Prevention of Money Laundering Act, 2002

1
Prevention of Money Laundering Act, 2002

• Compliance

2
Whats in

• Background
• PMLA
• SEBI Guidelines
• AMFI on PMLA Compliance
• Q A

3
Background

• Mid 1980s - Growing concern of international
  community to deprive criminal elements of the
  proceeds of their crimes.
• 1989 Financial Action Taskforce (FATF) set up
  to ensure global action to combat money
  laundering.
• Forty Recommendations - Complete set of
  counter-measures against money laundering
• Nine Special Recommendations on Terrorist
  Financing
• 1995 - Egmont Group set up to stimulate
  international cooperation amongst FIUs. Best
  Practices for exchange of information.
• 1997- Asia/Pacific Group on money laundering
  (APG) set up to create awareness and encourage
  adoption of AML measures.
• 2005 - Prevention of Money Laundering Act, 2002

4
Need for FIU

• Law enforcement agencies had limited access to
  relevant financial information.
• Need to engage the financial system in the
  efforts to combat laundering.
• Need to report suspect financial transactions by
  financial institutions to a central agency for
  assessing and processing reported transactions.

5
FIU

• A central, national agency responsible for
  receiving, (and as permitted, requesting)
  analysing and disseminating to the competent
  authorities, disclosures of financial
  information
• Concerning suspected proceeds of crime, or
• Required by national legislation or regulation,
• in order to combat money laundering.

6
Framework of FIU
Supervisory and Regulatory Agencies
RBI

DCA
Supervisory and Regulatory Agencies
SEBI
IRDA
RBI
Reporting Entities
DCA
SEBI
IRDA
Banking Company
Financial Institutions
Intelligence/Enforcement Agencies
FIU-IND
Intermediaries
Intelligence/Enforcement Agencies
IB /RAW
REIC
CBDT-DGIT/CCIT
IB /RAW
CBEC-DGDRI/DGCEI
REIC
CBDT-DGIT/CCIT
ED/NCB
CBEC-DGDRI/DGCEI
EOW of Police/CBI
ED/NCB
Others
Foreign FIUs
EOW of Police/CBI
Others
Foreign FIUs
7
Money Laundering
Money Laundering is a process by which illegal
funds and assets are converted into legitimate
funds and assets.

Investments Purchases
Placement Illegal funds or assets are first
brought into the financial system
Layering Use of multiple accounts, banks,
intermediaries, corporations, trusts, countries
to disguise the origin.
Integration Laundered funds are made available
as apparently legitimate funds.

Money Laundering is tax evasion in progress
8
PMLA

• Banking Companies
• Financial Institutions
• Intermediaries of the Securities Market

9
PMLA Money Laundering

• Offence of Money Laundering
• whoever directly or indirectly attempts to
  indulge or
• knowingly assists or knowingly is a party or
• actually involved in any process or activity
  connected with the proceeds of crime
  and
• projecting it as untainted property shall be
  guilty of offence of money laundering.
• Punishment for Money Laundering
• Rigorous imprisonment for not lt 3 years may
  extend to 7/10 years
• Fine up to Rs. 5 lakhs

10
PMLA Obligations of Intermediaries, etc.

• Section 12
• Maintenance of records of all transactions
• Furnish information of transactions to FIU
• Verify and maintain the records of identity of
  all clients
• Records to be maintained for 10 years from
  cessation of transaction

11
PMLA (Maintenance of Records, etc.) Rules, 2005

• Appointment of Principal Officer
• Maintenance of records of nature and value of
  transactions
• The procedure and manner of maintaining
• Time for furnishing information
• Verification and maintenance of records of the
  identity of the Clients

12

Role of Principal Officer

• Every Intermediary shall communicate the name,
  designation and address of the Principal Officer
  to the Director, FIU-IND. (Rule 7)
• Obligations
• furnish the information referred to in Rule 3 to
  the Director, FIU-IND.
• retain copy of such information shall for the
  purposes of official record.

13
Maintenance of RecordsCash Transactions (Rule
3)

• 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 have
  taken place within a month.
• All cash where forged or counterfeit currency
  notes or bank notes have been used as genuine and
  where any forgery of a valuable security has
  taken place.

14
Maintenance of Records Suspicious Transactions
(Rule 2)

• Transaction includes deposit, withdrawal,
  exchange or transfer of
• funds in whatever currency, whether in cash or by
  cheque, payment
• order of other instrument or by electronic of
  other non-physical
• means.
• Suspicious transaction means a transaction
  whether or not made in
• cash which, to a person acting in good faith
• gives rise to a reasonable ground of suspicion
  that it may involve the proceeds of crime, or
• Appears to be made in circumstances of unusual or
  unjustified complexity, or
• Appears to have no economic rationale or bonafide
  purpose

15
Maintenance of Records Suspicious Transactions
(Rule 3)

• Deposits and credits, withdrawal into or from
  any accounts in
• whatsoever name they are referred to in any
  currency maintained by
• way of
• Cheques including third party cheques, pay order,
  demand drafts, cashiers cheques or any other
  instrument of payment of money including
  electronic receipts or credits and electronic
  payments or debits, or
• Travellers cheques, or
• Transfer from one account within the same banking
  company, financial institution and intermediary,
  as the case may be including from Nostro and
  Vostro accounts, or
• Any other mode in whatsoever name it is referred
  to.

16
Maintenance of Records Suspicious Transactions
(Rule 3)

• Credits or debits into or from any non-monetary
  accounts such as
• demat account, security account in any currency
  maintained by the
• banking company, financial institution and
  intermediary, as the case
• may be.
• Collection services in any currency by way of
  collection of bills,
• cheques, instruments or any other mode of
  collection in whatsoever
• name it is referred to.

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Maintenance of Records Suspicious Transactions
(Rule 3)

• Money transfer or remittances in favour of own
  clients or non-clients
• from India or Abroad and to third party
  beneficiaries in India or abroad
• including transaction on its own account in any
  currency by any of
• the following
• Payment order or Cashiers orders or demand drafts
• Telegraphic or wire transfers or electronic
  remittances or transfers
• Internet transfers
• Automated Clearing House remittances
• Lock box driven transfers or remittances
• Remittances for credit or loading to electronic
  cards
• Any other mode of money transfer by whatsoever
  name it is called

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Maintenance of Records Suspicious Transactions
(Rule 3)

• Loans and advances including credit or loan
  substitutes, investment
• and contingent liabilities by way of
• Subscription to debt instruments such as CP, CD,
  P.Shares, Debentures, Securities participation,
  inter bank participation or
• any other investments in securities or the
  like in whatsoever form and name it is referred
  to,
• purchase and negotiation of bills, cheques and
  other instruments,
• Foreign exchange contracts, currency, interest
  rate and commodity and any other derivative
  instrument in whatsoever name it is called,
• Letter of credit, stand by letters or credit,
  guarantees, comfort letters, solvency
  certificates and any other instrument for
  settlement and/or credit support.

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PMLA Non Compliance with Section 12

• Directorate Action
• Call for records u/s. 12
• Fine not less than Rs. 10,000/-
• Extend up to Rs. 1 lakh each failure
• Jurisdiction
• No civil proceedings against intermediaries, etc.
• Civil courts not to entertain suit or proceedings
  under PMLA
• No injunction by any court for action taken under
  PMLA
• Appeal
• Appellate Tribunal
• Within 45 days of receipt of order
• Disposed of within 6 months from date of filing

20
PMLA Non Compliance

• Power to Summon
• any person to give evidence
• Any person to produce records
• Punishment for false information
• Imprisonment for a term up to 2 years or
• Fine up to Rs. 50,000/- or
• Both
• Punishment for failure to give information for
  each default/failure
• Penalty not less than Rs. 500/-
• May extend up to Rs. 10,000/-

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PMLA Offences by Companies

• Every person who at the time the contravention
  was committed, was in charge of or was
  responsible to the company shall be deemed to be
  guilty of the contravention and shall be
  proceeded against and punished accordingly.
  (exception no Knowledge or due diligence)
• Contravention has taken place with the consent or
  connivance of or attributable to any neglect on
  the part of any director, manager, secretary or
  other officer of any company, such director,
  manager, secretary or other officer shall be
  deemed to be guilty of the contravention and
  shall be proceeded against and punished
  accordingly.

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PMLA Offences

• Offences specified under Part A of the Schedule
• Offences under the Indian Penal Code (Sec 121,
  121A)
• Offences under the Narcotic Drugs And
  Psychotropic Substances Act, 1985
• Offences specified under Part B of the Schedule
  if the total value involved in such offences is
  Rs. 30 lakhs or more.
• Offences under the Indian Penal Code
• Offences under the Arms Act, 1959
• Offences under the Wild Life (Protection) Act,
  1972
• Offences under the Immoral Traffic (Prevention)
  Act, 1956
• Offences under the Prevention Of Corruption Act,
  1988

23
SEBI Guidelines on AML

• SEBI Circular ISD/CIR/RR/AML/1/06 dated 18th
  January, 2006
• Customer Due Diligence
• Policy for acceptance of Clients
• Risk based approach
• Clients of Special Category
• Client Identification Procedure
• Record keeping
• Records
• Retention Period
• Monitoring Transactions
• CTR
• STR
• High standards in hiring policies and training in
  respect of AML

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AMFIs proposal on PLMA

• Customer identification procedure w.e.f. 1st
  November, 2006
• POI and POA documents of Clients (Customer
  Categories)
• Obtaining additional information
• Preserving documents (Ten years from cessation of
  t/s.)

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AMFIs proposal on PLMA

• Suspicious Transaction Report with immediate
  effect
• Multiple accounts
• 20or more accounts with common 1st holder based
  on PAN and address
• 30 or more investors having different names but
  same address
• Activity in accounts
• One single t/s is 20 or more times greater than
  the average t/s in one folio within in life time
  or within last one year,
• Use of different bank accounts by clients during
  its life time or the last one year
• More than three change of address during a
  rolling period of 12 months.
• Transactions
• Sources of funds are doubtful (Rs. 1 lakh or more
  in value) via third party cheque
• Cheques issued by bank other than the mandate
  bank of the account
• Series of t/s under reporting threshold without
  PAN aggregating to Rs. 50000 or more in last 7
  days and the two year turnover exceeds Rs.
  5,00,000/- and current balance is more than Rs.
  5,00,000/-
• Large sum being transferred from overseas for
  making payments (more than Rs. 10 crores from NRI
  bank account)

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Challenges in detection of suspicious transactions

• Data Quality
• Decentralized databases
• Data not captured in electronic form
• Process
• New Roles and Responsibilities
• Identity matching with hot list of individuals
  and entities
• Mechanism to verify financial details
• Technology
• Selection of appropriate AML solution and
  analytical tools
• Money laundering typologies
• People
• Awareness
• Training
• Compliance Cost

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To Sum up

Customer Acceptance - Ensure that you accept only
legitimate and bona fide customers.
Customer Identification- Ensure that you properly
identify your customers to understand the risks
they may pose.
Transactions Monitoring- Monitor customers
accounts and transactions to prevent or detect
illegal activities.
Risk Management- Implement processes to
effectively manage the risks posed by customers
trying to misuse facilities.
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Queries

• www.fiuindia.gov.in