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Risk Review Report on Anti Money Laundering by Alea Consulting

Covai Post Network


Anti-Money Laundering (AML) refers to a set of rules, policies, procedures and regulations implemented to mitigate the risks of money laundering and terrorism financing. The implications of non-compliance with AML regulations are far reaching. For example, when a bank needs to provide creditor allow a customer to open a bank account, it is compulsory for the customer to complete its AML procedures. The onus of conducting the AML checks is on the bank and not on the customer or the Government.


AML procedures act as a safeguard against the risks associated with money laundering, including supporting crime and corruption, undermining the legitimate private sector, weakening financial institutions, and causing reputational, operational, legal and concentration risks. Globally, AML regulations and policies are framed and monitored by the Financial Action Task Force (FATF), United Nations Office of Drugs and Crime (UNODC) and the Wolfsberg Group. 


According to the Association of Certified Fraud Examiners, a typical organization loses ~5% of its annual revenues to fraud. This enhances the need for a robust AML framework at both global and regional levels, which would focus on verifying the identity of customers, vendors and employees.


Key Terms


Money Laundering (ML)

Prevention of Money Laundering Act, 2002 (PMLA) defines money laundering as “any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property”.

Terrorist Financing (TF)

Post 9/11, FATF expanded its mandate to cover the TF. Terrorists and ML’s may use same ways to move money to avoid detection, such as structure payments to avoid reporting and use of underground banking systems such as hawala, or fei ch’ien. However, funds destined for TF may include funds from perfectly legitimate sources. Concealment of funds used for terrorism is primarily designed to hide the purpose for use of these funds, rather than their source.

Financial Action Task Force (FATF)

FATF is an inter-governmental body from 7 industrialized nations to set standards and foster international action against ML. One of its early accomplishments was to dispel the notion that ML is only about cash transactions. Through several ML “typologies” exercises, FATF demonstrated that it can be achieved through financial institution or business.

Know Your Customers (KYC)

KYC refers to knowing and monitoring customers to identify any unusual or suspicious activity that may lead to fraud. The policies must be SMART – Specific, Measurable, Achievable, Relevant and Time-Bound. The Basel Committee on Banking Supervision is the primary global standard setter for the regulation of banks and their KYC procedures.

Some Red Flags/ Indicators: Abnormal ATM usage for cash withdrawal, customers who move frequently, lifestyle or deposits in accounts not in line with the disclosed source of funds and common identifiers (addresses, phone numbers or email addresses) for unrelated customers.

Know Your Vendors (KYV)

Vendor frauds generally fall under cheque tampering, billing schemes and bribery or extortion schemes.

Know Your Employees (KYE)

Employee behavior can lead to operational as well as reputational risks for the institutions. There is a critical need for identification and a thorough background check of employees.


Some Red Flags/ Indicators: Lifestyles that do not match known sources of income, frequent overriding of internal controls and policies, avoidance of vacations and use of company resources for personal use. 


Key Statistics

  • In 2014, it was estimated that global spending on AML compliance alone amounted to US$10 billion.

  • Banks have spent ~US$321 billion in fines since 2008 for regulatory failings, money laundering, terrorist financing and market manipulation.

  • In the AML Basel Index 2017, India ranked #88 (out of 146 countries) with a risk score of 5.58 (risk of money laundering and terrorist financing); US and UK were ranked 116 and 118 with a risk score of 4.85 and 4.81 respectively. Risk range is 0-10; 10 denotes highest risk and 0 denotes no risk.

  • UNODC indicates that around 2-5% of worldwide GDP is laundered globally every year.


AML Framework in India

Policies and Compliance

  • FATF: In June 2010, India became a member of the FATF and was placed in the category of countries which required ‘regular follow up process'. In June 2013, India attained a satisfactory level of compliance and was removed from the regular follow up process. 

  • PMLA: The act came into effect in July 2005; and was amended in 2009 (in force from June 2009) and in 2012 (effective February 15, 2013). The 2012 amendment brought India’s AML legislation at par with global norms.


Regulatory bodies

  • Financial Intelligence Unit (FIU) under the Finance Ministry, Government of India is the nodal agency for AML measures prescribed in PMLA. 

  • Other Regulators for AML Checks areRBI (for Banks); IRDA (for Insurance); SEBI (for Asset Management companies), Enforcement Directorate (ED), CBI, Police and NCB. 


Steps taken by the Government under PMLA

  • As of December 2017, over 226,000 companies have been ‘Struck Off’ for being inactive for a period of two or moreyears. Over 300,000 Directors, who failed to comply with regulatory requirements, have been disqualified from holding directorship in Indian entities. Of these directors, over 200,000 disqualified Directors had been on the Board of unregistered companies.

  • As of January 31, 2018, FIU has categorized 9,500 NBFCs (out of ~11,500 registered) as ‘high-risk financial institutions’, indicating them as non-compliant of PMLA and rules thereof.

  • According to the Finance Ministry, as of February 2018, approximately 884 companies are under the scanner for money laundering and assets worth Rs.50 billion have been attached following probes initiated under PMLA. In 2016-17, ED conducted searches in 161 cases filed under PMLA and the number went up to 570 until Feb 2018, registering an increase of over 300%. Investigations have been initiated in 318 cases and concluded in 417, however, convictions have been secured only in 4.


Recent Developments / Proposed Changes

  • In November 2017, the Supreme Court held a provision in PMLA as unconstitutional as due to the said provision an accused could be denied bail till the Court was convinced that the person was not guilty of money laundering. The Supreme Court remanded all such previous cases for reconsideration in which bail under the impugned provision was denied toaccused.

  • The Enforcement Directorate is proposing an amendment to PMLA, which allows ED’s case against an individual or a group to stand even if a case on the same matter by CBI falls through. The amendment, if cleared, would be a step towards tightening laws against corruption to bring PMLA at par with the laws of Australia and UK.

  • The Fugitive Economic Offenders Act, 2018, received the President’s assent on July 31, 2018 and it came into force retrospectively w.e.f. April 21, 2018. The Act provides measures to deter fugitive economic offenders (linked to funds over Rs. 1 billion) from evading the process of law in India by staying outside the jurisdiction of Indian courts and to preserve the sanctity of the rule of law in India. It allows the Government to confiscate properties and assets of such offenders.

  • The next FATF review in 2021 will lead to an increase in regulatory activities and enforcement over the next two years.


About Alea

Alea is a global risk mitigation and investigative consulting firm, which helps organizations reduce reputation and operational concerns. The firm has conducted significant assignments for international organizations and industries, including insurance, banking, financial services, telecom, manufacturing, pharmaceutical, mining, real estate, retail, EPC, renewable energy, hotels, education, logistics, healthcareand diagnostics, power, and infrastructure.


Alea’s risk mitigation services include: senior employee background checks, KYC/AML checks, corporate intelligence, asset searches, intellectual property protection, crisis management response, insurance & fraud investigations, litigation support and due diligence of business partners.

Source: Newsvior

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