PMLA (Prevention of Money Laundering)
The Prevention of Money Laundering Act, 2002 (PMLA) is the primary Indian legislation targeting money laundering, requiring financial intermediaries including brokers, mutual funds, and portfolio managers to implement Know Your Customer (KYC), transaction monitoring, and suspicious transaction reporting frameworks to prevent the use of financial markets for laundering proceeds of crime.
Money laundering is the process by which funds derived from criminal activities — such as drug trafficking, corruption, fraud, or tax evasion — are channelled through legitimate financial systems to make them appear as lawful income. The Prevention of Money Laundering Act, 2002, enacted in response to India's international obligations under the Financial Action Task Force (FATF) framework, criminalises the act of money laundering and establishes a comprehensive architecture of obligations for financial intermediaries to detect, report, and help prevent such activities.
Under PMLA, "reporting entities" — which include banks, stockbrokers, depository participants, mutual funds, portfolio managers, insurance companies, and payment system operators — are required to implement robust KYC (Know Your Customer) and AML (Anti-Money Laundering) programs. These programs require reporting entities to verify the identity of their clients at the time of onboarding using official government documents (PAN card, Aadhaar, passport), maintain records of client transactions for a minimum of five years, and monitor ongoing transaction patterns for unusual activity.
One of the core operational requirements under PMLA is the filing of Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs) with the Financial Intelligence Unit of India (FIU-IND). When a reporting entity's AML system identifies a transaction that appears inconsistent with the client's known financial profile or that lacks an apparent legitimate purpose, the entity is required to file an STR with FIU-IND within a specified time. The FIU-IND analyses these reports and shares actionable intelligence with law enforcement and investigative agencies.
The Enforcement Directorate (ED) is the primary agency responsible for investigating offences under PMLA. The ED has the power to attach property (both movable and immovable) that is suspected to be proceeds of crime (referred to as "proceeds of crime" in the Act). Such attached property is provisionally attached initially, with subsequent adjudication by the Adjudicating Authority established under the Act. If confirmed, the attachment becomes final and the property is confiscated by the government.
In the context of securities markets, PMLA has relevance in situations involving fraudulent trading, circular trading (where shares are traded among related parties to create artificial volumes and launder funds), or the use of securities market transactions to layer illicit funds. SEBI and FIU-IND have a memorandum of understanding (MoU) for sharing information, enabling coordinated action against participants who attempt to use capital market instruments as a laundering vehicle. Market participants are required to incorporate PMLA compliance into their risk management frameworks and ensure their client onboarding and transaction monitoring systems are fully operational and regularly audited.