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Keeping in view “Several critical irregularities in identifying & failure to report suspicious transaction in its branch”, one of the leading nationalized banks has been fined by the Financial Intelligence Unit-India (FIU-IND), an agency under the Union Finance Ministry responsible for enforcing anti-money laundering through a detail order. The penalty comes in the wake of finding Bank’s scrutiny insufficient on critical irregularities such as: 1)    Involving entities with a common registered address and identical beneficial owners. 2)    Further, having authorised capital only Rs 1 Lakh each these entities exhibited credit turnovers disproportionate to their declared business operations. 3)    Significant RTGS inflows from the accounts of the NBFC in question. 4)     Transferring of funds to other group entities of the NBFC. 5)    Filing of only one Suspicious Transaction Report (STR), despite having high volume of transaction and number of alerts. 6)     Closing of alerts with minimal justification Upon investigation, it is found by FIU-IND as follow: a)    Failure of bank to put in place system to detect and report suspicious transaction in violation of PMLA Act & Rules. b)    Failure to properly investigate and close alerts based on application of mind including consistent with knowledge of customers, its business, risk profiling and source of fund in respect of account in question. c)    Failure to review the due diligence measure of Bank including verifying again the identity of the customers and obtain information on the purposes and intended nature of the business relationship in respect of the account in question. d)   Failure to conduct customer due diligence of existing customers of bank on the basis of materiality & risk. e) Failure to evolve an internal mechanism to detect & report suspicious transaction. The FIU-IND directed Bank to implement following corrective measures: 1)    Comprehensive Review Mechanism: Bank shall have a comprehensive review of its due diligence procedure. It is recommended to have enhanced diligence be performed, particularly where newly opened accounts exhibit transaction volumes and velocities that are inconsistent with their declared business activities and turnover. 2)     Reassessment of internal mechanism: Bank shall reassess its internal mechanism & transaction monitoring approach, especially where a significant number of alerts are generated on a customer's accounts but are subsequently closed in a cursory manner. A copy of the order of the FIU-IND is attached herewith for information and learning of all.

CBI vs. Kapil Wadhawan Case: India’s Largest Bank Fraud Introduction In a recent legal development, the Central Bureau of Investigation (CBI) filed a chargesheet against Dewan Housing Finance Ltd (DHFL) former CMD Kapil Wadhawan, along with 17 other individuals and 57 shell companies. The case revolves around a staggering Rs. 34,000-crore loan fraud involving a consortium of 17 banks. Background Allegations: Kapil Wadhawan, the then Chairman & MD of DHFL, along with other accused persons, induced the consortium of banks to sanction massive loans aggregating to approximately Rs. 42,000 Crores. Misappropriation: Subsequently, they allegedly siphoned off and misappropriated a significant portion of these funds by falsifying DHFL’s books of account and deliberately defaulting on repayment to the consortium banks. Key Points Default Bail: The respondents no. 1 & 2 were granted default bail under Section 167 (2) Cr.P.C. Quashing Order: The CBI seeks the quashing and/or cancellation of the order granting default bail. Implications The case sheds light on financial irregularities and the need for stringent measures to prevent fraudulent activities in the banking sector. Legal proceedings play a crucial role in upholding justice and maintaining public trust.

July 25, 2024 Federal Reserve, OCC and FDIC remind banks of potential risks associated with third-party deposit arrangements and request additional information on bank-fintech arrangements (quoted from the Press release) The agencies have observed that risks may be elevated in certain circumstances, in e.g.s below Operational and Compliance • Significant operations performed by a third party to manage a bank’s deposits can eliminate or reduce crucial existing controls over and management of the deposit function. Without adequate initial due diligence and ongoing monitoring, heightened risks to the integrity of deposit function • Fragmented operations of deposit products and services among multiple third parties may make it difficult for the bank to effectively assess risks and assess whether all third parties can and do perform assigned functions as intended • Lack of access to records to the deposit and transaction system of record, data maintained by the third party can impair the bank’s ability to determine its deposit obligations. Uncertainty leading to delays in end-users’ access to their deposits expose the bank to additional legal and compliance risks • Third parties performing compliance functions may increase the risk of not meeting regulatory requirements. Specifically compliance functions such as monitoring and reporting suspicious activity, customer identification programs, customer due diligence, sanctions compliance etc. The bank remains responsible for failure to comply with applicable requirements • Insufficient risk management to meet consumer protection obligations may impact a compliance with consumer protection laws and regulations, like Regulation E (implementing the Electronic Fund Transfer Act) Regulation DD ( Truth in Savings Act) etc. Presenting insufficient or misleading information to end users lead to violations of laws and regulations. Lack of complaint administration and resolution processes limits addressing issues impacting end users resulting in potential consumer harm • Lack of contracts: Multiple levels of third-party and subcontractor relationships, without direct contracts with entities that perform crucial functions may reduce ability to identify, assess, monitor, and control various risks • Lack of experience with new technologies, methods of facilitating deposit products and services without management and staff prior experience result in inadequate risk and compliance management to oversee arrangements and associated risks • Weak audit coverage of audit scope and coverage, follow-up processes, and remediation may result in inadequate oversight of these arrangements and reduce the effectiveness of the audit function https://lnkd.in/gAZBVzGN https://lnkd.in/g6zRc4XS

#FraudAlert Mazars has uncovered significant fraud in corporate banking in a series of customer assessments. The consulting firm identified several fraudulent activities, highlighting serious issues within corporate banking. ➡️ In one case, a company's former managing director, in collaboration with a bank's sales representative, was diverting customer payments and VAT reimbursements into unofficial bank accounts for personal use. When the fraud was discovered, the bank involved refused to provide crucial account details, despite legal authorizations. The delay in updating signatory lists further complicated management’s ability to secure control over both official and unofficial accounts. ➡️ In another instance, during a cross-inventory of bank accounts, Mazars found hidden accounts managed exclusively by branch CEOs, unknown to the banks' corporate treasury departments. Some of these CEOs were using these accounts to funnel income for personal use, such as investing in real estate like parking spaces. Even after some of these CEOs had resigned, the accounts remained active with outdated signatories. It's crucial to demand better oversight and more robust systems to prevent such fraudulent activities. Real-time, transparent updates to bank mandates and authorized signatories could significantly improve security in corporate banking. Learn more below 👇 #CorporateBanking #FraudPrevention #RiskManagement #CorporateTreasury

SEC & FinCEN Propose Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers ON MAY 13, 2024, the US SEC & the FinCEN jointly proposed a new rule that would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). The proposal is designed to prevent illicit finance activity involving the customers of investment advisers by strengthening the anti-money laundering and countering the financing of terrorism (AML/CFT) framework for the investment adviser sector. Under this proposal, RIAs and ERAs would be required to implement reasonable procedures to identify and verify the identity of their customers, among other requirements, in order to form a reasonable belief that RIAs and ERAs know the true identity of their customers. The proposed rule would make it more difficult for criminal, corrupt, or illicit actors to establish customer relationships — including by using false identities — with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activity. This proposed rulemaking complements a separate FinCEN proposal in February 2024 to designate RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA) and subject them to AML/CFT program requirements and suspicious activity report (SAR) filing obligations, among other requirements. That proposal cites a Treasury risk assessment that identified that the investment adviser industry has served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, tax evasion, and other criminal activities. Together, these proposals aim to prevent illicit finance activity in the investment adviser sector and further safeguard the U.S. financial system. “The proposed rule is designed to make it more difficult to use false identities to establish customer relationships with investment advisers,” said SEC Chair Gary Gensler. “I support this proposal because it could reduce the risk of terrorists and other criminals accessing U.S. financial markets to launder money, finance terrorism, or move funds for other illicit purposes.”  The rule, if adopted, would require RIAs and ERAs to, among other things, implement a CIP that includes procedures for verifying the identity of each customer to the extent reasonable and practicable and maintaining records of the information used to verify a customer’s identity, among other requirements. The proposal is generally consistent with the CIP requirements for other financial institutions, such as brokers or dealers in securities and mutual funds.

The news about TD Bank and the fines and restrictions levied thereon will hurt the image of our collective banking industry across the country. The reputational damage is enormous and this comes after the numerous fines of another major money center bank a decade ago. CFOs will be performing serious due diligence as they look to move their funds but the ability to avoid these situations really only comes after the fact. The burden of maintaining compliance is on the bankers themselves but as a wise fellow banker pointed out the culprit is usually management (or a lack thereof). Choose your trusted banking advisors wisely.

Part 504 Certifications are due April 15th! Calling all BSA officers with operations in NY! If your institution is regulated under New York Banking Law, are you prepared for compliance with the New York Department of Financial Services (NYDFS) Superintendent’s Regulations Part 504, Banking Division Transaction Monitoring and Filtering Program Requirements and Certifications? As a licensee in New York, your financial institution is required to comply with Part 504 and complete an annual certification that the institution’s transaction monitoring and filtering programs comply with Section 504.3. One of the requirements in Section 504.3 is that the transaction monitoring and filtering programs are subject to an on-going analysis to assess the following: • The continued relevancy of the detection scenarios, the underlying rules, threshold values, parameters, and assumptions for transaction monitoring programs • The logic and performance of the technology or tools for matching names and accounts, as well as the OFAC sanctions list and threshold settings to see if they continue to map to the risks of the institution for filtering programs While the above requirements will appear obvious to most BSA officers in theory, execution sometimes tells a different story. At A7 Advisors, one of the most common things we identify when conducting independent BSA/AML reviews or Part 504 readiness reviews includes the following: 1. Lack of documented evidence that the institution conducted ongoing testing and tuning of the transaction monitoring and filtering programs, even it was completed; 2. Lack of governance around changes to transaction monitoring rules and filtering criteria, especially documentation identifying why the rules/filters were changed, who approved the change, and how it was communicated; and 3. Lack of a formally documented testing and tuning program entirely. Don’t get caught off guard. If you are a BSA officer preparing for licensure in New York or are preparing for annual certification and want assurance that your transaction monitoring and filtering programs are Part 504 compliant, A7 can assist. Book a 30-minute call with us today to get started! https://lnkd.in/g_Exu-Qz.

On The Radar: Federal banking regulators have issued a joint statement highlighting the significant risks that third-party servicers pose to banks. The Federal Reserve, FDIC, and OCC emphasize that while these servicers offer benefits, they also introduce operational, compliance, and reputational risks. The regulators urge banks to adopt robust risk management practices and oversight for third-party relationships, including thorough due diligence, appropriate contract provisions, and continuous monitoring of third-party activities.  https://bit.ly/4fIQqwE

Integrity a worthy trade-off? This isn't the usual sensational fraud cases we see in heist thrillers involving complicated ponzi schemes or clever roundtripping. Evaluative judgment of whether the immediate action is right or wrong could be clouded by monetary temptations. Surely one could have entertained the thought that his or her actions in facilitating loan deposits was beneficial to the bank? Customer service and experience matters right? I, for one, am guilty of pressurising RMs to expedite such due diligence process on banking transactions and often joked that e-signatures, when finally accepted, may be the biggest innovative disruption for the banking sectors in years. Making the process less painful is very helpful and customer centric, but doing so for the sake of personal gains, with full knowledge that the steps you skip are highly suspicious, warrants a different look. Relying on individuals to enforce a loss virtue like integrity will continue to be challenging. Looks like e-signatures will have to wait a while more. “We rely on the integrity of bankers in general and relationship managers in particular, as the interface between clients and the banks, to ensure this. Those who help clients circumvent their financial institutions’ due diligence processes or who help clients forge documents to conceal the true nature of their assets, must be dealt with robustly under our laws.” - Director of the Commercial Affairs Department, David Chew, https://lnkd.in/g7ebetT2

Is it possible to effect a partial transfer of an Oil LC to the second beneficiary involving the substitution of LOI? This question was raised by my friend, Daniels and my reply is below. Hi Daniels, I am glad you raise this subject on LOI substitution in respect of oil shipments under the transferable LCs. This can be done and I had done this previously when we were acting both as the transferable LC issuing bank as well as transferring bank in respect of a oil shipment. I have the expertise to do this and I can assist your customers to give effect to a partial transfer of the LC with the confirmation added to the transferred LC to the second beneficiary. If the second beneficiary has presented a complying presentation, the confirming bank must pay unless it is restrained by a court order. If the injunction is obtained by the LC applicant in a court of law of the country of the LC issuing bank, the confirming bank acting both as negotiating bank is entitled to an indemnity from the LC issuing bank. In such a case, there will be a protracted delay in payment but ultimately, the confirming/negotiating bank is entitled to reimbursement from LC issuing bank. This is no different from any LC be it transferable or not. Is the LC issuing bank entitled to claw back the payment if the fraud, if proven in a court of law, is committed by second beneficiary/applicant and the first beneficiary is reckless in the misrepresentations of LOI and has no honest belief in the veracity of the presentations, then the first beneficiary will be complicit in the fraud by LC applicant and they may be liable Re : Winson Oil v OCBC/SCB as affirmed by the Court of Appeal. However, if the first beneficiary can convince the court that it has no knowledge or is a party to the fraud and has acted in good faith, having exercised due diligence and acted honestly in the subsitution of second beneficiary's invoice and LOI is a matter to be decided in a court of law. In the event of fraud by the second beneficiary , the rights of the first beneficiary for recourse if he has to cough out the entire LC amount will have to be adjudicated under the contract between both parties. In any case, the LC issuing bank is unlikely to recover from the first beneficiary monies paid as it has no substantial means since the deal is financed by way of a transferable LC. The best part of availing the transferable LC for the transferring bank is that it does not have to 1) provide a line of credit and 2)seek recourse from the first beneficiary in the event of non-payment by LC issuing bank because of proven fraud unlike if it has issued an import LC for account of the first beneficiary. Hope it helps but definitely, I have a solution to address the LOI subsitution relating to a oil shipment. Sadly, the banks are not doing enough to help the SME commodities traders but rather choose to finance the big boys despite their involvement in bribes and corruption.