Anti-money laundering (AML) regulations in India apply to a range of entities, such as companies, banks, crypto exchanges, foreign portfolio investors, trusts, and NGOs. India recently made changes to its AML law to expand the scope of reporting entities to include company representatives (directors, etc.), banking intermediaries, financial companies, as well as accountancy professionals, such as Chartered Accountants and Company Secretaries.
In this article, we discuss which individuals and entities are subject to AML regulations in India, list the essential reporting requirements, and provide guidance on recommended best practices. India revises the scope of its anti-money laundering regulations from time to time. Foreign entities and professional service providers should be alert to any changes in the application of these reporting obligations.
The Prevention of Money Laundering Act (PMLA), 2002 and its accompanying rules (PML Rules) serve as the primary legal framework for the prosecution of money laundering in India.
As of May, 2023, the following entities are subject to AML Compliance in India:
Entities Subject to AML Compliance in India
Companies and all individuals helping in the formation of a company, including those acting as a director, secretary or proxy nominee director.
Non face-to-face customers
Foreign portfolio investors
Politically exposed persons outside India
Banking intermediaries and financial companies
Intermediaries in the crypto ecosystem, such as crypto exchanges, wallets, service providers
Accounting professionals including CA, CS, CWA
According to a notification released on May 9, 2023 the Indian government has further extended the reach of the PMLA to include all individuals helping in the formation of a company, including those acting as a director, secretary or proxy nominee director.
The law now also includes individuals who provide registered offices, business addresses, accommodations, correspondence, or administrative addresses for companies, limited liability partnerships, or trusts.
On May 3, 2023, the government made further revisions to the PMLA, 2002. The changes broaden the money laundering law’s application to include practicing chartered accountants (CA), company secretaries (CS), and cost and works accountants (CWA) who conduct financial transactions on behalf of their clients. However, the updated definition of covered entities under the PMLA does not include lawyers and legal professionals.
The revised regulations will now require CA, CS, and CWA professionals to undergo the Know Your Company (KYC) process before starting any work on behalf of their clients. This indicates that accountants will now be considered reporting entities if they manage their clients’ finances. As per the notification, accountants are required to carry out due diligence on their clients’ ownership and financial status, along with the sources of their funds, and also document the transaction’s purpose.
The recent changes to the PMLA, 2002 were made in response to the Chinese apps scam, where some accounting professionals assisted in setting up shell companies for these apps. These professionals used their office address to register these shell companies and even became directors, with some having access to their bank accounts.
Some of these Chinese apps offered instant loans, which many individuals found tempting. Unfortunately, personal data of the loan recipients was compromised and shared with other apps, including gaming apps.
To prevent such scams, accountants are now required to perform due diligence on their clients’ ownership, financial status, and source of funds, as well as document the transaction’s purpose.
The Indian government has taken legal action against some of the professionals involved and referred them to the Institute of Chartered Accountants of India for disciplinary action.
Earlier in March, 2023, the Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023 were introduced by the Department of Revenue under the Ministry of Finance. These rules widened the ambit of reporting entities under money laundering provisions to incorporate more disclosures for non-governmental organisations and defined politically exposed persons (PEPs) under the PMLA in line with the recommendations of the FATF.
The new rules require reporting entities like financial institutions, banking companies, or intermediaries to disclose beneficial owners in addition to the current KYC requirements through documents like registration certificates and PAN (Permanent Account Number).
The amendment rules have introduced a new clause, which defines “Politically Exposed Persons” (PEPs) as individuals who have been “entrusted with prominent public functions by a foreign country, including the heads of States or Governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials”.
In line with existing provisions of The Income-Tax Act, 1961 and The Companies Act, the amended rules have now lowered the threshold for identifying beneficial owners by reporting entities, where the client is acting on behalf of its beneficial owner. Earlier, definition of “beneficial owner” included, among other things, the ownership of or right to more than 25 percent of the company’s shares, capital, or profits. This threshold of 25 percent has been lowered to 10 percent, bringing more indirect players into the reporting net. The amendments require “reporting entities”- banks, other financial institutions, and businesses operating in the real estate and jewelry industries – to gather data on each person or organization that has a 10 percent ownership in their clients.
The definition of “non-profit organization” has been expanded, which will now include any entity or organization constituted for religious or charitable purposes referred to in Section 2(15) of the Income-tax Act, 1961; or registered as a trust or a society under the Societies Registration Act, 1860 or any similar state legislation; or a company registered under Section 8 of the Companies Act, 2013.
If the client is a non-profit organization, reporting entities must also register the client’s information on the NITI Aayog’s DARPAN portal.
The necessary due diligence documentation has now expanded beyond just getting the fundamental KYCs of clients, such as registration certificates, PAN copies, and documents of officers with the authority to act on their behalf. Depending on the legal structure of the firm, it now also involves the submission of information, such as the names of those in top management positions, partners, beneficiaries, trustees, settlors, and writers. Moreover, clients must now provide information about their registered office and primary place of business to financial institutions, banks, or intermediaries.
The new rules have brought crypto currency and VDAs under the ambit of anti-money laundering law (AML). As per new rules, an entity dealing in VDAs will now be considered a ‘reporting entity’ under the PMLA. The amendment will require intermediaries in the crypto ecosystem, such as crypto exchanges, wallets, and other service providers, to establish and implement PMLA measures and systems. These measures include conducting KYC checks during customer onboarding, retaining customer data for a specified period, monitoring and reporting suspicious transactions, and having policies for tracking transactions.
The transactions related to cryptocurrency and VDAs which are covered by the PMLA now include:
At the federal level, the Directorate of Enforcement (ED) is the principal legal entity in charge of looking into and prosecuting money laundering offences under the PMLA.
The ED comes under the Department of Revenue within the Ministry of Finance. It has the authority to initiate proceedings for the seizure of property as well as proceedings in the designated Special Court for money laundering crimes.
Find Business SupportThe Financial Intelligence Unit – India (FIU-IND), which is a part of the Department of Revenue and Ministry of Finance, is the primary national body in charge of collecting, processing, assessing, and disseminating data about suspicious financial transactions to law enforcement authorities and foreign FIUs.
Apart from the ED and FIU, regulators like the Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), and Insurance Regulatory & Development Authority of India (IRDAI) are empowered to handle matters relating to money laundering activities and establish AML standards.
As a designated service provider, businesses must guarantee that they have a stringent AML policy in place. The following steps can inform a strong AML policy:
As a designated service provider, a company is required to notify FIU-IND of certain purchases and suspicious activity. Notable ongoing reporting responsibilities are:
SEBI Checklist for Anti-Money Laundering in India
One-time compliance
Rolling / continuous compliance