Knowledge base · Anti-money laundering
What is the Prevention of Money Laundering Act 2002 (PMLA)?
Short answer
The Prevention of Money-laundering Act 2002 (PMLA) is India's principal anti-money laundering law. It makes laundering the proceeds of scheduled offences a crime, gives the Directorate of Enforcement power to attach, search, seize and arrest, and requires banks and other reporting entities to verify customers, keep records and report transactions to FIU-IND.
Definition of Prevention of Money Laundering Act 2002 (PMLA) (also: PMLA, PMLA 2002, Prevention of Money-laundering Act, money laundering law India)
The Prevention of Money-laundering Act 2002 (PMLA) is the central Indian statute against money laundering. It came into force on 1 July 2005 and has been amended several times since, including by the Finance (No. 2) Act 2019. It does three things: it creates the offence of money laundering, gives enforcement agencies powers to investigate and confiscate the proceeds of crime, and imposes preventive obligations on financial institutions and other "reporting entities".
What does the PMLA make an offence?
Section 3 makes it an offence to directly or indirectly attempt to indulge in, knowingly assist, knowingly be a party to, or be actually involved in any process or activity connected with "proceeds of crime". This includes concealment, possession, acquisition and use, and projecting or claiming the property as untainted. An Explanation inserted in 2019 makes clear that the offence is a continuing activity for as long as a person enjoys the proceeds.
"Proceeds of crime" under s. 2(1)(u) means property derived or obtained, directly or indirectly, from criminal activity relating to a scheduled offence, or its value, including equivalent property held abroad. The Schedule lists predicate offences across many statutes, including cheating, forgery and criminal breach of trust, corruption offences and others.
Punishment under s. 4 is rigorous imprisonment of three to seven years and a fine. Where the scheduled offence is under the NDPS Act, the maximum is ten years.
What powers do enforcement agencies have?
The Directorate of Enforcement (ED) investigates PMLA offences. Key powers include:
- Provisional attachment of property believed to be proceeds of crime for up to 180 days (s. 5), confirmed or rejected by the Adjudicating Authority (s. 8).
- Search and seizure (s. 17).
- Arrest (s. 19) where the officer has "reason to believe", recorded in writing, that a person is guilty. In Pankaj Bansal v. Union of India (2023), the Supreme Court required the grounds of arrest to be given in writing.
- Bail restrictions through the twin conditions in s. 45.
In Vijay Madanlal Choudhary v. Union of India (27 July 2022), a three-judge bench of the Supreme Court upheld the validity of these provisions. It held that the Enforcement Case Information Report (ECIR) is not an FIR and need not be supplied, and that the offence depends on the existence of a scheduled offence. Review petitions are pending.
What must reporting entities do?
Under s. 12, banks, financial institutions, intermediaries and other reporting entities must maintain records of transactions, furnish information to the Financial Intelligence Unit – India (FIU-IND), and verify the identity of clients and their beneficial owners. Records are kept for five years.
The PML (Maintenance of Records) Rules 2005 require, among other things, cash transaction reports for cash transactions above INR 10 lakh, suspicious transaction reports, and identification of beneficial owners using ownership thresholds. Sector regulators implement these duties through their own rules, such as the RBI's Know Your Customer Directions. FIU-IND can impose penalties for failures under s. 13.
The list of reporting entities has grown. Virtual digital asset service providers became reporting entities in March 2023, and practising chartered accountants, company secretaries and cost accountants became reporting entities for specified client activities in May 2023.
Why does the PMLA matter in corporate fraud cases?
Many corporate frauds involve scheduled offences, so the ED may become involved alongside the police, CBI or SFIO. Attachment can freeze assets that victims, lenders or resolution professionals are trying to recover. Companies may also receive summons for documents about transactions with people under investigation. Clear, well-documented fund-flow analysis is often needed to show which assets are tainted and which are not; our guide to asset tracing and recovery in India explains how that tracing is done.
How does the PMLA differ from related laws?
The Fugitive Economic Offenders Act 2018 targets individuals who flee India to avoid prosecution for scheduled offences of INR 100 crore or more. The Prohibition of Benami Property Transactions Act 1988 deals with property held in another's name. FEMA is a civil regime for foreign exchange contraventions. The PMLA is specifically concerned with the proceeds of crime and the process of laundering them. Rules on politically exposed persons and sanctions screening sit within the same preventive framework.
Questions about PMLA exposure need specific legal advice. Spectra Forensics' litigation and arbitration support and forensic accounting services cover fund-flow analysis and documentation in support of legal teams.
Frequently asked questions
Can a PMLA case continue if the accused is acquitted of the underlying offence?
According to the Supreme Court in Vijay Madanlal Choudhary v. Union of India (2022), the money-laundering offence depends on the scheduled offence. If the accused is discharged or acquitted of the predicate offence, or the case is quashed, the PMLA case cannot stand on that basis. Review petitions against the judgment remain pending, so the position should be checked at the time.
Are chartered accountants reporting entities under the PMLA?
Yes, for specified activities. Since a May 2023 notification, practising chartered accountants, company secretaries and cost accountants are reporting entities when, on behalf of a client, they handle activities such as buying or selling immovable property or business entities, managing client money or accounts, or creating, operating or managing companies, LLPs or trusts. Ordinary audit work is not on that list.
What are the twin conditions for bail under s. 45 PMLA?
Before granting bail for a money-laundering offence, the court must give the Public Prosecutor an opportunity to oppose the application. Where it is opposed, the court must be satisfied that there are reasonable grounds to believe the accused is not guilty and is not likely to commit an offence while on bail. The Supreme Court upheld these conditions in 2022.