Knowing the Legalities of Anti Money Laundering Compliance in India

Akansha Gupta

04 Oct, 2021

Money laundering is an illegal practise in which the source of funds is hidden within a financial institution. A complicated web of bank transfers or business activities is used to disguise the source of funding. Money laundering’s primary goal is to guarantee that filthy money is turned to clean money via a series of transactions. As a result, an enterprise should have a strong structure in place to combat money laundering. Anti-money laundering regulations are in place in every nation globally. It is critical for all businesses to have adequate anti-money laundering measures in place. Anti-money laundering compliance is the practice of screening customers’ backgrounds and monitoring them on a regular basis in order to detect and remove money laundering, terrorist funding, and fraud-related threats. Companies must adhere to a number of standards in order to create a robust Anti-Money Laundering Compliance programme that helps reveal illegal actors while also avoiding non-compliance fines. AML screening is a requirement for numerous enterprises, including banks, fintech, stock exchanges, real estate, art as well as precious metals dealers, cryptocurrencies, gaming platforms, and so forth.

India’s Anti-Money Laundering Compliance Framework

Money laundering is a problem in every country worldwide. The Reserve Bank of India (RBI) offers directions on anti-money laundering and counter-terrorist financing regulations in India. The Prevention of Money Laundering Act, 2002 was enacted by the Reserve Bank of India (RBI) and the Government of India (GOI) (PMLA). The RBI demands all banks and financial institutions to follow the anti-money laundering standards as a result of this statute. The RBI’s requirements are cantered on AML regulations that have been approved by international organisations.

Furthermore, the Government of Indian launched the Financial Intelligence Unit of India (FIU-IND) in 2004 to monitor and analyse suspected financial activities. The FIU-IND is a part of the Ministry of Finance and is in charge of combating financial crimes in India. Companies that are subject to AML responsibilities must report to the Financial Intelligence Unit.

Additionally, India is a signatory of the Financial Action Task Force (FATF). FATF is a multinational organisation dedicated to preventing money laundering across the globe. FATF hopes that by publicising AML standards, nations would be able to combat financial crime more efficiently. FATF member states’ anti-money laundering regimes should adhere to FATF guidelines. The Basel Committee on Banking Supervision (BCBS)^[1] has said that transactions or credit transfers, including wire transfers, originating in FATF grey listed nations must adhere to due diligence standards. Due diligence is required to be conducted on the consumer by a bank or financial institution.

Legal bodies governing Anti Money Laundering

In India, the mentioned regulatory organisations and legislation govern anti-money laundering compliance:-

Types of Customer Due-Diligence

According to the PMLA, client due diligence procedures should be implemented throughout the customer onboarding phase by the banking industry, financial institutions, financial service providers, gaming enterprises, and casinos. Consumer due-diligence aids in determining the risk level of a customer. Furthermore, these businesses must keep track of and preserve client information. These businesses must undertake AML checks, detect suspect consumer transactions, and report to authorised units.

• General Due Diligence – A bank, financial institution, microfinance business, or non-bank financial company does basic due-diligence. It is used to do a basic client background investigation. For general due-diligence, documents like the Aadhaar Card, Passport, Voter ID, and Pan Card would be required.

• Simple Due Diligence – This is a form of due-diligence that is one step ahead of General due-diligence. This is often done for institutional clients like corporations, international organisations, and other organisations.

• Enhanced Due Diligence – Only foreign clients are subjected to this type of due-diligence. This DD is performed for clients from countries on the FATF’s grey list, like North Korea & Yemen. In this type of DD, more documents are required.

Need for AML Compliance

Essential requirements for an efficient Anti-Money Laundering Compliance Framework

• A risk-based strategy to mitigating any type of risk.
• Keeping an eye out for high-risk clients
• Assigning duty to executives.
• Conduct an internal management audit so that AML compliance norms are followed.
• Keeping in touch with audit committee.

Anti-Money Laundering Compliance Procedure – KYC Compliance

To conduct an anti-money laundering compliance, banks and financial entities must follow the method outlined below:-

1. Account Creation – To make a transaction with a bank, a customer/client must either create an account or interact with a bank employee. This is referred to as the process of customer interaction, and it is a crucial component of the risk management framework.
2. Customer Due Diligence/Documentation – The bank would seek all crucial documents thereafter. The consumer must supply the bank with the bare minimum of documents in this case. If the bank/financial entity believe that more information is required, additional documentation will be requested. If there’s a reasonable perception that the customer or transaction offers a high level of risk, the bank will perform increased due diligence.
3. Process for conducting AML DD – The bank will operate in accordance with the person’s classification. Compliance with the following anti-money laundering measures is required:-
   • DD Compliance for an individual – The client must produce official, legitimate documents. Individual consumers may also use electronic KYC, according to the Unique Identification Authority of India (UIDAI). Small accounts would be established for individual a customer who does not have any of the formal valid credentials. There are some requirements for creating a small account. If a document lacks an address, another document with address verification must be given as an official document. If the client is genuinely legitimate and the bank believes that no verification is needed, the bank will perform its own risk analysis within 6 months of the relationship’s formation.
   • DD Compliance for a Business Entity-
     • Certificate documents, including the MOA and AOA.
     • Resolution from the Company’s BOD.
     • Incorporation Certificate
     • POA from the company allowing a representative, like manager, to execute transactions on the firm’s behalf.
   • For a Partnership Firm – A partnership agreement/ partnership deed and the Partnership Registration Certificate will be required.
   • DD Compliance Concerning a Trust – A Trust registration certificate and a trust deed would be required.
   • DD Compliance in the case of a Beneficial Owner – A beneficial owner of a business is usually a natural person. This might be a corporate executive, a director, or a shareholder. The beneficial owner of a corporation will have a majority interest in the corporation’s earnings. In case of a partnership firm, the partner will have a 15% beneficial stake. The beneficial interest for the trust or body of associations is 15%.
   • Compliance with Anti-Money Laundering Regulations for Politically Exposed Persons Outside of India – Such persons will be subjected to increased surveillance.
   • Foreign Portfolio Investors (Financial Institutional Investors) – Portfolio investors are governed by the Securities and Exchange Board of India (SEBI). As a result, Anti-Money Laundering Compliance must be carried out in accordance with SEBI requirements. Further, bank accounts will be created as part of this plan as a portfolio investing strategy.
   • Virtual Customers – This will be utilised more for consumers who use mobile banking or Smartphone banking. When banks interact with such consumers, E-KYC processes are typically employed. For anti-money laundering compliance, additional documents may be required.
4. Keeping Anti-Money Laundering Compliance Up to Date – KYC – Customers with a high risk profile must have their anti-money laundering compliance updated at least once every 2 years. Clients with a moderate risk profile must have their KYC updated every 8 years, whereas customers with a minimal risk profile must have their KYC updated every 10 years. For low-risk clients, no new credentials are required at the time of upgrading.
5. Noncompliance with Anti-Money Laundering Compliance Rules – In the event of noncompliance, banks or financial entities may either Freeze the accounts of persons, or partially freeze of these accounts. However, customers’ accounts, on the other hand, will be unfrozen if they comply. Further, if there is additional violation with the foregoing, banks have the right to deactivate the accounts.
6. Documentation Maintenance – The bank or financial organisation must keep track of certain types of transactions. For the objective of record keeping, the preceding transactions must be kept.
   • Transactions with a value not less than Rs. 10 Lakhs or over. This might be in a foreign currency.
   • A series of interconnected transactions with a monetary value of Rs. 10 lakh rupees or over.
   • Suspicious transactions are carried out through wire transfers.
   • Any transaction involving fake banknotes or counterfeit money.
   • Transactions involving receiving money from a charitable organisation in excess of Rs. 10 lakhs.
7. Records and documentation preservation – Banks and financial entities are required to keep records for a period 5 years – from initial transaction date under the PML Amendment Act, 2012. Banks can keep customer records in both hard & soft copy forms. Any anomalous transaction involving a complicated sequence of events must be reported to the bank’s senior officer or the Money Laundering Officer.
8. Final Reporting – Any type of transaction that takes place in an NGO must be reported in order to comply with the rules of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Besides that, banks are obligated to record transactions involving trusts and other forms of society. Transactions should be reported to the Director of the Financial Intelligence Unit of India.

The reports of any Cash transactions, Suspicious Transactions, Wire Transfers across Borders, Non-profit transactions must be sent to the Director of India’s Financial Intelligence Unit. Afterwards, the bank or financial entity would be adhering to anti-money laundering regulations.

Documents Necessary for Anti-Money Laundering

• KYC documents
• KYC documents electronic form
• Certified official credentials including:-
  • Voter ID Card.
  • Aadhaar Card
  • Pan Card
  • The individual’s utility bill from the provider (previous 2 months).
  • Municipal Taxes Receipts.
  • PPO documents (Pension Payment Order).
  • Letter from the Gazette Officer alongwith a photo of the person.
• For Partnerships & Companies:-
  • MOA and AOA.
  • The Company’s Certificate of Incorporation.
  • Partnership Deed.
  • Board of Directors Resolutions

Suggestions for a successful AML Compliance Framework

A business entity must first evaluate and identify its possible risks and legal responsibilities before developing a compliance system. The money laundering risks that a company faces should be taken care of. The entity and Anti-Money Laundering Compliance framework should be in accordance with the Domestic and international laws, as well as penalties for non-compliance shall be imposed on the violators. Further, potential suspicious actions inside the company must also be evaluated. Moreover, businesses must create strong recommendations in order to improve the creation of Anti-Money Laundering Compliance procedures. It would make the procedure easier and prevent compromise.

Read our article:Why should Anti Money Laundering be the top priority in the Digital Era?