Definition of Money Laundering

SHORT NOTES ON KYC/AML IIBF
# the phrase “Money Laundering” was first used in press by the British Newspaper “The Guardian” in
1972 & legally in 1982 in a US case.
# it affects global Economy in different aspects i.e.
1) Economic Effects – distortion of prices, excess money supply, impact on exchange rate, impending
impact on economic growth, dampen investment climate etc.
2) Social Effects: Corruption & Organised Crime Rise
3) Political Effects: influence led control over socio- political system
4) Financial System: vulnerability against disguised illicit money as deposits, reputation risk, &
regulatory action
Definition of Money Laundering:
*Conversion or Transfer of funds/property earned through offense or offenses
* Concealment or disguise of the true nature, source, location, disposition, movement, rights with
respect to, or ownership
* to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating
evidence
* Money laundering is the conversion of profits of illegal activities into financial assets which appear
to have legitimate origins. It can also be terms as sanitisation of criminal proceeds.
Some Famous Cases of AML:
@Bank of Credit & Commerce International (BCCI) in 1970 over 70 countries caught in 1991
involving $12 billion
@European Bank of Antigua, an offshore bank, first internet based bank (1994-1995), collapsed on
1997, July
@Riggs Bank (USA-Pinochet & Mbasogo), helped Chile dictator august Pinochet, paid $9million fine
& In 2004, helped Guinea dictator Teodaro Obiang Nguma Mbasogo paid $16 million in 2005 in
violation of US Bank secrecy Act
@Fraudulent encashment of Cheques –KYC issues, Overdraft against FDs- KYC issues,
@Trade Based Money Laundering (Oct 2015)- July-14 to July-15, 8000 transactions, Rs. 6000 crore
remittance, Serious Fraud Investigation Office (SFIO) investigating
@ Remittance through Fake Imports- Rs. 500 crores, 70 Fake Bank Accounts,7 Banks
Lessons for Banks and Bankers:
Not only have the institutions even their employees are exposed to several risked arising from
failures in compliance.
Terrorism Financing:
Mobilising or providing funds with the intention that they may be used for terrorist acts or
organisations. Funds may be from illicit or legal sources, only financing and nature of activity are
concealed.
Money Laundering Methods:
Earned through illegal activities then bring into system through:
 Placement- Physically placing i.e. depositing cash into banking system

 Layering- Making layer of multiple transactions to obscure initial entry of placement
 Integration- Accumulating funds at one or two points having an apparently legitimate form
or purpose
Common Source of Illegal Money:
Drugs, Crime, Bribery/Corruption, arms trafficking, humans trafficking, smuggling, Tax evasion
Methods/Modes for ML:
a. Deposit structuring/smurfing: depositing cash below the reporting threshold like in India
less than Rupees 10 Lakhs cash deposit in a month, large number of unconnected accounts,
keep revolving money among several accounts,
b. Multiple tier of accounts: pass through multiple accounts and being split at every stage
c. Funnel Accounts: Bank account is opened only for the purpose of depositing dirty money,
and amount withdrawn at distant locations.
d. Contra Transactions: repeated transactions to boost the turnover with no commercial or
economic purpose
e. Bank Drafts/Similar Instruments:
f. Cash deposits followed by transfers: cash deposited in one jurisdiction and transfer to
another with disguised business purpose, lowering the risk of seizure
g. Connected Accounts: benami accounts, in the name of relatives, friends, associates
operating on the behalf of criminal even shell companies are used as well
h. Front Companies: uses of companies which sells goods and provide services having large
volume of business in cash
i. Legitimate Accounts: having multiple accounts in the multiple banks or using money mules
(legitimate accounts of other persons who ready to return funds by taking small amount of
money)
j. Dormant Accounts: accounts kept for funds transfer at strategic time without attracting
attentions.
k. Wire Transfer:
Using Special Type of Accounts:
a. Collection Accounts: using pool accounts of fund transfers by immigrants

b. Payable through Accounts: this type of account is used by foreign banks to funnels deposits
and chq collection outside of country. Foreign customers have signing authority in the
account as sub account holder and can thereby conduct normal international banking
activities.
Using cross border Trade/Loan:
i. Back to Back Loans: A money laundrer
MCQ:
https://www.vskills.in/practice/aml-kyc-mock-test

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SHORT NOTES ON KYC/AML IIBF

# it affects global Economy in different aspects i.e.

2) Social Effects: Corruption & Organised Crime Rise

3) Political Effects: influence led control over socio- political system

Definition of Money Laundering:

*Conversion or Transfer of funds/property earned through offense or offenses

Some Famous Cases of AML:

Lessons for Banks and Bankers:

Money Laundering Methods:

Earned through illegal activities then bring into system through:

 Placement- Physically placing i.e. depositing cash into banking system

Common Source of Illegal Money:

Methods/Modes for ML:

Using Special Type of Accounts:

a. Collection Accounts: using pool accounts of fund transfers by immigrants

i. Back to Back Loans: A money laundrer

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