IBA-TCS Joint Seminar on Anti-Money Laundering

January 22, 2005.                                                                 Mumbai

Synopsis

Welcome & Opening Remarks

Dr. Dalbir Singh, CMD - Central Bank of India

Key Points

• Seminar designed to focus on AML - role of banks, how India is placed in the global context and finally the role of technology in helping the banks.
• Relation between money laundering, organized crime and terrorism
• All play an important role, individuals as well as corporate citizens in handling this problem
• Highlighted various guidelines and acts, already in place, in various parts of the world.
• The guidelines issued by RBI in India, highlight the Know Your Customer (KYC) norms and also the AML guidelines
• Urged all present to introspect and dwell on the implications, preventive measures and the action steps in various processes and transactions at the bank, with reference to AML
• Seminar would be useful to all bankers in handling the day-to-day transactions and processing in the backdrop of the AML policy and guidelines.
  

Dr. A K Khandelwal, CMD - Dena Bank

Key Points

• 40% of the money laundering activities emanate in Asia but as of now India does not figure in the list.
• Would only be adding the points not covered earlier.
• Highlighted the role of banks - banks are large, geographically dispersed organizations, so the challenge is how to keep track where the money laundering transaction is taking place especially in large branch banks. Therefore the banks need to internally see, how to tackle the problem and evaluate the internal systems and policies. Also the management attention has to be drawn towards it.
• Second is training of operations staff in handling the issue. Banks must organize seminars to sensitize people around, about the problem and its implications, since it can lead to reputational problems.
• A small incident can lead to a reputational issue for a country and therefore banks should take special care and should put in place the right policies.
• The RBI circular, which has come out is not just any other circular but is very fundamental in nature and requires banks to put in place the required guidelines by March 2005.
• Lot of internal vigilance, monitoring and importance is required to be given to the issue .

Key Note Address
Mr. A N Roy, Commissioner of Police - Greater Mumbai

Key Points

• Gravity of the issue has already been brought out and it is something that the world and we are facing.
• Highlighted the nexus between the national and international security and money laundering and therefore high stakes involved.
• Basics of money laundering - sources of money and the cycle of money laundering.
• Problem is huge since huge amounts of money involved. The black money gets recycled, becomes white and comes to us. Gangsters have become big through this route. Though they all start small but recycle the money and become big. They have businesses mainly abroad but some of them are also in India. Therefore organized crime leads to economic crime. There are huge profits involved in drug trafficking, organized crime and economic crime.
• There is a very close nexus between organized crime, transnational crime, economic crime, drug trafficking, terrorist activities, hawala transactions and money laundering.
• The laundered money is invested through chartered accountants, shell corporations, political parties, media, and judiciary and enforcement agencies. It is also used in hawala transactions, foreign bank accounts, creating trusts, gold and jewellery.
• The problem is that till now there is no money laundering legislation, FEMA'99 lacks teeth, forfeiture laws are almost non-existent and there is absence of holistic law enforcement strategy.
• The way forward is - a systematic study is required, banking practices should improve, laws should become more stringent, enforcement agency should be a multi-disciplinary force and the society would fight hawala and money laundering in the right earnest.
  

AML Overview and Role of Banks
Mr. Prashant Saran, Chief General Manager - RBI

Key Points

• Highlighted the PML Act of 2002 and the definition of money laundering therein.
• Highlighted the Know Your Customer guidelines of August 16, 2002 specifically with reference to the compliance required from banks.
• Highlighted the November 29, 2004 circular on anti-money laundering and said that the circular only laid down the principles and procedural details had not been consciously provided. It had been left upon the banks to formulate their policies and create systems to monitor their implementation.
• He said that the guidelines did not mean that there would be denial of service to the common man, intrusive behavior from the banks or use of information for cross selling.
• The banks would have to ensure that they do not help in laundering money, wittingly or unwittingly and would also have to address the reputational and legal risks.
• The salient features of the new guidelines were highlighted as:
  o KYC Policy would have to address the customer acceptance policy, customer identification        procedures, on going monitoring and risk management.
       o The Customer Acceptance Policy will have to define parameters of risk perception to help        classify nature of business activity, location, mode of payment, volume of turnover and         social and financial status.
       o Risk Profile would have to be prepared for each new customer and they would have to be        classified into low, medium, high or even higher risk categories. The elements of risk profile        would be, customer identity, social/financial status, nature of business activity, information        about clients' business, location
       o Features of Low Risk and Medium and High Risk Categories were discussed.
       o Customer Identification Procedure was highlighted and its applicability at different stages        was spelt out. The banks should identify beneficial owners and establish identity of the        customers to their satisfaction so that they are able to satisfy the competent authority.
       o There should be ongoing monitoring by the banks so that they understand the normal and        reasonable activity of the customer. The same should be based on risk sensitivity.
       o Risk Management within banks (specifically with reference to AML) was highlighted covering       systems & controls, segregation of duties, training, compliance, role of audit, etc.
       o The customer should be educated for the new type of information being asked. Pamphlets       and literature should be prepared and the frontline staff should be trained.
       o New technologies in the bank, which favor anonymity, should be employed with care.
       o In case of existing accounts, the new guidelines should be employed on the basis of        materiality and risk, if monitoring throws up unusual pattern, at the time of renewal.
       o The guidelines shall apply to branches/ subsidiaries abroad, NCCTs and if the local laws        prohibit the same in that country, RBI should be intimated
       o A senior management officer should be designated as the principal officer in the bank, who       would be responsible for reporting and liaison with the enforcement agencies.
       o For the Customer Identification Requirements, the beneficiaries should be identified
            - In case of foundations etc. the managers / directors should be identified
            - For companies and firms the control structures, sources of funds and managers should            be identified
            - For accounts on behalf of professional intermediaries, single client, each sub-account            should be identified
            - For politically exposed persons, identity should be verified and the source of funds           ascertained. Such accounts should be opened at the senior level only. The norm applies           to the family members and close relatives also.
           - For non face to face customers, specific and adequate procedure to mitigate higher risk           should be in place, certification of all documents should be ensured, additional           documents may be called for, and third party identification should be ensured.
           - For correspondent banks, sufficient information should be gathered to understand the           nature of the business, management, level of AML/CFT compliance, purpose of opening           account, third party usage, home country regulatory framework, any AML/CFT   investigation, approval at board level, payable through accounts and shell banks.

AML in Global Context
Farrokh Tarapore, Partner - Ernst & Young

Key Points

• Discussed why AML is a hot topic and said that since it is linked to corruption and fraud, damages the reputation and brand, the pressure from the market place, penal authorities and regulators was strongly increasing.
• Highlighted some of the money laundering cases and accusations worldwide.
• Discussed the concept of money laundering as per various bodies like the FATF, Basel Committee, Security Industry Association, International Federation of Accountants, etc. In short, it means making dirty money clean.
• Discussed the various stages of money laundering namely placement, layering and integration.
• Typologies of money laundering and terrorism were highlighted as, concealment with business structures; misuse of legitimate business; use of false identities, documents or straw men; exploitation of international jurisdictional issues and use of anonymous asset types.
• The specific schemes for money laundering were highlighted as misuse of non-profit organizations, informal money or value transfer systems, entry of illegal funds and layering of illegal funds to the securities sector, setting up a company as a front, market manipulation, the gold and diamond market, insurance, credit and debit cards.
• There are three dimensions of anti-money laundering:
     o Know Your Customer (KYC) where the focus is on understanding the customer and his      background, networks, sources of funds/wealth and timely monitoring and updating
     o Know Your Transactions (KYT) where systematic tracking is required to spot unusual      transactions and patterns, and complex and large transactions
     o Know Your Process (KYP) where policies, procedures and controls including case      management and roles, responsibilities and reporting have to be defined.
• Money Laundering is regulated by the following:
     o Financial Action Task Force which has come out with 40 recommendations and 8 special     recommendations.
     o Guidelines of profession (accountants, lawyers, etc.) / industries (banks, insurance, security      dealers etc.) / supervisory bodies (banking commissions, Basel committee, etc.) and      Supranational transposition (US Patriot Act)
     o Self-Regulatory bodies and industry standards (Wolfsberg Group, Egmont Group, etc.)
• Listed down the FATF members and the non-cooperative countries and territories.
• Discussed the AML status and outlook from a global perspective and said that majority of countries had adopted AML regulations and had increased scope of application and sophistication over the last months.
• The parties concerned about money laundering are retail and big banks, private banks, foreign banks, brokers, insurance companies, fund managers, casinos, real estate companies, dealers in high value goods, etc.
• Comparison on the international scene, with reference to scope of application and level of sophistication was also highlighted.
• It was highlighted that worldwide, concerted efforts to combat money laundering are not only intensifying but they show a strong trend in reversing the burden of proof in the financial sector.
• The Red Flags of Money Laundering activity were detailed
• The role of banks was highlighted and the impact of AML on banks was discussed:
     o Due to the risk rating, definition of clients was at risk
     o IT support and choice of IT system needed would have to be defined
     o Choice of methodologies in terms of profiling, business rules, artificial intelligence, etc. would      have to be defined.
     o New monitoring would have to be put into place with reference to scoring, smurfing, group of     economical beneficial owners, etc.
     o It would have to be implemented not only at the head office level but also at the branches and     subsidiaries.
     o There would be need for internal rules and directives
     o Resources would be required
     o Action Plan would have to be established
• The expectations from the banks was highlighted and discussed
• The challenges faced by Indian banks were highlighted. The following points were elaborated and discussed:
     o Resources
     o Delaying of important projects during the last few months
     o IT
     o Costs vs. profitability
     o Clients
• The session was summarized by pointing out, that money laundering was the biggest risk for the financial services industry with direct and indirect consequences and compliance was just too important to go wrong.

Role of Technology
Suresh Iyengar, Head, AML CoE - Tata Consultancy Services Ltd.

Key Points

• The IT challenges posed by AML compliance were highlighted and the following points were discussed:
  o Compliance pressure vs. customer relationships
  o Compliance but at what cost?
  o New remote channels bring anonymity and speed
  o Customer data - do we know enough?
  o We have the data but how do we make sense of it.
  o Manage data from multiple / legacy applications
  o Multiple locations, entities, financial institutions, transactions
  o Leverage existing technology investments
  § Enabling technologies for the following would be critical to any AML solution:
  o Customer due diligence / KYC
  o Mapping Behavior
  o Detection
  o Taking action
• Customer Due Diligence / KYC has the following components:
  o Data Transformation - acquisition of data from core systems in the format suitable for analysis
  o ID Verification - verifying customer information and performing background checks
  o Watch list Filtering - Scanning of customer records and transactions against key parameters
• Mapping Behavior has the following components:
  o Customer Profiling - enabling a risk based approach to transaction monitoring and enhanced due diligence strategy for high risk entities
  o Peer grouping - building knowledge about normal transaction behavior
  o Data mining - getting the relevant information regarding the customer data and historical transaction data
• Detection of unusual behavior has the following components:
  o Rule based - cause/effect statements which draw direct inference from input data, are based on expert knowledge of the business area and can be applied to EDD monitoring and predictable ML activity
  o Neural Networks - mimic the multi-lateral computing ability of the human brain, trained by experts to arrive at cause-effect inferences and useful in developing scenarios and profile modeling
  o Statistical Analysis - empirical analysis of historical data to develop statistical models which are then applied to the current transaction data to predict money laundering risk posed by a transaction.
  o Link Maps - detect undeclared links between a large number of objects such as accounts, customers, customer groups etc. through graphical representation of objects & links.
  o Pattern Matching - Matching sequence of transactions to know money laundering patterns, which are a set of transaction records.
• Taking Action has the following components:
  o Workflows & User Access - streamline the investigation, approval and reporting processes, which enable enterprise wide communication and need-based access to system and support resolving exceptions smoothly.
  o Case Investigation - decision making toolkit and case dashboard to enable investigation and decision making
  o Reporting & MIS - automatic filing of reports to regulatory authority in prescribed format and online management access to status of AML compliance
• Decision criteria for an AML solution were detailed as follows:
  o Types of transaction analysis used
  o Scalability & performance
  o Accuracy
  o Model refinement and improvement
  o Audit ability
  o Reporting & MIS
  o Coverage of regulations today and in the future
  o User friendliness
  o Extensibility to areas outside of ML
  o Optimal leverage of existing investments
  o Third party hardware / software
  o Use of industry standards for integration
  o Vendor credentials
• The session was summed up by saying that there are several AML solutions available but none would support all of the above features completely and an AML implementation is a complex, enterprise wide task requiring significant data enhancement, system integration and involvement across businesses.

Presentation and Concluding Session
Sunil Chopra, Head Business Development (ME, Africa and SA) - Tata Consultancy Services Ltd.

Presentations :

Key Presentation -
A N Roy,IPS,
Commissioner of Police,
Greater Mumbai

AML Overview and Role of Banks
Prashant Sharan,
Chief General Manager,
Reserve Bank of India.

Role of Technology in Anti Money Laundering
Suresh Iyengar,
Head - AML CoE ,
Tata Consultancy Services