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 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.