The Hindu Business Line : Anti-money laundering readiness of Indian banks

There has been a lot of talk surrounding terror funds coming into the country. Some say, even the stock markets could well be a potential investment destination for terrorist syndicates.

While it is unclear how money is coming in and also going out through that route, one thing is for sure: Indians banks play an important part in the anti-money laundering initiatives.

In fact, today all financial institutions globally are required to keep an eye on, possibly examine and report, transactions of a suspicious nature to the financial intelligence unit of the central bank in their respective countries.

While the US woke up to the necessity of anti-money laundering preparedness (or the lack of it) after September 2001, there are concerns that it might take our very own 9/11 to learn it the ‘hard way’. “In India, one of the functions of the Financial Intelligence Unit (FIU) is to review suspicious transactions reported by the banks.

However, this is not systemised and these reports are mostly a few months old, when they are up for review within the bank,” says Mr Sarabjeet Singh, a Partner in the Risk Practice at BMR Advisors ( www.bmradvisors.com ).

In an email interaction with Business Line, Mr Singh explains why systems are key for reporting suspicious transactions, how real-time reporting is more important than mere identification, etc.

Excerpts from the interaction:

Why has the issue of anti-money laundering come up again?

The US and the UK reeling under the current credit meltdown recently set up a joint working group to move towards a more robust financial monitoring and regulatory environment.

The purpose: To explore common or similar rules and guidelines operating in their financial markets. With the US and the UK financial markets having a reach far greater than their physical boundaries, this may be one of the first signs of greater collaborations amongst regulators and impacting global economies.

On the anti-money laundering (AML) front, this does raise readiness issues in the Indian financial sector, which is heading towards fast-paced integration with the global financial systems. An assessment would be required of how updated our AML regulations are and how well is the financial services sector geared up in systems and processes to meet with requirements, which would become the de facto global standard with the US Federal Reserve and the British Financial Services Authority (FSA).

How prepared are we?

Technology is certainly one of the factors that will play an important role in complying with global requirements, whether in customers profiling for a risk-based approach, simple record keeping, transaction monitoring or KYC (know your customer) needs.

Establishing systems and processes for collecting and retaining both identification- and transaction-related records in a manner from where the details can easily be retrieved, as and when required, would be important. This would help comply with all global sanctions lists that need to be monitored.

Does that mean Indian banks are prepared?

Some of the Indian banks have the systems, but they are highly fragmented. They are not integrated and do not allow the access of all customer-related data on a system. This becomes even more relevant from a transaction-monitoring system perspective. The anti-money laundering laws require banks to capture suspicious transactions and report these.

You were talking about a chink in the armour…

Yes. In India, one of the functions of the FIU is to review suspicious transactions reported by the banks. However, this is not systemised and these reports are mostly a few months old, when they are up for review within the bank.

With the globalisation of the AML laws, banks in India will have to establish systems and processes that are more dynamic, real-time and automated on the transaction-monitoring front. Complex threshold parameters would need to be operated on an ongoing basis.

What can make the systems efficient?

The technology requirement is not limited to identification of suspicious transactions, but also extends to reporting of these suspicious activities to relevant authorities. Processes will have to be built and documented around these systems as filters will be applied at each level of screening (alert monitor, AML officer, compliance, business, Money Laundering Reporting Officer, etc) before these are finally reported to the FIU.

So, what approach should banks take?

Adoption of a risk-based approach on AML and its application to the existing customer base (consumer and corporates) would need to be demonstrated to the regulator within a given timeframe.

This customer database of the bank would need to be run past the AML risk-based model and high-risk customers highlighted and addressed appropriately. This in turn would mean a significant amount of data cleansing, analytics and mining, in addition to training and communication for the banking staff to ensure adherence and awareness of compliance needs, “suspicious matter reporting obligation,” and on not breaching the tipping-off rules.

Many foreign banks are present in India. What role do they play?

All foreign banks providing correspondent banking services to their Indian counterparts would need to provide a certification that the correspondent bank does not do business with shell banks. Declarations regarding this would need to be made by the Indian banks to meet the requirements of the USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001). The challenge, however, is of identifying the relevant customers across the bank in an efficient manner.

Do you think the complicated nature of business and the geographically diverse nature of financial institutions make them vulnerable?

Financial institutions would have to put in processes to undertake certain additional measures against a jurisdiction or an entity wherein, it’s determined that any of these are high-risk and, thereby, are of ‘prime money laundering concern’.

Financial institutions will have to strengthen their record-keeping procedures to ascertain the identity and address of the participants to a transaction, specifically the beneficial owner of the funds by obtaining information on his/her accounts operating in the country by a foreign person.

Lastly, what do you envision as the key challenges for banks, especially the public sector ones?

All this is a significant challenge to banks in India. Those in the public sector have the challenge of getting their systems in place to generate the information required for monitoring and reporting, whereas other banks would face regulatory pressure on compliance and not being caught holding a hot potato.

D. MURALI

KUMAR SHANKAR ROY

http://InterviewsInsights.blogspot.com

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