PMLA

The Prevention of Money Laundering Act, 2002 (PMLA) is India's principal anti-money-laundering (AML) statute. Administered by the Directorate of Enforcement (ED) and Financial Intelligence Unit – India (FIU-IND).

The offence (Section 3):

Whoever directly or indirectly attempts to indulge, knowingly assists, or is a party to 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 money laundering.

Penalty (Section 4): rigorous imprisonment 3–7 years + fine; up to 10 years for drug-related cases.

Reporting Entities under PMLA — Section 12:

Certain categories must comply with KYC, record-keeping, and reporting obligations:

• Banks
• Financial institutions including NBFCs
• Intermediaries registered with SEBI — including AIFs, stock brokers, depository participants, mutual funds, portfolio managers, investment advisors
• Insurance companies
• Designated Non-Financial Businesses and Professions (DNFBPs) — real estate agents, dealers in precious metals/stones, CAs/CS/CMA in client representation
• Virtual Digital Asset (VDA) service providers — brought under PMLA via March 2023 notification, now subject to full KYC, STR/CTR, and FIU registration

Compliance pillars:

• KYC (Customer Due Diligence under PMLA Rules 2005): identity, address, beneficial owner (BO) identification, Politically Exposed Person (PEP) screening, risk-categorisation.
• Record retention: 5 years post-transaction / relationship.
• Suspicious Transaction Reports (STRs) to FIU-IND.
• Cash Transaction Reports (CTRs): aggregate cash receipts/payments ≥ ₹10 lakh.
• Non-Profit Organisation Transaction Reports (NTRs).
• Cross-Border Wire Transfer Reports (CBWTRs).
• Principal Officer and Designated Director appointments.

Impact on Indian startups and AIFs:

• Every AIF must run KYC on every LP at onboarding (PAN, BO declaration, FATCA/CRS for non-residents) and on every drawdown receipt.
• Fintechs, neobanks, crypto exchanges, payment aggregators — extensive PMLA compliance, registered as Reporting Entities or via PA-PG licences linked to RBI which incorporate PMLA.
• Aadhaar OVD vs digital KYC vs in-person verification — choose path per risk category.

Pitfall: Beneficial Owner (BO) identification thresholds — natural persons holding > 10% in a company, > 15% in a partnership/trust, or with controlling interest. Companies often fail to update BO records when the cap table changes; this is a discoverable PMLA breach.