AML/CFT Framework and FATF Standards

Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) refers to the set of laws, regulations, and institutional measures designed to prevent the misuse of financial systems for laundering the proceeds of crime and for financing terrorist activities. Money laundering involves disguising the illicit origin of funds generated from criminal activities, while terrorist financing may involve both illegal and legitimate funds used to support terrorism. Banks and other financial institutions play a central role in detecting and preventing such activities, as they act as the primary gateway through which funds move within the economy. Globally, the AML/CFT framework is shaped by international standards, most notably those issued by the fatf/">Financial Action Task Force (FATF), and is implemented domestically through national laws such as India’s Prevention of Money Laundering Act, 2002.

Concept and Scope of AML/CFT

The AML/CFT framework seeks to protect the integrity of the financial system and support national and international security. Criminal activities such as drug trafficking, corruption, fraud, and organised crime generate large amounts of illicit funds, which offenders attempt to integrate into the formal economy. Similarly, terrorist organisations require financial resources to plan and execute attacks. Effective AML/CFT measures aim to:

• Detect and deter illegal financial flows
• Prevent criminals and terrorists from accessing the financial system
• Enable authorities to trace, seize, and confiscate illicit assets

These objectives are achieved through a combination of preventive measures by financial institutions, legal sanctions, and cooperation among national and international authorities.

Global AML/CFT Standards and the Role of FATF

The Financial Action Task Force is an inter-governmental body established in 1989 to develop and promote policies to combat money laundering, terrorist financing, and proliferation financing. It sets international benchmarks through the FATF Recommendations, which serve as the global standard for AML/CFT.
FATF currently comprises 39 members, including India, and its standards are widely adopted across jurisdictions. The core of the framework consists of 40 Recommendations, last comprehensively revised in 2012, which cover:

• National AML/CFT policies and risk assessment
• Criminalisation of money laundering and terrorist financing
• Preventive measures for financial institutions and designated non-financial businesses
• Powers and responsibilities of supervisory and law enforcement authorities
• International cooperation and information sharing

Countries are periodically assessed through Mutual Evaluations to measure both technical compliance with the Recommendations and the effectiveness of their AML/CFT systems. Based on these assessments, FATF may place jurisdictions on monitoring lists:

• Grey List: Countries under increased monitoring due to strategic deficiencies
• Black List: High-risk jurisdictions subject to calls for counter-measures

Placement on these lists can restrict access to international finance and adversely affect economic stability.

Key FATF Requirements for Financial Institutions

Under FATF standards, banks and other financial institutions are required to adopt a risk-based approach to AML/CFT. Core obligations include:

• Customer Due Diligence (CDD) and Know Your Customer (KYC): Verification of customer identity, identification of beneficial owners, and understanding the nature and purpose of the business relationship.
• Record-Keeping: Maintenance of customer identification data and transaction records for a minimum of five years to support investigations.
• Suspicious Transaction Reporting: Timely reporting of transactions that appear unusual, lack economic rationale, or indicate potential criminal activity to the national financial intelligence unit.
• Cash Transaction Reporting: Reporting of high-value cash transactions as specified by domestic regulations.
• Internal AML Programmes: Establishment of compliance systems, staff training, independent audits, and appointment of compliance officers.
• Wire Transfer Rules: Inclusion of accurate originator and beneficiary information to ensure traceability of funds.
• Targeted Financial Sanctions: Immediate freezing of assets linked to individuals or entities designated under United Nations Security Council sanctions related to terrorism.

International cooperation among financial intelligence units and law enforcement agencies is a fundamental pillar of the FATF framework.

India’s Legal and Institutional AML/CFT Framework

India’s AML/CFT regime is broadly aligned with FATF standards and is anchored in a combination of legislation, regulatory guidelines, and specialised institutions.

Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act (PMLA) is India’s principal AML legislation, operational since 2005. It criminalises money laundering, defined as any process or activity connected with the proceeds of crime derived from scheduled offences. Key features include:

• Imprisonment ranging from three to seven years, extendable to ten years in specified cases
• Monetary penalties
• Provisional attachment, seizure, and confiscation of properties involved in money laundering

The Act also provides the legal basis for investigating and prosecuting money laundering offences.

Enforcement Directorate

The Enforcement Directorate, under the Department of Revenue, is responsible for enforcement of the PMLA. It conducts investigations, attaches assets, and prosecutes offenders involved in money laundering and related economic crimes.

Financial Intelligence Unit – India

The Financial Intelligence Unit – India (FIU-IND), established in 2004, serves as the central national agency for receiving, analysing, and disseminating financial information related to suspicious transactions. It acts as the nodal point for both domestic coordination and international information exchange.

Obligations of Banks under PMLA

Banks and other reporting entities in India are subject to extensive compliance obligations under the PMLA and related rules:

• KYC Compliance: Verification and periodic updating of customer identity using officially valid documents.
• Maintenance of Records: Retention of records relating to specified transactions and international transfers for at least five years.
• Regulatory Reporting to FIU-IND, including:
  • Cash Transaction Reports (CTR) for cash transactions of ₹10 lakh or more in a month
  • Suspicious Transaction Reports (STR) for transactions of any value deemed suspicious
  • Non-Profit Organisation Transaction Reports
  • Cross-Border Wire Transfer Reports
• No Tipping-Off: Prohibition on informing customers about the filing of STRs.
• Risk-Based Customer Classification: Categorisation of customers into low, medium, or high risk, with enhanced due diligence for high-risk categories such as Politically Exposed Persons (PEPs).

Countering Terrorist Financing

India addresses terrorist financing through both the PMLA and the Unlawful Activities (Prevention) Act (UAPA). UAPA criminalises the raising, holding, and transfer of funds for terrorist purposes and authorises freezing of assets of designated individuals and organisations. Banks are required to comply with domestic designations and United Nations sanctions lists. Amendments to PMLA have explicitly included terrorist financing as a standalone offence.

Regulatory Oversight and Guidelines

The Reserve Bank of India issues Master Directions on KYC and AML, consolidating compliance requirements for banks. These directions prohibit anonymous accounts, mandate PAN for specified transactions, and require enhanced scrutiny for transactions involving high-risk jurisdictions identified by FATF. Similar AML/CFT guidelines are issued by sectoral regulators for securities and insurance entities.

Recent Developments and Emerging Issues

India has strengthened its AML/CFT framework in response to evolving risks. Technology-driven measures such as Aadhaar-based e-KYC and advanced transaction monitoring systems using data analytics are increasingly used. In 2023, virtual digital asset transactions were brought within the scope of PMLA to address risks associated with cryptocurrencies. Recent FATF evaluations have recognised India’s broad compliance while highlighting the need for continued improvement in effective enforcement against complex money laundering networks.