Anti Money Laundering(AML) in Remittances, Dataflows and Privacy

We at the Cashless Consumer are working on all aspects of digital payments ecosystem(from increasing awareness, understanding technology, data and policy to representing consumers) with a goal of moving towards a fair cashless society. We had started a fortnightly series of webinars and held a session last week on IFSC opendata API project which was presented by Abhay Rana.

We have a session coming up this weekend — May 30th 7:00 PM IST — having a deep dive session on ‘AML in Remittances, Data flows and Privacy’ from an industry practitioner, Kanchan Kumar who is Co-founder & CEO of Remitr, which aims to bring simplicity, convenience and predictability to international banking and payments for small businesses.

This post aims to provide a primitive overview of Anti Money Laundering(AML) and how does AML compliance works in reality for us to appreciate the deep dive talk better.

So! Let’s start with the basics.

What is Money Laundering?

Money Laundering refers to any process which tries to conceal the source of funds(think Black Money). Through the process, one tries to make illegally gained proceeds appear legal. It comprises of 3 steps:

1. Placement: illegally-obtained funds are directly deposited in banks, which introduces them into the financial system
2. Layering: the funds are converted to other forms or moved to other institutions to separate them from their illicit or criminal source — mixing the money to create confusion, sometimes by wiring or transferring through numerous accounts
3. Integration: the funds are used to purchase assets to move them into the legitimate economy to make it appear “clean”.

What is Anti Money Laundering?

Anti-money laundering (AML) is a term to describe the legal controls that require financial institutions and other regulated entities to prevent, detect, and report money laundering activities. Anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards.

So AML and CFT (Combating the Financing of terrorism) are required to help stem illicit financing to activities like funding to terrorist groups, organized crime syndicates or simply inhibiting greedy business owners into siphoning off illegal funds. Globally the quantum of money being laundered every year is in trillions of dollars(3–4% of Global GDP).

How does AML work practically?

Its safe to assume that the AML laws apply to only a limited number of transactions and criminal behaviors in the financial industry. But it plays a vital role in the relationship with their customers for a bank or a company involved in it. The responsibility is on the institutions to develop the capability to detect and prevent illicit transactions(like KYC) who in turn expect a lot of due diligence from a customer’s point of view.

Level of information sharing for AML purposes

Information sharing in the financial group is meant to effectively identify, manage and mitigate ML/TF(Terror financing) risks by the group. This should include information and analysis of transactions or activities which appear unusual (if such analysis was done); and could include an STR(Suspicious Transaction Report), its underlying information, or the fact that an STR has been submitted. The full report of recommendations by Financial Action Task Force(FATF) for private sector information sharing can be accessed here.

Remittance Industry

Remittance refers to a transfer of money, often by a foreign or migrant worker to their home country. Remittances are a major source of revenue for developing countries. World Bank estimates the remittances across the globe to increase to 768 billion dollars by 2021.

World Bank Report

What should I know to be AML compliant as a Start-Up

Now if you are venturing into this lucrative field which is heavily regulated by government agencies across the globe, there are some steps you must take to make AML compliance a success:

1.Sophisticated reporting : A robust reporting system to inform the relevant authorities of money laundering activities at short notice.

2. Detecting Risky customers : Assessing and evaluating client’s risk profiles and processing them accordingly.

3. Compliance officer : The whole process is not easy to manage and requires a special person who has the knowledge and experience to keep the business in compliance.

How does data localization impact cross border remittance industry?

The regulators (mainly the central banks) have a broad oversight powers over payment systems in developing countries. Cross-border data flows are key to enabling the digital economy and as such, the development of data localization requirements is becoming a major area of concern.

The RBI has a pretty elaborate framework around cybersecurity in general for banks — but efforts around payment systems have been relatively less developed. With a Notification under the Payment and Settlement Systems Act of 2017 (‘PSS’ Act) dated April 6th 2018 ,it has introduced a local storage requirement for payment data in India.

The justifications for localized data requirements are usually for :

• Improved data security
• Stronger protection of privacy for citizens’ personal data, including protection from foreign governments’ access
• Easier access to data and control for national regulators and supervisors
• The creation of local jobs by necessitating the establishment of domestic data centers.

As the regulatory overhead increases, data localization norms are slowing down the whole process of remittance transfer and there have been calls for automating the process by FinTech unicorns.

There are several laws and regulations across geographies dealing with AML compliance practices. Some of them are listed below:

1. FATF 2017 guidance on AML/CFT measures.
2. The United States’ Bank Secrecy Act (BSA)
3. European Union — Fourth and Fifth Anti-Money Laundering Directives (AMLD4 & AMLD5)
4. RBI Prevention of Money Laundering (Amendment) Act, 2009(KYC Norms/ AML Standards/Combating Financing of Terrorism under MTSS)

Interested in knowing more? RSVP to event at https://hasgeek.com/cashlessconsumer/aml-remittances/. If you have any question to the speaker which needs detailed explanation on the topic, you can put it up here. We hope the session would serve as a primer for people interested in understanding Global KYC, AML and Compliance Best Practices. See you in the session!

References :

1. GSMA Report for understanding the impact of data localization.
2. AML Compliance program KB by sumsub.com
3. RBI’s KYC and AML standards document.
4. BIS’s General principles for international remittance services.
5. Fin Plaid’s article of AML.