- buying and selling of any immovable property;
- management of client money, securities or other assets;
- management of bank, savings or securities accounts;
- organisation of contributions for the creation, operation or management of companies; and
- creation, operation or management of companies, LLPs or trusts, and buying and selling of business entities, shall also be an activity for the purposes of said sub-section.
Accordingly, by way of the above notifications, Chartered Accountants, practising individually or through a firm, and a Company Secretaries, practising individually or through a firm, have also been included under the purview of the PMLA.
Further, as per F.No. 9-41/2022-23, [iv] issued by the FIU, entities carrying out activities (a) to (e) above are Trust and Company Service Providers (“TCSPs”) and thus would be covered within the definition of Reporting Entity.
The PMLA and the PML Rules subject all Reporting Entities to AML requirements such as customer identification, CDD, customer acceptance, and the tracking and reporting of some prescribed transactions that may qualify as proceeds of crime under the PMLA. Under the PML Rules, financial regulators such as the RBI, SEBI and IRDAI are empowered to issue guidelines and directions in connection with the compliance that the respective Reporting Entities must adhere to.
For the purposes of this note on the overview of applicable regulatory framework, we have restricted our inputs to the regulatory framework applicable to entities that are regulated by the RBI and SEBI only.
The RBI governs banks, All India Financial Institutions, NBFCs, prepaid payment instrument issuers, Miscellaneous Non-Banking Companies, Residuary Non-Banking Companies, all Payment System Providers, System Participants, Prepaid Payment Instrument Issuers, and authorised persons including those who are agents of the Money Transfer Service Scheme (“Regulated Entities”). [v]
The RBI MD and the Master Circular on Know Your Client (“KYC”) norms for the securities market (“SEBI KYC Circular”) have laid down specific enhanced procedures for the respective entities supervised by them to undertake CDD in relation to their clients, as well as the procedures and manner of maintaining records of certain prescribed transactions. The RBI, vide the aforementioned RBI MD, has provided a list of KYC guidelines for all Regulated Entities.
Payment system providers are also classified as Regulated Entities, and therefore businesses engaged in offering new payment technologies or alternative currencies may also be subject to these requirements.
Similarly, the SEBI Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism/Obligations of Securities Market Intermediaries under the PMLA and Rules framed there under (“SEBI AML Circular”) and the amendment to the SEBI AML Circular [vi] apply to all intermediaries registered with the SEBI, which includes stockbrokers, investment advisers, merchant bankers, depository participants, etc.
3.2 Describe the types of payments or money transmission activities that are subject to anti-money laundering requirements, including any exceptions.
Under PMLA provisions, there is no minimum investment threshold or category exemption for Reporting Entities carrying out CDD measures. However, the 2005 Rules mandate Reporting Entities to maintain records of certain transactions, including: all cash transactions of more than INR 1,000,000 or their equivalent in foreign currency (“Prescribed Value”); any series of interconnected transactions that may cumulatively amount to the Prescribed Value; transactions involving receipts by NPOs of an amount greater than the Prescribed Value; all cash transactions involving forged or counterfeit currency notes or bank notes being used as genuine; all cross-border wire transfers of the value of more than INR 5 lakhs; all purchases and sales of immovable property by any person valued at INR 50 lakhs or more; and suspicious transactions, regardless of whether the transactions are effected in cash. These records are to be maintained for a period of five years from the date of the transaction between the client and the Reporting Entity, or from the date when the account has been closed, whichever is later.
3.3 To what extent have anti-money laundering requirements been applied to the cryptocurrency industry? Describe the types of cryptocurrency-related businesses and activities that are subject to those requirements.
India has not enacted any special legislations for the governance of cryptocurrencies. However, the PMLA has been amended by Notification No. S.O. 1072(E) dated March 7, 2023, [vii] to include intermediaries trading in Virtual Digital Assets (“VDAs”) and further qualifying them as Reporting Entities. Further, it was clarified that “virtual digital asset” shall have the same meaning assigned to it in clause 47(A) of Section 2 of the Income Tax Act, 1961.
Further, the above notification has extended the compliance requirements, such as verification of identities, maintenance of records and enhanced due diligence as provided for in the PMLA to the various service providers of VDAs. The following activities/transactions concerning VDAs have been brought under the definition of “person carrying on designated business or profession”:
- exchange between VDA and fiat currencies;
- exchange between one or more forms of VDA;
- transfer of VDA;
- safekeeping or administration of VDA or instruments enabling control over VDA; and
- participation in and provision of financial services related to an issuer’s offer and sale of a VDA.
Further, the FIU has issued “AML & CFT Guidelines for Reporting Entities Providing Services Related To Virtual Digital Assets” on its website, effective from March 10, 2023, [viii] which will be applicable to entities trading in cryptocurrencies as well.
Previously, the RBI, through its Circular dated April 6, 2018, [ix] had banned Regulated Entities from providing services to any individual or business dealing in digital currencies, including services such as: maintaining accounts; registering, trading, settling, clearing, giving loans against virtual tokens, and accepting virtual tokens as collateral; and opening accounts of exchanges, dealing with them and transferring or receiving money in accounts relating to the purchase/sale of cryptocurrencies or facilitating the same. However, the Supreme Court ruled against the ban in Internet and Mobile Association of India vs. RBI [(2020) 10 SCC 274].
Thereafter, the RBI, through its Notification dated May 31, 2021 (“May 2021 Notification”) [x] set out that banks and financial institutions dealing in cryptocurrencies must follow the KYC, AML and CFT obligations of regulated entities as prescribed under AML law. Apart from the May 2021 Notification, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was tabled before the Indian Parliament to be considered; however, there have been no further updates in this regard.
In the context of tax compliance requirements, the Finance Act, 2022, which received presidential assent as recently as March 30, 2022, stipulates new norms for taxation of cryptocurrencies. It inserts Section 115BBH [xi] to the Income Tax Act, which deals with taxes on VDAs and imposes a flat 30% tax on capital gains on VDAs. This provision disallows set-off of any loss arising from the transfer of VDAs with the gains from the transfer of another VDA. It suggests inclusion of Section 194S [xii] to the Income Tax Act, which proposes a 1% tax deduction at source on payments towards VDAs beyond INR 10,000 in a year and taxation of such gifts in the hands of the recipient. The sections have been applicable since April 1, 2023.
3.4 To what extent do anti-money laundering requirements apply to non-fungible tokens (“NFTs”)?
NFTs have been classified as VDAs and are included in Section 2(47A) of the Income Tax Act. Therefore, our response to question 3.3 above would also apply to NFTs.
3.5 Are certain financial institutions or designated businesses required to maintain compliance programmes? What are the required elements of the programmes?
The PMLA, read with the PML Rules requires Reporting Entities to appoint:
- a principal officer, who is responsible for providing the requisite information to the FIU; and
- a designated director, who ensures compliance with the obligations of the Reporting Entities as provided under the PMLA and PML Rules.
All entities regulated pursuant to the SEBI AML Guidelines and the RBI MD are required to implement AML and KYC policies for governing customer acceptance, customer identification procedures, risk management parameters and monitoring of transactions, as well as to perform periodic exercises to assess money laundering/terrorism financing risks and mitigate any money laundering/terrorism financing risks for clients, countries or geographic areas, products, services, transactions or delivery channels.
All Regulated Entities are required to apply a risk-based approach (“RBA”) for the mitigation/management of identified risks and must have policies and procedures in place that are duly approved by the board of directors of the entity.
The Reporting Entities must also comply with further recordkeeping and reporting requirements, as detailed in question 3.6 below.
3.6 What are the requirements for recordkeeping or reporting large currency transactions? When must reports be filed and at what thresholds?
Nature of information
The information relating to transactions detailed in question 3.2 above is required to be maintained by Reporting Entities. Under the PML Rules, the records maintained must contain information including the:
- nature of the transactions;
- amount of the transaction and the currency in which it was denominated;
- date on which the transaction was conducted; and
- parties to the transaction, to enable the Reporting Entity to reconstruct individual transactions.
Manner of recording
The PMLA and PML Rules prescribe the manner and period in which Reported Entities are required to maintain records. Reporting Entities are mandated to maintain the information relating to the transaction for a period of five years from the date of transaction between a client and the Reporting Entity. Records relating to the identity of clients and beneficial owners, as well as account files and business correspondence, must be maintained for a period of five years after the business relationship between the client and Reporting Entity has ended or the account has been closed, whichever is later.
As per the 2005 Rules, every Reporting Entity shall maintain a record of all transactions, including the record of:
- all cash transactions of the value of more than INR 1,000,000 or its equivalent in foreign currency;
- all series of cash transactions integrally connected to each other, which have been individually valued below INR 1,000,000 or its equivalent in foreign currency, where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of INR 1,000,000 or its equivalent in foreign currency;
- all transactions involving receipts by NPOs of value more than INR 1,000,000, or its equivalent in foreign currency;
- all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine, or where any forgery of a valuable security or a document has taken place facilitating the transactions;
- all suspicious transactions whether or not made in cash;
- all cross-border wire transfers of the value of more than INR 5,000,000 or its equivalent in foreign currency where either the origin or destination of the fund is in India; and
- all purchase and sale by any person of immovable property valued at INR 5,000,000 or more that is registered by the Reporting Entity, as the case may be.
Reporting requirements
In terms of reporting requirements, every Reporting Entity must, inter alia, ensure the following:
- All client and transaction records and information are made available on a timely basis to the competent investigating authorities.
- The principal officer of a Reporting Entity is under an obligation to supply information relating to suspicious transactions (in the form of STRs) to the office of the director of the FIU no later than seven working days on being satisfied that the transaction is suspicious.
- The RBI MD and SEBI AML Guidelines mandate maintenance of “utmost confidentiality” in the filing of STRs with the FIU, and Reporting Entities are mandated to ensure that there is no tipping-off to the customer at any level.
- The principal officer must also supply information in respect of cash transaction (individual or connected) of the Prescribed Value, receipts by NPOs of more than the Prescribed Value, counterfeit currency transactions and cross-border wire transfers of a value of more than INR 500,000 every month to the FIU by the 15 th day of the following month.
- The principal officer must supply information relating to transactions in immovable property valued at more than INR 5,000,000 every quarter to the FIU by the 15 th day of the month following the quarter (i.e. April, July, October or January).
- Pursuant to the RBI MD and SEBI AML Guidelines, the background, including all documents, office records, memoranda and clarifications, sought pertaining to transactions that deviate from the client’s normal activity and purpose thereof must also be examined, and findings should be recorded in writing. Such findings, records and related documents should be made available to auditors as well as to the RBI, SEBI, the FIU and other relevant authorities during audit, inspection or as and when required.
The aforesaid records must be preserved for a period of at least five years.
3.7 Are there any requirements to report routinely transactions other than large cash transactions? If so, please describe the types of transactions, where reports should be filed and at what thresholds, and any exceptions.
The reporting requirements are in relation to certain specific type of transactions, which have been highlighted in questions 3.6 and 3.8 below.
In addition to the same, all wire transactions, both domestic and international, are to contain complete information about the originator and the beneficiary. However, there exist certain exceptions with regard to certain transactions:
- in case of batch transfer where several individual cross-border wire transfers from a single originator are bundled in a batch file for transmission to beneficiaries, individual transfers are exempted from the requirements of originator information;
- any transfer that flows from a transaction carried out using a credit card/debit card/PPI, including through a token or any other similar reference string associated with the card/PPI, for the purchase of goods or services, is exempted from these instructions as long as the credit or debit card number or PPI identity or reference number accompanies all transfers flowing from the transaction; and
- financial institution-to-financial institution transfers and settlements are exempt from these instructions as both the originator and the beneficiary are regulated financial institutions acting on their own behalf.
3.8 Are there cross-border transactions reporting requirements? Who is subject to the requirements and what must be reported under what circumstances?
Obligations of Reporting Entities
Yes, the principal officer of Reporting Entities under the PMLA and the PML Rules is mandated to supply information, in respect of:
- all cross-border wire transfers of the value of more than INR 5 lakhs or its equivalent in foreign currency where either the origin or destination of the funds is in India; and
- all suspicious transactions, whether or not made in cash and by way of money transfer or remittances in favour of the Entity’s own clients or non-clients from India or abroad, and to third-party beneficiaries in India or abroad, including transactions on its own account in any currency by any of the following:
- payment orders;
- cashier cheques;
- demand drafts;
- telegraphic or wire transfers or electronic remittances or transfers;
- internet transfers;
- Automated Clearing House remittances;
- lockbox-driven transfers or remittances;
- remittances for credit or loading to electronic cards;
- any other mode of money transfer by whatever name it is called; and
- loans and advances including credit or loan substitutes, investments and contingent liability by way of foreign exchange contracts, currency, interest rates and commodities and any other derivative instrument in whatsoever name it is called,
to the office of the director of the FIU by the 15 th day of the following month for transactions falling under (a), and not later than seven working days on being satisfied that the transaction is suspicious for transactions falling under (b).
Reporting obligations under FEMA
There are also several compliances required in this regard under the Foreign Exchange and Management Act, 1999, including:
- Every Indian resident company that has made a Foreign Direct Investment (“FDI”) in the preceding year, including the current year, must submit a Foreign Liabilities and Assets Return.
- An Annual Performance Report is to be submitted by a resident individual who has made an Overseas Direct Investment (“ODI”).
- An Indian company that receives investment outside India for the issue of shares or other eligible securities under the FDI scheme must report all the details of the amount of consideration to the concerned Regional Office of the RBI through its Authorised Dealer (“AD”) category I bank within 30 days from the date the shares were issued.
- An AD bank must record valid LEI for cross-border transactions of INR 50 crore and more undertaken through it on or after October 1, 2022. Post this, the AD bank must report the valid LEI for all cross-border transactions, irrespective of the value of the transactions. However, if the AD bank already has a valid LEI of the entity, it must report it for all transactions, irrespective of whether the entity has undertaken a transaction of INR 50 crore or above through it.
Information required in respect of cross-border wire transfers
All cross-border wire transfers from India are required to contain the following information:
- Name of the originator.
- Originator account number, if used to process the transaction. In the absence of an account, a unique transaction reference number should be included, which permits traceability of the transaction.
- Originator’s address, national identity number, customer identification number, or date and place of birth.
- Name of the beneficiary.
- Beneficiary account number, if used to process the transaction.
3.9 Describe the customer identification and due diligence requirements for financial institutions and other businesses subject to the anti-money laundering requirements. Are there any special or enhanced due diligence requirements for certain types of customers?
Requirements for Reporting Entities
Reporting Entities, at the time of commencement of an account-based relationship or while carrying out occasional transaction of an amount equal to or exceeding INR 50,000, whether conducted as a single transaction or several transactions that appear to be connected, or any international money transfer operations are required to:
- Identify clients and verify their identity using reliable and independent sources of information, and obtain information on the intended nature of the business relationship where applicable.
- Take reasonable steps to identify the nature of the customer’s business as well as its ownership and control.
- Assess and determine whether a client is acting on behalf of a beneficial owner, and identify the beneficial owner and take all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.
Banks and financial institutions are required to have customer identification procedures to be carried out at various stages, such as:
- while establishing a banking relationship;
- while carrying out a financial transaction;
- when the bank/financial institution doubts the authenticity or adequacy of the customer identification data it has obtained;
- when banks sell third party products as agents;
- while selling banks’ own products, payment of dues of credit cards/sale and reloading of prepaid/travel cards and any other product for more than INR 50,000;
- when carrying out transactions for a non-account-based customer, that is a walk-in customer, where the amount involved is equal to or exceeds INR 50,000, whether conducted as a single transaction or several transactions that appear to be connected; and
- when a bank/financial institution has reason to believe that a customer (account-based or walk-in) is intentionally structuring a transaction into a series of transactions below the threshold of INR 50,000.
There is no minimum investment threshold or category exemption available for Reporting Entities carrying out CDD measures prescribed under the PMLA and PML Rules.
The Reporting Entities are also required to conduct ongoing diligence of the client, closely examine transactions in order to ensure that they are consistent with their knowledge of the client, the client’s business and risk profile and, where necessary, the source of funds. Furthermore, the Reporting Entity shall review the due diligence measures, including verifying again the identity of the client and obtaining information on the purpose and intended nature of the business relationship where there are suspicions of money laundering or financing of activities relating to terrorism, or where there are doubts with regard to the adequacy or veracity of previously obtained client identification data. The reporting requirements (including confidentiality obligations, etc.) in relation to suspicious transactions have been detailed in question 3.6 above, and the criteria for reporting suspicious activities are provided in question 3.11 below.
Furthermore, the nature and extent of CDD depends on parameters such as the customer’s identity, social/financial status, the nature of business activity, and information on the customer’s business and their location, etc., to enable the categorisation of customers into low, medium and high risk.
SEBI-registered intermediaries are generally required to apply enhanced CDD for high-risk customers, i.e. those for whom the sources of funds are not clear (clients of special category). These include:
- Non-resident clients.
- High net worth clients.
- Trusts, Charities, NGOs and organisations receiving donations.
- Companies having close family shareholdings or beneficial ownership.
- PEPs of foreign origin.
- Current/former Heads of State, current or former senior high profile politicians and connected persons (immediate family, close advisers and companies in which such individuals have interest or significant influence).
- Companies offering foreign exchange offerings.
- Clients in high risk countries (where existence/effectiveness of money laundering controls is suspect, where there is unusual banking secrecy, countries active in narcotics production, countries where corruption (as per the Transparency International Corruption Perception Index) is highly prevalent, countries against which government sanctions are applied, countries reputed to be any of the following: havens/sponsors of international terrorism; offshore financial centres; tax havens; and countries where fraud is highly prevalent.
- Non-face-to-face clients.
- Clients with dubious reputation as per public information available, etc.
Such enhanced CDD requirements include, inter alia, taking additional steps to verify the client’s identity, examining ownership and financial position, the names of the senior management personnel or partners, and the registered office address and principal place of business, identifying the sources of the client’s funds, and recording the purpose of the transaction and the intended nature of the relationship between the transaction parties. Clients must update the Reporting Entities with any changes in the information provided.
3.10 Are financial institution accounts for foreign shell banks (banks with no physical presence in the countries where they are licensed and no effective supervision) prohibited? Which types of financial institutions are subject to the prohibition?
Yes, RBI’s KYC MD does not allow banks “to enter into a correspondent relationship with a shell bank”. Shell banks are not permitted to operate in India. The RBI MD prescribe that the “correspondent bank should not permit its accounts to be used by shell banks”.
Such prohibition is applicable to all Scheduled Commercial Banks/Regional Rural Banks/Local Area Banks/all Primary (Urban) Co-operative Banks/State and Central Co-operative Banks and any other entity that has been licensed under Section 22 of the BR Act.
3.11 What is the criteria for reporting suspicious activity?
The 2005 Rules define a “suspicious transaction”, and mandate that a principal officer of a Reporting Entity, on being satisfied that a transaction is suspicious, communicate the same to the director of the Reporting Entity. Suspicious transactions are those transactions, including attempted transactions, whether or not made in cash, which, to a person acting in good faith:
- give rise to a reasonable ground of suspicion that the transactions may involve the proceeds of a Scheduled Offence specified in the Schedule to the PMLA, regardless of the value involved;
- appear to be made in circumstances of unusual or unjustified complexity;
- appear to have no economic rationale or bona fide purpose; or
- give rise to a reasonable ground of suspicion that the transaction may involve the financing of activities relating to terrorism.
Furthermore, Reporting Entities are required to consider transactions that may be integrally connected to each other though individually coming below reporting thresholds, and transactions remotely connected or related.
3.12 What mechanisms exist or are under discussion to facilitate information sharing 1) between and among financial institutions and businesses subject to anti-money laundering controls, and/or 2) between government authorities and financial institutions and businesses subject to anti-money laundering controls (public-private information exchange) to assist with identifying and reporting suspicious activity?
KYC
All Reporting Entities, within 10 days of commencement of an account-based relationship with a client, are required to file the electronic copy of the client’s KYC records with the Central KYC Records Registry. A Reporting Entity shall not use the KYC records of a client obtained from the Central KYC Records Registry for purposes other than verifying the identity or address of the client and shall not transfer KYC records or any information contained therein to any third party unless authorised to do so by the client or by the Regulator or by the Director.
Suspicious transactions
Every Reporting Entity is required to immediately notify any suspicious transaction, whether or not made in cash (in the form of an STR including the details of clients, transactions and the nature of or reason for suspicion) to the principal officer within the Reporting Entity. The principal officer of a Reporting Entity shall, on being satisfied that the transaction is suspicious, furnish the information promptly in writing by fax or by electronic mail to the director of the FIU in respect of suspicious transactions.
Inter-regulatory arrangements
Separately, there are inter-regulatory arrangements for supervision and information sharing. On November 22, 2022, the Ministry of Finance issued a Notification amending the PMLA, allowing the ED to share information about economic offenders with 15 more agencies, in addition to the 10 government agencies (which include the CBI, RBI, SEBI, IRDAI, Intelligence Bureau, and FIU) that were previously permitted. These additional bodies include the:
- National Investigation Agency.
- Serious Fraud Investigation Office.
- State Police Department.
- Regulator, as defined under clause (fa) of rule 2 of the PML Rules.
- Directorate General of Foreign Trade.
- Ministry of External Affairs.
- Competition Commission of India.
- Special Investigation Team constituted, vide Notification of the Government of India, Department of Revenue, Ministry of Finance.
- National Intelligence Grid.
- Central Vigilance Commission.
- Defence Intelligence Agency.
- National Technical Research Organisation.
- Military Intelligence.
- Inquiry authority under Central Civil Services Rules.
- Wildlife Crime Control Bureau.
3.13 Is adequate, current, and accurate information about the beneficial ownership and control of legal entities maintained and available to government authorities? Who is responsible for maintaining the information? Is the information available to assist financial institutions with their anti-money laundering customer due diligence responsibilities as well as to government authorities?
The PMLA defines “beneficial owner” as an individual who ultimately owns and controls a Reporting Entity’s client or the person on whose behalf a transaction is being conducted, which includes a person who exercises ultimate effective control over a juridical person.
Per the PML Rules and the Prevention of Money Laundering Amendment Rules, 2023, in order to ascertain controlling interest for the purposes of determining beneficial ownership, the percentage of ownership/control in Foreign Portfolio Investors (“FPIs”) for companies and trusts is 10%. For unincorporated associations, bodies of individuals or partnership firms, the percentage for determining the beneficial owner is 15%.
Under the PMLA and PML Rules, it is the responsibility of a Reporting Entity to identify and maintain records of documents evidencing the identities of its clients and beneficial owners, and to file a copy of the records with the Central KYC Records Registry. These records must be maintained for a period of five years after the business relationship between a client and the Reporting Entity has ended or the account has been closed, whichever is later. Additionally, the Reporting Entity is required to take enhanced due diligence steps to examine ownership prior to the commencement of specified transactions.
Further, as per Section 90 of the CA, 2013, a company shall maintain a register of significant beneficial owners that must be open to inspection by any member of the company. The competent authorities at the RoC have access to the information recorded. Further, the CA, 2013 also provides that the Central Government may at any time appoint inspectors to investigate a company’s real ownership.
3.14 Is it a requirement that accurate information about originators and beneficiaries be included in payment orders for a funds transfer? Should such information also be included in payment instructions to other financial institutions? Describe any other payment transparency requirements for funds transfers, including any differences depending on role and domestic versus cross-border transactions.
The RBI MD mandates that all cross-border transactions must be accompanied by accurate and meaningful originator information such as name, address, and account number or unique reference number. Similarly, domestic wire transfers of INR 50,000 or above must be accompanied by originator information. Reporting Entities are directed to identify customers if a customer is intentionally structuring wire transfers below INR 50,000 to avoid reporting or monitoring. Further, if customers do not cooperate, efforts must be made to establish his identity, and an STR must be sent to the FIU.
Inter-bank transfers and settlements where both the originator and beneficiary are banks or financial institutions are exempted from the above requirement.
This is discussed in further detail in the response to questions 3.6 and 3.8 above.
3.15 Is ownership of legal entities in the form of bearer shares permitted?
Bearer shares are not permitted under the Indian legal framework.
3.16 Are there specific anti-money laundering requirements applied to non-financial institution businesses, e.g., currency reporting?
The extent of applicability of the PMLA is discussed in the responses to question 1.5 above. It applies to both natural and legal persons. Reporting Entities are required to undertake certain AML measures and ensure implementation of PMLA provisions, as discussed in the response to question 2.1 above. The 2005 Rules have also expanded obligations of banks, and banks are additionally required to maintain records of NPOs, PEPs, and NGOs, and furnish them as required to the ED.
Further, the RBI, SEBI and IRDAI contain frameworks regulating “persons” and “Reporting Entities”, as detailed in the response to question 2.2 above.
3.17 Are there anti-money laundering requirements applicable to certain business sectors, such as persons engaged in international trade or persons in certain geographic areas such as free trade zones?
AML requirements are applicable to Reporting Entities, as described in the response to question 3.1 above.
The PMLA was amended to include provisions relating to the International Financial Services Centre’s Authority (“IFSCA”). IFSCA has notified the IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022. These guidelines shall apply to every entity that is licensed, recognised, registered or authorised by IFSCA. The primary aim of these guidelines is to enable these entities to adopt an objective, proportional RBA to identify and assess the money laundering and terrorist financing risk to which the entities are exposed. They are required to review and update the RBA at appropriate intervals. These entities are also required to develop and implement policies for money laundering and terrorist financing risk, as well as laying down parameters for approving correspondent banking relationships.
As detailed in the responses to questions 1.5 and 2.1 above, the 2005 Rules have included a definition for PEPs. Banks and financial institutions are required to maintain records of financial transactions of PEPs and furnish them to the ED as may be necessary.
Further, as detailed in question 3.16 above, practising professionals in the field of Chartered Accountancy, Company Secretaries and Cost and Works Accountants are now under the ambit of the PMLA as a Reporting Entity for some specified transactions. The following activities (excluding some exceptions as listed above in question 3.16) when carried out in the course of business on behalf of or for another person will also need to be reported.
3.18 Are there government initiatives or discussions underway regarding how to modernise the current anti-money laundering regime in the interest of making it more risk-based and effective, including by taking advantage of new technology, and lessening the compliance burden on financial institutions and other businesses subject to anti-money laundering controls?
The Government of India has integrated biometric-based identification technology (Aadhaar) to identify customers in order to comply with KYC norms. Aadhaar is a unique 12-digit identification number listed on a document issued by the Indian Government, which captures all details, including demographic and biometric information, of every individual resident in India. Such technological integration has significantly lowered the cost of KYC compliance for financial institutions and improved the efficiency and accuracy of compliance.
4. General
4.1 If not outlined above, what additional anti-money laundering measures are proposed or under consideration?
In addition to the above, various steps have been taken to strengthen the AML regime in India. Inter alia, these include:
- The enactment of the Fugitive Economic Offenders Act, 2018, whereby all assets of an individual (as against the assets from the proceeds of crime), against whom an arrest warrant has been issued for committal of certain offences of which the value exceeds INR 1 billion, are confiscated.
- The enactment of the Companies (Significant Beneficial Owners) Rules, 2018, by the Companies (Amendment) Act, 2017. These rules have their origin in the recommendations made by the FATF to its member countries, with regard to making suitable changes to the national legislation in order to identify individuals who ultimately have significant beneficial shareholding in the reporting company.
- In a 2018 amendment, new offences under the PCA were added to the list of Scheduled Offences under the PMLA.
- The amendments brought to the PMLA through the Finance Act, 2019, expanded the scope of “proceeds of crime” to include properties and assets created, derived, or obtained through any criminal activity related to the Scheduled Offence, even if not listed under the PMLA. Further, the amendment introduces greater and more nuanced reporting obligations for Reporting Entities by insertion of Section 12AA, which mandates authentication of clients undertaking specified transactions. These include requiring every Reporting Entity to take additional steps to examine a client’s ownership and financial position, including the client’s sources of funds, prior to the commencement of each transaction. Additionally, proceedings before the ED in relation to summons, production of evidence, etc. have been deemed “judicial proceedings”, thereby making statements before the ED admissible as evidence.
- In consultation with the SEBI, the Central Government has directed that the provisions of rule 9(1A) of the PMLA, i.e. the requirement for Reporting Entities to file the electronic copy of the client’s KYC records with the Central KYC Records Registry within 10 days after the commencement of an account-based relationship with a client, shall not apply to FPIs.
- The Jan Vishwas (Amendment of Provisions) Act, 2022, aims to decriminalise and rationalise certain offences under the PMLA that are currently covered by the PMLA Schedule Part A, such as: Para. 21 (Offences under the Trade Marks Act, 1999); Para. 22 (Offences under the Information Technology Act, 2000); Para. 25 (Offences under the Environment Protection Act, 1986); and Para. 27 (Offences under the Air (Prevention and Control of Pollution Act, 1981).
- Recently, in the case of Rana Ayyub v. Directorate of Enforcement (2023 SCC Online SC 109), the Supreme Court held that the area in which the property is derived or obtained, or even held or concealed, will be the area in which the offence of money laundering is committed.
- In Vijay Madanlal Choudhary & Ors. v. Union of India & Ors. (2022 SCC Online SC 929), there was a challenge to the constitutionality of some provisions of the PMLA. The Supreme Court upheld the validity of certain challenged provisions that relate to the power of arrest, attachment, and search and seizure conferred on the ED under the PMLA:
- The Supreme Court held that “investigation” must be regarded as interchangeable with the function of “inquiry” undertaken by the authorities for submitting such evidence before the adjudicating authority. Therefore, any act done in pursuance of an investigation conducted by the officials under Section 2(na) of the PMLA would not attract the right guaranteed under Articles 20(3) and 21 of the Constitution of India.
- The Supreme Court upheld Section 45 of the PMLA, which provides for bail of the accused. It noted that the rigours of bail under Section 45 of the PMLA, even though more expansive while restricting the right of the accused to secure bail, do not impose absolute restraint on the grant of bail.
- The Supreme Court upheld, with regards to Section 3 of the PMLA, that it is not necessary to demonstrate that the proceeds of crime are untainted for the offence to be prosecuted under the PMLA. Indulging in or aiding in the activity of obtaining the proceeds of crime is a sufficient and reliable piece of evidence for attracting the crime under the PMLA, and the property need not be shown to be untainted.
- The Supreme Court upheld the validity of Section 5 of the PMLA, observing that even though the second proviso of Section 5 provides the power of provisional attachment without safeguards, it is necessary to view the urgency felt by the competent authority to secure the property, and effectively prevent and regulate the offence of money laundering.
- The Supreme Court stated that the authorised officer cannot resort to the action of provisional attachment of property (proceeds of crime) mechanically and has to record satisfaction and the reason for his belief in writing on the basis of the material in his possession; if an immediate provisional attachment is foregone, the proceedings may be frustrated.
- The petitioners contended that Section 24 of the PMLA reverses the burden of proof and falls foul of Articles 20 and 21 of the Constitution of India. The Court further held that Section 24 has reasonable nexus with purposes and objects sought to be achieved by the PMLA and cannot be regarded as manifestly arbitrary or unconstitutional.
- The Supreme Court held that supply of a copy of an ECIR in every case to the person concerned is not mandatory; it is instead enough if the ED at the time of arrest discloses the grounds of such arrest. However, it is important to note that the above judgment is pending review before the Supreme Court, where the question of validity of the law laid down in points (vi) and (vii) are being reconsidered.
4.2 Are there any significant ways in which the anti-money laundering regime of your country fails to meet the recommendations of the Financial Action Task Force (“FATF”)? What are the impediments to compliance?
The FATF’s most recent mutual assessment report of India was published in 2010. The report followed the 2004 methodology agreed by the FATF to rate India’s compliance with FATF recommendations. There are four levels of compliance: compliant; largely compliant; partially compliant; and non-compliant.
According to the assessment, India was found to be compliant with four and largely compliant with 25 of the FATF’s 49 recommendations. India was partially compliant or non-compliant with five of the six core recommendations. The key recommendations included, inter alia, the need to: address technical shortcomings in the criminalisation of money laundering and terrorist financing and loopholes in the domestic framework of confiscation and provisional measures; improve the reliability of identification documents; and enhance the suspicious transaction reporting regime.
In 2013, the FATF concluded that India has reached a satisfactory level of compliance with all core recommendations. Currently, India is not on the FATF’s list of countries identified as having strategic AML deficiencies.
The FATF has prepared a plan to review India’s CFT and AML measures. An on-site review of India’s actions took place in November 2023, and India’s activities are set to be discussed at the FATF Plenary meeting in June 2024.
4.3 Has your country’s anti-money laundering regime been subject to evaluation by an outside organisation, such as the FATF, regional FATFs, Council of Europe (Moneyval) or IMF? If so, when was the last review?
The FATF’s most recent mutual evaluation report of India was published in June 2010. There was an on-site evaluation of India’s anti-terrorism measures in November 2023.
The 2010 mutual evaluation report of India is available at: [Hyperlink] .
4.4 Please provide information on how to obtain relevant anti-money laundering laws, regulations, administrative decrees and guidance from the Internet. Are the materials publicly available in English?
For useful links, please see below:
- The PMLA and PML Rules are available at: [Hyperlink] .
- The RBI MD (updated as of January 4, 2024) are available at: [Hyperlink] .
- Notifications issued by the RBI may be found here: [Hyperlink] .
- The SEBI AML Guidelines (updated as on February 3, 2023) are available here: [Hyperlink] .
Consolidated lists of circulars and notifications issued by various regulators may be reached from here: [Hyperlink] .
Guidance and directions from various supervisory authorities, as issued from time to time, are publicly available on their respective websites.
Endnotes
