Anti Money Laundering-An Introduction
The phrase “money laundering” was first coined at the
beginning of the 20th Century. The criminalization of the
actual or attempted laundering of proceeds of crime is
also quite recent. However, the practice of disguising
income derived from illicit activities can be traced back
to the 13th Century B.C, when the oceans and seas
were originally used as international trade routes. Rife
with pirates, the shipments were often purged and
plundered for valuable commodities and assets. Pirates
were arguably pioneers in the practice of laundering
such articles as they and even the empires they served
sought to profit from their treacheries in a way that did
not attract any ramification.
Because of the sophistication that the global banking
industry has and because of the advent of information
technology, money laundering has been much easier in
twenty first century that that in pirates time. Crime has
become more global. It is no longer sufficient for
enforcement authorities to merely be aware of what is
occurring within their own jurisdiction. Hence criminals
no longer have the desire to remain or limit their
activities to one country. As a result, international
criminal organizations have become skilled and
experienced at moving property from one country to
another, taking advantage of the notoriously lax
legislation existent in some countries that provides safe
havens for foreigners seeking to conceal their wealth.
Many of these countries provide “dead ends” for
investigators who attempt to follow the trail left by the
proceeds.
Though money laundering came to the world centuries
back, however no industry level initiatives were taken
until a decade ago even though banks world over were
having different practices at their entity level. Finally Anti
Money laundering guidelines came to effect post the
September 11 attacks. Now the Regulators of more than
100 countries has set up Financial intelligence Units are
issuing guidelines to their stakeholders so as to combat
money laundering and terrorist financing activities.
Money Laundering-Defined
Money laundering is basically giving legitimate cover to
the funds acquired through illegal activities. It is a
process by which Criminals attempt to hide the original
source of the fund acquired through crime. If the attempt
becomes successful, it provides and apparent legitimate
cover for the criminals source of income.
Stages in Money Laundering
1. Placement (Hide) : The launderer introduces
the illegal profits into the financial system. This
may be done by breaking large amounts of cash
into less conspicuous, smaller sums that are
then deposited directly into a bank account. Or
by purchase of a series of monetary instruments
(the cashier's cheques and money orders) that
are then collected and deposited into accounts
at other locations.
2. Layering (Move) : The launderer engages in a
series of conversations or movements of funds
to distance them from their source. The funds
may be channeled through the purchase and
sale of investment products or the launderer
may simply wire the funds through series of
accounts at a number of different banks. In
some instances, the launderer may disguise the
transfers as payments for goods or services,
thus giving them a legitimate appearance.
Integration (Invest) : The illicit funds re-enter the
legitimate economy. The launderer may choose to invest
the funds into real estimate, luxury assets or business
ventures.
Money Laundering-Global Scenario
In today's global economy organized crime groups
generate huge sums of money through illegal activities
viz. drug trafficking, arms smuggling and financial crime.
The money generated from those activities are of very
little use for them as the same raises suspicions of the
law enforcement. The crime syndicates then tries to give
legitimate cover to their illegal money by disguising the
original source without exposing themselves. It has been
a major challenge for the financial services sector
across the world to combat money laundering and
terrorist financing.
The more developments in the global financial system of
the world, more difficult it has been to combat the anti-
money laundering activities. Because of the advent of
sophisticated technologies in the banking space, though
it has been able to provide services par excellence to
the customers at the same time it has made easy way to
the criminals to launder their money in. Going by the
estimation made by the experts, money laundering is
reporting to be more than US $ 1 Trillion every year by
the Criminals. And it is estimated to grow at the rate of
2.5%-3% annually.
Because of the fact that such huge amount of sums is
being laundered, it has been all the more important for
the entire financial institutions world over to develop
policies and implement the same to combat the anti
money laundering activities. And hence several bodies
have been formed to combat money laundering and
finance of terrorism. The wolfs berg group is an
association of twelve global banks, which aims to
develop financial services industry standards and
related products, for Know Your Customer, Anti Money
Laundering and Counter Terrorist Financing policies.
The Egmont Group is an association of several FIU's
across the world whose aim is information exchange
about money laundering activities. In the world at large,
more than 100 FIU's are working as on date and several
countries are in the process of establishing FIU's to
combat money laundering.
Money Laundering-Nepalese Perspective
Nepalese Financial Industry is way far from the
sophistication that the global banks have. However
because of the banking system in use and mushrooming
of banks which has been seen till the recent times, this
has been a safe haven for the criminals to penetrate
their illicit money in to the Nepalese banking channel.
Despite the fact that Nepalese banks have not even
been graduated from the pull based banking model, in
the scenario that banks are begging and competing for
deposits with the interest rate as high as 13-14 percent,
it has been a golden opportunity for criminals to launder
their money. The Thirst of the deposits is so deep that
bankers are ready to override any parameters set by the
regulators. In that context, thinking over Control A robust AML programme should incorporate the
mechanism by the banks for combating money following:
laundering and terrorist financing and working towards
the same seems to be far from distant.
So it gives all the more reasons to Nepalese Banking
Industry to think and develop strategies for combating
money laundering and terrorist financing to the country
at large. And at the same time, it has already rang siren
to the regulators to develop strategies to monitor money
laundering and terrorist financing. However as the
Nepalese economy is in transition phase, similar is the
situation of the Nepalese banking space. We have a
scenario that Nepalese banks are still way far from the
technologies, management models and information
system used by the gobal banks at one end. At the
other, it is bitter truth that the Top Management of the
bank itself is not AML literate in majority of the Banks.
Because of the same, it is really challenging at the
regulator's end to implement AML initiatives.
Though Anti Money Laundering act 2008 has been
enacted in Nepal, Hardly few banks are seen who are
having Transaction Monitoring Units(TMUs) to combat
the AML at the bank level and raising Suspicious
Transaction Reports (STRs) at the regulators level. Here
the challenge lies not only to compel banks to raise
STRs but also to educate the senior management with
respect to the implementation of AML Framework at the
bank level.
Mechanism to Prevent Money Laundering
It is official now that in Nepal we also do have Anti
Money Laundering Act formally known as Asset (Money)
Laundering Prevention Act 2008) and the Regulator viz.
Nepal Ratra Bank has already developed Financial
Intelligence Unit as a move towards the Prevention from
Money Laundering and Terrorist Financing Activities.
And also NRB is putting efforts on educating the
reporting entities to develop strategies to combat money
laundering activities at the supervisory level. Now the
changing banking scenario and the changing regulatory
level expectations warrant the reporting entities to
develop a mechanism to combat money laundering at
the reporting entity level also. And for the reporting
entities to comply with the requirements of the Anti
Money Laundering Act and develop strategies to combat
money laundering, they require to have in place a robust
AML programme that would not only help in detecting
instances of money laundering but also allow them to
report cash and suspicious transactions to FIU-Nepal.
 A designated Principle Compliance Officer:
 A system of Internal Policies, Procedures and
Controls
 A continuous employee training programme and
  An independent testing programme (i.e. internal
control/audit)
1) Principal Compliance Officer (Oversight
Activities): The first and foremost move towards the
development of an AML Programme is the
appointment of an AML Compliance Officer
(AMLCO) that is approved by the Board of Directors
and possesses requisite knowledge and
competency to effectively oversee the AML
programme.
Some of the roles and responsibilities of the AMLCO
would be
 To coordinate and monitor day to day AML
compliance
 Liaison with regulatory/enforcement
authorities
 Submit cash and Suspicious Transaction
Reports to the FIU
 To make sure that the AML policies and
procedures have been well documented,
approved by the Board and communicated
to all personnel
 Review adequacy of AML controls in the
existing and new products offered by the
organization
 Report to the Audit Committee on the
adequacy of existing control and
improvements needed
 Maintain oversight over AML related duties
and have been delegated within the
organization.
2) Internal policies, Procedures and Controls: The
organization needs to have in place a board
approved 'enterprise wide' AML policy and operating
policies and procedures for each area or function of
the organization. The enterprise-wide policy is like a
master document as it sets the tone of the senior
management towards AML. It communicates to the
personnel throughout the organization the AML
standards and procedures that the organization as a
whole would adopt. It also indicates the AML
Operating structure, regulatory reporting and
recording requirements and internal audit and
monitoring that would be carried out to ensure
adherence to AM requirements.
The Enterprise wide AML Policy should generally
incorporate
 The objectives the organization aims at
achieving
 The AML Organization structure
 Regulators requirements towards AML
 Role of Employees
 Reporting and Record Keeping
requirements
 Escalation procedures in place
 Monitoring and Audit that would carried
internally
After developing an AML policy at the enterprise
level, the organization needs to develop
"Operating Policies and Procedures" for each or
its functions. The operating policies and
procedures mention the documents that need to
be collected from customers, the due diligence
that needs to be performed, transaction
monitoring that needs to be conducted, records
that need to be maintained and the manner of
reporting to the AMLCO. Following are the
various components of the Operating Policies
and Procedures and the expectations of the
regulator.
a) Customer Identification Procedure:
The organization needs to put in place a
process for capturing information about
the customer. Popularly known as Know
Your Customer (KYC), this is the first
step in identifying potential money
laundering instances. For the same
Nepal Rastra Bank has already issued
guidelines.
KYC procedures allow the organization
to gather information about the
background of the customer. These
KYC procedures need to be adopted for
both existing and new customers.
The components of a robust Customer
Identification Procedures include:
 A list of documents (identity and
address proof) that needs to be
collected by the personnel from
different classes of customers
(e.g. individual, trust,
partnership firm, body
corporate)
 Collection from customers,
name and address proof (e.g.
Citizenship, PAN Card etc)
 Confirming the authenticity of
the documents provided
  Screening customer's name
against watch lists (e.g.
customer having the criminal
background, terrorist affiliations)
b) Customer Due Diligence: Once the
necessary KYC documents
collected and verified, the organization
needs to collect information about the
client. The process involves gathering
information about the customer's
nationality occupation, nature
business, source of wealth, affiliations
expected transaction volumes and types
of products the customer is likely to
engage in. Profile Checks, Residence
Verification, Business Verifications can
be conducted as a tool of CDD.
Based on the information gathered, the
organization should perform a risk
profiling of the customers, Customers
could be classified as low, medium or
high risk. Enhanced due diligence
should be performed for customers
classified as high risk, this would help
the organization in gathering maximum
information about the customer and take
a well informed decision whether it
wants to accept the customer or not.
Besides the above, organizations
should consider performing enhanced
due diligence for foreign correspondent
banking accounts, customers that are
from high risk geographic or purchase
certain products which are prone to
money laundering or are politically
exposed persons (PEPs).
It would be essential that the risk
profiling needs to be well documented
so that the parameters can be well
demonstrated to the regulator as and
when required.
c) Transaction Monitoring: The
regulations issued by the regulators
require organizations to perform
periodic monitoring of customer related
transactions. Accordingly, organizations
should undertake a risk-based
monitoring of transactions and aim to
detect unusual or suspicious activity in
customer's account.
The organization must clearly set out
procedures, which would serve as
guides to each function in the
organization. The procedures should
clearly spell out the transactions that
are would be monitored, the tools
(automated/manual) that would be used
to monitor the transactions, periodicity
of monitoring transactions, the
escalations procedures that need to be
of adopted when "alerts" are generated,
the time frame within which the "alerts"
need to be resolved and the procedure
that needs to be adopted for filing
Suspicious Transactions Reports (STR)
d) Transaction Reporting: The AML ACT
requires the organization to file with FIU
two kind of reports:
a. Cash Transaction Report (CTR)
b. Suspicious Transaction Report
(STR)
The organization needs to file these
reports in the prescribed format to
FIU in a timely manner as specified
in the Asset (Money) Laundering
Prevention Act 2008).
e) Record Retention: The guidelines
issued by the regulators require the
banks, financial institutions and
intermediaries to document policies for
retention of customer identification and
due diligence records, records of
transaction conducted by the customer
and documents supporting CTR and
STRs filed by the entity.
3) Employee Training Program: A robust and
updated training programme is the corner stone for
countering money laundering and terrorist financing.
Well-trained employees are a strong defence
against money laundering and terrorist financing.
Hence, it is important for organizations to develop
and implement an enterprise wide training
programme. It is advisable that training programs
are structured for:
 New Employees
 Existing Employees and
 High Risk Employees (employees that deal
with products or services which have a
substantial "money laundering risk")
 Further, the training program should be frequently
updated t incorporate changes in the money
laundering and terrorist financing laws and
scenarios.
4) Independent Review of the AML Programme:
Finally, the AML programme should be subjected to
an independent review. The guidelines issued by the
regulators require the internal audit or the
compliance team to evaluate the AML Programme.
Further, external reviewers may be appointed to
judge the adequacy and the robustness of the AML
programme. Lapses in the programme should be
communicated to the audit committee on a quarterly
basis.

Before Signing Off:

There is no denying that with the sophistication of the

globalised banking industry, money laundering activities
has also extended at the global scale. However the
innovations in information technology and evolution of
different logical computer languages, monitoring money
laundering and terrorist financing has made easier which
otherwise would have been a uphill task.

In our Nepalese context, though the banking operations

are moving towards the global sophistication, but we
cannot really see any upsurge in the control parameters
designed to monitor the subject like money laundering at
the enterprise wide level. In this context, it could be a
valid argument, If supervisory level controls are pin
pointed. But in the country like ours, where transition
phase is unending, Entity level preparedness plays more
prominent role than that of supervisory, as the Entities
need to sustain /grow despite the supervisory level
controls and guidelines. Hence it calls for the banks in
Nepal to develop Enterprise wide Anti Money
Laundering Controls and Procedures and to implement
them in the spirit for which it was designed irrespective
of whether supervisory level controls are working or not.

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