This document appears to be the introduction section of a thesis examining the prevalence of anti-money laundering practices in Pakistani financial institutions. It provides background information on money laundering including its definition, scale, origins and processes. It outlines the objectives and limitations of the research study, which aims to investigate anti-money laundering practices in Pakistani banks and identify methods used for money laundering in the country's financial system. The document also previews the literature review and research methodology sections to follow.
This document appears to be the introduction section of a thesis examining the prevalence of anti-money laundering practices in Pakistani financial institutions. It provides background information on money laundering including its definition, scale, origins and processes. It outlines the objectives and limitations of the research study, which aims to investigate anti-money laundering practices in Pakistani banks and identify methods used for money laundering in the country's financial system. The document also previews the literature review and research methodology sections to follow.
This document appears to be the introduction section of a thesis examining the prevalence of anti-money laundering practices in Pakistani financial institutions. It provides background information on money laundering including its definition, scale, origins and processes. It outlines the objectives and limitations of the research study, which aims to investigate anti-money laundering practices in Pakistani banks and identify methods used for money laundering in the country's financial system. The document also previews the literature review and research methodology sections to follow.
A thesis Presented to the faculty of Management Sciences Bahria University _______
In Partial Fulfillment of the Requirements for the Degree Master in Business Administration ____________ By1 Muhammad Adnan Israr Registration # 11561
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BAHRIA UNIVERSITY INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES KARACHI
RECOMMENDATION FOR ORAL EXAMINATION
This project/thesis here to attached, entitled, Prevalence of Anti Money laundering in financial Institutions of Pakistan , prepared and submitted by Muhammad Adnan Israr, in partial fulfillment of the requirements for the degree MASTER IN BUSINESS ADMINISTRATION, is hereby recommended for appropriate action.
In partial fulfillment of the requirements for the degree of MASTER IN BUSINESS ADMINSTRATION, this thesis entitled, Prevalence of Anti Money laundering in financial Institutions of Pakistan, is hereby recommended for Oral Examination.
INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, KARACHI
APPROVAL SHEET
This Project/ thesis entitled, Prevalence of Anti Money laundering in financial Institutions of Pakistan, prepared and submitted by Muhammad Adnan Israr, in partial fulfillment of the requirements for the degree of MASTER IN BUSINESS ADMINISTRATION has been examined and recommended for acceptance and approval.
PANEL OF EXAMINERS Approved by the Committee on Oral Examination with a Grade of __________ ____________________________ Examiner
Name: _______________
____________ ______________ Examiner Advisor
Name: _____________ Name: _____________
____________________________________________ Head of the Department Management Sciences Page | 5
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ACKNOWLEDEMENT
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ACKNOWLEDGMENT
With great reverence, I wish to express deep gratitude towards Al-Mighty ALLAH who has blessed me with all that I have done. I also want to thanks Mrs. Ahsan Rizvi, Department of Management Sciences, Bahria University, under whose dynamic supervision this report has been completed. Hope that the knowledge gained through this Research Report will help in the future endeavors.
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DEDICATION
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DEDICATION
I would like to dedicate my thesis to my Parents, Teachers and Friends.
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TABLE OF CONTENTS
Table of Content _Toc385139093ABSTRACT .................................................................................................................. 12 CHAPTER 1 ........................................................................................................................................... 14 BACKGROUND & STATEMENT ...................................................................................................... 14 OF PROBLEM ....................................................................................................................................... 15 1. INTRODUCTION .......................................................................................................................... 15 1.1. BACKGROUND OF THE RESEARCH .................................................................................... 15 1.1.1. DEFINITION OF MONEY LAUNDERING ......................................................................... 16 1.1.2. THE SCALE OF THE PROBLEM ........................................................................................ 16 1.1.3. ORIGIN OF MONEY LAUNDERING .................................................................................. 17 1.1.4. BACK GROUND HISTORY ................................................................................................. 17 Page | 10
1.1.5. PROCESS OF MONEY LAUNDERING .............................................................................. 17 1.1.5.1. PLACEMENT ..................................................................................................................... 18 1.1.5.2. LAYERING ........................................................................................................................ 18 1.1.5.3. INTERGRATION ............................................................................................................... 18 1.2. PROBLEM STATEMENT ......................................................................................................... 19 1.3. OBJECTIVE OF THE RESEARCH ........................................................................................... 19 1.4. LIMITATION ............................................................................................................................. 19 1.6. SCOPE ........................................................................................................................................ 19 1.7. ASSUMPTIONS ......................................................................................................................... 20 CHAPTER 2 ........................................................................................................................................... 21 LITERATURE REVIEW & ................................................................................................................... 21 STUDIES ................................................................................................................................................ 21 2. LITERATURE REVIEWS ............................................................................................................. 21 2.1. THE BANKING SECTOR ......................................................................................................... 22 2.1.1. SMURFING/ STRUCTURING .............................................................................................. 22 2.1.2. SHELL COMPANIES ............................................................................................................ 23 2.1.3. TELEPHONIC TRANSFER ................................................................................................... 23 2.1.4. MONEY EXCHANGER ........................................................................................................ 23 2.1.5. REMITTANCES ..................................................................................................................... 23 2.1.6. HUNDI .................................................................................................................................... 23 2.2. MONEY LAUNDERING IN PAKISTAN ................................................................................. 24 2.2.1. METHODS USE IN PAKISTAN FOR MONEY LAUNDERING ....................................... 24 2.2.1.1. FORMAL METHODS ........................................................................................................ 24 2.2.1.2. NON FORMAL METHOD ................................................................................................ 24 2.2.1.3. PRIZE BONDS ................................................................................................................... 25 2.2.1.4. REAL ESTAE SCHAMES ................................................................................................. 25 2.2.1.5. RETAIL BUSINESSES/HOTELS BUSINESSES ............................................................. 25 2.3. BANK FACE LOSSES BY MONEY LAUNDERING ............................................................. 25 CHAPTER 3 ........................................................................................................................................... 25 RESEARCH METHODOLOGY & PROCEDURE ............................................................................. 26 3. RESEARCH METHODOLOY & PROCEDURE .......................................................................... 26 3.1. RESEARCH DESIGN ................................................................................................................ 26 Page | 11
3.2. PROCEDURE ............................................................................................................................. 26 3.2.1. STAGE 1 ................................................................................................................................. 27 3.2.2. STAGE 2 ................................................................................................................................. 27 3.2.3. STAGE 3 ................................................................................................................................. 27 3.3. DATA COLLECTION METHOD ............................................................................................. 27 3.4. POPULATION ........................................................................................................................... 27 3.5. SAMPLING ................................................................................................................................ 27 3.6. MEASUREMENT ...................................................................................................................... 28 3.7. TIME FRAME ............................................................................................................................ 28 CHAPTER 4 ........................................................................................................................................... 28 PRESENTATION ANALYSIS & .......................................................................................................... 28 FINDINGS ............................................................................................................................................. 29 4. RESULT ANALYSIS AND FINDINGS ....................................................................................... 29 4.1. INTERVIEW ANALYSIS .......................................................................................................... 29 4.1.1. INTERNAL ARRANGEMENT TO CHECK MONEY LAUNDERING ............................. 29 4.1.1.1. AUTOMATED SYSTEM OF PRODUCING REPORTS .................................................. 29 4.1.1.2. TRAINING ......................................................................................................................... 30 4.1.1.3. RECORD KEEPING .......................................................................................................... 30 4.1.1.4. DORMANT ACCOUNTS .................................................................................................. 30 4.1.1.5. REMITTANCES ................................................................................................................. 30 4.1.1.6. CASH TRANSACTIONS ................................................................................................... 31 4.2. DIFFERENT IMPACT OF MONEY LAUNDERING .............................................................. 31 4.2.1. SOCIAL IMPACT OF MONEY LAUNDERING ................................................................. 31 4.2.2. MACRO ECONOMIC IMPACT OF MONEY LAUNDERING ........................................... 31 4.3. LAW RELATING TO MONEY LAUNDERING ..................................................................... 32 4.4. ANALYSIS OF QUESTIONNAIRE .......................................................................................... 33 CHAPTER 5 ........................................................................................................................................... 36 CONCLUSION& ................................................................................................................................... 37 RECOMMENDATION ......................................................................................................................... 37 5. CONCLUSION AND RECOMMENDATIONS ............................................................................ 37 5.1. CONCLUSION ........................................................................................................................... 37
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ABSTRACT Page | 13
ABSTRACT The basic objective of this research is to identify and discuss the methods of money laundering used in Pakistan. Money laundering by using banking channels is not a new thing in Pakistan, after 9/11, the consequences of money laundering have seen internationally, especially with perspective of Pakistan, being a Muslim country. In all over the world, the importance of money laundering have seen in last decade, therefore all banks from all over the work must have develop a confidential unit name is compliance, who continuously looking and working on the customer suspicious activities through banking channels. Pakistan also in the category of high risk jurisdiction, due to fail to implement FTAF recommendations and tighten the AML/CFT policies through parliament. Pakistan needs to enact AML/CFT act through parliament. There are diverse ways that are in practice for money laundering in commercial banks similar to placement, layering, and integration. The money laundering on one hand creates the social problem like Page | 14
concentration of wealth in few hands and on the other hand, from commercial banks point of view it results in the unbalanced increase in deposit of the banks. The phenomenon of money laundering was not so much famous before the 9/11. The incidence of 9/11 opened the eyes of financial institutions and the regulatory bodies specially in the USA because before 9/11 there were many shell banks (fugue banks) which used to transact with huge funds without any source of origin of these funds, which resulted in the disaster like 9/11.Money laundering exists in Pakistan, and money launders normally using banking channels and hundi, hawala system to launder money from one place to other place, detail analysis have done in this research. All banks must be focus on KYC process at the time of account opening and ongoing basis; Know your customer is very crucial part to prevent banks from money laundering. In this study, researcher define the process of money laundering, and how it works and how Pakistani banking channels is being used for money laundering, researcher also describe the facts and figures of money laundering and its impact on country, as a social and as a political. Researcher conducted interviews, fills up questionnaires from different bankers, reviewed prior history and then researched to conclude this research with recommendations. Key words: Money laundering, FATA, AML/CFT, KYC
CHAPTER 1 BACKGROUND & STATEMENT Page | 15
OF PROBLEM
1. INTRODUCTION 1.1. BACKGROUND OF THE RESEARCH The basic purpose of this research is to find out the process and techniques of money laundering used in Pakistan with perspective of International arena. In this research we will cover all areas of money laundering with the help of Banking systems and process in Pakistan. In this research we will also discuss Pakistan Standing in International prevent money laundering and terrorist financing. After 9/11 the department of compliance to safeguard banks from money laundering was established and working efficiently day by day. Pakistan not so far away to stop terrorist financing.SBP AML Regulations quite enough to strengthen the financial institution from money laundering, but the money launders knows more ways to convert black money into white money. Pakistan also passed an ordinance of money laundering AMLO 2007, in which SPB clearly mentioned thats every step of ML fall in predicate offences. Normally Financial institution is being used by Money launders as a channel to convert ill-gotten money to legal money. There are many processes to convert back money into white money. Page | 16
There are many ways in practice for money launders to hide true source of income, normally three processes in banking sectors is being used for money laundering, start with placement, they layering and finally integration. The money launder on one hand creates intense social issues, like compiling wealth in few people. The Phenomenon of money ML was not quite famous before incident of 9/11. Incident of 9/1, opened eyes of every one, especially for regulatory bodies and financial institutions in USA or outside of the USA, because before this incident, there were many shell banks or shell financial institutions which were used to transact hue amount of funds without any source of origin, resulted terrorists finance begins. After incident of 9/11, there are definite rules and regulations were established at international level to safeguard money laundering like Money Laundering Act 1986 USA, Criminal of terrorism Act UK. Money laundering and financial crimes strategy Act 1998, USA. The SBP took many steps to control the money laundering in banking sectors. In this regard, The SBP has provided Anti Money Laundering regulations. In the last point, researcher concluded this research that the money laundering is present in various ways and it is affecting the financial system in Pakistan. Approximately USD $ 1 billion yearly money laundering arises in Pakistan. In the last researcher suggested that the Pakistan banks or regulatory authority should take necessary actions to prevent Pakistani baking systems from money laundering. 1.1.1. DEFINITION OF MONEY LAUNDERING Money laundering is basically the concept of converting black money into white money (FATF Recommendations), Money launderers do to hide true source of funds, Money laundering is basically use to hide illicit money from its true source. The conversion of illicit money into legal money is called money laundering. Money launders usually use banking channels to hide the true source of money. Money laundering is the process by which hue amount of funds earned by illegally i.e drug trafficking, terrorist activities or other offenses define by FATF, is given the appearance of having originated from a legitimate source. 1.1.2. THE SCALE OF THE PROBLEM In the decade of 1990s, the money laundering was estimated through drug trade by IMF approximately 8% of the world trade equivalent to 2-5 % Global GDP and exceeding $ 100 billion on annual basis. In 2006, IMF estimate money laundering annually amount between 800 to 2 trillion US Dollars in todays term. Page | 17
Many financial institutions were fined due to engaged in the money laundering activities or due to week process of anti money laundering. In 2004, Riggs Bank of Washington also fined and engaged in the scandal of money laundering. They were failed to conduct due diligence of huge amount of fund flows into accounts. They faced $25million of penalty. In 2005, ABN AMRO penalties $ 80million for giving chance of individuals from Russia and other nations to move more than $ 32billion to shell companies in USA. 1.1.3. ORIGIN OF MONEY LAUNDERING The origination of money laundering is United States; it comes from Mafia Ownership of launders in the United States, Gangsters, were earning hue amount of cash through gambling, prostitution, extortion, and then they need to show illegitimate of money as a legitimate source of money. For this conversion, they were used banking channels. 1.1.4. BACK GROUND HISTORY In 1920, the term money laundering was emerged, when US Gangster needs to hide their illicit money. They tried to find a way to hid true source of their income. In 1980, Money Laundering arises as a crime, essentially, within drug trafficking, terrorism, and high jacking was also the main reason of money laundering and creates the awareness of the commercial banks and developed nation regarding the issue of money laundering. The Process of money ML was not quite famous before incident of 9/11. Incident of 9/11, opened eyes of every one, especially for regulatory bodies and financial institutions in USA or outside of the USA, because before this incident, there were many shell banks or shell financial institutions which were used to transact hue amount of funds without any source of origin, resulted terrorists finance begins. 1.1.5. PROCESS OF MONEY LAUNDERING There are three stages or process of money laundering. Placement Layering Integrating
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1.1.5.1.PLACEMENT Placement is first stage of the money laundering; this is the initial point when the money launders place their criminal money into banks. 1.1.5.2.LAYERING After placement of criminal fund in the bank, money launders creates the complex networks of transactions among different banks and same banks but different branches and transfer money from one bank to other bank, that hide the true source of fund and difficult to trace. 1.1.5.3.INTERGRATION Integration is the third stages of the money laundering in which money launders, buy luxury goods i.e luxury cars, watches, gold, diamonds etc, through illicit money and integrate illegitimate money in the economy of the country. Page | 19
1.2. PROBLEM STATEMENT The basic purpose and objective of this research is to prevalence of money laundering and its consequences in banking industry in Pakistan. This research will find out the process of money laundering and terrorist financing by using banking channel. 1.3. OBJECTIVE OF THE RESEARCH The main objective of this research is to comprehend the problem that arises due to money laundering, i.e unbalanced growth in the deposit in banking industry. Following are the some objective that will address in this research: To understand the money laundering process and its implication. To find out the risk that associated with money laundering. To find out the current trend of money laundering. To highlights the laws and regulations to prevent banks from money laundering. To highlights the level of satisfaction of Pakistani regulations to prevent money laundering. 1.4. LIMITATION The topic is very broad and controversial, and banks are restricted to disclose polices and procedures to control the money laundering. This research is based on secondary as well as primary source like interviews and questionnaires thats why its not easy for research to conduct interview from all AML/CFT Analyst, MLRO or CCO of the financial institutions, randomly interviews being conducted to analyze the current trend of money laundering in Pakistan, and its perspective as well as the role of compliance in the banking sectors to control the money laundering. 1.5. JUSTIFICATION This research study will beneficial for the researcher as well as bankers to analyze the money laundering and its impact on the banking industry. Bankers will analyze the banking channels and banking that money launders is using 1.6. SCOPE Due to lack of time, research frame work only limited to Karachi, and sampling also have done through telephonic conversation with the branches outside of the Karachi. Page | 20
Sample size is only limited to banking sectors. Money laundering though other financial institution does not part of this research. 1.7. ASSUMPTIONS This research only focus pattern, methods and techniques of money laundering and its impact on banks instead of actual amount of money launders through banking channels. No specific name of any bank would be disclose in this research for money laundering No Specific name of any group disclose in this research, who are involved in Money Laundering by using Banks.
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CHAPTER 2 LITERATURE REVIEW & STUDIES
2. LITERATURE REVIEWS The basic purpose of this research is to find out the process and techniques of money laundering used in Pakistan with perspective of International arena. In this research we will cover all areas of money laundering with the help of Banking systems and process in Pakistan. In this research we will also discuss Pakistan Standing in International prevent money laundering and terrorist financing. After 9/11 the department of compliance to safeguard banks from money laundering was established and working efficiently day by day. Pakistan not so far away to stop terrorist financing.SBP AML Regulations quite enough to strengthen the financial institution from money laundering, but the money launders knows more ways to convert black money into white money. Page | 22
Pakistan also passed an ordinance of money laundering AMLO 2007, in which SPB clearly mentioned thats every step of ML fall in predicate offences. Normally Financial institution is being used by Money launders as a channel to convert ill-gotten money to legal money. There are many processes to convert back money into white money. There are many ways in practice for money launders to hide true source of income, normally three processes in banking sectors is being used for money laundering, start with placement, they layering and finally integration. The money launder on one hand creates intense social issues, like compiling wealth in few people. The Phenomenon of money ML was not quite famous before incident of 9/11. Incident of 9/1, opened eyes of every one, especially for regulatory bodies and financial institutions in USA or outside of the USA, because before this incident, there were many shell banks or shell financial institutions which were used to transact hue amount of funds without any source of origin, resulted terrorists finance begins. After incident of 9/11, there are definite rules and regulations were established at international level to safeguard money laundering like Money Laundering Act 1986 USA, Criminal of terrorism Act UK. Money laundering and financial crimes strategy Act 1998, USA. The SBP took many steps to control the money laundering in banking sectors. In this regard, The SBP has provided Anti Money Laundering regulations. In the last point, researcher concluded this research that the money laundering is present in various ways and it is affecting the financial system in Pakistan. Approximately USD $ 1 billion yearly money laundering arises in Pakistan. In the last researcher suggested that the Pakistan banks or regulatory authority should take necessary actions to prevent Pakistani baking systems from money laundering. 2.1. THE BANKING SECTOR Banking sectors s one of the important part of the money laundering, illicit money is being deposited in their bank accounts followed by withdrawal in different modes like transfers, online and cash withdrawal etc. Despite of using banking channels, money launders have some issue they have some arguments i.e banks report to regulatory authorities like FIU, FIA or other law and enforcement agencies, after withdrawal or deposits huge cash. There are many ways of money laundering. Followings are the terms that familiarize term money laundering. 2.1.1. SMURFING/ STRUCTURING Structuring or Smurfing is the techniques that usually money launderers are using. Smurfing or structuring means breakup of large amount of fund into small numbers that avoiding the threshold of reporting CTR (Currency transaction reporting) that is $ 10,000 and above, money launders deposits cash Page | 23
in structured form followed by withdrawal in transfer form into different accounts or wire transfer through remittances. 2.1.2. SHELL COMPANIES Shell companies also playing a very vital role in money laundering. It is being used in both banking and non banking sectors. In shell companies, there is no physical place of the business. All transactions are conducting by professionals on the behalf of beneficial owner. Through the Shell banking, we can not identify the true beneficial owner of the fund. It is taken by highly professionals, lawyers, accountants, thats why the real beneficial owner is remain hidden. These professional manage secrecy of the transactions, they helps for placement of funds and in the last stages integration stage by using fund in other countries. 2.1.3. TELEPHONIC TRANSFER Telephonic transfers are very common techniques for money laundering and main tool for all stages because this is very quick transactions methods. It is very difficult for law and enforcement agencies to trace quickly. 2.1.4. MONEY EXCHANGER Money exchange companies are main source of money laundering, they are dealing in cash, and cash mode of transactions one of the suspicious mode and way of money laundering. They are dealing in different currencies. A wide range of currencies they are offered along with small denomination banks notes to larger ones and replacing techniques like money orders, etc. 2.1.5. REMITTANCES Remittance is very important tool of money laundering. In remittances, there is less regulatory requirement than institutions and banks, which provide corresponding service. Money launderers are using this method to launder money from one country to other country. 2.1.6. HUNDI Hundi or Hawala system one of the important process of money laundering, in which a group involved in money laundering from one place to other place. This system of money laundering is mostly associated with Asia. This systems is called Underground banking and usually use in Asian Countries. This system reduces remittances through banks and results a country lose foreign currency. If the country has shortage of foreign currency then they loses their currency values. Page | 24
Hundi or Hawala system is very common in money laundering; they are using banking channels for routing the money from one place to other places in the transferring mode. 2.2.MONEY LAUNDERING IN PAKISTAN Pakistan needs to endorse an anti-money laundering laws and regulations, recently parliament has approved Anti money laundering bill. In current scenario Pakistan is facing intense pressure from internal agencies against money laundering. After 9/11 incident, Pakistan on the top of the list, after 9/11 incident Pakistan is facing severe behavior from all of the world, On the Risk rating Pakistan fall in high risk country, and this is very big challenge for Pakistan to face and especially for trade purposes. As per FATF, Pakistans policies towards money laundering are not stronger than other countries. The basic causes of money laundering in Pakistan is cash base economy, there is no proper documentation in our country thats why we are facing money laundering instances in Pakistan. Hawal and Hundi system is vey lucrative business in Pakistan and its being used to remit fund fro Pakistan to other countries and from other countries to Pakistan without any resistance. State Bank of Pakistan has also took many actions to control money laundering by using banking or financial institution. SBP also supporting global agencies to establish well anti money laundering infra structured, they are established an independent unit that is working independently along with SBP with the help of international Agencies. SBP established six regulations to control the money laundering from banking sector. 2.2.1. METHODS USE IN PAKISTAN FOR MONEY LAUNDERING There are two methods of money laundering in Pakistan, money launderers are using both methods formal or informal. 2.2.1.1.FORMAL METHODS In formal methods, money lauders are sing banking channels, by open an account by fraudulently in banks then the are use that account for money laundering purposes, other money laundering methods including Credit Cards, Travelling cheques etc, but these are not common in use or prevailing of money laundering in Pakistan, due to magnitude of fund. 2.2.1.2.NON FORMAL METHOD The non formal methods is being used for money laundering is very old method, under the name of Hundi or Hawal system. His is very common in Pakistan. This is very simple of un traceable method because cash is being paid from one point and received by other person in other point, without any documentation. Page | 25
2.2.1.3.PRIZE BONDS Prize bond also very common method of money laundering in Pakistan, there is no restriction to purchase Prize bond and its non bearing security issued on the behalf of Minster of finance. 2.2.1.4.REAL ESTAE SCHAMES Investment in real estate is very common method of money laundering, due to poor infrastructure of documentation, Pakistan is facing very severe problem of money laundering through real estate. 2.2.1.5.RETAIL BUSINESSES/HOTELS BUSINESSES Hotels and retail business such as super stores etc are also categorize one of method of money laundering. 2.3.BANK FACE LOSSES BY MONEY LAUNDERING Pakistani Banks directly or indirectly are facing challenges of Money laundering. If the bank is being used and declared that the banks are affected by money laundering then the bank is facing reputational risk. All banks operation in Pakistan must developed a unit called Compliance division. Compliance division is working for the bank to safe guard banks from money launders by using proactive approaches.
CHAPTER 3 Page | 26
RESEARCH METHODOLOGY & PROCEDURE
3. RESEARCH METHODOLOY & PROCEDURE 3.1. RESEARCH DESIGN The major part of this research is based on Primary data. The methodology of the research is descriptive. Questionnaire is designed to substantiate the results and opinion of the analyst, researchers, bankers and anti money laundering specialist. Descriptive method is used for this research, due to its flexibility. Descriptive type of research is to gathered data in present active form and emphasis on explaining the scenarios instead of judging or interpreting. Descriptive study is convenient, quick and flexible approach that provides ease to the researcher; furthermore, researcher can easily do amendment if any new issues or scenario comes during the research. 3.2.PROCEDURE The strategy of the research is divided into three different stages. Page | 27
3.2.1. STAGE 1 In the first stage, data is gathered through different secondary sources, especially, SBP regulations, 40 recommendation of FATF (Financial Action Task Force), different articles, different reviews already done by different researchers, AML Specialist and AML Analyst. This is detailed and thoroughly study and takes a-lot concentrations. 3.2.2. STAGE 2 In the second stage, a focus group and interviews with different bankers and AML Specialist were conducted, to indentify the factors of money laundering by using banking channels. 3.2.3. STAGE 3 In the third stage, a detailed questionnaire was distributed among the different bankers, and AML specialist. This stage is very important for analysis, questionnaire was designed very carefully and each and every question has some worth and values, with the perspective of ML (Money Laundering). 3.3.DATA COLLECTION METHOD Data collected for this research from two sources, primary and secondary. The data collected trough Primary source i.e Interviews, focus group, surveys and questionnaire. The data collected through secondary source i.e SBP regulations, forty recommendations of FATF, AML journals, articles, and research papers. 3.4.POPULATION The population of the research depends on all banks operating in Pakistan. The compliance division is responsible for Money laundering, and implementation of SBP regulations. The focus of this research is prevalence of money laundering by using banking channels, thats why compliance division is authorize department to work as a Anti money laundering, so all compliance department of the banks are consider as a population. 3.5.SAMPLING The sampling method in the research is used as per our convenience. The respondents of the research were focus group, interviews were conducted with different AML Analyst, and surveys and questionnaire were distributed among different bankers. Page | 28
The sample size of the focus groups was 6 to 8 money laundering specialist. Some other online interviews also conducted through out the world. Standard size questionnaire was selected; total 200 questionnaires were distributed as per our convenience. Out of 200, only 171 questionnaires were returned. 3.6.MEASUREMENT This research is measured with the following tools: Interviews Focus group Questionnaire 3.7. TIME FRAME
The time frame of this research is 12 weeks.
CHAPTER 4 PRESENTATION ANALYSIS & Page | 29
FINDINGS
4. RESULT ANALYSIS AND FINDINGS 4.1.INTERVIEW ANALYSIS Detailed interviews were conducted with different bankers, AML specialist; each and every person provides very effective information. After discussion with them I concluded there remarks with y interpretation, they highlighted main areas of money laundering and given tips to overcome money laundering issues. Following are the key factors that minimize the chances of money laundering through banking channels. 4.1.1. INTERNAL ARRANGEMENT TO CHECK MONEY LAUNDERING All banks /DFIs must need to establish well internal control system to reduce the chance of money laundering. Following are the key concepts that reduce the probability of money laundering. 4.1.1.1.AUTOMATED SYSTEM OF PRODUCING REPORTS All banks needs to acquired electronic data processing system within the bank through banking softwares that generate automated reports of transactions for review purposes. Now a days very advanced level of technologies are using for transactions monitoring that reduces chances of money laundering. Page | 30
4.1.1.2.TRAINING Staff training is very important part of any job. Banks should develop training centre for branch level, branches must have to train their relationship managers to know about Anti money laundering, if RM understand AML procedure then they will use their knowledge to prevent Bank for money laundering. Being a compliance officer, AML training is basic necessity of their day to day work assignment. As per AML/CFT regulations R-6, all commercial banks should train their compliance officer at optimum level to understand the phenomenon of money laundering, thats why they instruct every bank to develop training centre and train every employees regarding Money laundering and how we protect bank from money laundering. 4.1.1.3.RECORD KEEPING Record keeping is very crucial part of any organization, especially for the banks, as per SBP AML/CFT regulation R-6 all banks/DFIs should keep all record up to 10 years in both form hard as well as soft form. Complete record of inward and outward remittances and other remittances must be store in safe area. Record keeping also helps banks to trace any customer with his previous track record in the nutshell, record keeping helps to prevent banks from money laundering. 4.1.1.4.DORMANT ACCOUNTS Sudden activity in dormant account seems suspicious and unusual activity in the account and compliance officer must go trough sudden activity in dormant account and report to higher management to trace and identify and take corrective measures. All dormant accounts must be active in front of Branch managers ad account holder himself present in the branch and submit an application to active his dormant account. Sudden activity in dormant accounts also red flag and one way of placing ill-gotten funds into bank. All compliance officers must give additional attention to transactions that would happen in dormant accounts. 4.1.1.5.REMITTANCES One of the ways of money laundering is remittance; it is the easiest way of transfer ill-gotten money from one place to other place. All compliance officers must pay additional attention in remittance; Money launders provide false information to remit the fund from one place to other place. All bankers must identify the actual source of fund before remit the fund. Many instances have seen in remittances that huge amount of fund transferred abroad without knowing the actual source of fund, and few banks were penalized. Page | 31
All banks are using advance level of system that protects them from money laundering by using remittance mode of transfer. OFAC, and European Union and other countries have developed list of black people who are involved in terrorist activities and money laundering, all banks are using good systems that screen out that list then release any payment, that decrease the chance of money laundering. 4.1.1.6.CASH TRANSACTIONS Cash transactions is very common pattern of money laundering, banks have to give extra attention in all cash transactions and they have to report all cash transactions that above 2.5M single transactions. All bankers must have to understand the importance of money laundering through cash transactions and give special attention to cash transactions. 4.2.DIFFERENT IMPACT OF MONEY LAUNDERING There are many impact of Money laundering, some impacts are: 4.2.1. SOCIAL IMPACT OF MONEY LAUNDERING Money laundering creates both impacts social and political. Costs of social and political of money laundering are extremely large, political involvement prevalence the money laundering by using their political power. Money launders loaded the criminal money into banks and business spoil the social environment. Illicit money move in the economy and that create bad impact on the economy. Social environments very affected by money laundering. 4.2.2. MACRO ECONOMIC IMPACT OF MONEY LAUNDERING The large flow of illicit money creates the distortions in macroeconomics factors and giving rising trend in unemployment and stops the economic activities and become cause of money laundering haven. Large flow of illicit money place in banking industry and thereafter they use illicit money in the economy. The banking standard also affected by money laundering. The impact of money laundering as a macroeconomic summarized as under: Dispute normal business activities and public policy decision making Create distorts in the allocation of financial and banking resources Discourages the inflow of foreign investment Damages the country image and its people Abet corruption in the country Create bad impact on the country currency Page | 32
4.3.LAW RELATING TO MONEY LAUNDERING Following are the laws associated with money laundering that helps to control the money laundering: Money laundering Act 1986 (USA) Money laundering control Act 1986 (USA) Financial transactions reports Act 1988 (AUS) Criminal of terrorism Act (UK) Money laundering Regulations 1993 (UK) Drug trafficking Act 1994 (UK) Money laundering suppression (USA) Criminal Justice Act 1995 (SCOT) Proceed of Crime Act 1995 (SCOT) Money laundering and financial crimes strategy Act 1998 (USA) Control of Narcotics substances Ordinance 1995 (PAK)
Mechanism of preventing Banks from Money Laundering
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4.4. ANALYSIS OF QUESTIONNAIRE
When researcher asked this question, does the money laundering exist in Pakistan, then 97% respondent said yes it exist and it increasing day by day, we need to improve our systems and need to implement AML/CFT measures in all over Pakistan. Money launders usually use banking channels to launder money over here.
In the above question, respondent said in Pakistan, money laundering usually done by hundi, smurfing, and money changers. 36% respondent said in Pakistan, money laundering done by using Hundi and 31% respondent said by Banking channels and 16% respondent said by money changer, and 17% respondent said they are using Smurfing. 97% 3% Money Laundering Exist in Pakistan Yes No Hundi 36% Smurfing 17% Banking products 31% Money Changer 16% If yes, which Source is used fr money laundering Page | 34
When researcher asked the question what level of money laundering exist in Pakistan, 36% respondent said 50% level of money laundering exist and 30% respondent said 75% exist and 19% respondent said 100% level of money laundering exist in Pakistan.
When the most important question asked with the respondent what is the level of cash transactions, 100% respondent said there is no limits of cash transaction in the banking sector, and this is very serious issues and no one giving so much interest if the financial institution give attention in this area then we can stop money laundering.
0% - 25% 15% 25% - 50% 36% 50%- 75% 30% 75% - 100% 19% Level of Money Laundering Exist in Pakistan 0% 0% 100% Banks allow Cash Transactions deposits at a time. 1M - 10 M 10M - 20M No Limits Page | 35
When researcher asked this question, does AML and KYC goes hand to hand, the 57% respondent said yes, there is directly link between AML and KYC, if you know your customer then you can easily categorize them according to their risk, KYC is vey important part of the customer profiling. 31% respondent said they dont know and 1% respondent said no, both are separately goes, money launder are very cleaver and they are hiding them self and no one can judge easily.
Does a bank use KYC as a on going process? 63% respondent said yes it is on going process and banks revised customer KYC as per customer profile, and 37% respondent said they use KYC only at the time of account opening. Yes 57% No 12% Dont Know 31% Does Anti Money Laundering and KYC go hand in hand Ongoing process 63% At the time of account opening 37% Do Banks use KYC as Page | 36
Staff training is very important part of AML/CFT unit. If the analyst not well educated to related filed then how can he analyze complex situations, 36% respondent said they get trained only annual basis, and 42% respondent said they get training on every six months and only 22% compliance officers said they get training on quarterly basis. As per SBP AML/CFT regulations point no 6, every banks must trained their compliance officers at least once a year. Its is mandatory requirement for every banks.
The basic objective of this research is to identify and discuss the methods of money laundering used in Pakistan. Money laundering by using banking channels is not a new thing in Pakistan, after 9/11, the consequences of money laundering have seen internationally, especially with perspective of Pakistan, being a Muslim country. In all over the world, the importance of money laundering have seen in last decade, therefore all banks from all over the work must have develop a confidential unit name is compliance, who continuously looking and working on the customer suspicious activities through banking channels. Pakistan also in the category of high risk jurisdiction, due to fail to implement FTAF recommendations and tighten the AML/CFT policies through parliament. Pakistan needs to enact AML/CFT act through parliament. Page | 38
There are diverse ways that are in practice for money laundering in commercial banks similar to placement, layering, and integration. The money laundering on one hand creates the social problem like concentration of wealth in few hands and on the other hand, from commercial banks point of view it results in the unbalanced increase in deposit of the banks. The phenomenon of money laundering was not so much famous before the 9/11. The incidence of 9/11 opened the eyes of financial institutions and the regulatory bodies specially in the USA because before 9/11 there were many shell banks (fugue banks) which used to transact with huge funds without any source of origin of these funds, which resulted in the disaster like 9/11.Money laundering exists in Pakistan, and money launders normally using banking channels and hundi, hawala system to launder money from one place to other place, detail analysis have done in this research. To prevent the banks from money laundering, USA and other countries have develop some laws and ACTs to prevent banks from money laundering. USA is very active member in this field. Financial Action Task force is doing excellent work in to prevent financial institution from money laundering. In this study, researcher define the process of money laundering, and how it works and how Pakistani banking channels is being used for money laundering, researcher also describe the facts and figures of money laundering and its impact on country, as a social and as a political. Researcher conducted interviews, fills up questionnaires from different bankers, reviewed prior history and then researched to conclude this research with recommendations. 5.2. RECOMMENDATION On the basis of findings, analysis and review interviews and literature reviews, researchers recommended following few things that would be beneficial to prevent the banking sector from money laundering. Banks should attempt sensible efforts to focus the customer identification, and must verify and do the effective measures for checking the bonafides of new customer. Banks/DFIs must be participation with law implementation orgs. With any obligations forced by principles identifying with client privately, banks should collaborate completely with national law implementation orgs including, where there are sensible reason for suspecting cash washing, taking suitable measures which are steady with the law. Banks/DFIs must need to enhance due diligence to manage suspicious and unusual or un- economic transactions. They must need to investigate the suspicious transactions with advance level of monitoring system. All banks/DFIs must follow SBP regulation to prevent Banks from money laundering. Page | 39
All banks must need to develop or establish their own AML/ KYC policy to prevent bank from money laundering. They must need to establish proper handling suspicious transactions. They must file suspicious transactions report to FMU. They must develop Compliance department to strengthen the banking system. Pakistan must need to develop the national anti money laundering database and keeping safely information submitted by financial institutions. Pakistan must need to implement World wide recommendations ad must establish their policy on the basis of FATA 40 Recommendations By implementation of above mentioned recommendations, the relevant authorities should further reinforce the battle against the cash launderer and demonstrate to them that there is no spot to cover up. Finally, Commercial banks are urged to create programs against money laundering that negligibly would see the advancement of strategies and methods and the contribution of administration all the while. On going representative, preparing projects and review checks of the framework are likewise proposed.
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REFERENCES
1. Andreas, Peter, and Ethan, 2006 Origins and transformation of international crime control, Oxford university press 2. Arjauo, Ricardo Azevedo and Moreira, Tito Belchior, 2005 Inter-Temporal Model of Dirty Money, Journal of money laundering control 3. Bell. R.E, 2001 Discreation and Decision Making in Money laundering Prosecutions:. Journal of Money Laundering Control, Vol 5 No 1. 4. Khan Nawz Gul 2002, Anti Money Laundering measures, The Institute of Bankers Pakistan. 5. Wolfsburg AML Principles 6. Norgren C. 2004. The control of risks associated with crime, terror and subversion, Journal of money laundering control, 7(3). Page | 41
7. Warren, M.E. 2006, Political Corruption as duplicitous Exclusion. PS Political science and Politiccs, 37 (4). 8. Asian development banks 2003, Enhancing the sian development Banks role in Combating Money Laundering and the financing of terrorism. 9. SB regulations AML/CFT 10. Risk based approach (RBA) 11. FATF Recommendations
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APPENDI X A: QUESTI ONNAI RE RESEARCH THESIS Prevalence of money laundering & its compliance in commercial Banks of Lahore. Name of the Bank__________ 1. Does money laundering exist in Pakistan? o Yes o No o Do not know 2. If yes, which source is used for money laundering in Pakistan? o Shall Banks o Hundi o Commercial Banks o Money Changers o Smuarfing o Hundi and Money Changers o Any other 3. To what extent money laundering exist in Pakistan? o 0% - 25% o 26%- 50% o 51% - 75% o 75% -100% o To certain extent________ Prevalence of money laundering in Commercial Bank of Pakistan 94 4. To what extent bank allow the money to be deposit by the customer at one time? o Rs.100 Rs.1 lac o Rs.2 lac 10 lac o Rs.1million Rs.10million o Rs.10million Rs.20 million o To certain extent_________ 5. To what extent bank allow the depositor, to deposit money over the counter transaction? o Rs.100 Rs.1 lac o Rs.2 lac 10 lac o Rs.1million Rs.10million o Rs.10million Rs.20 million o To certain extent_________ 6. What is the maximum interest rate on deposit, when deposit is greater then 1 million? o 0% - 10% o 11% - 20% o 21% - 30% o 31% - 40% o To certain extent_________ 7. Does bank allow the depositor to transfer money from one bank to another bank or other country banks? o Yes o No Prevalence of money laundering in Commercial Bank of Pakistan 95 8. If yes, then what effect on the performance of the bank? Page | 43
o Increase the performance. o Decrease the performance. o Decrease the deposit. o No effect. 9. To what extent (minimum to maximum) permission is granted to the customer by the bank to transfer money from on bank to another bank or from one country to another country? o Rs.1000 - Rs. 1 Lac o Rs. 1Lac - Rs. 1 million o Rs. 1 million - Rs. 10 million o Rs.10 million Rs. 20 million o To certain extent_________ 10. Does bank allow the non-account holder to transfer money to the other bank or to another branch of the same bank, or from other country bank? o Yes o No 11. To what extent the bank allow the non-account holder to transfer the money at one time? o Rs 1000 Rs. 10000 o Rs. 10000 Rs. 1 Lac o Rs. 1 Lac Rs.5 Lac o Rs. 5 Lac Rs 10 Lac o To certain extent________ 12. To what extent the bank allow the non account holder to transfer amount to his Prevalence of money laundering in Commercial Bank of Pakistan 96 own account? o Rs 1000- Rs 10000 o Rs 10000 Rs. 1 Lac o Rs. 1 Lac Rs. 5 Lac o To certain extent________ 13. To what extent (minimum to maximum) transfer fee is charged by the bank when the amount is transferred from one destination to another destination? o 0% -10% o 11% -20% o 21% -30% o 31% - 40% o To certain extent______ 14. Does anti-money laundering and KYC go hand in hand? o Yes o No o Does not know 15. Which identifying bank systems will you introduce as a result of KYC? o Customer information o Customer nature of business o Customer source of income o All of the above 16. Do Banks use KYC as? o Ongoing process o It done when bank need information o When SBP advice the Banks. o To be conducted at the time when bank entering into a formal Page | 44
relationship with Customer. Prevalence of money laundering in Commercial Bank of Pakistan 97 o All of above 17. How can bank recognize the customer which has never been seen before? o Introduction o ID card o Reference o All of above 18. Which elements are used to manage the money laundering risk in the bank? o Senior management oversight o Well defined organizational structure and staffing o Independent monitoring and assessment o Ongoing interaction with audit and risk review and other control functions. o All of the above 19. Which Customers must be identified by the bank? o Worthy customers o High risk customers o Non resident customers o Resident customers o All of the above 20. How money laundering effect the bank? o Unbalanced growth in deposit. o Provide liquidity position. o Performance increase. o Risk Increase. o Deposit increase. Prevalence of money laundering in Commercial Bank of Pakistan 98 o All of above. 21. If money laundering effect on the bank then which type of risk create money laundering for the bank. o Reputation risk o Credit risk o Operational risk o Compliance risk o All of above 22. Does the bank take steps to understand the normal and expected transactions of its customers based on its risk assessment of its customers? o Yes o No 23. Which prudential regulation is implemented by the bank to identify the customer? o KYC o Anti money Laundering o both 24. How frequently are your staffs trained on KYC processes? o Quarterly o Semiannually o Annually o Both 25. Do you have any suggestion about the anti money laundering? Page | 45
Prevalence of money laundering in Commercial Bank of Pakistan 99 APPENDI X B: Glossary Money laundering The process by which the proceeds of crime are converted into assets which appear to have a legitimate origin. Anti money laundering Anti money laundering, the process by which efforts. are made to prevent and, detect money laundering Compliance The process complying with laws, regulations and guidance. Base l The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice for banking supervisory authorities to implement in ways best suited to their own national systems. Basel II The Basel committee of banking supervisions. Basel II helped to strengthen the soundness and stability of the international banking system as a result of the higher capital rations it required. Know Your Customer (KYC) The requirement that financial institutions understand who their customers are, which includes obtaining documentation to verify identity, address source of Income. Non-Bank institution Non-Banking Financial Institutions By law or regulation, the jurisdiction requires non bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks. Data Protection The regulation of the use of personal data held by businesses, covering the way such Information is handled and the rights of individuals to gain access to information held about them. Dormant Accounts These are bank accounts where there have been no transactions (deposits or withdrawals for a period of time (usually at least a year) and where the account holder has made no contact with the bank during the period or following attempts made by the bank to make contact with the account holder. Terrorist Financing The financing of terrorist acts, terrorists, and terrorist organizations Financial Action Task Force (FATF) Financial action task force is an inter-governmental body; its Secretariat is based at the Organization for Economic Co-operation and Development (OECD). FATFs purpose is to develop and promote policies to combat money laundering and terrorist financing. It currently has 29 member countries. Prevalence of money laundering in Commercial Bank of Pakistan 100 Transaction Monitoring: Monitoring customer transactions for indications of suspicious activity report to be filed.
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APPENDIX-A
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QUESTIONNAIRE RESEARCH THESIS
Name of the Bank__________ 1. Does money laundering exist in Pakistan? o Yes o No o Do not know
2. If yes, which source is used for money laundering in Pakistan? o Shall Banks o Hundi o Commercial Banks o Money Changers o Smuarfing o Hundi and Money Changers o Any other
3. To what extent money laundering exist in Pakistan? o 0% - 25% o 26%- 50% o 51% - 75% o 75% -100% o To certain extent________
4. To what extent bank allow the money to be deposit by the customer at one time? o Rs.100 Rs.1 lac o Rs.2 lac 10 lac o Rs.1million Rs.10million o Rs.10million Rs.20 million o To certain extent_________
5. To what extent bank allow the depositor, to deposit money over the counter transaction? o Rs.100 Rs.1 lac o Rs.2 lac 10 lac o Rs.1million Rs.10million o Rs.10million Rs.20 million o To certain extent_________
6. Does bank allow the depositor to transfer money from one bank to another bank or other country banks? o Yes o No
7. If yes, then what effect on the performance of the bank? o Increase the performance. o Decrease the performance. o Decrease the deposit. o No effect.
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8. To what extent (minimum to maximum) permission is granted to the customer by the bank to transfer money from on bank to another bank or from one country to another country? o Rs.1000 - Rs. 1 Lac o Rs. 1Lac - Rs. 1 million o Rs. 1 million - Rs. 10 million o Rs.10 million Rs. 20 million o To certain extent_________
9. Does bank allow the non-account holder to transfer money to the other bank or to another branch of the same bank, or from other country bank? o Yes o No
10. To what extent the bank allow the non-account holder to transfer the money at one time? o Rs 1000 Rs. 10000 o Rs. 10000 Rs. 1 Lac o Rs. 1 Lac Rs.5 Lac o Rs. 5 Lac Rs 10 Lac o To certain extent________
11. To what extent the bank allow the non account holder to transfer amount to his own account? o Rs 1000- Rs 10000 o Rs 10000 Rs. 1 Lac o Rs. 1 Lac Rs. 5 Lac o To certain extent________
12. To what extent (minimum to maximum) transfer fee is charged by the bank when the amount is transferred from one destination to another destination? o 0% -10% o 11% -20% o 21% -30% o 31% - 40% o To certain extent______
13. Does anti-money laundering and KYC go hand in hand? o Yes o No o Does not know
14. Which identifying bank systems will you introduce as a result of KYC? o Customer information o Customer nature of business o Customer source of income o All of the above
15. Do Banks use KYC as? o Ongoing process o It done when bank need information o When SBP advice the Banks. o To be conducted at the time when bank entering into a formal relationship with Customer. o All of above Page | 49
16. How can bank recognize the customer which has never been seen before? o Introduction o ID card o Reference o All of above
17. Which elements are used to manage the money laundering risk in the bank? o Senior management oversight o Well defined organizational structure and staffing o Independent monitoring and assessment o Ongoing interaction with audit and risk review and other control functions. o All of the above
18. Which Customers must be identified by the bank? o Worthy customers o High risk customers o Non resident customers o Resident customers o All of the above
19. If money laundering effect on the bank then which type of risk create money laundering for the bank. o Reputation risk o Credit risk o Operational risk o Compliance risk o All of above
20. Which prudential regulation is implemented by the bank to identify the customer? o KYC o Anti money Laundering o both
21. How frequently are your staffs trained on KYC processes? o Quarterly o Semiannually o Annually o Both
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APPENDIX-B
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Glossary Money laundering The process by which the proceeds of crime are converted into assets which appear to have a legitimate origin. Anti money laundering Anti money laundering, the process by which efforts. are made to prevent and, detect money laundering Compliance The process complying with laws, regulations and guidance. Base l The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice for banking supervisory authorities to implement in ways best suited to their own national systems. Basel II The Basel committee of banking supervisions. Basel II helped to strengthen the soundness and stability of the international banking system as a result of the higher capital rations it required. Know Your Customer (KYC) The requirement that financial institutions understand who their customers are, which includes obtaining documentation to verify identity, address source of Income. Non-Bank institution Non-Banking Financial Institutions By law or regulation, the jurisdiction requires non bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks. Data Protection The regulation of the use of personal data held by businesses, covering the way such Information is handled and the rights of individuals to gain access to information held about them. Dormant Accounts These are bank accounts where there have been no transactions (deposits or withdrawals for a period of time (usually at least a year) and where the account holder has made no contact with the bank during the period or following attempts made by the bank to make contact with the account holder. Terrorist Financing The financing of terrorist acts, terrorists, and terrorist organizations Financial Action Task Force (FATF) Financial action task force is an inter-governmental body; its Secretariat is based at the Organization for Economic Co-operation and Development (OECD). FATFs purpose is to develop and promote policies to combat money laundering and terrorist financing. It currently has 29 member countries. Prevalence of money laundering in Commercial Bank of Pakistan 100 Transaction Monitoring: Monitoring customer transactions for indications of suspicious activity report to be filed.