Page 29 - Banking Finance February 2025

ARTICLE

of movement of illegal funds might be subject to the local regulators as well as other supervisory
comprehensive or targeted sanctions issued by different institutions.
global agencies. Any failure to comply with these c. Financial institutions must be in conformity with
sanctions may result in civil or criminal penalties. high ethical standards, have a corporate
c. The objective of criminals is hiding the source of money governance policy, and should do full cooperation
not to earn profit from their dirty money. This gives with agencies as per local laws.
them an economic advantage over regular industry d. Financial institutions should arrange for regular
people. People from genuine industry or businesses staff training for AML, KYC, and CFT. They should
suffer because of presence of criminal. While dirty have an independent audit function along with
money keeps flowing, but supply of clean money strong compliance monitoring program.
becomes restricted or limited.
3. Other important global organisation for strengthening
Efforts to Counter Money Laundering: global "AML CFT Compliance" is "The Wolfsberg
Principles." These principles represent a set of guidelines
Global efforts against the menace of money laundering and best practices, covering various aspects of financial
started in 1998 with the formation of FATF by G7 countries. crime risk management, including customer due
FATF has made 40 recommendations for financial
diligence, enhanced due diligence for high-risk clients,
institution's AML-CFT Compliance framework. These
correspondent banking relationships, and the detection
recommendations need to be adopted & implemented in
and reporting of suspicious activities.
an effective manner by the financial institutions. This
4. In India, the Prevention of Money Laundering Act
implementation is regularly evaluated by the FATF and its
regional style bodies FSRBs to ascertain the efforts done by (PMLA) 2002 is implemented to combat money
the jurisdictions to combat money laundering. On the basis laundering and related financial crimes. The law was
of these evaluations, jurisdictions are placed on "Black or enacted to align with global AML-CFT Standards. This
Gray" list if these recommendations are not implemented law, along with the "Prevention of Corruption Act 1988"
appropriately. and "Foreign Exchange Management Act 1991, plays a
1. FATF has also introduced the "Risk Based Approach," robust role in safeguarding the Indian financial system
from criminals.
meaning jurisdictions & financial institutions need to
assess and understand the money laundering risk to
which they are exposed. Suitable mitigation measures, Conclusion:
in accordance with the risk anticipated, need to be It is extremely critical for financial institutions to prevent
ensured by them in order to mitigate & manage the criminals from misusing the financial system. Financial
money laundering risk. institutions are like the backbone of an economy. Therefore,
2. Another important effort was made by the Basel financial institutions must understand the risk of money
Committee on Banking Supervision (BCBS) through their laundering crime, which they are exposed by virtue of their
"Statement of Principles for Prevention of Criminal Use business lines. They should be able to implement stringent
& effective AML & CFT measures. This would help them from
of the Banking System for the Purpose of Money
Laundering." These supervisory recommendations in reputational damages, financial losses, and also from being
a part of the systemic financial crisis.
brief are as under:
a. Financial institutions need to identify persons
through the "Customer Due Diligence (CDD)" References:
process before onboarding them as customer. The 1. Financial Action Task Force, available at: www.fatf-
CDD process requires to establish the identity of gafi.org
natural persons, who are the beneficial owners. The 2. www.unodc.org/unodc/en/organized-crime/intro/
Persons with anticipated 'High AML Risk' must be UNTOC.html
subject to 'Enhanced Due Diligence.' 3. https://enforcementdirectorate.gov.in
b. Financial Institutions must follow rules and 4. Basel Committee on Banking Supervision, available at
regulations about AML CFT compliance, issued by www.bis.org/

26 | 2025 | FEBRUARY | BANKING FINANCE