AML -Anti Money Laundering​

What is Money Laundering?

  • Anti money laundering meaning​/what is anti money laundering​: Process of converting illegal funds into legitimate money by disguising (to change the appearance) the source.
  • Stages:
    1. Placement: Introducing illicit (ग़ैर-क़ानूनी/अवैध) money into the financial system.
    2. Layering: Concealing the origin through multiple transactions.
    3. Integration: Re-entering the funds into the economy as legitimate money.

Importance of AML

  • Prevents financial crimes like fraud, corruption, and terrorism financing.
  • Safeguards the integrity of financial systems.
  • Ensures compliance with international standards.

Key Regulations and Acts

  1. Prevention of Money Laundering Act (PMLA), 2002:
    • Primary law in India for combating money laundering.
    • Mandates reporting of suspicious transactions.
  2. FATF (Financial Action Task Force):
    • Global watchdog for AML and counter-terrorism financing.
    • Sets international standards for financial systems.
  3. RBI Guidelines:
    • Mandates Know Your Customer (KYC) compliance.
    • Emphasizes reporting of Suspicious Transaction Reports (STRs).

Key AML Procedures

  1. Know Your Customer (KYC):
    • Identifies and verifies the identity of customers.
    • Includes:
      • Proof of Identity (e.g., Aadhaar, Passport).
      • Proof of Address.
  2. Customer Due Diligence (CDD):
    • Risk assessment of customers based on profile and transactions.
    • Enhanced due diligence for high-risk accounts (e.g., PEPs).
  3. Reporting Requirements:
    • Suspicious Transaction Reports (STR): Unusual or suspicious activities.
    • Cash Transaction Reports (CTR): Transactions exceeding ₹10 lakh.
    • Non-Profit Organization Transaction Reports (NTR): For NGOs.

Risk Categories

  1. Low Risk: Salaried individuals, low-value accounts.
  2. Medium Risk: Small businesses, accounts with frequent cash deposits.
  3. High Risk:
    • Politically Exposed Persons (PEPs).
    • Non-Resident Indians (NRIs).
    • Accounts with no proper documentation.

Red Flags in Transactions

  • Unusually large cash transactions.
  • Structured transactions to avoid CTR thresholds.
  • Sudden account activity inconsistent with customer profile.
  • Transactions with entities in high-risk countries.

Role of Financial Institutions

  • Monitoring: Ongoing scrutiny of accounts and transactions.
  • Training: Educating employees on AML policies and red flags.
  • Technology: Using software to detect unusual patterns (e.g., AI-based systems).

Penalties for Non-Compliance

  • Fines and imprisonment under PMLA.
  • Regulatory action from RBI and SEBI.
  • Reputational damage to institutions.

Key Terms to Remember

  • Politically Exposed Persons (PEPs): Individuals in prominent public positions.
  • Suspicious Transaction Report (STR): Reports of unusual activities.
  • FATF Blacklist: Countries non-compliant with AML standards.
  • Shell Companies: Businesses used to disguise ownership of funds.

AML – MCQ

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

Answer: B. Placement

Which of the following describes layering in money laundering?
A. Introducing funds into the financial system
B. Moving funds to obscure their origin
C. Re-entering funds into the economy as legitimate money
D. Avoiding detection through small transactions

Answer: B. Moving funds to obscure their origin

What is the purpose of money laundering?
A. To fund criminal activities
B. To convert illicit money into legitimate money
C. To evade taxes
D. To increase cash reserves

Answer: B. To convert illicit money into legitimate money

Which act governs money laundering in India?
A. Banking Regulation Act, 1949
B. Prevention of Money Laundering Act (PMLA), 2002
C. Companies Act, 2013
D. Securities Contract Act, 1956

Answer: B. Prevention of Money Laundering Act (PMLA), 2002

What is the global watchdog for AML practices?
A. World Bank
B. Financial Action Task Force (FATF)
C. International Monetary Fund (IMF)
D. World Trade Organization (WTO)

Answer: B

Under PMLA, what is the threshold for reporting cash transactions?
A. ₹5 lakh
B. ₹10 lakh
C. ₹15 lakh
D. ₹20 lakh

Answer: B. ₹10 lakh

What is KYC primarily intended for?
A. To monitor account balances
B. To identify and verify customers
C. To calculate customer risk ratings
D. To approve loan applications

Answer: B. To identify and verify customers

Which document is NOT valid for KYC under RBI guidelines?
A. Aadhaar Card
B. Passport
C. Driving License
D. Shopping Receipt

Answer: D

Enhanced Due Diligence (EDD) is mandatory for which category?
A. Low-risk accounts
B. Small business owners
C. Politically Exposed Persons (PEPs)
D. Student accounts

Answer: C. Politically Exposed Persons (PEPs)

What is an STR?
A. Suspicious Transaction Report
B. Standard Transaction Report
C. Secured Transfer Receipt
D. Statutory Transfer Record

Answer: A. Suspicious Transaction Report

Which type of transaction must be reported as an STR?
A. Consistent cash deposits
B. Transactions with unusual patterns
C. Small cash withdrawals
D. Low-value online payments

Answer: B. Transactions with unusual patterns

Non-Profit Organization Transaction Reports (NTRs) are filed for transactions involving:
A. NGOs and charitable trusts
B. Salaried individuals
C. Politically Exposed Persons
D. Corporates only

Answer: A. NGOs and charitable trusts

Which customer profile is categorized as high-risk?
A. Salaried employees
B. Politically Exposed Persons (PEPs)
C. Local business owners
D. Students with savings accounts

Answer: B

What is a red flag in AML monitoring?
A. Frequent small transactions
B. Structured transactions to avoid CTR thresholds
C. Consistent account activity
D. Regular salary deposits

Answer: B. Structured transactions to avoid CTR thresholds

Which country status requires enhanced scrutiny under FATF guidelines?
A. FATF Blacklisted countries
B. FATF Compliant countries
C. G7 member countries
D. Developing countries

Answer: A. FATF Blacklisted countries

What is a consequence of non-compliance with AML regulations?
A. Increased credit limits
B. Fines and imprisonment
C. Reduced operational costs
D. Enhanced employee benefits

Answer: B. Fines and imprisonment

Which organization in India regulates KYC compliance?
A. IRDAI
B. SEBI
C. RBI
D. NABARD

Answer: C

What type of organization often serves as a vehicle for money laundering?
A. Multinational corporations
B. Shell companies
C. Government agencies
D. Small-scale industries

Answer: B

Basic Treasury

Risk Management Practices