Prevention of Money Laundering Act (Detailed)
The Prevention of Money Laundering Act, 2002 (PMLA) is India's primary anti-money laundering legislation that obligates financial institutions, market intermediaries, and other reporting entities to conduct Know Your Customer (KYC) verification, maintain records, and report suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
The Prevention of Money Laundering Act, 2002 (PMLA) came into force in 2005 and has been amended multiple times to strengthen India's anti-money laundering (AML) and counter-financing of terrorism (CFT) framework in compliance with the Financial Action Task Force (FATF) standards. For investors in the Indian securities market, PMLA has wide-ranging implications for account opening, transaction monitoring, and regulatory compliance.
PMLA's obligations for the securities sector flow through the SEBI (KYC Registration Agency) Regulations and SEBI's master circulars on KYC, which implement PMLA requirements for market intermediaries including stock brokers, depository participants, mutual fund houses, portfolio managers, and investment advisors. All these entities are classified as Reporting Entities (REs) under PMLA and are required to conduct Customer Due Diligence (CDD) — commonly known as Know Your Customer (KYC) — before establishing a business relationship.
KYC under PMLA involves verifying the identity and address of the customer using Officially Valid Documents (OVDs) such as Aadhaar, passport, voter ID, or driving licence. The Central KYC Records Registry (CKYCRR or CKYCR), operated by CERSAI, enables investors to complete a single KYC that is valid across all financial sector regulators — securities, banking, insurance, and pension. For high-risk customers, enhanced due diligence (EDD) is required, including understanding the source of funds and more frequent monitoring.
Suspicious Transaction Reports (STRs) must be filed with the Financial Intelligence Unit-India (FIU-IND) when a reporting entity has reason to believe that a transaction involves money laundering, terrorism financing, or is not in keeping with the customer's known profile. Cash Transaction Reports (CTRs) must be filed for all cash transactions exceeding Rs 10 lakh in a month.
PMLA enforcement powers vest with the Directorate of Enforcement (ED), which can attach assets suspected of being proceeds of crime and prosecute individuals. Freezing or attachment of securities held by market participants under PMLA actions is a material risk that investors should be aware of — it can affect the liquidity and tradability of shares even if the underlying company itself is unaffected.