Compliance Interview Series
with Amlan Das
Amlan Das Senior Manager Anti-Money Laundering
1. Could you explain the concept of money laundering in simple terms?
One may say, money laundering in simple terms is washing or cleaning dirty money which are earned from criminal means mainly corruption, organized crimes, financial fraud, arms dealing, drugs/sex trade, and terrorist financing. In other words, it is a process adopted by the criminals to disguise the true origin of the criminal proceeds by channelizing them through the financial system so that they appear legitimate.
2. What is the biggest challenge in this sector?
There are quite a few challenges in the sector currently being faced by the industry.
- The changing patterns in transactions post COVID pandemic are making it difficult to identify and thus these transactions gets unnoticed. Post pandemic the utilization of cash has reduced and transactions through online channels have drastically increased making it difficult for the AML Systems to pick up alerts.
- Cost of implementation of emerging technologies to identify and analyse suspicious transactions. e.g. Blockchain.
- Cost of compliance, banks and financial institutions are incurring huge expenses to comply with the applicable and changing governance both domestic as well as international. If found not complied, hefty penalties are being imposed by the regulators.
- Absence of skilled resources in the industry to analyze and identify transactions involved in money laundering. Thus, financial institutions have been investing in training and development.
3. How can AML or KYC or KYB benefit from the blockchain technology?
Blockchain is a distributed ledger-based technology facilitating financial transactions. The ledger is maintained publicly to record each transaction within a network. Each party involved in a transaction is assigned a cryptographic key using which each transaction has to be approved and validated by the participants in the network. Once credentials are verified by the network, the transaction is completed, an encrypted block is created & added to the public ledger. The transaction details within the block remain private due to the cryptographic keys. The KYC or KYB details of the customers once updated can't be tampered. Encryption provides an un-hackable environment where customer data can be safe.
The distributed ledger makes this information available to all the financial institutions under the same network, thus reducing the time of verification. Unlike in the traditional model, where there is a lot of paperwork this is completely digital, resulting in a reduction in operations cost and expediting customer onboarding. Negative database can also be maintained along with the customer details thus, there is no requirement of additional sources to validate the information in the negative database. Blockchain coupled with AI and cognitive technology can improve the financial institution's KYC or KYB processes including multiple KYB issues like tracking the change in ownership & governance structure, interests of the beneficiaries across all the firms they are associated with & the location of the beneficiary.
The advantage of the distributed ledger will play a key role in identifying suspicious transactions. With a distributed ledger, it becomes easier for the financial institutions to trace both the legs of the transaction, be it domestic or cross-border. With blockchain real-time reporting of suspicious transactions may also be made feasible thus reducing the regulatory risks like inaccurate reporting, delayed reporting, or no reporting.
4. How can governments stop money laundering? What do you think, can they?
Money laundering can't be completely stopped. However, the same can be controlled by various measures collectively taken by law enforcement agencies and financial institutions. As mentioned by FATF, many governments have established comprehensive anti-money laundering regimes aiming to increase awareness both within the government and the private sector by providing necessary legal or regulatory tools (making the act of money laundering a crime; giving investigative agencies the authority to trace, seize and confiscate illegally derived assets) to the authorities charged with combating the issue.
Government must ensure that the launderers do not take recourse to parts of the economy with weak or ineffective anti-money laundering measures. They must ensure to build the necessary framework pertaining to the exchange of information within and between the countries. Further, Government shall impose strict guidelines to curb public sector corruption as money laundering and corruption are intrinsically linked.
Since, by successfully laundering the proceeds of corruption, the illicit gains may be enjoyed without fear of being confiscated. FATF recommendations 26 and 30 clearly describe measures to fight corruption. To conclude, money laundering is an international phenomenon and thus international cooperation is a critical necessity to fight against it.
5. If everything went to digital money and cash was no longer accepted, how will change the AML process?
The future of transactions is definitely digital money, but cash is something that is not going to be fading out soon. Developed countries may migrate to digital money faster than developing and underdeveloped countries. This change will have an effect on the AML process commencing from the change in the governance & regulations. Without a concrete governance process on digital payment systems, this change may not be viable. Regulators across the world may come together to form guidelines & use technology that can be adopted worldwide for easy data management and data sharing. This may lead to a change in the red flag indicators and even in the reporting regime. With the help of advanced technology, Financial institutions may effectively manage customer data, transactions and also may report suspicious transactions on a real-time basis.
6. Why is money laundering bad for the economy? What is the worst effect?
Money laundering has a devastating effect on the global economy and on the country’s economy, government, and social well-being. However, the effects ofmoney laundering is both on the economic and social front. Let us talk about the social effects first. Illegal money gained by this process strengthens the financial standards of criminals, drug dealers, terrorists, illegal arms dealers, corrupt public officials, and others. Thus, expansion in their operations results in the increased expenditure of the government due to the need for increased law enforcement and health care expenditures to combat serious consequences. Money laundering potentially increases the transfer of economic power from the market, government, and citizens to the criminals. It may even result in a complete takeover of the legitimate government . A higher inflow of illegal money tends to increase corruption in the country. One may watch the series "Narcos" on Netflix to understand this better.
Coming on to the economic consequences, money laundering results in inflating an economy leading to a rise in prices of the commodities. It results in loss of control of economic policies by the regulator & may influence currency and interest rates. The private sectors face the most common effect of money laundering which is "Undermining the Legitimate of Private Sector". Money launders often use front companies or shell companies to co-mingle the proceeds of laundered money with legitimate funds to conceal the source of funds. Investments of proceeds of money laundering may lead to economic distortion and instability as these investments are not made towards profit-making policies, rather they are made to safeguard their personal interests and conceal the source.
Excessive proceeds of laundered money in the economy lead to loss of revenue as it makes tax collection more difficult for the government. Money laundering threatens the privatization efforts by outbidding legitimate purchasers and further using them as vehicles for money laundering. History depicts instances, where money is laundered, have purchased Banks, Casinos, Resorts, Hotels, etc. to conceal their illicit funds and continue criminal activities under the radar. Excessive money laundering poses a risk to the reputation of the country and also restricts the country from conducting free trade with other countries. It is a problem that is not only restricted to the developed economies but also for the emerging economies too. As emerging markets open their economies and financial sectors, they become increasingly viable targets for money launderers.
Moreover, post-COVID pandemic, money laundering seems to have taken a shift from the conventional way and is affecting the essential sectors like healthcare, medical, personal proactive sector, food & nourishments by leveraging consumers’ economic insecurities.
7. What are the best books to read to learn about Anti Money Laundering? Have you any recommendations?
There are prominent books available in the market, however, I would recommend “Anti-Money Laundering in a Nutshell: Awareness and Compliance for Financial Personnel and Business Managers by Kevin Sullivan” & “The Cleaner: The True Story of One of the World’s Most Successful Money Launderers” by Bruce Aitken to understand both money laundering & anti-money laundering.
However, the book must be selected based on the experience & level of understanding the individual has in this sector. One may find numerous materials published in various international and domestic journals to enhance knowledge about anti-money laundering.
8. What are the risks and benefits of cryptocurrency in the AML?
Decentralized, algorithm-based cryptocurrencies especially BitCoin have emerged with two popular concepts.
- They are the base or underline phenomena of the future payments system.
- They are a powerful tool for criminals, terrorist financiers, drug dealers, and sanction evaders to rotate or hold illicit funds.
- Centralized Convertible CryptoCurrency is regulated, the ledger is maintained by a trusted third party & can be exchanged for fiat currency.
- Centralized Non-Convertible is regulated, the ledger is maintained by a trusted third party & can't be exchanged for fiat currency.
- De-Centralized Convertible Crypto Currency has no administrator (unregulated), no trusted third party maintains the ledger & can be exchanged for fiat currency
In my opinion, Centralized Non-Convertible Cryptocurrency has legitimate usage and can increase the efficiency of the payment system and reduce the cost of payments, fund transfer and may also evade or reduce exchange fees in case of cross border transactions. Since these are peer-to-peer transactions where the ledger is maintained by trusted third parties, these transactions along with the originator and beneficiary can be easily tracked. These currencies cannot be traded and rather mined, thus the criminals can't purchase them against cash. The reputed cryptocurrency business is similar to financial institutions, thus they follow KYC checks and follow suspicious activity reporting protocols.
A decentralized cryptocurrency system is vulnerable to various risks as the secrecy of the account holders and transactions are maintained by untrusted administration. There is neither a central agency responsible for oversight nor an AML application capable of monitoring and reporting these transactions to the competent authority. Cryptocurrencies can be accessed through the internet and also relies on complex infrastructure spread across various geographies to execute a payment. Thus, it may happen that the details of the customers and transactions are maintained at two different geographies. Decentralized convertible cryptocurrencies are highly vulnerable to money laundering as they allow anonymous person-to-person transactions which will not get monitored. Other criminal activities involving cryptocurrency are trafficking, fraud, child sexual abuse material, terrorism financing & corporate and organizational extortion.
9. What is the craziest money laundering scheme you've encountered?
This case involves the use of its own front-end company to launder money. AML system had generated an alert which was triggered due to a sudden spike in the volume of transactions in an account maintained jointly with his father aged 58. The case was referred for enhanced due diligence and the report disclosed that the customer had a political and criminal background and he was found to be a sleeping partner in one of the partnership firms owned by his brothers. However, his name was not there in the entity registration document. The customer is using the joint account for cash deposits in small amounts and further, they were remitted to the entity account collectively through online transaction mode. Meanwhile, an open-source search revealed that the customer was convicted twice of possessing narcotics and psychotropic substances but was out on bail due to his political connections. Further investigation revealed that his firm was precisely dealing in the sale of furniture where he was showing inflated profits by comingling the cash earned from illegal means.
10. What is the essential qualification of an anti-money laundering officer?
An anti-money laundering officer should have a thought process in line with the criminals, quality to probe and seek answers as this helps them analyze the transactions and conclude a case. They should have sound knowledge of geography & understand the trades the country is involved in. The pattern of money laundering varies between jurisdictions, thus it is advised to get certified accordingly, although the international certification helps. Moreover, one can refer to various online & offline study materials to enhance knowledge and skills.
11. How has anti-money laundering changed over the time?
Money laundering is an old phenomenon and has evolved over the years. Likewise, the anti-money laundering regime has also undergone a change especially post establishment of the Financial Action task Force (FATF) in 1989. Domestic and international regulations were developed based on FATF recommendations. The establishment of Financial Intelligence Units (FIUs) has led to international cooperation and information sharing within the FATF member countries. Other major global policymakers are the United Nations Office of Drugs and Crime (UNODC), International Money Laundering Information Network (ImoLIN), Asia-Pacific Group of Money Laundering, International Monetary Fund & Egmont Group.
These regulations target criminal activities like market manipulation, trade in illegal goods, drug/arms/human trafficking, corruption, and tax evasion, along with the methods used to conceal these crimes. Numerous cases of money laundering, terrorist financing and major scandals across the globe have led to amend the guidelines making them more stringent and robust.
Technology has also played a key role in developing AML applications using red flag indicators to trigger alerts which further results in reporting of suspicious activity reports (SAR) to FIU. Data collected by various FIU's have led to the understanding of pattern of transactions leading to money laundering or terrorist financing. Moreover, there are various data bases which are used worldwide by financial institutions to identify individuals, entities, countries, businesses, etc. involved in illicit activities and thus filtering them during onboarding.
Evolving digitalization of the payment system & introduction of wallet-based payments are making it complex to monitor transactions, thus there are various changes in the guidelines related to payments. The introduction of cryptocurrency is one of the new challenges the countries are facing, as in various geographies these are not regulated.
12. How can a transaction be called money laundering?
A transaction or series of transactions can be called money laundering where there is a deliberate attempt to conceal the origin, source, and destination of the funds. This process is of critical importance, as it enables the criminal to enjoy these proceeds without jeopardizing their source.
13. Have you any recommendations to fintech startups about the AML process?
Fintech start-ups should work with a common goal of developing a technologically sustainable ecosystem to combat financial crime. FinTechs should assist financial institutions with solutions based on machine learning, artificial intelligence, advanced computing, end-to-end digital currency transaction tracking, screening, maintaining, and connecting data. These solutions should be robust enough to understand regulations, analyze transactions and report where- ever required & develop a process for sanctions screening. Machine learning technology can identify suspicious transactions which even may go unnoticed and also predict subtle patterns of transactions & may reduce false-positive alerts.
14. If you trade with bitcoins, how do you manage to "explain" anti-laundering authorities the money-in & money-out?
Trading in bitcoin is neither recommended nor preferred personally. Considering the fact that the currency is not regulated and the owner may face legal and financial risk as there is no central authority responsible for settlement of the transaction and dispute resolution if any. Moreover, the income from bitcoin is highly taxable in major jurisdictions including India. Being completely digital, they may be subject to cyber security breaches and even may fall prey to the hands of hackers.
15. How did you get CAMS certificate, how did you prepare?
I have not yet obtained my CAMS certificate although I have obtained two other certifications in AML. However, I regularly read the information published on the ACAMS website, FATF website, and in any other domestic & international journals to keep myself updated with the latest happenings in AML world.