Important Banking term for IBPS Main exam: Money laundering

Money laundering is the process of concealing the source of illegally earned money. In India, if a suspected case of money laundering is spotted, the financial institution and banks needs to inform the Financial Intelligence Unit-India (FIU-IND), an enforcement agency.

Created On: Oct 8, 2015 15:49 IST
Modified On: Feb 18, 2016 12:08 IST

The online Main examination for IBPS PO/MT 2015 posts is tentatively scheduled in last week of October. Here, the banking team of jagranjosh is providing the description of important banking term asked in previous year in General Awareness section.

What is Money laundering?

Money laundering is the process of concealing the source of illegally earned money. Anybody who does this is a money launderer. Prevention of Money Laundering Act (PMLA) is Indian law passed in 2002 and was enacted in 2003. The Act along with the rules framed there under has come into force with effect from 1st July, 2005.

Objective of Act:

The PML Act seeks to combat money laundering in India and has three main objectives:

  • To prevent and control money laundering
  • To confiscate and seize the property obtained from the laundered money; and
  • To deal with any other issue connected with money laundering in India.

How Money Launderers are spotted?

Banks, financial institutions and intermediaries are obligated, by the act, for verification and maintenance of records of the identity of all its clients and also to keep an eye on suspicious transactions. In India, for example, if a suspected case of money laundering is spotted, the financial institution and banks needs to inform the Financial Intelligence Unit-India (FIU-IND), an enforcement agency.

Why Should Banks Co-operate and Disclose Client Data?

According to PMLA, the director of FIU-IND can impose fines on banks and other financial institutions if they fail to detect or conceal wrongdoings.

Who Investigates Money-laundering Cases?

The Enforcement Directorate(ED) carries out investigations. The ED is also empowered to attach property of entities involved in money laundering.

Money Laundering and ‘Know your Customer’ norms:

Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These are called ‘Know Your Customer’ guidelines. These guidelines have been revisited in the context of the recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT).  The objective of KYC/AML guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

KYC Policy

Banks should frame their KYC policies incorporating the following four key elements:

  • Customer Acceptance Policy
  • Customer Identification Procedures
  • Monitoring of Transactions
  • Risk Management

Customer Acceptance Policy

Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers and their relationship with banks.

Customer Identification Procedures

Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. For individual customers, the banks should obtain sufficient identification data to verify the identity of the customer, his address/location, and also his recent photograph.

Monitoring of Transactions:   Ongoing monitoring is an essential element of effective KYC procedures. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits.

Risk Management

Banks should devise procedures for creating risk profiles of their existing and new customers, assess risk in dealing with various countries, geographical areas and also the risk of various products, services, transactions, delivery channels, etc.

Money laundering and Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing. It was established in July 1989 by a G-7 Summit in Paris, initially to examine and develop measures to combat money laundering. 

The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. India became a member of the FATF in 2010.

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