Anti-Money Laundering. Talk about this to any banker or an insurance company, or a mutual fund sales guy, and he will look at you like a hissing cobra. If somewhere deep you feel we all should do our bit to help the system be rid of terrorism lets learn to put up with a little more inconvenience when we go out to open a bank account, a mutual fund or an insurance policy.

 

Let us get into a little detail about this.

 

What is money laundering?

'Money laundering is the process of moving illegally acquired cash through financial systems so that it appears to be legally acquired' 

 

Money laundering is the processing of dirty money in order to disguise their illegal origin. Dirty money is proceeds derived from criminal conduct and criminals want the money to look like it came from a legitimate source. 

 

There are three common stages of money laundering:

1) Placement

2) Layering

3) Integration

 

Placement is the process by which they dispose bulk cash into the banking system by:

- Small but regular deposits or investments and /or

 

-Bulk shipping cash to an offshore location where banking secrecy protects them and then wiring the cash to another location to launder funds.

 

Layering complicates the audit trail, effectively 'laundering' the dirty funds and giving them bona-fide status. It involves:

- Large volume of transactions or transfers between accounts in different jurisdictions.

- Use of a range of instruments and currencies

 

Integration involves the use of layered funds to purchase 'clean, legitimate' assets such as investment products, fixed assets, etc.  

 

Typically a person with dirty money has millions of ways of integrating the same with the white money in the Indian context. If he sets up a hotel, he can show as much sales as he wishes. If he does 'raddi' business, he can show tons of 'raddi' and show the same as sales. However all this money has to come into financial assets at some stage. What the AML Act is trying to do is to reduce the menace. It is like putting the signals in place. The violators can at least be recognized and fined. It will not eliminate accidents, but one can hope for some discipline.

 

Anti Money Laundering Act

In India, the Anti Money Laundering (AML) measures are controlled through the Prevention of Money Laundering Act, 2002 which was brought in force with effect from 1^st July 2005. RBI, SEBI and IRDA have been brought under the PML Act, and therefore it will be applicable to all financial institutions, banks, mutual funds, insurance companies, and their financial intermediaries. The agency monitoring the AML activities in India is called Financial Intelligence Unit (FIU IND) and compliance is required by all financial intermediaries. IRDA has made the AML guidelines mandatory for all insurance companies from 1^st August 2006.

 

Prevention of money laundering protects the interests of not only the company but also the honest customers, intermediaries, partners & employees.   

 

The PML Act, 2002 provides 'Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in the process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of money laundering'

 

Under the Act, offences will be punished with rigorous imprisonment for a term from three to seven years (up to ten years for drug related offences) and a fine up to Rs. 5 lakh.

 

How it affects you?

It is important for us to recognize that money laundering is:

- A criminal offence

- Causes reputation damage to the financial institution alleged of dealing with illicit money

- Combating money laundering has increased in importance after 9/11 to curb terrorist financing

 

Due to the severe penalties, everyone associated with financial instruments needs to understand what money laundering is and be fully aware of their responsibilities in combating such activities.

 

IRDA has instructed all insurers to classify their customers, into the following risk categories:

- High risk: Antique dealers, arms dealers / explosive dealers, money changers, film personalities, persons dealing with real estate, politically exposed persons, NRIs, HNIs, etc

- Low risk: All others

 

IRDA has mandated compulsory reporting to the FIU for all related cash transactions above Rs 10 lakh in a month and all transactions classified as suspicious by the company.

 

Moreover, you will now find yourself submitting a larger number of documents before you buy an insurance policy. For example a big insurance company has made the following documents compulsory:

 

 

Verification	Documents
Identify proof	-PAN Card -Voters Identity Card -Driving License -Passport -Letter from a recognized public authority (e.g. Gazetted authority/ municipal corporation) verifying identity of the customer -Employee identity card of a listed company or public sector company -Ration card (where photograph of customer is present)

 

 

 

 

 

 

 

 

 

 

 

 

 

Verification

Documents

Proof of Residence

-Telephone Bill (not more than 3 months old) -Electricity Bill (not more than 3 months old) -Credit card statement (not more than 3 months old) -Bank account statement (showing transactions within the last 6 months) -Valid lease agreement along with rent receipt which is not more than 3 months old -Passport -Ration Card -Letter from any recognized public authority (e.g. Gazetted authority/ gram panchayat/ municipal corporation) verifying residence of the customer -Letter from a listed/ public sector company/ armed forces employer/ government depts. along with latest salary slip

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Verification	Documents
Standard Income Proofs	-Income tax assessment orders/ Income -Tax returns slips -Form 16 in case of employed individual -Salary slips from reputed private limited / public sector employers (within last 3 months) -Audited company account -Audited firm accounts -Audited proprietorship profit & loss account -Copies of form no. 10CCAC under section 80 HHC of IT ACT 1961 for export income

 

 

 

 

 

 

 

 

 

 

 

 

 

What is worrying is that while some conscientious insurance companies (who are awaiting their mutual friend brethren to join them) will ensure compliance, some of the more adventurous ones might not bother.

 

Even when India had 97% personal taxation, there were honest taxpayers who paid (and many others did not). Similarly if the act becomes over ambitious, companies may just abdicate. But as a customer, be ready to face the extra documentation.

The author, PV Subramanyam, is a financial domain trainer. He can be reached at pv.subramanyam@moneycontrol.com .