Reassessment Of Anti-Money Laundering Obligations of Banks Under Prevention of Money Laundering Act, 2002

 

Written by Bhavya Gupta and Ritika Jain, the authors are law students currently pursuing BA.LLB from Symbiosis Law School, Pune.

Introduction

According to International Monetary Fund, money laundering accounts for 2-5% of total global GDP per annum, the concerned numbers are worrisome indicating the increased    proliferation of illicit financial flows, resulting in distorting  of investment flows, destabilizes financial markets, erodes the tax base and undermine the macroeconomic stability of a nation.

In India alone, the total amount of money laundering is estimated to around 159 billion dollars due to the rise of non-market actors and illicit markets. Beyond financial harm, it also results in the implications of money laundering transcend beyond financial ramifications and provide an impetus for the cross-border terrorism, organized crimes and corruption. Reports suggest that in 2025, more than 80 % of the anti-money laundering regulatory breaches were linked to existing gaps in due diligence and inadequate transaction monitoring systems in the banking sector thereby facilitating the entrenchment of money laundering activities.

Role of Banking Sector in ensuring Compliance- 

The practice of anti-money laundering (referred to as “AML”) constitutes a set of regulations and laws specifically aimed at preventing criminals from disguising illegally obtained money as legitimate funds.  The Prevention of Money Laundering Act, 2000 (hereinafter referred to as “PMLA”) is a primary legislation which governs and enshrines principle of financial accountability, transparency and regulatory fairness. The enactment of Act, its provisions, rules and relating guidance together forms a legal architecture, which defines how banks must detect and report suspicious activities. The banking sector forms the frontline in the India’s AML framework necessitating banks to monitor transactions, report any suspicious activities and to verify customer identities to the concerned authorities. Section 2(1) (wa) defines a reporting entity in which includes banking company, financial institutions, intermediaries or a person carrying on a designated business or profession. PMLA Act r/w Maintenance of Records Rules, 2015 are aimed to disrupt the process through which illegal proceeds that are integrated into financial system as “clean money”.

In the contemporary industrial area, this article aims to critically analyse sections 12-15 of PMLA and associate rules framed thereunder in order to identify structural and procedural ambiguities in the current compliance obligation practice, thereby aggrandising the existing AML framework in India

APPRAISAL OF STATUTORY AND LEGISLATIVE FRAMEWORK

 India’s commitment to tackle the menace of money laundering can be adduced to its active participation in the global efforts like  International Convention for the Suppression of the Financing of Terrorism, UN Convention against Transnational Organized Crime and UN Convention against Corruption (2003). The Parliament enacted the PMLA after it became a signatory to the Political Declaration adopted by the special session of the United Nations General Assembly (UNGASS) which prompted the member states to Anti Money Laundering Legislation.

Banks, under Section 12, have key obligations including mandating them to maintain records of client identities, all transactions, and business correspondence for minimum period of five years, and obligates them to furnish the information on suspicious transactions and activities to either the Enforcement Directorate (ED) or the Financial Intelligence Unit (FIU-IND). ED is the administrative body for regulating ML and foreign transactions Banks are also required to conduct Know Your Customer (KYC) procedures to verify client identities and beneficial owners and keep records of documents pertaining affirming individual identification to curtail proliferation of anonymous or fictitious accounts. 

Moreover, to ensure that banks comply with the aforesaid obligations, a monetary penalty can be imposed upon the entity if this obligation is not met under Section 13 of Act. Further, Section 14 of the Act ensures greater compliance in transparency norms for the reporting entities as it provides immunity to the key stakeholders of an organization including the directors and the employees from facing any civil or criminal proceedings of divulging any information furnished under Section 12(1)(b) of the Act. Section 15 of the Act list down the procedure required for furnishing information to the reported industries.

However, the effectiveness of these rules and its practical implementation have not achieved its purpose owing to deficient accountability. Banks don’t adhere to the due diligence and compliance measures as prescribed by applicable law. The concerned implementation of the regulatory obligations’ stems from the lack of legislative initiative. This has been aggravated by the emergence of untraceable digital assets[ak5] [BG6]  as also furthered through 2025, FIU issued notice to 25 offshore virtual digital assets service providers for non-compliance under Section 13 of the PMLA Act.

RECENT COMPLIANCES AND EVOLUTION THROUGH JUDICIAL DECISIONS

The Reserve Bank of India in 2024 reported around 4.8 lakh suspicious transactions in 2023 from 1.1 lakh in 2017, indicating lack of due care of the problem by the banking system and adoption for heightened surveillance.  The rise in suspicious transaction reports is a sign of systemic neglect due to defensive compliance behaviour, technological underinvestment, and a qualitative dilution of STR frameworks rather than necessarily indicating institutional misuse of banking channels for money laundering. In a time of rapid financial digitization, the crisis is a result of regulatory complacency rather than wilful complicity.

Mutual Evaluation Report, 2023 by India’s FATF emphasised on concerning issues relating low quality STRs, lack of technological integration and delay in reporting mechanisms in compliance systems of banks. Additionally, Financial Intelligence Unit-India stated that around 75% of the suspicious transaction reports (STRs) were found to be sourced through scheduled commercial banks, undermining the centrality and imperativeness in the laundering practice.

After evaluation and insistence by enforcement agencies, RBI imposed penalties exceeding Rs. 30 Crore on multiple banks including Bank of Baroda, HDFC Bank and Kotak Mahindra Bank for procedural lapses in ensuring commitment to AML regulations. The problem of weaker compliance with AML obligations by banks continues to be a pressing concern despite an evolving regulatory and legislative framework. The importance of due diligence and maintenance of precise record was also emphasised in the landmark case of Chamankar Enterprises v. Enforcement Directorate,[ii] wherein it was stated that “the Petitioners have been finally discharged from the scheduled offence, there can be no offence of money laundering against them or anyone claiming such property being the property linked or stated to be scheduled offence through him”, thereby indicating that the compliance obligations under Section 12 -15 were intrinsically linked with continuation and existence of scheduled offences.

In recent years, despite the heightened scrutiny by the RBI through quantitative and qualitative measures on both private sector and public banks for AML violations, the number of lapses have only exacerbated in recent years owing to lack of enforcement including failure to verify beneficial ownership of corporate clients, deficiencies in identifying accused personnels and uncontrolled monitoring of high-risk transactions.

This indicates the persistent systematic weaknesses wherein the financial institutions often regard compliance as an ancillary regulatory procedure rather than an intrinsic component of financial integrity and risk management as also reiterated in Vijay Madanlal Choudhary v. Union of India.[iii], wherein it was held that “special enactments like PMLA were needed since crimes like money laundering have ‘[a] transnational impact on the financial systems including sovereignty and integrity of the countries’ and are ‘an aggravated form of crime”.

The authors identified that the major reasons behind weak compliance are the quality of Suspicious Transactions Reports themselves as banks often indulge in the practice of over-reporting to insulate themselves from regulatory scrutiny resulting in lack of contextual analysis, targeted narratives, investigative mechanisms and reduced utility for enforcement. Section 12 of the PMLA read with Rule 3 of the Maintenance of Records Rules, 2005 are intended to function as qualitative intelligence tools within India’s AML regime. However, the prevalent practice of defensive over-reporting, suspicion narratives, and insufficient contextual analysis transforms a risk-based compliance mechanism into a procedural shield against regulatory sanction. This not only burdens enforcement agencies but also erodes the substantive purpose of financial integrity embedded in the PMLA framework.

This approach even though ensures technical compliance but undermines the rationale and the intent behind Section 12-15 of the PMLA , which was inserted to prevent laundering channels than mere statistical reporting and to facilitate pro-reactive identification. The weaknesses are  institutional in nature as banks face acute shortages of well-trained compliance resource personnel capable of conducting risk-based investigations, resulting in disbalance between compliance obligations and fundamental rights as also reiterated in Nikesh Tarachand Shah v. Union of India, 2017.

cross-jurisdictional and comparative analysis  

Financial Action Task Force (FATF) Recommendation-20 obligates financial institutions, including banks to promptly report suspicions that funds are proceeds of crime or linked to terrorist financing. Thus, banks, globally, are obligated to report suspicious money laundering (ML) or terrorist financing activity to its national financial intelligence units (FIUs). Under The Bank Secrecy Act, 1970 of the USA, it require banks to file a Suspicious Activity Report (SAR) to OCC (Office of the comptroller of the currency), which is responsible for prescribing regulations,  conduct regular examinations on national banks and provide notices to law enforcement to detect and deter money laundering. Further, OCC also provide national banks with tools such as FinCEN to bolster the financial system against illicit financial activity. Furthermore, Part 7 of the Proceeds of Crime Act 2002 obliges banks, lawyers and other financial institutions to file SARs with the UK Financial Intelligence Unit  whenever there is “knowledge or suspicion” of money laundering. In the US, 1.6 Million SARs was reported by FinCEN in 2021 (42% of all SARs filed that year) pertaining to identity fraud. In India, FIU-India received 433,000 STRs in FY 2021–22 (about 0.4 million), indicating that banks face difficulties in monitoring the payment gateways, especially when clients engage in a practice known as smurfing which involves money launderers to hide illicit activities by breaking up noticeable transactions into smaller unnoticeable ones so as to bypass the detection by the banks as Rule 3 of PMLA Maintenance Rules, 2015 stipulates the obligation on the reporting entity to adequately monitor and record those transaction that are above the threshold of certain amount.

The banks currently do not have access to the robust technology which can help in tackling and noticing the creative tactics and strategies that are pulled by the launders. This challenge is especially more difficult for small, neobanks to implement sophisticated technology to mitigate risks. The emergence of Fintech Platforms was based on premise of easing access to finances. Online banking provides for the opening of several bank accounts with minimal supervision, and subsequent facilities such as usage of ATMs, issuance of credit and debit cards, check scanning, and online payments can all be accessed on online basis only. This undoubtedly increases convenience but also allows for criminal misuse.

RECOMMENDATIONS;

Strengthening of Internal Control Framework and International Collaboration- The adoption of clear and transparent internal policies and regulations to prevent escalation of suspicious transactions and to ensure proper delineation of responsibilities and documentation of policy decisions by banks can reduce violations enabling a transparent transactional channel. The Indian banks must continue to align their AML frameworks against standard global practices through FATF recommendations, industrial forms and regulatory expectations in neighbouring jurisdictions.

Integration of New Technologies and Intelligence-Led Approaches- With the advancement of fintech and crypto exchanges, the financial institutions must adopt tools for traceability and cross-border monitoring through virtual asset providers so as to ensure that the third-party data sharing is being regulated and controlled in an effective manner. Banks should invest in technological frameworks that enable them to distinguish between nature of transactions, geographies, high-risk customers and transparent monitoring.

CONCLUSION

India’s AML regime depends majorly on incorporation of technology for real-time monitoring, stronger inter-divisional coordination, and a readiness of legal practitioners and financial institutions. Banks are considered to have central role in the system to prevent the practise of money laundering because as they are the first to sense suspicious transactions employees and questionable customers who engage in introducing the dirty money into the financial system. Sections 12-15 establishes a combat framework for ensuring accountability of banks and other reporting entities in the fight against money laundering. Yet, the experience of the past decade shows that statutory obligations and regulatory circulars alone cannot guarantee effective compliance effectively proven by FATF.

The efficacy of AML framework in India is dependent on regulated and continuous due diligence, including robust customer due diligence mechanisms, enhanced monitoring of high-risk accounts, and active board-level oversight protocols. Without strong internal controls and technological surveillance mechanisms, the obligations under Sections 12–15 risk devolving into mere procedural compliance rather than meaningful financial risk management. Since banks play such an important role, they must therefore view AML not as a regulatory checkbox but as an integral part of risk management. Without these, the statutory purpose of PMLA risk being undermined and defeated by weak implementation, leaving the financial system open to criminal abuse and terrorist financiers.