Indications of Possible Money Laundering Activities

As you are aware that Money Laundering is a process to infuse illegitimate Cash or funds into legitimate economic system. A criminal through money laundering converts his/her illegitimate cash or funds utilising banking and business organisation to hide source of cash or funds. We can say that Money laundering is the funnelling of cash or other funds generated from illegal activities through legitimate financial institutions and businesses to conceal the source of the funds.

A Money Laundering is a global activity and found all over world, a money launderer earn cash or funds from smuggling, human trafficking, bribe, corruption and from anti national activities. The fund generated through these activities generally not come into mainstream and generally utilised for terrorist and anti-social activities.

A money launderer by Placement, Layering and Integration introduces his/her illegitimate cash or fund into financial and business system.

The Money launderers use many different and sophisticated types of schemes, techniques and transactions to accomplish their ends. While it would be difficult to describe all money laundering methodologies, the following are the more frequently observed signs of suspicious activity:

• broadly, transactions that appear inconsistent with a client's known legitimate (business or personal) activities or means; unusual deviations from normal account and transaction patterns;
• any situation where personal identity is difficult to determine;
• unauthorized or improperly recorded transactions; inadequate audit trails;
• unconventionally large currency transactions, particularly in exchange for negotiable instruments or for the direct purchase of funds transfer services;
• apparent structuring of transactions to avoid dealing with identification requirements or regulatory record-keeping and reporting thresholds;
• transactions passed through intermediaries for no apparent business reason; and
• introduction of a client by an overseas associate or financial institution based in a country or jurisdiction known for drug trafficking and production, other financial crimes and "bank secrecy."

SUPPLEMENTING THE INFORMATION PROVIDED UNDER "INDICATIONS OF POSSIBLE MONEY LAUNDERING," THE FOLLOWING ITEMS ARE ADDITIONAL INDICATIONS OF UNUSUAL OR SUSPICIOUS ACTIVITY

1. COMMON INDICATORS

1.1 GENERAL

• Frequent address changes.
• Client does not want correspondence sent to home address.
• Client repeatedly uses an address but frequently changes the names involved.
• Client uses a post office box or general delivery address, or other type of mail drop address, instead of a street address when this is not the norm for that area.
• Client's home or business telephone number has been disconnected or there is no such number when an attempt is made to contact client shortly after he/she has opened an account.
• Client is accompanied and watched.
• Client shows uncommon curiosity about internal systems, controls, policies and reporting; client has unusual knowledge of the law in relation to suspicious transaction reporting.
• Client has only vague knowledge of the amount of a deposit.
• Client gives unrealistic, confusing or inconsistent explanation for transaction or account activity.
• Defensive stance to questioning or over-justification of the transaction.
• Client is secretive and reluctant to meet in person.
• Unusual nervousness of the person conducting the transaction.
• Client is involved in transactions that are suspicious but seems blind to being involved in money laundering activities.
• Client insists on a transaction being done quickly.
• Client appears to have recently established a series of new relationships with different financial entities.
• Client attempts to develop close rapport with staff.
• Client offers money, gratuities or unusual favors for the provision of services that may appear unusual or suspicious.
• Client attempts to convince employee not to complete any documentation required for the transaction.
• Large contracts or transactions with apparently unrelated third parties, particularly from abroad.
• Large lump-sum payments to or from abroad, particularly with countries known or suspected to facilitate money laundering activities.
• Client is quick to volunteer that funds are "clean" or "not being laundered."
• Client's lack of business knowledge atypical of trade practitioners.
• Forming companies or trusts with no apparent business purpose.
• Unusual transference of negotiable instruments.
• Uncharacteristically premature redemption of investment vehicles, particularly with requests to remit proceeds to apparently unrelated third parties or with little regard to tax or other cancellation charges.
• Large or unusual currency settlements for investments or payment for investments made from an account that is not the client's.
• Clients seeking investment management services where the source of funds is difficult to pinpoint or appears inconsistent with the client's means or expected behaviour.
• Purchase of large cash value investments, soon followed by heavy borrowing against them. • Buying or selling investments for no apparent reason, or in circumstances that appear unusual, e.g., losing money without the principals seeming concerned.
• Forming overseas subsidiaries or branches that do not seem necessary to the business and manipulating transfer prices with them.
• Extensive and unnecessary foreign travel.
• Purchasing at prices significantly below or above market.
• Excessive or unusual sales commissions or agents fees; large payments for unspecified services or loans to consultants, related parties, employees or government employees.

1.2 CASH TRANSACTIONS

• Client frequently exchanges small bills for large ones.
• Deposit of bank notes with a suspect appearance (very old notes, notes covered in powder, etc).
• Use of unusually large amounts in traveller's checks.
• Frequent domestic and international ATM activity.
• Client asks to hold or transmit large sums of money or other assets when this type of activity is unusual for the client.
• Purchase or sale of gold, diamonds or other precious metals or stones in cash.
• Shared address for individuals involved in cash transactions, particularly when the address is also for a business location or does not seem to correspond to the stated occupation (for example, student, unemployed, self-employed, etc.).

1.3 TRANSACTIONS INVOLVING ACCOUNTS

• Apparent use of personal account for business purposes.
• Opening accounts when the client's address is outside the local service area.
• Opening accounts with names very similar to other established business entities.
• Opening an account that is credited exclusively with cash deposits in foreign currencies.
• Use of nominees who act as holders of, or who hold power of attorney over, bank accounts.
• Account with a large number of small cash deposits and a small number of large cash withdrawals.
• Funds being deposited into several accounts, consolidated into one and transferred outside the country.
• Use of wire transfers and the Internet to move funds to/from high-risk countries and geographic locations.
• Accounts receiving frequent deposits of bearer instruments (e.g., bearer checks, money orders, bearer bonds) followed by wire transactions.
• Deposit at a variety of locations and times for no logical reason.
• Multiple transactions are carried out on the same day at the same branch but with an apparent attempt to use different tellers.
• Establishment of multiple accounts, some of which appear to remain dormant for extended periods.
• Account that was reactivated from inactive or dormant status suddenly sees significant activity.
• Cash advances from credit card accounts to purchase cashier's checks or to wire funds to foreign destinations.
• Large cash payments on small or zero-balance credit card accounts followed by "credit balance refund checks" sent to account holders.
• Attempting to open accounts for the sole purpose of obtaining online banking capabilities.

1.4 TRANSACTIONS RELATED TO OFFSHORE BUSINESS ACTIVITY

• Loans secured by obligations from offshore banks.
• Loans to or from offshore companies.
• Offers of multimillion-dollar deposits from a confidential source to be sent from an offshore bank or somehow guaranteed by an offshore bank.
• Transactions involving an offshore "shell" bank whose name may be very similar to the name of a major legitimate institution.

2. INDUSTRY-SPECIFIC INDICATORS

2.1 FINANCIAL ENTITIES

A) PERSONAL TRANSACTIONS

• Client makes one or more cash deposits to general account of foreign correspondent bank (i.e., flow-through account).
• Client runs large credit card balances.
• Client visits the safety deposit box area immediately before making cash deposits.
• Client wishes to have credit and debit cards sent to international or domestic destinations other than his or her address.
• Client has numerous accounts and deposits cash into each of them, with the total credits being a large amount.
• Client has frequent deposits identified as proceeds of asset sales, but assets cannot be substantiated.
• Client acquires significant assets and liquidates them quickly with no explanation.
• Client acquires significant assets and encumbers them with security interests that do not make economic sense.

B) CORPORATE AND BUSINESS TRANSACTIONS

• Financial statements of the business differ noticeably from those of similar businesses.
• Representatives of the business avoid contact with the branch as much as possible, even when it would be more convenient for them to have such contact.
• Client makes a large volume of seemingly unrelated deposits to several accounts and frequently transfers a major portion of the balances to a single account at the same bank or elsewhere.
• Client makes a single and substantial cash deposit composed of many large bills.
• Asset acquisition is accompanied by unusual security arrangements.

2.2 BUSINESSES THAT PROVIDE LOANS

• Client suddenly repays a problem loan unexpectedly.
• Client asks to borrow against assets held by another financial institution or a third party, when the origin of the assets is not known.
• Loan transactions are entered into in situations where the client has significant assets, and the loan transaction does not make economic sense.
• Customer seems unconcerned with terms of credit or costs associated with completion of a loan transaction.

2.3 LIFE INSURANCE COMPANIES, BROKERS AND AGENTS

• Atypical incidence of pre-payment of insurance premiums.
• Insurance policies with premiums that exceed the client's apparent means.
• Insurance policies with values that appear to be inconsistent with the client's insurance needs.
• Client requests an insurance product that has no discernible purpose and is reluctant to divulge the reason for the investment.
• Client conducts a transaction that results in a conspicuous increase in investment contributions.
• Client shows more interest in the cancellation or surrender than in the long-term results of investments.
• The duration of the life insurance contract is less than three years.
• The first (or single) premium is paid from a bank account outside the country.
• Client accepts very unfavourable conditions unrelated to his or her health or age.
• Transaction involves use and payment of a performance bond resulting in a cross-border payment.
• Substitution, during the life of an insurance contract, of the ultimate beneficiary with a person without any apparent connection with the policyholder.

2.4 SECURITIES DEALERS

• Attempts to purchase investments with cash.
• Client makes large or unusual settlements of securities in cash.
• The entry of matching buying and selling of particular securities or futures contracts (called match trading), creating the illusion of trading.
• Large fund flows through non-resident accounts with brokerage firms.
• Transaction of very large dollar size.
• Unusually complex method of purchasing financial products.
• All principals of client are located outside of local jurisdiction.
• Third-party purchases of shares in other names (i.e., nominee accounts).

2.5 FOREIGN EXCHANGE DEALERS AND MONEY SERVICES BUSINESSES

• Client exchanges currency and requests the largest possible denomination bills in a foreign currency.
• Client knows little about address and contact details for payee, is reluctant to disclose this information or requests a bearer instrument.
• Client wants a check issued in the same currency to replace the one being cashed.
• Client instructs that funds are to be picked up by a third party on behalf of the payee.
• Client requests numerous checks or postal money orders in small amounts and various names, which total the amount of the exchange.

2.6 ACCOUNTANTS

• Use of many different firms of auditors and advisers for connected companies and businesses.
• Client has a history of changing bookkeepers or accountants yearly.
• Client is uncertain about location of company records.
• Company records consistently reflect sales at less than cost, thus putting the company into a loss position, but the company continues without reasonable explanation of the continued loss.
• Company is invoiced by organizations located in a country that does not have adequate money laundering laws and is known as a highly secretive banking and corporate tax haven.

2.7 REAL ESTATE BROKERS OR SALES REPRESENTATIVES

• Client arrives at a real estate closing with a significant amount of cash.
• Client purchases property in the name of a nominee such as an associate or a relative (other than a spouse).
• Client does not want to put his or her name on any document that would connect him or her with the property or uses different names on Offers to Purchase, closing documents and deposit receipts.
• Client inadequately explains the last-minute substitution of the purchasing party's name.
• Client pays substantial down payment in cash and balance is financed by an unusual source or offshore bank.
• Client purchases property without inspecting it.
• Client purchases multiple properties in a short time period, and seems to have few concerns about the location, condition and anticipated repair costs, etc., of each property.
• Client pays rent or the amount of a lease in advance using a large amount of cash.
• Client is known to have paid large remodelling or home improvement invoices with cash, on a property for which property management services are provided.

2.8 CASINOS AND OTHER GAMING/BETTING ORGANIZATIONS

• • Acquaintances bet against each other in even-money games, and it appears that they are intentionally losing to one of the party.
• Client requests checks that are not for gaming winnings.
• Client purchases large volume of chips with cash, participates in limited gambling activity with the intention of creating a perception of significant gambling, and then cashes the chips for a casino check.
• Client exchanges small denomination bank notes for large denomination bank notes, chip purchase vouchers or checks.

ANTI-MONEY LAUNDERING COMPLIANCE CHECKLIST

The Security and Exchange Board of India has laid down various guidelines to act as a checklist for the prevention of money laundering in the country.

The compliances can be sectioned into two sub-types which are:

1. One-time compliances
2. Continuous compliances

One-time or periodical compliances refer to the ones non-recurring in nature and include compliances such as:

1. Whether the appointment of "Principal Officer" has taken place.
2. Whether the policies framed in pursuant to SEBI have been formed and incorporated in the company and are approved by the board of directors.
3. Whether the record of transactions as per the rules of the act has taken place.
4. Whether the internal mechanism of the company has been formed in a manner that evolves a quick and easy retrieval of data for aid and help to the competent authorities.
5. Whether the policies framed for enforcement of policies and rules of the act are being regularly updated to ensure their efficiency.
6. Whether periodic review of the policies is taking place internally in the company.

Continuous or ongoing compliances are those that are recurring in nature and need to be fulfilled in a periodic and frequent manner, these include:

1. Whether a successful audit trail can be undertaken using the information of the company.
2. Whether due diligence for the customer has been undertaken.
3. Whether the client identification program has been conducted.
4. Whether identification of the risk-sensitive consumers has been done.
5. Whether any suspicious transaction has been noted and identified along with reporting to the competent authority.
6. Whether the staff has been adequately trained for such activities in the organization.

LET'S DISCUSS IN COMPREHENSIVE MANNER

The checklist for compliance of Prevention of Money Laundering Act applicable to SEBI Intermediaries is given below:

One Time/Periodical Compliances

1. Whether proper policy framework as per the Guidelines on anti-money laundering measures is put into place?
2. Whether the above referred policy is approved by Board of Directors?
3. Whether an officer is appointed as 'Principal Officer'?
4. Whether such appointment of 'Principal Officer' is intimated to Office of the Director-FIU, New Delhi?
5. Whether proper record of transactions prescribed under Rule 3 are maintained?
6. Whether the following information in respect of transactions referred to in Rule 3 are maintained and preserved?

• the nature of the transactions;
• the amount of the transaction and the currency in which it was denominated;
• the date on which the transaction was conducted; and
• the parties to the transaction.

7. Whether an internal mechanism has been evolved for proper maintenance and preservation of such records and information in a manner that allows easy and quick retrieval of data as and when requested by the competent authorities?
8. Whether such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) have been maintained so as to provide, if necessary, evidence for prosecution of criminal behaviour?
9. Whether regularly reviewed the policies and procedures on prevention of money laundering and terrorist financing to ensure their effectiveness?
10. Whether review is done by the person who is different from the person who has framed such policies and procedures?
11. Whether the following information has been maintained for the purpose of satisfactory audit trail?

1. the beneficial owner of the account;
2. the volume of the funds flowing through the account; and
3. for selected transactions:

• the origin of the funds;
• the form in which the funds were offered or withdrawn, e.g. cash, cheques, etc.;
• the identity of the person undertaking the transaction;
• the destination of the funds;
• the form of instruction and authority.

Customer Due Diligence

1. Whether Customer Due Diligence Process has been conducted?
2. Whether the records of the identity of clients have been maintained?
3. Whether sufficient information in order to identify persons who beneficially own or control securities account has been obtained?
4. Whether beneficial ownership and control has been identified, i.e. which individual(s) ultimately own(s) or control(s) the customer and/or the person on whose behalf a transaction is being conducted?
5. Whether the customer's identity using reliable, independent source documents, data or information has been verified?
6. Whether ongoing due diligence and scrutiny has been conducted?

Policy for Acceptance of Clients

1. Whether customer acceptance policy has been defined?
2. Whether safeguard has been taken while accepting the clients that no account is opened in a fictitious or benami name or on an anonymous basis?
3. Whether documentation requirement and other information in respect of different classes of clients depending on perceived risk and having regard to the requirement to the Prevention of Money Laundering Act 2002, guidelines issued by RBI and SEBI from time to time have been collected?
4. Whether the identity of the client is verified for known criminal records or is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide?
5. Whether failure by prospective client to provide satisfactory evidence of identity have been noted and reported to the higher authority?
6. Whether intermediary has proactively put in place appropriate risk management systems to determine whether their client or potential client or the beneficial owner of such client is a politically exposed person?

Client Identification Procedure

1. Whether the client identification programme has been formulated on lines of rules and act of prevention of money laundering?
2. Whether the client identification programme is implemented?
3. Whether Customer Due Diligence has been conducted on a risk sensitive basis depending on the type of customer business relationship?
4. Whether customers are identified as per risk sensitive basis?

Monitoring of Transactions

1. Whether regular monitoring of transactions is done for ensuring effectiveness of the Anti-Money Laundering procedures?
2. Whether special attention has been given to all complex, unusually large transactions/patterns which appear to have no economic purpose?
3. Whether the compliance cell or department has randomly examined a selection of transaction undertaken by clients to comment on their nature i.e. whether they are in the suspicious transactions or not?

Suspicious Transaction Monitoring and Reporting

1. Whether transaction of suspicious nature or any other transaction notified is reported to the appropriate law authority?
2. Whether suspicious transactions are also regularly reported to the higher authorities/head of the department?
3. Whether the cash transaction report (CTR) (wherever applicable) for each month is submitted to FIU-IND by 15th of the succeeding month?
4. Whether the Suspicious Transaction Report (STR) is submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature?
5. Whether the Principal Officer has recorded his reasons for treating any transaction or a series of transactions as suspicious? Whether there is any undue delay in arriving at such a conclusion?
6. Whether CDD process is revisited when there are suspicions of money laundering or financing of terrorism (ML/FT)?

Training to Staff and Hiring Policies

1. Whether the content of PML Guidelines & CFT (Combating Financing of Terrorism) is understood by all staff members? Whether appropriate training has been provided to staff on ongoing basis?
2. Whether staff members' awareness and vigilance to guard against money laundering and terrorist financing has been developed?
3. Whether having adequate screening procedures in place to ensure high standards when hiring employees?

Investor Education

• Whether the intermediary has prepared specific literature/pamphlets, etc. so as to educate clients of the objective of AML?

Audit/Testing of Anti Money Laundering Program

1. Whether the audit is conducted periodically to test Anti Money Laundering Programme adequacy to meet the compliance requirements?
2. Whether the audit/testing is conducted by member's own personnel not involved in framing or implementing the AML programme or it is done by a qualified third party?
3. Whether the report of such an audit / testing is placed before the senior management for making suitable modifications / improvements in the AML programme?

Procedural Compliances

1. Whether KYC is complete in all respects before opening any client account?
2. Whether Branch / Relationship Managers are instructed to verify all original documents with copies of the same which form part of supporting to KYC?
3. Whether any account is opened without Introducer details and signature? If yes, whether any employee of the organization has taken interview of the client?
4. Whether any guidelines has been given to branches for the following:

• No Cash transactions
• No Third-Party Cheque or Securities to be accepted.
• No Demand Draft to be accepted (if accepted then only with Banker's certificate)
• POA with Photo Identity and address proof
• Income Proof of HNI Clients

5. Whether KYC Profile for risk sensitive clients including HNI is updated on periodical basis?
6. Whether the following transactions are monitored and reported to Principal Officer?
7. Client whose identity verifications seems difficult, or client appears not to co-operate in providing details.
8. Clients in high-risk jurisdictions
9. Substantial increase in volume without apparent cause
10. Large number of accounts having common parameters such as common partners / directors / promoters / address / e-mail address / telephone numbers / introducers or authorized signatories
11. Unusually large cash deposits made by an individual or business.
12. Client is willing to accept uneconomic terms without apparent reason.
13. Transaction inconsistent with legitimate business activity
14. Transaction inconsistent with the normal pattern of client's investment activity
15. Client is financially capable of transactions he has asked for.
16. Activity of the client is resumed after being in-operative for more than 3 months.
17. High value payments made from bank accounts not notified in KYC form.
18. Transfer of large number of securities from demat accounts not notified in KYC form or not pertaining to client.
19. Multiple transactions of value just below the threshold limit specified in PMLA so as to avoid possible reporting.
20. Purchases made on own account transferred to a third party through off market transactions through DP Accounts

There are other compliances also to be done by companies such as training of employees, establishment of Board Approved AML Policy of the company, establishment of management tools, timely submission of AML records with the enforcing authority, blocking of accounts of suspects etc.

DISCLAIMER: The article presented here is only for sharing information with readers. In case of necessity do consult with professionals.