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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,

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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
Managing The Change

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