Effectiveness of AML Policies in Prevention of Money Laundering

Effectiveness of AML Policies in Prevention
of Money Laundering

 

Quantitative Research In
Management

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Executive
Summary: – A Research has been carried out for
measuring the effectiveness of Anti Money Laundering Policies for prevention of
money laundering. This research is done focusing global economy but the data
are collected from companies operating in Indian and American economy. Entire
world is facing the issue of money laundering nowadays and some countries have
formed strict rules and regulation for prevention of money laundering but still
there are many countries who are badly controlled by money launderers. Terror
funding, black money, false account, smuggling, drug dealing etc. are the
aftereffect of money laundering. There are several other ways of money
laundering and these are sometimes in such a large scale that they manipulate
the entire economic system of a country. Some countries Syria, Iran,
Afghanistan etc. are badly affected from terror activities and could not able
to fight alone with them hence many other countries are helping them out to get
this issue of money laundering resolved. There is huge amount of funds involved
in the money laundering. According to a study conducted by UNODC for money
laundering and they found that in the year 2009 and they estimated that total
criminal proceed was 3.6% of global economy and out of which 2.7% in being
laundered. There are several policies implemented by governments to prevent
money laundering but the they are unable to stop it completely because it’s a
broad process and cannot be controlled overnight. We are studying the
effectiveness of these policies for prevention and see how much successful they
are.

 

 

 

Introduction:
– The
purpose of the study is concerned about the effectiveness of Anti Money
Laundering Policies. The research work will attempt to
examine the money laundering activities and the usefulness of prevention and
detection techniques by Government and companies. Hence the main purpose of
this study is to evaluate the effectiveness of Anti Money Laundering policies.

There are several agencies and
organizations involved in Anti Money Laundering policy making, implementation
and supervision such as: –

·        
Financial
Action Task Force

·        
International
Monetary Fund

·        
World
Bank

·        
United
Nations of Office on Drugs and Crime etc.

 

Meaning: – Money laundering refers
to a financial transaction scheme that aims to conceal the identity, source,
and destination of illicitly-obtained money.

Source – Legal
Information Institute (LII). https://www.law.cornell.edu/wex/money_laundering

“Money
Laundering is any action taken to conceal, arrange, use or possess the proceeds
of any criminal conduct” (Serious Organized Crime Agency, UK)

In
simple term if we see the money laundering terminology, we can understand it in
our own language. Any activity related to money or finance committed against
policies and procedures of the governing body. Here the purpose of money
laundering is considered as fraudulent, illegal or of criminal conduct. A
person obtaining money through such illegal manner for conducting any
fraudulent or criminal conduct himself become a criminal.

 

 

Overview and
Background: –

Money
laundering refers to exchanging assets or money that were come up criminally
for different assets or money that are ‘clean’. It is not necessary that clean
assets or money have a direct link with any criminal activity. Money laundering
also includes money that’s used to fund terrorist activities and to support
many other criminal activities.

Money
laundering is a global issue and it is very difficult to measure its impact on
any economy because it is something that it is unidentifiable by the action
only. We can’t understand by the action only. It is victimless crime and it
takes place behind everyone’s eyes but its unidentifiable until it happens.

Money
laundering was growing worldwide over many years hence, G-7 (Canada, France,
Germany, Italy, Japan, United Kingdom, and United States) summit established
Financial Action Task Force (FATF) in Paris in 1989. Its primary role was to create
an international responsibility to this increasing problem. Since then this organization
has been playing an important role in fighting with money laundering. It works
closely with other international bodies like OECD (Organisation for Economic
Co-operation and Development), UNSC (United Nations Security Council) etc. that
develops and regulates Anti-Money Laundering (AML) policies worldwide. FATF
members have 29 countries and jurisdiction includes major financial centers in
Asia, North and South America, Europe- as well as the European Commission and
The Gulf Co-Operation Council. There are still many countries like Iran, North
Korea, Myanmar etc. are non-co-operative with FATF for fighting with money
laundering issues.

 

 

Research
Focus: –

The
main focus of this study is to evaluate the effectiveness of anti-money
laundering policies implemented by governing bodies. Few past cases of money
laundering will be examined in this study and will focus on any loophole or
arears of weakness in the policies and some suggestions from my point of view.
I will keep my opinion and my opinion would be concerned to my study only.

 

Research Problem: –

In
this study I will be focusing on the issues related to money laundering.
Instead of strict government rules and regulations there are large number of
cases related to money laundering occurs and creates problem to innocent people
and government of the particular locality or country. Huge amount of fund misuses
and because of that development and growth of any economy affected and loss of
people’s faith from the government arise. Big terror activities occur and because
of this economic growth largely affected.

Literature Review: –

There
are three stages involved in money laundering; placement, layering and
integration.

 

Placement –

·        
Currency
Smuggling

·        
Bank Complicity

·        
Currency Exchanges

·        
Security Brokers

·        
Blending of Funds

·        
Asset Purchase

 

Layering –

·        
Cash converted into Monetary
Instruments

·        
Material assets bought with
cash then sold

 

Integration –

·        
Property Dealing

·        
Front Companies and False
Loans

·        
Foreign Bank Complicity

·        
False Import/Export Invoices

 

AML Policy in
India: –

Financial
Intelligence Unit – India (FIU – IND) is an independent body to report directly
to the Economic Intelligence Council headed by the Finance Minister. FIU-IND is
a central agency of a Government of India, that receives financial information
pursuant to country’s anti-money laundering laws and analyze and process information
and forward those to appropriate national and international bodies like FATF
and OCED, to support anti-money laundering efforts. There are many other authorities
in India like Securities and Exchange Board of India (SEBI), Reserve Bank of
India (RBI), Insurance Regulatory & Development Authority of India (IRDA),
Directorate of Enforcement, Central Bureau of Investigation – Economics
Offences Wing, Income Tax Department etc. are involved in the implementation
and enforcement of the anti-money laundering laws. For banks and other financial
institutions, RBI is the authority to implement and regulate for anti – money laundering
guidelines. SEBI is also a regulatory body for some other financial institution
working is security market. Income Tax Department is also authorized to take
steps to prevent the offence of money laundering. They can impose taxes on
undisclosed foreign income and assets on Indian residents. This has been
further enlarged or expanded by passing law of the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015.

There
are several other rules in effect in Indian market related to money laundering
such as: –

The
Prevention of Money Laundering Act, 2002 as amended up to 2012

Prevention
of Money-laundering (Maintenance of Records) Rules, 2005 as amended up to 2013

The
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015.

Foreign
Exchange Management Act, 1999.

Benami
Transactions (Prohibition) Act, 1988 (Amended in 2015).

Anti-Money Laundering/Counter
Financing of Terrorism (AML/CFT) –Guidelines for General Insurers, 2013.

 

 

Research
Methodology: –

Research
has been done on the basis of quantitative data collected from 23 employees
working in banking and financial sectors of India and United States. A
questionnaire has been forwarded to 60 people, out of them 23 has responded to
that and forwarded back after filling up. To measure the effectiveness, I will
focus on the policies implemented by regulatory authorities for prevention of
that.

Moreover,
will be focusing on the past cases of Money Laundering and measure of
preventions taken by responsible authorities, data will be taken from
government websites, company websites, reports and financial statement to
supplement the research.

 

 

 

Analysis: –

A
questionnaire prepared for analyzing the effectiveness of AML policies in banking
and other financial sector for prevention of money laundering.

Question 1.
What is your company’s regulatory status?

Asked
this question to all the 23 respondents and as per their answers it is found
that out of 23, 5 respondents were from banks and rest 18 were from the other financial
institutions.

 

Question 2. Does your company
do the background verification of every new employees they recruit?

 

Many of the money laundering
activities are done with the help of corrupt staff of the company. If the
employees are wise towards their work and not supporting to any illegal
activity then, it is practically not possible to any launderer to finish the
illegal task. Hence, it is important for the staff to explain if they are not
from any illegal background.

Asked this question to 23 respondents
and found that out of 23 respondents 15 respondents responded positively i.e.
they said yes, their company does background verification of new recruits before
hiring them and 8 responded negatively. That means there is still loophole that
some financial institutions are not taking proper steps to prevent money
laundering.

 

Question 3. Does
your company have an employee training program to teach employees about Money
Laundering/Terrorist financing and to assist them in identifying/reporting
suspicious activities?

Reason
for asking this question is to identify that if the employees are aware of
identifying suspicious activities or not, if not whether their company provide
them any kind of training for that or not. If employees are aware of such
scenario that they can identify such kind of suspicious activities then it
would be easier for preventing that kind of money laundering activities.

Asked
this question to 23 respondents and out of 23 respondents, 11 respondents said Yes,
their company have an employee training program to teach employees about Money
Laundering/Terrorist financing and to assist them in identifying/reporting
suspicious activities but 12 respondents said No as their company doesn’t have
such kind of training program. The results show that companies are still not
taking their part for the prevention of such kind of activities. Companies should
take their part in strengthening these kinds of measures by the responsible
authorities.

 

Question 4. How often do your
company train their employees on AML?

Policies,
rules and regulations are being changed frequently to keep updated with the
database with the activities and strengthen the measures of the government. So,
the reason for asking this question is to make sure if they are aware about the
changes and make them updated accordingly. Out of total 23 respondents, 11 respondents
said that they are being trained half yearly and 7 respondents said that they
are trained yearly, 2 respondents said that they are trained once and rest 3
were not trained.

According
to the responses received many of them updated at least once in a year but,
still there are some gap which needs to be filled and for that extensive amount
of efforts are required and companies should take the responsibility to do so.

 

Question 5. Are your senior
management and directors are also given the training on AML?

Companies
management and senior management must be aware about the rules and regulations
and recent amendments in the policies so the AML training must be given to them
as well to keep them updated.

Out
of 23 respondents 18 responded positively which means that most of the senior
management are aware of the risk of money laundering, which is a good sign of policy
effectiveness because if the companies senior management are effective and have
good awareness about the impact then they may effectively influence their
subordinates to follow the policy and keep the awareness about the cause and
effects of money laundering and AML policies.

 

 

Question 6. Does your
institution have an established audit and compliance review function to test
the adequacy of your Anti-Money Laundering/Terrorist Financing policies and
programs?

As
rules regulations are frequently updated so there should be a team or a group
of individuals who can review policies and able to demonstrate them to other member
of staff effectively and efficiently. Because policies, rules and regulations
are very critical and understanding them in same way are extremely important.

Out
of 23 respondents, 14 respondents answered as yes to their question and 9
respondents answer was no, it means companies need to implement or set a
particular team or hire a group of individuals who can thoroughly review newly
implemented policies and explain them to the other member of staff to implement
it effectively.

 

 

Question 7. Does your financial
institution communicate new AML related laws, or changes to existing AML
related policies or practices to relevant employees?

If there
is any policy changes or updates in thee policies are available then, it needs
to be communicated to the employees of the companies because if they are
available to the policy changes then they can effectively follow the rules and
procedures. Then it is the company’s responsibility to communicate any amendments
to its employees.

Out
of 23 respondents 18 said yes that their company communicate any changes in AML
related laws and 5 said no to this question. It is good scenario but companies
need to implement changes and communicate them to its employees.,

 

Question 8. “Has your
company implemented processes for the identification of those customers on
whose behalf it maintains or operates accounts or conducts transactions?”

It is
necessary for the companies to keep record of the customers on whose behalf
they maintain their accounts and does transactions. The reason being if they
are unaware of such customers activity then they may transact amount which
leads to money laundering or any illegal activities.

Out
of 23 respondents, 19 respondents responded positively to this question. Companies
are doing good in this perspective but there are some companies who still need to
implement this effectively to avoid any loophole in AML policies.

 

 

Question 9. Do your company have
procedures to establish a record for each new customer noting their respective
identification documents and ‘Know Your Customer’ information?

As per
policy, every company must record its customers details to avoid any problems
related to identity theft etc. It is mandatory for every company to do so. As per
the responses received from the respondents, every company keep record of the
customer to avoid the misuse of identity theft. That is good sign of it and may
be effective step to prevent money laundering.