The IBA WGR 2010 - Preparation, Review & Submission of STRs

Summary : Chapter -8

 

Preparation and Submission of STRs

 

Under PMLA 2002, the STR is required to be not later than seven working days on being satisfied that the transaction is suspicious. The banks are required to submit prescribed reports in electronic form if they have technical capabilities to do so.

 

The bank should provide complete and accurate information in the STR and capture all information of all accounts, individuals, entities related to the suspicion. It is important to mention identifiers such as PAN, ID number Date of Birth to enable effective linking of STR with other reports at FIU

 

The new reporting format specifications, the banks are required to capture suspicion related details in the element Suspicion Details, details of which is provided in Appendix E. The Suspicion details cover the following information:

 

• Source of alert for initiation
• Red flag indicator which had generated alert resulting in STR
• Whether the Suspicion relates to circumstances of unusual or unjustified complexity ?
• Whether the Suspicion relates to no economic rationale or bonafide purpose?
• Whether the Suspicion relates to financing of the activities relating to terrorism?
• Whether the STR relates to an attempted transaction that was not completed?
• Grounds of suspicion and sequence of events
• Details about investigation being conducted
• Whether any law enforcement agency is informed about the incident reported in the STR?
• Contact details of person in the law enforcement agency conducting the investigation
• Priority attached to the report as per assessment of the reporting entity
• Whether all the Suspicious transactions are covered or a sample set is being reported?
• Whether the reporting entity wants to submit additional documents separately for the STR?
• Whether the reporting entity wants to provide additional documents?

 

The bank should attempt to provide comprehensive information in the ground of suspicion covering the following:

• Background /profile/occupation of the customer and other related individuals /entities
• When did the relationship with the customer begin?
• How was suspicion detected?
• What information was linked or collected during the review process?
• What explanation was provided by the subject(s) or other persons(without tipping off)?
• Summary of suspicion
• Whether the suspicious activity is an isolated incident or relates to another transactions?
• Who benefitted, financially or otherwise, from the transaction(s), how much , and how(if known)?
• What is the volume of transactions in reported accounts in the financial year , or in a given period and what is the volume of cash transactions?

The banks should try to submit STR on a priority basis and the time taken to arrive at a conclusion that the transaction is suspicious should not be delayed. It should be ensured that there is no undue delay in arriving at such a conclusion once a suspicious transaction report is received from a branch or any other office.

Summary- Chapter: 9

 

Increasing Effectiveness of the STR Detection and Review System

 

The Principal Officer should use white listing and fine tuning of scenarios to increase the effectiveness of the STR detection and review system and reduce false positive alerts

 

White Listing

 

With threshold based alerts there may be instances where the same customer accounts repeatedly hit the threshold limit to generate alerts though the bonafides of the transaction and the customers is established. This results in a large number of repeated false positive alerts involving the same accounts. To deal with such situations, the AML software should allow accounts to be white listed for a specified period of time. It may be noted that the white listing should be done for a specific scenario only to suppress alerts for the customer for the particular scenario where the bonafides have been established

Banks should also note that white listing alerts  a documented note on the detailed investigation carried out and reason for white listing should be captured in the software and must be approved by the Principal Officer

Fine Tuning the alert generation system

 

The AML Software could be generating large number of false positive alerts for the scenarios defined in the software, which would therefore necessitate fine-tuning of the parameters or change in thresholds.

 

Adequate consideration of customer’s profile, nature of activity,  nature and value of transactions are some of the critical points that need to be considered while fixing thresholds for generation of identified as suspicious etc. may be analysed and parameters for generation of alerts may be reviewed based on the above and necessary  tweaking of the parameters for the scenarios carried out to reduce the false positives. The periodicity of such review should be documented.

 

The fine-tuning should take into account information about high risk scenarios, STR trends and typologies mentioned in reports of Financial Action Task Force , FATF Style Regional Bodies, Egmont Group of Financial Intelligence Units, RBI, FIU-Ind or other competent authorities

Summary-Chapter : 10

Other Factors Impacting Effectiveness

 Compliance Arrangement

 

Banks should develop appropriate compliance management arrangements e.g.., for financial institutions at a minimum the designation of an AML/CFT Compliance Officer should be at the management level. The AML/CFT Compliance Officer should be able to act independently and report to senior management or the board of directors.

It is recommended that the Principal Officer (PO) is at a sufficient level of seniority within the bank and has sufficient support staff. The Board of Directors and the senior management of the bank should have the responsibility to ensure that the Bank’s control process and procedures are appropriately designed and implemented, and are effectively operated to reduce the risk of the bank being used as a conduit for money laundering or terrorist financing

 

The internal reporting lines should be as far as possible under a narrow vertical with controlled umber of people between the person receiving the alert, investigating the suspicion and the PO. This ensures speed, confidentiality and accessibility to the PO. The PO should be able to take independent decision on reporting of Suspicious Transactions.

 

Each bank should have a centralized Anti-Money Laundering Cell (AML Cell) reporting to PO. The level of resources should reflect the size, complexity and geographical spread of the bank’s customer/product base. The staff of the AML Cell should be well trained in the identification of suspicious transactions. It is advisable that the staff members of the AML Cell undergo the certification course on KYC/AML procedures and processes from reputed institutes such as Indian Institute of Banking & Finance. The effective application of even the best-designed control systems can be quickly compromised if the staff members applying the systems are not adequately trained.

 

Employee Screening and Training

 

Banks should put in place screening procedures to ensure high standards when hiring employees. Banks should establish ongoing employee training to ensure that the employees are kept informed of new developments , including information on current ML and FT techniques, methods and trends; and that there is a clear explanation of all aspects of AML/CFT laws and obligations, and in particular, requirements concerning CDD and suspicious transaction reporting.

 

To increase awareness, banks should conduct periodic trainings and educate staff on the possible indicators/circumstances identified as suspiocious and also the methodology of reporting the transactions.

 

Audit

 

Banks should maintain an adequately resourced and independent audit function to test compliance (including sample testing) with the AML/CFT procedures, policies and controls. Bank’s internal audit and compliance functions have an important role in evaluating and ensuring adherence to the KYC policies and procedures. As a general rule, the compliance function should provide an independent evaluation of the bank’s own policies and procedures, including legakl and regulatory requirements. Banks should ensure that their audit machinery is staffed adequately with individuals who are well-versed in such policies and procedures. Concurrent/Internal Auditors should specifically check and verify the application of KYC  procedures at the branches and comment on the lapses observed in this regard. The compliance in this regard should be put up before the Audit committee of the Board on quarterly intervals.

Summary - Chapter:10 

Conclusion

 

The scope and Paramweters for generating suspicion had been debated by the industry and accordingly the purpose of the documentv was adopted by the member banks of IBA

This document is prepared ensuring that the legal framework that exists is duly articulated along with Prevention of Money Laundering Act and the guidelines issued by reserve bank of India

The approach adopted by the group was to identify and assess the risk before generationof alerts and manage the alerts ensuring proper preparation and submission of STR, in order to increase the effectiveness of STR filing and assist the finnacialsector in detecting appropriate concerns which may be emanating from various channels and products and business ensuring regular review of the mechanism 

It is important to ensure that the note be read jointly with Know your customer norms and anti Money Laundering standards guidance note for banks issued by Indian Bank's Association

All the members of the Working Group would like to thank Mr. Vinal Bajpal - Chief General Manager, RBI and Mr. Sudhir K Jha - Deputy General Manager, RBI and avery special thanks to Mr. Sanjeev Singh - additional Director , FIU-Ind for the valued contribution and guidance provided. The working Group members would also like to thank Mr. K Unnikrishnan - deputy Chief executive , Indian Bank's association and his team members for putting the Working Group to gether and facilitating the meetings

 

Happy Reading, 

Those who read this, also read: 

1. The IBA Working Group Report on AML/CFT  2010 : Alert Generation 

2. The IBA Working Group Report on AML/CFT  2010 : Appendices A, B and C

3. The IBA Working Group Report on AML/CFT  2010 : Appendices D & E

4. The IBA Working Group Report on AML/CFT  2010 : Legal Framework  and Risk Assessment

5. The IBA Working Group Report on AML/CFT  2010 :  Alert Management