Administrative Framework for AML/CFT in India

 

From the 1 July 2005, the Prevention of Money Laundering Act 2002, extended to all financial institutions, and intermediaries. Enacted on 17th Jan, 2003, is administered by Financial Intelligence Unit for verification of identity of clients, maintenance of records and reporting .  Enforcement Directorate entrusted with investigation of and prosecution for money-laundering offences. Since 1 June 2009, India has made a serious effort to bring the criminalisation of money laundering in the PMLA in line with the FATF standards. However, while there have been significant improvements, the measures that were implemented did not do away with all shortcomings.

The Prevention of Money-Laundering Act, 2002 consists of ten chapters containing 75 sections and one Schedule. Amendments were made to this Act vide The Prevention of Money-laundering (Amendment) Act, 2005 (20 of 2005), Prevention of Moneylaundering (Amendment) Act, 2009 (21 of 2009) and Prevention of Money laundering- (Amendment) Act, 2012 (2 of 2013). And continued to evolve with FATF review 2013 and 2023.

The object of the Act is to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and to punish those who commit the offence of money laundering. The Act extends to the whole of India including the state of Jammu and Kashmir.

India is among the countries that are members of Financial Action Task Force.  FATF is a global organization established to prevent money laundering all over the world. By publishing AML guidelines, FATF aims for countries to fight financial crime more effectively. The FATF member states' AML regimes must comply with FATF recommendations.

The PMLA has now been expanded by the Indian government, in accordance with a notification made public on May 9, 2023, to cover all people involved in the formation of a company, including those serving as a director, secretary, or proxy nominee director. Individuals who provide registered offices, business addresses, lodging, correspondence, or administrative addresses for corporations, limited liability partnerships, or trusts are now also covered by the law.

Money Laundering Penalties 

India has strict laws against money laundering that are intended to dissuade people and organizations from engaging in this criminal conduct. In India, the Prevention of Money Laundering Act, 2002 (PMLA) specifies the sanctions for money laundering.  

Penalties for money laundering in India: 

1. Imprisonment (3 to 7 years, extendable to 10 years). 
2. Fines (percentage of laundered funds) unlimited. 
3. Confiscation of proceeds. 
4. Attachment of properties. 
5. Forfeiture of assets. 
6. Enhanced penalties for repeat offenders. 

At the apex level there is National Committee on ML & FT Risk Management. RBI is the lead regulator for AML/CFT. Indian Banks Association help in developing policies and procedures in the banking industry that matches the required regulatory framework. Each sectoral regulators guides and aids adequate supervision of AML/CFT best practices in their respective fields.

Primary regulatory bodies that oversee the Indian financial sector and develop AML/CFT policies:

The below lists the key authorities responsible in India for the AML/CFT framework listed by the ministries with a policy responsibility; the coordination mechanisms, key national authorities for ML and TF; national authorities responsible for the predominant predicate offences; and relevant State authorities.  

 

The Ministries are responsible for the AML/CFT framework 

1. Ministry of Finance

Responsible for India‘s fiscal policies, including revenue and tax collection, budgeting and expenditure of the Government.

The MOF consists of the Department of Economic Affairs, the Department of Revenue, the Department of Expenditure, the Department of Financial Services, and the Department of Disinvestments.

Department of Revenue is responsible for exercising regulatory and supervisory control over the AML/CFT strategies, and for inter-ministerial and inter-departmental co-ordination with respect AML/CFT measures,

Directorate of Enforcement ensures the implementation of AML measures in accordance with the Prevention of Money Laundering Act. 

 

2. The Ministry of Home Affairs (MHA): 

The MHA is responsible for internal security in India including combatting terrorism and terrorist financing, with oversight of the UAPA. The MHA is the parent ministry for the following LEAs enforcing the UAPA: the National Investigation Agency, the Narcotics Control Bureau, and the Intelligence Bureau. The MHA is also responsible for the National Investigation Agency Act, 2008 (NIA Act) that constitutes the NIA, and is the central authority for Mutual Legal Assistance in criminal matters.

 

3. The Ministry of Corporate Affairs (MCA): 

The MCA is responsible for administration of corporate entities in India, with oversight of the Companies Act, 2013 and other associated Acts and rules and regulations, including the Partnership Act; the Societies Registration Act; Limited Liability Partnership Act, 2008 and the Competition Act, 2002. The MCA also oversees three professional bodies that conduct supervision, namely, the ICAI, the ICSI and ICWAI.

 

4. The Ministry of External Affairs (MEA). The MEA is responsible for processing extradition requests in all criminal matters, including those relating to ML and TF.

Mechanisms  to Support Domestic Coordination and Cooperation 

 1.Economic Intelligence Council

Supreme coordinating authority in matters regarding economic offences, strategies on intelligence sharing, co-ordination, etc.

The implementation of decisions taken by the EIC is monitored by the Working Group on Intelligence Apparatus, set up for this purpose within the EIC.

It is chaired by the Minister for Finance and comprises of the senior most functionaries of various Ministries and intelligence agencies; and the Governor of the RBI and the Chairman of the SEBI.

2.The Inter-Ministerial Coordination Committee (IMCC) 

The Inter-Ministerial Coordination Committee (IMCC) on anti-money laundering and combating of terrorist financing is tasked with

Development and implementing policies on anti-money laundering or countering the financing of Terrorism,

Operational co-operation between the Government, law enforcement agencies, the Financial Intelligence Unit-India and the regulators or supervisors;

Policy co-operation and co-ordination across all relevant or competent authorities.

The IMCC is headed by the Revenue Secretary at the Ministry of Finance.

3. Financial Stability and Development Council (FSDC)

In 2010, the then Finance Minister of India, Pranab Mukherjee, decided to set up such an autonomous body dealing with macro prudential and financial regularities in the entire financial sector of India. An apex-level FSDC is not a statutory body. The recent global economic meltdown has put pressure on governments and institutions across the globe to regulate their economic assets. This council is seen as India's initiative to be better conditioned to prevent such incidents in future. The new body envisages to strengthen and institutionalise the mechanism of maintaining financial stability,financial sector development, inter-regulatory coordination along with monitoring macro-prudential regulation' of economy. No funds are separately allocated to the council for undertaking its activities

Be it opening a bank account, investing in a mutual fund or buying a life insurance policy, submitting your know-your-customer (KYC) details is a must. Just submitting it is not enough, you may also need to update your KYC documents multiple times in some cases. It can be a hassle for many individuals to repeat the KYC process multiple times. To reduce the paperwork, time and cost of this process, the Financial Stability and Development Council (FSDC) has proposed to implement a uniform KYC system to verify customers across the financial sector. The central government has formed an expert committee under Finance Secretary TV Somanathan to make recommendations on uniform KYC norms. 

Competent Authorities 

Competent authorities are the key operational agencies for AML/CFT in India, with nation-wide responsibilities for ML, across predicate offences or for TF: 

1. Financial Intelligence Unit- India (Flu-IND)​

Established in 2004 as a central national organisation charged with the responsibility of collecting, sorting, analysing, and disseminating information about suspected financial activities to law enforcement authorities and international financial intelligence units.

2.The Directorate of Enforcement

Government body with field offices spread across various of the country.

Mandate is to

Investigate offences of money laundering under the provisions of Prevention of Money Laundering Act, 2002(PMLA)

Take actions of attachment and confiscation of property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA, and

Prosecute the persons involved in the offence of money laundering. 

3.The National Investigation Agency (NIA): 

The NIA is responsible for the investigation and prosecution of offences under the UAPA, including TF offences. The NIA has concurrent jurisdiction with States. The Courts may suo moto assign a case to the NIA

The following competent authorities are the key operational agencies for AML/CFT in India, with mandates focusing on major predicate crimes for ML in India:

4.The Narcotics Control Bureau (NCB): 

The NCB is an apex co-ordinating agency, meaning it coordinates the work of other law enforcement authorities (Drug Law Enforcement Agencies or DLEAs) that are responsible for prosecuting offences relating to the trafficking or possession of illegal drugs and psychotropic substances. The NCB also has powers to investigate and charge offences under India’s Narcotic Drugs and Psychotropic Substances (NDPS) Act, and trace and freeze illegally acquired property associated with offences under the NDPS Act.

5. Central Bureau of Investigation (CBI):

The CBI is a specialized police organization that’s been established to investigate certain kinds of crimes, such as crimes involving public officials who have engaged in corruption, significant economic offences, fraud, and crimes that have implications for the country or multiple states.

6. The Serious Frauds Investigation Office (SFIO): 

The SFIO is responsible for investigating corporate frauds of a serious and complex nature across India. The Vajpayee Government decided to set up SFIO on 9 January 2003, based on the recommendation of Naresh Chandra Committee on corporate governance (appointed by the Government of India in 2002) and in the backdrop of stock market scams as also the failure of non-banking companies resulting in a huge financial loss to the public.

Powers of SFIO

 

As per the resolution of 2nd July 2003, SFIO is to take up only the investigation of frauds characterized by:

• Complexity, having inter-departmental and multi-disciplinary repercussions.
• Significant involvement of public interest to be judged by size, either in terms of monetary malpractice or in terms of the persons affected.
• The potential of investigations leading to, or assisting towards, a clear improvement in systems, laws or procedures.

 

As per the Companies Act, 2013, Serious Fraud Investigation Office (SFIO) has been established through the Government of India vide Notification No. S.O.2005(E) dated 21.07.2015. It is a multi-disciplinary organization under the Ministry of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing, banking, law, information technology, investigation, company law, capital market and taxation, etc. for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.
Investigation into the affairs of a company is assigned to SFIO, where Government is of the opinion that it is necessary to investigate into the affairs of a company –

 

1.      On receipt of a report of the Registrar or inspector under section 208 of the Companies Act, 2013

2.      On intimation of a special resolution passed by a company that its affairs are required to be investigated

3.      In the public interest; or On request from any department of the Central Government or a State Government

4.      SFIO is headed by a Director as Head of Department in the rank of Joint Secretary to the Government of India. The Director is assisted by Additional Directors, Joint Directors, Deputy Directors, Senior Assistant Directors, Assistant Directors Prosecutors, and other secretarial staff. The Headquarter of SFIO is in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad & Kolkata.

SFIO falls under the jurisdiction of the Ministry of Corporate Affairs. The SFIO is involved in major fraud probes. It coordinates with the Income Tax Department and the Central Bureau of Investigation (CBI) for fraud investigation.

The government has recently constituted a 12-membered high-level panel recently set up to prepare an investigation manual for Serious Fraud Investigation Office (SFIO).

As per the recent order issued by the Corporate affairs ministry, Corporate Affairs Secretary Injeti Srinivas chaired the panel. The committee will devise a comprehensive manual for performing effective investigations and probes against white-collar crimes.

 

7. The Central Board of Direct Taxes (CBDT)

 

CBDT, the Central body responsible for implementation of Direct taxes, is responsible for monitoring PEPs, very High Net-Worth Individuals (VHNIs) and High Net-Worth Individuals (HNIs) to reduce tax risks and deepen the tax base in such groups of taxpayers. The CBDT also exchanges information with the FIU-IND and other regulators in order to increase coordination. It also monitors matters related to the FATF and other bodies dealing with AML/CFT having effect on direct taxes.⁷

8. Income Tax Department: 

This department has the authority to impose taxes on undisclosed foreign income and assets held by Indian residents to prevent the crime of money laundering.

 

9. The Directorate of Revenue intelligence (DRI): 

The DRI is part of the CBIC and is responsible for the collection of intelligence, analysis, and dissemination of intelligence associated with violations of customs laws, and has concurrent jurisdiction over anti-narcotics laws with other DLEAs as part of the CBIC. It is also the agency responsible for India at the World Customs Organisation (WCO), the Regional Intelligence Liaison Office (RILO), INTERPOL and foreign Customs Administrations.

10. Bureau of Immigration (BOI): 

There are 86 immigration checkpoints allowing entry in and exit from India of which 37 are controlled by the BOI while the remaining 49 are controlled by the State Governments.

11. The Central Board of Indirect Taxes and Customs (CBIC)

 The CBIC has been designated as the regulatory body for DPMS and the real estate sector, as these sectors are covered under the ambit of DNFBPs under the PMLA. In light of this, the CBIC has issued AML/CFT guidelines for both sectors. The AML/CFT guidelines for Real Estate sector dated May 4, 2023 prescribe for categorization of clients into high-risk and low-risk based on their location, nature of business, trading turnover, etc., and directs the reporting entities to conduct risk assessment of clients who are non-resident, HNI, trusts, charities, NGOs, etc

Central Bank & Sectoral Regulators 

Sectoral regulators and the central bank of the country play critical role in collection & emission of information in the AML/CFT regime

1. Reserve Bank of India (RBI)​

The central and primary financial regulator responsible for issuing bank licences, developing and enforcing anti-money laundering and counter-terrorist financing laws. RBI adheres to FATF's anti-money laundering and counter-terrorist financing strategy. RBI is responsible for holding the banks and financial institutions accountable for compliance with applicable regulations

 

2. Securities and Exchange Board of India (SEBI)​

SEBI was created on 12 April 1992 to safeguard the interests of securities investors and to facilitate and regulate the securities market. Additionally, it provides anti-money laundering and counter-terrorist financing rules for the financial markets. 

A fresh set of 'alert indicators' have been issued by India's financial intelligence unit (FIU) for capital markets, insurance companies, online payment gateway intermediaries and crypto currency service providers for effective checking of suspicious transactions in their channels as part of the anti-money laundering and counter-terrorism financing regime.

These new guidelineshave been issued under the provisions of the Prevention of Money Laundering Act (PMLA) during the 2022-23 financial year and published in a recently released report[Apr 28,2024]

3. Insurance Regulatory Development Authority (IRDA)​

This authority is responsible for regulating, promoting, and ensuring the insurance and reinsurance industries' orderly growth. IRDAI is in active coordination with various agencies/departments in ensuring effective implementation of AML/CFT regime in India and is part of the Working Group for National Risk Assessment (NRA) on AML/CFT constituted by the Department of Revenue. IRDAI is also part of the Core Working Group (CWG) constituted by the Department of Economic Affairs (FATF Cell) for implementation of revised recommendations of FATF.

In addition, IRDAI is also actively associated with the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG), a FATF style regional body.

Department of Revenue formed an Inter-Ministerial Co-ordination Committee (IMCC) and subsequently Joint Working Group (JWG) of which IRDAI is a member. The main aim of aforementioned Committees/group is to co-operate/ consult/ develop/ implement matters related to anti-money laundering or countering the financing of terrorism laws, regulations and guidelines among the Government, law enforcement agencies, FIU-IND and the regulators. IRDAI is reporting the concerned Ministry the preparedness of the insurance sector against the applicable FATF recommendations.

IRDAI vide circular dated July 12, 2016 advised insurers to upload the KYC records of individual policyholders to Central KYC Registry. Thereafter, to comply with the extant PML Rules, IRDAI vide circular dated January 22, 2021 advised insurers to:

1. Upload the KYC records of Legal Entities (LEs) to CKYCR on or after April 01, 2021.
2. Communicate the KYC identifier to the respective policyholder in a confidential manner, once generated/allotted by CKYCR.
3. Update the existing KYC records periodically.

4. Registrar of Companies (RoC): 

As per the new requirement under the Companies Act 2013, every Indian company, whether private and public, is mandated to file with the RoC a record of the company’s significant beneficial owners (in eForm MGT-6).

Other Competent Authorities & Coordination Mechanisms

The following competent authority  plays an important role at State level across relevant crime types:

A. The State Police: 

Under the Constitution of India, 'Police' and 'Public Order' are State subjects. Every State and Union Territory has its own police force. The State Police has concurrent jurisdiction with the NIA in the investigation of terrorism and TF cases. The State Police also investigate and prosecute offenders for other offences, a number of which constitute predicate offences under the PMLA. Economic Offence Wings (EoW) are specialised units within State Police Departments that are tasked primarily with investigating, but also prosecuting economic crimes. EoWs tend to focus on more complex white-collar crimes that typically involve large sums of money, multiple parties and more intricate schemes. Counter terrorism units (Anti-terrorism Squads) have been set up to investigate terrorism and TF cases within States.

The following coordination mechanism plays an important role across authorities:

B. Multi-Agency Centre/Subsidiary Multi-Agency Centre (MAC/SMAC): 

The MAC at the central level (supported by SMACs at the State level) is a coordination body for sharing intelligence inputs, coordination with representatives from state governments, numerous agencies, and ministries on national security matters, across authorities. There are sub-groups focused on key aspects of ML and TF and participating authorities depend on the focus of the sub-group.

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