Detecting structured transactions under PMLA and IFSCA (AML, CFT, & KYC) Guidelines, 2022
One of the standard techniques criminals use to launder illegally obtained money is through structuring. In this context, the Prevention of Money Laundering Act, 2002 (PMLA) and IFSCA (AML, CFT, and KYC) Guidelines, 2022 require financial institutions and other regulated entities to implement necessary anti-money laundering (AML) measures to identify the structured transactions, report, and prevent the same.
The article here discusses the structuring of transactions from an AML perspective and the measures to be adopted for enhancing the AML program, focusing on the detection and deterrence of such transactions.
What is Structuring?
It is essential to understand the concept first before deploying the controls to curb it. Structuring refers to a process where the large sum of the amount is intentionally broken into smaller denominations to avoid the attention of the authorities or AML-related enquiries from the regulated entities.
The launderers use structuring during the placement as well as the layering stage of the money laundering process.
During the placement stage, the large amount of cash generated through criminal activities is split into small values for putting such cash into the financial system without raising suspicion (when millions of cash value is divided into 100s of smaller deposits). During the layering phase, the structuring of transactions is done to distance the owner and origin from the dirty money.
The objective of structuring transactions is to artificially manipulate the value and count of transactions that appear to be expected and within the threshold of AML checks to escape scrutiny. Structuring leads to the creation of a complex web of transactions, concealing the source of criminal proceeds and the identity of the launderer.
This calls for a comprehensive framework to monitor the transactions to spot such falsely structured transactions attempted to launder illicit money.
Why is it crucial to detect structured transactions?
When any structured transactions go undetected, the regulated entities are deemed to have aided the money laundering process, though inadvertently. This can lead to severe unwarranted effects such as:
Legal consequences:
The failure to detect and prevent the structuring of transactions would be treated as non-compliance with provisions of PMLA and the IFSCA (AML, CFT, and KYC) Guidelines. This can result in huge penalties and other legal actions by the regulatory authorities.
Reputational damage:
when the entity is known for being exploited by criminals to route illegal money, it portrays the image of weak AML controls of the company. This adversely damages the business’s reputation in the market, including loss of customer trust. Rebuilding the original brand takes a long time and is an expensive affair!
Financial and Operational risk:
Loss of reputation and customer confidence has a long-lasting impact, resulting in loss of new business opportunities. No rational investor is willing to associate with an entity that does not demonstrate a solid commitment to AML compliance and overall ethical business conduct.
Further, when the business has been misused by criminals for money laundering, it may also have led to the exploitation of the business resources, resulting in financial loss to the regulated entity.
Given the severity of the impact the structured transaction can have on business, regulated entities must understand the significance of its detection and implement a strong AML program that ensures no structuring of transactions goes unidentified.
What are the key AML measures for Detecting the Structuring of Transactions?
The following elements must be developed thoroughly and implemented in the whole spirit to identify and prevent the potential suspicious transactions suggested structuring:
Customer Due Diligence
The regulated entity needs to identify the customer and the beneficial owners with whom the business relationship is to be established. Verification of the identity of such persons is very crucial to determine if the person is genuine, has no mention on the Sanctions List or is not connected with one, has some adverse media or is associated with a Politically Exposed Person (PEP) that warrants application of additional measures.
Further, understanding the purpose of transactions and the nature of business relationships is also a significant measure to uncover any potential structuring activities.
Implementing Robust Ongoing Monitoring Mechanism
Only with continuous monitoring can the structuring of transactions be detected. The regulated entities must develop a comprehensive ongoing monitoring program to identify suspicious trends or inconsistencies with the customer’s profile. This program must include tools and technologies configured with monitoring rules to immediately flag the complex transactional patterns suggesting structuring, as the manual review may not possibly cover a holistic review of the transactions and is also subject to human oversight. The system uses sophisticated logic to draw anomalies and unusual patterns, such as the same amount of funds being frequently deposited from one account to another or the purchase of the same value of gold (below the reporting threshold) every week.
The regulated entity must explore investing in advanced technologies like machine learning and artificial intelligence that can run large volumes of transactional data in seconds, predict the trends and generate alerts for any suspicious series of transactions, indicating structuring. Further, with intelligent algorithms, the number of false positives can be minimized, saving on human efforts to examine the alerted transactions. Data analytics capabilities can also analyse customer behaviour and map it with the overall risk profile of the customer and the transactions being executed by the customer over the period of time to determine any dubious activities.
AML Awareness and Training
Having well-trained employees is as important as having the AML program. The regulated entities must invest resources in imparting adequate training to the team to create awareness on:
- internal AML policies and procedures implemented,
- the money laundering-related red flags,
- the software and tools deployed to manage the AML compliance,
- identification and reporting of suspicious transactions, including potential structuring activities,
- specific to the structuring of transactions – various structuring methods must be discussed,
- overall duties and responsibilities towards the AML framework.
The employees must be trained on thoroughly investigating the flagged transactions to trace the origin and true beneficiary of the funds to uncover any attempts to launder the funds through structuring.
The training program must include case studies and workshops to empower the employees to deal with real-life scenarios when any risk indicators are observed.
Periodic review of the AML program, including monitoring systems
The regulated entities must periodically review their AML policies, procedures, controls and systems to check the effectiveness and validity in identifying and preventing the structuring of transactions, along with other vulnerabilities.
This periodic review of the AML program shall ensure that the entity is aligned with regulatory developments and emerging risk trends. During this process, gaps or weaknesses in the AML framework, if any, can be detected and addressed to strengthen the efficacy of the AML efforts. Further, it can also assist in verifying that the transaction monitoring rules are working fine and no transaction structuring goes unobserved.
With a systematic approach and a robust AML program encompassing Customer Due Diligence, continuous transaction monitoring, AML training and AML health checks, the regulated entities can effectively detect and prevent the structuring of transactions.
AML India – Your trusted partner for AML Compliance
The regulated entities must have diligent and sound AML programs, including vigorous measures to curb the exploitation of the financial system for laundering dirty money using various sophisticated techniques, including the structuring of transactions. To help you build this impenetrable shield, partner today with AML India.
AML India is one of the leading AML consultancy firms, offering end-to-end AML support to regulated entities subject to compliance with PMLA and the IFSCA (AML, CFT, and KYC) Guidelines, 2022. With years of experience, business understanding and subject knowledge, we assist the regulated entities in assessing the business exposure to financial crime and build a thorough AML compliance framework to stay safe and adhere to the regulatory landscape. We also impart training to employees and staff to ensure that the AML program does not just stay on paper but is practically applied in the whole sense.
Together, let’s strengthen the AML efforts!
About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.
