+Introduction : General

Criminals, money launderers and terrorist financiers succeed in their illegal

activities because they are able to sanitize, move and conceal illegitimate funds. For
this, they use financial institutions, designated non-financial businesses and
professions(DNFBPs) and other trade or charity based channels.
Weak AML/CFT policies and procedures assist such criminals to expand their
activities.
Such environment helps them to abuse the system and adds further to their engagements
in tax evasion, corruption, drug trafficking, exploitation and illicit trafficking of
human beings, smuggling, arms trafficking, terrorism, etc.
Money laundering and financing of terrorism can occur in any country. Such activities
have adverse economic and social consequences to all the countries and the impact is
severe for developing countries.

Introduction :Roles
With the financial cost of non-compliance on AML/CFT going up substantially in
recent times, combined with the loss of reputation, this is a very critical area which
cannot be neglected any more.
Compliance on risk based approach, as expected by the international standards and
domestic laws, requires in-depth knowledge, skill and instruments systematized
within an institution.
Employees working in financial institutions and designated non-financial businesses and
professions (DNFBPs) play a critical role in identifying, monitoring and detecting such
illegal activities by staying informed, vigilant and reporting suspicious activities or
transactions to the related government authority.
So, it is critical to ensure that you and your team understand the facts and spirit behind
AML/CFT regulations and how it should influence day-to-day behaviour at the
workplace.
Hence, the Fintelekt Course and Certification in AML/CFT provides the essential
knowledge from an educational, regulatory and ethical perspective, and includes an
assessment to determine if the officials of the Reporting Entities (REs) have indeed
understood the key aspects of AML/CFT regime.

Introduction : Institutions
Following financial and non-financial institutions are required to implement AML/CFT
preventative measures in a robust manner. Effective training is the cornerstone for such
successful implementation.

Banks, money remitters, exchange houses, institutions providing services of

financial leasing, lending, financial commitment or guarantee;
 Institutions issuing and managing different means of payment;
Institutions trading in different types of financial or money market instruments or
services;
Institutions engaged in insurance services, securities related industries like mutual
funds, commodities, brokering, portfolio managers;
Institutions like designated non-financial businesses and professions (DNFBPs) such as
casinos, independent legal and accounting professionals, real estate agents, precious
metal and stones dealers, trust and company service providers, and
Non Profit Organizations (NPOs) and others as applicable.

These institutions are normally classified as Reporting Entities (RE) in this regime.

Expected Results
By the end of the course, you will be able to:

Gain knowledge on the fundamentals of AML/CFT regime.

Understand AML/CFT compliance modalities and risk based approach.
Comprehend the instruments to detect and report Suspicious Transactions.

Objectives of AML/CFT Regime

The objectives of AML/CFT Regime are as follows:

Protecting the financial system

Preventing criminals from enjoying the proceeds of crimes
 Preventing criminals to build formidable economic powers and challenge the
stability

Financial Action Task Force (FATF) and

other International Initiatives
Over the years, many international efforts have been made to combat the threat of money
laundering and terrorist financing. These initiatives include the efforts of UNO and other
regional organizations, World Bank, IMF, ADB, OECD, Egmont Group of FIUs and
FATF and FATF Style Regional Bodies (FSRBs) (Currently 8 FSRBs are working
globally).
The Financial Action Task Force (FATF) was established at the G-7 Summit in Paris in
1989, as an inter-governmental body to develop a co-ordinated international response to
the threats of ML/TF/PF. It is basically the standard setting and compliance monitoring
body. It had issued 40+9 Recommendations on ML/TF in 1990 and 2001, which now
have been combined and revised as the FATF Standards of ML/TF/PF 2012. FATF has
36 members and numbers of international and regional observers.
The Asia/Pacific Group on Money
Laundering (APG)
APG is an autonomous FSRB founded in 1997 in Bangkok, Thailand and now
consists 41 members and numbers of international and regional organizations as
observers. Some of the key international observer organizations include Financial Action
Task Force, International Monetary Fund, World Bank, OECD, United Nations Office on
Drugs and Crime, Asian Development Bank, etc.
APG members and observers are committed to the effective implementation and
enforcement of AML/CFT international standards, in particular the Revised FATF
Recommendations. All SAARC countries are members of the APG.

Money Laundering
Money Laundering is the process by which illegal funds and assets are converted into
legitimate funds and assets.
Every year, huge amount of funds are generated from illegal activities. These funds are
mostly in the form of cash.
Criminals who generate these funds need to bring them into the legitimate financial
system.
Illegal, or dirty money is put through a cycle or series of transactions or washed, to
convert the money to clean or legal money.
Thus the dirty money has to pass through different stages before it gets clean.

The different stages of money laundering are:

1.Placement: Illegal funds or assets are first brought into the financial system. This placement
makes the funds more liquid. Money launderers place illegal funds using a variety of techniques
like, depositing cash into bank accounts or purchasing insurance products and using cash to
purchase assets.

2.Layering: To conceal the illegal origin of the placed funds and thus make them more useful,
the funds have to be moved, dispersed and disguised. This activity is known as layering. At
this stage, money launderers use many different techniques to layer the funds like, using multiple
banks and accounts, having professionals act as intermediaries and transacting through
corporations and trusts. This helps the launderers to disguise the origin of the funds.

3.Integration: The last stage of the money laundering process is called integration. The
cleaned funds can now be made available for investment in legitimate or illegitimate
businesses. Thus, the original dirty money has achieved the appearance of legitimacy.

Terrorist Financing
Terrorist financing means providing financial support to terrorists or terrorist organizations to
enable them to carry out terrorist acts. Terrorist funding or assisting terrorist is one of the
predicate offences of money laundering.

Key features of terrorist financing are:

Remittances to and from unrelated parties from high risk geographies, followed by
withdrawal or transfer to different parties in small values.
Withdrawal in cash or through cards in small values at high risk centers and merchant
establishments.
Support to terrorist organization, individual or group for their initiatives, acts and
preparations.
Undue use of Non Profit Organizations (NPOs) or charities.
Legal Framework of AML/CFT in Nepal
Asset (Money) Laundering Prevention Act, 2008
Asset (Money) Laundering Prevention Rules, 2009
Asset (Money) Laundering Prevention (Listing, Seizing, Freezing) Rules, 2013
Regulatory Directives such as from Nepal Rastra Bank, Insurance Board, Securities
Board and other Regulators
FIU Directives on STR and TTR
Other laws relating to the business of the REs and investigations, etc.
Asset (Money) Laundering Prevention Act,
2008
Objective: to provide for prevention of money laundering and terrorist financing,
Enactment : 14 Magh, 2064 (28 January, 2008)
First amendment: 2011
Second amendment as an Ordinance in 2013 and as an Act in 2014 (Nepali Year 2070)
Jurisdiction: Nepal and may extend globally if the proceeds or person has connection.

AML/CFT Related Authorities in Nepal

Policy and Coordination Mechanisms:

National Coordination Committee (Chaired by the Secretary, Ministry of Finance)

Implementation Committee (Chaired by the Deputy Governor)
Legal, Supervisory, Investigation, International Cooperation, Technical Sub-Committees

The Regulatory Bodies:

The Nepal Rastra Bank (NRB)

The Securities Board of Nepal (SEBON)
Insurance Board
Department of Cooperatives
Regulators for other FIs or DNFBPs

Law Enforcement and other Competent Authorities

Financial Information Unit (FIU)

Department of Money Laundering Investigation (DMLI)
 Commission for the Investigation of the Abuse of Authority (CIAA)
Nepal Police
Revenue Investigation Department (RID)
Tax, Customs and Immigrations authorities
Prosecutors and the Courts
MLA Central Authority
Assets Recovery Authority

Predicate Offence/s
Offences that are committed to illegally earn/generate money or income or property are predicate
offences.

FATF has listed the designated categories of predicated offences.

Different countries have different practices such as threshold- or list-based or blanket

approaches, but they include at least all FATF designated offences.

Nepal has adopted a list-based approach, which includes:

1.Any offence under the prevailing laws:

Participation in an organized criminal group and racketeering,

Disruptive (terrorist) act and terrorism,
Trafficking in human being and migrant smuggling in any form,
Any kinds of sexual exploitation including the children,
Illicit trafficking in narcotic drugs and psychotropic substances,
Illicit trafficking in arms and ammunition,
Illicit trafficking in stolen and other goods,
Corruption and bribery,
Fraud,
Forgery,
Counterfeiting of coin and currency,
Counterfeiting and piracy of products, or imitation, illegal copy or theft of products,
Environmental crime,
Murder, grievous bodily injury,
Kidnapping, illegal restraint or hostage-taking,
Theft or robbery,
Smuggling (including custom, excise and revenue),
Tax (including direct and indirect),
Extortion,
Piracy,
Insider Dealing and Market Manipulation in securities and commodities ,
Ancient monument conservation,
Forest, National park and wild animals,
 Money, banking, finance, foreign exchange, negotiable instruments, insurance,
cooperatives,
Black marketing, consumer protection, competition, supply,
Election,
Communication, broadcasting, advertising,
Transportation, education, health, medicine, foreign employment,
Firm, partnership, company, association,
Real estate and property,
Lottery, gambling, donation,
Citizenship, immigration and passport.

2.Offence of terrorist financing pursuant to section 4,

3.Any other offence as designated by the Government of Nepal by publishing a notice in the
Nepal Gazette, or

4.An offence under a law of a foreign State, in relation to act or omission under paragraph (1),
(2) or (3), which, had they occurred in Nepal, would have constituted an offence.

Fundamental Roles of Reporting Entities

Here are the roles that have to be fulfilled by the Reporting Entities(REs):

Customer Due Diligence

Compliance and Risk based approach
Monitoring
Reporting
Systematic development

Customer Education/ Employees

Training and Hiring
Every RE must abide by the AML/CFT policies, and it becomes necessary for the
institutions to educate their customers and train their employees about their objectives of
the AML/CFT programme.
Customer Education:
REs must prepare specific literature and pamphlets to educate customers about the
objectives of the AML/CFT programme.
Employees Training:
REs must have an ongoing employee training programme to adequately train its staff and
to have different focuses for front-line staff, compliance staff and staff dealing with new
customers.
Hiring of Employees:
 REs should have an adequate screening mechanism in place as an integral part of the
personnel recruitment or hiring process to ensure that criminals are not allowed to misuse
financial institutions.

Know Your Customer

Definition of Customer
A customer is generally defined as a person or entity:

Who maintains an account and/or has a business relationship with the REs.
On whose behalf the account is maintained (i.e. the beneficial owner).
 Beneficiaries of transactions conducted by professional intermediaries, such as stock
brokers, chartered accountants, solicitors etc. as permitted under the law.
Connected with the RE and who can pose significant reputation or other risks, for
example, while making a wire transfer or issuing a high value demand draft.
Who attempts to establish a business relationship or conduct a transaction.
Who receives services or requests for services from RE.

Type of Customers
Natural Persons
Legal Persons as follows:
Four Key Elements of KYC Policy
Know Your Customer (KYC) is the process used by the REs to verify the identity of their
clients. It allows the institutions to know and understand their customers and their transactions
better, which in turn allows the institutions to intercept any fraudulent dealing.

The KYC process normally has four key elements.

Customer Acceptance Policy:

No anonymous/ fictitious accounts

Risk assessment and categorization of customer into Low, Medium or High risk
Not to open an A/C and close an existing A/C where the bank is unable to apply
appropriate Customer Due Diligence(CDD) measures
Name screening against negative lists

Customer Identification Procedure:

Identification and verification of customer

Verification of customers from original and other reference documents
Periodic updates of customer identification data

Transaction Monitoring:

Threshold based monitoring : mix of automated and manual triggers

Special attention to all complex, unusually large transactions and all unusual pattern, with
no apparent economic or visible lawful purpose
Attention to large transactions inconsistent with normal & expected patterns
Review of AML risk categorization
Ongoing monitoring of high risk customers and Enhanced Customer Due
Diligence(ECDD)

Risk Management:

Assessment of Risks
Board approved AML/CFT Policy
Management oversight on policy implementation
 Independent internal audit and compliance function for evaluating and ensuring
adherence to the AML/CFT Policies and procedures

New Customer Acceptance

When entering into a relationship with new customers, it is mandatory to procure the
proof of identity and address.
REs should not accept as customers those persons whose identity and beneficial
owner(s), as required in the Acts, Rules and regulatory Directives, cannot be verified
/assured or for whom sufficient information to form a customer risk profile cannot be
gathered. In such cases REs should consider to file a suspicious transaction report if
necessary.

Maintenance of Customer Information on

an Ongoing Basis
REs must gather and maintain customer information on an ongoing basis. Documents,
data, or information collected under the CDD process should be kept up to date and
relevant by undertaking reviews of existing records at appropriate times.


Screening
REs should screen the names of customers and beneficiaries against the negative list.
UN and some other domestic and international organizations maintain a list of designated
terrorist or terrorist organizations.
REs are required to go through the list, search for similar names and freeze the fund if so
found.
The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury
administers and enforces certain economic and trade sanctions based on US foreign
policy. If RE has a branch or headquarters or any business existence or presence
(including ADR listing) in the United States, it should be aware that doing business with
any OFAC sanctions target country (including government agencies) is strictly
prohibited, unless the activity is otherwise authorized by OFAC under general or specific
license.
The purpose is to prevent economic support to terrorist and protecting national and
international security interests.
Economic sanctions are affected through blocked assets controls, trade embargoes, travel
bans and other commercial and financial restrictions.
OFAC is not applicable to institutions and entities that have no direct or indirect US
relationship; these may be guided by their local regulatory norms.

Understanding Beneficial Ownership

Beneficial Owner means the natural person/s who ultimately own or control a customer
and/or the person on whose behalf a transaction is being conducted. It also incorporates
 those persons who exercise ultimate effective control over a legal person, entity or
arrangement.
The term Beneficial Owner is important to understand because a person in whose name
an account is opened with an institution may not necessarily be the person who ultimately
controls or is entitled to the funds or investments. The distinction is important because
the focus of anti-money laundering guidelines is on the person who has the ultimate level
of control or entitlement.

Key Differences between Money

Laundering and Terrorist Financing


Customer Due Diligence (CDD)

Conducting CDD by all REs includes:

Identifying customers, including beneficial owners;

Gathering information on customers and beneficial owners and creating a customer risk
profile;
Applying established customer acceptance policies to new customers;
Maintaining customer and beneficial owner information on an ongoing basis; and
Monitoring customers transactions and relationship with the customer on an ongoing
basis.

CDD should be applied on risk basis, which must include enhanced CDD for higher risk
customers and may include simplified CDD for lower risk customers.
Politically Exposed Persons (PEP)
Politically exposed persons are individuals, who are or have been entrusted with prominent
public functions in a foreign country, e.g., Heads of States or of Governments, senior
politicians, senior government/ judicial/ military officers, senior executives of state-owned
corporations or important political party officials.

Reporting institutions should gather sufficient information about any prospective customer of
this category before establishing a relationship and check all the information available about the
person in the public domain. The identity of the person should be verified and information about
the sources of funds should be known before accepting the PEP as a customer.

The decision to open an account for a person suspected to be PEP should be taken at a senior
level as per the institutions Customer Acceptance Policy.
Enhanced CDD for Higher Risk Customers
Reporting institutions shall apply enhanced CDD for customers that are likely to pose a higher
risk of money laundering or terrorist financing (enhanced CDD") including for politically
exposed persons (PEPs) and non-face-to-face customers. Enhanced CDD should include
reasonable measures to establish the source of wealth, source of funds of customers and monitor
the background and purpose of the relationship and transactions.

Enhanced CDD should be applied to higher risk customers at each stage of the CDD process.

No higher risk customer should be accepted as a customer unless a senior member or institution's
management has formally accepted the relationship with this type of customer.
Enhanced CDD for Higher Risk Customers:
Contd..
Relevant factors in determining if a customer is of high risk include instances where the
person (natural or legal) is:

establishing customer relationship other than face to face;

a non-resident, or if the nationality, current residency, and previous residency of the
person suggests greater risk of money laundering or terrorist financing;
connected with jurisdictions that lack proper standards in the prevention of money
laundering or terrorist financing;
a politically exposed person ("PEP") or linked to a PEP;
a high net worth individual, especially if the potential customer is a private banking
customer or the source of funds or source of wealth is unclear;
engaged in a business that is particularly susceptible to money laundering or terrorism
financing;
a legal person or arrangement that is a personal asset holding vehicle;
a legal person or arrangement whose ownership structure is complex with no visible
economic or lawful purpose;
a company with nominee shareholders or shares in bearer form;
higher risk for other reasons based on relevant information such as jurisdictions identified
as having high levels of corruption; and
jurisdictions involved in cash intensive business activities.

Non face-to-face transactions referred to in Sub-clause (4) of this Clause include but are
not limited to:
 business relationships concluded over the Internet or by other means such as through the
post;
services and transactions over the Internet;
use of ATM machines;
telephone banking;
transmission of instructions or applications via facsimile or similar means; and
making payments and receiving cash withdrawals as part of electronic point of sale
transaction using prepaid or re-loadable or account-linked value cards.

Enhanced CDD for Higher Risk Customers:

Contd..
Enhanced CDD procedures for non-face to face transactions may include:

certification of documents presented by a notary or other reliable person;

requisition of additional documents to complement those that are required for face to face
customers;
development of independent verification measures and/or contact with the customer.

Procedures for determining who is a PEP may include:

seeking relevant information from the potential customer;

referring to publicly available information; and
making access to commercial electronic databases of PEPs, if available.
Simplified CDD for Lower Risk Customers
Reporting institutions may apply simplified customer due diligence procedures upon undertaking
a documented risk assessment of the customer relationships. They shall make the documents of
the procedures and the risk assessment available to Regulators and other competent authorities
upon request.

The general rule is that customers must be subject to the full range of customer due diligence
measures as provided in the laws. In certain circumstances where the risk of money laundering
or terrorist financing is lower, as determined by a risk assessment undertaken by the institutions,
where information on the identity of the customer and the beneficial owner of a customer is
publicly available, or where adequate checks and controls exist elsewhere in national systems,
simplified measures may be employed.

Non-resident and foreign entities may only qualify for reduced CDD if they are located in a
jurisdiction that is implementing effectively the international standards on AML/CFT. In
determining this, institutions should take into account the information available on whether these
countries adequately apply the international standards on AML/CFT, including by examining the
reports, assessments and reviews published by FATF, FSRBs such as APG, International
Monetary Fund, World Bank or regulators.

Transaction Monitoring
Monitoring of Transaction means having an understanding of the normal and reasonable activity
of the customer, so as to have the means of identifying transactions that fall outside the regular
pattern of activity.
While a customer approaches a financial institution to open a new account, the institution must
monitor both the account and the account holder.

Record-Keeping and Retention

Reporting entities must ensure that all records of transactions or business relationships, both
domestic and international, are retained for at least five years following completion of the
transaction or end of the business relationship (or longer if requested by a competent authority in
specific cases and upon proper authority). This requirement applies regardless of whether the
account or business relationship is ongoing or has been terminated.

Transaction records should be sufficient to permit reconstruction of individual transactions so as

to provide, if necessary, evidence for prosecution of criminal activity. Necessary components of
transaction records include, but not limited to:

Customer (and beneficiarys) name, address (or other identifying information normally
recorded by the intermediary):
The nature and date of the transaction;
The type and amount of currency involved; and
The type and identifying number of any account involved in the transaction.
Financial Information Unit (FIU)
The Financial Information Unit (FIU) is Nepal's financial intelligence unit. It is a central,
national agency responsible for receiving, processing, analyzing and disseminating financial
information and intelligence on suspected money laundering, terrorist financing and related
crimes to the Investigation Agencies like DMLI, CIAA, Nepal Police, RID and other competent
authorities including foreign FIUs.

The FIU was established on 21 April, 2008 under the section 9 of the Assets (Money)
Laundering Prevention Act, 2008 with the Nepal Rastra Bank (the central bank) as an
independent unit.

The FIU is also assigned to function as the secretariat of the National Coordination Committee
constituted as a standing committee under the coordination of Secretary of Ministry of
Finance including the Secretaries from Ministries from Law and Justice, Home Affairs, Foreign
Affairs, Office of the Prime Minister and Council of Ministers, Secretary from the Commission
for the Investigation of the Abuse of Authority, Deputy Attorney General from the Office of the
Attorney General, Deputy Governor from Nepal Rastra Bank, Inspector General of Nepal
Police, Chief of DMLI as members. The Chief of FIU works as the Secretary of the committee.

Reporting to FIU-NEPAL
1. Threshold or Cash Transactions within 15 days of such transactions.

2. Suspicious Transaction Reports within 3 days of arriving at a conclusion that the transaction is
suspicious.

Threshold or Cash Transactions includes:

 Banks, FIs, money remitters and exchange houses are required to submit the report of the
following transactions:
o Credit and debit transaction of NPR 1 million or more in the account of any
person or entity particularly of cooperative, private company, NGOs either by
single or multiple transactions through any mode in a day.
o Payment of remittance of NPR 1 million or more by any person or entity to any
person or entity through single or multiple transactions in a day.
o Exchange transactions of NPR 5,00,000 or more provided to any person or entity
through single or multiple transactions in a day.
Securities business persons or the Office of the Company Registrar are required to submit
threshold transaction report of the transaction of NPR 1 million or more of any person
either by single or multiple transactions through any mode in a day.
Insurance business persons are required to submit threshold transaction report of
premium payment of more than NPR 1,00,000 in life insurance and NPR 3,00,000 in
non-life insurance in a year.
Cooperatives are required to submit credit and debit transaction of NPR 1 million or
more in the account of any person.
Casinos are required to submit threshold transaction report of NPR 1 million or more of
any person either by single or multiple transactions through any mode in a day.
Precious metal and stones business persons are required to submit threshold transaction
report of NPR 1 million or more of any person either by single or multiple transactions
through any mode in a day.
Land Revenue Offices of the Government are required to submit real estate transactions
ofNPR 10 million or more in a day by any person.

Suspicious transactions
A Suspicious Transaction means a transaction or attempt:

That gives rise to a reasonable ground of suspicion that it may involve proceeds of an
offence, regardless of the value involved
Appears to be made in circumstances of unusual or unjustified complexity
Appears to have no economic or legal rationale or bonafide purpose
Gives rise to a reasonable ground of suspicion that it may involve financing of activities
relating to terrorism.
No Tipping Off
When an institution identifies a suspicious transaction, the customer should not be tipped
off or informed that:

His account is being monitored

Disclosure has been made to designate authority
There is an element of suspicion on the account/transaction

In this process, no internal mail should be forwarded to the customer that might give him an
indication that his account is under surveillance.

The customer should not know which particular employee has identified the suspicious
transaction or undertaken any action on the account.

Also, the customer should not be informed that discreet enquiries for transactions have been
triggered from the AML unit.
Wire Transfers
Wire transfers offer a quick way to transfer money from one party to another. Hence, financial
institutions need to exercise great caution while effecting wire transfers.

Banks and financial institutions must ensure that for all wire transfers, they obtain and maintain
full originator information and verify that the information is accurate and meaningful.

Full originator information includes:

Name of the originator,

Account number of the originator or in the absence of it, a unique reference number,
Originators address or, in the absence of the address, the citizenship or national identity
number or customer identification number or date and place of birth,
Name of beneficiary and account number or in the absence of an account number, a
unique reference number.

For cross-border wire transfers (including batch transfers and transactions using a credit or
debit card to effect a funds transfer), the ordering bank or financial should be required to include
full originator information in the message or payment form accompanying the wire transfer,
except in the circumstances provided for batch transfers.

For domestic wire transfers, the ordering institution must include either:

full originator information in the message or payment form accompanying the wire
transfer; or
the originators account number, where no account number exists, a unique identifier,
within the message or payment form.
For wire transfers including transactions using a credit or debit card as a payment system to
effect a money transfer or using any kind of cards, banks and financial institutions shall obtain
the full information of such card holders.

If a cross-border wire transfer is contained within a batch transfer it should be treated as wire
transfer.

Banks and financial institutions should ensure that non-routine transactions are not batched
where this would increase the risk of money laundering or terrorist financing.

Beneficiary banks or financial institutions must identify and handle wire transfers that are not
accompanied by complete originator information on the basis of perceived risk of money
laundering and terrorist financing. If the wire transfer is deemed to be suspicious, then it should
be reported to the FIU.

Money Mules
In money laundering, Money Mules could be used by criminals to launder the proceeds of the
fraudulent schemes (e.g. phishing and identity theft). Such criminals gain illegal access to
deposit accounts by recruiting third parties to act as money mules. In some cases, these third
parties may be innocent, while in others they may be working in connivance with the criminals.

In a money mule transaction, an individual holding a bank account is recruited to receive cheque
deposits or wire transfers and then transfer these funds to accounts held on behalf of another
person or to other individuals, minus a commission payment.
Financial institutions are, therefore, advised to strictly adhere to the guidelines on KYC/CFT,
periodical updation of customer identification data and monitoring of transaction in order to
protect themselves and their customers from misuse by such fraudsters.

Indicative Alerts
There are numerous indicators that may act as red flags for institutions to identify potential
money laundering or terrorist financing activity.

Some of these are listed here:

Customer did not open account or buy a financial product after being informed about
KYC requirement.
Customer provides information that seems minimal, possibly false or inconsistent.
Customer gives false identification documents or documents that appear to be
counterfeited, altered or inaccurate.
Identity documents presented are not verifiable, e.g. foreign documents.
Address provided by the customer found to be non-existent.
Customer is not staying at the address provided during account opening.
Customer is being investigated for offences related to criminal activities or terrorist
financing.
Customer name matches in media reports related to criminal activities or terrorist
financing.
Customer receives unapproved foreign remittance in Non-Profit Organization (NPO)
account.
Customer uses complex structures where it is difficult to identify the beneficial owner.
Customer is hurried or nervous.
 Customer is over cautious in explaining genuineness of the transaction.
Customer tries to convince you to avoid reporting anything about him to the authorities.
Customer could not explain source of funds satisfactorily.
Customer changes the information provided after more detailed information is requested.
Customer seems to be acting on behalf of the third party and does not know about the
exact amount of money involved in the transaction.
Customer is taking instructions from someone else for conducting transactions.
Customer is accompanied by unrelated individuals.
Multiple customers arrive together, but pretend to ignore each other.
Customer avoids making transactions at branches near his stated address.
Transaction is unnecessarily complex for its stated purpose.
Transaction has no economic rationale i.e. the amounts or frequency or the stated reason
of the transaction does not make sense for that particular customer.
Transaction involves movement of funds which is inconsistent with the customers
business.
Customer offers different identifications on different occasions with an apparent attempt
to avoid linkage of multiple transactions.
Complaint received from any member of the public for abuse of account for committing
fraud.
Alert raised by agents, intermediaries, other institutions, subsidiaries or business
associates, including cross-border referral.
Business transactions are conducted through personal accounts.

Indicative Alerts Specific to Insurance and

Mutual Funds
Persons who sell insurance products or mutual funds should be aware of these indicative alerts
which depict potential suspicious behaviour.

Customer whose identify matches with any person whose name figures in the list of
banned persons or entities released by the regulator.
Customer wants to pay premium or invest often via cash or cash in large amount.
Customer wants to pay premium or invest via multiple demand drafts or with numbers of
cash transactions.
Customer submits multiple Free Look cancellation/redemption requests within a month.
Customer requests for assignment of insurance policy or investment to an unrelated
person or entity.
Customer applies for insurance policies/investments beyond his apparent need or
economic profile.
Customer opts for termination of policies and refunds under unusual circumstances.
Customer submits frequent requests for change in addresses.
Customer wants to know whether he can immediately take a loan against the insurance
policy/investment.
Early claim is received for no substantial reasons.
 Customer wishes to overpay premium via cash or demand draft and then request for a
refund of the excess amount through an instrument or transfer.
Customer insists on anonymity and is reluctant to provide identifying information, or
provides minimal, seemingly fictitious information.
It is established that one customer has submitted different KYC documents and taken
different policies/investments in different versions of names to avoid clubbing of
policies/investments in a single name.
An adverse media report appears in a newspaper or television or radio or any other media
about an existing policy holder/investor.
A notice of enquiry is received from an enforcement authority, calling for information
about any policy holder/ investor.
A request for issuance of marine transit export policy is received by the same insured
under cost-plus-freight basis where the premium is paid by cash or a combination of cash
and demand drafts on three or more occasions in a financial year.
Requests for re-assignment of marine transit insurance policies are received in favour of
exporter.

Additional Indicative Alerts- Money Transfer

or Remittance
Here are now the additional red alert indicators for person undertaking money transfer or
remittance.

Customer wishes to send money transfer on behalf of another person or entity.

Customer wants to send money to a charity or trust.
Customer hesitates to disclose details about the payee.
Customer is receiving money transfers from unrelated parties often and for no apparent
reason.

Nepalese Sanction Regime: Regulatory

Regulators are empowered:

to issue directives
to make institutional risk profile
to adopt strategic supervision and inspection instrument

Regulators are mandated to take the following regulatory actions against REs for non-
compliance:

to fine from NPR 1 million to NPR 50 million for FIs and NPR 1,00,000 to NPR 10
million for other REs
to impose full or partial restriction on the business
 to suspend or cancel registration/permission/license
to impose other appropriate sanctions.

FIU is authorised to fine up to NPR 1 million for failure to report identified Suspicious
Transaction Reports(STR)/Threshold Transaction Reports(TTR).

Nepalese Sanction Regime: Criminal

Natural Person

Money Laundering: 2 to 10 years imprisonment, and

Confiscation of proceeds or corresponding value, and

Mandatory fines (two times of the proceeds)

Terrorist Financing: 3 to 20 years imprisonment, and

Confiscation of proceeds or corresponding value, and

Fines five times of the proceeds

Corporate Criminal Liability (legal persons)

Money Laundering: Confiscation of proceeds or corresponding value, and

Fines up to 10 times of the proceeds

Terrorist Financing: Confiscation of proceeds or corresponding value, and

Fines up to 25 times of the proceeds

Compensation or recovery of loss

License revocation, other barriers and liquidation

Key Takeaways
Lets have a recap of the key takeaways of this course.

AML Guidelines prevent REs from being abused by criminal elements for money
laundering or terrorist financing or other illigal activities.
KYC procedures enable REs to know and understand their customers and their financial
dealings better.
In line with regulatory guidelines, the four key elements of KYC are:

Customer Acceptance Policy- No fictitious, benami account to be opened. Customers

must be categorized into low, medium and high risk based on AML risk and client names
should be screened against negative lists.
Customer Identification Procedure- Include client identification verification on a risk-
based approach.
Monitoring of Transactions- The institution must have a system in place for the
detection of transactions inconsistent with expected activity.
Risk Management- Includes governance by the Board of Directors and ongoing internal
audits.

Financial Institutions are required to:

Implement the AML and CFT program.

Implement procedures to identify and verify a customers identity before offering a
product or service to the customer.
Conduct ongoing customer due diligence to monitor customers and their transactions.
Report all suspicious profiles and transactions to the FIU.
Prepare specific literature and pamphlets to educate customers about the objectives of
KYC program.
Provide AML/CFT training to staff.
Have an adequate screening mechanism as an integral part of recruitment and hiring
process of personnel to ensure that criminals are not allowed to misuse financial
channels.
Retain all customer records (identify records for a period of five years after the
relationship has ended; transaction records for a period of five years after the transaction
has been executed).

Case Studies

Banking Case Study 1
M/s XYZ Private Limited has recently opened an account with your bank. The officer/Director
of the company enquires with you whether you would accept a deposit of NPR 500 million
which they are going to receive from a venture capital fund. He also requests you to issue him a
letter stating that the bank is willing to do so.

What course of action should you adopt from the following options?

Target the customer for your month end target

Ask the customer to meet the private banking officials
Decline the customers request
Report to AML team

Case 1 Resolution
Banking Case Study 2
Mr. ABC opened a savings account six months ago with the bank. In recent days, he has been
receiving large value inward remittances on a weekly basis from high risk locations/countries.
This is followed by immediate transfers to various accounts/cash withdrawals leaving small or
nil balances in the account. There are no other receipts/payments in the account.

What is happening in the account?

Case 2 Resolution

Banking Case Study 3

A tour operator has been holding a savings account with a bank in a small town for the last one
year. It has been observed that in recent times, persons other than the account holder or his
family members frequently visit the branch for making withdrawals. The teller informs the
branch manager about this unusual activity. On checking with the customer discreetly, the
customer informs the branch manager that he has allowed certain persons to use his account for
conducting transactions.

What type of case is this?

Case 3 Resolution
Banking Case Study 4
Ms. XYZ aged about 45 years, has been operating a salary account with the bank for last six
years. She is employed with a Fortune 500 company. She has also linked her Demat and
Investment A/c to her salary account. Transactions in her account reveal investments in mutual
funds, shares and cash withdrawals through the ATM.

There is a sudden cheque deposit of NPR 8 million in the account followed by a subsequent debit
also by cheque. Inquiries with Mrs. XYZ reveal that the source of funds is from the sale of
property and subsequent investment in a new property.

What course of action is to be adopted?

Case 4 Resolution

Banking Case Study 5

An entity has a banking relationship from June 2012. Individuals and entities related to the above
client also have relationship with the bank. As declared at the time of account opening, it was a
new partnership firm, engaged in fabric related activities. The client was introduced by another
entity also having a relationship with the bank and was confirmed to be in a related business.
There were several credits through cheques, each for amounts less than NPR 8,50,000. There
after within a few days, there were similar transactions and again several credits through cheques
for such amounts.

What is happening in the account?

Case 5 Resolution
Banking Case Study 6
A company opens a current A/C with the purpose of conducting business transactions. The
Director of the company also opens his and his family members' individual A/Cs with the same
bank or FI and conducts a number of transactions. His transactions in the corporate A/C are
minimal.

What course of action is to be adopted?

Case 6 Resolution
Insurance Case Study 1
Mr. ABC comes into your branch and asks for information on purchasing a life insurance policy.
During the course of the discussion, he discloses that even though he has a bank account, instead
of giving a cheque for the premium, he would instead prefer to pay the premium either in cash or
through a demand draft. He also enquires about how soon he would be allowed to cancel the
policy and get a refund in case he changes his mind later.

Is this a suspicious transaction?

Case 1 Resolution

Insurance Case Study 2

Mr. J, a jewellery shop owner approaches Ms. A, a life insurance agent to buy a policy. He was
interested in purchasing a long term Unit Linked Single premium product, with single premium
remittance of NPR 5,00,000. He informed Ms. A that due to insufficient balance in his business
account, he will pay the premium from two different accounts. She accepted two cheques from
different accounts along with the basic documents required and the policy was issued. During the
Free look period, Mr. J applied for cancellation of policy and received a cheque of NPR
4,70,000.

After a few days, Ms. A heard the news on television that Mr. J was a prime suspect in the
smuggling of diamonds case revealed a few days back.

What should Ms. A do?

Case 2 Resolution

Insurance Case Study 3

Mr. A applied for a life insurance policy, with a half yearly premium of NPR 25,000. His
monthly salary is NPR 30,000, on the basis of which his policy gets issued. He then pays his
premiums regularly, sometimes overpaying, along with top ups of NPR 25,000- NPR 50,000. All
these top ups are paid via demand drafts. He then gets refund of excess premium paid via
cheques.

Is there anything suspicious in this case?

Case 3 Resolution

Insurance Case Study 4

Mr. MNO was an agent for a cigarette manufacturer, and operated as an independent tobacco
broker. He conducted trading activities with farmers in cash to help the farmers in hiding their
production. These farmers would not report the sales of the hidden tobacco and then apply for
crop insurance claims, thereby being paid for losses they did not suffer. Mr. MNO then resold
the hidden tobacco to the cigarette manufacturer at a much higher price. This way both the
parties were earning profits illegally.

What could have been done to avoid this scenario?

Case 4 Resolution
Mutual Fund Case Study 1
Ms. LMN, a 30 year old woman who is working with a bank has a folio with your mutual fund
company. She makes regular purchases and redemptions from and to various bank accounts in
her name.

What should you do?

Case 1 Resolution

Mutual Fund Case Study 2

Mr. MNO comes into your branch and asks for information on opening a folio with your Mutual
Fund Company. During the course of the discussion, he discloses that even though he has a
PAN, he would like to open a folio without PAN. He appears curious about the KYC
requirements and asks if we can invest without KYC. When he was told that KYC is mandatory,
he refused to open a folio.

What should you do?

Case 2 Resolution
Mutual Fund Case Study 3
Mr. ABC aged about 45 years, has been operating a folio with us for the last six years. He is
employed with a Fortune 500 company. Transactions in his folio reveal investments in mutual
funds through SIPs (Systematic Investment Plans) and lump sum purchases in various equity
schemes.

There is a sudden purchase transaction of NPR 8 million in the account. Inquiries with Mr. ABC
reveal that the source of funds is from the sale of property.

What course of action is to be adopted?

Case 3 Resolution

Assessment Homepage
You have come to the end of the course. Now you need to appear for the assessment. The
assessment consists of 15 questions, out of which you need to answer 12 correctly to pass. You
will get 20 minutes to attempt the assessment and you will be given 2 attempts to clear it. To take
the assessment, click the NEXT tab. All the best!