AML -Anti Money Laundering​

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What is Money Laundering?

Money laundering is the process of turning illegal money into legitimate funds by hiding its source.

Stages of Money Laundering

1. Placement: Introducing illegal money into the financial system.
2. Layering: Hiding the source of funds through multiple transactions.
3. Integration: Reintroducing the money into the economy as legitimate funds.

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Why is AML Important?

• Prevents financial crimes like fraud, corruption, and terrorism financing.
• Protects financial systems by ensuring their integrity.
• Complies with global standards, promoting a transparent economy.

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Key AML Laws and Regulations in India

Prevention of Money Laundering Act (PMLA), 2002

It requires individuals and institutions to:

• Report suspicious transactions and large cash dealings.
• Identify and verify customers through KYC.
• Prevent misuse of funds for illegal activities like fraud or terrorism.

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Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is a global organization that sets standards to combat money laundering, terrorism financing, and other financial crimes.

• Founded: 1989, with 39 member countries.
• Role: Develops international AML/CTF (Counter-Terrorism Financing) policies.
• Key Functions:
  • Monitors countries’ compliance with AML standards.
  • Maintains the FATF Blacklist (high-risk countries) and Greylist (monitored countries).

It ensures financial systems are transparent and secure globally.

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RBI Guidelines

The Reserve Bank of India (RBI) issues guidelines to prevent money laundering and ensure compliance with anti-money laundering (AML) standards. Key highlights include:

1. Know Your Customer (KYC)

• Banks must verify customer identity using valid documents (Aadhaar, PAN, Passport).
• Periodic updates are required for customer profiles.

2. Customer Due Diligence (CDD)

• Assess customer risk (low, medium, high) based on transactions and background.
• Enhanced due diligence (EDD) is mandatory for high-risk customers like PEPs.

3. Reporting Suspicious Activities

• Suspicious Transaction Reports (STR): Flag unusual transactions.
• Cash Transaction Reports (CTR): Report transactions above ₹10 lakh.
• Foreign Exchange Transactions: Must comply with FEMA and AML norms.

4. Record Keeping

• Maintain transaction records for at least 5 years.
• Ensure data availability for regulatory audits and investigations.

5. Staff Training

• Train employees to detect red flags in transactions and follow AML procedures.

These guidelines aim to secure the financial system and prevent its misuse for illegal activities.

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How AML Works

1. Know Your Customer (KYC)

• Verifies customer identity using documents like Aadhaar, PAN, or Passport.
• Includes Proof of Identity and Proof of Address.

2. Customer Due Diligence (CDD)

• Assesses customers’ risk levels based on their profile and transactions.
• Enhanced due diligence (EDD) applies to high-risk accounts like Politically Exposed Persons (PEPs).

3. Reporting Requirements

• Suspicious Transaction Reports (STRs): Report unusual activities.
• Cash Transaction Reports (CTRs): Flag transactions over ₹10 lakh.
• NGO Transaction Reports (NTRs): Track non-profit organization transactions.

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Common Red Flags in Transactions

• Large, unexplained cash deposits.
• Structuring transactions to avoid reporting thresholds.
• Sudden activity inconsistent with a customer’s profile.
• Transactions with high-risk countries.

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Role of Financial Institutions in AML

• Monitoring: Regularly review accounts and transactions.
• Training: Educate employees about AML practices and red flags.
• Technology: Use AI-based systems to detect unusual patterns.

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Penalties for Non-Compliance

• Fines and Imprisonment: Under PMLA.
• Regulatory Actions: From authorities like RBI and SEBI.
• Reputational Damage: Loss of trust and credibility.

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How Indian Banks Ensure AML in Account Opening

1. Customer Identification Process (CIP)

• Verify identity through Aadhaar, PAN, or Passport.
• Use biometric authentication linked to Aadhaar.

2. Risk Profiling

• Categorize customers as low, medium, or high risk based on factors like income, occupation, and transaction history.
• High-risk profiles (e.g., PEPs) undergo enhanced scrutiny.

3. Screening Against Watchlists

• Cross-check customers’ names with:
  • Global sanction lists (e.g., UN, OFAC).
  • Local watchlists and databases for PEPs.

4. Transaction Monitoring

• Track unusual activities such as large deposits, withdrawals, or offshore transfers.
• Report suspicious activities to the Financial Intelligence Unit-India (FIU-IND).

5. Enhanced Due Diligence (EDD)

• High-risk customers face additional verification, frequent monitoring, and scrutiny of large transactions.

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Benefits of AML Compliance

For Banks

• Prevents fraud and ensures regulatory compliance.
• Builds customer trust and safeguards reputation.

For Customers

• Protects accounts from misuse.
• Strengthens financial security.

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Key Terms to Remember

• Politically Exposed Persons (PEPs): Individuals in significant public roles.
• Suspicious Transaction Report (STR): A report filed for unusual activities.
• FATF Blacklist: Non-compliant countries with AML standards.
• Shell Companies: Businesses used to hide the true ownership of funds.

AML – MCQ

What is the first stage of money laundering?
A. Layering
B. Placement
C. Integration
D. Structuring

Answer: B. Placement