AML/CFT Controls

Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) controls are a cornerstone of modern financial regulation, designed to protect financial systems from being exploited for laundering illicit proceeds and financing terrorist activities. In the context of banking, finance, and the Indian economy, AML/CFT controls are critical for preserving financial stability, ensuring regulatory credibility, and maintaining India’s integration with the global financial system. As financial transactions become more complex and cross-border in nature, robust AML/CFT controls have become essential for economic governance and national security.
AML/CFT controls encompass a comprehensive set of preventive, detective, and reporting mechanisms implemented by financial institutions and supervised by regulatory authorities. These controls aim to deter criminal misuse of the financial system while promoting transparency, accountability, and trust.

Concept and Scope of AML/CFT Controls

AML/CFT controls refer to the institutional, legal, and operational measures adopted to combat money laundering and terrorist financing. Money laundering involves disguising the origins of illicitly obtained funds to make them appear legitimate, while terrorist financing involves the collection or transfer of funds for terrorist activities, which may originate from both lawful and unlawful sources.
The scope of AML/CFT controls extends across the entire financial system and includes banks, non-banking financial companies, capital market intermediaries, insurance firms, and emerging fintech platforms. These controls are risk-based, meaning that higher-risk customers, products, or jurisdictions are subject to enhanced scrutiny.

International Standards Governing AML/CFT

Globally, AML/CFT standards are shaped by the Financial Action Task Force (FATF), whose 40 Recommendations provide a comprehensive framework for combating money laundering, terrorist financing, and proliferation financing. FATF standards emphasise:

• A risk-based approach to regulation and supervision.
• Strong customer due diligence and beneficial ownership transparency.
• Effective suspicious transaction reporting mechanisms.
• Domestic and international cooperation among authorities.

Compliance with FATF standards is essential for maintaining access to international financial markets. Countries with weak AML/CFT controls face reputational risks, restrictions on correspondent banking, and reduced foreign investment.

AML/CFT Framework in India

India’s AML/CFT regime is primarily anchored in the Prevention of Money Laundering Act (PMLA), 2002, along with the rules issued thereunder. The PMLA criminalises money laundering, defines reporting entities, and prescribes obligations relating to record-keeping, customer verification, and reporting of suspicious transactions.
Institutional oversight is shared among several regulators:

• The Reserve Bank of India (RBI) supervises banks, non-banking financial companies, and payment systems.
• The Securities and Exchange Board of India (SEBI) oversees AML/CFT compliance in capital markets.
• The Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance sector.
• The Financial Intelligence Unit – India (FIU-IND) acts as the central agency for receiving and analysing financial intelligence.

This multi-agency framework reflects the diverse nature of India’s financial system and the need for coordinated supervision.

AML/CFT Controls in the Banking Sector

Banks are at the core of AML/CFT implementation due to their role in deposit-taking, lending, and payment services. Banking AML/CFT controls include customer onboarding procedures, transaction monitoring systems, internal controls, and reporting mechanisms.
A fundamental element is Know Your Customer (KYC), which requires banks to verify customer identity, understand the nature of the business relationship, and identify beneficial owners. Banks must also classify customers based on risk and apply enhanced due diligence to high-risk categories such as politically exposed persons, non-resident clients, and complex corporate structures.
Ongoing transaction monitoring enables banks to detect unusual patterns, including large cash transactions, rapid movement of funds, or cross-border transfers involving high-risk jurisdictions. Detected anomalies must be reported to FIU-IND through Suspicious Transaction Reports, forming the backbone of India’s financial intelligence system.

AML/CFT Controls in Financial Markets and Non-Banking Finance

AML/CFT controls extend beyond banking to capital markets and non-banking financial institutions. Stockbrokers, mutual funds, portfolio managers, alternative investment funds, and custodians are designated as reporting entities under the PMLA.
In capital markets, AML/CFT controls focus on preventing the use of securities transactions for layering and integration of illicit funds. This includes scrutiny of trading behaviour, source of funds verification, and monitoring of off-market transfers. The increasing participation of foreign investors has further heightened the importance of robust AML/CFT controls.
Non-banking financial companies and fintech firms face unique challenges due to high transaction volumes and digital delivery models. Regulators have emphasised technology-driven AML/CFT solutions, including automated monitoring systems and data analytics, to address these risks effectively.

Role of AML/CFT Controls in the Indian Economy

AML/CFT controls have wide-ranging implications for the Indian economy. By curbing illicit financial flows, they support fiscal discipline, improve tax compliance, and reduce the shadow economy. This contributes to more accurate economic data and better policy formulation.
Strong AML/CFT controls also enhance India’s attractiveness as an investment destination. International investors place significant emphasis on regulatory integrity and transparency, particularly in emerging markets. A credible AML/CFT regime reduces country risk and facilitates access to global capital.
From a developmental perspective, AML/CFT controls promote financial formalisation by discouraging cash-based and informal transactions. This aligns with broader economic objectives such as digitalisation, financial inclusion, and efficiency in resource allocation.

Counter-Financing of Terrorism and National Security

The CFT component of AML/CFT controls holds particular significance for India given its geopolitical environment. Terrorist financing poses direct threats to national security and social stability. Unlike money laundering, terrorist financing may involve relatively small amounts and legitimate sources, making detection more complex.
Indian regulators and enforcement agencies place emphasis on monitoring non-profit organisations, cross-border remittances, and high-risk geographic corridors. Financial institutions are required to screen customers and transactions against sanctions lists and report suspected terrorist financing activities promptly.
Effective CFT controls thus bridge financial regulation and national security, reinforcing the broader governance framework.

Challenges in Implementation

Despite a comprehensive framework, AML/CFT implementation in India faces several challenges. These include the complexity of beneficial ownership identification, particularly in layered corporate structures, and the rapid evolution of financial technologies such as virtual assets.
Compliance costs and operational burdens can be significant, especially for smaller institutions. There is also a need for continuous capacity-building among compliance professionals and regulators to keep pace with evolving risks. Ensuring consistency in supervision across sectors remains an ongoing concern.