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Back Ground:

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CHAPTER 29

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CHAPTER 3

Research Methodology

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1-10W BIG THE BUSINESS

"After foreign exchange and the oil industry, thelaundering of dirty money is the world's third-largest business."

How Much Is Laundered? IMF ESTIMATE = 2-5% Global

GDP


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MONEY L AUNDERING PARTICIPANTS

BANKS BROKERAGE FIRMS FINANCIAL SERICES

Other Examples:

Insurance companiesMoney remittersCash intensive businessesBrokerage firmsRealtorsCrooked Lawyers and Accountants

JTransfer on the BankAccount of

CompanyT

Purchase ofLuxury Assets

Financial Commercial/Industrial

WireTransfu

Money Laundering Cycle

PLACEMENT„ / " \ . L A Y E R I N G

A TYPICAL Dirty Money Integratesinto the Financial System

Collection of Dirty Money MONEYLAUNDERING Payment by"Yu of False

"- fCt6 SCHEME invoice to.in7 Company

ii III fir51

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Loan toCompany

INTEGRATION

OffshoreBank

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."klone Laundering - Stages of the Process

Money laundering is the disguising of funds derived fromillicit activity so that they may be used without detectionof the illegal activity that produced them. Money launderinginvolves three stages: placement, layering and integration.

Placement involves physically placing illegally obtainedmoney into the financial system or the retail economy."Dirty" money is most vulnerable to detection and seizureduring placement.

Layering means separating the illegally obtained money from itssource through a series of financial transactions that makes itdifficult to trace the origin. During the layering phase ofmoney laundering, criminals often take advantage of legitimatefinancial mechanisms in attempts to hide the source of theirfunds. A few of the many mechanisms that may be misused duringlayering are currency exchanges, wire transmitting services,prepaid cards that offer global access to cash via automatedteller machines and goods at point of sale, casino servicesand domestic shell corporations lacking real assets andbusiness activity that are set up to hold and move illicitfunds.

Integration means converting the illicit funds into a seemingly legitimate form. Integration may include the purchase of businesses, automobiles, real estate and other assets.

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. Investments.- •

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Purchases

Placement: Illegalfunds or assets arefirst brought into thefinancial system

Layering: Use of multipleaccounts, banks,intermediaries,

Integration: Laundered funds are made available as apparently legitimate

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iirslticentiN es to LaunderLkiLarge amount of proceeds from corruption that need to be hidden.1-. Low confidence in the security of assets in country.

• Asset disclosure requirements..•

Political instability or possible regime change.

Greater risk for corruptors and corrupters of

investigation and prosecution. \IETHODS

OF \IONE\ LAI NEW.R1\(;

Methods of money laundering can be divided into:1)The Conventional methods2)The Modern methods

( ON% ENTION,iii.

Including many of the activities and methods, like:\Smuggling:The money launderers smuggle illegal money out of thecountry, and then re-enter it legitimately through fakeprojects, to appear as a result of legal activities outsidethe country.

The exploitation of economic weakness:Money launderers exploited the need of states that sufferfrom economic problems to foreign investment, by enteringtheir money to these countries and the establishment of fakeprojects and then closing out these projects, and to pulltheir money out of these countries, so that this money looksas a result of the projects that took place in thosecountries, so this money may be legalized, and far from anylegal accountability.Counterfeit bills:

This method uses the import and export operations between the twostates having

economic exchange, as the money launderers do exaggerating andfalsifying of invoicing

of goods that are exchanged between the two countries or theissuance of fake invoices,

without real exchange between the two countries. Such operations ofinternational trade are

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often done through by letters of credit, whichconstitutes a legal cover to the source illegal funds

[1 Collusion with the banks' workers:

Money launderers resort to buy off some bank employees bybribing them rewardingly in return for allowing them to deposittheir illegal funds in the banks without checking the sourcesor application of instructions for this. This makes it easierto hold transactions or banking operations without governmentcontrol due to the banks not inform the regulatory stateauthority according to the instructions and the laws governingbanking activities

MODERN METHODS

Many of the banks offer financial services and banking bymodern electronic methods because of technologicaldevelopments, and this helped money launderers to takeadvantage of these techniques and developing of methods ofmoney laundering and the abandonment of the conventionalmethods as .much as possible to avoid the banking supervisionand the impossibility of tracing sources of Illegal money.

These methods include: ,‘. Internet Banking:

Anyone can use the Internet to create a virtual bank or store,or to exchange currency or establish fake companies in countriesthat "turn a blind eye" on the operations of money laundering.In these virtual facilities money is processed online, which iseasy to transport from one place to another using the Internet,and away from the control of the Executive government agenciesand the specialized legal legislations related to bankingoperations, which makes the internet banks, an ideal and easy-to-the-money laundering, especially that the internet banks areonly Virtual figures not subject to the control of legislationand Laws relating to regular commercial banks that give centralbanks authority to control and restrict their bank activities,due to lack of physical existence in the traditional sense,and its presence outside the spatial and legislativejurisdiction, which gives central banks the authority of

banking supervision and organizing activities and the right ofprosecution, upon the commission of any violations of the law.

3. Electronic Banking Services:After the tremendous development witnessed by the world ofelectronic communications, modern electronic banking services areheavily used in the implementation of money launderingoperations, particularly in the two phases of placement andintegration like electronic funds transfer, paying bills, whereit became the most common and easiest way to carry out moneylaundering, making it a global phenomenon beyond the borders ofone state, and calling for concerted international efforts tofight it.

C. Electronic-Cash or Money:Electronic money is one of the most modem methods used in moneylaundering, for the impossibility of tracking it, its theft andspeed of movement, and not being subject to the jurisdiction ofthe temporal and spatial bank Legislation of the States, forthe absence of physical space specific and effective in thetraditional sense, where the funds may be transferred freely,without obstacles or without resorting to the services ofbanks and financial intermediaries, making it outside thebanking supervision authorities.

In addition, electronic money shall not be subject to thestandards of traditional legal money imposed on exportingcountries, and this requires the existence of a compulsorylegal protection suitable to the exported money value, makingthis money subject to the issuance and conversion without anycontrol or specific legal standards and taking it outside thejurisdiction of central banks.

) Credit Cards:

Credit cards can be used in money laundering operations; asthese cards help in the transfer of money charged on the cardanywhere in the world, in addition to that the card that offersthe possibility to add any additional amounts on them.

It is known that the dealer who handles or accepts to deal withthe electronic card payment contacts the card issuing bank forsettlement of value on them; they become in this caseelectronic means easily and effectively for money launderingoperations.

Credit cards enable owners use them as means of payment inseveral countries without the need to take the risk of carryingmoney. This method is to deposit large sums of money in thebalance of the card, so that the account will remain a creditorand the money launderer can draw cash wherever in the world.

. Virtual Casinos:

There are web sites designed to provide all types of gambling,and these clubs are run by people from their homes or theirsmall offices. These casinos are means of money laundering,for the difficulty of tracing its actual existence and beingout of spatial jurisdiction for certain countries, becausethere are no geographical boundaries, where the launderersresort to virtual casinos and get coins and play coupons forcash, which are later replaced by checks drawn on banks so theyappear as if funds resulting from the profit of gambling.

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Mondex technology for money laundering:

It is a technique used in cyberspace that allows users toconvert illegal funds through a modem or over the Internetwith secure encryption to ensure the money launderingoperations, without leaving traces that can be used to identifythe perpetrators.

This technology is characterized by being away fromgovernment banking sector or traditional banking services andeasily going beyond the limits of geography, which makes theprocess of tracking impossible, and is a legal problem to thetraditional legislation, which makes it imperative forcountries to reconsider their legislation to keep pace withtechnological developments and the holding of internationalconventions to address this phenomenon.

k The effects of money laundering states:

Money laundering and financial crimes have great economic,social and political consequences in different countries.They try to weaken the financial systems as a result thesmuggling of money out of the country, which leads to weakeningthe savings rate and the decline rate of real investment inthe national economy and high rates of unemployment, whichendangers the social and economic development of thesecountries.

Financial institutions are the preferred means to carry out moneylaundering, because of its efficiency and low cost of thefinancial transactions, and because of the complexity andoverlapping of the bank operations at banks.

They are also a focus of concentration of capital, whichprovides funding for economic projects, and when investorconfidence in financial institutions is shaken and weakened, anegative impact on foreign direct investment is next, which inturn distorts the long-term economic growth, because of lack ofinvestor confidence in the local economy.

Money laundering operations result in unequal competition withactual investors whether local or foreign, as they affect theprice of the return and exchange rate and lead to capitalmovements, and affects the stability of international financialmarkets, and threatens the collapse of the national markets,and lead to the devaluation of national currency and raise ofprices.

In addition, the influence of money laundering on the socialaspects and work on the disruption of the social environmentand increase the gap between the rich and the poor and tearingthe national blend and lack of cohesion and social solidarity,thus contributing to poor distribution of national income andthe proliferation and spread of criminal offenses and lack ofloyalty to the homeland and negative feelings among thecitizens, making it cast a shadow on the social aspects.

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Money laundering effects extend to include thepolitical aspects, as some of these funds are channeled to thefinancing of terrorist organizations that work to underminesecurity and stability and confidence in the systems of thestate, and inciting sectarian, ethnic and religious clashes,and to harness social networking tools, using that money in theareas of media and newspapers to convert the facts and distortthe image of the ruling regimes.

Also, money laundering operations lead to the arrival of someof the owners of illegal capital to local and parliamentarycouncils, and giving them the possibility to enjoy legalimmunity and reduce the possibility of legal prosecution,and to participate in the development of legislation andpolicies that serve their interests, thanks to their potential inspending on the election campaign and pay bribes and toinfluence the votes of the electorate.

Money Laundering: Consequences,

Although difficult to quantify, it is clear that money laundering is detrimental to the economy of a country.

Economic Distortions

Money laundering impairs the development of the legitimateprivate sector through the supply of products priced belowproduction cost, making it therefore difficult for legitimateactivities to compete. Criminals may also turn enterpriseswhich were initially productive into sterile ones to laundertheir funds leading ultimately to a decrease in the overallproductivity of the economy. Furthermore, the laundering ofmoney can also cause unpredictable changes in money demand aswell as great volatility in international capital flows andexchange rates.

Erosion of Financial Sector

While the financial sector is an essential constituent in thefinancing of the legitimate economy, it can be a low-cost

vehicle for criminals wishing to launder their funds. Consequently,

the flows of large sums of laundered funds poured in or out offinancial institutions might undermine the stability of financialmarkets. In addition, money laundering may damage the reputation offinancial institutions involved in the scheming resulting to a loss intrust and goodwill with stakeholders. In worst case scenarios, moneylaundering may also result in bank failures and financial crises.

Reduction in Government Revenue

Money laundering also reduces tax revenue as it becomes difficult forthe government to collect revenue from related transactions whichfrequently take place in the underground economy.

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Socioeconomic Costs

The socio-economic effects of money laundering are variousbecause as dirty money generated from criminal activities arelaundered into legitimate funds; they are used to expandexisting criminal operations and finance new ones. Furtherto that money laundering may lead to the transfer of economicpower from the market, the government and the citizens tocriminals, abetting therefore crimes and corruption

THE ROLE OF BANKS IN NIONEY LAUNDERING ,

The phenomenon of money laundering is a serious challengefacing banks, economic and even political system of anycountry, due to its negative effects on economic activitiesand the destruction of the ingredients and production incentivesand increasing rates of inflation and groups' control, whichlead many economic, social and political activities.

It is worth mentioning that those responsible for anti-moneylaundering work, intelligibly and regularly follow up thedevelopment of modern technologies and channels available tothe banks, particularly after the widespread use ofcomputerized technology for banks in the banking operationsaround the world.

Banks are one of the most important institutions that are used in money laundering operations, given the advantages enjoyed by when compared to other institutions.

These advantages are convenient, accessible and safe for moneylaunderers to use banks and to access to International paymentsystem which offers them the ability to transfer money throughmodern electronic methods instead of using the traditionalmethods. Thus, the U.S. Federal Reserve Council describes

banking institutions and their staff as a strong defense lineagainst money laundering.

Masciandaro studied the relationship between banks and moneylaundering and found a way to assess the involvement of banksin money laundering, where he examined the relationshipbetween the Italian banking system and the legal and illegaleconomies of the country, and by using the gross nationalproduct to represent the legal economy, and the percentage ofmoney laundering to represent the illegal economy, and bankdeposits as an indicator of activity within the banking system.

He noted that the banks accept the money from the legal economy in theform of deposits,

daily deals, and at the same time accepting money illegally on theassumption that this

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money has not been reported as suspicious transactions, andthen these doubted deposits enter to the financial system, andwith the instructions of money launderers and complex operationsturn to financial transactions to be integrated into the legaleconomy.

The process of money laundering includes activities within thebanking system starting from the deposit on the counter to usethe international payment system.

Despite the importance of banking legislation in the provisionof an oversight role on banking operations and extending itscontrol over economic activities, there are six major factorsthat contribute to providing an ideal environment for moneylaundering: the role of private commercial banks as lawyers forthe client, the powerful clients who have a strong balancesheet, the secrecy culture of the company, the secret terms ofreference, the culture of the company's lax controls andthe.nature of industry rivalry.

They are explained as:

1)I lie =.jarr of Private hanks. ix., a do lease line lor

The staff of private banks is the main axis in the system ofcommercial banks being trained on customer service, openingaccounts and transfer money around the world using complexfinancial systems and confidential tools. Policies ofcommercial banks encourages their employees to build anddevelop personal relationships with customers, and visitcustomers' homes, attend social events, and arrange theirfinancial affairs etc., in order to win and attract the largestnumber of customers.

As a result, grows among workers in the commercial banks asense of loyalty to their customers for personal andprofessional reasons, and causes them to ignore or forget orexceeded the warning signs, which may lead the staff ofcommercial banks in the over-use of their personalrelationship breach legal banking restrictions, harnessingtheir professional expertise in crossing the so-called "Red

line", which limits the provision of banking services forspecial operations of the legal restrictions, which aim toextend government banking supervision and prevent moneylaundering.

2)r he povirerrtil cuhiomors.

It is known that some customers of commercial banks arewealthy and may have the influence they can to affectfinancially or politically on such banks and legal and financialcenters, which makes these banks eager to meet their demands andto refrain from some embarrassing inquiries to them about thesource of their money and ignore some legal bankingrestrictions, giving these customers a suitable environment formoney laundering operations.

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3)i Hre

Use of secrecy in private banks is to cover the accounts andtransactions. For example, private banks establish routinely"Shell and Trust" companies to protect the identity of thebeneficial owner of the bank account. Also, private banks openaccounts under symbolic names and refer to clients using theofficial names for transactions in the coded account deals,and thus sometimes the banking secrecy form a legal impedimentto disclose the identities of the perpetrators of crimes ofmoney laundering.

4)1 he sccru IL`rc2icAlL`C.

Some banks have secret business abbreviations and set criminalrestrictions on disclosure of information relating to bank customers

5)Hie culttireIa.\ control.

Private banks operate according to the culture of conflict attimes with controls on money laundering and often the problemstarts with the bank employee responsible for the initialimplementation of the controls of anti-money laundering becausethey are responsible for checking the background of potentialclients and monitoring of existing accounts and opening ofaccounts, expansion of deposits for the client.

The main problem shows in the conflict of roles required ofthe employee, for example, asking him to establish personalrelationships with the client, and at the same time monitorhis accounts for suspicious activities and inquire aboutspecific deals, which that it is difficult to implement.Therefore, some private banks resorted to deal with this problemby developing systems to review the banking activities by athird party like monitors or audits, yet that monitoring isinadequate and ineffective, for the inability of the thirdparty to know all the banking subtleties, especially when itcomes to system qualities of confidentiality.

6)The ti\ .

Another factor in the weakness of attention to moneylaundering is the ongoing competition between the privatecommercial banks to attract customers due to highprofitability. The competitive pressures and the expansion arefactors discouraging private banks to impose strict controlsto combat money laundering, which may limit the new business,or cause the transfer of existing customers to competinginstitutions, due to the importance of the speed factor incurrent operations. In addition to the general factorsmentioned above, the actual products and services provided bythe bank work to create opportunities for money launderingoperations.

The Actual Products and Services Provided by the Bank Work to Create Opportunities for Money Laundering Operations

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A. The numerous accounts:In most cases the bank customers have several accounts inseveral banks or branches of one bank, such as personal currentaccounts, money market accounts, credit card, and others onbehalf of the company to protect one or more accounts and multipleinvestments, including the common funds, and stock debentures andterm deposits.

In fact, banks encourage customers to open multiple accounts atmultiple locations with multiple names, and they do not collectinformation on these accounts, this of course provides theopportunity and the suitable environment for money launderingoperations as a result of the complexity of controls on all theseaccounts that have multiple sources.

B.The secret products:

Most banks offer a number of banking products and services that protect the ownership of the client for funds that pass through the banking operations.

These include the protection institutions (Offshore and Shell) andthe accounts of a private name and symbols used to refer to thecustomer or transfer of funds and banking transactions, whichmakes the customer's name and all banking operations and relevantinformation protected, and away from the government supervision ofbanking.

C.•i)vement of the money:

current accounts in banks include large sums of money and thoseaccounts increase bank possibility for money laundering byproviding an attractive field to money launderers who wish totransfer large sums of money without attracting attention, inaddition to that, most banks offer products and services tofacilitate speed and confidentiality and the difficulty oftracking the movement of funds.

D. The Credit:

Bank Service includes expansion in granting credit to customersand urging the bank staff to persuade customers to deposit their


money in the bank to be used as collateral for large loans. thispractice create opportunities for money laundering by allowing thedeposit of questionable funds and replacing it with clean moneythrough the loan, which helps in the creation of fake economicactivities and expand the circle of fake bank accountsmovements

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THE ROLE OF BANKS IN THE FIGHT AGAINST MONEY LAUNDERING

The banking system is the most effective way to legitimize theillegal funds, it is natural that money laundering activitiesare directed to the banks, in order to conduct a series ofbanking operations to achieve this goal, such as exchange andmoney transfer by many types of developed banking operations inthis area, particularly in light of developments in electronicinformation systems.

From here, emerged the role of experts combating the crime ofmoney laundering through their giving a greater role for thebanking system in the control operations, as rule (19) of therecommendations of th6 Financial Action Task Force to combatmoney laundering imposed on financial institutions establishingprocedures, controls and programs to combat money laundering,and to give the bank special importance to the technicaltraining of staff to detect and control the laundering and howto report them, in addition to developing the skills of workersin the field of combating money laundering.

In spite of the efforts to combat money launderinginternationally, regionally and locally, and the enactment ofmany of the international legislation to combat the crime ofmoney laundering, yet the degree of corruption and the enormousresulting profits as well as the great power and influence madein the continuous growth, with the accompanying negative effectson individuals, peoples and communities. So why did not theseefforts give the desired results? And why is still a tremendousand growing amount of money laundered?

The first step required to combat money laundering is thefight against financial and administrative corruption, andthis means that real fight not ostensible one, and that isappropriate banking legislation tare set o enable central banksto extend their control more effectively over private banks, andmonitor their implementation and their application to all banking

sectors, without exception, and forcing the banking system tothe application of the instructions and legislation on bankingand economic activities, and imposing sanctions on the bankthat does not abide.

As banks are the main gateway for money laundering and with themany tools used in its implementation on the one hand, they arealso the agency responsible for addressing the challenge anddeal with money laundering, on the other hand, which is why itis incumbent on the banking sector as a whole, starting fromthe central monetary authorities and all banks and financialcompanies and jointly with all institutions and officialauthorities to address and face this phenomenon, whichthreatens, in fact the national economy, and targets economic,social and political development, and enhances the bank'ssuccess in combating money laundering as well as performance ofthe banking sector; so instead of contributing to thedissemination of such economic crime, banks tends todevelopment based on optimum utilization the energies ofproductivity.

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Financial institutions play a major role in combating thecrime of laundering by assisting the specialized authoritiesin the detection of money laundering crimes, especially if weconsider that the majority of the money laundering operationsis rarely outside financial institutions.

In addition, banks are the target and the main tool in moneylaundering, for its substantial role in providing variousbanking services and the difficulty of tracking the sources offunds.

Banks usually have evidence guidelines on money launderingactivities and things that must be observed and taken care ofand subject to more scrutiny when done by a customer.

It should be noted, that the evidence guidelines issued by thebanking, regulatory and legal organizations and bodies do notinclude usually all the activities and methods used in moneylaundering operations, as a result of the growing and changingmoney laundering activities from day to day and its evolution,and that this evidence is not far from the reach of the handsof money launderers, which requires focusing more on behaviorsin the policy of protection against money laundering, relatedto e-business.

Behaviors in the policy of protection against money laundering

A. Verifying the customer between the real world and virtual world:

Verifying is the first and most important element of ensuringnot pit falling in of money laundering activities, both forthe client as a natural or moral person, as any failure to sohelp money launderers on the force of the gap, and freedomfrom legal accountability, particularly that the absence.of thepersonal information needed to combat the laundering operationsmoney makes tracking the sources of financing and illegal moneychannels that take place to legitimize money is impossible.

B. Beware of a client who conceals information or provides insufficient information:

Analytical studies of worldly money laundering activitiesreport have shown that the biggest deals of money launderingcould have been exposed by the bank once the pursuit of whatappears from the lack of accuracy of the information providedby the customer of the bank, whether that information relatingto his personality, activity or work. Therefore, this elementis one of the first indicators that can indicate the presenceof illegal operations and contribute to the detection ofoffenses relating to money laundering.

C. Money laundering activities often contrast activities for which dealing began:

Evidence guidelines usually suggests taking caution from thechange of the activities of customers, and activities that donot fit with their business routine, and require scrutiny, asit is known that the owners of capital seek to take advantageof every opportunity to make a profit as a result of the lackof clarity parameters of investment activities and swingingprojects between failure and success as well as trends ofchange in the investment climate,

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but this fact does not prevent the bank to stand on theactivities of its customer finance, especially with regard toits banking operations, like the issuance of money orders byelectronic means, in huge amounts without the clarity of thesource or from a source that does not fit with the nature ofclient activity, or the trend of client to finance projects oractivities suddenly differently from his normal activities.There are a large number of reports dictated by theactivities of supervision on banking and other required byevidence guidelines to combat money laundering, despitethe commitment to organize the reports of all kinds, yetthere is disregard for policy analysis and to drawconclusions on them and continue to read the real changesbetween a change and another. In this context, the reportson deposits and withdrawals, and the reports of outside fundand clearing house, and the reports of transfers with thestatement of sources and specifically the first bank thatreceived money from the client, and the reports of creditand lending, and other help in the detection of suspicioustransactions that hide behind money laundering.

Policies & Irocedures to combat Monc Laundering & Terrorist Financing

Guiding Principles:

These Guidelines have taken into account the requirementsof the Prevention of the Money Laundering Act, 2002 asapplicable to the intermediaries registered under Section12 of the SEBI Act. The detailed guidelines in Part IIhave outlined relevant measures and procedures to guide theregistered intermediaries in preventing money laundering andterrorist financing. Some of these suggested measures andprocedures may not be applicable in every circumstance.Each intermediary should consider carefully the specificnature of its business, organizational structure, typeof customer and transaction etc. to satisfy itself thatthe measures taken by them are adequate and appropriate tofollow the spirit of the suggested measures in Part II and

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the requirements as laid clown in the Prevention of MoneyLaundering Act, 2002.

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Obligation to establish policies and procedures

International initiatives taken to combat drug trafficking,terrorism and other organized and serious crimes haveconcluded that financial institutions including securitiesmarket intermediaries must establish procedures of internalcontrol aimed at preventing and impeding money launderingand terrorist financing. The said obligation onintermediaries has also been obligated under the Preventionof Money Laundering Act, 2002.In order to fulfill theserequirements; there is also a need for registeredintermediaries to have a system in place for identifying,monitoring and reporting suspected money laundering orterrorist financing transactions to the law enforcementauthorities.

In light of the above, senior management of a registeredintermediary should be fully committed to establishingappropriate policies and procedures for the prevention ofmoney laundering and terrorist financing and ensuringtheir effectiveness and compliance with all relevantlegal and regulatory requirements. The RegisteredIntermediaries should:

1)Issue a statement of policies and procedures, on a group basis where applicable,for dealing with money laundering and terrorist financing reflecting &current statutory and regulatory requirements.

2)Ensure that the content of these Guidelines are understoodby all staff members.3)Regularly review the policies and procedures on

prevention of money laundering and terrorist financing to ensure their effectiveness. Further in order

to ensure effectiveness of policies and procedures, the person doing such a review shall be different from the one who has framed such policies and procedures.

4)Adopt customer acceptance policies and procedures whichare sensitive to the risk of money laundering and terrorist financing.

5)Undertake customer due diligence ("CDD") measures toan extent that i s sensitive to the risk of moneylaundering and terrorist financing depending on thetype of customer, business relationship ortransaction.

6)Develop staff members' awareness and vigilance to

guard against money

laundering and

terrorist

financing.

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Policies and procedures to combat Money Laundering should cover:

1. Communication of group policies relating to prevention of money laundering and terrorist financing to all management and relevant staff that handleaccountinformation,securities transactions, money and customer recordsetc. whether in branches, departments or subsidiaries.

2.Customer acceptance policy and customer due diligence measures, including requirements for proper identification.

3. Maintenance of records.

4. Compliance with relevant statutory and regulatory requirements.

5.Co- operation with the relevant law enforcement authorities, including the timely disclosure of information. ,

6. Role of internal audit or compliance function to ensurecompliance with policies, procedures, and controlsrelating to prevention of money laundering and terroristfinancing, including the testing of the system for detectingsuspected money laundering transactions, evaluating andchecking the adequacy of exception reports generatedon large andior irregular transactions, the quality ofreporting of suspicious transactions and the level ofawareness of Front line staff of their responsibilitiesin this regard.


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Written Anti Money Laundering Procedures:

Each registered intermediary should adopt written proceduresto implement the anti money laundering provisions asenvisaged under the Anti Money Laundering Act, 2002. Suchprocedures should include inter alia, the followingthree specific parameters which are related to the overall'Client due Diligence Process':

1.Customer due diligence2.Policy for acceptance of clients3.Procedure for identifying the clients4.Transaction monitoring and reporting especially Suspicious5.Transactions Reporting (STR)

Customer Due Diligence The customer due diligence ("CDD") measures comprises the following:

I. Obtaining sufficient information in order to identifypersons who beneficially own or control securities account.Whenever it is apparent that the securities acquired ormaintained through an account are beneficially owned by aparty other than the client, that party should beidentified using' client identification and verificationprocedures. The beneficial owner is the natural person orpersons who ultimately own, control or influence a clientand/or persons on whose behalf a transaction is beingconducted. It also incorporates those persons whoexercise ultimate effective control over a legal person orarrangement.

2. Verify the customer's identity using reliable, independent source documents, data or information;

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3. Identify beneficial ownership and control, i.e. determinewhich individual 0)

ultimately own(s) or control(s) the, customer and/or the person onwhose behalf a transaction is being conducted;

4.Velify the identity of the beneficial owner of thecustomer and/or the person on whose behalf a transaction isbeing conducted, corroborating the information provided inrelation to (3)

5.Conduct ongoing due diligence and scrutiny, i.e. performongoing scrutiny of the transactions and account throughoutthe course of the business relationship to ensure that thetransactions being conducted are consistent with the registeredintermediary's knowledge of the customer, its business andrisk profile, taking into account, where necessary, thecustomer's.

Pity for acceptance of clients:

All registered intermediaries shoulddevelop customer acceptance policies and

procedures that aim to identify the types of customers that arelikely to pose a higher than the average risk of moneylaundering or terrorist financing. By establishing suchpolicies and procedures, they will be in a better position toapply customer due diligence on a risk sensitive basisdepending on the type of customer business relationship ortransaction. In a nutshell, the following safeguards are to befollowed while accepting the clients:

a)No account is opened in a fictitious 1 benarni name or on an anonymous basis.


b)Factors of risk perception (in terms of monitoring suspicious transactions) of the client are clearly defined having regard to clients' location (registered office address, correspondence addresses and other addresses if applicable), nature of business activity, trading turnover etc and manner of making payment for transactions

undertaken. The parameters should enable classificationof clients into low, medium and high risk. Clients ofspecial category (as given below) may, if necessary, beclassified even higher. Such clients require higher degreeof due diligence and regular update of KY C profile.

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c)Documentation requirement and other information to becollected in respect ofdifferent classes of clierts depending on perceived risk

and having regard to the requirement to the Prevention of Money Laundering Act 2002,

guidelines issued byRBI and SEBI from time to time.

d)Ensure that an account is not opened where the intermediaryis unable to apply appropriate Rate clients due diligencemeasures / KYC policies. This may be applicable in caseswhere it is not possible to ascertain the identity of theclient, information provided to the intermediary issuspected to be non genuine, perceived non cooperation ofthe client in providing full and complete information. Themarket intermediary should not continue to do businesswith such a person and file a suspicious activity report.It should also evaluate whether th ere is suspicious t rad ing in determining i n whether to freeze or close theaccount. The market intermediary should be cautious to ensurethat it does not return securities of money that may be fromsuspicious trades. However, the market intermediary shouldconsult the relevant authorities in determining what action it shouldtake when it suspects suspicious trading.

e)The circumstances under which the client is permitted to act onbehalf of another person / entity should be clearly laid down. Itshould be specified in what manner the account should be operated,transaction limits for the operation, additional authority requiredfor transactions exceeding a specified quantity / value and otherappropriate details. Further the rights and responsibilities of boththe persons (i.e. the agcnt- client registered with theintermediary, as well as the person on whose behalf the agent isacting should be clearly laid down). Adequate verification of aperson's authority to act on behalf the customer should also becarried out.

1) Necessary checks and balance to be put into place before opening an account so as to ensure that the identity of the client does not match with any person having known criminal background or is not banned in any other manner, whether in


terms of criminal or civil proceedings by any enforcement agency worldwide .

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