Throughout the 1990s, the world experienced a surge in financial crimes, propelled by the rapid globalization of financial markets and the advent of sophisticated technological advancements. Recognizing the threat, the Financial Action Task Force (FATF) outlined comprehensive recommendations to combat these global challenges, urging its member states to fortify their legal and regulatory frameworks.
In response to these international pressures and the specific vulnerabilities identified within its borders, the Indian government enacted the Prevention of Money Laundering Act (PMLA) in 2002. This crucial legislation aimed not only to curb the increasing tide of financial crimes but also to align India's financial security measures with global standards, ensuring a safer and more robust financial environment domestically and internationally.
Here is short visual snapshot to give you an overview of the AML Landscape in India!
Now that you have the TLDR version, we can break each concept down in details. Let's begin with the basics of understanding what AML is.
What is AML?
AML refers to Anti-Money Laundering. These are guidelines/directives that encompass the strategies and legal frameworks designed to prevent criminals from disguising illegally obtained funds as legitimate income - also known as money laundering!
For instance, imagine money earned from drug sales or accepting bribes is funnelled into a legitimate construction business to mask its origin, a classic example of the integration stage in money laundering. This tactic makes it hard to trace the illicit money back to its criminal source, effectively obscuring its origins through what appears to be legitimate business activities.
AML regulations strive to prevent such schemes by obstructing the formation of these misleading money trails, which often involve the use of money mules. These individuals, knowingly or unknowingly, help launder money through their bank accounts. Recently in Bangalore, India, we saw the arrest of 6 individuals operating 126 mule accounts!
Their modus operandi
They would target youngsters working in part-time and would offer them commissions in exchange for opening bank accounts and handing over the credentials to the masterminds. All the money parked in these accounts was proceeds from various criminal activities. Here’s the news report.
Recognizing the signs in money mules is crucial, including unusual account activity that does not fit the customer's profile or large, rapid transactions that seem to have no legitimate source. Understanding these stages of money laundering and indicators helps strengthen efforts to disrupt these illicit financial flows.
How does AML work?
Globally, AML efforts generally adopt a risk-based authentication strategy to assess and mitigate financial crime. This process includes screening transactions and monitoring for suspicious activities. Modern AML technologies leverage artificial intelligence and machine learning to enhance these processes.
The core elements of AML include:
- Customer Due Diligence (CDD) and Know Your Customer (KYC)
- Transaction Monitoring
- Risk-based authentication
- Suspicious Activity Reporting (SAR)
- Record Keeping
For example, Bureau, an identity verification platform, uses sophisticated technology to verify identities and evaluate risks by analyzing millions of data points within seconds, allowing companies to detect and prevent money mules right at the moment of onboarding.
List of AML regulators in India
India has been identified by the global organization FATF as a high-risk country for money laundering. In response, the Indian government has committed to bolstering its AML infrastructure and has adopted FATF's recommendations to improve oversight.
India's AML regulatory framework was established in 2002 and has since evolved into a comprehensive network. This system enhances information sharing across multiple authorities, helping to strengthen financial transparency and security.
The key authorities involved in anti-money laundering (AML) efforts:
1. The Financial Intelligence Unit (FIU_IND)
The financial intelligence unity of India was established in 20004 to monitor and analyze suspicious financial transactions. This organization reports to the Ministry of Finance.
2. Reserve Bank of India (RBI)
The Central Bank and regulatory body of India, the RBI is responsible for the overall economic development and growth of the nation. Since it oversees crucial activities in the financial sector, it is natural that it will also have regulatory powers to prevent money laundering. Find out the RBI’s AML guidelines here.
3. Securities and Exchange Board of India (SEBI)
SEBI is the regulatory authority that oversees the securities market in India. It outlines the detailed guidelines for all financial intermediaries and investors must follow. These guidelines also include robust Customer Due Diligence and Enhanced Due Diligence processes that aim to prove a secure digital ecosystem for financial investments and transactions.
4. Insurance Regulatory and Development Authority of India (IRDAI)
IRDAI is another essential regulator that aims at curbing money laundering in the insurance industry. It is responsible for a regular review and monitoring of the effectiveness of the AML systems in place through on-site and off-site inspections and audits. The IRDAI is also very active in its coordination with other agencies that are responsible for the effective implementation of the AML regime in India and is also part of the Working Group for National Risk Assessment established by the Department of Revenue. Read more about their responsibilities here.
To also know: AML enforcement agency in India - Enforcement Directorate (ED)
The Enforcement Directorate (ED) is the primary enforcement agency responsible for implementing the Prevention of Money Laundering Act (PMLA) in India. It conducts investigations, attaches and confiscates proceeds of crime, and adjudicates cases related to money laundering violations, collaborating with other agencies to combat financial crimes effectively.
Through enforcement actions and preventive measures, the ED aims to deter and prosecute individuals and entities engaged in money laundering activities. You might have seen the multiple arrests that the ED recently made in India in various money laundering cases like the ₹2,000 Liquor scam in Chattisgarh.
Evolution of AML regulations in India
In 1988, the Atal Bihari Vajpayee government introduced the first bill in India to combat money laundering, marking the start of legislative efforts against financial crimes. This effort culminated in 2002 with the passage of the Prevention of Money Laundering Act (PMLA) by both houses of Parliament, establishing a legal framework to prevent and prosecute money laundering activities. The PMLA came into force in 2005 after the United Progressive Alliance government framed the necessary rules, setting up critical mechanisms for enforcement, including the creation of the Financial Intelligence Unit-India (FIU-IND) to monitor and investigate suspicious financial activities.
Here's a timeline:
2002 - Prevention of Money-laundering Act (PMLA) Act
The Prevention of Money-laundering Act (PMLA), enacted by the Ministry of Finance, serves as the cornerstone of India's efforts to combat money laundering. This legislation aims to prevent and control money laundering activities, enable the confiscation of properties derived from such illicit activities, and tackle associated issues comprehensively.
The PMLA establishes a robust legal framework that empowers various regulatory bodies and enforcement agencies, facilitating a coordinated approach to tackle money laundering nationwide.
This unified framework not only enhances the efficacy of investigations but also strengthens the legal and institutional mechanisms against money laundering, thereby solidifying the integrity of India's financial system.
At Bureau, we are committed to the same goal of bolstering security and trust in India’s digital payments, and our solutions build upon the relevant infrastructure laid out by PMLA.
2009 - PMLA Amendment Act
This amendment gave the Directorate of Enforcement more control to intervene if there was an alleged “criminal conspiracy”. This gave the ED more power to take coercive actions against politicians if required. This amendment also gave the ED international jurisdiction to track the laundered money.
2012 - PMLA amendment
Expanded the definition of money laundering to include activities like concealment, acquisition, possession, and use of proceeds of crime as criminal offenses. It also gave higher importance to acts that covered offenses such as waging war against the nation, drug trafficking, corruption, the Wildlife Protection Act, the Immoral Traffic (Prevention) Act, and more.
2015 - Black Money Act
Augmented reporting requirements for financial institutions and other entities to detect and report transactions involving undisclosed foreign income and assets.
2019 - The Finance Act
This amendment addressed multiple loopholes, grey areas, or ambiguities by tightening definitions and scopes of terms outlined in the PMLA.
2023 - Maintenance of records
The latest amendment mandates that reporting entities must immediately obtain client due diligence records from third parties or the Central KYC Records Registry. Additionally, the RBI now requires periodic updates to KYC records as part of their Enhanced Due Diligence.
Related read: What is Enhanced Due Diligence in KYC? (Guidelines for 2024)
Present - Updates to the KYC master directives
Despite ongoing efforts, the challenge of money laundering continues to grow in India. Regulators are highly aware of this issue and are proactively enhancing measures to tackle it. For instance, the RBI has recently made significant amendments to the KYC Master Directives to bolster AML protocols.
Key updates include:
- Due Diligence for CKYC: Regulated Entities (REs) are now required to conduct due diligence checks on related documents stored within the Central KYC Records Registry (CKYC).
- Beneficial Ownership Threshold: The threshold for identifying beneficial ownership in entities has been lowered to 10%, enhancing transparency.
- Periodic KYC Updates: There is now a mandate for periodic updates to KYC information to ensure all records are current and accurate.
- Comprehensive Sanctions Screening: REs must perform checks against all 14 United Nations Security Council (UNSC) Sanctions Lists, as well as the lists specified in the First and Fourth Schedule of the Unlawful Activities (Prevention) Act (UAPA), 1967.
- Daily List Updates: These lists must be updated daily to maintain the most current information for screening and compliance purposes.
Bureau: Your one-stop solution for AML compliance
Bureau’s AML solution offers a robust mechanism that enables customers to streamline their compliance team's efforts in conducting AML/ CFT screening. It ensures adherence to compliance norms while simplifying the process, thereby reducing complexities.
- Screening against all specified lists
- Regular updation of lists
- Reduced false positives
- Periodic scrubbing of existing users to ensure ongoing compliance
- Global watchlists’ screening to have rigorous checks
If you’re looking to stay RBI compliant and protect your business from AML/CFT threats, we’d be more than happy to help.
