FINANCIAL CRIMES

INTRODUCTION

Financial Crimes are defined as a crime against property, involving the unlawful conversion of

the ownership of property (belonging to one person) to one’s own personal use and benefit.

Financial crimes often involve fraud.

Financial crimes are carried out via check and credit card fraud, mortgage fraud, medical fraud,

corporate fraud, bank account fraud, payment (point of sale) fraud, currency fraud, and

healthcare fraud, and they involve acts such as insider trading, tax violations, kickbacks,

embezzlement, identity theft, cyber attacks, money laundering, social engineering, and Securities

fraud. Financial crimes sometimes, but not always, involve additional criminal acts such as elder

abuse, armed robbery, burglary, and even murder. Victims range from individuals to institutions,

corporations, governments, and entire economies.

Any kinds of criminal conduct relating to money or to financial services or markets, including

any offence involving:

(a) Fraud or dishonesty; or

(b) Misconduct in, or misuse of information relating to, a financial market; or

(c) Handling the proceeds of crime;

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Financial crime has received increased attention in recent years. To understand what, how and

why financial crime, to stimulate know-what, know-how and know-why, there is a need for

theory development. A theory might be a prediction or explanation, a set of interrelated

constructs, definitions, and propositions that presents a systematic view of phenomena by

specifying relations among variables, with the purpose of explaining natural phenomena. The

systematic view might be an argument, a discussion, or a rationale, and it helps to explain or

predict phenomena that occur in the world.

In our context of financial crime, we search theoretical explanations in three streams of research.

One stream of re- search we label behavioral theories of financial crime where theories are

developed explicitly to explain individualistic aspects of financial crime. Another stream of

research we label organizational theories of financial crime where theories are developed to

explain organizational phenomena of financial crime. A third stream of research we label

managerial theories of financial crime, where general management theories are applied to the

phenomenon of financial crime.

There are three basic theories of financial crime. They are as follows:

Behavioral Theories

Organizational Theories

Managerial Theories

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Types of Financial Crimes:

Financial crimes affect private individuals, companies, organizations and even states, and have a

negative impact on the entire economic and social system through the considerable loss of

money incurred.

Different types of fraud include confidence tricks (such as lottery fraud), insurance fraud, tax

avoidance, offshore investment scams, marriage fraud, pyramid schemes and payment card

fraud.

There are many different ways that these crimes can be committed, for instance by mail, fax,

telephone and the Internet. By using social engineering techniques or sophisticated technical

methods such as “phishing”, fraudsters are able to plunder bank accounts across the world.

It includes:

Black market

Grey economy

Greenmail

Fraud

Financing of terrorism

Money Laundering

Organized crime

Tax haven

White-collar crime

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Black Market

The black market is not a physical place, but rather an economic activity in which merchandise

and/or services are bought and sold illegally. Also called the “underground market,” the black

market gets its name due to the fact that its activity is conducted out of sight and often “in the

dark,” outside the sight of law enforcement. The black market can be illustrated by something as

innocent and innocuous as selling gum on the playground, or by something as serious as the sale

of smuggled weapons or drugs.

Many factors can make a transaction illegal, thus qualifying it as a black market transaction. The

good or service itself may be illegal, such as illicit drugs, weapons, or prostitution. One prime

example of a black market created because of an illegal product was the result of prohibition.

After alcohol was outlawed in the Gujarat in 1995, it was smuggled into the country and sold.

Alcohol was smuggled into Gujarat from its neighboring states Rajasthan to the north, Madhya

Pradesh to the east, and Maharashtra to the south, and also from the small union territories of

Daman, located in south Gujarat near Surat ,and Diu, an island that lies off the Kathiawad

peninsula. The result was an era of organized crime and an estimated 500 million in lost tax

revenues annually.

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An example of an illegal service sold on the black market is prostitution. Outlawing the

prostitution of women and children throughout most of the world has created a huge illicit sex

trade. Countries where this type of black market flourishes are a destination spot for those

seeking to pursue this activity.

In other cases, goods may be stolen and then re-sold on the black market. When a good is

euphemistically referred to as having “fallen off the back of a truck,” usually it means that it has

been stolen for the purpose of being sold on the black market. If you are purchasing a new stereo,

for example, from an individual at an extremely low price, there’s a good chance that it’s been

stolen. Another way that a transaction can be illegal is if it is an otherwise legal good or service

that is bought or sold in such a way as to avoid proper licensing or taxes. This is the case with

unregistered firearms and cigarettes, which usually include a hefty local, state, or federal tax.

Due to man’s inherently entrepreneurial nature, coupled with government’s pesky tendency to

regulate, black markets can and do exist everywhere. They do, however, tend to develop more

readily in states or countries with especially heavy regulation. Even though a good or service

becomes outlawed or heavily regulated, the market may continue to demand it. As a result, the

black market springs up to meet the market’s demand. This is the case when governments place

price controls, rationing or complete prohibition on a good or service.

During wartime, black markets tend to thrive due to rationing or short supply. During World War

II, many countries had a hard time importing basic goods to meet demand, thereby driving up

prices on the black market. Eastern Europe and the former Soviet Union had and most likely still

have a healthy black market.

Although the consumer’s demand is met, usually the seller or “black marketer” is the one who

profits from a black market transaction. Black market prices tend to be higher due to smaller

supply and constant demand. The risk that a black marketer takes in acquiring and selling a good

or service is also included in the price. If it is a difficult good to acquire, it will have a higher

price as well. At times, prices can be lower if the seller has lower “overhead” because he or she

stole the good or is avoiding high taxes.

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Consumers are often willing to overlook the illegality of a black market transaction if they feel

that the good or service is “harmless.” This is often the case with illegal prostitution and also

applied to alcohol sales during prohibition. Although some people think that most black market

transactions are relatively harmless, the money generated on the black market is often used for

nefarious purposes. The mafia in the U.S. thrived during prohibition, resulting in bloody battles

over turf and profits. Governments combating black markets spend vast fortunes fighting

organized crime and racketeering, and lose millions in tax revenues from the prohibited good.

Many solutions to the black market have been proposed, including deregulation, legalizing drugs

and prostitution, and increasing supply of a particular black market good. Some argue that this is

a concession to criminals and drug users, while others argue that government resources can be

put to better use.

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Black Market in India

Like any other economy, India also faces the problem of

black market. The Indian black market deals with buying

and selling of goods and services illegally. However, the

black market in India should be the last place to be visited

by a tourist and that too if he/she wants to invite trouble!

Black marketing in India is as illegal as it is in any other

country and those found guilty of dealing with the black

market are often punished severely. The fines can run into

several thousands of dollars.

Black markets develop when the Government places certain limitations on the production or

provision of goods and services. During such situations, black markets take advantage and buy

and sell these prohibited commodities illegally. The transactions are done under hush-hush

conditions, necessarily in the dark, hence the name black market. The people handling these

transactions are very clever and will do anything to save their faces if caught in a scam.

Also, it has been reported that cops sometimes disguise as these people to find out who deals

with them and the prospective "clients". They strike a deal with you and if you agree to deal in

illegal transactions, you are caught red-handed and given a taste of the Indian jails!

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Grey market

A grey market or gray market is the trade of a commodity through distribution channels which,

while legal, are unofficial, unauthorized, or unintended by the original manufacturer. The term

gray economy, however, refers to workers being paid under the table, without paying income

taxes or contributing to such public services as Social Security and Medicare. It is sometimes

referred to as the underground economy or "hidden economy."

A grey market is the trade of goods and services that are illegal in themselves and/or

distributed through illegal channels, such as the selling of stolen goods, certain drugs or

unregistered handguns. The two main types of grey market are imported manufactured goods

that would normally be unavailable or more expensive in a certain country and unissued

securities that are not yet traded in official markets. Sometimes the term dark market is used to

describe secretive, unregulated (though often technically legal) trading in commodity futures,

notably crude oil in 2008. This can be considered a third type of "grey market" since it is legal,

yet unregulated, and probably not intended or explicitly authorized by oil producers.

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Unlike black market goods, grey-market goods are legal. However, they are sold outside

normal distribution channels by companies which may have no relationship with the producer of

the goods. Frequently this form of parallel import occurs when the price of an item is

significantly higher in one country than another. This situation commonly occurs with electronic

equipment such as cameras. Entrepreneurs buy the product where it is available cheaply, often at

retail but sometimes at wholesale, and import it legally to the target market. They then sell it at a

price high enough to provide a profit but under the normal market price. International efforts to

promote free trade, including reduced tariffs and harmonized national standards, facilitate this

form of arbitrage whenever manufacturers attempt to preserve highly disparate pricing. Because

of the nature of grey markets, it is difficult or impossible to track the precise numbers of grey-

market sales. Grey-market goods are often new, but some grey market goods are used goods. A

market in used goods is sometimes nicknamed a Green Market.

Importing certain legally restricted items such as prescription drugs or firearms would be

categorized as black market, as would smuggle the goods into the target country to avoid import

duties. A related concept is bootlegging, the smuggling or transport of highly regulated goods,

especially alcoholic beverages. The term "bootlegging" is also often applied to the production or

distribution of counterfeit or otherwise infringing goods. Grey markets can sometimes develop

for select video game consoles and titles whose demand temporarily outstrips supply and the

local shops run out of stock, this happens especially during the holiday season. Other popular

items, such as dolls can also be affected. In such situations the grey market price may be

considerably higher than the manufacturer's suggested retail price. Online auction sites such as

eBay have contributed to the emergence of the video game grey market.

The parties most concerned with the grey market are usually the authorized agents or

importers, or the retailers of the item in the target market. Often this is the national subsidiary of

the manufacturer, or a related company. In response to the resultant damage to their profits and

reputation, manufacturers and their official distribution chain will often seek to restrict the grey

market. Such responses can breach competition law to enforce trademark or other intellectual-

property rights against the grey market. Such rights may be exercised against the import, sale

and/or advertisement of grey imports.

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When grey-market products are advertised on Google, eBay or other legitimate web sites,

it is possible to petition for removal of any advertisements that violate trademark or copyright

laws. This can be done directly, without the involvement of legal professionals. eBay, for

example, will remove listings of such products even in countries where their purchase and use is

not against the law. Manufacturers may refuse to supply distributors and retailers (and with

commercial products, customers) that trade in grey-market goods. They may also more broadly

limit supplies in markets where prices are low. Manufacturers may refuse to honor the warranty

of an item purchased from grey-market sources, on the grounds that the higher price on the non-

grey market reflects a higher level of service even though the manufacturer does of course

control their own prices to distributors. Alternatively, they may provide the warranty service

only from the manufacturer's subsidiary in the intended country of import, not the diverted third

country where the grey goods are ultimately sold by the distributor or retailer. This response to

the grey market is especially evident in electronics goods. Local laws (or customer demand)

concerning distribution and packaging (for example, the language on labels, units of

measurement, and nutritional disclosure on foodstuffs) can be brought into play, as can national

standards certifications for certain goods.

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An example of Grey Market in Mumbai is the alpha store where all the imported items are

available easily. Even IPhone-4 which is not yet launched in India is available in that Grey

Market

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Grey marketing is common for products like:

Automobiles

Computer Games

Pharmaceuticals

Pianos

Photographic equipment

Broadcasting

Grey Market in India

Cities like Ahmedabad, Kolkata and Rajkot are the most active centers for the IPO (initial

public offerings). Trades done in the grey market are settled on the day of listing. Once the deal

is done at a stipulated price, the seller must deliver the shares after he has been allotted the shares

by the company. If the seller falls short in receiving the exact number of shares that he has sold

in anticipation, then he must buy the shares on the market (once the share is listed) to honor his

commitment. Most of the recently-concluded initial public offerings are quoting at a significant

premium in the grey market, compared to their issue prices; this means that the issues are

perceived to have been underpriced.

Many traders short sell in the grey market if they feel that the premium on offer is

unwarranted and that the stock may list at a price lower than what most market players expect it

to. Though grey-market operators say that there is a constant change in the grey-market

premium, it largely depends on the subscription on the last day and the market conditions, post

issue closing. Example: Grey market premium for the Roman Tarmat issue went up from Rs 28–

30 to Rs 110–140. This was because the issue was subscribed around 30 times eventually, after

receiving a lukewarm response from investors during the first two days when it was open for

subscription. Though illegal, the grey market continues to thrive. Investors who bid for an issue

normally do not get the full quantity because of the limits for each class.

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This has resulted in many people "selling" their IPO applications to the grey market

operators for a secured interest. Many investors earn a fixed amount—anywhere between Rs

2,500 and Rs 4,000 by selling their IPO applications to grey-market operators in Ahmedabad.

Though many IPOs are yet to open for subscription, investors may need to look at more than the

prospectus when subscribing to IPOs. Street-smart investors would rather look at indicators from

the booming grey market before taking a call on IPO investments. It is not only market-savvy

investors from Gujarat, but also lead managers of IPOs from Mumbai, Delhi and other parts of

the country, who look at Ahmedabad's grey-market premium rates as an indicator of the price at

which the issue is likely to get listed.

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FINANCIAL CRIMES

Greenmail

Greenmail or greenmailing is the practice of purchasing enough shares in a firm to

threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in

order to suspend the takeover.

The term is a neologism derived from blackmail and greenback as commentators and

journalists saw the practice of said corporate raiders as attempts by well-financed individuals to

blackmail a company into handing over money by using the threat of a takeover.

Tactic

Corporate raids aim to generate large amounts of money by hostile takeovers of large, often

undervalued or inefficient (i.e. non-profit-maximizing) companies, by either asset stripping

and/or replacing management and employees. However, once having secured a large share of a

target company, instead of completing the hostile takeover, the greenmailer offers to end the

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threat to the victim company by selling his share back to it, but at a substantial premium to the

fair market stock price.

From the viewpoint of the target, the ransom payment may be referred to as a goodbye kiss. The

origin of the term as a business metaphor is unclear, although it will certainly be understood in

context as kissing the greenmailer and, certainly, millions of dollars goodbye. A company which

agrees to buy back the bidder's stockholding in the target avoids being taken over. In return, the

bidder agrees to abandon the takeover attempt and may sign a confidential agreement with the

greenmailer who will agree not to resume the maneuver for a period of time.

While benefiting the predator, the company and its shareholders lose money. Greenmail also

perpetuates the company's existing management and employees, which would have most

certainly seen their ranks reduced or eliminated had the hostile takeover successfully gone

through.

Examples

Greenmail proved lucrative for investors such as T. Boone Pickens and Sir James Goldsmith

during the 1980s. In the latter example, Goldsmith made $90 million from the Goodyear Tire and

Rubber Company in the 1980s in this manner. Occidental Petroleum paid greenmail to David

Murdoch in 1984.

The St. Regis Paper Company provides an example of greenmail. When an investor group led by

Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the

paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group

acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its

stake at $52 per share, netting a profit of $51 million. Shortly after the payoff in March 1984, St.

Regis became the target of publisher Rupert Murdoch. St Regis turned to Champion International

and agreed to a $1.84 billion takeover. Murdoch tendered his 5.6% stake in St. Regis to the

Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J. Harold Mulherin --

Takeovers, Restructuring, and Corporate Governance: page 529)

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Prevention

Changes in the details of corporate ownership structure, in the investment markets generally, and

the legal requirement in some jurisdictions for companies to impose limits for launching formal

bids, or obligations to seek shareholder approval for the buyback of its own shares, and in

Federal tax treatment of greenmail gains (a 50% excise tax) have all made greenmail far less

common since the early 1990s.

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White Collar Crime

Within the field of criminology, white-collar crime has been defined by Edwin

Sutherland as "a crime committed by a person of respectability and high social status in the

course of his occupation" (1939). Sutherland was a proponent of Symbolic Interactionism, and

believed that criminal behavior was learned from interpersonal interaction with others. White-

collar crime, therefore, overlaps with corporate crime because the opportunity for fraud, bribery,

insider trading, embezzlement, computer crime copyright infringement, identity theft, and

forgery is more available to white-collar employees.

Characteristics

Deliberate acts motivated by profit

Differential Association

Element of Learning, Peer support, Rationalization and Neutralization

Diffuse

Lack of reporting and defining

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Civil vs. criminal violations

Sociological category

Sanctions: small fines, big payoffs

Investigation: limited resources, problem of technology

Enforcement:

Not very effective

Light sentences

Small fines

Limited resources available (street demands)

Regulatory--cease and desist

Respectability of the offender

Corporate structure and diffusion of responsibility

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Case types within white collar crime are:

• Federal Procurement Fraud • Federal Program Fraud • Tax Fraud • Arson for Profit • Other Insurance Fraud • Financial Institution Fraud • Bankruptcy Fraud • Advance Fee Schemes • Other Fraud Against Businesses • Consumer Fraud • Securities Fraud • Commodities Fraud • Other Investment Fraud • Antitrust Violations - Other • Computer Fraud • Health Care Fraud • Fraud Against Insurance Providers • Intellectual Property Violations • Insider Fraud Against Insurance Providers

• MEWA (Multiple Employer Welfare Arrangements) Fraud/MET

• Antitrust Violations - Airlines • Antitrust Violations - Banking • Antitrust Violations - Defense Procurement

• Antitrust Violations - Extraterritorial Application Of

• Antitrust Violations - Finance Markets, Other than Banking

• Telemarketing Fraud

• Corporate Fraud • Identity Theft • Aggravated Identity Theft • Other White Collar Crime/Fraud

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Terrorist Financing

There is probably nothing which can damage the reputation of a financial institution more than

the suggestion that it has been used as a conduit to provide funds which have been used to

finance a terrorist act. Even if the institution is an innocent participant, the very link of its name

to death and carnage can be damaging. So the institution needs as much help as possible to

identify and exclude known terrorists from their business but also to stand some chance of

identifying the criminals who are already inside.

Although key Western governments had some form of anti-terrorism legislation already, the

terrorist attacks in New York and Washington in 2001 provided the incentive for more robust

and wide ranging laws to counter the financing of terrorism (CFT). National legislation and

international cooperation is needed to target those who finance terrorist networks, be they

charities, businesses, individuals or even states which provide finance and sanctuary to terrorists.

Key pieces of legislation have included the UK Terrorism Act and the USA Patriot Act, and the

Financial Action Task Force has included specific Recommendations and guidance on terrorist

financing.

There is a subtle but very important difference between terrorist financing and money laundering

activities. Money Laundering is the term used to describe the use of the financial system by

criminals to hide the source of funds gained from illegal activity such as drug trafficking,

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bribery, extortion, embezzlement, theft or other criminal activity, as the criminals try to make

their ill gotten gains appear genuine.

In effect, Money Laundering is about turning dirty money into clean money. Terrorist Financing

can be the opposite of this – clean money (often in legitimate donations to charities) misdirected

by account holders to their criminal colleagues in what appear to be legitimate activities (again,

often charities but it can be any form of institution). And it need only take a small amount of

money to launch such an attack, so defenses need to be strong.

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Terrorism Financing Model

This model acknowledges the differences between terrorist financing and money laundering, and

that funds are but one way, if the most frequently used, to move value. This model is as

adaptable as are the terrorists, themselves, and accommodates the wide variety of means they

use.

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Stage 1: Acquisition

In this stage, funds or goods are initially moved into the process that eventually results in their

being used by terrorists or direct supporters. Contributors at this stage may or may not know that

the final purpose of the funds or goods is for terrorist activity.

Stage 2: Aggregation

In this stage, smaller amounts of funds or goods are pooled or funneled into larger ones. This is

done by moving them to one or a few financial institution accounts or physical locations. As in

the acquisition stage, individuals who combine the funds may or may not know how they will be

ultimately used.

Stage 3: Transmission to Terrorist Organization

In this stage, the aggregated funds or goods are moved to either the central terrorist organization

or to a designated location, person or group acting on behalf of the organization. Up until this

point, some or all of the people handling the funds may not be aware of their intended purpose.

Stage 4: Transmission to Operational Cell

In this stage, funds or goods are distributed to the cells (individuals or groups) that are

responsible for carrying out the organization’s activities. As with stage 3, the transmissions may

occur in one or a number of steps and include the same transmission methods. In addition,

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methods might include providing cells with debit cards and credit cards if they can readily be

used. Logistics play a large part in how sophisticated the transmission method used.

Stage 5: Conversion

In this stage, the funds or exchanged goods are exchanged for end-use goods and services to

carry out terrorist activities. End-use goods and services include such things as weapons, travel,

training, food, accommodation, fraudulent documents, recruitment, propaganda, bribes and

compensation.

Note that not all five stages are necessarily present in every terrorist financing process; nor are

they always in the order presented. In particular, conversion can take place at any point

following acquisition.

The following patterns of activity indicate collection and movement of funds that could be

associated with terrorist financing:

1. Account transactions that are inconsistent with past deposits or withdrawals such as cash,

cheques, wire transfers, etc.

2. Transactions involving a high volume of incoming or outgoing wire transfers, with no

logical or apparent purpose that come from, go to, or transit through locations of concern,

that is sanctioned countries, non-cooperative nations and sympathizer nations.

3. Unexplainable clearing or negotiation of third party cheques and their deposits in foreign

bank accounts.

4. Structuring at multiple branches or the same branch with multiple activities.

5. Corporate layering, transfers between bank accounts of related entities or charities for no

apparent reasons.

6. Wire transfers by charitable organisations to companies located in countries known to be

bank or tax havens.

7. Lack of apparent fund raising activity, for example a lack of small cheques or typical

donations associated with charitable bank deposits.

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8. Using multiple accounts to collect funds that are then transferred to the same foreign

beneficiaries

9. Transactions with no logical economic purpose, that is, no link between the activity of the

organization and other parties involved in the transaction.

10. Overlapping corporate officers, bank signatories, or other identifiable similarities

associated with addresses, references and financial activities.

11. Cash debiting schemes in which deposits in the US correlate directly with ATM

withdrawals in countries of concern. Reverse transactions of this nature are also

suspicious.

12. Issuing cheques, money orders or other financial instruments, often numbered

sequentially, to the same person or business, or to a person or business whose name is

spelled similarly.

Prevention:

But there are two aspects in which a financial institution can protect itself from both risks –

Strong Know Your Customer processes

Strong transaction checking processes

Know your customer describes the means by which the identity, background and other aspects of

potential customers can be checked, so that known and suspected terrorists can be excluded.

Legislation and regulation require firms to obtain evidence of identity of a customer at take-on

and to keep a record of that evidence for as long as there is a relationship with a customer.

Legislation and regulation also require a firm to keep up to date its knowledge of a customer

throughout the life of the relationship, so that changes in the customer's activity can be assessed

and dealt with – all with the principal aim of preventing Money Laundering and Terrorist

Financing. Having robust processes is all the more important when a business is looking for new

clients in emerging markets, where legislation and regulation may not yet be as strong as in more

developed financial markets.

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A business does not want to make the wrong decisions when looking at any type of customer, be

it an individual or a corporate, and especially at times of volatile economic conditions and with

such reputational risks. Good quality know your customer processes will

Ensure that a business knows background of an individual customer as well as the identity and

background of the shareholders and key principals behind a corporate entity or joint venture.

This provides two key benefits for the risk-aware financial business – first, comfort that the firm

is not exposing itself to excessive risk of being used by criminals to finance terrorism; and

second (and equally important), sufficiently detailed knowledge of the customer's source of

wealth and financial position to be able to sell products which are appropriate and which help the

customer and the firm to make money.

Similarly, during the life of a customer relationship, the firm wants to be able to carry out checks

on a customer's transactions to make sure that they are genuine and to be able to research any

which may appear unusual. In particular with transactions, a firm must be able to complete due

diligence very quickly where there are concerns, to be sure that suspicious items are blocked but

also that settlement or delivery is completed on or by the planned value date – a firm does not

want to have to be paying back-value for delaying a transaction when speedier due diligence

could have avoided it. Good quality Know Your Customer work will allow a firm to be efficient

and compliant in this area, report suspicions and not waste time or hard earned money.

In all major jurisdictions around the world, criminal legislation and regulation make it an offence

(often criminal) to make funds available to an individual or corporate entity for the purposes of

terrorism. World-check is the leading tool which helps firms to meet legal requirements and run

a safe business in the ongoing fight against.

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Identity Theft

Identity theft is a form of fraud in which someone pretends

to be someone else by assuming that person's identity,

typically in order to access resources or obtain credit and

other benefits in that person's name. The victim of identity

theft (here meaning the person whose identity has been

assumed by the identity thief) can suffer adverse

consequences if he or she is held accountable for the

perpetrator's actions. Organizations and individuals who

are duped or defrauded by the identity thief can also suffer

adverse consequences and losses, and to that extent are

also victims.

In many countries it is a crime to assume another person's

identity for personal gain.

The term identity theft was coined in 1964and is actually a

misnomer, since it is not literally possible to steal an

identity as such - more accurate terms would be identity fraud or impersonation or identity

cloning but identity theft has become commonplace.

"Determining the link between data breaches and identity theft is challenging, primarily because

identity theft victims often do not know how their personal information was obtained," and

identity theft is not always detectable by the individual victims, according to a report done for

the FTC. Identity fraud is often but not necessarily the consequence of identity theft. Someone

can steal or misappropriate personal information without then committing identity theft using the

information about every person, such as when a major data breach occurs. A US Government

Accountability Office study determined that "most breaches have not resulted in detected

incidents of identity theft". the report also warned that "the full extent is unknown". A later

unpublished study by Carnegie Mellon University noted that "Most often, the causes of identity

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theft is not known," but reported that someone else concluded that "the probability of becoming a

victim to identity theft as a result of a data breach is ... around only 2%". More recently, an

association of consumer data companies noted that one of the largest data breaches ever,

accounting for over four million records, resulted in only about 1,800 instances of identity theft,

according to the company whose systems were breached.

Sources such as the non-profit Identity Theft Resource Center sub-divide identity theft into five

categories:

business/commercial identity theft (using another's business name to obtain

credit)

criminal identity theft (posing as another person when apprehended for a crime)

financial identity theft (using another's identity to obtain credit, goods and

services)

identity cloning (using another's information to assume his or her identity in daily

life)

medical identity theft (using another's identity to obtain medical care or drugs)

Identity theft may be used to facilitate or fund other crimes including illegal immigration,

terrorism, and espionage. There are cases of identity cloning to attack payment systems,

including online credit card processing and medical insurance.

Identity thieves occasionally impersonate others for non-financial reasons—for instance, to

receive praise or attention for the victim's achievements.

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Identity cloning and concealment

In this situation, the identity thief impersonates someone else in order to conceal their own true

identity. Examples might be illegal immigrants, people hiding from creditors or other

individuals, or those who simply want to become "anonymous" for personal reasons. Unlike

identity theft used to obtain credit which usually comes to light when the debts mount,

concealment may continue indefinitely without being detected, particularly if the identity thief is

able to obtain false credentials in order to pass various authentication tests in everyday life.

Criminal identity theft

When a criminal fraudulently identifies himself to police as another individual at the point of

arrest, it is sometimes referred to as "Criminal Identity Theft." In some cases criminals have

previously obtained state-issued identity documents using credentials stolen from others, or have

simply presented fake ID. Provided the subterfuge works, charges may be placed under the

victim's name, letting the criminal off the hook. Victims might only learn of such incidents by

chance, for example by receiving court summons, discovering their drivers licenses are

suspended when stopped for minor traffic violations, or through background checks performed

for employment purposes.

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It can be difficult for the victim of a criminal identity theft to clear their record. The steps

required to clear the victim's incorrect criminal record depend on what jurisdiction the crime

occurred in and whether the true identity of the criminal can be determined. The victim might

need to locate the original arresting officers and prove their own identity by some reliable means

such as fingerprinting or DNA fingerprinting, and may need to go to a court hearing to be cleared

of the charges. Obtaining an expungement of court records may also be required. Authorities

might permanently maintain the victim's name as an alias for the criminal's true identity in their

criminal records databases. One problem that victims of criminal identity theft may encounter is

that various data aggregators might still have the incorrect criminal records in their databases

even after court and police records are corrected. Thus it is possible that a future background

check will return the incorrect criminal records. This is just one example of the kinds of impact

that may continue to affect the victims of identity theft for some months or even years after the

crime, aside from the psychological trauma that being 'cloned' typically engenders.

Synthetic identity theft

A variation of identity theft which has recently become more common is synthetic identity theft,

in which identities are completely or partially fabricated. The most common technique involves

combining a real social security number with a name and birth date other than the ones

associated with the number. Synthetic identity theft is more difficult to track as it doesn't show

on either person's credit report directly, but may appear as an entirely new file in the credit

bureau or as a subfile on one of the victim's credit reports. Synthetic identity theft primarily

harms the creditors who unwittingly grant the fraudsters credit. Individual victims can be

affected if their names become confused with the synthetic identities, or if negative information

in their subfiles impacts their credit ratings.

Medical identity theft

Medical identity theft occurs when someone uses a person's name and sometimes other parts of

their identity—such as insurance information—without the person's knowledge or consent to

obtain medical services or goods, or uses the person’s identity information to make false claims

for medical services or goods. Medical identity theft frequently results in erroneous entries being

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put into existing medical records, which may in turn lead to inappropriate and potentially life-

threatening decisions by medical staff.

Techniques for obtaining and exploiting personal information for identity theft

Identity thieves typically obtain and exploit personally identifiable information about

individuals, or various credentials they use to authenticate themselves, in order to impersonate

them. Examples include:

Rummaging through rubbish for personal information (dumpster diving)

Retrieving personal data from redundant IT equipment and storage media

including PCs, servers, PDAs, mobile phones, USB memory sticks and hard

drives that have been disposed of carelessly at public dump sites, given away or

sold on without having been properly sanitized

Using public records about individual citizens, published in official registers such

as electoral rolls

Stealing bank or credit cards, identification cards, passports, authentication tokens

... typically by pickpocketing, housebreaking or mail theft

Skimming information from bank or credit cards using compromised or hand-held

card readers, and creating clone cards

Using 'contactless' credit card readers to acquire data wirelessly from RFID-

enabled passports

Observing users typing their login credentials, credit/calling card numbers etc.

into IT equipment located in public places (shoulder surfing)

Stealing personal information from computers using malware, particularly Trojan

horse keylogging programs or other forms of spyware

Hacking computer networks, systems and databases to obtain personal data, often

in large quantities

Exploiting breaches that result in the publication or more limited disclosure of

personal information such as names, addresses, Social Security number or credit

card numbers

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Advertising bogus job offers in order to accumulate resumes and applications

typically disclosing applicants' names, home and email addresses, telephone

numbers and sometimes their banking details

Exploiting insider access and abusing the rights of privileged IT users to access

personal data on their employers' systems

Infiltrating organizations that store and process large amounts or particularly

valuable personal information

Impersonating trusted organizations in emails, SMS text messages, phone calls or

other forms of communication in order to dupe victims into disclosing their

personal information or login credentials, typically on a fake corporate website or

data collection form (phishing)

Brute-force attacking weak passwords and using inspired guesswork to

compromise weak password reset questions

Obtaining castings of fingers for falsifying fingerprint identification ... or

famously using gummy bears to fool low quality fingerprint scanners

Browsing social networking websites for personal details published by users,

often using this information to appear more credible in subsequent social

engineering activities

Diverting victims' email or post in order to obtain personal information and

credentials such as credit cards, billing and bank/credit card statements, or to

delay the discovery of new accounts and credit agreements opened by the identity

thieves in the victims' names

Using false pretenses to trick individuals, customer service representatives and

help desk workers into disclosing personal information and login details or

changing user passwords/access rights (pretexting)

Stealing checks to acquire banking information, including account numbers and

bank routing numbers .

Individual identity protection

The acquisition of personal identifiers is made possible through serious breaches of privacy. For

consumers, this is usually a result of them naively providing their personal information or login

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credentials to the identity thieves as a result of being duped but identity-related documents such

as credit cards, bank statements, utility bills, checkbooks etc. may also be physically stolen from

vehicles, homes and offices, or directly from victims by pickpockets and bag snatchers.

Guardianship of personal identifiers by consumers is the most common intervention strategy

recommended by the US Federal Trade Commission, Canadian Phone Busters and most sites that

address identity theft. Such organizations offer recommendations on how individuals can prevent

their information falling into the wrong hands.

Identity theft can be partially mitigated by not identifying oneself unnecessarily (a form of

information security control known as risk avoidance). This implies that organizations, IT

systems and procedures should not demand excessive amounts of personal information or

credentials for identification and authentication. Requiring, storing and processing personal

identifiers such as (Social Security number, national identification number, drivers license

number, credit card number, etc. increases the risks of identity theft unless this valuable personal

information is adequately secured at all times.

To protect themselves against electronic identity theft by phishing, hacking or malware,

individual are well advised to maintain computer security, for example by keeping their

operating systems fully patched against known security vulnerabilities, running antivirus

software and being cautious in their use of IT.

Identity thieves sometimes impersonate dead people, using personal information obtained from

death notices, gravestones and other sources to exploit delays between the death and the closure

of the person's accounts, the inattentiveness of grieving families and weaknesses in the processes

for credit-checking. Such crimes may continue for some time until the deceased's families or the

authorities notice and react to anomalies.

In recent years, commercial identity theft protection/insurance services have become available in

many countries. These services purport to help protect the individual from identity theft or help

detect that identity theft has occurred in exchange for a monthly or annual membership fee or

premium. The services typically work either by setting fraud alerts on the individual's credit files

with the three major credit bureaus or by setting up credit report monitoring with the credit

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bureaus. While identity theft protection/insurance services have been heavily marketed, their

value has been called into question.

Poor corporate diligence standards which can result in data breaches include:

failure to shred confidential information before throwing it into dumpsters

failure to ensure adequate network security

the theft of laptop computers or portable media being carried off-site containing

vast amounts of personal information. The use of strong encryption on these

devices can reduce the chance of data being misused should a criminal obtain

them.

the brokerage of personal information to other businesses without ensuring that

the purchaser maintains adequate security controls

Failure of governments, when registering sole proprietorships, partnerships, and

corporations, to determine if the officers listed in the Articles of Incorporation are

who they say they are. This potentially allows criminals access to personal

information through credit-rating and data mining services.

The failure of corporate or government organizations to protect consumer privacy, client

confidentiality and political privacy has been criticized for facilitating the acquisition of personal

identifiers by criminals.

Using various types of biometric information, such as fingerprints, for identification and

authentication has been cited as a way to thwart identity thieves; however there are technological

limitations and privacy concerns associated with these methods as well.

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Embezzlement

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Embezzlement is the act of dishonestly appropriating or secreting assets, usually financial in

nature, by one or more individuals to whom such assets have been entrusted.

Embezzlement is a kind of financial fraud. For instance, a clerk or cashier handling large sums of

money can embezzle cash from his or her employer, a lawyer can embezzle funds from clients'

trust accounts, a financial advisor can embezzle funds from investors, or a spouse can embezzle

funds from his or her partner. Embezzlement may range from the very minor in nature, involving

only small amounts, to the immense, involving large sums and sophisticated schemes.

More often than not, embezzlement is performed in a manner that is premeditated, systematic

and/or methodical, with the explicit intent to conceal the activities from other individuals,

usually because it is being done without their knowledge or consent. Often it involves the trusted

person embezzling only a small proportion or fraction of the funds received, in an attempt to

minimize the risk of detection. If successful, embezzlements can continue for years (or even

decades) without detection. It is often only when the funds are needed, or called upon for use,

that the victims realize the funds or savings are missing and that they have been duped by the

embezzler.

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Embezzlement is a statutory offense so the definition of the crime varies from statute to statute.

Typical elements are

the fraudulent

conversion

of the property

of another

By a person who has lawful possession of the property.

Embezzlement is a crime against ownership; that is, the owner's right to control the disposition

and use of the property. The conversion element requires a substantial interference with the true

owner's property rights (unlike larceny, where the slightest movement of the property when

accompanied by the intent to deprive one of the possessions of the property permanently is

sufficient).

The requirement that the conversion be fraudulent means simply that the defendant willfully and

without claim of right or mistake converted the property to his or her own use. The type of

property that is the subject of embezzlement varies among jurisdictions. Embezzlement statutes

do not limit the scope of the crime to conversions of personal property. Statutes generally include

conversion of tangible personal property, intangible personal property and choices in action. Real

property is not typically included. The critical element is that the defendant must have been in

lawful possession of the property at the time of the fraudulent conversion and not have mere

custody of the property. If the defendant had lawful possession the crime is embezzlement. If the

defendant merely had custody, the crime is larceny. Determining whether a particular person had

lawful possession or mere custody is sometimes extremely difficult.

Methods of embezzlement

Embezzlement sometimes involves falsification of records in order to conceal the activity.

Embezzlers commonly secrete relatively small amounts repeatedly, in a systematic and/or

methodical manner, over a long period of time, although some embezzlers commonly secrete one

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large sum at once. Some very successful embezzlement schemes have continued for many years

before being detected due to the skill of the embezzler in concealing the nature of the

transactions or their skill in gaining the trust and confidence of investors or clients, who are then

reluctant to "test" the embezzler's trustworthiness by forcing a withdrawal of funds.

Embezzling should not be confused with skimming which is under-reporting income and pocket

the difference. For example, in 2005, several managers of the service provider Aramark were

found to be under-reporting profits from a string of vending machine locations in the Banglore.

While the amount stolen from each machine was relatively small, the total amount taken from

many machines over a length of time was very large. A smart technique employed by many

small time embezzlers can be covered by falsifying the records. (Example, by removing a small

amount of money and falsifying the record the register would be technically correct, while the

manager would remove the profit and leave the float in, this method would effectively make the

register short for the next user and throw the blame onto them)

Another method is to create a false vendor account, and to supply false bills to the company

being embezzled so that the checks that are cut appear completely legitimate. Yet another

method is to create phantom employees, who are then paid with payroll checks.

The latter two methods should be uncovered by routine audits, but often aren't if the audit is not

sufficiently in-depth, because the paperwork appears to be in order. The first method is easier to

detect if all transactions are by cheque or other instrument, but if many transactions are in cash, it

is much more difficult to identify. Employers have developed a number of strategies to deal with

this problem. In fact, cash registers were invented just for this reason.

Some of the most complex (and potentially most lucrative) forms of embezzlement involve

Ponzi-like financial schemes where high returns to early investors are paid out of funds received

from later investors duped into believing they are themselves receiving entry into a high return

investment scheme. The Madoff investment scandal is an example of this kind of high level

embezzlement scheme, where is it alleged $65 billion was siphoned off from gullible investors

and financial institutions.

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Safeguards against embezzlement

Internal controls such as separation of duties are common defenses against embezzlement. For

example, at a movie theater, the task of accepting money and admitting customers into the

theater is typically broken up into two jobs. One employee sells the ticket, and another employee

takes the ticket and lets the customer into the theater. Because a ticket cannot be printed without

entering the sale into the computer, and the customer cannot enter the theater without a ticket,

both of these employees would have to collude in order for embezzlement to go undetected. This

significantly reduces the chance of theft, because of the added difficulty in arranging such a

conspiracy and the likely need to split the proceeds between the two employees, which reduce

the payoff for each.

Another obvious method to deter embezzlement is to regularly and unexpectedly move funds

from one advisor or entrusted person to another when the funds are supposed to be available for

withdrawal or use, to ensure that the full amount of the funds is available and no fraction of the

savings has been embezzled by the person to whom the funds or savings have been entrusted.

Money Laundering

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Money laundering is the process by which large amounts of illegally obtained money (from drug

trafficking, terrorist activity or other serious crimes) is given the appearance of having originated

from a legitimate source.

But in simple terms it is the Conversion of Black money into white money. This takes you back

to cleaning the huge piles of cash. Indian newspapers frequently report the money laundering

scams perpetrated by the Political leaders and some of the prominent stars are the chief ministers

of UP, Punjab and Kerala. UP chief minister ms. Mayawati as per the Indian Express reports

used some innovative techniques to launder the money by avoiding the tax in legitimate manner.

She accepted the donations from persons who were road side heroes. When CBI raided these

guys were found in no position to donate huge sums for political motives. 

Other Indian star in the laundering Business is Ketan Parekh.It is believed that he shifted the

proceeds of money received from the BoI pay order scam to various tax heavens and ultimately

in the Swiss Banks.These transactions are believd to be just the tip of the iceberg.

If done successfully, it allows the criminals to maintain control over their proceeds and

ultimately to provide a legitimate cover for their source of income. Money laundering plays a

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fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized

criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind

of attention from the authorities that sudden wealth brings from illegal activities. By engaging in

this type of activity it is hoped to place the proceeds beyond the reach of any asset forfeiture

laws.

Methods and Stages of Money Laundering

There are three stages involved in money laundering; placement, layering and integration.

Placement –This is the movement of cash from its source. On occasion the source can be easily

disguised or misrepresented. This is followed by placing it into circulation through financial

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institutions, casinos, shops, bureau de change and other businesses, both local and abroad. The

process of placement can be carried out through many processes including:

1. Currency Smuggling – This is the physical illegal movement of currency and monetary

instruments out of a country.

2. Bank Complicity – This is when a financial institution, such as banks, is owned or

controlled by unscrupulous individuals suspected of conniving with drug dealers and

other organised crime groups. This makes the process easy for launderers. The complete

liberalisation of the financial sector without adequate checks also provides leeway for

laundering.

3. Currency Exchanges – In a number of transitional economies the liberalisation of foreign

exchange markets provides room for currency movements and as such laundering

schemes can benefit from such policies.

4. Securities Brokers – Brokers can facilitate the process of money laundering through

structuring large deposits of cash in a way that disguises the original source of the funds.

5. Blending of Funds – The best place to hide cash is with a lot of other cash. Therefore,

financial institutions may be vehicles for laundering. The alternative is to use the money

from illicit activities to set up front companies. This enables the funds from illicit

activities to be obscured in legal transactions.

6. Asset Purchase – The purchase of assets with cash is a classic money laundering method.

The major purpose is to change the form of the proceeds from conspicuous bulk cash to

some equally valuable but less conspicuous form.

 

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Layering – The purpose of this stage is to make it more difficult to detect and uncover a

laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law

enforcement agencies. The known methods are:

1. Cash converted into Monetary Instruments – Once the placement is successful within the

financial system by way of a bank or financial institution, the proceeds can then be

converted into monetary instruments. This involves the use of banker’s drafts and money

orders.

2. Material assets bought with cash then sold – Assets that are bought through illicit funds

can be resold locally or abroad and in such a case the assets become more difficult to

trace and thus seize.

 

Integration – This is the movement of previously laundered money into the economy mainly

through the banking system and thus such monies appear to be normal business earnings. This is

dissimilar to layering, for in the integration process detection and identification of laundered

funds is provided through informants. The known methods used are:

1. Property Dealing – The sale of property to integrate laundered money back into the

economy is a common practice amongst criminals. For instance, many criminal groups

use shell companies to buy property; hence proceeds from the sale would be considered

legitimate.

2. Front Companies and False Loans – Front companies that are incorporated in countries

with corporate secrecy laws, in which criminals lend themselves their own laundered

proceeds in an apparently legitimate transaction.

3. Foreign Bank Complicity – Money laundering using known foreign banks represents a

higher order of sophistication and presents a very difficult target for law enforcement.

The willing assistance of the foreign banks is frequently protected against law

enforcement scrutiny. This is not only through criminals, but also by banking laws and

regulations of other sovereign countries.

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4. False Import/Export Invoices – The use of false invoices by import/export companies has

proven to be a very effective way of integrating illicit proceeds back into the economy.

This involves the overvaluation of entry documents to justify the funds later deposited in

domestic banks and/or the value of funds received from exports.

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Legislation in India

The Prevention of Money-Laundering Act, 2004 came into effect on 1 July 2005. Section 3 of

the Act makes the offense of money-laundering cover those persons or entities who directly or

indirectly attempt to indulge or knowingly assist or knowingly are party or are actually involved

in any process or activity connected with the proceeds of crime and projecting it as untainted

property, such person or entity shall be guilty of offense of money-laundering.

Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment

for a term which shall not be less than three years but which may extend to seven years and shall

also be liable to fine which may extend to five lakh rupees and for the offences mentioned

[elsewhere] the punishment shall be up to ten years.

Section 12 of The Prevention of Money-Laundering Act, 2004 (1) prescribes the obligations on

banks, financial institutions and intermediaries

(a) To maintain records detailing the nature and value of transactions which may be

prescribed, whether such transactions comprise of a single transaction or a series of transactions

integrally connected to each other, and where such series of transactions take place within a

month;

(b) To furnish information of transactions referred to in clause (a) to the Director within

such time as may be prescribed and to

(c) Verify and maintain the records of the identity of all its clients.

Section 12 of The Prevention of Money-Laundering Act, 2004 (2) prescribes that the records

referred to in sub-section (1) as mentioned above, must be maintained for ten years after the

transactions finished.

The provisions of the Act are frequently reviewed and various amendments have been passed

from time to time. The recent activity in money laundering in India is through political parties

corporate companies and share market.

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A CASE STUDY ON

MONEY LAUNDERING IN INSURANCE BUSINESS

Facts of the Case

During first week of August 2006, branch manager Mr. Sukdeep Singh of M/s Beassure

Insurance Co. Ltd, New Delhi branch was very excited to know that Mr. Sunder Lal, a business

man with an annual urnover of Rs. 2 crores, wanted to buy an Insurance Policy Long Life- a Unit

Linked Single premium product which had no cap on maximum premium payable. The point of

excitement was that he called to take a cover for 10 crores with a single premium remittance of

Rs. 10 lakhs. He, however, expressed his reservations regarding remittance of premium wherein

he desired to make the payment partly through bank account which at the moment had a balance

of Rs. 6 lakhs. He informed that balance of the premium

He would remit in cash. Mr. Singh was left in a fix. He was not in favour of losing his valuable

customer. At the same time, he had to comply with the IRDA guidelines on Anti-Money

Laundering (AML) wherein he was not supposed to allow remittance of premium in cash beyond

Rs. 50,000/-. He succumbed to the pressure to fulfill his annual targets and used all his mind and

influence to ensure that Mr. Lal was issued the policy. Mr. Singh, could accomplish this task

with all ease, as it was the time when software on AML was getting implemented in phases

across all the branches of the company and was facing certain teething problems.

In the free-look period Mr. Lal came back to cancel his policy as he was not happy with the

terms and he wished to take another policy with better terms to suit his requirement. As a

valuable customer Mr. Lal was given back Rs. 9.5 lakhs based on the NAV as on that date and

after deducting administrative charges. With a promise to take another policy after a weeks’

time, Mr. Lal vanished from the scene.

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After 10 days, Mr. Singh happened to read the local newspaper wherein he came to know that

Mr. Lal was arrested on a non- bailable warrant and is a prime suspect in the smuggling racket of

cocaine that came to light a week ago. He was happy that he had no more dealings with the

accused. He also recollected his agent’s informal remarks that the so called businessman had

changed his residential address twice during the previous year and was likely to shift to his own

house some time during the last quarter of the calendar year and as such provided his friend’s

address for communication.

Out of curiosity, he reviewed the documents attached along with the proposal form. He found

that Mr. Lal had submitted:

1 A written confirmation from his banker as Identity proof

L Income tax return for the previous year ended 2005 as income proof

l Photostat copy of his SSC certificate as age proof

Mr. Lal had furnished all the minimum documents required for financial underwriting.

Mr. Singh sighed with relief and thanked God, because the policy was cancelled as the terms and

conditions of Long life did not please Mr. Lal. Now that there is no insurance contract, there is

hardly any possibility of him being caught for having dealings with Mr. Lal.

Case Problem

Mr. Singh has no more dealings with Mr. Lal as there is no insurance contract. However, after

reading the news item, and having realized that Mr. Lal was a prime suspect in a smuggling case

and to whom he ensured issuance of an insurance policy violating vital requirements of the AML

guidelines issued by IRDA, what is the course of action left to Mr. Singh?

Mr. Singh is hardly in possession of any documents which could be used for an audit trail to

trace out that money laundering was involved. Has he got to report the transaction to Financial

Intelligence Unit FIU-IND?

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What is the position of Mr. Singh who did not report the transaction as required by the

guidelines?

What is the course of action towards the insurance company which might have become a part of

the money laundering process though unknowingly?

What steps should the insurance company take in order to avoid occurrence of such violations in

the implementation of AML guidelines?

Case Analysis

Background for analysis:

Money Laundering (ML) is a process of cleansing dirty money, derived out of organized

criminal activities, in order to make it look like having legal origin. It involves three stages,

namely placement, layering and integration in which criminal proceeds pass through a series of

intricate transactions among various financial institutions. Thus, illegal money is distanced from

its source and used at the destination. Recent past has witnessed the ML process being used

basically to fund terrorist activities. As such there is a growing concern across the world to curb

the progression. A step towards this direction in our country is the enactment of The Prevention

of Money Laundering Act, 2002 which criminalizes the ML process.

As per section 3 of the Prevention of Money Laundering Act, 2002 a person who is involved

directly or indirectly or indulges or assists or is a party in any process or activity connected with

the proceeds of crime and projecting it as untainted property would be guilty of offence of

money-laundering. He/she would be liable for a punishment, not less than 3 years and which

may extend upto 7 or 10 years, based on the crime involved and would also be liable to a fine

which may extend to Rs. 5 lakhs.

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Vulnerability of insurance sector to ML processes is far less in comparison with that of other

financial institutions. However, there are certain highly prone areas in this sector. Eg., single

premium products. Buying single premium products with huge premium remittance and

cancellation of the same especially during the free-look period is one of the various ways in

which ML can happen in life insurance industry. In general insurance, it takes the form of

fraudulent claims or refunds following cancellations.

The triumvirate regulators of the financial institutions (FIs) namely RBI, SEBI and IRDA have

issued guidelines to comply with the PML Act to their respective regulated entities. FIs should

submit reports of certain specified transactions to Financial Intelligence Unit (FIUIND), which is

the central, national agency responsible for receiving, processing, analyzing and disseminating

information relating to suspect financial transactions to enforcement agencies. Guidelines on

Anti-Money Laundering Programme for Insurers were issued in March 2006.

It requires every insurance company to have in place their Anti-Money Laundering Policy and

emphasizes “Know Your Customer (KYC)” norms.

Accordingly, insurance companies are required to collect recent photograph of individual clients;

document identity of the customer; his/her residential address (both permanent and temporary);

and sources of funds based on the risk profile of the customer besides the documents required by

underwriting norms. Premium remittance cannot be in cash beyond Rs. 50000/-. Cash

transactions above Rs. 10 lakhs in a month and series of all cash transactions integrally

connected to each other which have been valued below Rs. 10 lakhs where such series of

transactions have taken place within a month and those that are suspicious in nature (whether in

cash or not) should be reported to FIU-IND.

Analysis of case under review

AML guidelines are in the nascent stage of implementation in the insurance industry in our

country. There is a general lack of awareness in the industry as a whole that insurance products

are attractive to money launderers. Like Mr. Singh, many employees of the insurance companies

are not aware of the fact that their priorities in carrying out their responsibilities can facilitate

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insurance companies being utilized as a conduit in the layering process of ML. They are

concerned more about their routine annual targets and bypass major issues which are likely to

arouse regulatory concerns as seen in the present case. Mr. Singh, if he were compliant, should

have insisted upon proper proof of residence and photograph which needs to be collected

mandatorily under AML guidelines apart from whatever documents were submitted by Mr. Lal.

Had he insisted upon proper documentation, he might have got a clue about the intentions of his

client wherein he ensured to receive a cheque from the insurance company in the pretext of

cancellation. Client’s reactions could have roused suspicion which in turn warrants reporting

requirements.

Mr. Singh disregarded AML guidelines. He would have sensed the possibility of ML when he

had read the news item on the arrest of Mr. Lal in the smuggling racket. However, he tried to

pretend ignorance under the cover that he no longer had any contract with Mr. Lal. Suspicious

transactions are required to be reported within 3 days of identification. Mr. Singh suspected only

after the publication of the news item about Mr. Lal. He is very well bound to report at that stage

in spite of lack of any valid contract. But, as this would have brought out his non-compliance

with the AML requirements as regards documentation mandated in the AML guidelines, Mr.

Singh would not venture such an attempt.

Interrogation of the case can bring out the fact that proceeds, out of cancelled insurance

contracts, were being used in financing the smuggling process. It would ultimately crystal down

to reveal the fact that AML guidelines were not complied with. It certainly attracts penal action

against Mr. Singh, both for non-compliance with the guidelines and also with the PML Act.

Insurance company’s reputation is at stake as this case would highlight the fact that it has failed

in training and motivating their employees to comply with the guidelines. It also shows the

ineffective implementation of regulatory directions.

Insurance companies are responsible for the compliance and implementation of AML guidelines.

Insurance companies are expected to impart ample training on the subject to all their employees/

agents, both the front and back office staff, for effective implementation of their AML policy.

Any violation of Act or non-compliance of guidelines indicates improper communication of the

impact of ML at various levels of the organisation. In view of the responsibility fixed upon the

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insurance company, M/s Beassure Assurance Co. Ltd should review the training requirements of

the staff and make it more effective to educate their employees on the implications of non-

compliance and the penalties that follow non-compliance. In the instant case, delay in the

installation of software on AML which have in-built mechanisms to check the violation of

threshold limits of acceptance of cash has contributed towards violation. Internal audit

department of the Company should carry out extensive check on all the exceptional transactions

that took place during the installation phase of the software to bring out more violations if any.

Once the issue surfaces out, insurance company should take disciplinary action against Mr.

Singh which would prove a lesson to other employees. Unless strenuous action is initiated

against such violations, implementation of the guidelines cannot be effective and successful. The

company will have to intensify their training campaigns to make sure that the communications

on AML reaches all the levels of the organization. They may quote the specific incidence of non-

compliance and the action taken against such deviation to highlight the necessity and importance

of AML measures adopted by the company. The Company should also carry out quick and

thorough check of the software to ensure that it is fool-proof.

People like Mr. Singh will never be able to guess or understand, how they are aiding terrorist

attacks like ‘9/11’ by giving weightage to measly areas like fulfillment of their annual targets by

sacrificing the larger interest of the society. Achievement of pre-set targets lead to

accomplishment of organizational objectives, which however should not be at the cost of interest

of the society at large. In a dynamic competitive world, organizations are keen on attaining their

goals. In the process, however, they should not be indifferent towards their social responsibility.

Organizations have a duty to ensure that they educate their employees to give equal importance

to the accomplishment of individual annual targets and also comply with law and regulatory

concerns. Individual and organizational goals should not prove hazardous to the welfare of the

society.

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Satyam scandal

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when

Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.

On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members

and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been

falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

inflated figures for cash and bank balances of 5,040 crore (US$ 1.14 billion) as against

5,361 crore (US$ 1.22 billion) reflected in the books.

an accrued interest of 376 crore (US$ 85.35 million) which was non-existent.

an understated liability of 1,230 crore (US$ 279.21 million) on account of funds was

arranged by himself.

an overstated debtors' position of 490 crore (US$ 111.23 million) (as against 2,651

crore (US$ 601.78 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited

financially from the inflated revenues. He claimed that none of the board members had any

knowledge of the situation in which the company was placed.

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from

functioning and appoint 10 nominal directors. "The current board has failed to do what they are

supposed to do. The credibility of the IT industry should not be allowed to suffer." said

Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued

show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging.

"We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

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FINANCIAL CRIMES

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani

Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody.

On 11 January 2009, the government nominated noted banker Deepak Parekh, former

NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

Where did the money go?

Raju claims that Satyam inflated profits for many years...

By inflating cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected

in the books)

Accrued interest of Rs 376 crore is non-existent

Liability of Rs 1,230 crore is understated on account of funds arranged by "me"

Debtors position of Rs 490 crore is overstated (as against Rs 2,651 reflected in the books)

… but if this Rs 7,000-odd crore did not exist…

How were the salaries of 53,000 employees being paid with a business that ostensibly

survived on just a 3 per cent operating margin?

Were there more employees on the bench (than revealed)?

Was Raju inflating profits to boost Satyam's valuation, and borrowing money by pledging

its shares?

...but if the money did exist...

Did the Rajus use Satyam funds to build a land bank of over 6,000 acres via a web of

unlisted companies?

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FINANCIAL CRIMES

What happened to the funds raised? There was an ADR issue in 2001, via which Satyam

raised Rs 753 crore and on March 31, 2002, Satyam became an almost zero-debt

company with Rs 431 crore unutilized amount of ADR proceeds

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FINANCIAL CRIMES

CONCLUSION

Financial Crimes are defined as a crime against property, involving the unlawful conversion of

the ownership of property (belonging to one person) to one’s own personal use and benefit.

Financial crimes often involve fraud.

Financial crimes are carried out via check and credit card fraud, mortgage fraud, medical fraud,

corporate fraud, bank account fraud, payment (point of sale) fraud, currency fraud, and

healthcare fraud, and they involve acts such as insider trading, tax violations, kickbacks,

embezzlement, identity theft, cyber attacks, money laundering, social engineering, and Securities

fraud.

Tips to protect ourselves from financial crimes

We can lose thousands of rupees without our knowledge and the purchases can be done on the

credit card. They can also take the money by opening fake accounts with our personal

information. As the technology had increased, the financial crimes are increased along with the

increase in the financial crimes. The crime rate is increasing every day and so we should be

careful.

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FINANCIAL CRIMES

We generally use the pan card, telephone bill, driving license etc every day for some use. We

generally give the address along with signatures for the people for any purpose. This is enough to

do the financial crimes. The financial criminals take this information and open a fake account

and take the credit card. They easily draw the amount and create a loss for you.

We should remember that the information will reach the financial criminals through

internet also. We should be careful before accessing our accounts through internet.

We should follow the advice of the banks to change the user id and password when we

have a doubt.

We should keep only or two credit cards which we use more in the purse even though we

are having many cards.

It is better to use the debit card for shopping and if the details of credit card account are

known through online, then the amount in the savings account can be drawn. So it is

better to use the credit cards whose maximum withdrawal is less.

We should keep the passbooks for credit and debit cards at a safe place where we can

take them immediately when required. When we lose the cards, we should give the

details to the call center through the documents we are having.

Most of the people store the pin number along with the card or in the mobile or tell it to

friend through phone or mail. The best way is to remember it.

When we get a phone call that card is issued, we should be careful and if it takes some

time for us to take the card, and we should inform the authorities.

When we shopping online, we should not click on the links which contain the viruses.

We should be careful and we should type the link address in the address box than clicking

on it.

We should write to the bank when we face any problem. When there is no response we

should inform the bank authorities.

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FINANCIAL CRIMES

BIBLOGRAPHY

1) www.google.com

2) www.wikipedia.com

3) http://www.buzzle.com/articles/advertising

4) www.ehow.com/financial_crimes

5) www.ehow.com/moneylaundering

6) www.wisegeek.com/lawenforcement

7) www.etidynamics.com

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