Money Laundering:

Converting of illegal money to legal money through financial transactions

Eg: Drug trafficking, Illegal Arms sales, Smuggling, Gambling
Live examples: Common wealth Games scam 2010 70,000 crore fraud

Money laundering Stages:

Placement-depositing the criminal proceeds into financial system
Layering- conceal the criminal origin of proceeds
Integration- Use criminal proceeds to personal benefit

Anti Money Laundering (AML)

It is a Transaction monitoring software allows banks and other financial institutions to monitor customer
transactions on a daily basis on in real time for risk.

Various steps under AML:

A. KYC (Know Your Customer)
- On-boarding
- Periodic Reviews
- Trigger Events
B. Transaction Monitoring
C. Suspicious Activity Reporting.

Counter Terrorist Financing (CTF):

It is a process of preventing the Terrorist financing activities.

Terrorist Financing:
Providing financial support to individual terrorists or terrorist organizations. It can be legitimate (white)
or illicit (black) money.
Difference b/w Money Laundering & Terrorist Financing

Differences Money Laundering Terrorist Financing

Source of Funds Criminal activities Criminal or May be Legitimate
Motivation/Intention Financial Profit, Monetary gain Ideology, Publicity, Political Power
Type of Activity Occurs after the criminal act Supports future illegal acts
Unlawfulness of Funds Source/Origin of dirty funds Ultimate aim intended to use
Amount involved Huge Smaller or Minimal

What is Transaction monitoring?

Monitoring of the customer a/c transactions including current and historical data of customer to get a
clear picture of customer activity

Shell Companies
A shell company is an incorporated company that possesses no significant assets and does not perform
any significant operations. To launder money, the shell company purports to perform some service that
would reasonably require its customers to often pay with cash.

Front Companies
These front companies enable these criminal organizations to launder their income from illegal
activities. As well, the front companies provide plausible cover for illegal activities such as illegal
gambling, extortion, drug trafficking, smuggling, and prostitution.

Screening:
Necessary checks before opening a new account so as to ensure that the identity of the customer does
not match with any person with known criminal background or with banned entities such as terrorist
individuals or terrorist organizations
Screening tools:
- World Check – PEPs Identification; Regulatory and imprisonment news.
- Lexis Diligence / RDC – Negative News & Adverse Media.
-RDC – Regulatory Data Corp.
Screenings hits Individuals/Entities
- Name Mismatch
- DOB / Age Mismatch/Date of incorporation
- Country Mismatch
- Biography Mismatch
- Gender Mismatch

FCCR(Financial Crime Risk Calculating Model):

It is the risk calculator for the client and it is required to know the client risk rating while on-boarding or
periodic review stage.

Difference between Bribery and Corruption:

Bribery means offering money
Corruption means misusing the power

Tipping Off:
Informing the customer about the investigation of AML offence to the client

Bearer Shares:
No Ultimate Beneficiary owner
No shares in Bearer form
Traded without any records and physical possession of the security

Structuring:
Making bank deposits in a specific pattern to avoid triggering an alert

Smurfing:
Breaking up a transaction involving a large amount into smaller transactions below the threshold

PEP(Politically exposed person)

In financial regulation, a politically exposed person is one who has been entrusted with a prominent
public function. A PEP generally presents a higher risk for potential involvement in bribery and
corruption by virtue of their position and the influence that they may hold.

Sanctions:
Restriction imposed on either country or person
Types of sanctions: Individuals, Economic, Diplomatic, Military, Sanctions on Environment, Sports,

Sanction Policy: it outlines how the organization will adhere to sanction laws, both inside and outside,
Forms an essential part of our fight against financial crime.
Types of Sanctions: International, Trade, Economic, Sports, Military Sanctions

Sanctioned Countries:
Balkans, Belarus, Burma, Cote D'Ivoire (Ivory Coast), Cuba, Democratic Republic of Congo, Iran, Iraq,
Liberia, North Korea, Sudan, Syria, and Zimbabwe.

UN sanctioned Countries: Afghanistan, Central African, The Republic Democratic Republic of the Congo,
Democratic People’s Republic of Korea, Iran, ISIL and Al-Qaida, Libya, Mali, Somalia, Sudan, Yemen.

High risk industries: Banking Industry, Currency Exchange (MSB),Money Transfer (Remittance),Payment
Industry, Casinos & Gaming Industry, Investment Industry, Real Estate/Construction Industry, Insurance
Industry, Precious Metals

Red Flags:

 Creation of complex ownership structures when there is no legitimate or economic cause.

 Unexplained changes in instructions, especially in last minute
 Parties or their representatives are located in a high risk country
 Relatives and Close Associate with PEP
 If the asset Purchased in cash and then quickly used as a guarantee for the loan
 If the funding source is unusual
 Refuse to provide information, Data and the necessary documents

OFAC (Office of Foreign Control)-Is the Regulatory of US:

Administrates, Enforces trade and Economic Sanctions

FATCA (Foreign Account Tax Compliance Act):

To avoid tax evasion by the US citizens who holds assets in Foreign Financial institutions

FINCEN (Financial Crimes Enforcement Network):

It is a bureau of US Department of the Treasury, that collects and analyses information financial
transaction in order to combat Domestic and international money laundering, terrorist financing and
other financial crimes

US Patriot Law
Officially Uniting and Strengthening America by providing appropriate tools required to Intercept and
Obstruct Terrorism Act

Section 312 USA Patriot Act:

Requires US financial institution to perform due diligence and in some cases enhanced due diligence,
with regard to Correspondent accounts established or maintained for foreign financial institutions and
private banking accounts or maintained for non-US persons

BSA ( Bank Secrecy Act):

It requires all US Financial institutions have to keep record of cash purchase of negotiable instruments
and report transaction which are more than 10000 US Dollars

FATF (Financial Action Task Force)

It designs and promotes policies to combat ML/TF Eg: Works to stop funding for weapons of mass
destruction, They make standards, to ensure a coordinated global response to prevent organized crimes

Wolfsberg Group:
It is an association of thirteen global banks which aim to develop frameworks and guidance for the
management of financial crime risks. Wolfsberg group promoting engagement b/w public and private
sectors in the fight against financial crime.

Egmount Group:
Egmount group promoting engagement b/w public and private sectors in the fight against financial
crime.

AML typologies:
 Currency exchanges/Cash Conversion
 Cash couriers/Cash Smuggling
 Smurfing/Structuring
 Use of Credit cards, Cheques, Promissory notes, etc
 Purchase of portable valuable commodities(gems , precious metals)
 Purchase of Valuable assets ( Real estates, Luxury vehicles , Race horses etc)
 Use of wire transfers
 Hawala/Hundi
 Gaming activities( Casinos, internet gambling)
 Non Profit organizations
 Shell Companies/Front Companies
 Offshore Bank Accounts
 Identity fraud
 Use of gate keepers like Lawyers, Auditors, Brokers etc

SAR (Suspicious Activity Report):

It is a document that financial institutions must file with the FINCEN following a suspected incident of
money laundering or fraud

STR (Suspicious Transaction Reporting):

It is filed by a financial institution to the local Financial Intelligence Unit, if they have a transaction
related to criminal activity. STR has to file within & 7 days of transaction

CTR (Cash Transaction Reporting):

Bank is required to submit the details of, All the cash transactions which involves a transaction more
than $10000. CTR has to file within 15days of transaction.

KYC (Know your Customer/Client):

It is the process by which banks or financial institutions obtain information about the identity and
address of the customers.
Why KYC is important? To avoid the following risks
 Reputational Risk-danger to name
 Operational risk- bcz of failed internal processes
 Legal risk-breach of laws
 Regulatory risk-failed to comply with regulatory standards
 Liability risk-threat on the company
 Financial risk-cost
 Concentration risks-all eggs in one basket

Types of KYC:
 On boarding
 Periodic/Regular review
 Event driven review - Any Change in Client Corporate structure or Ownership or Top
Management./ Adverse Negative news on Media./ Business & Geographical Expansion.
 Off boarding

KYC Components/ Policy:

 Customer Acceptance Policy
 Customer Identification Policy (CIP)
 Monitoring of transactions
 Risk Management

Key parties in KYC teams:

Maker (Analyst / Senior Analyst)
Checker (QC – 4 eye)
SME (Subject Matter expert)
QA (Quality Assurance – 6 eye)
Compliance
Business Unit / FO (Front Office)
RM (Relationship Manager)

Risk Pillars/Appetite/Factors to consider risk:

 Geography
 Industry
 Customer
 Product
 Channel
Risk indicators (or risk deciding factors):
- Country risk
- Nature of business of the client
- Ownership type
- Products & Services provided by bank
- Negative News, sanction news & PEPs … etc.,

Process steps under KYC:

KYC = CIP(Customer Identification policy) + CDD + EDD
Onboarding:
Onboarding is the process of opening an account with our Bank for the first time.

Periodic review:
Once onboarding is completed; Periodical review will be started based on the client’s risk rating. (need
to review the all KYC docs once again for the existing clients)
- Low risk clients (3 years once)
- Medium risk clients (2 years once)
- High risk clients (annually)
*tenure depends on bank to bank.

Full KYC process:

- IDD:
 Step 1: Gap Analysis.
 Step 2: Client outreach
- CDD
 Step 1: Full document Analysis
 Step 2: Screenings
▪ World Check
▪ Lexis Diligence
▪ FCCR (Risk Rating)
- EDD (if client risk rated as High only).

CIP (Customer Identification Program):

It is a first phase in KYC.
It is process of gathering primary information regarding client before we on-board them. (Pre-On-
boarding).

Due diligence types:

SDD(Simplified due diligence):
Every 5 years due diligence is done, normally on very low risk customers

CDD(Customer Due Diligence):

It is the process of identifying customers and checking they are who they say they are. It includes:
- Documents analysis
- Screenings
- Risk rating of the client.

EDD(Enhanced Due Diligence):

EDD goes beyond/in depth CDD, It is additional information collected for higher-risk customers (PEP) to
provide a deeper understanding of customer activity to mitigate associated risks. It will be done Every
year. It includes:
- Ownership threshold is 10% or more.
- Source of funds of the client.
- Source of wealth of UBOs
- ID & Address copies of UBOs
- Compliance Approvals on KYC checks
IDD (Initial Due Diligence) :
It is also called the Gap analysis. Analyzing the initial documents available in public source and identify
the Gaps to complete the KYC checks.

Correspondent banks :
These are domestic banks that have been established to provide services to a bank or financial
institution in another nation. Money transfers, currency exchange, trade paperwork, and commercial
transactions are all services provided by a correspondent bank.

Offshore bank
It is a bank regulated under international banking license (often called offshore license), which usually
prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to
less regulation and transparency, accounts with offshore banks were often used to hide undeclared
income.

Main (common) requirements/documents to be obtained from client:

- Full legal name
- Certificate of Incorporation
- Registered address
- Business address
- MOA & AOA
- Source of funds/Source of Wealth
- Registered number and date
- Nature of business.
- List of Directors and Key controllers and Authorised Signatories with ID & V
- Complete ownership
- List of directors & controllers.
- Tax related information
-Audited Financial reports

Products and services provided to the client:

- Custody
- Foreign Exchange
- Correspondent Banking
- Trade Finance
- Debt Securities
- Bonds
- Stocks

Common connected parties to the client:

- Directors
- Controllers
- Shareholders
- Auditors
- Authorized signatories.

Controllers:
Chairman, CEO – Chief Executive Officer, CFO- Chief Financial Officer, COO - Chief Operating
Officer...etc.,

Types of Customers
 Individuals- Photo, ID ,address
 Proprietorship/Sole Trader- Registration certificate, License under shop and establishment act,
Tax returns, VAT certificate, utility bills for address
 Partnership-Registration certificate, Partnership deed, ID and address proof of partners,
Attorney granted to a partner to transaction for business
 Corporate firms/Companies-Certificate of Incorporation, MOA & AOA, Resolution of board
directors, telephone bill, power or attorney
 PIV(Private Investment vehicle) SPV(Special Purpose Vehicle): ADV form, IAPD (Investment
Advisor Public disclosure)document, Investment managers details
 Funds- Fund Prospectus, Offering Memorandum(people involved-Fund Manager, Fund
Administrator, Board of Directors, Marketing or Distribution company
 TRUSTS/ASSOCIATION/CLUB/SOCIETY: Trust Deed, Certificate of Registration, if registered,
Copy of TAX id of Trust / Association / Club / Society, Power of Attorney granted to transact
business on its behalf, if any, Any document listing out the names and addresses of the trustees,
sellers, beneficiaries and those holding power of Attorney, and other key officials involved in the
day to day management of the trust to the satisfaction of the bank, Resolution of the managing
body of the foundation, Declaration of Trust/Bye Law of society/Bye-law of Association/Bye-law
of club, Attach the Proof of name and address of the founder, Manager/director and the
beneficiaries, telephone/fax number, Telephone bill, Utility bill apart from the above(bills not
older than 3-6 months).
Connected parties to the Trust:
Trustor, Settler or Grantor, Trustees, Beneficiaries, Directors, Auditors, Administrator...etc.,
 NPO-Voluntary certificate, Registered address
 NBFI & Banks-License issued by financial institution ,Regulation proof ,Wolfsberg Questionnaire,
PAC(Patriot Act Certificate)
 Govt/State owned body
 Mutual funds/Chit Funds

State owned or Government owned entity:

Any entity which is more than 50% owned by any government it is called SOE.

Basic Docs required for the entity:

 Certificate of Incorporation
 MOA & AOA
 Source of funds
 List of Directors and Key controllers and Authorized Signatories with ID & V
 Ownership structure
 Audited Financial reports
 Nature of Business with NACE code

Primary sources for KYC:

-Registry Extracts
- Regulation Proofs
- Stock Exchange Websites
- Annual Reports
- Client Documents
Secondary sources:
- Bloomberg
- D&B
- Orbis
-Lexis Nexis
- Avox Data
- Bankers almanac
- Mint Global
- Client Websites.

MOA(Memorandum of Association):
It is one of the document which has to be filed with the registrar of the companies at the time of
incorporation of the company.it contains the fundamental conditions upon which the company has to
be incorporated.

AOA(Articles of Association):
It’s a form document that specifies the regulations for a company's operations and defines the
company's purpose. The document lays out how tasks are to be accomplished within the organization,
including the process for appointing directors and the handling of financial records

Ownership threshold for various risk clients:

Low & Medium – 25% or more.
High – 10% or more.

Ownership types:
- Public ownership (listed)
- Partnership
- Family Ownership
- Trust / Foundation... etc.,

IBO & UBO:

- IBO is the Intermediate Beneficial Owner
- UBO is the Ultimate Beneficial Owner.
For Eg., Infosys BPM Limited is wholly owned by Infosys Limited, which is wholly owned by Mr. Narayana
Murthy.
Here, Infosys Limited is IBO and Narayana Murthy is UBO
Note: UBO should be an individual or Government (It can’t be an entity).

UBO(Ultimate beneficial ownership)

Is an individual who, either by himself or with others, directly or indirectly through persons (resident or
non-resident) including trusts holds beneficial interests of at least 10% in EDD case 25% in CDD case.

Authorized Signatories:
There are the people, who can sign the Bank related documents on behalf of clients (there are might be
directors also). Generally, this info can be found in Board resolutions.
Power of Attorney:
A legal document that gives someone the right to make financial or business decisions for someone else.

Tax Heavens
It provides Offshore banking services to foreign individuals and businesses that allow them to avoid
paying income taxes in their country of residence.
 Switzerland
 Panama
 Luxembourg
 The Cayman Islands
 Bermuda
 The British Virgin Islands
 the Netherlands
Tax forms:
- US incorporated client : Form W-9
- Non-US clients : Form W8-BEN-E or W8-IMY
- CRS form (All locations)

TI CPI(Transparency International Corruption Perceptions Index):

by their perceived levels of public sector corruption, as determined by expert assessments and opinion
surveys

Source of Wealth: the origin of their entire wealth including the volume of wealth the customer would
be expected to have accumulated and how the customer acquired that wealth. Eg: Inheritance, Winning
Lottery, Investors-dividends, Bank Interests, proceeds from sale of property, Overall Assets (Total net
worth)

Source of funds: Refers to the origin of the particular funds or any other monetary instrument which are
the subject of the transaction between a Financial Institution and the customer. Eg: Salary, Commission,
Fees, Wages (funds used in a transaction originated).

Registries:
A centralized repository of KYC records. Once the KYC documents are submitted by an individual/entity
they are registered in the repository with a unique number/Registration number.

Regulators: Who aim to prevent financial crimes by regulations and laws. Regulations require you first
to KYC check your customers during the onboarding process and then follow their financial transactions.
Companies that meet this Know Your Customer (KYC) requirement will ensure compliance.

Regulator Entity:
Regulated by the financial regulator of that particular country to carry out financial activities. Eg: UK-
Companies House, India-Ministry of Corporate Affairs

Regulators of USA:

 The Federal Reserve Board.

 Office of the Comptroller of the Currency.
  Federal Deposit Insurance Corporation.
 Office of Thrift Supervision.
 CFTC- Commodity Futures Trading Commission
 FINRA- Financial Industry Regulatory Authority
 State Bank Regulators.
 State Insurance Regulators.

Regulators of India:

RBI- Reserve Bank of India

SEBI- Securities and Exchange Board of India
IRDA- Insurance Regulatory and Development Authority of India
PFRDA- Pension Fund Regulatory & Development Authority
NABARD-National Bank for Agriculture and Rural Development

Regulators of UK:

 Financial Conduct Authority (FCA)

 Financial Reporting Council.
 Institute of Chartered Accountants in England and Wales.
 Office of the Regulator of Community Interest Companies (ORCIC)
 Payment Systems Regulator (PSR)
 Pensions Regulator.
 Prudential Regulation Authority (PRA)

Regulators of Australia:

 The Australian Prudential Regulation Authority (APRA);

 The Australian Securities and Investments Commission (ASIC);
 The Reserve Bank of Australia (RBA); and.
 The Australian Treasury.

Regulators of Germany:

 The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, -

BaFin

Regulators of Netherland:
The Netherlands Authority for the Financial Markets (Dutch: Autoriteit Financiële Markten)

Regulators of Hongkong:

 Securities & Futures Commission

 Insurance Authority
 Monetary Authority

Line of Defense:

 1st line of Defense: Client facing business staff, Onboarding or CDD team
  2nd Line of Defense: AML compliance staff
 3rd Line of Defense: Internal Audit

SPV (Special Purpose Vehicle):

A special purpose vehicle is an orphan company created to isolate risks and reallocate assets to
investors. Property investments are typically held in special property vehicles. Companies can transfer
property ownership to an SPV and sell off that entity, paying (lower) capital gains tax instead of property
sales tax.

PIV (Private Investment Vehicle):

Investment vehicles are assets offered by the investment industry to help investors move money from
the present to the future, with the hope of increasing the value of their money. These assets include
securities, such as shares, bonds, and warrants; real assets, such as gold; and real estate.

Transaction Monitoring Alerts:

Based upon typologies and scenarios (sequence of event) alert will get triggered/generated

3 categories of alerts
1. Rule based Alerts
2. Behavioral Based Alerts
3. List Checking Alerts

Different type of Alerts

1. Structuring (Rule based)

Manipulation of currency transactions in such a way as to evade filing required reports. In other words
doing multiple Transactions in consecutive days in order to avoid the reporting threshold

2. Velocity: (Rule based)

Incoming transfer quickly followed by outgoing transfer
Money launderers may sometime use an account as a pass through to facilitate the layering phase of
money Laundering process

3. Unusual account Activity (Behavioral based)

This Activity is triggered if there is high turnover or Unusual amount of account activity in a month which
is Unusual for that particular customer
This alert begins to generate once the account age is greater than 4 months

4. Unusual specific Transaction Activity

Eg: Unusual international wire Activity, Unusual domestic wire Activity, Unusual ATM or cash Activity,
Unusual debit axed Activity etc..

5. Monetary Instruments Alerts

A. Purchaser: this alert triggers when a customer purchases multiple monetary instruments which
exceeds the threshold and quantity threshold

B. Beneficiary: this Alerts triggers when multiple monetary instruments are purchased made to the same
payee which exceed a dollar threshold and quantity threshold
6. Transaction from high risk country and fiscal Paradise
Trigger When customer sending currency to or receiving the currency from high risk country or tax
heaven country

7. Expected Behavior
Triggers when customer actual Activity exceeds the Expected Activity.