Atul Khurana

Introduction:

  • PREVENTION OF MONEY LAUNDERING ACT, 2002 came into force with effect from 01st July, 2005.
  • The Act extends to whole of India except J&K.
  • Objective: To prevent money- laundering, seize the property with authority, involved in money laundering
  • Administration: Directorate of Enforcement of the Department of Revenue, Ministry of Finance.

What is Money Laundering?

It is the process of taking the proceeds of criminal activity and making them appear legal.

Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. Those who commit the underlying criminal activity may attempt to launder the money themselves, but increasingly a new class of criminals provides laundering services to Organized Crime. This new class consists of lawyers, bankers, and accountants.

Criminals want their illegal funds laundered because they can then move their money through society freely, without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from being confiscated by the police.

Accuse of Money Laundering

Anybody who is directly or indirectly involves in any process or activity connected to the proceeds of crime or he assists anybody who is actually involved in this process shall be guilty of this offence of Money laundering.

How this Money Laundering takes place?

Money laundering is accomplished in many ways, though most include three common steps, including

  1. First of all introducing the money in the Financial system.
  2. Conceal that money by doing multiple transactions that becomes complex enough to trace.
  3. Returning the money back into the financial world so that it appears genuine and white. They money has been returned by the various means involving high-cash business, such as a check cashing service, bar, nightclub, or convenience store.

How this Money Laundering Starts in small transactions and then turns to higher Level……………

Just understand this with the help of the following example:

Mr. A, an Accountant of XYZ Co. steals heavy cash from the business. But he did not want this to be detected. So, instead of depositing large amount of money into his bank account, he breaks the money in different small amounts and deposit the same in bank account on weekly basis. So, This ensures the bank does not look at his transaction suspiciously since it is uncommon for him to deposit large sums of money.

Techniques of Money Laundering:

There are many techniques of money laundering. Some of them includes:

Bulk cash smuggling: It involves literally smuggling cash into another country for deposit into offshore banks or other type of financial institutions that honor client secrecy. The best and famous example in India is Big Businessmen depositing their money in Swiss Bank Accounts.

Structuring: It is a method in which cash is broken down into smaller amount, which are then used to purchase money orders or other instruments to avoid detection or suspicion.

Real estate laundering: It occurs when someone purchases real estate with money obtained illegally, then sells the property. This makes it seem as if the profits are legitimate.

Casino laundering: It involves an individual going into a casino with illegally obtained money. The individual purchases chips with the cash, plays for a while, then cashes out the chips, and claims the money as gambling winnings.

Punishment for Money Laundering:

Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees: Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been subs’tituted.

Section 12 of the Act:

According to Section 12 of this act and the Rules impose obligations on Banking companies Financial institutions Intermediaries of the securities market To maintain records furnish information verify identity of clients.

“Banking Company” under this act includes:

All nationalized banks, private Indian banks and private foreign banks All co-operative banks viz. primary co-operative banks, state co-operative banks and central (district level) co-operative banks State Bank of India and its associates and subsidiaries Regional Rural Banks

“Financial Institution” under this act includes:

Financial Institutions as defined in Section 45-I of the RBI Act namely EXIM Bank, NABARD, NHB, SIDBI, IFCI Ltd., IDFC Ltd., IIBI Ltd. and TFCI Ltd. Insurance companies Hire Purchase companies Chit fund companies as defined in the Chit Funds Act.

“Intermediary” under this act includes:

Persons registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992:

• Stock brokers • Sub-brokers • Share transfer agents • Registrars to issue • Merchant bankers • Underwriters • Portfolio Managers.

Here the question is How to maintain and verify the identity of the above mentioned clients?

The answer to this question is as simple as banks have started KYC Policy under which banks maintain the identity of their clients.

What is KYC?

Know your customer (KYC) is the process of a business verifying the identity of its clients. The term is also used to refer to the bank regulation which governs these activities.

Customer?

One who maintains an account, establishes business relationship, on who’s behalf account is maintained, beneficiary of accounts maintained by intermediaries, and one who carries potential risk through one off transaction.

Your?

Who should know? Branch manager, audit officer, monitoring officials, PO.

Know?

What you should know? True identity and beneficial ownership of the accounts. Permanent address, registered & administrative address.

Making reasonable efforts to determine the true identity and beneficial ownership of accounts; Sources of funds. Nature of customers’ business.What constitutes reasonable account activity?

Who your customer’s customer are?

Each and Every Thing so as to obtain True Identity of your customer.

Advantages of KYC norms:

KYC procedures have particular relevance to the safety and soundness of banks, in that:

1. They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage;

2. They provide an essential part of sound risk management system (basis for identifying, limiting and controlling risk exposures in assets & liabilities).

Measures to avoid Money Laundering:

1. Transactions Monitoring

  • Monitor customers accounts and transactions to prevent or detect illegal activities. – Issue of Mechanism to verify financial details – Transactions inconsistent with customers profile (business) – Unexplained transfers between multiple accounts with no rationale – Sudden activity in dormant accounts Risk Management
  • Implement processes to effectively manage the risks posed by customers trying to misuse facilities. – Categorization of customers: high/medium/low risk dynamic concept – Constant interaction between front desk and the compliance team required – Awareness and training of staff.

2. SUSPICIOUS TRANSACTION:

Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith –

  • It gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or
  • It appears to be made in circumstances of unusual or unjustified complexity; or
  • It appears to have no economic rationale or bonafide purpose;

How to know that the transaction is suspicious?

  • Providing misleading information / information not easily verifiable while opening an Account.
  • Large cash withdrawals from: a dormant or inactive account or account with unexpected large credit from abroad.
  • Sudden increase in cash deposits of an individual with no justification.
  • Employees leading lavish lifestyles that do not match their known income sources.
  • Large cash deposits into same account.
  • Substantial increase in turnover in a dormant account.
  • Receipt or payment of large cash sums with no obvious purpose or relationship to Account holder / his business.
  • Reluctance to provide normal information when opening an Account or providing minimal or fictitious information.

Use of cash in Money Laundering:

  • Disguise the audit trail.
  • Provide anonymity.
  • Concealing true ownership and origin of money.
  • Control over money.
  • Changing the form of money

High risk areas of Money Laundering:

  • High risk countries:
  • Drug producing countries
  • Countries with high levels of corruption
  • Countries linked to terrorist financing High risk customers:
    • Private money transmitters
    • Money changers
    • Real estate dealers
    • Casinos, gambling outfits
    • Private banking

Conclusion:

Prevention of Money laundering Act, 2002 was a major step taken by Indian Government for tracing and stopping fraudulent monetary activities but despite of this step a lot of scams happened in Country which proved this act to be a failure. The major reason for failure is the Corruption in Govt. Departments because ultimately it our own administration who is helping these people in committing frauds.

“The Author is a student of Institute of Chartered Accountants of India. For any query related to above article, You can contact him anytime at atulkhurana9@gmail.com or call him at 98888-55340 (preferably 6 pm to 9 pm)”

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