DETAILED NOTES ON MONEY LAUNDERING, HAWALA, TERRORIST FINANCING & AML
1. MONEY LAUNDERING (ML)
Money laundering is the process of disguising the illegal origin of criminal proceeds. It aims to make
dirty money appear clean.
Stages of Money Laundering:
1. Placement – Introducing illegal funds into the financial system.
2. Layering – Conducting complex transactions to obscure the money trail.
3. Integration – Reintroducing laundered money as legitimate income.
Placement Examples:
• Structuring deposits across multiple accounts.
• Purchasing monetary instruments like drafts or cheques.
• Depositing cash via intermediaries.
Layering Examples:
• Multiple wire transfers to offshore accounts.
• Using shell companies.
• Crypto conversions and mixing services.
• Buying and selling assets.
Integration Examples:
• Investing in property.
• Luxury purchases.
• Business investments.
2. HAWALA SYSTEM
Hawala is an informal value transfer system using a trust-based network of brokers (hawaladars)
without moving physical money.
How Hawala Works:
• Sender pays hawaladar A.
• Hawaladar A contacts hawaladar B in another country.
• Hawaladar B pays the recipient.
• Settlement happens through trade, cash, or net balancing.
Risks:
• No documentation or KYC.
• Anonymity.
• Used for ML, tax evasion, smuggling, terrorist financing.
3. TERRORIST FINANCING (TF)
TF involves collecting and transferring funds for terrorist activities. Funds may come from legal or
illegal sources.
Key Difference Between ML and TF:
• ML hides the source of funds.
• TF hides the destination and purpose.
Sources of Terror Funding:
• Donations and charities.
• Hawala networks.
• State sponsorship.
• Criminal income (drug trafficking, extortion).
• Sale of goods, counterfeit products.
Methods of Terrorist Financing:
• Small remittances (smurfing).
• Use of prepaid cards.
• Cryptocurrencies.
• Cash couriers.
• Misuse of NGOs and NPOs.
4. ML TRENDS & INDICATORS
Customer Red Flags:
• Refusal to provide KYC documents.
• Use of forged or unverifiable documents.
• Sudden change in activity level.
• Overly complex corporate structures.
Transaction Red Flags:
• Large unexplained cash deposits.
• Rapid in-out transfers.
• Multiple small transactions (structuring).
• Transfers to/from high-risk countries.
Sector Trends:
• Trade-Based ML.
• Cryptocurrency laundering.
• Use of shell companies.
• Use of gaming platforms for layering.
5. ANTI-MONEY LAUNDERING (AML)
AML includes processes and laws designed to detect and prevent ML and TF.
Core AML Pillars:
• Customer Due Diligence (CDD).
• Enhanced Due Diligence (EDD).
• Ongoing monitoring.
• Sanctions screening.
• Suspicious Transaction Reporting.
• Internal audits and employee training.
6. ML THROUGH SPECIFIC SECTORS
i. Insurance Sector:
• Overpayment of premiums.
• Early surrender of policies.
• Third-party premium payments.
• Single premium products used for layering.
ii. Correspondent Banking:
• High transaction volume makes monitoring difficult.
• Nested accounts (respondent banks allow third-party banking).
• Weak AML controls create risks.
iii. Shell Companies:
• Companies existing only on paper.
• Used to hide beneficial owners.
• Used for layering via complex corporate structures.
iv. Trade-Based ML (TBML):
• Over/under invoicing.
• Multiple invoicing for single shipment.
• Phantom shipments.
• Misclassification of goods.
7. KNOW YOUR CUSTOMER (KYC)
KYC ensures financial institutions verify customer identity and risk.
Customer Due Diligence (CDD):
• Identity verification.
• Address proof.
• Beneficial ownership identification.
• Business profile understanding.
Enhanced Due Diligence (EDD):
Applied for high-risk customers:
• PEPs.
• High-risk countries.
• Complex ownership structures.
• Cash-intensive businesses.
8. TRANSACTION MONITORING
Financial institutions monitor for unusual or suspicious activities.
Monitoring Includes:
• Automated transaction monitoring systems.
• Threshold-based alerts.
• Pattern analysis.
• Sanctions and name screening.
Common Alerts:
• Large cash deposits.
• Sudden change in transaction behavior.
• Transfers from tax havens.
• Account used as a pass-through.
9. SUSPICIOUS ACTIVITY REPORTING (SAR/STR)
Banks must file STRs when transactions appear suspicious.
When to File:
• Transaction inconsistent with customer profile.
• Attempts to avoid reporting thresholds.
• High-value or structured deposits.
• Suspicious third-party funding.
Important:
Tipping-off is strictly prohibited.
10. AML REGULATIONS
Global Laws:
• FATF 40 Recommendations.
• Basel Committee guidelines.
• Wolfsberg Principles.
India-Specific Laws:
• Prevention of Money Laundering Act (PMLA), 2002.
• Prevention of Money Laundering Rules, 2005.
• FIU-IND reporting requirements.
• RBI/SEBI/IRDAI AML guidelines.
Conclusion:
Understanding ML, TF, and AML controls is essential for combating financial crime and maintaining
compliance within financial systems.