1.	WHAT IS MONEY LAUNDERING? In Black Law of Lexicon the term ‘Laundering’ is referred to as being used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced. The literal meaning of laundering is washing. Money laundering is the disguising or concealing of illicit income in order to make it appear legitimate. Indian anti-money laundering law encompasses money generated from numerous different crimes – e.g., drug trafficking, murder for hire, racketeering, and embezzlement etc. The word laundering is used for cleaning dirty clothes. Money Laundering is used to clean the dirty money. Just as soap and water are used for cleaning clothes, in the same way placement, layering and integration are used for cleaning dirty money. It involves insurance too. Money Laundering is moving illegally acquired cash through financial systems so that it appears to be legally acquired. Process of Money Laundering - There are three common stages of money laundering which are resorted to by the launderers as given below:
			Placement- Funds from illegal activity enter legitimate financial systems – i.e. the physical disposal of cash proceeds derived from illegal activity;
			Layering- Felons try to hide the source of their money in a maze of complex transactions directed to numerous accounts in different countries - i.e. separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the source of money, subvert the audit trail and provide anonymity.
			Integration- Creating the impression of apparent legitimacy to criminally derived wealth. Laundered money is integrated into the legitimate economy. Different financial sectors are more vulnerable at different stages of the money-laundering process. For example, criminals often make use of banks in the placement stage, and then funnel money through mutual fund and credit card companies in efforts to layer and integrate laundered funds. In today’s digital domain, it is virtually impossible to differentiate “dirty” money from “clean” money, once it enters the global banking network. The speed and convenience of self-service EFT channels and web-enabled financial tools have created a technology climate where money-laundering activity can take root and flourish. As criminals and their methods for circumventing existing financial control systems become more sophisticated, anti-money laundering programs must incorporate leading-edge technologies that are robust, scalable, and can identify suspect transactions as close to the time of occurrence as possible. It is increasingly evident that any businesses dealing in high-value purchases or large amounts of cash will need to take steps to protect themselves from money-laundering activities.
	2.	ANTI-MONEY LAUNDERING & COMPLIANCE: TURNED REGULATORY BURDEN INTO THE CURRENT COMPETITIVE ADVANTAGES: For as long as third-party institutions have managed money, felons have devised clever ways to disguise the true origin of proceeds from crime, deceiving financial institutions into becoming involuntary partners. Today, the potent combination of technology and terrorism has forced governments and regulators to clamp down on money laundering. With the advent of 24/7 electronic banking, billions of dollars comprising millions of transactions now flow though the global banking system every day. The speed, volume, and complexity of transactions all create new opportunities for money laundering, while making financial institutions more vulnerable and less able to identify potential risks. The need to counteract these offences has taken on greater urgency, since the terrorist attacks of September 11, 2001. Money laundering now poses a major threat to not only the integrity and viability of financial institutions, but to national security. Financial services organizations must comply with a growing list of rules and regulations designed to expose perpetrators of money laundering and related crime. The USA PATRIOT Act established severe penalties for financial services organizations that do not demonstrate comprehensive anti-money laundering policies and procedures. Other nations around the world have enacted similar legislation. Global regulatory agencies such as the Financial Action Task Force on Money Laundering (FATF) serve in an oversight capacity as nations develop and promote national and international policies to combat money laundering. New regulations in India have put the onus on financial institutions (like all the bankers & insurers) to take the lead in investigating and identifying potential money-laundering activities. So the necessary compliance of various legal requirements is a must for every insurer. IRDA & RBI – both are keeping a strong watch on the insurers for their necessary compliance in fulfilling the compulsory norms as set in the current era of insurance operations under the legal framework in India.

LEGAL BACK GROUND TO COMBAT THE PROCESS:
While compliance reporting mandated by government legislation sets baseline standards, a reputation for integrity remains one of the most valuable assets of a financial institutions like insurers. Failure to take the necessary steps to detect and prevent financial transactions supporting criminal or terrorist activity may result in stiff fines, criminal charges, and negative publicity in the market. Evidence of non-compliance can irreparably damage a financial institution’s reputation with customers, regulators, and shareholders, and present a serious challenge to continued viability. In India the effective measures are taken to combat this process of Money Laundering as enumerated below:

	I.	FATF- Financial Action Task Force: It is an inter-governmental body that sets broad standards of policies to combat money laundering & terrorist financing. It has released 40 initial & 9 special recommendations. India is a member of FATF.
	II.	IAIS - International Association of Insurance Supervisor IRDA is a member of IAIS. Establishment of AML programme by financial institution forms part of the Insurance Core-Principles (ICP) of IAIS.
	III.	PMLA - Prevention of Money Laundering Act, 2002 - Came into force w.e.f. 1.7.2005.
	IV.	FIU-IND – Financial Intelligence Unit India: It is the central, national agency, responsible for receiving, processing, analysing and disseminating information relating to suspect financial transaction, to enforcement agencies and foreign FIUs.
	V.	UAPA – Unlawful Activities Prevention Act, 1967 - It is an Act provide effective prevention of certain unlawful activities of individuals and associations (and dealing with terrorist activities) and for matters connected therewith.
	VI.	IRDA – Insurance Regulatory and Development Authority Has issued guidelines on AML for general insurance companies from time to time. The latest guideline was issued on 7th February 2013.

REQUIREMENTS IN INSURANCE SECTOR TO FULFILL THE KYC NORMS AND THEIR STRICT APPLICATION:

		Insurance company and its intermediaries should make reasonable efforts to determine the true identity of customers. This is known as Know Your Customer (KYC) Procedures to be followed by the operating office of all the Indian Insurers.
		Here the word ‘Customer’ includes the proposer/policy holder; beneficiaries and assignee of any insurance company.
		It requires that the Indian Insurers shall verify and the following to definitely establish the identity of the proposer / insured by providing the following authenticated documents like:
		1.	Identity Proof
		2.	Address Proof
		3.	Recent photograph (in case of individual customers) as part of compliance with KYC norms.

REQUIREMENT OF LEGAL SOURCE OF FUND:
It is imperative to ensure that the insurance being purchased is reasonable. Accordingly, customer's source of funds, his estimated net worth etc., could be documented where considered necessary.

The list of requirements in this regard may include the following aspects:

		Insurers should not enter into contract with a customer with known criminal background and with banned entities and those who have links with terrorists or terrorist organizations.
		Insurers maintain an updated list of designated individuals/entities subject to UN sanction measures under UNSC Resolutions. For getting this list we need to visit UN website at http://www.un.org/sc/committees/1267consolist.shtml and there are around 230 odd entities’ and around 70 individuals’ details are given.
		Do not accept proposal from such designated individuals/entities.
		By virtue of section 51A of UAPA, the Central Government is empowered to freeze, seize or attach funds of and/or prevent entry into or transit through India any individual or entities that are suspected to be engaged in terrorism. Insurance Policies of 'designated individuals’/ entities’ can be freezed if any matching records are identified. Reporting to Authority within 24 hours of identification of matching.
		Insurers are required to detailed due diligence while taking insurance risk exposure to individuals/entities connected with countries identified by FATF as having deficiencies in their AML/CFT regime.
		General insurance companies are required to carry out KYC norms at the settlement stage where claim payout/premium refund crosses a threshold of one lakh per claim/premium refund.
		KYC is mandated where premium is more than ? 1 lakh (i.e. Rupees One lakh & onwards).
		In cases where payments are made to third party service providers such as hospitals/garages/repairers etc., the KYC norms shall apply on the customers on whose behalf service providers act.
		The AML/CFT checks become more important in case of claims on the policies assigned by the policyholder to a third party not related to him (except where the assignment is to banks/FIs/Capital intermediaries regulated by IRDA/RBI/SEBI).
		Detailed due diligence measures should be applied in the event where there are suspicions of  money laundering or terrorist financing, or where there are factors to indicate a higher risk.

EXEMPT PRODUCTS UNDER AML ACT:
In Indian Insurance parlance there are only two areas which are exempted and they are:

	1.	REINSURANCE AND RETROCESSION CONTRACTS.
	2.	GROUP INSURANCE BUSINESS.

VULNERABLE PRODUCTS /AREA:
Worldwide the most affected areas in Insurance Industry are:

	1.	PERSONAL ACCIDENT POLICIES
	2.	ASSIGNMENT OF POLICIES

INSURERS’ REPORTING OBLIGATIONS:

	i)	Suspicious Transaction Reports (STR): All complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose are called Suspicious Transaction.   Intermediaries have to inform such suspicious transaction to the Company. Employees have to inform to their Authority. Company has to report to FIU-IND immediately on identification. If identified post facto the contract, statement to be submitted to FIU-IND within 7 working days of identification. Illustrative list of Suspicious Transactions: Sl. No. Suspicious Transactions 1. Customer insisting on anonymity, reluctance to provide identifying information, or providing minimal, seemingly fictitious information.  2. Cash based suspicious transactions for payment of premium over and above ?5 lakh per person per month. It should also consider multiple DDs each denominated for less than ? 50,000/- 3. Frequent free look surrenders by customers; 4. Assignments to unrelated parties without valid consideration; 5. Policy from a place where he does not reside or is employed; 6. Frequent request for change in addresses; 7. Inflated or totally fraudulent claims e.g.by arson or other means causing a fraudulent claim to be made to recover part of the invested illegitimate funds. 8. An established trend or pattern or frequent overpayment of premium with a request for refund of the overpaid amount 9. Frequent cancellation of policies for the return of premium by an insurer’s cheque
	ii)	Monitoring and Reporting of Cash Transactions (CTR): a) Remittance of premium in cash should not exceed Rs.50, 000.  b) Premium beyond Rs.50, 000 should be remitted only through cheques, demand drafts, credit cards or any other banking channels. c) Splitting of the insurance policies/issue of number of policies to one or more entities facilitating individuals to defeat the spirit of the AML/CFT guidelines should be avoided. d) Intermediaries/employees have to report to the Company when they come across splitting of the premium in cash and demand drafts below Rs.50,000. e) Any cash transaction above Rs. 10 lacs and integrally collected cash transactions above Rs. 10 lacs per month shall be reported to FIU-IND by 15th of succeeding month.
	iii)	Reporting of receipts by Non-Profit Organisation All transactions, involving receipts by NPOs of value more than Rs.10 lacs or its equivalent in foreign currency has to be reported to FIU-IND by 15th  day of next succeeding month.
	iv)	Reporting of Counterfeit Currency/Forged Bank Notes (CCR) All cash transactions, where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transaction should be reported to FIU-IND within 7days of identification.

RECORD KEEPING
The insurer/agents/corporate agents are required to maintain the types of transactions mentioned under Rule 3 of PMLA Rules 2005 as well as those relating to the verification of identity of clients for a period of 10 years.

RESPONSIBILITY ON BEHALF OF THE AGENTS AND CORPORATE AGENTS
Agents and corporate agents engaged by the insurers are mandatorily required to follow the AML guidelines and it is a part of the contracts.
Services of defaulting agents who expose the insurers to AML/CFT related risks are liable to be terminated.

COMPLIANCE ARRANGEMENTS

	1)	Company has to have a detailed Board approved AML/CFT Policy.
	2)	Appointment of Principal Compliance Officer: He has to ensure that the Board approved AML/CFT Program is being implemented effectively.
	3)	Recruitment and training of employees and agents; Company has to have adequate screening procedures when recruiting employees and agents. Training on AMLICFT has to be imparted to new and existing employees/agents from time to time.
	4)	Internal Control/Audit: Audit Dept. has to verify the compliance of AML/CFT Policy on regular basis. Exception reporting under AML/CFT policy has to be done to Audit Committee of the Board.

PENALTY

	1)	Imprisonment for a term of not less than 3 years but may be enhanced to 7 years.
	2)	Narcotic and Drugs if involved – then rigorous imprisonment of 10 years
	3)	Fine – in monitory terms.
	4)	Confiscation of tainted money by Central Govt.

CONCLUSION:
Different financial sectors are more vulnerable at different stages of the money-laundering process. For example, criminals often make use of banks in the placement stage, and then funnel money through mutual fund and credit card companies in efforts to layer and integrate laundered funds. In today’s digital domain, it is virtually impossible to differentiate “dirty” money from “clean” money, once it enters the global banking network. The speed and convenience of self-service EFT channels and web-enabled financial tools have created a technology climate where money-laundering activity can take root and flourish. As criminals and their methods for circumventing existing financial control systems become more sophisticated, anti-money laundering programs must incorporate leading-edge technologies that are robust, scalable, and can identify suspect transactions as close to the time of occurrence as possible. The tentacles of anti-money laundering rules are spreading. With new Indian regulations now encompassing organizations as diverse as jewelers, car dealerships, and travel agencies, it is increasingly evident that any businesses dealing in high-value purchases or large amounts of cash will need to take steps to protect themselves from money-laundering activities.

Reference:
References have been taken from the contemporary text materials / various reports / current discussions as read in hard & soft forms.