What is KYC?
By K P C Rao.,
LLB., FCS., FICWA
kpcrao.india@gmail.com
Money laundering is the process of changing the appearance of large amounts of money obtained from serious crimes, such as drug trafficking, into origination from a legitimate source. It is a crime in many jurisdictions with varying definitions. It is a key operation of the underground economy.
In US law it is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money. In UK law the common law definition is wider. The act is defined as taking any action with property of any form which is either wholly or in part the proceeds of a crime that will disguise the fact that property is the proceeds of a crime or obscure the beneficial ownership of said property.
As financial crime has become more complex, and "Financial Intelligence" (FININT) has become more recognized in combating international crime and terrorism, money laundering has become more prominent in political, economic, and legal debate. Money laundering is ipso-facto illegal; the acts generating the money almost always are themselves criminal in some way. Money may be laundered through a complex business network of shell companies and trusts based in tax havens. "Smurfing" is an example of a money laundering technique.
A business taking large amounts of small change each week needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money.
After September 11, 2001, money laundering became a major concern of the United States' war on terror.
The Prevention of Money Laundering Act, 2002, which came into effect from 1st July, 2005 also requires all the banks, financial instructions and other intermediaries to ensure that they follow the standards of KYC and AML as laid in the Act. Section 3 of the Prevention of Money Laundering (PML) Act 2002 has defined the “offence of money laundering" as under:
“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering[1]".
Section 4 of the Act prescribes punishment for money-laundering 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.
Money-laundering means ‘washing’ of the proceeds or profits generated from:
i) Tax evasion
ii) Corruption
iii) Smuggling & Drug trafficking
iv) Financial crimes
v) Illegal sale of wild life products and predicate offences
Money Launderers use the banking system for cleansing 'dirty money' obtained from criminal activities with the objective of hiding/disguising its source. The process of money laundering involves creating a web of financial transactions, so as to hide the origin and true nature of these funds. The term 'money laundering' would also cover financial transactions where the end use of funds goes for terrorist financing irrespective of the source of funds.
The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.
The Prevention of Money Laundering (Amendment) Act, 2009 passed by the parliament has come into force with effect from June 01, 2009 aimed at effectively combating money-laundering, terror financing and cross-border economic offences and to check use of black money for financing terror activities.
Financial intermediaries like full-fledged money changer, money transfer service providers such as Western Union and International Payment gateways, including VISA and Master Card have also been brought under the ambit of “The Prevention of Money-Laundering Act”.
The enactment of this amended Act, 2009 will enable India’s entry into Financial Action Task Force (FATF), an inter-governmental body that has the mandate to combat money laundering and terrorist financing and will address India’s international obligation and empower the enforcement directorate to search the premises immediately after the offences are committed and police have filed a report.
Policy Objectives of KYC issued by RBI:
(i) To prevent criminal elements from using the bank for money laundering activities
(ii) To enable the Bank to know/understand the customers and their financial dealings better, which in turn would help the bank to manage risks prudently.
(iii) To put in place appropriate controls for detection and reporting of suspicious activities in accordance with applicable laws/laid down procedures.
(iv) To comply with applicable laws and regulatory guidelines.
(v) To take necessary steps to ensure that the relevant staff are adequately trained in KYC/AML procedures
Inspite of the clear cut guidelines from RBI, there seems to be the biggest slip by an Indian financial institution which is supposed to maintain heightened vigilance on suspicious and high-value cash transactions. At least Rs 640 crore was deposited in cash in Union Bank of India at its Zaveri Bazar branch between November 2006 and December, 2008 by one of the alleged front companies of former Jharkhand CM Madhu Koda in a state-owned bank in Mumbai. The bank failed to trigger an alert to the “counter intelligence agencies” tasked to keep a tab[2].
As part of ‘know your customer’ guidelines issued by RBI, it is mandatory for all banks and financial institutions to monitor transactions of high-risk individuals and their intermediaries on a day-to-day basis and report all suspicious transactions to the Financial Intelligence Unit (FIU), under Union finance ministry, within seven days of getting such information or be liable for punitive action.
It’s that the bank failed to generate an alert when such huge transactions were being carried out by a relatively unknown firm, especially when the bank is believed to have appointed a principal officer located at its head office who is responsible for monitoring and reporting all suspicious transactions to FIU, apart from maintaining close liaison with enforcement agencies.
Interestingly, a leading PSU bank has come out with a slogan saying:
Help the country in preventing Money Laundering / Terrorist Financing.
Let’s make your Bank Anti- Money Laundering compliant.
Yes, only you can do it!”
-------------------------------------------------------------------------------------------------------------------------
[Published in the monthly magazine of ICWAI 'Circuit Magazine', in April, 2010]
No comments:
Post a Comment