Stages of money laundering

Money Laundering Prevention Act, 2002 defines money laundering as properties acquired or earned directly or indirectly through illegal means; illegal transfer, conversion and concealment of location of the properties earned through legal or illegal means or assistance in the said acts.

There are three main stages of money laundering. These are:

1. Placement: The physical disposal of the initial proceeds derived from illegal activity e.g. depositing the money earned by theft, robbery, bribery or hijacking to a bank account.

2. Layering: Separating illicit proceeds from their sources by creating complicated layers of financial transactions designed to disguise the audit trail and provide anonymity e.g. electronic

transfer of the fund to a fake firm, issuing overseas bank draft, purchasing travelers cheques, transfer of fund from one bank account to various names of different bank branches.

3. Integration: It means the provision of apparent legitimacy to property gained in an unlawful way. If the layering process is complete, integration process place the laundered proceeds back

into the economy in such a way that they re-enter the financial system appearing as normal business fund e.g. sale of flat/house/land purchased by illegal income.

Explain the concept of mobile banking.

 Mobile banking (also known as M-Banking, m-banking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA).

Mobile banking and Mobile payments are often, incorrectly, used interchangeably. The two terms are differentiated by their service provider-to-consumer relationship; financial

institution-to-consumer versus commercial institution-to-consumer for mobile banking and

payments, respectively. Mobile Banking involves using mobile devices gain to access financial services. Mobile payments on the other hand may be defined as the use of mobile devices to pay for goods or services either at the point of purchase or remotely. Bill payment is not considered a form of mobile payment because it does not occur in real time.

The following services are provided by a bank to its customers through mobile banking:

A. Pull services

I. Account balance inquiry

II. Last three transactions

III. Cheque leaf status

IV. Profit/interest rate on deposit V. Foreign currency exchange rate VI. Branch location/ phone number VII. ATM booths location

I. SMS registration information

II. Help list for key words to send SMS III. Help message format to send SMS

A. Request services

I. Fund transfer

II. Mobile bill payment

III. Cheque book request

IV. Account statement print request

V. Account statement request by courier/e-mail

B. Execution services: I. Stop payment

II. Stopped cheque leaf reactivation

III. PIN change

C. Alert services

I. Debit alert

II. Clearing cheque return alert

III. Loan expiry

IV. Scheme deposit maturity alert

How does Bangladesh Bank regulate the money supply through “Bank rate policy” and “Open Market Operation”?

 Bank rate policy:

The bank rate is the rate of interest at which BB re-discounts the first class bills of exchange from commercial banks. Whenever BB wants to reduce credit, the bank rate is raised and whenever the volume of bank credit is to be expanded the bank rate is lowered. This is because by change in the bank rate. BB seeks to influence the cost of bank credit.

The efficacy of bank rate policy depends, to a greater extent, on its power to influence the market rates. There is no organized money market in our country and thereby the market rates seldom respond to bank rate changes. The absence of any kind of conventional relationship between the central bank and other components of the money market further adds to the ineffectiveness of the bank rate policy

 

Open Market Operations:

The Central Bank buys or sells ((on behalf of the Fiscal Authorities (the Treasury)) securities to the banking and non-banking public (that is in the open market). One such security is Treasury

Bills. When the Central Bank sells securities, it reduces the supply of reserves and when it buys

(back) securities-by redeeming them-it increases the supply of reserves to the Deposit Money

Banks, thus affecting the supply of money.

Point out the major guidelines of Bangladesh Bank’s management of capital of BASEL –II

 A committee of central banks and bank supervisor and regulators from he major industrialized countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, U.K and USA) that meets every three months at BIS in Basel.

 Objectives of Basel II:

The objectives of Basel II are given below:

1. Should constitute a more comprehensive approach to address banking risks.

2. Appropriately sensitive to degree of risk.

3. Should continue to enhance competitive equality and promote safety and soundness of the financial system.

Three Pillars of Basel II:

1. Minimum Capital Requirement

2. Supervisory Review

3. Market Discipline

Guidelines for Minimum Capital Requirement:

1. Minimum Capital Requirement

2. Assessing Overall Capital Adequacy

3. Disclosure of Information on Bank’s Risk Profile, Capital Adequacy and Risk Management.

 

Capital Base: Regulatory capital is composed of:

• Tier -1 or Core Capital

• Tier-2 or Supplementary Capital

• Tier-3 or Additional Supplementary Capital

 

What is Tier – 1 Capital:

Tier-1 capital or Core Capital comprises of highest quality capital elements:

• Paid up capital/capital deposited with Bangladesh Bank

• Non-repayable share premium account

• Statutory Reserve

• General Reserve

• Retained Earnings

• Minority interest in subsidiaries

• Non-cumulative irredeemable Preference Share

• Dividend Equalization Account

 

What is Tier-2 Capital?

Tier-2 capital or Supplementary Capital represents other elements which fall short of some of the characteristics of the Core Capital but contribute to the overall strength of a bank. Tier-2

capital is for long term.

• General Provision

• Asset Revaluation Reserves

• All other Preference Share

• Perpetual Subordinated Debt

• Exchange Equalization Account

• Revaluation Reserves for Securities

 

What is Tier-3 Capital?

Tier-3 capital of Additional Supplementary Capital consists of short-term subordinated debt

(original/residual maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting capital requirement for market risk.

 

Conditions for Maintaining Regulatory Capital:

1. T-2 + T-3 cannot exceed T-1.

2. At least 20% market risk to be supported by T-1.

3. General provisions is limited to maximum 1.25% of Total Risk Weighted Asset (TRWA)

4. Subordinated debt (T-2) shall be limited to maximum 30% of T-1.

5. 50% of asset and security revaluation reserve shall be eligible for T-2.

6. For downside revaluation full amount will be deducted but for upside revaluation only 50%

will be added.

7. T-3 is limited to 250% of T-1 after meeting credit risk.

 

Eligible Regulatory Capital:

1. Following Deductions are to be made from T-1:

a) Book value of Goodwill

b) Provisioning shortfall

c) Deficit on account of revaluation in investment.

2. Eligible T-2 and T-3 will be derived after deducting components, if any, qualified for deduction.

3. Total Eligible Regulatory Capital = (Eligible Tier-1 Capital + Eligible Tier-2 Capital + Eligible

Tier-3 Capital).

 

Minimum Capital Requirement:

• No schedule bank in Bangladesh shall commence and carry on business unless it has minimum

paid up capital/capital deposited with Bangladesh Bank as fixed by Bangladesh Bank.

• Capital Requirement = ≥ 10% with Tier-1 at least 5%.

• TRWA = RWA for Credit Risk + 10 (capital charge for market risk and operational risk).

 

Methodology for Calculating RWA

1. Convert OBSA to BSA by multiplying with the credit conversion factors.

2. Apply Risk Mitigation Technique

3. Multiply each asset and converted OBSA by appropriate R. W. in order to get RWA.

4. Then, sum these RWA and get TRWA.

National Payment Switch Bangladesh

 The Bangladesh Bank has taken initiative to establish National Payment Switch (NPS) in order to facilitate interbank electronic payments originating from different delivery channels e.g. Automated Teller Machines (ATM), Point of Sales (POS), Internet, Mobile Applications, etc. The main objective of NPS is to create a common platform among the existing shared switches already built-up by different private sector operators. NPS will facilitate the expansion of the card based payment networks substantially and promote e-commerce throughout the country. Online payment of Government dues, using cards and account number information through Internet will greatly be enhanced using NPS. Payment Systems Division (PSD), Department of Currency Management and Payment Systems (DCMPS), BB has started the implementation of NPS which is funded by the International Finance Corporation-Bangladesh Investment Climate Fund (IFC-BICF).