions of the value of more than Rs 10 lakh or its equivalent in foreign currency. • All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakh or its equivalent in foreign currency where such series of transactions take place within one calendar month. • All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as DEMAT account, security account maintained by the registered intermediary
- 16. Suspicion Transactions • Funds derived from illegal activities • Conducted to disguise such funds • No apparent purpose • Not the sort of transaction the customer would enter into • No reasonable explanation considering the background and purpose
- 17. EXAMPLES: • Large transactions or patterns • Clients with links to criminals • False ID documents or not face to face • Multiple accounts • Sudden activity in dormant accounts • Use of different accounts alternately
- 18. Client Identity • Verify identity of clients: – Identity of clients – Current and permanent address – Nature of business – Financial status • Maintain records of the identity of clients for a period of 10 years from the date of cessation of the transactions with the client. (Rule 10)
- 19. Changes in Subordinate Legislation • Reporting entity to maintain records of all transaction which contain all necessary information to permit reconstruction of individual transaction … • Record of receipt by NPOs of value more than Rs 10 lakh to be maintained and reported • Record of cash transaction to be maintained where forged or counterfeit currency notes tendered • No specific mode of maintaining the information • Period of ten years for retention of records - from the date of transaction and not from the date of cessation of the transaction
- 20. Legal Obligations & Guidelines imply CUSTOMER DUE DILIGENCE Customer Acceptance - • Ensure acceptance of only legitimate and bona fide customers – Issue of mechanism to verify ID – Issue of Multiple IDs – Issue of list of suspects/criminals/unwanted elements – Awareness and training of staff Customer Identification- • Ensure that the customers are properly identified to understand the risks they may pose. – Background check of new customer – Background check of existing clients – Issue of List of suspects/criminals/unwanted elements – Awareness and training of staff
- 21. Transactions Monitoring- • Monitor customers accounts and transactions to prevent or detect illegal activities. – Issue of Mechanism to verify financial details – Transactions inconsistent with customers profile (business) – Unexplained transfers between multiple accounts with no rationale – Sudden activity in dormant accounts Risk Management- • Implement processes to effectively manage the risks posed by customers trying to misuse facilities. – Categorization of customers: high/medium/low risk : a dynamic concept – Constant interaction between front desk and the compliance team required – Awareness and training of staff
- 22. • Set up processes and technology to identify and report suspicious transactions – Capture customer details – Generate alerts – Collect and analyze additional information – Decide whether transactions are suspicious – Ensuring reporting of quality data electronically • Alignment of people, process and technology • Confidentiality and Privacy