aml survey 2012
TRANSCRIPT
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FORENSIC
India
Anti-MoneyLaunderingSurvey 2012
kpmg.com/in
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c | Section or Brochure nameIndia Anti-Money Laundering Survey 2012
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Foreword 01
Executive Summary 04
AML Environment 07
Know your customer 11
Client screening, Transaction Filteringand Monitoring 17
Reporting 23
Training 24
Cost o Compliance 25
Conclusion 26
Prole o Respondents 27
Contents
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ForewordI am happy to learn that KPMG in India is launching its Anti Money
Laundering (AML) Survey 2012. Ater the legislative ramework or
AML was laid down by the Prevention o Money Laundering Act, 2002,
substantial progress has been made in increasing awareness and
strengthening the anti-money laundering/counter nancing o terrorism
(AML/CFT) regime.
The Financial Action Task Force (FATF), which sets standards in the area o
AML/CFT, is undertaking a resh exercise to review and revise the existing
recommendations to make them more relevant to the changing times.These changes may pose resh challenges in terms o implementation and
compliance.
The survey being brought out by KPMG is an important initiative in capturing
inputs rom the reporting universe. The survey also highlights important
trends and patterns that would assist the regulators and policy makers in
better understanding o the issues and challenges aced by the reporting
entities.
While complimenting KPMG on taking this initiative, I am condent that the
publication will also help in wider dissemination o the relevant issues and in
improving compliance to urther our quest or protecting the integrity o thenancial sector.
Shri P. K. Tiwari
Director
Financial Intelligence Unit – India
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Executive SummaryIncreased ocus on money laundering risk by the Senior
Management
The estimated amount o money laundered globally in one year is 2-5 percent o the
global GDP, or USD 800 billion - USD 2 trillion1. Increasingly, the nancial services
industry is looking at anti money laundering compliance as a key concern area,
with it guring as an important point o discussion or board o directors and senior
management on a requent basis. Organizations are using AML compliance as aparameter to measure senior management perormance, which in turn is ensuring
accountability across organizational processes and products. Increasing internal
ocus by the organizations on AML coupled with the external actors such as high
prole corruption cases, terrorism, heavy nes paid by global nancial institutions
and FATF membership is gradually leading to tighter AML compliance.
FATF: Membership comes with increased responsibilities
The commitment o nancial institutions to the Financial Action Task Force (FATF)
standards is crucial or the ght against money laundering and terrorist nancing.
India’s membership and commitment to FATF standards will eventually lead us to
attain an equal ooting with other developed countries on compliance with AML
regulations. The nancial services industry has recognized the changes due to FATF
membership and our respondents believe that scrutiny is intensiying primarily oncustomer identication procedures (KYC) and transaction monitoring and reporting.Increasingly, nancial institutions are evaluating the inherent AML risks in their
products and services/ delivery channels/ transactions and taking steps to mitigate
those risks.
1 United Nations Oce on Drugs and Crime(http://www.unodc.org/unodc/en/money-laundering/globalization.html
India Anti-Money Laundering Survey 2012 | 4
Discuss the AML
prole on at leasta monthly or
quarterly basis
76%
Regulatory
scrutiny has
become more
stringent post
FATF membership
84%
Integrate AML
in the businessstrategy o
new products/
services
41%
Regulatory scrutiny
is high in the area
o Know Your
Customer policy
and processes
90%
Publicize the
AML complianceprogramme
internally
35%
Agree that scrutiny
will remain high in the
area o Transaction
Monitoring /
Reporting
81%
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Laying the oundation: Money laundering risk assessment
Regulators have advised nancial institutions to regularly assess money laundering
risks in their products/services/transactions/delivery channels as well as evaluate
i their current policies and procedures mitigate those risks. While an increasing
number o respondents conduct periodic risk assessments to evaluate their
money laundering risks, a signicant number undertake this based on a change in
product/ procedure or regulatory change, which is a matter o concern. Also, with a
signicant number stating that their institutions’ AML policies and procedures arebased on local regulations and benchmarked against global best practices – this
percentage needs to increase given the global requirements and standards that
come as a part o being a member o the FATF.
Drilling down to unearth the core
Largely, nancial institutions have put in place basic policies and procedures toidentiy and prevent money laundering and terrorist nancing. A risk based approach
towards AML, proper customer identication procedures including identication o
benecial ownership and politically exposed persons, ongoing client due diligence
and sanctions monitoring etc. are some o the key areas that are being monitored
closely. However, while monitoring and identiying o these procedures is
important, establishing an ecient client data updation process is also equally vital.
Conduct an AML
risk assessment on
at least a hal yearly
or yearly basis
Institution ollows arisk based approach
in relation to
account opening
Conduct an AML
risk assessment
on the basis o an
event
Benecial owneridentied at the
time o opening an
account
AML policies and
procedures are based
on local regulations and
benchmarked against
global best practices
Have proceduresor monitoring
sanctions lists
beore account
opening
Customerdocuments are
collected and
veried beore
opening an account
Have specicprocedures in place
or identiying
politically exposed
persons
65%
86%
32%
84%
51%
83% 81% 77%
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Testing and monitoring the eectiveness oyour controls
As important as it is to set up policies and procedures to
monitor the risk o money laundering, it is equally important
to establish a ormal programme that tests and monitors the
eectiveness o that system. A majority o our respondents
do have such a procedure in place with the onus largely alling
on the Compliance and Internal Audit unctions.
Investment to be made in the area o AMLNot only is the risk o money laundering being taken more
seriously, a majority o our respondents also eel that the
overall investment in AML, including direct and indirect
cost, will increase in the next two to three years. A
majority o the respondents eel that this investment will,
in all likelihood, be in the area o a 10 to 50 percent hike
largely in areas such as implementing / upgrading their
transaction monitoring system ollowed by implementingglobal policies and remediating/ reresh exercise.
Have a ormal
procedure to test
and monitor the
eectiveness
o anti-money
laundering systems
and controls
Investment wil l
increase by 10 to 20
percent
Compliance
unction plays an
important role
in the testing
and monitoring
procedures
Internal Audit
plays an important
role in the testing
and monitoring
procedures
Investment will
increase by 21 to
50 percent
71% 44%80% 76% 29%
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In June 2010, ater a stringent
evaluation, India was admitted asthe 34th country member to the
Financial Action Task Force (FATF). This
membership has helped domestic
enorcement agencies to exchange
inormation and Indian nancial
institutions gain entry into markets oother member countries by portraying
that Indian nancial institutions are
more comparative in terms o risk
management standards.
The FATF mutual evaluation report
also highlighted certain improvement
areas in the AML regime within India
and hence it comes as no surprise that
the regulatory guidelines have been
strengthened by bringing in changes to
the Prevention o Money Laundering Act
(PMLA) and Rules in 2009.
The Financial Intelligence Unit - India (FIU-India) is the nodal agency in India or
managing the AML ecosystem and has signicantly helped in coordinating and
strengthening eorts o national and international intelligence, investigation and
enorcement agencies in pursuing the global eorts against money laundering and
related crimes; while the Prevention o Money Laundering Act (PMLA) 2002, orms
the core ramework or combating money laundering in the country.
AML Environment
Environment post FATF membership
On discussing the state o AML
compliance post the FATF membership
o India, while a majority o the
respondents elt that the AML
requirements were acceptable, a
signicant number also indicated thatthese requirements needed to bebetter ocused primarily with respect
to areas like customer due diligence,
identication o benecial owners and
ongoing due diligence approach. Some
o the respondents also eel that the
burden is getting onerous. (refer to
Figure 1)
FATF is an inter-governmental
policy making body whose purpose
is development and promotion
o policies to combat money
laundering and terrorist nancing
threats. FATF has established aseries o orty recommendations
and nine special recommendations
that set out the basic ramework
or anti money laundering eortsand are intended or universal
application.
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Figure 1: In relation to AML compliance in the country post FATF membership,
which o the ollowing statements fts your view?
Figure 2: Which o the ollowing areas has the most regulatory scrutiny?
Post obtaining the membership, an
overwhelming 84 percent o the
respondents believe, as a consequence,
that the regulatory scrutiny will become
more stringent. The key areas that
Source: KPMG in India’s AML survey 2012
Source: KPMG in India’s AML survey 2012
1 As per news reports - http://articles.economictimes.
indiatimes.com/2011-07-1/news/29758455_1_small-
banks-aml-apex-bank
2 www.bankersonline.com/security/bsapenaltylist.htm
specically stand out (refer to Figure
2) are Know Your Customer (KYC)
policy and processes and transaction
monitoring.
Globally, regulators have imposed nancial penaltiesand initiated look back reviews or deciencies in the
areas o sanction screening and payment ltering2.
Though currently the respondents to the survey have
not considered these areas to be prime areas or
regulatory scrutiny, however, in our opinion based on
global trends, this shit will probably occur.
There have been multiple instances whereenorcement agencies have taken action against
nancial institutions in the recent past. RBI has ned
48 Indian Banks in six months leading up to June 2011
or violating the KYC and AML norms1. These actions
by the banking regulator may have triggered the
respondents to believe that regulatory scrutiny hasbecome stringent.
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percent o the respondents stating that
discussions relating to AML issues areundertaken at least quarterly.
We can attribute multiple reasons or
this shit bucking the global trend. Over
and above the FATF membership o
the country, there have been multiple
high prole instances o nancial
crime, corruption and black money
investigations which have hit the Indian
corporate world. This has led to serious
questioning o corporate governance
standards and increased pressure
on organizations rom enorcementagencies to ocus on regulatory
compliance. Moreover, India has been
This increasing importance being
given may be due to a combination oactors such as FATF membership o the
country, higher scrutiny o regulators,
nancial penalties on major global banks
by respective country regulators and
reputational risk associated with non
compliance.
Globally there has been a downward
shit, with only 62 percent o the
respondents3 citing anti-money
laundering as a high prole issue or
senior management; this o course
could be attributed to the global nancialcrisis. In India, the risk o AML seems
to be taken more seriously with 76
Senior management play a key role in
setting the right tone at the top and
ensuring accountability throughout the
hierarchy to maintain eective oversightat all levels within an organization.
They are responsible or managing
the risks aced by the organization and
are accountable to shareholders and
regulators alike.
Compared to our last survey, there
has been a substantial increase in the
level o involvement and importance
that is now being given to AML issues.While in 2009 only 67 percent o the
respondents indicated that their senior
management including their board
o directors took an active interest in
AML related issues and discussions;
in the current survey 86 percent o therespondents state the same.
Today, management is setting
leadership examples by integrating AML
compliance within the business strategy
(refer to Figure 3). It is important to notethat respondents have begun to take
disciplinary action against employees
breaching policy. While it is a very small
percentage, this shows the growing
seriousness o the management
towards AML compliance.
Figure 3: How has the management set an example or AML compliance in your
organization?
Source: KPMG in India’s AML survey 2012
a target o terrorism rom homegrown
and separatist cross border terroristgroups and thus the greater need
to manage nancial channels and
scrutinize the movement o unds.
In comparison to the western world,
India has been a late entrant (34th
member country o FATF) thus being
lower in the AML compliance maturity
curve vis-à-vis. other developed nations.
Hence, in our opinion, the management
ocus in India will continue to remain on
AML compliance as regulatory scrutiny
will become more rigorous.
AML is a board level topic
3 Statistic rom the KPMG Global Anti-Money Laundering Survey 2011
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Moving away rom just a ‘Tick in the Box’
While the current AML regulations are old, they are still evolving. A review o the surveyresults indicate that entities are still trying to nd their way in relation to the implementation
o an eective AML compliance program in their organizations. Though the seniormanagement are actively involved in discussing and reviewing the status o AML compliance,
the same may be because o heightened regulatory scrutiny and in light o imposition o nesby regulators across the globe.
AML has traditionally been a compliance topic and the nancial services community howeveris yet to view it with all its potential as a risk management tool. Hence the objective has been
basic compliance rather than using it as a risk management practice. In order o priority, AMLcompliance, i not at the same level, would all ater basic regulatory and nancial requirements,
Basel II requirements and nancial crime (raud) management requirements o an institution.
The Basel II requirements ocus on credit and market risk and more recently operational risk area.As per Basel Il guidelines, the operational risk area is the risk o direct or indirect loss resulting rom
inadequate, or ailed internal processes, people and systems, or rom external events. One o thekey requirements o operational risk management is managing the risk o money laundering which
is vulnerable to high regulatory action in turn eecting the reserve requirements and eventually theprotability o a bank. Hence, managing money laundering can be considered to be an integral part o the
risk management unction.
The perception o the industry is slowly undergoing a transormation. Regulators have become moreactive and are developing robust processes such as FIU India has signed MoU’s with multiple geographies
or sharing o inormation and data related to money laundering activities. These developments, along withthe FATF umbrella, would eventually urge institutions to benchmark themselves globally on AML compliance
procedures and processes, thus enabling them to make that strategic move rom basic compliance to a riskmanagement outlook towards AML compliance.
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Know your customer (KYC)
Global benchmarking
Financial institutions are increasingly
becoming global in their approach by
establishing branches, subsidiariesor promoting entities in multiplegeographies. This creates a unique
challenge to manage the regulatory
requirements o multiple regulators.
Hence, more and more institutions
have been benchmarking their policies
and procedures with global best
practices. This was evident in our
2009 India survey wherein 66 percent
o the respondents had stated thatthey benchmark their policies andprocedures with global best practices
which are implemented as consistently
as possible across all locations.
However, there are only 51 percent
respondents stating the same this year.
(refer to Figure 4) This could be due
to the turmoil in the nancial markets
across the globe which may have ledmultiple nancial institutions to hold onto their global expansion plans. Indian
regulators themselves are moving
towards global standards as FATF
requirements are being introduced in a
phased manner by incorporating those
guidelines in domestic regulations.
Policy
Figure 4: Which o the ollowing best describes your organization’s current AML
policies and procedures?
Source: KPMG in India’s AML survey 2012
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Risk based approach
A risk based approach helps to
avoid additional cumbersome cost
or the organization as it eliminates
elaborate identication procedures
and acceptance measures or all the
customers who do not pose signicantrisks as perceived by the bank.
A structured due diligence procedure
at the time o customer on- boarding
ensures that the organization is taking
adequate precautions in its anti-money
laundering eorts. Encouragingly, 86
percent o the respondents have stated
that their institutions ollow a risk based
approach.
Institutions should look to capture
adequate data and inormation such as
background, social and nancial status,
source o unds, nature o business,
country o origin etc. in a bid to identiy
the customer. However there is
disparity in the actors which are used
by the nancial institutions in applying
the risk based approach, as highlightedby the respondents in Figure 5 .
Having said that, it is critical or
institutions to understand that there are
inherent AML risks in their products and
services/delivery channels/transactions;
hence, they need to accordingly
conduct a comprehensive assessment
to identiy their AML risk prole and
how these are/can be mitigated.
With 65 percent o the respondents
stating that AML risk assessment isconducted either hal yearly or yearly
(refer to Figure 6) ; it is clear that the
risk o money laundering is now
being perceived as a major ocus and
organizations are gearing up to identiy
and insulate themselves rom such
risks. However, nearly one third o the
respondents stated that a periodic risk
assessment is not carried out and is
instead event driven. In our experience
global rms conduct annual and eventdriven AML risk assessments more
requently, owing to the act that
Figure 5: In relation to account opening, which o the ollowing actors are considered while ollowing a
risk based assessment/ approach?
Figure 6: How oten does your organization conduct an AML risk assessment?
Source: KPMG in India’s AML survey 2012
Source: KPMG in India’s AML survey 2012
AML risk assessment is mandatory
regulatory requirement in the western
jurisdictions. In India, regulators are
emulating global trends which is evidentrom the recent RBI circular4, which has
asked banking companies to assess
money laundering/ terrorist nancing
(ML/ TF) risks in their products/ services/
transactions/ delivery channels and thus
make the AML/ CFT (Counter nancingo terrorism) regime more robust.
4 Reerence to the RBI Circular dated 19 December 2011
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A vast majority o respondents (81
percent) mentioned that customer
documents are collected and veried
beore opening an account, however
13 percent open accounts without ullycollecting or veriying the documents
(refer to Figure 7) . While this might be
a small percentage, it is worrisome
because this is not in line with the
regulatory requirements which clearly
state that KYC documents should becollected beore the commencement
o an account based relationship. The
KYC documentation process orms
the oundation o a satisactory due
diligence process; with this missing
even in a partial orm, is a red fag thatneeds to be addressed.
As a ollow on, when asked about theincrease in raudulent documentation
being provided at the due diligence
stage, 21 percent o the respondents
(refer to Figure 8) stated that raudulent
documents have been encountered
in ve to ten percent cases. While this
number may be a conservative gure,
there are chances o this percentage
being higher since a large number ounveried documents (as highlighted
in Figure 7) may also turn out to be
raudulent.
Currently, India does not have any
unique citizen identier such as a
social security number as in some othe western countries. The problem o
raudulent documents should hopeully
reduce with the implementation
o Unique Identication Authorityo India (UIDAI)/ Aadhar project
o the government. However, the
implementation o this project will take
some time and even once implemented,
the same may need to be reviewedand tested beore using it as a valid
KYC option to be implemented by the
nancial institutions.
Hence, organizations need to put in
place robust processes and solutions
to monitor any lapse in the KYC
process and remediate the same at
the earliest. There should be qualitychecks in place to identiy anomalies
in the documentation and procedures
ollowed. Adequate training should also
be imparted to the ront oce sta oncustomer identication and acceptance
procedures.
DocumentationFigure 7: Are all customer documents collected and verifed beore opening an
account
Figure 8: In the past two years, how many instances o raudulent documents in
account opening have been encountered?
Source: KPMG in India’s AML survey 2012
Source: KPMG in India’s AML survey 2012
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The benecial owner (BO) as per Rule 9 sub rule (1A) o the
PMLA is the natural person who ultimately owns or controls
a client and/or the person on whose behal a transaction is
being conducted.
Thus it was interesting to note that only 52 percent o our
respondents (refer to Figure 9) identiy the BO up to thenatural person. In light o non identication o benecial
owners up to natural persons, it is dicult to state whether
adequate customer verication procedures are deployed
beore commencement o the relationship. It is also hard to
judge how the screening procedures or identication o PEP
and Sanctioned entities/individuals are implemented by the
organizations.
Another key element o the AML monitoring requirement is
the need to keep relevant KYC data attributes up-to-date.
The local regulatory requirements state that KYC data rereshshould be done once in two years or high and medium risk
customers and once in ve years or low risk customers.
70 percent o the respondents do not ollow any proactiveapproach to collecting customer data. Surprisingly, 14 percent
o the respondents do not undertake any periodic updation o
existing KYC at all. (refer to Figure 10)
Benefcial Ownership KYC data reresh
Figure 9: Which o the ollowing best describes the
procedures adopted by your organization?
Figure 10: Which o the ollowing best describes your
approach to periodic updation o existing KYC inormation?
Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012
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Other respondents who do not have a proactive strategy in
place to update KYC records have cited various reasons such
as system limitations, cost and lack o legal mandates (refer to
Figure 11) .
o the respondents stated that they havespecic procedures in place or updating
the principal inormation on an ongoing
basis which comprises o collecting
customer inormation and data to ll any
gaps that might exist in the KYC process.
On comparing the responses to the 2009 survey results, we
note that this year only 25 percent o the respondents have
stated that they do not have enough gaps in the system to
warrant such an exercise against 36 percent in 2009. This
shows that respondents have become aware o the need to
have updated inormation about customers on an ongoingbasis.
Another reason that also gets highlighted this year is the
existence o system limitations – 38 percent this year versus
32 percent in the 2009 survey. This shows that instead o any
undamental policy level issues in not conducting the activity,the main hurdle in implementing an eective remediation
policy is at the operational level.
72%
Figure 11: Why is there no program in place to update the
principal inormation?
Source: KPMG in India’s AML survey 2012
On-going due diligence
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Do we really know our customers?A robust compliance program needs to take into consideration all aspects in the customer lie
cycle rom customer identication to customer acceptance and periodic review o customer
inormation. While nancial institutions have come a long way in ollowing requisite due diligence
procedures and adopting global best practices, the survey results also lead us to question the extent
o the level o control that organizations have on their KYC compliance programs.
As evident rom the responses, many organizations are still struggling with basic issues like customer
identication and acceptance programs and also ew others such as benecial owner identication, KYC
reresh exercises and on-going due diligence programs. The requent challenges aced by organizations in
implementing adequate and robust processes in place is due to non-cooperative customers, inadequate
strategy, employee training issues, co-ordination problems and inconsistent policies and processes across
geographies. In addition, at a later stage, due to regulatory scrutiny they might also be mandated to conductlook back reviews and remediation plans. I customer behavior were static, then the entire process would
be nalized once and or all; but in this scenario where customer prole and preerences keep changing with
time, organizations need to have an ongoing oversight on the customer.
Regulatory scrutiny is bound to increase in the next ew years as domestic regulations are being benchmarked
against the global AML ramework. This will entail that regulators might be more inclined to award nes/
penalties in the event o non compliance o the regulatory guidelines as is evident in some o the western
geographies such as the US. Penalties applied in ASPAC jurisdictions have been relatively small by European and
US standards5.
A sizable majority o respondents have also stated that senior management is taking a keen interest in the
development o their AML ramework while making the eort to benchmark their policies and procedures with global
best practices. While this is a good sign, organizations need to move away rom the mindset o satisying only the
minimum regulatory requirements and actively take it orward to proactive levels o compliance. In our opinion, data
gathering is only the rst step in the process o identiying the customer. Once the required data has been captured,organizations need to convert this into meaningul customer proles which would help to identiy behavior and manage
money laundering risks more eectively.
5 Finding iterated in the KPMG Global Anti-Money Laundering Survey 2011
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Politically Exposed Persons(PEP)One o the major cornerstones in AML is screening otransactions and customers. The current regulatory guidelinesrequire institutions to identiy politically exposed persons and
also carry out sanction screening against United Nations list.
Globally, there has been increased ocus on PEP screening
due to multiple actors such as recent events in the Middle
East and Arica. While the Indian nancial sector sharesglobal concerns on PEP status, the ASPAC including the India
region, lags behind on the actual identication and monitoring
process o PEPs. In the ASPAC region only 73 percent o the
respondents6 identiy and monitor PEPs. The trend in India is
no dierent as only 77 percent o the institutions have specic
procedures in place, using a combination o commercial lists
and the vigilance o branch sta to identiy PEPs (refer to
Figure 12) .
This lag can mainly be attributed to the act that while the
FATF has issued guidelines, there is no global denition
o a PEP. There is ambiguity in terms o the denition o
a person considered as a ‘senior’ as well as the extent o
coverage towards amily, relatives and riends. The denition
also talks about prominent public unction but does not give
any indication as to what they reer to and thus adds more
ambiguity to the whole denition o PEP.
In addition, the interpretation o PEP varies between
countries. Some countries ocus on oreign political gures
while others limit the denition to the national level; alsoincluding regional politically exposed persons
Sanction screening83 percent o the respondents have stated that they
undertake sanction screening o customers beore account
opening, with a majority reerring to the United Nations (UN)
list, Oce o Foreign Assets Control (OFAC) and other lists.
The local regulation requires screening against the UN listwhile the global best practice is to generally use multiple lists
such as the UN, OFAC, SDN (Specially designated Nationals
list issued by the US department o Treasury) and Blocked
list, Her Majesty’s treasury list, EU terrorism list, Interpol,
CBI (Central Bureau o Investigation) and others. Indian
organizations have been using a combination o lists (refer to
Figure 13) or the sanction screening process and hence have
benchmarked this activity with its global counterparts.
Figure 12: How do you identiy PEP’s?
Figure 13: Which lists are used by you or the purpose o
screening customers?
Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012
Client screening, Transaction
fltering and MonitoringGlobal nancial institutions have paid millions in nancial penalties or breach in their
sanction compliance programs, lapses in transaction monitoring and non-identication
o PEPs. The nancial sector in India needs to realize the growing importance o
investing a larger portion o their resources in building world class operations in the
areas pertaining to PEP identication, transaction monitoring and sanction compliance.
6 Statistic rom the KPMG Global Anti-Money Laundering Survey 2011
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While it is comorting to know that global practices are
ollowed, 72 percent o the respondents have stated that they
screen benecial owners against sanction list. This needs to
be considered under the given circumstances wherein 16percent o them do not identiy benecial owners at all and
a urther 40 percent o the respondents do not identiy the
benecial owners till the natural person. This questions the
eectiveness o how the benecial owners are screened i
they are not identied.
By and large, while screening is conducted on at least amonthly basis, 34 percent o the respondents have stated that
the process is undertaken at the time o change in customer
inormation (refer to Figure 14) . This may be inconsistent with
the global approach as the customer demographic inormation
is primarily static in nature and undergoes changes on
irregular intervals.
Another important actor that emerges is that only 49 percent
o the respondents have an automated system in place or
PEP and sanction screening(refer to Figure 15).This makes it
dicult to understand the robustness o the periodic sanctionscreening process or the customer database as generally the
names existing on sanctioned lists have multiple aliases and
data sets or individuals and entities.
One o the advantages or automating screening procedures
is that there would be very minimal chances o manual errors.
The automated system would be able to handle multiple lists
and use uzzy logic and phonetics approach to reduce alse
positives.
Figure 14: As part o the ongoing monitoring process, how
oten is a customer’s data reviewed against PEP and sanction
list?
Figure 15: Do you have an automated system or PEP and
sanction screening?
Source: KPMG in India’s AML survey 2012
Source: KPMG in India’s AML survey 2012
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Payment flteringPayment ltering is screening or ltering o relevant payment
instructions and is a real time activity. This involves screening
o payment inormation to identiy payment instructions
involving potential sanction targets and geographies.
Surprisingly, only 37 percent o the respondents stated that
their organization has an automated system or payment
ltering, with the rest either having a manual system in place
or planning to introduce an automated system sometimein the uture. In the absence o robust controls o real time
monitoring o the payments, it cannot be ruled out that
potential sanction violations may occur.
63 percent o the respondents replied in the armative when
questioned whether they include originator inormation in theSWIFT messages sent to other banks. On asking whether
they receive SWIFT messages with originator inormation
rom other banks (refer to Figure 16) , majority (71 percent)
o the respondents stated that they have aced less than 5
percent cases where this inormation is incomplete.
The absence o complete originator inormation or
transactions aected through SWIFT puts a question mark on
the payment ltering process. With organizations relying on
their counterparts or adequate due diligence on the originator
inormation which is not shared with them, this lacuna
hole could be used by money launderers to circumvent thenancial systems.
Figure 16: What percentage o SWIFT messages received by
you has incomplete originator inormation?
Source: KPMG in India’s AML survey 2012
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In excess o 70 percent o the respondents ound client
screening and the handling o lter hits either challenging orvery challenging, while 35 percent o the respondents did
not consider sactions list management to be a challenge
(refer to Figure 17) . This is surprising, given the regular
complaints about duplication o names on dierent lists,
lack o identier inormation and the diculty o getting lists
uploaded into ltering systems with the 24-48 hours timeline
that the authorities expect adherence to. These ndings are
complementary and in proportion to our Global Anti-Money
Laundering Survey 2011 as well.
Similarly, in relation to payment ltering, the key challenge
lies with automatic screening o payments and handling o
lter hits. The diculty arises in relation to management oalse positives which increases in number due to incomplete
customer inormation available with organizations.
The monitoring o transactions to ensure that they are
consistent with the institution’s understanding o the
customer behavior is the cornerstone o any nancial
institutions’ AML systems and controls.
Almost 63 percent o the respondents appear to be satised
with their transaction monitoring system. A large number
o respondents also depend on the vigilance o their sta to
identiy suspicious activity or by investigation o exceptionreports (refer to Figure 18) .
Figure 17: How would you describe the ollowing areas o
sanctions compliance?
Figure 18: Which o the ollowing methods are used by your
organization to monitor transactions in order to identiy
potential money laundering?
Source: KPMG in India’s AML survey 2012
Source: KPMG in India’s AML survey 2012
Challenges being aced inSanction compliance
Transaction monitoring
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An overwhelming number o respondents (89 percent)
mentioned that increased levels o human and nancial
resources were required. This was due to multiple actors
such as complex implementation, ongoing maintenance and
need to review the alse positive (refer to Figure 19) .
On delving urther into transaction monitoring, it appears
that customer proles and risk categorization does not
reside in the transaction monitoring system as indicated by
49 percent o the respondents. Additionally, 46 percent o
the respondents have indicated that they do not have the
capability to view single customer transactions and account
status across products and business. This also questions
the use o IT systems developed internally instead o using
externally developed IT systems which generally encompass
an overall IT ramework in relation to the organization. The
inability o a nancial institution to monitor transactionsacross dierent products or business, calls into question
their capability o a consolidated and comprehensive AML
transaction monitoring system.
In our view, ongoing monitoring is an essential requirement
and only a ew organizations are able to use the data collected
and prole created or customers to leverage the identication
o suspicious transactions. KYC and transaction monitoring
processes are distinctly separate unctions which operate
in silos. Hence the holistic view o the customer and related
transactions are not available or the purpose o transaction
monitoring in turn reducing its eectiveness.
Figure 19: Increase in the level o human and fnancial
intervention is due to?
Source: KPMG in India’s AML survey 2012
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Are we doing enough?
A comprehensive review o the survey responses has made
us question i the industry is doing enough to combat money
laundering and terrorist nancing.
The transaction monitoring system needs to be geared to
have a single view o the customer across products and
services so that a holistic view o the customer relationship
can be judged. This would ultimately help to comprehend
whether the customer transaction is suspicious or not.
Similarly, the customer risk categorization should be strong
enough to decide the extent o monitoring or dierent typeso customers (RBI regulatory guidelines state that transactionmonitoring should be high or higher risk categorized
customers). With hal o our survey respondents stating
that their customer risk categorization resides outside the
transaction monitoring system, this needs to be reviewed.
The threshold or transaction monitoring is another areawhich may be improved by using statistical modeling and
judging the risk perception o the organization to identiy the
right mix o thresholds or dierent types o customers and
their risk categorization.
Sanctions screening or customers and payments to date
have ocused almost exclusively on screening ociallists. Knowledge o this act, coupled with the publicity
surrounding nancial penalties across the globe means
money launderers seeking to evade sanctions will inevitably
adopt an approach to circumvent these controls. It will
become increasingly important to conduct screening against
lists containing relevant geographic indicators such as cities
and ports, particularly when dealing with trade nance.
The key concern or sanction screening is the duplication
o names on dierent lists and the perennial concern about
the amount o identier inormation included in such lists.
Surprisingly, only 17 percent o survey respondents stated
that they nd maintenance o sanctions list challenging.
Globally, rms spend enormous amounts on screening
customers and payments. In this environment, rms have
to ocus on ensuring eective screening o payments.Institutions should look to get their own houses in orderbeore tracking others in the market that do not provide the
necessary inormation or screening. The eectiveness o
this screening is reduced, however, i everyone is not doing
the same.
The challenges highlighted above in both the areas oTransaction Monitoring and Sanctions Compliance indicate an
underdeveloped or rudimentary system which would require
investment to be made in areas o building IT capabilities
encompassing the customer prole, risk ratings and nancial
transactions. Non availability o expert tools or transaction
monitoring, customer and payment screening can hamperthe AML program o an organization. Thus we believe that
Indian organizations need to realize the importance o ully
integrating AML as a risk management practice keeping
in mind all the various AML related processes such as
transaction monitoring, sanction and PEP compliance.
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More than hal (60 percent) o the respondents indicated
that there has been an increase in the STRs led by the
organization to the FIU.
A major attribute to this (refer to Figure 20) is sta awareness,
improved interactions with regulatory bodies, increased
regulatory scrutiny and enhanced due diligence procedures
ollowing suit. A deensive approach to reporting more cases
is also a signicant actor.
Figure 20: I there has been an increase in the STRs fled to FIU, could you defne the impact each o the ollowing 8 reasons
had on the increase, on a scale rom 1 to 5, where 1 is no impact at all and 5 is very strong impact.
Source: KPMG in India’s AML survey 2012
Reporting
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TrainingIt is essential that nancial institutions are equipped with
the appropriate resources to tackle money laundering risks.
This does not only include technological solutions, but also
the provision o training and tools to assist those in the ‘rontoce’ who are best placed to identiy riskier transactions,such as relationship managers and private bankers.
Most organizations today impart AML training directly to their
sta – majority o who concentrate on role specic training
using an internally developed training module (refer to Figure
21) .
While ace to ace and computer based training appear to
be the most popular methodologies (refer to Figure 22)
adopted, 85 percent o the respondents have their internal
compliance team taking the ownership o AML training.Thus, organizations have not had the benet o industry bestpractices as they have primarily been internally developed and
conducted.
The mindset however does seem to be changing or the better
with a majority o the respondents having specied training to
be a major area or investment in the days to come.
Figure 21: Do you conduct role specifc training or sta
handling transaction monitoring/cross border payments/
branch sta/AML compliance division and operation teams? Figure 22: What methods are used to deliver AML trainings?
Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012
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It is surprising that not many respondents eel that the cost
o sanction screening will be very high which is slightly in
variance with the current status o implementation. As per
the responses 37 percent o the respondents do not have anautomated system or PEP and sanction screening. Similarly,
customer screening is conducted as and when there is a
change in sanction and PEP databases, as indicated by 34
percent o the respondents. In our opinion, the respondents
have under estimated the cost to be incurred towards
screening activity.However, it is interesting to note that institutions are
increasing their ocus towards transaction look back reviews.
This can be considered as a maturing o the compliance
program and a welcome proactive step.
To keep up with the regulatory environment, sound
investments are required in customer due diligence,
customer identication & acceptance procedures, monitoring
suspicious transactions and related AML processes and
procedures. This will lead to improved condence amongst
various stakeholders domestically and allow organizations
to explore greater business opportunities in the international
arena in developed economies which may have stringent AML
regulations.
An overwhelming 82 percent o respondents indicated that
the cost o AML compliance will increase over the next 3
years, with investment being mostly in the area o 10 to 20
percent. The majority o the increase would be (refer to Figure
23) in the area o implementing/upgrading their transaction
monitoring system ollowed by implementing global policies
and remediating/reresh exercise.
Figure 23: Out o the nine areas o anti money laundering activity, could you defne relatively how much investment each area
will need in the next three years, including all direct and indirect costs on a scale rom 1 to 5, where 1 is no investment at all
and 5 is great investment required
Source: KPMG in India’s AML survey 2012
Cost o compliance
While in the 2009 survey, more than 73 percent had indicated
that cost will increase over the next three years, in the current
survey, over 82 percent have indicated the same. Compared
to the 2009 survey where introduction o global polices andtransaction monitoring were indicated as the major ocus
areas needing investment, the current survey also indicates
the same in addition to remediation/reresh exercise. This
indicates that the cost o AML compliance is going to keep
rising and institutions may be underestimating costs or
deerring the investments required.
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Conclusion
The integrity o the banking and nancial services
marketplace depends heavily on the perception that itunctions within a ramework o high legal, proessional and
ethical standards. A reputation or integrity is one o the most
valuable assets o a nancial institution. A damaged integrity
o a nancial institution can lead to a damping eect on a
country’s growth aspects when a country’s commercial and
nancial sectors are perceived to be subject to the controland infuence o organised crime. Fighting money laundering
and terrorist nancing is thereore a part o creating a
business riendly environment which is a precondition or
lasting economic development.
This is not to say that we are not headed in the right
direction. We are on the right path with India having
tripled the manpower o the Directorate o Enorcement7
which spearheads the money laundering investigations
in the country; presence o the Financial Intelligence Unit
which tracks and analyses money laundering risk through
its reporting mechanism; and the recent updation o the
legislative ramework through the proposed changes. Someo other positive signs are the existing unied KYC platorm
or the mutual und industry and a similar platorm being
mooted or the insurance sector.
However what needs to be done urther is increased
enorcement and action against the entities violating them.Further, nancial institutions need to bring in additional levels
o control in relation to ew areas highlighted in the survey like
transaction monitoring, annual review and periodic updation
o accounts that is legally mandatory. It is clear that the
maturity o the AML environment is varied between MNC,
public sector, private sector, co-operative banks etc. andthe challenge or regulators would be to plug the regulatory
arbitrage that money-launderers are able to utilize and
eventually exploit the system. However, cost actors would
also play a signicant role as budgets or institutions do vary,
leading to a reduced ocus and thus high AML risk.
With India being a member o the FATF which was not an
easy process and was only granted ater a very stringent
evaluation process by the ocials o the FATF, we need to
be geared up or the increased responsibility and the road
that lies ahead. While this might present its own gamut o
challenges, regulatory requirements and risk mitigation has to
be a key area o ocus and cannot be given secondary status.
7 Source: Article in The Times o India dated 19 July 2011 (http://articles.timesondia. indiatimes.com/2011-07-19/india/29790686_1_money-laundering-act-nancial-action-
task-orce-laundering-and-terror-unding)
Regulators and the Indian Ministry are denitely taking
charge, with amendments currently in progress on the
Prevention o Money Laundering Act, 2002 and Unlawul
Activities (Prevention) Act, 1967 to make them more eective
in dealing with money laundering and terror unding. With
the act having been amended twice in 2005 and 2009,
the proposal o this new amendment bill is a positive sign.It will help to bring us at par with international standards
and to obviate some o the deciencies existing in the act.
The amendment is necessitated by the act that India is an
important member o the FATF and chairs its Asia Pacicgroup.
The PMLA amendment act 2011 plans to bridge the gap
between the FATF recommendations and the Indian
regulatory requirements with respect to enacting o strong
and eective anti money laundering laws and to remove
operational diculties or the regulators and government
agencies implementing these regulations. Thus eventually
make the existing PMLA in tune with the practice being
ollowed world over.
Tightening the noose: Recommendations to amend the PMLA, 2002
Key changes under PMLA amendment bill 2011
Introduce and recognize corresponding law provisions o othercountries in respect to money laundering oences and to provide ortranser o proceeds o oreign oences in any manner in India
Increase in power o directors to call or records and conduct inquiriesand direct audits in cases o non compliance o obligations
Reporting entity to include banks, nancial institutions, intermediariesor a proessional including persons engaged in real estate businessand/or jewelry business
Money-laundering denition widened to include concealment,acquisition, possession and use o proceeds o crime
Removal o upper cap or ne o INR 5 lakh and no caps prescribed
Attachment and conscation o the proceeds o crime withoutconviction in proven cases o oence
Provision or appeal against appellate tribunal’s order directly to theSupreme Court
Responsibility o omissions and commissions on reporting entity,Board o directors and employees
Addition o multiple persons/ entities including members o ICAI,
ICWAI, ICSI to assist the authorities in the enorcement o this Act.
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We have made a conscious attempt to include a variety o institutions with dierent
sizes and type o operations in order to obtain a detailed picture and an in-depth
understanding o the AML regime in India.
The survey was conducted across the nancial services sector covering public
sector banks, private sector banks, oreign banks, general and lie insurancecompanies, mutual unds, non-banking nancial companies and other institutions inthe FS sector covered under PMLA.
The primary target respondents o the survey were senior and mid management
members rom Compliance, Audit, Risk Management and AML departments.
The respondents were also senior management members rom the business and
operation unctions.
Profle o respondents
Figure 24: Scope o respondent organization’s operations Figure 25: Annual turnover o respondent organizations (in INR)
Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012
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Figure 26: Designation o respondents Figure 27: Type o organization that respondents represent
Source: KPMG in India’s AML survey 2012 Source: KPMG in India’s AML survey 2012
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The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual
or entity. Although we endeavour to provide accurate and timely inormation, there can be no guarantee that such inormation
is accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on such inormation
without appropriate proessional advice ater a thorough examination o the particular situation. The views and opinions expressed
herein as a part o the Survey are those o the survey respondents and do not necessarily represent the views and opinions o
KPMG i I di
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