STUDY ON MONEY LAUNDRING

Bachelor of Accounting and Finance

Semester VI

Submitted

In Partial Fulfillment of the requirements

For the Award of Degree of

Bachelor of Accounting And Finance

By

Sayli More

Roll No. 19

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE

BHANDUP- 4000 78
 DECLARATION

I, SAYLI V. MORE the student of T.Y. BAF Semester VI (2018-2019) hereby declare that I have

completed the project on STUDY ON MONEY LAUNDREING.

The information submitted is true and original to the best of my knowledge.

 ACKNOWLEDGEMENT

To list who all have helped me is difficult they are so numerous and the depth is so numerous.

I would like to acknowledge the following as idealistic channels and fresh dimensions in the

completion of this project.

I take this opportunity to thank University of Mumbai for giving me chance to do this project.

I would like to thank my Principal Mrs merry mam for providing the necessary facilities required for

Completion of project.

I would also like to express my sincere gratitude towards my project guide whose guidance and

Care made the project successful.

I would like to thank my College Library, for having provided various reference books and

Magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
complention of the project especially my Parents and Peers who supported me throughout my
project.
laundering would have a time of several countries in order to obscure its origin. It
was difficult to discuss the topic of money laundering nationally in abstract. If done
so would have appeared as a patchwork. to have a comprehensive paper, the
researcher discuss the theme of the paper in three parts.

Opens up with explaining the concept and processes of money laundering

pointing out the challenges and losses and is a kind of primer to money
laundering. As observed earlier, money laundering essentially involves a foreign
ground for washinglaundering the dirty money proceeds the crime.

moves with elaborating the international development & control mechanisms to

deal with the problem of money laundering. in light of aforesaid discussion.

proceeds to analyze the position of India in controlling money laundering &

keeping up with the mandate of international forum. India proposing to update its
anti money-laundering and a bill of 2008 is waiting for enforcement. A
comparative analysis of bill of 2008 is done in one of sub-parts of the paper.

To sum up the paper various problems & loopholes in implementation of anti

moneylaundering laws are discussed putting forth few humble suggestion to
have a balanced anti-money-laundering.

INDEX
SR.N TOPIC PG.NO
O

I PART-I
I.I Introduction to money laundering 08
I.II Money laundering- The root Problem 08
I.III Money laundering- The concept 11
I.IV Money laundering- An organised crime 11
 I.V Money laundering-Historical evolution 12
I.VI Money laundering- The Alarming Statistics 13

II PART-II
II.I The process of Money Laundering
II.II Some Techniques of Money Laundering
II.III New Areas of Operational of Money
Laundering
II.IV Harmful Effects of Money Laundering
II.V Argument for money laundering - how far
sustainable ?
II.VI Rational for Anti money laundering law

III PART-III
III.I Regulation of Money laundering international
perspective
III.II Basel committee on banking Regulation and
supervisory practices
III.III UN Convention against illegal traffic in
Narcotic drugs and psychotropic substances
III.IV GPML
III.V The financial action task force
III.VI Council of Europe Convention on Laundering ,
search, seizure and Confiscation of the proceeds
of crime

III.VII Other Organization and Initiatives against Anti-

Money-Laundering

IV PART-IV
IV-I REGULATION OF MONEY LAUNDERING IN
INDIA
IV-II Salient features of prevention of Money
Laundering Act 2002
IV-III The schedule to the Act
IV-IV Inclusion on New Definition
 IV.V Prevention of Money laundering Act 2011
IV.VI Financial Intelligence Unit-India (FIU-IND)
IV.VII Role of Reserve Bank of India
IV.VIII Role of Securities Exchange Board of India
IV.XI Problem area for India in having a proper AML

V Steps Banks should follow to ensure a robust

anti-money laundering process
VI Master Circular on Know Your Customer
(KYC) norms
VII CONCULSION 57
VII SUGGESTION 58
I
IX BIBLOGRAPGHY 60
X ABBREIVATION 61

PART-I
I.I. INTRODUCTION TO MONEY LAUNDERING

Money is like fire, an element as little troubled by moralising as earth, air and
water men can employ it as a tool or they can dance around it as if were the
incarnation of a God. money vote's socialist or monarchist, finds a profit in
pornography or translation from the bible, commissions Rembrandt and
underwrites the technology of Auschwitz. it acquires the meaning from the uses
to which it puts.

Mahatma Gandhi said:-

"Capital as such is not evil; it is its wrong use that is evil. Capital in some form or in
other will always be needed.

I.II Money laundering- The rootProblem

The primary function of money is to serve as a medium of exchange and as

such it is accepted without question ton final discharge of debts or payment of
goods or services. The term 'money' generally includes banknotes as well as
coins, although it may be limited to such of as each legal tender at the time and
place in question. The precise meaning of the term depend upon the content in
which it is used so that, for example it is usually a wide meaning when used in a
will and when that meaning gives effect to the intension of the testator, an
intermediate in connection with the claims for money paid or for money had
received and the narrow meaning in the criminal law and in relation to
execution.

Money has been regarded as bone of contention between friends and relative. It
is said that lend money to a person if you want to spoil him or make foe.
Moneywealth, property or estate have always caused family, feuds or even
murder for it is said that all is fair in love and war. Money is devil's child and
responsible for mischief and evils. Some people think that money can bring
happiness in life but it is not so.

Money is root cause of many evils like corruption, black marketing, smuggling,
drug trafficking, tax evasion and the bucks does not stop here it goes to the
extent of sex tourism and human trafficking(A human selling another
human)people are crazy for money. Majority is here to become rich and money
has become the basic goal and education. The more developed the nation, the
more the standard of living of the people. People want more money to cater to
their needs and at a point of time they don't hesitate to have money from any
source. this is available soft corner were the concept of money laundering enter and
prosper.

Influence of money on the people was appropriately portrayed by Henry fielding

as follows: Sir, money is the most charming of all the things; which will say
more in one moment than the most elegant lover can in years. Perhaps you will
say a man is not young; I answer is rich . he is genteel handsome, witty, brave,
good humoured, but he is rich, rich, rich and rich that one word contradicts
everything you can say against him.
I.III. Money laundering- The concept

Money laundering refers to the conversion or "laundering" of money which is

illegally obtained' so as to make it appear to originate from a legitimate source
money laundering is being employed by launders to worldwide to conceal
criminal activity associated with it such drug arms trafficking terrorism and
extortion Robinson states that:-

"Money laundering is called what it is because that perfectly describes what

take place illegally, or dirty, money is put through a cycle of transaction, or
washed, so that it comes out the other end as legal, or clean money. In other
words, the source of illegally obtained money is obscured through a
succession of transfer and deals in order that those same funds can eventually be
made to appear as legitimate income."

EC directive defines the term 'Money laundering' as " the conversion of property
knowing that such property is derived from serious crime, for the purpose of
concealing or disguising the illegal origin of the property or of assisting any
person who is involved in the such an offence or offences to evade the legal
consequences of his action and the concealment or disguise of the true nature,
source, location, disposition, movement right with respect to, or ownership of
the property is derived from serious crime".

Thus, the money laundering is not an independent crime it depends upon

another crime the proceeds of which is the subject matter of the crime in the
money laundering.

I.IV Money laundering- An organised crime

Money laundering has a close nexus with organised crime. Money launderers
accumulate enormous profit through drug trafficking, international frauds,
arms dealing etc. Cash transaction are predominately used for money
laundering as they facilitate the concealment of the true ownership & origin of
money. It is well organised that through huge profit the criminals earn from
drugs trafficking and other illegal means, by way of money laundering could
contaminate and corrupt the structure of the state at all the levels, this
definitely leads to corruption. Further, this adds to constant pursuit of profits and
the expansion to the new area of criminal activity.

Through money laundering organised crime diversifies its source of income and
enlarges its sphere of action. The social danger of money laundering consist in
the consolidate of the economic power of criminals organisations, enabling them
to penetrate the legitimate economy. In advanced societies. Crime is
increasingly economic in character. Criminal association now tend to organised
like business enterprise and to follow the same tendencies as legitimate firms;
specialisation growth expansion in market and linkage with other enterprise.
The holders of capital of illegal origin are prepared to bear considerable cost in
order to legalise its use.

IV. Money laundering-Historical evolution:

'Money laundering' as an expression is one of fairly recent origin. the original

sighting was in the newspapers reporting the Watergate scandal in the United
States in 1973.

The expression first appeared in a judicial or legal context in 1982 in America in

the case of US $4,255,625.39. The term money laundering is said to be
originated from Mafia ownership Laundromats in the United States. Gangsters
there were earning huge sums in cash from extortion, prostitution, gambling
and bootleg liquor. They needed to show a legitimate source for these monies.
One of the ways in which they were able to do this was by purchasing outwardly
legitimate businesses and to min their illegal earnings with the legitimate
earnings they received from these businesses. Laundromats were chosen by
these gangsters because they were cash businesses and this was an undoubted
advantage to people like AL Capone who purchased them Capone was
prosecuted, through not for money laundering but for tax evasion. However, the
conviction of Capone may have triggered the money laundering business of the
ground. But other historians differ from this in as much as they are of the view
that money laundering is called so, because it perfectly describes what
takes place illegal or dirty money is put through a cycle of transactions, or
washed, so that it comes out at the other end as legal or clean money. In other
words, the source of illegally obtained funds is obscured through a succession
of transfers and deals, in order that those same funds can eventually be made to
appear as legitimately earned income.

Another celebrated mode of doing money laundering was with SWISS bank.
Gangster Meyer Lansky used the number of SWISS bank accounts to hide his
illegal money. He used the "loan-back" concepts, which meant that the illegal
money could now be disguised as 'loans' provided by complaint foreign banks,
which could be declared as their 'revenue' if necessary and a tax-deduction
obtained in the bargain. Money laundering as a crime attracted the interest in the
1980s, essentially within a drug trafficking context. It was from an
increasing awareness of the huge profit generated from the criminal activity and
a concern at the massive drug abuse problem dealers by creating legislation that
deprive them of their illegal gains.

I.VI Moneylaundering- The Alarming Statistics

Estimating how much money is laundered is actually laundered in the United

States, any other, or globally is extremely difficult. Money laundering is a
largely secretive phenomenon. the exact number of launders that operate every
year, how much money they launder in which country and sector, and which
money laundering techniques they use it not known. however a sustain effort
between 1996 and 2000 by the FAFT(Financial Action Task Force) to produce
such estimate failed. In fact, no direct estimates exits of how much money
passes through financial system, whether broadly or narrowly defined, for the
purpose of converting illegal gains into a non trace able form.

john walker was the first to make a serious attempt at quantifying money
laundering and initial output. His model suggests that US $ 2.85 trillion are
laundered globally. As per an estimate of the international monetary fund, the
aggregate size of money laundering in the world could be somewhere between 2
or 5 % of the world's GDP. Although money laundering is impossible to
measure with precision, it is estimate that US$5000 billon to US$10,000billon in
proceeds from the serious crime is laundered every year. Though data on the
size of money laundering in the scant UK and US officials estimate that the
amount of money laundering in the financial system worldwide was roughly
$500billion gross domestic product.
II.I The process of Money Laundering

money laundering is not a single act but is in fact a process that is accomplished in
three basic steps as enumerated below:

1. Placement:

Placement refer to the physical disposal of bulk cash proceeds derived from
illegal activity. This is the 1st step of money laundering and ultimate aim of the is
to remove the cash from the location of acquisition so as to avoid detection from
system by opening up a bank account in the name of unknown individuals or
organisations and depositing the money in that account.

2. Layering :

Layering refers to the separation of illegal proceeds from their sources by

creating complex layer of financial transaction. Layering conceals the audit trail
and provides anonymity. This is achieved by moving money to offshore bank
accounts in the name offshore companies, purchasing high value commodities
like diamond and transferring the same to different jurisdictions. Now,
electronic funds transfer(EFT) has become boon for such layering exercise
different techniques like correspondent banking loan at low or no interest rates,
money exchange offices, back- to-back loans, fictitious sales and purchases,
trust offices, and recently the special purpose vehicles(SVPs) are utilized for
the purpose of laundering the money.

3. Integration:

"Integration" refers to the reinjection of the laundered proceeds back into the
economy in such a way that they re-enter the financial system as normal
business funds. The launders normally accomplish this by setting up unknown
institutions in nations where secrecy is guaranteed. New forms of business with
just a webpage and convert his illegal money to legal by showing profits from
the webpage. There are other ways like capital market investments, real estate
acquisition, the catering industry, the gold market and the diamond Market.
Money laundering, at its simplest, is the act of making money that comes from
source A look like it comes from source B.
II.II Some Techniques of Money Laundering:

At each stage of money laundering various techniques can be ssible to

of three utilised. It enlist all the techniques of money laundering
is really not po
exercise; however some o
thfe techniques are illustrated for the sake nodfeurstanding.

1. Hawala:-

Hawala is a alternative and parallel remittance systemIt. exits and

operate outside of, or paralel to traditional banking or financial cha nnels. It was
developed in India befo re the introduction of western banking practices, and is
currently a major remittancseystem and used around the world. In haawanletwork the
money is not moved physiclya.l A typically hawala transaction would blieke a resident in
USA of Indian person has option either to send money through foraml channel of
banking or through hawalasystem. The commission in hawala system
less than the
bank charges and it is witho
t uany complications for opening accountvoisrit the bank, etc.
The money reaches inot the doorstep of the person's relative antdhe process is
speedier and cheaper.
2. Structuring Deposits:-

Also known as smurfing, this method entails breaking up large amounts off money
into smaller, less-suspicious amounts. In the United States, this smaller amount has to
be below $10,000- the dollar amount at which U.S. banks have to report the
transaction to the government. The money is then deposited into one or more bank
accounts either by multiple people (smurfs) or by a single person over an extended
period of the time.

3. Third-party Cheques:-

Utilizing counter cheques or banker's drafts drawn on different institutions and

clearing them. Via various third-party accounts. Third party cheques and traveller's
cheques are often purchased using proceeds of crime. since these are negotiable in
many countries, the nexus with sources money is difficult to establish.

4. Credit card

clearing credit and credit card balance at the counter is different banks. Such cards
have a number of uses and can be used across international borders. For example, to
purchase assets, for payment of services or goods received a global network of cash
-dispensing machines.

5. Peso broker:-

A drug traffickers turns over dirty U.S dollars to a peso Colombia. the peso then use
those drug to purchase goods in united states for Colombia importers. when the
importer received those goods and sell them for peso in Colombia, they pay back the
peso broker from the proceeds. the broker then gives the drugs trafficker the equivalent
in peso of the original, dirty U.S dollars that began in the process. The list is endless and
quite a lot of techniques are not easily used to one laundering phase alone . With each
reporting of crime, the modus operandi changes keeping in view the earlier detecting.
the money laundering appear to be serious researcher and the officials appear to be mere
readers of research reports.
 II.III Some New Areas of Operational of Money Laundering

Both authorities and the money launderers seem to permanently change their
behaviour. when trying to hunt and escape money laundering. One can notice
changed explored new routes of laundering their money. economies with growing and
developing establish financial centres as the latter must have implemented
comprehensive money laundering regimes.

1. Insurance sector

Then insurance sector is a relatively less haunted sector compared to banks and other
avenues of financial and other services, however there has been gradual increase in
laundering activity in insurance sector as well. The laundering in insurances is either
internal or external in nature. the internal channels of laundering money or agent
premium diversion, reinsurance fraud and rented assets scheme etc. phony insurance
companies, staged auto accident, vertical and senior settlement fraud are external
channels of money laundering.

2. Open Securities Market:-

Money launderers have traditionally targeted banks, which accept cash and
facilitate domestic and international funds are transfers. However the securities
markets, which is known for their liquidity, may also be targeted by criminals seeking to
hide and obscure illegal funds. Money launderers can targeted any type of the
businesses that participate in securities industry. Broker-dealer for instance provide a
variety product and services to retail and institutional investor buying and selling
stocks bond and mutual fund and shares. this is more over possible due the instrument
like hedge funds and participatory Notes which have very limited disclosure as to the
source.these funds can effectively used as Laundromat. although the number of
document cases in which broker and dealer or mutual fund accounts have been used to
launder money is limited, law enforcement agenices are concerned that criminals may
increasingly attempt to use the securities industry to launder money. this is new area
which requires a serious thought processing.
 3. Cyber crime

Now one has to confront with hybrid crimes, the with many attributes . According to
capt. Raghu Raman "five types of crime are now converging. Cybercrimes such as
identify theft access to e-mail and credit card fraud are coming together with money
laundering and terrorist activities. large amounts of money is now stored in digital
form . Now you can transfer money through electronic and online gateways to
multiple accounts. This convergence leads to a greater problem of tackling of different
issues at onetime.
II. IV Harmful Effects of Money Laundering:

In a detailed study by Unger about money laundering literature they were able to
identify 25 different effects of money laundering. Unger classifies the effect of money
laundering on the basis of its gestation period within which it surfaces, fewer than two
broad heads, i.e. short term effects of money laundering and long term effects of money
laundering.

Money laundering threatens national governments and international relations

between them through corruption of officials and legal systems. It undermines free
enterprise and threatens financial stability by crowding out the private sector,
because legitimate businesses cannot compete with the lower prices for goods and
services that posed by Money-laundering activities throughout the world.

Terrorism:-

Terrorism is an evil which affects each and everybody. Now and then we can find
terrorist attacks being made by terrorists. These attacks definitely cannot be done
without the help of money. Money laundering serves as an important mode of
terrorism financing. Terrorist organizations rise funding from legitimate sources,
including the abuse of charitable entities or legitimate businesses or self-financing by the
terrorists themselves. Terrorists also derive funding from a variety of criminal
activities ranging in scale and sophistication from low-level crime to organized fraud or
narcotics smuggling or from state sponsors and activities in failed states and other safe
havens. Terrorists use a wide variety of methods to move money within and between
organisations including the financial sector, the physical movement of cash by
couriers, and the movement of goods through the trade system. Charities and
alternative remittance systems have also been used to disguise terrorist movement of
funds.
Threat to banking system:-

Across the world, banks have become a major target of money laundering
operations and financial crime because they provide a variety of services and
instruments that can be used to conceal the source of money, with their
polished.

Articulate and disarming behaviour, Money launderers attempt to make

bankers lower their guard so as to achieve their objective. through norms for
record keeping, reporting, account opening and transaction monitoring are
being introduced by central banks across the globe for checking the incidence
of money laundering and the employees of banks are also being trained to
recognize suspicious transactions, the dilemma of the banker in the context
of money laundering is to sift the irregular/suspicious transactions. Launders
generally use this channel in two stages to disguise the origin of the funds and
introduce these funds in the financial system and second, once these funds
have entered the banking system, through a series of transactions, they
distance the funds from illegal source. The banks and financial institutions
through whom the 'dirty-money' is laundered become unwittingvictims of this
crime.

Threat to Economic and Political Stability:-

The infiltration and sometimes saturation of dirty money into legitimate

financial sectors and national accounts can threaten economic and political
stability. An IMF working paper concludes that money laundering impact the
financial behaviour and macro-economic performance in variety of ways
including policy mistake due to measurement errors in national account
statistics volatility in exchange and interest rate due to unanticipated cross
border transfer of funds the threat of monetary instability due to unsound
asset structures effects on tax collection and public expenditure allocation due
to misreporting of income and many more such ways.
II.V. Argument for money laundering - how far sustainable ?

In contrast to the position with insider dealing a few serious academic argument
have been advanced that money laundering is beneficial or even that it should be
permitted there exists theory of legitimisation suggestion that money laundering
enables to criminals to come in from the shadows and take their place in the
legitimate economy. An of this was the Seychelles proposed economic
development assistance act 1995, which would have provided that, where a person
invested a person invested at least US$10 million in the country they would be
immune from criminal prosecution by any party the only exception bring by
Seychelles authorities and then only in the context of the drug investigation,
Further the funds themselves would clean and not liable to the confiscation.
Professor Barry Rider and the other have also pointed out that it may often be
beneficial to the state as well as to the individual not only to keep the origin of
certain funds secret but actually to disguise their provenance. however this
argument is not sustainable because money laundering is essentially concerned
with the enabling of criminals and on occasions their associate to retain or to
recover the proceeds of their offences. moreover the financial confidentiality and
money are to distinct things. Dr. Kris Hinterseer has gone to the context of telling
that actual money laundering is on occasion in a country's interest.

II.VI. Rationalfor Anti money laundering law:-

Though academically it could be discussed that money laundering may prove useful in
certain context in light of harmful effects of money laundering posed above no one
would argue against the anti-money laundering laws. there are various motivation to
have an AML mechanism in place to began with at most basic, the rationale is to
support the adage that crimes don't play. Firstly there is the moral dimension; crime
should not pay. it is simply not acceptable to society that a person who does wrong
should benefit as aresult.

A part from the aforesaid dimension it is intended to deprive the criminal

organisation of their financial lifeblood. Moreover if it is shown that crime does
not pay would act as a sufficient deterrent as few theorists suggest for the cost
benefit analysis especially in economics crime like money laundering . Further
there is another theory that if criminals can be prevented from profiting from their
offences they will not able to reinvest money in those various ways and hence will be
hampered from the law abiding public see criminal enjoying very comfortable
life far more comfortable from their own, this will lead to a considerable public
disquiet. Further we live in a globalised world as a community international
relation at stake. There are pressure from parent organisation to which one has
acceded to as well as pressure from the developed countries for compliance to
tough anti-money-laundering regimes. The compliance result in better
international status of the country.

Anti-money laundering law is necessary because money laundering tends to

corrupt even the most professional players in the market. Now a money laundering
can be a white collar businessmen doing business legitimate. However when lured
by low interest rate loans, he would be tempted to launder the black money for the
purpose. This illegal business in the long run contaminates the legal business and
profession, for example money laundering needs lawyer and the lure of money
can transform the noble professional to criminals. Money laundering promotes
corruption and bribery in very sector specially the banking sector.

This provides a ration able for having an anti money laundering law which act
like a slow poison though to some it may seem as a power vitamin.
PART-III
III.I. Regulation of Money laundering international perspective:-

Money laundering is a truly global phenomenon. The increasing integration of

the world's financial system as technology has proved barriers to free movement of
capital have been reduced has meant that money launderers cam make use of this
system to hide ill-gotten gains. They are able to quickly move their criminal
derived cash proceeds between national jurisdiction complicating the task of
tracing and confiscating theseassets.

The international dimension of money laundering was evident in the study of

Canadian money laundering polices files. They revealed that over 80percent of all
laundering schemes had an international dimension. More recently operation green
ice (1992) showed the essentially transnational nature of modern money
laundering. Only a handful of industrialised western nations had system in place by
ends of 1980s. Because of this, it has been recognised by many government that
close international operation was needed to counter money laundering and a number
of agreements have reached internationally in order to counter this menace.

Today there are an increasing number of states that are passing laws and regulations
but UNDCP estimates that about 70% of the government do not yet have effect
legislation in place. Action at the international level to combat money laundering
began in1998 with 2 important initiatives. The Basel committee on the banking
regulation and supervisory practices and the united nations convention against illegal
traffic in narcotic drugs and psychotropic substances.

III.II. Basel committee on banking Regulation and supervisory practices

The Basel committee statement of principles on the prevention of criminal use of

banking system was a significant breakout on the financial front to have some
controlling mechanism for money laundering on an international plane. The
statement of principles does not restrict itself to drug-related money laundering
but extends to all aspects of laundering through the banking system ,
i.e. the deposit transfer and/or concealment of money derived from illegal
activities whether robbery terrorism fraud
or drugs. It seeks to deny the banking system to those involved in money laundering by
the application of the four basic principle.

1. Know Your Customer (KYC):-

This mandates the bank to take reasonable efforts to

determine their customers true identify and have effective procedures for
verifying the confides of a new customer.

2. Compliance with Laws:-

Bank management should ensure high ethical standards in complying with

laws and regulation and keep a vigil not to provide services when any money-
laundering activity is suspected.

3. Cooperation with the law Enforcement agencies 4.

Adherence to the statement

III.III. UN Convention against illegal traffic in Narcotic drugs and psychotropic
substances:-

This UN Convention was one of the historic conventions in as much as the parties to the
convention recognised the links between illegal drugs traffic and other related
organised criminal activities which undermine the legitimate economics and
threaten the stability security and sovereignty of states and illegal drug
trafficking is an international criminal activity that generates large profits and
wealth enabling transnational criminal organisation to penetrate contaminate and
the concept the structures of the government legitimate commercial and
financial business and society at all levels. The treaty required the signatories to
criminalise the laundering of drug money and to confiscate it where found. All
countries ratifying agree to introduce measures to identify trace and freeze or
seize the proceeds of drugs trafficking. council of Europe Convention on
laundering is motivated by this convention as well as this convention gave a
frame work for FATF to work.
 III.IV. GPML

The global programme against money laundering was established in year 1997
in response to the mandate given to UNODC by 1998 UN convention against
illegal traffic in narcotic drugs and psychotropic substance. GPML mandate was
strengthened in 1998 by the united nations General Assembly Special Session
(UNGASS) political declaration and Action plan against money laundering which
broadened its remit beyond drug offences to all serious crime.

Three further convention have been adopted/specify provisions for

AML/CFT related crimes.

international convention for the suppression of the financing of

terrorist.(1999)

UN convention against transnational organised crime(2000)

 III.V. The financial action taskforce(FATF)

The Financial action task force(FATF) is an inter-government body founded by G7 countries

(Canada, France, Germany, Italy, United Kingdom), created in 1989, whose
purpose is the development and promotion of national and international policies
to combat money laundering and terrorist financing. The forty recommendation
of the FATF on money laundering have been established as the international
standard for effective anti money laundering measures.

FATF regularly reviews its member to check their compliance with these forty
recommendation and to suggest areas for improvement. It does this through
annual selfassessment of and periodic mutual evaluation of its members. The
FATF also identifies emerging trend in method used to launder money and
suggest measures to combat them in addition to the existing 40 recommendation
FATF has come up with 9special recommendation on terrorist financing. As per
the recommendation of the task force all countries have to ensure that offences
such as financing of terrorism, terrorist act and
terrorist organization are designated as " Money laundering predicate offence "

The 40 recommendation provides a complete set of counter measures against

money laundering covering the criminal justice system and law enforcement the
financial system and its regulation, and international co-operation. They set out the
principles for action and allow countries a measures of flexibility in
implementing these principles according to their particular circumstance and
constitutional frameworks. Through not a binding international convention
many countries in the world have made a political commitment to combat
money laundering by implementing the 40.

III.VI. Council of Europe Convention on Laundering ,

search, seizure and
Confiscation of the proceeds of crime:-

popularly known as a Strasbourg convention was intended to extend the

provision of international cooperation against the activities of international
organised criminality in general beyond the area of drug. Further the EC
Directive on prevention of the use of financial system for the purpose of money
laundering in 1991 a legal regulation of mandatory force requiring member
states to incorporate the rules contained to therein in their own legal system by a
certain date. Other initiatives of European union to deal with situation are
council common position on combating terrorism, Council convention_ Council
of Europe Convention on money laundering, search, seizure and Confiscation of
the proceeds from crime and on the financing of Terrorism dated 16 may 2005
and Directive 2005/60/EC dated 26th October,2005.

III.VII. Other Organization and Initiatives against

Anti- MoneyLaundering (AML)

Money laundering is an increasingly ramified, complex phenomenon that must

be tackled in an integrated and interdisciplinary fashion. Towards this there are
many organizations throughout the world co-ordinately. Some of the prominent
ones are discussed below:-
 III.VII.A international money
laundering Information Network
(IMoLIN):-

IMoLIN is an Internet-based network assisting government, organization and

individuals in the fight against money laundering and the financing of terrorism
administered by UN office on Drugs and Crime. IMoLIN has been developed
with the cooperation of the world's anti-money laundering organization. It
provides with an international database called Anti-money laundering
international Database (AMLID) 2nd Round of Legal Analysis has been
launched by UNODC on 27 February 2006, IMoLIN has twelve participating
organization , four international organization, and five international financial
institution on its website

III.VII.B Wolfberg AML Principal:

This gives eleven principal as an important step in the fight against money
laundering, corruption and other related crimes. Transparency International(TI), a
Berlin based NGO in collaboration with 11 International Private Banks under the
expert participation of Stanley Morris and Prof. Mark Pieth came out with these
principles as important global guidance for sound business conducting international
private banking. The importance of these principles is due to the fact that it comes
from initiative by private sector.

Normally, most initiatives to date have been public sector led by governments and
their regulatory and law enforcement agencies, or by government representatives
acting through international form such as the Financial Action Task Force(FATF) and
the Basel Committee of Bank Supervisors. The Wolfsberg Principles are a non-
binding set of best practice guidelines governing the establishment and maintenance of
relationships between private and bankers and clients.
 III.VII.C Egmont Groups of Financial Intelligence Units:

The Egmont Group is the coordinating body for the international group of
Financial Intelligence Units (FIUs) formed in 1995 to promote and enhance
international co-operation in anti-money laundering and counter-terrorist
financing. The Egmont Group consist of 108 Financial intelligence units are
responsible for following the money trail, to counter money laundering and
terrorism financing. FIUs are an essential component of the international fight
against laundering, the financing of terrorism and related crime.

Their ability to transform data into financial intelligence is a key element in the
fight against money laundering and the financing of terrorism. The FIUs
participating in the Egmont Group affirm their commitment to encourage the
development of FIUs and cooperation among and between them in the interest of
combating Money Laundering and in assisting with the global fight against
terrorism financing.
 III.VII.D. Asia-Pacific Group on Money Laundering(APG):

The Asia/Pacific group on Money Laundering is an International organization

consisting of 38 member countries/jurisdictions and a number of international and
regional observers including the United Nations, IMF and World Bank. The APG is closely
affiliated with the FATF in the OECD Headquaters at Paris, France.

All APG members commit to effectively implement the FATF's international standards
for anti-money laundering and combating financing of terrorism referred to as
the 40+9 Recommendations. Part of this commitment includes implementing
measures against terrorist listed by the United Nations in the "1267 consolidated
List". The key functions of APG is to access APG members compliance with
the global AML/CFT standards through mutual evaluations; coordinate
technical assistance and training with donor agencies and APG jurisdiction to
improve compliance with the AML/CFT standards; co-operate with the
international AML/CFT network. Conduct research into Money Laundering and
terrorist financing methods, trends , risks, and vulnerabilities;
contribute to the global AML/CFT policy development by Associate Membership of
FATF.

Thus one can see the panoply of efforts taken by the

international community to fight the menace of money-laundering. As the
financial systems of the world grow increasingly interconnected, international
cooperation has been, and must continue to be fundamental in curtailing the
growing influence on national economics of drug trafficking, financial fraud,
other serious transactional organized crime, and the laundering of proceeds of
such crimes.
PART-IV
 IV.I REGULATION OF MONEY LAUNDERING IN INDIA:

With its growing financial strength, India is vulnerable to money

laundering activities even though the country's strict foreign exchange laws
make it difficult for criminals to launder money. International Narcotics and Law
Enforcement Affairs emphasizes India's Vulnerability to money-laundering
activities in the following words.

"India emerging status as a regional financial centre, its large system of

informal cross-border money flows, and its widely vulnerability to money
laundering activities, some common sources of illegal proceeds in India are
narcotics trafficking, illegal trade in endangered wild life, trade in illegal gems
(particularly diamond), smuggling, trafficking in persons, corruption and income
tax evasion. Historically because of its location between the herion-providing
countries of the Golden Triangle Cresent, India continues to be a drug-transit
country."

Money-laundering in India has to be seen from two different perspective, i.e,

Money-laundering on international forum and Money-laundering within the country.
As far as the cross-border money-laundering is concerned in India's historically strict
foreign-exchange laws and reporting norms have contributed to a great extent to
control money laundering on international forum. However, there has been threat from
informal transaction like 'hawala'.

According to Indian observers, funds transferred through the hawala market

are equal to between 30 to 40 percent of the formal market. The Reserve Bank of
India(RBI), India's central bank, estimated that remittances to India sent through legal
formal channels in 2006-2007 amounted to US $28.2 billion. Due to large number of
expatriate Indians in North America and the Middle East, India continues to retain its
position as the leading recipient of remittances in the world, followed by China and
Mexico.

In India, before the enactment of the provision of Money-Laundering Act

2002 (PMLA-02 hereinafter), the following statues add reseed scantily the issue in
question:
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  The Income Tax Act, 1961.
 The Benami transaction (prohibition) act, 1988.
 The Indian Penal Code of Criminal Procedure, 1973.
 The Narcotics Drugs and Psychotropic substance Act, 1985.
 The Prevention of Illegal Traffic in Narcotics Drugs and Psychotropic
Substance Act, 1988.

However, this was not sufficient with the growth of varied areas of
generating illegal money by selling antiques, rare animal flesh and skin, human organ
and many such varied new areas of generating money which was illegal.
MoneyLaundering was an effective way to launder the black money (wash is to make it
clean) so as to make it white.

The International initiatives as discussed above to obviate the threat not

only to financial systems but also to the integrity and sovereignty of the nations and the
recent Hawala episode in India triggered the need for anti-money laundering law. In view
of the urgent need for the enactment of a comprehensive legislation inter alia for
preventing money laundering and connected activities, confiscation of proceeds of
crime, setting up of agencies and mechanisms for coordinating measures for
combating money-laundering etc. the PML Bill was introduced in the Lok Sabha on
4th August 1998, which ultimately was passed on 17th January 2003.

However the implementation of the same did not see the light of the day
until 2005 when it was enforced. The time when the Act of 2002 came to be enforced it
was too old to cater to the current needs of the anti-money laundering law. To bring the
necessary changes in light of the liberalization of economy and securities market in
India, there was a need to have more comprehensive anti money-laundering law and
that is how the Preventions of money laundering Act 2008 came into existance, the
salient feature of which will be discussed later.
IV.II. Salient features of prevention of Money Laundering Act 2002:-

The aforesaid Act was enacted to prevent money-laundering and to

provide for confiscation of property derived from or involved in money laundering .
The Act extends to the whole of India including J&K. The Act comprises of X chapter
75 section and aschedule.

IV.II.A. Offence of money laundering and punishment:-

offence of money laundering means the projection of tainted money as

untainted either directly or indirectly or assisting in such act knowingly is a party or is
actually involved in such process or activity the proceeds of the crime referred above
includes the normal crimes and scheduled crimes. The punishment prescribed for the
offence of money laundering in the case of money obtained from normal crime is
rigorous imprisonment for term which shall not be less than 3 years but which may
extend to 7 years and shall also be liable to fine which may extend to 5lakh rupees .
However for the proceeds of the crime which is involved in money laundering relates to
any offence specified under the paragraph 2 of the schedule the punishment of
rigorous imprisonment of 7 years has to be read as 10 years.

IV.II.B. Attachment of property involved in Money laundering:-

If the director has a reason to believe that a person is in possession of

property involved in money laundering or he is dealing in such property the director
empowered to attach the property. As far as offence under the NDPS Act is concerned
the director is empowered to attach the laundered property in drug related cases soon after
the case regarding offence is sent by the police officer or a complaint is field before
the court for taking cognisance of the offence. However in other cases some safeguard
is provided as to attachment can only be made only when the investigation is complete
and a report is forwarded under sec.173 of criminal procedure code. under the
proposed bill this distinction has been removed and the safeguard is now available to all
schedule offences.
IV.II.C. Reporting requirement for the certain entities:-

every banking company and financial institution and intermediary is

under as obligation to maintain a record and furnish information to the
director with in such time as prescribed of all transaction the nature and the
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. the
said records have to be maintained for a period of 10years from the date of
transactions between the clients and the banking company or financial
institution or intermediary, as the case may be. further aforesaid entities have to
maintain the records of the identity of all its clients for a period of 10years from
the date of cession of the date of the transaction between the client and them.
IV.II.D. Salient features of the PML bill-2008:-

minister of the state for the finance Pawan Kumar Bansal

tabled a bill recently amend the prevention of money laundering Act,
2002(PMLA-02) in rajya sabha. The present bill's key features are as follows:

1. It seeks to bring certain financial institutions like full Fledge money

changers, money transfer service and master card within the reporting
regime of the Act.

2. Provision to combat financing of terrorism by way of introducing new

category of offence which have cross border implications.

3. Offences with cross border implication introduce by way of part C to

the schedule of the Act with the removal of monetary threshold limit of
rs.30lakhs. However, the monetary limit still limits for the part B offences.

4. Provisional attachment period is enhanced from 90dasys to 150days

under section 5 and additional safeguard has been introduce in as much
as the property can be attached and a person can be searched only after
completion of the investigation by the investigation agency.

5. Enforcement Directorate is now more empowered to search the

premises immediately after the offence is committed and the police have
filed the report under section 157 of the Cr. P.C.

6. Protection of tenure of chairman and member of appellate tribunal in as

much as requirement of consultation with chief justice of India before
 their removal. Moreover the retirement age of chairman/member is increased
from 62 to 65.

7. The requirement of appointment of member of the Appellate tribunal that the

person should be or has been a judge of high court has been removed retaining
other qualifications.

8. In case of cross border money laundering the present bill enables the central
government to return the confiscated property to the requesting country in order to
implement the provision of the UN convention and corruption.

9. Expanded the reach of the act by adding many more crimes under various
legislation in part A and part B in the schedule of the Act.

10. delegated legislation is provided empowering Central Government to

notify from time to time activity for planning games of chances for cash or kind as
designated business or profession for the purpose of bringing them into the
reporting regime under the Act.

IV.III. The schedule to theAct:-

proceeds from a crime committed under the following legislation if shown as

untainted would be treated as money laundering and would be accordingly punishable
under the Act.

PART A

Paragraph 1 offences under the Indian penal code

Paragraph 2 The narcotic drugs and psychotropic on substances Act,

1985 Paragraph 3 The explosive substance Act 1908

Paragraph 4 The unlawful activities Act 1967 PART B

Paragraph 1 offence under the Indian penal

code Paragraph 2 The arms Act 1959 Paragraph

Paragraph 3 The wild life protection Act

1956

Paragraph 4 The immoral traffic of corruption Act

1988 Paragraph 5 The prevention of corruption Act 1988

Paragraph 6 The Explosive Act 1884

Paragraph 7 The antiques and the Arts Treasures Act 1972

Paragraph 8 The securities and exchange board of India Act

1986 Paragraph 9 The customs Act 198

Paragraph 10 The bonded system Act 1976

Paragraph 11 The child labour prohibition and Regulation Act

1986 Paragraph 12 The transplantation of human organ Act 1994

Paragraph 13 The juvenile justice Act 2000

Paragraph 14 The emigration act 1983

Paragraph 15 The passport act 1957

Paragraph 16 The foreigner act 1946

Paragraph 17 The copyright Act

1957 Paragraph 18 The trade mark

Act 1999

Paragraph 19 The information technology Act

2000 Paragraph 20 The biological diversity Act

2002

Paragraph 21 The protection of plant varieties and framer's right Act 2001

Paragraph 22 The environment protection Act1986

Paragraph 23 The water (prevention and control of pollution Act)

1974 Paragraph 24 The air (prevention and control pollution Act) 1981

Paragraph 25 The suppression of unlawful acts against safety of maritime

navigation and fixed platforms on continental shelf Act 2002.

PART C

Includes an offences which is the offences of cross border implication and is

specified in Part A and Part B without any monetary threshold; or the offences
against property under chapter XVII of Indian panel code.
 The schedule under each paragraph refers few specific section describing the
offence the proceeds of a crime under section 3 of the Act. There is a significant
addition to those offence under the aforesaid Act also by the amendment Bill of 2008.

From the aforesaid amendment it is evident than the legislature is vigilant towards
the illegal proceeds from various fields like illegal killing of animals, violation of
environmental laws violation of intellectual property laws, proceeds from selling of the
antiques and treasure against the law violation of customer Act, proceeds from internet
related crime cyber crime, proceeds from bonded labour and child labour, illegal
organ transplantation, proceeds from the illegalities in the securities market like insider
trading, violation of laws relating to dealing of explosive substances and many more.

IV.IV. Inclusion on New Definition:-

The new skills provides few definition and amends a few for further clarity
and broadening of theAct.

Authorised Person:-

Means an authorised person as defined in clause of section 2 of the FEMA,

1999 and includes a person who has been authorised or given general or principals
with whom the person so authorised or having general or special permission conducts
a services involving international money transfer.

Designated business or profession:-

Means carrying on activity for playing games of chance for cash or kind, and
includes such activities associated with casino or such other activities as the central
Government may by notification, so designated from time to time.

The Definition of Financial Institutions:-

Has been mended so as to include also an authorised person and a payment

system operator. As well as the Non-Banking Financial Company per clause.

Offences of Cross Border Implication:-

The bill introduces a new category that has cross-border implication for
fighting terrorism. This particular provision gives the Indian anti-money laundering
legislation an extraterritorial exposure. Now under this provision a person who is
presently outside India under one of the parts referred to above and transfer the
proceeds or part thereof outside India commits an offence of cross-border Implication.
Thus now cross-border illegal proceeds can be put under the scanner of anti-money
laundering legislation in India.

Regulation Payment System Operator:-

Payment gateways such as visa master card, money changers, money transfer,
service provider and casinos will soon come under the ambit of India's money laundering
law and face mandatory reporting obligations.

Strengthened Enforcement Directorate:-

As noted earlier the draft legislation also empowered the Enforcement Directorate to
search immediately after the offence is committed. The investigation agency can attach
any property and search a person after completing the probe. It can enhance the period of
provisional attachment of property from 90 days to150 days.
Enhanced Reporting requirement:-

At the present the mandatory is applicable on banks, financial institutions

and intermediaries. Under the rules , every banking company, financial
institution and intermediaries has to maintain a record o f all transaction for 10
years. Records of all transaction above the stipulated limit submitted to
financial intelligence unit (FIU), Which manages the data and deciphers it into
intelligence to be used by various agencies. The new entities that are proposed to
be brought under the PMLA through this amendment will now have to report
details of transaction ofFIU.

IV.V Prevention of Money laundering Act 2011

During 2011 the Finance minister of India Mr. Pranab Mukherji presented the
Prevention of Money Laundering (Amendment) Bill in Lok Sabha. This Bill seeks
to amend the Prevention of Money Laundering Act, 2002.

This law provides the provision to link the Indian law to the laws of the foreign
countries. It also adds the concept of ‘reporting entity’ which would include a
banking company, financial institution, intermediary or a person carrying on a
designated business or profession.

The Bill expands the definition of offence under money laundering to include
activities like concealment, acquisition, possession and use of proceeds of crime.
This law can allow to levy a fine of upto Rs. 5 lakh but upper limit needs to be
reconsidered.
This bill gives the authority to confiscate
the property of any person for a period
not exceeding tha180 days. This
power may be exercised by the
authority if it has reason to believe that
the offence of money laundering has
taken place. Image Credit: PRS Legislative Research

The Bill proposes to confer powers

upon
the Director to call for records of transactions or any additional information that
may be required for the purposes of investigation. The Director may also make
inquiries for non-compliance of the obligations of the reporting entities.

The Bill seeks to make the reporting entity, its designated directors on the Board and
employees responsible for omissions or commissions in relation to the reporting
obligations.

The Bill states that in the proceedings relating to money laundering, the funds shall be presumed to
be involved in the offence, unless proven otherwise.

The Bill proposes to provide for appeal against the orders of the Appellate
Tribunal directly to the Supreme Court within 60 days from the communication of
the decision or order of the Appellate Tribunal.

The Bill seeks to provide for the process of transfer of cases of the Scheduled
offences pending in a court (which had taken cognizance of the offence) to the
Special Court for trial. In addition, on receiving such cases, the Special Court
shall proceed to deal with it from the stage at which it was committed.

Part B of the Schedule in the existing Act includes only those crimes that are above Rs 30
lakh or more whereas Part A did not specify any monetary limit of the offence.
The Bill proposes to bring all the offences under Part A of the Schedule to ensure
that the monetary thresholds do not apply to the offence of money laundering.
IV. Financial Intelligence Unit-India (FIU-IND):-

Financial intelligence Unit-India (FIU-IND) was setup by the

government of India the central national agency responsible for receiving
processing, analysing and disseminating information relating to suspect
financial FIU-IND is also responsible for coordinating and the strengthen efforts
of national and international intelligence, investigation and enforcement agency in
pursuing the global efforts against money laundering and related crimes. FIU- IND
is an independent body reporting directly to the economic intelligence
council(EIC) headed by the finance minister. FIU-IND mandates a series of
reporting requirement as outlined below:

Cash Transaction Report:-

A. All the cash transaction of the value of more than rupees ten Lakhs is
equivalent in foreign currency.

B. All the series of cash transaction integrally connected to each other

which have valued below rupees ten lakhs or its equivalent in foreign currency
where such series of transaction have taken place within a month. These reports
have to filed on 15th of the succeeding month.

Suspicious transaction reports:-

Every banking company, financial institution and intermediary shall furnish

information of all suspicious transaction whether or not made cash. The reports
has to be field not later than seven working days on being satisfied that the
transaction are suspicious.

Counterfeit Currency Reports:-

Every banking company, financial institution and intermediary , to furnish

to FIUIND information relating to all cash transaction were forged or
counterfeit currency notes or banknotes have been used as genuine or where any
forgery of a valuable security or a document has taken place facilitating the
transaction . This report has to be filed not later than seven working days from
the date of occurrence of such transaction.
 FIU-IND has doing great job in terms of information retrieval and
remittance and is applauded by the international community, but one should not
be satisfied with that there remains a lot to be done.

V. Role of Reserve Bank of India:-

The regulatory of the reserve bank of India extends to large segment

of financial institutional, including commercial bank, cooperative bank, non
banking financial institutions and various financial market. The board for
financial supervision continued to exercise its supervisory role over those
segments of the financial institutions that are under preview of the Reserve
Bank.

Recently, the RBI has issued a series of the bank, about the precaution to
be exercised in handling their customer's transaction. Important amongst these is a
guidance note issued about treatment of customer and key to knowing the
customer. The identity, background and standing of the customer should be
verified not only at the time of commencement of relationship, but also be
updated from time to time, to reflect the changes of circumstances and the
nature of operation of the account. RBI plays a significant role AML activities.
RBI, recently block the application of SWISS bank UBS for a banking license
in india on the ground that it was involved in $8 billion money laundering racket.
RBI said it put the UBS application on hold because the bank failed to cooperate in
a money laundering case in which controversial Bombay based business man
Hasan Ali Khan was involved. Khan is charged with large scale breaching of
Indian's currency controls. RBI investigators found a link between UBS and
Khan as a businessman had deposited $8 billion at a zurich branch of UBS.
They cited it a direct evidence for blocking the license of the bank.

VI. Role of Securities Exchange Board of India:-

Vulnerability of securities market to money laundering activities

have been discussed in the earlier part of this paper. Indian securities market is also
prone to money laundering activities. Intermediaries registered under the
SEBI are under reporting obligation of PMLA 02. FIU-IND has also issued
certain guidelines relating to KYC to followed by these intermediaries.

The main source of money laundering would be particularly

Notes transaction and Overseas Direct Investment Routes. The finding in the
UBS securities case have highlighted serious regulatory concerns in that the
PN/ODI route and its cover of anonymity being used by certain entities without
their being any real time check, control and due to diligence on the credentials.
Such a lapse have very grim portents as far as the market integrity and interest of
investor are concerned. The mechanism of opening-up the Indian securities
market through PN/ODI routes to entities outside India impose a commensurate
onus on the registered intermediaries of maintaining high standards of
regulatory compliance, exercise of high due diligences and independent
professional judgement and therefore any gaps in measuring up to the onus may be
fraught with critical repercussion in the market.

SEBI has almost taken a full circle on the issue of participatory Notes.
SEBI has taken certain important measures in favour of the Foreign Institutional
Investor (FII) as well as the unregistered foreign investors who intend to invest in
the Indian Securities market. Looking at the lacklustre performance of the
capital markets and in a order to encourage inflow of foreign capital in india
.SEBI has decided to remove the restriction on issuance offshore derivative
instrument (ODI) commonly known as participatory notes(PN), which had been
imposed on FIIs. This is an evidence of market forces compelling the regulator
to change its tough stance of regulation.

VII. IX. Problem area for India in having a proper AML:-

Anti-money laundering efforts of india are commendable n paper.

There are many problem areas for india having an effective AML regime. There
are several factors contributing to these problem and there is a need to
concentrate the efforts on one direction aimed towards the focus of the problem.
some of the key problem areas are pointed out. They are as follows:-
Lethargy of Enforcement Mechanism:-

India started its anti-money laundering exercise in the year 1998, a well
start but not properly tackled and saw the day of enforcement only in 2005
seven years along time for enforcement. When AML 02 with amendment 2005
came in force, It was inherent with many lacunas as there were several
development in those years which the Act failed to address. Then, as obvious a
need was felt to have a further amendments.PML bill 2008 is laid before the
parliament.

Growth of Technology:-

Not only the growth of technology has helped the common man its
proved also a boon for these money-laundering and India is not exception to
this. Cyber finance is the growing concept in this developing economy. The
speed at which the technology is growing is not matched up with the
enforcement agencies, specifically highlighted by the lame situation of
cybercrimes.

Unawareness about the Problem:-

unawarness about the problem of money laundering among the people is

an impediment in having a proper AML regime . people in India especially
among the poor and illiterate, do not trust the bank and prefer to avoid the
lengthy paper work required to complete a money transfer through a financial
institution. The Hawala system provides them same remittance services as a
bank with a little or no document and at a lower rates and provides anonymity
and securities. This is because many don't treat this is to be a crime and are not
aware about the harmful effects of crime.

KYC Norms-Do they serve the purpose:-

Now india has a KYC norms in place in both money market and capital
market. However, these KYC norm don't desist the Hawala transaction as RBI
cannot regulate them further , KYC norms become a mockery because of in
difference shown by the implementing authorities.KYC norms are followed in
letters but the requirement is to follow it in spirit. Increased competition in the
market requires and gives the motivation to the bank to lower their guards.
specifically the franchises banks that are authorised to open accounts.

smuggling- A rampant activity:-

India has illegal black market channels for selling the goods. Smuggled
goods such as food items, computer parts, cellular phones, gold and a wide
range of imported consumer goods are routinely sold through the black market.
By dealing in cash transaction and avoiding customs duties and taxes, black
market merchants offer better prices than those offered by the regulated
merchants. This is the problem though lessened due to liberalisation policy of
the government.

Tax law:-

justice learned hand in commissioner. Newmen stated the " over and
over again court have said that there is nothing sinister in so arranging one's
affairs to keep taxes as low as possible, everybody does so rich, or poor, and all do
right, for nobody owes any public duty than the law demands. Taxes are
enforced exactions, not voluntary contributions. To demand more in the name of
morals is mere cant. closer Bach home in India, the supreme court of India in
Azadi Bachao Andolan & Anr cited Lord Tomlin in IRC vs Duke of west
minister while uploading the validity of treaty shopping. there is need to make a
distinction between the tax avoidance and tax evasion. There are
comprehensions that double taxation treaties may lead to the money laundering
channel.
Threshold limit under PMLA02:-

The definition of money laundering creates 2classes of schedule offences.

In respect of offences against the state and drug related offences any sum or
property how so ever small may be seized and confiscated under the Act. In
respect of other scheduled offences failing under scheduled B, floor value of
rs.30 lakh is prescribed so as to exclude relatively small offences, and
properties. Unfortunately, this floor limit itself provides as escape route as a
person may engage with relative immunity in a series of transaction of money
laundering below this limit. This had been discussed under the concept of
smurfing in earlier part of the paper.

Absence of comprehensive enforcement agency:-

As seen earlier money laundering has become hybrid and has not only
related to NDPS cases but many areas of operation. separate wings of the law
enforcement agencies are dealing with the digital crimes. Money laundering,
economic offences and terrorist crimes. The agencies do not have the
convergence among themselves but the criminals have. criminals are working in
a borderless world but the policies in one state is still grappling with the
procedures on how to arrest a person in another state.

Apart from the above problem areas costs involved in having a anti- moneylaundering
regime is also relevant.
V. Steps Banks should follow to ensure a robust anti-money laundering
process

COBRAPOST an online magazine carried out a sting operation in March 2013 against
three private sector banks which had violated the money laundering rules and
guidelines set by the regulatory authorities. These violations are as follows.

1. Opening of account without mandatory PAN card.

2. Opening of account to route the cash to the Bank's menu of Insurance products.

3. Facilitating spilt of money to evade detection.

4. using dummy account to faceplate the conversion of black money.

Subsequently COBRAPOST alleged that many Public Sector Bank Units are
also involved in such scenarios and facilitate money laundering. The number of
institutions under the scanner is more than thirty now.

All the banks had immediately issued statements about the robustness of their
systems and about the actions they intended to take to get to the depth of the issue. The
banks appointed external auditors and / or set up high level expert committees to
examine these allegations and the underlying issues, if any. The banks also took actions
such as suspending the personnel concerned or asking them to go on leave till the
completion of investigations.

Subsequently, some of the banks made public statements that there were no
incidents of money laundering found in their processes as alleged by COBRAPOST.

Reserve Bank of India (RBI) had also initiated its investigation based on the sting
operation allegations. RBI investigation had observed various concerns such as not
collecting mandatory PAN details, allowing submission of dummy PAN details,
multiple cash transactions below Rs. 10 lakh to avoid being reported and splitting of
deposits into smaller amounts to avoid providing PAN. The articles also reported that
the banks had been found suppressing the alerts generated through their AML solutions
and non-reporting the integrally connected transactions. Perverse insurance selling
incentive structure had also been cited as a driver of these transactions without due
verifications.

What should the banks do?

In India, most of the banks have AML solutions / software that trigger alerts in case
any violation of the above-mentioned scenarios happens. These solutions are, in
general, compliant with the RBI mandated guidelines. However, in light of the
COBRAPOST sting operation and the subsequent initiatives taken by banks and the
RBI, there is a need for the entities to take certain additional steps and make the
whole monitoring / anti-money laundering exercise more robust and meaningful.
Here’s a ten point program banks should follow:

1. Response - Crisis Management Teams

Any untoward incident of this magnitude that can seriously dent the reputation or
confidence of an institution tends to consume large amounts of executive bandwidth. In
the aftermath of COBRAPOST sting, several senior executives were working with their
teams to get a detailed assessment of the issues at hand, and methods and means to fix
these issues. A good crisis management team should be able to investigate an issue,
conduct a root cause analysis and present the recommendations to an executiveteam.

2. Reputation Risk Management Committee

The biggest impact for a bank due to anti-money laundering non-compliance

would be through reputation risk / loss. Hence, a specialized team designated
‘Reputation Risk Management Committee’ would be well-suited to handle any
such issue, which has the mandate to organize the institutional approach and
thinking, manage the market facing communication, maintain relationship
with regulators, and ensure complete cooperation amongst various
stakeholders.

3. Process Redesign - Customer Due Diligence process

India as a country is known for different types of identity proof documents and the same
comes with an issue. There is no guarantee that the name will be spelt uniformly in all
the documents. For instance, PAN may be in the name of Akshay Kumar Gupta and
the driving license would be in the name of Akshay K Gupta or even spelt as Kumar
Akshay. It also means that same person can open accounts in different names. With
inter- and intra-city mobility being a common phenomenon, the customer addresses can
never be fully relied upon. The date of birth is a potential ‘unchangeable’ parameter,
even though it is not a full proof solution. Augmenting it with multiple addresses
captured by bureaus like CIBIL to create a robust customer deduplication process and
verification is of paramount importance. In the absence of above scenario, KYC
compliance for each account would have no meaning.

4. Efficiency Improvement- Rationalization of alert scenarios and false positive

management

Banks should work towards rationalizing the alert scenarios built in the bank’s AML
solution, suiting its requirements taking into account parameters such as bank profile,
customer profile, past alert history, past reporting history etc. Such processes would
gradually reduce the number of alerts getting generated, thereby improving the efficiency
in alert management. Even a conservative 20 percent reduction can have a huge impact
on the way alerts are scrutinized. Further, the bank should carry out such
rationalization process periodically, preferably once in a quarter. Banks should explore
working with the AML solution providers and augmenting current framework through
external consultants for false positive management / reduction.

5. Field Execution - Centralized alert management teams

While some banks already have a centralized set-up, it would be advisable for other banks
to have similar set-ups and follow it up with duly documented policies and processes
on handling the alerts generated by the AML solution. The most important ingredient for
success is to provide necessary training to the staff assigned to these units.

6. Data Quality Improvement - Enterprise Data Review

Despite all the advancements in core banking solutions, database technologies and
platforms, and data enrichment solutions, most organizations struggle to arrive at a single
version of truth in times of crisis. Often, disconnect between various enterprise
systems seems magnified due to inconsistent data. A sub-segment within the analytics/
business intelligence function should be dedicated for resolving inter- system
inconsistencies and ensuring customer data integrity.

7. Single Customer View - 360-degree

Having a comprehensive view of the customer across multiple relationship and

products is a necessity for compliance. Handling alerts will also not be considered
proper if a case investigator does not get complete picture of customer relationships or
linkages. All banks should make the investments in creating periodically refreshable
universal IDs. Ability to create dummy householder IDs would add more power to
compliance process.

Larger groups of companies have a bigger challenge here. Achieving a comprehensive

view will require close and unobtrusive working relationship between the different group
companies, without stepping over the regulatory boundaries around sharing of
information (with or without customer consent).

Most importantly, an integrated view of the customer is a backward as well as

forward looking idea– forensics across asset and liability portfolio of a particular
customer (fraud prevention, risk monitoring), better customer lifetime value
assessment, better cross-sell and up-sell recommendations, and better overall
customer relationship management.
8. Analytic Reengineering - From trigger reports to dashboards to analytics

Further, most software and solutions are good at capturing violates and creating alerts
and triggers. However, banks need to enable closed loop systems and thinking, whereby
the action and the resolution against a trigger is captured

as structured data, and is used for further profiling triggers, monitoring action windows,
measuring TATs, and evaluating risk to the business. Over a period of time, this analysis
should aspire to build custom risk assessment models for various triggers, thereby
helping prioritize action and managerial bandwidth.

9. Continuous Investigation - Forensic Analytics Unit (FAU)

Howsoever intelligent the system, the one’s looking to find a loophole, often manage to
find one. Banks should have an internal Forensic Analytics Units, something that is
already being done in many developed markets. FAU’s core job is to review the triggers
that come in, and find patterns and problems that are not part of the standard rule
based systems that exist today. It takes away the need to conduct these forensic
exercise on a reactive basis, because this team can act as the response team as well as
the proactive deterrent team. These teams can be set up as part of the central
compliance and audit function, or a special unit within the business intelligence unit.

10. Collaboration - Facilitating the regulator or FIU:

Once a transaction leaves a bank’s system, a bank’s ability to further track it is non-
existent. In order to make it possible for regulatory entities to track such transactions,
exception reports should be documented to facilitate the same.
Furthermore, FIU / RBI can facilitate a suspicious transaction report mechanism
whereby bank’s FAU can request for more information regarding tracking these through
the next system. In an ideal world, a large team under the aegis of FIU / RBI team can
conduct such investigation under the economic crimes investigation umbrella. Such a
system shall also throw up persons misusing multiple banks (for instance – breach of
cash transaction trigger in more than one bank) and would also
facilitate AML policy / process making.

VI. Master Circular on Know Your Customer (KYC) norms/Anti-Money

Laundering (AML) standards/Combating of Financing of Terrorism
(CFT)/Obligation of banks under Prevention of Money Laundering Act, (PMLA),
2002

The following are some of the bullets

'Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards

Adherence to Know Your Customer (KYC) guidelines by NBFC and persons
authorised by NBFCs including brokers/agents etc.

 Due diligence of persons authorised by NBFCs including brokers/agents etc.

 Customer service in terms of identifiable contact with persons authorised by
NBFCs including brokers/agents etc.
 Letter issued by Unique Identification Authority of India (UIDAI) containing
details of name, address and Aadhaar number
 Accounts of Politically Exposed Persons (PEPs)
 Client accounts opened by professional intermediaries
  Accounts of proprietary concerns
 Suspicion of money laundering/terrorist financing
 Filing of Suspicious Transaction Report (STR)

CONCULSION AND SUGGESTION:-

Combating money laundering is a dynamic process because of the

criminal who launder money are continually seeking new ways to achieve their
illegal ends. Moreover, it has become evident to the FATF through its regular
typologies exercise that as its member have strengthened their system to combat
money laundering the criminals have sought to exploit weakness in other
jurisdiction to continue their laundering activities.

many important financial centres have now adopted legislation to curb

drug related money laundering. However too many priority financial have still
not adopted needed legislation or ratified the convention. There is also
substantial question of whether the drug trafficking-oriented money laundering
laws that many governments adopted in the earlier part of this decade are
adequate, given recent development in money laundering practices and new
technologies used in banking. organised crime group are increasingly a factor in
the major money laundering schemes and the multiple sources of their proceeds
compounds the difficulty of linking the monetary transaction to a
unique predicate offences like drug trafficking. moreover, criminal organisation
have distinct patterns of operations.

The need for definitive policy is obvious. UN data that terror group financing
accounts for just 0.5% of the total $856 billon money laundering worldwide.
While this amount to just $4.16billon money laundering the potency to cause
for the global economy.

Suggestion:-

1. As we have seen earlier, money laundering involves international

activity at a greater level hence a suggestion borrowing from the words of the
Interpol expert Mr. Brown would be appropriate the key to making impact in
money laundering is to get all of the countries of the world to enact and enforce
the same laws dealing with money laundering so the criminal have nowhere to
go. As it is open to the states to decide exactly which crimes would qualify as
predicate offence to money laundering, this has resulted into serious in road into
the international harmonising efforts of moneylaundering.

Most countries have serious offences as predicate crimes but

have nevertheless, adopted different approaches to what exactly constitutes a
serious crime for the purpose. Thus there is a need to have a common list of
predicate offences to solve the problem of crossroads, specifically keeping into
the mind the transactional character of the money laundering crime and the
need for a unitary and coherent approach international level.

2. In order to reduce the vulnerability of the international financial

system money laundering, governments must intensify their efforts to remove
any detrimental rules and practices which obstruct the international co-
operation against money laundering.

3. Offshore financial confidentially is an issue. The states are

reluctant to comprise their financial confidentiality. There is a need to build a
balance between financial confidentiality to a money laundering haven.

4. Money laundering seems to be a various crime to the most of the

persons, however in view of the harmful, in view of the harmful effects to the
crime discussed in the earlier part of the discussion it is need of the day to
educate people about such crimes and inculcate a sense of vigilance towards the
instances of money laundering. Once the problem is visible to the eyes of
people, it would contribute towards better law enforcement as it would be
subject to public examination.

5. There is a need to sensitize the private sector about their role in

antimoney laundering activities. An example would be the wolfberg principals.
Anti money laundering should not be only the responsibility of the government,
but also the private players.

6. Continuous up-gradation and dissemination of the information is

necessary. FIU-IND website stills does not have a link which talks about the
proposal bill of 2008on AML. There is a need of reviewing the AML strategies
periodically. The enforcement agencies now have to step in the shoes of money
laundering to find out their techniques of money laundering.

7. There is a requirement to have a convergence of different

enforcement agencies sharing of the information is necessary.

8. It is suggested that a special cell dealing with money laundering

activities should be created on the lines of economics intelligence council
exclusively dealing with research and development of AML, this special cell
should have a link with Interpol and other international organisation dealing
with AML. All key stakeholders , like RBI, SEBI etc, should be parts of this.

9. There is a need to develop the political will to tackle the problem,

so long as it will be just an international compliance show piece, any number of
laws would not serve the purpose. The tussle between the centre and the state has
to be removed for having an effective AML regime.

10. The law should be implemented at the level of state government

and it should not only be the responsibility of central government. The more
decentralised the law would be better the reach it would have. however there
should be an effective coordination between the central and state agencies.

11. To have an effective AML one should think regionally nationally

and globally.

BIBLOGRAPGHY:-

WWW.bis.or

g.com

WWW.fatf.co

WWW.un.co

WWW.money laundering.com

And various other site visited through www.google.com.

 ABBERIVATION

FATF:- FINANCIAL ACTION TASK

FORCE. GPML:- GLOBAL PROGRAMME

AGANIST MONEY
LAUNDERING.

AML:- ANTI- MOENY LAUNDERING.

FIU-IND:- FINANCIAL INTELLIGENCE

UNIT-INDIA. UN:- UNITED NATIONS.

KYC:- KNOW YOURS CUSTOMER .

SEBI:- SECURITIES EXCHANGE BOARD OF INDIA.