Chapter 2 AML-KYC Guidelines

2.1 Money Laundering and Financing of Terrorism Risks

Money laundering (ML) is a process where by the origin of funds generated from criminal
activities (drug trafficking, gun smuggling, corruption etc ) is concealed and these funds are
infused in the financial system appearing as if these originated from legitimate sources .
Often such funds are deployed in legal activities or in legitimate assets.

Corruption, tax evasion, Ponzi schemes, other financial crimes, cybercrimes are closely
connected with money laundering. Funds from these crimes now form a substantial portion
of money laundering funds. Financial Crimes (FC) now constitute a significant part of
criminal activities.

Terrorist Financing (TF) With growth of several terrorist organisations, big and small ,
terrorist financing has assumed large proportions . Terrorist has developed linkages with
money laundering as for both purposes similar modalities are used .

Thus ML, TF and FC are interconnected . Another aspect is that certain criminals have
organized into Organized Crime Groups (OCGs) and Professional Money Launders (PMLs).

OCGs and PMLs together form the network that propagates criminal activities and launders
the funds generated from such activities.

Financial Action Task Force (TATF), a global organization, was set up for evolving measures
to be taken by financial sector businesses and certain non –financial businesses and
professions for prevention of money laundering.

FATF issued certain recommendations that serve as Anti money laundering (AML) and
combating financing of terrorism (CFT), and are known as FATF standard 2012. Money
laundering and terrorism financing are considered as criminal activities across the world .
2.1.2 Stages of Money Laundering

Funds from criminal activities are typically generated outside the financial system, and are
placed in it to give them legal form . This money laundering cycle comprises three stages
stated below—

(a) Placement: In this stage the funds from criminal activity are introduced into the
financial system Typically, this is done through deposits in multiple bank accounts .
(b) Layering: Next, those funds are passed through numerous financial transaction in
these accounts creating several layers of funds tranfers . This helps in hiding the
source of these funds.
 (c) Integration: Next step is collecting the funds lying in multiple accounts in one or few
accounts that are then deployed for investing in some legal business activity or for
acquiring some asset in legitimate manner.

2.1.3 Stages of Financing of Terrorism

There are numerous terrorist outfits, in the world these have financial cycles similar to
commercial entities , and use banks and financial institution . Financing of Terrorism
comprises following stages.

(a) Raising: Terrorist organisations source funds from their sympathisers both individuals
and organisations . Sometimes , terrorist outfits also engage in various income
generating activities , legal or criminal
Chanelling funds from both such sources is done in a clandestine manner so that the
purpose for which these are collected is not known .
(b) Moving: Contributors to the terrorist organization can be located anywhere not only
in their home country but across the world . These funds are therefore required to be
moved to the places of their establishments of the terrorist organisations.
(c) Storing: As the funds raised may be deployed for terrorism related activities including
the regular activities for running the outfits with a gap of time and spread over a
period , these are parked in the interim in bank accounts or any other financial
investment .
(d) Using: Finally , the raised funds are used for the purposes of carrying out the
terrorism act or for various organisational related activities.

2.1.4 Objectives of Prevention of Money Laundering

The main objectives of measures for prevention of money laundering are:

(a) To prevent criminal elements from using the financial system for money laundering
activities.
(b) To prevent spread of criminal activities in society.
(c) To safeguard the economy from financial crimes.
(d) To prevent terrorists from gaining access to financial resources.

2.2 AML Framework in India

Based on FATF Reconcillation, in India Prevention of Money Laundering Act, 2002 (PMLA)
was enacted under which, inter alia, few obligations for all financial sector players and
certain non-finance businesses have also been stipulated. These entities in the financial
sector and the designated businesses in non-financial sector are termed as Reporting
Entities (RE). Detailed legal provisions for REs, have been included in Prevention of Money
Laundering (Maintenance of Records ) Rules (PMLR).
Besides, specific institutional framework has also been put in place for dealing with money
laundering crime.

(i) Financial Intelligence Unit-India (FIU-Ind) has been set up for receiving
information about various financial transaction from certain businesses, including
banks and financial institutional. FIU-INDIA also has supervisory powers over the
business entities that are subject to PMLA.
(ii) Enforcement directorate (ED) is the investigation and prosecuting authority for
money laundering crime. The powers of ED include tracking and attaching assets
related to money laundering.
(iii) Special courts are set up for adjudication of cases pertaining to money laundering
crime . The adjudicating authority has powers to freeze the assets and even
confiscate the assets proved to be related to money laundering.
(iv) The Regulators of various business activities , covered under PMLA, issue
operating instructions and guidelines for the businesses regulated by them for
discharging their obligations under the PMLA and PMLR.

2.2.1 Money laundering offence

The offence of money laundering has been defined in Sec. 3 of the PMLA as:

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a

party or is actually involved in any process or activity connected with the proceeds of crime
including its concealment, possession. Acquisition or use and projecting or claiming it as
untained property shall be guilty of offence of money laundering.”

Sec 45 of PMLA stipulates that all offences under the PMLA are to be deemed to be
cognizable and non bailable offences.

Sec 4 of PMLA stipulates the punishment for money laundering offence , which is rigorous
imprisonment for not less than 3 years but up to 7 years and fine as per the gravity of the
offence . In cases connected with offences under the Narcotics Drugs and Psychotropic
substances Act the imprisonment may extend up to maximum 10 years.

2.2.2 Money Laundering –Risk Perception

Thus the primary source of ML/FT risks is the customers .These are also affected by:

(i) Nature of products and services.

(ii) Country of incorporation of the bank.
(iii) Place of the bank branch.
(iv) Place(s) with which the transition is connected.
(v) Nature and value of transaction.
2.2.3 Measure to Mitigate Money Laundering Risk

The obligations under PMLA require the banks to mitigate ML/FT risks . Banks are required
to take appropriate measures for the following purposes :

(a)