The Challenge of Money Laundering

The Challenge of Money Laundering  -- What We Have & What We Need To Do”

 Om Prakash Pandey

III LLB Ils Law College

INTRODUCTION

Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent or report money laundering activities. Anti-money laundering guidelines came into prominence globally after the September 11, 2001 attacks and the subsequent enactment of the USA PATRIOT Act. It was Britain's The Guardian newspaper that coined the term, referring to the process as "laundering."

As financial crime has become more complex, and "financial intelligence information gathering intelligence" (FININT) has become more recognized in combating international crime and terrorism, money laundering has become more prominent in political, economic, and legal debate. Money laundering is ipso facto illegal; the acts generating the money almost always are themselves criminal in some way for if not, the money would not need to be laundered.

Anti money laundering is the legal procedure which aims to ensure zero money laundering. it envisages the use of regulatory and banking norms coupled with traditional policing and newer technological tools to fight money laundering operations.

MONEY LAUNDERING: DEFINITION

In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government and international regulators to mean any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. In the UK, it does not even need to involve money, but any economic good. As a result, courts may see money laundering committed by private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations such as the Mafia, and even states. However basically ML is the process which criminals engineer to cover the real origin and ownership of dirty or illegal money emanating from criminal illegal activities, and thereby render the prosecution and confiscation of funds so generated, impossible. Some definitions of the term are as follows:

·        Money laundering is the practice of disguising illegally obtained funds so that they seem legal. It is a crime in many jurisdictions with varying definitions. It is a key operation of the underground economy.

·        In US law it is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money.

·        In UK law the common law definition is wider. The act is defined as taking any action with property of any form which is either wholly or in part the proceeds of a crime that will disguise the fact that that property is the proceeds of a crime or obscure the beneficial ownership of said property.

STEPS IN MONEY LAUNDERING

Money laundering involves three independent and often simultaneous steps:

·        Placement: The first stage is successfully disposing of the physical cash received thru illegal activity. The crooks accomplish this by placing this into traditional or non-traditional financial institutions.

·        Layering: The second stage concentrates on separation of proceeds from criminal activity thru the use of various layers of monetary transactions. These layers are aimed at wiping audit trails, disguise the origin and maintain anonymity for people behind the transactions. E.g. Fraudulent letters of credit transactions, over invoicing for goods transshipped from another country, using high value credit cards to pay for goods/services and accounting for the credit card invoices with balances held in offshore banking secrecy havens .

·        Integration: The final link in money laundering process is sometimes called the integration stage. This occurs when the laundered or cleaned up money is legitimately brought back into financial systems operated by end user and when it is safe and insulated from enquiry by any agency with a legitimate reason for querying the existence of money. E.g. Loan back technique or loan-default technique where the lender bank seeks to recover its assets (loans to money launderers) by attaching the securities held by bank which exist in the form of black money.

 MONEY LAUNDERING: WHAT MAKES IT POSSIBLE?

The major factors which create money laundering vulnerabilities are: the role of private bankers, banks as client advocates, powerful customers, a corporate culture of secrecy, a corporate culture of lax controls and the competitive nature of the industry. Apart from these factors the very products offered by the banks may sometimes lead to money laundering activities. These are now dealt with in detail:

1.      Private Bankers as Client Advocates

Private bankers are the linchpin of the private bank system. They are trained to service their clients and to set up accounts and move money around the world using sophisticated financial systems and secrecy tools. Private Banks encourage their bankers to develop personal relationships with their clients. The result is that private bankers may feel loyalty to their clients for both professional and personal reasons, leading private bankers use their expertise in bank systems to evade what they may perceive as unnecessary "red tape" hampering the services their clients want, thereby evading controls designed to detect or prevent money laundering.

2.      Powerful Clients

Private bank clients are, by definition, wealthy. Many also exert political or economic influence which may make banks anxious to satisfy their requests and reluctant to ask hard questions. If a client is a government official with influence over the bank's in country operations, the bank has added reason to avoid offence.

3.      Culture of Secrecy

A culture of secrecy pervades the banking industry. Numbered accounts at Swiss banks are but one example. There are other layers of secrecy that banks and clients routinely use to mask accounts and transactions. For example, banks may create shell companies and trusts to shield the identity of the beneficial owner of a bank account. Banks also open accounts under code names and will, when asked, refer to clients by code names of encode account transactions.

4.      Secrecy Jurisdictions

In additions to shell corporations and codes, a number of banks also conduct business in secrecy jurisdictions such as Switzerland and Cayman Islands, which impose criminal sanctions on the disclosure of bank information, related to clients and restrict oversight. The secrecy laws are so light; they even restrict internal bank oversight.

5.      Culture of Lax Controls

In addition to secrecy, banking operates in a corporate culture that is at times indifferent or resistant to anti-money laundering controls, such as due diligence requirements and accounts monitoring. The problem begins with the banker who, in most banks, is responsible for the initial enforcement of anti-money laundering controls. It is the banker who is charged with researching the background of prospective clients, and it is the banker who is, asked in the first instance to monitor existing accounts for suspicious activity. But it is also the job of the banker to open accounts and expand client deposits this creates substantial conflict of interest.

6.      Cut throat Competition

Another factor creating money laundering concerns is the ongoing competition among banks for clients, due to profitability of the business. The dual pressures of competition and expansion are disincentives for banks to impose tough anti-money laundering controls that may discourage new business or cause existing clients to move to other institutions.

In addition to the general factors cited above, the actual products and services offered by banks also create opportunities for money laundering. These products and services are as follows:

1. Multiple Accounts:  Bank clients often have many accounts in many locations. Some are personal checking, money market or credit card accounts. Others are in the name of one or more shell companies and multiple investment accounts are common including mutual funds, stock, bonds and time deposits. This approach creates vulnerabilities to money laundering by making it difficult for banks to have a comprehensive understanding of their own client's accounts. It also complicates regulatory oversight and law enforcement, by making it nearly impossible for an outside reviewer to be sure that all bank accounts belonging to an individual have been identified.

2. Secrecy Products: Most private banks offer a number of products and services that shield a client's ownership of funds. They include offshore trusts and shell corporations, special name accounts, and codes used to refer to clients or fund transfers. Such a secrecy regime promotes criminal activities and proves to be of immense hindrance in the event of any investigations into crime.

3. Movements of Funds: Current account transactions at private banks routinely involve large sums of money. The size of client transaction increases the banks vulnerability to money laundering by providing an attractive venue for money launderers who want to move large sums without attracting notice. In addition, most private banks provide products and services that facilitate the quick, confidential and hard-to-trace movement of money across jurisdictional lines.

4. Credit: Another common private bank service involves the extension of credit to clients. Several private bankers told the subcommittee that private banks urge their private bankers to convince clients to leave their deposits in the bank and use them as collateral for large loans. This practice enables a bank to earn a free not only on the deposits under their management, but also on the loans. This practice also however, creates vulnerability for money laundering by allowing a client to deposit questionable funds and replace them with “clean" money from a loan. Moreover, as the client loans are fully collaborative by assets on deposits with the bank, the bank may not scrutinize the loan purpose and repayment prospects as carefully as for a conventional loan, and may unwittingly further a money launderer's efforts to hide illicit proceeds behind seemingly legitimate transactions.

5. Development of Off -Shore Banking: Originally, off-shore centers were quite literally islands, hence the expression. Today the term is used rather loosely for financial centers, which operate within a low tax regime; this enables international transfers of money to take place with a great deal of facility and with no hindrance to capital flows.

MONEY LAUNDERING: HOW IS IT DONE?

Most money-laundering schemes involve some combination of methods, The variety of tools available to launderers makes this a difficult crime to stop. Some of these methods are listed below:

1.      Cashing Up

A business taking large amounts of small change each week (e.g. a convenience store) needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money.

2.      Irregular Funding

One way to keep cash anonymous is to give it to another who is already legitimately taking in large amounts of cash. The intermediary then deposits the money in an account, takes a premium, and writes a cheque. Little attention is drawn because, for the intermediary, it is a relatively small amount of the usual takings, but for the originator it is all of his takings. This works well for one-off transactions, but if it happens regularly then the cheques themselves forms a paper trail that can raise suspicion.

3.      Captive Business

Another method is to start a business whose cash inflow cannot be monitored, and funnel the small change into it and pay taxes on it. But all bank employees are trained to be constantly on the lookout for transactions that seem to be trying to get around reporting requirements. To avoid suspicion, shell companies should deal directly with the public, perform some service (not provide physical goods), and have a business that reasonably would accept cash as a matter of course. Dealing directly with the public in cash gives a plausible reason for not having a record of customers.

4.      Smurfing

This is the system which is used wherein random amounts of less than $10,000 are deposited in many different bank accounts. This stops suspicion as no large amounts are involved and investigations into such varied amounts deposits by different people in far flung areas usually does not lead to any positive results.

5.      Underground/Alternative Banking

Some countries in Asia have well-established, legal alternative banking systems that allow for undocumented deposits, withdrawals and transfers. These are trust-based systems, often with ancient roots, that leave no paper trail and operate outside of government control. This includes the hawala system in Pakistan and India and the fie chen system in China.

6.      Shell Companies

These are fake companies that exist for no other reason than to launder money. They take in dirty money as "payment" for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.

7.      Overseas banks

Money launderers often send money through various "offshore accounts" in countries that have bank secrecy laws, meaning that for all intents and purposes, these countries allow anonymous banking. A complex scheme can involve hundreds of bank transfers to and from offshore banks. According to the International Monetary Fund, "major offshore centers" include the Bahamas, Bahrain, the Cayman Islands, Hong Kong, Antilles, Panama and Singapore.

MONEY LAUNDERING: THE RISKY FACTORS

Identification of the money laundering risks of customers and transactions allows us to determine and implement proportionate measures and controls to mitigate these risks. The used risk criteria inter alia are the following:

1.      Country Risk

Factors that may result in a determination that a country poses a higher risk include:

• Countries subject to sanctions, embargoes or similar measures;

• Countries identified by the Financial Action Task Force (“FATF”) as non-cooperative in the fight against money laundering or identified by credible sources as lacking appropriate money laundering laws and regulations;

• Countries identified by credible sources as providing funding or support for terrorist activities;

• Countries identified by credible sources as having significant levels of corruption, or non-transparent tax environment.

2.      Customer Risk

Characteristics of customers that have been identified with potentially higher money laundering risks are:

• Armament manufactures,

• Cash intensive business;

• Unregulated charities and other unregulated “non profit” organizations;

• Dealers in high value of precious goods.

3.      Services Risk

Determining the money laundering risks of services should include a consideration of such factors as:

• Services identified by regulators, governmental authorities or other credible sources as being potentially high risk for money laundering;

• Services involving banknote and precious metals trading and delivery.

ADVERSE EFFECTS OF MONEY LAUNDERING

1.      The Financial Sector: Money Laundering Undermines Domestic Capital Formation

·        Erodes financial institutions

·        Weakens the financial sector's role in economic growth

·        Anti-money-laundering reforms support financial institutions through enhanced financial prudence.

2.      The Real Sector: Money Laundering Depresses Growth

·        Distorts investment and depresses productivity

·        Facilitates corruption and crime at the expense of development

·        Increases the risk of macroeconomic instability

3.      The External Sector: Money Laundering Diverts Capital Away from

Development

·        Outbound capital flows: facilitating illicit capital flight

·        Inbound capital flows: depressing foreign investment

·        Trade: distorting prices and content.

ANTI MONEY LAUNDERING

Since human greed and the profit motive fuel organized crime, it seems logical that confiscating the proceeds of crime would adequately deter potential criminals. Anxious to avoid confiscation, organized criminals now need to give these huge sums of money, not easily consumed or invested in the legal economy without raising eyebrows, a patina of legitimacy, i.e. they need to “launder” it. Money laundering has been dubbed the “Achilles’ heel of organized crime,” for it compels them to seek out and co-opt established businessmen and women with highly technical know-how and access to legal institutions like banks to launder their plunder.

Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must perform due diligence by ascertaining a customer's identity and monitor transactions for suspicious activity. To do this, many financial institutions utilize the services of special software, and use the services of companies such as World Compliance to gather information about high risk individuals and organizations. Financial institutions face penalties for failing to properly file CTRs (Currency Transaction Reports) and SARs (Suspicious Activity Reports), including heavy fines and regulatory restrictions.

Different standards exist in different countries and, depending on the activity, demand different action. For example; in the US a deposit of US$10,000 or more requires a CTR, in Europe it is EUR 15,000, and in Switzerland it is CHF 25,000. In some countries there is no CTR requirement. Suspicion of ML activity in the US requires the submission of a SAR, while in Switzerland a SAR will only get filed if that activity can be proved. As a result, thousands of SARs are filed daily in the US, while in Switzerland the rate is much lower.

A whole industry has developed to provide software for AML procedures. These software applications effectively monitor bank customer transactions on a daily basis and, using customer historical information and account profile, provide a whole picture to the bank management. Transaction monitoring can include cash deposits and withdrawals, wire transfers, credit card activity, cheques (checks), share (securities) dealing and ACH activity. In the bank circles, these applications are known as BSA software or AML software.

THE INTERNATIONAL SCENARIO

·        THE UNITED STATES OF AMERICA

United States federal law related to money laundering is implemented under the Bank Secrecy Act of 1970 as amended by anti-money laundering acts up to the present. In US Law, "reasonably accepting cash" means the business must regularly perform services that on average are less than $500 each. It is assumed that above that amount most people pay with a check, a credit card, or other another (traceable) payment method. The company should actually function on a legitimate level. So the legitimate business will generate a legitimate (if low) level of parts use, and enough traceable transactions to mask the illegitimate ones.

Anti-money laundering laws typically have other offences such as "tipping off (warning)", "wilful blindness", "not reporting suspicious activity", "conscious facilitation of a money launderer", "assisting a terrorist financier with moving terrorist financing".

The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, and added a focus on terrorist financing, specifying that financial institutions take specific actions to "know your customer" (KYC).

In the United States, Federal law provides: "Whoever ... knowingly ... conducts or attempts to conduct ... a financial transaction which in fact involves the proceeds of specified unlawful activity ... with the intent to promote the carrying on of specified unlawful activity ... shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

While money laundering typically involves the flow of "dirty money" (criminal proceeds) into a clean bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to "dirty" purposes. A criminal may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions. The word “proceeds” in the federal money-laundering statute, 18 U.S.C. §1956, and §1956(a) (1) (A) (i) and§1956 (h), applies only to transactions involving criminal profits, not criminal receipts; those are expenses, and prosecutors must show that profits were used to promote the illegal activity." Congress enacted the 1986 statute after the President's Commission on Organized Crime stressed the problem of "washing" criminal proceeds through overseas bank accounts and legitimate businesses. It imposes a 20-year maximum prison term.

·        THE UNITED KINGDOM

The United Kingdom has an "all-crimes" regime. Money laundering legislation in the UK is governed by three Acts of primary legislation:-

1.      The Terrorism Act 2000.

2.      The Anti-Terrorist Crime & Security Act 2001.

3.      The Proceeds of Crime Act 2002.

Secondary regulation is provided by the Money Laundering Regulations 2003 and 2007.

In the UK "money laundering" need not involve money (it relates to assets of any kind, both tangible and intangible, and to the avoidance of a liability) and need not mean passing on the assets: a thief's possession himself is included. There is no lower limit to what has to be reported— a suspicious transaction involving a single £5 note must be reported. Technically, everyone, not just financial services employees or firms, is required to report, and get consent for, his own involvement in crime or suspicious activities involving money or assets of any kind. So in the UK a thief who steals a vest from a clothes store commits, as well as common theft, a money laundering offence: because he has possession of an asset derived from crime. He is technically required to seek consent from law enforcement for his continued possession of the vest if he is to avoid risk of prosecution for money laundering.

The UK law makes it a money laundering offence when a person enters into, or becomes concerned in, an arrangement which facilitates by whatever means the acquisition, retention, use, or control of criminal property by another person.

·        BANGLADESH

In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002 (Act No. VII of 2002). In terms of section 2 (a), “Money Laundering means (a) Properties acquired or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly of indirectly through legal or illegal means.” In this Act, “Properties means movable or immovable properties of any nature and description”.

THE DOMESTIC SCENE

In India the fight against money laundering is carried out through the Prevention of money laundering act which came into force in 2005. Section 3 of the Act makes the offence of money-laundering cover those persons or entities who directly or indirectly attempt to indulge or knowingly assist or knowingly are party or are actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, such person or entity shall be guilty of offence of money-laundering.

Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned [elsewhere] the punishment shall be up to ten years.

Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and to (c) verify and maintain the records of the identity of all its clients, As per Section 12 (2), the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished.

As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include:

·        All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign currency.

·        All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month.

·        All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as dmat account, security account maintained by the registered intermediary.

·        For the purpose of suspicious transactions reporting, apart from ‘transactions integrally connected’, ‘transactions remotely connected or related’ should also be considered.

 Thus the act has tried to be as comprehensive as possible and has described both the offence and the obligations on financials institutions very succinctly.

The Reserve Bank of India has also passed various orders and circulars from time to time and has brought various entities which deal with cash within the purview of the act. Prominent amongst such are the various Money Changers who regularly deal with foreign currency and are thus a highly exposed to the risk of money laundering. The RBI has made the following norms through a circular[1] wherein it has prescribed the following guidelines:

The purpose of prescribing Anti-Money Laundering Guidelines is to prevent the system of Authorised Money Changers (AMCs) engaged in the purchase and / or sale of foreign currency notes/Travellers cheques from being used for money laundering. Therefore, Anti-Money Laundering (AML) measures should include:

1.      Identification of Customer according to "Know Your Customer" norms,

2.      Recognition, handling and disclosure of suspicious transactions,

3.      Appointment of Money Laundering Reporting Officer (MLRO),

4.      Staff Training,

5.      Maintenance of records,

6.      Audit of transactions.

Another method on combating the menace of money laundering is by creating a system of internal checks and balances within financial institutions in order to achieve this government has relied on the Appointment of a Money Laundering Reporting Officer (MLRO)

An MLRO may be appointed for monitoring transactions and ensuring compliance with the AML Guidelines issued by the Reserve Bank from time to time. The MLRO will also be responsible for reporting of suspicious transaction/s to the Financial Intelligence Unit (FIU). Any suspicious transaction/s, if undertaken, should have prior approval of MLRO. The MLRO shall have reasonable access to all the necessary information/ documents, which would help him in effective discharge of his responsibilities. The responsibility of the MLRO may include:

1.      Putting in place necessary controls for detection of suspicious transactions.

2.      Receiving disclosures related to suspicious transactions.

3.       Deciding whether a transaction should be reported to the appropriate authorities

4.      Training of staff & preparing guidelines for detection of suspicious transactions.

5.      Preparing annual reports on the adequacy or otherwise of systems and procedures in place to prevent money laundering and submit it to the Top Management within 3 months of the end of the financial year.

To the extent possible, all suspicious transactions should be reported to the MLRO before they are undertaken. Full details of all suspicious transactions, whether put through or not, should be reported, in writing, to the MLRO. Any transaction which seems suspicious may be undertaken only with prior approval of MLRO. If the MLRO is reasonably satisfied that the suspicious transaction has / may have resulted in money laundering, he should make a report to the appropriate authority viz. the FIU.

FIGHTING MONEY LAUNDERING: WHAT NEEDS TO BE DONE

Successful money laundering means that criminal activity actually does pay off. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions. This means more fraud, more corporate embezzling (which means more workers losing their jobs when the corporation collapses), more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who don't break the law and don't make nearly the profits that the criminals do.

1.      KYC

The first defence against money laundering is the requirement on financial intermediaries to know their customers— often termed KYC know your customer requirements. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behaviour, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. The requirements under these norms need to be made more stringent and greater compliance must be demanded and ensured. Regular checks must be conducted to ensure the compliance of these norms.

2.      Using Information Technology

Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too does the technology used to fight it. There are various software packages capable of name analysis, rule-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching.. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.

3.      Financial Crimes Enforcement Network (FinCEN)

It is an organization created by the United States Department of the Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and Financial Intelligence Units FIUs of other countries. One of its strategic goals is to improve information-sharing through e-Government. It offers training and advice to organizations of foreign governments to help improve the efficacy of their own anti-money laundering programs. We need such an office in India as well so that the various anti money laundering activities may be coordinated properly.

4.      Amounts

Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. A frequently cited figure is 2-5% of the worldwide global economy, stated by the IMF. There is a dearth of data on the actual amounts of money laundered worldwide. Some academic commentators have expressed real concerns about the reliability and basis of figures used by governmental and multinational organizations. It is always hard to find out real figures about illegal acts. Therefore we need to put in place a system not only to stop money laundering but also to effectively detect and calculate its amount so as to have better clarity regarding its consequences

5.      Establishment Of Business Relationship

Relationship with a business entity like a company / firm should be established only after obtaining and verifying suitable documents in support of name, address and business activity such as certificate of incorporation under the Companies Act, 1956, MOA and AOA, registration certificate of a firm (if registered), partnership deed, etc. A list of employees who would be authorised to transact on behalf of the company/ firm and documents of their identification together with their signatures, should also be called for. Copies of all documents called for verification should be kept on record.

6.      Suspicious Transactions

The financial institutions must ensure that its staff is vigilant against money laundering transactions at all times. An important part of the AML measures is determining whether a transaction is suspicious or not. A transaction may be of suspicious nature irrespective of the amount involved.

7.      Staff Training

All the managers and staff of the AMC must be trained to be aware of the policies and procedures relating to prevention of money laundering, provisions of the PMLA and the need to monitor all transactions to ensure that no suspicious activity is being undertaken under the guise of money changing. The steps to be taken when the staff comes across any suspicious transactions should be carefully formulated by the AMC and suitable procedure should be laid down.

8.      Audit/Compliance

The concurrent auditor should check all transactions to verify that they have been done in compliance with the anti-money laundering guidelines and have been reported as required. Compliance on the lapses, if any, recorded by the concurrent auditor should be put up to the Board. A certificate from the Statutory Auditor on the compliance with AML guidelines should be obtained at the time of preparation of the Annual Report and kept on record.

9.      Maintenance Of Records

The following documents should be preserved for a minimum period of five years.

1.   Records including identification obtained in respect of all transactions.

2.   Statements / Registers prescribed by the Reserve Bank from time to time.

3.   All Inspection / Audit / Concurrent Audit Reports.

4.   Annual reports of the MLRO submitted to the Top Management and details of all

      suspicious transactions reported in writing or otherwise to the MLRO.

5.      Details of transactions involving purchase of foreign exchange against payment in cash exceeding Rs.10, 00,000 from inter-related persons during one month.

10.  Build an internal taskforce to identify laundering clues.

The financial institutions should invest in building an internal task force which would work towards identifying any suspicious transactions at the best possible speed thereby reducing the chances of the money being lost in layering

11.   Change regulations regarding cash transactions.

The terms of executing different payments, on a household or company level, should favour the usage of bank instruments (like electronic cards, wires, etc.) and in some transactions (where involved big amounts) payments in cash should be completely forbidden. There are exactly these transactions that may represent the biggest risk of money that is laundered from illegal activities, including fraud and tax evasion.

THE HARMFUL EFFECTS OF ANTI MONEY LAUNDERING

1.      Costs

The financial services industry has become increasingly vocal about the rising costs of anti-money laundering regulation, and the limited benefits that it appears to bring.

 Legislation has sometime been driven on rhetoric, driving by ill-guided activism responding to the need to be "seen to be doing something" rather than by an objective understanding of its impact on predicate crime. The social panic approach is justified by the language used - we talk of the battle against terrorism or the war on drugs”

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2.      Small Institutions

 For small institutions, especially for those that are not branches or subsidiaries of any stronger financial institution, the costs and other requirements can be substantial and difficult to be absorbed.

3.      Haste In Making The Law

The anti money laundering laws have been made in a haste after the 9/11 attacks as a knee jerk reaction and therefore require careful revision. The law needs to be updated frequently so as to remain effective in today’s world of ever changing technology.

4.      Targeting Only banks

While banks, as regulated, transparent and supervised institutions, play an important role in this objective, they are not the sole institutions. A no less important role play other institutions, especially those of tax collection or other institutions of services. Special attention should be paid to the supervision of market segments out of the banking system but within the scope of law.

CONCLUSION

The negative economic effects of money laundering on economic development are difficult to quantify, just as the extent of money laundering itself is difficult to estimate. Nonetheless, it is clear from the evidence that allowing money laundering activity to proceed unchallenged is not an optimal economic-development policy because it damages the financial institutions that are critical to economic growth, reduces productivity in the economy's real sector by diverting resources and encouraging crime and corruption, and can distort the economy's international trade and capital flows to the detriment of long-term economic development. Effective anti-money-laundering policies, on the other hand, reinforce a variety of other good-governance policies that help sustain economic development, particularly through the strengthening of the financial sector. The connection between money laundering and terrorism may be a bit complex, but it plays a crucial role in the sustainability of terrorist organizations. Most people who financially support terrorist organizations do not simply write a personal check and hand it over to a member of the terrorist group. They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot. They launder the money so authorities can't trace it back to them and foil their planned attack. Interrupting the laundering process can cut off funding and resources to terrorist groups.

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3. Agarwal, J.D., (2004a), “Financial Developments in the World Economy” delivered

the late Professor K.S. Mathur Memorial Lecture, by University of Rajasthan on

Saturday, 3rd January 2004 in Senate Hall of University of Rajasthan, Jaipur, INDIA;

forthcoming Finance India Vol. XVIII Special Issue, 2004.

4. Agarwal, J.D., (2004b), “Volatility of International Financial Markets: Regulation

and Financial Supervision” delivered as Keynote Address at the 4th International

Conference in Finance organized by Faculty of Administration & Economics,

University of Santiago de Chile, CHILE on 7th January 2004; forthcoming Finance

India Vol. XVIII No. 1, March 2004.

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Press, London, England

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Agarwal, J.D. and Aman Agarwal “International Money Laundering in the Banking Sector”

Page 13 of 13

7. FSA Report, (2003); “Reducing money laundering risk – Know your customer and

anti money laundering and risk, management practices” Financial Services Authority

(FSA) Regulations, Discussion paper, August 2003.

8. FSA Website (Financial Services Authority), UK, http.//www.fsa.gov.uk

9. IMF, “World Economic Outlook”, 2003, 2002, 2001, publication of IMF

10. Lal, Bhure, (2003); “Money Laundering: An Insight into the Dark World of Financial

Frauds”, Siddharth Publications, Delhi, India.

11. Logical CMG Report, (2003)“Money Laundering ascending to research announced”

by Logical CMG on l7th November 2003.

12. Ploix, Helene, (1995); “Money and Morals Worldwide” Annual Report, Association

d’economie financiere, France

13. RBI Website (Reserve Bank of India), India, http://www.rbi.org.in

14. UN, “World Development Investment”, 2003, 2002, publication of United Nations

15. US Senate, (1999); “Minority Staff Report for Permanent Sub committee on

Investigations”, US Senate Committee on Government Affairs, November 9, 1999

16. US Senate, (2001); “Minority Staff Report for Permanent Sub committee on

Investigations on Correspondent Banking: A Gateway for Money Laundering”,

Senate Committee on Government Affairs, February 5, 2001

17. Wolfsberg, Château, (2000), "Leading International Banks Establish Anti-Money-

Laundering Principles Banks Work with Transparency International on Guidelines

for Private Banking" Wolfsberg Press Releases, Zurich, October 30, 2000

18. Wolfsberg, Château; "Wolfsberg Anti-Money Laundering Principles”

http://www.wolfsberg-principles.com/