Lesson- 6 –Prevention of Money Laundering

CORRESPONDENT BANKING AND SHELL BANK

Correspondent banking is the provision of banking services by one bank (the
“correspondent bank”) to another bank (the “respondent bank”). These services may
include cash/funds management, international wire transfers, drawing arrangements for
demand drafts and mail transfers, payable-through-accounts, cheques clearing etc. Banks
may take the following precautions while entering into correspondent banking
relationship.
(a) Gather sufficient information to fully understand the nature of business of the bank
including information on management, major business activities, level of AML/CFT
compliance, purpose of opening the account, identity of any third party entities that will
use the correspondent banking services, and regulatory/supervisory framework in the
bank’s home country.
(b) Such relationships may be established only with the approval of the Board, or by a
Committee headed by the Chairman/CEO with clearly laid down parameters for approving
such relationships, as approved by the Board. Proposals approved by the Committee should
be put up to the Board at its next meeting for post facto approval.
(c) The responsibilities of each bank with whom correspondent banking relationship is
established should be clearly documented.
(d) In case of payable-through-accounts, the correspondent bank should be satisfied that
the respondent bank has verified the identity of the customers having direct access to the
accounts and is undertaking on-going 'due diligence' on them.
(e) The correspondent bank should ensure that the respondent bank is able to provide the
relevant customer identification data immediately on request.
(f) Banks should be cautious while continuing relationships with correspondent banks
located in jurisdictions which have strategic deficiencies or have not made sufficient
progress in implementation of FATF Recommendations.
(g) Banks should ensure that their respondent banks have KYC/AML policies and
procedures in place and apply enhanced 'due diligence' procedures for transactions carried
out through the correspondent accounts.
(h) Banks should not enter into a correspondent relationship with a “shell bank” (i.e., a
bank which is incorporated in a country where it has no physical presence and is not
affiliated to any regulated financial group).
(i) The correspondent bank should not permit its accounts to be used by shell banks.

5.0 WIRE TRANSFER

Wire transfers are being used as an expeditious method for transferring funds between
bank accounts. Wire transfers include transactions occurring within the national
boundaries of a country or from one country to another. As wire transfers do not involve
actual movement of currency, they are considered as rapid and secure method for
transferring value from one location to another.
(a) The salient features of a wire transfer transaction are as under:
(i) Wire transfer is a transaction carried out on behalf of an originator person (both natural
and legal) through a bank by electronic means with a view to making an amount of money
available to a beneficiary person at a bank. The originator and the beneficiary could be
the same person.
(ii) Domestic wire transfer means any wire transfer where the originator and receiver are
located in the same country. It may also include a chain of wire transfers that takes place
entirely within the borders of a single country even though the system used to effect the
wire transfer may be located in another country.
(iii) Cross-border transfer means any wire transfer where the originator and the
beneficiary bank or financial institutions are located in different countries. It may include
any chain of wire transfers that has at least one cross-border element.
(iv) The originator is the account holder, or where there is no account, the person (Natural
or legal) that places the order with the bank to perform the wire transfer.
(b) Wire transfer is an instantaneous and most preferred route for transfer of funds across
the globe and hence, there is a need for preventing terrorists and other criminals from
having unfettered access to wire transfers for moving their funds and for detecting any
misuse when it occurs. This can be achieved if basic information on the originator of wire
transfers is immediately available to appropriate law enforcement and/or prosecutorial
authorities in order to assist them in detecting, investigating, prosecuting terrorists or
other criminals and tracing their assets. The information can be used by Financial
Intelligence Unit – India (FIU-IND) for analysing suspicious or unusual activity and
disseminating the same. The originator information can also be put to use by the
beneficiary bank to facilitate identification and reporting of suspicious transactions to FIU-
IND. Owing to the potential terrorist financing threat posed by small wire transfers, the
objective is to be in a position to trace all wire transfers with minimum threshold limits.
Accordingly, branches must ensure that all wire transfers are accompanied by the
following information branches.
1. Cross-border wire transfers
(i) All cross-border wire transfers must be accompanied by accurate and meaningful
originator information.
(ii) Information accompanying cross-border wire transfers must contain the name and
address of the originator and where an account exists, the number of that account. In the
absence of an account, a unique reference number, as prevalent in the country
concerned, must be included.
(iii) Where several individual transfers from a single originator are bundled in a batch file
for transmission to beneficiaries in another country, they may be exempted from including
full originator information, provided they include the originator’s account number or
unique reference number as at (ii) above.
2. Domestic wire transfers
(i) Information accompanying all domestic wire transfers of Rs.50000/- (Rupees Fifty
Thousand) and above must include complete originator information i.e. name; address and
account number etc., unless full originator information can be made available to the
beneficiary bank by other means.
(ii) If a bank has reason to believe that a customer is intentionally structuring wire
transfer to below Rs.50,000/- (Rupees Fifty Thousand) to several beneficiaries in order to
avoid reporting or monitoring, the bank must insist on complete customer identification
before effecting the transfer. In case of non-cooperation from the customer, efforts
should be made to establish his identity and Suspicious Transaction Report (STR) should be
made to FIU-IND.
(iii) When a credit or debit card is used to effect money transfer, necessary information as
at (i) above should be included in the message.
(c) Exemptions
Interbank transfers and settlements where both the originator and beneficiary are banks
or financial institutions would be exempted from the above requirements.
(d) Role of Ordering, Intermediary and Beneficiary banks
(i) Ordering Bank
An ordering bank is the one that originates a wire transfer as per the order placed by its
customer. The ordering bank must ensure that qualifying wire transfers contain complete
originator information. The bank must also verify and preserve the information at least for
a period of five years.
(ii) Intermediary bank
For both cross-border and domestic wire transfers, a bank processing an intermediary
element of a chain of wire transfers must ensure that all originator information
accompanying a wire transfer is retained with the transfer. Where technical limitations
prevent full originator information accompanying a cross-border wire transfer from
remaining with a related domestic wire transfer, a record must be kept at least for five
years (as required under Prevention of Money Laundering Act, 2002) by the receiving
intermediary bank of all the information received from the ordering bank.
(iii)Beneficiary bank
A beneficiary bank should have effective risk-based procedures in place to identify wire
transfers lacking complete originator information. The lack of complete originator
information may be considered as a factor in assessing whether a wire transfer or related
transactions are suspicious and whether they should be reported to the Financial
Intelligence Unit-India. The beneficiary bank should also take up the matter with the
ordering bank if a transaction is not accompanied by detailed information of the fund
remitter. If the ordering bank fails to furnish information on the remitter, the beneficiary
bank should consider restricting or even terminating its business relationship with the
ordering bank.

6.0 MAINTENANCE OF KYC DOCUMENTS AND PRESERVATION PERIOD

PML Act and Rules cast certain obligations on the bank regard to maintenance,
preservation and reporting of customer account information. Branches are, therefore,
advised to go through the provisions of the PMLA, 2002 and the Rules notified there under
and take all steps considered necessary to ensure compliance with the requirements of the
Act and the Rules ibid.
6.1 Maintenance of records of transactions
Our bank has introduced a system of maintaining proper record of transactions prescribed
under Rule 3 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005
(PML Rules, 2005), as mentioned below:
(i)All cash transactions of the value of more than Rupees Ten Lakh or its equivalent in
foreign currency;
(ii) Series of all cash transactions individually valued below Rupees Ten Lakh or its
equivalent in foreign currency which are that have taken place within a month and the
monthly aggregate which exceeds rupees ten lakhs or its equivalent in foreign currency. It
is clarified that for determining ‘integrally connected transactions’ ‘all accounts of the
same customer’ should be taken into account.
(iii) All transactions involving receipts by non-profit organisations of value more than
rupees ten lakh or its equivalent in foreign currency [Ref: Government of India
Notification dated November 12, 2009- Rule 3,sub-rule (1) clause (BA) of PML Rules]
(iv) All cash transactions where forged or counterfeit currency notes or bank notes have
been used as genuine and where any forgery of a valuable security or a document has
taken place facilitating the transaction and
(v) All suspicious transactions, whether or not in cash, made as mentioned in the Rules.
Branches are required to maintain all necessary information in respect of transactions
prescribed under PML Rule 3 so as to permit reconstruction of individual transaction,
including the following information:
(i) The nature of the transactions;
(ii) The amount of the transaction and the currency in which it was denominated;
(iii) The date on which the transaction was conducted; and
(iv) The parties to the transaction.

6.2 Preservation of Records

Our bank has taken appropriate steps to evolve a system for proper maintenance and
preservation of account information in a manner that allows data to be retrieved easily
and quickly whenever required or when requested by the competent authorities
(i) In terms of PML Amendment Act 2012, branches should maintain for at least Ten years
from the date of transaction between the branch and the client, all necessary records of
transactions, both domestic or international, which will permit reconstruction of
individual transactions (including the amounts and types of currency involved, if any) so as
to provide, if necessary, evidence for prosecution of persons involved in criminal activity.
(ii) Branches should ensure that records pertaining to the identification of the customers
and their address (e.g. Copies of documents like passports , identity cards, driving
licenses, PAN card, utility bills, etc.) obtained while opening the account and during the
course of business relationship, are properly preserved for at least t e n years after the
business relationship is ended as required under Rule 10 of the Rules ibid. The
identification of records and transaction data should be made available to the competent
authorities upon request.
(iii) Branches may maintain records of the identity of their clients, and records in respect
of transactions referred to in Rule 3 in hard or soft format.
(iv) As mentioned in paragraph 3.3.1(1)(b) of this policy, branches are required to pay
special attention to all complex, unusual large transactions and all unusual patterns of
transactions, which have no apparent economic or visible lawful purpose. It is further
clarified that the background including all documents/office records/memorandums
pertaining to such transactions and purpose thereof should, as far as possible, be
examined and the findings at branch as well as Principal Officer level should be properly
recorded. Such records and related documents should be made available to help auditors
to scrutinize the transactions and also to Reserve Bank/other relevant authorities. These
records are required to be preserved for ten years as is required under PMLA, 2002.
COMBATING FINANCING OF TERRORISM
The United Nations periodically circulates the following two lists of individuals and
entities, suspected of having terrorist links, and as approved by its Security Council
(UNSC).
(a) The “Al-Qaida Sanctions List”, includes names of individuals and entities associated
with the Al-Qaida. The Updated Al-Qaida Sanctions List is available at
http://www.un.org/sc/committees/1267/aq_sanctions_list.shtml.
(b) The “1988 Sanctions List”, consisting of individuals (Section A of the consolidated list)
and entities (Section B) associated with the Taliban which is available at
http://www.un.org/sc/committees/ 1988/list.shtml.
(c) The “Yemen Sanction List”, including names of Terrorist individuals and entities
linked to Yemen. The sanctions updated list is available at
http://www.un.org/sc/committees/dft.shtml.

(d)The "ISIL (Da'esh) & Al-Qaida Sanctions List", which includes names of individuals and
entities associated with the Al-Qaida. The updated ISIL & Al-Qaida Sanctions List is
available at https://www.un.org/sc/suborg/sites/www.un.org.sc.suborg/files/1267.pdf
The United Nations Security Council Resolutions (UNSCRs), received from the Government
of India, are circulated by the Reserve Bank to all banks and FIs.The bank is required to
update the lists and take them into account for implementation of Section 51A of the
Unlawful Activities (Prevention) (UAPA) Act, 1967, discussed below. Branches should
ensure that they do not have any account in the name of individuals/entities appearing in
the above lists.
Details of accounts resembling any of the individuals/entities in the list should be reported
to
FIU-IND through HO- KYC& AML Division.
Details of accounts resembling any of the individuals / entities in the lists shall be
reported to FIU-IND apart from advising Ministry of Home Affairs as required under UAPA
notification dated August 27, 2009.
Explanation: The process referred to in Section 55 a & b do not preclude REs from having
legitimate trade and business transactions with the countries and jurisdictions mentioned
in the FATF statement
.
6.3 Freezing of Assets under Section 51A of Unlawful Activities (Prevention) Act, 1967
(a) The Unlawful Activities (Prevention) Act, 1967 (UAPA) has been amended by the
Unlawful Activities (Prevention) Amendment Act, 2008. Government has issued an Order
dated August 27, 2009 (Annex VI of this policy) detailing the procedure for implementation
of Section 51A of the Unlawful Activities (Prevention) Act, 1967 for prevention of, and for
coping with terrorist activities. In terms of Section 51A, the Central Government is
empowered to freeze, seize or attach funds and other financial assets or economic
resources held by, on behalf of or at the direction of the individuals or entities listed in
the Schedule to the Order, or any other person engaged in or suspected to be engaged in
terrorism and prohibit any individual or entity from making any funds, financial assets or
economic resources or related services available for the benefit of the individuals or
entities listed in the Schedule to the Order or any other person engaged in or suspected to
be engaged in terrorism.
(b) Branches are required to strictly follow the procedure laid down in the UAPA Order
dated August 27, 2009 (Annex VI of this policy) and ensure meticulous compliance to the
Order issued by the Government.

6.4 Jurisdictions that do not or insufficiently apply the FATF Recommendations

(a)Branches are required to take into account risks arising from the deficiencies in
AML/CFT regime of the jurisdictions included in the FATF Statement. In addition to FATF
Statements circulated by Reserve Bank of India from time to time, branches should also
consider publicly available information for identifying countries, which do not or
insufficiently apply the FATF Recommendations. It is clarified that branches should also
give special attention to business relationships and transactions with persons (including
legal persons and other financial institutions) from or in countries that do not or
insufficiently apply the FATF Recommendations and jurisdictions included in FATF
Statements.
(b)Branches should examine the background and purpose of transactions with persons
(including legal persons and other financial institutions) from jurisdictions included in
FATF
Statements and countries that do not or insufficiently apply the FATF
Recommendations. Further, if the transactions have no apparent economic or visible
lawful purpose, the background and purpose of such transactions should, as far as possible
be examined, and written findings together with all documents should be retained and
made available to Reserve Bank/other relevant authorities, on request
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