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A Guide to AML/CFT Compliance in India

Last Updated on Aug 04, 2025, 2k Views

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A Guide to AML/CFT Compliance in India

1. Regulatory Framework

  • India’s Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) compliance is governed by the following:

  • Prevention of Money Laundering Act (PMLA), 2002 – Primary legislation.

  • PMLA Rules – Operational guidelines.

  • Reserve Bank of India (RBI) – For banks and NBFCs.

  • SEBI – For securities market intermediaries.

  • IRDAI – For insurance companies.

  • FIU-IND – Financial Intelligence Unit for suspicious transaction reporting.

2.Key Obligations for Reporting Entities

  • Entities such as banks, NBFCs, mutual funds, payment systems, and others must:

  • Maintain KYC Records: Follow RBI’s KYC Master Direction.

  • Conduct Customer Due Diligence (CDD):

  • Identify and verify customers and beneficial owners.

  • Risk-based approach for CDD (Low/Medium/High risk).

  • File Reports to FIU-IND:

  • CTR: Cash Transaction Report (₹10 lakh and above).

  • STR: Suspicious Transaction Report.

  • NTR: Non-Profit Organization Transaction Report (for NGOs).

  • Ongoing Monitoring: Transactions must be continuously monitored for red flags.

  • Record Keeping: Maintain transaction records for at least 5 years.

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3. Customer Due Diligence (CDD)

CDD Includes:

  • Verification of identity using Aadhaar, PAN, Passport, etc.

  • Beneficial Ownership: Especially for companies and trusts.

  • Enhanced Due Diligence (EDD) for high-risk clients (PEPs, NGOs, cross-border entities).

  • Periodic KYC Updates: Based on customer risk rating.

4. Risk-Based Approach (RBA).

Institutions must:

  • Categorize customers by risk level.

  • Apply controls proportionate to the risk:

  • Low: Basic verification.

  • High: Enhanced due diligence, source of funds checks.

  • Review risk ratings periodically.

5. Screening & Sanctions Compliance

  • Screen customers and transactions against:

  • UN Sanctions Lists (as notified by Ministry of External Affairs).

  • Domestic blacklists (RBI defaulters, SEBI debarred entities, etc.).

  • OFAC/PEP databases (if international exposure exists).

  • Maintain systems for automated screening and alert management.

6. Training & Internal Controls.

  • AML/CFT training for all staff—especially frontline and compliance teams.

  • Designate a Principal Officer (PO) to report to FIU-IND.

  • Appoint a Designated Director responsible for overall compliance.

  • Perform internal audits and system validations regularly.

7. Technology in AML/CFT

Use AML software for:

  • Transaction monitoring

  • Pattern detection

  • Automated alerts

  • Case management

  • Examples: Tookitaki, ComplyAdvantage, NameScan, etc.

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    8. Penalties for Non-Compliance

    Under PMLA: Fines, imprisonment, or both.

    • Regulatory action by RBI, SEBI, or FIU-IND:

    • Penalties

    • Suspension or cancellation of license

    • Public reprimands

    • Practical Tips for Compliance Teams

    • Conduct regular risk assessments.

    • Keep AML/CFT policies updated with global best practices.

    • Establish a whistleblower policy for internal reporting.

    • Ensure board-level oversight on compliance effectiveness.

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