Anti-Money Laundering (AML)

Definition

Anti-Money Laundering (AML) refers to the set of laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. In India, the primary legislation is the Prevention of Money Laundering Act (PMLA), 2002, enforced by the Enforcement Directorate (ED) and the Financial Intelligence Unit-India (FIU-IND) under the Ministry of Finance. PMLA applies to a wide range of entities called Reporting Entities (REs), including banks, non-banking financial companies (NBFCs), stock brokers, mutual fund houses, payment aggregators, and certain designated non-financial businesses and professions (DNFBPs) such as chartered accountants, company secretaries, real estate agents, and jewelers.

Reporting Entities under PMLA are required to implement a robust AML compliance program comprising Know Your Customer (KYC) procedures, Customer Due Diligence (CDD) at onboarding and periodically thereafter, Enhanced Due Diligence (EDD) for high-risk customers such as Politically Exposed Persons (PEPs), and ongoing transaction monitoring to detect unusual patterns. When suspicious transactions are identified, REs must file Suspicious Transaction Reports (STRs) with FIU-IND within seven days. They must also file Cash Transaction Reports (CTRs) for cash transactions above Rs 10 lakh and Cross-Border Wire Transfer Reports (CCTRs) for international transfers above the prescribed threshold. Non-compliance with PMLA can result in penalties, suspension of business licenses, and criminal prosecution of the responsible officers.

India's AML framework is assessed periodically by the Financial Action Task Force (FATF), the global standard-setting body for AML and counter-terrorist financing (CFT). India was placed under FATF's enhanced monitoring (grey list) in 2023 and has since taken significant legislative and enforcement actions to strengthen its AML framework. The RBI, SEBI, and IRDAI issue sector-specific AML/KYC master directions and circulars that their regulated entities must comply with. For fintech companies and payment service providers, AML compliance involves real-time transaction screening against sanction lists (UN, OFAC), name screening using fuzzy matching algorithms, and filing of regulatory reports through the FIU-IND reporting platform.

Key Points

• The Prevention of Money Laundering Act (PMLA), 2002 is India's primary AML legislation, enforced by the ED and FIU-IND.
• Reporting Entities must conduct KYC and Customer Due Diligence at onboarding and apply Enhanced Due Diligence for high-risk customers including PEPs.
• Suspicious Transaction Reports (STRs) must be filed with FIU-IND within seven days of identifying a suspicious transaction.
• Cash transactions above Rs 10 lakh must be reported through Cash Transaction Reports (CTRs) filed monthly with FIU-IND.
• FATF assesses India's AML framework periodically; non-compliance with FATF standards can affect India's access to international financial markets.
• Sector-specific AML guidelines are issued by RBI (banks/NBFCs), SEBI (capital markets), and IRDAI (insurance) to their regulated entities.