1 Legal and enforcement framework
1.1 Which legislative and regulatory provisions constitute the anti-money laundering, counter-terrorist financing and general financial crime prevention (collectively, ‘AML') regime in your jurisdiction, from a regulatory (preventive/sanctions) and enforcement (civil/criminal penalties) perspective? Are there any legislative and regulatory requirements that apply below the national level (ie, at a state or regional level)?
Over the past two decades, India has systematically introduced a variety of laws – including specialised AML statutes – in a structured attempt to combat financial crimes more effectively. Enforcement of this robust legislative framework has also been made a priority, as evidenced by a significant uptick in recent enforcement activity by specialised agencies.
India's specialised AML statute is the Prevention of Money Laundering (PML) Act, 2002 which, together with the various rules framed thereunder, forms the legislative backbone for the prosecution of AML-related offences in India. The Directorate of Enforcement is the primary investigative agency in India responsible for enforcing the PML Act. To supplement its efforts, the Financial Intelligence Unit of India (FIU) – another central agency – has been constituted to receive, process, analyse, possess and disseminate information with a view to identifying and reporting suspicious financial transactions which may potentially constitute a violation of the AML requirements under the PML Act.
Additionally, the following bodies have been authorised to identify and report AML violations and to frame preventive guidelines in their respective sectors to combat sector-specific AML violations:
- the principal banking regulator, the Reserve Bank of India (RBI);
- the primary financial markets regulator, the Securities and Exchange Board of India (SEBI); and
- the insurance sector regulator, the Insurance Regulatory and Development Authority of India (IRDAI).
The guidelines and rules laid down by the RBI, SEBI and the IRDAI dealing with money laundering include:
- the RBI Master Direction: Know Your Customer Direction, 2016 (‘RBI KYC Direction');
- the Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism Obligations of Securities Market Intermediaries (‘SEBI Anti Money Laundering Guidelines'); and
- the IRDAI Master Guidelines on Anti-Money Laundering/Counter Financing of Terrorism, 2022.
The PML Act applies throughout India, and all guidelines and rules framed by the abovementioned national agencies apply nationally. There are no additional state-specific requirements.
1.2 Which bilateral and multilateral instruments on AML have effect in your jurisdiction?
To assist in the effective enforcement of the PML Act, the central agencies tasked with enforcement have expanded their global footprint and established lines of cooperation with other federal agencies in several international jurisdictions. Bilateral and multilateral instruments between India and other countries have formalised standards of international cooperation to a large extent, as demonstrated by the following:
- In 2008, the FIU signed separate bilateral memoranda of understanding with Mauritius, the Philippines and Brazil to facilitate the exchange of information and resources, with a view to effectively cooperate and analyse information concerning financial transactions that are suspected of being related to money laundering and terrorist financing. A similar treaty was signed with Saudi Arabia in 2016. In its 2021-2022 Annual Report, the FIU stated that it has entered into international cooperation treaties with 49 countries (some of which are still under negotiation).
- The Agreement between India and the United Kingdom concerning the Investigation and Prosecution of Crime and the Tracing, Restraint and Confiscation of the Proceeds and Instruments of Crime (Including Crimes involving Currency Transfers) and Terrorist Funds aims to provide the widest measures for mutual assistance in:
- the investigation and prosecution of crime; and
- the tracing, restraint and confiscation of the proceeds and instruments of crime (including crimes involving currency transfers) and terrorist funds.
- The Agreement between the FIU and the Federal Financial Monitoring Service of the Russian Federation aims to formulate an understanding between the two countries to share and analyse information in their possession regarding financial transactions that are suspected of being related to the laundering of proceeds of crime and persons or companies involved in such transactions.
- India is a party to the United Nations Convention against Transnational Organized Crime, 2000, which aims to prevent and combat transnational organised crime, including money laundering related to such crimes.
- India has ratified the United Nations Convention against Corruption, 2003, which sets out preventive measures to be adopted by countries for international cooperation in combating corruption and money laundering.
1.3 Which public sector bodies and authorities are responsible for enforcing the AML laws and regulations? What powers do they have?
The following public sector bodies are responsible for enforcing the AML laws and regulations.
Directorate of Enforcement: The Directorate of Enforcement is the primary enforcement agency responsible for the investigation and prosecution of offences under the PML Act. The Directorate of Enforcement has the power:
- to conduct arrests, searches and seizures;
- to initiate proceedings for the attachment of property that is suspected of having been acquired through the proceeds of crime; and
- to initiate and pursue prosecution proceedings before a special court (specially designated to deal with cases under the PML Act) against persons accused of violations of the PML Act.
Other authorised officers: Section 54 of the PML Act sets out a comprehensive list of officers/public authorities that are empowered to enforce the act. Such authorities are empowered to:
- assist in the investigation of PML Act offences; and
- report violations of any specific acts, rules and directions issued by the specific authority with a view to enforcing the objectives of the PML Act.
The authorities specified under the PML Act are as follows:
- officers of the Customs and Central Excise Department;
- officers appointed under Section 5(1) of the Narcotic Drugs and Psychotropic Substances Act (61/1985);
- income tax authorities, which are empowered to impose taxes on undisclosed income and foreign assets of India to prevent offences falling within the ambit of money laundering;
- officers of the stock exchange recognised under Section 4 of the Securities Contracts (Regulation) Act (42/1956);
- officers of the RBI, which has the power to impose penalties under Section 58B of the RBI Act 1934 in event of violation of the RBI KYC Direction by reporting entities;
- police officers;
- enforcement officers appointed under Section 36(1) of the Foreign Exchange Management Act (40/1999);
- officers of the SEBI. That said, while the SEBI Anti-Money Laundering Guidelines clearly mandate every banking company, financial institution and intermediary to adhere to the client account opening procedures stipulated in the guidelines and the rules, SEBI has no independent powers in the event of violation of the guidelines;
- officers of any other body corporate constituted or established under a central act or a state act – every company under Section 89 of the Companies Act is required to file with the Registrar of Companies a record of its significant owners. Such information is mandated to prevent money laundering through beneficial ownership; and
- such other officers of the central government, state governments, local authorities or banking companies as the central government may, by notification, specify in this regard.
1.4 Are there any self-regulatory organisations or professional associations? What powers do they have?
There are several industry-specific self-regulatory organisations and professional associations. These self-regulatory organisations and professional associations have not been authorised to enforce the PML Act and thus have no enforcement powers in case of AML-related violations. However, these self-regulatory organisations and professional organisations play an important role in voicing industry-specific concerns and issues arising from compliance with obligations that are imposed on certain industries under the PML Act.
1.5 What is the general approach of the financial services regulators in enforcing the AML laws and regulations?
The PML Act lays down a broad framework for AML compliance which applies to banking companies, financial institutions, intermediaries and reporting entities (as defined under the PML Act). Based on this framework, financial services regulators (eg, the RBI, SEBI and the IRDAI) have framed industry-specific rules, directions and guidelines to ensure compliance with the AML objectives set out in the PML Act. These directions and guidelines (see question 1.1) are aimed at monitoring the manner in which banking companies, financial institutions, intermediaries and reporting entities are obliged to furnish information with a view to identifying suspicious transactions and accordingly report such information to the FIU. In turn, the FIU is responsible for analysing the reports/information provided by financial service regulators and, where necessary, reporting such transactions to the Directorate of Enforcement, so that appropriate action can be initiated in terms of the PML Act.
1.6 What are the statistics regarding past and ongoing AML procedures in your jurisdiction?
There has been a significant increase in the number of money-laundering investigations in recent year. The Eighth Follow-Up Report of the Financial Action Task Force (FATF) noted that the number of investigations being conducted for AML-related violations increased from 798 in December 2009 to 1,405 in December 2011 and subsequently to 1,561 in April 2013. However, conviction rates remain extremely low since, under Indian law, the standard of proof for criminal prosecution is beyond all reasonable doubt.
1.7 What reporting activities exist for reporting suspicious activities and/or transactions (SARs)? Are there any specific powers to identify the proceeds of crime or to require an explanation as to the source of funds?
All reporting entities (as defined under the PML Act), in accordance with Rule 3(d) and Rule 8(2) of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Maintenance of Records Rules'), must maintain and furnish information in relation to all suspicious transactions (as defined by Rule 2(1)(g)). The financial service regulators, by way of specific rules, guidelines and directions (see question 2.1), further stipulate specific reporting procedures for reporting suspicious transactions with a view to preventing money laundering in the market. The reports generated and submitted by reporting entities are then analysed by financial regulators and the matter can be escalated (as mentioned in question 1.5) if required.
With regard to the power to identify proceeds of crime or require an explanation of the source of funds, the Directorate of Enforcement has the power to attach property that it considers was acquired through the proceeds of crime. Once a property is attached, Section 5 of the PML Act specifies that the Director of the Directorate of Enforcement must notify the Adjudicating Authority – a quasi-judicial authority constituted within the framework of the PML Act to deal with cases involving the attachment of property and so on – of the specific reasons for attaching the property. At this stage, the attachment of property is provisional. The persons whose property has been attached are then given the opportunity by the Adjudicating Authority to argue against the attachment of the property (including by proving the source of funds). After consideration of the same, the Adjudicating Authority will pass an order either confirming or setting aside the attachment of the property by the Directorate of Enforcement.
1.8 Is there a central authority for reporting (ie, a Financial Intelligence Unit (FIU) responsible for assessing SARs reported from relevant entities subject to AML requirements)? Does this authority work internationally?
Yes, the FIU is a central agency which is responsible for receiving information regarding all transactions which are suspicious in terms of Rule 2(1)(g) of the PML Maintenance of Records Rules. The FIU will analyse the relevant information and any activity which seems to be related to money laundering or terrorist financing will be reported to the Directorate of Enforcement for it to take necessary action. The FIU operates internationally and has led the Indian delegation at various participatory meetings of the FATF. The FIU also participates in the Joint Working Groups on Counter Terrorism set up by the Indian government with various countries to evaluate AML/counter-terrorist financing vulnerabilities and conduct national risk assessments.
1.9 What relevant public or private corporate or other registers exist to assist with conducting and/or validating AML information, ultimate beneficial owners etc; and what details must be disclosed?
Under Indian corporate laws, companies, limited liability firms and partnership firms must be registered and comply with:
- various reporting and filing obligations in relation to ownership, shareholdings and other relevant details as part of the registration process; and
- various ongoing periodic filing requirements (eg, financial statements, updates regarding significant changes in ownership/directorship).
These filings are accessible through the public information portals maintained by government agencies – for example, the Ministry of Corporate Affairs maintains an online repository of all public information and filings of registered companies and limited liability partnerships on its website (www.mca.gov.in). These publicly available information repositories maintained by government authorities can be used to assist in conducting and/or validating AML information, ultimate beneficial ownership and other details. While these registries interoperate more often than not, they do not ordinarily do so internationally.
The central government, in accordance with Rule 9A of the PML Maintenance of Records Rules, is obliged to establish a Central Know-Your-Customer (KYC) Records Register for the purpose of receiving, storing, safeguarding and retrieving electronic copies of KYC records/information obtained by reporting entities.
1.10 How do such registers interoperate with one another and do they do so internationally?
The publicly available records and filings of registered firms are available to all industry-specific regulators registers. Therefore, any investigation being conducted in relation to any AML violation under the PML Act will benefit from the cooperation of all authorities involved in the registration and documentation of records of registered firms. Unlike the FIU, which has a track record of international cooperation, these registers do not generally work internationally.
2 Scope of application
2.1 Can both individuals and companies be prosecuted under the AML legislation?
Yes, as per Section 2(1)(s) of the Prevention of Money Laundering (PML) Act, both individuals and companies are liable to prosecution for money-laundering offences. With regard to companies, Section 70 of the PML Act provides that every person who is in charge of or responsible for the day-to-day affairs of the company may face consequences if the company violates the PML Act. Such company officers can defend themselves by proving that their decisions were supported by reasonable diligence.
2.2 Can foreign companies be prosecuted under the AML legislation?
The PML Act does not distinguish between prosecuting domestic companies and foreign companies. The scope of its provisions makes clear that both domestic and foreign persons (including corporate entities) can be prosecuted for violations of the act. Foreign nationals – including foreign companies (through their relevant officers) – involved in violations of the PML Act can be charged with offences under the act and may face attachment proceedings (if they have rights in property/commercial interests in India) if they are involved in violations of the PML Act. If such foreign companies have no domestic presence in India, the investigative agencies have the authority to pursue the matter through diplomatic channels and/or cooperation with national or international agencies by requesting their cooperation.
2.3 Does the AML legislation have extraterritorial reach?
The PML Act has extraterritorial jurisdiction to prosecute persons for money-laundering offences:
- in cases where the implications of the offences are cross-border in nature; and
- especially in cases involving the transmission of proceeds of crime to foreign jurisdictions.
Section 5 of the PML Act empowers the Directorate of Enforcement to provisionally attach and confiscate assets of equivalent value in India or abroad if the assets constituting the proceeds of crime are acquired and held abroad. Section 56 of the PML Act also empowers the Indian government to enter into reciprocal arrangements with other countries:
- to enforce the PML Act; and
- for the exchange of information for the prevention of any offence either under the PML Act or under the corresponding laws in force in that country.
2.4 Are there restrictions on financial institutions' accounts for foreign shell banks? Which types of firms are subject to such restrictions?
Section 63(f) of the Reserve Bank of India Master Direction: Know Your Customer (KYC) Direction (‘KYC Direction') prohibits banks from entering into "a correspondent relationship with a shell bank". Section 63(g) further prohibits correspondent banks from allowing their accounts to be used by shell banks. All banks that wish to enter into correspondent banking relationships must establish a committee headed by the chairman/chief executive/managing director of the bank to approve cross-border correspondent banking and other similar relationships. Therefore, all banks which enter into such correspondent relationships are governed by the restrictions and procedures set out in Section 63 of the KYC Direction and are therefore restricted from entering into any such relationships with foreign shell banks.
2.5 Are there cross-border transaction reporting requirements? If so, what must be reported under what circumstances and to whom?
The Prevention of Money-Laundering (Maintenance of Records) Rules (‘PML Maintenance of Records Rules') set out the cross-border transaction reporting requirements to be followed by all reporting entities in India, as follows:
- Cross-border transactions: Rule 3(E) of the PML Maintenance of Records Rules mandates all reporting entities to maintain information relating to all cross-border transactions worth more than INR 500,000 where either the destination or the origin of the funds is in India. The principal officer of the reporting entity must furnish all information in relation to such cross-border transaction by the 15th day of the succeeding month to the Financial Intelligence Unit of India in accordance with Rule 8(1) of the PML Maintenance of Records Rules.
- Suspicious transactions: Rule 3(D)(iii) of the PML Maintenance Rules further requires all reporting entities to maintain information pertaining to all cross-border transactions which are in the nature of suspicious transactions. In accordance with Rule 8 of the PML Maintenance of Records Rules, the principal officer of a reporting entity must furnish such information promptly either in writing or by fax or email to the Director of the Directorate of Enforcement within seven working days upon being satisfied that a cross-border transaction is suspicious.
2.6 Does money laundering of the proceeds of foreign crimes constitute an offence in your jurisdiction?
Yes, money laundering of the proceeds of foreign crimes constitutes an offence under the PML Act in India.
The PML Act stipulates that if a person commits a crime in a foreign jurisdiction which also constitutes an offence under the PML Act and such person transfers the proceeds of the crime, the PML Act will apply, including those pertaining to prosecution and attachment of property.
3 AML offences
3.1 What AML offences are recognised in your jurisdiction and what do they involve? Are there any codified or common law defences?
As per the Prevention of Money Laundering (PML) Act, the offence of money laundering arises from criminal activity committed by a person in relation to scheduled offences. Scheduled offences (as defined in Section 2(y) of the PML Act) are those offences which are mentioned in Parts A, B and C of the Schedule to the PML Act. Part A provides a list of certain offences pertaining to various laws, such as:
- the Indian Penal Code, 1860;
- the Prevention of Corruption Act, 1988;
- the Companies Act, 2013;
- the Securities and Exchange Board of India Act, 1992;
- the Information Technology Act, 2000;
- the Narcotic Drugs and Psychotropic Substances Act, 1985;
- the Explosive Substances Act, 1908;
- the Unlawful Activities (Prevention) Act, 1967; and
- the Arms Act, 1959.
Part B deals with offences of false declaration, false documents and so on under the Customs Act, 1962. Part C deals with:
- offences with cross-border implications as specified in Part A of the Schedule;
- offences against property under Chapter XVII of the Penal Code, 1860; and
- offences of wilful attempt to evade taxes, penalties or interest in relation to the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
Persons facing criminal charges under the PML Act cannot take common law defences and must defend their case in accordance with the defences set out under the criminal law regime in India. However, with respect to offences committed by companies, the concept of vicarious liability is not recognised under Indian criminal law – that is, persons in charge and responsible for the conduct of an offending company do not automatically become liable for the offences of the company. Only those persons who are directly involved in the decision making and specific operations of the company can be implicated under the PML Act for acts of the company. Such persons can defend the allegations by establishing that their decision-making process was backed by necessary due diligence to prevent such offences.
3.2 How are predicate offences defined in your jurisdiction? Is tax evasion a predicate offence for money laundering?
Predicate offences, also known as scheduled offences under the PML Act, are defined in Section 2(y) of the PML Act as the offences mentioned in Part A, B and C of the Schedule to the PML Act. A predicate offence is criminal/illegal activity committed by a person, as a result of which that person directly or indirectly derives any property or assets of any type, such as movable or immovable, tangible or in tangible, corporeal or incorporeal, and including deeds or title to any such property or assets.
Tax evasion is a predicate/scheduled offence under Part C of the Schedule to the PML Act. A wilful attempt to evade any taxes, penalties or interest under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 also attracts consequences under the PML Act.
3.3 What reporting offences exist (eg, failure to disclose, tipping-off and prejudicing or obstructing an investigation)?
As per the Reserve Bank of India Master Direction: Know Your Customer Direction and the Securities and Exchange Board of India Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism Obligations of Securities Market Intermediaries, reporting entities and their directors, officers and employees must not tip off any client in relation to the reporting of a suspicious transaction or related information to the Financial Intelligence Unit of India.
3.4 Do any restrictions or thresholds (eg, in terms of parties, asset type or transaction value) serve to limit the types of activities that constitute AML offences?
Given the scope and definitions set out in the PML Act, money-laundering offences can be committed by a person in relation to property or assets of every description. There are no specific thresholds or restrictions set out under the PML Act in relation to such offences.
Money-laundering offences include any process or criminal activity connected with the proceeds of crime which involves:
- use; or
- the projection or claiming of such proceeds of crime as untainted property.
Under the PML Act, the ‘proceeds of crime' means any property or any value of such property which has been derived or obtained as a result of criminal activity relating to the scheduled offences. This includes property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible, including deeds and instruments evidencing title to or interest in such property.
4.1 Is implementing an AML compliance programme a regulatory requirement in your jurisdiction? If so, what aspects must this cover? Are there any criteria and/or conditions that a money laundering reporting officer or any other person responsible for AML must observe?
The Prevention of Money Laundering (PML) Act and the Prevention of Money-Laundering (Maintenance of Records) Rules (‘PML Maintenance of Records Rules') establish a regulatory requirement for reporting entities to establish an AML compliance programme. This should include:
- written AML procedures;
- client due diligence;
- record keeping;
- the provision and maintenance of information;
- the monitoring of transactions; and
- the reporting of suspicious transactions to the concerned authority under the PML Act.
In order to combat money laundering, the PML Act, the PML Maintenance of Records Rules, the Reserve Bank of India (RBI) Master Direction: Know Your Customer Direction and the Securities and Exchange Board of India (SEBI) Guidelines on Anti-Money Laundering Standards and Combating the Financing of Terrorism Obligations of Securities Market Intermediaries (‘SEBI Anti-Money Laundering Guidelines') provide for the appointment of a principal officer and a designated director to ensure adherence with the AML compliance programme. Such officers are duty bound to maintain records of all transactions specifying:
- the nature of the transaction;
- the amount;
- the date; and
- the parties to the transaction.
In addition, the principal officer and the designated director must furnish relevant information to the Director of the Directorate of Enforcement in relation to transactions which are mentioned in Rule 3 of the PML Maintenance of Records Rules. These include:
- all cash transactions or series of transactions with a value of more than INR 1 million or its equivalent in foreign currency;
- transactions involving receipts by non-profit organisations of value of more than INR 1 million or its equivalent in foreign currency;
- all cash transactions where forged or counterfeit currency notes or bank notes have been used or involving the forgery of some security documents;
- all suspicious transactions, whether or not made in cash or in some other way;
- all cross-border wire transfers with a value of more than INR 500,000 or its equivalent in foreign currency; and
- all purchases and sales of immovable property valued at INR 5 million or more that are registered with reporting entities.
This information must be provided by the principal officer or designated officer in the manner and under the procedure prescribed in the PML Act, the PML Maintenance of Records Rules and the reporting entity's respective internal AML guidelines. In addition, reporting entities and their compliance officer must conduct client due diligence in all cases.
4.2 What customer and business partner due diligence (know your customer/client due diligence) requirements apply in this regard? Do any look-through requirements apply? Are there any simplified or enhanced due diligence requirements for certain types of persons and activities?
In addition to the PML Act and the PML Maintenance of Records Rules, the RBI KYC Direction and the SEBI Anti-Money Laundering Guidelines set out guidance on client due diligence which must be followed by reporting entities. In general, client due diligence involves:
- the verification and identification of clients or beneficial owners;
- risk assessment of clients;
- record keeping of all transactions; and
- maintenance and retention of all information relating to transactions.
Reporting entities are mainly required to monitor transactions and report suspicious transactions to the concerned authorities.
Reporting entities must conduct enhanced due diligence with respect to certain high-risk clients, such as:
- politically exposed persons;
- non-resident clients;
- high-net-worth clients;
- non-governmental organisations;
- non-face-to-face clients; and
- clients of dubious reputation as per the public information available.
In conducting client due diligence, reporting entities must take additional steps in relation to:
- verification – in particular, by examining the ownership and financial position; and
- recording, maintaining and furnishing information on transactions, including suspicious transactions.
Reporting entities must also:
- step up the future monitoring of business relationships with high-risk clients; and
- maintain records for a period of five years from the date of such transactions.
Reporting entities must also follow a simplified due diligence process in case of low-risk clients such as:
- self-help groups;
- foreign students; and
- foreign portfolio investors.
However, simplified client due diligence measures are not acceptable:
- if there is a suspicion of money laundering or terrorist financing; or
- in the case of specific high-risk clients.
4.3 What due diligence requirements apply in relation to ultimate beneficial owners?
As per Section 2(1)(fa) of the PML Act, a ‘beneficial owner' is an individual who ultimately owns or controls a client of a reporting entity or a person on whose behalf a transaction is being conducted, including a person who exercises ultimate effective control over a legal person. In accordance with the PML Maintenance of Records Rules, reporting entities must:
- verify the identity of clients;
- take all necessary steps to verify the identity of beneficial owners; and
- in the case of beneficial owners, carry out due diligence involving:
- verification and identification;
- risk assessment;
- record keeping of transactions;
- maintenance and retention of information relating to transactions;
- monitoring of transactions; and
- reporting of suspicious transactions to the concerned authorities.
4.4 Which books and records requirements have relevance in the AML context? What privacy laws apply?
As per Section 12 of the PML Act, reporting entities must maintain a record of all transactions (eg, the value and nature of the transaction) for a period of five years from the date of such transaction. Reporting entities must also maintain:
- records of documents evidencing the identity of clients and beneficial owners; and
- account files and business correspondence relating to clients.
Rule 3 of the PML Maintenance of Records Rules also requires reporting entities to maintain a record of specified transactions, including the suspicious transactions mentioned therein.
Subject to the data privacy laws, records and information maintained, furnished or verified by the reporting entities must be kept confidential. Under the PML Act, no civil or criminal proceedings can be initiated against a reporting entity for divulging records of transactions to the enforcement authorities under the PML Act.
4.5 What other compliance best practices should a company implement to mitigate the risk of AML violations?
In order to prevent the risk of AML violations, companies generally formulate and implement internal guidelines aimed at preventing money laundering by:
- laying down proper procedures to identify and assess such criminal activities; and
- providing for internal reporting mechanisms.
Employees and staff members should be duly informed of these guidelines to ensure awareness of potential AML violations and relevant reporting procedures.
In addition, companies can:
- conduct internal audits to monitor activity;
- investigate AML violations; and
- appoint a compliance officer to oversee the implementation of the AML guidelines.
4.6 Are companies obliged to report financial irregularities or actual or potential AML violations?
The PML Act imposes certain statutory obligations on reporting entities to report suspicious transactions which might lead to actual or potential AML violations. As per the PML Act and the PML Maintenance of Records Rules, reporting entities must:
- monitor transactions; and
- furnish relevant information on all transactions and report any suspicious transactions to the concerned authorities.
Under Rules 7 and 8 of the PML Maintenance of Records Rules, a reporting entity and its designated directors, officers and employees must observe the correct procedure for furnishing information. Any delay in providing such information will constitute a separate violation under the PML Maintenance of Records Rules. Moreover, any failure on the part of a reporting entity to comply with or fulfil its obligations under the PML Act and the PML Maintenance of Records Rules may result in legal action by the Directorate of Enforcement, such as:
- the commencement of an inquiry;
- the issue of a warning letter and specific directions; and
- the imposition of a monetary penalty.
4.7 Does failure to implement an adequate AML programme constitute a regulatory and/or criminal violation in your jurisdiction?
If a reporting entity fails to comply with its statutory obligations under the PML Act and the PML Maintenance of Records Rules, the Director of the Directorate of Enforcement has the power, under Section 13 of the PML Act, to hold an inquiry in relation to such non-compliance. Further to this, the Director of the Directorate of Enforcement also has the power to issue a warning letter and specific directions to the reporting entity to comply or to send a report in relation to the measures it has taken. The Director of the Directorate of Enforcement also has the power to impose a monetary penalty ranging from INR 10,000 to INR 100,000 for each failure by the reporting entity.
In case of non-compliance by a reporting entity, the PML Act and the PML Maintenance Rules do not provide for the revocation of licences of reporting entities. However, licences can be revoked by:
- the Reserve Bank of India (RBI);
- the Securities and Exchange Board of India (SEBI); and
- other sector-specific regulators.
The RBI Master Direction: Know Your Customer (KYC) Direction was issued by the RBI under Section 35A of the Banking Regulation Act 1949 to issue any directions as it may deem fit. On a joint reading of Sections 35A and 22 of the Banking Regulation Act 1949, if a banking company does not comply with a direction that has been validly issued by the RBI, the RBI has the power to revoke its banking licence. Accordingly, if a banking company fails to follow the KYC Direction, the RBI may be empowered to revoke its licence. Section 11B of the SEBI Act also empowers the SEBI:
- to regulate the securities market by any measures as it thinks fit; and
- to cancel the licence of an intermediary for non-compliance with any directions issued by the SEBI, such as the Anti-Money Laundering Guidelines.
5.1 Can companies that voluntarily report AML violations or cooperate with investigations benefit from leniency in your jurisdiction?
The money-laundering offences which fall within the purview of the Prevention of Money Laundering (PML) Act are not compoundable in nature. Therefore, while companies can voluntarily report AML violations and cooperate with investigations, this does not entitle them to any leniency from the Directorate of Enforcement. However, if the Directorate of Enforcement believes that a party is instrumental to an investigation and will disclose all facts pertaining to it and all other accuseds in relation to all offences allegedly committed under the PML Act, it can seek a judicial pardon for that party from prosecution under the PML Act by filing an application under Section 306 of the Criminal Procedure Code, 1973 with the Special Court. However, the exercise of this power to apply for a judicial pardon of an accused involved in money laundering is entirely within the Directorate of Enforcement's 's discretion and is not mandatory in any scenario.
5.2 Can the existence of an AML compliance programme constitute a defence to charges of AML violations?
The existence of an AML compliance programme is not an automatic defence for a company facing charges of violations under the PML Act. However, an AML compliance programme can be effective in:
- highlighting a company's commitment towards its AML obligations; and
- establishing due diligence on the part of a company or person under Section 70 of the PML Act.
5.3 What other defences are available to companies charged with AML violations?
The PML Act and the Prevention of Money-Laundering (Maintenance of Records) Rules do not provide for any explicit defences for companies charged with the commission of an offence under the act or the rules. With respect to offences committed by companies, the concept of vicarious liability is not recognised under Indian criminal law – that is, the persons in charge and responsible for the conduct of the offending company do not automatically become liable for the offences of the company. Only those persons who are directly involved in the decision making and specific operations of the company can be implicated under the PML Act for acts of the company. Such persons can defend the allegations by establishing that their decision-making process was backed by necessary due diligence to prevent such offences.
5.4 Can companies negotiate a pre-trial settlement through plea bargaining, settlement agreements or similar?
No, the companies cannot negotiate a pre-trial settlement through plea bargaining, settlement agreements or any other similar mode. While Sections 265A to 265L of the Criminal Procedure Code recognise the concept of plea bargaining, they carve out an exception for offences which affect the "socio economic condition of the country". Therefore, the PML Act does not:
- recognise the concept of plea bargaining; or
- provide any option for a settlement of any form.
5.5 What penalties can be imposed for violations of the AML legislation? How are these determined? Can non-exhaustive penalties be imposed for such violations (eg, exclusion from public procurement, exclusion from entitlement to public benefits or aid, disqualification from the practice of certain commercial activities, judicial winding up)?
Monetary penalties can be imposed for violation of the PML Act stipulated under Sections 13, 63 and 64 of the PML Act. The Directorate of Enforcement is empowered under the act to:
- conduct an investigation; and
- seek relevant information from concerned persons, companies or reporting entities as part of its investigation.
However, in the event of failure to furnish information as sought by the Directorate of Enforcement, the Director of the Directorate of Enforcement is empowered to impose penalties of between INR 10,000 and INR 100,000 for each failure.
The PML Act does not provide for any non-exhaustive penalties (eg, exclusion from public procurement, exclusion to entitlements, judicial winding up) and the penalties for all substantive offences (which includes imprisonment). Compliance-related offences (mostly monetary penalties) are specifically set out under the PML Act.
5.6 Can funds, property and/or proceeds of AML and/or financial crime be subject to asset freezing/confiscation/forfeiture or victim compensation laws? If so, under what circumstances and what types of funds or property may be confiscated/forfeited? Can such actions be taken if there is no criminal conviction?
Yes, funds, property and/or proceeds of AML and/or financial crime are subject to asset freezing and confiscation under the PML Act:
- Section 17(1A) of the PML Act empowers an authority to freeze assets/property if an authorised officer deems it impracticable to seize records/property/assets which are identified as the proceeds of crime under the PML Act.
- The Directorate of Enforcement, where it is satisfied that the attachment of property identified as the proceeds of crime would stand infructuous if prompt action is not taken, is empowered under Section 5(1) to provisionally attach such property and freeze such accounts which are identified as the proceeds of crime. However, such assets/property/funds will be confiscated only in the event of attachment by the Special Court at the conclusion of trial.
- Section 8(5) stipulates that where the Special Court, on receipt of a complaint from the Directorate of Enforcement, determines that property or assets were involved in money laundering at the conclusion of a trial, such property or assets will be confiscated by the central government. If the proceeds of crime (eg, property or assets) are located outside India, property of equivalent value of the offender under the PML Act will be confiscated by the central government to that extent.
- Section 60 further provides for the confiscation and attachment of property located in India:
- which has been acquired from the proceeds of crime earned outside India; and
- where the contracting party has, in view of the same, requested the central government to confiscate such property.
- On receiving such request, the central government will approach the Directorate of Enforcement, which will provisionally attach the property and thereafter initiate proceedings before the Adjudicating Authority for confirmation of such attachment.
5.7 What is the statute of limitations for prosecuting AML offences in your jurisdiction?
The PML Act does not stipulate any limitation period for the prosecution of AML-related offences. In fact, the Indian courts have identified offences which fall within the purview of the PML Act to be continuing offences. Judicial precedents state that Sections 3 and 4 of the PML Act will apply as long as the accused:
- remains in possession of the proceeds of crime; or
- indulges in any activity relating to the proceeds of crime while claiming that they constitute untainted property.
6 Alternatives to prosecution
6.1 What alternatives to criminal prosecution are available to enforcement agencies that find evidence of AML violations?
The Prevention of Money Laundering (PML) Act was passed by Parliament to prevent criminal offences of money laundering and sets out the criminal procedure to be followed by the authorities and courts in relation to such offences. There are no alternatives to criminal prosecution provided under the PML Act for dealing with the offence of money laundering. Section 41 of the act also expressly bars the civil courts from entertaining any suit or proceedings in relation to such offences.
6.2 What procedures are involved in concluding an investigation in this way?
Not applicable (see question 6.1).
6.3 What factors will determine whether such an alternative to prosecution is to be offered by an enforcement agency to those who have been involved in AML violations?
Not applicable (see question 6.1).
6.4 How common are these alternatives to prosecution?
Not applicable (see question 6.1).
6.5 What reasons, if any, could lead to an increase in the use of such alternatives?
Not applicable (see question 6.1).
7 Private AML enforcement
7.1 Are private enforcement actions for AML offences available in your jurisdiction? If so, where can they be brought and what process do they follow?
The Prevention of Money Laundering (PML) Act does not provide for any private enforcement actions for the offence of money laundering, as such offences are treated as crimes not only against individuals, but also against society/the state. Hence, private enforcement actions are not available for such offences, as they have the potential to endanger society at large.
The victims of AML-related offences can pursue civil/contractual remedies, which may be separately available.
7.2 What types of relief may be sought and what types of relief are most commonly awarded? How is the relief awarded determined?
Not applicable (see question 7.1).
7.3 Can the decision in a private enforcement action be appealed? If so, to which reviewing authority?
Not applicable (see question 7.1).
8 AML, cyber and crypto-assets
8.1 How does the AML regime dovetail with other cyber law in your jurisdiction?
The Prevention of Money Laundering (PML) Act requires reporting entities to maintain records physically and digitally in order to authenticate customer identification, so that they can then furnish such information to the Central Know Your Customer Records Registry in accordance with Sections 11A and 12(e) of the PML Act. As such authentication includes customer biometrics, which constitute sensitive information as per Section 3(iv) of the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (‘Sensitive Information Rules'), the rules complement the PML Act by specifying:
- the procedure and manner in which such information should be maintained; and
- the reciprocal penalties in the event of disclosure of such sensitive information.
The Information Technology Act, 2000 replicates the principles enshrined in the AML regime in relation to the fight against cyber terrorism. While the PML Act mandates the reporting of suspicious transactions (including cross-border transactions) with a view to preventing money laundering and terrorist financing, the Information Technology Act stipulates a penalty of life imprisonment for any act that is tantamount to cyber terrorism as per Section 66(f).
8.2 What specific considerations, concerns and best practices should companies be aware of with regard to AML prevention in the cyber sphere?
The Sensitive Information Rules impose certain data protection obligations on the collection, storage and transmission of information that is considered to be sensitive information. This information is collected by companies in electronic form. Therefore, the Sensitive Information Rules:
- set out the procedure and manner in which such sensitive information should be stored by companies; and
- impose restrictions on the disclosure of such information to third parties without the prior permission of the information provider.
The disclosure of such information to third parties can lead to the wrongful utilisation of such information for committing not only scheduled offences, but also offences which are against the national interest.
8.3 Does the AML regime extend to crypto-asset activity and if so, how?
Section 2(1)(sa)(vi) of the PML Act has been amended to provide that all economic activities relating to virtual digital assets are governed by the rules and regulations of the PML Act with effect from 7 March 2023. The term ‘virtual digital assets', as defined in Section 2(47A) of the Income Tax Act 1961, includes:
any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically.
9 Trends and predictions
9.1 How would you describe the current AML enforcement landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In recent years, the Prevention of Money Laundering (PML) Act has been amended on various occasions to ensure the effective enforcement and implementation of the law and address new types of AML violations. Some of these amendments include the following:
- Politically exposed person (PEPs), non-governmental organisations (NGOs) and beneficial owners: The government has made it mandatory for banks and financial institutions to record financial transactions of PEPs. Also, financial institutions or reporting agencies must collect information about the financial transactions of non-profit organisations and NGOs under the provisions of the PML Act.
- Inclusion of chartered accountants and company secretaries: By way of a notification dated 5 May 2023, the government expanded the scope of reporting entities under the PML Act and the Prevention of Money-Laundering (Maintenance of Records) Rules to include chartered accountants, cost accountants and company secretaries as reporting entities. Any transactions carried out by chartered accountants, company secretaries and cost accountants with respect to the following activities now fall within the purview of the PML Act:
- the purchase and sale of immovable property;
- the management of clients' assets;
- the provision of bank and securities accounts; and
- the organisation of contributions for company formation and business incorporation.
- Like other reporting entities under the PML Act, chartered accountants, company secretaries and cost accountants must also follow the compliance and reporting guidelines as set out in the PML Act and the Prevention of Money-Laundering (Maintenance of Records) Rules.
- Inclusion of virtual assets and currency: By way of a notification dated 7 March 2023, the government has brought virtual digital assets within the purview of the PML Act. According to the notification, virtual digital asset service providers and businesses such as crypto exchanges and wallets are now considered reporting entities under the PML Act and must comply with the necessary reporting obligations. The new regime was introduced in order to control and prevent money laundering and fraud through various online modes.
These amendments and notifications should ensure greater transparency and more effective implementation of the PML Act. They also reflect the fact that enforcement of the AML provisions under the PML Act is a priority for India.
9.2 Has your jurisdiction's AML regime been evaluated by an international organisation, such as the Financial Action Task Force (FATF), the Council of Europe (Moneyval) or the International Monetary Fund; and if so, when?
The Indian AML regime was evaluated by Financial Action Task Force (FATF) in 2010. This mutual evaluation was based on:
- Indian laws and regulations and other materials supplied by the Indian government; and
- information obtained by the FATF evaluation team during an on-site visit to India in 2009.
Due to the COVID-19 pandemic, the latest onsite visit and assessment for mutual evaluation was delayed; it is now scheduled to be held in November 2023, with the plenary discussion to be held in June 2024.
9.3 Does your jurisdiction meet the recommendations of the Financial Action Task Force; and if not, what are the barriers to meeting these?
In its 2010 Mutual Evaluation Report, the FAFT highlighted certain issues in India's AML legislation and guidelines. These included:
- ineffective implementation and conviction of persons for money-laundering offences;
- reliance for conviction on scheduled offences; and
- the absence of enhanced measures for relatives of politically exposed persons.
Pursuant to these recommendations, India has taken steps in the right direction to deal with the issues faced in the implementation of the PML Act. With respect to effective implementation and conviction, the courts are seeking to deal with money-laundering matters in a timely manner; however, the COVID-19 pandemic has caused major delays in court proceedings in general.
In addition, in 2019, the government introduced an amendment to insert an explanation in Section 44 of the PML Act which clarifies that:
- the jurisdiction of the Special Court to deal with offences under PML Act – whether during investigation, inquiry or trial – does not depend on any orders passed in respect of the scheduled offence; and
- the trial of both sets of offences by the same court will not be construed as a joint trial.
The definition of the ‘proceeds of crime' was also expanded to include any property which is directly or indirectly derived or obtained as a result of any criminal activity that relates to scheduled offences.
9.4 What noteworthy technology developments have you observed in your jurisdiction over the past 12 months in the growth of regtech and suptech solutions, as well areas where blockchain and digital assets or online-based communities are used as an enabler (eg, money laundering using video games or online forums)?
By way of a notification dated 7 March 2023, the government brought virtual digital assets within the purview of the PML Act. According to the notification, virtual digital asset service providers and businesses such as crypto exchanges and wallets are now considered reporting entities under the PML Act and must comply with the necessary reporting obligations. The new regime was introduced in order to control and prevent money laundering and fraud through various online modes.
10 Tips and traps
10.1 What are your top tips for the smooth implementation of a robust AML compliance programme and what potential sticking points would you highlight?
Our top tips for the smooth implementation of a robust AML compliance programme include the following:
- Issue specific rules or guidelines which establish proper mechanisms for the identification of activities that might constitute money laundering. These guidelines or rules should be issued at an internal level which will facilitate the identification of such activities and the subsequent implementation of the rules or guidelines. It is also possible to set up a committee to govern the procedures established under the rules or guidelines to identify and assess such criminal activities.
- Establish a training programme for employees and staff members to:
- inform them of the internal AML rules and guidelines; and
- raise awareness of the risk of AML violations and the relevant reporting procedures to be followed.
10.2 What are the key threats and trends that you have seen in your jurisdiction with respect to money-laundering techniques during the COVID-19 pandemic?
During the COVID-19 pandemic, India saw a surge in virtual financial crimes and the emergence of new money-laundering techniques to launder the proceeds of crime. The enforcement agencies on account of their experience over the last few years, are now better equipped to deal with virtual financial crimes and trace money-laundering channels accordingly.
10.3 Are your jurisdiction's relevant AML legislative and rulemaking instruments available in online; and if so, are they publicly available and in English?
Yes, the Prevention of Money Laundering (PML) Act and the Prevention of Money-Laundering (Maintenance of Records) Rules and all other rules, directions and guidelines issued by the financial service regulators from time to time are publicly available in English from the relevant official websites.
Co-Authored by Samudra Sarangi, Partner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.