Anti-Money Laundering 2023

Jun 19, 2023

Anti-Money Laundering 2023

This practice guide provides insights into anti-money laundering laws and regulations, investigatory powers, criminal enforcement, compliance, reporting requirements, civil claims, procedures, damages and remedies, international anti-money laundering efforts, and recent updates and trends.

Domestic law

Identify India’s money laundering and anti-money laundering (AML) laws and regulations. Describe the main elements of these laws.

The Prevention of Money Laundering Act 2002 (the PML Act), together with the rules issued thereunder and the rules and regulations prescribed by regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), set out the broad framework for the anti-money laundering laws in India. Some of the primary rules and guidelines regulating money laundering activities in India include:

the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), issued under the PML Act;
the Master Circular on Guidelines on AML Standards and Combating Financing of Terrorism, and Obligations of Securities Market Intermediaries under the PML Act and Rules Framed Thereunder (the SEBI AML Guidelines), issued by the SEBI on 3 February 2023; and
the RBI Know-Your-Customer Directions 2016 (the RBI KYC Master Directions) issued by the RBI on 25 February 2016, as updated on 10 May 2021, which is the most up-to-date consolidation of the know-your-customer guidelines and norms for all entities regulated by the RBI.

PML Act

The PML Act was enacted by the Parliament of India in 2002 and came into force in 2005. It was enacted following 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 legislation and programmes. The PML Act criminalises the offence of money laundering and puts preventative measures in place. These measures are proposed to be achieved through provisional attachment of proceeds of crime, which are likely to be concealed, transferred or dealt with in a manner that may frustrate proceedings; and through obligations imposed on banks, financial institutions and intermediaries to maintain records and supply information regarding certain types of transactions.

The PML Act provides for the appointment of authorities to administer and enforce its provisions. These authorities are vested with powers, similar to those vested in a civil court, to provisionally attach property involved in money laundering, issue summons, and search, seize and arrest with regard to the proceeds of crime. Under the PML Act, financial institutions and intermediaries (reference to which includes, inter alia, non-banking financial companies (NBFCs), stockbrokers and payment system operators) are required to maintain records of transactions of a prescribed nature and above certain thresholds. The procedure and manner for providing this information is prescribed by the RBI in consultation with the central government.

Although there is limited jurisprudence on the interpretation of provisions of the PML Act, Indian courts have widely accepted the position that criminal statutes must be construed strictly. Additionally, the courts take the view that, for a penalty to be imposed under any criminal statute, an offence must have been committed that falls not only within the letter but also within the spirit of the statute (see Glaxo Industries v Presiding Officer , Labour Court, Meerut AIR 1984 SC 505). However, the courts in India have also held that, where a plain reading of the statute does not cover the objectives of the legislature in passing the law, the courts must also have due consideration for those objectives while interpreting the provisions of the statute. The above principle is especially important in the context of socio-economic statutes, such as those dealing with corruption or violations of foreign exchange laws. Thus, one may view that the PML Act, if litigated before Indian courts, may also be interpreted and enforced in line with the above principles.

PML Rules

The PML Rules have been issued by the central government in consultation with the RBI, setting out the process to be adopted by reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) for identifying and verifying their clients before commencing a business relationship with them. The PML Rules also prescribe exhaustive requirements for reporting entities to establish and verify the identity of any client at the time of operating an account or executing a transaction, including prescribing the documents that the reporting entity should seek from a client and maintain on record.

The definitions of the terms ‘financial institutions’, ‘designated persons’ and ‘intermediaries’ are extremely wide under the PML Act. The PML Rules cast obligations on reporting entities to maintain records of certain prescribed transactions, which include all transactions in excess of a certain value, series of interconnected transactions that may cumulatively amount to a prescribed value and suspicious transactions (as defined in the PML Rules), regardless of whether the transactions are effected in cash. The PML Rules stipulate that reporting entities should follow the procedures and manner of maintenance of records prescribed by their respective regulators. In this regard, the RBI has issued the RBI KYC Master Directions for banks and financial institutions, and the SEBI has issued the SEBI AML Guidelines for SEBI-registered intermediaries.

RBI KYC Master Directions

The RBI KYC Master Directions were issued by the RBI and are applicable to all entities regulated by the RBI (regulated entities), including banking companies and NBFCs. The purpose of the RBI KYC Master Directions is to prevent regulated entities from being used for money laundering or terrorist financing activities. The RBI KYC Master Directions require regulated entities to put in place requirements for establishing the identity of customers, categorising customers based on the degree of risk they may pose, undertaking client due diligence (CDD) (including enhanced CDD for high-risk customers and beneficiary accounts) and procedures for dealing with various types of transactions, such as cross-border wire transactions, and reporting such transactions to the Financial Intelligence Unit.

SEBI AML Guidelines

The SEBI AML Guidelines were issued by the SEBI and are applicable to SEBI-registered intermediaries. The SEBI AML Guidelines require that intermediaries must put in place policies and procedures to combat money laundering, which shall include:

communication of group policies relating to the prevention of money laundering and terrorist financing to all management and relevant staff members that handle, inter alia, account information, securities transactions, money and client records;
client acceptance policy and CDD measures (including requirements for proper identification); maintenance of records;
compliance with the relevant statutory and regulatory requirements;

Investigatory powers

Describe any specific powers to identify proceeds of crime or to require an explanation as to the source of funds.

The Directorate of Enforcement (ED) has been given broad powers under the PML Act to conduct search and seizure when it believes that a person has committed any act constituting money laundering, or is in possession of proceeds of crime, records or property relating to money laundering.

When any property or record is attached or seized, an application or complaint must be filed before the Adjudicating Authority, which has been constituted to exercise jurisdiction, powers and authority conferred by or under the PML Act. Typically, a criminal court or a special court set up for this purpose is appointed and vested with the powers of the Adjudicating Authority under the PML Act.

If the Adjudicating Authority has reason to believe that any person has committed an offence of money laundering or is in possession of proceeds of crime, it has been given powers under section 8 of the PML Act to serve a notice, calling upon the person to indicate the sources of his or her income, earnings or assets out of which, or by which means, he or she acquired the property that has been seized, attached or frozen and the evidence on which the person relies, as well as to show cause as to why those properties should not be declared to be properties involved in money laundering and confiscated by the central government.

For the purposes of the PML Act, the Adjudicating Authority has been vested with the same powers as that of a civil court under the Code of Civil Procedure 1908, including, inter alia, in relation to discovery and inspection; compelling the production of records; receiving evidence on affidavits; and enforcing the attendance of any person.

Recently, in Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929), the Supreme Court of India upheld the provisions of the PML Act conferring wide powers on the ED in matters of search and seizure.

Criminal enforcement

Which government entities enforce India’s money laundering laws?

The Directorate of Enforcement (ED), which is under the administrative control of the Department of Revenue of the Ministry of Finance, the Indian government and the director of the Financial Intelligence Unit (FIU) under the Department of Revenue of the Ministry of Finance, has been appointed to exercise exclusive powers under specific sections of the Prevention of Money Laundering Act 2002 (the PML Act).

Additionally, section 54 of the PML Act provides that certain officers are empowered and required to assist authorities under the Act with enforcement, including:

members and officers of recognised stock exchanges under the Securities Contracts (Regulation) Act 1956;
income tax authorities under the Income Tax Act 1961;
registrars and sub-registrars appointed by state governments under the Registration Act 1908;
officers appointed in terms of certain provisions of the Narcotic Drugs and Psychotropic Substances Act 1985;
police officers;
officers and members of associations recognised under the Forward Contracts (Regulation) Act 1952;
registering authorities empowered to register motor vehicles under the Motor Vehicles Act 1988;
officers of-the Customs and Central Excise Departments;
the Reserve Bank of India (RBI);
enforcement appointed under the Foreign Exchange Management Act 1999;
the Securities and Exchange Board of India (SEBI);
the Insurance Regulatory and Development Authority;
the Forward Markets Commission;
the Pension Fund Regulatory and Development Authority; and
the Department of Posts in the Indian government;
officers and members of the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India; and
officers of any other body corporate that is established under a state or central legislation, and such other officers of the central government, state government, local authorities or reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) who may be notified by a special order of the central government.

The PML Act specifically mandates assistance and cooperation between the above-mentioned authorities, since an essential element for the commission of the offence of money laundering is being involved in a process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming those proceeds of crime as untainted property.

The PML Act confers the power on a special court to adjudicate on and finalise an order of attachment of property. Further, the PML Act permits the special court to direct that any property that stands confiscated to the central government be restored to a claimant with a legitimate interest in the property who, while acting in good faith, may have suffered a quantifiable loss as a result of the offence of money laundering, despite having taken all reasonable precautions. The special court has been empowered to consider the claim for restoration of such a claimant during the trial of the offence.

The PML Act provides that the appellate tribunal constituted under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act 1976 shall be the appellate tribunal for hearing appeals against the orders of the Adjudicating Authority and the director of the FIU under the PML Act.

Defendants

Can both natural and legal persons be prosecuted for money laundering?

Under the PML Act, both natural and legal persons can be prosecuted for money laundering.

The term ‘person’ under the PML Act has been defined to include individuals, Hindu undivided families, companies, firms, associations of persons (whether incorporated or not), artificial juridical persons and agencies, and offices and branches owned or controlled by any such natural or legal persons. The PML Act provides for a wide range of penal actions that may be taken against persons in possession of proceeds of crime who have committed scheduled offences.

Under section 70 of the PML Act, if a body corporate (including a firm or association of individuals) contravenes any of the provisions of the PML Act, the persons in charge of the body corporate (and responsible to the body corporate for the conduct of its business) at the time of commission of the offence by the body corporate and the body corporate itself will be deemed to be guilty of the contravention of the provisions of the PML Act.

However, section 70 of the PML Act provides that persons in charge of the company will not be liable for the contravention if they are able to prove that the contravention of the PML Act by the body corporate took place without their knowledge or that they exercised all due diligence to prevent the commission of such an offence by the body corporate.

Further, where a contravention by a body corporate is attributable to any particular director, officer, secretary or manager (either on account of his or her consent, connivance or negligence), the director, officer, secretary or manager may also be prosecuted separately under the PML Act for the contravention committed by the body corporate.

The offence of money laundering

What constitutes money laundering?

Offence of money laundering

Money laundering is defined in the PML Act as direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or have actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such property as untainted property.

In Vijay Madanlal v Union of India (2022 SCC OnLine SC 929), the Supreme Court of India took the view that ‘and’ in section 3 of the PML Act must be construed as ‘or’ to give full effect to provisions of the PML Act. Therefore, projecting or claiming the property to be untainted is not an essential condition for the fulfilment of the provisions of section 3 of the PML Act. Pursuant to the above, a person shall be guilty of the offence of money laundering under section 3 of the PML Act if such a person is found to have directly or indirectly attempted to indulge, knowingly assisted or knowingly is a party to, or is actually involved (in any manner whatsoever) in, one or more of the following processes or activities connected with the proceeds of crime:

concealment;
possession;
acquisition;
use; and
projecting or claiming as untainted property.

Therefore, the element of knowledge is an important component for the offence of money laundering in India; thus, a strict liability standard may not be applicable in India in the context of a money laundering offence. The term ‘knowledge’ was specifically inserted into section 3 of the PML Act after deliberations over the draft bill in Parliament prior to the passing of the PML Act. As such, the legislative intent of Parliament in this regard is clear.

Further, the process or activity connected with the proceeds of crime is a continuing activity and continues until such a time that a person is directly or indirectly enjoying the proceeds of crime through concealment, possession, acquisition, use, or projecting or claiming it as untainted property in any manner.

Regarding section 24 of the PML Act, where there are any proceedings relating to proceeds of crime under the PML Act, in the case of a person involved in the offence of money laundering, unless the contrary is proved, it is presumed that the proceeds of crime are involved in the offence of money laundering.

The PML Act defines ‘proceeds of crime’ as any property (or the value of any property) derived or obtained, directly or indirectly, by any person as a result of any offence under the Indian penal statutes set out in the Schedule to the PML

Act (scheduled offences); or, where such property is taken or held outside the country, the property equivalent in value held within the country or abroad. It has been clarified in an explanation that the term ‘proceeds of crime’ covers not only property that is derived or obtained from scheduled offences but also any property that may directly or indirectly be derived or obtained as a result of any criminal activity that is relatable to a scheduled offence.

In Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929), the Supreme Court held that this explanation is merely clarificatory in nature. The term ‘proceeds of crime’ must be construed strictly to differentiate between property that is a vehicle used for the commission of a crime and property that is derived or obtained as a result of crime. While the former does not qualify as proceeds of crime, the latter does.

Reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) can be prosecuted or pursued for money laundering offences committed by their clients if it can be demonstrated that they were aware of the commission of a scheduled offence, knowingly became recipients of the proceeds of crime and projected the proceeds as untainted property. The obligations cast on the reporting entities in terms of the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules), the RBI Know-Your-Customer Directions 2016 (the RBI KYC Master Directions), and Master Circular on Guidelines on AML Standards and Combating Financing of Terrorism, and Obligations of Securities Market Intermediaries under the PML Act and Rules Framed Thereunder (the SEBI AML Guidelines) are to exercise due diligence in their dealings with clients, and to maintain and supply records of certain prescribed dealings with clients. Accordingly, although the exercise of diligence on the part of the reporting entities does not constitute a defence under the PML Act and the PML Rules, it may be used as a factor in demonstrating the lack of knowledge of the commission of money laundering by their clients.

Qualifying assets and transactions

Is there any limitation on the types of assets or transactions that can form the basis of a money laundering offence?

Determination of the commission of a scheduled offence is required to ascertain whether the offence of money laundering has been committed. For such a determination, a monetary threshold has been prescribed for certain scheduled offences (namely, Part B offences). Part B offences include offences of false declarations and false documents under section 132 of the Customs Act 1962, for which a monetary threshold of 10 million rupees has been prescribed. Accordingly, the other elements of the offence of money laundering would only be satisfied if the total value involved in the commission of such a Part B offence exceeds 10 million rupees.

No monetary threshold has been prescribed for the offences specified in Part A or Part C of the Schedule to the PML Act.

In the context of a Part A offence and an offence of cross-border implications, however, the above monetary threshold does not apply.

Predicate offences

Generally, what constitute predicate offences?

The commission of a scheduled offence under the PML Act is an essential condition for determining whether the offence of money laundering has been committed. These include certain identified offences under the Indian Penal Code 1860, such as, inter alia:

criminal conspiracy;
counterfeiting;
kidnapping for ransom;
extortion;
robbery;
receiving stolen property; and
fraud.

Further offences are identified under:

the SEBI Act 1992;
the Companies Act 2013;
the Unlawful Activities (Prevention) Act 1967;
the Customs Act 1962;
the Information Technology Act 2000;
the Arms Act 1959 (relating to, inter alia, the manufacturing and selling of arms and ammunition in contravention of the Act);
the Prevention of Corruption Act 1988; the Wildlife (Protection) Act 1972;
the Immoral Traffic (Prevention) Act 1956; and
the Narcotic Drugs and Psychotropic Substance Act 1985 (the NDPS Act).

Further, if the offence of a deliberate attempt to evade tax under section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 has cross-border implications, it is a scheduled offence under the PML Act. The commission of a scheduled offence is a prerequisite for constituting the offence of money laundering under the PML Act (see P Chidambaram v Directorate of Enforcement (AIR 2019 SC 4198)).

Scheduled offences are the predicate offences for the commission of the offence of money laundering. Accordingly, if any transaction is not linked to a scheduled offence, the funds relating to those transactions would not constitute proceeds of crime and, therefore, dealing in those funds would not amount to money laundering. The investigation of the offence of money laundering is inextricably linked to the investigation of the scheduled offence, and it is because of this that various investigative agencies have been directed in terms of the PML Act to coordinate and cooperate with the ED.

Scheduled offences and the offence of money laundering are to be tried together by a special court constituted by the PML Act that has jurisdiction over the area in which the offence has been committed. Section 43 of the PML Act provides that the central government may, in consultation with the chief justice of the relevant high court, designate one or more sessions courts as a special court. Accordingly, the commission of a scheduled offence must be alleged before the special court that is trying the offence of money laundering under the PML Act, and evidence and material relating to the scheduled offence must be placed before the special court to enable it to frame a charge in respect of the offence and to try it (see Rana Ayyub v Directorate of Enforcement (2023 SCC OnLine SC 109)).

The PML Act’s jurisdiction applies where an offence is committed by a person outside India and the offence would also constitute a scheduled offence (had it been committed in India), and any part of the proceeds of the offence have been remitted to India. Further, the PML Act’s jurisdiction also extends to situations where the scheduled offences have been committed within India and all or part of the proceeds of crime have been remitted outside India.

Defences

Are there any codified or common law defences to charges of money laundering?

There are no codified defences to the charge of money laundering other than demonstrating a lack of knowledge.

Resolutions and sanctions

What is the range of outcomes in criminal money laundering cases?

A money laundering offence is punishable by a fine and imprisonment for a term of between three years and seven years. The maximum term of imprisonment may extend to 10 years if the proceeds of crime relate to an offence under the NDPS Act, which deals with crimes relating to narcotics. Plea bargaining is available under section 265A in terms of the Code of Criminal Procedure, 1973 (CrPC), but not for:

offences that have been designated by the government as affecting the socio-economic condition of the country; or
offences where the punishment prescribed by law is:
death;
life imprisonment; or
imprisonment for a term in excess of .

The process for plea bargaining involves the accused making an application to the court and, upon the court being satisfied that the application was made voluntarily, making an order for the accused to work out a mutually satisfactory disposition of the case. This may include the accused giving compensation and other expenses to the victim during the case and thereafter.

The offence of money laundering has not yet been designated as affecting the socio-economic condition of the country. However, in Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929) the Supreme Court observed that money laundering is a heinous crime that not only affects the social and economic fabric of the nation, but also tends to promote other heinous offences, including terrorism and offences related to the NDPS Act. In light of this observation from the Supreme Court, the availability of plea bargaining for offences under the PML Act is unclear.

Under the PML Act, fines ranging from 10,000 rupees to 100,000 rupees for each failure can be imposed on a reporting entity if it has failed to maintain records or supply information in the manner prescribed under the PML Act and the PML Rules.

In addition, although the PML Act and PML Rules do not provide for the revocation of licences of reporting entities, this may be possible based on the circulars relating to know-your-customer and AML requirements issued by the regulators of the reporting entities. The RBI KYC Master Directions were issued by the RBI under section 35A of the Banking Regulation Act 1949 (which empowers the RBI to issue such general or specific directions as it may deem fit), as well as under the PML Rules. Section 35A of the Banking Regulation Act 1949, read with section 22, provides that, if a banking company does not comply with a direction validly issued by the RBI, the RBI has the power to revoke the banking licence of the banking company. Accordingly, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may be empowered to revoke the licence of the banking company.

Similarly, sections 45K and 45L read with section 45IA(6) of the RBI Act 1934 provide that, if a non-banking finance company (NBFC) fails to comply with the provisions of a direction issued by the RBI (including, for instance, the RBI KYC Master Directions), the RBI is empowered to cancel the registration of the NBFC.

Among its other powers, section 11B of the SEBI Act 1992 empowers the SEBI to regulate the securities market by any measures it deems fit and to cancel the licence of an intermediary for non-compliance with the directions issued by the SEBI, including, for instance, the SEBI AML Guidelines.

Forfeiture

Describe any related asset freezing, forfeiture, disgorgement and victim compensation laws.

Provisional attachment

The PML Act provides for the provisional attachment of any property that is the proceeds of crime, pending a final confirmation by the Adjudicating Authority under the PML Act. The term ‘property’ has been defined very broadly to mean any property or assets of every description, whether corporeal or incorporeal, movable or immovable and tangible or intangible, and it includes deeds and instruments evidencing title to, or interest in, such property or assets wherever located. Further, the term ‘property’ includes property of any kind used in the commission of an offence under the PML Act or any scheduled offence.

The PML Act also envisages the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, such right of attachment also extends to property (equivalent to the proceeds of crime) held outside India.

In terms of section 5 of the PML Act, if the ED has reason to believe, based on the materials in its possession, that a person is in possession of the proceeds of crime and those proceeds are likely to be concealed, transferred or dealt with in any manner that may result in the frustration of any proceedings relating to the confiscation of those proceeds, then the ED, by an order in writing, may provisionally attach such property for a period of 180 days from the date of the order or until a confirming order is passed by the Adjudicating Authority under section 8(2) of the PML Act (whichever is earlier). An order of provisional attachment can be made only after a report has been forwarded to a magistrate under section 173 of the CrPC in relation to a scheduled offence or a complaint has been filed before a magistrate for taking cognisance of the scheduled offence. The PML Act was amended to clarify that, in computing the 180-day period for provisional attachment of the property, the period during which the proceedings are stayed by the relevant high court is excluded and a further period not exceeding 30 days from the date of order of vacation of the stay order is counted.

The PML Act does not define or explain the term ‘reason to believe’. However, the construction of the phrase may be aided by the definition of the term in section 26 of the Indian Penal Code 1860, wherein it is provided that a person may have reason to believe something if there is sufficient cause to believe it, but not otherwise. The courts have held that reason to believe does not mean a purely subjective satisfaction and the belief must be held in good faith (see Income Tax Officer v Lakhmani Mewal Das ([1976] SCR (3) 956)). It is up to the courts to examine the reasons for a belief, and to ascertain whether such reasons are relevant and not extraneous to the matter in question.

It has been held by the courts (albeit not in the context of the PML Act, but in the context of other statutes) that a mere doubt or suspicion cannot constitute a reason to believe. Following provisional attachment under section 5 of the PML Act, the ED (or an officer authorised in this regard) is required to forward the material in its possession along with the provisional attachment order in a sealed envelope to the Adjudicating Authority in accordance with the procedure prescribed in the Prevention of Money Laundering (the Manner of Forwarding a Copy of the Order of Provisional Attachment of Property along with the Material, and Copy of the Reasons along with the Material in respect of Survey, to the Adjudicating Authority and its Period of Retention) Rules 2005. The PML Act specifically permits a person interested in the ‘enjoyment’ of immovable property to enjoy the immovable property that has been attached.

In the B Rama Raju v Union of India (2011 164 CompCas 149(AP)) judgment, the High Court of Andhra Pradesh held that for the purposes of attachment and confiscation (which are civil and economic consequences and not penal sanctions and are distinct from the process for prosecution under the PML Act) neither mens rea nor knowledge that a property has a lineage of criminality has been statutorily prescribed as a prerequisite. Therefore, even where a person has not been charged with the predicate offence or the offence of money laundering, the authorities may, nevertheless, attach (and confiscate) property in the possession of the person if the property constitutes the proceeds of crime.

Limitation periods on money laundering prosecutions

What are the limitation periods governing money laundering prosecutions?

The PML Act does not specifically provide for a limitation period in relation to the offence of money laundering. However, section 468 of the CrPC specifies the limitation periods of various categories of offences in India. Under section 468, there is no limitation period for an offence punishable with imprisonment for a term greater than three years. The CrPC defines the term ‘offence’ as ‘any act or omission made punishable by any law for the time being in force’. Consequently, the offence of money laundering under the PML Act constitutes an ‘offence’ within the meaning of the CrPC. Given that the offence of money laundering is punishable with a term of imprisonment of between three and 10 years, in accordance with the provisions of section 468 of the CrPC, there is no limitation period for the offence of money laundering.

Further, under section 468 of the CrPC, if two or more offences are being tried together, then the limitation period for each offence will be determined with reference to the offence that is punishable with the most severe punishment. Thus, if a person is prosecuted simultaneously for a scheduled offence punishable by imprisonment for a term of less than three years together with the offence of money laundering under the PML Act (which is punishable with imprisonment for three or more years), even if the limitation period for the underlying scheduled offence may have expired when considered independently, the accused person may still be tried for the scheduled offence in light of section 468 of the CrPC given that the limitation period in such a scenario for both offences would be determined based on the offence of money laundering and not the scheduled offence.

Extraterritorial reach of money laundering law

Do the money laundering laws applicable in India have extraterritorial reach?

The PML Act applies to the whole of India; however, its application is not restricted to proceeds of crime situated in India. The term ‘proceeds of crime’ is defined under the PML Act to include any property or assets, wherever located, derived from or obtained as a result of criminal activity relatable to any of the scheduled offences. The PML Act also envisages the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, such a right of attachment also extends to property (equivalent to the proceeds of crime) held outside India.

To give effect to this limited extraterritorial application in the context of certain specified offences that may be committed abroad (which also constitute scheduled offences if committed in India) but the proceeds of which may have been remitted to India, or where the scheduled offence may have been committed in India but the proceeds of the crime are remitted abroad, section 56 of the PML Act empowers the central government to enter into reciprocal arrangements with the government of any country outside India to enforce the provisions of the PML Act and to exchange information for the prevention of any offence under the PML Act or under the corresponding law in force in

that country, or for investigation under the PML Act.

The PML Act also contemplates offences of cross-border implications, which are:

offences committed or related to conduct outside India that constitute an offence in that jurisdiction and are scheduled offences under the PML Act, and a part of or all the proceeds of crime arising from such conduct are remitted to India; or
scheduled offences committed in India, and part of or all the proceeds of the crime have been transferred or have been attempted to be transferred from India to a place outside India.

Offences of cross-border implications are scheduled offences under the PML Act and, accordingly, the PML Act may be applicable to those offences.

Further, UN Security Council Resolution 1373 (2001) obliges countries to freeze without delay the funds or other assets of:

persons who commit or attempt to commit terrorist acts, or participate in or facilitate the commission of terrorist acts;
entities owned or controlled directly or indirectly by point (1); and
persons and entities acting on behalf of, or at the direction of, points (1) or (2), including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by those persons and associated persons and entities.

Each country has the authority to designate the persons and entities that should have their funds or other assets frozen. Additionally, to ensure that effective cooperation is developed between countries, countries should examine and give effect to, if appropriate, the actions initiated under the freezing mechanisms of other countries. To give effect to the requests of foreign countries under UN Security Council Resolution 1373 (2001), the Ministry of External Affairs will examine the requests made by foreign countries and forward it electronically, with their comments, to a designated officer for the freezing of funds or other assets. Freezing orders take place without prior notice to the designated persons involved.

Enforcement and regulation

Which government entities enforce the AML regime and regulate covered institutions and persons in India? Do the AML rules provide for ongoing and periodic assessments of covered institutions and persons?

There are several government entities that are collectively responsible for different aspects of enforcement and regulation of the AML framework in India.

The Financial Intelligence Unit (FIU) was set up by the government by way of an office memorandum on 18 November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions. The FIU is also responsible for coordinating and strengthening the efforts of national and international intelligence, investigation and enforcement agencies in pursuing global efforts against money laundering and related crimes. The FIU is an independent body reporting directly to the Economic Intelligence Council, headed by the Finance Minister.

By way of an order dated 1 July 2005, the central government empowered the Directorate of Enforcement (ED), which is under the administrative control of the Department of Revenue of the Ministry of Finance and the government for operational purposes, to exercise exclusive powers regarding the investigation and prosecution of cases under the Prevention of Money Laundering Act 2002 (the PML Act).

In addition, section 54 of the PML Act provides that certain officers are empowered and required to assist authorities under the PML Act with enforcement. Given that the PML Act requires that the scheduled offence (ie, the offence under the Indian penal statutes set out in the Schedule to the PML Act) and the offence of money laundering are tried together, the investigative agencies responsible for prosecuting the scheduled offence have been mandated to assist the ED that is authorised to prosecute the offence of money laundering.

Further, the Reserve Bank of India (RBI) regulates banks and financial institutions, including in relation to their obligations under the PML Act, the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time (the PML Rules) and the RBI Know-Your-Customer Directions 2016 (the RBI KYC Master Directions). Similarly, the Securities and Exchange Board of India (SEBI) regulates intermediaries registered with it, including in relation to their obligations under the PML Act, the PML Rules and the Master Circular on Guidelines on AML Standards and Combating Financing of Terrorism, and Obligations of Securities Market Intermediaries under the PML Act and Rules Framed Thereunder (the SEBI AML Guidelines).

Covered institutions and persons

Which institutions and persons must have AML measures in place?

Reporting entities (ie, banks, financial institutions, persons carrying out a designated business or profession (designated persons) and intermediaries) are required to carry out certain AML measures, including customer identification, client due diligence (CDD), customer acceptance, and tracking and reporting of certain types of transactions. The terms ‘financial institutions’, ‘intermediaries’ and ‘designated persons’ have broad definitions under the PML Act.

Financial institutions have been defined as companies, corporations or cooperative societies carrying out the activities prescribed under section 45I of the RBI Act 1934. They include chit fund companies, housing finance institutions, authorised persons, payment system operators, non-banking financial companies (NBFCs) and the Department of Posts.

Intermediaries have been defined as:

stockbrokers, share transfer agents, merchant bankers, underwriters, investment advisers or other institutions registered as intermediaries with the SEBI under section 12 of the SEBI Act 1992;
associations registered or recognised under the Forward Contracts (Regulation) Act 1952 or any members of such associations;
institutions registered with the Pension Fund Regulatory and Development Authority as intermediaries; and
recognised stock exchanges.

Designated persons include, inter alia, the following:

person carrying out activities for playing games of chance for cash or kind, including such activities associated with casinos;
the Inspector General of Registration appointed under section 3 of the Registration Act 1908;
real estate agents (ie, persons engaged in providing services in relation to sale or purchase of real estate) having an annual turnover of 2 million rupees or above;
dealers in precious metals and precious stones if they engage in any cash transactions with a customer in an amount equal to or above 1 million rupees, carried out in a single operation or in several operations that appear to be linked; and
persons engaged in the safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the central government.

Taking note of increasing use of cryptocurrency in money laundering, the Ministry of Finance of Indian government notified by way of a notification dated 7 March 2023 that the following activities, when carried out for or on behalf of another natural or legal person in the course of business, shall constitute a designated business or profession under PML Act:

exchange between virtual digital assets (VDAs) and fiat currencies;
exchange between one or more forms of VDAs;
transfer of VDAs;
safekeeping or administration of VDAs or instruments enabling control over VDAs;
and participation in and provision of financial services related to an issuer’s offer and sale of a VDA.

Compliance

Do the AML laws applicable in India require covered institutions and persons to implement AML compliance programmes? What are the required elements of such programmes?

Pursuant to the PML Act and the PML Rules, reporting entities are required to appoint a principal officer who is responsible for supplying information specified under the PML Rules to the office of the director of the FIU, and a designated director who is responsible for ensuring compliance with the obligations cast on the reporting entity under Chapter IV of the PML Act and the PML Rules. Names, designations and addresses (including email addresses) of the principal officer and the designated director, including any changes thereto, must be intimated to the office of the director of the FIU. The designated director is required to be of a sufficiently senior position and able to discharge the functions with independence and authority. Further, every SEBI-registered intermediary should ensure that the proper policy framework required by the SEBI AML Guidelines is put into place.

Financial institutions (and other entities regulated by the RBI are required to have a know-your-customer (KYC) policy duly approved by the board of directors of the entity or any committee of the board to which such power has been delegated. The KYC policy must include a customer acceptance policy, risk management parameters, customer identification procedures and monitoring of transactions. These regulated entities are mandated to carry out money laundering and terrorist financing risk assessment exercises periodically to identify, assess and take effective measures to mitigate their money laundering and terrorist financing risk for clients, countries or geographic areas, products, services, transactions, or delivery channels. Regulated entities are further required to apply a risk-based approach for the mitigation and management of identified risks, and should have in place policies, controls and procedures in this regard that have been approved by their board of directors.

Record-keeping and reporting are integral elements of the compliance programme.

Further, as part of such compliance requirements, reporting entities and their directors, officers and employees (permanent and temporary) are prohibited from disclosing (tipping off) to their client the fact that a suspicious transaction report or related information is being reported or provided to the FIU.

Breach of AML requirements

What constitutes breach of AML duties imposed by the law?

The following constitute a breach of AML duties imposed by law:

acting in breach of section 3 of the PML Act by way of direct or indirect attempts to indulge in, knowingly assist or knowingly become a party to, or have actual involvement in, the process or activity connected with the proceeds of crime (including its concealment, possession, acquisition or use) and projecting or claiming such proceeds of crime as untainted property; or
reporting entities acting in breach of the various compliance requirements imposed on them under Chapter IV of the PML Act, the PML Rules or specific guidelines and regulations issued by the RBI KYC Master Directions and the SEBI AML Guidelines.

Customer and business partner due diligence

Describe due diligence requirements in India’s AML regime.

The PML Rules require that every reporting entity:

at the time of commencement of an account-based relationship, verify the client’s identity as well as its beneficial owners (if the client is acting on behalf of a beneficial owner) and obtain information on the purpose and intended nature of the business relationship; and
in all other cases, verify the client’s identity while carrying out:
transactions of an amount equal to or exceeding 50,000 rupees, whether conducted as a single transaction or several transactions that appear to be connected; or
any international money transfer operations.

However, irrespective of the amount deposited, invested or transacted by clients, no minimum threshold or exemption is available from obtaining the minimum information or documents from clients as stipulated in the PML Rules regarding the verification of the records of the identity of clients. Further, no exemption from carrying out CDD exists in respect of any category of clients. In other words, there is no minimum investment threshold or category exemption available for carrying out CDD measures by registered intermediaries.

The PML Rules require an intermediary to obtain certain minimum documentation from a client to verify the client’s identity. The nature of the documentation that is required to be obtained is, in turn, dependent on the nature of the client.

The following documents must be obtained by a reporting entity for opening an individual client’s account:

the client’s Aadhaar number or proof of possession of an Aadhaar number (for carrying out offline verification), or any officially valid document containing details of his or her identity and address;
his or her permanent account number; and
other documents in respect of the nature of the business and financial status of the client as may be required.The RBI also mandates similar KYC norms for banks, requiring regular monitoring of transactions and periodic updates of the customer identification data for high-risk individuals every two years.

Beneficial ownership

A client has been defined as a person who engages in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person engaged in the transaction or activity is acting. The PML Act has been amended to define the term ‘beneficial owner’ as an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person. Therefore, an obligation is cast upon the reporting entities to ensure that the entities know the true identity of each and every client. However, where a client is subscribing or dealing with depository receipts or equity shares, issued or listed in jurisdictions notified by the Indian government, of a company incorporated in India and is acting on behalf of a beneficial owner who is a resident of such jurisdiction, the determination, identification and verification of such a beneficial owner will be governed by the norms of such jurisdiction.

The Ministry of Finance, by way of a notification dated 7 March 2023, amended the PML Rules, to (inter alia) bring down the threshold for determining beneficial ownership for purpose of CDD by reporting entities under PML Rules in the following manner:

In the case of a company, 10 per cent of shares or capital or profits (the previous threshold was 25 per cent); and
in the case of a trust, 10 per cent or more interest (the previous threshold was 15 per cent).

High-risk categories of customers, business partners and transactions

Do the AML rules applicable in India require that covered institutions and persons conduct risk-based analyses? Which high-risk categories are specified? What level of due diligence is expected in relation to customers assessed to be high risk?

The RBI KYC Master Directions and the SEBI AML Guidelines provide for certain parameters of risk perception to be defined in terms of the nature of business activity, location of clients, mode of payments, volume of turnover, social and financial status, and so on to enable the categorisation of customers into low, medium and high risk. Customers requiring a very high level of monitoring (eg, politically exposed persons (PEPs)) may, if considered necessary, be categorised even higher.

Banks, financial institutions and financial intermediaries must put in place documentation requirements in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of the PML Act. The nature and extent of CDD depends on the risk perceived by the bank, and the information sought from a customer must be relevant to the risk category and should not be intrusive. For the purpose of risk categorisation, individuals (other than high net worth individuals) and entities whose identities and sources of wealth can be easily identified, and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk. Banks must apply enhanced CDD for high-risk customers, especially those for whom the sources of funds are not clear.

Some instances of high-risk customers requiring enhanced due diligence include:

non-resident customers; high net worth customers;
trusts, charities, non-governmental organisations and organisations receiving donations;
companies with close family shareholding or beneficial ownership;
customers in high-risk countries;
PEPs of foreign origin and close relatives of PEPs;
non-face-to-face customers and customers with dubious reputations according to publicly available information; and
other entities that the intermediaries may suspect or find upon exercising their independent judgement.

However, non-governmental organisations promoted by the United Nations or its agencies may be classified as low-risk customers.

Banks and other regulated entities are mandated to carry out money laundering and terrorist financing risk assessment exercises periodically to identify, assess and take effective measures to mitigate their money laundering and terrorist financing risk for clients, countries or geographic areas, products, services, transactions, or delivery channels. The risk assessment process should consider all the relevant risk factors before determining the level of overall risk, and the appropriate level and type of mitigation to be applied. The risk assessment by regulated entities must be properly documented, and should be proportionate to the nature, size, geographical presence and complexity of the activities or structure of the regulated entity.

Further, the periodicity of the risk assessment exercise must be determined by the board of directors of the entity, in line with the outcome of the risk assessment exercise. However, it should be reviewed at least annually. The outcome of the risk assessment exercise must be put up to the board of directors (or the relevant committee of the board) of the entity and should be made available to competent authorities and self-regulating bodies, as required by them.

Regulated entities must apply a risk-based approach for the mitigation and management of the identified risks and should have policies, controls and procedures, approved by their board of directors, in this regard.

Banks and NBFCs are required to have policies, controls and procedures in place to effectively manage and mitigate their risk, adopting a risk-based approach as discussed above. In this regard, the Indian Banks’ Association has taken initiative in assessing the money laundering and terrorist financing risk in the banking sector, and prepared a guidance note on KYC norms and AML standards in July 2009. The Indian Banks’ Association guidance also provides an indicative list of high-risk customers, products, services and geographies. The RBI has clarified that banks and NBFCs may use the same guidance in their own risk assessments.

Record-keeping and reporting requirements

Describe the record-keeping and reporting requirements for covered institutions and persons.

Pursuant to the PML Rules, every reporting entity is required to maintain a record of all transactions, including a record of:

all cash transactions where the value is more than 1 million rupees or its equivalent in foreign currency;
all series of cash transactions that are integrally connected to each other and that have been valued below 1 million rupees or its equivalent in foreign currency, where the series of transactions have taken place within a month and the aggregate value of the transactions exceeds 1 million rupees or its equivalent in foreign currency;
all transactions involving receipts by non-profit organisations of a value of over 1 million rupees or its equivalent in foreign currency;
all cash transactions where counterfeit currency notes or bank notes have been used as genuine currency or where any forgery of a valuable security or a document has taken place facilitating the transactions; and
all suspicious transactions; in other words, transactions, including attempted transactions, regardless of whether these are made in cash, that to a person acting in good faith:

-give rise to reasonable grounds of suspicion that they may involve proceeds of a scheduled offence, 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 they may involve financing of activities relating to terrorism, regardless of whether they are in cash, made by way of:

-deposits and credits, withdrawals into or from any accounts by way of cheques, traveller’s cheques or transfers from one account to another within the same reporting entity and any other mode in whatever name it is referred to;

-credits or debits into or from any non-monetary accounts, such as demat accounts or security accounts, in any currency, maintained with the reporting entity;

-money transfers or remittances in favour of 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 mode of money transfer;

-loans and advances including credit or loan substitutes, investments and contingent liability by way of subscription to debt instruments such as commercial papers, certificates of deposit, preferential shares, debentures, securitised participation, interbank participation or any other investments in securities; purchase and negotiation of bills, cheques and other instruments; foreign exchange contracts, currency, interest rate and commodity and any other derivatives; or letters of credit, standby letters of credit, guarantees, comfort letters, solvency certificates or any other instrument for settlement or credit support; collection services in any currency by way of the collection of bills, cheques or instruments, or any other mode of collection;

-all cross-border wire transfers of the value of more than 500,000 rupees or its equivalent in foreign currency where either the origin or destination of the funds is in India; or

-all purchases and sales by any person of immovable property valued at 5 million rupees or more that is registered by the reporting entity, as the case may be.

For the purpose of reporting suspicious transactions, apart from transactions integrally connected, transactions remotely connected or related must also be considered.

The records required to be maintained with respect to a transaction must contain all the necessary information specified by the regulator of the regulated entity to permit reconstruction of individual transactions, including the following information:

the nature of the transaction;
the amount of the transaction and the currency in which it was denominated;
the date on which the transaction was conducted; and
the parties to the transaction.

The records are required to be maintained using the procedure and in the manner specified by the PML Rules. Every reporting entity must maintain such records as are sufficient to permit reconstruction of individual transactions (including the amounts and types of currencies involved, if any) to provide, if necessary, evidence for prosecution of criminal behaviour. Should there be any suspected laundered money or terrorist property, the competent investigating authorities may need to go through the audit trail to reconstruct a financial profile of the suspect account. To enable this reconstruction, registered intermediaries should retain the following information for the accounts of their clients to maintain a satisfactory audit trail:

the beneficial owner of the account;
the volume of the funds flowing through the account;
and for selected transactions:

-the origin of the funds;

-the form in which the funds were offered or withdrawn (eg, cheques and demand drafts);

-the identity of the person undertaking the transaction;

-the destination of the funds; and

-the form of instruction and authority.

Every reporting entity must ensure that all client and transaction records and information are made available on a timely basis to the competent investigating authorities. Where required by the investigating authority, they should retain certain records, such as client identification, account files and business correspondence for periods that may exceed those typically required under the relevant legislation, rules and regulations, including the Banking Regulation Act 1949, the RBI Act 1934, the SEBI Act 1992, and the rules and regulations framed under each of these and the PML Act.

The principal officer is under an obligation to supply information relating to suspicious transactions to the office of the director of the FIU no later than seven working days on being satisfied that the transaction is suspicious. Reporting entities should not put any restrictions on operations on the accounts where a suspicious transaction report has been made.

The principal officer must supply information in respect of cash transactions (individual or connected) in the amount of more than 1 million rupees, receipts by NPOs of more than 1 million rupees, counterfeit currency transactions and cross-border wire transfers of a value of more than 500,000 rupees every month to the office of the director of the FIU by the 15th day of the following month. Further, the principal officer must supply information relating to transactions in immovable property valued at more than 5 million rupees every quarter to the office of the director of FIU by the 15th day of the month following the end of a quarter (ie, April, July, October or January). Utmost confidentiality must be maintained in such filings and reporting as tipping off is prohibited.

Pursuant to the RBI KYC Master Directions and the 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. Further, those findings, records and related documents should be made available to auditors as well as to the RBI, the SEBI, the FIU and other relevant authorities during audit, inspection or as and when required. These records must be preserved for a period of at least five years.

Reporting of suspicious transactions

Any suspicious transaction (in the form of a detailed report that includes details of clients, transactions and the nature or reason of suspicion) must immediately be notified to the designated officer within the reporting entity. The principal officer and other related staff members are required to have timely access to client identification data and CDD information, transaction records and other relevant information. There have been some recent developments that may extend suspicious transaction reporting requirements to suspicious transactions involving employees of certain reporting entities as well.

To ensure that the registered intermediaries properly discharge their legal obligations to report suspicious transactions to the authorities, the principal officer acts as a central reference point in facilitating the reporting of suspicious transactions and for playing an active role in the identification and assessment of potentially suspicious transactions, Such an officer has access to and is able to report to senior management at the next reporting level or the board of directors.

UN designated list

Pursuant to a circular dated 23 October 2009, all banks, financial institutions and intermediaries are required to maintain an updated list of designated persons who are subject to UN sanctions measures and run a periodic check based on certain parameters to identify whether those persons have had any transactions with the intermediary. If, pursuant to the check, a client’s details match with the United Nations’ designated persons list, the intermediary is required to inform the joint secretary (Internal Security 1 Division) at the Ministry of Home Affairs, the Unlawful Activities (Prevention) Act 1967 Nodal Officer of the state where the account is held, the Nodal Officer of the SEBI and the office of the director of the FIU of the name and details of the client within 24 hours. If the details of the client match the details of a designated person beyond doubt, the bank, financial institution or intermediary is under an obligation to prevent the person from conducting financial transactions and to notify the joint secretary (Internal Secretary 1 Division) at the Ministry of Home Affairs. These transactions must also be included in the suspicious transaction reports submitted to the FIU in the prescribed format.

Privacy laws

Describe any privacy laws that affect record-keeping requirements, due diligence efforts and information sharing.

Under section 12 of the PML Act, every reporting entity is required to maintain certain records and disclose such information to the authorities under the PML Act.

The Information Technology Act 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (the Sensitive Information Rules) impose certain data protection obligations on the collection, storage and transmission in electronic format of information that is considered to be sensitive personal data or information.

The term ‘sensitive personal data or information’ is defined in the Sensitive Information Rules as personal information (ie, any information relating to a natural person that, in combination with information available or likely to be available with an entity, is capable of identifying the person) that comprises:

passwords;
financial information, such as bank account, debit card or credit card details;
an individual’s physical, psychological and mental health condition;
an individual’s sexual orientation; medical records and history;
biometric information;
any details relating to the above as provided to the body corporate for providing a service; and
any information received relating to the above by the body corporate for processing or that is to be stored or processed under a lawful contract or otherwise.

The Sensitive Information Rules lay down practices and procedures that must be followed when collecting, storing and transferring sensitive personal data or information. The Sensitive Information Rules prohibit the sharing of sensitive personal data or information unless the person to whom the data or information pertains (ie, the data subject) has consented in writing to the sharing of the information, or the sharing of the information is necessary for the performance of the contract between the data subject and the body corporate that seeks to share the information. The Sensitive Information Rules, however, expressly permit the disclosure of sensitive personal data or information:

to the extent necessary to comply with legal obligations;
where a government agency that is mandated under law to obtain the information makes a request in writing for the information; and
pursuant to any order passed under law that is in force.

Accordingly, the storing and disclosure of information in terms of the PML Act should not be in violation of the Sensitive Information Rules. In addition, section 14 of the PML Act also provides that no civil or criminal proceedings may be initiated against a reporting entity for divulging records of transactions to the enforcement authorities under the PML Act in accordance with the provisions of section 12 of the PML Act.

An entity that collects, possesses or handles the personal information or sensitive personal data or information of the provider of the information is required to maintain a privacy policy for handling such information and must ensure that the privacy policy is available to the providers of the information in accordance with Rule 4 of the Sensitive Information Rules. The privacy policy must also be published on the website of the entity or any person on its behalf. The privacy policy must stipulate, inter alia:

the type of personal information or sensitive personal data or information collected;
the purpose and usage of the information;
the details regarding disclosure of the information to third parties; and
the reasonable security practices and procedures followed by the body corporate to safeguard the personal information.

Resolutions and sanctions

What is the range of outcomes in AML controversies? What are the possible sanctions for breach of AML laws?

An offence of money laundering is punishable by a fine and imprisonment for a term of between three years and seven years. The maximum term of imprisonment may extend to 10 years if the proceeds of crime relate to an offence under the Narcotic Drugs and Psychotropic Substance Act 1985, which deals with crimes relating to narcotics. The availability of plea bargaining for offences under the PML Act is unclear.

Under the PML Act, fines ranging from 10,000 to 100,000 rupees for each failure can be imposed on a reporting entity if it has failed to maintain records or supply information in the manner prescribed under the PML Act and the PML Rules.

In addition, although the PML Act and PML Rules do not provide for the revocation of licences of reporting entities, this may be possible based on the circulars relating to KYC and AML issued by the regulators of the reporting entities. The RBI KYC Master Directions were issued by the RBI under section 35A of the Banking Regulation Act 1949 (which empowers the RBI to issue such general or specific directions as it may deem fit), as well as under the PML Rules.

Section 35A of the Banking Regulation Act 1949, read with section 22, provides that, if a banking company does not comply with a direction validly issued by the RBI, the RBI has the power to revoke the banking licence of the banking company. Accordingly, if a banking company fails to comply with the provisions of the RBI KYC Master Directions, the RBI may be empowered to revoke the licence of the banking company.

Similarly, sections 45K and 45L read with section 45IA(6) of the RBI Act 1934 provide that, if an NBFC fails to comply with the provisions of a direction issued by the RBI – including, for instance, the RBI KYC Master Directions – the RBI is empowered to cancel the registration of the NBFC.

Section 11B of the SEBI Act 1992, inter alia, 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 the directions issued by the SEBI, including, for instance, the SEBI AML Guidelines.

Limitation periods for AML enforcement

What are the limitation periods governing AML matters?

The PML Act does not specifically provide for a limitation period in relation to the offence of money laundering. However, section 468 of the CrPC specifies the limitation periods of various categories of offences in India. Under section 468, for an offence punishable with imprisonment for a term greater than three years, there is no limitation period. The CrPC defines the term ‘offence’ to mean ‘any act or omission made punishable by any law for the time being in force’. Consequently, the offence of money laundering under the PML Act constitutes an offence within the meaning of the CrPC. Given that the offence of money laundering is punishable with a term of imprisonment of between three and 10 years, in accordance with the provisions of section 468 of the CrPC, there is no limitation period for the offence of money laundering.

Further, under section 468 of the CrPC, if two or more offences are being tried together, the limitation period for each offence will be determined with reference to the offence that is punishable with the most severe punishment. Thus, if a person is prosecuted simultaneously for a scheduled offence punishable by imprisonment for a term of less than three years together with the offence of money laundering under the PML Act (which is punishable with imprisonment for three or more years), even if the limitation period for the underlying scheduled offence may have expired when considered independently, the accused person may still be tried for the scheduled offence in light of section 468 of the CrPC, given that the limitation period in such a scenario for both offences would be determined based on the offence of money laundering and not the scheduled offence.

Extraterritoriality

Do India’s AML laws have extraterritorial reach?

The PML Act applies to the whole of India; however, its application is not restricted to proceeds of crime situated in India. The term ‘proceeds of crime’ is defined under the PML Act to include any property or assets, wherever located, that is derived from, arises out of or is obtained as a result of any criminal activity related to any of the scheduled offences. The PML Act envisages the attachment and confiscation of equivalent assets in India where the proceeds of crime have been taken or held outside India. Further, such a right of attachment also extends to property (equivalent to the proceeds of crime) held outside India.

have been remitted to India, section 56 of the PML Act empowers the central government to enter into reciprocal arrangements with the government of any country outside India for enforcing the provisions of the PML Act. This also applies to where the scheduled offence may have been committed in India but the proceeds of the crime are remitted abroad. This also allows for the exchange of information for the prevention of any offence under the PML Act or under the corresponding law in force in that country, or for investigation under the PML Act.

The PML Act also contemplates offences of cross-border implications, which are:

offences committed or related to conduct outside India that constitute an offence in that jurisdiction and are scheduled offences under the PML Act, and a part of or all the proceeds of crime arising from such conduct are remitted to India; or
scheduled offences committed in India, and part of or all the proceeds of the crime have been transferred or have been attempted to be transferred from India to a place outside India.

Offences of cross-border implications are scheduled offences under the PML Act and, accordingly, the PML Act may be applicable to those offences.

Further, UN Security Council Resolution 1373 (2001) obliges countries to freeze without delay the funds or other assets of:

persons who commit, or attempt to commit, terrorist acts, or participate in or facilitate the commission of terrorist acts;
entities owned or controlled directly or indirectly by point (1); and
persons and entities acting on behalf of, or at the direction of, point (1) or (2), including funds or other assets derived or generated from property owned or controlled, directly or indirectly, by those persons and associated persons and entities.

Procedure

Enumerate and describe the required elements of a civil claim or private right of action against money launderers and covered institutions and persons in breach of AML laws.

The Prevention of Money Laundering Act 2002 (the PML Act) is a criminal statute, and civil claims and private rights of action have not been contemplated therein.

Damages

How are damages calculated?

The PML Act does not create a private right of action and, therefore, damages are not recoverable in a civil claim for a breach of AML laws.

Other remedies

What other remedies may be awarded to successful claimants?

Not applicable.

Supranational

List India’s memberships of supranational organisations that address money laundering.

India is a member of the Financial Action Task Force (FATF); the Eurasian Group on Combating Money Laundering and Financing of Terrorism; and the Asia/Pacific Group on Money Laundering. The purpose of the latter is to facilitate the adoption, implementation and enforcement of internationally accepted AML and anti-terrorist financing standards set out in the recommendations of the FATF.

Further to the Multilateral Competent Authority Agreement on the automatic exchange of financial account information, joined by India on 3 June 2015, and for the purpose of implementing the Foreign Account Tax Compliance Act (FATCA) introduced by the US government in 2010, the Indian and US governments entered into an intergovernmental agreement on 9 July 2015 to improve international tax compliance and provide for the implementation of the FATCA based on domestic reporting and reciprocal automatic exchange.

In terms of the FATCA read with the aforementioned intergovernmental agreement, Indian financial institutions are required to identify, establish and report information on financial accounts held directly or indirectly by US persons. In this regard, the Ministry of Finance, by way of a notification dated 7 August 2015, amended the Income-tax Rules 1962 (the IT Rules) to include rules setting out the information to be maintained and reported, as well as the due diligence requirements. A reportable account under the IT Rules is a financial account that has been identified, pursuant to the due diligence procedures provided in the IT Rules in this regard, as being held by:

one or more specified US persons (ie, a resident or citizen of the United States (or the estate of such a decedent);
a partnership or corporate organised in the United States, or under US law;
or a trust controlled by citizens or residents of the United States or subjected to the authority of the US courts) or one or more persons other than:

-a corporation, the stock of which is regularly traded on one or more established securities markets, or a related corporation;

-a government entity; or

-an international organisation, a central bank or a financial institution that is a resident of any country or

-territory outside India (except the United States) under the tax laws of such a country or territory, or an estate of a decedent who was a resident of any country or territory outside India (except the United States) under the tax laws of such a country or territory;

a passive non-financial entity with one or more controlling persons that is a person described in points (1) to (3); or
an entity, not based in the United States, with one or more controlling persons that is a specified US person.

The amendment to the IT Rules was followed by the issuance of circulars and notifications from various authorities – such as the Securities and Exchange Board of India, the Reserve Bank of India and the Central Board of Direct Taxes – relating to steps to be taken by entities regulated by such regulators for ensuring compliance with the requirements specified in the IT Rules after carrying out the necessary due diligence.

Through a notification dated 13 July 2022, the Ministry of Finance amended the Prevention of Money Laundering (Maintenance of Records) Rules 2005 to include provisions for covering reporting entities located in an International Financial Services Centre, set up under the Special Economic Zones Act 2005.

Anti-money laundering assessments

Give details of any assessments of India’s money laundering regime conducted by virtue of your membership of supranational organisations.

India’s mutual evaluation was last completed on 25 June 2010. The conclusion was that India has several mechanisms in place for domestic coordination and cooperation at both the policy and operational levels to identify new and emerging trends and to formulate appropriate responses.

India has progressively expanded and strengthened its preventive measures for the financial sector, which now apply to all but one of the financial activities required to be covered under the FATF standards; however, several preventive provisions need to be brought more closely into line with the FATF standards. Overall, more time is needed before all requirements are substantially implemented.

The key recommendations made to India in the mutual assessment included the need to:

address the technical shortcomings in the criminalisation of both money laundering and terrorist financing and in the domestic framework of confiscation and provisional measures;
broaden the client due diligence obligations with clear and specific measures to enhance the current requirements regarding beneficial ownership;
improve the reliability of identification documents, the use of pooled accounts, politically exposed persons and non-face-to-face business;
ensure that India Post, which recently became subject to the Prevention of Money Laundering Act 2002 (the PML Act), effectively implements the AML and combating the financing of terrorism requirements;
enhance the effectiveness of the suspicious transaction report reporting regime;
enhance the effectiveness of the financial sector supervisory regime and ensure that India Post is adequately supervised; and
ensure that the competent supervisory authorities make changes to their sanctioning regimes to allow for effective, proportionate and dissuasive sanctions for failures to comply with AML and combating the financing of terrorism requirements.

The FATF, at the June 2013 plenary meeting, decided that India could be removed from the regular follow-up process as it had reached a satisfactory level of compliance with all the core and key recommendations. As per news reports, the next mutual assessment by the FATF to analyse the effectiveness of India’s AML regime is scheduled to begin in November 2023 (which was scheduled for an earlier date, but was delayed due to the covid-19 pandemic).

FIUs

Give details of India’s Financial Intelligence Unit (FIU).

India’s Financial Intelligence Unit (FIU) has been a member of the Egmont Group, an international organisation for stimulating cooperation among FIUs, since May 2007. In accordance with its 2021–2022 annual report, as at 31 March 2020, India’s FIU has signed bilateral memoranda of understanding (MOUs) with 47 jurisdictions (Australia, Bahrain, Bangladesh, Belarus, Bermuda, Bhutan, Brazil, Cambodia, Canada, Cyprus, Egypt, Georgia, Guernsey, Fiji, Indonesia, Israel, Japan, Kazakhstan, Kyrgyzstan, Laos, Macau, Malaysia, Maldives, Mauritius, Montenegro, Myanmar, Nepal, Nigeria, North Macedonia, the Philippines, Poland, Qatar, Russia, San Marino, Saudi Arabia, Singapore, Senegal, South Africa, Sri Lanka, Tajikistan, Thailand, Togo, the United Arab Emirates, the United States, Ukraine, Uzbekistan and Vatican City). In addition, MOUs with various countries are under various stages of negotiation. The MOUs facilitate the exchange of intelligence between countries for the purpose of cooperation to gather, develop and analyse information concerning financial transactions suspected of being related to money laundering and terrorist financing.

The contact details for India’s FIU are as follows:

Financial Intelligence Unit – India 6th Floor Tower – 2, Jeevan Bharati Building Connaught Place New Delhi 110 001 India

Tel: +91 2331 4429; +91 2331 4459

Help desk: +91 11 2331 9793

General queries: helpdesk@fiuindia.gov.in Website: https://fiuindia.gov.in/

Queries relating to reporting entity or principal officer registration: ctrcell@fiuindia.gov.in

Complaints: complaints@fiuindia.gov.in

Mutual legal assistance

In which circumstances will India provide mutual legal assistance with respect to money laundering investigations? What are India’s policies and procedures with respect to requests from foreign countries for identifying, freezing and seizing assets?

Indian authorities may seek information from a contracting state under the PML Act or take any steps to attach the assets of a person accused of money laundering (which may be located in a contracting state) when an investigation under the PML Act is ongoing (ie, once a predicate offence is established and an Enforcement Case Information Report is in place) Indian authorities have to seek information by following the process set out in the reciprocal arrangement

for the exchange of information between India and the contracting state, or the procedure detailed in sections 57 to 60 of the PML Act. Section 56 of the PML Act empowers the Indian government to enter into reciprocal arrangements with the government of any country outside India for enforcing the provisions of the PML Act and the exchange of information for the prevention of any offence under the PML Act or under the corresponding law in force in that country.

Section 57 of the PML Act provides that, in the course of the investigation of an offence or other proceedings under the PML Act, the relevant investigating officer may make an application to a special court in India to issue a letter of request to the competent authorities in the contracting state to forward, inter alia, the relevant evidence to the special court. If the special court is satisfied that such evidence is required in connection with the investigation, the special court may issue a letter of request to the relevant contracting state.

Section 58 of the PML Act provides that, where a letter of request is received by the central government of India from a court or authority in contracting state requesting for investigation into an offence or proceedings or any evidence connected therewith, the central government may, upon examination of whether the request is complete and fit to be executed in India, forward the letter of request to the relevant court or authority for execution of the request.

Section 59 of the PML Act provides that a special court may, in relation to an offence under the PML Act, issue a warrant or summons for execution to competent authorities in a contracting state requiring an accused person to allow searches, attend proceedings before the special court or produce documents before the special court, inter alia. In addition, under section 60 of the PML Act, the special court may take necessary steps to attach or seize property involved in money laundering that is located or suspected to be located in a contracting state by issuing a letter of request to a court or authority in the contracting state if an offence corresponding with an offence under the Indian penal statutes set out in the Schedule to the PML Act has been committed in the contracting state. In terms of the PML Act, the power of the Indian government is limited to seeking information regarding a person accused of the commission of an offence under the PML Act and no other persons.

Enforcement and compliance

Describe any national trends in criminal money laundering schemes and enforcement efforts. Describe any national trends in AML enforcement and regulation. Describe current best practices in the compliance arena for companies and financial institutions.

In July 2022, in Vijay Madanlal Choudhary v Union of India (2022 SCC OnLine SC 929), the Supreme Court of India decided on the constitutional challenges to various provisions of the Prevention of Money Laundering Act 2002 (the PML Act). The Supreme Court’s verdict validated the wide gamut of powers relating to search, seizure and attachment of assets conferred on the investigation and enforcement authorities under the PML Act. The court observed that there are adequate safeguards enshrined in the PML Act to prevent abuse of these powers.

This judgment of the Supreme Court has been the subject of widespread debate. While discussing the confiscation proceedings under section 8 of the PML Act, the three-judge bench of the Supreme Court in Union of India v Ganapati Dealcom Pvt Ltd noted that the ratio of the Vijay Madanlal Choudhary case requires further expounding, without which much scope is left for the arbitrary application of the provisions of the PML Act. A similar observation was made by the High Court of Kerala while hearing the Life Mission bribe case. The High Court remarked that the reversal of burden of proof under section 24 of the PML Act seems to be ‘very, very dangerous’. Amid concerns regarding arbitrary action under the PML Act, a review petition has been filed in the Vijay Madanlal Choudhary case. At the time of writing, the petition is pending before the Supreme Court.

Indian courts and the legislature have also taken cognisance of the increasing role of cryptocurrency in money

laundering offences. As at 1 January 2023, proceeds of crime amounting to 9.36 million rupees have been attached, seized or frozen by special courts under the provisions of the PML Act. One of the cryptocurrency stock exchanges that is being investigated under the PML Act had argued that it did not have any obligations under the provisions of the PML Act. The government has notified that, with effect from 7 March 2023, transacting in virtual digital assets is also covered under the ambit of designated business or profession; hence, persons dealing with cryptocurrency are now required to undertake the AML measures prescribed under the PML Act and the Prevention of Money Laundering (Maintenance of Records) Rules 2005, as amended from time to time.

There is no single guide on best practices to be followed by the companies and financial institutions in the compliance arena – this depends on several factors, including the nature of the entity’s business, its operations and its organisational structure. Broadly, matters concerning customer identification, periodic due diligence, maintenance of records, monitoring and timely reporting of suspicious transactions, and putting in place robust internal controls for identification of potential areas of concern are are critical for monitoring and enforcing compliance.

AUTHORS & CONTRIBUTORS

Partner:
Prerak Ved
Associates:
Abhay Bundela
Akash Kumar Prasad
Neha Dhavalikar

DISCLAIMER

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