AML and CFT Provisions in Securities Markets

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)

   Why are anti-money laundering laws important for a country?

   1. A.They help prevent criminals from hiding illegally obtained money
   2. B.They let criminals enjoy the ill-gotten profits
   3. C.They have minimum social consequences
   4. D.They erode the integrity of a nation's financial institutions
   Show the answer

   Answer: A. They help prevent criminals from hiding illegally obtained money

   Anti-money laundering (AML) laws are important and much required because 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.

   Options B and D describe what money laundering does, not what AML laws do — they invert the position.

   Money laundering... enables the criminal to enjoy these profits without jeopardizing their source, and if, left unchecked, money laundering can erode the integrity of our nation's financial institutions. Hence, financial institutions employ anti-money laundering (AML) policies to detect and prevent such activities.

   Option C is contradicted directly: money laundering has devastating social consequences. For one thing, money laundering provides the fuel for un-ethical persons such as drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises.

   And laundering is a business in itself: in addition to organized criminal groups, professional money launderers perform money laundering services on behalf of others as their core business.

   Where the money comes from: illegal arms sales, smuggling, and the activities of organised crime, including drug trafficking and prostitution rings · embezzlement, insider trading, bribery and computer fraud schemes.

   How the global framework arose: anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards. These standards began to have more relevance in 2000 and 2001, after FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation.

   And India's own answer: the Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering.

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

   The PMLA and the Rules notified thereunder came into force with effect from which date?

   1. A.July 1, 2005
   2. B.July 1, 2002
   3. C.Both of the above
   4. D.None of the above
   Show the answer

   Answer: A. July 1, 2005

   PMLA and the Rules notified there under came into force with effect from July 1, 2005.

   The Act was passed in 2002 but took effect three years later — a gap the paper tests directly.

   Chapter 1 says the same: the Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. The provisions of PMLA came into force on July 1, 2005.

   What the Act is for: 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.

   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.

   Note "exclusive and concurrent" — some powers belong to one director alone, others to both.

   And who it binds: 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.

   Those four categories are the definition of a reporting entity: "reporting entity" means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

   And three obligations follow — verify identity, maintain records, furnish information. They become section 11A (verification of identity by reporting entity), section 12 (reporting entity to maintain records) and section 15 (procedure and manner of furnishing information by reporting entities).

   One related date to keep separate: the PML Rules were amended vide Gazette Notification dated 7th March, 2023 to become the Prevention of Money-laundering (Maintenance of Records) Amendment Rules, 2023.

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 — defining implementation, stating performance, and providing flexibility.

   Why flexibility matters in practice. Rules can be amended by notification without returning to Parliament, which is how these Rules have kept pace: 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.

   Where these particular Rules come from: 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.

   **Section 73 is listed in the Act's own section map as power to make Rules.

   What the Rules require, in four lines: develop internal controls: Create policies, procedures, systems, and controls to prevent financial crimes · conduct customer due diligence: Follow a process before onboarding customers or executing transactions · report suspicious activity: Report suspicious transactions and other specified activities · maintain client identity records: a reporting entity shall keep records of the client identity in the manner as may be specified by its Regulator from time to time.

   And the aim behind them: by mandating robust customer verification, due diligence and reporting practices, 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

   Which of the following is a critical element for an offence to be termed a money laundering offence?

   1. A.Commission of a scheduled offence
   2. B.Generation of proceeds of crime
   3. C.Doing an activity not included in the list of scheduled offences
   4. D.None of the above
   Show the answer

   Answer: A. Commission of a scheduled offence

   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.

   Note the reasoning in that sentence. Proceeds of crime must indeed be generated — but they can only be generated by a scheduled offence, so the commission of the scheduled offence is the foundation. That is why option B, though related, is not the answer the workbook gives.

   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.

   Option C states the opposite of the requirement. An activity outside the Schedule generates no proceeds of crime at all.

   The offence of money laundering arises from criminal activity committed by a person in relation to scheduled offences. Scheduled offences (as defined in section 2(1)(y) of the PML Act) are those offences that are mentioned in Parts A, B and C of the Schedule to the PML Act and refer to any type of property or assets derived from proceeds of crime or used in the commission of crime in relation with the scheduled offences.

   The chain runs backwards from section 3. That section punishes involvement in activity connected with the proceeds of crime; "proceeds of crime" means any property derived or obtained, directly or indirectly... as a result of criminal activity relating to a scheduled offence; and "scheduled offence" means an offence in Part A, in Part B where the value is one crore rupees or more, or in Part C.

   Break any link and there is no charge — which is why an intermediary needs to know the Schedule at least in outline.

5. Question 5 · Chapter 5: Anti Money Laundering (AML), Combating the Financing of Terrorism (CFT) and Proliferation Financing (PF) Guidelines

   Exchange between virtual digital assets and fiat currencies is a service provided by which kind of agency?

   1. A.Service Provider
   2. B.Source Provider
   3. C.Stability Provider
   4. D.Solution Provider
   Show the answer

   Answer: A. Service Provider

   The term Service Provider (SP) means a person carrying out the following activities for another natural or legal person in the course of business • exchange between virtual digital assets and fiat currencies • exchange between one or more forms of virtual digital assets • transfer of virtual digital assets • safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets and • participation in and provision of financial services related to an issuer's offer and sale of a virtual digital asset.

   Five activities, and exchange to fiat is the first.

   Two qualifiers narrow the definition. The activity must be carried out for another natural or legal person — so proprietary trading is outside — and in the course of business.

   How SPs came within the PMLA: persons carrying on designated business or profession are defined in Clause (s) of sub-section (1) of Section 2 of the PMLA. Sub-clause (vi) of the said clause includes within the ambit of 'person carrying on designated business or profession' such persons who carry on activities as the Central Government may, by notification, designate from time-to-time.

   And a person carrying on a designated business or profession is a reporting entity under the Act — with the obligations to verify identity, maintain records and furnish information.

   What the guidelines ask of an SP: these guidelines are intended to set out the steps that a SP shall implement to discourage and to identify any money laundering, terrorist financing or proliferation financing activities.

   Through a three-part strategy: deterrence (implementation of effective KYC, CDD and EDD measures), detection (e.g., monitoring and suspicious transaction reporting), and record-keeping so as to facilitate investigations by the appropriate authorities wherever required.

   Note the fourth activity in the definition — safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets — which reaches the holding of private keys.

Frequently asked questions

What is the passing mark for NISM Series XXIV?

You need 50% to pass NISM-Series-XXIV: AML and CFT Provisions in Securities Markets. On a 50-mark paper that is 25 marks.

Is there negative marking in NISM Series XXIV?

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

How long is the NISM Series XXIV exam?

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

How long is the NISM Series XXIV 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.