Discussion on PMLA related Cases

What this chapter is for

Chapter 8 carries 5 marks out of 50 — 10% of the paper, and closes the syllabus.

Learning Objective: After studying this chapter, you should know about: Practical implementation and coverage of PMLA through case studies.

This Chapter covers different cases based on SEBI Adjudicating Orders in the scope of Prevention of Money Laundering Act (PMLA).

Read the cases for the failures they identify, not for the names. Every penalty in this chapter traces back to an obligation set out in Chapters 2, 3, 6 and 7.

8.1 FIU-IND v. Way2Wealth Brokers Private Limited

Order-in-Original No. 29/DIR/FIU-IND/2022 dated 10.11.2022.

How FIU-IND supervises: as part of its supervisory functions under Prevention of Money Laundering Act (PMLA), Financial Intelligence Unit-India (FIU-IND) takes up cases where apparent or potential non-compliances of relevant obligations have been observed. They are carried out with a view towards identifying weaknesses in the safeguards implemented by 'reporting entities' and for conducting enforcement activity where non-compliances are found.

And why the securities market matters: such actions are taken to ensure that all possible safeguards, as required by law, were effectively implemented by the reporting entities so as to ensure malicious actors do not take advantage of the capital flows therein. In this regard, FIU-IND works closely with various sectoral regulators including, the Securities and Exchange Board of India (SEBI).

The facts: based on a reference from the SEBI highlighting alleged non-compliance with PMLA guidelines by Way2Wealth Brokers Private Limited, FIU-IND had taken up the case for further analysis in order to examine whether there was any non-compliance by the reporting entity with respect to the obligations under Chapter IV of PMLA.

Two breaches were found:

• its underlying transactions in December 2021. Failure of the reporting entity to properly raise, investigate alerts, handle the alerts and to file the same as a Suspicious Transaction Report (STR) with FIU-IND.
• failure of the reporting entity to properly raise an alert and consider adverse orders of SEBI from the perspective of AML transactional monitoring and reporting obligations.

Note the second breach — an adverse SEBI order against a client is itself information that should feed the AML monitoring system.

The order: it was found appropriate to issue monetary penalty of Rs. 1 Lac under section 13(2)(d) to Way2Wealth Brokers Private Limited along with detailed directions to the reporting entity under section 13(2)(a) and 13(2)(b).

And a certification requirement: the firm was further required to return, within a period of 30 days, a certification under signature of its Designated Director and Principal Officer that the directed measures would be implemented within the periods prescribed.

Both designated officials had to sign — the pair from Chapter 2.

8.2 SEBI v. SKSE Securities Limited

SEBI conducted inspection into the books of account and other records of SKSE Securities Limited (notice) to examine its Anti Money Laundering (AML) mechanism and compliance level.

Three allegations:

It was alleged in the show cause notice that the Noticee had not implemented AML mechanism.

It was also alleged... that the Noticee had not categorised the clients into high, medium and low category and hence was not exercising additional due diligence for monitoring the transactions of high and medium risk clients as compared to low risk clients.

It was further alleged... that the Noticee had not appointed the 'Principal Officer' as required under the SEBI circular in time and even after appointment of the 'Principal Officer', the details of the 'Principal Officer' were intimated to FIU with a delay.

The findings on timing. SEBI vide its Circular No. ISD/CIR/RR/AML/1/06 dated January 18, 2006 issued guidelines on AML standards and advised all intermediaries to ensure that a proper policy framework as per the guidelines on anti-money laundering measure is put into place within one month from the date of the circular. In the instant case, the Noticee has failed to implement the said policy in time.

One month from 18 January 2006.

On client categorisation: the circular required intermediaries to develop customer acceptance policies and procedures aimed at identifying the types of customers that are likely to pose a higher than the average risk of money laundering or terrorist financing, enabling them to apply customer due diligence on a risk sensitive basis depending upon the type customer business relationship. Safeguards required classification into low, medium and high risk.

And the delay was extreme: it was evident from the reply of the Noticee that it had not taken any steps towards implementation till 2010. It was also noted that the categorization of old clients was still being carried on by the Noticee even then.

On the Principal Officer: the circular mandates that the intermediaries designate an officer as 'Principal Officer' who would be responsible for ensuring the compliance of the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). The name, designation and addresses (including e-mail address) of the 'Principal Officer' had to be intimated to the Office of the Director, FIU on an urgent basis.

The appointment of 'Principal Officer' was made by the Noticee on December 14, 2007, i.e., with a delay of almost two years from the date of the SEBI Circular. Further, the appointment was also not intimated to the Director- FIU on an urgent basis. It was intimated only on January 10, 2008.

The order: SEBI imposed a penalty of Rs. 2,00,000/- (Rupees Two Lakhs only) on the Noticee in terms of section 15HB of the SEBI Act.

8.3 SEBI v. Raima Equities Private Limited

SEBI had conducted an inspection... of Raima Equities Private Limited (Noticee), a stock broker registered with SEBI for the period from April 2011 till July 02, 2012 to verify whether the Noticee is complying with the provisions of Anti Money Laundering (AML) or not.

Four observations:

It was observed that the Noticee had no basis while classifying clients into high, medium and low risk.

The Noticee had no system in place to monitor transactions from the view point of "Anti Money Laundering and Combating Financing of Terrorism". The entire concept of risk management system of the Noticee was limited to stock market risks i.e., delivery, payment, margin, etc.

That second point is the heart of the case — market risk management is not AML risk management.

The Noticee had not even set any parameters in its system which could generate suspicious transaction reports (STRs). STRs received from depository had been closed by the Principal Officer of the Noticee without stipulating any reason in writing.

The Noticee had no system in place to identify whether a client or potential client was a Politically Exposed Person (PEP) or not.

The findings. On risk classification, the broker argued that clients were categorised not only on the basis of their income but also their financial credibility (wealth), relations or introducers, margin held and past performance regarding payment. But no documentary evidence showing the networth of clients being good during the relevant period under inspection had been produced, so categorizing certain client under the 'low' risk category is indeed arbitrary on the part of the Noticee.

On STRs: no documentary evidence had been submitted by the Noticee to show as to how the STRs are dealt with by the Principal Officer. From the submissions of the Noticee, it was concluded that there does not seem to be any internal policy / system to deal with the STRs and that the STRs were being closed by the Principal Officer without giving any reasons in writing.

On PEPs: the broker submitted that the clients are introduced by the directors / shareholders or the sub brokers of the company and thus, they all are known persons. The AO did not find any merit in the said submission and the same clearly indicates that the Noticee does not have any system in place to identify the PEP.

Personal familiarity is not a system.

The order: the AO imposed a monetary penalty of Rs. 2,00,000/- (Rupees Two Lakh Only) under Section 15HB of the SEBI Act, 1992.

8.4 SEBI v. Marfatia Stock Broking Private Limited

An inspection for the period from April 1, 2012 to March 31, 2013 to ascertain whether the Anti-Money Laundering (AML) Policy was in place within 30 days of the promulgation of SEBI circular ISD/CIR/RR/AML/1/06 dated January 18, 2006 read with SEBI Master Circular No. CIR/ISD/AML/3/2010 dated December 31, 2010.

Three issues were framed: whether the circulars and the Code of Conduct specified under Schedule II read with Regulation 9 of Brokers Regulations and regulation 26(xvi) were violated; whether that attracts monetary penalty under section 15HB of SEBI Act; and what would be the quantum... after taking into consideration the factors mentioned in section 15J of the SEBI Act read with the Adjudication Rules.

On the policy: Marfatia had admitted that it had adopted AML policy on June 30, 2009. However, it had submitted that though a separate AML Policy was not documented, but the requirements of PMLA were duly incorporated in the relevant policies itself like KYC policy and RMS policy.

The reasoning is instructive. The purpose of having the documented procedure is to ensure compliance with the regulatory requirements and maintain internal controls to put checks and balances to curb money laundering by incorporating various requirements. It is noted that Marfatia had documented processes for activities like the Client Registration process and risk management control although there was no separate documented policy within the prescribed timeline, the various requirements were adopted in other policies. In view of the same, the allegation of not complying with the provisions of the circular does not stand established.

Substance over form — the requirements were in place, though not in a single document.

On the Principal Officer: the firm first said one person was appointed on March 19, 2008, then during adjudication produced a copy of letter dated February 13, 2006 addressed to the FIU mentioning that it had appointed Mr. Hiren Bipin Chandra Shah as a Principal Officer on February 2, 2006.

The letter was late in coming and imperfectly proved: it was never brought to the notice of SEBI before the adjudication proceedings, and the firm submitted only the proof of despatch of the said letter in the form of a courier slip of a courier company and there is no proof of delivery.

Even so: since there is nothing on record to suggest the contrary, Adjudicating Officer was inclined to accept the submission... Hence, there is no violation on the part of the Marfatia.

The order: the observations made during the inspection were procedural in nature and all of these were complied with after being pointed out by the inspection team. No serious observations were made where the investors' interests would have been adversely affected. The Adjudicating Officer did not find the case fit for imposing monetary penalty and disposed of the Marfatia of the Show Cause Notice.

The only case in the chapter with no penalty.

An inspection on February 13 and 18, 2015... to examine the systems put in place by SHF to comply with the Anti-Money Laundering (AML) and Combating the financing of terrorism (CFT) norms, for Financial Year 2013-14 and April 1, 2014 till December 31, 2014.

Four allegations:

1. SHF had delayed in updating the AML Policy, in terms of SEBI Circular dated March 12, 2014. It admitted that it had updated the AML Policy on November 23, 2014, which resulted in a delay of 8 months. Its argument that the SEBI Circular... did not prescribe any fixed timeline failed, because SHF cannot absolve it from the mandatory obligation of immediate compliance of the provisions of the SEBI Circular.

No stated deadline means immediate compliance, not indefinite time.

2. SHF said no suspicious alerts have been generated by it. However, during the said period, SHF had received suspicious transaction alerts from National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It was required to analyse those alerts, update Know Your Customer (KYC) information of the concerned clients, where required, seek an explanation from the clients involved, seek additional documentary evidence, etc., and then record the final observations after the analysis.

3. SHF had received 83 alerts from BSE and 54 alerts from NSE during the period of inspection. It was observed in the inspection that SHF closed all the alerts received from the exchanges without assigning any reason for the same and did not maintain any record, either electronic or written, of the reasons for closing those alerts. There were no records available, either electronic or written, of the data which were examined while closing those alerts. No additional information or documents were sought from the involved clients in order to analyse the alerts.

137 alerts, all closed unreasoned.

4. SHF did not have any system/ mechanism to monitor transactions with respect to client transactions vis-à-vis the declared client financials. This was corroborated by the fact that the SHF did not have any written down policy on such alerts and also did not generate any alerts during the period under consideration.

The conclusions. SHF had admittedly not rectified the observations made in the inspection. SHF took corrective steps only after issuance of Show Cause Notice (SCN) — and the non-compliance with SEBI's directions issued to give effect to the amendments carried out to PMLA and PML Rules, in order to prevent money laundering and terror financing, was grave in nature.

The delay was long: the deficiencies were rectified in the month of February 2015 only after issuance of SCN in the instant proceedings in August, 2017 i.e., after a delay of more than two years. Had the inspection been not carried out and the instant proceedings have not been carried out, SHF would have remained non-compliant with respect to AML & CFT.

And a statement of principle closes the case: the Directives issued by SEBI from time to time set out the steps that a registered intermediary or its representatives shall implement to discourage and to identify any money laundering or terrorist financing activities. Any lapse in non-compliance of the same by an Intermediary poses a serious threat to the national economy and national interest. Therefore, there is a need to impose a penalty on SHF which will act as a deterrent in future.

The order: a penalty of Rs. 3,00,000/- (Rupees Three lakhs only) was imposed... under Section 15HB of SEBI Act.

And the chapter's own summary of the first five: the above cases direct securities market entities to adhere to regulatory directives and meet compliances so as to safeguard market integrity, protect investors' confidence and protect reputation of the market players.

8.6 BOI Shareholding Limited (BOISL) v. SEBI

An appeal, and the only case where a penalty was reduced.

SEBI, on June 29, 2015 conducted an inspection of the appellant's (BOISL) books of accounts to examine whether the appellant had put in place systems and processes to comply with the Circulars issued by SEBI relating to the AML policy.

The show cause notice of March 8, 2017 alleged violation on three heads — (i) AML/CFT policy; (ii) Client Risk Categorization; and (iii) Suspicious Transaction Monitoring and Reporting.

The order of July 31, 2017 found the appellant to have violated AML/CFT policy by delaying its proper implementation by a number of years and therefore imposed a penalty of ₹ 40 Lakh.

The provisions: clause 11 of the Third Schedule of Regulation 20AA of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 ('DP Regulations' for short) for non-incorporation of the provisions of the (i) SEBI Master Circular no. CIR/ISD/3/2010 on AML/CFT dated December 31, 2010, (ii) Circular no. CIR/MIRSD/2/2013 issuing Guidelines on Identification of Beneficial Ownership dated January 24, 2013 and (iii) Circular no. CIR/MIRSD/1/2014 dated March 12, 2014, modifying the AML Circular.

Six violations, all of delay: the order lists six violations committed by the appellant in terms of delay in implementation of the required policies and practices under anti-money laundering policy. Such delays ranged from 2 to 4 years. However, it was not disputed that though delayed, the appellant was in compliance with all the ingredients of the anti-money laundering policy as required under the extant SEBI Circulars.

The arguments. The appellant said the policy framed was more like procedural in nature to be incorporated in the internal policies of the appellant which had been done, and that the amount of penalty of Rs.40 Lakh imposed was too high given that the violations were only in the nature of procedural delays and did not adversely affect the investors in any manner — pointing to comparable cases where the penalty imposed by SEBI was either Nil (in the matter of IFCI Financial Services Limited) or Rs.1.50 Lakh (in the matter of Triveni Management Consultancy Services Limited).

SEBI answered that the AML policy was to be implemented with full force given that they were emanating from international obligations and provided for under the Indian laws. Therefore, delay of several years for implementing each of the six noted violations cannot go unpunished.

The conclusion: given the fact that, though belatedly, the appellant had implemented all the required policies and procedures on AML/CFT policy as stipulated under the various circulars of SEBI and by the penalty precedent set by SEBI itself, the Securities Appellate Tribunal was of the view that the penalty of Rs.40 Lakh imposed on the appellant was excessive. The Securities Appellate Tribunal, therefore, reduced the amount of penalty imposed on the appellant to Rs. 6 Lakh.

Rs. 40 lakh reduced to Rs. 6 lakh — the violation stood; only the quantum changed.

Paytm Payments Bank Ltd by virtue of operating as a payments bank, is a 'reporting entity' for the purposes of Section 2(l)(wa) and is registered as such with FIU-IND.

A show-cause notice (SCN) numbered 9-55/2020/Compl/FIU-IND dated 14.02.2022, was issued.

The background is a criminal syndicate. The inception of the current proceedings stems from the identification by law enforcement agencies of extensive illegal activity conducted by multiple businesses under the syndicate of individuals connected to a foreign state. The matter first came to light with the lodging of First Information Reports (FIRs) by the Cyber Crime Station of Hyderabad under relevant sections of the Indian Penal Code and the Telangana State Gambling Act.

The FIRs state that these entities and their network of businesses engaged in a number of illegal acts, such as organizing and assisting online gambling, and that the money obtained from these illegal operations that were proceeds of such criminal activities were routed and channeled through bank accounts maintained by the same entities with the Bank.

How FIU-IND came to look: as part of its mandate to ensure effective implementation of Chapter IV of the PMLA, FIU-IND regularly examines the compliance levels of 'reporting entities' in the wake of any criminal conduct or fraud being reported to it or otherwise coming to light.

What was found: certain entities were found to have cheated lakhs of Indians through the offering of fraudulent services including prohibited gambling activities, dating services, and streaming. The proceeds of these fraudulent activities were subsequently remitted abroad. It came to light that several of the involved entities had made use of payment intermediaries to implement their fraudulent designs within the country.

Five charges, in two groups.

Payout-related charges:

• a) failure of the Bank to put in place an internal mechanism to detect and report suspicious transactions in the manner prescribed under the PMLA and PML Rules including with reference to its Payout service and accounts of the entities in question. In violation of Section 12(1) of PMLA read with Rules 3(1)(0) and 7(3).
• b) failure of the bank to exercise ongoing due diligence with respect to its Payout service and accounts of entities in question relating to the same service in violation of Section 12(1) of PMLA read with Rule 9(12).
• c) failure of the Bank to satisfy the requirements with respect to reliance on third-party KYC by relying on a non-compliant / unregulated entity in violation of Section 12 of PMLA read with Rule 9(2)(c) and Rule 9(2)(f).

That third charge is the Rule 9(2) reliance condition — the third party must be regulated, supervised or monitored.

Beneficiary account related charges:

• a) failure to file suspicious transaction reports, in respect of 34 beneficiary accounts, in the manner, and within timelines, prescribed under the PMLA and PML Rules in violation of Section 12(1) of PMLA read with Rules 3(0) and Rule 8 of the PML Rules.
• b) failure of the bank to exercise ongoing due diligence with reference to the accounts of 34 beneficiaries which received proceeds from the Payout accounts of and entities in question in violation of Section 12(1) of PMLA read with Rule 9(12), PML Rules.

The order: the Director FIU-IND vide order dated 15 March, 2024 in exercise of his powers under Section 13 PMLA, imposed a total fine of Rs. 5,49,00,000 (Rupees Five Crore Forty-Nine Lakh Only) on the Bank.

8.8 FIU-IND v. Bybit Fintech Limited

A virtual digital asset case — the framework from Chapter 5 in action.

The Financial Intelligence Unit-India (FIU-IND) in furtherance of the powers conferred upon the Director FIU-IND under Section 13(2)(d) of the Prevention of Money Laundering Act, 2002 (as amended) ("PMLA") has imposed a monetary penalty of Total ₹9,27,00,000 (Nine crore twenty-seven lakh rupees) on Bybit Fintech Limited (Bybit) a Virtual Digital Asset Service Provider (VDA SP).

As a Virtual Digital Asset Service Provider (VDA SP), Bybit Fintech Limited (Bybit) is classified as a 'reporting entity' under Section 2(1)(wa) of the Prevention of Money Laundering Act (PMLA).

The core failure was registration: Bybit kept expanding its services in the Indian market without securing mandatory registration with the FIU-IND. The persistent and continuous non-compliance caused FIU-IND to block their websites to stop operations under the Information Technology Act, 2000 through the Ministry of Electronics and Communication Technology (MEITY).

Website blocking — an enforcement tool beyond monetary penalty.

And Bybit had been given the rules in advance: FIU-IND had previously issued comprehensive Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Guidelines for Reporting Entities offering Services related to Virtual Digital Assets on March 10, 2023. Furthermore, a detailed circular regarding the registration of Virtual Digital Asset Service Providers as reporting entities was issued on October 17, 2023.

That first date is the one from Chapter 5 — these guidelines became effective from 10th March 2023.

The order: in an order dated January 31st, 2025, and exercising authority under Section 13 of the PMLA, it was unequivocally established that Bybit was in violation of Section 12(1) of the PMLA read with Rule 2(1)(h), Rule 7(2), Rule 8(2) Rule 8(4), Rule 3(1)(D) and Rule 7(3) of PMLR, 2005. Consequently, a total penalty of Rs. 9,27,00,000 was imposed on Bybit.

Recognise the rules cited. Rule 7(2) — the Principal Officer furnishes the information. Rule 8(2) — the STR within seven working days. Rule 8(4) — each day's delay a separate violation. Rule 3(1)(D) — suspicious transactions. Rule 7(3) — the internal detection mechanism.

What the cases teach

Read together, the eight matters name the same handful of failures:

No AML policy, or one adopted years late — SKSE, SHF, BOISL.

No or arbitrary client risk categorisation — SKSE, Raima, BOISL.

Alerts and STRs closed without recorded reasons — Raima, SHF, Way2Wealth.

No system to identify a PEP — Raima.

Late appointment or intimation of the Principal Officer — SKSE.

Reliance on an unregulated third party for KYC — Paytm.

Operating without FIU-IND registration — Bybit.

The workbook's sample questions distil the lesson. A reporting entity must never ignore an alert; every intermediary must have an Anti Money Laundering Policy, apply customer due diligence on risk sensitive basis and appoint a Principal Officer; and the true statement about an intermediary's actions is that it should have a system to identify clients as a potential PEP (Politically Exposed Person).