AML and Counter-Terrorist Financing in the IFSC

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Introduction to Anti Money Laundering (AML), Combating the Financing of Terrorism (CFT) and Proliferation Financing (PF)

   Criminals practise money laundering by which of the following ways?

   1. A.All of the above
   2. B.Disguising the source of ill-gotten gains
   3. C.Changing the form of criminal proceeds
   4. D.Moving profits of criminal acts elsewhere
   Show the answer

   Answer: A. All of the above

   When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

   Practice of or engagement in any of such activities is known as Money Laundering.

   Three methods, and any one of them is money laundering.

   The underlying definition: money laundering is the process of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

   Where the money comes from: illegal arms sales, smuggling, and the activities of organised crime, including drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to "legitimize" the ill-gotten gains through money laundering.

   Note the second sentence — white-collar offences generate launderable proceeds just as violent and organised crime does.

   The three methods map onto the three stages. Changing the form and disguising the source characterise placement; moving the funds characterises layering, where the launderer moves the money through a series of financial transactions with the goal of making it difficult to trace the original source.

   And a fourth technique gets its own treatment in this workbook — trade-based money laundering, defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin.

   Which is why AML laws exist: they help preventing criminals from hiding illegally obtained money and the financial impact of money laundering on a country, thus safeguarding the financial system from crimes.

2. Question 2 · Chapter 2: Prevention of Money Laundering Act, 2002

   Under the Prevention of Money Laundering Act, which authorities have been conferred with exclusive and concurrent powers to implement the provisions of the Act?

   1. A.Director, FIU-IND and Director (Enforcement)
   2. B.Chairperson, Central Board of Direct Taxes (CBDT)
   3. C.Secretary, Department of Revenue
   4. D.Comptroller & Auditor General
   Show the answer

   Answer: A. Director, FIU-IND and Director (Enforcement)

   Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act.

   Two officers, holding both exclusive and concurrent powers — some functions belong to one alone, others to both.

   Their roles differ. The Directorate of Enforcement is a multi-disciplinary organization mandated with investigation of offence of money laundering and violations of foreign exchange laws, enforcing the Prevention of Money Laundering Act, 2002 (PMLA), the Foreign Exchange Management Act, 1999 (FEMA), the Fugitive Economic Offenders Act, 2018 (FEOA) and acting as sponsoring agency under COFEPOSA.

   FIU-IND is the intelligence side — the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions, and an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

   Receive and analyse on one side; investigate and prosecute on the other.

   The Act itself: Prevention of Money Laundering Act (PMLA) forms the core of the legal framework put in place by India to combat money laundering. It is an act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering.

   And it came into force later than its year suggests: Prevention of Money Laundering Act (PMLA) and the Prevention of Money Laundering Rules (PMLR) notified there under came into force with effect from July 1, 2005.

   The obligations it imposes: on banking companies, financial institutions, and intermediaries and persons carrying on a designated business or profession, to verify identity of clients, maintain records and furnish information to FIU-IND.

   Other agencies may still be involved. Depending on the scheduled offence, agencies like IFSCA, SEBI, CBI, customs, and police may be involved for parallel investigation of predicate (scheduled) offences — but the Act's implementation rests with the two named Directors.

3. Question 3 · Chapter 3: The Prevention of Money-laundering (Maintenance of Records) Rules, 2005

   After an Act has been passed and approved, its subsequent rules are made for what purpose?

   1. A.All of the above
   2. B.To define how the Act will be implemented
   3. C.To state how the Act will be performed
   4. D.To provide flexibility in the implementation of the Act
   Show the answer

   Answer: A. All of the above

   An act is a law or the statute which has been passed by the legislature and approved by the President of India. Rules, on the other hand, help in governing laws. Rules are created after an act to define how the act will be implemented and performed. Rules are secondary to the act, and are created to provide flexibility in implementation.

   All three purposes appear in that passage — implementation, performance and flexibility.

   Note the hierarchy: rules are secondary to the act. An Act is passed by the legislature and approved by the President; rules are made by the executive under a power the Act confers.

   Here the power is section 73. In exercise of the powers conferred by section 73 of the Prevention of Money-Laundering Act, 2002 (15 of 2003), the Central Government in consultation with the Reserve Bank of India, hereby made the following rules for maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information and verification of records of the identity of the clients of the banking companies, financial institutions and intermediaries.

   **Chapter 2 lists section 73 as Power to make Rules.

   And flexibility is exactly what has been used. Vide Gazette Notification dated 7th March, 2023, the above mentioned rules were amended and to be called as the Prevention of Money-laundering (Maintenance of Records) Amendment Rules, 2023 — the Rules have been amended repeatedly while the Act itself has changed far less often.

   What these particular Rules require: develop internal controls · conduct customer due diligence · report suspicious activity · maintain client identity records.

   And their purpose: by mandating robust customer verification, due diligence and reporting practices, IFSCA, SEBI and RBI aim to create a secure environment within the financial sector to prevent illicit financial activities.

4. Question 4 · Chapter 4: Scheduled Offences

   Under the PMLA, 2002, which of the following is a mandatory pre-condition for initiating proceedings for the offence of money laundering?

   1. A.Commission of a scheduled offence listed in Parts A, B or C of the Schedule and generation of proceeds of crime
   2. B.Registration of an FIR under any cognizable offence
   3. C.Detection of suspicious transaction by a reporting entity
   4. D.Issuance of a show-cause notice by FIU-IND
   Show the answer

   Answer: A. Commission of a scheduled offence listed in Parts A, B or C of the Schedule and generation of proceeds of crime

   In order to proceed against a person under the PMLA, a scheduled offence, as defined under section 2(1)(y) and mentioned in Parts A, B and C of the Schedule of the PMLA 2002 should have been committed and the proceeds of crime should have been generated.

   Two requirements, joined by "and" — the offence and the proceeds.

   Option B is too wide. Not every cognizable offence is a scheduled offence; only those listed in the Schedule qualify, and Part B offences only above the threshold.

   Option C confuses a report with a prosecution. A reporting entity files a Suspicious Transaction Report when, to a person acting in good faith, a transaction gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime — the standard being suspicion, not proof. That obligation exists whether or not any prosecution follows.

   Option D misplaces FIU-IND's role. It is the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspected financial transactions — it does not issue show-cause notices founding a prosecution.

   Why the precondition exists: a critical element, for an offence to be termed as a money laundering offence is the commission of a scheduled offence, as it serves as the foundation for generating proceeds of crime.

   And it follows from the definition of proceeds of crime, which is property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence.

   Two investigations therefore run in parallel. Depending on the scheduled offence, agencies like IFSCA, SEBI, CBI, customs, and police may be involved for parallel investigation of predicate (scheduled) offences, while the Directorate of Enforcement investigates the laundering.

5. Question 5 · Chapter 5: IFSCA (Anti Money Laundering, Counter Terrorist Financing and Know Your Customer) Guidelines, 2022

   Which of the following is correct about the duty of a Regulated Entity?

   1. A.Every member of the Regulated Entity's Senior Management shall be responsible for the Regulated Entity's compliance under the IFSCA (AML, CFT and KYC) Guidelines
   2. B.Only the Compliance officer shall be responsible for the Regulated Entity's compliance
   3. C.Only the Designated Director shall be responsible for the Regulated Entity's compliance
   4. D.Only the Principal Officer shall be responsible for the Regulated Entity's compliance
   Show the answer

   Answer: A. Every member of the Regulated Entity's Senior Management shall be responsible for the Regulated Entity's compliance under the IFSCA (AML, CFT and KYC) Guidelines

   Every member of Regulated Entity's Senior Management shall be responsible for the Regulated Entity's compliance under these Guidelines. While carrying out their responsibilities under these Guidelines every member of a Regulated Entity's Senior Management shall exercise due skill, care, and diligence.

   "Every member" — which is why all three "only" options fail. Compliance is not delegable to a single officer.

   **The standard imposed on them is due skill, care, and diligence.

   The other two duties: every Regulated Entity shall formulate an AML-CFT policy, which shall be duly approved by the Governing Body or by a committee to whom such power has been delegated by the Governing Body, incorporating the key principles or elements of these Guidelines; and every Regulated Entity shall develop a KYC Policy which shall be the part of its AML-CFT policy.

   The KYC policy sits inside the AML-CFT policy, not beside it.

   The theme recurs throughout the Guidelines. The risk-based approach must trickle down from the level of Senior Management to the rest of the organization; the AML/CFT policies, procedures and controls shall be approved by Senior Management; correspondent banking requires approval from the Senior Management; and systems must include a provision enabling its Senior Management to regularly review the information on operations and effectiveness of its AML systems and controls.

   The Principal Officer's role is operational and upward-reporting — taking overall charge of all AML/CFT matters within the organisation and reporting to Senior Management on the outcome of reviews.

   And who this applies to: a Regulated Entity means a unit/entity which has been granted license, recognition, registration or authorisation by the Authority.

Frequently asked questions

What is the passing mark for NISM Series IFSCA-01?

You need 50% to pass NISM-Series-IFSCA-01: AML and Counter-Terrorist Financing in the IFSC. On a 50-mark paper that is 25 marks.

Is there negative marking in NISM Series IFSCA-01?

There is no negative marking, so never leave a question blank — an uncertain guess costs you nothing.

How long is the NISM Series IFSCA-01 exam?

The exam runs for 60 minutes and carries 50 marks in total.

How long is the NISM Series IFSCA-01 certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.