Chapter 16: Anti-Money Laundering and Electronic Payments-Theory Flashcards
What is Money Laundering?
- Money laundering is the process of converting “dirty” money earned from illegal activities into “clean” money.
- Criminals (including Terrorist Organizations) use money laundering with the help of Accountants, Lawyers, and Financial Institutions to hide ill-gotten money.
- Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) have become global concerns. Therefore, Financial Action Task Force (FATF) and World Bank are collaborating with National Authorities and State Bank to make and implement Anti-Money Laundering Laws to control money laundering.
What is the most important requirement of anti-money laundering laws?
That Financial Institutions should monitor customers’ transactions and report large and suspicious transactions to regulators.
What is covered in definition of Financial Institutions?
Financial Institution means any person who carries out any of following activity:
1. Accepting deposits, and Lending.
2. Leasing.
3. Insurance.
4. Money or Value Transfers.
5. Manage means of payments (including online payments) e.g. Debit and Credit Cards, Electronic Money, Money Orders, Cheques, Bank Draft, Traveler’s Cheques.
6. Financial Guarantees and Commitments.
7. Business trading in:
a. Portfolio management.
b. Money market instruments,
c. Transferable securities
d. Investing and managing funds on behalf of others.
e. Safekeeping and administering cash or liquid securities on behalf of others.
f. Foreign exchange
g. Money and currency changing
h. Exchange, Interest Rate and Index Instruments
i. Commodity Futures Trading
j. Share Issue Services.
k. Intermediaries.
Examples include Banks, Master Card, JazzCash, EasyPaisa, Western Union.
When is a person guilty of offence of money laundering? (1+4)
A person is guilty of offence of money laundering if he knows (or having reasons to believe) that a property is proceeds of crime and still:
1. Acquire, converts, possess, use or transfer such property.
2. Conceals the true nature, origin, location, ownership, movement of such property.
3. Holds or possess such property on behalf of any other person.
4. A person shall also be guilty if he participates, aids, or counsels to commit above acts.
What is evidence of offence of money laundering?
To prove offence of money laundering:
- Knowledge or intent may be inferred from factual circumstances in accordance with Qanun-e-Shahadat Order, 1984.
- Conviction of accused for respective ‘predicate offence’ shall not be required.
A predicate offence is a crime (e.g. opening a bank account with fake name) that is a component of a larger crime (e.g. money laundering).
What is the punishment for money laundering for individuals?
For Individuals: (i.e. natural person)
If a person commits money laundering, he will be liable of:
- Imprisonment upto 10 Years (but not less than 1 year).
- Fine upto Rs. 25 million.
- Forfeiture of property involved in money laundering (or property of equal value).
What is the punishment for money laundering for Legal Persons?
For Legal Persons: (i.e. company)
- If a company commits money laundering, it will be liable of fine upto Rs. 100 million.
- Any director, officer or employee of such legal person who is found guilty, shall be liable for same penalty as above for individuals.
What Electronic Payments mean?
Now a days, individuals and business organizations frequently use Payment System (PS), and Electronic Fund Transfer (EFT).
What is a payment system?
A Payment System (PS) is any system used to settle financial transactions through transfer of money.
Payment system may or may not be Electronic.
Describe “Designation of Payment System”.
State Bank may designate a Payment System to be a Designated Payment System (DPS) by written order, if necessary in the public interest.
Financial Institution, who is authorized (by State Bank) to operate a DPS is called “Operator”.
In considering whether to designate a payment system as DPS, State Bank may inspect the premises, equipment, books accounts and transactions relating to PS.
What operational arrangements should be made by operator of Designated Payment System (DPS) ? (4)
Operational Arrangements:
1. Rules and procedures setting out rights and liabilities of Operator and Participant.
2. Measures to ensure safety, security, operational reliability and contingency arrangements.
3. Rules and procedures for management of credit, liquidity and settlement risk (including time when a payment is instructed and settlement is final).
4. Criteria for participation in DPS.
Write down all situations when State Bank may revoke designation of a DPS. (5)
State Bank may revoke designation of a DPS if:
1. DPS ceases to operate effectively as PS.
2. Operator has knowingly submitted materially false or misleading information to State Bank.
3. Operator or Settlement Institution is in winding up.
4. There is violation of terms and conditions of designation.
5. State Bank considers it in public interest to revoke the designation:
Can State Bank revoke a designation without notice? Elaborate
State Bank shall not revoke a designation without giving notice and hearing opportunity to Operator.
However, State Bank can suspend a designation (until final order is issued) without giving notice if
there is immediate systematic risk.
Define “Electronic Fund Transfer”. (4)
“Electronic Fund Transfer” means:
- Transfer of funds, other than by cheque, draft or similar paper instrument.
- which is initiated through Electronic Terminal (POS Terminal, Stored Value Card Terminal), ATM, telephone instrument, computer, magnetic medium or any other electronic device
- to order, instruct, or authorize a Financial Institution to debit or credit an Account.
EFT works without direct intervention of bank staff.
Define “Electronic Fund” or “Electronic Money”: (4)
“Electronic Fund” or “Electronic Money”:
It means:
- money transferred through an Electronic Terminal, ATM, telephone instrument, computer, magnetic medium or any other electronic device
- to order, instruct, or authorize a Financial Institution, or a Bank or other Company to debit or credit an Account.
, and:
- includes monetary value which represents a claim on the issuer, and is stored in an electronic device or Payment Instrument. Such monetary value is issued on receipt of funds (not less than monetary value issued), and is accepted as means of payment by undertakings other than the issuer and
- includes electronic store of monetary value on an electronic device that may be used for making payments or as may be prescribed by the State Bank
