Anti – Money Laundering Compliance Checklist for Indian Companies

Introduction 

As the name suggests, “Money Laundering” refers to the process of unlawful and illegal concealment of funds obtained from illegal sources and disguising them in such a manner that the proceeds seem to be obtained or generated legally. Therefore, the process entails conversion of illegally obtained funds into legally generated proceeds.  

The process of money laundering functions upon three basic parameters or steps which are:  

• Placement of illegally obtained funds into a legalised financial system.  
• Layering of the source of money by manipulating the books of accounts.  
• Through integration, the laundered or legalised money is withdrawn from the legitimate accounts to be used for illegal activities.  There are various laws in India which prohibit the money – laundering activities and various laws have been drawn up by the legislature in furtherance of the same. For instance, Prevention of Money Laundering Act or PMLA 2002 was introduced by the Central Government which came into effect on 1st July, 2005. The provisions of the Prevention of Money Laundering Act have mandated all financial institutions including banking institutions like the Reserve Bank of India, mutual fund companies and various other financial intermediaries.  

Anti – Money Laundering Compliance Checklist for Indian Companies 

The Security and Exchange Board of India has, from time to time laid down the guidelines pertaining to prevention of money laundering in order to ensure financial stability in the markets. The guidelines can be divided into the following categories:  

a) One – time/Single – time compliances 

b) Continuous compliances 

One time or single time compliances refer to those compliances or guidelines whose fulfilment needs to be ensured by the companies only once in the financial year or lifetime of the company, depending upon the nature of the guidelines. Therefore, they are non – recurring in nature and include the following:  

• Whether the “Principal Officer” responsible for ensuring the compliance of the provisions of Prevention of Money Laundering Act and other statutes has taken place.  
• Whether such appointment of “Principal Officer” has been intimated to the Director of Financial Intelligence Unit in New Delhi. 
• Whether there is a review mechanism of the policies framed by the company by those individuals who are different from those who have framed the policies.  
• Whether there is an internal mechanism for proper maintenance and preservation of records of financial transactions in such a manner which allows a convenient and timely retrieval of data and records as and when requested by the appropriate authorities.  
• Whether the transactions are recorded including their nature, amount of transaction and the currency in whose denominations it took place, the date and parties to the transaction.  

Ongoing or Continuous Compliances refer to those compliances which need to be done periodically after a fixed period of time and involve the following:  

• Whether the customer due diligence is being conducted on a periodical basis.  
• Whether the client identification program is taking place.  
• Whether there are any suspicious transactions which take place within the company and have been reported to the competent authorities.  
• Whether there is adequate training and sensitization of the staff handling financial transactions towards money laundering and allied procedures.  
• Whether there are proper policies for acceptance of customers and safeguards against those customers who have no account in their name or accounts have been opened in benami or fictitious name.  
• Whether there is periodic monitoring of transactions for ensuring the effectiveness of anti – money laundering procedures.  
• Whether there is a proper audit mechanism for periodically checking the Anti – Money Laundering program to meet its efficacy requirements.  
• Whether there is proper adherence to the Know–Your–Customer (KYC) requirements before opening any client’s account.  
• Whether there is proper monitoring of the framework of transactions involving the unusually large number of cash deposits or a substantial increase in deposits of customers without increase in their revenue or acceptance or willingness on part of the client to adhere to uneconomic conditions without any apparent cause or reason.

These ongoing or continuous requirements are mandatorily required to be fulfilled by the authorities, failing to do so would result in penal consequences including fines levied upon the companies. Additionally, such transactions may also be monitored by the Enforcement Directorate (ED) which was formulated in 2005 by the Government of India to strengthen the anti – money laundering laws of India and combat the malice of money laundering from every possible end.  

Conclusion 

The checklist and guidelines pertaining to money laundering have acted as an effective mechanism for ensuring that illegal activities in form of money laundering do not take place in the economy. Additionally, those companies or entities which are unaware of the laws governing money laundering do not pave way for a law – free zone for money laundering activities. Since money laundering not only impacts the financial and economic sector of the economy but also disturbs the economy but also leads to disruption of the financial markets in terms of the prices of shares, debentures and other securities, there is a pressing need to promote the anti – money laundering policies in the country and ensure that the effectiveness of such activities is uncompromised.