Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

As time passed, people started to get innovative with the techniques they use to launder their money. Such people continuously look for such new routes as and when their old methods become public knowledge and easy for the authorities to track. Also, with the advent of the internet, criminals are now able to store their monies in digital forms and can transfer them from country to country wireless and through online gateways to multiple accounts. There are a range of factors that eased the process and they were listed by the United Nations Office on Drugs Control (UNODC) on their website. Some of them include the absence of cooperation agreements on such matters between countries, the ease of incorporation, tight corporate and bank secrecy laws in some countries, their geographical location, increasing number of professionals such as accountants, financial analysts, lawyers etc. involved, non-cooperating governments when outside pressure is applied, quality electronic communication.

A detailed study has revealed several short and long term effects of this process. Indians have been alleged to have kept a total of 1.945 billion Swiss Francs or about INR 9,295 Crore have Swiss Bank and other bodies as a method to launder their illicit earnings. This information was provided by Government of India in their White Paper released in 2012. However, individual experts such as John Walker and the UNODC claim that the figure is nowhere near the actual amount and figure is closer to the 40% mark of the Indian GDP.  This money put away through various systems are then used for further crimes including terrorism, narcotics smuggling, street-level and organized crime rings, destabilizing of banking systems, and political control among others. Anti-money laundering legislation has been put in places throughout the world for protection against such crimes. Crimes should not pay, and these legislations try to suck out the financial backing received by organizations involved in illicit activities.

India has been one of the fastest growing economies in the 1990s and the early 2000s and its geographical location has contributed towards it becoming a regional financial power. It comprises of a large system of informal money exchanges and tax evasion techniques which has contributed to the country being vulnerable to money laundering activities. India has traditionally been strict on foreign-exchange and reporting norms but with the rise of hawala transactions and Indians migrating to the middle-east, UK taking advantage of schemes such as Windrush, North America and the rise of the remittance transfers, the governments and the Law Commission started paying attention to these practices in their reports and parliamentary discussions. Before the enactment of a specific legislation tackling the issue, several pieces such as the Income Tax Act 1961, The Benami Transactions (Prohibition) Act 1988, The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 and many more were indirectly dealing with problems that were arising however, it was not sufficient with the growth of illegal activities funded by the laundered money such as poaching, organ trade etc. Experts on the topic urged the government to take inspiration from international initiatives and how the issue has the potential to instigate economic problems and lack of funds for government expenditure in a country with such a large population. Not to mention, the social problems that might arise such as drug addictions, increase in violent crimes against humans and animals, anti-national sentiments etc. The adoption of the Political Declaration and Global Programme of Action by the United National General Assembly in February 1990, which called upon member states to develop money laundering legislations and programmes also played a major hand in the country's intention to go forward with the legislation. The Prevention of Money Laundering Bill was introduced in the Lok Sabha in 1998 which passed in 2003 and finally implemented in 2005. It has gone through various amendments with the last one being in 2019. Administration and enforcement authorities and agents are appointed under PMLA to implement its provisions and rules. Wide powers are assigned, which are very similar to those granted to the civil courts of the country, to exercise the provisional attachment of properties which are involved in the offence under PMLA. They are also enforced to issue summons, conduct searches and arrests, and seize evidence and records. Under PMLA, maintenance of records of transaction which qualify as being of a certain nature and involving an amount greater than the set threshold is considered to be a duty of the utmost importance. This duty needs to be complied by financial institutions and intermediaries, reference to which includes, among others, non-banking financial companies (NBFCs), stockbrokers, payment system operators, etc. The RBI, in consultation with the relevant government portfolios, is in charge of prescribing the relevant procedure and manner for providing and maintaining the above-mentioned information. This has resulted in the implementation of rules on top of the statute;


The RBI, alongside the Central Government issued these rules in 2005 which sets out the above-mentioned processes that several bodies such as banks, financial institutions and its intermediaries, etc. must abide by in order to conduct the required due diligence for identifying and verifying their clients before they initiate or enter into a business relationship with them. These rules also include measures and requirements that these bodies must use to identify their clients at the time of opening an account and executing a transaction. They also include the documents that the bodies must seek from the client for keeping on their own record. These have been explained in a better manner in a later chapter.

The provisions of PMLA have been well thought out and defines the terms ‘financial institutions' and ‘intermediaries' in an extremely broad manner. The rules mentioned above puts an onus on the banks, financial institutions and intermediaries to maintain the records of certain transactions which are;

  • in excess of a certain value,
  • series of interconnected transactions that may cumulatively amount to a prescribed value, and
  • suspicious looking transactions (as defined in the rules). There is no requirement for the transaction to be conducted in cash.

These Rules stipulate that the procedures and manner of maintenance of records may be prescribed by the respective regulators of banks, financial institutions or intermediaries, namely, the RBI and the SEBI. In this regard, the RBI has issued the RBI Directions for KYC Implementation for banks and financial institutions, and SEBI has issued the SEBI anti money laundering Guidelines for SEBI-registered intermediaries.


The RBI Directions for the implantation of KYC have been issued by the RBI and are applicable to banking companies and NBFCs regulated by the RBI. The key purpose of these directions are the prevention of individuals or companies to misuse the banks and NBFCs from being used for money laundering or other illegal acts such as terrorist financing activities. These directions require banks and NBFCs to put policies and requirements in place in order to establish the identity of their customer, assessing the risk faced by each customer and categorizing them based on it, enhancing their due diligence techniques and procedures in general and even further for the so called high risk clients, various procedures for dealing with different types of transactions and also devising an effective mechanism for reporting such transactions to the Financial Intelligence Unit (FIU).

  • The SEBI anti money laundering Guidelines

The SEBI anti money laundering Guidelines have been issued by the SEBI and are applicable to SEBI-registered intermediaries. These guidelines puts a duty on such intermediaries to enact policies and procedures to assist in the fight against money laundering, which should include the communication of such group policies which relate to the anti-money laundering and illicit activities such as terrorist financing to all persons and employees involved in handling customer account information, securities transactions, client acceptance policy and CDD measures (including requirements for proper identification); the maintenance of records; and cooperation with the relevant law enforcement authorities (including the timely disclosure of information).

It has been claimed that the legislation, when enforced, was already outdated for the needs of the now-booming growth rate of the economy which required a major amendment in 2008.

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