Mar 15,2023 | 12 min read

Money Laundering and Anti Money Laundering Laws and Regulations

Money laundering refers to the various techniques used to make illicitly acquired assets appear legal. In simpler terms, it involves converting illegally obtained funds into seemingly lawful assets or creating businesses to generate further income for financing the same illicit activities that generated the funds in the first place. Money laundering and terrorist financing have become pressing concerns for governments and regulators worldwide, leading to increased efforts to halt the flow of illicit funds. Nevertheless, this issue remains a significant obstacle for nations and financial institutions worldwide.

In India, Anti-money laundering (AML) laws refers to a comprehensive framework of regulations, laws, and procedures aimed at preventing the illicit acquisition of funds through illegal means. The Prevention of Money Laundering Act, 2002 (PMLA) and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (Rules) are the primary laws enforced to combat money laundering activities in the country.


The Prevention of Money Laundering Act, 2002 (PMLA)

The anti-money laundering laws in India are framed within a comprehensive framework consisting of the Prevention of Money Laundering Act 2002, its associated rules, and regulations developed by regulatory bodies such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Together, these laws and regulations form a robust framework for preventing money laundering activities in the country.

Section 3 of the PML Act deals with the offence of money-laundering. "Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering."

Section 4 of the Act provides that Punishment for money-laundering. "Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees."

The objectives of the Act includes:

  • Preventing and controlling money laundering.

  • To seize and confiscate property derived from or involved in money laundering.

  • To provide a penalty for the crime of money laundering.

  • To appoint an Adjudicating Authority and an Appellate Tribunal to handle money laundering cases.

  • To impose record-keeping obligations on banks, financial institutions, and intermediaries.

  • To address any other issues related to money laundering in India.


The Benami Transactions (Prohibition) Act, 1988

The term 'benami' transaction is defined by the Act as a transfer of property from one person to another, where the consideration for the transfer is paid by someone else. The Act, which was enacted in 1988, aims to restrict such transactions and empower authorities to reclaim properties held under benami. Section 3 of the Act explicitly prohibits individuals from engaging in benami transactions. Also, the Act outlines the properties acquired through benami transactions that can be seized by competent authorities without any obligation to provide compensation.


The Foreign Exchange Management Act, 1999 (FEMA)

The Foreign Exchange Management Act (FEMA), 1999 was enacted by the Parliament "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India". FEMA was passed on 29 December 1999, which replaced the Foreign Exchange Regulation Act (FERA).

Under this act, if a taxpayer violates the provisions, they will be liable to pay a penalty equal to three times the amount of default, if it can be quantified, or a penalty of Rs. 2 lakhs if the amount cannot be quantified. If the taxpayer continues to commit the offence, the penalty increases to Rs. 5,000 for each day of default. Furthermore, the relevant authority may seize any currency, securities or other assets belonging to the taxpayer on behalf of the Central Government. The officer is also authorized to repatriate the offender's foreign exchange earnings back to India.


The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA)

The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, or COFEPOSA Act, gave  broad executive authority to detain anyone suspected of smuggling. It came into effect on December 19, 1974. Smuggling and breaking foreign exchange laws seriously harm the country's economy and security. Under the Act, a person may be held in preventative detention for up to one year in connection with smuggling activities; in general, this time limit may be increased to two years in the case of specific types of smuggling into, out of, or via "any area vulnerable to smuggling."


The RBI KYC Master Directions

The RBI, India's central bank, has issued KYC Master Directions that apply to all entities regulated by the RBI, including banking companies and NBFCs. The objective of these directions is to prevent regulated entities from being exploited for money laundering or terrorist financing activities. The RBI KYC Master Directions require regulated entities to establish customer identity, categorize customers based on the risk they pose, undertake client due diligence (CDD) (including enhanced CDD for high-risk customers and beneficiary accounts), establish procedures for handling various types of transactions, such as cross-border transactions, and report such transactions to the Financial Intelligence Unit (FIU).


The SEBI AML Guidelines

SEBI, the regulatory body for securities markets in India, has issued AML Guidelines that apply to intermediaries registered with SEBI. These guidelines mandate that intermediaries establish policies and procedures to prevent money laundering, which must include communication of group policies related to preventing money laundering and terrorist financing to management and staff who handle account information, securities transactions, client acceptance policies, and CDD measures (including proper identification requirements), maintenance of records, collaboration with law enforcement authorities (including timely information disclosure), and the use of internal audits or compliance functions to ensure adherence to policies, procedures, and controls related to preventing money laundering and terrorist financing.




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Bharat Misra

My area of practice is mainly Criminal, Civil, Constitutional, Family and Law of Contracts. I appear in all courts of Delhi NCR.