FAQs on Anti-Money Laundering

FAQs On Anti Money Laundering(AML)

What is Money Laundering?

Money laundering is the act of taking illegal money ("dirty" money) & putting it through a cycle of transactions that “washes” the funds & “cleans” them, making the money look like proceeds from legal activities.

Who is a Money Launderer?

A money launderer is a person or a group that either has possession of the proceeds of a crime or of the assets that represent the proceeds of illegal activities such as fraud, theft, drug trafficking, or any other crimes

Regulatory Regime

The Prevention of Money Laundering Act, 2002 (PMLA) has come into effect from 1st July 2005 in India.

To Whom it is Applicable

The Act covers Banking Companies, Financial Institutions & Market Intermediaries i.e. Stock-Broker, Sub-Broker, Share Transfer Agent, Depository Participants, Portfolio Manager, Investment Adviser etc. registered under Section 12 of the SEBI Act. W.e.f. November 25, 2009, the PMLA Guidelines has also been adopted by FMC (for Commodities segment)

Who is a Principal Officer?

Every banking company, financial institution & Intermediary has to designate a “Principal Officer”& has to communicate the details of the Principal Officer (name, designation & address) to the Office of the Director-FIU-New Delhi. Principal Officer is responsible for ensuring compliance relating to PMLA.

Stages in Money Laundering Cycle

  • Placement: Where the dirty money is placed into the financial institutions or retail economy through Bank Deposits etc.
  • Layering: Means separating the illegally obtained money from its source through a series of financial transactions that makes it difficult to trace the origin i.e. several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, changing the money's currency etc.
  • Integration: Means converting the illicit funds into actually legal form i.e. by Purchase of high value goods/property, purchasing businesses, automobiles & other assets. (Picture below showing different stages in Money Laundering)

Prescribe Value & Nature of Transactions for Which Records Need to be Maintained

  • All cash transactions of the value of more than Rs 10 lacs or its equivalent in foreign currency
  • All series of cash transactions integrally connected to each other which have been valued below Rs 10 lacs or its equivalent in foreign currency where such series of transactions take place within one calendar month.
  • All suspicious transactions whether or not made in cash
  • Transactions remotely connected or related should also be considered.

What is a Suspicious Transactions?

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

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

Illustrative List of Suspicious Transaction in Broking Industry are as follows

  • Client Identity/Background
    • False / incorrect identification documents
    • Client not present for registration personally
    • Suspicious background or links with known criminals
  • Multiple Accounts / Activity in Account
    • Large number of accounts having a common account holder
    • Unexplained transfers between multiple accounts with no rationale
    • Unusual activity compared to past transactions
    • Doubt over the real beneficiary of the account
  • Particulars of Transactions
    • Pay-Out/Pay-In of funds & securities transferred to /from a third party
    • Off market transactions especially in illiquid stock & in F & O at unrealistic prices
    • Large sums being transferred from overseas for making payments
    • Inconsistent with the clients’ financial background

Key Features of PMLA

  • Client Due Diligence which include policy for acceptance & identification of clients
  • Record keeping procedures including retention thereof.
  • Monitoring of transactions
  • Suspicious transactions monitoring & reporting.
  • Appointment of Principal Officer.
  • Continuous review of procedures & systems.
  • Ongoing training & up gradation of skill set.