Legal regime for AML

(Anti Money Laundering)

Issues for Discussion

 Anti Money Laundering Legislation in Pakistan

 Implications of AML/CFT Measures on the

Financial Sector

 International Scenario

 Key Issues
What is Money Laundering?

 Money laundering is the process by which the proceeds of the

crime, and the true ownership of those proceeds, are concealed
or made opaque so that the proceeds appear to come from a
legitimate source.
 Generally money laundering is the process by which one
conceals the existence, illegal source, or illegal application of
income to make it appear legitimate. In other words, it is the
process used by criminals through which they make “dirty”
money appear “clean” or the profits of criminal activities are
made to appear legitimate.

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Money Laundering

 Money laundering generally refers to ‘washing’ of the

proceeds or profits generated from:
(i) Drug trafficking
(ii) People smuggling
(iii) Arms, antique, gold smuggling
(iv) Prostitution rings
(v) Financial frauds
(vi) Corruption, or
(vii) Illegal sale of wild life products and other specified
predicate offences

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Money Laundering

 Money launderers are big time criminals who operate through

international networks without disclosing their identity.
 The money laundered every year could be in the range of $600
bio to $2 trio. This gives money launderers enormous financial
power to engage or coerce or bribe people to work for them
 Generally, money launderers use professionals to create legal
structure/ entities which act as ‘front’ and use them for
laundering of funds

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Money Laundering Process

 Money Laundering consists of three stages:

1. The first stage involves the Placement of proceeds derived
from illegal activities – the movement of proceeds,
frequently currency, from the scene of the crime to a place,
or into a form, less suspicious and more convenient for the
criminal.
2. The second stage is called Layering. It involves the
separation of proceeds from illegal source through the use
of complex transactions designed to obscure the audit trail
and hide the proceeds. The criminals frequently use shell
corporations, offshore banks or countries with loose
regulation and secrecy laws for this purpose.

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Money Laundering Process

3. The third stage is called Integration. It represents the

conversion of illegal proceeds into apparently legitimate
business earnings through normal financial or commercial
operations. Integration creates the illusion of a legitimate
source for criminally derived funds and involves techniques as
numerous and creative as those used by legitimate businesses.
For e.g false invoices for goods exported, domestic loan
against a foreign deposit, purchasing of property and co-
mingling of money in bank accounts.

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What is Money
Laundering ?
Money Laundering is the process by which illegal funds and
assets are converted into legitimate funds and assets.

Investments
Purchases

Placement: Illegal funds or assets Layering: Use of multiple Integration: Laundered funds are
are first brought into the financial accounts, banks, intermediaries, made available as apparently
system corporations, trusts, countries to legitimate funds.
disguise the origin.

Important: All money laundering transactions need not go through this three-stage process.
Typologies/ Techniques
employed
 Deposit structuring or smurfing
 Connected Accounts
 Payable Through Accounts
 Loan back arrangements
 Forex Money Changers
 Credit/ Debit cards
 Investment Banking and the Securities Sector
 Insurance and Personal Investment Products
 Companies Trading and Business Activity
 Correspondent Banking
 Lawyers, Accountants & other Intermediaries
 Misuse of Non-Profit Organisations

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Financing of terrorism

 Money to fund terrorist activities moves through the global

financial system via different typologies and in and out of
personal and business accounts. It can sit in the accounts of
illegitimate charities and be laundered through buying and
selling securities and other commodities, or purchasing and
cashing out insurance policies.
 Although terrorist financing is a form of money laundering, it
doesn’t work the way conventional money laundering works.
The money frequently starts out clean i.e. as a ‘charitable
donation’ before moving to terrorist accounts. It is highly time
sensitive requiring quick response.

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Combating financing of
terrorism
 (i) State Sponsored
 (ii) Other Activities- legal or non-legal
 Legal Sources of terrorist financing
 Collection of membership dues

 Sale of publications

 Cultural of social events

 Door to door solicitation within community

 Appeal to wealthy members of the community

 Donation of a portion of personal savings

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Combating financing of
terrorism
 Illegal Sources
 Kidnap and extortion;

 Smuggling;

 Fraud including credit card fraud;

 Misuse of non-profit organisations and charities fraud;

 Thefts and robbery; and

 Drug trafficking

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Macroeconomic impact

 Money laundering can have a range of severe macroeconomic

consequences on countries.
 IMF has cited unpredictable changes in money demand,
prudential risks to the soundness of banking systems,
contamination of legal financial transactions, and increased
volatility of international capital flows and exchange rates due
to unanticipated cross-border asset transfers.

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Macroeconomic impact

 The economic and political influence of criminal

organizations can weaken the social fabric; collective
ethical standards and ultimately the democratic institutions
of the society. Organized crime can infiltrate financial
institutions, acquire control of large sectors of the economy
through investment, or other bribes to public officials and
indeed governments
 Money Laundering can also have a dampening effect on
FDI if a country’s financial sectors are perceived to be
under control and influence of organized crime.

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Money Laundering Risks

What are the risks to banks?

(i) Reputational risk
(ii) Legal risk
(iii) Operational risk (failed internal processes, people and
systems & technology)
(iv) Concentration risk (either side of balance sheet)
All risks are inter-related and together have the potential of
causing serious threat to the survival of the bank

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Penalties imposed on banks

 Jan. 2006 ABM AMRO US$ 80 mio

 Aug. 2005 Arab Bank US$ 24 mio
 Feb. 2005 City National Bank US$750,000
 Jan. 2005 Riggs Bank US$ 41 mio
 Oct. 2004 AmSouth Bank US$ 50 mio
 Sep. 2004 City Bank Japan Licence cancelled
 May. 2004 Riggs Bank US$ 25 mio

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What KYC means?

 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

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What KYC means?

 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?

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Core elements of KYC

 Customer Acceptance Policy

 Customer Identification Procedure- Customer Profile
 Risk classification of accounts- risk based approach
 Risk Management
 Ongoing monitoring of account activity
 Reporting of cash and suspicious transactions

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Know Your Customer (KYC)
Guidelines

Customer Acceptance - Ensure that only

legitimate and bona fide customers are
accepted.

Customer Identification- Ensure that

customers are properly identified to
understand the risks they may pose.

Transactions Monitoring- Monitor

customers accounts and transactions to
prevent or detect illegal activities.

Risk Management- Implement processes to

effectively manage the risks posed by
customers trying to misuse facilities.

Guidelines issued by FATF

Advantages of KYC norms

 Sound 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 likelyhood 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)

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Risk based approach

 The potential risk that a customer carries depends on:

(a) Identity of the customer including beneficial ownership
(b) The nature of customer’s business and his product profile-
jewels, precious metals, arms, antiques
(c) Location of business
(d) Products and services offered
(e) Customer’s customer or clientrs; their location & business

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High risk countries

 Geography
 Drug producing nations

 Drug transshipment countries

 Drug using countries

 Secrecy jurisdictions and tax havens, particularly those that

grant offshore banking licenses.

 Countries with high degree of public corruption

 Countries linked to terrorist financing

 Non Cooperative Countries and Territories

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High risk customers

 Non-bank financial institutions ( money transmitters, cheque

cashiers, full fledged money changers, sellers of stored value
cards, security brokers & dealers etc. )
 Travel agencies / Property dealers/ builders
 Professional and consulting firms
 Exporters or importers of goods and services
 Cash intensive business e.g. retail stores, restaurants,
gambling casinos, second hand car dealerships etc.
 Off-shore corporations, banks in secrecy heavens
 Non-profit organisations e.g charities

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High risk products &
services
 Wire transfers
 Electronic banking services which includes services offered
through internet, credit cards, stored value cards
 Private banking relationships
 Correspondent banking relationships

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Cross border accounts-deposits

 All KYC procedures to be observed

 Third party verification of documents through Correspondent
bank which is committed to KYC regime and is willing to
share KYC information on demand
 Verification of document during visit to India
 Remittance through banking channels

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Payment gateways/ wire
transfers
 Both domestic and cross border wire transfers carry potential
risk of money laundering
 Payment gateways facilitate wire transfers for customers of
banks located anywhere in the world
 Whether AML/ KYC compliance level
 Ascertain whether it is regulated at the place of incorporation
 Insist on complete originator information with wire
 Make payment to beneficiary through account or DD
 Keep record of transactions

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Salient features of IPO
scam
Modus operandi
 Current account opened in the name of multiple
companies on the same date in the same branch of a bank
 Sole person authorised to operate all these accounts who
was also a Director in all the companies
 Identity disguised by using different spelling for the same
name in different companies
 Multiple accounts opened in different banks by the same
group of joint account holders

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Salient features of IPO
scam
 Huge funds transferred from companies accounts to the
individual’s account which was invested in IPO’s
 Loans/ overdrafts got sanctioned in multiple names to
bypass limit imposed by RBI
 Loans sanctioned to brokers violating guidelines
 Multiple DP accounts opened to facilitate investment in
IPO
 Large number of cheques for the same value issued from
a single account on the same day

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Salient features of IPO
scam
 Multiple large value credits received by way of transfer
from other banks
 Several accounts opened for funding the IPO on the
request of brokers, some were in fictitious names
 Refunds received got credited in brokers a/cs
 Margin money provided by brokers through single
cheque
 Nexus between merchant banker, brokers and banks
suspected

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Operational deficiencies

Factors that facilitated the scam

 Photographs not obtained

 Proper introductions not obtained

 Signatures not taken in the presence of bank official

 Failure to independently verify the identity and address of

all joint account holders
 Directors identity/ address not verified

 Customer Due Diligence done by a subsidiary

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Operational Deficiencies

 Objective of large number of jt. account holders opening

account not ascertained
 Purpose of relationship not clearly established
 Customer profiling based on risk classification not done
 Poor monitoring and reporting system due to inadequate
appreciation of ML issues
 Absence of investigation about use and sources of funds

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Operational Deficiencies

 Unsatisfactory training of personnel

 No system of fixing accountability of bank officials
responsible for opening of accounts and complying with
KYC procedures
 Ineffective monitoring and control

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 Legislative Framework

 Money Laundering Act, 2010

 National Accountability Ordinance, 1999

 Control of Narcotics Substance Act 1997

 Anti-Terrorism Act 1997.

National Accountability Ordinance, 1999
 Deals mainly with the detection, investigation,
prosecution and speedy disposal of cases involving
corruption and corrupt practices
 The following offences under NAO covers the offence
of money laundering :
• Acquisition of any property / pecuniary advantage
through corrupt, dishonest or illegal means
• Having assets beyond known sources of income
which can not be reasonably accounted for.
• Pursuant to Section 20, financial institutions are
bound to report suspicious financial transactions
to NAB.
Control of Narcotics Substance Act 1997

The following offences/ provisions under CNSA covers the

AML measures:
 Makes the acquisition of assets through drug money an
offence
 The suspected properties / assets may be frozen and
subsequently forfeited through the Court. This measure
can be construed as an anti-money laundering measure.
 Section 67: it is mandatory for financial institutions to
report STRs to ANF, suspected to be related to drug
business.
 Anti-Terrorism Act 1997

 Deals comprehensively with the offences of

terrorism and financing of terrorism.
 Makes compulsory for the proscribed
organizations to submit all accounts for it’s
political and social welfare activities and
disclose all funding sources.
 Freezing, Seizure and Forfeiture of assets
AML/CFT Measures by SBP
Institutional Arrangements
• Setting up of dedicated AML/ CFT Units.

• Capacity Building- training

Regulatory Framework
 Issuance of Prudential Regulations
Monitoring & Enforcement
 On-site inspection and off-site surveillance
International Obligations
 UNSC Resolutions- Freezing of accounts
Curbing of Informal Value Transfers
 Formation of Exchange Companies
Documentation of Economy
 Restriction on RTCs – Bearer Instruments
AML/ CFT UNITS
 Primary Responsibilities of the Units
• Issuance of regulations and directions to banks and
DFIs in accordance with FATF Recommendations
and international best practices
• Receive STRs and process them for suitable action
• Coordination and liaison with relevant Govt.
departments, LEAs, International and Multilateral
bodies
• Issue directives for freezing of accounts
Regulatory Framework

 A separate section in new PRs has been dedicated

to regulations pertaining to AML and CFT.
 PR Compliant with 40 + 9 recommendations
 In line with Basel Core Principle No.15
 Violations of regulations dealt with penal action
International scenario
International organizations engaged in
AML/CFT

 Mid 1980s - Growing concern of international community to deprive

criminal elements of the proceeds of their crimes.

 1989 – Financial Action Taskforce (FATF) set up to ensure global action

to combat money laundering.
 Forty Recommendations - Complete set of counter-measures against money
laundering
 Nine Special Recommendations on Terrorist Financing
 33 members

 1995 - Egmont Group set up to stimulate international cooperation

amongst FIUs. Best Practices for exchange of information.
 101 Members

 1997- Asia/Pacific Group on money laundering (APG) set up to create

awareness and encourage adoption of AML measures.
International standards –
FATF
40 Recommendations + 9 Special
Recommendations on TF
 Legal System and Related Institutional Measures
 R 1,2,3,26,27,28,30,32

 SR II,III

 Preventive Measures – Financial Institutions

 R 4,5,6,7,8,9,10,11,13,14,15,17,18,19,21,22,23,25,29,32

 SR VI, IX

 Preventive Measures – Non Financial Businesses and Profession

 R 12,16,20,24

 Legal Person and arrangements & Non-profit Organizations

 R 33

 SR VIII

 National and International Cooperation

 R 31,32,35,36,27,38,39,40

 SR V

FATF
International standards –
FATF
 Extension of KYC, CDD & AML/CFT measures
to other sectors, as mentioned under 40+9
standards, in case of India, such as:
 Non-Designated Financial Businesses & Professions
(NDFBPs) (R 12) : Casinos, Real estate agents, Dealers in
precious metals and precious stones, Lawyers, notaries, other
independent legal professionals and accountants, Trust and company
service providers
 Exchange Houses and money remitters (R 23)
 Alternative remittances, Wire transfers, Non-Profit
Organizations, Cash Couriers (SR VI to IX)

FATF
Salient Features of FATF
Recommendations
 Criminalize ML to include all serious offences(R1)
 Follow standards set in Vienna & Palermo UN conventions for
offence of ML(R2)
 Confiscate/attach laundered assets(R3)
 Secrecy laws should not prohibit sharing of information by
financial institutions (FI)-(R4)
 Give special attention to business relation with countries,
which do not or insufficiently apply FATF standards(R21)
 FIs should be subject to regulatory & supervisory measures
through licensing, registrations etc. for AML purposes(R23)
 DNFBPs also be subject to similar regulations &
supervision(R24)

FATF
Salient Features of FATF
Recommendations
 FIs to follow CDD:- no anonymous accounts, verify
identity of client & beneficial owner, CDD for politically
exposed persons (PEP)(R5,6)
 CDD & Record keeping requirements for NDFBPs(R12)
 CDD for cross border correspondent banking(R7)
 Do not approve operations with Shell Banks(R18)
 FIs should develop AML/CFT Programme(R15):
 Develop internal AML/CFT policies
 Set screening standards while hiring employees
 Train employees
 Independent audit to test check the system
 Pay special attention to non face to face customers(R8)
 Apply similar standards to branches/offices abroad(R22)

FATF
Salient Features of FATF
Recommendations
 Set up FIU, empower law enforcement agencies and
competent authorities for AML/CFT(R26 to 32)
 Filing of STRs(R13)
 Provide legal immunities to financial institutions & their
representatives for disclosures(R14)
 Maintain all necessary records(R10)
 Dissuasive civil/administrative/criminal sanctions for
failing to comply with AML/CFT requirements(R17)
 International cooperation, mutual legal assistance,
extradition & information exchange(R35 to 40)

FATF
Salient Features of FATF
Recommendations
 Special Nine Recommendations on Terrorist
Financing (TF)
 Ratify & implement UN instruments-SR I
 Criminalize TF as ML offence-SR II
 Freeze & confiscate terrorist assets-SR III
 Report STRs on TF- SR IV
 International cooperation on CFT- SR V
 KYC/CDD & AML/CFT measure for- SR VI to IX:
 Services involved in transmission of money/value
 Wire transfers
 Non-Profit organizations
 Cash couriers

FATF
Key Issues
Key Issues
 To what extent should Pakistan be compliant with
these 40+9 FATF recommendations?
 No country fully compliant
 These are ideal financial standards best suited for
developed countries where formalization of economy is
at an advanced stage
 Non-membership likely to have consequences
 How best can these standards be adopted in
Pakistan?
Measures to deter money
laundering
 Board and management oversight of AML risks
 Appointment a senior executive as principal officer with
adequate authority and resources at his command
 Systems and controls to identify, assess & manage the money
laundering risks
 Make a report to the Board on the operation and effectiveness
of systems and control
 Appropriate documentation of risk management policies, their
application and risk profiles

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Measures to deter money
laundering
 Appropriate measures to ensure that ML risks are taken into
account in daily operations, development of new financial
products, establishing new business relationships and changes
in the customer profile
 Screening of employees before hiring and of those who have

access to sensitive information

 Appropriate quality training to staff

 Quick and timely reporting of suspicious transactions

But it doesn't work they way we want

Because
‘The law hath not been dead, though it hath slept’

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