Organised Financial Crime Customer

 

Organized crime is a category of transnational, national, or local group of centralized enterprises run to engage in illegal activity, most commonly for profit.

A newer structure of organized crime occurs in the virtual world of cyberspace. Cyberspace is the electronic marketplace in which illicit goods and services are sold, and businesses sometimes infiltrated, without physical contact between the supplier and customer.

Organized criminal groups use digital services but also run digital services, both for financial or other material benefit. (Broadhurst, Grabosky, Alazab, Bouhours, Chon, 2014; Choo and Smith, 2008) Hackers threaten and extort victims, illicit drugs are sold and purchased online, as are falsified medical products, counterfeit merchandise, illicit wildlife specimen and stolen property. The Internet and the Darknet provide virtual spaces that can be used to connect criminals to customers without physical contacts. 

The United Nations Convention against Transnational Organized Crime 2000 (Palermo convention) is a United Nations-sponsored multilateral treaty against transnational organized crime and it marks the main international instrument in the fight against organized crime.

In legal terms, organized criminal groups can use coercion or extortion in the infiltration of legitimate business and governments, which involves implied or explicit threats to obtain a criminal objective. Coercion and extortion are not necessary to provide illicit goods or services although, as discussed in Module 1, there are exceptions such as human trafficking. This is because the demand for illicit goods and services already exists among the public, so no threats are required to attract customers to buy counterfeit products, illegal firearms or other products and services described in Module 3.

Such practices should not be confused with most forms of corruption, where both the briber and recipient of the bribe gain some form of benefit. In the case of infiltration of business and government, victims (often small to medium-sized companies, sole proprietors, or family businesses) do not receive a benefit, but are coerced to pay in order to avoid worse treatment. That is to say, the failure to pay will result in property damage, violence to employees or their loved ones, harassment of customers, interruption in deliveries, or related problems that businesses cannot afford to experience (Transcrime, 2012).  

To “legitimize” the ill-gotten gains of these criminal activities, organized criminal groups disguise their illegal origin and often reinvest them in the legal economy through money-laundering, a process of critical importance as it enables the criminals to enjoy the profits of criminal activities without jeopardizing their source. If left unchecked, money-laundering can have very high social and political costs, since it allows organised criminal groups to infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials (FATF, 2020). 

The crucial need to conceal organized crime activity was addressed by articles 6 and 7 of the Organized Crime Convention. Article 6 requires State parties to criminalize money-laundering, while article 7 refers to measures to combat money-laundering.

Criminalization of the laundering of proceeds of crime in article 6 of the Organized Crime Convention

1. Each State Party shall adopt, in accordance with fundamental principles of its domestic law, such legislative and other measures as may be necessary to establish as criminal offences, when committed intentionally:

(a)

(i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action;

(ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime;

(b) Subject to the basic concepts of its legal system:

(i) The acquisition, possession or use of property, knowing, at the time of receipt, that such property is the proceeds of crime;

(ii) Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article.

 

Article 6(1) of the Convention requires that each State party criminalize money-laundering. Criminalization not only allows national authorities to organize the detection, prosecution and repression of the offence, but also provides the legal basis for international cooperation among police, judicial and administrative authorities, including mutual legal assistance and extradition.

The Organized Crime Convention seeks to establish uniformity for the intolerance for money-laundering, which serves to conceal organized crime activity. In article 7, requirements for comprehensive domestic regulatory and supervisory schemes for banks and non-bank financial institutions are set forth, as is strong guidance for cooperation and the exchange of information at the national and international levels to investigate suspected money-laundering activity.

The United Nations Office on Drugs and Crime (UNODC) is the custodian of the UNTOC. India ratified the UNTOC in 2011 becoming the fourth South Asian country to do so. The nodal agency for all dealings with UNTOC is the Central Bureau of Investigation (CBI).

The USA observes 15 November as the International Day for the Prevention of and Fight against All Forms of Transnational Organized Crime. First observed in 2024, by USA , this day aims to raise awareness and encourage international cooperation against these criminal networks.

The FACTA 2010 provides for exchange of information about US citizen's income earned in other countries where it has a bilateral agreement, aiming at fighting tax evasion. 

To combat the problem of offshore tax evasion and avoidance and stashing of unaccounted money abroad requiring cooperation amongst tax authorities, the G20 and OECD countries working together developed a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI). The CRS on AEOI was presented to G20 Leaders in Brisbane on 16th November, 2014. The Hon’ble Prime Minister of India, speaking on the occasion, supported the new global standard as it would be instrumental in getting information about unaccounted money hoarded abroad and in its eventual repatriation. The CRS on AEOI requires the financial institutions of the “source” jurisdiction to collect and report information to their tax authorities about account holders “resident” in other countries, such information having to be transmitted “automatically’ on yearly basis. The information to be exchanged relates not only to individuals but also to shell companies and trusts having beneficial ownership or interest in the “resident” countries. Further, the reporting needs to be done for a wide range of financial products, by a wide variety of financial institutions including banks, depository institutions, collective investment vehicles and insurance companies.

Impact on Countries 

Financial crimes have a significant impact on an organization’s revenue — but so can remaining compliant. According to a study performed by LexisNexis, the global cost of financial crime compliance topped $274 billion in 2022, up from $213.9 billion in 2020. That means the global cost has soared 28% in just a couple years.

Financial scams orchestrated by complex organized crime networks are reaching alarming levels, in part accelerated by the increasing use of artificial intelligence and cryptocurrency. According to a 2024 report by the Global Coalition to Fight Financial Crime, the estimated proceeds from scam losses across Australia, Hong Kong, Singapore, United Kingdom, Canada, and the United States amount to $114 billion – comparable with the GDP equivalent of the 64th largest country.

In the first four months of the year 2024, Indians had lost over ₹1,776 crore in 89,054 cases of financial crimes such as digital arrest, stock market scam, investment scam and romance or dating scam and there had been a “spurt in the organised crime from south-east Asia. These complaints were received on national cyber crime portal — cybercrime.gov.in and 1930 helpline, and not all of them were converted into First Information Reports (FIR).

With the effort of Indian Cyber Crime Coordination Centre (I4C) and State police, a total of 3.25 lakh mule bank accounts, 595 apps and more than 3,000 URLs had been blocked in the past four months. Additionally, 5.3 lakh SIM cards, 80,848 IMEI numbers had been suspended since July 2023 and 3,401 WhatsApp groups had been taken down in the past two months.

 

Out of the total complaints on the portal, 85% complaints pertain to financial crimes, out of which 48% originate from south-east Asia. The financial crime hotspots in Jharkhand, Haryana, Rajasthan and West Bengal were still active and are expanding. Around 1,000 people have been arrested since December 2023. 

With the effort of I4C and State police, a total of 3.25 lakh mule bank accounts, 595 apps and more than 3,000 URLs had been blocked in the past four months. Additionally, 5.3 lakh SIM cards, 80,848 IMEI numbers had been suspended since July 2023 and 3,401 WhatsApp groups had been taken down in the past two months.

Cambodia, Myanmar, Laos emerge hub of organised financial crimes targeting Indians. The government had identified “scam compounds” in these countries which resembled call centres. Fraudsters, including a large number from India, make calls to unsuspecting people in the country from Indian mobile phone numbers and dupe money through various methods.

Out of the total financial scams originating from south-east Asia, the maximum number of complaints — 62,687 were related to investment scam. It lures people mainly through social media. The victim is told to sit at home and earn money. Generally it starts with earning money and later the victims end up losing a large amount. In 2023, there were  more than 1 lakh complaints, and 10,000 FIRs were published

According to open-source information, China was also a victim of such scams and in one spell in the past two years, 44,000 Chinese people were brought back from the “scam compounds.

There are people who are renting out their accounts to such fraudsters, then there are a large number of mule bank accounts which are being used to deposit the money cheated by the people. For every five mule bank accounts, two are in private and three are with public sector banks. Even the payment made for advertisements on Google luring people to frauds are made from Indian accounts. Google is making money. In collaboration with the platform, India is  devising a machine-based solution.

The biggest risks in the global fight against financial crime today

The emergence of complex, technology-enabled scams run on a massive scale poses huge risks to consumers and banks. In Southeast Asia, factors such as improved digital connectivity, fragmented regulations, civil conflict, and corruption have contributed to the problem. These factors, fueled by criminals’ use of advanced, methodical ways to operate scams, create an environment for syndicates to generate and launder illicit proceeds.  

Money-laundering is the processing of criminal proceeds to disguise their illegal origin. For instance, a drug trafficker might buy a restaurant to disguise drug profits with the legitimate profits of the restaurant. In this way, the drug profits are "laundered" through the restaurant to make the income look as if it was earned lawfully. Money-laundering is crucial to organized crime operations because offenders would be discovered easily if they could not "merge" their illegal cash into, for instance, a legal business, bank, or real estate (Soudijn, 2014; Malm and Bichler, 2013).

 

The money-laundering cycle can be broken down into three distinct stages; however, it is important to remember that money-laundering is a single process. The stages of money-laundering include:

 

·         Placement (i.e. moving the funds from direct association with the crime)

·         Layering (i.e. disguising the trail to foil pursuit)

·      Integration (i.e. making the money available to the criminal, once again, from what seem to be legitimate sources)

 

The placement stage represents the initial entry of the proceeds of crime into the financial system. Generally, this stage serves two objectives: it relieves the criminal of holding large amounts of cash obtained illegally; and it inserts the money into the legitimate financial system. During this stage, money launderers are most vulnerable to being caught, because placing large amounts of cash into the legitimate financial system may raise suspicions.

The layering stage comes after the placement stage and it is sometimes referred to as "structuring." This is the most complex money-laundering stage and often entails moving the illicit funds internationally. The primary purpose of the placement stage is to separate the illicit money from its source. This is done through a sophisticated process involving layering financial transactions, whose final goal is to conceal the audit trail and break the link with the original criminal activity.

The final stage of the money-laundering process is termed "integration." During this stage the money is returned to the perpetrators from what seems to be a legitimate source. The criminal proceeds, that were initially placed as cash and layered through a number of financial transactions, are now fully integrated into the financial system and can be used for any legitimate purpose.

Anti-money laundering laws generally require the recipients of funds to exercise the reasonable care expected in a financial transaction. There have been many significant cases involving banks moving money internationally without exercising proper due diligence in knowing their customers or the source of the funds. Given the threats of transnational crime, corruption, and terrorism, many countries have expanded their money-laundering control efforts beyond banks, to include other businesses that might exchange or move large amounts of cash (e.g., check-cashing companies, money transmitters, jewellers, pawnbrokers, casinos, credit card companies, traveller's check and money order issuers).

The Financial Action Task Force (FATF) is an independent intergovernmental body that develops and promotes policies to protect the global financial system against money-laundering. In 2003, the FATF issued an updated set of 40 Recommendations for improving national legal systems, enhancing the role of the financial sector and intensifying cooperation in the fight against money-laundering (FATF, 2003).

The FATF's approach of identifying non-cooperating countries and territories proved successful in forcing improvements in the anti-money laundering and counter-terrorist financing systems of a number of countries. Through financial incentives, sanctions, and monitoring, the FATF has successfully encouraged countries to create and enforce money-laundering laws and to cooperate in international investigations.

The financial crime experts observe that organized crime networks strategically establish themselves in countries where they can take advantage of civil conflict or instability. They set up legitimate physical and technical infrastructure – call centers or scam centers – to lure victims into forced labor conditions. Once ensnared, victims are coerced into conducting scams, with the proceeds then integrated into the financial system. This cycle perpetuates as illicit gains are reinvested into building new scam operations.

As scammers refine their tactics to exploit vulnerabilities, new scam typologies – from digital currencies, to telecommunications, to investment frauds – are on the rise. INTERPOL’s 2024 Global Financial Fraud Assessment highlighted the increase in digital scams and human trafficking fraud globally, with Asia being particularly vulnerable to “pig butchering” scams. 

The IMF has identified organised financial crimes and that is used by FATF in National Risk Assessment Guidlines (2013)[page33].

Different Types of Financial Crime

 

Financial crime  commonly considered as covering the following offenses:

·         Fraud

·         Money laundering

·         Terrorist financing

·         Bribery and corruption

·         Insider trading

·         Cybercrime

 

Prevention of financial crime is a law enforcement priority in jurisdictions worldwide. The following are the most significant types of financial crimes: 

Fraud

 

Fraud usually includes theft, corruption, embezzlement, money laundering, bribery, insider trading, and extortion. All fraud activities are illegal, and person or persons involved in these activities are categorized as criminals. In other words, using deception to dishonestly make a personal gain for oneself and/or create a loss for another is fraud.

Fraud is usually an intentional act or series of acts perpetrated by human beings using trickery and cunning using two types of misrepresentations which are a suggestion of falsehood or suppression of truth. It is primarily the responsibility of management to establish systems and controls, to prevent or detect fraud, errors, and weaknesses of internal controls.

Money Laundering

 

When criminals derive funds from illegal activities, money must be disguised before it can be introduced into the legitimate financial system. Money laundering is the illegal process of disguising the profits of financial crime, typically by using the services of banks and businesses. Criminals transfer their illicit funds from one place to another through a country’s financial system, such as banking channels. The transfer of illegal money may support other criminals in various jurisdictions or countries. 

Terrorism Financing 

 

The financing of terrorism involves the provision of funds to individuals and groups to commit terrorist acts. Terrorism financing resembles money laundering because it often requires criminals to conceal the transfer of funds within the legitimate financial system.

 

Bribery and Corruption

 

Bribery means offering, promising, giving, accepting, or soliciting an advantage as an inducement for an action that is illegal, unethical, or a breach of trust.

 

The inducement or bribe may take the form of anything of value to the person receiving it, including:

·         Cash and cash equivalents, such as gift cards;

·         Gifts, meals, entertainment, travel;

·         Fees, including those claimed to be consulting or success fees;

·         Commissions, kickbacks, discounts, or credits;

·         Rebates;

·         Contractual rights or interests;

·         Business, employment, or investment opportunities; and

·         Loans, payment of expenses, or donations.

 

Corruption means the abuse of entrusted power for private gain. Public officials who abuse public office authority may commit corruption for personal gain, which interferes with democracy and the rule of law. Corruption also may be committed by private individuals who abuse their positions for personal gain, which can hinder fair market operations and distort competition.

Insider Trading

Insider trading is the buying or selling of a publicly traded company’s stock by someone who has non-public information about that stock. Material non-public information is any information that could substantially impact an investor’s decision to buy or sell the security that has not been made available to the public. Insider trading is illegal and leads to penalties, including fines. 

Cyber Crime

Cybercrime is a crime that involves a computer and a network. The computer is used in the commission of a crime, or it may be the target. Cybercrime may harm someone’s security and financial health.Cybercrime has many concerns when confidential information is intercepted or disclosed, lawfully or otherwise. Internationally, both governmental and non-state actors engage in cybercrimes. 

Other the major types of financial crime include: 

• Market Abuse
• Tax evasion 
• Embezzlement 
• Counterfeiting
• Identity theft 
• Electronic crime

These crimes can be executed both by external attackers or internal employees, including leaders at the very top of the business.

Financial crime also incorporates a range of less-serious criminal activities. While the cost or legal ramifications may not be as high as with the major types listed above, the following behavior falls under the umbrella of financial crimes:

·         Personal purchases: Employees use company funds to buy items that aren’t work-related.

·       Theft: Employees steal money (e.g., from a cash register or safe) or items from the business to sell for cash.

·      Skimming: Employees take a little off the top of each transaction, usually in amounts that are small enough to go undetected, but which add up over time — a particular problem in cash-based retail businesses.

·        Payroll schemes: In other cases, payroll employees issue non-approved checks or bonuses, or overstate an employee’s hours.

·        Billing schemes: Employees submit false invoices that the business then pays, and the employee or an accomplice receives the payment.

·       Forgery: Employees sign or reproduce documents using someone else’s signature. Documents might include timesheets, expense reports, contracts and even checks.

Meanwhile, financial crime perpetrators tend to range from petty thieves to heavy-hitting global crime syndicates:

• Organized criminals: Large-scale operations that can include powerful, dangerous people.
• Individual criminals: Includes hackers with no connection to the organization, or customers, suppliers or contractors, but with some knowledge of the business.
• Business leaders: Includes executives or board members stealing from the company or misrepresenting how an organization is performing (e.g., manipulating financial data to exaggerate profits).
• Employees: Typically involves stealing funds in some way and taking steps to cover their tracks (e.g., skimming). Outside criminals often target employees as partners to help carry out these activities. The employee could be complicit in this or be unknowingly targeted to carry out criminal activity, e.g., a bad actor pretending to be the CEO or a business leader to gain access to secure info (phishing).

Organised Financial Crime Customer Experience 

India

The brazen murder of Atiq Ahmed, an Indian mafia don-turned-politician was shot dead by three assailants in Prayagraj on April 15, 2023, while being escorted by about a dozen police personnel for a routine medical check-up. He was killed hours after the last rites  of his son Asad Ahmed, who was gunned down in a police encounter in Jhansi two days ago. This incident has once again put the limelight on the don culture in India that has plagued our society for decades. 

Dawood Ibrahim is one of the richest gangsters of all time. As per Forbes 2015 list, Dawood Ibrahim has an estimated net worth of $6.7 billion. The son of a police constable, Dawood Ibrahim included his relatives and friends and created a gang to engage in robberies, smugglings, fraud, and other petty crimes during his teens. This made him lock horns with the infamous Haji Mastan. However, by the late 1970s’, Dawood Ibrahim started money laundering, illegal arms trade, extortion, gold smuggling, and drug trafficking – He formed the D-Company, a syndicate that is believed to have thousands of members operating across multiple continents. He was named the main perpetrator of the 1993 serial blasts. He escaped to Pakistan after this and started to operate from there

Nepal

Charles Shobharaj, a convicted killer who police believe murdered more than 20 western backpackers on the “hippie trail” through Asia in the 1970s and 1980s was freed on December 23, 2022 after spending almost 20 years in a Nepali prison

Nicknamed “the Bikini Killer” and “the Serpent”, Sobhraj is a Frenchman of Indian and Vietnamese parentage. He was serving a life-term in a Kathmandu jail since 2003. He was slapped with a life sentence, for the murder of American woman Connie Jo Bronzich in 1975 in Nepal, after a trial. A life-term in Nepal means 20 years in jail.

Sobhraj was spotted in a Kathmandu casino in August 2003 and arrested. He had also been linked to multiple killings of backpackers. In 2014, he was convicted of killing Laurent Carriere, a Canadian backpacker, and given a second life sentence.

The USA

The St. Valentine’s Day Massacre on February 14, 1929, might be regarded as the culminating violence of the Chicago gang era, as seven members or associates of the “Bugs” Moran mob were machine-gunned against a garage wall by rivals posing as police. The massacre was generally ascribed to the Capone mob, although Al himself was in Florida.

The FBI’s investigation of Al Capone arose from his reluctance to appear before a federal grand jury on March 12, 1929 in response to a subpoena

On November 16, 1939, Al Capone was released after having served seven years, six months and fifteen days, and having paid all fines and back taxes.

Financial Crime Risk Management

Financial Crime Risk Management (FCRM) is the practice of actively attempting to identify and prevent financial crime. It is done by identifying suspicious activity and vulnerabilities that an organization possesses in order to mitigate the impact of financial crime.

 

Financial crime risk management is the proactive identification and management of risks associated with financial crimes. It is a critical component of any financial organization’s operations and is essential for reducing an organization’s vulnerabilities, as well as managing its overall risk appetite. Financial crime risk management should be a regular practice for financial services organizations to protect their customers, reputation and bottom line.

One of the most effective ways to manage financial crime risk is to leverage advanced technology solutions. In particular, real-time monitoring and analysis allows financial organizations to identify potential financial crimes and take prompt action to prevent them. This approach helps financial organizations increase their operational efficiency while also meeting regulatory requirements.

 

Financial crime risk management, or FCRM, is a process that helps financial organizations identify and mitigate risks associated with financial crimes. FCRM utilizes a range of methodologies and technology solutions to monitor transactions and detect suspicious activity within a financial system. This process is essential for ensuring compliance with anti-money laundering (AML) regulations and preventing financial crimes.

There are various tools that can assist with financial crime risk management, such as employing analysts or developing software to protect against financial crime. Overall, financial crime risk management comes from the concerted effort of all parties to assist in preventing and mitigating financial crime.

The FCRM process can involve a variety of AML compliance programs, including:

• Know Your Customer (KYC)
• Customer due diligence (CDD)
• Transaction monitoring

These programs work in tandem to create a comprehensive risk management strategy. Automation can be used to streamline workflows and make it easier to manage large amounts of data and transactions. However, it is still crucial to have an AML analyst review and oversee FCRM efforts to ensure the system is operating effectively.

The ultimate goal of FCRM is to prevent financial crimes before they occur. By utilizing advanced technology solutions, financial organizations can monitor their systems in real time, identify suspicious activity and take prompt action to mitigate risks. This helps protect the organization, its customers and the financial system as a whole from the damaging effects of financial crime.

Financial Institutions Detect Red Flags of organized crime operations in their Network

 

As scams can be notoriously difficult to trace, financial institutions play an important role as intermediaries between scam operations and the laundering of proceeds. This is where banks can dig deeper, beefing up their compliance and third-party risk controls.

While the easiest way to detect red flags would be to run entities or individuals against official lists, some criminal networks or associated individuals with no prior enforcement actions taken against them would not be on these lists. In this case, financial institutions can look out for other indicators that signal suspicious activity: multiple concurrent directorships, nominee arrangements, or weak indications of actual operations could suggest shell companies are potentially being used to launder scam proceeds.

Beyond traditional customer due diligence procedures, financial institutions can also leverage advanced analytics and automation tools to streamline compliance processes and improve efficiency. Automated know your customer (KYC) checks and intelligent screening solutions alert companies to changes in counterparty networks, helping them to mitigate potential issues early. The ability to see hidden risks in their network – by unraveling complex ownership structures or revealing ultimate beneficial ownership – also help organizations manage and address growing risk promptly. 

An always-on approach, otherwise known as perpetual KYC (pKYC), also helps organizations strengthen their detection and prevention efforts using real-time, event-based triggers to update changes in a customer’s profile. This can be incorporated within our client lifecycle solution that enables companies to tailor triggers to their risk policies and create automated workflows. By reducing the need for manual, periodic reviews, pKYC empowers compliance teams to react to real-time changes in the risk profiles in their network.  

Combating financial crime in compliance

Given the rise of scam attempts throughout the world, one may wonder why and where detection is falling short. It is important to consider certain operational complexities at play, such as an inevitable delay between banks reporting suspicious activity and authorities gathering additional intelligence.

The importance of public-private partnerships

As criminal masterminds operate in a wider financial ecosystem, aligning multi-sector priorities and efforts for a more effective response can be useful. Organizations should continue banding together to fight financial crime. 

Recent achievements in the region demonstrate the power of collaboration. Hong Kong’s Fraud and Money Laundering Intelligence Taskforce (FMLIT), an intelligence-sharing platform used by the national police, regulator, and several banks, is a case study on the efficacy of public-private cooperation. Since the creation of FMLIT in 2017 till October 2023, approximately HK$1.1 billion in crime proceeds has been restrained or confiscated. 

 

Adopting a risk-based approach

 

Financial institutions are also increasingly adopting a risk-based approach in the fight against scams. Unlike rigid rules that rely on preset thresholds and criteria, a risk-based approach allows institutions to tailor their detection strategies based on the specific risks posed by different customers and transactions. 

For example, sudden, large transactions to unfamiliar overseas accounts may trigger alerts under a risk-based approach in the context of several factors:

• Customer's profile; 
• Transaction history; or 
• Regulatory environment of the destination country. 

When institutions customize triggers based on their risk appetite and business objectives, compliance teams can prioritize resources and focus due diligence efforts on higher-risk activities and customers.

As scams persist, financial institutions are tasked with proactive responses and prevention at the root of the crime, not just detecting it when illicit proceeds have been flagged in the system. It will take a multi-sector approach to outsmart financial criminals and preserve trust in the global financial system. 

Protection Against Financial Crime Within an Organization

Financial crime is defined slightly differently depending on what jurisdictions an organization operates in. Understanding specific jurisdictional laws and learning which ones apply to a specific organization is therefore crucial. These financial crime laws must also be communicated across an organization so that there is broad awareness of them. The best ways to protect against financial crime include:

• Use of shared intelligence – This includes sharing information and using financial activity and risk data linked to crime to prevent financial crime. It can be in the form of reporting suspicious activity and keeping records of transactions with complete transparency. Furthermore, collaboration with public entities such as law enforcement and regulatory bodies may enforce protection.
• Prioritizing risk – This includes understanding the different levels of risk that an organization faces from financial crime.
• Use of technology – This includes using innovative technologies such as data analytics and machine learning to predict potential vulnerabilities within an organization.

An actionable plan to reduce financial crime risk includes:

1. Identifying risks
2. Creating a plan to counteract or mitigate risks
3. Implementing crime prevention systems
4. Stress-testing prevention systems regularly
5. Monitoring the effectiveness of systems

Overall, regulators, leaders, employees, and others must work together with data and technology to form viable protection from financial crime.

FCRM helps businesses protect their customers and assets from financial crime. Online banking platforms are used by more customers than ever before, and the FCRM process ensures their information and digital assets are secure from cybercriminals.

FCRM tools can detect suspicious behaviors and provide data to prevent future financial threats. They also play a crucial role in identifying bad actors who may attempt to exploit vulnerabilities within the system. Businesses can then take action to mitigate risks and prevent financial crimes from occurring.

Furthermore, with increasingly stringent regulations in place to prevent financial crimes, businesses need to ensure that they are organized and able to meet regulatory compliance requirements. FCRM systems can streamline their regulatory compliance efforts and minimize the risk of penalties or legal consequences.

OFCC and Indian Laws

Second Administrative Reforms Commission headed by Veerappa Moily (2007) had stated that the incidents of organized crime was on the rise in the country and if not checked they had the potential to threaten national peace and security.

Along with a central law, the Commission had suggested setting up of special courts, enhanced punishment, special evidence rules, circumstances under which confession to police officers could be admissible in trials, protection of witnesses, forfeiture and attachment of property of the criminals and authorization for interception of communication

The Unlawful Activities (Prevention) Act 1967 is an Indian law aimed at the prevention of unlawful activities associations in India. Its main objective was to make powers available for dealing with activities directed against the integrity and sovereignty of India. It  was enacted to prevent unlawful activities and terrorist activities. The UAPA was amended in 2019 to allow the government to designate individuals as terrorists. 

Though terrorism has for the first time been defined as a separate offenceunder Section 111(1)  in the Bharatiya Nyaya Sanhita (BNS) Bill, 2023, (Indian Penal Code 1860) the other special law that deals with terrorist acts — the Unlawful Activities Prevention Act (UAPA) 1967 will remain in practice. BNS has new sections  regarding attachment and confiscation of property, mob lynching, and snatching offences; using children to commit crimes will attract 7-10 years of imprisonment

The Bharatiya Nagarik Suraksha Sanhita 2024 (Criminal Procedure Code 1973)mandate forensic investigation for offences that attract more than 7 years in jail punishment . It also provides for electronic mode for trials. 

The Bharatiya Sakhsya Abhinyayan Sanhita 2024 ( Indian Evidence Act 1872)recognizes electronic and digital records and also the written and oral submissions in the court 

Other than UAPA 1967, there are also State Laws that exist to adress the menace of organised crimes. 

For example, in Maharastra, The Maharashtra Control of Organised Crime Act 1999 was enacted as an ordinance on Feb 1999 due to the series of insurgencies and disturbances in the state of Maharashtra back then. It became law under the procedure of Article 245 of the Indian Constitution which replaced the temporary Maharashtra Control of Organised Crime Ordinance of 1999. 

The Uttar Pradesh House  passed The Uttar Pradesh Control of Organised Crime Bill (UPCOCB), 2017 in March  2017 to give the police unprecedented power to act against a wide range of criminal offenders including the mafia, land-grabbers, those attempting to foment terror, or to dislodge the government through violent means.  In april 2018, the Governor has sent the UP Control of Organized Crime Bill (UPCOCA), 2018 passed by both Houses of UP legislature for Presidential reference.

The Gujarat Control of Terrorism and Organised Crime (GCTOC) Act, which received President Ram Nath Kovind’s assent on November 5, 16 years after the Assembly passed the first version of the Bill, comes into effect on December 1, 2019

The anti-terrorism law, which three Presidents before Kovind had returned to the state, draws heavily from The Maharashtra Control of Organised Crime Act (MCOCA), 1999, with two significant differences: the checks on interception of communication that are part of the Maharashtra law are missing in the Gujarat law; and the definition of “terrorist act” in the GCTOCA also covers “intention to disturb public order”.

Andhra Pradesh, Karnataka and Delhi, have enacted a similar law.

To counter increasing organised criminal activities like drug trafficking, smuggling, looting and extortion, the Kerala government has decided (Aug 2020) to introduce a stringent law on the lines of the Maharashtra Control of Organised Crime Act (MCOCA) 1999, to give the police special powers to deal with the criminals involved.

Other national laws 

1. The Narcotic Drugs and Psychotropic Substances Act (NDPS) 1985 and
2. The Prevention of Money Laundering Act (PMLA) 2002
3. The Unlawful Activities Prevention Act (UAPA) 1967
4. IPC1860 (BNS 2023)
5. sections 120B (criminal conspiracy), 384 (extortion), and 420 (cheating) are frequently used
6. The Arms Act 1959
7. The Wildlife Protection Act 1972
8. The Immoral Traffic (Prevention) Act, the Bonded Labor System (Abolition) Act, and the Child Labour (Prohibition and Regulation) Act
9. The Companies Act 2013
10. The POCSO Act 2012

Authorities 

1. The Narcotics Control Bureau (NCB),
2. The Directorate of Revenue Intelligence (DRI), and
3. The Central Bureau of Investigation (CBI)
4. National Investigation Agency (NIA)

Definition of Customer under  KYC Principles - RBI

In order to prevent banks and other financial institutions from being used as a channel for Money Laundering (ML)/ Terrorist Financing (TF) and to ensure the integrity and stability of the financial system, efforts are continuously being made both internationally and nationally, by way of prescribing various rules and regulations. Internationally, the Financial Action Task Force (FATF) which is an inter-governmental body established in 1989 by the Ministers of its member jurisdictions, sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. India, being a member of FATF, is committed to upholding measures to protect the integrity of international financial system.

In India, the Prevention of Money-Laundering Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, form the legal framework on Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT). In terms of the provisions of the PML Act, 2002 and the PML Rules, 2005, as amended from time to time by the Government of India, Regulated Entities (REs) are required to follow certain customer identification procedures while undertaking a transaction either by establishing an account-based relationship or otherwise and monitor their transactions.

2. Accordingly, in exercise of the powers conferred by Sections 35A of the Banking Regulation Act, 1949, the Banking Regulation Act (AACS), 1949, read with Section 56 of the Act ibid, Sections 45JA, 45K and 45L of the Reserve Bank of India Act, 1934, Section 10 (2) read with Section 18 of Payment and Settlement Systems Act 2007 (Act 51 of 2007), Section 11(1) of the Foreign Exchange Management Act, 1999, Rule 9(14) of Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 and all other laws enabling the Reserve Bank in this regard, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest to do so, hereby issues the Directions hereinafter specified.

 

Banks were advised to follow certain customeridentification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These ‘Know Your Customer’ guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Detailed guidelines based on the Recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision, with indicative suggestions wherever considered necessary, have been issued. Banks have been advised to ensure that a proper policy framework on ‘Know Your Customer’ and Anti-Money Laundering measures with the approval of the Board is formulated and put in place.

iv. Beneficial Owner (BO)

a. Where the customer is a company, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical persons, has/have a controlling ownership interest or who exercise control through other means. Explanation- For the purpose of this sub-clause-

1. “Controlling ownership interest” means ownership of/entitlement to more than 10 percent of the shares or capital or profits of the company.

2. “Control” shall include the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. 

b. Where the customer is a partnership firm, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/have ownership of/entitlement to more than 10 percent of capital or profits of the partnership or who exercises control through other means. Explanation - For the purpose of this sub-clause, “control” shall include the right to control the management or policy decision.

c. Where the customer is an unincorporated association or body of individuals, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has/have ownership of/entitlement to more than 15 percent of the property or capital or profits of the unincorporated association or body of individuals. Explanation: Term ‘body of individuals’ includes societies. Where no natural person is identified under (a), (b) or (c) above, the beneficial owner is the relevant natural person who holds the position of senior managing official.

d. Where the customer is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10 percent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

xvi. “Person” has the same meaning assigned in the Act and includes:

a. an individual,

b. a Hindu undivided family,

c. a company,

d. a firm,

e. an association of persons or a body of individuals, whether incorporated or not,

f. every artificial juridical person, not falling within any one of the above persons (a to e), and

g. any agency, office or branch owned or controlled by any of the above persons (a to f).

xxi(b) iii. “Customer” means a person who is engaged in a financial transaction or activity with a Regulated Entity (RE) and includes a person on whose behalf the person who is engaged in the transaction or activity, is acting.

Xxi(b) iv. “Walk-in Customer” means a person who does not have an account-based relationship with the RE, but undertakes transactions with the RE.

Conclusion

For the purpose of KYC policy, a ‘Customer’ is defined as:

·   A person or entity that maintains an account and/or has a business relationship with the bank;

·    One on whose behalf the account is maintained (i.e. the beneficial owner). [Ref: Government of India Notification dated February 12, 2010 - Rule 9, sub-rule (1A) of PMLA Rules - 'Beneficial Owner' means the natural person who ultimately owns or controls a client and or the person on whose behalf a transaction is being conducted, and includes a person who exercise ultimate effective control over a juridical person]

·   Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and

·  Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Wrapping it all up 

 

Financial crime is commonly thought to include fraud, money laundering, terrorist financing, bribery and corruption, insider trading, and cybercrime as offenses. Governments all over the world have become increasingly concerned about financial crime. This concern stems from a number of issues, as the impact of financial crime varies depending on the context. It is now widely acknowledged that the prevalence of economically motivated crime in many societies poses a significant threat to the development and stability of economies.

 Organized crime groups will continue innovating new ways to outsmart the financial system. However, more collaboration, stronger compliance controls, and the right tools can all aid in financial crime detection and prevention.

Happy reading,

Those who read this, also read:

1. Money Laundering Techniques

2. Money Laundering & Evolution of AML

3. International Cooperation in AML/CFT