Prevention of Money Laundering Act (PMLA) — Securities Market Compliance

Supplementary Topic — PMLA 2002, AML/CFT Obligations for Intermediaries, KYC, STRs & FIU-India | SEBI Law Officer

The Prevention of Money Laundering Act, 2002 (PMLA) creates obligations that directly affect SEBI-registered intermediaries — stock brokers, mutual funds, depository participants, and others are 'reporting entities' under PMLA and must implement AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) programmes. SEBI has issued detailed AML guidelines and coordinates with the Financial Intelligence Unit-India (FIU-IND) for suspicious transaction monitoring. PMLA questions appear regularly in the SEBI Law Officer examination as part of the broader regulatory compliance framework.

1. PMLA Overview — Key Provisions

Section	Provision	Significance for Securities Markets
Section 2(1)(y)	Definition of 'proceeds of crime'	Any property derived from criminal activity (including securities market fraud, insider trading, manipulation)
Section 3	Offence of money laundering	Concealment, possession, acquisition, use of proceeds of crime knowing it to be such
Section 4	Punishment	Imprisonment 3-7 years + fine; up to 10 years for NDPS-linked crimes
Section 12	Obligations of reporting entities	Maintain records; report suspicious transactions; verify customer identity (KYC)
Section 12A	Enhanced monitoring	High-value cash transactions; suspicious transaction reports (STRs)
Section 13	Powers of Director — FIU-IND	FIU-IND can impose penalty on non-compliant reporting entities
Section 66	Sharing of information	SEBI and FIU-IND can share information for investigation/enforcement

2. Reporting Entities in the Securities Market

Under PMLA Section 2(wa) read with Rules, the following securities market participants are 'reporting entities' with full PMLA obligations:

Stock brokers registered under SEBI Act.
Sub-brokers registered under SEBI Act.
Share transfer agents registered under SEBI Act.
Merchant bankers registered under SEBI Act.
Portfolio managers registered under SEBI Act.
Investment advisers registered under SEBI Act.
Depository participants registered under Depositories Act.
Mutual fund companies (AMCs) registered under SEBI (MF) Regulations.
Alternative Investment Funds registered under SEBI (AIF) Regulations.

3. Key AML/CFT Obligations for Reporting Entities

Obligation	Requirement
KYC — Know Your Customer	Verify identity of every client before establishing business relationship. Obtain: name; address; PAN; date of birth; photograph. Use KYC Registration Agency (KRA) maintained by depositories.
Enhanced Due Diligence (EDD)	For high-risk clients (PEPs — Politically Exposed Persons; non-resident clients; high-value transaction clients), enhanced verification including source of funds.
Suspicious Transaction Reports (STRs)	File STR with FIU-IND within 7 days of forming suspicion. Suspicion triggers: unusual transaction patterns; transactions inconsistent with client's stated income; structuring to avoid reporting thresholds.
Cash Transaction Reports (CTRs)	Report all cash transactions above ₹10 lakh in a month — or ₹50,000 in a single day for non-accountholders.
Record maintenance	Maintain all KYC and transaction records for a minimum of 5 years after the business relationship ends.
Principal Officer designation	Every reporting entity must designate a Principal Officer responsible for AML compliance; must be adequately senior; directly reports to senior management.

4. Beneficial Ownership — PMLA & SEBI Regulations

PMLA and SEBI jointly regulate beneficial ownership disclosure:

Companies Act 2013 Section 90: significant beneficial owner (SBO) — any person with more than 25% indirect ownership/voting rights must be registered.
SEBI (FPI) Regulations: FPIs must disclose UBOs with more than 25% economic interest (15% for high-risk jurisdictions).
SEBI AIF Regulations: AIFs must know and disclose UBOs of their investors above prescribed thresholds.
PMLA purpose: prevent the securities market from being used to launder proceeds of crime through complex beneficial ownership structures.

5. FIU-IND — Financial Intelligence Unit India

The Financial Intelligence Unit — India (FIU-IND) is the national agency responsible for receiving, processing, analysing, and disseminating financial intelligence:

Established under the Ministry of Finance.
Receives STRs and CTRs from all reporting entities — including securities market intermediaries.
Analyses patterns for money laundering and terrorist financing.
Disseminates intelligence to: ED (Enforcement Directorate); CBI; Income Tax Department; SEBI; RBI; and foreign FIUs.
SEBI-FIU coordination: if FIU identifies suspicious trading patterns connected to ML activities, it shares intelligence with SEBI for securities law enforcement action.

6. SEBI's AML Guidelines

SEBI has issued comprehensive AML guidelines (periodically updated) requiring all registered intermediaries to:

Formulate a written AML/CFT policy.
Designate a Principal Officer for AML compliance.
Train all employees on AML obligations.
Conduct ongoing monitoring of client transactions.
File STRs with FIU-IND — importantly, SEBI intermediaries are prohibited from disclosing to clients that an STR has been filed (tipping-off prohibition under PMLA Section 12A(b)).

7. Model Examination Questions

Q1. What are the AML obligations of SEBI-registered intermediaries under the PMLA 2002? What is the role of FIU-IND?

PMLA Obligations for Securities Market Intermediaries & FIU-IND

Model Answer — PMLA 2002 Section 12 makes SEBI-registered intermediaries (stock brokers, DPs, MFs, portfolio managers, IAs, merchant bankers, AIFs) 'reporting entities' with mandatory AML/CFT obligations. KEY OBLIGATIONS: (i) KYC: verify every client's identity (name/address/PAN/DOB/photograph) before establishing relationship; use KRA for centralised KYC. (ii) Enhanced Due Diligence (EDD): for PEPs, non-residents, high-value clients — verify source of funds. (iii) STRs: file Suspicious Transaction Report with FIU-IND within 7 days of forming suspicion of ML/TF. (iv) CTRs: report cash transactions above ₹10 lakh monthly. (v) Record maintenance: minimum 5 years after relationship ends. (vi) Principal Officer: designated AML compliance officer reporting to senior management. (vii) Tipping-off prohibition: cannot inform client that STR has been filed. BENEFICIAL OWNERSHIP: FPIs must disclose UBOs above 25% (15% for high-risk); AIFs must know their investors' UBOs; PMLA requires intermediaries to identify and verify UBOs. FIU-INDIA: Ministry of Finance agency that receives/processes all STRs and CTRs; shares intelligence with ED, CBI, Income Tax, SEBI, RBI. SEBI-FIU COORDINATION: Section 66 PMLA permits information sharing between SEBI and FIU for joint enforcement of securities market ML offences. SEBI AML Guidelines: require written AML policy; trained employees; ongoing transaction monitoring; Principal Officer designation.

🎯 EXAM POINTERS — Topic 83: PMLA & AML Compliance

PMLA 2002 Section 12: securities market intermediaries = REPORTING ENTITIES — full AML obligations.
Reporting entities in securities market: stock brokers; DPs; merchant bankers; portfolio managers; IAs; MFs; AIFs.
KYC: mandatory before business relationship; centralised through KRA (KYC Registration Agency).
STR (Suspicious Transaction Report): file with FIU-IND within 7 DAYS of forming suspicion.
CTR (Cash Transaction Report): cash transactions above ₹10 LAKH in a month.
Record maintenance: minimum 5 YEARS after business relationship ends.
TIPPING-OFF PROHIBITION: cannot inform client that STR has been filed — PMLA Section 12A(b).
FIU-INDIA: Ministry of Finance; receives STRs/CTRs; disseminates intelligence to ED/CBI/SEBI/RBI.
Section 66 PMLA: SEBI-FIU information sharing for joint enforcement.
Beneficial ownership: FPIs → 25% UBO threshold (15% high-risk); AIFs → must know investor UBOs.

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