GoAML is a requirement, Not choice!

The Central Bank of Nepal (NRB) is in the final stage of execution of the Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) which will be operative into the Nepalese financial system effective from January 15, 2020. The banking community in Nepal has urged to practice and adopt the zero-tolerance for compliance after the Central Bank circulated the rule to all the country’s commercial institutions. Having seen three decades of banking contribution for the upliftment of Nepalese economy, the next milestones are employment opportunity, financial attribution and improvement of liquidity in the market. Ups and downs in the Nepalese Banking performance last three decades are highly remarkable to meet the International Standard. 

International concern towards Nepalese banking activities is growing very prominently and is observed in the high manual. Payment settlement process is being seriously watched by concerned authorities in order to mitigate Terrorist Financing (TF). Nepal as a member of the EG Mont group, agreed to exchange information and engage for international cooperation to counter ML/TF through members of Financial Intelligence Unit (FIUs), and this clearly shows that Nepal needs to uphold the standard at any cost. Central Bank is under the pressure to sanctuary the International Payment settlement process and perform well in maintaining the International Trade function. Fear of being blacklisted, NRB and Government of Nepal are working instantly to cope with it.

Need of CFT/AML 

In general terms, money laundering is understood as converting black or illegal money, which is not obtained through a legal source, into white or legal money. ML is carried out in three phases; placement, layering, and integration. Placement means that the illegal money or wealth are entered into the banks or deposit shell. Layering means that the money is hidden for the purpose of practicing criminal activities. Integration means that the laundered money is brought back through the banking channel as a bank check, and used for donation purposes having stated that it is from a legal source. Such money is laundered in huge amounts and found across the world for the purpose of terrorist financing, human trafficking, and drugs. 

Photo Credit: Internet

As the first phase of money laundering i.e. placement starts from bank, this is regarded as the crucial stage and requires extra attention while performing any financial transition. Our financial system is under cash-based transaction because a majority of Nepalese customers prefer cash-based rather than smart banking which includes internet banking and/or mobile banking. Traditional financial transaction creates multiple risks at banking with higher changes of having ML and TF being practiced directly or indirectly. Due to the factors such as absence of economic stability, lack of guidance, open border with India, and weak interrogative system, Nepal is considered as a playground for illegal and unfavorable financial activities. The concept of money laundering issues and its assessments were directed at the time when Nepal stood as a member of the Asian Pacific Group (APG) on Money Laundering, FATF in the year 2005 A.D. However since then, Nepal has not been able to shown any progress in working with the 49 standards set by FATF, which rises the doubt over Nepal in its ability to control Financing Terrorism. 

The central bank is now preparing to implement the FATF Assessment Act 2020 very aggressively in the Nepalese financial sector with fine and penalty that are expected to rise upto 50 million in  case of any failure to fulfill the requirements, and hold of the payment system. After the execution of GoAML software launched by United Nations Office on Drugs and Crime (UNODC), now it is easier for FIU to control terrorist financing and money laundering all over the globe. The UN body sold this system software for free in Nepal. The NRB enforced the commercial banks to link its system with this software and report regularly on threshold, suspicious accounts and transition. Nepalese BFIs are in a condition of ‘do or die’ to enforce it.

Know Your Customer (KYC) 

The Nepalese economy largely suffers due to the negligence in customer profiling, the most used terminology called KYC, which has led to having seen multiple suspicious transactions and big scandals in banking community. KYC is the DNA for the bank or financial institution to operate in stability manner. Compliance Department of any commercial bank must be serious in this regard, should classify the risk and have categorization of customer risk profile into High, Medium and Low. 

Similarly, KYC is the backbone for having GoAML system software operate and run effectively. Every reporting over the threshold transit is mandatory to mitigate the issues. Commercial Institution must not open the fictitious accounts, proper identification of the politically exposed person (Peps), screening the wired/high-value transaction. Monitoring beneficial owners and beneficiaries are necessary to overcome the challenges. Suspicious Transaction (STR), which is mainly done in the name of Foreign Direct Investment (FDI), possess a great loss in the economy. AML is fully dependent on the operation of KYC and its risk profiling. 

AML Challenges 

Major challenges for GoAML in Nepal could be in the offshore transaction and political intervention. Nepali money launder is involved in various trafficking, actively engaged for their money protection into tax heaven nations like Virgin Island, Panama, and Egypt. They are fully protected by political prevention and it’s hard to investigate them in a rigorous manner. Indian currency and informal transactions of money are the next hurdles to implement the AML perfectly. Nepal has so many issues with its Acts and Regulation. The degree of proper punishment is very low in the laws. 

In this regime, action taken by BFIs can mitigate potential fallout, including fines and penalties for failing to meet reporting requirements, as well as added time and effort to update and revise reporting data. With more FIUs around the globe adopting the goAML solution and showing global commitment on detecting, preventing and reducing financial crimes. Threats and risks are rapidly evolving, it is only through culture of continuous learning and collaboration that can stay ahead in this ever-changing world of finance.

Gyawali is an MBA candidate at APEX College.