The United Kingdom have adopted the Know Your Customer rule by which banks have to verified accordingly for their customer before opening an account in respect of them. KYC is probably the most important aspect of the Rules and Regulations and underpins all anti-money laundering procedures. Satisfactory "know your customer" procedures provide the basis for recognizing unusual and suspicious transactions. Where there is a business relationship, a suspicious transaction or instruction will often be one that is inconsistent with customers know legitimate transactions, or with the normal business activities for that type of account or customer and the customers normal expected activities to recognize when a transaction or instruction, or a series of transactions or instructions, is abnormal. [1]
Risk Based Approach
Guidance notes suggested that firms form a commercial judgment on the level of risk associated with
The client's source of wealth and its country of origin;
The product and services; and
Whether the application is made in person or through a remote medium such as telephone, post or the internet.
It is called a risk based approach and involves consideration of factors such as whether the client is a politically exposed person, and whether they are based in blacklisted territory. Risk assessment as to whether the client or product/ service is high or low risk will influence the nature and extent of KYC and KYB verification that is required at the outset of the relationship, and also subsequently for the purpose of transaction monitoring. Financial Services Authority FSA has itself taken a risk-based approach to monitoring money laundering compliance. Firstly it will identify risk clusters; [2]
International banking and high risk jurisdiction: The FSA report refers to the Abacha investigation and need to focus on banks with direct involvement in non-FATF markets.
IFAs and offshore funds: The FSA report refers to a perceived lack of understanding within the sector of the money laundering risks combined with cash purchases of products;
Domestic banking: The FSA report refers to large volumes of small scale deposits;
Online banking: The FSA report refers to firms using online broking to conduct business being potentially vulnerable because the sector is not a face-to-face environment and controls are perceived weak;
Credit unions: The FSA report refers to a general low level of awareness in this sector, making it particularly vulnerable to the risk of money laundering;
Spread betting: The FSA report states that this sector provides a channel for money laundering. There is a lack of awareness increasing its vulnerability.
These are the risk areas which should have to be covered by each and every financial institution and carry out risk assessment. This assessment needs to take account of views of the FSA and other bodies as to what sectors are high risks. [3]
Procedures considered for high Risk situations
Firms should have assessed whether they have adequate procedures or management information system in place to provide relationship managers and MLROs with timely information. The type of information that may be needed includes transactions made through a customer's account that are unusual, the nature of a customer's relationship with the firm, and they readily identifiable connected accounts and relationships.
The persona; circumstances and sources of wealth and income for higher risk customers should be recorded, reviewed at least annually and, wherever possible, verified to check their legitimacy.
Firms should seek to develop a clear policy, procedures and controls in respect of business relationship with customers who are known, suspected, or advised, to be PEPs being particular area of risk which requires enhanced due diligence. Since not all PEPs may be identified initially, and because existing customers may subsequently acquire PEP status, regular reviews for identifying PEP customers should be undertaken.
Firms should consider reviewing the KYC information held on file and the activity for higher risk customers at least annually. [4]
Identifying Your Client Requirement
This is probably the most important aspect of the rules and regulations and underpins all anti money laundering procedures. The FSA recently fined Royal Bank of Scotland about £750,000 for failing KYC Know your client procedures. FSA acquired this power on 1st Dec 2001.
Carol Sergeant, Managing director of the FSA said," This fine demonstrates that the FSA takes anti-money laundering compliance very seriously indeed. The steps RBS took to satisfy it that their clients really were who they claimed to be were inadequate. We have made clear that we expect all financial firms to have strong and effective anti-money laundering procedures in place and - equally importantly - to ensure that they are properly implemented. This requires firms to monitor the effectiveness of those procedures to ensure an appropriate standard of compliance. Firms that fail to do this lay themselves open to increased risks of being used for money laundering."
"The good news in this case is the prompt and effective way in which the shortcomings were addressed once senior management became aware of them. As a result of this, and RBS's open and constructive approach to the FSA's investigation, the fine imposed is very substantially lower than it otherwise would have been. The other good news is that there is no evidence of actual money laundering having taken place." [5]
In a Final Notice to the RBS the FSA noted;
'The high level of breaches between January and March 2002;
That 'in spite of the system which RBS had in place, there was a failure adequately to monitor compliance with regulatory requirements;
'the size of the RBS and the retail banking market in which it operates presents a serious risk to the FSA's statutory objective to reduce financial crime'. [6]
The Role of the Financial Sector
While it is generally accepted that efforts to combat money laundering and the broader financial aspects of serious forms of transnational criminality must place particular reliance on criminal justice mechanisms of the orthodox kind, the nature and extent of the problem are such as to require the imposition of internationally co-ordinate measures to avoid the use of the financial system by criminals for their criminal activities. The prevailing philosophy in this regard was well captured by Sherman in 1993 in these words: 'The fight against money laundering cannot be the sole responsibility of government and law enforcement agencies if these activities are to be suppressed and hopefully, in the long term, substantially eliminated it will require the collective will and commitment of the public and private sector working together'.
The first major initiative to give substantive expression to this approach was the December 1988 Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering issued by the Basle Committee on Banking Regulations and Supervisory Practices (the Basle Committee). Its basic purpose is to encourage the banking sector, through 'a general statement of ethical principles', to adopt a common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities and, in particular, through drug trafficking. The central principles which it enunciates were recently summarized by a senior official of the Bank of England as follows:
Know your customer: Banks have responsibility upon themselves in identifying their customer before opening up their accounts. They should have to make reasonable efforts to verify the customer's true distinctiveness, and they should have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet).
Compliance with laws: Bank management should have to ensure that the business is conducted in compliance with high ethical standards, that laws and regulations are followed up properly and that a service should not provided where there is good reason to believe that transactions are related with laundering activities.
Co-operation with law enforcement agencies: Within any constraints imposed by rules of agencies in relation to the customer confidentiality, banks should have to co-operate fully with the national law enforcement agencies. In addition to that where there are reasonable grounds for suspecting money laundering, banks should have to take appropriate measures which are reliable with the law.
Policies, procedures and training: All banks should properly adopt policies reliable with the principles set out in the Statement and should have to ensure that all members of their staff anxious, wherever positioned, are informed of the bank's policy. Concentration should be given to staff training in matters which were covered by the Statement. To promote obedience to these principles banks should implement specific procedures for customer classification and for retaining internal records of transactions. Arrangements for internal audit may need to be comprehensive in order to set up an effectual means of testing for general conformity with the Statement. [7]
By then till today in this modern era of advanced technological world were the banking has reached to superb heights. Banking regulation has been controlled by the Financial Services Authority FSA who gave its time to time modifications but the basic practices in banking generally based on KYC (Know your customer) rule.
Basle Committee on Banking Regulation and Supervisory Practices has revisited money laundering several times to further reflect and elaborate current supervisory thinking. Customer due diligence for banks was published in October 2001 and has had a significant impact, designed as it was to provide guidance as to minimum standards for worldwide implementation by all banks. While harmonious with the FATF Recommendations the guidance provided on the KYC principle is much more detailed. [8]
US Prevention and Enforcement strategies
The risk based approach is grounded in the premise that the limited resources (both governmental and private sector) available to combat money laundering and terrorist financing should be employed and allocated in the most efficient manner possible so that the sources of the greatest risks receive the most attention. A risk-based approach is intended to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified, thereby facilitating an efficient allocation of this limited pool of resources. By contrast, a "rules-based" approach ignores risk and mechanically applies the governing standards in rote, box ticking manner. The proportionate nature of risk-based approach means that higher risk areas should be subject to enhanced risk-based procedures, such as enhanced CDD (Customer Due Diligence) and enhanced transaction monitoring. By contrast, simplified, modified, or reduced risk management procedures may apply to lower risk areas. An effective risk-based approach involves identifying and categorizing money laundering and terrorist financing risks and establishing reasonable controls based on the risks identified. [9]
Prevention and Enforcement
The prevention pillar of the AML regime is designed to deter criminals from using private individuals and institutions to launder the proceed of their crimes. Enforcement is designed to punish criminals when, despite prevention efforts, they have facilitated the successful laundering of those proceeds.
The prevention pillar has four key elements:
Customer Due Diligence: CDD is intended to limit criminal access to the financial system and to other means of placing the proceeds of crime.
Reporting: Reporting requirements alert authorities to activities that may involve attempts to launder those proceeds.
Regulation and Supervision: Regulation implement anti-money laundering laws and often specify detailed CDD and reporting requirements, while supervision ensures compliance with laws and regulations by financial institutions and nonfinancial businesses and activities.
Sanctions: Sanctions punish individuals and institutions that fail to implement the prevention regime, in particular with respect to CDD and reporting requirements.
The enforcement pillar has four key elements: a list of underlying offences or predicate crimes, investigations, prosecution and punishment, and confiscation. The list of predicate crimes establishes the legal basis for criminalizing money laundering. Various detection and investigation techniques are used to identify specific instances of money laundering and link each to predicate crimes. If justified by the investigation, the money launderer is prosecuted. If convicted, the money launderer is not only fined or sentenced to serve time, but the criminal proceeds that he was attempting to launder may also be confiscated or forfeited after having been initially blocked or seized. For example, A drug dealer, having collected $25,000 from the sale of illegal drugs, takes the money to a bank and seeks to open an account in order to deposit the money (placement) before writing it to a bank in Colombia (layering), with the ultimate intention of bringing the funds back to the United States to invest in a legitimate business (integration). An effective AML regime requires the bank to conduct CDD before opening this account through a process sometimes referred to as "knowing your customer". What is the true name of the customer? Where does he live? What is his line of business? Can the bank be reasonably confident that the money that the customer wants to deposit is not derived from criminal activity? Assumes that the customer succeeds in passing these tests and is allowed to open an account. The bank is still required to submit a report to the authorities about the large cash deposit. An employee of the bank may also be suspicious of the fact that the customer is wiring a large amount of money to a bank in Colombia, and may decide that it is appropriate to submit a suspicious activity report (SAR) to the authorities.
Reporting Requirements under the UK money laundering laws
The Financial Services Authority (FSA) plays an important part in the fight against money laundering through its continued involvement in the authorization of banks and investigations of money laundering activities in banks. The Financial Services and Markets Act were implemented in December 2001. The FSA administers a new civil-fines regime and prosecution powers. The FSA has the power to make regulatory rules in relation to money laundering, and enforce those rules with a range of disciplinary measures (including fines) if the institutions fail to comply.
There are various organizations in the UK which comply with the anti money laundering measures. The Financial services authority deals with the financial or business sector of the UK. All businesses and financial institutions have to cooperate with the FSA in performing their businesses and activities and must have to report any suspicious activity to the FSA. Banks are playing major role in compliance with the FSA, they should have to report any suspicious activity to the FSA otherwise they would bear serious penalties. In UK there is civil liability as well as criminal liability for the related money laundering offences and crimes.
The regulation and rules require those within their scope to establish and maintain certain procedures, to raise awareness of these procedures and to train staff to recognize money laundering activities. The purpose is that financial sector can provide intelligence to law enforcement agencies in their fight against organized crime.
The criminal law imposes a mandatory obligation on all management and staff within regulated financial sector to report as soon as is practicable where they have knowledge or suspicion of money laundering, or where there are reasonable grounds to suspect money laundering, and the information is gained in the course of their regulated business activities. The PCA requires that person handling relevant financial business must report their knowledge or suspicion to 'a nominated officer'. FSA rule 4.1.2. Applies this requirement to any member staff that handles or is managerially responsible for handling transactions that may involve money laundering.
Unusual, Suspicious and other transactions
Monitoring of transactions and relationships
Recommendation 11 (Attention to unusual transactions)
Banking and Securities sector
Banks, securities broker dealers, future commission merchants and introducing brokers in commodities are obligated under the BSA to file suspicious activity reports, and reports on a number of specified types of transactions. Regulation 31 CFR 103.18 characterizes the obligation, in part, as one where "the bank knows, suspects, or has reason to believe that…the transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the facts available, including the background and possible purpose of the transaction". Then as a part of their AML compliance program, financial institutions must have appropriate policies, procedures and processes in place to monitor and identify unusual activity, with particular emphasis on high risk products, services, customers and geographic locations.
All of these written records must be retained by the reporting financial institution for at least five years
Reporting Requirements under the US money laundering laws
The BSA and the USA PATRIOT ACT covers the financial institutions that should have adequate anti money laundering program and customer identification measures. Those were two central authorities for reporting which are listed below.
US department of the Treasury's
Financial Crime Enforcement Network FinCEN
In the Patriot Act title III which is known as International Money Laundering Abatement and Financial Anti Terrorism Act 2001, it made a number of amendments to the BSA, which are codified in subchapter II of chapter 53 of title 31, United States code. These amendments are made in order to prevent, detect and prosecute international money laundering and financing of terrorism.
Under the BSA the financial institutions are required to report deposits of more than $10,000 in cash made by individuals on a single day transaction. In order to disguise criminal activity the launderers can change cash through various other techniques like business operation in dealing with check cashing services or jewelers stores. Converting cash into negotiable instruments for example cashier checks, travelers check and money orders.
The BSA requires financial institutions to engage in customer due diligence which is popularly known as know your customer. In dealing with this the customers true identification is needed by the bank to proceed further with their accounts. This is very important aspect from the nature of banking activity because by doing this bank is being able to stop the fake accounts which can be used to disguise criminal money or illegal money. The high class of customers like Govt. officials and private banking account deals with enhanced or extra due diligence as because there accounts were more risky to be use for money laundering purposes. The institutions should have to file suspicious activity reporting as soon as there is a suspicious activity seen. The regulators of the industries involved are responsible to ensure that the financial institutions comply with the BSA. There is authority or responsibility of the Federal Reserve and the Office of the Comptroller of the Currency which should have to regularly inspect banks, and may impose civil fines and can put matter for criminal prosecution for non-compliance. There is number of banks which have been fined and prosecuted for failure to comply with BSA rules and regulations.
Overview
The UK and US money laundering requirements were different in nature but both have determined to look forward about banking sector regulation. They have stressed upon the customer due diligence significantly so that banks should no more be use as means of money laundering. Those measures which have been adopted by the countries are vulnerable to banking sector. In UK FSA playing an important role in preventing money laundering whereas in US BSA have proving its worth in preventing money laundering.
