SKP Forensic Update
28 December 2015
Anti-money laundering compliance: Enhanced internal controls for foreign exchange remittance transactions

India’s anti-money laundering (AML) compliance requirements for financial institutions are guided by the Prevention of Money Laundering Act, 2002 and the Reserve Bank of India’s (RBI) Master Circular on AML standards. The regulatory requirements expect financial institutions to have adequate internal control mechanisms including the following:
  • Risk-based customer due diligence process;
  • Establishing an AML/combating financing of terrorism (CFT) compliance function and review programme; and
  • Focus on complying with record-keeping or regulatory reporting requirements, including suspicious activity reporting.
Suspicious activity in the country is reported to the Financial Intelligence Unit – India (FIU-IND), the national agency responsible for receiving, processing, analysing and disseminating information related to suspect financial transactions to enforcement agencies and foreign FIUs. Broad categories of suspicious activities and reasons for suspicion as defined by FIU-IND include falsified documentation, a large number of accounts having common account relationships, unusual activity compared to past transactions, and the nature of transactions being inconsistent to the declared business of the customer.

In the wake of recent incidents of reported money laundering investigations, it is pertinent to examine the internal controls related to foreign exchange (forex) remittance/receipts that could enhance identification, prevention and reporting of potential money laundering incidents through the banking channel:
Primary risk Transaction level Branch level Bank/financial institution level
Aspect: Customer identity
Falsified identity documentation Identity documentation of the customers or its signatories may include a Permanent Account Number (PAN) card or Aadhar card. The information in these documents could be verified from the registered government website. 

The proof of address provided by the customer or its signatory can also be validated against the electoral rolls for the respective constituency.

Furthermore, the proximity of the date of identity or address proof documentation to the date of approaching the bank of a relationship can be another red flag considering the outcome of the above measures.
On a monthly basis, the branch shall identify sample customers (current accounts with forex transactions) to conduct a physical site visit to the premises for site verification. Analyse pattern of:
  • a large number of accounts having a common account holder, introducer or authorised signatory with little or no rationale;
  • account holders choosing to have a banking relationship in a location away from their address, while a branch exists in their locality;
  • multiple accounts opened from the same locality in the same time period.
Aspect: Compliance function
Inadequate/falsified documentation mechanism for transactions It is critical to ensure that the customer has provided all essential documents as required.
Transactional documents such as those for import/export of materials could be validated with copies of the bill of lading or bill of entry. The bill of entry could also be verified online.
In addition, for service remittance or receipts, the transactional nature being inconsistent with the declared business could also be verified.
Concurrent audit reviews shall be expected to review specific transactional exceptions including those related to compliance with AML guidelines. Analyse trends including:
  • unusual activity compared to past transactions;
  • sudden activity in dormant accounts;
  • nature of transactions being inconsistent with what would be expected from a declared business.
Aspect: Suspicious transaction reporting
Potential non-reporting of suspicious activities The RBI, in its Master Circular, clarifies that suspicious activity shall be reported even if the transaction is not executed.
Communicate and train employees to come forward to report concerns, even if they are not affected.
Review trends of transactional remittances to identify potential unusual activity compared to past transaction trends.
Report any exception identified in the process as part of a Suspicious Transaction Report (STR).
Analyse trends of:
  • value just under the reporting threshold amount in an apparent attempt to avoid reporting;
  • value inconsistent with the client&rs
  • inconsistent frequency of transactions;
  • unexplained transfers between multiple accounts with no rationale.

With increasing regulatory oversight and compliance demands, traditional approaches towards compliance may be limited or ineffective. Additional measures along with appropriate segregation of duties are essential to ensure that financial institutions’ interests are appropriately protected.

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