Prevention of Money Laundering Act, 2002

What this chapter covers

Chapter 2 carries 7 marks out of 50 — 14% of the paper.

Learning Objective - After studying this chapter, you should know about: Definition, objective and explanation of the concept and importance of Prevention of Money Laundering as per PMLA 2002 · Authorities entrusted for investigations regarding money laundering.

2.1 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.

What it is: an act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.

Two limbs — prevention and confiscation.

When it came into force: 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.

Note the gap — enacted in 2002, in force from July 1, 2005, with the Rules alongside.

Who implements it: 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.

The first sample question asks exactly this.

And on whom the obligations fall: the PMLA and rules notified thereunder impose obligation 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.

Four categories, three duties — verify identity, maintain records, furnish information. The third sample question tests the four categories.

2.1.1 Section 2 — the definitions

This section defines terms used in the Act. The definitions are long, so they are set out in tables below. Read the plain notes after each table first. Then go back to the exact words.

Who is covered — the reporting entity and its clients

The reporting entity definition gathers the four categories in one line. The last limb of the designated business list is open. The government can add new kinds of business by notification.

A footnote on beneficial owner adds: from the IFSCA perspective the meaning of beneficial owner has been explained in point 6.3.6 of this book.

What is caught — the money and the offence

Note the equivalent-value limb. Property moved abroad does not escape. Equivalent value held in India can be reached instead.

The one-crore threshold applies only to Part B. Parts A and C have no value limit. Chapter 4 deals with the Schedule in full.

The process words

2.1.2 Section 3 — the offence

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 including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.

In plain words: anyone who helps hide, hold, get, use or pass off crime money as clean is guilty. Even an attempt counts.

Six activities, any one of which suffices:

• (a) concealment.
• (b) possession.
• (c) acquisition.
• (d) use.
• (e) projecting as untainted property.
• (f) claiming as untainted property, in any manner whatsoever.

And four modes of involvement — directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved.

The continuing-offence rule: the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

So the offence does not end when the laundering transaction ends. It runs for as long as the person enjoys the proceeds.

The section map

The PMLA is divided in multiple sections. An illustrative list regarding applicability/scope of coverage of these sections is as mentioned below:

Section 14 is the protection reporting entities rely on. It provides for no civil or criminal proceedings against reporting entity, its Directors & Employees in certain cases. Section 41 says the civil court not to have jurisdiction. Section 44 makes offences triable by special courts.

2.1.3 Section 4 — punishment

Whoever commits the offence of money-laundering is punishable with rigorous imprisonment for a term which will not be less than three years but which may extend to seven years and shall also be liable to fine.

Three to seven years, rigorous, plus fine. The second sample question tests this.

And the enhanced term: where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words "which may extend to seven years", the words "which may extend to ten years" had been substituted.

Paragraph 2 of Part A is the narcotics paragraph — there the maximum becomes ten years. The minimum stays at three.

2.1.4 Section 5 — attachment

The rule in short: a senior officer who believes, on written grounds, that someone holds crime money that may vanish can freeze it for up to 180 days. The exact words follow.

Where the Director or any other officer not below the rank of Deputy Director authorised by the Director for the purposes of this section, has reason to believe (recorded in writing), on the basis of material in his possession, that--

(a) any person is in possession of any proceeds of crime; and

(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime

— may, by order in writing, provisionally attach such property for a period not exceeding one hundred and eighty days from the date of the order, in such manner as may be prescribed.

Three safeguards: the rank floor (not below the rank of Deputy Director), the belief recorded in writing and on the basis of material in his possession, and the one hundred and eighty days limit.

And attachment is not confiscation. It is prohibition of transfer, conversion, disposition or movement of property. The owner cannot move the property, but it has not been taken away.

2.1.5 Section 12 — records

Every reporting entity is required to—

Three duties, then: keep transaction records, report, and keep identity records.

Note "whether attempted or executed" in clause (b) — an attempted transaction is reportable.

Confidentiality: every information maintained, furnished or verified, save as otherwise provided under any law for the time being in force, shall be kept confidential.

Two retention periods, both five years but running from different events:

The records referred to in clause (a) of sub-section (1) shall be maintained for a period of five years from the date of transaction between a client and the reporting entity.

The records referred to in clause (c) of sub-section (1) shall be maintained for a period of five years after the business relationship between a client and the reporting entity has ended or the account has been closed, whichever is later.

Transaction records run from the transaction. Identity records run from the end of the relationship.

And an exemption power: the Central Government may, by notification, exempt any reporting entity or class of reporting entities from any obligation under this Chapter.

2.1.6 Section 56 — international agreements

Section 56 is about working with other countries. India can sign agreements to enforce the Act and to share information. Here is the wording.

The Central Government may enter into an agreement with the Government of any country outside India for:

(a) enforcing the provisions of this Act;

(b) exchange of information for the prevention of any offence under this Act or under the corresponding law in force in that country or investigation of cases relating to any offence under this Act, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

And conditions may be attached: the Central Government may, by notification in the Official Gazette, direct that the application of this Chapter in relation to a contracting State with which reciprocal arrangements have been made, shall be subject to such conditions, exceptions or qualifications as are specified in the said notification.

This section matters particularly in an IFSC, whose business is cross-border by definition.

2.2 Rule 3 — what must be reported

For effective implementation of the Act, maintenance and reporting of records is an important requirement. Under the PML Rules, Rule 3 – Maintenance of records of transactions, the following transactions have been specified, for which records have to be maintained and reports are to be furnished to FIU-IND:

Three thresholds to remember: ten lakh for cash and NPO receipts, five lakh for cross-border wire transfers, fifty lakh for immovable property.

But note the IFSC footnote: no cash transactions are permitted in IFSC domain.

So clauses (a), (b) and (d) — all cash-based — have no practical application to an IFSC entity. What remains live are the NPO, suspicious transaction, cross-border wire transfer and immovable property limbs.

The timelines:

The Suspicious Transaction Report mentioned at para (e) above should be furnished within seven working days on being satisfied that the transaction is suspicious.

The information in respect of immoveable property transactions referred to in (g) above should be furnished to FIU-IND every quarter by the 15th day of the month succeeding the quarter.

All other reports need to be furnished on a monthly basis by the 15th day of the succeeding month.

Seven working days for an STR. Quarterly for property. Monthly for everything else. Both periodic reports are due by the 15th.

And note the trigger for the STR clock — on being satisfied that the transaction is suspicious, not the date of the transaction.

How reports are filed: every reporting entity is necessarily required to furnish information to Director, FIU-IND online in a standard format prescribed for the purpose. For this purpose, the reporting entity has to register itself with FIU-IND.

Which is the FINGate 2.0 registration of Chapter 1.

2.2.1 Suspicious transaction

Suspicious Transaction means a transaction (including an attempted transaction) whether or not made in cash which, to a person acting in good faith:

Four limbs, joined by "or". Any one is enough.

Note the standard. It is a person acting in good faith with a reasonable ground of suspicion. Proof is not needed. And the definition says including an attempted transaction, so a deal the client abandons is still reportable.

Limb (d) is the terrorist financing limb — which is why the same report serves both AML and CFT.

The designated officers

Each reporting entity has to appoint certain designated officials to implement the provisions of the Act in the reporting Organisation.

2.2.2 Principal Officer

The Principal Officer is an officer designated by a registered intermediary who should be an officer at the management level. Principal Officer is designated by a reporting entity for the purpose of Section 12 of PMLA.

Rule 7 of the PML Rules requires every reporting entity to communicate the name, designation and address of the Principal Officer to the Director, FIU-IND.

And his role: the Principal Officer would act as a central reference point in facilitating onward reporting of suspicious transactions.

2.2.3 Designated Director

In addition to the existing requirement of designation of a Principal Officer, the registered intermediaries shall also designate a person as a 'Designated Director'.

His responsibility: a person designated by the reporting entity to ensure overall compliance with the obligations imposed under chapter IV of the PMLA Act and the Rules.

Who it must be, by legal form:

Clause (vi) is this exam's clause — for an IFSC entity, the Designated Director is a person who is heading the reporting entity in India.

And a footnote limits the legal forms available: in IFSCA the permitted legal forms are company/partnership firms/body corporates; proprietory concerns are not allowed.

So clause (iii) cannot arise in an IFSC.

"Managing Director" and "Whole-time Director" shall have the meaning assigned to them in the Companies Act, 2013.

2.2.4 Compliance requirements for IFSCA regulated entities

The International Financial Services Centres Authority (IFSCA) requires entities operating in an IFSC to comply with specific provisions under the Prevention of Money Laundering Act (PMLA), 2002. The IFSCA (Anti Money Laundering, Counter-Terrorist Financing, and Know Your Customer) Guidelines, 2022, lay out compliance expectations, including mandated exemptions and operational safeguards.

The four key requirements:

The fourth sample question lists Business Risk Assessment, Transaction Routing and KYC & Due Diligence. The answer is All of the above.

A note on the name of requirement (ii). The workbook itself uses both names. Its list of key requirements calls it Transaction Monitoring, while its sample question calls it Transaction Routing. Both refer to the same rule, so recognise either name in the exam.

Note requirement (ii) — all monetary receipts must only be through accounts maintained with a banking unit in the IFSC. That is the rule behind no cash transactions are permitted in IFSC domain: money must arrive through an IFSC banking unit account, so its origin is always traceable.

Exemptions

Certain entities, such as international branch campuses of foreign universities and service providers within the same financial group (not in FATF high-risk jurisdictions), are exempt from direct AML/CTF/KYC compliance but must still do a business risk assessment.

And the exemption is conditional: if any AML/CTF risks are identified, normal compliance obligations under the PMLA and the IFSCA Guidelines resume.

Exempted institutions are not relieved from all oversight and are still required to conduct formal risk assessment and maintain relevant records and safeguards.

So "exempt" never means unexamined. The business risk assessment stays compulsory for everyone. And it is that assessment which decides whether the exemption survives.

**The exemptions come from IFSCA has exempted certain entities and activities from the applicability of the IFSCA AML, CFT and KYC Guidelines, as per its circular dated 18/11/2024.

Note the condition on the group service provider — not in FATF high-risk jurisdictions. Chapter 8 explains those lists.

2.3 The investigating authorities

2.3.1 Directorate of Enforcement

The Directorate of Enforcement is a multi-disciplinary organization mandated with investigation of offence of money laundering and violations of foreign exchange laws.

The statutory functions of the Directorate include enforcement of following Acts:

• The Prevention of Money Laundering Act, 2002 (PMLA).
• The Foreign Exchange Management Act, 1999 (FEMA).
• The Fugitive Economic Offenders Act, 2018 (FEOA).
• Sponsoring agency under COFEPOSA.

2.3.2 FIU-IND

FIU-IND was set by the Government of India vide O.M. dated 18th November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.

It is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

The division of labour. FIU-IND receives and analyses. The Directorate of Enforcement investigates.

2.3.3 Adjudicating Authority

Section 6 of the PMLA, 2002 defines Adjudicating authority. It is constituted by the Central Government, and it exercises quasi-judicial powers, such as issuing notices, adjudicating property attachments, and confirming confiscations.

Quasi-judicial, not judicial. It adjudicates the attachments made under section 5. The section map also lists Appeals to Appellate Tribunal at section 26 and Appeal to high court at section 42.

2.3.4 Other regulatory agencies

Depending on the scheduled offence, agencies like IFSCA, SEBI, CBI, customs, and police may be involved for parallel investigation of predicate (scheduled) offences.

Note the word "parallel". Money laundering is always built on a predicate offence. So two investigations can run at once — the ED on the laundering, and the sectoral or police agency on the underlying crime.