Anti-Money Laundering (AML) refers to the set of laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. The primary goal of AML guidelines is to stop the process of money laundering.
Money laundering is the process of making “dirty” money (obtained from criminal activities like terrorism, drug trafficking, or corruption) appear “clean” by passing it through the formal financial system.
The Three Stages of Money Laundering
To understand AML, you must first understand the three stages of money laundering that these guidelines aim to prevent.
- Placement: This is the first stage where the criminal introduces their illegal funds into the financial system.
- Example: A criminal deposits small amounts of cash into multiple bank accounts to avoid suspicion. This is also known as structuring or smurfing.
- Layering: This is the most complex stage. The criminal engages in a series of conversions or movements of the funds to distance them from their illegal source.
- Example: Moving the money through various bank accounts in different countries, buying and selling stocks or real estate, and creating complex webs of shell companies.
- Integration: This is the final stage where the laundered money is reintroduced into the legitimate economy. The money now appears to be from a legal source.
- Example: The criminal might use the “clean” money to buy a luxury car, invest in a legitimate business, or receive a fake salary from a shell company.
Key Pillars of AML Guidelines for Banks
The RBI has mandated a framework for banks based on these key pillars:
1. Know Your Customer (KYC)
This is the cornerstone of AML. KYC is the process that banks must follow to verify the identity and assess the risk of their customers.
- Purpose: To ensure that customers are who they say they are and are not involved in any criminal activities.
- Key Components:
- Customer Acceptance Policy: Deciding what kind of customers to accept.
- Customer Identification Procedures (CIP): Verifying the customer’s identity using reliable documents (like Aadhaar, PAN card, Passport), now collectively known as Customer Due Diligence (CDD).
- Risk Management: Classifying customers into low, medium, and high-risk categories based on their profile and monitoring them accordingly.
2. Transaction Monitoring
- Banks must monitor their customers’ transactions to identify any activity that is unusual or inconsistent with their known profile.
- Example: A customer’s account that usually has small, regular transactions suddenly receives a very large cash deposit.
3. Reporting of Suspicious Activities
- If a bank detects a suspicious transaction, it is legally obligated to report it to the Financial Intelligence Unit – India (FIU-IND).
- Banks must file a Suspicious Transaction Report (STR) in such cases. They must also report all cash transactions above a certain limit (Cash Transaction Report – CTR).
Legal Framework in India
- The primary law governing AML in India is the Prevention of Money Laundering Act (PMLA), 2002.
- The FIU-IND is the central national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions.
In essence, AML guidelines turn banks into the first line of defence against financial crime, making it harder for criminals to use the banking system to legitimise their illicit wealth.