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Money laundering and AML importance

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KYC & AML – Complete Guide

KYC (Know Your Customer) & AML (Anti-Money Laundering)

1. What is Money Laundering?

Money laundering is the process of disguising the origin of illegally earned money by passing it through a complex series of transactions. The goal is to make the money appear legitimate.

Three Stages of Money Laundering:

  • Placement: Injecting illegal funds into the financial system
  • Layering: Complex movement to obscure the source
  • Integration: Reintroducing funds as legitimate money

2. Money Laundering vs Terrorist Financing

Aspect Money Laundering Terrorist Financing
Source of Funds Always illegal Can be legal or illegal
Purpose To enjoy illegal funds To fund terrorism

3. Sources of Money Laundering

  • Drug trafficking
  • Bribery and corruption
  • Illegal immigration
  • Human trafficking
  • Fraud and gambling

4. What is KYC?

KYC is a regulatory process of verifying a customer's identity to prevent misuse of the financial system. It is mandatory for financial institutions under various global standards.

Importance of KYC: Protects against fraud, money laundering, and terrorism financing.

5. Elements of KYC

  • Customer Acceptance Policy (CAP)
  • Customer Identification Procedure (CIP)
  • Customer Due Diligence (CDD)
  • Ongoing Monitoring

6. Types of Customer Due Diligence

  • Simplified: Low-risk clients
  • Standard: Regular clients
  • Enhanced: High-risk clients (e.g. PEPs, NRIs)

7. Red Flags in Transactions

  • Unusual trading volume
  • Frequent cash transactions
  • Complex transaction chains
  • Clients unwilling to share information

8. Regulatory Framework

  • India: PMLA 2002, SEBI, RBI guidelines
  • Australia: AUSTRAC
  • Canada: FINTRAC
  • Brazil: Central Bank

9. Case Studies

  • Nirav Modi – PNB Scam: Lack of KYC for LoUs
  • Yes Bank: Weak monitoring, bad loans

10. Consequences of Non-Compliance

  • Employees: Legal penalties, job loss
  • Firms: Regulatory fines, reputation damage

11. Best Practices

  • Onboard customers only after full KYC
  • Use Enhanced Due Diligence for risky clients
  • Update documents regularly
  • Employee training on red flags and compliance
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