Why financial institutions should comply with anti-money laundering laws
Money laundering and crime are interconnected; it is the crime that thrives on money laundering—if money laundering is blocked or detected it will lead to discouragement of crime
To answer this question, we need to first understand what money laundering is and how it can rip through the socio-economic fabric.
Money laundering is like the sting of a cobra that injects poison into the socio-economic structure making it numb and thereafter leading it to a slow and agonizing death. Like a cannibalistic creature, it feeds on the foundations of the organization weakening it to such an extent that its downfall is the only eventuality. BCCI is a glaring example. Like fertilizer nourishing the soil, it nourishes criminal activities. Criminal activities generate a lot of illegitimate funds (proceeds of crime) that cannot straightway mingle with the legitimate money in circulation in the country. It provides criminals with the financial strength to fund and expand their illicit activities.
So to reduce the generation of illicit money the supply of this fertilizer has to be stopped and blocked—stop the flow of money laundering and criminals will be devoid of a very effective channel to launder dirty money. Money laundering and crime are interconnected; it is the crime that thrives on money laundering—if money laundering is blocked or detected it will lead to discouragement of crime. It is the illegally sourced cash that needs to be legitimized by mixing it with legitimately earned money. Crime generates dirty money and money laundering washes that dirt to make it look clean. It is a service that criminals use to move funds from the place of origin to a distant place, where it may be rather difficult, though not impossible to trace its origin. So if dirty money is not there money laundering will not be there and if money laundering service is not available then it will discourage criminals and will lead to lesser crime.

To help prevent this, various nations have established anti-money laundering (AML) laws that regulate how certain types of businesses interact with their clients. We are now at a stage where financial institutions are committing criminal offences and assisting their clients in the process of money laundering on a regular basis. The regulators and law enforcement agencies do not appear to have the will or resources to prosecute those involved criminally. Many financial institutions either turn a blind eye or positively collude with clients to place suspect finance in offshore jurisdictions through shell companies, with nominee directors making it very difficult to discover the true beneficial owner.

The Cayman Islands Monetary Authority (CIMA) has officially revoked the banking license of one of the largest multinational banks (Cayman Islands Branch). This follows recent reports that the bank has handed million-pound pay packages to more than 200 staff in a year that saw it fined 1.2 billion pounds for money laundering. In an exclusive disclosure to Cayman Net News last September, CIMA concluded that the bank  was conducting business in a manner detrimental to the public interest, the interest of depositors or of the beneficiaries of any trust or other creditors, and that the direction and management of its businesses has not been conducted in a fit and proper manner. 

According to the British press, the UK Bank’s chief executive, picked up 7.4 million pounds in pay and perks as a reward for bumper profits. Similar seven-figure payouts went to 78 of his British-based staff. Such massive sums indicate that “culture of entitlement” was alive, and kicking, in the Bank. Lamentably compliance culture did not exist.
Compliance culture needs to be created: If the senior management says—and it was widely reported in newspapers—that compliance people tell us how not to do business, but one has to take one's own call for business growth, this implies an encouragement to the employees not to bother about compliance but concentrate on promoting business and business growth. Unfortunately, this is a mindset that seems to focus on business growth at the cost of violating the regulatory and compliance requirements. Moreover, if for such digressions penalty paid is a fraction of huge profits made (Cayman Islands Branch of this bank made profits of 13.7 billion pounds for 2012, while the US financial regulators fined it 1.2 billion pounds), then why bother about implementation and ethical conduct. This is indeed a sad state of affairs!
If financial institutions complied fully with FATF recommendations especially in relation to PEPs and reported their suspicions/knowledge then the recovery of a large part of the world’s dirty money would have been possible and the beneficial owners behind them identified. 
Banking industry that accepts business from high risk customers must have systems, controls and practices to manage that risk. Despite occasional aberrations, India has consistently maintained a robust Anti Money Laundering (AML) system. Historically, the country’s strict foreign exchange laws and transaction reporting requirements, together with the RBI’s Know Your Customer (KYC) policy guidelines make it difficult, though not entirely impossible for criminals to use banks or other financial institutions to launder money. Large portions of illegal proceeds are usually laundered through the alternative remittance system called ‘hawala’ or ‘hundi’.
Banks are in the first line of defence to make sure that proceeds of crime do not get entry into the country. Purpose of RBI directives, IBA guidance notes and the Prevention of Money Laundering Act is to put in place systems that help ensure the realization of that objective. However while these policies and directives look good on paper, in practice as is revealed by many cases of violations recently reported, it has apparently failed to ensure that AML risks are addressed appropriately. Poor implementation of the prescribed policies and procedures exposes banks to risk of handling the proceeds of crime. These failures attract a strong penalty from the Reserve Bank of India.
One of the objectives of PML Act, RBI and IBA guidelines are to protect the financial soundness and   integrity of the Indian financial system. This includes ensuring that criminals do not get access to financial system and that money circulating in the Indian economy is clean.
But we should understand that it is not only a sound system that can take care of all these ills. Ethics is an integral part and in my opinion it is something that cannot be taught but can certainly be shown and if the organization is really serious about it, then it has to percolate down from top management. They have to behave in a way which is demonstrably ethical and such ethical practice over time becomes culture. So a robust control system coupled with a culture of zero tolerance for flouting norms can ensure that a Financial Institution stays firm like the mighty oak during the most turbulent times.   
(Saiyid (SSA) Zaidi is a training and development consultant as well as external subject matter expert at the Educom Group Banker's Academy in New York.)




3 years ago

Union leaders of both supervising and operating staff, the teaching staff at training centres of the same staff and the Auditors both external and internal used to stress the need of implementation of the KYC, AML guidelines issued by the Management from time to time, as directed by its regulators.

But, then who are flouting the rules and at whose interests?

Why is the Insurance Information Bureau now an independent body?

Insurance Information Bureau which was formed as an advisory body of the IRDA has now been transformed as an independent body. No reasoning is given by the IRDA circular. Could it be due to IRDA’s plans to set up an insurance credit bureau, for which companies like CIBIL are interested?

The Insurance Information Bureau (IIB) was formed as an advisory body of the Insurance Regulatory and Development Authority (IRDA) in the year 2009. Insurance companies and TPAs (third party administrators) are required to submit data to the IIB for processing and dissemination of the data. The IIB has been collecting transactional data from the market (insurance companies, TPAs, etc) for different lines of business, analyzing the same and producing periodical and ad-hoc reports for the benefit of stakeholders in the insurance industry.

The IIB has now been transformed into a society as an independent body. The reasons are unclear as the IRDA circular is silent about it. An email sent to IRDA has also not been answered. The change could have been triggered by IRDA’s plans to set up a credit bureau for the insurance sector, for which companies like CIBIL are interested.

Credit bureau for the insurance sector will take into account the individual credit history, claims pattern, financial habits and past premium payment history for charging of premium. The insurance credit bureau will act as a “consumer rating agency” as there is no mandatory requirement for insurance companies to consider credit history at the time of issuing policies.

Some insurance experts feel that an independent agency should come forward to create a database of insured in an authentic manner and to make it accessible to the stakeholders. The database, if correctly done with proper technology and correct structure, can give detailed information. It can be used to come up with correct premium pricing. Today, if insurers charge a high premium, they will lose customers; if they price themselves low, then they will suffer losses; if they get the pricing right, they will get customers. Insurers sometimes play safe in underwriting to stay out of risk.

While a credit bureau for the insurance sector may be the future, it seemed that in the past IRDA may not have been keen on outside companies getting on board. IIB data even with its limited accuracy was considered an important entity. With IIB now becoming independent body, it may be an easy road for outside companies like CIBIL, which are looking forward to get into the insurance credit bureau business.

Read  - Health insurance reports from the Insurance Information Bureau—an IRDA body—are riddled with errors


Economy & Nation Exclusive
Jet-Etihad deal: Handing over benefits to Abu Dhabi on a platter

There are 25,000 seats per week vacated by the defunct Kingfisher. The additional weekly seat entitlement of 40,000 by India would only help Etihad whose sole aim is to establish Abu Dhabi as a hub at the cost of Indian airports

The deal between India's Jet Airways and Abu Dhabi-based Etihad Airways has several angles. However, one point that stands out is how the deal was ‘facilitated’ to provide benefit to both the private parties at the cost of India. Especially, signing of the bilateral for enhancing weekly seat entitlement to 40,000 seats between India and Abu Dhabi is turning out to be more beneficial to Etihad than anyone else.


Basically, the bilateral covers only Third and Fourth Freedom Rights (as provided in the Convention on International Civil Aviation or Chicago Convention). However, the deal between Jet and Etihad is based more on the Fifth and Sixth Freedom Rights and the bilateral appears to facilitate this. More about the Freedom Rights later.


The Indian government has literally given Jet and Etihad the right to pick up passengers from any domestic airport to Abu Dhabi. From here, the passengers would be flown to destinations beyond United Arab Emirates (UAE) like London and New York.


However, this requires consent of the third country to which passengers are flown. In this case, the government has chosen to merge its own bilateral flight slots on international routes, which either remain unused or have been given up by domestic carriers like Air India and the grounded Kingfisher Airlines.


In February 2013, the Indian government decided to scrap international flying rights and domestic slots of Vijay Mallya-led Kingfisher due to non-utilization. The cancellation of rights of Kingfisher to fly overseas alone created 25,000 seats per week for use to eight countries, including Dubai, UAE, UK, Hong Kong, Singapore, Nepal, Sri Lanka and Thailand.


Ideally, this should have benefitted domestic carriers like Air India. However, these vacated slots were adjusted to several destinations beyond Abu Dhabi to be used by Etihad, thus violating the Chicago Convention.


The Parliamentary Standing Committee on Transport Tourism and Culture has rightly pointed out this issue in its report submitted in the Lok Sabha on 3 May 2013. Questioning the bilateral agreement, the Committee had said, “Indian carriers are not in a position to use increased seat capacity due to fleet constraints. In such a situation, the foreign airline may try to catch up passenger traffic headed to destinations in North America, Europe, Africa and Middle East resulting in huge losses to Air India and various airports of India.”


Emirates Airlines has already established Dubai as its hub point by operating more flights and carrying more passengers to and from India. More than 70% of the passengers carried by Emirates Airlines travel to points beyond Dubai, on Emirates’ network. Etihad is trying to emulate the same for Abu Dhabi with help from the Indian government.


The Parliamentary Committee also mentioned about Jet Airways selling three of its slots at London’s Heathrow Airport to Etihad, which was confirmed by the secretary of MCA. This was done without taking any permission from the Indian government. The Committee categorically said, “Carriers have no right to sell the bilateral allotted to them to other airlines that too a foreign airline. The Committee recommends that the government should take away the slots from Jet Airways and the airlines should be penalized for selling the national property—bilateral.”


The minutes of the meeting held on 22 April 2013 under the chairmanship of P Chidambaram not only talks about the bilateral but also mentions third country code sharing and air service agreement. Here is the mandate approved for the bilateral air service negotiation between India and Abu Dhabi...


1. Additional entitlement up to 40,000 seats per week may be considered in addition to the current entitlement in a phased manner over next few years, preferably 3 to 5 years.


2. Third country code sharing [code sharing with designated airline of third country i.e. other than India & UAE (Abu Dhabi)] and domestic code sharing may be allowed.


3. Any other issue relating to air service agreement may also be considered in the overall interest of bilateral relationship.


On the same day, the Group of Ministers, including Chidambaram, Ajit Singh, minister of civil aviation, Anand Sharma, minister of commerce and industries and Salman Khurshid, minister of external affairs, as well Shivshankar Menon, National Security Advisor and Pulok Chatterji, principal secretary briefed the prime minister.


PM Manmohan Singh raised some objection on the bilateral, which was side-tracked after an assurance from Ajit Singh and commerce minister Sharma.


The decision was then implemented within 48 hours, and on 24th April, the bilateral agreement between India and Abu Dhabi was signed. This was followed by signing of a deal between Jet and Etihad on the same day. However, signing of the bilateral between two countries and buying stake in Jet is proving to be more beneficial to Etihad.


Coming back to Freedom Rights, the International Civil Aviation Organization (ICAO) or Chicago Convention, a specialized agency of the United Nations, looks after coordination and regulation of international air travel. The original document of the Chicago Convention was signed on 7 December 1944 by 52 signatory states. At present, the Chicago Convention has 191 state parties, including all member states of the United Nations—except Dominica, Liechtenstein, and Tuvalu—plus the Cook Islands.


The Freedoms of the air are a set of commercial aviation rights granting a country’s airline(s) the privilege to enter and land in another country’s airspace. The First through Fifth Freedoms are officially enumerated by international treaties, especially the Chicago Convention. Several other Freedoms have since been added and although most are not officially recognised under international treaties, they have been agreed by a number of countries. The lower-numbered Freedoms are relatively universal while the higher-numbered ones are rarer and more controversial. At present, there are nine Freedoms.


Importantly, Freedoms are not automatically granted to an airline as a right; they are privileges that have to be negotiated and can be the object of political pressures.


The First Freedom is the right to fly over a foreign country without landing. The Second Freedom allows technical stops without the embarking or disembarking of passengers or cargo. The Third and Fourth Freedoms allow basic international service between two countries.


The Fifth Freedom allows an airline to carry revenue traffic between foreign countries as a part of services connecting the airline's own country. The unofficial Sixth Freedom combines the Third Freedom and Fourth Freedoms and is the right to carry passengers or cargo from a second country to a third country by stopping in one's own country.


India and UAE have signed an agreement for only Third and Fourth Freedom Rights, which allows bilateral flights on reciprocal basis between two countries. However, the deal between Jet and Etihad is completely based on Fifth and Sixth Freedom. This is really a cause for concern, as it has the potential to cause premature death of several Indian carriers.


Reported by: Yogesh Sapkale

Read More

EXCLUSIVE Jet-Etihad deal: What happened in those 48-hours?

EXCLUSIVE: Jet-Etihad deal: What are the Parliamentary Standing Committee, FIPB, SEBI and CCI worried about?





3 years ago

I do agree with Dr Vaidya , it is similar to 2G/3G, so the case might go to SC.


3 years ago

As disclosed in the Papers even Aviation Minister/Ministry is against the deal but who to stop the arrogant Congress, only public at the hustings because they are afraid that it might be the end of Congress.

Ankur Bhatnagar

3 years ago

What is meant by "gain" or "loss" in these agreements and complex world of highly regulated international aviation? When we say something is loss to India, does it mean loss to the Indian airlines? But what about the passengers? Is this deal a loss to Indian passengers as well?

There must be lot of horse trading going on somewhere, but I guess this deal could be a gain for the passengers. And that is what should matter. The airlines exist for passengers, not the other way round. More options for flying to US, Europe and Mid East should be good, right?


Dr Paresh Vaidya

In Reply to Ankur Bhatnagar 3 years ago

This is a correct point. Passengers will gain if King Fisher seats are now utilized. Unfortunately Parliamentary committees, CAG, Courts - all want more money for the exchequer, not realizing that the money will come from the public. A case similar to 2G/ 3G auctions.

Sadanand Patwardhan

3 years ago

Yogesh Sapkale,

You have hit the bulls-eye with your analysis of Fifth and Sixth freedom rights acquired by Etihad through backdoor by virtue its deal with Jet. I believe those who sell country's interest are called traitors. But, then it seems we entered the new era of Democracy: by, of, and for traitors.

ashwin bahl

3 years ago

The moot point we and our rulers should ponder over is why Indian carriers have not captured the lucrative Indian market, we should have had the worlds biggest airline in the world today.
Why this failure ?
Even private operators have failed in capturing this share, forget Air India, it does not exist !


3 years ago

This is an excellent move by jet and etihad.
Indian passangers have had enough of the rotten service dished out by Indian airline companies.
Indian airports are probably worst in the world, save perhaps, Cuba.
even African coutries have better airports.moving the hub to abudhabi will better the flying experience of passangers.
its time to stop lousy service in the name of nationalism ( which in India means the cronies get richer and by providing the lowest common denominator in terms of service).

Next move should be to hand over immigration, andcustoms at airports to Dubai or Malaysia



In Reply to arif 3 years ago

While there is logic in what you say nevertheless instead of handing over the whole cake to Etihad it would be better if it was shared between Qatar,Emirates and even some other interested parties. Or else there should be a review option after 1 or 2 years.

Anil Agashe

3 years ago

It is impossible to believe that King Fischer was flying 25k passengers per week to Gulf. if they were they should have been making money!
Air India has no planes to fly so cannot occupy the space created by KF.
Why have we not been able able to create a base here in India say at Nagpur to make it available as a hub ti International carriers?
The attitude we won't do anything to exploit market opportunities and also will not allow others to do it is going to be damaging in the long run.


J Thomas

In Reply to Anil Agashe 3 years ago

Well said

We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)