Describe the methodology of banking system in order to prevent money laundering.

1          Introduction

Money laundering is a process of concealing the source of obtained money. This is a common organized crime. The methods by which money can be laundered are varied and can range in sophistication. [1]Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either world wide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the Financial Action Task Force on Money Laundering (FATF), an intergovernmental body set up to combat money laundering, stated that “overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard”. Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.[2]

Money laundering can  be defined in a number of ways. But the fundamental concept of money laundering is the process by which proceeds from a criminal activity are disguised to conceal their illicit origins. Most countries subscribe to the definition adopted by the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances(1988) (the Vienna Convention) and the United Nations Convention Against Transnational Organized Crime (2000) (the Palermo Convention)[3]:

“The conversion or transfer of property, knowing that such property is derived from any offense, e.g. drug trafficking, or offenses or from an act of participation in such offense or offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offense or offenses to evade the legal consequences of his actions;”[4]

? The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offense or offenses or from an act of participation in such an offense or offenses, and;

? The acquisition, possession or use of property, knowing at the time of receipt that such property was derived from an  offense or offenses or from an act of participation in such offense or offenses.

The Financial Action Task Force on Money Laundering (FATF), which is recognized as the international standard setter for anti-money laundering (AML) efforts, defines the term “money laundering” succinctly as “the processing of…criminal proceeds to disguise their illegal origin” in order to “legitimize” the ill-gotten gains of crime.[5]

  1. 1.      Stages of money laundering:

There is no single method of money laundering. Methods can range from the purchase and resale of a luxury item (e.g a house, car or jewellery) to passing money through a complex international web of legitimate businesses and ‘shell’ companies (i.e. those companies that  primarily exist only as named legal entities without any trading or business activities).  There are a number of crimes where the initial proceeds usually take the form of cash that needs to enter the financial system by some means.  Bribery, extortion, robbery and street level purchases of drugs are almost always made with cash. This has a need to enter the financial system by some means so that it can be converted into a form which can be more easily transformed, concealed or transported.  The methods of achieving this are limited only by the ingenuity of the launderer and these methods have become increasingly sophisticated. But the scholars have listed 3 ways money can be laundered.[6]

  1. 2.     The impact of money laundering:

The banks, equity markets, and non-bank financial institutions, such as insurance (NBFIs), invalid fund, internationally and within developing countries favored way of laundering. Financial Abuse of the IMF (2001) as part of the definition of ML illegal financial activities in a country with disastrous effects on the broader financial system and of the legal activities of financial abuse as defined in the role of Financial Institutions (FIS at the time) on the basis of involvement in financial crime are identified as three types of financial abuse, as well as criminal as an excuse[7]. As victims, FIS fraudulent activities of various kinds, including the cause, such as financial information, check embezzlement and credit card fraud, securities fraud, insurance fraud, pension fraud and misrepresentation. When FIs used as perpetrator, FIs can be used to sale false monetary goods, stock exploitation, and stealing of client money. As an instrumentality FIs are used to keep or move funds, either knowingly or without knowing, that are themselves the profits or proceeds of a crime, regardless of whether the crime is itself financial in nature. These types of crimes suitably define as Money Laundering. On the basis of the over perceptive the impact of ML can be explained from the point of impact on financial sector and on the real sector.

 2.1  Financial Sector:

Money Laundering may hinder the status of the financial institution and may increase the operational risk of the banking firm when banking firm itself involved with the launderer or in criminal activities. Thus, without even involvement in any criminal offence, money laundering may be a reason of breakdown of banking (financial) sector of an economy. People may loose their self-confidence on the banking system. Such confidence failure towards the official sector may increase the activities of informal monetary firm. The growth of activities of the informal sector might again increase the possibility of money laundering such as credit union, hawala remittance systems etc. [8] ”Money laundering shifts the economic power to the criminals” (Bartlett, 2002). In such a situation, criminals may use their economic power to undertake the operation of the financial firm of the country and may use the fund of the depositors to do more criminal activities. Therefore, the scarce financial resources of the developing country may be used for the criminal activates of few launderers, instead of productive investment of the economy. Such criminal activities can lead to more terrorism against humanity. Even, money laundering and terrorist financing can threaten financial stability and economic prosperity, adding to the gravity of the underlying crimes[9]. In the extreme scenario, money-laundering activity undermines capital formation within developing economies [10]

3.2. Real Sector:

The ease of money laundering in the financial sectors leads to increased money laundering in the real sector (Bartlett 2002). If the financial sector is not strong enough to combat ML, then the criminals marginal cost to do ML will be reduced and they would be able to do more ML with the same cost. Such ease of ML has devastating effect on production, employment and distribution. More and more economic power would be concentrated to the launderers and they might use the resources for personal interest rather than development of real economy. Such power concentration may also reduce the financial ability of the government to invest in real sector growth or to invest in combating ML (Rahman, 2007). As argued by Bartlett (2002), the most important effect of money laundering on the real sector is the reduction of investment in the productive sector. By increasing sterile investment1 in the economy launderer create “crowding-out” situation in the system. By reinvesting in such sector, the criminals increase the price of the sector, or the value of the assets, which means more unproductive investment and more money laundering. Supporting the argument Agarwal and Agarwal (2007) argued that in the recent decades the real estate sector being the most commonly reported entities associated with money laundering and related illicit activity Although it is not possible to identify the appropriate level of black money investment in the real estate sector as a means of money laundering, however, several studies found that in some developing countries despite reduction in real growth, real estate investment booming (Fryer, 2007).[11] Such over investment leads to asset price bubble and could be a cause of banking sector failure. [12]Money laundering encourages more import in an economy, leading to less production and more unemployment. ML may also be a cause of macroeconomic instability in the developing countries. Laundered money may increase the instability in the exchange rate, increased supply of fund in the market leads to price push inflationary effect in the real sector (Rahman, 2007, IMF, 2001). Such inflationary pressures increase the interest rate in the economy and therefore less investment, less growth, unemployment and in the extreme situation increased possibility of loan default in the financial sector.[13]

  1. 3.     Bangladesh and money laundering:

The 2002 of the law of money laundering prevention (MLPA) is the original foundation of Bangladesh under the Anti-Money Laundering (AML) funds. However, the government sought to expand the scope of the system, and provided for the Prevention of Money Laundering Decree (MLPO) in April 2008, in February 2009 and was re-released as an act of parliament of the new government. In June 2008  the government also issued anti-terrorism law, which criminalizes the financing of terrorism for the first time.

Bangladesh faces a range of serious ML and Tf threats. Authorities indicate the following offences as the most  common offences generating substancial criminal proceeds:

  • Bribery,
  • Abuse of public office
  • Securities fraud,
  • Embezzlement,
  • Human trafficking,
  • Extortion and
  • Drug trafficking

Bangladesh is a transshipment point for illicit drugs with a long porous border with India and Myanmar noticed vulnerable and at-sea transshipment by fishing trawlers.

Bangladesh as a transshipment point for drugs produced in the golden triangle “and” Golden Crescent “area, as well as drugs for markets in Europe, the USA and Canada. Bangladesh is used as a transit country for shipments using heroin at Dhaka airport and sea, as an exit point of Chittagong.

4.1: Methods, techniques, and the magnitude of money laundering

Bangladesh economy is cash based. The banking sector laundering and bulk cash smuggling is the most common method of communication. Alternative remittance systems (draft), Bangladesh is a common event, send money abroad illegally.

These money are then used for terrorist financing. According to a report it is visible that the terrorists of Bangladesh are homegrown and are going to stay in that country.[14] They do not need extravagant amount of money to buy weapons as most of the weapons are crude. This tpe of financing is called micro financing.[15]

  1. 4.     How do banks prevent money laundering:
  1. Policies and procedures:

Policies talk about the high level snit money laundering approach your firm. It has to incorporate local legislative and regulatory requirements. All the policies need to ratified by the senior management. It needs to be understood that procedures outline the detailed day to day anti-money laundering operations of the firm or bank.[16]

 6.1 Know Your Customer Procedures

6.1.1 Each Financial Institution is required to perform due diligence on all prospective clients prior to opening an account. This process is completed by fulfilling the documentation requirements (Account Application, Bank References, Source of funds and Identification for example) and also a ‘Know Your Customer’ profile which is used to record a client’s source of wealth, expected transaction activity at it’s most basic level.

6.1.2 Once the identification procedures have been completed and the client relationship is established, Financial Institutions  should monitor the conduct of the relationship/account to ensure that it is consistent with the nature of business stated when the relationship/account was opened.  Financial Institutions do this firstly by the their staff being diligent, reportingsuspicious transactions undertaken by the customer, updating the client’s KYC profile for any significant changes in their lifestyle (e.g., change of employment status, increase in net worth) and by monitoring the transaction activity over the client’s account on a periodic basis.

6.1.3 KYC profile gives the basic information about the customer like, Name, Address, Tel/Fax Numbers, line of business, Annual sales. If the customer is a Public Figure, the account will become automatically a High Risk Account.

6.1.4 The KYC Profile information will also include the observations of the Institution’s Staff/Officer

when they visit the customer’s business place like, the business place is owned or rented, the type of clients visited, by what method is the client paid (cheque or cash). The Staff/Officer will record his observations and sign the KYC Profile form.

6.1.5 In the case of high net worth Accounts, the information will include net worth of the customer, source of funds etc

6.1.6 The KYC Profile leads to Risk Classification of the Account as High/Low Risk.

 6.2 Risk categorization – Based on Activity/KYC Profile

6.2.1 When opening accounts, the concerned staff/Officer must assess the risk that the accounts could be used for “money laundering”, and must classify the accounts as either High Risk or Low Risk.   The risk assessment may be made using the KYC Profile Form given in Annexure D in which following seven risk categories are scored using a scale of 1 to 5 where scale 4-5 denotes

High Risk, 3- Medium Risk and  1-2 Low Risk:

ß Occupation or nature of customer’s business

ß Net worth / sales turnover of the customer

ß Mode of opening the account

Staff/Officer assessment Or customerProvided

  • info
  • KYC
  • profile
  • Risk
  • Classification
  • Frequency of
  • Monitoring and
  • Review38
  • Expected value of monthly transactions
  • Expected number of monthly transactions
  • Expected value of monthly cash transactions
  • Expected number of monthly cash transactions

6.2.2 The risk scoring of less than 14 indicates low risk and more than 14 would indicate high risk.

The risk assessment scores are to be documented in the KYC Profile Form (see Annexure D).

However, management may judgmentally override this automatic risk assessment to “Low

Risk” if it believes that there are appropriate mitigants to the risk. This override decision must

be documented (reasons why) and approved by the Branch Manager, and Branch AML

Compliance Officer.

6.2.3 KYC Profiles and Transaction Profiles must be updated and re-approved at least annually for

“High Risk” accounts (as defined above).  There is no requirement for periodic updating of

profiles for “Low Risk” transactional accounts.  These should, of course, be updated if and

when an account is reclassified to “High Risk”, or as needed in the event of investigations of

suspicious transactions or other concern.

6.3 Transaction Monitoring Process

6.3.1 Financial Institutions are expected to have systems and controls in place to monitor on an

ongoing basis the relevant activities in the course of the business relationship. The nature of this

monitoring will depend on the nature of the business. The purpose of this monitoring is for Financial Institutions to be vigilant for any significant changes or inconsistencies in the pattern of transactions. Inconsistency is measured against the stated original purpose of the accounts i.e. the declared Transaction Profile (TP) of the Customer.  Possible areas to monitor could be: –

a. transaction type

b. frequency

c. unusually large amounts

d. geographical origin/destination

e. changes in account signatories

6.3.2.It is recognized that the most effective method of monitoring of accounts is achieved through a combination of computerized  and human manual solutions. A corporate compliance culture, and properly trained, vigilant staff through their day-to-day dealing with customers, will form an effective monitoring method as a matter of course. Computerized approaches may include the setting of “floor levels” for monitoring by amount. Different “floor levels” or limits may be set for different categories of customers.

6.3.3.Whilst some Financial Institutions may wish to invest in expert computer systems specifically designed to assist the detection of fraud and money laundering, it is recognized that this may not be a practical option for many Financial Institutions for the reasons of cost, the nature of their business, or difficulties of systems integration, in such circumstances institutions will need to ensure they have alternative systems in place.

6.3.4.Every Business and every individual will have normally certain kind of transaction in line with their business/individual needs. This will be declared in a Transaction Profile (TP) at the time of opening account from the customer.  Ideally any deviation from the normally expected TP 39should be reviewed with human judgment and interaction with customer. Such reviews may result in changing the expected profile or closing the customer account.

6.3.5. It may  not be feasible for some institutions or specific branches of institutions having very

large number of customers to track every single account against the TP where a risk based approach should be taken for monitoring transactions based on use of  “Customer Categories” and “Transaction Limits” (individual and aggregate) established within the branch.   The Customer Category is assigned at account inception  – and may be periodically revised  – and is documented on the Transaction Profile.  Transaction Limits are established by the business subject to agreement by Branch AMLCO.  The Customer Categories and Transaction Limits are maintained in the manual ledgers or computer systems.

6.3.6.On a monthly basis Branch/ Unit of the financial institution must prepare an exception report of customers whose accounts showed one or more individual account transaction during the period that exceeded the “transaction limit” established for that category of customer based on AntiMoney Laundering risk assessment exercise.

6.3.7.Account Officers/Relationship Managers or other designated staff will review and sign-off on such exception report of customers whose accounts showed one or more individual account transaction during the period that exceeded the “transaction limit” established for that category of customer.  The concerned staff will document their review by initial on the report, and where necessary will prepare internal Suspicious Activity Reports (SARs) with action plans for approval by the relevant Branch Manager and review with the Branch AMLCO. A copy of the transaction identified will be attached to the SARs.

6.3.8.AMLCO will review the SARs and responses from the Account Officers /Relationship Managers or other concerned staff. If the explanation for the exception does not appear reasonable then the Branch/Unit Head should review the transactions prior to considering submitting them to the regional AMLCO or CAMLCO.

6.3.9.If the Branch/Unit Head and / or AMLCO believe the transaction should be reported then the AMLCO will supply the relevant details to the RAMLCO or the CAMLCO.

6.3.10. The RAMLCO and CAMLCO will investigate any reported accounts and will send a status report on any of the accounts reported. No further action should be taken on the account until

notification has been received.

6.3.11. If, after confirming with the client, the transaction trend is to continue the Account Officer is responsible for documenting the reasons why the transaction profile has changed and should amend the KYC profile accordingly.

6.4 Suspicious Activity Reporting Process

6.4.1 Financial Institutions  must establish written internal procedures so that, in the event of a

suspicious activity being discovered, all staff is aware of the reporting chain and the procedures

to follow. Such procedures should be periodically updated to reflect any regulatory changes.

6.4.2 Financial Institutions should ensure that staff report all suspicious activities to their

Branch/Unit  level AMLCO, and that any such report be considered in the light of all other 40

relevant information by the AMLCO, or by another designated person, for the purpose of

determining whether or not the information or other matter contained in the report does give

rise to a knowledge or suspicion (See section 2 Umah of the AML Circular #2).

6.4.3 Where staff continues to encounter suspicious activities on an account, which they have

previously reported to the AMLCO, they should continue to make reports to the  AMLCO

whenever a further suspicious transaction occurs, and the  AMLCO should determine whether a

disclosure in accordance with the regulations is appropriate.

6.4.4 All reports of suspicious activities must reach the CAMLCO and only the CAMLCO should

have the authority to determine whether a disclosure in accordance with the regulation is

appropriate. However the line/relationship manager can be permitted to add his comments to the

suspicion report indicating any evidence as to why he/she believes the suspicion is not justified.

6.4.5 Detailed procedures on reporting of suspicious activities are given in Chapter VIII of this

Guidance Notes.

6.5 Self-Assessment Process

Each financial institution should establish an annual self-assessment process that will assess how

effectively the financial institution’s anti-money laundering procedures enable management to

identify areas of risk or  to assess the need for additional control mechanisms. The self-assessment should conclude with a report documenting the work performed, who performed it, how it was controlled and supervised and the resulting findings, conclusions and recommendations. The self assessment should advise management whether the internal procedures and statutory obligations of the financial institution have been properly discharged. The report should provide conclusions to

three key questions:

ß Are anti-money laundering procedures in place?

ß Are anti-money laundering procedures being adhered to?

ß Do anti-money laundering procedures comply with all policies, controls and statutory


6.6 System of Independent Procedures Testing

Testing is to be conducted at least annually by the financial institution’s internal audit personnel,

compliance department, and by an outside party such as the institution’s external auditors. The tests include:

ß interviews with employees handling transactions and interviews with their supervisors to determine their knowledge and compliance with the financial institution’s anti-money laundering procedures;

ß a sampling of large transactions followed by a review of transaction record retention forms and suspicious transaction referral forms;

ß a test of the validity and reasonableness of any exemptions granted by the financial institution; and

ß a test of the record keeping system according to the provisions of the Act.

Any deficiencies should be identified and reported to senior management together with a request for a response indicating corrective action taken or to be taken and a deadline


With the increased financial globalization, money laundering has emerged as an activity affecting societies and financial systems everywhere in the world. With the increase in money laundering activities financial systems are used by the launderers in washing up their illegal income to make it clean in different ways. Sometimes financial systems are used as a route to transfer funds from one geographic location to another. Therefore, keeping into mind the trans-national character of the money laundering crime, there is need for a unitary and coherent approach at international level, to protect the global financial system from the money laundering.

The impact of money laundering on the financial and real sector cannot be faced for longer term in an economy. Moreover, ML distorts the performance and capacity of the financial institutions to distribute credit among the productive sectors. Terrorists use a wide variety of ML methods to move funds between organizations. Mostly financial institutions are involved in such methods to finance the terrorism by the criminal?s fund. In the era of globalization ML is not a problem for a single country, it has to be face by the global community.


  1. ^ The IT Law Community. “Data Protection, Money Laundering and Terrorism”. Retrieved 23 October 2011.
  2. ^ American Civil Liberties Union. “The Surveillance Industrial Complex”. Retrieved 23 October 2011.
  3. ^ Booth, William (26 August 2010). “Mexico targets money laundering with plan to limit cash transactions”.Washington Post. Retrieved 19 September 2011.
  4. ^ Financial Action Task Force. “Member Country and Observers FAQ”.
  5. ^ Financial Action Task Force. “Mission”. Retrieved 1 March 2011.
  6. ^ International Money Laundering Information Network. Retrieved on 21 October 2011.
  7. ^ World Bank Financial Market Integrity. Retrieved on 21 October 2011.
  8. ^
  9. ^ Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. Retrieved on 21 October 2011.
  10. (Ka) Penal Code, 1860 (XLV of 1860);
  11. (Kha) Arms Act, 1878 (XL of 1878)
  12. (Ga) Foreign Exchange Regulation Act, 1947 (VII of 1947);
  13. (Gha) Anti-Corruption Act, 1957 (XXVI of 1957);
  14. (Umah)   Special Power Act, 1974 (XIV of 1974);
  15. (Cha) Madak Drabwa Niatran Ain (Drugs Control Act), 1990 (Act No. 20 of 1990);
  16. (Chaa) Jana Nirapatra (Bishesh Bidhan) Ain [ Public Safety (Special power) Act],2000
  17. (Act No 7 of 2000)
    1. Rahman, A 2007, Managing Core Risk in Banking, Guidance notes on prevention of Money laundering, Bangladesh Bank, viewed 31 February2011,  <>.
    2. International Monetary Fund 2001, Financial System Abuse, Financial Crime and Money Laundering
    3. Bartlett, BL 2002, The negative effects of money laundering on economic development?. Platypus Magazine, No. 77, pp. 32.

[1] ^ “Criminal finances”. SOCA. Retrieved 17 July 2012.

[2] Reuter, Peter (2004). Chasing Dirty Money. Peterson. ISBN 978-0-88132-370-2.

[3] ^ Financial Action Task Force. “About the FATF”. Retrieved 20 September 2011.


[6] Money Laundering Bulletin, Issue 154, June 2008, Dr Jackie Harvey (Newcastle Business School

[7] “OPSI: Terrorism Act”. Retrieved 14 February 2009.

[8] (Chêne, 2008).

[9] (Aninat at el.2002

[10] Bartlett, BL 2002, The negative effects of money laundering on economic development?. Platypus Magazine, No. 77, pp. 32.

[11] BCCI’s Criminality”. Retrieved 3 March 2011.


[12] Bank for International Settlements 2006, BIS 76th Annual Report, Bank for International Settlements, Basel, viewed 10 February 2011,