Anti Money Laundering – Indian Perspective

Introduction:

The Guidelines as outlined below provides a general background on the subjects of Laundering money and terrorist financing summarizes the main provisions of the applicable laundering money and anti-terrorist financing legislation India and provides guidance on the practical implications of the Act. The Guidelines also sets out the steps that a registered intermediary and any of its representatives, should implement to discourage and identify any money laundering terrorist financing activities. These Guidelines are intended for use primarily by intermediaries registered under Section 12 of the SEBI Act, 1992. While it is recognized that a “one-size-fits-all” approach may not be appropriate for the securities industry in Country, each registered intermediary should consider the specific nature of its business, organizational structure, type of customers and transactions, etc. when implementing the suggested measures and procedures to ensure that they are effectively applied. The overriding principle is that they should be able to satisfy them that the measures taken by them are adequate, appropriate and follow the spirit of these measures and the requirements as enshrined in Prevention of Money laundering Act Act, 2002

Back Ground:

The Prevention of Money laundering Act, 2002 has come into effect from 1stJuly 2005. Necessary Notifications / Rules under the said Act have been published in the Gazette of India on 1stJuly 2005 by the Department of Revenue, Ministry of Finance, Government of India.

As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include:

All cash transactions of the value of more than Rs 10 Lacs or its equivalent in foreign currency. All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month.

All suspicious transactions whether or not made in cash and including, inter-alia credits or debits into from any non monetary account such as d-mat account, security account maintained by the registered intermediary.

It may, however, be clarified that for the purpose of suspicious transactions reporting, apart from ‘transactions integrally connected’, ‘transactions remotely connected or related’ should also be considered.

What is money laundering?

Money laundering involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Through money laundering, the launderer transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.

Policies and Procedures to Combat Money Laundering and Terrorist

Financing:

These Guidelines have taken into account the requirements of the Prevention of the Money laundering Act, 2002 as applicable to the intermediaries registered under Section 12 of the SEBI Act. The detailed guidelines have outlined relevant measures & laundering procedures to guide the registered intermediaries in preventing money and terrorist financing. Some of these suggested measures and procedures may not be applicable in every circumstance. Each intermediary should consider carefully the specific nature of its business, organizational structure, type of customer and transaction etc. to satisfy itself that the measures taken by them are adequate and appropriate to follow the spirit of the suggested measures and the requirements as laid down in the PML Act, 2002.

Obligation to establish policies and procedures:

International initiatives taken to combat drug trafficking, terrorism and other organized and serious crimes have concluded that financial institutions including securities market intermediaries must establish procedures of internal control aimed at preventing and impeding money laundering and terrorist financing. The said obligation on intermediaries has also been obligated under the Prevention of Money laundering Act, 2002. In order to fulfill these requirements, there is also a need for registered intermediaries to have a system in place for identifying, monitoring and reporting suspected laundering or terrorist financing transactions to the law enforcement authorities.

Procedures for Anti Money Laundering:

Each registered intermediary should adopt written procedures to implement the Anti Money Laundering provisions as envisaged under the Prevention of Money laundering Act, 2002. Such procedures should include inter alia, the following three specific parameters which are related to the overall ‘Client Due Diligence Process:

a. Policy for acceptance of clients

b. Procedure for identifying the clients

c. Transaction monitoring and reporting especially Suspicious

Transactions Reporting (STR)

What is a Money Laundering offence?

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.

Person includes:

(i) an individual

(ii) a Hindu undivided family,

(iii) a company,

(iv) firm,

(v) an association of persons or a body of individuals whether incorporated or not,

(vi) every artificial juridical person not falling within any of the preceding sub-clauses, and

(vii) any agency, office or branch owned or controlled by any of the above persons mentioned in the preceding sub-clauses;

Laws regarding anti money laundering procedures

o The Prevention of Money Laundering Act 2002 (PMLA 2002)

it forms the core of the legal framework put in place by India to combat money laundering. PMLA 2002 came into force with effect from July 1, 2005. It imposes an obligation on banking companies, financial institutions and intermediaries to verify the identity of clients maintain records and furnish information to FIU-IND.

o Foreign Exchange Management Act, 1999 it prescribes checks and limitations on certain foreign exchange remittances.

o Benami Transactions (Prohibition) Act, 1988 it prohibits transactions in which property is transferred to one person for consideration paid or provided by another person.

o The Narcotics Drugs and Psychotropic Substances Act, 1985 it provides for confiscating sale proceeds acquired in relation to any narcotic drug or psychotropic substance and any goods used to conceal such drugs. It provides for forfeiture of any illegally acquired property.

o The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 it authorizes detaining persons to prevent illicit traffic in narcotic drugs and psychotropic substances.

o Know-Your-Customer Guidelines it was introduced by The Reserve Bank of India to banks in India to reduce financial frauds and identify money-laundering transactions. The obligations imposed by these guidelines were reduced in October 2007 to allow foreigners and non-resident Indians to receive cash payments of up to $3,000 from money changers. Acceptable identity documentation was also expanded to allow money changers to accept a wider class of documents as evidence of a business relationship.

o Guidelines for anti-money laundering measures The Securities and Exchange Board of India (SEBI) has published guidelines for capital market intermediaries under the PMLA 2002. The guidelines concern all intermediaries registered with SEBI – a grouping that includes institutional investors, brokers and portfolio managers.

“In November 2006, India’s Insurance Regulatory and Development Authority issued anti-money laundering guidelines that exempt general insurance companies from the need to comply with certain entry-level checks on customers.”

On 17 April 2008, India finalized amendments to broaden the reach of its AML laws. The amendments will extend these laws to bring international credit card transactions, money transfers, and offences with “cross border implications” within their ambit. The amendments allow for “single criminality”, whereby a transaction only needs to be illegal in India, and not in the other state involved, in order to risk prosecution for money laundering offenses. The amendments will also expand the reach of the anti-money laundering laws to include casinos, credit card companies, and money changes. It has been reported that India’s Union Cabinet has approved the amendments for introduction to parliament.

Under what circumstances is a lawyer under obligation to report?

Currently, there is no specific law obliging a lawyer to report a money laundering offense

Lawyer’s responsibility?

No current obligations for client identification and verification

Client’s identification and verification

Indian lawyers normally do so, but not because there is any obligation. Section 12 of the PMLA 2002, requires every banking company, financial institution and intermediary to verify and maintain the records of the identity of all its clients, as prescribed by Rule 9 of the Rules notified by Notification No.9/2005

Conclusion

The Act is a first step towards a comprehensive legislation for preventing Money Laundering and has placed India on equal footing to its international counterparts. Another best part is that it has also included the banks and financial institutions, which channelize Money Laundering activities, within its ambit, by imposing certain obligations upon them.

The genesis of a transaction pertaining to Money Laundering may be India, however, it may spread to other territorial boundaries. Hence international cooperation is necessary to fight against it. Keeping in mind this vital aspect, the provisions relating to the reciprocal arrangements with other countries to enforce the provisions of this Act, exchange of any information or assistance for the transfer of accused person for the prevention of the offence under this Act, have been clearly provided for in the Act itself. All this ensures a regime under which Money Laundering shall construe to be a serious crime and its practice shall lead to serious consequences.