fema aml & kyc pp

8/9/2019 fema aml & kyc pp

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FEMA, MONEY LAUNDERINGPROVISIONS & KNOW YOUR

CUSTOMER (KYC )GUIDELINES

DEEPAK TANDON

(ASSOCIATE PROFESSOR )

IILM GURGAON


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FEMA In India all the Forex transactions is

administered , controlled and regulated by the

government or by a centralized agency. FEMA1999 confers powers to the Central Governmentand the RBI to control and regulate foreignexchange in India.

Notified by Govt. No. GSR 9371)E dated1.5.2000 and has been in force sinceJune1.2000. Consists of 49 sections and 7Chapters.


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1.PRELIMINARIES, PREAMBLE , DEFINITIONSEC1-2

3.AUTHORISED PERSONS --SEC 10-12

4. CONTRAVENTIONS&PENALTIES SEC13-155. ADJUDICATION & APPEALS SEC16-35

2.REGULATION AND MANAGEMENT OF FOREX SEC3-9

6.DIRECTORATE OF ENFORCEMENT SEC36-38

7. MISC PROVISIONS-SEC39-49

BROAD STRUCTURE OF

FEMA


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FEMA,1999PREAMBLE

-An Act to consolidate and amend the laws

relating to FOREX-Facilitate external trade and payments

-promote orderly development and maintenanceof Forex market in India

-49 sections out of which 12 sections relate tooperations part and rest deal with penalprovisions

-Basically a civil law Act. No Mens Rea.


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FEMA vs. FERA--Details

Applies to citizen of India

Only specified Actsrelating to FOREX

Capital account, Currentaccount transactions,persons , service areintroduced

Sec10 RBI to appointA.D.

Act only to attract fine andnot imprisonment


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PENALTIES & COMPOUNDING Penalty to 3 times sum involved is provided

provided it is quantifiable. If not upto RS 2

lacs . If it is of a continuing nature furtherpenalty Rs 5000/- per day after first day

Sec 15 Directorate of Offences has powerto compound the offences with the rules of

Central Govt.


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OTHERS Under Sec 32 , the appellant has the right

to take assistance of legal practitioner or

Chartered Accountant Under Section37-38 Power to search //

Seizure laid down

Presumption of Mens- Rea-No suchpresumption of guilty of mind unless theprosecution proves so .


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An Analysis of FEMA1.Authorised Person-Clubbing

2. Capital account transactions-alters the

assets and liabilities including thecontingent liabilities outside India ofpersons resident of India

3. Current account transactions other thancapital account transactions

4. Person resident in India


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FOREX REGULATIONS

&DEALINGS IN FEMA Sec3 prohibits dealings in FEX//Foreign

securities//transfer FEX other than Authorised

//Payments to NRI // Receiving except fromAuthorised person//inward remittance

Entering into specified financial transactionswhich involve a transaction in India having a

counterpart transaction outside India or hawalatransaction


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SIMILARITIES

OF FERA & FEMA The similarities between FERA and FEMA are

as follows:

y The Reserve Bank of India and centralgovernment would continue to be the regulatorybodies.

y Presumption of extra territorial jurisdiction

as envisaged in section (1) of FERA has beenretained.

The Directorate of Enforcement continues to bethe agency for enforcement of the provisions ofthe law such as conducting search and seizure


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PIO SCHEME Person of Indian Origin" means a foreign

citizen (not being a citizen of Pakistan,

Bangladesh and other countries as may bespecified by the Central Government from timeto time) if,

i. he/she at any time held an Indian passport; or

ii. he/she or either of his/her parents or grandparents or great grand parents was born inand permanently resident in India and otherterritories OTHER THAN PAK/BANGLADESH.


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--------contd---i. he/she is a spouse of a citizen of India or a person of

Indian origin covered under (i) or (ii) above.

Accordingly, Persons of Indian Origin upto the

fourth generation (great grand parents) settledthroughout the world may obtain benefitsunder this scheme.

"PIO Card" means a card issued under this

Scheme must be made to the Indian Mission.PIO card is valid till 20 years and a joiningfees to be deposited is USD 1000 .


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PIO CARD

i. A PIO Card holder shall not require a visa tovisit India.

ii. A PIO Card holder will be exempted from therequirement of registration if his stay in Indiadoes not exceed 180 days.

iii. In the event of continuous stay in India of the

PIO Card holder exceeding 180 days, he/sheshall have to get himself/herself registeredwithin 30 days of the expiry of 180 days withthe concerned Foreigners Registration Officerat District Headquarters

.


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-----contd----------

i. PIO Card holder shall enjoy parity withNRIs in respect of all facilities available

to the latter in the economic, financialand educational fields except in mattersrelating to the acquisition of agricultural /

plantation properties


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The Foreign Contribution

(Regulation) Act, 1976

The Foreign Contribution ( Regulation )Act, 1976 is an Act to regulate the

acceptance and utilization of foreigncontributions / donations or foreignhospitality by certain persons or

associations


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--------------FCRA

It is basically an act to ensure that the integrityof Indian institutions and persons is

maintained and that they are not undulyinfluenced by foreign donations to theprejudice of India's interests.

The Act extends to the whole of India, and italso applies to :-

i. citizens of India outside India and

ii. associates, branches or subsidiaries, outsideIndia.


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--contd--

Foreign contribution" means the donation,delivery or transfer made by any foreign

source :-i. of any article, not being an article given to a

person as a gift for his personal use, if themarket value, in India, of such article, on thedate of such gift, does not exceed onethousand rupees

ii. of any currency, whether Indian or foreign

iii. of any foreign security


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CAPITAL ACCOUNTTRANSACTIONS

1. R.B.I. may make all these restrictions, ingeneral or with respect to "Capital Account

Transactions.""CAPITAL ACCOUNT TRANSACTIONS"

means a transaction, which alters the assetsor liabilities, including contingent liabilities,

outside India of persons resident in India orassets or liabilities in India of persons residentoutside India.


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EXEMPTIONS

1. Possession of foreign currency orforeign coins by any person upto such limit

as the Reserve Bank may specify. 2. Foreign currency account held or

operated by such person or class of

persons and the limit upto, which theReserve Bank specifies.


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---contd--

3. Foreign Exchange acquired or receivedbefore the 8th day of July 1947 or any

income arising or accruing thereon, whichis held outside India by any person inpursuance of a general or special

permission granted by the Reserve Bank.


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--contd---

4.Foreign Exchange acquired from employment,business, trade vocation, services, honorarium,

gifts, inheritance or any other legitimate meansupto such limit as the Reserve Bank may specify

. 5. Such other receipt in foreign Exchange as theReserve Bank may specify.


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FERA Provisions & statutes

81 Sections and complex than FEMA.

Inherent Mens Rea. Negative intention .

No Terms as Current & Capital A/c.

Authorised Person definition narrow one

Offence a criminal Offence( Cr.P.C.1973).

Five Times Penalty for amount involved.

Appeals under High Court.


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__Contd FERA

No Provision on right to be impleadedperson to take legal assistance

Power of search of police officer not below

rank of DSP to make search .


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FEMA

FEMA is much simple 49 sections.

No presumption of Mens Rea & abetment

Current A/c & Capital account in detail Definition Of Authorised Person widened

Offence is treated as civil offence

punishable with same amount as penalty Quantum of penalty decreased to three

times amount involved


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---Contd -- FEMA

FEMA is the special Director( Appeals)andlies before Appellate Tribunal for Foreign

Exchange in sec 17,18,35 at High Court. Right to take a legal practitioners /

Chartered Accountant assistance. Sec 32

Scope and power of seizure has beencurtailed.


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MONEY LAUNDERING

Process to make Illegitimate money appear

legitimate. Pakistan, India and the United States are

among 55 money-laundering countries ofprimary concern, where financial

institutions engage in transactionsinvolving significant amounts of proceedsfrom serious crime


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The Prevention Of

Money Laundering Act 2002 Money laundering means direct or indirect

involvement in cleansing of dirty money (by

engaging in financial transactions) from criminalactivities with the objective of hiding their truesource and making them legally usable.

Hawala is a preferred mechanism in cross-

border money laundering as it involves secretand paperless deals.


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OBJECTIVE OF THE ACT:

To prevent, combat and control money laundering.

To confiscate and sieze the property obtained fromthe laundered money.

To deal with any other issue connected with money

laundering in India.


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SALIENT FEATURES OF THE ACT

Personal accountability of the officers implementingthe Act.

Reasons to be recorded in writing before any action istaken and dispatched in sealed envelope to theAdjudicating Authority.

Time limit provided for any action and its follow up.This would provide faster disposal of the matter.


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LOK SABHA ADOPTS MONEYLAUNDERING BILL (6/5/05)

Provides Chairperson or member of any tribunalmay be appointed the chairperson or a member

of the Appellate Tribunal A Police Officer would investigate an offence

after he has been specifically authorised by theCentral Government .

All offences are Non cognisable . FIR filing must. Criminal proceedings lead to Civil Proceedings


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Stages ofMoney Laundering

Placement/conversionintroduction of illegal profits

into financial system

Layering/Concealmenttransfer of moneyinto different bank

accounts all over globe

Integration/creationfunds re-enter the legitimateeconomy through investment

real estate,business etc.

Stages of Money Laundering


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Financial institutions and country suffer from reputationdamage due to loss of financial integrity.

Increased scrutiny of regulatory bodies increasescompliance cost of banks.

Banks may suffer from financial and criminal sanctions.

The increased volatility in international capital flows andexchange rate is because of disruptive effects of moneylaundering.

Dampening effect on foreign direct investment.

This business contributes 8% of total world trade.(2-5%OF Global GDP)


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Punishment for Laundering (Sec 4)

Minimum penalty is rigorous imprisonment for 3years along with fine, which may extended to Rs5 Lacs .

Maximum imprisonment is for 7 years in generaloffences.

No Law of Limitation is applicable No time

period where proceedings can be initiated. Act w.e.f 1/07/2005 and has no retrospective

effect.

Can be punished for the same offence twice --

Prevention of Money-Laundering Act,2002 &IPC.


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PROCESS OF ADJUDICATION

Authorized officer seizes the property or

any record

File a complaint with Adjudicating authority

Within 30 days

Examines the matter and after confirming

issue a notice to concerned person

Min of 30 days to the accused to explain the

source of his income and assets

If confirm, authorised officer take possession

of property and proper action is taken.


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HAWALA

Hawala is an alternative or parallelremittance system. It exists and operates

outside of, or parallel to 'traditional'banking or financial channels. It wasdeveloped in India, before the introductionof western banking practices, and is

currently a major remittance system usedaround the world. It is but one of severalsuch systems.


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Hawala works by transferring moneywithout actually moving it.


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Why would anyone botherwith hawala?

1.Cost effectiveness

2. Efficiency

3. Reliability

4. Lack of bureaucracy

5.Lack of paper Trail

6.Tax evasion


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hawala 'works' - or competeseffectively with other remittance

mechanisms - because of its costeffectiveness. A secondaryconsideration is that hawala is often

related or even integral to existingbusiness dealings.]


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How is hawala used tolaunder money?

Many 'white' hawala transactions areessentially remittances, and, while illegalunder Indian and Pakistani law, are notillegal in other jurisdictions. `Black'hawala transactions, however, are almostalways associated with some seriousoffense (e.g. narcotics trafficking, fraud),

that is illegal in most jurisdictions. Money laundering consists of three

phases: placement, layering andintegration. Since hawala is a remittance

system, it can be used at any phase.


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What are some indicatorsof hawala?

A 'hawala' bank account almostalways shows significant deposit

activity, usually in the forms of cashand checks, which are often fromone or more ethnic communities

(e.g. Afghan, Bangladeshi, Indian,Pakistani, Somali) associated withthe hawaladar


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The following diagram summarizes 'hawala account' behavior:


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The Prevention of Money Laundering Act, '02(PMLA), which came into force from Friday, July

1 2005, had made it clear that even if the valueof individual cash transactions is less than Rs 10lakh each, but are seemingly between relatedparties and takes place in a month, records

have to be maintained.


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The U.S. Congress estimates that every year,between $500 billion and a trillion dollarsgenerated through criminal activity is"laundered" through international banks andfinancial institutions. According to a KPMGstudy, money laundered in India isapproximately 2 to 3% of the country's GDP. An

increasing emphasis on anti-money launderingsolutions would counter terrorism and drugtrafficking, a lot of which originates from theIndian subcontinent.


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TCS --finDNA software would allow multinationalbanks to standardize procedures, meet

regulatory requirements and protect assets. Thesolution encompasses sophisticatedtechnologies including pattern analysis, linkanalysis, statistical analysis and artificial

intelligence. It is a part of the entire Quartzsolutions offering, which is their product forbanking solutions.


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Sarbanese Oxley (Sox)AML Software

Infrasoft -software can do pattern

detections and rule-based checks on themillions of transactions happening acrossthe enterprise, to assist in figuring outanomalies in transactions. Besides this,the software can help a bank know the

source of the deposit in a customersaccount and track it across differentaccounts.


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KNOW YOUR CUSTOMER I.EKYC NORMS

Branches are to issue TCs/ DDs/MTs/TTs for Rs50000/-and above to thedebit of the Customers accounts only or against Cheques but not againstcash.

Applicants for such transactions above Rs 50000/- must affix PANnumber on the Applications.

Branches to report the data monthly in FORM AUF-2 to their

controlling offices for cash transaction and deposits of Rs 10 lacsand above in a month and as well as the transactions ofsuspicious nature.

Risk Management , Internal Control System , Precautions against

terrorism finance ., Internal Audits and inspections and adherence


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fema aml & kyc pp

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