Fintech

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August 24, 2022

AML Regulations: Global Regulator & AML Regulations followed in India

Want to know about AML Regulations? Click here to about the Anti Money Laundering regulations followed in India anf the global regulators of AML regulations

For any business entity, public or private, to operate in the finance domain, compliance with the international and national CTF (Counter-Terrorism Financing) and AML (Anti-Money Laundering) regulations is necessary. This is to make sure that financial frauds are kept under check.

But what are those regulations? Read along to find out.

This blog discusses everything financial entities need to know about the AML regulations, from what they are and who creates them to what regulations must be followed within India.

What are AML regulations, and what is their purpose?

AML regulations are a set of rules and regulations to be followed by entities such as banks and NBFCs. These regulations are meant to detect the disguise of illicit funds as genuine income and their use for tax evasion and other crimes such as funding terrorism.

Who Creates and Regulates the AML Regulations?

The FATF, or the Financial Action Task Force, is an intergovernmental organisation that the G7 created in 1989 initially to tackle money laundering. However, over the years, the FATF has expanded its horizon and now creates, promotes, and regulates policies for combating financial crimes across the globe.

FATF, as of 2021, had 39 members, including India, and regularly publishes and updates the CFT and AML regulations. In addition, all the member countries and organisations must abide by the regulations mentioned in the policy. Inability to comply might result in sanctions against the defaulting party.

What AML Regulations are Followed in India?

The RBI is one of the organisations that has issued regulatory guidelines on the KYC norms for combating financial terrorism and anti-money laundering. These guidelines aim to prevent the misuse of entities such as banks and other NBFCs for terror financing, money laundering, and other illicit activities.

Here are the CFT and AML regulations the banks and NBFCs need to keep in mind while framing KYC/AML policies:

1.    Policy for Customer Acceptance 

  • All financial institutions must develop a clear customer acceptance policy that lays down the criteria for customer acceptance. This ensures that only genuine customers can sign up or open accounts with the financial institution. 
  •  Create customer profiles based on the risk they pose. For instance, government employees usually have a well-laid-out salary structure, so they can be categorised as low-risk customers. And businesses that involve risk can be categorised under medium or high risk.  
  • The strictness of the customer acceptance policy must be kept in check. It should never be strict enough to deny services to socially or financially disadvantaged people.

2.    CIP or Customer Identification Procedure 

  • Customer ID verification must be done using independent and reliable data or information. 
  • The finance entity must regularly update the customer identification data/information, including photographs. The periodicity should never be less than one time in 5 years (for low-risk profiles) and once in 2 years for medium and high-risk customers. 
  • The customer identification procedure can be carried out at different stages of the customer’s journey, such as a transaction, or in case the organisation is doubtful about the customer’s identity.

3.    Monitoring of Transactions

  • The organisation must monitor all the complex, large and unusual transactions that lack a lawful purpose, and this is to keep the frauds in check.
  • The high-risk accounts must be under strict scrutiny. In addition, the entities must note where the money is coming from and other details, including the country of origin. 
  • There must be a periodic review of risk categories, and any extra measures, if required, must be taken. The review must happen once every six months.

4.    Risk Management

  • The board of directors of the bank or financial entity must ensure that there is an effective KYC procedure in place that ensures effective implementation of the required procedures. 
  • The procedure must contain everything from the segregation of duties and management oversight to training the employees. 
  • The internal auditors must check and verify the set KYC procedures and point out the gaps or shortcomings observed.

5.    Additional Guidelines  

  • The finance entities must take a risk-based approach to tackle AML/CFT threats.
  • Integrating KYC, including other due diligence measures, is also required.
  • Always screen for international sanctions, adverse media, and even PEPs or
  • politically exposed persons.
  • File CTRs or cash transaction reports, and STRs, or suspicious transaction reports.
  • Maintain all the records and documentation and train employees.
  • An AML regulations compliance official must be appointed to ensure perfect compliance.  

Conclusion

CFT and AML regulations effectively prevent money laundering and terror financing and safeguard the global economy. Therefore, all the banks and even NBFCs must comply with all those regulations and guidelines to align with the national interest.  

FAQs on AML Regulations in India

Who regulates AML in India?

Authorities such as the Ministry of Finance, the Directorate of Enforcement in the Department of Revenue, and the RBI regulate the AML in India.

What are the AML regulations for?

The AML regulations are meant to detect, report and mitigate issues such as money laundering and terror financing.

Who sets money laundering standards?

The FATF, or the Financial Action Task Force, is responsible for creating, promoting, and regulating money laundering globally. This organisation includes around 39 members who must comply with these mutually decided anti-money laundering guidelines. 

Is AML mandatory?

For all the companies operating in the finance domain wherein there is a risk of financial crime, compliance with anti-money laundering regulations is mandatory.

What is money laundering?

Money laundering is the act of disguising money obtained from illegal sources and using it for criminal proceeds such as tax evasion, terror financing, etc. For instance, earning money from illegal activities such as insider trading, bribery, smuggling, illicit sales of arms, organised crimes, and changing the source to a legitimate one is an example of money laundering.

What is the benefit of complying with AML regulations?

Complying with AML regulations helps the government stop money laundering and terror financing. However, it also supports other entities operating in the finance domain to ensure complete security for themselves and their customers.

FAQs

What is the difference between KYC and CDD?

KYC is the initial step of getting to know your customer, that of creating a profile for a customer on your platform after identification and verification. CDD is the process of reverification of such information over a period of time, repeated in some cases.

What is the difference between KYC and AML?

AML is a framework that helps track and disrupt any money laundering activities. It can be built into KYC. KYC is a set of routines for identifying and getting to know your customer better during the process of onboarding on any business platform.

What are the CDD requirements according to FinCEN?

There are four key requirements for CDD. Written policies and procedures must be maintained that:

  1. Identify and verify the  business
  2. Identify and verify the beneficial owners of a business
  3. Develop customer risk profiles
  4. Monitor and report any suspicious activity

Should CDD be updated on a specific schedule?

No, there is no specific schedule to update the CDD or EDD information of a customer or business but any suspicious activity must be reported and customer risk profiles must be maintained.

Which is the latest EU directive against money laundering?

The Fifth AML Directive (EU) 2018/843 of the European parliament is the latest amendment that prevents the use of financial system for terrorist financing and money laundering activities.

What is the difference between KYC and CDD?

KYC is the initial step of getting to know your customer, that of creating a profile for a customer on your platform after identification and verification. CDD is the process of reverification of such information over a period of time, repeated in some cases.

What is the difference between KYC and AML?

AML is a framework that helps track and disrupt any money laundering activities. It can be built into KYC. KYC is a set of routines for identifying and getting to know your customer better during the process of onboarding on any business platform.

What are the CDD requirements according to FinCEN?

There are four key requirements for CDD. Written policies and procedures must be maintained that:

  1. Identify and verify the  business
  2. Identify and verify the beneficial owners of a business
  3. Develop customer risk profiles
  4. Monitor and report any suspicious activity

Should CDD be updated on a specific schedule?

No, there is no specific schedule to update the CDD or EDD information of a customer or business but any suspicious activity must be reported and customer risk profiles must be maintained.

Which is the latest EU directive against money laundering?

The Fifth AML Directive (EU) 2018/843 of the European parliament is the latest amendment that prevents the use of financial system for terrorist financing and money laundering activities.

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