Presentation On Anti Money Laundering The Balancing Act – Compliance and Customer Relationship October 22, 2005 Bhas - PowerPoint PPT Presentation

Presentation

On

Anti Money Laundering

The Balancing Act –

Compliance and Customer Relationship

October 22, 2005

Bhaskar Ghose, Managing Director

What is Money Laundering

• Money laundering is the process of
• converting money earned from illegal / criminal activities,
• through a series of financial transactions,
• into forms of money
• whereby illegal origin of the money cannot be traced
• Money Laundering is not the same as Black Money transactions
• IMF estimates: Size of Money Laundered estimated at USD 1 trillion at the minimum. Possibly upto USD 2.5 trillion

What Money Laundering does

• Illegal funds are introduced into the financial system (Placement stage)
• The funds are distanced from their sources (Layering stage)
• {Genuine customers may be unwittingly drawn in at this stage}
• Funds re-enter the legitimate economy (Integration stage)
• Bank officials overlook the laundering of the money (Paper-trail-avoidance stage)

Common indications of ML

• Reluctance to provide information
• Disproportionate cash transactions
• Multiple transactions or sudden high value transactions
• Wire transfers from high risk countries
• Deposits offered as security for loans of huge amount
• Consequences of ML
• Integrity of the bank (and banking system) affected
• Reputation of the bank at stake
• Unchecked ML can increase organised crime in the society
• FDI into the country may be affected

Approaches for AML Implementation

• Two possible approaches
• “Only-Compliance” approach – Tactical approach
• “Compliance + Business” approach – Strategic approach
• Only-Compliance approach
• Tactical approach
• Reactive mode
• Involves “Point Solutions”, specific to compliance requirements of date
• Involves “Additional Point solutions” to address new regulations and changing scenarios
• Involves issues relating to “Providing resources to a cost centre” – a difficult issue for management

Approaches for AML Implementation (con’t)

• Compliance + Business approach
• Strategic approach
• Proactive mode
• Involves “Business Process Management”, even while addressing compliance
• Information important for business is available in the compliance process
• Source of funds
• How the customer uses these funds
• Developments in the financial life of the customer
• These can be used for business promotion, internal control and other productive purposes

Challenges in Implementation

• Compliance does not simply happen. It must be caused. Causing takes effort and resources.
• Software solutions and mindset of bankers need to be one step ahead of the launderer (gets smarter every day).
• “To catch a crook, think like one”
• Sea of data that is made up of
• millions of transactions daily,
• complex customer relationships,
• diverse monetary instruments,
• numerous transaction channels and
• international reach
• Each factor involving a suspicious transaction may be insignificant but together they may raise suspicion

Challenges in Implementation (con’t)

• Detection of suspicious account conduct through account behavioural analysis
• Protecting legitimate and innocent customers even while some of their transactions may raise suspicion
• Dependence only on pre-defined rules tend to be an ineffective tool
• Detection of odd suspicious behaviour – Needle in a haystack
• Absence of uniform identification documents coupled with centralised validation mechanism
• Unwieldy number of false positive alerts
• Technology alone is not sufficient.
• Any amount of investment in software alone may not be sufficient to prevent losses.
• Acquiring full knowledge of different, new and emerging techniques of money laundering is important.

Key components of AML initiatives

• Choose a strategic approach
• Comply in letter and spirit
• Look beyond compliance
• Installation of right technology
• Pick up a state-of-the-art solution for AML
• Solution to blend with CRM tools
• Capability to generate intelligent alerts
• Educating/sensitising the bank staff
• to identify potential money laundering
• to guard against offending genuine customers

Role of Technology in Implementation

• Huge volumes of transactions – Impossible to analyse manually
• Needs software support to find the “needle” in a huge haystack
• Technology support reduces time lag between ML event and detection
• Software to undertake
• Behavioural analysis
• Link analysis
• Statistical analysis
• Anomaly detection
• Predictive modelling (decision trees, regression analysis, etc.) – to decide the likelihood of new activities being suspicious
• Artificial intelligence tasks

Role of Technology in Implementation (con’t)

• Software to screen transactions from the following perspectives
• Client details
• Categorisation of customers – low risk, medium risk and high risk
• Transaction details
• Cash / Transfer / Wire transfer/ Channel etc.
• Behavioural analysis
• Threshold amount, Abnormal behaviour, Alerts etc.
• Analysing customer behaviour on the basis of transaction behaviour
• Management of alerts / cases / investigations
• Reporting

Managing The Change

• Convincing ourselves
• Part of the tasks required under AML are already undertaken by banks for other purposes.
• KYC norms
• Due diligence of customers
• Tracking transactions
• Updating customer profile etc.
• Only additions under AML are
• Looking for suspicious transactions from ML perspective
• Managing the cases thrown up by alerts
• Reporting suspicious cases
• Convincing ourselves is the first and foremost step in convincing the customers

Convincing the customer

• Social Responsibility – Stability of the national economy and promotion of economic growth
• Protecting society at large by restricting the flow of terrorist money, drug trafficking funds, etc.
• Prevention of unwitting use of customer for routing of illegal funds
• Regulatory requirement

Convincing the customer (con’t)

• Approach as an advisor rather than an investigator
• It is like subjecting ourselves to frisking at Airport Security Checks
• Millions of other genuine passengers are frisked for the sake of my safety
• Similarly I am frisked for the safety of other genuine passengers
• Similar is the situation under AML too.
• To quote our Finance Minister:
• “AML legislation has nothing to do with remittances by millions of Indians who are working hard abroad.”

Balancing Act – Regulatory safeguards & Customer Convenience

• Comply with regulations
• But take care of genuine customers
• Sensitise the frontline staff
• Educate the customers on need for AML
• Seek information tactfully – without offending the customer

Balancing Act – Regulatory safeguards & Customer Convenience

• Both marketing managers and compliance managers have to help each other.
• Marketing managers have to soften the ‘iron fist’ of compliance
• Compliance managers have to provide to marketing managers useful business inputs from the compliance data

International Scenario

• Stiff monetary penalties and strong regulatory actions in most developed countries
• Riggs Bank fined $ 25 million in 2004
• Arab Bank in New York fined $ 24 million in August 2005
• Deutsche Bank in New York agreed to tighten policies and procedures, and reporting of suspicious transactions and customer vetting to prevent money laundering

Regulatory provisions in India

• The Prevention of Money Laundering (Amendment) Act in force from July’05
• Banks, FIs and other intermediaries to maintain records
• of all cash transactions above Rs.10 lacs and
• transactions below Rs.10 lacs between related parties
• any other suspicious transaction
• Financial Intelligence Unit, India created by the Government
• Banks to comply with AML provisions before December 31, 2005

Present Status of Implementation in India

• Banks are gearing up in the last few months
• Compliance may be achieved by many banks in time
• Effective usage beyond compliance may take some time since only experience can enable efficient handling of suspicious transactions

The Way Forward

• Be convinced that AML is here to stay
• Don’t just comply; comply in spirit
• Think beyond the narrow; not just as a compliance requirement
• Adopt a strategic approach of “Compliance + Business”
• Pick up a state-of-the-art solution for AML
• Use it for effective compliance and beyond
• Educate and sensitise front line staff
• Free banks from integrity and reputation threats
• In the process, make our country an honourable financial hub in the global market

Our Bank’s position

• Policy framework approved by Board
• Procedural guidelines in place
• Adopted sophisticated software
• Implementation of software completed
• Gone live with AML software
• AML software also used as fraud detection tool in certain areas
• Centralised cell constituted to monitor and report suspicious transactions under AML
• Video film being arranged on KYC/AML to sensitise staff
• Brochures being arranged for customer guidance

Thank You