Why AML is so crucial in India?

Money laundering as well as terrorist financing are the driving forces behind transnational crimes. As a result of high-value fines and enforcement actions, authorities worldwide have significantly raised their focus on Anti-Money Laundering (AML) compliance in recent years and this shall definitely continue to be the case.

India is also a member of various global bodies, such as the Basel Committee on Bank Supervision; the Asia/Pacific Group on Money Laundering; Eurasian Group on Combating Money Laundering and Financing of Terrorism. These associations make sure that financial institutions in India strengthen their standards to meet not only regulatory expectations but also international expectations

To combat the many challenges related to financial crimes faced by India as a rapidly growing economy, India has criminalized money laundering under the Prevention of Money Laundering Act, 2002 (PMLA), as amended in 2005 and 2009.

The PMLA lays down the key legislative framework for AML compliance requirements applicable to banking companies, financial institutions, intermediaries, and persons carrying out a designated business or profession (collectively, “Reporting Entities”).

PMLA provisions are further supplemented by various rules along with guidelines issued by supervisory regulators such as the SEBI, RBI, and IRDAI, providing the framework for imposing AML and compliance requirements.  

  • The primary legal authority responsible for investigating and prosecuting such money laundering offenses under the PMLA at the national level is the Directorate of Enforcement (“ED”), under the aegis of the Department of Revenue, Ministry of Finance.
  • The Reserve Bank of India RBI, the Securities and Exchange Board of India SEBI, and the Insurance Regulatory and Development Authority of India IRDAI are explicitly empowered to deal with issues related to money laundering activities and also, lay down guidelines on AML standards.
  • The Financial Intelligence Unit – India (“FIU”) under the Department of Revenue, Ministry of Finance is the central national agency and its primary functions are to receive cash/suspicious transaction reports (“STRs”), analyze them, and as appropriate, forward valuable financial information to intelligence/enforcement agencies and regulatory authorities.
  • The RBI MD regulates all financial institutions, whereas SEBI Guidelines on AML Standards/CFT/Obligations of Intermediaries (“SEBI AML Guidelines”) regulate the intermediaries registered with it.  Breach of these regulations can lead to regulatory enforcement action against violators.
  • RBI-regulated entities, including financial institutions, are required to verify and maintain records evidencing the identity of all clients including beneficial owners, all transactions, and furnish information to the FIU, among other mandates. 
  • All Reporting Entities must have a board-approved KYC policy; including four key elements: customer acceptance policy; risk management; customer identification policy; and monitoring of transactions.


What exactly is money laundering and how does it work?

To identify and report potential money laundering and address compliance requirements, financial institutions must have a deep understanding of how the crime works. 

Money laundering involves three stages: placement, layering and integration

These are a complex series of transactions that start with depositing funds, then gradually moving them into what appear to be legitimate assets.

  • Placementrefers to how and where illegally obtained funds are placed. Money is often placed via: Payments to cash-based businesses; payments for false invoices; “smurfing,” which means putting small amounts of money (below the AML threshold) into bank accounts or credit cards; moving money into trusts and offshore companies that hide beneficial owners’ identities; using foreign bank accounts; and aborting transactions shortly after funds are lodged with a lawyer or accountant.
  • Layeringrefers to separating criminal funds from their source. It involves converting the illicit proceeds into another form and creating complex layers of financial transactions to disguise the funds’ origin and ownership. Criminals do this to blur the trail of their illicit funds so it will be hard for AML investigators to trace the transactions back to source.
  • Integrationrefers to re-entry of the laundered funds into the economy in what appears to be normal, legitimate business or personal transactions. This is sometimes done by investing in real estate or luxury assets. It gives launderers and criminals an opportunity to increase their overall wealth.


What are the different ways money laundering occurs?

Some of the various ways money laundering occurs for launderers to hide their criminal proceeds are: –

However, the major types of money laundering in practice today used by criminals are the following:- 

  • Smurfing: Structuring, also referred to as smurfing, is the process of moving a large amount of illicit proceeds by dividing it into smaller transactions to conceal the source of these proceeds. These transactions are often spread out over different accounts to ensure they are not detected. In some cases, the transactions are spread out across multiple accounts to further conceal the true source possibly through a group of accomplices, commonly known as ‘money mules.’
  • Cash Smuggling: Cash transportation is one of the oldest ways for terrorists to move funds while avoiding conventional banking systems and the AML/CFT measures established by regulators. 
  • Cash Intensive Businesses: Since cash transactions don’t leave any trace of where the money is coming from, these businesses give fraudsters the opportunity to launder funds easily. Such businesses have been the target of launderers as it is easy to claim such cash received as revenue. The best way to tackle this is by establishing procedures and policies while onboarding customers. 
  • Shell companies: A shell company is a business/organization that only exists on paper, has no physical location or staff, but may have a bank account, passive investments, or be the legally recognized owner of the property. Shell companies are usually used for tax evasion, tax avoidance, and money laundering.
  • Trade-Based Money Laundering: TBML is the process of conducting international trade transactions to conceal the proceeds of crime and move cash to cover up its illegal sources. TBML involves misusing different kinds of offshore trade processes and the import and export of goods in question.
  • Gambling: Criminals have been using online and offline gambling as a method to launder money for a long time now. By depositing a huge amount into a betting account and then making a series of dummy bets in different accounts to eventually cash out all that money. This has become an increasingly common practice with many unlicensed websites launched daily with little to no KYC restrictions. 
  • Transaction Laundering: TL is the action where one merchant processes payment card transactions on behalf of another merchant. In a transaction laundering scheme, two websites would be used. The first website deals with illegal products such as counterfeit goods, drugs, weapons, and forged documents, while a second merchant account (that appears to be running a legitimate business) completes the sale instead of the original seller’s merchant account.

The second eCommerce website functions mostly as a gateway to a merchant account and services for credit card processing and exists only on the internet.


What is an Organizational Approach to Counter Money Laundering and to Comply with Regulations?

The following methods are used by financial services as standard measures to address money laundering and related compliance issues: 

  1. Know Your Customer (KYC) Various regulations from across the world mandate financial services institutions to know certain details about their customers as part of their usual process of customer acquisition to help protect themselves and stakeholders from potential money laundering schemes.
  2. Watch List Filtering – Under watch list filtering, financial services screen for all parties involved in various day-to-day financial transactions to deal with money laundering issues through a risk-based approach. Financial services screen all entities and individuals against a list of high-risk individuals provided by financial intelligence units, as well as other politically exposed persons who are likely candidates for money laundering activities. 
  3. Suspicious Activity Reporting –  Financial services generally report any known or suspicious activity around money laundering to financial intelligence units, as well as other national/ state financial crime and anti-money laundering units.
  4. Suspicious Transaction Reporting (STR)  When a financial services has a strong reason to believe one of its transactions is being used to finance terrorist activities or launder money, the company is required to report the transaction to FINTRAC. Under no circumstances is the client under suspicion to know that he or she has been reported as a suspect. 
  5. Policy Formulation and Employee Training – Financial services across the globe have anti-money laundering policy guidelines and minimum standards in the form of “do’s” and “don’ts” for employees. In addition, most financial services employees are given training on various regulations around money laundering and their obligations to comply with the regulations.


Why money laundering is catastrophic to people and the economy?

Money laundering rightfully earns its status as a criminal act, primarily because it serves as a conduit for criminals to reap substantial benefits from their illicit activities. 

This unethical process equips fraudulent people, entities and organizations  with a powerful tool that effectively transforms the proceeds of their crimes into seemingly legitimate assets. 

This concealment not only shields these ill-gotten gains from the scrutiny of law enforcement but also adds on an external layer of legitimacy to the funds involved. This perceived legitimacy of funds, in turn, empowers criminals to invest further in unlawful activities, thereby propagating a cycle of crime.

Moreover, money laundering poses a significant threat to financial stability.

By disrupting the regular flow of economic activity and distorting financial transparency, it propagates an environment of uncertainty and undermines the very foundation of our economic structure as a nation, cultivating a breeding ground for financial instability and systemic risks.



The rising volumes of customer transactions nationwide and across the globe has made compliance more complicated as time goes on. Moreover, anti-money laundering continues to be one of the largest areas of regulatory compliance highlighting the importance of dealing with anti-money laundering issues at the most stringent level.

Advances in transaction monitoring, the greater use of AI and machine learning, including network analytics, and greater focus on perpetual KYC will enable us to hopefully and tangibly fight financial crimes better.