The challenge to tackle money laundering is now internal

Written by Sarabjeet Singh | Updated: Aug 27 2009, 03:36am hrs
Money laundering concern has grown many-fold in the mature economies as apart from its known links with terrorist financing and narcotics smuggling, new avenues such as football clubs and other large-revenue sporting events are also attracting investigation. Many global financial institutions have reported an increase in suspicious activity over the past year. With the increase in integration of Indias markets with global ones, Indian regulators and the banking institutions are under greater stress to rise to the threat of money laundering than ever before.

India has enhanced the AML regulatory framework significantly. Recent additions to the PMLA have brought more entities under its ambit. Expanding from banks, non-banking and even non-financial entities like casinos have to comply with AML requirements. The RBI has done its bit by notifying rules that are fairly detailed and specific in their specifications. On the monitoring side, the FIU has managed to get institutions to increase the filing of CTRs and STRs such that STRs increased by 100% over the previous year. However the banks have not matched this pace of this activity.

We have captured certain insights of the Indian AML environment in the BMR World-Check India AML survey 2009. The survey has found that the major challenges for banks are internal to their organisations. Banking compliance consists broadly of interpretation, execution and reporting. While any regulation would always be open to some interpretation difficulty this is not the prime concern on the AML side.

Similarly banks in India are used to complex reporting. So while this adds to the already large load, it does not add much to complexity. On the execution front though, there is a huge effort required.

Regulators in the western economies have placed enormous importance on AML laws, regulations and processes, particularly so post 9/11. There has been a significant amount of efforts that have been made by regulators, banks and institutions on setting up new AML systems post more stringent regulations being in place.

These efforts in training people and large technology platforms have been significant and run into hundreds of millions of dollars. Clearly, the objective has matured from a detective control system to a more preventative one.

In India, the regulations have just been put in place and hence after the regulatory framework comes its implementation and institutionalisation. This requires massive investments in training and hiring additional skilled resources and building technology platforms/ software for complex data monitoring. Are the Indian banks ready for this

This is a serious concern as given the meltdown and its impact of business, the foot is off the AML pedal for bank managements, where survival is the big concern. Given this becomes a secondary topic, one may see the Indian banks reducing the stress or not giving this topic enough attention, laying the foundation wherein the Indian banks would perpetually be playing catch-up.

Additionally, this would seriously impact the ability of Indian banks to expand their offshore foot print.

Further, India plans to be a full member of the Financial Action Task Force (FATF) and accordingly has updated its PML Act, 2002, this year, incorporating a number of FATF guidelines. However, there are key areas where the regulatory framework requires improvements. These include issues such as designated non-financial businesses to include dealers in real estate, precious stones, etc and to criminalise money laundering as per the UN Convention Against Transnational Crime, 2000.

A good step has been taken by including the definition of Politically Exposed Persons (PEPs).

However, its broad definition makes it open for differential interpretation and hence issues such as duration of a person being considered as a PEP after remitting office and seniority of government officials needs to be addressed. A key exception is that Indian PEPs have been kept out of the ambit of the definition and only foreign nationals are subject to this requirement.

Also, another way to look at the banks in India would be in three broad types public-sector, private and foreign. Public-sector banks identify transaction monitoring as a key improvement area and it ties in well with their response in the survey of saying that the primary manner of the most effective monitoring is staff vigilance.

The public-sector banks need massive investments in training, personnel and technology to be in a position to even start being comparable to some of the private-sector banks or for that matter, need a generational jump to come to the level of most foreign banks operating in India.

The writer is Partner leading the AML practice in BMR Advisors