Presentation On Anti Money Laundering The Balancing Act – Compliance and Customer Relationship October 22, 2005 Bhaska

1. Presentation On Anti Money Laundering The Balancing Act – Compliance and Customer Relationship October 22, 2005 Bhaskar Ghose, Managing Director

2. What is Money Laundering • Money laundering is the process of • converting money earned from illegal / criminal activities, • through a series of financial transactions, • into forms of money • whereby illegal origin of the money cannot be traced • Money Laundering is not the same as Black Money transactions • IMF estimates: Size of Money Laundered estimated at USD 1 trillion at the minimum. Possibly upto USD 2.5 trillion

3. What Money Laundering does • Illegal funds are introduced into the financial system (Placement stage) • The funds are distanced from their sources (Layering stage) • {Genuine customers may be unwittingly drawn in at this stage} • Funds re-enter the legitimate economy (Integration stage) • Bank officials overlook the laundering of the money (Paper-trail-avoidance stage)

4. Common indications of ML • Reluctance to provide information • Disproportionate cash transactions • Multiple transactions or sudden high value transactions • Wire transfers from high risk countries • Deposits offered as security for loans of huge amount • Consequences of ML • Integrity of the bank (and banking system) affected • Reputation of the bank at stake • Unchecked ML can increase organised crime in the society • FDI into the country may be affected

5. Approaches for AML Implementation • Two possible approaches • “Only-Compliance” approach – Tactical approach • “Compliance + Business” approach – Strategic approach • Only-Compliance approach • Tactical approach • Reactive mode • Involves “Point Solutions”, specific to compliance requirements of date • Involves “Additional Point solutions” to address new regulations and changing scenarios • Involves issues relating to “Providing resources to a cost centre” – a difficult issue for management

6. Approaches for AML Implementation (con’t) • Compliance + Business approach • Strategic approach • Proactive mode • Involves “Business Process Management”, even while addressing compliance • Information important for business is available in the compliance process • Source of funds • How the customer uses these funds • Developments in the financial life of the customer • These can be used for business promotion, internal control and other productive purposes

7. Challenges in Implementation • Compliance does not simply happen. It must be caused. Causing takes effort and resources. • Software solutions and mindset of bankers need to be one step ahead of the launderer (gets smarter every day). • “To catch a crook, think like one” • Sea of data that is made up of • millions of transactions daily, • complex customer relationships, • diverse monetary instruments, • numerous transaction channels and • international reach • Each factor involving a suspicious transaction may be insignificant but together they may raise suspicion

8. Challenges in Implementation (con’t) • Detection of suspicious account conduct through account behavioural analysis • Protecting legitimate and innocent customers even while some of their transactions may raise suspicion • Dependence only on pre-defined rules tend to be an ineffective tool • Detection of odd suspicious behaviour – Needle in a haystack • Absence of uniform identification documents coupled with centralised validation mechanism • Unwieldy number of false positive alerts • Technology alone is not sufficient. • Any amount of investment in software alone may not be sufficient to prevent losses. • Acquiring full knowledge of different, new and emerging techniques of money laundering is important.

9. Key components of AML initiatives • Choose a strategic approach • Comply in letter and spirit • Look beyond compliance • Installation of right technology • Pick up a state-of-the-art solution for AML • Solution to blend with CRM tools • Capability to generate intelligent alerts • Educating/sensitising the bank staff • to identify potential money laundering • to guard against offending genuine customers

10. Role of Technology in Implementation • Huge volumes of transactions – Impossible to analyse manually • Needs software support to find the “needle” in a huge haystack • Technology support reduces time lag between ML event and detection • Software to undertake • Behavioural analysis • Link analysis • Statistical analysis • Anomaly detection • Predictive modelling (decision trees, regression analysis, etc.) – to decide the likelihood of new activities being suspicious • Artificial intelligence tasks

11. Role of Technology in Implementation (con’t) • Software to screen transactions from the following perspectives • Client details • Categorisation of customers – low risk, medium risk and high risk • Transaction details • Cash / Transfer / Wire transfer/ Channel etc. • Behavioural analysis • Threshold amount, Abnormal behaviour, Alerts etc. • Analysing customer behaviour on the basis of transaction behaviour • Management of alerts / cases / investigations • Reporting

12. Managing The Change

13. Managing The Change • Convincing ourselves • Part of the tasks required under AML are already undertaken by banks for other purposes. • KYC norms • Due diligence of customers • Tracking transactions • Updating customer profile etc. • Only additions under AML are • Looking for suspicious transactions from ML perspective • Managing the cases thrown up by alerts • Reporting suspicious cases • Convincing ourselves is the first and foremost step in convincing the customers

14. Managing The Change Convincing the customer • Social Responsibility – Stability of the national economy and promotion of economic growth • Protecting society at large by restricting the flow of terrorist money, drug trafficking funds, etc. • Prevention of unwitting use of customer for routing of illegal funds • Regulatory requirement

15. Convincing the customer (con’t) • Approach as an advisor rather than an investigator • It is like subjecting ourselves to frisking at Airport Security Checks • Millions of other genuine passengers are frisked for the sake of my safety • Similarly I am frisked for the safety of other genuine passengers • Similar is the situation under AML too. • To quote our Finance Minister: • “AML legislation has nothing to do with remittances by millions of Indians who are working hard abroad.”

16. Balancing Act – Regulatory safeguards & Customer Convenience • Comply with regulations • But take care of genuine customers • Sensitise the frontline staff • Educate the customers on need for AML • Seek information tactfully – without offending the customer

17. Balancing Act – Regulatory safeguards & Customer Convenience • Both marketing managers and compliance managers have to help each other. • Marketing managers have to soften the ‘iron fist’ of compliance • Compliance managers have to provide to marketing managers useful business inputs from the compliance data

18. International Scenario • Stiff monetary penalties and strong regulatory actions in most developed countries • Riggs Bank fined $ 25 million in 2004 • Arab Bank in New York fined $ 24 million in August 2005 • Deutsche Bank in New York agreed to tighten policies and procedures, and reporting of suspicious transactions and customer vetting to prevent money laundering

19. Regulatory provisions in India • The Prevention of Money Laundering (Amendment) Act in force from July’05 • Banks, FIs and other intermediaries to maintain records • of all cash transactions above Rs.10 lacs and • transactions below Rs.10 lacs between related parties • any other suspicious transaction • Financial Intelligence Unit, India created by the Government • Banks to comply with AML provisions before December 31, 2005

20. Present Status of Implementation in India • Banks are gearing up in the last few months • Compliance may be achieved by many banks in time • Effective usage beyond compliance may take some time since only experience can enable efficient handling of suspicious transactions

21. The Way Forward • Be convinced that AML is here to stay • Don’t just comply; comply in spirit • Think beyond the narrow; not just as a compliance requirement • Adopt a strategic approach of “Compliance + Business” • Pick up a state-of-the-art solution for AML • Use it for effective compliance and beyond • Educate and sensitise front line staff • Free banks from integrity and reputation threats • In the process, make our country an honourable financial hub in the global market

22. Our Bank’s position • Policy framework approved by Board • Procedural guidelines in place • Adopted sophisticated software • Implementation of software completed • Gone live with AML software • AML software also used as fraud detection tool in certain areas • Centralised cell constituted to monitor and report suspicious transactions under AML • Video film being arranged on KYC/AML to sensitise staff • Brochures being arranged for customer guidance

23. Thank You