Feature: Anti Money Laundering and India

One of the biggest faced by governments across the globe battling terror is money laundering. How to stop the funding and transfer of funds to terror outfits? Post 9/11, a lot of measures have been put into force to curb the transactions. All these actions are labelled as Anti-Money Laundering or AML. Recently there were reports of how sleeping cells in Germany and Canada were recieving money through Internet. In fact, Internet has become a favored means for surreptiously sending across money by terrorist outfits.

AML is a war, rather an ongoing war. And the biggest weapon that the governments have with them is technology. By using IT extensively, money laundering can be curbed to a great extent. Indian authorities have also woken up to AML and are trying to put in place the strategy, it is an uphill task. I had authored a story on the issue, and it was published in CIOL. Thought, I'd share the same....
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Battling terror by choking finance

Several countries are in the process of implementing anti money laundering measures to fight off the evil of terrorism. Where does India stand? An analysis.

One hot summer morning in June, 2000, Mohammed Atta and his close associate Marwan al-Shehhi sauntered into the Florida SunTrust Bank and opened a joint account with few and forged documents. Just a few months ago, Atta and al-Shehhi had opened accounts in Citibank and HSBC’s Dubai branches, respectively. Over the summer, approximately $109,440 was wired into their account from their U.A.E. bank accounts. According to FBI, the deposits to their bank account totaled $303,481.63 in over a year. This money was used for airline tickets, flying lessons, living expenses, etc. The whole operation culminated on the morning of September 11, 2001, when Atta crashed the American Airlines Flight 11 Boeing 767-223ER aircraft in the North Tower of the World Trade Center. And the world woke up to terrorism, and the evil known as money laundering.

Post 9/11, U.S. came down stringently on money laundering, trying to eradicate the financial sources was an important objective of America’s war on terror. To that end, numerous legislations were promulgated; in the U.S. it was the Patriot Act, while the European Commission set up the Financial Action Task Force (FATF) recommendations and the Wolfsberg Principles on Private Banking. “The FATF has a set of forty recommendations which are updated on a consistent basis to keep pace with money laundering techniques. The FATF membership now includes 31+ countries with some countries from the Gulf Council as permanent members,” says Hanuman Tripathi, MD, Infrasoft.

It is certainly not an easy task, as the criminals try and stay one step ahead of the legal dragnet. And technology is on their side. With the boom in Internet banking and online transactions, fraudulent funds can be transferred at click of the mouse. Premjit Dass, associate director (Advisory), Forensic Services, KPMG, estimates that close to $590 billion to $1.5 trillion are laundered annually, “When viewed in the context of the global GDP, it is a very large amount,” he points out.

But the authorities are trying to catch up, with the use of technology, especially software. Major banks across the developed countries have put in to place anti money laundering (AML) processes; these could range from appointing an officer to installation of an enterprise wide software solution.

In the Indian context, money laundering has always been a big problem. Hawala and black money economy are the two big issues that have plagued the various regulatory authorities over the years. Black economy according to estimates was around 40% of GDP in 1995-96, (Source: The Black Economy in India, author Arun Kumar). “Few can realistically estimate the dramatic amount of wealth locked out of the Indian economy and the myriad means through which is seeks legitimacy,” says Suheim Sheikh, managing director, SDG & head (Capital Market & Anti Money Laundering Solutions), 3i Infotech.

Ironically, money laundering has never been considered a serious issue in India, it is often deemed as a legitimate mean to save money from the tax department. All that seems to be changing now, with the Reserve Bank of India (RBI) and the government coming down heavily on money launderers and trying to get to the very roots of these activities.

The Prevention of Money Laundering Act 2002 has come into effect from July 1, 2005. The RBI has issued KYC (know your consumer) guidelines to banks that were needed to implement by December 31, 2005, but many Indian banks are still in the process of implementing these guidelines. “SEBI (Securities and Exchange Bureau of India) has also issued AML guidelines to stock brokers vide its notification ISD/CIR/RR/AML/1/06 dated January 18, 2006. A FIU or Financial Intelligence Unit has also become operational,” adds Premjit.

According to source at Indian Bank Association, the format for the KYC feedback forum is still being discussed.

To help banks and financial institutions keep track of fraudulent transactions, many IT firms have developed enterprise level AML software. “AML software is essentially a pattern recognition and behavior detection technology. It is largely comprised of a KYC and transaction monitoring modules,” says Hanuman. Simply speaking, if there are constant transactions of big amounts of money, the system will alert the bank and it could then keep a tab. Were, this system in place in 2001, the big transactions made by Atta and al-Shehhi would have alerted the authorities. The software has the ability to categorize the customer from a risk-based perspective. The bank customers are a worried lot though, as the authorities will be watching and recording every transaction.

Indian IT companies are vying to grab a chunk of the global anti money laundering that is estimated to be worth around $10 billion, whereas the Indian market is estimated to be worth around Rs. 185-220 crores. Companies like Infrasoft and SDG-3i Infotech are the leading players in the domestic space. While most of the multinational banks have or are in the process of implementing AML processes, it is the nationalized banks that seem to be dragging their feet.

There are many reasons as to why public sector banks are lacking in comparison to private ones, chiefly because they have much larger number of branches situated in far-flung areas that are difficult to connect and they also have a complex decision making process.

“The MNC banks have an additional advantage since they have had to implement their group AML standards as they fall under the purview of the regulators in the home jurisdictions that have had AML legislation and rules and regulations for a number of years,” adds Premjit. Banks like Vijaya Bank, UTI Bank, Karnataka Bank, Canara Bank have all implemented AML systems.

Indian IT firms are also making a foray into the Middle East and South Asia markets and looking at garnering a major share. Meanwhile, companies like TCS, Iflex, Infosys, etc. are also looking at tweaking their core-banking solutions, so as to be able to deliver AML features.
Finally, will the stopping the cash flow really make an impact on global terrorism?

The answer is unequivocally yes. Nothing works like money, if these terror groups are deprived of their legitimate finances, they will be unable to carry out any major attacks. It isn’t a coincidence that with the implementations of these measures, U.S. has become a lot safer and hopefully there never will be another 9/11.